Unassociated Document
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2010

OR

¨ 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
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
2 ELM STREET, CAMDEN, ME
04843
(Address of principal executive offices)
(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter 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 ¨

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

Yes ¨          No ¨

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

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

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

Yes ¨          No x

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practical date:
Outstanding at May 7, 2010:  Common stock (no par value) 7,656,653 shares.
 


CAMDEN NATIONAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2010
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT

   
PAGE
   
PART I.  FINANCIAL INFORMATION
 
   
ITEM 1.
FINANCIAL STATEMENTS
 
     
 
Report of Independent Registered Public Accounting Firm
3
     
 
Consolidated Statements of Condition
March 31, 2010 and December 31, 2009
4
     
 
Consolidated Statements of Income
Three Months Ended March 31, 2010 and 2009
5
     
 
Consolidated Statements of Changes in Shareholders’ Equity
Three Months Ended March 31, 2010 and 2009
6
     
 
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2010 and 2009
7
     
 
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2010 and 2009
8-18
     
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
19-31
     
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
32-33
     
ITEM 4.
CONTROLS AND PROCEDURES
34
     
PART II. OTHER INFORMATION
 
     
ITEM 1.
LEGAL PROCEEDINGS
35
     
ITEM 1A.
RISK FACTORS
35
     
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND  USE OF PROCEEDS
35
     
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
35
     
ITEM 4.
[RESERVED]
35
     
ITEM 5.
OTHER INFORMATION
35
     
ITEM 6.
EXHIBITS
36
     
SIGNATURES
37
     
EXHIBIT INDEX
38
     
EXHIBITS
39-42
 

 
PART I. FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Shareholders and Board of Directors
Camden National Corporation

We have reviewed the accompanying interim consolidated financial information of Camden National Corporation and Subsidiaries as of March 31, 2010, and for the three-month periods ended March 31, 2010 and 2009. These financial statements are the responsibility of the Company's management.

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

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

Bangor, Maine
May 7, 2010

3

 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION

   
March 31,
   
December 31,
 
   
2010
   
2009
 
(In Thousands, Except Number of Shares)
 
(unaudited)
       
ASSETS
           
Cash and due from banks
 
$
29,899
   
$
29,772
 
Securities
           
  
 
Securities available for sale, at fair value
   
460,702
     
479,708
 
Securities held to maturity, at amortized cost (fair value $39,462 and $39,639 at March 31, 2010 and December 31, 2009, respectively)
   
37,900
     
37,914
 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost
   
21,965
     
21,965
 
Total securities
   
520,567
     
539,587
 
Trading account assets
   
1,794
     
1,725
 
Loans
   
1,530,067
     
1,526,758
 
Less allowance for loan losses
   
(21,379
)   
   
(20,246
)   
Net loans
   
1,508,688
     
1,506,512
 
Goodwill and other intangible assets
   
46,254
     
46,398
 
Bank-owned life insurance
   
42,049
     
41,677
 
Premises and equipment, net
   
26,563
     
26,054
 
Deferred tax asset
   
10,268
     
10,317
 
Prepaid FDIC assessment
   
7,635
     
8,197
 
Interest receivable
   
7,500
     
7,236
 
Other real estate owned
   
5,201
     
5,479
 
Other assets
   
12,138
     
12,429
 
Total assets
 
$
2,218,556
   
$
2,235,383
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Deposits:
               
Demand
 
$
184,449
   
$
193,549
 
Interest checking, savings and money market
   
691,186
     
675,681
 
Retail certificates of deposit
   
538,832
     
545,789
 
Brokered deposits
   
86,563
     
80,788
 
Total deposits
   
1,501,030
     
1,495,807
 
Federal Home Loan Bank advances
   
179,607
     
209,710
 
Other borrowed funds
   
275,978
     
274,125
 
Junior subordinated debentures
   
43,538
     
43,512
 
Accrued interest and other liabilities
   
23,246
     
21,668
 
Total liabilities
   
2,023,399
     
2,044,822
 
             
  
 
Shareholders’ Equity
           
  
 
Common stock, no par value; authorized 20,000,000 shares, issued and outstanding 7,654,303 and 7,644,837 shares on March 31, 2010 and December 31, 2009, respectively
   
50,180
     
50,062
 
Retained earnings
   
136,987
     
133,634
 
Accumulated other comprehensive income
               
Net unrealized gains on securities available for sale, net of tax
   
8,403
     
7,083
   
Net unrealized gains on derivative instruments, at fair value, net of tax
   
536
     
739
 
Net unrecognized losses on postretirement plans, net of tax
   
(949
)
   
(957
)   
Total accumulated other comprehensive income
   
7,990
     
6,865
   
Total shareholders’ equity
   
195,157
     
190,561
 
Total liabilities and shareholders’ equity
 
$
2,218,556
   
$
2,235,383
 

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
4

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

  
 
Three Months Ended March 31,
 
(In Thousands, Except Number of Shares and per Share Data)
 
2010
   
2009
 
Interest Income
           
Interest and fees on loans
 
$
20,447
   
$
21,621
 
Interest on U.S. government and sponsored enterprise obligations
   
5,163
     
7,235
 
Interest on state and political subdivision obligations
   
539
     
645
 
Interest on federal funds sold and other investments
   
25
     
49
 
Total interest income
   
26,174
     
29,550
 
Interest Expense
               
Interest on deposits
   
4,121
     
6,402
 
Interest on borrowings
   
3,294
     
3,934
 
Interest on junior subordinated debentures
   
694
     
713
 
Total interest expense
   
8,109
     
11,049
 
Net interest income
   
18,065
     
18,501
 
Provision for credit losses
   
1,996
     
1,730
 
Net interest income after provision for credit losses
   
16,069
     
16,771
 
Non-Interest Income
               
Income from fiduciary services
   
1,567
     
1,354
 
Service charges on deposit accounts
   
1,280
     
1,233
 
Other service charges and fees
   
690
     
613
 
Bank-owned life insurance
   
371
     
395
 
Brokerage and insurance commissions
   
294
     
358
 
Mortgage banking income
   
89
     
455
 
Other-than-temporary impairment of securities
   
(48
   
 
Other income
   
329
     
146
 
Total non-interest income
   
4,572
     
4,554
 
Non-Interest Expenses
               
Salaries and employee benefits
   
6,225
     
5,678
 
Furniture, equipment and data processing
   
1,068
     
963
 
Regulatory assessments
   
715
     
872
 
Net occupancy
   
1,034
     
1,118
 
Consulting and professional fees
   
808
     
572
 
Other real estate owned and collection costs
   
974
     
880
 
Amortization of intangible assets
   
144
     
144
 
Other expenses
   
1,954
     
2,064
 
Total non-interest expenses
   
12,922
     
12,291
 
Income before income taxes
   
7,719
     
9,034
 
Income Taxes
   
2,406
     
2,820
 
Net Income
 
$
5,313
   
$
6,214
 
                 
Per Share Data
               
Basic earnings per share
 
$
0.69
   
$
0.81
 
Diluted earnings per share
 
0.69
   
$
0.81
 
Weighted average number of common shares outstanding
   
7,652,089
     
7,639,169
 
Diluted weighted average number of common shares outstanding
   
7,659,640
     
7,642,705
 

See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
5

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

(In Thousands, Except Number of
Shares and per Share Data)
 
Common
Stock
   
Retained
Earnings
   
Net
Unrealized
Gains
(Losses) on
Securities
Available
for Sale
   
Net
Unrealized
Gains
(Losses) on
Derivative
Instruments
   
Net
Unrecognized
Losses on
Postretirement
Plans
   
Total
Shareholders’
Equity
 
Balance at December 31, 2008
 
$
48,984
   
$
118,564
   
$
(89
)
 
$
   
$
(1,059
)
 
$
166,400
 
                                                 
Net income
   
     
6,214
     
     
     
     
6,214
 
Change in unrealized losses on securities available for sale, net of taxes of ($713)
   
     
     
1,325
     
     
     
1,325
 
Change in unrealized losses on derivative instruments at fair value, net of taxes of $89
   
     
     
     
(165
 
   
     
(165
 
)
Change in net unrecognized losses on post-retirement plans, net of taxes of ($8)
   
     
     
     
     
16
     
16
 
Total comprehensive income
   
     
6,214
     
1,325
     
(165
   
16
     
7,390
 
Stock-based compensation expense
   
122
     
     
     
     
     
122
 
Cash dividends declared   ($0.25/share)
   
     
(1,916
)
   
     
     
     
(1,916
)
Balance at March 31, 2009
 
$
49,106
   
$
122,862
   
$
1,236
   
$
(165
 
$
(1,043
)
 
$
171,996
 
                                                 
Balance at December 31, 2009
 
$
50,062
   
$
133,634
   
$
7,083
   
$
739
   
$
(957
)
 
$
190,561
 
                                                 
Net income
   
     
5,313
     
     
     
     
5,313
 
Change in unrealized gains on securities available for sale, net of taxes of ($711)
   
     
     
1,320
     
     
     
1,320
 
Change in unrealized gains on derivative instruments at fair value, net of taxes of $109
   
     
     
     
(203
   
     
(203
)
Change in net unrecognized losses on postretirement plans, net of taxes of ($4)
   
     
     
     
     
8
     
8
 
Total comprehensive income
   
     
5,313
     
1,320
     
(203
   
8
     
6,438
 
Stock-based compensation expense
   
118
     
     
     
     
     
118
 
Common stock repurchased (1,385 shares)
   
     
(44
)
   
     
     
     
(44
)
Cash dividends declared ($0.25/share)
   
     
(1,916
)
   
     
     
     
(1,916
)
Balance at March 31, 2010
 
$
50,180
   
$
136,987
   
$
8,403
   
$
536
   
$
(949
)
 
$
195,157
 
 
  See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.

6

 
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 
  
 
Three Months Ended March 31,
 
(In Thousands)
 
2010
   
2009
 
Operating Activities
           
Net income
 
$
5,313
   
$
6,214
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for credit losses
   
1,996
     
1,730
 
Depreciation and amortization
   
707
     
667
 
Stock-based compensation expense
   
118
     
122
 
Increase in interest receivable
   
(264
)
   
(60
)
Amortization of intangible assets
   
144
     
144
 
Net increase in trading assets
   
(69
)
   
 
Other-than-temporary impairment of securities
   
48
     
 
Increase in other real estate owned valuation allowance
   
370
     
666
 
Originations of mortgage loans held for sale
   
     
(29,119
)
Proceeds from the sale of mortgage loans
   
     
20,155
 
Gain on sale of mortgage loans
   
     
(112
)
Liquidation of defined benefit pension plan
   
     
(735
)
Decrease in prepaid FDIC assessment
   
562
     
 
Decrease in other assets
   
654
     
1,649
 
Increase in other liabilities
   
1,652
     
388
 
Net cash provided by operating activities
   
11,231
     
1,709
 
Investing Activities
               
Proceeds from maturities of securities held to maturity
   
     
500
 
Proceeds from sales and maturities of securities available for sale
   
40,784
     
47,830
 
Purchase of securities available for sale
   
(19,887
)
   
(30,469
)
Net (increase) decrease in loans
   
(3,961
)
   
30,074
 
Proceeds from the sale of other real estate owned
   
212
     
175
 
Purchase of premises and equipment
   
(3,148
)
   
(194
)
Net cash provided by investing activities
   
14,000
     
47,916
 
Financing Activities
               
Net increase (decrease) in deposits
   
5,219
     
(8,336
)
Proceeds from Federal Home Loan Bank long-term advances
   
11,200
     
 
Repayments on Federal Home Loan Bank long-term advances
   
(41,302
)
   
(42,445
)
Net change in short-term Federal Home Loan Bank borrowings
   
4,385
     
(31,185
)
Net (decrease) increase in other borrowed funds
   
(2,646
)
   
27,823
 
Common stock repurchase
   
(44
)
   
 
Cash dividends paid on common stock
   
(1,916
)
   
(1,912
)
Net cash used by financing activities
   
(25,104
)
   
(56,055
)
Net increase (decrease) in cash and cash equivalents
   
127
     
(6,430
)
Cash and cash equivalents at beginning of year
   
29,772
     
35,195
 
Cash and cash equivalents at end of period
 
$
29,899
   
$
28,765
 
Supplemental information
               
Interest paid
 
$
8,260
   
$
11,341
 
Income taxes paid
   
1,000
     
 
Transfer from loans to other real estate owned
   
304
     
 
 
See Report of Independent Registered Public Accounting Firm.
The accompanying notes are an integral part of these consolidated financial statements.
 
7


CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Tables Expressed in Thousands, Except Number of Shares and per Share Data)

NOTE 1 - BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements were prepared in accordance with instructions for Form 10-Q and, therefore, do not include all disclosures required by accounting principles generally accepted in the United States of America (“GAAP”) for complete presentation of financial statements. In the opinion of management, the consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) necessary to present fairly the consolidated statements of condition of Camden National Corporation (the “Company”) as of March 31, 2010 and December 31, 2009, the consolidated statements of income for the three months ended March 31, 2010 and 2009, the consolidated statements of changes in shareholders' equity for the three months ended March 31, 2010 and 2009, and the consolidated statements of cash flows for the three months ended March 31, 2010 and 2009. All significant intercompany transactions and balances are eliminated in consolidation. Certain items from the prior year were reclassified to conform to the current year presentation. The income reported for the three-month period ended March 31, 2010 is not necessarily indicative of the results that may be expected for the full year. The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the December 31, 2009 Annual Report on Form 10-K.

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

   
Three Months Ended March 31,
 
   
2010
   
2009
 
Net income, as reported
 
$
5,313
   
$
6,214
 
Weighted-average common shares outstanding – basic
   
7,652,089
     
7,639,169
 
Dilutive effect of stock-based compensation
   
7,551
     
3,536
 
Weighted-average common and potential common shares – diluted
  
 
7,659,640
     
7,642,705
 
Basic earnings per share – common stock
 
$
0.69
   
$
0.81
 
Basic earnings per share – unvested share-based payment awards
   
0.69
     
0.81
 
Diluted earnings per share – common stock
   
0.69
     
0.81
 
Diluted earnings per share – unvested share-based payment awards
   
0.69
     
0.81
 

At March 31, 2010 and 2009, options to purchase 98,877 and 134,800 shares, respectively, of common stock were not considered in the computation of potential common shares for purposes of diluted EPS, since the exercise prices of the options were greater than the average market price of the common stock for the respective periods.

8


NOTE 3 – SECURITIES

The following tables summarize the amortized costs and estimated fair values of securities available for sale and held to maturity, as of the dates indicated:
 
   
Amortized
Cost
   
Unrealized
Gains
   
Unrealized
Losses
   
Fair
Value
 
March 31, 2010
                       
Available for sale
                       
Obligations of U.S. Government sponsored enterprises
 
$
10,000
   
$
   
$
(40
)
 
$
9,960
 
Obligations of states and political subdivisions
   
16,875
     
411
     
     
17,286
 
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
   
383,209
     
17,757
     
     
400,966
 
Private issue collateralized mortgage obligations
   
32,748
     
10
     
(4,689
)
   
28,069
 
Total debt securities
   
442,832
     
18,178
     
(4,729
)
   
456,281
 
Equity securities
   
5,000
     
     
(579
)
   
4,421
 
Total securities available for sale
 
$
447,832
   
$
18,178
   
$
(5,308
)
 
$
460,702
 
Held to maturity
                               
Obligations of states and political subdivisions
 
$
37,900
   
$
1,562
   
$
   
$
39,462
 
Total securities held to maturity
 
$
37,900
   
$
1,562
   
$
   
$
39,462
 
                                 
December 31, 2009
                               
Available for sale
                               
Obligations of states and political subdivisions
 
$
17,587
   
$
473
   
$
   
$
18,060
 
Mortgage-backed securities issued or guaranteed by U.S. government sponsored enterprises
   
412,113
     
16,608
     
(365
)
   
428,356
 
Private issue collateralized mortgage obligations
   
34,121
     
12
     
(5,261
)
   
28,872
 
Total debt securities
   
463,821
     
17,093
     
(5,626
)
   
475,288
 
Equity securities
   
5,000
     
     
(580
)
   
4,420
 
Total securities available for sale
 
$
468,821
   
$
17,093
   
$
(6,206
)
 
$
479,708
 
Held to maturity
           
  
     
  
     
  
 
Obligations of states and political subdivisions
 
$
37,914
   
$
1,725
   
$
   
$
39,639
 
Total securities held to maturity
 
$
37,914
   
$
1,725
   
$
   
$
39,639
 

Unrealized gains on securities available for sale arising during the first quarter of 2010 and included in other comprehensive income amounted to $1.3 million, net of deferred taxes of $711,000.
 
At March 31, 2010, securities with an amortized cost of $346.2 million and an estimated fair value of $363.5 million were pledged to secure Federal Home Loan Bank (“FHLB”) advances, public deposits, securities sold under agreements to repurchase and other purposes required or permitted by law.
 
The amortized cost and estimated fair values of debt securities by contractual maturity at March 31, 2010 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized
Cost
   
Fair
Value
 
Available for sale
 
 
   
 
 
Due in one year or less
  $ 2,934     $ 2,961  
Due after one year through five years
    37,057       38,094  
Due after five years through ten years
    59,186       61,384  
Due after ten years
    343,655       353,842  
  
  $ 442,832     $ 456,281  
Held to maturity
               
Due in one year or less
  $ 297     $ 301  
Due after one year through five years
    3,669       3,809  
Due after five years through ten years
    32,043       33,387  
Due after ten years
    1,891       1,965  
  
  $ 37,900     $ 39,462  
 
9

 
Management reviews the investment portfolio on a periodic basis to determine the cause, magnitude and duration of declines in the fair value of each security. Thorough evaluations of the causes of the unrealized losses are performed to determine whether the impairment is temporary or other than temporary in nature. Considerations such as the ability of the securities to meet cash flow requirements, levels of credit enhancements, risk of curtailment, recoverability of invested amount over a reasonable period of time and the length of time the security is in a loss position, for example, are applied in determining other than temporary impairment (“OTTI”). Once a decline in value is determined to be other-than-temporary, the value of the security is reduced and a corresponding charge to earnings is recognized.
 
The following table shows the unrealized gross losses and estimated fair values of investment securities at March 31, 2010 and December 31 2009, by length of time that individual securities in each category have been in a continuous loss position.

   
Less Than 12 Months
   
12 Months or More
   
Total
 
  
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
March 31, 2010
                                   
Obligations of U.S. Government sponsored enterprises
 
$
9,960
   
$
(40
)
 
$
   
$
   
$
9,960
   
$
(40
)
Private issue collateralized mortgage obligations
   
     
     
27,256
     
(4,689
)
   
27,256
     
(4,689
)
Equity securities
   
     
     
4,421
     
(579
)
   
4,421
     
(579
)
Total
 
$
9,960
   
$
(40
)
 
$
31,677
   
$
(5,268
)
 
$
41,637
   
$
(5,308
)
                                                 
December 31, 2009
                                               
Mortgage-backed securities
 
$
25,003
   
(364
)
 
$
57
   
$
(1
)
 
$
25,060
   
$
(365
)
Private issue collateralized mortgage obligations
   
     
     
27,910
     
(5,261
)
   
27,910
     
(5,261
)
Equity securities
   
     
     
4,420
     
(580
   
4,420
     
(580
)
Total
 
$
25,003
   
$
(364
)
 
$
32,387
   
$
(5,842
)
 
$
57,390
   
$
(6,206
)
 
At March 31, 2010, $41.6 million of the Company’s investment securities had unrealized losses that are primarily considered temporary. A large portion of the unrealized loss was related to the private issue collateralized mortgage obligations (“CMOs”), which includes $9.0 million that have been downgraded to non-investment grade. The Company’s share of these downgraded CMOs is in the senior tranches. Management believes the unrealized loss for the CMOs is the result of current market illiquidity and the underestimation of value in the market. Including the CMOs, there were 22 securities with a fair value of $31.7 million in the portfolio which had unrealized losses for twelve months or longer. Management currently has the intent and ability to retain these investment securities with unrealized losses until the decline in value has been recovered. Stress tests are performed regularly on the higher risk bonds in the portfolio using current statistical data to determine expected cash flows and forecast potential losses. The results of the stress tests at March 31, 2010, reflect no current credit loss in the base case, but did reflect potential future losses. Based on this analysis the Company recorded a $48,000 OTTI write-down on two private issue CMOs during the first quarter of 2010.
 
At March 31, 2010, the Company held Duff & Phelps Select Income Fund Auction Preferred Stock with an amortized cost of $5.0 million which failed at auction during 2008. The security is rated Triple-A by Moody’s and Standard and Poor’s. Management believes the failed auctions are a temporary liquidity event related to this asset class of securities. The Company is currently collecting all amounts due according to contractual terms and has the ability and intent to hold the securities until they clear auction, are called, or mature; therefore, the securities are not considered other-than-temporarily impaired.

 NOTE 4 – LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the Company’s loan portfolio, including residential loans held for sale, at March 31, 2010 and December 31, 2009 was as follows:
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
Residential real estate loans
 
$
625,994
   
$
627,979
 
Commercial real estate loans
   
437,294
     
434,783
 
Commercial loans
   
192,087
     
191,214
 
Consumer loans
   
275,025
     
273,106
 
Deferred loan fees net of costs
   
(333
)
   
(324
Total loans
 
$
1,530,067
   
$
1,526,758
 

10

 
The Company’s lending activities are primarily conducted in Maine. The Company makes single family and multi-family residential loans, commercial real estate loans, business loans, municipal loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. For the year ended December 31, 2009, the Company sold $72.5 million of fixed-rate residential mortgage loans on the secondary market, which resulted in a net gain on the sale of loans of $86,000. The Company did not sell mortgage loans during the first quarter of 2010. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy.

Non-accrual loans at March 31, 2010 were $18.0 million, or 1.18% of total loans, compared to $17.9 million, or 1.18% of total loans, at December 31, 2009. Non-accrual loans at March 31, 2010 were comprised of $6.2 million in commercial real estate loans, $6.2 million in residential real estate loans, $4.3 million in commercial loans, and $1.2 million in consumer loans. Non-accrual loans at December 31, 2009 consisted of $6.5 million in commercial real estate loans, $6.2 million in residential real estate loans, $4.1 million in commercial loans, and $1.2 million in consumer loans.

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

 The following is a summary of activity in the allowance for loan losses:

   
Three Months Ended March 31,
 
  
 
2010
   
2009
 
Balance at beginning of period
 
$
20,246
   
$
17,691
 
Loans charged off
   
(1,253
)
   
(1,827
Recoveries on loans previously charged off
   
386
     
97
 
Net charge-offs
   
(867
)
   
(1,730
Provision for loan losses
   
2,000
     
1,730
 
Balance at end of period
 
$
21,379
   
$
17,691
 

NOTE 5 – GOODWILL, CORE DEPOSIT AND TRUST RELATIONSHIP INTANGIBLES

In 2008, the Company acquired $37.9 million of goodwill, $5.0 million of core deposit intangible and $753,000 of trust relationship intangible related to the acquisition of Union Bankshares Company (“Union Bankshares”). The changes in goodwill, core deposit intangible and trust relationship intangible for the three months ended March 31, 2010 are shown in the table below:

   
Goodwill
 
   
Banking
   
Financial
Services
   
Total
 
Balance at December 31, 2009
 
$
34,720
   
$
7,060
   
$
41,780
 
2010 activity
   
     
     
 
Balance at March 31, 2010
 
$
34,720
   
$
7,060
   
$
41,780
 
 
   
Core Deposit Intangible
 
   
Total
   
Accumulated
Amortization
   
Net
 
Balance at December 31, 2009
  $ 14,444     $ (10,428 )   $ 4,016  
2010 amortization
          (126 )     (126 )
Balance at March 31, 2010
  $ 14,444     $ (10,554 )   $ 3,890  
 
11

 
   
Trust Relationship Intangible
 
   
Total
   
Accumulated
Amortization
   
Net
 
Balance at December 31, 2009
 
$
753
   
$
            (151
)
 
$
602
 
2010 amortization
   
     
(18
)
   
(18
)
Balance at March 31, 2010
 
$
753
   
$
(169
)
 
$
584
 

During the fourth quarter of 2009, the Company completed its annual impairment evaluation of goodwill and did not identify any impairment.

The following table reflects the expected amortization schedule for intangible assets at March 31, 2010:

   
Trust 
Relationship
   
Core Deposit
 
   
Intangible
   
Intangible
 
2010
 
$
57
   
$
376
 
2011
   
75
     
502
 
2012
   
75
     
502
 
2013
   
75
     
502
 
2014
   
75
     
502
 
Thereafter
   
227
     
1,506
 
Total unamortized intangible
 
$
584
   
$
3,890
 
 
NOTE 6 – OTHER REAL ESTATE OWNED

Other real estate owned (“OREO”) properties acquired through foreclosure or deed-in-lieu of foreclosure are recorded at the fair value of the real estate, less costs to sell.  Any write-down of the recorded investment in the related loan is charged to the allowance for loan losses upon transfer to OREO.  Subsequent write-downs required for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense.

Activity in other real estate owned was as follows:
 
   
Three Months Ended
March 31,
 
  
 
2010
   
2009
 
Balance at beginning of year
 
$
5,479
   
$
4,024
 
Additions
   
304
     
 
Increase in OREO valuation allowance
   
(370
)
   
(666
)
Properties sold
   
(212
)
   
(175
)
Balance at end of period
 
$
5,201
   
$
3,183
 
 
NOTE 7 – EMPLOYEE BENEFIT PLANS

Supplemental Executive Retirement Plan
The Company maintains an unfunded, non-qualified supplemental executive retirement plan for certain officers.  The components of net period benefit cost for the periods ended March 31, 2010 and 2009 were as follows:
 
  
 
Three Months Ended
March 31,
 
  
 
2010
   
2009
 
Net period benefit cost
           
Service cost
 
$
45
   
$
51
 
Interest cost
   
107
     
104
 
Recognized net actuarial loss
   
8
     
19
 
Recognized prior service cost
   
5
     
5
 
Net period benefit cost
 
$
165
   
$
179
 
 
12

 
Other Postretirement Benefit Plan
The Company provides medical and life insurance to certain eligible retired employees.  The components of net period benefit cost for the periods ended March 31, 2010 and 2009 were as follows:
 
  
 
Three Months Ended
March 31,
 
  
 
2010
   
2009
 
Net period benefit cost
           
Service cost
 
$
17
   
$
16
 
Interest cost
   
36
     
34
 
Recognized net actuarial loss
   
0
     
1
 
Net period benefit cost
 
$
53
   
$
51
 

NOTE 8 – STOCK-BASED COMPENSATION PLANS

On March 11, 2010 the Company granted 7,500 restricted stock awards to certain executive officers of the Company and/or Bank, from the 2003 Stock Option and Incentive Plan. The holders of these awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. The restricted stock awards have been determined to have a fair value of $32.49, based on the market price of the Company’s common stock on the date of grant. The restricted stock awards vest over a three year period.

On March 15, 2010 the Company awarded options to purchase 30,750 shares of common stock from the Stock Option and Incentive Plan to certain officers of the Company and/or the Bank. The expected volatility, expected life, expected dividend yield, and expected risk free interest rate for this grant used to determine the fair value of the shares as determined on March 15, 2010 were 50%, 5 years, 3.08%, and 2.36%, respectively. The options have been determined to have a fair value of $11.74 per share. The options vest over a five year period and have a contractual life of ten years from date of grant.

Under the Management Stock Purchase Plan, 1,677 shares were granted in lieu of management employees’ annual incentive bonus during the first three months of 2010.  During the first quarter of 2010, the Company granted 1,565 Deferred Stock Awards under the Defined Contribution Retirement Plan.
 
NOTE 9 – FAIR VALUE
 
GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections as of March 31, 2010.
 
Pursuant to GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy exists in GAAP for fair value measurements based upon the inputs to the valuation of an asset or liability.
 
Level 1:   Valuation is based on quoted prices in active markets for identical assets and liabilities.
 
Level 2:   Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.
 
Level 3:   Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.
 
When available, the Company attempts to use quoted market prices in active markets to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices in active markets are not available, fair value is often determined using model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. The following is a description of the valuation methodologies used for the Company’s assets and liabilities that are measured on a recurring basis at estimated fair value.
 
13

 
The following table summarizes assets and liabilities measured at estimated fair value on a recurring basis.
 
   
 
 
Level 1
   
 
 
Level 2
   
 
 
Level 3
   
Fair Value
Measurements at
March 31,
2010
 
Assets:
                       
Securities available for sale:
                       
Obligations of U.S. government sponsored enterprises
  $     $ 9,960     $     $ 9,960  
Obligations of states and political subdivisions
          17,286             17,286  
Mortgage-backed securities issued or guaranteed by US government sponsored enterprises
          400,966             400,966  
Private issue collateralized mortgage obligations
          28,069             28,069  
Equity securities
          4,421             4,421  
Trading account assets
    1,794                   1,794  
Derivatives instruments
          825             825  
 
   
 
 
 
Level 1
   
 
 
 
Level 2
   
 
 
 
Level 3
   
Fair Value
Measurements at
December 31,
2009
 
Assets:
                       
Securities available for sale:
                       
Obligations of states and political subdivisions
  $     $ 18,060     $     $ 18,060  
Mortgage-backed securities issued or guaranteed by US government sponsored enterprises
          428,356             428,356  
Private issue collateralized mortgage obligations
          28,872             28,872  
Equity securities
          4,420             4,420  
Trading account assets
    1,725                   1,725  
Derivatives instruments
          1,136             1,136  
 
The following table summarizes assets and liabilities measured at fair value on a non-recurring basis:
 
   
 
 
Level 1
 
 
 
Level 2
 
 
 
Level 3
 
Fair Value
Measurements at
March 31,
2010
Assets:
   
  
     
  
     
  
     
  
 
Impaired loans
 
$
   
$
1,385
   
$
   
$
1,385
 
Other real estate owned
   
     
     
5,201
     
5,201
 
Mortgage servicing rights
   
     
945
     
     
945
 
 
14

 
   
 
 
Level 1
 
 
 
Level 2
 
 
 
Level 3
 
Fair Value
Measurements at
December 31,
2009
Assets:
   
  
     
  
     
  
     
  
 
Impaired loans
 
$
   
$
16,135
   
$
   
$
16,135
 
Other real estate owned
   
     
     
5,479
     
5,479
 
Mortgage servicing rights
   
     
965
     
     
965
 
 
The following table reconciles the beginning and ending balances of other real estate owned measured at fair value on a nonrecurring basis using significant unobservable (Level 3) inputs:
 
  
 
Three Months Ended
March 31,
 
  
 
2010
   
2009
 
Balance at beginning of year
 
$
5,479
   
$
4,024
 
Additions
   
304
     
 
Increase in OREO valuation allowance
   
(370
)
   
(666
)
Properties sold
   
(212
)
   
(175
)
Balance at end of period
 
$
5,201
   
$
3,183
 
 
OREO properties acquired through foreclosure or deed-in-lieu of foreclosure are recorded at the fair value of the real estate, less costs to sell. Any write-down of the recorded investment in the related loan is charged to the allowance for loan losses upon transfer to OREO. Upon acquisition of a property, a current appraisal or a broker’s opinion is used to substantiate fair value for the property. 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 through a valuation allowance and a provision for losses charged to other non-interest expense.

15

 
The carrying amounts and estimated fair value for financial instrument assets and liabilities are presented in the following table:
 
   
March 31, 2010
 
December 31, 2009
  
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial assets:
   
  
     
  
     
  
     
  
 
Cash and due from banks
 
$
29,899
   
$
29,899
   
$
29,772
   
$
29,772
 
Securities available for sale
   
460,702
     
460,702
     
479,708
     
479,708
 
Securities held to maturity
   
37,900
     
39,462
     
37,914
     
39,639
 
Trading account assets
   
1,794
     
1,794
     
1,725
     
1,725
 
Derivatives instruments
   
825
     
825
     
1,136
     
1,136
 
Federal Home Loan and Federal Reserve Bank stock
   
21,965
     
21,965
     
21,965
     
21,965
 
Loans receivable, net of allowance
   
1,508,688
     
1,530,518
     
1,506,512
     
1,526,148
 
Mortgage servicing rights
   
756
     
945
     
810
     
965
 
Interest receivable
   
7,500
     
7,500
     
7,236
     
7,236
 
Financial liabilities:
                   
  
     
  
 
Deposits
   
1,501,030
     
1,506,858
     
1,495,807
     
1,502,020
 
Federal Home Loan Bank advances
   
179,607
     
185,852
     
209,710
     
216,373
 
Commercial repurchase agreements
   
116,438
     
125,005
     
126,466
     
135,189
 
Other borrowed funds
   
159,540
     
159,540
     
147,659
     
147,659
 
Junior subordinated debentures
   
43,538
     
50,776
     
43,512
     
51,075
 
Interest payable
   
2,442
     
2,442
     
2,593
     
2,593
 
 
The following assumptions, methods and calculations were used in determining the estimated fair value of financial instruments.
 
Cash and Due from Banks:  The carrying amounts of cash and due from banks approximate their fair value.
 
Securities Available for Sale and Trading Account Assets:  The fair value of securities available for sale and trading account assets is reported utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value of equity securities was calculated using a discounted cash flow analysis using observable information including, but not limited to, cash flows, risk-adjusted discount rates and market spreads.
 
Securities Held to Maturity:  Fair values of securities held to maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.
 
Federal Home Loan and Federal Reserve Bank Stock:  The carrying amount approximates fair value.
 
Loans:  For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loan impairment is deemed to exist when full repayment of principal and interest according to the contractual terms of the loan is no longer probable. Impaired loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the collateral if the loan is collateral dependent. If the fair value measure is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the ALL. Accordingly, certain impaired loans may be subject to measurement at fair value on a non-recurring basis. Management has estimated the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party appraisals for collateral-dependent loans.
 
Derivatives:  Derivatives are reported at fair value utilizing Level 2 inputs obtained from third parties to value interest rate caps and swaps.
 
Mortgage Servicing Rights:  Mortgage servicing rights are evaluated regularly for impairment based upon the fair value of the servicing rights as compared to their amortized cost. The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes a variety of observable inputs for its assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Other assumptions include delinquency rates, servicing cost inflation, and annual unit loan cost.
 
Interest Receivable and Payable:  The carrying amounts approximate their fair value.
 
Deposits:  The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates and remaining maturities for currently offered certificates of deposit.
 
Borrowings:  The carrying amounts of short-term borrowings from the FHLB, securities sold under repurchase agreements, the notes payable and other short-term borrowings approximate fair value. The fair value of long-term borrowings and commercial repurchase agreements is based on the discounted cash flows using current rates for advances of similar remaining maturities.
 
Junior Subordinated Debentures:  The fair value is estimated using a discounted cash flow calculation that applies current rates for debentures of similar maturity.
 
NOTE 10 – COMMITMENTS AND CONTINGENCIES

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

16

 
Financial Instruments
 
In the normal course of business, the Company is a party to both on-balance sheet and off-balance sheet financial instruments involving, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the Consolidated Statements of Condition.
 
A summary of the contractual and notional amounts of the Company’s financial instruments follows:
 
   
March 31,
 
December 31,
  
 
2010
 
2009
Lending-Related Instruments:
   
  
     
  
 
Loan origination commitments and unadvanced lines of credit:
   
  
     
  
 
Home equity
 
$
156,808
   
$
153,245
 
Commercial and commercial real estate
   
116,256
     
120,515
 
Residential
   
16,539
     
9,009
 
Letters of credit
   
3,248
     
3,089
 
Derivative Financial Instruments:
           
  
 
Interest rate cap
   
     
20,000
 
Forward interest rate swap
   
20,000
     
20,000
 

Lending-Related Instruments

The contractual amounts of the Company’s lending-related financial instruments do not necessarily represent future cash requirements since certain of these instruments may expire without being funded and others may not be fully drawn upon. These instruments are subject to the Company’s credit approval process, including an evaluation of the customer’s creditworthiness and related collateral requirements. Commitments generally have fixed expiration dates or other termination clauses.

Derivative Financial Instruments

The Company uses derivative financial instruments for risk management purposes and not for trading or speculative purposes. The Company controls the credit risk of these instruments through collateral, credit approvals and monitoring procedures.

The Company has a notional amount of $20.0 million in forward interest rate swap agreements on its junior subordinated debentures. As the interest on these debentures converts from fixed interest rate to variable rate on June 30, 2011, the Company swapped a portion of the variable cost for a fixed cost. On March 18, 2009, the Company purchased a 10-year forward interest rate swap with a notional amount of $10.0 million, with a fixed cost of 5.09% and a maturity date of June 20, 2021. On July 8, 2009, the Company purchased an 18-year forward interest rate swap with a notional amount of $10.0 million, a fixed cost of 5.84% and a maturity of June 30, 2029. The fair value of the swap agreements at March 31, 2010 was $825,000 and, as this instrument qualifies as a highly effective cash flow hedge, the change in fair value was recorded in other comprehensive income, net of tax, and other liabilities.

Through the acquisition of Union Trust, the Company acquired an interest rate cap agreement with a cap rate of 5.50% and notional amount of $20.0 million, which expired on March 15, 2010.

17

 
Forward Commitments to Sell Residential Mortgage Loans

The Company enters into forward commitments to sell residential mortgages in order to reduce the market risk associated with originating loans for sale in the secondary market. There were no commitments outstanding to sell mortgages at March 31, 2010 and December 31, 2009.

As part of originating residential mortgage and commercial loans, the Company may enter into rate lock agreements with customers, and may issue commitment letters to customers, which are considered interest rate lock or forward commitments. At March 31, 2010 and December 31, 2009, based upon the pipeline of mortgage loans with rate lock commitments and of commercial loans with commitment letters, and the change in fair value of those commitments due to changes in market interest rates, the Company determined the balance sheet impact was not material.

NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance (incorporated in the FASB Accounting Standards Codification (“ASC”) via Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing: Accounting for Transfers of Financial Assets, in December 2009) which provides amended guidance relating to transfers of financial assets that eliminates the concept of a qualifying special-purpose entity. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after its effective date. On and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The new guidance also changed the requirements which must be satisfied in order for an entity to treat a loan participation as a sale.  The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance. The adoption of this update did not have a significant impact on the Company’s consolidated financial statements.
 
In June 2009, the FASB issued guidance (incorporated in the FASB ASC via ASU 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, in December 2009) which provides amended guidance for consolidation of a variable interest entity by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity. The amended guidance uses an approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The adoption of this update did not have a significant impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued ASU 2010-6, Fair Value Measurements and Disclosures: Improving Disclosures about Fair Value Measurements, to amend the disclosure requirements related to recurring and nonrecurring fair value measurements.  The guidance requires new disclosures regarding transfers of assets and liabilities between Level 1 (quoted prices in active market for identical assets or liabilities) and Level 2 (significant other observable inputs) of the fair value measurement hierarchy, including the reasons and the timing of the transfers.  Additionally, the guidance requires a rollforward of activities, separately reporting purchases, sales, issuance, and settlements, for assets and liabilities measured using significant unobservable inputs (Level 3 fair value measurements).  The guidance is effective for annual reporting periods that begin after December 15, 2009, and for interim periods within those annual reporting periods except for the changes to the disclosure of rollforward activities for any Level 3 fair value measurements, which are effective for annual reporting periods that begin after December 15, 2009, and for interim periods within those annual reporting periods.  Other than requiring additional disclosures, adoption of this new guidance did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, Subsequent Events: Amendments to Certain Recognition and Disclosure Requirements, related to events that occur after the statement of condition date but before financial statements are issued. This guidance amends existing standards to address potential conflicts with Securities and Exchange Commission (“SEC”) guidance and refines the scope of the reissuance disclosure requirements to include revised financial statements only. Under this guidance, SEC filers are no longer required to disclose the date through which subsequent events have been evaluated. The adoption of this update did not have a material effect on the Company’s consolidated financial statements.
 
 NOTE 12 – SUBSEQUENT EVENTS

The Company has evaluated events and transactions subsequent to March 31, 2010 for potential recognition or disclosure as required by GAAP.

18

 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
 
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. We may make written or oral forward-looking statements in other documents we file with the Securities Exchange Commission, in our annual reports to shareholders, in press releases and other written materials and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “will,” “should” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause the actual results, performance or achievements of Camden National Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.
 
Some of the factors that might cause these differences include, but are not limited to, the following:

 
general, national, regional or local economic conditions which are less favorable than anticipated, including continued global recession, impacting the performance of our investment portfolio, quality of credits or the overall demand for services;

 
changes in loan default and charge-off rates could affect the allowance for credit losses;

 
declines in the equity and financial markets which could result in impairment of goodwill;

 
reductions in deposit levels could necessitate increased and/or higher cost borrowing to fund loans and investments;

 
declines in mortgage loan refinancing, equity loan and line of credit activity which could reduce net interest and non-interest income;

 
changes in the domestic interest rate environment and inflation, as substantially all of our assets and virtually all of the liabilities are monetary in nature;

 
changes in the carrying value of investment securities and other assets;

 
further actions by the U.S. government and Treasury Department, similar to the Federal Home Loan Mortgage Corporation conservatorship, which could have a negative impact on the Company’s investment portfolio and earnings;

 
misalignment of our interest-bearing assets and liabilities;

 
increases in loan repayment rates affecting interest income and the value of mortgage servicing rights;

 
changing business, banking, or regulatory conditions or policies, or new legislation affecting the financial services industry, that could lead to changes in the competitive balance among financial institutions, restrictions on bank activities, changes in costs (including deposit insurance premiums), increased regulatory scrutiny, declines in consumer confidence in depository institutions, or changes in the secondary market for bank loan and other products; and

changes in accounting rules, Federal and State laws, IRS regulations, and other regulations and policies governing financial holding companies and their subsidiaries which may impact our ability to take appropriate action to protect our financial interests in certain loan situations.

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 Item 1A. Risk Factors within our Annual Report on Form 10-K for the year ended December 31, 2009.  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.
 
19

 
CRITICAL ACCOUNTING POLICIES

In preparing the 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 review of goodwill and other identifiable intangible assets for impairment, valuation of other real estate owned, other-than-temporary impairment of investments, accounting for postretirement plans and income taxes. Our significant accounting policies and critical estimates are summarized in Note 1 of our Annual Report on Form 10-K for the year ended December 31, 2009.

Allowance for Credit Losses.   The allowance for credit losses consists of two components: 1) the allowance for loan losses (“ALL”) which is present as a contra to total gross loans in the asset section of the statement of condition, and 2) the reserve for unfunded commitments included in other liabilities on the statement of condition. In preparing the Consolidated Financial Statements, the ALL requires the most significant amount of management estimates and assumptions. The ALL, which is established through a charge to the provision for credit losses, is based on our evaluation of the level of the allowance required in relation to the estimated loss exposure in the loan portfolio. We regularly evaluate the ALL for adequacy by taking into consideration, among other factors, local industry trends, management’s ongoing review of individual loans, trends in levels of watched or criticized assets, an evaluation of results of examinations by regulatory authorities and other third parties, analyses of historical trends in charge-offs and delinquencies, the character and size of the loan portfolio, business and economic conditions and our estimation of probable losses.

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 includes four 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. The 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 and flexibility, 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 contingencies, management strength, and the industry in which the obligor operates. These factors are based on an evaluation of historical information, as well as 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. 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 residential mortgages 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. We also consider the results of regulatory examinations, historical loss ranges, portfolio composition, and other changes in the portfolio. An additional allocation is determined based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. For example, a significant portion of our loan portfolio is concentrated among borrowers in southern Maine and a substantial portion of the portfolio is collateralized by real estate in this area. Another portion of the commercial and commercial real estate loans are to borrowers in the hospitality, tourism and recreation industries. Finally, an unallocated portion of the total allowance is maintained to allow for shifts in portfolio composition and account for uncertainty in the economic environment.

Since 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 results of regulatory examinations. While management’s evaluation of the ALL as of March 31, 2010 determined the allowance to be appropriate, under adversely different conditions or assumptions, we may need to increase the allowance. The Corporate Risk Management group reviews the ALL with the Camden National Bank 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 Camden National Bank Board of Directors, on a quarterly basis.

The adequacy of the reserve for unfunded commitments is determined similarly to the allowance for loan losses, with the exception that management must also estimate the likelihood of these commitments being funded and becoming loans. This is done 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.

20

 
Accounting for Acquisitions and Review of Goodwill and Identifiable Intangible Assets for Impairment.  We are required to record assets acquired and liabilities assumed at their 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. 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 such property 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 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 other-than-temporary impairment 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.

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 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.

Income Taxes.  We account for income taxes by deferring income taxes based on estimated future tax effects of differences between the tax and book basis 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 Statement 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. Although not currently under review, income tax returns for the years ended December 31, 2006 through 2008 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.

21

 
RESULTS OF OPERATIONS

Executive Overview

For the three months ended March 31, 2010:

Net income of $5.3 million for the three-month period ended March 31, 2010 decreased $901,000, compared to the three-month period ended March 31, 2009.  Net income per diluted share decreased to $0.69, compared to $0.81 per diluted share earned during the first three months of 2009. The following were major factors contributing to the results of the first three months of 2010 compared to the same period of 2009:
 
 
•  
Net interest income on a fully-taxable equivalent basis for the first three months of 2010 decreased 2.7% to $18.4 million due to average earning assets declining $90.3 million.
 
•  
The provision for loan losses of $2.0 million increased $266,000 in the first three months of 2010 compared to the same period of 2009 primarily due to the level of non-performing assets.
 
•  
For the three months ended March 31, 2010, net charge-offs totaled $867,000, or an annualized rate of 0.23% of average loans, compared to $1.7 million, or 0.46%, for the same period of 2009. Non-performing assets as a percentage of total assets amounted to 1.09% and 0.89% at March 31, 2010 and 2009, respectively.
 
•  
Non-interest income for the first three months of 2010 was $4.6 million, a 0.4% increase over the first three months of 2009.
 
•  
Non-interest expense for the first three months of 2010 was $12.9 million, an increase of $631,000, or 5.1%, over the first three months of the prior year due to an increase in salaries and employee benefits and an increase in consulting and professional fees.

Financial condition at March 31, 2010 compared to December 31, 2009:
 
 
•  
Total loans at March 31, 2010 were $1.5 billion, an increase of $3.3 million compared to December 31, 2009. The increase in loan balances was primarily in the commercial real estate and consumer portfolios.
 
•  
Investment securities declined $19.0 million at March 31, 2010 compared to December 31, 2009 due to security prepayments.
 
•  
Deposits at March 31, 2010 were $1.5 billion, an increase of $5.2 million compared to December 31, 2009.  The increase in deposit balances was primarily in the core deposits categories of interest checking, savings and money markets.
 
•  
Total liabilities at March 31, 2010 of $2.0 billion decreased $21.4 million compared to December 31, 2009, or 1.0%, as borrowings decreased $28.2 million, primarily in Federal Home Loan Bank of Boston (“FHLBB”) borrowings, which offsets the decline in investment securities.
 
•  
Shareholders’ equity increased 2.4% due to current year earnings and other comprehensive income, in part offset by dividends declared.

Net Interest Income

Net interest income is our largest source of revenue and accounts for approximately 80% of total revenues. Net interest income reflects revenues generated through income from earning assets plus loan fees, less interest paid on interest-bearing deposits and borrowings. Net interest income is affected by changes in interest rates, by 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 $18.4 million on a fully-taxable equivalent basis for the three months ended March 31, 2010, compared to $18.9 million for the first three months of 2009, a decrease of $518,000 or 2.7%. The decrease in net interest income is primarily due to a decrease of $130.8 million in average investment securities for the three months ended March 31, 2010 compared to the same period in 2009, partially offset by an improvement of 7 basis points in the net interest margin, to 3.58%.  Total average interest-earning assets decreased $90.3 million for the three months ended March 31, 2010 compared to the same period in 2009, due to the decrease in investments, partially offset by increases in average loans of $40.0 million.  The yield on earning assets for the first three months of 2010 decreased 42 basis points compared to the same period in 2009, reflecting the impact of the low investment rate environment on both investment and loan yields as these earning assets were booked or repriced.  Average interest-bearing liabilities decreased $124.2 million for the three months ended March 31, 2010 compared to the same period in 2009, primarily due to declines in wholesale funding, in part offset by an increase in retail deposits driven by increases in interest checking, savings and money market accounts and demand deposits. Total cost of funds decreased 49 basis points due to the decline in short-term interest rates.

The following table presents, for the periods noted, average balance sheets, 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. 
 
22

 
Average Balance, Interest and Yield/Rate Analysis
 
   
Three Months Ended
March 31, 2010
   
Three Months Ended
March 31, 2009
 
(Dollars in Thousands)
 
Average
Balance
   
Interest
   
Yield/
Rate
   
Average
Balance
   
Interest
   
Yield/
Rate
 
ASSETS
                                   
Interest-earning assets:
                                   
Securities – taxable
 
$
466,901
   
$
5,184
     
4.44
%
 
$
586,207
   
$
7,279
     
4.96
%
Securities – nontaxable (1)
   
55,703
     
829
     
5.95
%
   
67,156
     
993
     
5.91
%
Trading account assets
   
1,723
     
4
     
1.01
%
   
1,255
     
5
     
1.55
%
Loans (1) (2) :
                                               
Residential real estate
   
626,941
     
8,457
     
5.40
%
   
616,602
     
9,269
     
6.01
%
Commercial real estate
   
436,821
     
6,193
     
5.67
%
   
398,901
     
6,266
     
6.28
%
Commercial
   
178,164
     
2,431
     
5.46
%
   
187,438
     
2,592
     
5.53
%
Municipal
   
13,911
     
197
     
5.74
%
   
21,587
     
271
     
5.09
%
Consumer
   
273,612
     
3,238
     
4.80
%
   
264,887
     
3,316
     
5.08
%
Total loans
   
1,529,449
     
20,516
     
5.38
%
   
1,489,415
     
21,714
     
5.85
%
Total interest-earning assets
   
2,053,776
     
26,533
     
5.18
%
   
2,144,033
     
29,991
     
5.60
%
Cash and due from banks
   
29,032
                     
27,765
                 
Other assets
   
164,663
                     
153,243
                 
Less: allowance for loan losses
   
(21,005
                   
(17,963
)
               
Total assets
 
$
2,226,466
                   
$
2,307,078
                 
LIABILITIES & SHAREHOLDERS’ EQUITY
                                               
Interest-bearing liabilities:
                                               
Interest checking accounts
 
$
229,037
     
238
     
0.42
%
 
$
196,319
     
253
     
0.52
%
Savings accounts
   
150,859
     
123
     
0.33
%
   
133,173
     
118
     
0.36
%
Money market accounts
   
289,131
     
578
     
0.81
%
   
281,043
     
869
     
1.25
%
Certificates of deposit
   
544,244
     
2,795
     
2.08
%
   
590,448
     
4,624
     
3.18
%
Total retail deposits
   
1,213,271
     
3,734
     
1.25
%
   
1,200,983
     
5,864
     
1.98
%
Broker deposits
   
85,605
     
387
     
1.82
%
   
83,247
     
537
     
2.58
%
Junior subordinated debentures
   
43,530
     
694
     
6.47
%
   
43,423
     
713
     
6.66
%
Borrowings
   
478,787
     
3,294
     
2.79
%
   
617,749
     
3,935
     
2.58
%
Total wholesale funding
   
607,922
     
4,375
     
2.92
%
   
744,419
     
5,185
     
2.82
%
Total interest-bearing liabilities
   
1,821,193
     
8,109
     
1.81
%
   
1,945,402
     
11,049
     
2.30
%
Demand deposits
   
189,077
                     
173,601
                 
Other liabilities
   
22,811
                     
20,193
                 
Shareholders’ equity
   
193,385
                     
167,882
                 
Total liabilities and shareholders’ equity
 
$
2,226,466
                   
$
2,307,078
                 
Net interest income (fully-taxable equivalent)
           
18,424
                     
18,942
         
Less: fully-taxable equivalent adjustment
           
(359
)
                   
(441
)
       
  
         
$
18,065
                   
$
18,501
         
Net interest rate spread (fully-taxable equivalent)
                   
3.37
%
                   
3.30
%
Net interest margin (fully-taxable equivalent)
                   
3.58
%
                   
3.51
%
 
 
(1)
Reported on tax-equivalent basis calculated using a rate of 35%.
 
(2)
Loans held for sale and non-accrual loans are included in total average loans.
 
Provision and Allowance for Loan Losses
The ALL is our best estimate of inherent risk of loss in the loan portfolio as of the balance sheet date. The ALL was $21.4 million, or 1.40% of total loans, at March 31, 2010, compared to $20.2 million, or 1.33% of total loans, at December 31, 2009. For the three months ended March 31, 2010, our provision for credit losses charged to earnings amounted to $2.0 million, compared to $1.7 million for the same period in 2009. The increase in the provision was based on management’s assessment of various factors affecting the loan portfolio, including, among others, growth in the loan portfolio, levels of nonperforming assets, loan losses, and our evaluation of credit quality and general economic conditions.  For the first three months of 2010, the annualized ratio of net loan charge-offs to average loans was 0.23% compared to 0.46% for the same period in 2009.  See additional ALL discussion under the caption “Asset Quality.”

23

 
Non-Interest Income

   
Three Months Ended
March 31,
  
 
2010
 
2009
Income from fiduciary services
 
$
1,567
   
$
1,354
 
Service charges on deposit accounts
   
1,280
     
1,233
 
Other service charges and fees
   
690
     
613
 
Bank-owned life insurance
   
371
     
395
 
Brokerage and insurance commissions
   
294
     
358
 
Mortgage banking income
   
89
     
455
 
Net securities losses
   
(48
   
 
Other income
   
329
     
146
 
Total non-interest income
 
$
4,572
   
$
4,554
 
 
Non-interest income for the three month periods ended March 31, 2010 and March 31, 2009, respectively, totaled $4.6 million.  The significant changes include:

 
Increase in income from fiduciary services of $213,000, or 15.7%, resulting from market value increases in assets under administration,

 
Increase in other service charges and fees of $77,000, or 12.6%, resulting from increased debit card income associated with transaction volume,

 
Decrease in mortgage banking income of $366,000, or 80.4%, primarily due to mortgage servicing rights related to $20.2 million in residential loan sales during the first quarter of 2009, and,

 
Increase in other income of $183,000, or 125.3%, resulting primarily from a $128,000 increase in the market value of management and director deferred compensation and $29,000 in gains on the sale of OREO properties.
 
24

 
Non-Interest Expenses

   
Three Months Ended
March 31,
  
 
2010
 
2009
Salaries and employee benefits
 
$
6,225
   
$
5,678
 
Furniture, equipment and data processing
   
1,068
     
963
 
Regulatory assessments
   
715
     
872
 
Net occupancy
   
1,034
     
1,118
 
Consulting and professional fees
   
808
     
572
 
OREO and collection costs
   
974
     
880
 
Other expenses
   
2,098
     
2,208
 
Total non-interest expenses
 
$
12,922
   
$
12,291
 
 
Non-interest expense increased $631,000, or 5.1%, for the three months ended March 31, 2010 compared to the same period in 2009. The significant changes include:

 
Increase in salaries and employee benefits of $547,000, or 9.6%, primarily due to a $199,000 increase in health care cost, a $129,000 increase related to increased staffing and salaries, and a reduction in deferred salary costs of $162,000 related to high mortgage production volume in 2009,
 
 
Decrease in regulatory assessments of $157,000, or 18.0%, due to an adjustment in the Federal Deposit Insurance Corporation insurance assessment accrual during the first quarter of 2009,
 
 
Increase in consulting and professional fees of $236,000, or 41.3%, were primarily related to increased legal costs related to securities registration and other matters,  and

 
Increase in costs associated with foreclosure and collection costs and expenses on other real estate owned of $94,000, or 10.7%, which includes an OREO write-down of $370,000 due to declining real estate values.
 
The efficiency ratio (non-interest expense divided by net interest income on a tax equivalent basis plus non-interest income excluding net investment securities gains/losses) was 56.08% for the period ended March 31, 2010, compared to 52.31% for March 31, 2009.

FINANCIAL CONDITION
Overview

Total assets at March 31, 2010 were $2.2 billion, a decrease of $16.8 million, or 0.8%, from December 31, 2009. The change in assets consisted primarily of a $19.0 million decrease in investments, partially offset by a $2.2 million increase in net loans. Total liabilities decreased $21.4 million as borrowings decreased $28.2 million partially offset by an increase in total deposits (including brokered deposits) of $5.2 million. Total shareholders’ equity increased $4.6 million, which was a result of current year earnings and other comprehensive income, partially offset by dividends declared to shareholders.

During the first three months of 2010, average assets of $2.2 billion decreased $80.6 million, compared to the same period in 2009.  This decrease was primarily the result of a decline in average investments of $130.8 million, partially offset by a $40.0 million increase in the loan portfolio and an $8.0 million increase in prepaid FDIC assessment. Average liabilities decreased $106.1 million for the three months ended March 31, 2010 compared to the same period of 2009, primarily due to a decrease in average borrowings of $138.9 million, partially offset by a $30.1 million increase in average deposits (including brokered deposits).
 
25

 
Assets
 
Investment Securities. Investments in securities of U.S. government sponsored enterprises, states and political subdivisions, mortgage-backed securities, Federal Home Loan Bank (“FHLB”) and FRB stock, investment grade corporate bonds and equities are used to diversify our revenues, to provide interest rate and credit risk diversification and to provide for liquidity and funding needs. As a result of balance sheet deleveraging, total investment security balances at March 31, 2010 of $520.6 million decreased $19.0 million, or 3.5%, from December 31, 2009. We have investment securities in both the available-for-sale and held-to-maturity categories.
 
Unrealized gains or losses from investments categorized as “held to maturity” are only recorded when, and if, the security is sold or is considered other-than-temporarily impaired. Unrealized gains or losses on securities classified as “available for sale” are recorded as adjustments to shareholders’ equity, net of related deferred income taxes and are a component of other comprehensive income in the Consolidated Statement of Changes in Shareholders’ Equity. At March 31, 2010, we had $8.4 million of unrealized gains on securities available for sale, net of deferred taxes, compared to $7.1 million of unrealized gains, net of deferred taxes, at December 31, 2009. The change is primarily attributed to an increase in market interest rates.
 
At March 31, 2010, $9.0 million of our private issue collateralized mortgage obligations (“CMOs”) have been downgraded to non-investment grade. The Company’s share of these downgraded CMOs is in the senior tranches. Management believes the unrealized loss for the CMOs is the result of current market illiquidity and the underestimation of value in the market.  Stress tests are performed regularly on the higher risk bonds in the portfolio using current statistical data to determine expected cash flows and forecast potential losses.  The results of the stress tests at March 31, 2010, reflect no current credit loss in the base case, but did reflect potential future losses.  Based on this analysis the Company recorded a $48,000 OTTI write-down on two private issue CMOs during the first quarter of 2010.
 
At March 31, 2010, the Company held Duff & Phelps Select Income Fund Auction Preferred Stock with an amortized cost of $5.0 million which has failed at auction. The security is rated Triple-A by Moody’s and Standard and Poor’s. Management believes the failed auctions are a temporary liquidity event related to this asset class of securities. The Company is currently collecting all amounts due according to contractual terms and has the ability and intent to hold the securities until they clear auction, are called, or mature; therefore, the securities are not considered other than temporarily impaired.
 
Federal Home Loan Bank Stock. We are required to maintain a level of investment in FHLBB stock based on the level of our FHLB advances. As of March 31, 2010, our investment in FHLB stock totaled $21.0 million. No market exists for shares of the FHLB. FHLB stock may be redeemed at par value five years following termination of FHLB membership, subject to limitations which may be imposed by the FHLB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLB. While we currently have no intention to terminate our FHLB membership, the ability to redeem our investment in FHLB stock would be subject to the conditions imposed by the FHLB.
 
In early 2009, the FHLB advised its members that it is focusing on preserving capital in response to ongoing market volatility.  Accordingly, payments of quarterly dividends were suspended and payment of quarterly dividends in 2010 is unlikely. Further, the FHLB has placed a moratorium on excess stock repurchases from its members. We will continue to monitor our investment in FHLB stock.
 
Loans. At March 31, 2010, loans of $1.5 billion (including loans held for sale) increased $3.3 million from December 31, 2009 primarily due to an increase in commercial real estate, commercial, and consumer loans of $2.5 million, $873,000 and $1.9 million, respectively. These increases were partially offset by a decline in the residential real estate portfolio of $2.0 million as a result of normal pay-downs and decreased demand.  
 
Asset Quality

Non-Performing Assets.  Non-performing assets include non-accrual loans, accruing loans 90 days or more past due, renegotiated loans and property acquired through foreclosure or repossession.

26

 
The following table sets forth the amount of our non-performing assets as of the dates indicated:

   
March 31,
   
December 31,
 
(Dollars in Thousands)
 
2010
   
2009
 
Non-accrual loans
               
Residential real estate
 
$
6,234
   
$
6,161
 
Commercial real estate
   
6,223
     
6,476
 
Commercial
   
4,320
     
4,145
 
Consumer
   
1,227
     
1,158
 
Total non-accrual loans
   
18,004
     
17,940
 
Accruing loans past due 90 days
   
211
     
1,135
 
Renegotiated loans not included above
   
677
     
581
 
Total non-performing loans
   
18,892
     
19,656
 
Other real estate owned
   
5,201
     
5,479
 
Total non-performing assets
 
$
24,093
   
$
25,135
 
Non-performing loans to total loans
   
1.23
%
   
1.29
%
Allowance for credit losses to non-performing loans
   
113.41
%
   
103.26
%
Non-performing assets to total assets
   
1.09
%
   
1.13
%
Allowance for credit losses to non-performing assets
   
88.93
%
   
80.75
%
 
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 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 analysis of non-accrual loans above. At March 31, 2010, potential problem loans amounted to approximately $3.5 million, or 0.23% of total loans, compared to $1.7 million, or 0.11% of total loans at December 31, 2009.

Past Due Loans. Past due loans consist of accruing loans that were between 30 and 89 days past due. The following table sets forth information concerning the past due loans at the date indicated.

   
March 31,
 
December 31,
 
(Dollars in Thousands)
 
2010
   
2009
 
Loans 30-89 days past due:
               
Residential real estate loans
 
$
74
   
$
1,847
 
Commercial real estate
   
1,862
     
2,196
 
Commercial loans
   
3,530
     
639
 
Consumer loans
   
716
     
563
 
Total loans 30-89 days past due
 
$
6,182
   
$
5,245
 
                 
Loans 30-89 days past due to total loans
   
0.40
%
   
0.34
%

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. Through the first three months of 2010, there were no significant changes to the allowance assessment methodology. 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.

27

 
The following table sets forth information concerning the activity in our ALL during the periods indicated.
 
   
Three Months Ended March 31,
 
(Dollars in Thousands)
 
2010
   
2009
 
Allowance at the beginning of the period
 
$
20,246
   
$
17,691
 
Provision for loan losses
   
2,000
     
1,730
 
Charge-offs:
               
Residential real estate loans
   
268
     
26
 
Commercial real estate
   
314
     
846
 
Commercial loans
   
377
     
719
 
Consumer loans
   
294
     
236
 
Total loan charge-offs
   
1,253
     
1,827
 
                 
Recoveries:
               
Residential real estate loans
   
160
     
7
 
Commercial real estate loans
   
26
     
8
 
Commercial loans
   
91
     
19
 
Consumer loans
   
109
     
63
 
Total loan recoveries
   
386
     
97
 
Net charge-offs
   
(867
)
   
(1,730
)
Allowance at the end of the period
 
$
21,379
   
$
17,691
 
                 
Components of allowance for credit losses:
               
Allowance for loan losses
 
$
21,379
   
$
17,691
 
Liability for unfunded credit commitments
   
47
     
 
Balance of allowance for credit losses at end of the period
 
$
21,426
   
$
17,691
 
Average loans outstanding
 
$
1,529,449
   
$
1,489,415
 
                 
Net charge-offs (annualized) to average loans outstanding
   
0.23
%
   
0.46
%
Provision for credit losses (annualized) to average loans outstanding
   
0.52
%
   
0.47
%
Allowance for loan losses to total loans
   
1.40
%
   
1.20
%
Allowance for credit losses to net charge-offs (annualized)
   
609.51
%
   
252.11
%
Allowance for loan losses to non-performing loans
   
113.16
%
   
102.55
%
Allowance for loan losses to non-performing assets
   
88.74
%
   
86.58
%
 
During the first three months of 2010, the Company provided $2.0 million of expense to the ALL compared to $1.7 million for the same period of 2009. The determination of an appropriate level of ALL, and subsequent provision for loan losses, which affects earnings, is based on our analysis of various economic factors and review of the loan portfolio, which may change due to numerous factors including loan growth, payoffs of lower quality loans, recoveries on previously charged-off loans, improvement in the financial condition of the borrowers, risk rating downgrades/upgrades and charge-offs. We utilize a comprehensive approach toward determining the ALL, which includes an expanded risk rating system to assist us in identifying the risks being undertaken, as well as migration within the overall loan portfolio. The increase in the provision for loan losses was primarily a result of the level of non-performing assets and general economic conditions.  Non-performing assets as a percentage of total assets amounted to 1.09% at March 31, 2010, compared to 0.89% and 1.13% at March 31, 2009 and December 31, 2009, respectively, primarily resulting from an increase in non-accrual loans. Our local economy has continued to experience a decline in retail sales, rising unemployment, and an overall decline in real estate values.  We believe the ALL of $21.4 million, or 1.40% of total loans outstanding and 113.2% of total non-performing loans at March 31, 2010, was appropriate given the current economic conditions in our service area and the condition of the loan portfolio, although, if conditions continue to deteriorate, more provision may be needed.  The ALL was 1.20% of total loans outstanding and 102.6% of total non-performing loans at March 31, 2009, and 1.33% of total loans outstanding and 103.0% of total non-performing loans at December 31, 2009.

Liabilities and Shareholders’ Equity

Total liabilities have decreased $21.4 million, or 1.0%, since December 31, 2009, to $2.0 billion at March 31, 2010.  Borrowings declined $28.2 million which was comprised primarily of a decrease of $30.1 million in advances from the FHLBB and a slight increase in other borrowings of $1.9 million. Total deposits including brokered deposits increased $5.2 million primarily due to increases in interest checking, savings and money markets balances of $15.5 million and brokered deposits of $5.8 million, partially offset by declines in demand deposits and retail certificates of deposit of $9.1 million and $7.0 million, respectively.

Total shareholders’ equity increased $4.6 million, or 2.4%, since December 31, 2009 which was a result of current year earnings of $5.3 million and an increase in other comprehensive income of $1.1 million offset by dividends declared to shareholders of $1.9 million.

28

 
The following table presents certain information regarding shareholders’ equity for the periods ended:
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
Return on average equity
    11.14 %     12.81 %
Average equity to average assets
    8.69 %     7.80 %
Dividend payout ratio
    36.01 %     33.56 %
Dividends declared per share
  $ 0.25     $ 1.00  
Book value per share
    25.50       24.93  
 
LIQUIDITY

Liquidity needs require the availability of cash to meet the withdrawal demands of depositors and credit commitments to borrowers. Liquidity is defined as our ability to maintain availability of funds to meet customer needs, as well as to support our asset base. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet our cash flow needs in the most economical and expedient manner. Due to the potential for unexpected fluctuations in both deposits and loans, active management of liquidity is necessary. We maintain various sources of funding and levels of liquid assets in excess of regulatory guidelines in order to satisfy their varied liquidity demands. We monitor liquidity in accordance with internal guidelines and all applicable regulatory requirements. As of March 31, 2010 and 2009, our level of liquidity exceeded target levels. We believe that we currently have appropriate liquidity available to respond to liquidity demands. Sources of funds that we utilize consist of deposits, borrowings from the FHLBB and other sources, cash flows from operations, prepayments and maturities of outstanding loans, investments and mortgage-backed securities and the sales of mortgage loans.

Deposits continue to represent our primary source of funds. For the first three months of 2010, average deposits (including brokered deposits) of $1.5 billion increased $30.1 million compared to the same period of 2009. Comparing average deposits for the first three months of 2010 to the same period of 2009, we experienced a decline in average retail certificates of deposit balances of $46.2 million, while average demand deposits, interest checking, savings, and money market balances increased $15.5 million, $32.7 million, $17.7 million and $8.1 million, respectively.  Average brokered deposits increased $2.4 million. Included in the money market and interest checking deposit categories are deposits from Acadia Trust, representing client funds. The balance in the Acadia Trust client accounts, which was $77.9 million on March 31, 2010, could increase or decrease depending upon changes in the portfolios of the clients of Acadia Trust. The shift from retail certificates of deposit to other core deposit categories reflects customers continuing to shift to more liquid deposit instruments given the low interest rate environment.
 
Borrowings are used to supplement deposits as a source of liquidity. In addition to borrowings from the FHLBB, we purchase federal funds, sell securities under agreements to repurchase and utilize treasury tax and loan accounts. Average borrowings and long-term debt for the first three months of 2010 was $522.3 million, a decrease of $138.9 million from the first three months of 2009. We secure borrowings from the FHLBB, whose advances remain the largest non-deposit-related funding source, with qualified residential real estate loans, certain investment securities and certain other assets available to be pledged. The carrying value of loans pledged as collateral at the FHLBB was $732.1 million and $679.1 million at March 31, 2010 and 2009, respectively. The carrying value of securities pledged as collateral at the FHLBB was $26.1 million and $100.7 million at March 31, 2010 and 2009, respectively. Through our bank subsidiary, we have an available line of credit with the FHLBB of $9.9 million at March 31, 2010 and 2009. We had no outstanding balance on the line of credit with the FHLBB at March 31, 2010.

The Company also has a $10.0 million line of credit through a correspondent bank available to us through December 28, 2010.  We had no outstanding balance on this line of credit at March 31, 2010.  
 
We believe the investment portfolio and residential loan portfolio provide a significant amount of contingent liquidity that could be accessed in a reasonable time period through sales of those portfolios. We also believe that we have additional untapped access to the brokered deposit market, commercial reverse repurchase transaction market and the Federal Reserve Bank discount window. These sources are considered as liquidity alternatives in our contingent liquidity plan. We believe that the level of liquidity is sufficient to meet current and future funding requirements. However, changes in economic conditions, including consumer saving habits and availability or access to the national brokered deposit and commercial repurchase markets, could significantly impact our liquidity position.
 
29

 
CAPITAL RESOURCES

Under FRB guidelines, we are required to maintain capital based on risk-adjusted assets. These capital requirements represent quantitative measures of our assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital classification is also subject to qualitative judgments by our regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). These guidelines apply to us on a consolidated basis. Under the current guidelines, banking organizations must maintain a risk-based capital ratio of 8.0%, of which at least 4.0% must be in the form of core capital (as defined). Our risk-based ratios, and those of our bank subsidiary, exceeded regulatory guidelines at March 31, 2010 and 2009. The Company’s Tier 1 capital to risk weighted assets was 12.65% and 11.68% at March 31, 2010 and 2009, respectively and total capital to risk weighted assets was 13.90% and 12.91% at March 31, 2010 and 2009, respectively. In addition to risk-based capital requirements, the FRB requires bank holding companies to maintain a minimum leverage capital ratio of core capital to total assets of 4.0%. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted. Our leverage ratio was 8.42% and 7.40% at March 31, 2010 and 2009, respectively.

Although the junior subordinated debentures are recorded as a liability on our Statement of Condition, we are permitted, in accordance with regulatory guidelines, to include, subject to certain limits, the trust preferred securities in our calculation of risk-based capital. At March 31, 2010, $43.0 million of the trust preferred securities was included in Tier 1 and total risk-based capital.

As part of our goal to operate a safe, sound and profitable financial organization, we are committed to maintaining a strong capital base. Shareholders’ equity totaled $195.2 million and $172.0 million at March 31, 2010 and 2009, respectively, which amounted to 8.8% of total assets at March 31, 2010 and 7.5% of total assets at March 31, 2009.

Our principal cash requirement is the payment of dividends on our common stock, as and when declared by the Board of Directors. We paid dividends to shareholders in the aggregate amount of $1.9 million for both of the three month periods ended March 31, 2010 and 2009, respectively. Our Board of Directors approves cash dividends on a quarterly basis after careful analysis and consideration of various factors, including the following: a) capital position relative to total assets, b) risk-based assets, c) total classified assets, d) economic conditions, e) growth rates for total assets and total liabilities, f) earnings performance and projections and g) strategic initiatives and related capital requirements. All dividends declared and distributed by the Company will be in compliance with applicable state corporate law and regulatory requirements.

We are primarily dependent upon the payment of cash dividends by our subsidiaries to service our commitments. We, as the sole shareholder of our subsidiaries, are entitled to dividends, when and as declared by each subsidiary’s Board of Directors from legally available funds.  Camden National Bank (“CNB”) declared dividends in the aggregate amount of $3.0 million for both the first three months of 2010 and the first three months of 2009. If we are required to use dividends from CNB to service unforeseen commitments in the future we may be required to reduce the dividends paid to our shareholders going forward.
 
CONTRACTUAL OBLIGATIONS AND COMMITMENTS

In the normal course of business, we are a party to credit related financial instruments with off-balance sheet risk, which are not reflected in the Consolidated Statements of Condition. These financial instruments include lending commitments and letters of credit. Those instruments involve varying degrees of credit risk in excess of the amount recognized in the Consolidated Statements of Condition. We follow the same credit policies in making commitments to extend credit and conditional obligations as we do for on-balance sheet instruments, including requiring similar collateral or other security to support financial instruments with credit risk. Our exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those instruments. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. At March 31, 2010, we had the following levels of commitments to extend credit.
 
30

 
   
Total Amount
Committed
 
Commitment Expires in:
 
(Dollars in Thousand)
     
<1 Year
   
1 – 3 Years
   
4 – 5 Years
   
>5 Years
 
Letters of Credit
 
$
3,248
   
$
3,248
   
$
   
$
   
$
 
Commercial Commitment Letters
   
10,876
     
10,876
     
     
     
 
Residential Loan Origination
   
16,539
     
16,539
     
     
     
 
Home Equity Line of Credit Commitments
   
156,808
     
17,411
     
8,031
     
3,285
     
128,081
 
Other Commitments to Extend Credit
   
105,380
     
97,902
     
5,644
     
1,256
     
578
 
Total
 
$
292,851
   
$
145,976
   
$
13,675
   
$
4,541
   
$
128,659
 

We are a party to several off-balance sheet contractual obligations through lease agreements on a number of branch facilities. We have an obligation and commitment to make future payments under these contracts. At March 31, 2010, we had the following levels of contractual obligations.
 
   
Total Amount
of Obligations
 
Payments Due per Period
(Dollars in Thousands)
     
<1 Year
   
1 – 3 Years
   
4 – 5 Years
   
>5 Years
 
Operating Leases
 
$
5,007
   
$
744
   
$
1,201
   
$
623
   
$
2,439
 
Capital Leases
   
1,200
     
40
     
94
     
97
     
969
 
FHLBB Borrowings – Overnight
   
36,560
     
36,560
     
     
     
 
FHLBB Borrowings – Advances
   
179,607
     
57,055
     
60,104
     
31,001
     
31,447
 
Commercial Repurchase Agreements
   
116,438
     
10,000
     
65,127
     
36,000
     
5,311
 
Other Borrowed Funds
   
120,928
     
120,928
     
     
     
 
Junior Subordinated Debentures
   
43,538
     
     
     
     
43,538
 
Note Payable
   
852
     
231
     
501
     
103
     
17
 
Other Contractual Obligations
   
231
     
231
     
     
     
 
Total
 
$
504,361
   
$
225,789
   
$
127,027
   
$
67,824
   
$
83,721
 

Borrowings from the FHLBB consist of short- and long-term fixed and variable rate borrowings and are collateralized by all stock in the FHLBB and a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one-to-four family properties, certain pledged investment securities and other qualified assets. Other borrowed funds include treasury, tax and loan deposits and securities sold under repurchase agreements. We have an obligation and commitment to repay all borrowings and debentures. These commitments, borrowings, junior subordinated debentures and the related payments are made during the normal course of business.

We may use derivative instruments as partial hedges against large fluctuations in interest rates. We may also use fixed-rate interest rate swap and floor instruments to partially hedge against potentially lower yields on the variable prime rate loan category in a declining rate environment. If rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap and floor instruments. We may also use variable-rate interest rate swap and cap instruments to partially hedge against increases in short-term borrowing rates. If rates were to rise, resulting in an increased interest cost, there would be an increased income flow from the interest rate swap and cap instruments. These financial instruments are factored into our overall interest rate risk position. We regularly review the credit quality of the counterparty from which the instruments have been purchased. At March 31, 2010, the Company had two forward interest rate swaps, each with a notional amount of $10.0 million, related to the junior subordinated debentures, expiring on June 30, 2021 and June 30, 2029.

31

 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT MARKET RISK

MARKET RISK

Market risk is the risk of loss in a financial instrument arising from adverse changes in market rates/prices, such as interest rates, foreign currency exchange rates, commodity prices and equity prices. Our primary market risk exposure is interest rate risk. The ongoing monitoring and management of this risk is an important component of our asset/liability management process, which is governed by policies established by the CNB Board of Directors, and are reviewed and approved annually. The Board of Directors’ Asset/Liability Committee (“Board ALCO”) delegates responsibility for carrying out the asset/liability management policies to the Management Asset/Liability Committee (“Management ALCO”). In this capacity, Management ALCO develops guidelines and strategies impacting our asset/liability management-related activities based upon estimated market risk sensitivity, policy limits and overall market interest rate levels/trends. The Management ALCO and Board ALCO jointly meet on a quarterly basis to review strategies, policies, economic conditions and various activities as part of the management of these risks.

Interest Rate Risk

Interest rate risk represents the sensitivity of earnings to changes in market interest rates. As interest rates change, the interest income and expense streams associated with our financial instruments also change, thereby impacting net interest income (“NII”), the primary component of our earnings. Board and Management ALCO utilize the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While Board and Management ALCO routinely monitor simulated NII sensitivity over a rolling 2-year horizon, they also utilize additional tools to monitor potential longer-term interest rate risk.

The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interest-bearing liabilities reflected on our Statement of Condition, as well as for derivative financial instruments, if any. None of the assets used in the simulation were held for trading purposes. This sensitivity analysis is compared to ALCO policy limits, which specify a maximum tolerance level for NII exposure over a 1-year horizon, assuming no balance sheet growth, given a 200 basis point (“bp”) upward and 200 bp downward shift in interest rates. Although our policy specifies a downward shift of 200 bp, this could result in negative rates as many benchmark rates are currently below 2.00%. A parallel and pro rata shift in rates over a 12-month period is assumed. Using this approach, we are able to produce reports that illustrate the effect that both a gradual change of rates (year-1) and a “rate shock” (year-2 and beyond) has on margin expectations.  In the down 100 bp scenario, Fed Funds and Treasury yields are floored at .01% while Prime is floored at 3.00%.  All other market rates are floored at 0.25%.  During the first quarter of 2010 and 2009, our NII sensitivity analysis reflected the following changes to NII assuming no balance sheet growth and a parallel shift in interest rates over a 1-year horizon.  All rate changes were “ramped” over the first 12-month period and then maintained at those levels over the remainder of the ALCO simulation horizon.  In 2009 the +400 bps scenario was based on a flattening rate curve.
 
32

 
   
Estimated Changes in NII
 
Rate Change
 
March 31, 2010
   
March 31, 2009
 
Year 1
           
+400 bp
    (0.70 )%     0.50 %
+200 bp
    (0.70 )%     (2.40 )%
-100 bp
    (0.70 )%     0.50 %
Year 2
               
+400 bp
    (1.40 )%     3.80 %
+200 bp
    0.10 %     (1.70 )%
-100 bp
    (4.00 )%     0.30 %
 
The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.
  
The most significant factors affecting the changes in market risk exposure during the first three months of 2010 were the decrease in the investment balances, higher balances of retail deposits, and an overall reduction in the cost of funds that outpaced the drop in the yield on average assets.  If rates remain at or near current levels and the balance sheet mix remains similar, net interest income is projected to increase slightly over year one with funding maturities expected to continue to roll over at lower current rate levels, offsetting declining loan yields.  By the end of the first year, net interest income levels come under pressure as funding cost reductions slow and the asset base continues to adjust lower. In a falling interest rate environment, net interest income is expected to trend in line with the base case scenarios before developing a downward trend thereafter.   Beyond the first year, opportunities to reduce funding costs become more difficult while mortgage related cashflows accelerate and are replaced at lower rate levels; resulting in tighter spreads and a decrease in expected net interest income.  In the early stages of a rising rate environment, net interest income is projected to trend slight below the base scenarios as the short-term funding base adjusts upward producing funding cost increases while asset yields are slower to respond.  Thereafter, funding costs stabilize and the asset base continues to be reprice or replaced at higher levels, causing an upward trend to extend throughout the remaining simulation period.  If the yield curve were to flatten as rate rise, pressure on net interest income would be greater.  The risk in the various rate scenarios is within our policy limits.

Periodically, if deemed appropriate, we use interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge interest rate risk position. The Board of Directors has approved hedging policy statements governing the use of these instruments. As of March 31, 2010, we had a notional principal amount of $20.0 million in interest rate swap agreements related to the junior subordinated debentures. Board and Management ALCO monitor derivative activities relative to its expectation and our hedging policies.
 
33

 
ITEM 4.  CONTROLS AND PROCEDURES

As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company’s management conducted an evaluation with the participation of the Company’s Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer), regarding the effectiveness of the Company’s disclosure controls and procedures, as of the end of the last fiscal quarter covered by this report.  In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer (Principal Financial & Accounting Officer) concluded that they believe the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
 
There was no change in the internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 
34

 
PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

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

ITEM 1A.  RISK FACTORS

There have been no material changes in the Risk Factors described in Item 1A.of the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

ITEM 2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table provides information as of and for the quarter ended March 31, 2010 regarding shares of common stock of the Corporation that were repurchased under the 2003 Stock Option and Incentive Plan.

   
Total
number of
shares
purchased
   
Average
price paid
per share
   
Total number of
shares purchased
as part of publicly
announced plan
 
Purchases of Equity Securities(1)
                       
1/1/2010 to 1/31/2010
   
    $
     
 
2/1/2010 to 2/28/2010
   
  1,249
   
$
30.64
     
1,249
 
3/1/2010 to 3/31/2010
   
136
     
33.05
     
136
 
Total Purchases of Equity Securities
   
1,385
   
$
30.88
     
1,385
 

(1)
Pursuant to the Corporation’s share-based compensation plans, employees may deliver back shares of stock previously issued in payment of the exercise price of stock options or to satisfy the minimum tax withholdings obligation in conjunction with recipient’s vesting of stock-based compensation.  
 
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.  [RESERVED]
 
ITEM 5.  OTHER INFORMATION

None
 
35

 
ITEM 6.  EXHIBITS

 (a)  Exhibits
(3.i.1) The Articles of Incorporation of Camden National Corporation (incorporated by reference to Exhibit 3.i to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 10, 2001)

(3.i.2) Articles of Amendment to the Articles of Incorporation of Camden National Corporation, as amended to date (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 9, 2003)

(3.i.3) Articles of Amendment to the Articles of Incorporation of Camden National Corporation, as amended to date (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 4, 2007)

(3.ii) The Bylaws of Camden National Corporation, as amended to date (incorporated by reference to Exhibit 99.1 to the Company’s Form 8-K filed with the Securities and Exchange Commission on March 10, 2008)

(11.1) Statement re computation of per share earnings (Data provided in Note 2 to the consolidated financial statements in this report)

(23.1) Consent of Berry, Dunn, McNeil & Parker relating to the financial statements of Camden National Corporation*

(31.1) Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934*

(31.2) Certification of Chief Financial Officer, Principal Financial & Accounting Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934*

(32.1) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

(32.2) Certification of Chief Financial Officer, Principal Financial & Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
__________________________
* Filed herewith
 
36

 
SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CAMDEN NATIONAL CORPORATION
(Registrant)
 
/s/ Gregory A. Dufour
 
May 7, 2010
Gregory A. Dufour
 
Date
President and Chief Executive Officer
   
     
/s/ Deborah A. Jordan
 
May 7, 2010
Deborah A. Jordan
 
Date
Chief Financial Officer and Principal
   
Financial & Accounting Officer
   
 
37

 
Exhibit Index

(3.i.1)
The Articles of Incorporation of Camden National Corporation (incorporated by reference to Exhibit 3.i to the Company’s Form 10-Q filed with the Securities and Exchange Commission on August 10, 2001)

(3.i.2)
Articles of Amendment to the Articles of Incorporation of Camden National Corporation, as amended to date (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 9, 2003)

(3.i.3)
Articles of Amendment to the Articles of Incorporation of Camden National Corporation, as amended to date (incorporated by reference to Exhibit 3.3 to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 4, 2007)

(3.ii)
The Bylaws of Camden National Corporation, as amended to date (incorporated by reference to Exhibit 3.ii to the Company’s Form 10-Q filed with the Securities and Exchange Commission on May 4, 2007)

(11.1)
Statement re computation of per share earnings (Data is provided in Note 2 to the consolidated financial statements in this report)

(23.1)
Consent of Berry, Dunn, McNeil & Parker relating to the financial statements of Camden National Corporation

(31.1)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

(31.2)
Certification of Chief Financial Officer, Principal Financial & Accounting Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934

(32.1)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(32.2)
Certification Chief Financial Officer, Principal Financial & Accounting Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
38