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CAMDEN NATIONAL CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2010

TABLE OF CONTENTS OF INFORMATION REQUIRED IN REPORT

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

 

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PART I. FINANCIAL INFORMATION

CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CONDITION

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

See Report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated financial statements.

 

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CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

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

See Report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated financial statements.

 

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CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(unaudited)

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

 

  See Report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated financial statements.

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CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

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

 

See Report of Independent Registered Public Accounting Firm.

The accompanying notes are an integral part of these consolidated financial statements.

 

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CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES

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

 

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

 

The following table shows the unrealized gross losses and estimated fair values of investment securities at March 31, 2010 and December 31 2009, by length of time that individual securities in each category have been in a continuous loss position.

NOTE 9 – FAIR VALUE

 

GAAP permits an entity to choose to measure eligible financial instruments and other items at fair value. The Company has not made any fair value elections as of March 31, 2010.

 

Pursuant to GAAP, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A three-level hierarchy exists in GAAP for fair value measurements based upon the inputs to the valuation of an asset or liability.

 

Level 1:   Valuation is based on quoted prices in active markets for identical assets and liabilities.

 

Level 2:   Valuation is determined from quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active or by model-based techniques in which all significant inputs are observable in the market.

 

Level 3:   Valuation is derived from model-based and other techniques in which at least one significant input is unobservable and which may be based on the Company’s own estimates about the assumptions that market participants would use to value the asset or liability.

 

When available, the Company attempts to use quoted market prices in active markets to determine fair value and classifies such items as Level 1 or Level 2. If quoted market prices in active markets are not available, fair value is often determined using model-based techniques incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using model-based techniques are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation. The following is a description of the valuation methodologies used for the Company’s assets and liabilities that are measured on a recurring basis at estimated fair value.

 

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The following table summarizes assets and liabilities measured at estimated fair value on a recurring basis.

 

		Level 1				Level 2				Level 3				Fair Value Measurements at March 31, 2010
Assets:
Securities available for sale:
Obligations of U.S. government sponsored enterprises		$	—			$	9,960			$	—			$	9,960
Obligations of states and political subdivisions			—				17,286				—				17,286
Mortgage-backed securities issued or guaranteed by US government sponsored enterprises			—				400,966				—				400,966
Private issue collateralized mortgage obligations			—				28,069				—				28,069
Equity securities			—				4,421				—				4,421
Trading account assets			1,794				—				—				1,794
Derivatives instruments			—				825				—				825

 

		Level 1				Level 2				Level 3				Fair Value Measurements at December 31, 2009
Assets:
Securities available for sale:
Obligations of states and political subdivisions		$	—			$	18,060			$	—			$	18,060
Mortgage-backed securities issued or guaranteed by US government sponsored enterprises			—				428,356				—				428,356
Private issue collateralized mortgage obligations			—				28,872				—				28,872
Equity securities			—				4,420				—				4,420
Trading account assets			1,725				—				—				1,725
Derivatives instruments			—				1,136				—				1,136

 

The following table summarizes assets and liabilities measured at fair value on a non-recurring basis:

 

		Level 1				Level 2				Level 3				Fair Value Measurements at March 31, 2010
Assets:
Impaired loans		$	—			$	1,385			$	—			$	1,385
Other real estate owned			—				—				5,201				5,201
Mortgage servicing rights			—				945				—				945

 

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		Level 1				Level 2				Level 3				Fair Value Measurements at December 31, 2009
Assets:
Impaired loans		$	—			$	16,135			$	—			$	16,135
Other real estate owned			—				—				5,479				5,479
Mortgage servicing rights			—				965				—				965

 

The following table reconciles the beginning and ending balances of other real estate owned measured at fair value on a nonrecurring basis using significant unobservable (Level 3) inputs:

 

		Three Months Ended March 31,
		2010				2009
Balance at beginning of year		$	5,479			$	4,024
Additions			304				—
Increase in OREO valuation allowance			(370	)			(666	)
Properties sold			(212	)			(175	)
Balance at end of period		$	5,201			$	3,183

OREO properties acquired through foreclosure or deed-in-lieu of foreclosure are recorded at the fair value of the real estate, less costs to sell. Any write-down of the recorded investment in the related loan is charged to the allowance for loan losses upon transfer to OREO. Upon acquisition of a property, a current appraisal or a broker’s opinion is used to substantiate fair value for the property. After foreclosure, management periodically obtains updated valuations of the OREO assets and, if additional impairments are deemed necessary, the subsequent write-downs for declines in value are recorded through a valuation allowance and a provision for losses charged to other non-interest expense.

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The carrying amounts and estimated fair value for financial instrument assets and liabilities are presented in the following table:

 

		March 31, 2010								December 31, 2009
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
Financial assets:
Cash and due from banks		$	29,899			$	29,899			$	29,772			$	29,772
Securities available for sale			460,702				460,702				479,708				479,708
Securities held to maturity			37,900				39,462				37,914				39,639
Trading account assets			1,794				1,794				1,725				1,725
Derivatives instruments			825				825				1,136				1,136
Federal Home Loan and Federal Reserve Bank stock			21,965				21,965				21,965				21,965
Loans receivable, net of allowance			1,508,688				1,530,518				1,506,512				1,526,148
Mortgage servicing rights			756				945				810				965
Interest receivable			7,500				7,500				7,236				7,236
Financial liabilities:
Deposits			1,501,030				1,506,858				1,495,807				1,502,020
Federal Home Loan Bank advances			179,607				185,852				209,710				216,373
Commercial repurchase agreements			116,438				125,005				126,466				135,189
Other borrowed funds			159,540				159,540				147,659				147,659
Junior subordinated debentures			43,538				50,776				43,512				51,075
Interest payable			2,442				2,442				2,593				2,593

 

The following assumptions, methods and calculations were used in determining the estimated fair value of financial instruments.

 

Cash and Due from Banks:  The carrying amounts of cash and due from banks approximate their fair value.

 

Securities Available for Sale and Trading Account Assets:  The fair value of securities available for sale and trading account assets is reported utilizing prices provided by an independent pricing service based on recent trading activity and other observable information including, but not limited to, dealer quotes, market spreads, cash flows, market interest rate curves, market consensus prepayment speeds, credit information, and the bond’s terms and conditions. The fair value of equity securities was calculated using a discounted cash flow analysis using observable information including, but not limited to, cash flows, risk-adjusted discount rates and market spreads.

 

Securities Held to Maturity:  Fair values of securities held to maturity are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

 

Federal Home Loan and Federal Reserve Bank Stock:  The carrying amount approximates fair value.

 

Loans:  For variable rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of other loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loan impairment is deemed to exist when full repayment of principal and interest according to the contractual terms of the loan is no longer probable. Impaired loans are reported based on one of three measures: the present value of expected future cash flows discounted at the loan’s effective interest rate; the loan’s observable market price; or the fair value of the collateral if the loan is collateral dependent. If the fair value measure is less than an impaired loan’s recorded investment, an impairment loss is recognized as part of the ALL. Accordingly, certain impaired loans may be subject to measurement at fair value on a non-recurring basis. Management has estimated the fair values of these assets using Level 2 inputs, such as the fair value of collateral based on independent third-party appraisals for collateral-dependent loans.

 

Derivatives:  Derivatives are reported at fair value utilizing Level 2 inputs obtained from third parties to value interest rate caps and swaps.

 

Mortgage Servicing Rights:  Mortgage servicing rights are evaluated regularly for impairment based upon the fair value of the servicing rights as compared to their amortized cost. The fair value of mortgage servicing rights is based on a valuation model that calculates the present value of estimated net servicing income. The Company obtains a third-party valuation based upon loan level data including note rate, type and term of the underlying loans. The model utilizes a variety of observable inputs for its assumptions, the most significant of which are loan prepayment assumptions and the discount rate used to discount future cash flows. Other assumptions include delinquency rates, servicing cost inflation, and annual unit loan cost.

 

Interest Receivable and Payable:  The carrying amounts approximate their fair value.

 

Deposits:  The fair value of deposits with no stated maturity is equal to the carrying amount. The fair value of certificates of deposit is estimated using a discounted cash flow calculation that applies interest rates and remaining maturities for currently offered certificates of deposit.

 

Borrowings:  The carrying amounts of short-term borrowings from the FHLB, securities sold under repurchase agreements, the notes payable and other short-term borrowings approximate fair value. The fair value of long-term borrowings and commercial repurchase agreements is based on the discounted cash flows using current rates for advances of similar remaining maturities.

 

Junior Subordinated Debentures:  The fair value is estimated using a discounted cash flow calculation that applies current rates for debentures of similar maturity.

 

NOTE 10 – COMMITMENTS AND CONTINGENCIES

Legal Contingencies

 

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

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Financial Instruments

 

In the normal course of business, the Company is a party to both on-balance sheet and off-balance sheet financial instruments involving, to varying degrees, elements of credit risk and interest rate risk in addition to the amounts recognized in the Consolidated Statements of Condition.

 

A summary of the contractual and notional amounts of the Company’s financial instruments follows:

 

		March 31,				December 31,
		2010				2009
Lending-Related Instruments:
Loan origination commitments and unadvanced lines of credit:
Home equity		$	156,808			$	153,245
Commercial and commercial real estate			116,256				120,515
Residential			16,539				9,009
Letters of credit			3,248				3,089
Derivative Financial Instruments:
Interest rate cap			—				20,000
Forward interest rate swap			20,000				20,000

Lending-Related Instruments

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

Derivative Financial Instruments

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

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

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

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Forward Commitments to Sell Residential Mortgage Loans

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

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

NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued guidance (incorporated in the FASB Accounting Standards Codification (“ASC”) via Accounting Standards Update (“ASU”) 2009-16, Transfers and Servicing: Accounting for Transfers of Financial Assets, in December 2009) which provides amended guidance relating to transfers of financial assets that eliminates the concept of a qualifying special-purpose entity. This guidance must be applied as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after its effective date. On and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The new guidance also changed the requirements which must be satisfied in order for an entity to treat a loan participation as a sale.  The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance. The adoption of this update did not have a significant impact on the Company’s consolidated financial statements.

 

In June 2009, the FASB issued guidance (incorporated in the FASB ASC via ASU 2009-17, Consolidations: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, in December 2009) which provides amended guidance for consolidation of a variable interest entity by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity. The amended guidance uses an approach that focuses on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise’s involvement in variable interest entities are also required. This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The adoption of this update did not have a significant impact on the Company’s consolidated financial statements.

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

 

 NOTE 12 – SUBSEQUENT EVENTS

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

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ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995. We may make written or oral forward-looking statements in other documents we file with the Securities Exchange Commission, in our annual reports to shareholders, in press releases and other written materials and in oral statements made by our officers, directors or employees. You can identify forward-looking statements by the use of the words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “assume,” “will,” “should” and other expressions which predict or indicate future events or trends and which do not relate to historical matters. You should not rely on forward-looking statements, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control. These risks, uncertainties and other factors may cause the actual results, performance or achievements of Camden National Corporation to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

 

Some of the factors that might cause these differences include, but are not limited to, the following:

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

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

•

misalignment of our interest-bearing assets and liabilities;

•

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

•

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

•

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

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in Item 1A. Risk Factors within our Annual Report on Form 10-K for the year ended December 31, 2009.  Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.

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

 

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CRITICAL ACCOUNTING POLICIES

In preparing the Consolidated Financial Statements, management is required to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from our current estimates, as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near-term change, including the allowance for credit losses, accounting for acquisitions and review of goodwill and other identifiable intangible assets for impairment, valuation of other real estate owned, other-than-temporary impairment of investments, accounting for postretirement plans and income taxes. Our significant accounting policies and critical estimates are summarized in Note 1 of our Annual Report on Form 10-K for the year ended December 31, 2009.

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

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

We use a risk rating system to determine the credit quality of our loans and apply the related loss allocation factors. In assessing the risk rating of a particular loan, we consider, among other factors, the obligor’s debt capacity, financial condition and flexibility, the level of the obligor’s earnings, the amount and sources of repayment, the performance with respect to loan terms, the adequacy of collateral, the level and nature of contingencies, management strength, and the industry in which the obligor operates. These factors are based on an evaluation of historical information, as well as subjective assessment and interpretation of current conditions. Emphasizing one factor over another, or considering additional factors that may be relevant in determining the risk rating of a particular loan but which are not currently an explicit part of our methodology, could impact the risk rating assigned to that loan. We periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our analysis of loss experience. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency rates and other economic conditions which may affect the ability of borrowers to meet debt service requirements, including interest rates and energy costs. We also consider the results of regulatory examinations, historical loss ranges, portfolio composition, and other changes in the portfolio. An additional allocation is determined based on a judgmental process whereby management considers qualitative and quantitative assessments of other environmental factors. For example, a significant portion of our loan portfolio is concentrated among borrowers in southern Maine and a substantial portion of the portfolio is collateralized by real estate in this area. Another portion of the commercial and commercial real estate loans are to borrowers in the hospitality, tourism and recreation industries. Finally, an unallocated portion of the total allowance is maintained to allow for shifts in portfolio composition and account for uncertainty in the economic environment.

Since the methodology is based upon historical experience and trends as well as management’s judgment, factors may arise that result in different estimations. Significant factors that could give rise to changes in these estimates may include, but are not limited to, changes in economic conditions in our market area, concentration of risk, declines in local property values, and results of regulatory examinations. While management’s evaluation of the ALL as of March 31, 2010 determined the allowance to be appropriate, under adversely different conditions or assumptions, we may need to increase the allowance. The Corporate Risk Management group reviews the ALL with the Camden National Bank Board of Directors on a monthly basis. A more comprehensive review of the ALL is reviewed with the Company’s Board of Directors, as well as the Camden National Bank Board of Directors, on a quarterly basis.

The adequacy of the reserve for unfunded commitments is determined similarly to the allowance for loan losses, with the exception that management must also estimate the likelihood of these commitments being funded and becoming loans. This is done by evaluating the historical utilization of each type of unfunded commitment and estimating the likelihood that the historical utilization rates could change in the future.

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

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

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

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

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RESULTS OF OPERATIONS

Executive Overview

For the three months ended March 31, 2010:

Net income of $5.3 million for the three-month period ended March 31, 2010 decreased $901,000, compared to the three-month period ended March 31, 2009.  Net income per diluted share decreased to $0.69, compared to $0.81 per diluted share earned during the first three months of 2009. The following were major factors contributing to the results of the first three months of 2010 compared to the same period of 2009:

 

•

Net interest income on a fully-taxable equivalent basis for the first three months of 2010 decreased 2.7% to $18.4 million due to average earning assets declining $90.3 million.

•

The provision for loan losses of $2.0 million increased $266,000 in the first three months of 2010 compared to the same period of 2009 primarily due to the level of non-performing assets.

•

For the three months ended March 31, 2010, net charge-offs totaled $867,000, or an annualized rate of 0.23% of average loans, compared to $1.7 million, or 0.46%, for the same period of 2009. Non-performing assets as a percentage of total assets amounted to 1.09% and 0.89% at March 31, 2010 and 2009, respectively.

•

Non-interest income for the first three months of 2010 was $4.6 million, a 0.4% increase over the first three months of 2009.

•

Non-interest expense for the first three months of 2010 was $12.9 million, an increase of $631,000, or 5.1%, over the first three months of the prior year due to an increase in salaries and employee benefits and an increase in consulting and professional fees.

Financial condition at March 31, 2010 compared to December 31, 2009:

 

•

Total loans at March 31, 2010 were $1.5 billion, an increase of $3.3 million compared to December 31, 2009. The increase in loan balances was primarily in the commercial real estate and consumer portfolios.

•

Investment securities declined $19.0 million at March 31, 2010 compared to December 31, 2009 due to security prepayments.

•

Deposits at March 31, 2010 were $1.5 billion, an increase of $5.2 million compared to December 31, 2009.  The increase in deposit balances was primarily in the core deposits categories of interest checking, savings and money markets.

•

Total liabilities at March 31, 2010 of $2.0 billion decreased $21.4 million compared to December 31, 2009, or 1.0%, as borrowings decreased $28.2 million, primarily in Federal Home Loan Bank of Boston (“FHLBB”) borrowings, which offsets the decline in investment securities.

•

Shareholders’ equity increased 2.4% due to current year earnings and other comprehensive income, in part offset by dividends declared.

Net Interest Income

Net interest income is our largest source of revenue and accounts for approximately 80% of total revenues. Net interest income reflects revenues generated through income from earning assets plus loan fees, less interest paid on interest-bearing deposits and borrowings. Net interest income is affected by changes in interest rates, by loan and deposit pricing strategies and competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets.

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

The following table presents, for the periods noted, average balance sheets, interest income, interest expense, and the corresponding average yields earned and rates paid, as well as net interest income, net interest rate spread and net interest margin. 

 

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Average Balance, Interest and Yield/Rate Analysis

 

		Three Months Ended March 31, 2010												Three Months Ended March 31, 2009
(Dollars in Thousands)		Average Balance				Interest				Yield/ Rate				Average Balance				Interest				Yield/ Rate
ASSETS
Interest-earning assets:
Securities – taxable		$	466,901			$	5,184				4.44	%		$	586,207			$	7,279				4.96	%
Securities – nontaxable (1)			55,703				829				5.95	%			67,156				993				5.91	%
Trading account assets			1,723				4				1.01	%			1,255				5				1.55	%
Loans (1) (2) :
Residential real estate			626,941				8,457				5.40	%			616,602				9,269				6.01	%
Commercial real estate			436,821				6,193				5.67	%			398,901				6,266				6.28	%
Commercial			178,164				2,431				5.46	%			187,438				2,592				5.53	%
Municipal			13,911				197				5.74	%			21,587				271				5.09	%
Consumer			273,612				3,238				4.80	%			264,887				3,316				5.08	%
Total loans			1,529,449				20,516				5.38	%			1,489,415				21,714				5.85	%
Total interest-earning assets			2,053,776				26,533				5.18	%			2,144,033				29,991				5.60	%
Cash and due from banks			29,032												27,765
Other assets			164,663												153,243
Less: allowance for loan losses			(21,005	)											(17,963	)
Total assets		$	2,226,466											$	2,307,078
LIABILITIES & SHAREHOLDERS’ EQUITY
Interest-bearing liabilities:
Interest checking accounts		$	229,037				238				0.42	%		$	196,319				253				0.52	%
Savings accounts			150,859				123				0.33	%			133,173				118				0.36	%
Money market accounts			289,131				578				0.81	%			281,043				869				1.25	%
Certificates of deposit			544,244				2,795				2.08	%			590,448				4,624				3.18	%
Total retail deposits			1,213,271				3,734				1.25	%			1,200,983				5,864				1.98	%
Broker deposits			85,605				387				1.82	%			83,247				537				2.58	%
Junior subordinated debentures			43,530				694				6.47	%			43,423				713				6.66	%
Borrowings			478,787				3,294				2.79	%			617,749				3,935				2.58	%
Total wholesale funding			607,922				4,375				2.92	%			744,419				5,185				2.82	%
Total interest-bearing liabilities			1,821,193				8,109				1.81	%			1,945,402				11,049				2.30	%
Demand deposits			189,077												173,601
Other liabilities			22,811												20,193
Shareholders’ equity			193,385												167,882
Total liabilities and shareholders’ equity		$	2,226,466											$	2,307,078
Net interest income (fully-taxable equivalent)							18,424												18,942
Less: fully-taxable equivalent adjustment							(359	)											(441	)
						$	18,065											$	18,501
Net interest rate spread (fully-taxable equivalent)											3.37	%											3.30	%
Net interest margin (fully-taxable equivalent)											3.58	%											3.51	%

 

	(1)	Reported on tax-equivalent basis calculated using a rate of 35%.
	(2)	Loans held for sale and non-accrual loans are included in total average loans.

 

Provision and Allowance for Loan Losses

The ALL is our best estimate of inherent risk of loss in the loan portfolio as of the balance sheet date. The ALL was $21.4 million, or 1.40% of total loans, at March 31, 2010, compared to $20.2 million, or 1.33% of total loans, at December 31, 2009. For the three months ended March 31, 2010, our provision for credit losses charged to earnings amounted to $2.0 million, compared to $1.7 million for the same period in 2009. The increase in the provision was based on management’s assessment of various factors affecting the loan portfolio, including, among others, growth in the loan portfolio, levels of nonperforming assets, loan losses, and our evaluation of credit quality and general economic conditions.  For the first three months of 2010, the annualized ratio of net loan charge-offs to average loans was 0.23% compared to 0.46% for the same period in 2009.  See additional ALL discussion under the caption “Asset Quality.”

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Non-Interest Income

		Three Months Ended March 31,
		2010				2009
Income from fiduciary services		$	1,567			$	1,354
Service charges on deposit accounts			1,280				1,233
Other service charges and fees			690				613
Bank-owned life insurance			371				395
Brokerage and insurance commissions			294				358
Mortgage banking income			89				455
Net securities losses			(48	)			—
Other income			329				146
Total non-interest income		$	4,572			$	4,554

 

Non-interest income for the three month periods ended March 31, 2010 and March 31, 2009, respectively, totaled $4.6 million.  The significant changes include:

•

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

•

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

•

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

•

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

 

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Non-Interest Expenses

		Three Months Ended March 31,
		2010				2009
Salaries and employee benefits		$	6,225			$	5,678
Furniture, equipment and data processing			1,068				963
Regulatory assessments			715				872
Net occupancy			1,034				1,118
Consulting and professional fees			808				572
OREO and collection costs			974				880
Other expenses			2,098				2,208
Total non-interest expenses		$	12,922			$	12,291

 

Non-interest expense increased $631,000, or 5.1%, for the three months ended March 31, 2010 compared to the same period in 2009. The significant changes include:

•

Increase in salaries and employee benefits of $547,000, or 9.6%, primarily due to a $199,000 increase in health care cost, a $129,000 increase related to increased staffing and salaries, and a reduction in deferred salary costs of $162,000 related to high mortgage production volume in 2009,

 

•

Decrease in regulatory assessments of $157,000, or 18.0%, due to an adjustment in the Federal Deposit Insurance Corporation insurance assessment accrual during the first quarter of 2009,

 

•

Increase in consulting and professional fees of $236,000, or 41.3%, were primarily related to increased legal costs related to securities registration and other matters,  and

•

Increase in costs associated with foreclosure and collection costs and expenses on other real estate owned of $94,000, or 10.7%, which includes an OREO write-down of $370,000 due to declining real estate values.

 

The efficiency ratio (non-interest expense divided by net interest income on a tax equivalent basis plus non-interest income excluding net investment securities gains/losses) was 56.08% for the period ended March 31, 2010, compared to 52.31% for March 31, 2009.

FINANCIAL CONDITION

Overview

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

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

 

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Assets

 

Investment Securities. Investments in securities of U.S. government sponsored enterprises, states and political subdivisions, mortgage-backed securities, Federal Home Loan Bank (“FHLB”) and FRB stock, investment grade corporate bonds and equities are used to diversify our revenues, to provide interest rate and credit risk diversification and to provide for liquidity and funding needs. As a result of balance sheet deleveraging, total investment security balances at March 31, 2010 of $520.6 million decreased $19.0 million, or 3.5%, from December 31, 2009. We have investment securities in both the available-for-sale and held-to-maturity categories.

 

Unrealized gains or losses from investments categorized as “held to maturity” are only recorded when, and if, the security is sold or is considered other-than-temporarily impaired. Unrealized gains or losses on securities classified as “available for sale” are recorded as adjustments to shareholders’ equity, net of related deferred income taxes and are a component of other comprehensive income in the Consolidated Statement of Changes in Shareholders’ Equity. At March 31, 2010, we had $8.4 million of unrealized gains on securities available for sale, net of deferred taxes, compared to $7.1 million of unrealized gains, net of deferred taxes, at December 31, 2009. The change is primarily attributed to an increase in market interest rates.

 

At March 31, 2010, $9.0 million of our private issue collateralized mortgage obligations (“CMOs”) have been downgraded to non-investment grade. The Company’s share of these downgraded CMOs is in the senior tranches. Management believes the unrealized loss for the CMOs is the result of current market illiquidity and the underestimation of value in the market.  Stress tests are performed regularly on the higher risk bonds in the portfolio using current statistical data to determine expected cash flows and forecast potential losses.  The results of the stress tests at March 31, 2010, reflect no current credit loss in the base case, but did reflect potential future losses.  Based on this analysis the Company recorded a $48,000 OTTI write-down on two private issue CMOs during the first quarter of 2010.

 

At March 31, 2010, the Company held Duff & Phelps Select Income Fund Auction Preferred Stock with an amortized cost of $5.0 million which has failed at auction. The security is rated Triple-A by Moody’s and Standard and Poor’s. Management believes the failed auctions are a temporary liquidity event related to this asset class of securities. The Company is currently collecting all amounts due according to contractual terms and has the ability and intent to hold the securities until they clear auction, are called, or mature; therefore, the securities are not considered other than temporarily impaired.

 

Federal Home Loan Bank Stock. We are required to maintain a level of investment in FHLBB stock based on the level of our FHLB advances. As of March 31, 2010, our investment in FHLB stock totaled $21.0 million. No market exists for shares of the FHLB. FHLB stock may be redeemed at par value five years following termination of FHLB membership, subject to limitations which may be imposed by the FHLB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLB. While we currently have no intention to terminate our FHLB membership, the ability to redeem our investment in FHLB stock would be subject to the conditions imposed by the FHLB.

 

In early 2009, the FHLB advised its members that it is focusing on preserving capital in response to ongoing market volatility.  Accordingly, payments of quarterly dividends were suspended and payment of quarterly dividends in 2010 is unlikely. Further, the FHLB has placed a moratorium on excess stock repurchases from its members. We will continue to monitor our investment in FHLB stock.

 

 

Asset Quality

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

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

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

 

Potential Problem Loans. Potential problem loans consist of classified accruing commercial and commercial real estate loans that were between 30 and 89 days past due. Such loans are characterized by weaknesses in the financial condition of borrowers or collateral deficiencies. Based on historical experience, the credit quality of some of these loans may improve due to changes in collateral values or the financial condition of the borrowers, while the credit quality of other loans may deteriorate, resulting in some amount of loss. These loans are not included in the analysis of non-accrual loans above. At March 31, 2010, potential problem loans amounted to approximately $3.5 million, or 0.23% of total loans, compared to $1.7 million, or 0.11% of total loans at December 31, 2009.

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

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

We are a party to several off-balance sheet contractual obligations through lease agreements on a number of branch facilities. We have an obligation and commitment to make future payments under these contracts. At March 31, 2010, we had the following levels of contractual obligations.

		Total Amount of Obligations				Payments Due per Period
(Dollars in Thousands)						<1 Year				1 – 3 Years				4 – 5 Years				>5 Years
Operating Leases		$	5,007			$	744			$	1,201			$	623			$	2,439
Capital Leases			1,200				40				94				97				969
FHLBB Borrowings – Overnight			36,560				36,560				—				—				—
FHLBB Borrowings – Advances			179,607				57,055				60,104				31,001				31,447
Commercial Repurchase Agreements			116,438				10,000				65,127				36,000				5,311
Other Borrowed Funds			120,928				120,928				—				—				—
Junior Subordinated Debentures			43,538				—				—				—				43,538
Note Payable			852				231				501				103				17
Other Contractual Obligations			231				231				—				—				—
Total		$	504,361			$	225,789			$	127,027			$	67,824			$	83,721

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

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

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ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE

ABOUT MARKET RISK

MARKET RISK

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

Interest Rate Risk

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

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

 

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		Estimated Changes in NII
Rate Change		March 31, 2010				March 31, 2009
Year 1
+400 bp			(0.70	)%			0.50	%
+200 bp			(0.70	)%			(2.40	)%
-100 bp			(0.70	)%			0.50	%
Year 2
+400 bp			(1.40	)%			3.80	%
+200 bp			0.10	%			(1.70	)%
-100 bp			(4.00	)%			0.30	%

 

The preceding sensitivity analysis does not represent a forecast and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions including, among others, the nature and timing of interest rate levels, yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits and reinvestment/replacement of asset and liability cash flows. While assumptions are developed based upon current economic and local market conditions, we cannot make any assurances as to the predictive nature of these assumptions, including how customer preferences or competitor influences might change.

  

The most significant factors affecting the changes in market risk exposure during the first three months of 2010 were the decrease in the investment balances, higher balances of retail deposits, and an overall reduction in the cost of funds that outpaced the drop in the yield on average assets.  If rates remain at or near current levels and the balance sheet mix remains similar, net interest income is projected to increase slightly over year one with funding maturities expected to continue to roll over at lower current rate levels, offsetting declining loan yields.  By the end of the first year, net interest income levels come under pressure as funding cost reductions slow and the asset base continues to adjust lower. In a falling interest rate environment, net interest income is expected to trend in line with the base case scenarios before developing a downward trend thereafter.   Beyond the first year, opportunities to reduce funding costs become more difficult while mortgage related cashflows accelerate and are replaced at lower rate levels; resulting in tighter spreads and a decrease in expected net interest income.  In the early stages of a rising rate environment, net interest income is projected to trend slight below the base scenarios as the short-term funding base adjusts upward producing funding cost increases while asset yields are slower to respond.  Thereafter, funding costs stabilize and the asset base continues to be reprice or replaced at higher levels, causing an upward trend to extend throughout the remaining simulation period.  If the yield curve were to flatten as rate rise, pressure on net interest income would be greater.  The risk in the various rate scenarios is within our policy limits.

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

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ITEM 4.  CONTROLS AND PROCEDURES

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

 

There was no change in the internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

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PART II.  OTHER INFORMATION

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

None

ITEM 5.  OTHER INFORMATION

None

 

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ITEM 6.  EXHIBITS

 (a)  Exhibits

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

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

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

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

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

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

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

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

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

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

__________________________

* Filed herewith

 

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SIGNATURES

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

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

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Exhibit Index

(3.i.1)

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

(3.i.2)

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

(3.i.3)

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

(3.ii)

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

(11.1)

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

(23.1)

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

(31.1)

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

(31.2)

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

(32.1)

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

(32.2)

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

 

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