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 September 30, 2000 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 [ ] 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 September 30, 2000: Common stock (no par value) 8,609,898 shares.
CAMDEN NATIONAL CORPORATION FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2000 TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT PART I. PAGE ITEM 1. FINANCIAL INFORMATION Independent Accountants' Report 3 Consolidated Statements of Income Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Income Three Months Ended September 30, 2000 and 1999 5 Consolidated Statements of Comprehensive Income Nine Months Ended September 30, 2000 and 1999 6 Consolidated Statements of Comprehensive Income Three Months Ended September 30, 2000 and 1999 6 Consolidated Statements of Condition September 30, 2000 and December 31, 1999 7 Consolidated Statements of Cash Flows Nine Months Ended September 30, 2000 and 1999 8 Notes to Consolidated Financial Statements Nine Months Ended September 30, 2000 and 1999 9 Analysis of Changes in Net Interest Margin Nine Months Ended September 30, 2000 and 1999 10 Average Balance Sheets Nine Months Ended September 30, 2000 and 1999 11 Analysis of Volume and Rate Changes on Net Interest Income & Expenses September 30, 2000 over September 30, 1999 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12-15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 15-17 PART II. ITEM 6. Exhibits and Reports on Form 8-K 17 SIGNATURES 18 EXHIBITS 19-20 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 September 30, 2000, and for the three-month and nine-month periods then ended. These financial statements are the responsibility of the Company's management. We conducted our review 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 review, 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 November 7, 2000 Page 3
PART I. ITEM I. FINANCIAL INFORMATION CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) <TABLE> <CAPTION> (In thousands, except number NINE MONTHS ENDED SEPTEMBER 30, of shares and per share data) 2000 1999 <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 45,400 $ 39,770 Interest on U.S. Government and agency obligations 10,169 9,810 Interest on state and political subdivision obligations 295 301 Interest on interest rate swap agreements 765 155 Interest on federal funds sold and other investments 1,998 1,460 ------------ ------------ TOTAL INTEREST INCOME 58,627 51,496 INTEREST EXPENSE Interest on deposits 19,235 17,229 Interest on other borrowings 9,212 5,232 Interest on interest rate swap agreements 720 150 ------------ ------------ TOTAL INTEREST EXPENSE 29,167 22,611 ------------ ------------ NET INTEREST INCOME 29,460 28,885 PROVISION FOR LOAN LOSSES 1,897 2,015 ------------ ------------ NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 27,563 26,870 OTHER INCOME Service charges on deposit accounts 2,171 2,109 Other service charges and fees 2,595 2,220 Other income 1,818 1,496 ------------ ------------ TOTAL OTHER INCOME 6,584 5,825 OPERATING EXPENSES Salaries and employee benefits 8,706 9,510 Premises and fixed assets 2,825 2,863 Other 7,254 6,622 ------------ ------------ TOTAL OPERATING EXPENSES 18,785 18,995 ------------ ------------ LESS MINORITY INTEREST NET INCOME 47 20 INCOME BEFORE INCOME TAXES 15,315 13,680 ------------ ------------ INCOME TAXES 4,774 4,403 ------------ ------------ Net Income $ 10,541 $ 9,277 ============ ============ PER SHARE DATA Basic earnings per share (Net income divided by weighted average shares outstanding) $ 1.29 $ 1.15 Diluted earnings per share 1.29 1.15 Cash dividends per share 0.47 0.39 Weighted average number of shares outstanding 8,166,831 8,027,471 </TABLE> Page 4
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (unaudited) <TABLE> <CAPTION> (In thousands, except number THREE MONTHS ENDED SEPTEMBER 30, of shares and per share data) 2000 1999 <S> <C> <C> INTEREST INCOME Interest and fees on loans $ 15,832 $ 13,702 Interest on U.S. Government and agency obligations 3,349 3,288 Interest on state and political subdivision obligations 98 100 Interest on interest rate swap agreements 432 0 Interest on federal funds sold and other investments 675 564 ----------- ---------- Total interest income 20,386 17,654 INTEREST EXPENSE Interest on deposits 7,115 5,864 Interest on other borrowings 3,061 1,872 Interest on interest rate swap agreements 401 0 ----------- ---------- TOTAL INTEREST EXPENSE 10,577 7,736 ----------- ---------- NET INTEREST INCOME 9,809 9,918 PROVISION FOR LOAN LOSSES 609 775 ----------- ---------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 9,200 9,143 OTHER INCOME Service charges on deposit accounts 705 716 Other service charges and fees 1,157 1,005 Other income 584 489 ----------- ---------- TOTAL OTHER INCOME 2,446 2,210 OPERATING EXPENSES Salaries and employee benefits 2,466 3,230 Premises and fixed assets 912 945 Other 2,342 2,622 ----------- ---------- TOTAL OPERATING EXPENSES 5,720 6,797 ----------- ---------- LESS MINORITY INTEREST NET INCOME 24 7 INCOME BEFORE INCOME TAXES 5,902 4,549 ----------- ---------- INCOME TAXES 1,878 1,445 ----------- ---------- Net Income $ 4,024 $ 3,104 =========== ========== PER SHARE DATA Basic earnings per share (Net income divided by weighted average shares outstanding) $ 0.49 $ 0.38 Diluted earnings per share 0.49 0.38 Cash dividends per share 0.16 0.13 Weighted average number of shares outstanding 8,165,788 8,018,590 </TABLE> Page 5
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) <TABLE> <CAPTION> (In thousands) NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 <S> <C> <C> Net income $10,541 $ 9,277 Other comprehensive income, net of tax: Change in unrealized appreciation (depreciation) on securities available for sale (net of taxes of $893 and $(1,929) for 2000 and 1999, respectively) 1,734 (3,745) ------- ------- Comprehensive income $12,275 $ 5,532 ======= ======= </TABLE> CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited) <TABLE> <CAPTION> (In thousands) THREE MONTHS ENDED SEPTEMBER 30, 2000 1999 <S> <C> <C> Net income $ 4,024 $ 3,104 Other comprehensive income, net of tax: Change in unrealized appreciation (depreciation) on securities available for sale (net of taxes of $561 and $(700) for 2000 and 1999, respectively) 1,089 (1,358) ------- ------- Comprehensive income $ 5,113 $ 1,746 ======= ======= </TABLE> Page 6
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CONDITION <TABLE> <CAPTION> (In thousands, except number of shares and per share data) SEPTEMBER 30, DECEMBER 31, 2000 1999 (unaudited) (audited) <S> <C> <C> ASSETS Cash and due from banks $ 32,683 $ 24,230 Federal funds sold - 415 Securities available for sale 156,227 147,939 Securities held to maturity (market value $60,605 and $68,049 at September 30, 2000 and December 31, 1999, respectively) 60,280 68,193 Other securities 16,232 16,058 Residential mortgages held for sale 11,557 6,906 Loans, less allowance for loan losses of $10,716 and $9,390 at September 30, 2000 and December 31, 1999, respectively 676,486 619,138 Bank premises and equipment 15,025 12,093 Other real estate owned 580 1,405 Interest receivable 6,704 5,041 Other assets 35,578 26,932 ---------- -------- Total assets $1,011,352 $928,350 ========== ======== LIABILITIES Deposits: Demand $ 90,640 $ 80,385 NOW 92,876 89,740 Money market 103,961 71,237 Savings 83,566 112,335 Certificates of deposit 345,579 308,009 Broker Certificates of deposit 26,931 6,014 ---------- -------- TOTAL DEPOSITS 743,553 667,720 Borrowings from Federal Home Loan Bank 133,947 128,866 Other borrowed funds 39,577 45,058 Accrued interest and other liabilities 8,229 8,968 Minority interest in subsidiary 165 115 ---------- -------- Total liabilities 925,471 850,727 ---------- -------- SHAREHOLDERS' EQUITY Common stock, no par value; authorized 10,000,000 shares, issued 8,609,898 shares 2,450 2,450 Surplus 5,909 5,990 Retained earnings 90,259 83,563 Net unrealized depreciation on securities available for sale, net of income tax (4,048) (5,782) Less cost of 453,195 and 442,540 shares of treasury stock on September 30, 2000 and December 31, 1999, respectively 8,689 8,598 ---------- -------- Total shareholders' equity 85,881 77,623 ---------- -------- Total liabilities and shareholders' equity $1,011,352 $928,350 ========== ======== </TABLE> Page 7
CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) <TABLE> <CAPTION> (In thousands) NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 <S> <C> <C> OPERATING ACTIVITIES Net Income $ 10,541 $ 9,277 Adjustment to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,897 2,015 Depreciation and amortization 892 1,405 Increase in interest receivable (1,280) (968) Decrease (increase) in other assets 1,536 (2,592) (Decrease) increase in other liabilities (1,827) 5,894 Cash receipts from sale of residential loans 1,228 4,915 Origination of mortgage loans held for sale (5,879) (2,813) Decrease in obligation under ESOP and BRRP 0 168 -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 7,108 17,301 INVESTING ACTIVITIES Proceeds from maturities of securities held to maturity 8,008 26,286 Proceeds from maturities of securities available for sale 6,035 18,692 Purchase of securities available for sale (11,956) (60,352) Purchase of Federal Home Loan Bank Stock (174) (1) Net increase in loans (59,245) (61,896) Net decrease in other real estate owned 825 420 Purchase of premises and equipment (4,030) (1,310) Purchase of life insurance policy (10,000) 0 Net sale of federal funds 415 0 -------- -------- NET CASH USED BY INVESTING ACTIVITIES (70,122) (78,161) FINANCING ACTIVITIES Net increase in demand deposits, NOW accounts, and savings accounts 17,346 30,121 Net increase in certificates of deposit 58,487 5,870 Net (decrease) increase in short-term borrowings (400) 38,717 Increase in minority position 50 25 Purchase of treasury stock (180) (2,247) Exercise and repurchase of stock options 0 (975) Proceeds from other stock issuance 9 142 Cash dividends (3,845) (3,177) -------- -------- NET CASH PROVIDED BY FINANCING ACTIVITIES 71,467 68,476 NET INCREASE IN CASH AND CASH EQUIVALENTS 8,453 7,616 Cash and cash equivalents at beginning of year 24,230 18,175 -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,683 $ 25,791 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Non-Cash transactions: Transfer from loans to real estate owned 222 148 Transfer from loans held for sale to loan portfolio 6,629 8,230 </TABLE> Page 8
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 September 30, 2000, and December 31, 1999, the consolidated statements of income for the nine and three months ended September 30, 2000 and September 30, 1999, the consolidated statements of comprehensive income for the nine and three months ended September 30, 2000 and September 30, 1999 and the consolidated statements of cash flows for the nine months ended September 30, 2000, and September 30, 1999. All significant intercompany transactions and balances are eliminated in consolidation. The income reported for the period ended September 30, 2000 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, 1999 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: <TABLE> <CAPTION> NINE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2000 1999 <S> <C> <C> Net income, as reported $ 10,541 $ 9,277 Weighted average shares 8,166,831 8,027,471 Effect of dilutive employee stock options 21,825 44,054 Adjusted weighted average shares and assumed conversion 8,188,656 8,071,525 Basic earnings per share $ 1.29 $ 1.15 Diluted earnings per share 1.29 1.15 THREE MONTHS ENDED SEPTEMBER 30, (Dollars in thousands) 2000 1999 Net income, as reported $ 4,024 $ 3,104 Weighted average shares 8,165,788 8,018,590 Effect of dilutive employee stock options 21,825 44,054 Adjusted weighted average shares and assumed conversion 8,187,613 8,062,644 Basic earnings per share $ 0.49 $ 0.38 Diluted earnings per share 0.49 0.38 </TABLE> Page 9
NOTE 3 - RECENT DEVELOPMENTS On February 4, 2000, the Company completed the merger of two of its bank subsidiaries, United Bank, a state chartered bank based in Bangor, Maine and Kingfield Savings Bank, a state chartered bank based in Kingfield, Maine. The successor is UnitedKingfield Bank, a state chartered bank based in Bangor, Maine. On October 16, 2000, the Company terminated its defined benefit plan. The Company recognized income of $645,000 on the termination pursuant to SFAS No. 88. ANALYSIS OF CHANGES IN NET INTEREST MARGIN <TABLE> <CAPTION> September 30, 2000 SEPTEMBER 30, 1999 -------------------- -------------------- AMOUNT AVERAGE AMOUNT AVERAGE of Yield/ of Yield/ Dollars in thousands INTEREST COST INTEREST COST --------- ------- --------- ------- <S> <C> <C> <C> <C> Interest-earning assets: Securities - taxable $ 12,120 7.15% $ 11,160 6.93% Securities - nontaxable 443 6.82% 456 6.49% Federal funds sold 50 5.93% 111 6.21% Loans 45,712* 9.11% 40,095* 8.91% -------- ---- -------- ---- TOTAL EARNING ASSETS 58,325 8.59% 51,822 8.36% INTEREST-BEARING LIABILITIES: NOW accounts 676 1.04% 822 1.29% Savings accounts 1,546 2.39% 2,322 2.75% Money market accounts 3,031 4.38% 1,668 3.51% Certificates of deposit 13,555 5.57% 12,160 5.23% Short-term borrowings 9,212 5.85% 5,232 4.84% Broker certificates of deposit 427 6.98% 257 5.66% -------- ---- -------- ---- TOTAL INTEREST-BEARING LIABILITIES 28,447 4.70% 22,461 4.17% NET INTEREST INCOME (FULLY-TAXABLE EQUIVALENT) 29,878 29,361 LESS: FULLY-TAXABLE EQUIVALENT ADJUSTMENT (418) (476) -------- -------- $ 29,460 $ 28,885 ======== ======== Net Interest Rate Spread (FULLY-TAXABLE EQUIVALENT) 3.89% 4.19% NET INTEREST MARGIN 4.40% 4.75% (FULLY-TAXABLE EQUIVALENT) </TABLE> *Includes net swap income figures - 2000: $45,000 and 1999: $5,000. Notes: Nonaccrual loans are included in total loans. Tax exempt interest was calculated using a rate of 34% for fully-taxable equivalent. Page 10
AVERAGE BALANCE SHEETS Dollars in thousands NINE MONTHS ENDED SEPTEMBER 30, 2000 1999 INTEREST-EARNING ASSETS: Securities - taxable $226,111 $214,182 Securities - nontaxable 8,662 9,274 Federal funds sold 1,124 2,671 Loans 668,969 598,603 -------- -------- TOTAL INTEREST-EARNING ASSETS 904,866 824,730 Cash and due from banks 27,124 19,344 Other assets 58,396 42,059 Less allowance for loan losses 10,401 8,696 -------- -------- TOTAL ASSETS $979,985 $877,437 ======== ======== INTEREST-BEARING LIABILITIES: NOW accounts $ 86,368 $ 84,419 Savings accounts 86,385 108,872 Money market accounts 92,288 62,331 Certificates of deposits 324,438 312,004 Short-term borrowings 209,823 142,830 Broker certificates 8,157 6,009 -------- -------- TOTAL INTEREST-BEARING LIABILITIES 807,459 716,465 Demand deposits 83,406 77,085 Other liabilities 7,368 6,377 Shareholders' equity 81,752 77,510 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $979,985 $877,437 ======== ======== Page 11
ANALYSIS OF VOLUME AND RATE CHANGES ON NET INTEREST INCOME AND EXPENSES September 30, 2000 Over September 30, 1999 ------------------------------------------ Change Change Due to Due to Total Dollars in thousands Volume Rate Change -------- -------- ------- INTEREST-EARNING ASSETS: Securities--taxable $ 622 $ 338 $ 960 Securities--nontaxable (30) 17 (13) Federal funds sold (64) 3 (61) Loans 4,713 904 5,617 ------ ------- ------ TOTAL INTEREST INCOME 5,241 1,262 6,503 INTEREST-BEARING LIABILITIES: NOW accounts 19 (165) (146) Savings accounts (480) (296) (776) Money market accounts 802 561 1,363 Certificates of deposit 485 910 1,395 Short-term borrowings 2,454 1,526 3,980 Broker certificates 122 48 170 ------ ------- ------ TOTAL INTEREST EXPENSE 3,402 2,584 5,986 NET INTEREST INCOME (FULLY TAXABLE EQUIVALENT) $1,839 $(1,322) $ 517 ====== ======= ====== ITEM 2. MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATION FORWARD LOOKING INFORMATION The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information contained in this report, including the information incorporated by reference in this report, are or may be considered to be forward-looking. Forward-looking statements relate to the future operations, strategies, financial results or other developments, and contain words or phrases such as "may," "expects," "should" or similar expressions. Forward-looking statements are based upon estimates and assumptions that are subject to significant business, economic and competitive uncertainties, many of which are beyond the Company's control or are subject to change. Inherent in the Company's business are certain risks and uncertainties. Therefore, the Company cautions the reader that actual revenues and income results could differ materially from those results expected to occur depending on factors such as general economic conditions including changes in interest rates and the performance of financial markets, changes in domestic and foreign laws, regulations and taxes, competition, industry consolidation, credit risks and other factors. Other factors that could cause or contribute to such differences include, but are not limited to, variances in the actual versus projected growth in assets, return on assets, loan losses, expenses, rates charged on loans and earned on investment securities, rates paid on deposits, competitive effects, fee and other noninterest income earned, as well as other factors. The Company disclaims any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise. Page 12
FINANCIAL CONDITION During the first nine months of 2000, consolidated assets increased by $83.0 million, or 8.9% to $1.0 billion. This increase was largely the result of an increase in the loan portfolio, including residential mortgages held for sale, of $63.3 million or 10.0%. The increase in loans can be attributed to strong loan demand during the first nine months of 2000. The liquidity needs of the Company's financial institution subsidiaries require the availability of cash to meet the withdrawal demands of depositors and the credit commitments to borrowers. Deposits represent the Company's primary source of funds. Since December 31, 1999, deposits have increased by $75.8 million. Making up this increase were increases of $37.6 million in certificates of deposit, $32.7 million in money market accounts, $20.9 million in broker deposits, $13.4 million in transaction accounts, offset by a decline of $28.8 million in savings accounts. Both of the Company's banking subsidiaries continue to experience substantial competition for deposits. Therefore, other funding sources continue to be pursued and utilized, including broker deposits. Borrowings provide liquidity in the form of federal funds purchased, securities sold under agreements to repurchase, treasury, tax and loan accounts, and borrowings from the Federal Home Loan Bank. Total borrowings have decreased by $0.4 million or 0.2% since December 31, 1999. Federal Home Loan Bank of Boston advances remain the largest nondeposit-related interest- bearing funding source for the Company. These borrowings are secured by qualified residential real estate loans, certain investment securities and certain other assets available to be pledged. The Company views borrowed funds as a reasonably priced alternative funding source that should be utilized. In determining the adequacy of the loan loss allowance, management relies primarily on its review of the loan portfolio both to ascertain if there are any probable losses to be written off, and to assess the loan portfolio in the aggregate. Nonperforming loans are examined on an individual basis to determine estimated probable loss. In addition, management considers current and projected loan mix and loan volumes, historical net loan loss experience for each loan category, and current and anticipated 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 allowance for loan losses as conditions dictate. During the first nine months of 2000, $1,897,000 was added to the reserve for loan losses based upon the expansion of the loan portfolio, resulting in an allowance of $10.7 million, or 1.53%, of total loans outstanding. Management believes that this allowance is appropriate given the current economic conditions in the Company's service area and the overall condition of the loan portfolio. 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 eight percent, of which at least four percent must be in the form of core capital. The Company's Tier 1 and total risk based capital ratios at September 30, 2000, of 11.1% and 12.3%, respectively, exceed regulatory guidelines. The Company's Tier1 and total risk based capital ratios at December 31, 1999 were 11.7% and 13.0%, respectively. 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's Board of Directors from legally available funds. Camden National Corporation declared dividends in the aggregate amount of $3.8 million and $3.2 million in the first nine months of 2000 and 1999, respectively. During the first nine months of 2000, the dividends declared by Camden National Bank included $2.0 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 and $113,000 for dividend payments to shareholders of Camden National Corporation during the first nine months of 2000 and the first nine months of 1999, respectively. Page 13
RESULTS OF OPERATIONS Net income for the nine months ended September 30, 2000 was $10.5 million, an increase of $1,264,000 or 13.6% from 1999's first nine month's net income of $9.3 million. For the three months ended September 30, 2000, net income was $4.0 million an increase of $920,000 or 29.6% from September 1999's three month ended net income of $3.1 million. A contributing factor was net income of $437,000, classified in salaries and employee benefits, resulting from the changeover of the Company's defined-benefit retirement plan to a defined- contribution plan. Excluding this non-recurring net income, third quarter earnings would have amounted to $3.6 million. NET INTEREST INCOME Net interest income, on a fully taxable equivalent basis, for the nine months ended September 30, 2000 was $29.9 million, a 1.8% or $0.5 million increase over the net interest income for the first nine months of 1999 of $29.4 million. Net interest income, on a fully taxable equivalent basis, for the three months ended September 30, 2000 and September 30, 1999 was $10.0 million in each period. Interest income on loans increased by $5.6 million, or 14.0% and $2.2 million, or 16.2% during the nine and three month periods compared to the same periods of 1999, respectively. This increase was due to the increase in loan volume as well as the increase in yields, from 8.91% during the first nine months of 1999 to 9.11% during the first nine months of 2000. The Company also experienced an increase in interest income on investments during the first nine months of 2000 compared to the same period in 1999 due to increased volume as well as an increase in yields. The Company's net interest expense on deposits and borrowings increased during the first nine months of 2000 compared to the same period in 1999. The majority of this increase was the result of increased volumes as well as increased rates on short-term borrowings. The Company also saw an increase in the cost of short-term borrowings, from 4.84% during the first nine months of 1999 to 5.87% during the first nine months of 2000. The Analysis of Change in Net Interest Margin, the Average Daily Balance Sheets, and the Analysis of Volume and Rate Changes on Net Interest Income and Expenses are provided on pages 10-12 of this report to enable the reader to understand the components of the Company's interest income and expenses. The first table provides an analysis of changes in net interest margin on earnings assets; interest income earned and interest expense paid and average rates earned and paid; and net interest margin on earning assets for the nine months ended September 30, 2000 and 1999. The second of these tables presents average assets, liabilities and stockholders' equity for the nine months ended September 30, 2000 and 1999. The third table presents an analysis of volume and rate change on net interest income and expense from September 30, 1999 to September 30, 2000. The Company utilizes off-balance sheet instruments such as interest rate swap agreements that have an effect on net interest income. There was an increase in net interest income of $45,000 during the first nine months of 2000 compared to an increase of $5,000 in the first nine months of 1999. During the three month periods ended September 30, 2000 the increase to net interest income was $31,000. There was no impact to net interest income during the three month period ended September 30, 1999. NONINTEREST INCOME Total noninterest income increased by $759,000 or 13.0% in the first nine months of 2000 compared to the first nine months of 1999. Service charges on deposit accounts increased $62,000 or 2.9% for the first nine months of 2000 compared to 1999. Other service charges and fees increased by $375,000 or 16.9% in the first nine months of 2000 compared to 1999. The largest contributing factors to this increase was $201,000 of fee income generated by merchant assessments and $94,000 in commissions earned from the outsourcing of official check processing. Other income increased by $322,000 or 21.5% in the first nine months of 2000 compared to 1999. The major reason for this increase in other income was the increase of $396,000 generated by the additional $10 million in bank owned life insurance. This increase was somewhat offset by a decrease in gain on sale of securities of $151,000. Page 14
Total noninterest income increased by $236,000 or 10.7% in the three months ended September 30, 2000 compared to the three months ended September 30, 1999. Service charges on deposit accounts decreased $11,000 or 1.5% for the third quarter of 2000 compared to 1999. Other service charges and fees increased by $152,000 or 15.1% in the third quarter of 2000 compared to 1999. The largest contributing factor to this increase was the fee income generated from the commissions earned from the outsourcing of official check processing. Other income increased by $95,000 or 19.4% in the third quarter of 2000 compared to 1999. The major reason for this increase in other income was the increase in income generated by the additional $10 million in bank owned life insurance. NONINTEREST EXPENSE Total noninterest expense decreased by $210,000 or 1.1% in the first nine months of 2000 compared to the first nine months of 1999. Salaries and employee benefits cost decreased by $804,000 or 8.5% in the first nine months of 2000 compared to 1999. The largest share of this decrease, approximately $645,000, is related to the termination of the Company's defined benefit retirement plan. The remainder of the decrease was the result of reductions in staff due to the merger of United Bank and Kingfield Savings Bank. Other operating expenses increased by $632,000 or 9.5%. A contributing factor for this increase was the expense incurred to merge United Bank and Kingfield Savings Bank into one new bank during the first quarter. The Company also experienced increases in credit card, data processing, and various other general operating expenses during the first nine months of 2000. Total noninterest expense decreased by $1,077,000 or 15.8% in the three months ended September 30, 2000 compared to the three months ended September 30, 1999. Salaries and employee benefits cost decreased by $764,000 or 23.6% in the third quarter of 2000 compared to 1999. As mentioned above, the majority of this decrease is a result of the termination of the Company's defined benefit retirement plan. Another factor contributing to the decrease is the result of reductions in staff due to the merger of United Bank and Kingfield Savings Bank. Other operating expenses decreased by $280,000 or 10.7% in the third quarter of 2000 compared to 1999. During the third quarter of 1999 the Company recognized $417,000 in non-recurring acquisition related expenses. The Company experienced increases in credit card, data processing, and various other general operating expenses during the third quarter of 2000. IMPACT OF INFLATION AND CHANGING PRICES The Consolidated Financial Statements and related Notes 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's Board of Directors delegates responsibility for carrying out the asset/liability management policies to that bank's Page 15
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 two-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 tolerance level for NII exposure over a one-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 third quarter of 2000. Estimated Rate Change Changes in NII +200bp (5.42%) -200bp 4.04% 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. The assumptions differed in each of the four periods included in the sensitivity analysis above. 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. When appropriate, the Company may utilize off-balance sheet 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 off-balance sheet 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 September 30, 2000, the Company had a notional principal of $35 million in interest rate swap agreements, $10 million in floor contracts and $20 million in cap contracts. The Company uses interest rate swaps and floor instruments to hedge against potentially lower yields on the variable prime rate loan category in a declining rate in environment. If rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increase income flow from the interest rate swap and floor instruments. The Company has $10 million of the interest rate swaps that mature in 2004 for this purpose. In addition, the Company has $25 million of callable interest rate swaps that mature in 2010. These swaps are tied to $25 million of callable broker deposits, resulting in a variable rate funding source. The floor contract has a strike rate of 6% and matures in 2005. The cap contract has a strike rate of 7.5% and matures in 2002. ALCO monitors the effectiveness of its derivative hedges relative to its expectation that a high correlation be maintained between the hedging instrument and the related hedged assets/liabilities. All outstanding positions are estimated to remain effective. Page 16
While it is not the Company's practice to unwind derivative hedges prior to their maturity, any recognized gains/losses would be deferred in the Statement of Condition and amortized to interest income or expense, as required, over the remaining period of the original hedge. To the extent that a hedge were to be deemed ineffective due to a lack of correlation with the hedged items or if the hedged items were to be settled/terminated prior to maturity of the hedging instrument, then unrecognized gains/losses associated with the hedging instrument would be recognized in the income statement with subsequent accruals and gains/losses also included in the consolidated income statement in the period they occur. RECENT ACCOUNTING PRONOUNCEMENTS During 2000, the financial Accounting Standards Board issued the following: SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of SFAS No. 133" SFAS No. 139, "Recession of FASB Statement No. 53 and amendments to FASB Statements No. 63, 89 and 121" SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities - a replacement of FASB Statement No. 125." The Company expects to adopt SFAS No. 139 and 140 when required and management believes adoption will not have a material effect on the financial condition and results of operation of the Company. SFAS No. 137 and SFAS No. 138 amended SFAS N0. 133, which established accounting reporting standards for derivative instruments and for hedging activity. SFAS No. 137 defers the elective date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after June 15, 2000. Management has not determined the impact, if any, of SFAS No. 133 on the Consolidated Financial Statements. 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 National Corporation. (27) Financial Data Schedule. (b) Reports on Form 8-K. None. Page 17
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 11-13-00 - -------------------------- --------------------------- Robert W. Daigle Date President and Chief Executive Officer /s/ Susan M. Westfall 11-13-00 - -------------------------- ---------------------------- Susan M. Westfall Date Treasurer and Chief Financial Officer Page 18