10-Q 1 v238565_10q.htm FORM 10-Q Unassociated Document
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2011

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to _______

Commission File No.      0-28190

CAMDEN NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)

MAINE
01-0413282
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
2 ELM STREET, CAMDEN, ME
04843
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:  (207) 236-8821

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x          No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                

Yes x          No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer ¨
Smaller reporting company   ¨
( Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨          No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at November 1, 2011:  Common stock (no par value) 7,691,508 shares. 

 
 

 

CAMDEN NATIONAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2011
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT

 
PAGE
   
PART I.  FINANCIAL INFORMATION
 
   
ITEM 1.
FINANCIAL STATEMENTS
 
     
 
Report of Independent Registered Public Accounting Firm
3
     
 
Consolidated Statements of Condition September  30, 2011 and December 31, 2010
4
     
 
Consolidated Statements of Income Three and Nine Months Ended September 30, 2011 and 2010
5
     
 
Consolidated Statements of Changes in Shareholders’ Equity Nine Months Ended September 30, 2011 and 2010
6
     
 
Consolidated Statements of Cash Flows Nine Months Ended September 30, 2011 and 2010
7
     
 
Notes to Consolidated Financial Statements Nine Months Ended September 30, 2011 and 2010
8-25
     
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
26-39
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
40-41
     
ITEM 4.
CONTROLS AND PROCEDURES
41
     
PART II. OTHER INFORMATION
 
     
ITEM 1.
LEGAL PROCEEDINGS
41
     
ITEM 1A.
RISK FACTORS
41
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS
41
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
42
     
ITEM 4.
[REMOVED AND RESERVED]
42
     
ITEM 5.
OTHER INFORMATION
42
     
ITEM 6.
EXHIBITS
43
     
SIGNATURES
44
     
EXHIBIT INDEX
45
     
EXHIBITS
 
 
2

 

PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Shareholders and Board of Directors
Camden National Corporation

We have reviewed the accompanying interim consolidated financial information of Camden National Corporation and Subsidiaries as of September 30, 2011, and for the three-month and nine-month periods ended September 30, 2011 and 2010. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is to express an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
 
/s/ Berry Dunn McNeil & Parker, LLC
 
Berry Dunn McNeil & Parker, LLC
 

Bangor, Maine
November 4, 2011

 
3

 

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

   
September 30,
   
December 31,
 
   
2011
   
2010
 
(In Thousands, Except Number of Shares)
 
(unaudited)
   
 
 
ASSETS
           
Cash and due from banks
  $ 89,266     $ 31,009  
Securities
               
Securities available-for-sale, at fair value
    591,955       553,579  
Securities held-to-maturity, at amortized cost (fair value $38,037 at December 31, 2010)
          36,102  
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
    21,962       21,962  
Total securities
    613,917       611,643  
Trading account assets
    2,162       2,304  
Loans held for sale
    762       5,528  
Loans
    1,512,312       1,524,752  
Less allowance for loan losses
    (23,011 )     (22,293 )
Net loans
    1,489,301       1,502,459  
Goodwill and other intangible assets
    45,389       45,821  
Bank-owned life insurance
    44,019       43,155  
Premises and equipment, net
    23,970       25,044  
Deferred tax asset
    11,341       12,281  
Interest receivable
    6,519       6,875  
Prepaid FDIC assessment
    5,088       6,155  
Other real estate owned
    1,759       2,387  
Other assets
    13,223       11,346  
Total assets
  $ 2,346,716     $ 2,306,007  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Deposits
               
Demand
  $ 278,900     $ 229,547  
Interest checking, savings and money market
    823,349       721,905  
Retail certificates of deposit
    417,456       464,662  
Brokered deposits
    121,552       99,697  
Total deposits
    1,641,257       1,515,811  
Federal Home Loan Bank advances
    126,953       214,236  
Other borrowed funds
    279,033       302,069  
Junior subordinated debentures
    43,691       43,614  
Accrued interest and other liabilities
    33,843       24,282  
Total liabilities
    2,124,777       2,100,012  
                 
Shareholders’ Equity
               
Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,678,143 and 7,658,496 shares on September 30, 2011 and December 31, 2010, respectively
    51,375       50,936  
Retained earnings
    165,300       150,730  
Accumulated other comprehensive income (loss)
               
Net unrealized gains on securities available-for-sale, net of tax
    13,485       6,229  
Net unrealized  losses on derivative instruments, at fair value, net of tax
    (7,072 )     (709 )
Net unrecognized losses on postretirement plans, net of tax
    (1,149 )     (1,191 )
Total accumulated other comprehensive income
    5,264       4,329  
Total shareholders’ equity
    221,939       205,995  
Total liabilities and shareholders’ equity
  $ 2,346,716     $ 2,306,007  

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

 
4

 

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)

  
 
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
(In Thousands, Except Number of Shares and per Share Data)
 
2011
   
2010
   
2011
   
2010
 
Interest Income
                       
Interest and fees on loans
  $ 19,515     $ 20,685     $ 59,241     $ 61,725  
Interest on U.S. government and sponsored enterprise obligations
    4,439       5,037       14,241       15,366  
Interest on state and political subdivision obligations
    387       528       1,284       1,601  
Interest on federal funds sold and other investments
    45       28       125       84  
Total interest income
    24,386       26,278       74,891       78,776  
Interest Expense
                               
Interest on deposits
    2,842       3,734       8,820       11,812  
Interest on borrowings
    2,265       2,953       7,913       9,357  
Interest on junior subordinated debentures
    632       712       1,983       2,108  
Total interest expense
    5,739       7,399       18,122       23,277  
Net interest income
    18,647       18,879       56,769       55,499  
Provision for credit losses
    1,182       1,291       3,271       5,237  
Net interest income after provision for credit losses
    17,465       17,588       53,498       50,262  
Non-Interest Income
                               
Income from fiduciary services
    1,517       1,618       4,503       4,697  
Service charges on deposit accounts
    1,296       1,151       3,879       3,716  
Other service charges and fees
    878       945       2,691       2,507  
Bank-owned life insurance
    910       401       1,784       1,119  
Brokerage and insurance commissions
    307       419       1,050       1,065  
Mortgage banking income
    368       160       500       332  
Net gain (loss) on sale of securities
    177       (188 )     197       (188 )
Other income
    433       2,331       1,433       2,765  
Total non-interest income before other-than-temporary impairment of securities
    5,886       6,837       16,037       16,013  
Other-than-temporary impairment of securities
    (61 )     (38 )     (88 )     (217 )
Total non-interest income
    5,825       6,799       15,949       15,796  
Non-Interest Expenses
                               
Salaries and employee benefits
    7,437       6,949       21,402       19,472  
Furniture, equipment and data processing
    1,149       1,150       3,518       3,396  
Net occupancy
    944       899       2,960       2,830  
Consulting and professional fees
    601       591       2,143       1,929  
Regulatory assessments
    410       832       1,515       2,149  
Other real estate owned and collection costs
    517       636       1,423       2,768  
Amortization of intangible assets
    144       144       433       432  
Other expenses
    2,105       2,258       6,470       6,262  
Total non-interest expenses
    13,307       13,459       39,864       39,238  
Income before income taxes
    9,983       10,928       29,583       26,820  
Income Taxes
    3,054       3,487       9,245       8,480  
Net Income
  $ 6,929     $ 7,441     $ 20,338     $ 18,340  
                                 
Per Share Data
                               
Basic earnings per share
  $ 0.90     $ 0.97     $ 2.65     $ 2.40  
Diluted earnings per share
  $ 0.90     $ 0.97     $ 2.65     $ 2.39  
Weighted average number of common shares outstanding
    7,677,972       7,657,098       7,671,911       7,655,097  
Diluted weighted average number of common shares outstanding
    7,683,570       7,663,051       7,680,401       7,660,919  

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

 
5

 

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(unaudited)

    
Common Stock
         
Accumulated
Other
   
Total
 
(In Thousands, Except Number of Shares and per Share Data)
 
Shares
Outstanding
   
Amount
   
Retained
Earnings
   
Comprehensive
Income (Loss)
   
Shareholders’
Equity
 
                               
Balance at December 31, 2009
    7,644,837     $ 50,062     $ 133,634     $ 6,865     $ 190,561  
Net income
                18,340             18,340  
Other comprehensive income (loss), net of tax:
                                       
Change in fair value of securities available-for-sale
                      3,734       3,734  
Change in fair value of cash flow hedges
                      (3,375 )     (3,375 )
Change in net unrecognized losses on postretirement plans
                      24       24  
Total comprehensive income
                18,340       383       18,723  
Stock-based compensation expense
          623                   623  
Exercise of stock options and issuance of restricted stock
    10,940       78                   78  
Common stock repurchased
    (1,385 )           (44 )           (44 )
Cash dividends declared ($0.75 per share)
                (5,751 )           (5,751 )
Balance at September 30, 2010
    7,654,392     $ 50,763     $ 146,179     $ 7,248     $ 204,190  
                                         
Balance at December 31, 2010
    7,658,496     $ 50,936     $ 150,730     $ 4,329     $ 205,995  
Net income
                20,338             20,338  
Other comprehensive income (loss), net of tax:
                                       
Change in fair value of securities available-for-sale
                      7,256       7,256  
Change in fair value of cash flow hedges
                      (6,363 )     (6,363 )
Change in net unrecognized losses on postretirement plans
                      42       42  
Total comprehensive income
                20,338       935       21,273  
Stock-based compensation expense
          593                   593  
Exercise of stock options and issuance of restricted stock
    27,782       118                   118  
Common stock repurchased
    (8,135 )     (272 )                 (272 )
Cash dividends declared ($0.75 per share)
                (5,768 )           (5,768 )
Balance at September 30, 2011
    7,678,143     $ 51,375     $ 165,300     $ 5,264     $ 221,939  

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

 
6

 

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

   
Nine Months Ended September 30,
 
(In Thousands)
 
2011
   
2010
 
Operating Activities
           
Net income
  $ 20,338     $ 18,340  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
    3,271       5,237  
Depreciation and amortization
    2,618       2,560  
Stock-based compensation expense
    593       623  
Decrease (increase) in interest receivable
    356       (101 )
Amortization of intangible assets
    433       432  
Net decrease (increase) in trading assets
    142       (448 )
Net (gain) loss on sale of securities
    (197 )     188  
Other-than-temporary impairment of securities
    88       217  
Increase in other real estate owned valuation allowance
    188       21  
Originations of mortgage loans held for sale
    (11,848 )     (4,690 )
Proceeds from the sale of mortgage loans
    16,817       2,234  
Gain on sale of mortgage loans
    (203     (83 )
Decrease in prepaid FDIC assessment
    1,067       1,511  
Increase in other assets
    (5,660 )     (4,391 )
Increase (decrease) in other liabilities
    3,238       (825 )
Net cash provided by operating activities
    31,241       20,825  
Investing Activities
               
Proceeds from maturities of securities held-to-maturity
    251       1,130  
Proceeds from sales and maturities of securities available-for-sale
    133,416       121,929  
Purchase of securities available-for-sale
    (125,358 )     (178,245 )
Net decrease (increase) in loans
    7,231       (13,858 )
Recoveries on previously charged-off loans
    865    
653
 
Proceeds from the sale of other real estate owned
    1,638       4,169  
Proceeds from bank-owned life insurance
    370        
Purchase of premises and equipment
    (722 )     (1,736 )
Net cash provided (used) by investing activities
    17,691       (65,958 )
Financing Activities
               
Net increase in deposits
    125,449       86,432  
Proceeds from Federal Home Loan Bank long-term advances
    190,000       20,177  
Repayments on Federal Home Loan Bank long-term advances
    (277,265 )     (65,489 )
Net change in short-term Federal Home Loan Bank borrowings
    (37,275 )     (24,335 )
Net increase in other borrowed funds
    14,335       37,670  
Common stock repurchase
    (272 )     (44 )
Proceeds from exercise of stock options
    118       78  
Cash dividends paid on common stock
    (5,765 )     (5,746 )
Net cash provided by financing activities
    9,325       48,743  
Net increase in cash and cash equivalents
    58,257       3,610  
Cash and cash equivalents at beginning of year
    31,009       29,772  
Cash and cash equivalents at end of period
  $ 89,266     $ 33,382  
Supplemental information
               
Interest paid
  $ 18,433     $ 23,777  
Income taxes paid
    8,340       9,860  
Transfer from loans to other real estate owned
    1,198       1,341  

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

 
7

 

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Tables Expressed in Thousands, Except Number of Shares and per Share Data)
 
NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation (the “Company”) as of September 30, 2011 and December 31, 2010, the consolidated statements of income for the three and nine months ended September 30, 2011 and 2010, the consolidated statements of changes in shareholders' equity for the nine months ended September 30, 2011 and 2010, and the consolidated statements of cash flows for the nine months ended September 30, 2011 and 2010. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior year were reclassified to conform to the current year presentation. The income reported for the three month and nine month periods ended September 30, 2011, is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s December 31, 2010 Annual Report on Form 10-K.

NOTE 2 – EARNINGS PER SHARE
 
Basic earnings per common share (“EPS”) excludes dilution and is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if certain securities or other contracts to issue common stock (such as stock options) were exercised or converted into additional common shares that would then share in the earnings of the Company. Diluted EPS is computed by dividing net income applicable to common stock by the weighted average number of common shares outstanding for the year, plus an incremental number of common-equivalent shares computed using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share under the two-class method, as unvested share-based payment awards include the nonforfeitable right to receive dividends and therefore are considered participating securities:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net income, as reported
  $ 6,929     $ 7,441     $ 20,338     $ 18,340  
Weighted-average common shares outstanding – basic
    7,677,972       7,657,098       7,671,911       7,655,097  
Dilutive effect of stock-based compensation
    5,598       5,953       8,490       5,822  
Weighted-average common and potential common shares – diluted
    7,683,570       7,663,051       7,680,401       7,660,919  
Basic earnings per share – common stock
  $ 0.90     $ 0.97     $ 2.65     $ 2.40  
Basic earnings per share – unvested share-based payment awards
    0.87       0.97       2.51       2.40  
Diluted earnings per share – common stock
    0.90       0.97       2.65       2.39  
Diluted earnings per share – unvested share-based payment awards
    0.90       0.97       2.65       2.39  

For the three month and nine month periods ended September 30, 2011, options to purchase 108,200 and 102,400 shares, respectively, of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, because the exercise prices of the options were greater than the average market price of the common stock for the respective periods.  For both the three month and nine month periods ended September 30, 2010, options to purchase 92,050 and 87,750 shares of common stock, respectively, were not considered in the computation of potential common shares for purposes of diluted EPS, because the exercise prices of the options were greater than the average market price of the common stock for the respective periods.

 
8

 

NOTE 3 – SECURITIES

The following tables summarize the amortized costs and estimated fair values of securities available-for-sale and held-to-maturity, as of the dates indicated:

   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
September 30, 2011
                       
Available-for-sale
                       
Obligations of U.S. government sponsored enterprises
  $ 59,908     $ 510     $ (28 )   $ 60,390  
Obligations of states and political subdivisions
    39,234       3,004             42,238  
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
    454,125       19,907       (90 )     473,942  
Private issue collateralized mortgage obligations
    12,942             (1,799 )     11,143  
Total debt securities
    566,209       23,421       (1,917 )     587,713  
Equity securities
    5,000             (758 )     4,242  
Total securities available-for-sale
  $ 571,209     $ 23,421     $ (2,675 )   $ 591,955  
December 31, 2010
                               
Available-for-sale
                               
Obligations of U.S. government sponsored enterprises
  $ 49,870     $ 237     $ (750 )   $ 49,357  
Obligations of states and political subdivisions
    13,777       443             14,220  
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
    451,909       15,986       (3,053 )     464,842  
Private issue collateralized mortgage obligations
    23,441             (2,719 )     20,722  
Total debt securities
    538,997       16,666       (6,522 )     549,141  
Equity securities
    5,000             (562 )     4,438  
Total securities available-for-sale
  $ 543,997     $ 16,666     $ (7,084 )   $ 553,579  
Held-to-maturity
                               
Obligations of states and political subdivisions
  $ 36,102     $ 1,935     $     $ 38,037  
Total securities held-to-maturity
  $ 36,102     $ 1,935     $     $ 38,037  

During the first quarter of 2011, $36.1 million of municipal bonds that had been previously classified as held-to-maturity at purchase were moved to the available-for-sale category and the associated unrealized gains and temporary unrealized losses on these securities are now being reported on an after-tax basis in shareholders’ equity as accumulated other comprehensive income or loss.  This change reflects management’s decision during the first quarter of 2011 to more actively manage these investments in changing economic environments.

Unrealized gains on securities available-for-sale at September 30, 2011 and December 31, 2010 and included in accumulated other comprehensive income amounted to $13.5 million and $6.2 million, net of deferred taxes of $7.2 million and $3.4 million, respectively.

Impaired Securities

Management reviews the Company’s investment portfolio on a periodic basis to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other-than-temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, recoverability of invested amount over a reasonable period of time and the length of time the security is in a loss position, for example, are applied in determining other-than-temporary impairment (“OTTI”). Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.

 
9

 

The following table shows the unrealized gross losses and estimated fair values of investment securities at September 30, 2011 and December 31, 2010, by length of time that individual securities in each category have been in a continuous loss position:

    
Less Than 12 Months
   
12 Months or More
   
Total
 
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
September 30, 2011
                                   
U.S. government sponsored enterprises
  $ 19,968     $ (28 )   $     $     $ 19,968     $ (28 )
Mortgage-backed securities
    20,289       (90 )     74             20,363       (90 )
Private issue collateralized mortgage obligations
                11,142       (1,799 )     11,142       (1,799 )
Equity securities
                4,243       (758 )     4,243       (758 )
Total
  $ 40,257     $ (118 )   $ 15,459     $ (2,557 )   $ 55,716     $ (2,675 )
December 31, 2010
                                               
U.S. government sponsored enterprises
  $ 29,145     $ (750 )   $     $     $ 29,145     $ (750 )
Mortgage-backed securities
    96,604       (3,053 )     85             96,689       (3,053 )
Private issue collateralized mortgage obligations
    2,160       (79 )     18,562       (2,640 )     20,722       (2,719 )
Equity securities
                4,438       (562 )     4,438       (562 )
Total
  $ 127,909     $ (3,882 )   $ 23,085     $ (3,202 )   $ 150,994     $ (7,084 )

At September 30, 2011, $55.7 million of the Company’s investment securities had unrealized losses that are considered temporary. A portion of the unrealized loss was related to the private issue collateralized mortgage obligations (“CMOs”), which includes $10.1 million that have been downgraded to non-investment grade. The Company’s share of these downgraded CMOs is in the senior tranches. Management believes the unrealized loss for the CMOs is the result of current market illiquidity and the underestimation of value in the market. Including the CMOs, there were 20 securities with a fair value of $15.5 million in the investment portfolio which had unrealized losses for twelve months or longer. Management currently has the intent and ability to retain these investment securities with unrealized losses until the decline in value has been recovered. Stress tests are performed regularly on the higher risk bonds in the investment portfolio using current statistical data to determine expected cash flows and forecast potential losses. The stress tests at September 30, 2011, indicated potential future credit losses in the most likely scenario on four private issue CMOs.  Based on these results, the Company recorded a $61,000 OTTI write-down during the third quarter of 2011.

At September 30, 2011, the Company held Duff & Phelps Select Income Fund Auction Preferred Stock with an amortized cost of $5.0 million which failed at auction during 2008. The security is rated Triple-A by Moody’s and Standard and Poor’s. Management believes the failed auctions are a temporary liquidity event related to this asset class of securities. The Company is currently collecting all amounts due according to contractual terms and has the ability and intent to hold the securities until they clear auction, are called, or mature; therefore, the securities are not considered other-than-temporarily impaired.

Security Gains and Losses

The following information details the Company’s sales of securities:

   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Available-for-sale
           
Proceeds from sales of securities
  $ 15,128     $ 4,210  
Gross realized gains
    270        
Gross realized (losses)
    (73 )     (188 )

During the first nine months of 2011, the Company sold sixteen municipal bonds that the Company was monitoring that either had below “A” ratings, split ratings, withdrawn ratings, or negative outlooks or were revenue bonds.  Due to increased pressures on state and local government revenues around the country as municipalities struggle with a weakened economy, management decided to sell these securities. The Company also sold three private issue CMOs in response to favorable market pricing, which reduced its CMO holdings by $7.8 million.  The Company had not recorded any OTTI on these securities.

Securities Pledged

At September 30, 2011 and 2010, securities with an amortized cost of $486.8 million and $378.2 million and estimated fair values of $508.6 million and $395.9 million, respectively, were pledged to secure Federal Home Loan Bank (“FHLB”) advances, public deposits, securities sold under agreements to repurchase and other purposes required or permitted by law.

 
10

 

Contractual Maturities
 
The amortized cost and estimated fair values of debt securities by contractual maturity at September 30, 2011 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized
Cost
   
Fair
Value
 
Available-for-sale
           
Due in one year or less
  $ 758     $ 763  
Due after one year through five years
    66,151       67,376  
Due after five years through ten years
    99,902       105,028  
Due after ten years
    399,398       414,546  
  
  $ 566,209     $ 587,713  

NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the Company’s loan portfolio, excluding residential loans held for sale, at September 30, 2011 and December 31, 2010 was as follows:

   
September 30,
2011
   
December 31,
2010
 
Residential real estate loans
  $ 580,672     $ 596,655  
Commercial real estate loans
    458,348       464,037  
Commercial loans
    191,060       180,592  
Home equity loans
    270,468       270,627  
Consumer loans
    12,188       13,188  
Deferred loan fees net of costs
    (424 )     (347 )
Total loans
  $ 1,512,312     $ 1,524,752  

The Company’s lending activities are primarily conducted in Maine. The Company originates single family and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy.  During the first nine months of 2011, the Company sold $16.6 million of fixed-rate residential mortgage loans on the secondary market that resulted in a net gain on the sale of loans of $203,000.  For the year ended December 31, 2010, the Company sold $20.1 million of fixed-rate residential mortgage loans on the secondary market, which resulted in a net gain on the sale of loans of $106,000.

The allowance for loan losses (“ALL”) is management’s best estimate of the inherent risk of loss in the Company’s loan portfolio as of the statement of condition date. Management makes various assumptions and judgments about the collectability of the loan portfolio and provides an allowance for potential losses based on a number of factors including historical losses. If those assumptions are incorrect, the ALL may not be sufficient to cover losses and may cause an increase in the allowance in the future. Among the factors that could affect the Company’s ability to collect loans and require an increase to the allowance in the future are: general real estate and economic conditions; regional credit concentration; industry concentration, for example in the hospitality, tourism and recreation industries; and a requirement by federal and state regulators to increase the provision for loan losses or recognize additional charge-offs.

The Board of Directors monitors credit risk management through the Directors’ Loan Committee and the Risk Management Group. The Directors’ Loan Committee reviews large exposure credit requests, monitors asset quality on a regular basis and has approval authority for credit granting policies. The Risk Management Group oversees management’s systems and procedures to monitor the credit quality of the loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system and determine the adequacy of the ALL. The Company's practice is to identify problem credits early and take charge-offs as promptly as practicable. In addition, management continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions.  For purposes of determining the ALL, the Company disaggregates its portfolio loans into portfolio segments, which include residential real estate, commercial real estate, commercial, home equity, and consumer.

 
11

 

The following is a summary of activity in the ALL for the three and nine month periods ended September 30, 2011 and 2010:

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Balance at beginning of period
  $ 22,989     $ 22,266     $ 22,293     $ 20,246  
Loan charge-offs
    (1,400 )     (1,395 )     (3,417 )     (3,805 )
Recoveries on loans previously charged off
    235       173       865       653  
Net charge-offs
    (1,165 )     (1,222 )     (2,552 )     (3,152 )
Provision for loan losses
    1,187       1,292       3,270       5,242  
Balance at end of period
  $ 23,011     $ 22,336     $ 23,011     $ 22,336  

The following table presents activity in the ALL by portfolio segment for the three months ended September 30, 2011:

    
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home
Equity
   
Consumer
   
Unallocated
   
Total
 
ALL:
                                         
Beginning balance
  $ 6,109     $ 6,324     $ 4,473     $ 2,478     $ 453     $ 3,152     $ 22,989  
Loans charged off
    (239 )     (621 )     (325 )     (205 )     (10 )           (1,400 )
Recoveries
    1       124       83       25       2             235  
Provision (reduction)
    75       179       633       188       (12 )     124       1,187  
Ending balance
  $ 5,946     $ 6,006     $ 4,864     $ 2,486     $ 433     $ 3,276     $ 23,011  

The following table presents the activity in the ALL and select loan information by portfolio segment for the nine months ended September 30, 2011:
 
    
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home
Equity
   
Consumer
   
Unallocated
   
Total
 
ALL:
                                         
Beginning balance
  $ 3,273     $ 8,198     $ 5,633     $ 2,051     $ 202     $ 2,936     $ 22,293  
Loans charged off
    (1,036 )     (946 )     (1,080 )     (325 )     (30 )           (3,417 )
Recoveries
    114       307       239       195       10             865  
Provision (reduction)
    3,595       (1,553 )     72       565       251       340       3,270  
Ending balance
  $ 5,946     $ 6,006     $ 4,864     $ 2,486     $ 433     $ 3,276     $ 23,011  
Ending Balance:   Individually evaluated for impairment
  $ 2,669     $ 1,411     $ 831     $ 370     $ 91     $     $ 5,372  
Ending Balance:   Collectively evaluated for impairment
  $ 3,277     $ 4,595     $ 4,033     $ 2,116     $ 342     $ 3,276     $ 17,639  
                                                         
Loans ending balance:
                                                       
Ending Balance:   Individually evaluated for impairment
  $ 12,305     $ 9,596     $ 4,343     $ 1,343     $ 159     $     $ 27,746  
Ending Balance:   Collectively evaluated for impairment
  $ 567,943     $ 448,752     $ 186,717     $ 269,125     $ 12,029     $     $ 1,484,566  
Loans ending balance
  $ 580,248     $ 458,348     $ 191,060     $ 270,468     $ 12,188     $     $ 1,512,312  


 
12

 

The following table presents activity in the ALL and select loan information by portfolio segment for the year ended December 31, 2010:

    
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home
Equity
   
Consumer
   
Unallocated
   
Total
 
ALL:
                                         
Beginning balance
  $ 2,693     $ 6,930     $ 5,015     $ 1,773     $ 184     $ 3,651     $ 20,246  
Loans charged off
    (1,262 )     (1,382 )     (1,502 )     (932 )     (469 )           (5,547 )
Recoveries
    225       232       553       123       136             1,269  
Provision (reduction)
    1,617       2,418       1,567       1,087       351       (715 )     6,325  
Ending balance
  $ 3,273     $ 8,198     $ 5,633     $ 2,051     $ 202     $ 2,936     $ 22,293  
Ending Balance:   Individually evaluated for impairment
  $ 840     $ 660     $ 631     $ 316     $ 25     $     $ 2,472  
Ending Balance:   Collectively evaluated for impairment
  $ 2,433     $ 7,538     $ 5,002     $ 1,735     $ 177     $ 2,936     $ 19,821  
                                                         
Loans ending balance:
                                                       
Ending Balance:   Individually evaluated for impairment
  $ 9,330     $ 6,182     $ 4,486     $ 1,711     $ 25     $     $ 21,734  
Ending Balance:   Collectively evaluated for impairment
  $ 586,978     $ 457,855     $ 176,106     $ 268,916     $ 13,163     $     $ 1,503,018  
Loans ending balance
  $ 596,308     $ 464,037     $ 180,592     $ 270,627     $ 13,188     $     $ 1,524,752  

The Company focuses on maintaining a well-balanced and diversified loan portfolio. Despite such efforts, it is recognized that credit concentrations may occasionally emerge as a result of economic conditions, changes in local demand, natural loan growth and runoff. To ensure that credit concentrations can be effectively identified, all commercial and commercial real estate loans are assigned Standard Industrial Classification codes, North American Industry Classification System codes, and state and county codes. Shifts in portfolio concentrations are continuously monitored by the Company’s Risk Management Group.
 
To further identify loans with similar risk profiles, the Company categorizes each portfolio segment into classes by credit risk characteristic and applies a credit quality indicator to each portfolio segment.  The indicators for commercial, commercial real estate and residential real estate loans are represented by Grades 1 through 10 from lowest to highest risk rating. The Company uses the following definitions when assessing grades for the purpose of evaluating the risk and adequacy of the ALL:
 
Grade 1 – Substantially risk free loans. Loans to borrowers of unquestioned financial strength with stable earnings, cash flows and sufficient primary and secondary sources of repayment. These loans have no known or suspected shortcomings or weaknesses. Most loans in this category are secured by properly margined liquid collateral. Loan to value and loan to cost parameters are most conservative.
 
Grade 2 – Loans with minimal risk. Includes loans to borrowers with a solid financial condition and good liquidity, significant cash flows and interest coverage and well-defined repayment strength. Loan to value and loan to cost parameters are conservative.
 
Grade 3 – Loans with very modest risk. Borrowers in this category exhibit strong sources of repayment, consistent earnings and acceptable profitability growth. Working capital, debt to worth and coverage ratios are comparable with industry standards and there are no known negative trends. Collateral protection is adequate. Loan to value parameters do not exceed the maximum established by the Company’s loan policy.
 
Grade 4 – Loans with less than average risk. Loans to borrowers with adequate repayment source or a recently demonstrated ability to service debt with acceptable margins. Working capital, debt to worth and coverage ratios may be on the lower end of industry standards, but are not considered unsatisfactory. There may be minor negative trends but collateral position is adequate. Loan to value and debt coverage ratios meet the criteria in the Company’s loan policy.
 
Grade 5 – Average risk loans. Loans to borrowers with acceptable financial strength but possible vulnerability to changing economic conditions or inconsistent earnings history. Borrower evidences a reasonable ability to service debt in the normal course of business and has available and adequate secondary sources of repayment. Working capital, debt to worth and coverage ratios may be below industry standards, but are not considered unsatisfactory. Loan to value and debt coverage ratios meet the criteria outlined in the Company’s loan policy.

 
13

 

Grade 6 – Loans with maximum acceptable risk (Watch List). Loans in this grade exhibit the majority of the attributes associated with Grade 5, perform at that level, but have been recognized to possess characteristics or deficiencies that warrant monitoring.  These loans have potential weaknesses which may, if not checked or corrected, weaken the assets or inadequately protect the Company’s credit position at some future date.

A Grade 6-Watch rating is assigned to a loan when one or more of the following circumstances exist:

 
-
Lack of sufficient current information to properly assess the risk of the loan facility or value of pledged collateral.
 
-
Adverse economic, market or other external conditions which may directly affect the obligor’s financial condition.
 
-
Significant cost overruns occurred.
 
-
Market share may exhibit some volatility. Sales and profits may be tied to business, credit or product cycles.
 
Grade 7 – Loans with potential weakness (Special Mention). Loans in this category are currently protected based on collateral and repayment capacity and do not constitute undesirable credit risk, but have potential weakness that may result in deterioration of the repayment process at some future date. This classification is used if a negative trend is evident in the obligor’s financial situation. Special mention loans do not sufficiently expose the Company to warrant adverse classification.
 
Grade 8 – Loans with definite weakness (Substandard). Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the obligor or by collateral pledged. Borrowers experience difficulty in meeting debt repayment requirements. Deterioration is sufficient to cause the Company to look to the sale of collateral.
 
Grade 9 – Loans with potential loss (Doubtful). Loans classified as doubtful have all the weaknesses inherent in the substandard grade with the added characteristic that the weaknesses make collection or liquidation of the loan in full highly questionable and improbable. The possibility of some loss is extremely high, but because of specific pending factors that may work to the advantage and strengthening of the asset, its classification as an estimated loss is deferred until its more exact status may be determined.
 
Grade 10 – Loans with definite loss (Loss). Loans classified as loss are considered uncollectible. The loss classification does not mean that the asset has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off the asset because recovery and collection time may be protracted.
 
Asset quality indicators are periodically reassessed to appropriately reflect the risk composition of the Company’s loan portfolio. Home equity and consumer loans are not individually risk rated, but rather analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. Performing loans include loans that are current and loans that are past due less than 90 days. Loans that are past due over 90 days and non-accrual loans are considered non-performing.
   
The following table summarizes credit risk exposure indicators by portfolio segment as of September 30, 2011:

   
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home 
Equity
   
Consumer
 
Pass (Grades 1-6)
  $ 563,468     $ 393,868     $ 162,316     $     $  
Performing
                      269,125       12,029  
Special Mention (Grade 7)
    883       16,860       9,513              
Substandard (Grade 8)
    15,897       47,620       18,648              
Non-performing
                      1,343       159  
Doubtful (Grade 9)
                583              
Total
  $ 580,248     $ 458,348     $ 191,060     $ 270,468     $ 12,188  
 
 
14

 

The following table summarizes credit risk exposure indicators by portfolio segment as of December 31, 2010:

   
Residential
Real Estate
   
Commercial
Real Estate
   
Commercial
   
Home
Equity
   
Consumer
 
Pass (Grades 1-6)
  $ 583,460     $ 390,488     $ 146,412     $     $  
Performing
                      268,873       13,163  
Special Mention (Grade 7)
          22,692       11,089              
Substandard (Grade 8)
    12,848       50,852       23,091              
Non-performing
                      1,754       25  
Doubtful (Grade 9)
          5                    
Total
  $ 596,308     $ 464,037     $ 180,592     $ 270,627     $ 13,188  

The Company closely monitors the performance of its loan portfolio. In situations when the financial condition of the borrower is deteriorating, payment in full of both principal and interest is not expected as scheduled or principal or interest has been in default for 90 days or more, a loan is placed on non-accrual status. Exceptions may be made if the asset is well-secured by collateral sufficient to satisfy both the principal and accrued interest in full and collection is assured by a specific event such as the closing of a pending sale contract. When one loan to a borrower is placed on non-accrual status, all other loans to the borrower are re-evaluated to determine if they should also be placed on non-accrual status. All previously accrued and unpaid interest is reversed at this time. A loan may be returned to accrual status when collection of principal and interest is assured and the borrower has demonstrated timely payments of principal and interest for a reasonable period. Unsecured loans are not normally placed on non-accrual status, as they are charged-off once their collectability is in doubt.

A loan is classified as non-accrual generally when it becomes 90 days past due as to interest or principal payments. All previously accrued but unpaid interest on non-accrual loans is reversed from interest income in the current period. Interest payments received on non-accrual loans (including impaired loans) are applied as a reduction of principal. A loan remains on non-accrual status until all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans, which include troubled debt restructured loans ("TDRs"), and loans past due over 90 days and accruing as of September 30, 2011:

    
30-59 days
Past Due
   
60-89 days
Past Due
   
Greater
Than
90 Days
   
Total
Past Due
   
Current
   
Total Loans
Outstanding
   
Loans > 90
Days Past
Due and
Accruing
   
Non-Accrual
Loans
 
Residential real estate
  505     1,262     7,333     9,100     571,148     580,248         9,060  
Commercial real estate
    2,057       1,935       5,116       9,108       449,240       458,348             9,596  
Commercial
    1,482       193       2,406       4,081       186,979       191,060             4,278  
Home equity
    284       149       1,041       1,474       268,994       270,468             1,343  
Consumer
    126       8       159       293       11,895       12,188             159  
Total
  $ 4,454     $ 3,547     $ 16,055     $ 24,056     $ 1,488,256     $ 1,512,312     $     $ 24,436  

The following is a loan aging analysis by portfolio segment (including loans past due over 90 days and non-accrual loans) and a summary of non-accrual loans which include TDRs, and loans past due over 90 days and accruing as of December 31, 2010:

    
30-59 days
Past Due
   
60-89 days
Past Due
   
Greater
than
90 Days
   
Total
Past Due
   
Current
   
Total Loans
Outstanding
   
Loans > 90
Days Past
Due and
Accruing
   
Non-Accrual
Loans
 
Residential real estate
  $ 1,488     $ 1,533     $ 5,616     $ 8,637     $ 587,671     $ 596,308     $ 424     $ 7,225  
Commercial real estate
    1,642       979       4,166       6,787       457,250       464,037       214       6,072  
Commercial
    911       883       2,888       4,682       175,910       180,592       15       4,421  
Home equity
    590       170       739       1,499       269,128       270,627       58       1,696  
Consumer
    164       28       25       217       12,971       13,188             25  
Total
  $ 4,795     $ 3,593     $ 13,434     $ 21,822     $ 1,502,930     $ 1,524,752     $ 711     $ 19,439  
 
 
15

 

The Company takes a conservative approach in credit risk management and remains focused on community lending and reinvesting. The Company’s Credit Administration works closely with borrowers experiencing credit problems to assist in loan repayment or term modifications. TDR loans consist of loans where the Company, for economic or legal reasons related to the borrower’s financial difficulties, granted a concession to the borrower that it would not otherwise consider. TDRs involve term modifications or a reduction of either interest or principal. Once such an obligation has been restructured, it will continue to remain in restructured status until paid in full. Loans restructured due to credit difficulties that are now performing were $3.3 million and $2.3 million at September 30, 2011 and December 31, 2010, respectively.

Loans that were restructured on or after January 1, 2011 were reassessed during the third quarter of 2011 as a result of the adoption of the new accounting guidance for TDRs.  In its reassessment, the Company did not identify any modifications constituting TDRs under the new guidance that were not previously considered TDRs.  At September 30, 2011, the allowance related to TDRs was $124,000. The specific reserve component was determined by using the fair value of the underlying collateral, which was obtained through independent appraisals and internal evaluations, or by discounting the total expected future cash flows from the borrower.  There were no commitments to lend additional funds to borrowers with loans classified as TDRs at September 30, 2011, and there were no TDR loans that subsequently defaulted during the first nine months of 2011.

The following is a summary of all TDR loans (accruing and non-accruing) by portfolio segment as of September 30, 2011:

   
Number of
Contracts
   
Pre-Modification
Outstanding
Recorded
Investment
   
Post-Modification
Outstanding
Recorded
Investment
   
Current
Balance
 
Troubled-Debt Restructurings
                       
Residential real estate
    18     $ 2,797     $ 3,437     $ 3,363  
Commercial real estate
    2       824       824       371  
Commercial
    2       163       163       103  
Total
    22     $ 3,784     $ 4,424     $ 3,837  

Impaired loans consist of non-accrual and TDR loans. All impaired loans are allocated a portion of the allowance to cover potential losses. At September 30, 2011 and December 31, 2010, there were no impaired loans without a related recorded allowance.

The following is a summary of impaired loan balances and associated allowance by portfolio segment as of September 30, 2011:

                     
Three Months Ended
   
Nine Months Ended
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Average
Recorded
Investment
   
Interest
Income
Recognized
   
Average
Recorded
Investment
   
Interest
Income
Recognized
 
With an allowance recorded:
                                         
Residential real estate
  $ 12,305     $ 12,905     $ 2,669     $ 11,567     $ 35