10-K 1 v303034_10k.htm FORM 10-K

  

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



 

FORM 10-K



 

 
x   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2011

 
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

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
Incorporation or Organization)
  (I.R.S. Employer
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



 

Securities registered pursuant to Section 12(b) of the Act:

 
Title of Each Class   Name of Exchange on Which Registered
Common Stock, without par value   The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act: None



 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 periods 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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s most recently completed second fiscal quarter: $228,741,739. Shares of the Registrant’s common stock held by each executive officer, director and person who beneficially owns 5% or more of the Registrant’s outstanding common stock have been excluded, in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of each of the registrant’s classes of common stock, as of February 28, 2012 is: Common Stock: 7,666,962.

Listed hereunder are documents incorporated by reference and the relevant Part of the Form 10-K into which the document is incorporated by reference:

(1) Certain information required in response to Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporated by reference from Camden National Corporation’s Definitive Proxy Statement for the 2012 Annual Meeting of Shareholders pursuant to Regulation 14A of the General Rules and Regulations of the Commission.
 

 


 
 

TABLE OF CONTENTS

CAMDEN NATIONAL CORPORATION
2011 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 
  Page
PART I
 

Item 1.

Business

    1  

Item 1A.

Risk Factors

    12  

Item 1B.

Unresolved Staff Comments

    19  

Item 2.

Properties

    19  

Item 3.

Legal Proceedings

    19  

Item 4.

Removed and Reserved

    19  
PART II
 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

    20  

Item 6.

Selected Financial Data

    22  

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

    23  

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

    50  

Item 8.

Financial Statements and Supplementary Data

    51  

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

    100  

Item 9A.

Controls and Procedures

    100  

Item 9B.

Other Information

    100  
PART III
 

Item 10.

Directors, Executive Officers and Corporate Governance

    101  

Item 11.

Executive Compensation

    101  

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

    101  

Item 13.

Certain Relationships, Related Transactions and Director Independence

    101  

Item 14.

Principal Accounting Fees and Services

    101  
PART IV
 

Item 15.

Exhibits and Financial Statement Schedules

    102  
Signatures     105  

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FORWARD-LOOKING STATEMENTS

The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, including certain plans, exceptions, goals, projections, and statements, which are subject to numerous risks, assumptions, and uncertainties. Forward-looking statements can be identified by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “plan”, “target”, or “goal” or future or conditional verbs such as “will,”, “may”, “might”, “should”, “could” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. Forward-looking statements should not be relied on, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

Although the Company believes that the expectations reflected in the Company’s forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors (some of which are beyond the Company’s control). The following factors, among others, could cause the Company’s financial performance to differ materially from the Company’s goals, plans, objectives, intentions, expectations and other forward-looking statements:

continued weakness in the United States economy in general and the regional and local economies within the New England region and Maine, which could result in a deterioration of credit quality, a change in the allowance for loan losses, or a reduced demand for the Company’s credit or fee-based products and services;
adverse changes in the local real estate market could result in a deterioration of credit quality and an increase in the allowance for loan loss, as most of the Company’s loans are concentrated in Maine, and a substantial portion of these loans have real estate as collateral;
changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System;
inflation, interest rate, market and monetary fluctuations;
adverse changes in asset;
competitive pressures, including continued industry consolidation, the increased financial services provided by non-banks and banking reform;
continued volatility in the securities markets that could adversely affect the value or credit quality of the Company’s assets, impairment of goodwill, the availability and terms of funding necessary to meet the Company’s liquidity needs, and the Company’s ability to originate loans and could lead to impairment in the value of securities in the Company’s investment portfolios;
changes in information technology that require increased capital spending;
changes in consumer spending and savings habits;
new laws and regulations regarding the financial services industry including but not limited to, the Dodd-Frank Wall Street Reform & Consumer Protection Act;
changes in laws and regulations including laws and regulations concerning taxes, banking, securities and insurance; and
changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters.

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in Part II, Item 1A, “Risk Factors,” beginning

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on page 12. Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.

These forward-looking statements were based on information, plans and estimates at the date of this report, and we do not promise to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes.

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PART I

Item 1. Business

Overview.  Camden National Corporation (hereafter referred to as “we,” “our,” “us,” or the “Company”) is a publicly-held bank holding company, with $2.3 billion in assets at December 31, 2011, incorporated under the laws of the State of Maine and headquartered in Camden, Maine. The Company, as a diversified financial services provider, pursues the objective of achieving long-term sustainable growth by balancing growth opportunities against profit, while mitigating risks inherent in the financial services industry. The primary business of the Company and its subsidiaries is to attract deposits from, and to extend loans to, consumer, institutional, municipal, non-profit and commercial customers. The Company makes its commercial and consumer banking products and services available directly and indirectly through its subsidiary, Camden National Bank (the “Bank”), and its brokerage and insurance services through Camden Financial Consultants (“Camden Financial”), a division of the Bank. The Company also provides wealth management, trust and employee benefit products and services through its subsidiary, Acadia Trust, N.A. (“Acadia Trust”), a federally regulated, non-depository trust company headquartered in Portland, Maine. In addition to serving as a holding company, the Company provides managerial, operational, human resource, marketing, financial management, risk management and technology services to its subsidiaries. The Consolidated Financial Statements of the Company accompanying this Form 10-K include the accounts of the Company, the Bank and its divisions, and Acadia Trust. All inter-company accounts and transactions have been eliminated in consolidation.

Descriptions of the Company and the Company’s Subsidiaries

The Company.  Following is a timeline of recent major events of the Company:

On January 3, 2008, the Company acquired Union Bankshares Company, Maine, including its principal wholly-owned subsidiary, Union Trust Company. Union Trust Company became a division of the Bank.
On February 22, 2011, the Union Trust division was merged into the Bank.

As of December 31, 2011, the Company’s securities consisted of one class of common stock, no par value, of which there were 7,664,975 shares outstanding held of record by approximately 1,700 shareholders. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees, which is estimated to be 3,500 shareholders.

The Company is a bank holding company (“BHC”) registered under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and is subject to supervision, regulation and examination by the Board of Governors of the Federal Reserve System (the “FRB”).

Camden National Bank.  The Bank, a direct, wholly-owned subsidiary of the Company, is a national banking association chartered under the laws of the United States and having its principal office in Camden, Maine. Originally founded in 1875, the Bank became a direct, wholly-owned subsidiary of the Company as a result of the corporate reorganization in 1985. The Bank offers its products and services in the Maine counties of Androscoggin, Cumberland, Franklin, Hancock, Knox, Lincoln, Penobscot, Piscataquis, Somerset, Waldo, Washington, and York, and focuses primarily on attracting deposits from the general public through its branches, and then using such deposits to originate residential mortgage loans, commercial business loans, commercial real estate loans and a variety of consumer loans. Customers may also access the Bank’s products and services using other channels, including the Bank’s website located at www.camdennational.com. The Bank is a member bank of the Federal Reserve System and is subject to supervision, regulation and examination by the Office of the Comptroller of the Currency (the “OCC”). The Federal Deposit Insurance Corporation (the “FDIC”) insures the deposits of the Bank up to the maximum amount permitted by law.

Camden Financial Consultants, located at Camden National Bank.  Camden Financial is a full-service brokerage and insurance division of the Bank, which is in the business of helping clients meet all of their financial needs by using a total wealth management approach. Its financial offerings include college, retirement, and estate planning, mutual funds, Strategic Asset Management accounts, and variable and fixed annuities.

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Acadia Trust, N.A.  Acadia Trust, a direct, wholly-owned subsidiary of the Company, is a national banking association chartered under the laws of the United States with a limited purpose trust charter, and has its principal office in Portland, Maine, and a website located at www.acadiatrust.com. Acadia Trust provides a broad range of trust, trust-related, investment and wealth management services, in addition to retirement and pension plan management services, to both individual and institutional clients. The financial services provided by Acadia Trust complement the services provided by the Bank by offering customers investment management services. Acadia Trust is a member bank of the Federal Reserve System and is subject to supervision, regulation and examination by the OCC as well as to supervision, examination and reporting requirements under the BHCA and the regulations of the FRB.

Competition.  Through the Bank and its division, Camden Financial, the Company competes throughout the State of Maine, and considers its primary market areas to be in Knox, Hancock, Waldo, Penobscot, and Franklin counties, with a growing presence in Cumberland, Lincoln, Androscoggin and York counties. The combined population of the two primary counties of Knox and Waldo is approximately 81,000 people and their economies are based primarily on tourism and fishing and supported by a substantial population of retirees. The Bank’s downeast, central and western Maine markets are characterized as rural areas, with the exception of Bangor and Lewiston, which have populations of approximately 33,000 and 37,000, respectively. Major competitors in the Company’s market areas include local branches of large regional bank affiliates and brokerage houses, as well as local independent banks, financial advisors, thrift institutions and credit unions. Other competitors for deposits and loans within the Bank’s primary market areas include insurance companies, money market funds, consumer finance companies and financing affiliates of consumer durable goods manufacturers.

The Company and its banking subsidiary generally have effectively competed with other financial institutions by emphasizing customer service, which it has branded the Camden National Experience, including local decision-making, establishing long-term customer relationships, building customer loyalty and providing products and services designed to meet the needs of customers. No assurance can be given, however, that in the future, the Company and its banking subsidiary will continue to be able to effectively compete with other financial institutions. The Company, through its non-bank subsidiary, Acadia Trust, competes for trust, trust-related, investment management, retirement and pension plan management services with local banks and non-banks, which may now, or in the future, offer a similar range of services, as well as with a number of brokerage firms and investment advisors with offices in the Company’s market area. In addition, most of these services are widely available to the Company’s customers by telephone and over the internet through firms located outside the Company’s market area.

The Company’s Philosophy.  The Company is committed to the philosophy of serving the financial needs of customers in local communities, as described in its core purpose: Through each interaction, we will enrich the lives of people, help businesses succeed and vitalize communities. The Company, through the Bank, has branches that are located in communities within the Company’s geographic market areas. The Company believes that its comprehensive retail, small business and commercial loan products enable the Bank to effectively compete.

The Company’s Growth.  The Company has achieved a five-year compounded annual asset growth rate of 5.4%, resulting in $2.3 billion in total assets as of the end of 2011. The primary factor contributing to the growth was the acquisition of Union Trust. The financial services industry continues to experience consolidations through mergers that could create opportunities for the Company to promote its value proposition to customers. The Company evaluates the possibility of expansion into new markets through both de novo expansion and acquisitions. In addition, the Company is focused on maximizing the potential for growth in existing markets, especially in markets where the Company has less of a presence.

The Company’s Employees.  The Company employs approximately 425 people on a full- or part-time basis, which calculates into 410 people on a full-time equivalent basis. The Company’s management measures the corporate culture every 18 months and is pleased with the most recent rating, which came in as a “positive” culture, signifying that employees understand and support the overall Company objectives and

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strategies. In 2009, the Company was named one of the top two “Best Places to Work in Maine” in the large-size category (200 or more employees) by ModernThink, a workplace excellence firm. There are no known disputes between management and employees.

The Company’s Employee Incentives.  All Company employees are eligible for participation in the Company’s performance-based incentive compensation program and Retirement Savings 401(k) Plan, while certain officers of the Company may also participate in various components of the Company’s 2003 Stock Option Plan, Supplemental Executive Retirement Plan, Postretirement Medical Plan, Defined Contribution Retirement Plan, Executive Incentive Compensation Program, Deferred Compensation Plan and Long-term Incentive Plan.

Supervision and Regulation

The business in which the Company and its subsidiaries are engaged is subject to extensive supervision, regulation and examination by various federal regulatory agencies (the “Agencies”), including the FRB and the OCC. The Bank is also subject to regulation under the laws of the State of Maine and the jurisdiction of the Maine Bureau of Financial Institutions. State and federal banking laws generally have as their principal objective either the maintenance of the safety and soundness of financial institutions and the federal deposit insurance system or the protection of consumers or classes of consumers, and depositors in particular, rather than the specific protection of shareholders. Set forth below is a brief description of certain laws and regulations that relate to the regulation of the Company and its banking subsidiaries.

Regulatory Reform.  The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) comprehensively reformed the regulation of financial institutions, products and services. Among other things, the Dodd-Frank Act:

bars banking organizations, such as the Company, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances, as discussed in “— Supervision and Regulation — Bank Holding Company  — Activities and Other Limitations” and “— Supervision and Regulation — Activities and Investments of National Banking Associations” below;
codifies the source of strength doctrine, as discussed in more detail in “— Supervision and Regulation — Bank Holding Company Support of Subsidiary Banks” below;
grants the FRB increased supervisory authority allowing it to directly examine the subsidiaries of the Company, including the Bank;
provides for new capital standards applicable to the Company and the Bank, as discussed in more detail in “— Supervision and Regulation — Capital Requirements” below;
modifies deposit insurance coverage, as discussed in “— Supervision and Regulation — Deposit Insurance” below;
established the Bureau of Consumer Financial Protection (the “CFPB”), as discussed in “— Consumer Protection Regulation — Consumer Protection Laws — General” below;
established a new standard for preemption of state consumer financial laws, which will affect national banking associations such as the Bank, as discussed in “— Consumer Protection Regulation — Preemption of State Consumer Protection Laws” below;
established new minimum mortgage underwriting standards for residential mortgages, as discussed in “— Consumer Protection Regulation — Mortgage Reform” below;
established new corporate governance and proxy disclosure requirements, as discussed in “— Other Regulatory Requirements — Corporate Governance and Executive Compensation” below;

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authorizes the FRB to regulate interchange fees for debit card transactions. The FRB has issued a rule governing the interchange fees charged on debit cards which caps the fees a bank may charge on a debit card transactions and shifts such interchange fees from a percentage of the transaction amount to a per transaction fee. Although the rule does not directly apply to institutions with less than $10 billion in assets, market forces may result in debit card issuers of all sizes adopting fees that comply with this rule;
permits the payment of interest on business demand deposit accounts;
established and empowered the Financial Stability Oversight Council to designate certain activities as posing a risk to the U.S. financial system and recommend new or heightened standards and safeguards for financial institutions engaging in such activities; and
established the Office of Financial Research, which has the power to require reports from financial services companies such as the Company.

Bank Holding Company — Activities and Other Limitations.  As a BHC, the Company is subject to regulation under the BHCA. In addition, the Company is subject to examination and supervision by the FRB, and is required to file reports with, and provide additional information requested by, the FRB.

Under the BHCA, the Company may not generally engage in activities or acquire more than 5% of any class of voting securities of any company which is not a bank or BHC, and may not engage directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities the FRB determined to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. However, a BHC that has elected to be treated as a “financial holding company” may engage in activities that are financial in nature or incidental or complementary to such financial activities, as determined by the FRB alone, or together with the Secretary of the Department of the Treasury. The Company has not elected “financial holding company” status. Under certain circumstances, the Company may be required to give notice to or seek approval of the FRB before engaging in activities other than banking. Additionally, the Dodd-Frank Act bars banking organizations, such as the Company, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances.

Acquisitions and Branching.  The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (“Riegle-Neal”) and the Dodd-Frank Act permit well capitalized and well managed BHCs and banks, as determined by the FRB and the OCC, respectively, to acquire banks in any state subject to certain concentration limits and other conditions. Riegle-Neal also generally authorizes the interstate merger of banks. In addition, among other things, Riegle-Neal and the Dodd-Frank Act permit banks to establish new branches on an interstate basis to the same extent a bank chartered by the host state may establish branches. However, as a BHC, we are required to obtain prior FRB approval before acquiring more than 5% of a class of voting securities, or substantially all of the assets, of a BHC, bank or savings association.

The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a BHC, such as the Company, unless the FRB has been notified and has not objected to the transaction. Under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting securities of a BHC with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control of the BHC. In addition, a company is required to obtain the approval of the FRB under the BHCA before acquiring 25% (5% in the case of an acquirer that is a BHC) or more of any class of outstanding voting securities of a BHC, or otherwise obtaining control or a “controlling influence” over that BHC. In September 2008, the FRB released guidance on minority investment in banks which relaxed the presumption of control for investments of greater than 10% of a class of outstanding voting securities of a BHC in certain instances discussed in the guidance.

Activities and Investments of National Banking Associations.  National banking associations must comply with the National Bank Act and the regulations promulgated thereunder by the OCC, which limit the activities of national banking associations to those that are deemed to be part of, or incidental to, the “business of banking.” Activities that are part of, or incidental to, the business of banking include taking

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deposits, borrowing and lending money and discounting or negotiating paper. Subsidiaries of national banking associations generally may only engage in activities permissible for the parent national bank. As noted above, the Dodd-Frank Act bars the Bank from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances.

Bank Holding Company Support of Subsidiary Banks.  Under the Dodd-Frank Act, the Company is required to serve as a source of financial strength for the Bank in the event of the financial distress of the Bank. This provision codifies the longstanding policy of the FRB. This support may be required at times when the BHC may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act, as amended (the “FDIA”), the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the “default” of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution “in danger of default.”

Transactions with Affiliates.  Under Sections 23A and 23B of the Federal Reserve Act and Regulation W promulgated thereunder, there are various legal restrictions on the extent to which a BHC and its nonbank subsidiaries may borrow, obtain credit from or otherwise engage in “covered transactions” with its FDIC-insured depository institution subsidiaries. Such borrowings and other covered transactions by an insured depository institution subsidiary (and its subsidiaries) with its nondepository institution affiliates are limited to the following amounts: in the case of one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; and in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. The Dodd-Frank Act amended the definition of affiliate to include an investment fund for which the depository institution or one of its affiliates is an investment adviser. “Covered transactions” are defined by statute for these purposes to include a loan or extension of credit to an affiliate, a purchase of or investment in securities issued by an affiliate, a purchase of assets from an affiliate unless exempted by the FRB, the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company, the issuance of a guarantee, acceptance, or letter of credit on behalf of an affiliate, securities borrowing or lending transactions with an affiliate that creates a credit exposure to such affiliate, or a derivatives transaction with an affiliate that creates a credit exposure to such affiliate. Covered transactions are also subject to certain collateral security requirements. Further, a BHC and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.

Declaration of Dividends.  According to its Policy Statement on Cash Dividends Not Fully Covered by Earnings (the “FRB Dividend Policy”), the FRB considers adequate capital to be critical to the health of individual banking organizations and to the safety and stability of the banking system. Of course, one of the major components of the capital adequacy of a bank or a BHC is the strength of its earnings, and the extent to which its earnings are retained and added to capital or paid to shareholders in the form of cash dividends. Accordingly, the FRB Dividend Policy suggests that banks and BHCs generally should not maintain their existing rate of cash dividends on common stock unless the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. The FRB Dividend Policy reiterates the FRB’s belief that a BHC should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of bank subsidiaries, or that can be funded only through additional borrowings or other arrangements that may undermine the BHC’s ability to serve as a source of strength. The FRB has the authority to prohibit a BHC, such as the Company, from paying dividends if it deems such payment to be an unsafe or unsound practice.

Under Maine law, a corporation’s board of directors may declare, and the corporation may pay, dividends on its outstanding shares, in cash or other property, generally only out of the corporation’s unreserved and unrestricted earned surplus, or out of the unreserved and unrestricted net earnings of the current fiscal year and the next preceding fiscal year taken as a single period, except under certain circumstances, including when the corporation is insolvent, or when the payment of the dividend would render the corporation insolvent or when the declaration would be contrary to the corporation’s charter.

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The revenue of the Company is derived substantially from interest and dividends paid to it by the Bank. Dividend payments by national banks, such as the Bank, also are subject to certain restrictions. For instance, national banks generally may not declare a dividend in excess of the bank’s undivided profits and, absent OCC approval, if the total amount of dividends declared by the national bank in any calendar year exceeds the total of the national bank’s retained net income of that year to date combined with its retained net income for the preceding two years. National banks also are prohibited from declaring or paying any dividend if, after making the dividend, the national bank would be considered “undercapitalized” (as defined by reference to other OCC regulations). The OCC has the authority to use its enforcement powers to prohibit a national bank, such as the Bank, from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis.

Capital Requirements.  The FRB and the OCC have issued substantially similar risk-based and leverage capital guidelines applicable to United States banking organizations. In addition, the Agencies may from time to time require that a banking organization maintain capital above the minimum levels, whether because of its financial condition or actual or anticipated growth.

The FRB’s risk-based guidelines define a three-tier capital framework. Tier 1 capital for bank holding companies generally consists of the sum of common stockholders’ equity, perpetual preferred stock and trust preferred securities (both subject to certain limitations and, in the case of the latter, to specific limitations on the kind and amount of such securities which may be included as Tier 1 capital and certain additional restrictions described below), and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and other non-qualifying intangible assets. Pursuant to the Dodd-Frank Act, trust preferred securities issued after May 19, 2010, will not count as Tier 1 capital; however, the Company’s currently outstanding trust preferred securities have been grandfathered for Tier 1 eligibility. Tier 2 capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities; perpetual preferred stock and trust preferred securities, to the extent it is not eligible to be included as Tier 1 capital; term subordinated debt and intermediate-term preferred stock; and, subject to limitations, general allowances for loan losses. The sum of Tier 1 and Tier 2 capital less certain required deductions, such as investments in unconsolidated banking or finance subsidiaries, represents qualifying total capital. Risk-based capital ratios are calculated by dividing Tier 1 and total capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of four categories of risk-weights, based primarily on relative credit risk. The minimum Tier 1 risk-based capital ratio is 4% and the minimum total risk-based capital ratio is 8%. The Dodd-Frank Act requires the FRB to establish minimum risk-based capital requirements that may not be lower than those in effect on July 21, 2010. As of December 31, 2011, the Company’s Tier 1 risk-based capital ratio was 14.69% and its total risk-based capital ratio was 15.95%.

In addition to the risk-based capital requirements, the FRB requires top rated bank holding companies to maintain a minimum leverage capital ratio of Tier 1 capital (defined by reference to the risk-based capital guidelines) to its average total consolidated assets of at least 3.0%. For most other bank holding companies (including the Company), the minimum leverage capital ratio is 4.0%. Bank holding companies with supervisory, financial, operational or managerial weaknesses, as well as bank holding companies that are anticipating or experiencing significant growth, are expected to maintain capital ratios well above the minimum levels. The Company’s leverage capital ratio was 9.59% as of December 31, 2011.

Pursuant to the Dodd-Frank Act, as with the risk-based capital requirements discussed above, the leverage capital requirements generally applicable to insured depository institutions will serve as a floor for any leverage capital requirements the FRB may establish for bank holding companies, such as the Company. The Dodd-Frank Act also specifies that the FRB may not establish leverage capital requirements for bank holding companies that are quantitatively lower than the leverage capital requirements in effect for insured depository institutions as of July 21, 2010.

The OCC has promulgated regulations and adopted a statement of policy regarding the capital adequacy of national banks. These requirements are substantially similar to those adopted by the FRB regarding bank holding companies, as described above. Moreover, the OCC has promulgated corresponding regulations to implement the system of prompt corrective action established by Section 38 of the Federal Deposit Insurance

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Act (“FDIA”). Under the regulations, a bank is “well capitalized” if it has: (1) a total risk-based capital ratio of 10.0% or greater; (2) a Tier 1 risk-based capital ratio of 6.0% or greater; (3) a leverage ratio of 5.0% or greater; and (4) is not subject to any written agreement, order, capital directive or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. A bank is “adequately capitalized” if it has: (1) a total risk-based capital ratio of 8.0% or greater; (2) a Tier 1 risk-based capital ratio of 4.0% or greater; and (3) a leverage ratio of 4.0% or greater (3.0% under certain circumstances) and does not meet the definition of a “well capitalized bank.”

The OCC also must take into consideration: (1) concentrations of credit risk; (2) interest rate risk; and (3) risks from non-traditional activities, as well as an institution’s ability to manage those risks, when determining the adequacy of an institution’s capital. This evaluation will be made as a part of the institution’s regular safety and soundness examination. At December 31, 2011, the Bank was deemed to be a “well capitalized” institution for the above purposes. Information concerning the Company and its subsidiaries with respect to capital requirements is incorporated by reference from Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, in the section entitled “Capital Resources,” and Item 8. Financial Statements and Supplementary Data, in the section entitled “Note 18, Regulatory Capital Requirements.”

Generally, a bank, upon receiving notice that it is not adequately capitalized (i.e., that it is “undercapitalized”), becomes subject to the prompt corrective action provisions of Section 38 of FDIA that, for example, (i) restrict payment of capital distributions and management fees, (ii) require that the OCC monitor the condition of the institution and its efforts to restore its capital, (iii) require submission of a capital restoration plan, (iv) restrict the growth of the institution’s assets and (v) require prior regulatory approval of certain expansion proposals. A bank that is required to submit a capital restoration plan must concurrently submit a performance guarantee by each company that controls the bank. A bank that is “critically undercapitalized” (i.e., has a ratio of tangible equity to total assets that is equal to or less than 2.0%) will be subject to further restrictions, and generally will be placed in conservatorship or receivership within 90 days.

The Company has not elected, and does not expect to elect, to calculate its risk-based capital requirements under either the “advanced” or “standard” approach of the Basel II capital accords. The Basel Committee on Banking Supervision has also released new capital requirements, known as Basel III, setting forth higher capital requirements, enhanced risk coverage, a global leverage ratio, provisions for counter-cyclical capital, and liquidity standards. The FRB has not yet adopted Basel III, and when it is implemented in the United States, it may be with some modifications or adjustments. Additionally, the timetable for the adoption and implementation of Basel III is expected to last for several years. Accordingly, the Company is not yet in a position to determine the effect of Basel III on its capital requirements.

The Agencies may raise capital requirements applicable to banking organizations beyond current levels. The Company is unable to predict whether higher capital requirements will be imposed and, if so, at what levels and on what schedules. Therefore, the Company cannot predict what effect such higher requirements may have on it.

Deposit Insurance.  The Bank pays deposit insurance premiums to the FDIC based on an assessment rate established by the FDIC. For most banks and savings associations, including the Bank, FDIC rates depend upon a combination of CAMELS component ratings and financial ratios. CAMELS ratings reflect the applicable bank regulatory agency’s evaluation of the financial institution’s capital, asset quality, management, earnings, liquidity and sensitivity to risk. For large banks and savings associations that have long-term debt issuer ratings, assessment rates depend upon such ratings, and CAMELS component ratings. Pursuant to the Dodd-Frank Act, deposit premiums are now based on assets rather than insurable deposits. To determine its actual deposit insurance premiums, the Bank will compute the base amount on its average consolidated assets less its average tangible equity (defined as the amount of Tier 1 capital) and its applicable assessment rate. The new assessment formula was effective on April 1, 2011, and was used to calculate the June 30, 2011 assessment. Future expenses will be based on asset levels, Tier 1 capital levels, assessment rates, CAMELS ratings, and whether there are any future special assessments by the FDIC.

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Pursuant to an FDIC rule issued in November 2009, the Bank prepaid its quarterly risk-based assessments to the FDIC for the fourth quarter of 2009 and for all of 2010, 2011, and 2012 on December 30, 2009. The amount of the Bank’s prepaid deposit premium was $4.8 million as of December 31, 2011. The Bank, recorded the entire amount of its prepayment as an asset (a prepaid expense). The prepaid assessments bear a 0% risk weight for risk-based capital purposes. Each quarter, the Bank has recorded and will record an expense for its regular quarterly assessment for the quarter and a corresponding credit to the prepaid assessment until the asset is exhausted. The FDIC will not refund or collect additional prepaid assessments because of a decrease or growth in deposits over the remaining two years. However, should the prepaid assessment not be exhausted after collection of the amount due on June 30, 2013, the remaining amount of the prepayment will be returned to the Bank. Pursuant to the Dodd-Frank Act, FDIC deposit insurance has been permanently increased from $100,000 to $250,000 per depositor. Additionally, the Dodd-Frank Act provides temporary unlimited deposit insurance coverage for noninterest-bearing transactions accounts beginning December 31, 2010, and ending December 31, 2012. This replaced the FDIC’s Transaction Account Guarantee Program, which expired on December 31, 2010.

The FDIC has the power to adjust deposit insurance assessment rates at any time. We cannot predict whether, as a result of the adverse change in U.S. economic conditions and, in particular, declines in the value of real estate in certain markets served by the Bank, the FDIC will in the future increase deposit insurance assessment levels.

Consumer Protection Regulation

Consumer Protection Laws — General.  The Company and the Bank are subject to a number of federal and state laws designed to protect consumers and prohibit unfair or deceptive business practices. These laws include the Equal Credit Opportunity Act, the Fair Housing Act, the Home Ownership Protection Act, the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”), the Gramm-Leach-Bliley Act of 1999 (the “GLBA”), Truth in Lending Act, the Community Reinvestment Act (the “CRA”), the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans and providing other services. Further, the Dodd-Frank Act established the CFPB, which has the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The OCC examines the Bank for compliance with CFPB rules and enforce CFPB rules with respect to the Bank.

Preemption of State Consumer Protection Laws.  The Dodd-Frank Act established a new standard for preemption of state consumer financial laws, which will affect national banking associations such as the Bank. Under the new standard, a state consumer protection law may only be preempted if it has a discriminatory effect against national banks, it prevents or significantly interferes with the exercise of a national bank’s powers as determined by court order or by the OCC on a case-by-case basis or such law is preempted by a provision of federal law. This standard is expected to result in the preemption of fewer state consumer laws, thus, the Bank may have to comply with certain state laws that were considered preempted before the enactment of the Dodd-Frank Act.

Mortgage Reform.  The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan. The Dodd-Frank Act also allows borrowers to assert violations of certain provisions of the Truth-in-Lending Act as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, in each billing statement and for negative amortization loans and hybrid adjustable rate mortgages.

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Privacy and Customer Information Security.  GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the Bank must provide its customers with an annual disclosure that explains its policies and procedures regarding the disclosure of such nonpublic personal information, and, except as otherwise required or permitted by law, the Bank is prohibited from disclosing such information except as provided in such policies and procedures. GLBA also requires that the Bank develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information (as defined under GLBA), to protect against anticipated threats or hazards to the security or integrity of such information; and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Bank is also required to send a notice to customers whose “sensitive information” has been compromised if unauthorized use of this information is “reasonably possible.” A majority of states have enacted legislation concerning breaches of data security and Congress is considering federal legislation that would require consumer notice of data security breaches. Pursuant to the FACT Act, the Bank must also develop and implement a written identity theft prevention program to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations.

Other Regulatory Requirements

The Community Reinvestment Act.  The CRA requires lenders to identify the communities served by the Bank’s offices and other deposit taking facilities and to make loans and investments and provide services that meet the credit needs of these communities. The Agencies examine banks and rate such institutions’ compliance with the CRA as “Outstanding,” “Satisfactory,” “Needs to Improve” or “Substantial Noncompliance.” Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from undertaking certain activities, including engaging in activities newly permitted as a financial holding company under the GLBA and acquisitions of other financial institutions. The FRB must take into account the record of performance of banks in meeting the credit needs of the entire community served, including low-and moderate-income neighborhoods. The Bank has achieved a rating of “Outstanding” on its most recent CRA examination.

Anti-Money Laundering and the Bank Secrecy Act.  Under the Bank Secrecy Act (“BSA”), a financial institution, is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report to the United States Treasury any cash transactions involving more than $10,000. In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), which amended the BSA, is designed to deny terrorists and others the ability to obtain anonymous access to the U.S. financial system. The USA PATRIOT Act has significant implications for financial institutions and businesses of other types involved in the transfer of money. The USA PATRIOT Act, together with the implementing regulations of various federal regulatory agencies, has caused financial institutions, such as the Bank, to adopt and implement additional policies or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer identity verification and customer risk analysis. In evaluating an application under Section 3 of the BHCA to acquire a bank or an application under the Bank Merger Act to merge banks or affect a purchase of assets and assumption of deposits and other liabilities, the applicable federal banking regulator must consider the anti-money laundering compliance record of both the applicant and the target. In addition, under the USA PATRIOT Act financial institutions are required to take steps to monitor their correspondent banking and private banking relationships as well as, if applicable, their relationships with “shell banks.”

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Office of Foreign Assets Control (“OFAC”).  The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by OFAC, take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for the Company.

Regulation R.  The GLBA also amended the federal securities laws to eliminate the blanket exceptions that banks traditionally have had from the definition of “broker,” “dealer” and “investment adviser” under the Exchange Act. The GLBA provided 11 exceptions from the definition of “broker” in Section 3(a)(4) of the Exchange Act that permit banks to effect securities transactions under certain conditions without registering as broker-dealers with the SEC. Regulation R, which was issued jointly by the SEC and the FRB, implements certain of these exceptions. The FRB and SEC have stated that they will jointly issue any interpretations or no action letters/guidance regarding Regulation R and consult with each other and the appropriate federal banking agency with respect to formal enforcement actions pursuant to Regulation R.

Corporate Governance and Executive Compensation.  Under the Dodd-Frank Act, the SEC has adopted rules granting shareholders a non-binding vote on executive compensation and “golden parachute” payments. Pursuant to modifications of the proxy rules under the Dodd-Frank Act, the Company will be required to disclose the relationship between executive pay and financial performance, the ratio of the median pay of all employees to the pay of the chief executive officer, and employee and director hedging activities. The Dodd-Frank Act also requires that stock exchanges change their listing rules to require that each member of a listed company’s compensation committee be independent and be granted the authority and funding to retain independent advisors and to prohibit the listing of any security of an issuer that does not adopt policies governing the claw back of excess executive compensation based on inaccurate financial statements. The Agencies have proposed new regulations which prohibit incentive-based compensation arrangements that encourage executives and certain other employees to take inappropriate risks.

Regulatory Enforcement Authority.  The enforcement powers available to the Agencies include, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties. In general, these enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Under certain circumstances, federal and state law requires public disclosure and reports of certain criminal offenses and also final enforcement actions by the Agencies.

Legal Contingencies

In the normal course of business, the Company and its subsidiaries are subject to pending and threatened legal actions. Although the Company is not able to predict the outcome of such actions, after reviewing pending and threatened actions with counsel, management believes that based on the information currently available the outcome of such actions, individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position as a whole.

Reserves are established for legal claims only when losses associated with the claims are judged to be probable, and the loss can be reasonably estimated. In many lawsuits and arbitrations, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the case is close to resolution, in which case a reserve will not be recognized until that time.

In October 2010, Daniel G. Lilley Law Offices, P.A. filed a complaint against the Bank in the Superior Court in Oxford County, Maine claiming that the Bank owed Daniel G. Lilley Law Offices, P.A. compensation for a benefit that the Law Offices provided to the Bank. While the plaintiff has not yet given a final

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calculation of the damages sought, it appears that it seeks payment of approximately $574,000, or 40% of the benefit it alleges was retained by the Bank from The Steamship Navigation Company judgment in September 2004. The case was transferred to the Business Court in Portland and a motion to dismiss was filed with the court by the Bank. On May 19, 2011, the court granted the Bank’s motion to dismiss the complaint. However, on June 8, 2011, Daniel G. Lilley Law Offices, P. A. filed an appeal to this ruling. In December 2011, both parties filed documents with the law court under the appeal and we are awaiting a final ruling. We anticipate final ruling and/or resolution in the next few months.

Available Information

The Company’s Investor Relations information can be obtained through its subsidiary bank’s internet address, www.camdennational.com. The Company makes available on or through its Investor Relations page without charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. The Company’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov. In addition, the Company makes available, free of charge, its press releases and Code of Ethics through the Company’s Investor Relations page. Information on our website is not incorporated by reference into this document and should not be considered part of this Report.

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Item 1A. Risk Factors

If our allowance for loan losses is not adequate to cover actual loan losses, our earnings could decrease.

We make various assumptions and judgments about the collectability of our loan portfolio and provide an allowance for probable loan losses based on a number of factors. Monthly, the Corporate Risk Management group reviews the assumptions, calculation methodology and balance of the allowance for loan losses with the board of directors for the Bank. On a quarterly basis, the Company’s board of directors, as well as the board of directors for the subsidiary bank, completes a similar review of the allowance for loan losses. If the assumptions are incorrect, the allowance for loan losses may not be sufficient to cover the losses we could experience, which would have an adverse effect on operating results, and may also cause us to increase the allowance for loan losses in the future. In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our provisions for credit losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by regulatory authorities could have a material adverse effect on our consolidated results of operations and financial condition. If additional amounts are provided to the allowance for loan losses, our earnings could decrease.

Our loans are concentrated in certain areas of Maine and adverse conditions in those markets could adversely affect our operations.

We are exposed to real estate and economic factors throughout Maine, as virtually the entire loan portfolio is concentrated among borrowers in Maine, with higher concentrations of exposure in Cumberland, Hancock, Knox and Waldo counties. Further, because a substantial portion of the loan portfolio is secured by real estate in this area, the value of the associated collateral is also subject to regional real estate market conditions. Adverse economic, political or business developments or natural hazards may affect these areas and the ability of property owners in these areas to make payments of principal and interest on the underlying mortgages. If these regions experience adverse economic, political or business conditions, we would likely experience higher rates of loss and delinquency on these loans than if the loans were more geographically diverse.

We experience strong competition within our markets, which may impact our profitability.

Competition in the banking and financial services industry is strong. In our market areas, we compete for loans, deposits and other financial products and services with local independent banks, thrift institutions, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies and brokerage and investment banking firms operating locally as well as nationally. Many of these competitors have substantially greater resources and lending limits than those of our subsidiaries and may offer services that our subsidiaries do not or cannot provide. Our long-term success depends on the ability of our subsidiaries to compete successfully with other financial institutions in their service areas. Because we maintain a smaller staff and have fewer financial and other resources than larger institutions with which we compete, we may be limited in our ability to attract customers. If we are unable to attract and retain customers, we may be unable to achieve growth in the loan and core deposit portfolios, and our results of operations and financial condition may be negatively impacted.

If we do not maintain net income growth, the market price of our common stock could be adversely affected.

Our return on shareholders’ equity and other measures of profitability, which affect the market price of our common stock, depend in part on our continued growth and expansion. Our growth strategy has two principal components — internal growth and external growth. Our ability to generate internal growth is affected by the competitive factors described below as well as by the primarily rural characteristics and related demographic features of the markets we serve. Our ability to continue to identify and invest in suitable acquisition candidates on acceptable terms is an important component of our external growth strategy. In pursuing acquisition opportunities, we may be in competition with other companies having similar growth strategies. As a result, we may not be able to identify or acquire promising acquisition candidates on acceptable terms. Competition for these acquisitions could result in increased acquisition prices and a diminished pool of acquisition opportunities. An inability to find suitable acquisition candidates at reasonable prices could slow our growth rate and have a negative effect on the market price of our common stock.

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Interest rate volatility may reduce our profitability.

Our profitability depends to a large extent upon our net interest income, which is the difference between interest income on interest-earning assets, such as loans and investments, and interest expense on interest-bearing liabilities, such as deposits and borrowed funds. Net interest income can be affected significantly by changes in market interest rates. In particular, changes in relative interest rates may reduce our net interest income as the difference between interest income and interest expense decreases. As a result, we have adopted asset and liability management policies to minimize the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments and funding sources. However, there can be no assurance that a change in interest rates will not negatively impact our results from operations or financial position. Since market interest rates may change by differing magnitudes and at different times, significant changes in interest rates over an extended period of time could reduce overall net interest income. An increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations, which could not only result in increased loan defaults, foreclosures and write-offs, but also necessitate further increases to our allowance for loan losses.

Our banking business is highly regulated, and we may be adversely affected by changes in law and regulation.

We are subject to regulation and supervision by the FRB, and the Bank is subject to regulation and supervision by the OCC and the FDIC. Federal laws and regulations govern numerous matters, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible nonbanking activities, the level of reserves against deposits and restrictions on dividend payments. The OCC possesses the power to issue cease and desist orders to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the FRB possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we may conduct business and obtain financing.

The Dodd-Frank Act comprehensively reformed the regulation of financial institutions, products and services. Because many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years, it is difficult to forecast the impact that such rulemaking will have on us, our customers or the financial industry. Certain provisions of the Dodd-Frank Act that affect deposit insurance assessments, the payment of interest on demand deposits and interchange fees could increase the costs associated with the Bank’s deposit-generating activities, as well as place limitations on the revenues that those deposits may generate. For example, while the FRB adopted rules pursuant to the Dodd-Frank Act governing debit card interchange fees that apply to institutions with greater than $10 billion in assets, market forces may effectively require all banks to adopt debit card interchange fee structures that comply with these rules.

Among other things, the Dodd-Frank Act established the Consumer Financial Protection Bureau, or the “CFPB,” as an independent bureau of the FRB. The CFPB has the authority to prescribe rules for all depository institutions governing the provision of consumer financial products and services, which may result in rules and regulations that reduce the profitability of such products and services or impose greater costs on us and our subsidiaries. The Bank will be examined by the OCC for compliance with such rules. The Dodd-Frank Act established new minimum mortgage underwriting standards for residential mortgages and the regulatory agencies have focused on the examination and supervision of mortgage lending and servicing activities. Over the past year there has been a heightened regulatory scrutiny of consumer fees, which may result in new disclosure requirements or regulations regarding the fees that the Bank may charge for products and services.

Regulators may raise capital requirements above current levels in connection with the implementation of Basel III, the Dodd-Frank Act or otherwise, which may require us and the Bank to hold additional capital which could limit the manner in which we and the Bank conduct our business and obtain financing. Furthermore, the imposition of liquidity requirements in connection with the implementation of Basel III in the United States, or otherwise, could result in us and the Bank having to lengthen the term of our funding, restructure our business models, and/or increase our holdings of liquid assets. If the federal banking agencies

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implement a capital conservation buffer and/or a countercyclical capital buffer, as proposed in Basel III, a failure by us or the Bank to satisfy the applicable buffer’s requirements would limit our ability to make distributions, including paying out dividends or buying back shares.

Our cost of funds may increase as a result of general economic conditions, interest rates and competitive pressures.

The Bank has traditionally obtained funds principally through deposits and borrowings. As a general matter, deposits are a less costly source of funds than borrowings because interest rates paid for deposits are typically less than interest rates charged for borrowings. If, as a result of general economic conditions, market interest rates, competitive pressures or otherwise, the value of deposits at our banking subsidiary decreases relative to our overall banking operations, we may have to rely more heavily on borrowings as a source of funds in the future.

We are subject to liquidity risk.

Liquidity risk is the risk of potential loss if we are unable to meet our funding requirements at a reasonable cost. Our liquidity could be impaired by an inability to access the capital markets or by unforeseen outflows of cash. This situation may arise due to circumstances that we may be unable to control, such as a general market disruption or an operational problem that affects third parties or us. Our credit ratings are important to our liquidity. A reduction in our credit ratings could adversely affect our liquidity and competitive position, increase our borrowing costs, limit our access to the capital markets or trigger unfavorable contractual obligations.

Our access to funds from subsidiaries may be restricted.

The Company is a separate and distinct legal entity from our banking subsidiaries. We therefore depend on dividends, distributions and other payments from our banking and nonbanking subsidiaries to fund dividend payments on our common stock and to fund all payments on our other obligations. Our subsidiaries are subject to laws that authorize regulatory bodies to block or reduce the flow of funds from those subsidiaries to the Company, which could impede access to funds we need to make payments on our obligations or dividend payments.

Prepayments of loans may negatively impact our business.

Generally, our customers may prepay the principal amount of their outstanding loans at any time. The speeds at which such prepayments occur, as well as the size of such prepayments, are within our customers’ discretion. If customers prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, our interest income will be reduced. A significant reduction in interest income could have a negative impact on our results of operations and financial condition.

We may incur significant losses as a result of ineffective risk management processes and strategies.

We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance and legal reporting systems, internal controls, management review processes and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application may not be effective and may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes. Market conditions over the last several years have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.

We may be unable to attract and retain key personnel.

The Company’s success depends, in large part, on its ability to attract and retain key personnel. Competition for qualified personnel in the financial services industry can be intense and the Company may not be able to hire or retain the key personnel that it depends upon for success. The unexpected loss of services of

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one or more of the Company’s key personnel could have a material adverse impact on its business because of their skills, knowledge of the markets in which the Company operates, years of industry experience and the difficulty of promptly finding qualified replacement personnel.

We have credit and counterparty risk inherent in our securities portfolio and bank-owned life insurance policies.

We maintain a diversified securities portfolio, which includes mortgage-backed securities issued by U.S. government and government sponsored agencies, obligations of the U.S. Treasury and government-sponsored agencies, securities issued by state and political subdivisions, private issue collateralized mortgage obligations and auction preferred securities. We also carry investments in bank-owned life insurance and Federal Home Loan Bank stock. We seek to limit credit losses in our securities portfolios by generally purchasing only highly-rated securities.

The current economic environment and financial markets volatility increase the difficulty of assessing investment securities impairment and the same influences tend to increase the risk of potential impairment of these assets. During the years ended December 31, 2011, 2010 and 2009, we recorded charges for other-than-temporary impairment of securities of $109,000, $221,000 and $11,000, respectively. We believe that we have adequately reviewed our investment securities for impairment and that our investment securities are carried at fair value. However, over time, the economic and market environment may provide additional insight regarding the fair value of certain securities, which could change our judgment regarding impairment. In addition, if the counter-party should default, become insolvent, declare bankruptcy, or otherwise cease to exist, the value of our investment may be impaired. This could result in realized losses relating to other-than-temporary declines being charged against future income. Given the current market conditions and the significant judgments involved, there is continuing risk that further declines in fair value may occur and additional material other-than-temporary impairments may be charged to income in future periods, resulting in realized losses.

Increases in FDIC deposit insurance premiums will increase our non-interest expense.

Pursuant to the Dodd-Frank Act, the FDIC has amended the deposit insurance assessment by changing the calculation of deposit assessments. Under the new calculation, deposit premiums will be based on assets rather than insurable deposits. To determine its actual deposit insurance premiums, the Bank will compute the base amount on its average consolidated assets less its average tangible equity (which the FDIC proposes to be defined as the amount of Tier 1 capital) and its applicable assessment rate. The new assessment formula was effective on April 1, 2011, and was used to calculate the June 30, 2011 assessment. Future expenses will be based on asset levels, Tier 1 capital levels, assessment rates, CAMELS ratings, and whether there are any future special assessments by the FDIC. Any increase in our deposit insurance premiums will result in an increase in our non-interest expense.

We could be held responsible for environmental liabilities of properties we acquired through foreclosure.

If we are forced to foreclose on a defaulted mortgage loan to recover our investment, we may be subject to environmental liabilities related to the underlying real property. Hazardous substances or wastes, contaminants, pollutants or sources thereof may be discovered on properties during our ownership or after a sale to a third party. The amount of environmental liability could exceed the value of the real property. There can be no assurance that we would not be fully liable for the entire cost of any removal and clean-up on an acquired property, that the cost of removal and clean-up would not exceed the value of the property, or that we could recoup any of the costs from any third party.

Due to the nature of our business, we may be subject to litigation from time to time, some of which may not be covered by insurance.

As a holding company and through our bank subsidiary, we operate in a highly regulated industry, and as a result, are subject to various regulations related to disclosures to our customers, our lending practices, and other fiduciary responsibilities, including those to our shareholders. From time to time, we have been, and may become, subject to legal actions relating to our operations that have involved, or could involve, claims

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for substantial monetary damages. Although we maintain insurance, the scope of this coverage may not provide us with full, or even partial, coverage in any particular case. As a result, a judgment against us in any such litigation could have a material adverse effect on our financial condition and results of operation.

We are subject to reputational risk.

Our actual or perceived failure to (a) identify and address potential conflicts of interest, ethical issues, money-laundering, or privacy issues; (b) meet legal and regulatory requirements applicable to the Bank and to the Company; (c) maintain the privacy of customer and accompanying personal information; (d) maintain adequate record keeping; (e) engage in proper sales and trading practices; and (f) identify the legal, reputational, credit, liquidity and market risks inherent in our products could give rise to reputational risk that could cause harm to the Bank and our business prospects. If we fail to address any of these issues in an appropriate manner, we could be subject to additional legal risks, which, in turn, could increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines and penalties and cause us to incur related costs and expenses. Our ability to attract and retain customers and employees could be adversely affected to the extent our reputation is damaged.

To the extent that we acquire other companies, our business may be negatively impacted by certain risks inherent with such acquisitions.

We have acquired and will continue to consider the acquisition of other financial services companies. To the extent that we acquire other companies in the future, our business may be negatively impacted by certain risks inherent with such acquisitions. These risks include the following:

the risk that the acquired business will not perform in accordance with management’s expectations;
the risk that difficulties will arise in connection with the integration of the operations of the acquired business with the operations of our businesses;
the risk that management will divert its attention from other aspects of our business;
the risk that we may lose key employees of the combined business; and
the risks associated with entering into geographic and product markets in which we have limited or no direct prior experience.

We may be required to write down goodwill and other identifiable intangible assets.

When the Company acquires a business, a portion of the purchase price of the acquisition is allocated to goodwill and other identifiable intangible assets. The excess of the purchase price over the fair value of the net identifiable tangible and intangible assets acquired determines the amount of the purchase price that is allocated to goodwill acquired. At December 31, 2011, the Company’s goodwill and other identifiable intangible assets were approximately $45.2 million. Under current accounting standards, if the Company determines goodwill or intangible assets are impaired, it would be required to write down the value of these assets. The Company conducts an annual review to determine whether goodwill and other identifiable intangible assets are impaired. The Company recently completed such an impairment analysis and concluded that goodwill was impaired by $50,000, which resulted in an expense recorded in 2011. The Company cannot provide assurance whether it will be required to take an additional impairment charge in the future. Any impairment charge would have a negative effect on its shareholders’ equity and financial results and may cause a decline in our stock price.

We are subject to operational risk.

We are subject to certain operational risks, including, but not limited to, information technology system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. We depend upon information technology, software, communication, and information exchange on a variety of computing platforms and networks and over the Internet. Despite instituted safeguards, we cannot be certain that all of our systems are entirely free from vulnerability to attack or other technological difficulties or failures. If our information security is breached or other technology difficulties or failures occur,

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information may be lost or misappropriated, services and operations may be interrupted and we could be exposed to claims from customers. While we maintain a system of internal controls and procedures, any of these results could have a material adverse effect on our business, financial condition, results of operations or liquidity.

We must adapt to information technology changes in the financial services industry, which could present operational issues, require significant capital spending, or impact our reputation.

The financial services industry is constantly undergoing technological changes, with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and reduce costs. The Company’s future success will depend, in part, upon the Company’s ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience, as well as to create additional efficiencies in the Company’s operations. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to the Company’s customers.

The market value of wealth management assets under administration may be negatively affected by changes in economic and market conditions.

A substantial portion of income from fiduciary services is dependent on the market value of wealth management assets under administration, which are primarily marketable securities. Changes in domestic and foreign economic conditions, volatility in financial markets, and general trends in business and finance, all of which are beyond our control, could adversely impact the market value of these assets and the fee revenues derived from the management of these assets.

We may not be able to attract and retain wealth management clients at current levels.

Due to strong competition, our wealth management division may not be able to attract and retain clients at current levels. Competition is strong as there are numerous well-established and successful investment management and wealth advisory firms including commercial banks and trust companies, investment advisory firms, mutual fund companies, stock brokerage firms, and other financial companies. Our ability to attract and retain wealth management clients is dependent upon our ability to compete with competitors’ investment products, level of investment performance, client services, marketing and distribution capabilities. If we are not successful, our results of operations and financial condition may be negatively impacted.

Our shareholders may not receive dividends on the common stock.

Holders of our common stock are entitled to receive dividends only when, and if declared by our board of directors. Although we have historically declared cash dividends on our common stock, we are not required to do so and our board of directors may reduce or eliminate our common stock dividend in the future. Further, the FRB has issued guidelines for evaluating proposals by large bank holding companies to increase dividends or repurchase or redeem shares, which includes a requirement for such firms to develop a capital distribution plan. The FRB has indicated that it is considering expanding these requirements to cover all bank holding companies, which may in the future restrict our ability to pay dividends. A reduction or elimination of dividends could adversely affect the market price of our common stock.

Changes in accounting standards can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.

Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board (“FASB”) changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to anticipate and implement and can materially impact how we record and report our financial condition and results of operations. For example, the FASB’s current financial instruments project could, among other things, significantly change the way loan loss provisions are determined from an incurred loss model to an expected loss model, and may also result in most financial instruments being required to be reported at fair value.

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Our financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future.

Pursuant to U.S. generally accepted accounting principles, we are required to use certain assumptions and estimates in preparing our financial statements, including in determining credit loss reserves, reserves related to litigation and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying our financial statements are incorrect, we may experience material losses. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies.”

Our financial condition and results of operations have been adversely affected, and may continue to be adversely affected, by the U.S. and international financial market and economic conditions.

We have been and continue to be impacted by general business and economic conditions in the United States and, to a lesser extent, abroad. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets, broad trends in industry and finance, unemployment and the strength of the U.S. economy and the local economies in which the Company operates, all of which are beyond the Company’s control. Continued deterioration in any of these conditions could result in an increase in loan delinquencies, and non-performing assets, decreases in loan collateral values and a decrease in demand for the Company’s products and services. While there are indications that the U.S. economy is stabilizing, there remains significant uncertainty regarding the sustainability of the economic recovery, unemployment levels and the impact of the U.S. government’s unwinding of its extensive economic and market support.

Continued market volatility may impact our business and the value of our common stock.

Our business performance and the trading price of shares of our common stock may be affected by many factors affecting financial institutions, including volatility in the credit, mortgage and housing markets, the markets for securities relating to mortgages or housing, and the value of debt and mortgage-backed and other securities that we hold in our investment portfolio. Government action and legislation may also impact us and the value of our common stock. We cannot predict what impact, if any, volatility will have on our business or share price and for these and other reasons our shares of common stock may trade at a price lower than that at which they were purchased.

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Item 1B. Unresolved Staff Comments

There are no unresolved written comments relating to our periodic or current reports under the Securities Exchange Act of 1934 that were received from the SEC staff 180 days or more before the end of our fiscal year.

Item 2. Properties

The Company operates in 40 facilities, all of which are fully utilized and considered suitable and adequate for the purposes intended. The Company has a 38 branch network located in 12 counties throughout Maine. The Company owns twenty-three of its branch facilities, none of which are subject to a mortgage and the remaining branch facilities and, two parking lots are leased. Related rent expense appears in Note 5 of the Consolidated Financial Statements. The following table presents our materially important properties as of December 31, 2011.

         
Facility Name   Location   General
Character of the
Physical Property
  Primary Business Segment   Property
Status
  Property
Square Feet
Main Office     Camden, Maine       3 story building       Principal executive office       Owned       15,500  
Hanley Center     Rockport, Maine       2 story building       Service center       Owned       32,360  
Bangor     Bangor, Maine       2 story building       Branch       Owned       25,334 (a) 
Acadia Trust     Portland, Maine       1 floor       Main office       Leased       18,966 (b) 
Rockland     Rockland, Maine       3 story building       Branch       Owned       21,600  
Ellsworth     Ellsworth, Maine       3 story building       Branch       Owned       44,000 (a) 

(a) Includes leased space to third parties.
(b) Property square feet represents the square footage occupied by the Company.

Item 3. Legal Proceedings

Various legal claims arise from time to time in the normal course of the Company’s business, which in our opinion, are not expected to have a material effect on our Consolidated Financial Statements.

Item 4. Removed and Reserved

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PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

The Company’s common stock is currently traded on the NASDAQ Global Market (“NASDAQ”) under the ticker symbol “CAC.” The Company has paid quarterly dividends since its inception in 1984 following a corporate reorganization in which the shareholders of the Bank exchanged shares of Bank stock for shares in the Company. The high and low closing sales prices (as quoted by NASDAQ for 2011 and 2010) and cash dividends paid per share of the Company’s common stock, by calendar quarter for the past two years were as follows:

           
  2011   2010
     Market Price   Dividends
Paid per
Share
  Market Price   Dividends
Paid per
Share
     High   Low   High   Low
First Quarter   $ 37.63     $ 31.74     $ 0.25     $ 34.53     $ 28.75     $ 0.25  
Second Quarter   $ 37.67     $ 30.95     $ 0.25     $ 36.94     $ 27.42     $ 0.25  
Third Quarter   $ 34.57     $ 25.19     $ 0.25     $ 35.00     $ 26.58     $ 0.25  
Fourth Quarter   $ 33.12     $ 25.80     $ 0.75     $ 39.63     $ 32.63     $ 0.25  

As of December 31, 2011, there were 7,664,975 shares of the Company’s common stock outstanding held of record by approximately 1,700 shareholders, as obtained through our transfer agent. Such number of record holders does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms and other nominees, which is estimated to be 3,500 shareholders based on the number of requested copies from such institutions.

Although the Company has historically paid quarterly dividends on its common stock, the Company’s ability to pay such dividends depends on a number of factors, including restrictions under federal laws and regulations on the Company’s ability to pay dividends, and as a result, there can be no assurance that dividends will be paid in the future. For further information on dividend restrictions, refer to the “Capital Resources” section in Item 7.

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The following graph illustrates the annual percentage change in the cumulative total shareholder return of the Company’s common stock for the period December 31, 2006 through December 31, 2011. For purposes of comparison, the graph illustrates comparable shareholder returns of the ABA NASDAQ Community Bank Index, the SNL $1B – $5B Bank Index, and the Russell 2000 Stock Index. The graph assumes a $100 investment on December 31, 2006 in each case and measures the amount by which the market value, assuming reinvestment of dividends, has changed as of December 31, 2011.

Stock Performance Graph

[GRAPHIC MISSING]

In September 2011, the Company’s board of directors authorized the 2011 Common Stock Repurchase Program (“The Repurchase Program”). The Repurchase Program will allow for the repurchase of up to 500,000 shares, or approximately 6.5%, of the Company’s outstanding common stock over the next year when it feels conditions warrant. The following table presents the Company’s purchase of equity securities during the fourth quarter of 2011.

       
Period   Total number
of shares
purchased
  Average
price paid
per share
  Total number of shares
purchased as part of
publically announced
plans or programs
  Maximum number of shares
that may yet be
purchased under the
plans or programs
November 1 – 30, 2011     7,616     $ 29.03       7,616       492,384  
December 1 – 31, 2011     5,625       29.71       5,625       486,759  
Total     13,241     $ 29.34       13,241       486,759  

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Item 6. Selected Financial Data

         
  At or for the Year Ended December 31,
(In Thousands, Except per Share Data)   2011   2010   2009   2008(1)   2007
Financial Condition Data
                                            
Investments   $ 611,998     $ 611,643     $ 539,587     $ 670,040     $ 483,648  
Loans and loans held for sale     1,520,089       1,530,280       1,526,758       1,500,908       1,145,639  
Allowance for loan losses     23,011       22,293       20,246       17,691       13,653  
Total assets     2,302,720       2,306,007       2,235,383       2,341,496       1,716,788  
Deposits     1,591,366       1,515,811       1,495,807       1,489,517       1,118,051  
Borrowings     456,233       559,919       527,347       661,805       460,133  
Shareholders’ equity     218,876       205,995       190,561       166,400       120,203  
Operating Data
                                            
Interest income   $ 98,372     $ 104,507     $ 113,331     $ 127,120     $ 107,736  
Interest expense     23,153       30,217       40,320       56,899       57,866  
Net interest income     75,219       74,290       73,011       70,221       49,870  
Provision for credit losses     4,735       6,299       8,213       4,397       100  
Net interest income after provision for credit losses     70,484       67,991       64,798       65,824       49,770  
Non-interest income before other-than-temporary impairment of securities     23,162       21,046       19,434       16,673       12,652  
Other-than-temporary impairment of securities     (109 )      (221 )      (11 )      (14,950 )       
Non-interest expense     55,579       52,937       51,005       46,829       33,686  
Income before income taxes     37,958       35,879       33,216       20,718       28,736  
Income taxes     11,781       11,113       10,443       5,383       8,453  
Net income   $ 26,177     $ 24,766     $ 22,773     $ 15,335     $ 20,283  
Ratios
                                            
Return on average assets     1.13 %      1.09 %      1.00 %      0.67 %      1.16 % 
Return on average equity     12.16 %      12.42 %      12.81 %      9.15 %      18.34 % 
Allowance for credit losses to total loans     1.52 %      1.46 %      1.33 %      1.18 %      1.19 % 
Non-performing loans to total loans     1.82 %      1.47 %      1.29 %      0.85 %      0.93 % 
Non-performing assets to total assets     1.27 %      1.08 %      1.13 %      0.71 %      0.64 % 
Average equity to average assets     9.32 %      8.77 %      7.80 %      7.28 %      6.33 % 
Efficiency ratio(2)     54.68 %      55.74 %      54.26 %      52.44 %      52.70 % 
Tier 1 leverage capital ratio     9.59 %      8.77 %      8.17 %      7.19 %      8.55 % 
Tier 1 risk-based capital ratio     14.69 %      13.80 %      12.24 %      11.11 %      13.41 % 
Total risk-based capital ratio     15.95 %      15.05 %      13.49 %      12.32 %      14.64 % 
Per common share data
                                            
Basic earnings per share   $ 3.41     $ 3.23     $ 2.98     $ 2.00     $ 3.09  
Diluted earnings per share     3.41       3.23       2.97       2.00       3.09  
Dividends declared per share     1.50       1.00       1.00       1.00       1.20  
Dividends paid per share     1.50       1.00       1.00       0.99       0.96  
Book value per share     28.56       26.90       24.93       21.78       18.45  
Tangible book value per share(3)     22.66       20.91       18.86       15.62       17.79  
Dividend payout ratio     44.05 %      30.95 %      33.56 %      50.00 %      38.83 % 

(1) The 2008 data includes the merger of Union Bankshares Company with and into the Company as of January 3, 2008.
(2) Computed by dividing non-interest expense (excluding prepayment penalties) by the sum of net interest income (tax equivalent) and non-interest income (excluding security gains/losses, OTTI and proceeds from legal settlement of $2.0 million in 2010). The Company uses certain non-GAAP financial measures, such as the efficiency ratio and tangible book value per share, to provide information for investors to effectively analyze financial trends of ongoing business activities, and to enhance comparability with peers across the financial sector.
(3) Computed by dividing shareholders’ equity less goodwill and other intangibles by the number of common shares outstanding.

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis, which follows, focuses on the factors affecting our consolidated results of operations for the years ended December 31, 2011, 2010 and 2009 and financial condition at December 31, 2011 and 2010 and, where appropriate, factors that may affect our future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Consolidated Financial Data.

Executive Overview

Net income for 2011 of $26.2 million, or $3.41 per diluted share, was 6% higher than the net income of $24.8 million, or $3.23 per diluted share, reported for 2010. This financial performance translated to an increase in return on average assets to 1.13% for 2011, compared to 1.09% in 2010. The following were significant factors influencing the results of fiscal year 2011 compared to fiscal year 2010:

Total loans were $1.5 billion, a decrease of $10.2 million, or 1%, compared to a year ago. The decrease in total loans was primarily related to the residential real estate loan portfolio, which declined by $17.4 million due to the sale of thirty-year fixed rate mortgages totaling $28.6 million. The commercial and commercial real estate portfolios grew $4.5 million and $6.0 million, respectively, while consumer and home equity balances declined $3.2 million;
Investments at December 31, 2011 were $612.0 million, an increase of $355,000 compared to December 31, 2010;
Total deposits of $1.6 billion at December 31, 2011 increased $75.6 million, or 5%, compared to December 31, 2010. During 2011, we experienced strong core deposit (demand, checking, savings, and money market accounts) growth of $133.9 million, or 14%, which offset the decline in retail certificates of deposit of $69.2 million, or 15%. The overall growth across our core deposits reflects excess customer liquidity and success in obtaining several large deposit relationships;
Stabilized asset quality ratios and a reduction in net loan charge-offs for the year resulted in a decline in the loan loss provision to $4.7 million for 2011 compared to $6.3 million in 2010. The allowance for credit losses compared to total loans was 1.52% and 1.46% at December 31, 2011 and 2010, respectively;
Non-performing assets as a percentage of total assets amounted to 1.27% and 1.08% at December 31, 2011 and 2010, respectively;
Net interest income, our primary revenue source, increased $929,000, or 1%, due to an increase in average earning assets of $39.2 million or 2% in 2011, partially offset by a decline in our net interest margin of three basis points to 3.57% during 2011;
Non-interest income increased $2.2 million, or 11%, primarily due to increases in investment security gains of $2.4 million, loan servicing income of $1.1 million and bank-owned life insurance earnings and proceeds of $695,000, partially offset by the $2.0 million settlement proceeds received in 2010; and
Non-interest expenses increased $2.6 million, or 5%, primarily as a result of the prepayment penalty on borrowings of $2.3 million and increases in compensation and benefit costs of $2.3 million, partially offset by declines in OREO and collections costs of $1.4 million and FDIC assessment costs of $913,000.

Critical Accounting Policies

In preparing the Company’s Consolidated Financial Statements, management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results could differ from our current estimates, as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near-term change, including the allowance for credit losses, accounting for acquisitions and our review of goodwill and other identifiable intangible assets for impairment, valuation of other real estate owned, other-than-temporary impairment of

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investments, accounting for postretirement plans, and income taxes. Our significant accounting policies and critical estimates are summarized in Note 1 to the Consolidated Financial Statements included in Item 8.

Allowance for Credit Losses.  Management is committed to maintaining an allowance for loan losses (“ALL”) that is appropriate to absorb likely loss exposure in the loan portfolio. Evaluating the appropriateness of the ALL is a key management function, one that requires the most significant amount of management estimates and assumptions. The ALL, which is established through a charge to the provision for credit losses, consists of two components: (1) a contra to total gross loans in the asset section of the balance sheet, and (2) the reserve for unfunded commitments included in other liabilities on the balance sheet. We regularly evaluate the ALL for adequacy by taking into consideration, among other factors, historical trends in charge-offs and delinquencies, overall risk characteristics and size of the portfolios, ongoing review of significant individual loans, trends in levels of watched or criticized assets, business and economic conditions, local industry trends, evaluation of results of examinations by regulatory authorities and other third parties, and other relevant factors.

In determining the appropriate level of ALL, we use a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio. The methodology focuses on four key elements: (1) identification of loss allocations for specific loans, (2) loss allocation factors for certain loan types based on credit grade and loss experience, (3) general loss allocations for other environmental factors, and (4) the unallocated portion of the allowance. The specific loan component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. This methodology is in accordance with accounting principles generally accepted in the United States of America.

We use a risk rating system to determine the credit quality of our loans and apply the related loss allocation factors. In assessing the risk rating of a particular loan, we consider, among other factors, the obligor’s debt capacity, financial condition, the level of the obligor’s earnings, the amount and sources of repayment, the performance with respect to loan terms, the adequacy of collateral, the level and nature of contingent liabilities, management strength, and the industry in which the obligor operates. These factors are based on an evaluation of historical information, as well as a subjective assessment and interpretation of current conditions. Emphasizing one factor over another, or considering additional factors that may be relevant in determining the risk rating of a particular loan but which are not currently an explicit part of our methodology, could impact the risk rating assigned to that loan.

Three times annually, management conducts a thorough review of adversely risk rated commercial and commercial real estate exposures exceeding certain thresholds to re-evaluate the risk rating and identify impaired loans. This extensive review takes into account the obligor’s repayment history and financial condition, collateral value, guarantor support, local economic and industry trends, and other factors relevant to the particular loan relationship. Allocations for impaired loans are based upon discounted cash flows or collateral values and are made in accordance with accounting principles generally accepted in the United States of America.

We periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our analysis of loss experience. Portfolios of more homogenous populations of loans including home equity and consumer loans are 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. An additional allocation is determined based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. Finally, an unallocated portion of the total allowance is maintained to allow for measurement imprecision attributable to uncertainty in the economic environment.

Because the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in our market area, concentration of risk, declines in local property values, and the results of regulatory examinations. While management’s evaluation of the ALL as of December 31, 2011 determined the allowance to be appropriate,

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under adversely different conditions or assumptions, we may need to increase the allowance. The Corporate Risk Management group reviews the ALL with the Bank’s board of directors on a monthly basis. A more comprehensive review of the ALL is reviewed with the Company’s board of directors, as well as the Bank’s board of directors, on a quarterly basis.

The adequacy of the reserve for unfunded commitments is determined in a similar manner as the ALL, with the exception that management must also estimate the likelihood of these commitments being funded and becoming loans. This is accomplished by evaluating the historical utilization of each type of unfunded commitment and estimating the likelihood that the historical utilization rates could change in the future.

Goodwill and Identifiable Intangible Assets for Impairment.  We record all assets and liabilities acquired in purchase acquisitions at fair value, which is an estimate determined by the use of internal or other valuation techniques. These valuation estimates result in goodwill and other intangible assets and are subject to ongoing periodic impairment tests and are evaluated using various fair value techniques. Goodwill impairment evaluations are required to be performed annually and may be required more frequently if certain conditions indicating potential impairment exist. Identifiable intangible assets are amortized over their estimated useful lives and are subject to impairment tests if events or circumstances indicate a possible inability to realize the carrying amount. If we were to determine that our goodwill was impaired, the recognition of an impairment charge could have an adverse impact on our results of operations in the period that the impairment occurred or on our financial position. Goodwill is evaluated for impairment using several standard valuation techniques including discounted cash flow analyses, as well as an estimation of the impact of business conditions. The use of different estimates or assumptions could produce different estimates of carrying value.

Valuation of Other Real Estate Owned (“OREO”).  Periodically, we acquire property in connection with foreclosures or in satisfaction of debt previously contracted. The valuation of this property is accounted for individually based on its fair value on the date of acquisition. At the acquisition date, if the fair value of the property less the costs to sell is less than the book value of the loan, a charge or reduction in the ALL is recorded. If the value of the property becomes permanently impaired, as determined by an appraisal or an evaluation in accordance with our appraisal policy, we will record the decline by charging against current earnings. Upon acquisition of a property, we use a current appraisal or broker’s opinion to substantiate fair value for the property.

Other-Than-Temporary Impairment (“OTTI”) of Investments.  We record an investment impairment charge at the point we believe an investment has experienced a decline in value that is other-than-temporary. In determining whether an OTTI has occurred, we review information about the underlying investment that is publicly available, analysts’ reports, applicable industry data and other pertinent information, and assess our ability to hold the securities for the foreseeable future. The investment is written down to its current market value at the time the impairment is deemed to have occurred. Future adverse changes in market conditions, continued poor operating results of underlying investments or other factors could result in further losses that may not be reflected in an investment’s current carrying value, possibly requiring an additional impairment charge in the future.

Effectiveness of Hedging Derivatives.  The Company maintains an overall interest rate risk management strategy that incorporates the use of interest rate contracts, which are generally non-leveraged generic interest rate and basis swaps, to minimize significant fluctuations in earnings that are caused by interest rate volatility. Interest rate contracts are used by the Company in the management of its interest rate risk position. The Company’s goal is to manage interest rate sensitivity so that movements in interest rates do not significantly adversely affect earnings. When interest rates fluctuate, hedged assets and liabilities appreciate or depreciate in fair value or cash flows. Gains or losses on the derivative instruments that are linked to the hedged assets and liabilities are expected to substantially offset this unrealized appreciation or depreciation or changes in cash flows. The Company utilizes a third-party service to evaluate the effectiveness of its cash flow hedges on a quarterly basis. The effective portion of a gain or loss on a cash flow hedge is recorded in other comprehensive income, net of tax, and other assets or other liabilities on the Consolidated Statements of Condition. The ineffective portions of cash flow hedging transactions are included in “other income” in the Consolidated Statements of Income, if material.

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Accounting for Postretirement Plans.  We use a December 31 measurement date to determine the expenses for our postretirement plans and related financial disclosure information. Postretirement plan expense is sensitive to changes in the number of eligible employees (and their related demographics) and to changes in the discount rate and other expected rates, such as medical cost trends rates. As with the computations on plan expense, cash contribution requirements are also sensitive to such changes.

Stock-Based Compensation.  The fair value of restricted stock and stock options is determined on the date of grant and amortized to compensation expense, with a corresponding increase in common stock, over the longer of the service period or performance period, but in no event beyond an employee’s retirement date. For performance-based restricted stock, we estimate the degree to which performance conditions will be met to determine the number of shares that will vest and the related compensation expense. Compensation expense is adjusted in the period such estimates change. Non-forfeitable dividends, if any, paid on shares of restricted stock are recorded to retained earnings for shares that are expected to vest and to compensation expense for shares that are not expected to vest.

Income Taxes.  We account for income taxes by deferring income taxes based on the estimated future tax effects of differences between the tax and book bases of assets and liabilities considering the provisions of enacted tax laws. These differences result in deferred tax assets and liabilities, which are included in the Consolidated Statements of Condition. We must also assess the likelihood that any deferred tax assets will be recovered from future taxable income and establish a valuation allowance for those assets determined not likely to be recoverable. Judgment is required in determining the amount and timing of recognition of the resulting deferred tax assets and liabilities, including projections of future taxable income. Although we have determined a valuation allowance is not required for all deferred tax assets, there is no guarantee that these assets will be realized. We are currently under review by the Internal Revenue Service for the year ended December 31, 2009. Although not currently under review, income tax returns for the years ended December 31, 2008 and 2010 are open to audit by federal and Maine authorities. If we, as a result of an audit, were assessed interest and penalties, the amounts would be recorded through other non-interest expense.

Non-GAAP Financial Measures and Reconciliation to GAAP

In addition to evaluating the Company’s results of operations in accordance with GAAP, management supplements this evaluation with an analysis of certain non-GAAP financial measures, such as the efficiency and tangible equity ratios, tangible book value per share, and tax equivalent net interest income. We believe these non-GAAP financial measures help investors in understanding the Company’s operating performance and trends and allow for better performance comparisons to other banks. In addition, these non-GAAP financial measures remove the impact of unusual items that may obscure trends in the Company’s underlying performance. These disclosures should not be viewed as a substitute for GAAP operating results, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other financial institutions.

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Efficiency Ratio.  The efficiency ratio, which represents an approximate measure of the cost required for the Company to generate a dollar of revenue, is the ratio of (i) total non-interest expense excluding prepayment penalties (the numerator) to (ii) net interest income on a fully taxable equivalent basis plus total non-interest income excluding net gains or losses on sale of securities, OTTI, and proceeds from a 2010 legal settlement (the denominator).

         
  At or for the Year Ended December 31,
(In Thousands)   2011   2010   2009   2008   2007
Non-interest expense, as presented   $ 55,579     $ 52,937     $ 51,005     $ 46,829     $ 33,686  
Prepayment penalty on borrowings     2,318                          
Adjusted non-interest expense     53,261       52,937       51,005       46,829       33,686  
Net interest income, as presented     75,219       74,290       73,011       70,221       49,870  
Effect of tax-exempt income     1,212       1,452       1,628       1,765       1,393  
Non-interest income     23,053       20,825       19,423       1,723       12,652  
Gains (losses) on sale of securities     2,185       (188 )      52       (624 )       
Other-than-temporary impairment of securities     (109 )      (221 )      (11 )      (14,950 )       
Legal settlement proceeds           2,000                    
Adjusted net interest income plus
non-interest income
  $ 97,408     $ 94,976     $ 94,021     $ 89,283     $ 63,915  
Non-GAAP efficiency ratio     54.68 %      55.74 %      54.26 %      52.44 %      52.70 % 
GAAP efficiency ratio     56.49 %      55.53 %      55.17 %      53.89 %      53.88 % 

Tax Equivalent Net Interest Income.  Tax-equivalent net interest income is net interest income plus the taxes that would have been paid had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax liabilities. The following table provides a reconciliation of tax equivalent net interest income to GAAP net interest income using a 35% tax rate.

         
  At or for the Year Ended December 31,
(In Thousands)   2011   2010   2009   2008   2007
Net interest income, as presented   $ 75,219     $ 74,290     $ 73,011     $ 70,221     $ 49,870  
Effect of tax-exempt income     1,212       1,452       1,628       1,765       1,393  
Net interest income, tax equivalent   $ 76,431     $ 75,742     $ 74,639     $ 71,986     $ 51,263  

Tangible Book Value per Share.  Tangible book value per share is the ratio of (i) shareholders’ equity less goodwill, premium on deposits and other acquisition-related intangibles (the numerator) to (ii) total common shares outstanding at period end. The following table reconciles tangible book value per share to book value per share.

         
  At or for the Year Ended December 31,
(In Thousands, Except per Share Data)   2011   2010   2009   2008   2007
Shareholders’ equity   $ 218,876     $ 205,995     $ 190,561     $ 166,400     $ 120,203  
Less goodwill and other intangibles     45,194       45,821       46,379       47,083       4,327  
Tangible shareholders’ equity   $ 173,682     $ 160,174     $ 144,182     $ 119,317     $ 115,876  
Shares outstanding at period end     7,664,975       7,658,496       7,644,837       7,638,713       6,513,573  
Tangible book value per share   $ 22.66     $ 20.91     $ 18.86     $ 15.62     $ 17.79  
Book value per share   $ 28.56     $ 26.90     $ 24.93     $ 21.78     $ 18.45  

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Results of Operations

For the year ended December 31, 2011, we reported record net income of $26.2 million compared to $24.8 million for the year ended December 31, 2010, and $22.8 million for the year ended December 31, 2009. Diluted earnings per share for each of these years were $3.41, $3.23, and $2.97, respectively. The major components of these results, which include net interest income, provision for credit losses, non-interest income, non-interest expense, and income taxes, are discussed below.

Net Interest Income

Net interest income is interest earned on loans, securities, and other earning assets, plus loan fees, less the interest paid on interest-bearing deposits and borrowings. Net interest income, which is our largest source of revenue and accounts for approximately 77% of total revenues, is affected by factors including, but not limited to: changes in interest rates, loan and deposit pricing strategies and competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets.

Net interest income was $76.4 million on a fully-taxable equivalent basis for 2011, compared to $75.7 million for 2010, an increase of $689,000, or 1%. The increase in net interest income was primarily due to growth in our average earning assets of $39.2 million, partially offset by a three basis point decline in our net interest margin. The tax equivalent net interest margin was 3.57% and 3.60% for the years ended December 31, 2011 and 2010, respectively. The yield on our earning assets averaged 4.65% in 2011 compared to 5.04% in 2010, a decrease of 39 basis points, as amortization and prepayments on loans and investments are reinvested at lower rates, particularly in the investment portfolio. The cost of funds averaged 1.27% in 2011, compared to 1.64% in 2010, as a result of lower interest rates and a favorable shift in the deposit mix to lower cost transaction accounts. Average balance sheet growth was funded primarily by growth in average core deposits (demand deposits, interest checking, savings and money market accounts) of $112.3 million, or 12%. Average balances on retail certificates of deposit declined $84.0 million as customers continue to shift to more liquid deposit instruments given the current low interest rate environment.

Net interest income was $75.7 million on a fully-taxable equivalent basis for 2010, compared to $74.6 million for 2009, an increase of $1.1 million, or 2%. The increase in net interest income was primarily due to an improvement of seven basis points in the net interest margin, to 3.60%, for 2010. Total average interest-earning assets decreased $10.9 million for 2010 compared to 2009, primarily due to decreases in investments, partially offset by increases in average loans of $25.9 million. The yield on earning assets averaged 5.04% in 2010 compared to 5.44% in 2009, a decrease of 40 basis points. The earning asset yield declined during 2010 primarily as the result of reinvestment of cash flows at lower rates. Average interest-bearing liabilities decreased $48.6 million for 2010 compared to 2009, primarily due to declines in Federal Home Loan Bank (“FHLB”) advances, in part offset by an increase in brokered deposits. The cost of funds averaged 1.64% in 2010 compared to 2.13% in 2009, a decrease of 49 basis points. The cost of funds declined in 2010 due to lower interest rates on deposit accounts, maturing retail certificates of deposit and wholesale funding combined with a favorable change in our deposit mix as a result of growth in lower cost deposit accounts. The average balance for demand deposit, interest checking, savings and money market accounts increased $64.8 million, or 8%, to $909.2 million for 2010.

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The following table presents, for the years noted, average balances, interest income, interest expense, and the corresponding average yields earned and rates paid, as well as net interest income, net interest rate spread and net interest margin:

                 
                 
  Average Balance, Interest and Yield/Rate Analysis
December 31,
     2011   2010   2009
(Dollars in Thousands)   Average
Balance
  Interest   Yield/
Rate
  Average
Balance
  Interest   Yield/
Rate
  Average
Balance
  Interest   Yield/
Rate
ASSETS
                                                                                
Interest-earning assets:
                                                                                
Securities – taxable   $ 564,418     $ 18,496       3.28 %    $ 511,800     $ 20,425       3.99 %    $ 539,959     $ 25,979       4.81 % 
Securities – nontaxable(1)     44,112       2,556       5.79 %      54,392       3,247       5.97 %      63,472       3,707       5.84 % 
Trading account assets     2,245       39       1.74 %      1,973       36       1.82 %      1,479       24       1.62 % 
Loans(1)(2):
                                                                                
Residential real estate     590,238       30,184       5.11 %      620,357       33,165       5.35 %      622,535       35,726       5.74 % 
Commercial real estate     463,581       25,381       5.47 %      444,153       25,486       5.74 %      415,369       25,168       6.06 % 
Commercial     175,760       9,007       5.12 %      173,073       9,464       5.47 %      181,981       10,170       5.59 % 
Municipal     19,465       910       4.68 %      16,417       901       5.49 %      21,533       1,079       5.01 % 
Consumer     281,596       13,010       4.62 %      280,069       13,235       4.73 %      266,786       13,106       4.91 % 
Total loans     1,530,640       78,492       5.13 %      1,534,069       82,251       5.36 %      1,508,204       85,249       5.65 % 
Total interest-earning assets     2,141,415       99,583       4.65 %      2,102,234       105,959       5.04 %      2,113,114       114,959       5.44 % 
Cash and due from banks     36,168                         33,204                         28,985                    
Other assets     154,550                         161,067                         155,921                    
Less: ALL     (22,850 )                        (22,021 )                        (18,742 )                   
Total assets   $ 2,309,283                       $ 2,274,484                       $ 2,279,278                    
LIABILITIES &
SHAREHOLDERS’ EQUITY
                                                                                
Interest-bearing liabilities:
                                                                                
Interest checking accounts   $ 258,322       509       0.20 %    $ 252,692       861       0.34 %    $ 218,715       1,042       0.48 % 
Savings accounts     171,840       426       0.25 %      156,397       467       0.30 %      140,246       499       0.36 % 
Money market accounts     344,369       2,369       0.69 %      292,510       2,408       0.82 %      300,455       3,158       1.05 % 
Certificates of deposit     431,850       6,322       1.46 %      515,882       9,647       1.87 %      578,231       15,997       2.77 % 
Total retail deposits     1,206,381       9,626       0.80 %      1,217,481       13,383       1.10 %      1,237,647       20,696       1.67 % 
Brokered deposits     120,143       1,965       1.64 %      102,702       1,760       1.71 %      75,204       1,881       2.50 % 
Junior subordinated debentures     43,666       2,614       5.99 %      43,565       2,817       6.47 %      43,462       2,845       6.55 % 
Borrowings     451,034       8,947       1.98 %      480,897       12,257       2.55 %      537,658       14,898       2.77 % 
Total wholesale funding     614,843       13,526       2.20 %      627,164       16,834       2.68 %      656,324       19,624       2.99 % 
Total interest-bearing liabilities     1,821,224       23,152       1.27 %      1,844,645       30,217       1.64 %      1,893,971       40,320       2.13 % 
Demand deposits     246,995                         207,579                         184,979                    
Other liabilities     25,753                         22,832                         22,598                    
Shareholders’ equity     215,311                         199,428                         177,730                    
Total liabilities and shareholders’ equity   $ 2,309,283                       $ 2,274,484                       $ 2,279,278                    
Net interest income (fully-taxable equivalent)              76,431                         75,742                         74,639           
Less: fully-taxable equivalent adjustment              (1,212 )                        (1,452 )                        (1,628 )          
              $ 75,219                       $ 74,290                       $ 73,011           
Net interest rate spread (fully-taxable equivalent)                       3.38 %                        3.40 %                        3.31 % 
Net interest margin (fully-taxable equivalent)                       3.57 %                        3.60 %                        3.53 % 

(1) Reported on tax-equivalent basis calculated using a rate of 35%.
(2) Non-accrual loans are included in total average loans.

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The following table presents certain information on a fully-taxable equivalent basis regarding changes in interest income and interest expense for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided with respect to changes attributable to rate and volume.

           
  December 31, 2011 vs. 2010
Increase (Decrease) Due to
  December 31, 2010 vs. 2009
Increase (Decrease) Due to
(Dollars in Thousands)   Volume   Rate   Total   Volume   Rate   Total
Interest-earning assets:
                                                     
Securities – taxable   $ 2,099     $ (4,028 )    $ (1,929 )    $ (1,354 )    $ (4,200 )    $ (5,554 ) 
Securities – nontaxable     (614 )      (77 )      (691 )      (530 )      70       (460 ) 
Trading account assets     5       (2 )      3       8       4       12  
Residential real estate     (1,611 )      (1,370 )      (2,981 )      (125 )      (2,436 )      (2,561 ) 
Commercial real estate     1,115       (1,220 )      (105 )      1,744       (1,426 )      318  
Commercial     147       (604 )      (457 )      (498 )      (208 )      (706 ) 
Municipal     167       (158 )      9       (256 )      78       (178 ) 
Consumer     72       (297 )      (225 )      653       (524 )      129  
Total interest income     1,380       (7,756 )      (6,376 )      (358 )      (8,642 )      (9,000 ) 
Interest-bearing liabilities:
                                                     
Interest checking accounts     19       (371 )      (352 )      162       (343 )      (181 ) 
Savings accounts     46       (87 )      (41 )      57       (89 )      (32 ) 
Money market accounts     425       (464 )      (39 )      (84 )      (666 )      (750 ) 
Certificates of deposit     (1,571 )      (1,754 )      (3,325 )      (1,725 )      (4,625 )      (6,350 ) 
Brokered deposits     298       (93 )      205       688       (809 )      (121 ) 
Junior subordinated debentures     7       (210 )      (203 )      7       (35 )      (28 ) 
Borrowings     (762 )      (2,548 )      (3,310 )      (1,573 )      (1,068 )      (2,641 ) 
Total interest expense     (1,538 )      (5,527 )      (7,065 )      (2,468 )      (7,635 )      (10,103 ) 
Net interest income
(fully-taxable equivalent)
  $ 2,918     $ (2,229 )    $ 689     $ 2,110     $ (1,007 )    $ 1,103  

Provision and Allowance for Loan Losses

The provision for loan losses is a recorded expense determined by management that adjusts the allowance for loan losses to a level, which, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for loan losses reflects loan quality trends, including, among other factors, the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans, net charge-offs or recoveries and growth in the loan portfolio. Accordingly, the amount of the provision reflects both the necessary increases in the allowance for loan losses related to newly identified criticized loans, as well as the actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. The provision for credit losses for 2011 totaled $4.7 million, or 0.31% of average loans, compared with $6.3 million in 2010 and $8.2 million in 2009. Please see the caption “Asset Quality” located below for additional discussion regarding the allowance for loan losses.

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Non-Interest Income

Non-interest income represented 21.8%, 22.2% and 21.0% of total revenues (net interest income and non-interest income), before net securities gains, losses and OTTI, for the years ended December 31, 2011, 2010 and 2009, respectively. Non-interest income of $23.1 million for 2011 increased $2.2 million, or 11%, compared to $20.8 million for 2010. The following table presents the components of non-interest income:

     
  Year Ended December 31,
(Dollars in Thousands)   2011   2010   2009
Income from fiduciary services   $ 6,027     $ 6,236     $ 5,902  
Service charges on deposit accounts     5,134       4,911       5,261  
Other service charges and fees     3,577       3,345       2,908  
Proceeds from legal settlement           2,000        
Bank-owned life insurance     2,173       1,478       1,476  
Brokerage and insurance commissions     1,363       1,449       1,356  
Mortgage banking income, net     729       761       1,314  
Other income     1,974       1,054       1,154  
Non-interest income before security gains (losses)     20,977       21,234       19,371  
Net gains (losses) on sale of securities     2,185       (188 )      63  
Other-than-temporary impairment of securities     (109 )      (221 )      (11 ) 
Total non-interest income   $ 23,053     $ 20,825     $ 19,423  

The significant changes in non-interest income in 2011 compared to 2010 include:

Increase in net gains on sale of securities of $2.4 million related to sale of $54.6 million in available-for-sale (“AFS”) securities during 2011 and a decrease in OTTI of $112,000;
Increase in other income primarily related to a $1.1 million increase in loan servicing income resulted from the growth of our loan servicing business, which services 9,000 MaineHousing loans;
Increase in bank-owned life insurance income of $695,000, primarily related to revenue recorded from insurance proceeds; and
Legal settlement proceeds of $2.0 million recorded in 2010, related to the Company’s investment in auction pass-through certificates with Federal Home Loan Mortgage Corporation (“Freddie Mac”) for preferred stock assets which resulted in an OTTI write-down of $15.0 million in 2008.

Non-interest income increased to $20.8 million for the year ended December 31, 2010, compared to non-interest income of $19.4 million in 2009, an increase of $1.4 million. The increase was primarily related to: legal settlement proceeds of $2.0 million recorded in 2010; increase in fiduciary services of $334,000, resulting from the market value increases in assets under management; an increase in other service charges and fees of $437,000, resulting from increased debit card income associated with increased transaction volume; decrease in mortgage banking income of $553,000, due to the decline in loan sales proceeds to $20.2 million in 2010 compared to $72.6 million during 2009; and a decrease in service charges on deposit accounts of $350,000 resulting primarily from a decrease in overdraft fee income associated with recent regulation prohibiting financial institutions from charging consumers fees for paying overdrafts on automated teller machines and debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

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Non-Interest Expenses

Non-interest expenses increased $2.6 million, or 5%, for the year ended December 31, 2011 compared to the year ended December 31, 2010. The following table presents the components of non-interest expense:

     
  Year Ended December 31,
(Dollars in Thousands)   2011   2010   2009
Salaries and employee benefits   $ 28,627     $ 26,337     $ 24,588  
Furniture, equipment and data processing     4,773       4,647       4,150  
Net occupancy     3,949       3,833       3,908  
Consulting and professional fees     2,629       2,596       2,455  
OREO and collection costs     2,104       3,459       2,314  
Regulatory assessments     1,955       2,868       4,035  
Amortization of identifiable intangible assets     577       577       578  
Prepayment penalty on borrowings     2,318              
Other expenses     8,647       8,620       8,977  
Total non-interest expenses   $ 55,579     $ 52,937     $ 51,005  

The significant changes in non-interest expenses in 2011 compared to 2010 include:

Prepayment penalty on wholesale borrowings of $2.3 million as a result of the refinancing of $70.0 million of wholesale borrowings that had an average cost of 4.90% into lower cost short-term funds;
An increase in salaries and employee benefits of $2.3 million, or 9%, primarily due to increases in incentive compensation of $1.4 million, based on the Company’s 2011 financial performance, which exceeded the benchmarks determined by the board of directors, salaries of $522,000, or 3%, due to merit increases and new positions, and health insurance cost and retirement expenses of $414,000, or 12%;
A decrease in OREO and collection costs of $1.4 million, or 39%, primarily due to a $1.4 million decrease in write-downs on OREO properties;
A decrease in regulatory assessments of $913,000, or 32%, primarily due to a decrease in the FDIC deposit assessment fee related to change in the assessment base from deposits to assets minus tangible equity; and
The efficiency ratio (non-interest expense excluding prepayment penalties divided by net interest income on a tax equivalent basis plus non-interest income excluding net investment securities gains/losses, OTTI and proceeds from legal settlement) was 54.68% for the year ended December 31, 2011, compared to 55.80% for 2010.

Total non-interest expense increased $1.9 million, or 4%, for the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase was primarily due to: increase in salaries and employee benefits of $1.7 million, primarily due to a $799,000 increase in benefits associated with increased health insurance cost and retirement expenses: a reduction in deferred salary costs of $522,000 related to the decline in mortgage production volume in 2010: an increase in salary and incentives of $504,000 due to merit increases and new positions; an increase in furniture, equipment and data processing of $497,000, related to depreciation associated with investments in technology, including a telephone system and document imaging technology; an increase in foreclosure and collection costs and expenses on OREO of $1.2 million, which includes OREO write-downs of $1.6 million due to declining real estate values; and a decrease in regulatory assessments of $1.2 million, related to the FDIC special assessment imposed on all banks in 2009.

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Income Taxes

Income tax expense totaled $11.8 million, $11.1 million and $10.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. The Company’s effective income tax rate was approximately 31.0%, 31.0%, and 31.4% in each of the past three years, respectively. These effective rates differ from our marginal rate of about 35%, primarily due to our significant non-taxable interest income from state and political subdivisions obligations. A full detail of these amounts can be found in Note 10 to the Consolidated Financial Statements.

Impact of Inflation and Changing Prices

The Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented in Item 8, “Financial Statements and Supplementary Data,” have been prepared in accordance with accounting principles generally accepted in the United States of America, which require the measurement of financial position and operating results in terms of historical dollars and, in some case, current fair values without considering changes in the relative purchasing power of money over time due to inflation. Unlike many industrial companies, substantially all of our assets and virtually all of our liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the general level of inflation. Over short periods of time, interest rates and the yield curve may not necessarily move in the same direction or in the same magnitude as inflation.

Financial Condition

Overview

Total assets at December 31, 2011 were $2.3 billion, a slight decline of $3.3 million compared to December 31, 2010. At December 31, 2011, total loans were $1.5 billion, a decrease of $10.2 million, or 1%, compared to a year ago. The decrease in total loans was primarily related to the residential real estate loan portfolio, which declined by $17.4 million due to the sale of thirty-year fixed rate mortgages totaling $27.6 million. Total liabilities decreased $16.2 million as total borrowings decreased $103.7 million, partially offset by an increase in total deposits (including brokered deposits) of $75.6 million. Total shareholders’ equity increased $12.9 million, which was a result of earnings in 2011 of $26.2 million offset by dividends declared of $11.5 million and a decrease of $2.3 million in other comprehensive income.

Growth in total deposits resulted from strong core deposit growth of $133.9 million, or 14%, which was offset by the decline in retail certificates of deposit of $69.2 million, or 15%. The overall growth across our core deposits reflects excess customer liquidity and success in obtaining several large deposit relationships.

Average assets during 2011 were $2.3 billion, an increase of $34.8 million, compared to 2010. This increase was primarily the result of an increase in average investments of $42.6 million offset by decline in average loans of $3.4 million. Average interest bearing liabilities decreased $23.4 million in 2011 compared to 2010; however, the deposit mix reflected an increase in average core deposits (interest checking, savings and money market accounts) of $72.9 million and brokered deposits of $17.4 million, partially offset by a decline in average retail certificates of deposit of $84.0 million and average wholesale funding (excluding brokered deposits) of $29.8 million. In addition, average demand deposit balances grew $39.4 million. Average shareholders’ equity increased $15.9 million, which was primarily the result of current earnings, partially offset by other comprehensive income and dividends declared to shareholders.

Investment Securities

We invest in securities of U.S. government sponsored enterprises, states and political subdivisions, mortgage-backed securities, FHLB and Federal Reserve Bank (“FRB”) stock, investment grade corporate bonds and equities to diversify our revenues, interest rate and credit risk, and to provide for liquidity and funding needs. Total investment securities increased $355,000 to $612.0 million at December 31, 2011. At December 31, 2010, we held investment securities in both the AFS and held-to-maturity (“HTM”) portfolios. During 2011, we transferred $36.1 million of municipal bonds from the HTM portfolio to the AFS portfolio. This change reflects management’s decision during 2011 to more actively manage these investments in changing economic environments.

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Unrealized gains or losses on securities classified as AFS are recorded as adjustments to shareholders’ equity, net of related deferred income taxes and are a component of other comprehensive income in the Consolidated Statements of Changes in Shareholders’ Equity and Note 19 to the Consolidated Financial Statements. At December 31, 2011, we had $11.1 million of unrealized gains on AFS securities, net of deferred taxes, compared to $6.2 million of unrealized gains, net of deferred taxes, at December 31, 2010. The increase in unrealized gains from 2010 to 2011 is primarily attributed to a decline in market interest rates.

Within our AFS portfolio, we hold senior tranches of non-agency collateralized mortgage obligations (“CMOs”), which were rated Triple-A by Moody’s, S&P and/or Fitch at the time of purchase. At December 31, 2011, six of our CMOs were non-investment grade, with fair values of $9.7 million, and unrealized losses of $1.8 million. We believe that the decline in the fair values is primarily a reflection of the lack of liquidity in the market and not deterioration in the credit. The Company has the intent and ability to hold these securities until recovery and will continue to evaluate the unrealized losses within our portfolio each quarter to determine if the impairment is other than temporary.

We determine if a security has OTTI by evaluating the present value of projected credit losses that result from a discounted cash flow analysis. Each month we obtain various discounted cash flow models, stress tests, and other current information about our securities. Currently, we use the Bloomberg’s “Cash Flow Analyzer.” We review the significant inputs of the discounted cash flow analysis to ensure reasonableness and a prudent measure, we compare the Bloomberg assumptions to the assumptions used by FTN Financial, which is a division of First Tennessee Bank. Included in the monthly analyses is a review of the performance of the individual tranches held and the related entire issue, a base case and several stress test scenarios. The base case scenario uses current data and historical performance, which provides a basis for determining if a credit loss is projected during the life of the security. Stress tests are performed on our higher risk securities (non-investment grade and/or coverage ratio of less than 1.00) using current statistical data to determine expected cash flows and forecast potential losses. Based on the results of this analysis, the Company recorded $109,000 OTTI write-downs on two private issue CMOs during 2011, compared to a $221,000 write-down in 2010. During 2011, the Company recorded proceeds of $7.8 million on the sale of three investment grade CMO investments classified as AFS, which resulted in a net realized gain of $153,000.

At December 31, 2011, the Company held Duff & Phelps Select Income Fund Auction Preferred Stock with an amortized cost of $5.0 million. The security, which has maintained its Triple-A rating by Moody’s and Standard and Poor’s, has failed at auction. Management believes the failed auctions are a temporary liquidity event related to this asset class of securities. No OTTI has been recorded as 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.

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The following table presents the carrying amount and fully-taxable equivalent weighted average yields of our investment securities by contractual maturity as of the dates indicated.

             
             
          December 31,
             2011   2010   2009
(In thousands)   Due in
1 year or less
  Due in
1 – 5 years
  Due in
5 – 10 years
  Due in over
10 years
  Carrying
Value
  Carrying
Value
  Carrying
Value
Available-for-sale
                                                              
Obligations of U.S. government sponsored enterprises   $     $ 20,112     $ 9,995     $     $ 30,107     $ 49,357     $  
Obligations of states and political subdivisions     2,510       4,701       31,886       661       39,758       14,220       18,060  
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises     43       10,759       84,035       410,547       505,384       464,842       428,356  
Private issue collateralized mortgage obligations                       10,641       10,641       20,722       28,872  
Total debt securities     2,553       35,572       125,916       421,849       585,890       549,141       475,288  
Equity securities
(no fixed maturity)
                            4,146       4,438       4,420  
Total securities
available-for-sale
    2,553       35,572       125,916       421,849       590,036       553,579       479,708  
Yield on securities
available-for-sale
    4.97 %      3.07 %      3.24 %      3.11 %                            
Held-to-maturity
                                                              
Obligations of states and political subdivisions                                   36,102       37,914  
Total securities
held-to-maturity
                                  36,102       37,914  
Total investments   $ 2,553     $ 35,572     $ 125,916     $ 421,849     $ 590,036     $ 589,681     $ 517,622  

Federal Home Loan Bank Stock

We are required to maintain a level of investment in FHLB of Boston (“FHLBB”) stock based on the level of our FHLBB advances. At December 31, 2011, our investment in FHLBB stock totaled $21.0 million. No market exists for shares of the FHLBB. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Agency, to maintain capital adequacy of the FHLBB. While we currently have no intention to terminate our FHLBB membership, the ability to redeem our investment in FHLBB stock would be subject to the conditions imposed by the FHLBB.

In early 2009, the FHLBB advised its members that it was focused on preserving capital in response to ongoing market volatility. Accordingly, payments of quarterly dividends were suspended for 2009 and 2010 and the FHLBB placed a moratorium on excess stock repurchases from its members. The FHLBB commenced quarterly dividends in 2011 at a current annual yield of approximately the daily average of the three-month LIBOR yield.

Loans

We provide loans primarily to customers located within our geographic market area. At December 31, 2011, total loans of $1.5 billion (including loans held-for-sale) decreased $10.2 million from December 31, 2010, primarily related to the residential real estate loan portfolio (net of deferred fees), which declined by $18.0 million due to the sale of thirty-year fixed rate mortgages in 2011 totaling $28.6 million. The commercial and commercial real estate portfolios grew $4.5 million and $6.0 million, respectively, while consumer and home equity balances declined $3.2 million.

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The following table sets forth the composition of our loan portfolio at the dates indicated.

                   
                   
December 31,
(Dollars in Thousands)   2011   2010   2009   2008   2007
Residential real estate   $ 578,262       38 %    $ 596,308       39 %    $ 627,655       41 %    $ 621,048       41 %    $ 410,687       36 % 
Commercial real estate     470,061       31 %      464,037       30 %      434,783       28 %      400,312       27 %      333,506       29 % 
Commercial     185,045       12 %      180,592       12 %      191,214       13 %      213,683       14 %      197,736       17 % 
Consumer and home equity     280,660       19 %      283,815       19 %      273,106       18 %      265,865       18 %      203,710       18 % 
Total loans   $ 1,514,028       100 %    $ 1,524,752       100 %    $ 1,526,758       100 %    $ 1,500,908       100 %    $ 1,145,639       100 % 

Residential real estate loans.  Residential real estate loans consist of loans secured by one to four-family residences. We generally retain in our portfolio adjustable-rate mortgages and fixed-rate mortgages with original terms of 20 years or less. Based on market risk assessments, we may retain thirty-year fixed-rate mortgages. We originated and sold $28.6 million in residential fixed-rate real estate production on the secondary market to Freddie Mac, and $6.1 million of loans were held for sale at December 31, 2011. In 2010, residential real estate loan balances decreased $31.3 million, or 5% from 2009 due to the sale of $20.1 million in production on the secondary market.

Commercial real estate loans.  Commercial real estate loans consist of loans secured by income and non-income producing commercial real estate. We focus on lending to financially sound business customers within our geographic marketplace, as well as offering loans for the acquisition, development and construction of commercial real estate. In 2011, commercial real estate loans increased $6.0 million, or 1%, from 2010, and in 2010, commercial real estate loans increased $29.3 million, or 7%, from 2009. We have experienced five consecutive years of growth in commercial real estate portfolio because of the opportunity created by the pull-back of many financial institutions in this segment.

Commercial loans.  Commercial loans consist of loans secured by various corporate assets, as well as loans to provide working capital in the form of lines of credit, which may be secured or unsecured. Municipal loans primarily consist of short-term tax anticipation notes made to municipalities for fixed asset or construction related purposes and are included in commercial loans. We focus on lending to financially sound business customers and municipalities within our geographic marketplace. In 2011, commercial loans increased $4.5 million, or 2%, from 2010 and in 2010, commercial loans decreased $10.6 million, or 6%, from 2009.

Consumer loans and home equity loans.  Consumer loans and home equity loans are originated for a wide variety of purposes designed to meet the needs of our customers. Consumer loans include overdraft protection, automobile, boat, recreational vehicle, and mobile home loans, home equity loans and lines, and secured and unsecured personal loans. In 2011, consumer loans decreased by $3.2 million, or 1%, from 2010. In 2010, consumer loans increased by $10.7 million, or 4%, from 2009.

Asset Quality

The board of directors monitors credit risk management through the Directors’ Loan Committee and Corporate Risk Management. The Directors’ Loan Committee reviews large exposure credit requests, monitors asset quality on a regular basis and has approval authority for credit granting policies. Corporate Risk Management 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. Our practice is to identify problem credits early and take charge-offs as promptly as practical. In addition, management continuously reassesses its underwriting standards in response to credit risk posed by changes in economic conditions.

Non-Performing Assets.  Non-performing assets include non-accrual loans, accruing loans 90 days or more past due, accruing renegotiated loans and property acquired through foreclosure or repossession. The level of our non-performing assets over the past five (5) years is shown in the table below. Non-performing assets represented 1.27% of total assets as of December 31, 2011 compared to 1.08% at year-end 2010. While this ratio has increased over last year, it continues to compare favorably to our peer group’s most recently available ratio of 3.57% as of September 30, 2011. For purposes of comparison, this peer data is based upon

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information available through the FFIEC for banks and holding companies with $1-$3 billion in assets (peer group 3). Overall, the increase in the Company’s non-performing assets is attributable to the generally weak economy, substantial changes in real estate valuations, and legislative changes that have resulted in lengthening foreclosure timelines, among other factors.

         
  December 31,
(Dollars in Thousands)   2011   2010   2009   2008   2007
Non-accrual loans
                                            
Residential real estate loans   $ 9,503     $ 7,225     $ 6,161     $ 4,048     $ 1,800  
Commercial real estate     7,830       6,072       6,476       4,957       6,625  
Commercial loans     3,955       4,421       4,145       2,384       2,200  
Consumer loans     2,822       1,721       1,158       1,112        
Non-accrual loans     24,110       19,439       17,940       12,501       10,625  
Accruing loans past due 90 days     236       711       1,135       206       6  
Accruing renegotiated loans not included above     3,276       2,295       581              
Total non-performing loans     27,622       22,445       19,656       12,707       10,631  
Other real estate owned     1,682       2,387       5,479       4,024       400  
Total non-performing assets   $ 29,304     $ 24,832     $ 25,135     $ 16,731     $ 11,031  
Non-performing loans to total loans     1.82 %      1.47 %      1.29 %      0.85 %      0.93 % 
Allowance for credit losses to
non-performing loans
    83.38 %      99.44 %      103.26 %      139.22 %      128.43 % 
Non-performing assets to total assets     1.27 %      1.08 %      1.13 %      0.71 %      0.64 % 
Allowance for credit losses to
non-performing assets
    78.59 %      89.88 %      80.75 %      105.73 %      123.77 % 

Generally, a loan is classified as non-accrual when interest and/or principal payments are 90 days past due or when management believes collecting all principal and interest owed is in doubt. 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.

Non-accrual loans at December 31, 2011 were $24.1 million compared to $19.4 million a year ago. This $4.7 million increase in non-accruals is primarily attributable to the continued pressure on homeowners and real estate values affecting both the residential real estate and home equity loan (included in “consumer”) portfolios.

Interest income that would have been recognized if loans on non-accrual status had been current in accordance with their original terms was approximately $1.1 million, $985,000 and $961,000 in 2011, 2010, and 2009, respectively. Interest income attributable to these loans included in the Consolidated Statements of Income amounted to approximately $141,000, $36,000 and $12,000 in 2011, 2010 and 2009, respectively.

The OREO balance at December 31, 2011 consisted of fifteen properties, including ten residential properties and five commercial/mixed use properties. After foreclosure, management periodically obtains updated valuations of the OREO assets and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded. During 2011, the Company recorded OREO write-downs of $188,000 related to five properties.

Potential Problem Loans.  Potential problem loans consist of classified accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of our borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in some amount of loss. These loans are not included in the above analysis of non-accrual loans. At December 31,

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2011, potential problem loans amounted to approximately $1.6 million, or 0.11% of total loans, compared to $1.8 million, or 0.12% of total loans, at December 31, 2010.

Past Due Loans.  Past due loans consist of accruing loans that were between 30 and 89 days past due. The following table sets presents past due loans at the dates indicated:

   
(Dollars in Thousands)   December 31,
2011
  December 31,
2010
Loans 30 – 89 days past due:
                 
Residential real estate loans   $ 2,429     $ 2,493  
Commercial real estate     2,107       1,439  
Commercial loans     911       928  
Consumer loans     1,793       926  
Total loans 30 – 89 days past due   $ 7,240     $ 5,786  
Loans 30 – 89 days past due to total loans     0.48 %      0.38 % 

Allowance for Loan Losses.  We use a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient ALL. The ALL is management’s best estimate of the probable loan losses as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged-off, and is reduced by charge-offs on loans. During 2011, there were no significant changes to the allowance assessment methodology.

Reserve for Unfunded Commitments.  The reserve for unfunded commitments is based on management’s estimate of the amount required to reflect the probable inherent losses on outstanding letters and unused loan credit lines. Adequacy of the reserve is determined using a methodology similar to the one that analyzes the allowance for loan losses. Additionally, management must also estimate the likelihood that these commitments would be funded and become loans.

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The following table sets forth information concerning the activity in our ALL during the periods indicated:

         
  Years Ended December 31,
(Dollars in Thousands)   2011   2010   2009   2008   2007
Allowance for loan losses at the beginning of period   $ 22,293     $ 20,246     $ 17,691     $ 13,653     $ 14,933  
Acquired from Union Trust                       4,369        
Provision for loan losses     4,741       6,325       8,162       4,397       100  
Charge-offs:
                                            
Residential real estate loans     1,216       1,262       792       221       50  
Commercial real estate     1,633       1,382       1,844       3,236       416  
Commercial loans     1,256       1,502       2,640       1,286       1,411  
Consumer loans     920       1,401       1,180       810       315  
Total loan charge-offs     5,025       5,547       6,456       5,553       2,192  
Recoveries:
                                            
Residential real estate loans     120       225       10       12        
Commercial real estate loans     374       232       127       78       215  
Commercial loans     296       553       306       422       425  
Consumer loans     212       259       406       313       172