UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2001
Commission File No. 0-28190
CAMDEN NATIONAL CORPORATION
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
MAINE 01-04132282
------------------------------- -------------------
(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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Outstanding at May 10, 2001: Common stock (no par value) 8,145,341 shares.
CAMDEN NATIONAL CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2001
TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT
PAGE
----
PART I.
ITEM 1. FINANCIAL INFORMATION
Independent Accountants' Report 3
Consolidated Statements of Income
Three Months Ended March 31, 2001 and 2000 4
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2001 and 2000 5
Consolidated Statements of Condition March 31, 2001 and December 31, 2000 6
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000 7
Notes to Consolidated Financial Statements
Three Months Ended March 31, 2001 and 2000 8-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10-16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 16-19
PART II.
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBITS 21
Page 2
INDEPENDENT ACCOUNTANTS' REPORT
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, 2001, and for the
three-month periods ended March 31, 2001 and 2000. These financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. 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 generally accepted auditing standards, 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 generally accepted accounting principles.
Berry, Dunn, McNeil & Parker
Portland, Maine
May 7, 2001
Page 3
PART I.
ITEM I. FINANCIAL INFORMATION
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(In thousands, except number THREE MONTHS ENDED MARCH 31,
of shares and per share data) 2001 2000
INTEREST INCOME
Interest and fees on loans $ 16,142 $ 14,381
Interest on U.S. Government and agency
obligations 3,235 3,384
Interest on state and political subdivision
obligations 98 98
Interest on interest rate swap agreements 642 176
Interest on federal funds sold and other
investments 634 655
---------- ----------
TOTAL INTEREST INCOME 20,751 18,694
INTEREST EXPENSE
Interest on deposits 7,423 5,949
Interest on other borrowings 2,539 2,694
Interest on interest rate swap agreements 521 152
---------- ----------
TOTAL INTEREST EXPENSE 10,483 8,795
---------- ----------
NET INTEREST INCOME 10,268 9,899
PROVISION FOR LOAN LOSSES 714 644
---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 9,554 9,255
OTHER INCOME
Service charges on deposit accounts 843 708
Other service charges and fees 877 650
Unrealized gains on derivative instruments 427 0
Other income 686 614
---------- ----------
TOTAL OTHER INCOME 2,833 1,972
OPERATING EXPENSES
Salaries and employee benefits 3,252 3,124
Premises and fixed assets 1,093 1,025
Unrealized losses on derivative instruments 84 0
Other 2,566 2,425
---------- ----------
TOTAL OPERATING EXPENSES 6,995 6,574
---------- ----------
LESS MINORITY INTEREST NET INCOME 10 21
INCOME BEFORE INCOME TAXES 5,382 4,632
---------- ----------
INCOME TAXES 1,762 1,438
---------- ----------
NET INCOME $ 3,620 $ 3,194
========== ==========
PER SHARE DATA
Basic earnings per share (Net income divided
by weighted average shares outstanding) $ 0.44 $ 0.39
Diluted earnings per share 0.44 0.39
Cash dividends per share 0.16 0.15
Weighted average number of shares outstanding 8,145,341 8,167,358
See Independent Accountants' Report.
The accompanying notes are an integral part of
these Consolidated Financial Statements.
Page 4
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
(In thousands) THREE MONTHS ENDED MARCH 31,
2001 2000
Net income $3,620 $3,194
Other comprehensive income, net of tax:
Cumulative effect to record unrealized appreciation
on securities held to maturity transferred to securities
available for sale (net of taxes of $1,021) 1,982 0
Change in unrealized appreciation (depreciation)
on securities available for sale (net of taxes of $902 and
$(14) for 2001 and 2000, respectively) 1,752 (41)
Cumulative effect of implementation of SFAS No. 133 (net
of taxes of $158 and $0 for 2001 and 2000, respectively) 308 0
Change in effective cash flow hedge component
unrealized appreciation on derivative instruments
marked to market (net of taxes of $31 and
$0 for 2001 and 2000, respectively) 61 0
------ ------
Comprehensive income $7,723 $3,153
====== ======
See Independent Accountants' Report.
The accompanying notes are an integral part of
these Consolidated Financial Statements.
Page 5
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except number MARCH 31, DECEMBER 31,
of shares and per share data) 2001 2000
(unaudited) (audited)
ASSETS
Cash and due from banks $ 23,551 $ 29,337
Federal funds sold 2,233 0
Securities available for sale 221,725 159,315
Securities held to maturity (market value $0 and
$60,698 at March 31, 2001 and December 31, 2000,
respectively) 0 57,695
Other securities 16,232 16,232
Residential mortgages held for sale 4,279 12,838
Loans, less allowance for loan losses of $11,502
and $10,801 at March 31, 2001 and December 31,
2000, respectively 706,552 677,701
Bank premises and equipment 16,094 16,023
Other real estate owned 381 380
Interest receivable 6,790 6,959
Core deposit intangible 6,516 6,660
Other assets 26,222 27,743
---------- ----------
Total assets $1,030,575 $1,010,883
========== ==========
LIABILITIES
Deposits:
Demand $ 75,892 $ 83,631
NOW 91,017 87,270
Money market 126,943 121,292
Savings 82,358 81,730
Certificates of deposit 327,772 343,506
Brokered certificates of deposit 26,931 26,931
---------- ----------
TOTAL DEPOSITS 730,913 744,360
Borrowings from Federal Home Loan Bank 162,497 132,348
Other borrowed funds 31,818 36,092
Accrued interest and other liabilities 7,842 6,984
Minority interest in subsidiary 166 176
---------- ----------
Total liabilities 933,236 919,960
---------- ----------
SHAREHOLDERS' EQUITY
Common stock, no par value; authorized
10,000,000 shares, issued 8,609,898 shares 2,450 2,450
Surplus 5,909 5,909
Retained earnings 94,591 92,278
Accumulated other comprehensive income:
Net unrealized appreciation (depreciation) on
securities available for sale, net of
income tax 2,922 (812)
Net unrealized appreciation on derivative
instruments marked to market, net of income tax 369 0
---------- ----------
Total accumulated other comprehensive income 3,291 (812)
Less cost of 464,557 shares of treasury stock 8,902 8,902
---------- ----------
Total shareholders' equity 97,339 90,923
---------- ----------
Total liabilities and shareholders' equity $1,030,575 $1,010,883
========== ==========
See Independent Accountants' Report.
The accompanying notes are an integral part of
these Consolidated Financial Statements.
Page 6
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands) THREE MONTHS ENDED MARCH 31,
2001 2000
OPERATING ACTIVITIES
Net Income $ 3,620 $ 3,194
Adjustment to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 714 644
Depreciation and amortization 388 396
Increase in interest receivable (606) (810)
Decrease in other assets 475 686
Increase in other liabilities 1,215 960
Decrease (increase) in residential mortgage
loans held for sale 8,559 (2,479)
(Decrease) increase in minority position (10) 22
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 14,355 2,613
INVESTING ACTIVITIES
Proceeds from sale and maturities of securities
held to maturity 0 2,386
Proceeds from sale and maturities of securities
available for sale 4,140 1,406
Purchase of securities available for sale (3,201) (6,925)
Purchase of Federal Home Loan Bank Stock 0 (175)
Net increase in loans (29,565) (21,099)
Net (increase) decrease in other real estate owned (1) 454
Purchase of premises and equipment (403) (1,104)
Purchase of life insurance policy 0 (10,000)
Net (sale) purchase of federal funds (2,233) 415
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (31,263) (34,642)
FINANCING ACTIVITIES
Net (decrease) increase in deposits (13,447) 194
Net increase in short-term borrowings 25,875 41,407
Exercise and repurchase of stock options 0 (5)
Cash dividends (1,306) (1,228)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,122 40,368
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (5,786) 8,339
Cash and cash equivalents at beginning of year 29,337 24,230
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 23,551 $ 32,569
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the quarter for:
Interest 9,754 9,020
Non-Cash transactions:
Transfer of securities from held to maturity to
available for sale 57,695 0
Transfer from loans to real estate owned 0 47
Transfer from loans held for sale to loan
portfolio 0 6,629
See Independent Accountants' Report.
The accompanying notes are an integral part of
these Consolidated Financial Statements.
Page 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 generally accepted accounting principles 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, as of March 31, 2001,
and December 31, 2000, the consolidated statements of income for the three
months ended March 31, 2001 and March 31, 2000, the consolidated statements of
comprehensive income for the three months ended March 31, 2001 and March 31,
2000 and the consolidated statements of cash flows for the three months ended
March 31, 2001, and March 31, 2000. All significant intercompany transactions
and balances are eliminated in consolidation. The income reported for the
period ended March 31, 2001 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, 2000 Annual Report to Shareholders.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share data is computed based on the weighted average number
of common shares outstanding during each year. Potential common stock is
considered in the calculation of weighted average shares outstanding for diluted
earnings per share.
The following table sets forth the computation of basic and diluted earnings per
share:
THREE MONTHS ENDED MARCH 31,
(Dollars in thousands) 2001 2000
Net income, as reported $ 3,620 $ 3,194
Weighted average shares 8,145,341 8,167,358
Effect of dilutive employee stock options 12,585 23,958
Adjusted weighted average shares
and assumed conversion 8,157,926 8,191,316
Basic earnings per share $ 0.44 $ 0.39
Diluted earnings per share 0.44 0.39
NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS
On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." As part of its interest rate risk management, the Company has
interest rate swap agreements with a notional amount of $25 million at March 31,
2001. These swap agreements are used to hedge a portfolio of brokered
certificates of deposit. Most of the swaps are designated as a fair value hedge
since they are used to convert the cost of the certificates of deposit from a
fixed to variable rate. Since the hedge relationship is estimated to be 100
percent effective (gain or loss on the swap agreements will completely offset
the gain or loss on the brokered certificates of deposit) the Company expects
that there will be no impact on the statement of income nor on the statement of
comprehensive income. The application of SFAS No. 133 results in a grossing up
of the statement of condition to reflect the swap and the brokered certificates
of deposit at fair value. At March 31, 2001 the fair value (or replacement
cost) of these swap agreements was approximately $83,600. Under SFAS No. 133,
the Company recognized a swap asset of $83,600 and an increase in other
liabilities by the same amount.
Page 8
In addition to the interest rate swaps used to hedge the costs of certificates
of deposit, the Company has a swap agreement with a notional amount of $10
million at March 31, 2001 to hedge floating rate loans. This swap agreement is
designated as a cash flow hedge since it converts a portion of the loan
portfolio from a variable rate based upon the Prime rate to a fixed rate.
Because the hedged loans reset based upon the Prime rate and the variable rate
paid on the interest rate swap is based upon three month LIBOR, there is not a
perfect hedge correlation. For the three months ending March 31, 2001, the
Company estimates the correlation was 116%. As a result of the ineffectiveness,
the Company recognized a portion (16%) of the fair value increase as current
income with the remainder of the gain reflected through the statement of
comprehensive income. As of March 31, 2001, the fair value gain equaled
$527,298. Of this amount, $84,948 is recognized as income for the current
quarter and $291,952, net of applicable taxes, has been reflected through the
statement of comprehensive income.
The Company also has interest rate protection agreements (caps) with a notional
amount of $90 million at March 31, 2001. These caps are used to limit the
Company's exposure to rising interest rates on its borrowings. Under these
agreements the Company paid up-front premiums of $239,000 for the right to
receive cash flow payments in excess of the predetermined cap rate, thus
effectively capping its interest rate cost for the duration of the agreement.
In accordance with SFAS No. 133, management designates these caps as cash-flow
hedges. For a qualifying cash flow hedge, an interest rate cap is carried on
the statement of condition at fair value with the time and option volatility
value changes reflected in the current statement of income. Any intrinsic value
will be recorded in other comprehensive income, net of applicable taxes, and
recognized in future statements of income as an offset to related future
borrowing costs. As of March 31, 2001, the Company has a loss of $176,526 that
has been recognized in the statement of income.
Finally, the Company also has interest protection agreements (floors) with a
notional amount of $10 million at March 31, 2001. These floors are used to
limit the Company's exposure to falling rates on Prime rate loans. Under these
agreements the Company paid a lump-sum premium of $75,750 for the right to
receive cash flow payments below the predetermined floor rate, thus effectively
flooring its interest income for the duration of the agreement. In accordance
with SFAS No. 133, management designates these floors as cash flow hedges. For
a qualifying cash flow hedge, an interest rate floor will be carried in the
statement of condition at fair value with the time and option volatility value
changes reflected through the current statement of income. Any intrinsic value
will be recorded in other comprehensive income, net of applicable taxes, and
reflected in future statements of income as an adjustment to the related future
loan interest receipts. Because the hedged loans reset based upon the Prime
rate and the variable rate paid on the interest rate swap is based upon three
month LIBOR, there is not a perfect hedge correlation. For the quarter ending
March 31, 2001, the Company estimates the correlation was 110%. As a result of
the ineffectiveness, the Company recognized a portion (10%) of the fair value
increase as current income with the remainder of the gain reflected through the
statement of comprehensive income. As of March 31, 2001, the fair value of the
cap was $436,440 of which $116,268 is intrinsic value and $258,309 is
time/option value. In accordance with SFAS No. 133 the intrinsic value is
reflected in other comprehensive income, net of applicable taxes. Current
income reflects a net benefit of $258,309 (current time value of $275,000 and
the 10% ineffective portion of the fair value less amortized cost of $61,862).
On January 1, 2001, upon implementation of SFAS No. 133, net gains and losses
related to the effective cash flow hedge component of derivative instruments
were reported as a cumulative effect adjustment to other comprehensive income.
Upon implementation of SFAS No. 133, the Company transferred all of its
investment securities classified as held to maturity to available for sale, the
impact of this reclassification was an increase to other comprehensive income of
$2.0 million, net of applicable taxes.
Page 9
NOTE 4 - RECENT DEVELOPMENTS
On May 7, 2001 the Company announced the signing of a definitive agreement to
acquire 100% of the outstanding common stock of Acadia Trust, N.A. ("Acadia")
and Gouws Capital Management, Inc. ("Gouws Capital"). Headquartered in
Portland, Maine, Acadia is a nationally chartered trust company offering
traditional trust services to high net worth individuals and institutions.
Acadia's assets under management are approximately $400 million. Gouws Capital,
headquartered in Portland, Maine, offers investment advisory services to high
net worth individuals and institutions, many of whom are also clients of Acadia,
has approximately $400 million of assets under management. Gouws Capital was
founded in 1984, followed by Acadia in 1991. The transactions, which are
subject to the receipt of regulatory approvals and certain other conditions, are
expected to close within sixty days.
ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
FORWARD LOOKING INFORMATION
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. The
Company may make written or oral forward-looking statements in other documents
we file with the SEC, in our annual reports to stockholders, 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 the control of the
Company. These risks, uncertainties and other factors may cause the actual
results, performance or achievements of the Company to be materially different
from the anticipated future results, performance or achievements expressed or
implied by the forward-looking statements.
Some of the factors that might cause these differences include the following:
changes in general, national or regional economic conditions; changes in loan
default and charge-off rates; reductions in deposit levels necessitating
increased borrowing to fund loans and investments; changes in interest rates;
changes in laws and regulations; changes in the size and nature of the Company's
competition; and changes in the assumptions used in making such forward-looking
statements. You should carefully review all of these factors, and you should be
aware that there may be other factors that could cause these differences,
including, among others, the factors listed under "Certain Factors Affecting
Future Operating Results," beginning on page 16 of our Annual Report on
Form 10-K for the year ended December 31, 2000. Readers should carefully review
the factors described under "Certain Factors Affecting Future Operating Results"
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.
Page 10
RESULTS OF OPERATIONS
The Company reported consolidated net income of $3.6 million or $.44 per fully
diluted share, for the first quarter of 2001. This compares to $3.2 million or
$.39 per fully diluted share for the first quarter of 2000. Return on average
equity for the quarter was 15.38%, compared to 16.26% for the same period in
2000. Return on average assets for the quarter was 1.41% for the quarter,
compared to 1.35% for the same period in 2000. On January 1, 2001 the Company
adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. These statements set
the accounting and reporting standards for derivative financial instruments and
hedging activities. They require and entity to recognize all derivative
financial instruments as either assets or liabilities in the Statement of
Condition and measure those instruments at fair value. SFAS No. 133 supersedes
SFAS No. 80, which the Company used to account for gains and losses from its
derivative activities prior to January 1, 2001. Without this accounting change
net income would have been $3,512,000 or $.43 per fully diluted share.
NET INTEREST INCOME
The Company's net interest income, on a fully taxable equivalent basis, for the
three months ended March 31, 2001 was $10.4 million, a 3.8% or $0.4 million
increase over the net interest income for the first three months of 2000 of
$10.0 million. Interest income on loans increased by $1.9 million, or 12.9%
during the three-month period of 2001 compared to the same period of 2000. This
increase was due to the increases in both loan volume and yields. The Company
experienced a slight decrease in interest income on investments during the first
three months of 2001 compared to the same period in 2000 due to a decrease in
yields. The Company's net interest expense on deposits and borrowings increased
during the first three months of 2001 compared to the same period in 2000. This
increase funding costs was the result of increased volumes as well as increased
rates. Net interest income, expressed as a percentage of average interest-
earnings assets for the three months ended March 31, 2000 and 2001, was 4.38%
and 4.56%, respectively.
The following tables, which present changes in interest income and interest
expense by major asset and liability category for three months ended March 31,
2001 and 2000, illustrate the impact of average volume growth and rate changes.
The income from tax-exempt assets has been adjusted to a tax-equivalent basis,
thereby allowing a uniform comparison to be made between asset yields. Changes
in net interest income are the result of interest rate movements, changes in the
amounts and mix of interest-earning assets and interest-bearing liabilities, and
changes in the level of non-interest-earning assets and non-interest-bearing
liabilities. The Company utilizes derivative financial instruments such as
interest rate swap agreements that have an effect on net interest income. There
was an increase in net interest income of $121,000 during the first three months
of 2001 compared to an increase of $24,000 in the first three months of 2000.
The average amount of non-accrual loans can also affect the average yield on all
outstanding loans. However, the average amount of non-accrual loans for the
periods reflected were minimal and, therefore, had an insignificant effect on
average loan yield.
Page 11
ANALYSIS OF CHANGES IN NET INTEREST MARGIN
MARCH 31, 2001 MARCH 31, 2000
----------------------- -----------------------
Dollars in thousands AMOUNT OF AVERAGE AMOUNT OF AVERAGE
INTEREST YIELD/COST INTEREST YIELD/COST
--------- ---------- --------- ----------
Interest-earning assets:
Securities - taxable $ 3,865 6.85% $ 4,018 7.15%
Securities - nontaxable 148 6.45% 148 6.92%
Federal funds sold 4 4.97% 22 4.94%
Loans 16,329* 9.17% 14,462* 9.01%
-------- ---- -------- ----
TOTAL EARNING ASSETS 20,346 8.58% 18,650 8.51%
INTEREST-BEARING LIABILITIES:
NOW accounts 207 0.94% 278 1.27%
Savings accounts 503 2.44% 623 2.60%
Money market accounts 1,283 4.13% 845 4.05%
Certificates of deposit 4,923 5.88% 4,117 5.28%
Short-term borrowings 2,539 5.38% 2,694 5.47%
Broker certificates of deposit 507 7.53% 86 5.72%
-------- ---- -------- ----
TOTAL INTEREST-BEARING LIABILITIES 9,962 4.71% 8,643 4.43%
NET INTEREST INCOME (FULLY-TAXABLE EQUIVALENT) 10,384 10,007
LESS: FULLY-TAXABLE EQUIVALENT ADJUSTMENT (116) (108)
-------- --------
$ 10,268 $ 9,899
======== ========
NET INTEREST RATE SPREAD (FULLY-TAXABLE EQUIVALENT) 3.87% 4.08%
NET INTEREST MARGIN (FULLY-TAXABLE EQUIVALENT) 4.38% 4.56%
*Includes net swap income figures - 2001: $121,000 and 2000: $24,000.
Notes: Nonaccrual loans are included in total loans. Tax exempt interest was
calculated using a rate of 34% for fully-taxable equivalent.
Page 12
AVERAGE BALANCE SHEETS
Dollars in thousands THREE MONTHS ENDED MARCH 31,
2001 2000
INTEREST-EARNING ASSETS:
Securities - taxable $ 225,784 $224,801
Securities - nontaxable 9,175 8,588
Federal funds sold 322 1,780
Loans 712,626 642,677
---------- --------
TOTAL INTEREST-EARNING ASSETS 947,907 877,846
Cash and due from banks 25,456 25,470
Other assets 63,041 57,616
Less allowance for loan losses 11,138 9,898
---------- --------
TOTAL ASSETS $1,025,266 $951,034
========== ========
INTEREST-BEARING LIABILITIES:
NOW accounts $ 88,492 $ 87,314
Savings accounts 82,480 95,859
Money market accounts 124,171 83,436
Certificates of deposits 334,926 311,489
Short-term borrowings 188,760 198,654
Broker certificates of deposit 26,931 6,014
---------- --------
TOTAL INTEREST-BEARING LIABILITIES 845,760 782,766
Demand deposits 76,647 80,939
Other liabilities 8,728 8,746
Shareholders' equity 94,131 78,583
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,025,266 $951,034
========== ========
Page 13
ANALYSIS OF VOLUME AND RATE CHANGES ON
NET INTEREST INCOME AND EXPENSES
March 31, 2001 Over March 31, 2000
----------------------------------
Change Change
Due to Due to Total
Dollar in thousands Volume Rate Change
------- ------- -------
INTEREST-EARNING ASSETS:
Securities - taxable $ 18 $(171) $ (153)
Securities - nontaxable 10 (10) 0
Federal funds sold (18) 0 (18)
Loans 1,576 291 1,867
------ ----- ------
TOTAL INTEREST INCOME 1,586 110 1,696
INTEREST-BEARING LIABILITIES:
NOW accounts 4 (75) (71)
Savings accounts (87) (33) (120)
Money market accounts 413 25 438
Certificates of deposit 309 497 806
Short-term borrowings (135) (20) (155)
Broker certificates of deposit 299 122 421
------ ----- ------
TOTAL INTEREST EXPENSE 803 516 1,319
NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT) $ 783 $(406) $ 377
====== ===== ======
NONINTEREST INCOME
Total non-interest income increased by $861,000 or 43.7% in the three months
ended March 31, 2001 compared to the three months ended March 31, 2000. Service
charges on deposit accounts increased $135,000 or 19.1% for the first quarter of
2001 compared to 2000. This increase was primarily attributable to a
restructuring of deposit accounts and a change in the service charge fee
structure. Other service charges and fees increased by $227,000 or 34.9% in the
first quarter of 2001 compared to 2000. The largest factors contributing to
this increase were merchant assessment fees, which increased $88,000 or 38.5%,
and mortgage servicing (net servicing rights and fees) which increased $69,000
or 160.1%. Other income, including unrealized gains on derivative instruments,
increased by $499,000, or 81.3%, in the first quarter of 2001 compared to the
same period in 2000. The major reason for this increase in other income was the
unrealized gain on derivative instruments of $427,000 recorded due to the
adoption of SFAS No. 133.
NONINTEREST EXPENSE
Total non-interest expense increased by $421,000 or 6.4% in the three months
ended March 31, 2001 compared to the three months ended March 31, 2000.
Salaries and employee benefits cost increased by $118,000 or 3.8% in the first
quarter of 2001 compared to 2000. This increase was the result of normal annual
increases and higher benefit costs. Other operating expenses, including
unrealized losses on derivative instruments, increased by $303,000 or 8.8%, in
the first quarter of 2001 compared to the first quarter of 2000. The largest
increase in other operating expenses related to derivative financial
instruments, caps and floors, which increased $294,000 due in part to the
adoption of SFAS No. 133. There were no expenses related to derivative
financial instruments during the first quarter of 2000. In addition, merchant
expenses also increased by $83,000 or 34.6%, in the first quarter of 2001
compared to the same period in 2000. The Company also experienced minimal
increases in various other general operating expenses. Offsetting some of the
increases in other operating expenses was the reduction of acquisition and
merger related expenses that were incurred during the first quarter of 2000.
Page 14
FINANCIAL CONDITION
During the first three months of 2001, average assets increased by $74.2
million, or 7.8%% to $1.0 billion. This increase was primarily the result of an
increase in the loan portfolio (including residential mortgages held for sale)
of $69.9 million or 10.9% to $712.6 million of average loans outstanding during
the first quarter of 2001 compared to $642.7 million of average loans
outstanding during the first quarter of 2000. There were increases in all loan
categories. The largest increase was in the average commercial loans which
increased by $59.0 million or 18.6% during the first quarter of 2001 compared to
2000. Average consumer loans increased by $4.7 million or 5.5%, average
municipal loans increased $.4 million or 3.7%, and average residential real
estate loans increased by $5.8 million or 2.6% during the first quarter of 2001
compared to the first quarter of 2000.
The liquidity needs of the Company's bank subsidiaries require the availability
of cash to meet the withdrawal demands of depositors and credit commitments to
borrowers. Due to the potential for unexpected fluctuations in both deposits
and loans, active management of the Company's liquidity is necessary. The
Company seeks to maintain various sources of funding and prudent levels of
liquid assets in order to satisfy its varied liquidity demand. In order to
respond to the various circumstances, the Company has both on- and off-balance
sheet funding resources in place. Deposits continue to represent the Company's
primary source of funds. Average deposits of $733.6 million during the first
quarter of 2001 increased $68.5 million from $665.1 million the first quarter of
2000. Excluding brokered deposits, average total deposits increased $47.7
million compared to the first quarter of 2000. Borrowings supplement deposits
as a source of liquidity. In addition to borrowings from the Federal Home Loan
Bank of Boston ("FHLBB"), the Company's bank subsidiaries purchase federal
funds, sell securities under agreements to repurchase and utilize treasury tax
and loan accounts. Average borrowings for the first quarter of 2001 were $188.8
million, a decrease of $9.9 million or 5.0% from $198.7 million the first
quarter of 2000. The majority of the borrowings were from the FHLBB, whose
advances remained the largest non-deposit-related, interest-bearing funding
source for the Company. Qualified residential real estate loans, certain
investment securities and certain other assets available to be pledged secure
these borrowings. The Company views borrowed funds as an alternative funding
source that should be utilized when appropriate.
In determining the adequacy of the allowance for loan losses ("ALL"), management
relies primarily on its review of the loan portfolio both to ascertain whether
there are specific loan losses to be reserved, and to assess the collectibility
of the loan portfolio in the aggregate. Non-performing loans are examined on an
individual basis to determine the estimated probable loss on these loans. In
addition, each quarter management conducts a formal analysis of the ALL, which
considers the current loan mix and loan volumes, historical net loan loss
experience for each loan category, and current economic conditions affecting
each loan category. No assurance can be given, however, that adverse economic
conditions or other circumstances will not result in increased losses in the
portfolio. The Company continues to monitor and modify its ALL as conditions
dictate.
During the first three months of 2001, the Company provided $714,000 to the
allowance for loan losses compared to $644,000 in the first quarter 2000. Total
non-performing assets were .85% of total loans outstanding at March 31, 2001,
compared to 1.03% of loans outstanding March 31, 2000. Determining an
appropriate level of ALL involves a high degree of judgment. Management
believes that the ALL at March 31, 2001 of $11.5 million, or 1.59%, of total
loans outstanding was appropriate given the current economic conditions in the
Company's service area and the overall condition of the loan portfolio. As a
percentage of total loans outstanding, the ALL was 1.53% at March 31, 2000.
Under Federal Reserve Board ("FRB") guidelines, bank holding companies such as
the Company are required to maintain capital based on risk-adjusted assets.
These guidelines apply to the Company on a consolidated basis. Under the
current guidelines, banking organizations must maintain a risk-based capital
ratio of 8%, of which at least 4% must be in the form of core capital. The
Company's Tier 1 and total risk based capital ratios at March 31, 2001, of 11.9%
and 13.1%, respectively, exceed regulatory guidelines. The Company's Tier 1 and
total risk based capital ratios at December 31, 2000 were 11.8% and 13.1%,
respectively.
Page 15
The principal cash requirement of the Company is the payment of dividends on
common stock when declared. The Company is primarily dependent upon the payment
of cash dividends by its subsidiary banks to service its commitments. The
Company, as the sole shareholder of its subsidiary banks, is entitled to
dividends when and as declared by each bank subsidiary's Board of Directors from
legally available funds. Camden National Corporation declared dividends in the
aggregate amount of $1.3 million and $2.6 million in the first three months of
2001 and 2000, respectively. During the first three months of 2001, the
dividends declared by Camden National Bank included $0.8 million for dividend
payments to shareholders of Camden National Corporation. During the first three
months of 2000, the dividends declared by Camden National Bank included $1.2
million for dividend payments to shareholders of Camden National Corporation and
$1.4 million related to contributions of capital by Camden National Bank to
equalize the capital ratios of the two subsidiary banks for the year 2000.
UnitedKingfield Bank declared $0.5 million for dividend payments to shareholders
of Camden National Corporation during the first three months of 2001. During
the first three months of 2000, UnitedKingfield declared no dividends.
IMPACT OF INFLATION AND CHANGING PRICES
The Consolidated Financial Statements and the Notes to Consolidated Financial
Statements thereto presented elsewhere herein have been prepared in accordance
with generally accepted accounting principles which require the measurement of
financial position and operating results in terms of historical dollars without
considering changes in the relative purchasing power of money over time due to
inflation.
Unlike many industrial companies, substantially all of the assets and virtually
all of the liabilities of the Company are monetary in nature. As a result,
interest rates have a more significant impact on the Company's performance than
the general level of inflation. Over short periods of time, interest rates may
not necessarily move in the same direction or in the same magnitude as
inflation.
ITEM 3. QUALITATIVE AND QUANTITATIVE 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. The Company's primary market
risk exposure is interest rate risk. The ongoing monitoring and management of
this risk is an important component of the Company's asset/liability management
process which is governed by policies established by the bank subsidiaries'
Boards of Directors that are reviewed and approved annually. Each bank
subsidiary's Board of Directors delegates responsibility for carrying out the
asset/liability management policies to that bank subsidiary's Asset/Liability
Committee ("ALCO"). In this capacity ALCO develops guidelines and strategies
impacting the Company's asset/liability management-related activities based upon
estimated market risk sensitivity, policy limits and overall market interest
rate levels/trends.
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 the Company's financial instruments also change, thereby
impacting net interest income ("NII"), the primary component of the Company's
earnings. ALCO utilizes the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While ALCO routinely monitors simulated NII sensitivity over a rolling 2-year
horizon, it also utilizes 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 liabilities reflected on the Company's balance sheet as well as for
off-balance sheet derivative financial instruments. 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
Page 16
tolerance level for NII exposure over a 1-year horizon, assuming no balance
sheet growth, given both a 200 basis point (bp) upward and downward shift in
interest rates. A parallel and pro rata shift in rates over a 12-month period is
assumed. The following reflects the Company's NII sensitivity analysis as
measured during the first quarter of 2001.
Estimated
Rate Change Changes in NII
+200bp (4.31%)
-200bp 2.14%
The preceding sensitivity analysis does not represent a Company 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, the Company 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 exposures
during the first quarter of 2001 were the 1) decrease in interest rates market-
wide, 2) changes in the yield curve for U.S. government securities, 3) increase
in the principal amount of fixed-rate loans extended by the subsidiary banks,
and 4) increases in fixed term borrowings. With the extension of fixed-rate
borrowings the Company was less liability sensitive during the first quarter of
2001 compared to the fourth quarter of 2000. The changes made to the Company's
loan portfolio and derivative financial instruments since December 31, 2000
have reduced the Company's exposure to a rising rate environment. Although the
Company is still positively positioned in a downward rate environment, these
changes have resulted in an increased level of net interest risk in the event
rates continue to decline. The Company considers net interest rate risk in both
rising and declining rate scenarios in establishing its ALCO policy limits.
When appropriate, the Company may utilize derivative financial instruments such
as interest rate floors, caps and swaps to hedge its interest rate risk
position. The Board of Directors' approved hedging policy statements govern the
use of these instruments by the bank subsidiaries. All derivative financial
instrument positions are reviewed as part of the asset/liability management
process at least quarterly. The instruments are factored into the Company's
overall interest rate risk position. As of March 31, 2001, the Company had a
notional principal of $35 million in interest rate swap agreements, $10 million
in floor contracts and $90 million in cap contracts. Of the $35 million of
interest rate swap agreements, the Company has $10 million of the interest rate
swaps that mature in 2004 and $25 million of callable interest rate swaps that
mature in 2010. The floor contract has a strike rate of 6.0% and matures in
2005. The two cap contracts ($20 million and $70 million) have strike rates of
7.5% and 7.0%, respectively, and both mature in 2002. These instruments are
more fully described in Note 3 - Derivative Financial Instruments on page 8.
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 "Accounting for Derivative Instruments and Hedging Activities." This
statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments that are embedded in other
contracts, and for hedging activities. SFAS No. 133 requires the fair value
recognition of all derivatives, unless specifically exempted, in the statement
of financial position (as assets or liabilities). In accordance with SFAS No.
133, changes in the fair value of derivative instruments are accounted for as
current income or other comprehensive income, depending on their designation and
hedge effectiveness.
SFAS No. 133 generally provides for the matching of the timing of gain or loss
recognition on the hedging instruments with the recognition of either the
changes in the fair value of the hedged asset or liability, or the earnings
effect of the hedged forecasted transaction. The Company adopted SFAS No. 133
effective January 1, 2001.
Page 17
SFAS No. 133 supersedes SFAS No. 80 for hedge accounting. Under SFAS No. 80,
the cost of caps utilized to reduce interest rate risk was amortized on a
straight-line method over the term of coverage as a prepaid expense. Under SFAS
No. 80, the amortization for the quarter ended March 31, 2001 would have been
$29,875.
Since the Company believes that the true business purpose of the hedge is more
accurately reflected under SFAS No. 80, reconciliation with SFAS No. 133 and a
further explanation of hedging activities is discussed below.
The business purpose of the interest rate caps entered into by the Company was
to reduce the exposure of interest expense to rising interest rates by "capping"
certain liability costs for a contracted period of time, thus "insuring" a
maximum cost level. The risks entered into in this transaction are: 1) the
risk of default from the counterparty from whom the Company purchased the cap;
2) poor correlation between the rate being capped and the liability cost of the
Company; and, 3) the fee being paid for the protection (i.e. if rates don't rise
the protection will never have any value). Over the term of the cap, the
Company will always write-off the total premium paid for protection.
As discussed above, SFAS No. 80 allowed for a straight-line amortization of the
premium paid for the cap as a prepaid expense. SFAS 133 has the effect of
accelerating the write-off of the "insurance contract" cost even though the
protection provided by the caps will not expire for another fifteen to eighteen
months.
IMPACT ON CURRENT EARNINGS STATEMENT - QUARTER ENDING 3/31/01
Accounting under SFAS No. 133 ($206,400)
Accounting under SFAS No. 80 $ 29,875
--------
DIFFERENCE: ($176,525)
Under SFAS No. 80 the cost of these floors was amortized on a straight-line
method over the term of coverage as a prepaid expense. Under SFAS No. 80, the
amortization for the quarter ended March 31, 2001 would have been $3,788.
Since the Company believes that the true business purpose of the hedge is more
accurately reflected under SFAS No. 80, reconciliation with SFAS No. 133 and a
further explanation of hedging activities is discussed below.
The business purpose of the interest rate floors entered into by the Company was
to protect net interest income from falling interest rates by "flooring" certain
asset yields for a contracted period of time, thus "insuring" a minimum earnings
level. The risks entered into in this transaction are: 1) the risk of default
from the counterparty from whom the Company purchased the floor; 2) poor
correlation between the rate being floored and the hedged asset of the Company;
and, 3) the fee being paid for the protection (i.e. if rates don't fall the
protection will never have any value). Over the term of the floor, the Company
will always write-off the total premium paid for protection.
As discussed above, SFAS No. 80 allowed for a straight-line amortization of the
premium paid for the floor as a prepaid expense. The accrued benefit of the
floor for the current quarter would have been $5,712. The net benefit of $1,924
would have been recognized as an adjustment to income. SFAS No. 133 requires the
floor to be carried at fair value with the time/option value changes reflected
in current income. Under SFAS No. 133 the write-up of the value of the floor for
the quarter ending March 31, 2001 was $374,578 ($76,737, net of applicable
taxes) recorded in other comprehensive income and $258,309 reflected in current
earnings). The fair value at the end of the period was $436,440. SFAS No. 133
has the effect of accelerating the write-up of the floor value even though the
protection provided by the floors will not actually be realized until a future
date.
Page 18
IMPACT ON CURRENT EARNINGS STATEMENT - QUARTER ENDING 3/31/01
Accounting under SFAS No. 133 260,233
Accounting under SFAS No. 80 (1,924)
----------
DIFFERENCE: 258,309
RECENT ACCOUNTING PRONOUNCEMENTS
The Company implemented SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended by SFAS No. 137, and SFAS No. 138 "Accounting for
Certain Derivative Instruments and Certain Hedging Activities," on January 1,
2001. These statements set accounting and reporting standards for derivative
instruments and hedging activities. They require an entity to recognize all
derivatives as either assets or liabilities in the statement of condition and
measure those instruments at fair value. Upon implementation of SFAS No. 133,
the Company transferred all of its investment securities classified as held to
maturity to available for sale, the impact of this reclassification was an
increase to other comprehensive income of $2.0 million, net of applicable taxes.
SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities" is effective for transfers occurring after March
31, 2001. SFAS No. 140 replaces SFAS No. 125. This statement is expected to
have no material impact on the Company's consolidated financial condition and
results of operation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(3.i.) The Articles of Incorporation of Camden National Corporation, are
incorporated herein by reference.
(3.ii.) The Bylaws of Camden National Corporation, as amended to date,
Exhibit 3.ii. to the Company's Registration Statement on Form S-4 filed
with the Commission on September 25, 1995, file number 33-97340, are
incorporated herein by reference.
(23.1) Consent of Berry, Dunn, McNeil & Parker relating to the financial
statements of Camden.
(b) Reports on Form 8-K.
None.
Page 19
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/ Robert W. Daigle 5-14-01
- --------------------------------------------- --------------------
Robert W. Daigle Date
President and Chief Executive Officer
/s/ Gregory A. Dufour 5-14-01
- --------------------------------------------- --------------------
Gregory A. Dufour Date
Senior Vice President - Finance
Page 20