EX-13 4 0004.txt THE COMPANY'S 2000 ANNUAL REPORT TO SHAREHOLDERS At Camden National Corporation ... we value our employees, our customers, our communities, and our shareholders. And we value the quality of life both at work and at home. We present this 2000 Annual Report to you as a keepsake, celebrating the magnificent natural beauty of Maine. 1 Dear Fellow Shareholders Values are the foundation upon which Camden National Corporation was built. That foundation is as strong today as ever. Values appear in many forms. They appear in the products and services our subsidiaries offer to our customers; in the continuing focus on generating earnings and long-term value for our shareholders; in our sincere interest in the growth and development of our employees; and in the quality of life we strive to enhance in all of the Maine communities of which we are part. Most significantly, our Company abides by a set of Core Values, shared with you on page 20, whose principles guide our employees day in and day out, resulting in superior customer service and the continued financial success of your Company. This Annual Report is our opportunity to highlight the financial performance of the Company over the past year, as well as share with you some of the plans and initiatives that are directly related to our successes. For the first time we are including profiles of our senior managers and reports from each describing their areas of responsibility. Let me assure you that you have entrusted your capital to one of the most talented groups of leaders at any Maine financial institution today. I am pleased to report to you that your Company enjoyed another very successful year. After experiencing a slight earnings decline in 1999, there was a resumption of growth in 2000. Diluted earnings per share grew 33% to $1.69, compared to $1.27 per share in 1999. Looking at the 2-year period of 1998 to 2000, diluted earnings per share grew at a compounded annual rate of 10.7%. Likewise, growth occurred in assets, deposits, loans and book value, all of which is detailed in the following pages. By mid-summer of 2000 the Company achieved a significant milestone when, for the first time, the combined assets of the Company and its subsidiaries exceeded one billion dollars. The only significant disappointment this past year was that our Company's stock price showed little movement, despite growth in earnings. Nonetheless, I remain optimistic that if we maintain our operational discipline and continue to increase earnings, the market will recognize the value of our stock. Patience appears to be the watchword. During the first quarter of last year, we merged United Bank and newly-acquired Kingfield Bank to form UnitedKingfield Bank. The purpose of this merger, as reported to you last year, was to provide certain economies of scale and to position the new bank to generate stronger market penetration into the larger Bangor, Lewiston and Farmington population centers. By the end of the first quarter of this year, we will have completed the planned expansion of the Service Center. This expansion will provide the Company with desperately needed space and resources to support our growth, including a new mainframe computer that will speed the processing of transactions for our subsidiaries. During 1999 Bob Daigle, President and CEO, announced the implementation of a new strategic planning process for the Company. During 2000 this process became fully integrated at the subsidiary level, resulting in a consolidated approach to our long-term planning. Progress on achieving our strategic goals is reviewed quarterly by the Boards of Directors, and new action plans are adopted as existing goals are successfully completed. In addition to continuing our annual Corporate Culture Survey, this year the Company introduced a new 360-Degree Leadership Evaluation process for reviewing the performance of our senior executives. The leadership ability of each executive is evaluated not only by his or her superior, but also by his or her peers and staff. The value of each of these management tools is more fully described in this Annual Report by June Parent, our Director of Human Resources. It is clear that these investments are helping to create the best possible work environment for our employees. The final comment on operations is to advise you that we continue to improve upon existing systems to better understand the financial needs of our customers and address those needs ever more successfully. As a customer of one or more of our subsidiaries, I hope that you will take advantage of the new technology that we continue to introduce and the enhanced products and services it permits us to provide. 2 Despite strong competitive pressures, from within the banking industry as well as from non-banking entities, I have never been more optimistic about our potential for continued success. The Company has a strong and dynamic strategic planning process, and adequate capital to complete our strategic objectives as well as to capitalize on any opportunities that come our way. Our talented management team and employees are focused on delivering superior products and personal service, supported by state-of-the-art technology and effective, efficient processes. On behalf of the Board of Directors, I want to thank Peter Allen for his 9 years of service to the Company and its shareholders. In 2000, Peter resigned as a director of the Company. He represented shareholder interests very well, and we will miss his insight and good humor. Two new members joined the Company's Board of Directors--Ward I. Graffam of Portland and Camden, and Robert J. Campbell of Rockport. Ward spent 30 years at Unum Corporation and served as a member of senior management since 1986. He now has his own consulting business, concentrating efforts in strategic planning. Bob is a partner in the New York money management firm of Beck, Mack & Oliver. Each of these individuals helps to broaden the range of experience of the Board, by way of their understanding of the financial markets and their specific knowledge of the businesses of insurance and investment management, respectively. At Camden National Corporation, we are positioning ourselves for continued success and prosperity. With an obsession to live by the Company's Core Values, we continue to build on the foundation of values that began over 125 years ago. Through a staff of dedicated and motivated employees, supported by world-class products, services and technology, we are building a unique and sustainable competitive advantage that bodes well for the future of your Company. Sincerely, /s/ Rendle A. Jones Rendle A. Jones Chairman of the Board of Directors Rendle A. Jones Chairman of the Board of Directors, Camden National Corporation PHOTO HERE VALUES -------------------------------------------------------------------------------- Table of Contents Shareholders' Letter ......................................... 2-3 Senior Management Profiles ................................... 4-19 Core Values .................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operation ..................................... 21-31 Summary of Financial Performance ............................. 32 Selected Five-Year Financial Data ............................................... 33 Consolidated Statements ...................................... 34-37 Notes to Consolidated Financial Statements ......................................... 38-56 Auditor's Letter ............................................. 57 Boards of Directors and Bank Administrations ......................................... 58-59 Announcement of Annual Meeting ............................... 60 -------------------------------------------------------------------------------- 3 Aldermere Farm - Rockport -------------------------------------------------------------------------------- PHOTO HERE -------------------------------------------------------------------------------- "Having been raised in rural Maine, I find Aldermere Farm to be a welcome reminder of days gone by, when life was far more simple and tranquility reigned supreme." - Bob Daigle 4 Robert W. Daigle Bob Daigle (right), President & CEO of Camden National Bank: Shown here with Mike McAvoy, Sr. VP. PHOTO HERE INTEGRITY By just about any measure, the year 2000 was one of significant achievement for Camden National Bank. Strong financial results, increased market share, wider geographic reach, and a steadfast commitment to doing whatever it takes to ensure customer satisfaction, all combined in providing the necessary impetus to make this one of our most successful years ever. In reflecting upon our record levels of loans, deposits and net income, I feel strongly that these results were fueled by the implementation of a Preferred Way of Selling, which encourages our customer service personnel to think of selling as helping. Simply stated, we recommend a product or service to a customer only when there is mutual agreement that an identified need is being appropriately satisfied. When this approach is combined with our employees unwavering commitment to top quality customer service--the hallmark of our Company--we are able to nurture more meaningful and longer lasting relationships with our customers. Another major contributor to bottom-line improvement was our decision to open a loan production office (LPO) in Portland. While we continue to experience steady growth in our traditional, four-county area in the mid-coast region--as evidenced by the most recent FDIC data which revealed market share increases across the board--we saw an opportunity to our south that warranted this strategic move. The office specializes in middle-market commercial real estate lending and is staffed by one of our veteran lenders who is very familiar with Cumberland County. Our first-year success can best be highlighted by the recent decision to add a second business developer in the Portland Office to help us capitalize on the opportunities. In an industry that has undergone tremendous consolidation in recent years--witness the fact that the number of banks in Maine has declined by 70% since the 1970s--the enduring 125-year history of our local community bank is truly a source of great pride, and a reason to celebrate. Celebrate we did in 2000 with a series of community events that included special open houses at each of our branch offices, the hosting of over 2000 of our friends and neighbors to a viewing of Andrew Wyeth's artistic masterpiece, Christina's World, at the Farnsworth Museum, and the sponsorship of a spectacular century-welcoming fireworks display that lit up the skies over Mt. Battie this past New Year's Eve. All in all it was a most successful year, made possible by the unbeatable combination of dedicated employees and loyal customers. Our senior management team looks forward to doing whatever it takes in 2001 to earn your continued loyalty and ongoing support. /s/ Robert W. Daigle 5 Bigelow Preserve - Western Maine -------------------------------------------------------------------------------- PHOTO HERE -------------------------------------------------------------------------------- "Each changing season brings a new activity to Bigelow Preserve--hunting in fall, skiing in winter, fishing in spring, hiking in summer. It's the best part of living in Maine." - John Witherspoon 6 John C. Witherspoon John Witherspoon (left), President & CEO of UnitedKingfield Bank: Shown here with Chuck Osgood (middle), Sr. VP, and Bob Stone (right), VP. PHOTO HERE VIGILANCE UnitedKingfield Bank celebrated its inaugural year in 2000. Built on values consistent with the combined 150-year history of its two predecessor banks, United Bank and Kingfield Bank, UnitedKingfield Bank is committed to providing long-term value to our constituents through the efficient delivery of high quality personalized financial services. By virtue of our relationship with Camden National Corporation, UnitedKingfield Bank has access to expertise in marketing, bank operations, finance and technology, along with the financial backing of a large, well-capitalized Company. Our lenders, relationship managers and branch staff can draw on resources such as Internet banking, cash management, investment advice and retirement plan administration for their customers. With respect to our business banking capabilities, UnitedKingfield Bank is able to meet the varying needs of customers ranging from the corner store to a corporation requiring sophisticated cash management services and a $10 million credit facility. Importantly, as an independent community bank, UnitedKingfield's service and credit decisions are made and delivered locally by people familiar with the markets they serve. For much of this past year the resources of UnitedKingfield Bank were focused internally--restructuring the Bank, building a new management team, strengthening our credit administration, and maximizing the use of holding company resources. These efforts have positioned us to take advantage of the opportunities in our markets with one of the strongest professional banking teams in Maine, uniquely qualified to serve the diverse financial needs of our customers. The opportunities for our Bank are great. We plan to expand our market share in the greater Bangor and Lewiston/Auburn regions by further leveraging the resources available to us and focusing the Bank's resources on a sales and service strategy. This will result in greater value to our customers by better meeting their needs with high quality financial services. We are confident that our unique position as an independent community bank, combined with the resources available at Camden National Corporation, will result in enhanced relationships with our customers and, in turn, increased value to our shareholders. /s/ John C. Witherspoon 7 Penobscot River - West Branch -------------------------------------------------------------------------------- PHOTO HERE -------------------------------------------------------------------------------- "On the back side of the Penobscot River is the perfect calm spot between two very rough stretches. It's indescribable ... the river is constant and flat, but moving very fast." - Pete Averill 8 Andrew P. Averill Pete Averill (left), Chairman, President & CEO of Trust Company of Maine: Shown here with (left to right) Shirley Kile, Executive VP; Lynn Bowden, VP; and Paul Pasquine, Executive VP. PHOTO HERE TEAMWORK During the past year, Trust Company of Maine ("TCOM") continued to build its presence and integrate its services within the Camden National family, enhancing the Corporation's position as a diversified financial services company. TCOM offers the clients of Camden National Bank and UnitedKingfield Bank the opportunity to establish a relationship that encompasses their banking services, as well as their trust, investment and estate planning needs, within one institution. The Employee Benefit Services department continued to maintain its revenue stream while improving operating efficiency and service quality. Contributing to our strong performance in 2000 were the number and quality of referrals made by the 10 Camden National Bank branches and the 18 UnitedKingfield Bank branches. This is particularly gratifying in light of last year's volatility in the equity markets and bodes well for future growth. During 2000 all of our software and operating systems were upgraded, providing increased functionality and the necessary platform to execute our Internet strategy, which was implemented in the fourth quarter of the year. As a result, all TCOM clients are now able to access their accounts on-line to review transactions or to obtain investment reviews. In addition, not only can our business clients access their 401(k) plan on-line, individual participants in those plans also have access to their accounts. Participants are able to make investment election changes, check their balances, model plan loans, and educate themselves regarding investment choices. Going forward, our goal is to continue to build relationships with both banking subsidiaries as well as their customers, and to contribute to the position of the Company as the financial service provider of choice throughout the markets it serves. TCOM's success would not be possible without the efforts of our dedicated and talented staff. Their strong work ethic and the sense of urgency with which they approach their duties have contributed to our growth over the past 6 years, and will serve to position us as a leader in providing financial services in the future /s/ Andrew P. Averill 9 Damariscotta Lake - Jefferson -------------------------------------------------------------------------------- PHOTO HERE -------------------------------------------------------------------------------- "Each day as I pass this beautiful spot on my way to work, I recall how fortunate we are to live in a place others can only dream of." - Laurie Bouchard 10 Laurel J. Bouchard Laurie Bouchard, VP: Shown here as she teaches the class, "The Preferred Way of Selling." PHOTO HERE PASSION The retention, acquisition and expansion of customer relationships are the 3 primary objectives on which the efforts of the sales, marketing, and training areas are focused. With these 3 objectives in mind, we create initiatives designed to maximize the opportunities that exist within Camden National Bank and UnitedKingfield Bank to increase loan portfolios, retain and attract deposits, generate non-interest income, and enhance the overall profitability of our customer relationships. In order to increase loans and deposits, we first have to focus on retaining the relationships we already have. To this end, we have redesigned the product offerings at both banks to maximize the value we provide to our relationship customers. Our mission in selling is to truly help our clients so that the value they receive far exceeds what they pay us in exchange for our services. We ensure that our most valued customers know that we appreciate them by communicating with them at least 4 times a year with special offers, gifts, or invitations to special events. It is also important for us to measure our client satisfaction. Surveys are now sent quarterly to solicit feedback on how we are doing, and the results are used to make improvements in our products, rates and service levels. One of the best ways to generate new loans and deposits is expanding relationships with our existing customers. Of significance this past year, we instituted comprehensive training for all customer service staff on our Preferred Way of Selling. This simple process increases sales as we help customers identify and meet their financial needs. We also use our state-of-the-art Marketing Customer Information Files (MCIF) software to analyze customer, account and product information, and then target market products and services to the best prospects within our own customer base, resulting in expanded relationships in a very efficient and effective manner. While we enjoy exceptional market share in some areas, we have great potential for growth in others. Strategic plans have been developed to ensure that our marketing resources are focused on the areas where we have the most opportunity. Attracting new customers is especially challenging as the field of competitors for financial services expands. We are confident that our newly-designed products are clearly different and better than those offered by our competitors, and they are delivered and supported by a staff that is committed to excellence in customer service. We use technology to provide added value to our customers' banking convenience (such as on-line banking), as well as to support our staff with product knowledge and competitor information through the use of our intranet. Leading the sales, marketing and training areas into 2001 and beyond, we will continue to support the efforts of our staff at each subsidiary to retain and increase our market share, expand existing customer relationships, and attract new clients. And 2001 will bring an added focus to the internal education of our employees, because it is our staff who care for our customers, and our customers who in turn ensure an attractive return to you, our shareholders. /s/ Laurie Bouchard 11 Schoodic Point - Acadia National Park -------------------------------------------------------------------------------- PHOTO HERE -------------------------------------------------------------------------------- "Schoodic Point is a part of my life. My husband and I love to walk on the rocks and find quiet places to relax. We once spent an entire afternoon just watching the waves roll in." - Joanne Campbell 12 Joanne T. Campbell Joanne Campbell (right), VP: Shown here with Pam Fowles, Mortgage Supervisor. PHOTO HERE COMMUNITY Year 2000 was an exciting and challenging year for the Residential Real Estate Loan department of the Company. With the acquisition of Kingfield Bank and its merger with United Bank during the first quarter, we transitioned Camden National Bank's mortgage processing center to the holding company in order to provide services to both subsidiary banks, resulting in greater processing efficiencies and universal product menus. We offer a wide range of secondary market and portfolio mortgage products, including a new land loan that provides for longer amortization periods and higher loan-to-value levels than previously available. The latter is in response to an increase in borrowers acquiring land with a goal of building in 3 to 5 years. For those prospective homeowners looking to reduce interest costs over the life of their loan, we anticipate introducing a bi-weekly mortgage product in the near future. In 2001, we will focus on utilizing automated technology to improve turnaround time for the customer while providing cost savings in the processing center. Mortgage originators will utilize laptop computers to take applications at the customers' convenience, and then upload the information into an automated underwriting system to provide preliminary commitment letters at the time of application. In addition, we will be able to e-mail documentation packages to our closing agents by the end of the second quarter, streamlining the process and making it more cost effective. These technological enhancements in underwriting, processing and closing procedures will enable us to handle greater volumes of loans without adding to staff. As to expected levels of productivity this year, we anticipate that the continued decline in mortgage rates may result in fairly strong refinance activity. Consumers with higher cost credit cards and other obligations may use this lower mortgage rate environment to obtain some payment relief by consolidating debt. It may not be common knowledge that Maine leads the nation in per capita home-ownership. We would like to think that our superior knowledge of the Maine markets in which we operate, coupled with our comprehensive product offering and a convenient, personalized loan process, have helped more people enjoy the quality of life Maine has to offer than would otherwise have been possible. /s/ Joanne T. Campbell 13 Sherman's Point Cove - Camden -------------------------------------------------------------------------------- PHOTO HERE -------------------------------------------------------------------------------- "Living on the coast takes on new meaning every time I walk down to Sherman's Point Cove. The view of both ocean and mountains amplifies the changing beauty of the seasons." - June Parent 14 June B. Parent June Parent (left), VP and Human Resources Manager: Shown here introducing Tammy Bryant (middle), VP and Manager of the Main Office, to a new employee, Tracy Leavitt (right), Marketing Assistant. PHOTO HERE GROWTH In business classes, college students are asked to debate who is most important to a company--its customers, its shareholders, or its employees. While satisfying the needs of all three are critical for success, the Human Resources department believes employees are the most important. Loyal, satisfied, well-trained and rewarded employees ensure that our customers are happy with the products and services we deliver, and the retention of satisfied customers will in turn ensure that we produce an attractive return on equity for our shareholders. Thus it is only natural that we focus our energy and resources in attracting and retaining the best possible workforce, give them the skills and knowledge they need to excel in their jobs, and then recognize and reward them for their achievements. Since two elements strongly influencing employee satisfaction are effective leadership and a positive corporate culture, we focused on these two areas in 2000. To further develop the skills of our managers, we implemented a 360-Degree Leadership Evaluation process, where leaders receive quality feedback from their supervisors, their staff and a group of their peers. The feedback is then used by each individual to develop a plan that will capitalize on their strengths and further develop areas where there is opportunity for improvement. "Corporate culture," according to our strategic planning consultant, Cass Bettinger, is "the sum total of the beliefs, values, attitudes, ideologies and behavior patterns and norms which are shared and adhered to by a group." While our first corporate culture survey, administered in 1999 to all employees within Camden National Corporation, showed many positive characteristics to our corporate culture, we focused our attention last year on those areas identified by our employees as needing improvement. Each year we will repeat the survey, monitor our progress, and use the results to refocus our energy. Using employee feedback in this manner to make improvements directly translates into reduced turnover and higher levels of productivity. We are confident that our staff--at all levels and in all entities--exemplifies a level of excellence rarely found in today's institutions. They are loyal, talented people who work diligently on your behalf. They collectively have what it takes to meet the mission, vision and strategic action plans put in place to ensure your Company's continued success. /s/ June B. Parent 15 Appleton Ridge - Appleton -------------------------------------------------------------------------------- PHOTO HERE -------------------------------------------------------------------------------- "I treasure the fields of Appleton Ridge--green in spring, full of hay in summer, vibrant with colors in fall, and blanketed by snow in winter. There's no better place to live." -Jeff Smith 16 Jeffrey D. Smith Jeff Smith (left), VP and Chief Operations Officer: Shown here as he works with his Services Management team to fully implement the latest technology. PHOTO HERE PRIDE The Services Management team moved into the year 2000 with a great deal of confidence and enthusiasm as all of our efforts to address the Y2K challenge were a success. Along with most other companies, our organization found operations untouched by the speculation of date change issues deeply embedded in computer language. The results of our energies to ensure we were prepared provided a much greater benefit than thwarting the Y2K problem. As a result of a comprehensive analysis of our operations and technological infrastructure, we made a number of modifications to our processes and upgraded and standardized many of our systems. As our Y2K efforts were winding down, we redirected our resources to the merger of Kingfield Bank with our existing banking subsidiary, United Bank. Working in concert with our accounting, marketing and mortgage departments, as well as other corporate and bank functional areas, we managed the conversion project collectively as a team. This project from start to finish spanned some 6 months, an impressively short time frame considering the complexity and vast number of tasks that were required to make this a seamless transition for both our internal and external customers. After much planning, the culmination of the project was left in the capable hands of the Service Management staff, who successfully orchestrated the final stages of the merger over just a short, two-day weekend in February. At 8:00 A.M. Monday, February 7, the new UnitedKingfield Bank opened for business. In the late spring, having outgrown our current 15,000 square foot facility built in 1990, we broke ground on an expansion of the Service Center in Rockport. We doubled the size of the existing facility and completely renovated and upgraded the original building, creating a more efficient and secure operations center, a fully functioning training lab, as well as community and meeting rooms. By late February 2001, the project will be complete, resulting in a state-of-the-art facility with the capacity to support our future growth. We look to 2001 with plans to support the expanding sales and service efforts of our client banks. We have established a comprehensive Technology and Operations Plan to meet the strategic initiatives of the Company and its banking and non-banking subsidiaries. In addition to a number of initiatives to bolster the banks' sales and customer service efforts, our ambitious plan includes an engagement with an outside consulting firm to further refine our processes, with an overall goal of continued improvement in the areas of efficiency and quality service. When all is said and done, our job is to take care of the countless, unseen details, which create for our customers the difference between satisfactory service and excellence. Our team is committed to delivering the latter. /s/ J.D. Smith 17 Rockland Breakwater - Penobscot Bay -------------------------------------------------------------------------------- PHOTO HERE -------------------------------------------------------------------------------- "After 20 years, I still find the view of the sun rising over the Rockland Breakwater to be breathtaking. It's a magnificent and peaceful place to spend the day." - Susan Westfall 18 Susan M. Westfall Susan Westfall (left), Chief Financial Officer: Shown here with Kelly Gatcomb, Assistant Manager, Accounting Department. PHOTO HERE QUALITY The major areas of responsibility encompassed within the Accounting/Finance department of the Company include financial reporting, both internal and external, financial planning and all accounting functions. Since much of our work is reflected in the financial pages of this annual report, I would like to take this opportunity to describe to you our Company's employee incentive program, Performance Compensation for Stakeholders. In 1997 the Company implemented a performance-based compensation program that motivates employees to think of themselves as "Stakeholders" in our business. Just as shareholders have their capital invested in our stock, every employee has a vested interest in the financial performance of our Company. Employees are motivated by and rewarded for contributions made towards the master strategy of balancing profit with growth and quality with productivity, which contributes to maximizing long-term shareholder value as well as the long-term viability of the Company. The program is designed to give employees a better understanding of the factors that contribute to strong financial performance, to take ownership and pride in the success of the Company, and be compensated accordingly. The Accounting/Finance department supports the Company's Performance Compensation for Stakeholders program by ensuring that the financial modeling of information is distributed on a timely basis each month to all stakeholders. This enables our managers to share the financial results with their staff, and discuss areas where we are performing well and others where there is room for improvement. Without question, well-informed employees, all of whom have a direct stake in our financial results, help to maximize the long-term success of the Company. In 2001, we will further develop the value of the Performance Compensation for Stakeholders program by strengthening our coaching program, where managers and supervisors work with individuals and teams to strategize on ways to improve performance on specific "Key Performance Indicators." The ultimate objective of coaching is to unlock each employee's potential to maximize the contributions he/she is able to make, not only in his/her own personal performance, but to the Company's overall success. By clearly setting forth financial goals, providing ongoing measurement, and offering meaningful rewards, we look forward to another outstanding year and sharing that success with both stakeholders and shareholders alike. /s/ Susan M. Westfall 19 Our Core Values INTEGRITY We will all conduct our business, internally and externally, with the highest degree of honesty, integrity, consistency and fairness. PASSION We will all share a passion to "WOW" our customers by doing whatever it takes to exceed their expectations. GROWTH We will all demonstrate a genuine concern for all employees, by providing opportunities for professional growth and by treating one another with respect, fairness and compassion. PRIDE We will all strive to maximize individual productivity and organizational efficiency through stakeholder pride and a strong work ethic. COMMUNITY We will all contribute to the strength of our communities through direct employee involvement and volunteerism in community organizations and events. TEAMWORK We will all strive to ensure that "the whole is greater than the sum of the parts" through effective teamwork within and between all work groups in the organization. VIGILANCE We will all be forever vigilant in our attention to credit quality with respect to new loan requests and to loans within our existing portfolio. INVOLVEMENT We will all strive to ensure, through effective and timely communication, that our Board of Directors is active, involved and well-informed. QUALITY We will all differentiate ourselves in the marketplace with our obsession for superior quality and professionalism. FUN We will all contribute to an environment of having fun. 20 As we move forward in the new millennium, Camden National Corporation promises to continue to serve the financial needs of the people of Maine and to cherish the places in which we live and work -- guided by the core values we have practiced for over 125 years. [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis reviews the consolidated financial condition of Camden National Corporation ("the Company") at December 31, 2000 and 1999, the consolidated results of operations for the past three years and, where appropriate, factors that may affect future financial performance. This discussion should be read in conjunction with the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Selected Consolidated Financial Data. Forward-Looking Information The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information contained in this discussion, or in any other written or oral statements made by the Company, is or may be considered to be forward-looking. Forward-looking statements relate to future operations, strategies, financial results or other developments, and typically contain words or phrases such as "may," "believe," "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 its actual results could differ materially from those expected to occur depending on factors such as economic conditions in local markets as well 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 non-interest 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. GENERAL Overview of the Company. The Company is a multi-bank holding company headquartered in Camden, Maine, offering a broad range of financial services in its geographic marketplace. The Company has two wholly owned bank subsidiaries. Camden National Bank is a national banking association based in Camden, Maine. UnitedKingfield Bank, a state-chartered bank based in Bangor, Maine, is the successor by merger, effective February 4, 2000, of United Bank and Kingfield Savings Bank ("Kingfield Bank"). The Company also has a 51% interest in Trust Company of Maine, Inc., a non-bank subsidiary based in Bangor, Maine. Business. The Company's wholly owned bank subsidiaries are independent banks with branches serving mid-coast, central and western Maine. The banks are full-service financial institutions that focus primarily on attracting deposits from the general public through their branches and using such deposits to originate residential mortgage loans, business loans, commercial real estate loans and a variety of consumer loans in their respective service areas. In addition, the Company also invests in mortgage-backed securities and securities issued by the United States government and agencies thereof. The Company's majority owned trust subsidiary, Trust Company of Maine, Inc., offers a broad range of trust and trust investment services, in addition to retirement and pension plan management services. The Company's goal is to balance profit with growth and quality with productivity. Therefore, the Company emphasizes increasing its loan and deposit market shares in the communities in which its bank subsidiaries serve by offering a wide range of quality financial products and services coupled with local decision-making. In addition, the Company closely manages yields on interest-earning assets and rates on interest-bearing liabilities, and strives to increase non-interest income while controlling the growth of non-interest expenses. It is also part of the business strategy of the Company to supplement internal growth with acquisitions of other banks, branches of other banks and non-bank financial service companies when such purchases are perceived to offer enhanced long-term shareholder value. The Company generally does not, as a matter of policy, make any specific projections as to future earnings nor does it endorse any projections regarding future performance that may be made by others. 21 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Acquisition. On December 20, 1999, the Company completed the acquisition of KSB Bancorp, Inc. ("KSB"), a bank holding company with one principal subsidiary, Kingfield Bank. Approximately 1,481,800 shares of common stock were issued in connection with this transaction. KSB was subsequently merged into the Company. KSB had total assets of $191.1 million and total shareholders' equity of $14.0 million. The acquisition of KSB was accounted for under the pooling-of-interests method and, accordingly, financial information for all periods presented prior to the date of acquisition, including the financial information discussed below, has been restated to present the combined financial condition and results of operations as if the acquisition had been in effect for all such periods. REVIEW OF FINANCIAL STATEMENTS The discussion and analysis which follows focuses on the factors affecting the Company's consolidated results of operations during 2000, 1999 and 1998 and financial condition at December 31, 2000 and 1999. The Consolidated Financial Statements and Notes to Consolidated Financial Statements beginning on page 34 of this report should be read in conjunction with this review. RESULTS OF OPERATIONS Overview. The Company reported net income of $13.9 million in 2000, $10.2 million in 1999 and $11.5 million in 1998. Earnings per diluted share were $1.69 in 2000, $1.27 in 1999 and $1.38 in 1998. Return on average assets was 1.40% in 2000 compared to 1.15% in 1999 and 1.52% in 1998. Return on average equity was 16.43% in 2000 compared to 13.16% and 15.09% in 1999 and 1998, respectively. Net operating income of $1.65 per diluted share represented an increase of 10.74% per diluted share compared to $1.49 per diluted share for 1999. The net operating amount for 2000 excluded expenses, net of income taxes of $200,000, or $.02 per diluted share, incurred during the first quarter of 2000 related to the Company's acquisition of KSB in December 1999 and the subsequent merger of United Bank with Kingfield Bank to form UnitedKingfield Bank in February 2000. Also excluded is income after taxes of $437,000, or $.06 per diluted share, due to the changeover of the Company's defined-benefit noncontributory pension plan to a defined contribution plan, recognized during the third quarter of 2000. The 1999 net operating amount excluded the previously referenced merger-and acquisition-related expenses incurred during the fourth quarter. On an operating basis, the Company's return on average assets during 2000 was 1.38% compared to 1.35% in 1999. Return on average equity, on an operating basis, during 2000 was 16.17% compared to 15.47% in 1999. Strong loan growth during 2000 contributed to increases in interest income which, on a fully taxable equivalent basis, totaled $78.7 million in 2000 compared to $69.9 million and $61.6 million in 1999 and 1998, respectively. During this same period the cost of interest-bearing deposits and borrowings increased to $38.7 million in 2000 compared to $30.4 million and $26.7 million in 1999 and 1998, respectively. The net result was an increase in net interest income, on a fully-taxable equivalent basis, to $40.0 million in 2000 compared to $39.5 million and $34.9 million in 1999 and 1998, respectively. The Company's results of operations are also affected by the provision for loan losses, resulting from the Company's assessment of the adequacy of the allowance for loan losses, and other non-interest income and expenses. Each of these principal components of the Company's operating results is discussed on the following pages. Net Interest Income. Net interest income, when expressed as a percentage of average assets, is referred to as net interest margin. The following tables on pages 23 and 24, which present changes in interest income and interest expense by major asset and liability category for 2000, 1999 and 1998, 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. 22 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Analysis Of Change In Net Interest Margin on Earning Assets
(Dollars in thousands) DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998 ------------------------------------------------------------------------------------------------------------------------------------ Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets Interest-earning assets: Securities--taxable $224,698 $ 16,079 7.16% $216,666 $ 15,084 6.96% $175,357 $ 12,129 6.92% Securities--nontaxable (1) 8,993 595 6.62% 9,152 606 6.62% 3,126 209 6.69% Federal funds sold 2,215 109 4.92% 1,784 69 3.87% 4,373 195 4.46% Loans (1) (2) 675,316 61,899 9.17% 605,271 54,157 8.95% 521,559 49,035 9.40% -------- -------- ---- -------- -------- ---- -------- -------- ---- Total interest-earning assets 911,222 78,682 8.64% 832,873 69,916 8.39% 704,415 61,568 8.74% -------- -------- ---- -------- -------- ---- -------- -------- ---- Cash and due from banks 27,544 24,122 19,720 Other assets 58,817 43,750 38,389 Less allowance for loan losses 10,541 8,895 7,581 -------- -------- -------- Total assets $987,042 $891,850 $754,943 ======== ======== ======== Liabilities & Shareholders' Equity Interest-bearing liabilities: NOW accounts $ 86,783 $ 889 1.02% $ 85,861 $ 1,129 1.31% $ 61,340 $ 1,003 1.64% Savings accounts 85,427 2,168 2.54% 109,078 3,050 2.80% 94,014 2,873 3.06% Money market accounts 98,559 4,467 4.53% 64,562 2,347 3.64% 60,452 1,908 3.16% Certificates of deposit 329,664 18,595 5.64% 312,019 16,317 5.23% 286,234 15,810 5.52% Broker certificates of deposit 12,876 947 7.35% 6,010 344 5.72% 3,847 221 5.74% Short-term borrowings 198,597 11,650 5.87% 146,627 7,182 4.90% 93,204 4,873 5.23% -------- -------- ---- -------- -------- ---- -------- -------- ---- Total interest-bearing liabilities 811,906 38,716 4.77% 724,157 30,369 4.19% 599,091 26,688 4.45% -------- -------- ---- -------- -------- ---- -------- -------- ---- Demand deposits 84,357 79,764 71,862 Other liabilities 6,409 10,229 8,090 Shareholders' equity 84,370 77,700 75,900 -------- -------- -------- Total liabilities and shareholders' equity $987,042 $891,850 $754,943 ======== ======== ======== Net interest income 39,966 39,547 34,880 (fully-taxable equivalent) Less: fully-taxable equivalent adjustment (561) (592) (342) -------- -------- -------- $ 39,405 $ 38,955 $ 34,538 ======== ======== ======== Net interest rate spread (fully-taxable equivalent) 3.87% 4.20% 4.29% ==== ==== ==== Net interest margin (fully-taxable equivalent) 4.39% 4.75% 4.95% ==== ==== ====
(1) Reported on tax-equivalent basis calculated using a rate of 34%. (2) Non-accrual loans are included in total average loans. 23 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Analysis of Volume and Rate Changes on Net Interest Income
DECEMBER 31, 2000 VS 1999 DECEMBER 31, 1999 VS 1998 (Dollars in thousands) INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO -------------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total Interest-earning assets: Securities--taxable $ 559 $ 436 $ 995 $2,858 $ 97 $2,955 Securities--nontaxable (11) -- (11) 403 (6) 397 Federal funds sold 17 23 40 (115) (11) (126) Loans 6,264 1,478 7,742 7,871 (2,749) 5,122 ------ ------- ------ ------ ------- ------ Total interest income 6,829 1,937 8,766 11,017 (2,669) 8,348 ------ ------- ------ ------ ------- ------ Interest-bearing liabilities: NOW accounts 12 (252) (240) 402 (276) 126 Savings accounts (662) (220) (882) 460 (283) 177 Money market accounts 1,237 883 2,120 130 309 439 Certificates of deposit 923 1,355 2,278 1,423 (916) 507 Broker certificates of deposit 393 210 603 124 (1) 123 Short-term borrowings 2,547 1,921 4,468 2,794 (485) 2,309 ------ ------- ------ ------ ------- ------ Total interest expense 4,450 3,897 8,347 5,333 (1,652) 3,681 ------ ------- ------ ------ ------- ------ Net interest income (fully-taxable equivalent) $2,379 $(1,960) $ 419 $5,684 $(1,017) $4,667 ====== ======= ====== ====== ======= ======
The Company's net interest income, on a fully-taxable equivalent basis, was $40.0 million, $39.5 million and $34.9 million in 2000, 1999 and 1998, respectively. 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. Net interest income in 2000 increased by $.5 million, or 1.1%, on a fully-taxable equivalent basis compared to 1999. This increase was due to the increase in both the volume and yields on loans and investments, partially offset by an increase in volume and cost of interest-bearing liabilities. During 1999, net interest income increased by $4.7 million, or 13.4%, on a fully-taxable equivalent basis, compared to 1998. This increase was due to the increase in loan and investment volumes, partially offset by a decrease in yields on average loans outstanding. Net interest income, expressed as a percentage of average interest-earning assets, was 4.39% in 2000, 4.75% in 1999 and 4.95% in 1998. The average amount of loans outstanding increased by $70.0 million, or 11.6%, in 2000 over 1999 and by $83.7 million, or 16.1%, in 1999 over 1998. Interest income on loans increased by $7.7 million in 2000 compared to 1999 and by $5.1 million in 1999 compared to 1998. The weighted average yield on loans was 9.17% in 2000 compared to 9.0% in 1999 and 9.4% in 1998. The average amount of non-accrual loans can also affect the average yield earned on all outstanding loans. However, the average amount of non-accrual loans for 2000, 1999 and 1998 were minimal and, therefore, had an insignificant effect on average loan yield. Interest and Dividends. Interest and dividends on investment securities increased by $1.0 million, on a fully-taxable equivalent basis, in 2000 compared to 1999. The primary reason was increased volume and yields. In 1999, interest and dividends on investment securities increased by $3.4 million, on a fully-taxable equivalent basis, compared to 1998. The reason for the increase was also increased volume and yields. The average balance of investments outstanding totaled $233.7 million in 2000 compared to $225.8 million in 1999 and $178.5 million in 1998. The weighted average tax-adjusted yield on investment securities was 7.14% in 2000 compared to 6.95% in 1999 and 6.91% in 1998. Average deposits and borrowings increased by $87.7 million, or 12.1%, in 2000 over 1999 and by $125.1 million, or 20.9%, in 1999 over 1998. Interest expense on deposits and borrowings increased by $8.3 million in 2000 compared to 1999. This increase was the result of increased volumes and rates in most categories. Interest expense on deposits and borrowings increased by $3.7 million in 1999 compared to 1998. This increase was the result of increased balances in all categories. The weighted average rate on interest-bearing liabilities was 4.77% in 2000 compared to 4.19% in 1999 and 4.45% in 1998. 24 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Additionally, the Company periodically uses interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge interest rate risk associated with purchases and sales of investments and loans, as well as deposit practices (see Note 19, "Financial Instruments" of the Notes to Consolidated Financial Statements, on page 51, and "Market Risk," on page 29, for further information on derivative financial instruments). During 2000, 1999 and 1998, the Company was a party in several agreements requiring it to make variable market-indexed interest payments in exchange for fixed-rate interest payments (interest rate swaps). The Company utilized interest rate swaps to protect a portion of its net interest income stream against the effects of falling rates on prime-based floating rate loans. The off-balance sheet instruments have an effect on net interest income. The net result of the Company's interest rate swap agreements was net interest income of $108,000 in 2000, $37,000 in 1999 and $46,000 in 1998. Entering into interest rate swap agreements involves not only the risk of dealing with counterparties and their ability to meet the terms of the contracts, but also interest rate risk associated with unmatched positions. Notional principal amounts are used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Non-interest Income. Non-interest income was $8.9 million, $7.7 million and $6.6 million for the years ended December 31, 2000, 1999 and 1998, respectively. During 2000, there was an increase of $1.2 million, or 15.9%, in total non-interest income compared to 1999. Service charges on deposit accounts increased by $107,000, or 3.9%, over 1999. Other service charges and fees increased by $276,000, or 18.5%, over the same period. The largest factors contributing to the increase in non-interest income were trust fees that increased by $505,000, or 65.1%, and merchant assessment fees that increased $308,000, or 20.6%. Total non-interest income increased by $1.1 million, or 17.1%, in 1999 compared to 1998. Service charges on deposit accounts increased by $397,000, or 16.7%, over 1998. Other service charges and fees increased by $315,000, or 26.9%, over the same period. The largest factor contributing to this increase was the full year of service charges and fee income generated by the 9 branches added in March and October of 1998. Merchant assessment fees increased $187,000, or 14.3%, trust fees increased $131,000, or 20.3%, and other income increased by $91,000, or 8.5%, during 1999 over 1998. Non-interest Expenses. Non-interest expenses were $25.4 million, $27.6 million and $22.2 million for the years ended December 31, 2000, 1999 and 1998, respectively. There was a decrease of $2.2 million, or 8.0%, in total non-interest expenses during 2000 compared to 1999. Salaries and employee benefits decreased by $1.0 million, or 8.1%, during this same period. Contributing to this reduction was $645,000 related to the termination of the Company's defined-benefit noncontributory pension plan. The remainder of the decrease was the result of reductions in staff due to the merger of United Bank and Kingfield Bank on February 4, 2000. All other operating expenses also decreased by $1.2 million, or 7.9%, during 2000 compared to 1999. This decrease is the net of increases in credit card, supplies and various other general operating expenses during 2000 and the $2.0 million in merger- and acquisition-related expenses related to the acquisition of KSB in 1999. Total non-interest expenses increased by $5.4 million, or 24.2%, in 1999 compared to 1998. The largest increase of $2.0 million was attributed to KSB merger- and acquisition-related costs. Salaries and employee benefits increased by $1.4 million, or 12.5%, from $11.2 million in 1998 to $12.6 million in 1999. The major factor contributing to this increase was the full year of expense associated with the additional staff resulting from the branch acquisitions during March and October of 1998. All other operating expenses increased by $4.0 million, or 36.1%, in 1999 over 1998. The major contributing factors to this increase were credit card expenses, data processing, marketing, supply costs, other real estate owned ("OREO") expenses and amortization of the core deposit intangibles. With the addition of 9 new branches, higher than normal expenses were incurred in the areas of data processing, marketing and supplies. In addition, the amortization of the core deposit intangibles totaled $1.0 million in 1999 and $.7 million in 1998 for the branches acquired in March and October of 1998. FINANCIAL CONDITION Overview. The year 2000 was highlighted by the merger of United Bank and Kingfield Bank to create a new community bank known as UnitedKingfield Bank during the first quarter of the year. This merger provided the Company with an opportunity to capitalize on certain economies of scale. The Company acquired KSB on December 20, 1999. Kingfield Bank had branch locations in Kingfield, Stratton, Phillips, Strong, Rangeley, Farmington, Lewiston, Bingham and Madison. The Company considers the acquisition of Kingfield Bank and its branches a logical expansion of its service areas. 25 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Total assets at December 31, 2000 were $1.0 billion, an increase of $82.5 million, or 8.9%, from December 31, 1999. The change in assets consisted primarily of a $64.5 million increase in net loans, an increase in premises and equipment of $3.9 million, an increase in other assets of $8.4 million, an increase of $4.7 million in cash and due from banks and federal funds sold, and an increase in investment securities of $1.0 million. The asset growth was supported by an increase of $76.6 million in deposits and a $13.3 million increase in total shareholders' equity, combined with a decrease of $5.5 million in total borrowings and $1.9 million in other liabilities. Investment Securities. Total investment securities increased by $1.0 million, or 0.5%, to $233.2 million at December 31, 2000. The Company has investment securities in both the available-for-sale and held-to-maturity categories. During 2000, the Company increased the available-for-sale portion of the investment portfolio. The change in the investment portfolio reflects the Company's desire for greater flexibility to achieve asset and liability objectives, while managing liquidity and funding needs pursuant to the policies developed by the Asset/ Liability Committee ("ALCO"). The available-for-sale category increased during 2000 by $11.6 million. Although these securities are available for sale, the Company has the ability to hold the debt securities in this portfolio until maturity. A portion of the Company's investment portfolio is also classified as held to maturity. The ability to use these securities as collateral for Federal Home Loan Bank of Boston ("FHLBB") loans enhances the Company's ability to hold the securities to maturity consistent with liquidity objectives. At December 31, 2000, the Company had $.8 million of unrealized losses on securities available for sale, net of the deferred tax benefits compared to $5.8 million of unrealized losses, net of deferred tax benefits at December 31, 1999. This reduction of unrealized losses was attributed to a decrease in market rates. Unrealized gains and losses do not impact income or regulatory capital, but are recorded as adjustments to shareholders' equity net of related deferred income taxes. In 1999, the Company had also increased the available-for-sale portion of the investment portfolio supporting the desire for greater flexibility in managing the portfolio. Loans. During 2000, the loan portfolio experienced growth in every major loan category. Loans, including loans held for sale, totaled $701.3 million at December 31, 2000, a 10.4% increase from total loans of $635.4 million at December 31, 1999. This resulted from a continuation of the loan growth experienced by the Company for the past several years. Residential real estate mortgage loans increased by $3.1 million, or 1.4%, in 2000. During 2000, the Company originated $11.8 million of fixed-rate residential loans that were sold to investors in the secondary market. Residential real estate mortgage loans increased in 1999 by $49.7 million, or 29.1%, from $170.9 million in 1998 to $220.5 million in 1999. Residential real estate loans consist of loans secured by one-to-four family residences. The Company generally retains adjustable-rate mortgages in its portfolio but will, from time to time, retain fixed-rate mortgages. With a relatively low interest rate environment, it was the Company's asset/liability strategy during 1999 to hold fixed-rate mortgages in its portfolio. The yields on these assets were higher than yields available in the investment portfolio. All of the mortgage loans in the Company's loan portfolio are secured by properties located in Maine. Commercial loans increased by $47.8 million, or 15.1%, during 2000. In 1999, commercial loans increased from $269.7 million to $316.4 million, an increase of $46.7 million, or 17.3%. Commercial loans consist of loans secured by various corporate assets, as well as loans to provide working capital in the form of lines of credit, which may be secured or unsecured. The commercial category also includes commercial real estate loans secured by income producing commercial real estate. In addition, the Company makes loans for the acquisition, development and construction of commercial real estate. The Company focuses on lending to financially sound small- and medium-sized business customers within its geographic marketplace. Consumer loans increased by $6.4 million, or 7.6%, in 2000. In 1999, consumer loans increased from $78.5 million to $83.8 million, an increase of $5.3 million, or 6.8%. Consumer loans are originated by the Company's bank subsidiaries for a wide variety of purposes to meet customers' needs. Consumer loans include credit card, overdraft protection, automobile, boat, recreation vehicles, mobile homes, home equity, and secured and unsecured personal loans. It is the Company's policy to discontinue the accrual of interest on loans when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all accrued but unpaid interest is reversed. Non-performing loans, defined as non-accrual loans plus accruing loans 90 days or more past due, totaled $6.5 million, or 0.9%, of total loans at December 31, 2000 compared to $6.3 million, or 1.0%, of total loans at December 31, 1999. 26 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Allowance for Loan Losses / Provision for Loan Losses. 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 (see Note 6, "Allowance for Loan Losses," of the Notes to Consolidated Financial Statements, on page 44, for further information). During 2000, the Company provided $2.9 million to the allowance for loan losses compared to $3.7 million and $2.1 million in 1999 and 1998, respectively. Net charge-offs to average loans outstanding were .24% in 2000 compared to .39% in 1999. During 1999, the allowance was increased due to the need for replenishment as a result of charge-offs, primarily at United Bank. Determining an appropriate level of ALL involves a high degree of judgment. Management believes that the ALL at December 31, 2000 of $10.8 million, or 1.54%, 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 1.48% in 1999. The following table sets forth information concerning the activity in the Company's ALL during the periods indicated. Five-Year Activity in the Allowance for Loan Losses
(Dollars in thousands) YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------------------------------------- 2000 1999 1998 1997 1996 Allowance at the beginning of period $ 9,390 $ 8,092 $ 6,982 $ 5,365 $ 4,947 Provision for loan losses 2,930 3,670 2,056 2,207 1,228 Charge-offs: Commercial loans 1,296 1,520 417 671 539 Residential real estate loans 432 715 415 160 210 Consumer loans 417 425 444 400 308 -------- -------- -------- -------- -------- Total loan charge-offs 2,145 2,660 1,276 1,231 1,057 Recoveries: Commercial loans 421 64 158 473 82 Residential real estate loans 29 54 35 36 27 Consumer loans 176 170 137 132 138 -------- -------- -------- -------- -------- Total loan recoveries 626 288 330 641 247 Net charge-offs 1,519 2,372 946 590 810 -------- -------- -------- -------- -------- Allowance at the end of the period $ 10,801 $ 9,390 $ 8,092 $ 6,982 $ 5,365 ======== ======== ======== ======== ======== Average loans outstanding $675,316 $605,271 $521,559 $445,599 $392,128 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans outstanding 0.22% 0.39% 0.18% 0.13% 0.21% Ratio of provision for loan losses to average loans outstanding 0.43% 0.61% 0.39% 0.50% 0.31% Ratio of allowance for loan losses to total loans at end of period 1.54% 1.48% 1.42% 1.44% 1.30% Ratio of allowance for loan losses to net charge-offs 711.06% 395.87% 855.39% 1183.39% 662.35% Ratio of allowance for loan losses to non-performing loans at end of period 166.48% 148.32% 172.50% 162.03% 128.72%
27 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES The allowance for loan losses is available to offset credit losses in connection with any loan, but is internally allocated to various loan categories as part of the Company's process for evaluating its adequacy. The following table sets forth information concerning the allocation of the Company's ALL by loan categories at the dates indicated. Allocation of the Allowance for Loan Losses--Five-Year Schedule
(Dollars in thousands) AS OF DECEMBER 31, ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 Percent of Percent of Percent of Percent of Percent of loans in loans in loans in loans in loans in each each each each each Balance at End of Period category to category to category to category to category to Applicable to: Amount total loans Amount total loans Amount total loans Amount total loans Amount total loans -------------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ ----------- Commercial loans $ 5,972 55% $5,286 55% $4,288 51% $4,672 49% $3,529 47% Residential real estate loans 2,329 32% 2,772 35% 2,166 35% 875 37% 758 42% Consumer loans 1,218 13% 475 13% 729 14% 657 14% 529 11% Unfunded commitments 673 0% 329 0% 324 0% 366 0% 252 0% Unallocated 609 N/A 528 N/A 585 N/A 412 N/A 297 N/A ------- --- ------ --- ------ --- ------ --- ------ --- $10,801 100% $9,390 100% $8,092 100% $6,982 100% $5,365 100% ======= === ====== === ====== === ====== === ====== ===
LIQUIDITY Liquidity is defined as the ability to meet current and future financial obligations of a short-term nature. The primary objective of liquidity management is to maintain a balance between sources and uses of funds to meet the cash flow needs of the Company in the most economical and expedient manner. 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 demands. In order to respond to the various circumstances, the Company has both on- and off-balance sheet funding resources in place. Each of the Company's bank subsidiaries monitors its liquidity in accordance with guidelines established by the Company and applicable regulatory requirements. As of December 31, 2000 and 1999, the Company's level of liquidity exceeded its target levels. Management believes that the Company's bank subsidiaries currently have adequate liquidity available to respond to liquidity demands. Sources of funds utilized by the Company's bank subsidiaries consist of deposits, borrowings from the FHLBB and other sources, cash flows from operations, prepayments and maturities of outstanding loans, investments and mortgage-backed securities, and the sales of mortgage loans. Deposits continue to represent the Company's primary source of funds. In 2000, total deposits increased by $76.6 million, or 11.5%, over 1999, ending the year at $744.4 million. The Company experienced growth in all deposit categories in 2000. Comparing year-end balances at 2000 to 1999, transaction accounts (demand deposits and NOW) increased by $.8 million, money market accounts by $10.5 million, saving accounts by $8.9 million, and certificates of deposit by $56.4 million. In 1999, total deposits increased by $26.2 million, or 4.1%, over 1998, ending the year at $667.7 million. Borrowings supplement deposits as a source of liquidity. In addition to borrowings from the FHLBB, the Company's bank subsidiaries purchase federal funds, sell securities under agreements to repurchase and utilize treasury tax and loan accounts. Total borrowings were $168.4 million at December 31, 2000 compared to $173.9 million at December 31, 1999, a decrease of $5.5 million, or 3.2%. The reduction can be attributed to the increase in deposits, which allowed the Company to pay down borrowings. The majority of the borrowings were from the FHLBB, whose advances remained the largest non-deposit-related, interest-bearing funding source for the Company in both 2000 and 1999. 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. 28 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES CAPITAL RESOURCES 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 8.0%, of which at least 4.0% must be in the form of core capital. The risk-based ratios of the Company and its bank subsidiaries exceeded regulatory guidelines at December 31, 2000 and December 31, 1999. The Company's Tier 1 capital to risk-weighted assets was 11.8% and 11.7% at December 31, 2000 and 1999, respectively (see Note 20, "Regulatory Matters," of the Notes to Consolidated Financial Statements, on page 53, for other capital ratios). In addition to risk-based capital requirements, the FRB requires bank holding companies to maintain a minimum leverage capital ratio of core capital to total assets of 4.0%. Total assets for this purpose do not include goodwill and any other intangible assets and investments that the FRB determines should be deducted. The Company's leverage ratio at December 31, 2000 and 1999 was 8.6% and 8.5%, respectively. As part of the Company's goal to operate a safe, sound and profitable financial organization, the Company is committed to maintaining a strong capital base. Shareholders' equity totaled $90.9 million and $77.6 million, or 9.0% and 8.4%, of total assets at December 31, 2000 and 1999, respectively. The $13.3 million, or 17.1%, increase in shareholders' equity in 2000 was primarily attributable to net income of $13.9 million, less 1) treasury stock activity of $.4 million and 2) $5.2 million in cash dividends, plus 3) $5.0 million in unrealized gains on securities available for sale, net of deferred tax benefit. The principal cash requirement of the Company is to pay dividends on common stock when declared. Dividends paid on the Company's common stock in 2000 represented a 21.2% increase over 1999 on a per share basis. 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 Bank declared dividends in the aggregate amount of $5,910,000 and $8,051,000 in 2000 and 1999, respectively. UnitedKingfield Bank declared dividends in the aggregate amounts of $1,846,000 and $205,000 in 2000 and 1999, respectively. As of December 31, 2000, and subject to the limitations and restrictions under applicable law, Camden National Bank and UnitedKingfield Bank had $7.7 million available for dividends to the Company, although there is no assurance that dividends will be paid at any time in any amount (see Note 14, "Shareholders' Equity," of the Notes to Consolidated Financial Statements, on page 48, for additional information). 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. 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 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. 29 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 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 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 periodically over the past 2 years. 2000 -------------------------------------------------------------------------------- Estimated Rate Change Changes in NII -------------------------------------------------------------------------------- High Low Average +200bp (6.01%) (3.61%) (4.89%) -200bp 4.63% 1.96% 3.49% 1999 -------------------------------------------------------------------------------- Estimated Rate Change Changes in NII -------------------------------------------------------------------------------- High Low Average +200bp (3.25%) 0.87% (1.25%) -200bp (4.50%) (0.80%) (1.87%) 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 cashflows. The assumptions differed in each of the 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. The most significant factors affecting the changes in market risk exposures during 2000 compared to 1999 were the 1) increase 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, 4) increases in adjustable borrowings and 5) increases in off-balance sheet financial instruments. With increases on the balance sheet in fixed-rate loans and variable-rate borrowings the Company was more liability sensitive during 2000 compared to 1999. Although these balance sheet changes resulted in increased market risk in a rising interest rate environment during 2000, this increased risk was within the Company's policy limits. 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. Board of Directors' approved hedging policy statements govern the use of these instruments by the bank subsidiaries. As of December 31, 2000, the Company had a notional principal of $35 million interest rate swap agreements, $10 million floor contracts and $90 million cap contracts. The estimated effects of these derivative financial instruments on the Company's earnings are included in the sensitivity analysis presented above. ALCO monitors derivative activities relative to its expectation and the Company's hedging policy. Recent Accounting Pronouncements. Statement of Financial Accounting Standards ("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," are effective for all fiscal years beginning after June 15, 2000. 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 balance sheet and measure those instruments at fair value. At December 31, 2000, the fair value of derivative instruments, which will be reported as an asset upon adoption of SFAS No. 133, was approximately $650,000. Management is in the process of evaluating the impact on earnings of implementing SFAS No. 133. To the extent that management determines the derivatives are not effective as cash flow hedges, the fair value will be included in earnings during the first quarter of 2001, net of applicable income taxes. Effectiveness is defined as the change in the cash flows of the derivative hedging instrument in comparison to the change in expected cash flows of the hedged item. To the extent that management determines the derivatives are effective and qualify as cash flow hedges, the fair value will be recorded in other comprehensive income during the first quarter of 2001, net of applicable income taxes. Upon implementation of SFAS No. 133 on January 1, 2001, the Company will also transfer all of its investment securities classified as held to maturity to available for sale. The impact of the reclassification will be an increase to comprehensive income of $2.0 million, net of applicable income taxes. 30 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 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 to the Company's consolidated financial condition and results of operation. Common Stock Information. The common stock of Camden National Corporation (ticker symbol CAC) began trading on the American Stock Exchange ("AMEX") October 7, 1997. Prior to that date, the stock was not traded on any exchange. The Company elected to repurchase stock for its treasury during 1998 and 1999. In November 1998, the shareholders approved an increase in the number of authorized shares of common stock from 5,000,000 to 10,000,000 shares. The Board of Directors subsequently approved a three-for-one split of the Company's common stock to shareholders of record on November 19, 1998, with a distribution date of December 4, 1998. On December 20, 1999, the Company completed the acquisition of KSB. Approximately 1,481,800 shares of common stock were issued in connection with this transaction. The Company has paid quarterly dividends since its inception in 1985. The market price (as quoted by AMEX) and cash dividends paid, per share of the Company's common stock, by calendar quarter for the past 2 years were as follows: 2000 -------------------------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter High $15.50 $15.75 $15.88 $16.88 Low 12.63 12.50 12.00 10.13 Close 14.25 15.75 13.50 11.88 Dividend paid 0.16 0.16 0.16 0.15 1999 -------------------------------------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter High $21.06 $23.94 $22.75 $20.06 Low 16.38 16.88 17.50 17.63 Close 16.75 23.94 20.88 17.94 Dividend paid 0.13 0.13 0.13 0.13 Information concerning restrictions on the ability of the Company's affiliates to transfer funds to the Company in the form of cash dividends is described in the Capital Resources section on page 29. As of December 31, 2000, there were 8,609,898 shares of the Company's common stock outstanding, held of record by approximately 1,026 shareholders. 31 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Summary of Financial Performance [The following tables were depicted as bar graphs in the printed material.] NET INCOME (IN MILLIONS) '96 9.359 '97 10.698 '98 11.451 '99 10.229 '00 13.859 ASSETS (IN MILLIONS) '96 644.4 '97 726.6 '98 839.3 '99 928.4 '00 1,010.9 DEPOSITS (IN MILLIONS) '96 463.5 '97 485.1 '98 641.6 '99 667.7 '00 744.4 LOANS (IN MILLIONS) '96 411.3 '97 483.3 '98 569.7 '99 635.4 '00 701.3 EARNINGS PER SHARE (IN DOLLARS) '96 1.13 '97 1.31 '98 1.40 '99 1.27 '00 1.70 BOOK VALUE PER SHARE (IN DOLLARS) '96 8.15 '97 9.01 '98 9.61 '99 9.51 '00 11.17 32 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Selected Five-Year Financial Data
(In thousands, except number of shares and per share data) DECEMBER 31, ------------------------------------------------------------------------------------------ FINANCIAL CONDITION DATA 2000 1999 1998 1997 1996 Assets $1,010,883 $ 928,350 $ 839,280 $ 726,644 $ 644,435 Loans 701,340 635,434 569,705 483,348 411,336 Allowance for Loan Losses 10,801 9,390 8,092 6,982 5,365 Investments 233,242 232,190 218,693 204,260 190,669 Deposits 744,360 667,720 641,553 485,132 463,522 Borrowings 168,440 173,924 113,682 160,697 106,946 Shareholders' Equity 90,923 77,623 77,789 74,112 67,614
YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------- OPERATIONS DATA 2000 1999 1998 1997 1996 Interest Income $79,555 $69,496 $61,591 $58,363 $51,719 Interest Expense 40,042 30,504 27,007 27,270 24,270 ------- ------- ------- ------- ------- Net Interest Income 39,513 38,992 34,584 31,093 27,449 Provision for Loan Losses 2,930 3,670 2,056 2,207 1,228 ------- ------- ------- ------- ------- Net Interest Income after Provision for Loan Losses 36,583 35,322 32,528 28,886 26,221 Non-interest Income 8,915 7,694 6,573 4,936 4,550 Non-interest Expense 25,396 27,604 22,220 17,916 16,799 ------- ------- ------- ------- ------- Income before Provision for Income Tax 20,102 15,412 16,881 15,906 13,972 Income Tax Expense 6,243 5,183 5,430 5,209 4,613 ------- ------- ------- ------- ------- Net Income $13,859 $10,229 $11,451 $10,697 $ 9,359 ======= ======= ======= ======= =======
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ OTHER DATA 2000 1999 1998 1997 1996 Basic Earnings Per Share $ 1.70 $ 1.27 $ 1.40 $ 1.31 $ 1.13 Diluted Earnings Per Share 1.69 1.27 1.38 1.27 1.10 Dividends Per Share 0.63 0.52 0.47 0.38 0.28 Book Value Per Share 11.17 9.51 9.61 9.01 8.15 Return on Average Assets 1.40% 1.15% 1.52% 1.52% 1.50% Return on Average Equity 16.43% 13.16% 15.09% 15.11% 13.70% Allowance for Loan Losses to Total Loans 1.54% 1.48% 1.42% 1.44% 1.30% Non-Performing Loans to Total Loans 0.93% 1.00% 0.82% 0.89% 1.01% Stock Dividend Payout Ratio 37.17% 40.90% 33.74% 29.31% 24.70%
33 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Condition
(In thousands, except number of shares and per share data) DECEMBER 31, ------------------------------------------------------------------------------------------------------ 2000 1999 Assets Cash and due from banks $ 29,337 $ 24,230 Federal funds sold -- 415 Securities available for sale, at market 175,547 163,997 Securities held to maturity (market value $60,698 and $68,049 at December 31, 2000 and 1999, respectively) 57,695 68,193 Residential mortgages held for sale 12,838 6,906 Loans, less allowance for loan losses of $10,801 and $9,390 at December 31, 2000 and 1999, respectively 677,701 619,138 Premises and equipment 16,023 12,093 Other real estate owned 380 1,405 Interest receivable 6,959 5,041 Core deposit intangible 6,660 7,645 Other assets 27,743 19,287 ---------- ---------- Total assets $1,010,883 $ 928,350 ========== ========== Liabilities Deposits: Demand $ 83,631 $ 80,385 NOW 87,270 89,740 Money market 81,730 71,237 Savings 121,292 112,335 Certificates of deposit 370,437 314,023 ---------- ---------- Total deposits 744,360 667,720 Borrowings from Federal Home Loan Bank 132,348 128,866 Other borrowed funds 36,092 45,058 Accrued interest and other liabilities 6,984 8,968 Minority interest in subsidiary 176 115 ---------- ---------- Total liabilities 919,960 850,727 ---------- ---------- Commitments (Notes 12, 14, 18, 19 and 20) Shareholders' Equity Common stock, no par value; authorized 10,000,000 shares, issued 8,609,898 shares in 2000 and 1999 2,450 2,450 Surplus 5,909 5,990 Retained earnings 92,292 83,583 Accumulated other comprehensive loss Net unrealized losses on securities available for sale, net of income tax (812) (5,782) ---------- ---------- 99,839 86,241 Less remaining obligation under: Bank recognition and retention plan 14 20 Less cost of 464,557 and 442,540 shares of treasury stock on December 31, 2000 and 1999 8,902 8,598 ---------- ---------- Total shareholders' equity 90,923 77,623 ---------- ---------- Total liabilities and shareholders' equity $1,010,883 $ 928,350 ========== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 34 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income
(In thousands, except number of shares and per share data) YEAR ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------- 2000 1999 1998 Interest Income Interest and fees on loans $ 61,540 $ 53,771 $ 48,765 Interest on U.S. government and agency obligations 14,753 14,041 11,156 Interest on state and political subdivision obligations 393 400 138 Interest on interest rate swap agreements 1,434 172 365 Interest on federal funds sold and other investments 1,435 1,112 1,167 ---------- ---------- ---------- Total interest income 79,555 69,496 61,591 ---------- ---------- ---------- Interest Expense Interest on deposits 27,066 23,187 21,815 Interest on other borrowings 11,650 7,182 4,873 Interest on interest rate swap agreements 1,326 135 319 ---------- ---------- ---------- Total interest expense 40,042 30,504 27,007 ---------- ---------- ---------- Net interest income 39,513 38,992 34,584 Provision for Loan Losses 2,930 3,670 2,056 ---------- ---------- ---------- Net interest income after provision for loan losses 36,583 35,322 32,528 ---------- ---------- ---------- Other Income Service charges on deposit accounts 2,880 2,773 2,376 Other service charges and fees 1,764 1,488 1,173 Merchant assessments 1,802 1,494 1,307 Trust fees 1,281 776 645 Other income 1,188 1,163 1,072 ---------- ---------- ---------- Total other income 8,915 7,694 6,573 ---------- ---------- ---------- 45,498 43,016 39,101 ---------- ---------- ---------- Operating Expenses Salaries and employee benefits 11,558 12,578 11,178 Net occupancy 1,666 1,579 1,327 Furniture, equipment and data processing 2,097 2,167 2,159 Merchant program 1,778 1,488 1,268 Amortization of core deposit intangible 986 1,011 665 Acquisition related 232 2,046 -- Other 7,079 6,735 5,623 ---------- ---------- ---------- Total operating expenses 25,396 27,604 22,220 ---------- ---------- ---------- Income before income taxes 20,102 15,412 16,881 Income Taxes 6,243 5,183 5,430 ---------- ---------- ---------- Net Income $ 13,859 $ 10,229 $ 11,451 ========== ========== ========== Per Share Data Basic earnings per share $ 1.70 $ 1.27 $ 1.40 Diluted earnings per share 1.69 1.27 1.38 Weighted average number of shares outstanding 8,164,188 8,033,757 8,156,968
The accompanying notes are an integral part of these Consolidated Financial Statements. 35 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity
Net Unrealized Gains (Losses) on Securities (In thousands, except number Common Retained Available of shares and per share data) Stock Surplus Earnings for Sale ------------------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 $ 2,449 $ 5,953 $70,096 $ 78 ------- ------- ------- ------- Net income for 1998 -- -- 11,451 -- Change in unrealized gains (losses) on securities available for sale, net of deferred taxes of $2 -- -- -- 4 ------- ------- ------- ------- Total comprehensive income -- -- 11,451 4 Purchase of treasury stock (159,339 shares) -- -- -- -- Exercise and repurchase of stock options (93,000 shares), net of tax benefit of $604 -- (267) -- -- Retirement of treasury stock (5,019 shares) -- (13) (68) -- Payment of obligation under employee stock ownership plan -- 230 -- -- Bank recognition and retention plan -- -- -- -- 30,535 shares issued under stock option plans -- 81 -- -- Filing fees related to stock split -- -- (35) -- Cash dividends declared ($0.47 / share) -- -- (3,863) -- ------- ------- ------- ------- Balance at December 31, 1998 $ 2,449 $ 5,984 $77,581 $ 82 ------- ------- ------- ------- Net income for 1999 -- -- 10,229 -- Change in unrealized gains (losses) on securities available for sale, net of tax benefit of $3 million -- -- -- (5,864) ------- ------- ------- ------- Total comprehensive income -- -- 10,229 (5,864) Purchase of treasury stock (102,740 shares) -- -- -- -- Sale of treasury stock (125,000 shares) -- -- -- -- Exercise and repurchase of stock options (93,000 shares), net of tax benefit of $525 -- (338) -- -- Retirement of treasury stock (31,983 shares) -- (270) (66) -- Payment of obligation under employee stock ownership plan -- 388 21 -- Bank recognition and retention plan -- -- -- -- 71,440 shares issued under stock option plans 1 226 -- -- Cash dividends declared ($0.52 / share) -- -- (4,182) -- ------- ------- ------- ------- Balance at December 31, 1999 $ 2,450 $ 5,990 $83,583 $(5,782) ------- ------- ------- ------- Net income for 2000 -- -- 13,859 -- Change in unrealized gains (losses) on securities available for sale, net of deferred taxes of $2.6 million -- -- -- 4,970 ------- ------- ------- ------- Total comprehensive income -- -- 13,859 4,970 Purchase of treasury stock (24,950 shares) -- -- -- -- Exercise and repurchase of stock options (8,680 shares), net of tax benefit of $6 -- (62) -- -- Exercise of stock options (2,933 shares), net of deferred taxes of $11 -- (19) -- -- Bank recognition and retention plan -- -- -- -- Cash dividends declared ($0.63 / share) -- -- (5,150) -- ------- ------- ------- ------- Balance at December 31, 2000 $ 2,450 $ 5,909 $92,292 $ (812) ======= ======= ======= ======= Employee Bank Stock Recognition Total (In thousands, except number Ownership and Retention Treasury Shareholders' of shares and per share data) Plan Plan Stock Equity ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 $ (117) $ (50) $(4,297) $74,112 ------- ------- ------- ------- Net income for 1998 -- -- -- 11,451 Change in unrealized gains (losses) on securities available for sale, net of deferred taxes of $2 -- -- -- 4 ------- ------- ------- ------- Total comprehensive income -- -- -- 11,455 Purchase of treasury stock (159,339 shares) -- -- (3,139) (3,139) Exercise and repurchase of stock options (93,000 shares), net of tax benefit of $604 -- -- (854) (1,121) Retirement of treasury stock (5,019 shares) -- -- 81 -- Payment of obligation under employee stock ownership plan 49 -- -- 279 Bank recognition and retention plan -- 20 -- 20 30,535 shares issued under stock option plans -- -- -- 81 Filing fees related to stock split -- -- -- (35) Cash dividends declared ($0.47 / share) -- -- -- (3,863) ------- ------- ------- ------- Balance at December 31, 1998 $ (68) $ (30) $(8,209) $77,789 ------- ------- ------- ------- Net income for 1999 -- -- -- 10,229 Change in unrealized gains (losses) on securities available for sale, net of tax benefit of $3 million -- -- -- (5,864) ------- ------- ------- ------- Total comprehensive income -- -- -- 4,365 Purchase of treasury stock (102,740 shares) -- -- (2,337) (2,337) Sale of treasury stock (125,000 shares) -- -- 2,249 2,249 Exercise and repurchase of stock options (93,000 shares), net of tax benefit of $525 -- -- (637) (975) Retirement of treasury stock (31,983 shares) -- -- 336 -- Payment of obligation under employee stock ownership plan 68 -- -- 477 Bank recognition and retention plan -- 10 -- 10 71,440 shares issued under stock option plans -- -- -- 227 Cash dividends declared ($0.52 / share) -- -- -- (4,182) ------- ------- ------- ------- Balance at December 31, 1999 $ -- $ (20) $(8,598) $77,623 ------- ------- ------- ------- Net income for 2000 -- -- -- 13,859 Change in unrealized gains (losses) on securities available for sale, net of deferred taxes of $2.6 million -- -- -- 4,970 ------- ------- ------- ------- Total comprehensive income -- -- -- 18,829 Purchase of treasury stock (24,950 shares) -- -- (394) (394) Exercise and repurchase of stock options (8,680 shares), net of tax benefit of $6 -- -- 40 (22) Exercise of stock options (2,933 shares), net of deferred taxes of $11 -- -- 50 31 Bank recognition and retention plan -- 6 -- 6 Cash dividends declared ($0.63 / share) -- -- -- (5,150) ------- ------- ------- ------- Balance at December 31, 2000 $ -- $ (14) $(8,902) $90,923 ======= ======= ======= =======
The accompanying notes are an integral part of these Consolidated Financial Statements. 36 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
(In thousands) YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------ 2000 1999 1998 Operating Activities Net Income $ 13,859 $ 10,229 $ 11,451 Adjustments to reconcile net income to net cash provided (used) by operating activities: Provision for loan losses 2,930 3,670 2,056 Depreciation and amortization 1,371 1,089 1,626 Decrease in obligation under ESOP and BRRP 6 487 301 (Decrease) increase in interest receivable (1,117) (551) 77 Increase (decrease) in other assets 2,744 (3,755) (2,787) (Decrease) increase in other liabilities (5,343) 6,004 (489) Sale of residential mortgage loans held for sale 11,767 4,610 7,334 Origination of mortgage loans held for sale (17,699) (3,288) (35,387) Increase in minority position 61 25 5 Loss on disposal of assets -- -- 3 -------- -------- -------- Net cash provided (used) by operating activities 8,579 18,520 (15,810) -------- -------- -------- Investing Activities Proceeds from sales and maturities of securities held to maturity 10,587 29,909 77,429 Proceeds from sales and maturities of securities available for sale 8,509 20,251 6,117 Purchase of securities available for sale (12,456) (72,072) (88,734) Purchase of Federal Home Loan Bank Stock (174) (331) (104) Net increase in loans (61,493) (69,424) (49,410) Net increase (decrease) in other real estate owned 1,025 (353) 943 Purchase of premises and equipment (5,506) (1,421) (1,689) Net decrease (increase) in federal funds sold 415 (415) 1,103 Purchase of bank-owned life insurance (10,000) -- -- Net cash provided by acquisitions -- -- 74,321 -------- -------- -------- Net cash (used) provided by investing activities (69,093) (93,856) 19,976 -------- -------- -------- Financing Activities Net increase in demand deposits, NOW accounts, money markets and savings accounts 20,226 22,896 35,505 Net increase in certificates of deposit 56,414 3,271 17,433 Net increase (decrease) in borrowings (5,484) 60,242 (47,536) Purchase of treasury stock (394) (2,337) (3,139) Sale of treasury stock -- 2,249 -- Proceeds from stock issuance under option plan 31 227 81 Exercise and repurchase of stock options (22) (975) (1,121) Filing fees related to stock split -- -- (35) Cash dividends paid (5,150) (4,182) (3,863) -------- -------- -------- Net cash provided (used) by financing activities 65,621 81,391 (2,675) -------- -------- -------- Net increase in cash and cash equivalents 5,107 6,055 1,491 Cash and cash equivalents at beginning of year 24,230 18,175 16,684 -------- -------- -------- Cash and cash equivalents at end of year $ 29,337 $ 24,230 $ 18,175 ======== ======== ======== Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 39,516 $ 30,270 $ 26,369 Income tax 6,320 6,057 6,310 Non-Cash transactions: Transfer from loans to other real estate owned 302 1,418 1,196 Securitization of mortgage loans -- -- 9,014 Transfer from loans held for sale to loan portfolio -- 24,637 --
See Note 3, "Branch Acquisitions," of the Notes to Consolidated Financial Statements, on page 41, for branch acquisition disclosure. The accompanying notes are an integral part of these Consolidated Financial Statements. 37 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2000, 1999 and 1998 (Amounts in tables expressed in thousands, except number of shares and per share data) NATURE OF OPERATIONS. The Company is a multi-bank and financial services holding company. The Company has 2 wholly owned bank subsidiaries. Camden National Bank is a national banking association based in Camden, Maine. UnitedKingfield Bank, a state-chartered bank based in Bangor, Maine, is the successor by merger, effective February 4, 2000, of United Bank and Kingfield Bank. The Company also has a 51% interest in Trust Company of Maine, Inc., a non-bank subsidiary based in Bangor, Maine. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies conform to generally accepted accounting principles and to general practice within the banking industry. The following is a summary of the significant accounting and reporting policies. Principles of Consolidation. The accompanying Consolidated Financial Statements include the accounts of the Company, its wholly owned bank subsidiaries, Camden National Bank and UnitedKingfield Bank, and its majority owned non-bank subsidiary, Trust Company of Maine, Inc. All intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates in the Preparation of Financial Statements. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of loans. In connection with the determination of the allowance for loan losses and the carrying value of real estate owned, management obtains independent appraisals for significant properties. Cash. The Company is required to comply with various laws and regulations of the FRB which require the Company to maintain certain amounts of cash on deposit and restrict the Company from investing those amounts. The Company maintains those balances at the Federal Reserve Bank of Boston. In the normal course of business, the Company has funds on deposit at other financial institutions in amounts in excess of the $100,000 insured by the Federal Deposit Insurance Corporation ("FDIC"). For the statement of cash flows, cash equivalents consist of cash and due from banks. Investment Securities. The Company has classified its investment securities into investments available for sale and investments to be held to maturity. Securities Available for Sale. Debt and other securities that are to be held for indefinite periods of time are stated at market value. Changes in net unrealized gains or losses are recorded as an adjustment to shareholders' equity until realized. Market values of securities are determined by prices obtained from independent market sources. Realized gains and losses on securities sold are computed on the identified cost basis on the trade date. Securities Held to Maturity. Bonds, notes and debentures for which the Company has the positive intent and ability to hold to maturity are reported at cost, adjusted for amortization of premiums and accretion of discounts which are recognized in interest income using the interest method over the period to maturity. Residential Mortgages Held for Sale. Residential mortgages held for sale are primarily one-to-four family real estate loans which are valued at the lower of cost or market on an individual basis, as determined by quoted market prices from the Federal Home Loan Mortgage Corporation ("Freddie Mac"). Gains and losses from sales of residential mortgages held for sale are recognized upon settlement with investors and recorded in other income. These activities, together with underwriting residential mortgage loans, comprise the Company's mortgage banking business. Loan Servicing. The cost of mortgage servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. Fair values are 38 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES estimated using discounted cash flows based on a current market interest rate. For purposes of measuring impairment, the rights are stratified based on the following predominant risk characteristics of the underlying loans: interest rate, fixed versus variable rate, and period of origination. The amount of impairment recognized is the amount by which the capitalized mortgage servicing rights for a stratum exceed their fair value. Loans. Interest on loans is accrued and credited to income based on the principal amount outstanding. The accrual of interest on loans is discontinued when, in the opinion of management, there is an indication that the borrower may be unable to meet payments as they become due. Upon such discontinuance, all unpaid, accrued interest is reversed. Fees received and direct costs incurred for the origination of loans are deferred and recognized as an adjustment of loan yield. The allowance for loan losses is maintained at a level adequate to absorb future charge-offs of loans deemed uncollectible. Management determines the adequacy of the allowance based upon reviews of individual credits, recent loss experience, current economic conditions, known and inherent risk characteristics of the various categories of loans, adverse situations that may affect the borrower's ability to repay, estimated value of underlying collateral, and other pertinent factors. The allowance is increased by provisions charged to operating expense and by recoveries on loans previously charged off. Credits deemed uncollectible are charged against the allowance. Loans considered to be impaired are reduced to the present value of expected future cash flows or to the fair value of collateral, by allocating a portion of the allowance for loan losses to such loans. If these allocations cause the allowance for loan losses to require an increase, such increase is reported as provision for loan losses. The carrying values of impaired loans are periodically adjusted to reflect cash payments, revised estimates of future cash flows, and increases in the present value of expected cash flows due to the passage of time. Cash payments representing interest income are reported as such. Other cash payments are reported as reductions in carrying value, while increases or decreases due to changes in estimates of future payments and due to the passage of time are reported as provision for loan losses. Other Real Estate Owned. Other real estate owned represents real estate acquired through foreclosure or upon receipt of a deed in lieu of foreclosure and is recorded at the lower of the recorded amount of the loan or market value of the underlying collateral, less estimated selling costs, determined by an independent appraisal, with any difference at the time of acquisition treated as a loan loss. Subsequent reductions in market value below the carrying cost are charged directly to other operating expenses. Premises and Equipment. Premises and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed on the straight-line method over the estimated useful lives of the related assets. Intangible Assets. The value of core deposits premium is being amortized over periods ranging from 10 to 15 years using the straight-line method. Other intangible assets, including goodwill, are being amortized over 20 to 25 years using the straight-line method. Amortization of software is recognized using the straight-line method over the estimated useful lives of the various software items. On an ongoing basis, management reviews the valuation and amortization of intangible assets to determine possible impairment. Other Borrowed Funds. Other borrowed funds consist of commercial and consumer repurchase agreements and treasury tax and loan deposits. Securities sold under agreements to repurchase generally mature within 30 days and are reflected at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities. Treasury tax and loan deposits generally do not have fixed maturity dates. Income Taxes. Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Principal temporary differences occur with respect to pension and other postretirement benefits, depreciation and the provision for loan losses. Earnings Per Share. Basic earnings per share data is computed based on the weighted average number of the Company's common shares outstanding during each year. Potential common stock is considered in the calculation of weighted-average shares outstanding for diluted earnings per share, and is determined using the treasury stock method. In 1998, the shareholders approved a three-for-one split of the Company's common stock to shareholders of record on November 19, 1998. The number of shares and per share amounts have been restated to reflect this transaction. Financial Instruments with Off-Balance Sheet Risk. The Company uses off-balance sheet financial instruments as part of its asset/liability management activities. The Company presently does not intend to sell any of these instruments. In the ordinary course of business, the Company has entered into off-balance sheet financial instruments consisting of commitments to extend credit, commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded. 39 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Derivative Financial Instruments. As part of its asset/liability management, the Company uses interest rate contracts, which include swaps to hedge various exposures or to modify interest rate characteristics of various balance sheet accounts. Interest Rate Exchange Agreements (swaps) are accounted for using the accrual method. Net interest income (expense) resulting from the differential between exchanging floating and fixed-rate interest payments is recorded on a current basis. Interest Rate Caps and Floors are contracts in which a ceiling or floor is established at a specified rate and for a specified period of time. The premium paid for the contract is amortized over its life. Any cash payments received are recorded as an adjustment to net interest income. Fair Value Disclosures. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: Cash and due from banks and federal funds sold: The carrying amounts of cash and due from banks and federal funds sold approximate their fair value. Investment securities and securities available for sale: Fair values for investment securities and securities available for sale are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. The carrying amounts of other securities approximate their fair value. Residential mortgages held for sale: Fair values are based on quoted market prices from Freddie Mac. Loans receivable: For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Interest receivable and payable: The carrying amounts of interest receivable and payable approximate their fair value. Life insurance policies: The carrying amounts of life insurance policies approximate their fair value. Deposits: The fair value of demand and NOW deposits, savings accounts, and certain money market deposits is the amount payable on demand. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered in the Company's market for deposits of similar remaining maturities. Borrowings: The carrying amounts of short-term borrowings from the FHLBB, securities under repurchase agreements and other short-term borrowings, approximate fair value. The fair value of long-term borrowings is based on the discounted cash flows using current rates for advances of similar remaining maturities. Off-balance sheet instruments: Fair values for interest rate swaps and floor and cap contracts are based on quoted market prices. In the course of originating loans and extending credit and standby letters of credit, the Company charges fees in exchange for its lending commitment. While these commitment fees have value, the Company does not believe their value is material to its financial statements due to the short-term nature of the underlying commitments. Effect of Recently Issued Financial Standards. 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," are effective for all fiscal years beginning after June 15, 2000. 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 balance sheet and measure those instruments at fair value. At December 31, 2000, the fair value of derivative instruments, which will be reported an asset upon adoption of SFAS No. 133, was approximately $650,000. Management is in the process of evaluating the impact on earnings of implementing SFAS No. 133. To the extent that management determines the derivatives are not effective as cash flow hedges, the fair value will be included in earnings during the first quarter of 2001, net of applicable income taxes. Effectiveness is defined as the change in the expected cash flows of the derivative hedging instrument in comparison to the change in expected cash flows of the hedged item. To the extent that management determines the derivatives are effective and qualify as cash flow hedges, the fair value will be recorded in other comprehensive income during the first quarter of 2001, net of applicable income taxes. Upon implementation of SFAS No. 133 on January 1, 2001, the Company will also transfer all of its investment securities classified as held to maturity to available for sale. The impact of the reclassification will be an increase to comprehensive income of $2.0 million net of applicable income 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 to the Company's consolidated financial condition and results of operations. Reclassification. Certain items from the prior year were restated to conform with the current year presentation. 40 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 2. MERGER On December 20, 1999, KSB was merged into the Company. The merger was accounted for under the pooling-of-interests method. KSB had total assets of $191,084,000 and total shareholders' equity of $13,971,000. The Company exchanged approximately 1,481,800 shares of its common stock for approximately 1,304,401 shares of KSB common stock. Under the pooling-of-interests method, the recorded amounts of assets and liabilities of the Company and KSB have been carried forward at their previously recorded amounts. All prior period financial statements presented have been restated as if the merger took place at the beginning of such periods. The following table sets forth the results of operations for the years ended December 31: 1999 1998 -------------------------------------------------------------------------------- Net income KSB Bancorp, Inc. $ 1,236 $ 1,806 Camden National Corporation 8,993 9,645 ------- ------- Combined $10,229 $11,451 Basic earnings per share KSB Bancorp, Inc. $ 1.01 $ 1.47 Camden National Corporation 1.35 1.43 Combined 1.27 1.40 Diluted earnings per share KSB Bancorp, Inc. $ 1.01 $ 1.41 Camden National Corporation 1.35 1.41 Combined 1.27 1.38 Dividends per share KSB Bancorp, Inc. $ .16 $ .11 Camden National Corporation .60 .55 Combined .52 .47 On February 4, 2000, United Bank was merged with Kingfield Bank to create a new community bank, UnitedKingfield Bank, having total assets of $325,233,000. 3. BRANCH ACQUISITIONS During 1998, the Company's 2 bank subsidiaries acquired 8 branch locations. The excess of cost over fair value of net assets acquired in these branch acquisitions has been amortized to expense using the straight-line method over 10 years. The acquisition was accounted for under the purchase method of accounting for business combinations. The following is a summary of the transactions: Loans acquired $ 19,340 Premises and equipment 714 Premium on deposits 8,553 Other assets 1,210 Deposits assumed 104,005 Other liabilities 133 Net cash received 74,321 Amortization expense of core deposit intangibles was $986,000, $1,011,000 and $665,000 in 2000, 1999 and 1998, respectively. 41 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 4. INVESTMENT SECURITIES The following tables summarize the amortized costs and market values of securities available for sale and held to maturity, as of the dates indicated:
DECEMBER 31, 2000 --------------------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U.S. treasury securities and obligations of U.S. government corporations and agencies $ 57,919 $ 1,088 $ (299) $ 58,708 Obligations of states and political subdivisions 8,208 -- (280) 7,928 Mortgage-backed securities 30,174 179 (236) 30,117 Other debt securities 45,780 -- (1,313) 44,467 -------- -------- -------- -------- Total debt securities 142,081 1,267 (2,128) 141,220 -------- -------- -------- -------- Federal Home Loan Bank of Boston stock 16,193 -- -- 16,193 Federal Reserve Bank stock 39 -- -- 39 Other equity securities 18,464 150 (519) 18,095 -------- -------- -------- -------- Total equity securities 34,696 150 (519) 34,327 -------- -------- -------- -------- Total securities available for sale $176,777 $ 1,417 $ (2,647) $175,547 ======== ======== ======== ======== Held to maturity U.S. treasury securities and obligations of U.S. government corporations and agencies $ 300 $ -- $ (25) $ 275 Obligations of states and political subdivisions 1,142 12 -- 1,154 Other debt securities 595 14 (11) 598 Mortgage-backed securities 55,658 3,038 (25) 58,671 -------- -------- -------- -------- Total securities held to maturity $ 57,695 $ 3,064 $ (61) $ 60,698 ======== ======== ======== ======== DECEMBER 31, 1999 --------------------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value Available for sale U.S. treasury securities and obligations of U.S. government corporations and agencies $ 67,466 $ 15 $ (2,435) $ 65,046 Obligations of states and political subdivisions 8,210 -- (690) 7,520 Mortgage-backed securities 13,737 -- (633) 13,104 Other debt securities 50,320 -- (3,382) 46,938 -------- -------- -------- -------- Total debt securities 139,733 15 (7,140) 132,608 -------- -------- -------- -------- Federal Home Loan Bank of Boston stock 16,019 -- -- 16,019 Federal Reserve Bank stock 39 -- -- 39 Other equity securities 16,966 32 (1,667) 15,331 -------- -------- -------- -------- Total equity securities 33,024 32 (1,667) 31,389 -------- -------- -------- -------- Total securities available for sale $172,757 $ 47 $ (8,807) $163,997 ======== ======== ======== ======== Held to maturity U.S. treasury securities and obligations of U.S. government corporations and agencies $ 5,949 $ 60 $ (35) $ 5,974 Obligations of states and political subdivisions 1,152 11 (2) 1,161 Other debt securities 129 -- (3) 126 Mortgage-backed securities 60,963 414 (589) 60,788 -------- -------- -------- -------- Total securities held to maturity $ 68,193 $ 485 $ (629) $ 68,049 ======== ======== ======== ========
42 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES The amortized cost and fair values of debt securities by contractual maturity at December 31, 2000 are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Fair Cost Value -------------------------------------------------------------------------------- Available for sale Due in one year or less $ -- $ -- Due after one year through five years 41,386 51,112 Due after five years through ten years 39,362 39,315 Due after ten years 61,333 50,793 -------- -------- $142,081 $141,220 ======== ======== Amortized Fair Cost Value -------------------------------------------------------------------------------- Held to maturity Due in one year or less $ 1,897 $ 1,871 Due after one year through five years 5,980 7,572 Due after five years through ten years 3,600 3,736 Due after ten years 46,218 47,519 ------- ------- $57,695 $60,698 ======= ======= For purposes of the maturity table, mortgage-backed securities, which are not due at a single maturity date, have been allocated to the due-after-ten-years category. There were no sales in either the available-for-sale or held-to-maturity portfolios during 2000. Proceeds from the sale of investments classified as held to maturity during 1999 were $5,023,000, which resulted in a gross realized gain of $26,000. The investments were sold within 3 months of the maturity date. In 1999, proceeds from the sale of investments classified as available for sale were $10,637,000, which resulted in a gross realized gain of $125,000. There were no sales in the available-for-sale or held-to-maturity portfolios during 1998. At December 31, 2000 and 1999, securities with a book value of $78,539,000 and $85,469,000 and a fair value of $79,504,000 and $83,311,000, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and other purposes required or permitted by law. 5. LOANS The composition of the Company's loan portfolio at December 31 was as follows: 2000 1999 -------------------------------------------------------------------------------- Commercial loans $364,169 $316,411 Residential real estate loans 223,625 220,534 Consumer loans 90,231 83,832 Municipal loans 10,924 8,307 Other loans 462 336 -------- -------- Total loans 689,411 629,420 Less deferred loan fees net of costs 909 892 Less allowance for loan losses 10,801 9,390 -------- -------- $677,701 $619,138 ======== ======== The Company's lending activities are conducted in mid-coast, central and western Maine. The Company makes single family and multi-family residential loans, commercial real estate loans, business and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity within the geographic area and the general economy. As of December 31, 2000 and 1999, nonaccrual loans were $4,644,000 and $6,136,000, respectively. Interest foregone was approximately $528,000, $408,000 and $248,000 for 2000, 1999, and 1998, respectively. 43 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 6. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows: DECEMBER 31, -------------------------------------------------------------------------------- 2000 1999 1998 Beginning balance $ 9,390 $ 8,092 $ 6,982 Provision for loan losses 2,930 3,670 2,056 Recoveries 626 288 330 Loans charged off (2,145) (2,660) (1,276) ------- ------- ------- Net charge offs (1,519) (2,372) (946) ------- ------- ------- Ending balance $10,801 $ 9,390 $ 8,092 ======= ======= ======= Information regarding impaired loans is as follows:
DECEMBER 31, ----------------------------------------------------------------------------------------------------------------- 2000 1999 1998 Average investment in impaired loans $5,871 $5,455 $4,499 Interest income recognized on impaired loans, all on cash basis 241 452 525 Balance of impaired loans 4,644 6,136 5,009 Less portion for which no allowance for loan losses is allocated -- -- 2,745 Portion of impaired loan balance for which an allowance for credit losses is allocated 4,644 6,136 2,264 Portion of allowance for loan losses allocated to the impaired loan balance 860 1,179 487
7. MORTGAGE SERVICING Residential real estate mortgages are originated by the Company for both portfolio and for sale into the secondary market. The sale of loans are to institutional investors such as Freddie Mac. Under loan sale and servicing agreements with the investor, the Company generally continues to service the residential real estate mortgages. The Company pays the investor an agreed-upon rate on the loan, which, including a guarantee fee paid to Freddie Mac, is less than the interest rate the Company receives from the borrower. The difference is retained by the Company as a fee for servicing the residential real estate mortgages. As required by SFAS No. 125, the Company capitalizes mortgage servicing rights at their fair value upon sale of the related loans. Capitalized servicing rights totaled $107,000, $171,000 and $115,000 during 2000, 1999 and 1998, respectively. Amortization expense totaled $32,000 and $22,000 for 2000 and 1999, respectively. There was no amortization expense during 1998, the year SFAS No. 125 was implemented. Mortgage loans serviced for others are not included in the accompanying Consolidated Statements of Condition of the Company. The unpaid principal balance of mortgage loans serviced for others was $111,002,000, $105,263,000 and $112,052,000 at December 31, 2000, 1999 and 1998, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were $267,000 and $216,000 at December 31, 2000 and 1999, respectively. 8. PREMISES AND EQUIPMENT Details of premises and equipment, at cost, at December 31 were as follows: 2000 1999 -------------------------------------------------------------------------------- Land and buildings $12,265 $11,505 Furniture, fixtures and equipment 12,813 11,671 Leasehold improvements 1,186 604 Construction in process 2,524 223 ------- ------- 28,788 24,003 Less: Accumulated depreciation and amortization 12,765 11,910 ------- ------- $16,023 $12,093 ======= ======= Depreciation expense was $1,529,000, $1,553,000 and $1,489,000 for 2000, 1999 and 1998, respectively. 44 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 9. OTHER REAL ESTATE OWNED The transactions in other real estate owned for the years ended December 31 were as follows: 2000 1999 1998 -------------------------------------------------------------------------------- Beginning balance $1,405 $1,052 $1,532 Additions 302 1,418 1,196 Properties sold 1,180 491 1,599 Writedowns 147 574 77 ------ ------ ------ Ending balance $ 380 $1,405 $1,052 ====== ====== ====== 10. DEPOSITS The aggregate amount of certificates of deposit, each with a minimum denomination of $100,000, was approximately $74,329,000 and $52,224,000 at December 31, 2000 and 1999, respectively. Certificates of deposit included brokered deposits in the amount of $26,931,000 and $6,014,000 at December 31, 2000 and 1999, respectively. At December 31, 2000, the scheduled maturities of certificates of deposit were as follows: 2001 $295,286 2002 35,771 2003 7,734 2004 3,756 2005 2,217 Thereafter 25,673 -------- $370,437 ======== 11. BORROWINGS A summary of the borrowings, including the outstanding balance of lines of credit, from the FHLBB is as follows: DECEMBER 31, 2000 -------------------------------------------------------------------------------- Principal Amounts Interest Rates Maturity Date $ 78,348 6.52% - 6.67% 2001 32,000 6.08% - 6.12% 2003 12,000 4.88% - 4.97% 2009 10,000 4.95% 2010 -------- $132,348 ======== DECEMBER 31, 1999 -------------------------------------------------------------------------------- Principal Amounts Interest Rates Maturity Date $ 83,866 4.06% - 6.05% 2000 2,000 6.08% 2003 1,000 4.80% 2004 5,000 5.09% 2008 37,000 4.83% - 5.35% 2009 -------- $128,866 ======== Short- and long-term borrowings from the FHLBB consist of both fixed and adjustable rate borrowings and are collateralized by all stock in the FHLBB and a blanket lien on qualified collateral consisting primarily of loans with first mortgages secured by one-to-four family properties, certain unencumbered investment securities and other qualified assets. The carrying value of loans pledged as collateral was $228,511,000 and $225,039,000 at December 31, 2000 and 1999, respectively. The FHLBB at its discretion can call $52,000,000 of the Company's long-term borrowings. The Company, through its bank subsidiaries, has an available line of credit with FHLBB of $12,980,000 and $14,292,000 at December 31, 2000 and 1999, respectively. The Company had no outstanding balance on its line of credit with the FHLBB at December 31, 2000 and $1,284,000 outstanding at December 31, 1999. 45 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 11. Borrowings continued The Company utilizes other borrowings in the form of federal funds purchased; treasury, tax and loan deposits; and repurchase agreements secured by U.S. government or agency securities. Balances outstanding at December 31 are shown in the table below: 2000 1999 -------------------------------------------------------------------------------- Federal funds purchased $ -- $ 1,300 Treasury, tax and loan deposits 1,031 1,523 Securities sold under repurchase agreements 35,061 42,235 ------- ------- Total other borrowed funds $36,092 $45,058 ======= ======= Weighted-average rate at the end of period 4.24% 4.10% 12. EMPLOYEE BENEFIT PLANS Pension and Other Postretirement Plans The Company's postretirement plans provide medical and life insurance to certain eligible retired employees. It is the Company's policy to fund the cost of postretirement health care and life insurance plans as premiums are paid; therefore, there are no plan assets. On October 17, 2000, the Company terminated the defined-benefit noncontributory pension plan, which covered substantially all eligible employees over 21 years of age with 1 year of employment. Total plan assets of $5,168,000 are expected to be distributed to eligible employees during the first half of 2001. During 2000, the Company recognized $437,000 of net income due to the over accrual of the benefit obligation at the date of plan termination. POSTRETIREMENT BENEFITS -------------------------------------------------------------------------------- 2000 1999 1998 Change in benefit obligation Benefit obligation at beginning of the year $ 481 $ 399 $ 356 Service cost 38 25 21 Interest cost 32 28 26 Actuarial gain 200 50 15 Benefits paid (27) (21) (19) ----- ----- ----- Benefit obligation at end of year 724 481 399 ----- ----- ----- Funded status (724) (481) (399) Unrecognized net actuarial loss 273 77 27 Unrecognized net prior service cost (94) (110) (126) ----- ----- ----- Accrued benefit cost $(545) $(514) $(498) ===== ===== ===== Weighted-average discount rate assumption 7.0% 7.0% 7.5% POSTRETIREMENT BENEFITS -------------------------------------------------------------------------------- 2000 1999 1998 Components of net periodic benefit cost Service cost $ 38 $ 25 $ 21 Interest cost 32 28 26 Amortization of prior service cost (16) (16) (16) Recognized net actuarial loss 3 -- -- ----- ----- ----- Net periodic benefit cost $ 57 $ 37 $ 31 ===== ===== ===== 46 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES For measurement purposes, a 6.4% annual rate of increase in the per capita cost to cover health care benefits was assumed for 2001. The rate was assumed to decrease gradually to a 6.0% annual growth rate after 7 years, and remain at a 6.0% annual growth rate thereafter. A 1.0% increase or decrease in the assumed health care cost trends rate would not have a material impact on the accumulated postretirement benefit obligation due to a built-in cap on annual benefits. The Company also sponsors an unfunded, non-qualified supplemental retirement plan for certain officers. The agreement provides supplemental retirement payments payable in installments over 15 years upon retirement or death. Effective September 1, 1999, active participants will be paid a life annuity upon retirement or death. The expense of this supplemental plan was $347,000, $309,000 and $217,000 in 2000, 1999 and 1998, respectively. The accrued liability of this plan at December 31, 2000, 1999 and 1998 was $1,318,000, $1,198,000 and $955,000, respectively. 401(k) Plan The Company has a 401(k) plan whereby substantially all employees participate in the plan. Employees may contribute up to 15% of their compensation subject to certain limits based on federal tax laws. The Company makes matching contributions based on Board of Director approval. For the years ended December 31, 2000, 1999 and 1998, expenses attributable to the 401(k) plan amounted to $214,000, $171,000 and $138,000, respectively. Employee Stock Ownership Plan During 1999 and 1998, the Company, as successor to KSB, had an Employee Stock Ownership Plan ("ESOP"). As of the merger date (December 20, 1999), all liabilities related to this plan were paid. Total ESOP expense was $368,765 and $279,770 in 1999 and 1998, respectively. Bank Recognition and Retention Plan The Company, as successor to KSB, maintains a Bank Recognition and Retention Plan ("BRRP") as a method of providing certain officers and other employees of the Company with a proprietary interest in the Company. During 1994, the Company contributed funds to the BRRP to enable such Company officers and employees to acquire, in the aggregate, 56,045 shares of common stock of the Company. The Company recognizes expense related to the BRRP based on the vesting schedule. Participants are vested at a rate of 20% per year commencing 1 year from the date of the award. Total expense related to the BRRP was $5,712, $9,726 and $21,194 for 2000, 1999 and 1998, respectively. A summary of shares outstanding under the BRRP is presented below: 2000 1999 1998 -------------------------------------------------------------------------------- Outstanding at beginning of year 56,045 56,045 44,488 Granted during the year -- -- 11,557 Forfeited during the year -- -- -- ------ ------ ------ Outstanding at end of year 56,045 56,045 56,045 ====== ====== ====== 13. SEGMENT REPORTING The Company, through its bank and non-bank subsidiaries, provides a broad range of financial services to individuals and companies in mid-coast, central and western Maine. These services include lending, demand, savings and time deposits; cash management; and trust services. While the Company's senior management team monitors operations of each subsidiary, these subsidiaries are primarily organized to operate in the banking industry. Substantially all revenues and services are derived from banking products and services in Maine. Accordingly, the Company's subsidiaries are considered by management to be aggregated in 1 reportable operating segment. 47 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 14. SHAREHOLDERS' EQUITY Dividends paid by subsidiaries are the primary source of funds available to the Company for payment of dividends to its shareholders. The Company's subsidiary banks are subject to certain requirements imposed by state and federal banking laws and regulations. These requirements, among other things, establish minimum levels of capital and restrict the amount of dividends that may be distributed by the subsidiary banks to the Company. The Company has 4 fixed stock option plans accounted for under Accounting Principles Board Opinion 25 and related interpretations. The plans allow the Company to grant options to employees for up to 676,140 shares of Company common stock. Under 2 plans, options are vested 20% per year from the date of the grant and expire 10 years from the date of the grant. Under the remaining 2 plans, the options are immediately vested when granted, and expire 10 years from the date the option was granted. The exercise price of all options equals the market price of the Company's stock on the date of grant. Accordingly, no compensation cost has been recognized for the plans. Had compensation cost for the plans been determined based on the fair value of the options at the grant dates consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net income and earnings per share for 1999 and 1998 would have been reduced to the pro forma amounts indicated below. The Company's net income and earnings per share for 2000 is equal to pro forma amounts since there were no options granted during the year ended December 31, 2000. EARNINGS PER SHARE NET INCOME BASIC DILUTED -------------------------------------------------------------------------------- 2000 As reported $13,859 $1.70 $1.69 Pro forma 13,859 1.70 1.69 1999 As reported $10,229 $1.27 $1.27 Pro forma 9,985 1.24 1.24 1998 As reported $11,451 $1.40 $1.38 Pro forma 10,256 1.26 1.23 The fair value of each option granted is estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for all grants; in 1998 dividend yield of 3.0%, expected volatility of 1.35%, risk-free interest rate of 4.75%, and expected lives of 10 years; in 1999 dividend yield of 3.3%, expected volatility of 1.35%, risk-free interest rate of 4.75%, and expected lives of 10 years. A summary of the status of the Company's fixed stock option plans as of December 31, 2000, 1999 and 1998, and changes during the years ended on those dates is presented below. 2000 -------------------------------------------------------------------------------- Number of Weighted-average Shares Exercise Price Outstanding at beginning of year 199,842 $ 14.13 Exercised during the year 11,613 11.55 Forfeited during the year 4,500 14.47 ------- ------- Outstanding at end of year 183,729 $ 14.29 ======= ======= Exercisable at end of year 183,729 $ 14.29 ======= ======= 48 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
1999 --------------------------------------------------------------------------------------------------------- Number of Weighted-average Shares Exercise Price Outstanding at beginning of year 337,366 $ 9.62 Granted during the year 18,180 16.28 Exercised during the year 164,440 4.91 Reload options granted during the year 8,736 10.26 ------- ------- Outstanding at end of year 199,842 $ 14.13 ======= ======= Exercisable at end of year 184,393 $ 13.95 ======= ======= Weighted-average fair value of options granted during the year $ 13.42 1998 -------------------------------------------------------------------------------------------------------- Number of Weighted-average Shares Exercise Price Outstanding at beginning of year 371,018 $ 6.47 Granted during the year 88,272 16.55 Exercised during the year 123,535 5.21 Reload options granted during the year 5,019 16.23 Forfeited during the year 3,408 16.29 ------- ------- Outstanding at end of year 337,366 $ 9.62 ======= ======= Exercisable at end of year 270,228 $ 8.33 ======= ======= Weighted-average fair value of options granted during the year $ 13.54
The following table summarizes information related to options outstanding at December 31, 2000: Number Remaining Weighted-average Outstanding Contractual Life Exercise Price 10,822 2.0 $12.95 70,500 5.0 12.33 9,542 6.0 6.75 80,365 7.0 16.44 12,500 8.0 18.38 ------- --- ------ 183,729 6.0 $14.29 ======= === ====== 15. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
2000 1999 1998 ---------------------------------------------------------------------------------------------- Net income, as reported $ 13,859 $ 10,229 $ 11,451 Weighted-average shares 8,164,188 8,033,757 8,156,968 Effect of dilutive employee stock options 14,617 33,877 153,658 Adjusted weighted-average shares and assumed conversion 8,178,805 8,067,634 8,310,626 Basic earnings per share $ 1.70 $ 1.27 $ 1.40 Diluted earnings per share $ 1.69 $ 1.27 $ 1.38
Options to purchase 93,908 and 24,500 shares of common stock at an average exercise price of $16.54 and $18.56 per share were outstanding at December 31, 2000 and 1999, respectively, but were not included in the computation of diluted earnings per share because the options exercise price was greater than the average market price of the common stock. 49 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 16. INCOME TAXES The current and deferred components of income tax expense were as follows: 2000 1999 1998 -------------------------------------------------------------------------------- Current: Federal $ 5,070 $ 5,095 $ 5,889 State 219 188 183 ------- ------- ------- 5,289 5,283 6,072 Deferred: Federal 954 (100) (642) ------- ------- ------- $ 6,243 $ 5,183 $ 5,430 ======= ======= ======= The actual expense differs from the expected tax expense computed by applying the applicable U.S. fbederal corporate income tax rate to earnings before income taxes, as follows:
2000 1999 1998 ------------------------------------------------------------------------------------ Computed tax expense $ 7,036 $ 5,394 $ 5,881 Increase (reduction) in income taxes resulting from: Tax exempt income (471) (349) (184) State taxes, net of federal benefit 142 122 119 Income from life insurance (264) (92) (80) Acquisition costs 27 452 -- Low income housing credits (106) (77) (304) Other (121) (267) (2) ------- ------- ------- $ 6,243 $ 5,183 $ 5,430 ======= ======= =======
Items which give rise to deferred income tax assets and liabilities and the tax effect of each are as follows:
2000 1999 -------------------------------------------------------------------------------------------------------- Asset Liability Asset Liability Allowance for possible losses on loans $3,697 $ -- $2,930 $ -- Allowance for investment losses 86 -- 86 -- Capitalized costs 231 -- -- 34 Pension and other benefits 652 -- 855 -- Depreciation -- 183 -- 134 Deferred loan origination fees -- 226 -- 207 Deferred compensation and benefits 312 -- 268 -- Unrealized gains on investments available for sale 418 -- 2,978 -- Unrealized appreciation on loans held for sale 167 -- -- 447 Valuation of other real estate owned 20 -- 148 -- Interest receivable 185 -- 122 -- Deposit premium 80 -- 38 -- Mortgage servicing rights -- 82 26 -- Other 26 -- 126 -- ------ ------ ------ ------ $5,874 $ 491 $7,577 $ 822 ====== ====== ====== ======
The related income taxes have been calculated using a rate of 35%. No valuation allowance is deemed necessary for the deferred tax asset, which is included in other assets. Retained earnings include $222,000 representing an allocation for income tax bad debt deductions prior to 1988, referred to as the base year reserve. No income taxes have been provided for the base year reserve, though it continues to be subject to provisions of present law that require recapture in the case of certain excess distributions to shareholders. 50 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 17. RELATED PARTIES In the ordinary course of business, the Company has made loans to certain officers and directors and the companies with which they are associated. All such loans were made under terms that are consistent with the Company's normal lending policies. Changes in the composition of the board of directors or the group comprising executive officers result in additions to or deductions from loans outstanding to directors, executive officers, or principal shareholders. Loans to related parties which in aggregate exceed $60,000 were as follows: 2000 1999 -------------------------------------------------------------------------------- Balance, January 1, $16,178 $15,933 Loans made/advanced and additions 4,545 9,866 Repayments and reductions 6,425 9,621 ------- ------- Balance, December 31 $14,298 $16,178 ======= ======= In addition to the loans noted above, the Company had deposits at December 31, 2000 and 1999 to the same individuals of $4,763,000 and $5,970,000, respectively. 18. LEGAL CONTINGENCIES Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company's Consolidated Financial Statements. 19. FINANCIAL INSTRUMENTS In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk, which are not reflected in the accompanying Consolidated Statements of Condition. The Company's significant off-balance sheet risks are lending commitments, letters of credit, interest rate floors, caps, and interest rate swap agreements. Those instruments involve varying degrees of credit and interest rate risk in excess of the amount recognized in the Consolidated Statements of Condition. The Company follows the same credit policies in making commitments to extend credit and conditional obligations as it does for on-balance sheet instruments, including requiring similar collateral or other security to support financial instruments with credit risk. The Company's exposure to credit loss in the event of nonperformance by the customer is represented by the contractual amount of those instruments. Since many of the commitments are expected to expire without being drawn upon, the total amount does not necessarily represent future cash requirements. The Company has not incurred any losses on its commitments in 2000, 1999 or 1998. The Company uses off-balance sheet derivative instruments as hedges against large fluctuations in interest rates. 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 environment. If rates were to decline, resulting in reduced income on the adjustable rate loans, there would be an increased income flow from the interest rate swap and floor instruments. The Company also uses cap instruments to hedge against increases in short-term borrowing rates. If rates were to rise, resulting in an increased interest cost, there would be an increased income flow from the cap instruments. 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. The Company regularly reviews the credit quality of the counterparties from which the instruments have been purchased. As of December 31, 2000, the Company had $35 million (notional principal amount) in interest rate swaps, $10 million in floor contracts and $90 million in cap contracts. The Company has interest rate swaps maturing in 2004, 2006 and 2010. The floor contracts have a strike rate of 6.00% and mature in 2005. The two cap contracts ($20 million and $70 million) have strike rates of 7.50% and 7.00%, respectively, and both mature in 2002. At December 31, 2000 and 1999, the contractual or notional amounts of off-balance sheet financial instruments were as follows: 2000 1999 -------------------------------------------------------------------------------- Contractual Commitments to extend credit $ 99,108 $119,586 Letters of credit 1,865 1,303 Notional Swaps 35,000 10,000 Floors 10,000 -- Caps 90,000 -- 51 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 19. Financial Instruments continued The estimated fair values of the Company's financial instruments reported in the Consolidated Statements of Condition were as follows:
DECEMBER 31, 2000 DECEMBER 31, 1999 ------------------------------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value Financial assets: Cash and due from banks and federal funds sold $ 29,337 $ 29,337 $ 24,645 $ 24,645 Securities available for sale 175,547 175,547 163,997 163,997 Securities held to maturity 57,695 60,698 68,193 68,049 Residential mortgages held for sale 12,838 12,838 6,906 6,906 Loans receivable 677,701 674,814 619,138 616,935 Interest receivable 6,959 6,959 5,041 5,041 Life insurance policies 16,842 16,842 5,402 5,402 Financial liabilities: Deposits $744,360 $745,291 $667,720 $665,231 Borrowings from Federal Home Loan Bank 132,348 131,680 128,866 126,010 Other borrowed funds 36,092 36,092 45,058 45,058 Interest payable 3,963 3,963 3,162 3,162
The estimated fair values of the Company's off-balance sheet instruments were as follows:
DECEMBER 31, 2000 ------------------------------------------------------------------------------------------ Fair Value Notional Contract Maturity Including Principal Date Date Accruals Interest Rate Swaps $10,000 23-Dec-99 23-Dec-04 $316 20,000 11-Aug-00 11-Aug-10 39 5,000 23-Aug-00 23-Feb-06 13 ------- ---- $35,000 $368 ======= ==== Interest Rate Floors $10,000 10-May-00 12-May-05 $258 ======= ==== Interest Rate Caps $20,000 26-Jul-00 26-Jul-02 $ 12 70,000 23-Oct-00 23-Oct-02 31 ------- ---- $90,000 $ 43 ======= ==== DECEMBER 31, 1999 ------------------------------------------------------------------------------------------ Fair Value Notional Contract Maturity Including Principal Date Date Accruals Interest Rate Swaps $10,000 23-Dec-99 23-Dec-04 $ -- ======= ====
52 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 20. REGULATORY MATTERS The Company and its bank subsidiaries are subject to various regulatory capital requirements administered by the FRB, the Comptroller of the Currency, and the FDIC. Failure to meet minimum capital requirements can result in mandatory and possible additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company's Consolidated Financial Statements. These capital requirements represent quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital classification is also subject to qualitative judgments by its regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined). Management believes that, as of December 31, 2000, the Company and its bank subsidiaries meet all capital requirements to which they are subject. As of December 31, 2000, both bank subsidiaries were categorized by their supervisory regulatory agencies as well capitalized. To be categorized as well capitalized, each bank subsidiary of the Company must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events that management believes have changed the banks' respective capital categories. The Company's actual capital amounts and ratios are also presented in the table.
To Be Well Capitalized For Capital Under Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount> Ratio> Amount> Ratio> - - - - --------------------------------------------------------------------------------------------------------------------------- As of December 31, 2000 Total Capital (To Risk-Weighted Assets): Consolidated $94,077 13.1% $57,618 8.0% N/A Camden National Bank 59,373 12.3% 38,735 8.0% $48,419 10.0% UnitedKingfield Bank 27,685 11.7% 18,883 8.0% 23,603 10.0% Tier 1 Capital (To Risk-Weighted Assets): Consolidated $85,074 11.8% $28,809 4.0% N/A Camden National Bank 53,320 11.0% 19,368 4.0% $29,051 6.0% UnitedKingfield Bank 24,734 10.5% 9,441 4.0% 14,162 6.0% Tier 1 Capital (To Average Assets): Consolidated $85,074 8.6% $39,482 4.0% N/A Camden National Bank 53,320 8.3% 25,722 4.0% $32,152 5.0% UnitedKingfield Bank 24,734 7.3% 13,548 4.0% 16,935 5.0% As of December 31, 1999 Total Capital (To Risk-Weighted Assets): Consolidated $83,841 13.0% $51,725 8.0% N/A Camden National Bank 52,998 12.6% 33,568 8.0% $41,960 10.0% UnitedKingfield Bank 25,975 11.4% 18,157 8.0% 22,697 10.0% Tier 1 Capital (To Risk-Weighted Assets): Consolidated $75,759 11.7% $25,863 4.0% N/A Camden National Bank 47,753 11.4% 16,784 4.0% $25,176 6.0% UnitedKingfield Bank 23,138 10.2% 9,079 4.0% 13,618 6.0% Tier 1 Capital (To Average Assets): Consolidated $75,759 8.5% $35,674 4.0% N/A Camden National Bank 47,753 8.3% 22,974 4.0% $28,717 5.0% UnitedKingfield Bank 23,138 7.4% 12,587 4.0% 15,734 5.0%
53 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 21. HOLDING COMPANY Following are the condensed Statements of Condition, Income and Cash Flows for the Company. Statements of Condition DECEMBER 31, -------------------------------------------------------------------------------- 2000 1999 Assets Cash $ 216 $ 81 Premises and equipment 4,731 1,533 Investment in subsidiaries: Bank subsidiaries 83,903 72,755 Other subsidiaries 184 120 Amounts receivable from subsidiaries -- 2,367 Goodwill 41 46 Other assets 2,762 2,633 ------- ------- Total assets $91,837 $79,535 ======= ======= Liabilities & Shareholders' Equity Amounts due to subsidiaries $ 663 $ 1,300 Accrued and other expenses 251 612 Shareholders' equity 90,923 77,623 ------- ------- Total liabilities and shareholders' equity $91,837 $79,535 ======= =======
Statements of Income FOR YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------ 2000 1999 1998 Operating Income Dividend income from subsidiaries $ 7,756 $ 8,256 $ 8,682 Fees from subsidiaries 6,300 3,579 3,323 Other income 70 10 14 ------- ------- ------- Total operating income 14,126 11,845 12,019 ------- ------- ------- Operating Expenses Salaries and employee benefits 3,698 2,158 2,030 Net occupancy 218 155 170 Furniture, equipment and data processing 886 709 653 Other operating expenses 1,558 1,353 905 Acquisition related expenses 129 1,019 -- ------- ------- ------- Total operating expenses 6,489 5,394 3,758 ------- ------- ------- Income before equity in undistributed earnings of subsidiaries 7,637 6,451 8,261 Equity in undistributed earnings of subsidiaries 6,240 3,705 3,166 ------- ------- ------- Income before income taxes 13,877 10,156 11,427 Income tax (expense) benefit (18) 73 24 ------- ------- ------- Net Income $13,859 $10,229 $11,451 ======= ======= =======
54 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
Statements of Cash Flows FOR YEARS ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------- 2000 1999 1998 Operating Activities Net income $13,859 $10,229 $11,451 Adjustments to reconcile net income earnings to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (6,240) (3,705) (3,166) Depreciation and amortization 299 300 361 Decrease in obligation under ESOP and BRRP 6 487 301 Amortization of goodwill 5 5 4 (Increase) decrease in amount receivable from subsidiaries 2,367 (427) (1,869) Increase in other assets (131) (2,292) (103) (Decrease) increase in payables (998) (1,799) 4,003 Other -- -- (265) ------- ------- ------- Net cash provided by operating activities 9,167 2,798 10,717 ------- ------- ------- Investing Activities Purchase of premises and equipment (3,497) (347) (172) ------- ------- ------- Net cash used by investing activities (3,497) (347) (172) ------- ------- ------- Financing Activities Proceeds from sale of treasury stock -- 2,249 -- Exercise and repurchase of stock options (22) (975) (1,121) Purchase of treasury stock (394) (2,337) (3,139) Dividends paid (5,150) (4,182) (3,863) Proceeds from stock issuance under stock plan 31 227 81 Filing fee related to stock split -- -- (35) ------- ------- ------- Net cash used by financing activities (5,535) (5,018) (8,077) ------- ------- ------- Net increase (decrease) in cash 135 (2,567) 2,468 Cash at beginning of year 81 2,648 180 ------- ------- ------- Cash at end of year $ 216 $ 81 $ 2,648 ======= ======= =======
55 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 22. QUARTERLY RESULTS OF OPERATIONS (Unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 2000 and 1999: THREE MONTHS ENDED -------------------------------------------------------------------------------- Mar 31 June 30 Sept 30 Dec 31 2000 Interest income $18,694 $19,547 $20,386 $20,928 Interest expense 8,795 9,795 10,577 10,875 Net interest income 9,899 9,752 9,809 10,053 Provision for loan losses 644 644 609 1,033 Income before income taxes 4,632 4,781 5,902 4,787 Applicable income taxes 1,438 1,458 1,878 1,469 Net income 3,194 3,323 4,024 3,318 Per common share: Basic 0.39 0.41 0.49 0.41 Diluted 0.39 0.41 0.49 0.40 THREE MONTHS ENDED -------------------------------------------------------------------------------- Mar 31 June 30 Sept 30 Dec 31 1999 Interest income $16,548 $17,107 $17,601 $18,240 Interest expense 7,246 7,601 7,736 7,921 Net interest income 9,302 9,506 9,865 10,319 Provision for loan losses 585 655 775 1,655 Income before income taxes 4,506 4,625 4,549 1,732 Applicable income taxes 1,445 1,513 1,445 780 Net income 3,061 3,112 3,104 952 Per common share: Basic 0.38 0.39 0.38 0.12 Diluted 0.38 0.39 0.38 0.12 During the third quarter of 2000, the Company recognized net income of $437,000, or $0.06 per diluted share, resulting from a changeover of the Company's defined-benefit noncontributory pension plan to a 401(k) defined contribution plan and company profit-sharing program. During the fourth quarter of 1999, the Company made a special provision to its loan loss reserve and had OREO writedowns aggregating $1.9 million. In addition, during that period the Company incurred merger- and acquisition-related expenses, net of income taxes, in the amount of $1,434,000, or $0.17 per diluted share, due to its acquisition of KSB in December 1999, and the subsequent merger of United Bank and Kingfield Bank in February 2000. 56 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Auditor's Letter 57 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Boards of Directors and Bank Administrations ------------------------------------ Directors of Camden National Corporation Rendle A. Jones Chairman, Camden National Corporation Attorney & Partner, Harmon, Jones, Sanford & Elliot, LLP Ann W. Bresnahan Civic Leader Robert J. Campbell Partner, Beck, Mack & Oliver, LLC Robert W. Daigle President & CEO, Camden National Corporation & Camden National Bank Robert J. Gagnon Store Manager, Rockland Shop 'n Save Ward I. Graffam Graffam & Associates John W. Holmes President, Consumers Fuel Company Theodore C. Johanson Managing Director, Harbor Wharf, LLC John S. McCormick, Jr. Engineer & Developer, Consolidated Real Estate and Engineering Winfield F. Robinson President, Timber Resource Group, LLC Richard N. Simoneau, C.P.A. Tax Partner, Simoneau, Norton, Masters & Alex, P.A. Arthur E. Strout Attorney, Strout & Payson, P.A. ------------------------------------ Administration of Camden National Corporation Robert W. Daigle President & CEO Laurel J. Bouchard Vice President, Corporate Sales & Marketing Officer Joanne T. Campbell Vice President & Residential Real Estate Administration Officer James C. Ebbert Assistant to the President June B. Parent Vice President & Human Resource Manager Jeffrey D. Smith Vice President & Chief Operations Officer Susan M. Westfall Vice President, Clerk, Treasurer & Chief Financial Officer John A. Gobel Vice President & Information Systems Manager Kimberly J. Nason Assistant Vice President & Residential Real Estate Loan Officer Kathryn M. Ryder Assistant Vice President, Financial Officer & Accounting Manager Lee Ann Szelog Assistant Vice President & Marketing Manager Robert E. Cleveland, Jr. Senior Network Administrator Kathleen L. Downing Risk Management Officer Ellen L. Ellis Loan Servicing Manager Ann E. Filley Training Manager Pamela J. Fowles Residential Real Estate Loan Officer Lorraine M. Ivers Quality Services Manager Elizabeth L. Laiho Call Center/Internet Banking Manager Jennifer F. Mazurek Unit Manager, Deposit Services & Electronic Banking Jane G. Pierce Residential Real Estate Underwriter Timothy J. Pratt Unit Manager, Items Processing & Loan Servicing ------------------------------------ Directors of Camden National Bank Rendle A. Jones Chairman, Camden National Bank Attorney & Partner, Harmon, Jones, Sanford & Elliot, LLP Ann W. Bresnahan Civic Leader Robert W. Daigle President & CEO, Camden National Corporation & Camden National Bank David C. Flanagan President, Viking Lumber, Inc. Robert J. Gagnon Store Manager, Rockland Shop 'n Save John W. Holmes President, Consumers Fuel Company John S. McCormick, Jr. Engineer & Developer, Consolidated Real Estate and Engineering Richard N. Simoneau, C.P.A. Tax Partner, Simoneau, Norton, Masters & Alex, P.A. Arthur E. Strout Attorney, Strout & Payson, P.A. Rosemary B. Weymouth President, Megunticook Management Co. ------------------------------------ Associate Directors of Camden National Bank C.R. de Rochemont C.R. de Rochemont, Realtor Kenneth C. Dickey Retired Vice Chairman, Camden National Corporation Haskell & Corthell Real Estate Frederick G. "Ted" Hanley Retired Executive Vice President, Camden National Bank David H. Montgomery Retired Chairman, Camden National Corporation Past Chairman, Allen Agency Keith C. Patten Retired Chairman, Camden National Bank Retired President & CEO, Camden National Corporation ------------------------------------ Administration of Camden National Bank Robert W. Daigle President & CEO Michael A. McAvoy Senior Vice President, Senior Loan Officer, Commercial Services Group John P. "Jack" Williams Senior Vice President, Small Business Group Jayne Crosby-Giles Vice President, Small Business Group Barbara B. Hanson Vice President, Small Business Group Michael F. Jones Vice President, Commercial Services Group Richard E. Littlefield Vice President, Commercial Services Group Stephen C. Staples Vice President, Small Business Group Stephen C. Wallace Vice President, Retail Group 58 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Boards of Directors and Bank Administrations Vera E. Rand Assistant Vice President, Commercial Services Group Todd L. Savage Assistant Vice President, Commercial Services Group Stephen J. Matteo Credit Administrator Barry J. King Credit Analyst ------------------------------------ Branch Administration of Camden National Bank Tamara J. Bryant Vice President, Manager, Main Office & Camden Square Office Robert P. Wheeler Vice President, Manager, Vinalhaven Office Judith L. Brogden Manager, Thomaston Office Laverne M. Hatch Manager, Belfast Office & Bucksport Office Susan L. O'Brien Manager, Union Office Walter C. Reynolds Manager, Waldoboro Office R. Todd Starbird Manager, Rockland Office Raymond B. Teixeira Manager, Damariscotta Office ------------------------------------ Directors of UnitedKingfield Bank Winfield F. Robinson Chairman, UnitedKingfield Bank President, Timber Resource Group, LLC Robert W. Daigle President & CEO, Camden National Corporation & Camden National Bank William Dubord Attorney & Senior Partner, Marden, Dubord, Bernier & Stevens William T. Gardner President, William T. Gardner & Sons, Inc. Dr. Joyce B. Hedlund President, Eastern Maine Technical College Theodore C. Johanson Managing Director, Harbor Wharf, LLC Rendle A. Jones Attorney & Partner, Harmon, Jones, Sanford & Elliott, LLP C. Charles Lumbert President, Moose River Co., Inc. Roger G. Spear Chief Financial Officer, University of Maine at Farmington John C. Witherspoon President & CEO, UnitedKingfield Bank ------------------------------------ Administration of UnitedKingfield Bank John C. Witherspoon President & CEO Charles D. Osgood Senior Vice President & Senior Loan Officer Timothy P. Nightingale Regional Vice President & Market Manager, Penobscot & Piscataquis Counties Gordon A. Flint Regional Vice President & Market Manager, Franklin & Somerset Counties Robert D. Stone Vice President & Market Manager, Androscoggin County Gerard R. Belanger Regional Vice President, Commercial Loan Officer, Androscoggin County Valarie A. Coolong Commercial Loan Officer, Bangor Joseph E. Hackett Commercial Loan Officer, Bangor John B. Ellrich Commercial Loan Officer, Franklkin County Joseph T. McOscar Credit Administrator Susan H. Froehlich Retail Underwriting Manager ------------------------------------ Branch Administration of UnitedKingfield Bank Michael A. Durgin Regional Sales Manager, Hermon John M. Farrell Regional Sales Manager, Lewiston Leslie M. Ferguson Regional Sales Manager, Rangeley Linda D. Gilbert Regional Sales Manager, Dover-Foxcroft Cynthia J. Gilmore Regional Sales Manager, Kingfield Stephen D. Gray Regional Sales Manager, Farmington Joseph G. Poulin Regional Sales Manager, Madison Catherine L. Moore Branch Administrator ------------------------------------ Directors of Trust Company of Maine, Inc. Andrew P. Averill Chairman, President & CEO, Trust Company of Maine, Inc. Randall A. Bishop Chief Financial Officer, William T. Gardner & Sons, Inc. Robert W. Daigle President & CEO, Camden National Corporation & Camden National Bank Shirley B. Kile Executive Vice President & Treasurer, Trust Company of Maine, Inc. R. Paul Pasquine Executive Vice President, Trust Company of Maine, Inc. Richard N. Simoneau, C.P.A. Tax Partner, Simoneau, Norton, Masters & Alex, P.A. John C. Witherspoon President & CEO, UnitedKingfield Bank ------------------------------------ Administration of Trust Company of Maine, Inc. Andrew P. Averill President & CEO R. Paul Pasquine Executive Vice President & Senior Trust Officer Shirley B. Kile Executive Vice President Employee Benefits Division Lynn M. Bowden Vice President, New Business Development Susan L. Kenney Assistant Vice President & Trust Officer Robert M. Parker, Jr. Assistant Vice President & Trust Officer Pamela M. Webster Sr. Employee Benefits Officer Jana D. Hanscom Employee Benefits Officer Leander MacVane Employee Benefits Officer Kathy Pelletier Employee Benefits Officer 59 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Annual Meeting Camden National Corporation -------------------------------------------------------------------------------- Tuesday, May 1, 2001, 3:30 pm. The Camden Opera House The Company will provide, upon written request and without charge, a copy of Camden National Corporation's 2000 Annual Report on Securities and Exchange Commission Form 10K. Please contact: Susan M. Westfall, Chief Financial Officer Camden National Corporation P.O. Box 310 Camden, Maine 04843 207-236-9131, ext. 2165 swestfall@camdennational.com -------------------------------------------------------------------------------- [MAP] Sharing Maine's Natural Beauty ... A. Bull Moose at Sandy Stream Pond, Baxter State Park - Cover B. Katahdin Falls, Baxter State Park - 1 C. Aldermere Farm, Rockport - 4 D. Bigelow Preserve, Western Maine - 6 E. Penobscot River, West Branch - 8 F. Damariscotta Lake, Jefferson - 10 G. Schoodic Point, Acadia National Park - 12 H. Sherman's Point Cove, Camden - 14 I. Appleton Ridge, Appleton - 16 J. Rockland Breakwater, Penobscot Bay - 18 K. Mooselookmeguntic Lake, Rangeley - Inside Back Cover Credits ... Copy Editing - Joanne Miller Design & Layout - Peggy Mason, ABC-webdesign & graphics, inc. Photography Nature Photographs - Thomas Mark Szelog Rendell Jones Portrait - Mark Haskell Senior Management Portraits - Benjamin Magro Printing - Spectrum Printing & Graphics Inc. 60