EX-13 5 dex13.txt 2001 ANNUAL REPORT Exhibit #13 The Company's 2001 Annual Report to Shareholders ------------------------------------------------------------ [PHOTO] [LOGO]CNC Camden National Corporation Annual Report 2001 [PHOTO] Maine trees are the foundation of many finely handcrafted wood products. Since 1875, we have provided a foundation for high-quality financial services in Maine. Maine Trees... have endured over the ages, ever changing and growing. Maples, pines, cedars and birches are firmly rooted in the earth and reach upward with their branches. From these trees, dedicated artisans craft a multitude of fine-quality wood products that serve our everyday needs and even fulfill our dreams. Like these trees, Camden National Corporation serves as the foundation for a myriad of high-quality financial products that are delivered by dedicated employees in all our subsidiaries. Since 1875, we have been reaching out to meet the ever-changing financial needs of our clients and to help make their dreams a reality. Camden National proudly stands tall among financial service providers. [PHOTO] [PHOTO] [PHOTO] Table of Contents Shareholders' Letter .......................................2-3 Subsidiary Reports .........................................4-9 Management's Discussion and Analysis of Financial Condition and Results of Operations ............................... 10-21 Summary of Financial Performance.............................22 Selected Five-Year Financial Data ...........................23 Consolidated Statements ................................. 24-27 Notes to Consolidated Statements .........................28-47 Auditor's Letter ............................................48 Boards of Directors and Bank Administrations .....................................49-51 Announcement of Annual Meeting ..............................52 1 [PHOTO] Rendle A. Jones (right), Chairman of the Board of Directors, and Robert W. Daigle, President & CEO of Camden National Corporation, work closely to ensure our continuing financial success. Craftsmen have a passion for creating works of art. We have a passion for serving clients' financial needs. Dear Shareholders The true skill of a craftsman is to take raw material, readily available to anyone, and through his or her own sense of quality and passion for excellence, create a unique product that will withstand the test of time. Camden National Corporation and its subsidiaries approach clients and customers with that same unique sense of quality and passion for excellence in crafting a set of financial services that will benefit them and their families for generations. Our acquisitions, the introduction of a new line of business, our expansion into a relatively new market, and the recruitment of top-caliber personnel in 2001 reflect a continuation of our 126-year tradition of crafting and delivering the best possible financial solutions for our customers and clients. Diversification of the Company's revenues through the expansion of our investment management products and expertise had been targeted as an area of strategic importance for some time. However, the right selection of partners to provide those services within our banking franchises was determined to be one of the most critical factors to realizing success. We were pleased that, after careful review, Acadia Trust, N.A. and Gouws Capital Management, Inc., both controlled by Johann Gouws, joined Camden National Corporation in July 2001. We further augmented our personal investment management services by forming Acadia Financial Consultants, a division of Camden National Bank, and hiring Marcia Mansfield as its President in October 2001. Marcia had previously served 2 over 500 clients through her own brokerage and investment advisory enterprise based in mid-coast Maine. The final piece of our revenue diversification strategy in 2001 was to gain 100 percent ownership of Trust Company of Maine, Inc. through our acquisition of its remaining minority interests. In fulfillment of yet another strategic planning objective, we added deposit-gathering capabilities to complement our commercial lending activities in the Portland market. This was the culmination of a series of steps designed to take advantage of changes in the southern Maine banking landscape that provided an opportunity for Camden National's brand of community banking. This began in 1999 when we traveled from Camden to Portland to work with some existing customers who themselves were expanding into that market. A loan production office followed in 2000, staffed with first one and then two lenders. On October 9, 2001, we opened our newly expanded Portland Office in the heart of the "Old Port" area. We designed this office to specifically meet the financial needs of our Portland customers, based on their direct input about what matters most in a financial partnership. Our growth in this new market has exceeded our expectations, and customers seem pleasantly surprised with the breadth of our banking services and the personalized manner in which they are delivered. Several other important strategic initiatives were undertaken during 2001 to support our financial and organizational growth objectives. Management implemented a number of capital and funding strategies triggered by historically low interest rates. A balance sheet restructuring program, which began in the third quarter, was implemented to provide flexibility in managing the Company's assets and liabilities. A share repurchase program was announced to give investors liquidity in a tax-efficient manner and to take advantage of opportunities in our stock price valuation. A state-ofthe- art telecommunications system was installed to efficiently deliver enhanced voice and data communications throughout the Company. Finally, we created a corporate risk management function that analyzes and monitors credit risks for our banking subsidiaries and ensures proactive and uniform management of those risks. The Board of Directors of the Company changed its composition during the year as John S. McCormick, Jr. retired from the Board after 26 years of service. We wish to thank Jack for his nurturing guidance during a period of considerable growth for our Company. The Board also welcomed Johann Gouws as its newest member following the acquisition of Acadia Trust, N.A. and Gouws Capital Management, Inc. Johann's extensive background in the investment arena will serve as a valuable resource to the Board. Through all these events and in the midst of a challenging economic environment, your Company reported strong financial results for the year. Diluted earnings per share grew 11.83% from 2000 to $1.89 in 2001, resulting in a full-year average return on assets of 1.47%. The stock price of the Company also increased over 31% from the end of December 2000 to the end of December 2001. We encourage all shareholders to carefully review the financial statements and associated footnotes, as well as the management discussion and analysis that are included as part of this annual report. As we look back at the economic, business and social changes that swirled about us during the past year, we are proud of the efforts put forth by the employees of your Company to meet each challenge as craftsmen in their own right. We are optimistic that the strategies we've implemented in 2001 will serve as the foundation to provide the flexibility necessary to take advantage of new challenges and opportunities that await us in 2002 and beyond. Sincerely, /s/ Rendle A. Jones ------------------- Rendle A. Jones Chairman of the Board of Directors /s/ Robert W. Daigle -------------------- Robert W. Daigle President & Chief Executive Officer 3 [PHOTO] A sculptor meticulously details a wing to create a lifelike bird carving from a piece of basswood. With patience and skill, wood sculptors create realistic bird carvings. With understanding and expertise, we help customers make their dreams a reality. 4 Camden National Bank In keeping with our promise to do whatever it takes to support our strategic mission and commitments to our shareholders, customers, community and employees, I am pleased to report on several initiatives that contributed to Camden National Bank's success during 2001. Commitment to Shareholders: To maximize our contribution to long-term shareholder value. To fulfill this most important commitment, we embarked on several exciting initiatives designed to enhance our geographic and functional diversification. By expanding the capabilities of our Portland office to gather deposits, we created a new, low-cost funding resource that has exceeded our expectations. The formation of Acadia Financial Consultants, our new full-service brokerage and insurance division, will add further diversification to the Bank's revenue stream. This puts Camden National Bank another step closer to providing its customers with the convenience of one-stop shopping for their financial services. Commitment to Customers: To deliver high-quality financial solutions, which create value for each targeted customer segment. In January, we repositioned our entire deposit product line, providing thousands of relationship customers with a better value proposition for services such as checking accounts, loans, certificates of deposit and online banking. Combined with enrolling over 160 of our employees in the Preferred Way of Selling program, we equipped the sales force with the tools, resources and techniques to better help customers with their financial needs. Commitment to Community: To contribute, through community reinvestment and employee volunteerism, to the social and economic well-being of the communities we serve. I am especially proud to report that Joanne T. Campbell, Senior Vice President in the Residential Real Estate Loan Department, was the recipient of the prestigious Volunteer Banker of the Year Award presented annually by the Maine Bankers Association, in recognition of her outstanding community service in the area of affordable-housing. Her dedication and commitment have served as an inspiration to all of our employees, who combined provide over 850 hours per month of community service in the Bank's four-county trade area. Commitment to Employees: To foster an environment that attracts, rewards and retains exceptional employees who, through performance and loyalty, demonstrate a commitment to the success of our Company. Based on the belief that "the organization with the best people wins," Camden National Bank took several steps in 2001 to ensure our ability to attract and retain the best possible work force. From the feedback we received in the 2000 corporate culture survey, we learned that employees want more recognition for outstanding performance. As a result, we restructured our employee incentive program and added the Top Performer Program, which is designed to reward those who clearly demonstrate superior performance. In addition, new employees attend a day-long orientation program that includes a welcome video highlighting our core values and rich history. These programs resulted in an overall improvement in productivity, increased focus on service quality and overall efficiency improvements, as well as helping us retain our best performing employees. In summary, our fundamental mission and commitments focus on strategies that put the needs of our shareholders, customers, community and employees first. Through a dedicated and motivated team, supported by state-of-the-art technology, innovative products and premier service quality, we are creating a truly unique and sustainable competitive advantage that will help ensure a successful future for Camden National Bank. Sincerely, /s/ Robert W. Daigle -------------------- Robert W. Daigle, President & CEO 5 [PHOTO] A wreath maker handpicks and wires boughs of balsam fir before adding the final decorative touches. Artisans select the best balsam branches to create fragrant, seasonal wreaths. We select the best people and products to enhance our customers' experience. 6 UnitedKingfield Bank In 2001 UnitedKingfield Bank continued to build its value within Camden National Corporation by strategically positioning itself to take advantage of the unique opportunities in its marketplace. Our long-range plan focuses the Bank's resources on the diverse financial needs of our consumer and business customers, while maintaining our commitment to our communities. We believe that we have great opportunities to grow in markets currently underserved by our competitors, and that many of our prospects would benefit from a relationship with a true "one-to-one financial partner." One exciting opportunity involves focusing resources on growing our share of the business banking markets in Androscoggin and Penobscot counties. Since we know that the quality of a banking relationship depends on the quality of the banker, we have named a market manager in each county with the authority and expertise to serve the needs of our customers and the communities. The market managers are responsible not only for business development, but also to serve as advocates for the business owners and for the communities in which they live and work. Creating solutions to meet the diverse financial needs of our customers was a priority in 2001. With the establishment of Acadia Financial Consultants, a division of UnitedKingfield Bank, we now provide full-service brokerage and insurance services to retail customers and business owners who desire to work with a representative who will take the time to understand their needs and financial objectives. In addition, our affiliation with Acadia Trust, N.A. gives our customers access to trust, wealth management and investment services. These services complement our traditional banking products, providing clients with convenient access to a wide range of solutions to meet the financial challenges which individuals and businesses constantly face. Another strategic initiative undertaken in 2001 was a review of the Bank's allocation of resources. In order to focus on the opportunities for growth, we concluded that our branch delivery system must become more efficient. As a result of our study, we closed two offices and restructured the hours at some of our smaller, less active branches. With expanded online banking and bill payment services, these changes allow us to serve customers in smaller communities in a more cost-effective manner. UnitedKingfield Bank is uniquely positioned for success in 2002 and beyond. We have an opportunity to grow our market share in Androscoggin and Penobscot counties, the second and third largest markets in Maine. We have realized greater cost and operating efficiencies through our corporate affiliation, resulting in not only products and services clearly different and better than those of the competition, but also in exceptional customer service, technology and support. With these resources, an aggressive strategic plan and a dedicated and experienced team, UnitedKingfield Bank will continue to make significant financial contributions to Camden National Corporation's success in building long-term shareholder value. Sincerely, /s/ John C. Witherspoon ----------------------- John C. Witherspoon, President & CEO 7 [PHOTO] Boat builders exhibit their mastery of engineering and art with the mahogany and cedar double-planked hull of this sloop. Woodworkers build solid, finely crafted boats that ensure smooth sailing. We build enduring client relationships that foster future financial success. 8 Acadia Trust, N.A. Trust Company of Maine, Inc. Acadia Trust, N.A. ("Acadia") and Gouws Capital Management, Inc. ("Gouws Capital") became the newest affiliates of Camden National Corporation in July of last year. Acadia is a federally regulated, non-depository trust company; Gouws Capital, an investment advisory firm, was merged into Acadia at the end of 2001. Our mission is to build enduring relationships with clients by helping them accumulate, manage and conserve wealth. In conjunction with Trust Company of Maine, Inc., Acadia offers a comprehensive set of trust, investment, wealth management and retirement plan services to individuals, families, businesses, endowments and foundations. Our strategic alliance with Camden National Corporation gives each subsidiary bank the ability to offer their clients access to a full range of financial services from any branch location. Like our parent company, we believe that client satisfaction is, by far, our most important business objective. Every decision we make is measured by its impact on our ability to service our clients. We work closely with each client to understand and define objectives and explore various strategies, before pursuing the plan to achieve those objectives. Indeed, we judge our very success by the degree of client satisfaction. As we continue to refine our product and service offerings, our thought process parallels that of the highly skilled boat builders found along the coast of Maine. No seafarer dares venture far offshore in a vessel of unproven design or haphazard construction. Maine's leading boat builders combine sophisticated hull construction techniques and innovative technology with meticulous, handcrafted joinery and clarity of line that satisfy the observer's aesthetic sense. The builder seeks to please the owner, but avoids design and construction elements that jeopardize the integrity of the vessel. In many ways, we conduct our trust and investment business with a similar mindset. The strategy fits the mission, which is to meet the financial objectives of the client. Long-term goals cannot be achieved without a plan which, as with the design of a vessel, requires tradeoffs among conflicting considerations. Portfolio construction is based on what is realistic and doable, and technology is used to enhance the result. On the surface, the plan is well crafted and its execution is elegant, while behind the scenes we fulfill our responsibility by steering around the risks that would endanger the achievement of the client's stated objectives. Looking forward to 2002, we envision that the synergies created in our alliance with Camden National Corporation, along with our enhanced ability to meet the financial needs of our mutual clients, bode well for our continued success. Sincerely, /s/ Johann H. Gouws -------------------- Johann H. Gouws, Chairman, President & CEO 9 [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, 2001 and 2000, the consolidated results of operations for the past 3 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 forwardlooking.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 Camden National Corporation (the "Company"), as a multi-bank holding company, provides financial services to its customers through four principal subsidiaries. Camden National Bank and UnitedKingfield Bank provide traditional commercial and consumer banking services through 28 branch locations in central, southern, mid-coast and western Maine and also by online access. Acadia Trust, N.A. and Trust Company of Maine, Inc. provide trust and investment management services to the Company's clients, who are primarily located in the State of Maine, and to the clients of the Company's two banking affiliates. Additionally, the Company invests in securities issued by the United States government and its agencies, as well as mortgage backed securities and high grade corporate securities to supplement and diversify its revenue base. The Company has implemented a strategy to provide a diversified set of financial products to its customers located within its geographic boundaries and to opportunistically expand those boundaries. As part of this strategy, and to diversify its sources of revenues, the Company acquired Acadia Trust, N.A. ("Acadia") and Gouws Capital Management Inc. ("Gouws Capital") on July 19, 2001. These companies, which were merged on December 31, 2001, provide trust and investment services, as well as investment management expertise. Also, in furtherance of its strategy to diversify its revenue, the Company acquired the remaining minority interests in Trust Company of Maine, Inc. on October 24, 2001. The Company had previously acquired its majority interest in Trust Company of Maine, Inc. through its acquisition of UnitedCorp, a one-bank holding company with two principal subsidiaries, United Bank and Trust Company of Maine, Inc., on December 31, 1995. The Acadia Trust, N.A., Gouws Capital Management Inc. and Trust Company of Maine Inc. acquisitions were accounted for under the purchase method of accounting as prescribed by SFAS No. 141, "Business Combinations." As part of its geographic diversification strategy, on October 8, 2001, the Company's Camden National Bank subsidiary converted its Portland, Maine loan production office to a full service banking branch. This allowed the Company to expand its deposit gathering activities to the Portland, Maine market. 10 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] REVIEW OF FINANCIAL STATEMENTS The discussion and analysis which follows focuses on the factors affecting the Company's consolidated results of operations during 2001, 2000 and 1999 and financial condition at December 31, 2001 and 2000. The Consolidated Financial Statements and Notes to Consolidated Financial Statements beginning on page 24 of this report should be read in conjunction with this review. RESULTS OF OPERATIONS Summary Financial Overview The Company reported net income of $15.4 million, or $1.89 per diluted share, for 2001 compared to $13.9 million and $1.69 per diluted share in 2000. Return on average assets was 1.47% in 2001 compared to 1.40% in 2000 and return on average shareholders' equity was 15.55% in 2001 compared to 16.43% in 2000. This performance primarily reflected loan growth from its Portland, Maine location, expansion of fee based revenues from its banking subsidiaries, revenues from its acquired investment management subsidiaries, and control of its operating expenses. Total revenues for 2001 were $57.3 million compared to $48.4 million in 2000, an increase of 18.3%, primarily reflecting improved non-interest income and revenues from increased lending activities. Revenues of Acadia Trust, N.A. contributed $676,000, while revenues from the sale of loans, securities and the securitization of a portion of the Company's residential mortgage portfolio contributed $1.3 million. Excluding these factors, revenues increased $6.9 million or 14.2% from the prior year. Non-interest expenses for the Company during 2001 were $31.0 million compared to $25.4 million in 2000, an increase of 22.1%. Expenses from the companies acquired during the year and associated acquisition costs incurred by the Company totaled $1.7 million during 2001 while the Company's UnitedKingfield Bank subsidiary recorded costs of $1.0 million in connection with the settlement of a lawsuit. Additionally, during 2000, the Company terminated its defined-benefit noncontributory pension plan which resulted in a one-time expense reduction of $645,000. Excluding these factors, non-interest expenses increased $2.3 million, or 8.7%. The Company's consolidated provision for loan losses was $3.7 million during 2001 compared to $2.9 million in 2000 which resulted in the Company increasing its ratio of allowance for loan losses ("ALL") to total loans from 1.54% in 2000 to 1.87% in 2001. The reserve was increased in response to management's view of probable economic deterioration in its central, eastern and western Maine geographic markets which could negatively affect some of the Company's lending relationships in those geographic areas. Reflective of this view, non-performing assets, defined as non-accrual loans, accruing loans 90 days or more past due, and other real estate owned, increased from $6.9 million in 2000 to $8.3 million in 2001, resulting in the ratio of non-performing assets to total loans increasing from 0.93% in 2000 to 1.11% in 2001. The Company recorded a 7.8% growth in total assets during 2001 to $1.1 billion at December 31, 2001. Loan growth of $22.7 million during 2001 was primarily a result of the Company's continued expansion in the Portland, Maine market as well as moderate growth throughout its geographic franchise. Net Interest Income Net interest income, which reflects revenues from interest earning assets less associated funding expenses, was $44.7 million in 2001 compared to $40.0 million in 2000, an increase of 11.8%. The following tables on pages 12 and 13, present changes in interest income and interest expense by major asset and liability category for 2001, 2000 and 1999, and 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. 11 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Analysis of Change in Net Interest Margin on Earning Assets
(Dollars in thousands) DECEMBER 31, 2001 DECEMBER 31, 2000 DECEMBER 31, 1999 ---------------------------------------------------------------------------------------------------------------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate ---------- -------- ------ -------- ------- ------ -------- -------- ------ Assets ------ Interest-earning assets: Securities--taxable $ 234,835 $15,666 6.67% $224,698 $16,079 7.16% $216,666 $15,084 6.96% Securities--nontaxable (1) 9,161 589 6.43% 8,993 595 6.62% 9,152 606 6.62% Federal funds sold 3,399 83 2.44% 2,215 109 4.92% 1,784 69 3.87% Loans (1) (2) 732,460 63,065 8.61% 675,316 61,899 9.17% 605,271 54,157 8.95% ---------- ------- ---- -------- ------- ---- -------- ------- ---- Total interest-earning assets 979,855 79,403 8.10% 911,222 78,682 8.64% 832,873 69,916 8.39% ---------- ------- ---- -------- ------- ---- -------- ------- ---- Cash and due from banks 24,742 27,544 24,122 Other assets 57,874 58,817 43,750 Less allowance for loan losses 12,200 10,541 8,895 ---------- -------- -------- Total assets $1,050,271 $987,042 $891,850 ========== ======== ======== Liabilities & Shareholders' Equity ---------------------------------- Interest-bearing liabilities: NOW accounts $ 92,111 $ 733 0.80% $ 86,783 $ 889 1.02% $ 85,861 $ 1,129 1.31% Savings accounts 84,201 1,646 1.95% 85,427 2,168 2.54% 109,078 3,050 2.80% Money market accounts 128,106 4,333 3.38% 98,559 4,467 4.53% 64,562 2,347 3.64% Certificates of deposit 321,503 16,047 4.98% 329,664 18,595 5.64% 312,019 16,317 5.23% Broker certificates of deposit 34,659 2,136 6.16% 12,876 947 7.35% 6,010 344 5.72% Borrowings 199,615 9,846 4.95% 198,597 11,650 5.87% 146,627 7,182 4.90% ---------- ------- ---- -------- ------- ---- -------- ------- ---- Total interest-bearing liabilities 860,195 34,741 4.04% 811,906 38,716 4.77% 724,157 30,369 4.19% ---------- ------- ---- -------- ------- ---- -------- ------- ---- Demand deposits 82,572 84,357 79,764 Other liabilities 8,327 6,409 10,229 Shareholders' equity 99,177 84,370 77,700 ---------- -------- -------- Total liabilities and shareholders' equity $1,050,271 $987,042 $891,850 ========== ======== ======== Net interest income 44,662 39,966 39,547 (fully-taxable equivalent) Less: fully-taxable equivalent adjustment (481) (561) (592) ------- ------- ------- $44,181 $39,405 $38,955 ======= ======= ======= Net interest rate spread (fully-taxable equivalent) 4.06% 3.87% 4.20% ==== ==== ==== Net interest margin (fully-taxable equivalent) 4.56% 4.39% 4.75% ==== ==== ====
(1) Reported on tax-equivalent basis calculated using a rate of 35%. (2) Non-accrual loans are included in total average loans. 12 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] Analysis of Volume and Rate Changes on Net Interest Income
DECEMBER 31, 2001 VS 2000 DECEMBER 31, 2000 VS 1999 (Dollars in thousands) INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO --------------------------------------------------------------------------------------------- Volume Rate Total Volume Rate Total Interest-earning assets: Securities--taxable $ 725 $(1,138) $ (413) $ 559 $ 436 $ 995 Securities--nontaxable 11 (17) (6) (11) -- (11) Federal funds sold 58 (84) (26) 17 23 40 Loans 5,238 (4,073) 1,165 6,264 1,478 7,742 ------- ------- ------- ------- ------- ------- Total interest income 6,032 (5,312) 720 6,829 1,937 8,766 ------- ------- ------- ------- ------- ------- Interest-bearing liabilities: NOW accounts 55 (211) (156) 12 (252) (240) Savings accounts (31) (491) (522) (662) (220) (882) Money market accounts 1,339 (1,473) (134) 1,237 883 2,120 Certificates of deposit (460) (2,124) (2,584) 923 1,355 2,278 Broker certificates of deposit 1,602 (413) 1,189 393 210 603 Borrowings 60 (1,828) (1,768) 2,547 1,921 4,468 ------- ------- ------- ------- ------- ------- Total interest expense 2,565 (6,540) (3,975) 4,450 3,897 8,347 ------- ------- ------- ------- ------- ------- Net interest income (fully-taxable equivalent) $ 3,467 $ 1,228 $ 4,695 $ 2,379 $(1,960) $ 419 ======= ======= ======= ======= ======= =======
The Company reported increased net interest income of $44.7 million during 2001 compared to $40.0 million in 2000 due to changes in the yields, volumes and compositions of its interest-earning assets and interest-bearing liabilities. During 2001, the Company benefited from the declining interest rate environment which affected income received on interest-earning assets and expenses on interest-bearing liabilities. Interest income on variable rate earning assets declined as a result of the declining interest rate environment and contributed to the decline of $5.3 million in interest income attributed to the "rate" component in the Analysis of Volume and Rate Changes on Net Interest Income table above. This decrease was offset by an increase in interest earning assets from 2000 to 2001, which contributed to the increase of $6.0 million related to the "volume" component in the table above. The Company also benefited from the declining interest rate environment as its interest expenses on variable rate borrowings and deposit accounts were reduced during 2001. This contributed to a reduction in interest expenses due to "rate" of $6.5 million which was partially offset by increased "volume" of funding required to support the growth in earning assets of $2.6 million. Investments in U.S. government securities, U.S. government agency securities and highly rated corporate bonds are used by the Company to diversify its revenues as well as provide interest rate risk and credit risk diversification. The Company periodically uses interest rate swaps, floors and caps, which are common derivative financial instruments, to hedge interest rate risk associated with its loan and investment portfolios as well as its deposit and borrowing strategies. Footnote 20, "Financial Instruments" of the Notes to Consolidated Financial Statements, on page 42, and the "Market Risk" section, on page 19, should be reviewed for further discussion of the Company's derivative and market risk strategies. During 2001, the Company's taxable investment portfolio interest income declined $413,000 primarily due to the declining interest rate environment, while the Company's non-taxable investment portfolio interest income declined $6,000, both partially offset by increased volumes in the portfolios. During 2001 and 2000, the Company was a party to several interest rate swap agreements that were part of the Company's strategy to protect a portion of its interest income revenue stream against a changing interest rate environment. These instruments contributed $422,000 to interest income in 2001 and $108,000 in 2000. Interest rate swap agreements involve risks associated with counterparties to the agreements and their abilities to meet the contractual terms of the agreements as well as risks associated with a changing interest rate environment. Notional principal amounts are used to reflect the volume of these transactions, but credit risks associated with these agreements are limited to the 13 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES forecasted payment stream expected from counterparties. The Company's counterparties to these agreements had an investment grade rating by Moody's and Standard and Poor's rating agencies. These instruments involve only the exchange of fixed- and variable-rate interest payments based upon a notional principal amount and maturity date. At December 31, 2001, the Company's notional value of derivative financial instruments was $90.0 million, compared to $135.0 million on December 31, 2000. Footnote 20 on page 42 should be reviewed for further discussion of derivative instruments. Non-interest Income Non-interest income was $13.1 million and $8.9 million for the years ended December 31, 2001 and 2000, respectively. During 2001, the increase of $4.2 million, or 46.9%, in total non-interest income compared to 2000 reflects the effects of various balance sheet management activities which included the securitization of $57.0 million of the Company's residential mortgages (i.e. the sale of residential mortgages purchased back by the Company as mortgage-backed securities) and sales of various investments which resulted in $1.2 million of non-interest income. Additionally, due to the declining interest rate environment, the Company recognized $932,000 of non-interest income from the sale of interest rate derivatives. Service charges on deposit accounts increased by $662,000, or 23.0%, over 2000 as a result of a product redesign initiative focused on customer relationships and the introduction of a fee based overdraft privilege service for its customers. Other service charges and fees increased by $626,000, or 35.5%, over the same period primarily due to mortgage servicing fees associated with the sale of residential real estate loans. Merchant program fees increased $284,000, or 15.8%, over 2000 due to a combination of restructured pricing and increased volumes, while trust fees increased $1.2 million, or 95.4%, during the same period. The major contributing factor for this increase in trust fees was the acquisition of Acadia and Gouws Capital on July 19, 2001. Non-interest Expenses Non-interest expenses increased to $31.0 million for the year ended December 31, 2001 from $25.4 million in 2000, or 22.1%. Salaries and employee benefits increased by $2.7 million, or 23.5%, during this same period reflecting, in part, increased salaries and employee benefits associated with the Acadia and Gouws Capital acquisitions of $854,900. Also included in 2000 results was a one-time expense reduction of $645,000 associated with the Company terminating its defined-benefit noncontributory pension plan. Occupancy expenses increased $409,000, or 24.5%, due to the renovation and expansion of several of the Company's branch facilities and expansion of its operations center. Expenses associated with the processing of merchant transactions increased $217,000, or 12.2%, during 2001 compared to 2000 reflecting increased volumes. Other expenses increased by $2.3 million, or 32.2%, in 2001 compared to 2000 due to expenses related to the Company's new subsidiaries, courier costs, debit card processing costs, and closing and solicitation costs associated with a home equity loan promotion. Comparison of 2000 to 1999 The Company reported net income of $13.9 million, or $1.69, per diluted share in 2000 compared to $10.2 million, or $1.27, per diluted share in 1999. Return on average assets was 1.40% in 2000 compared to 1.15% in 1999, while return on average shareholders' equity was 16.43% in 2000 compared to 13.16% in 1999. During 1999, the Company acquired Kingfield Savings Bank which was accounted for under the pooling-of-interests method and accordingly, the Consolidated Financial Statements of the Company have been restated to reflect the acquisition as though it occurred at the beginning of each period presented. On February 4, 2000, Kingfield Savings Bank, and the Company's United Bank subsidiary were merged to create UnitedKingfield Bank. Net interest income on a fully-taxable equivalent basis was $40.0 million in 2000 compared to $39.5 million in 1999, reflecting increased yields on earning assets and growth in the Company's loan and investment portfolios. The increase of $419,000 was primarily due to an increase in earning asset volumes and yields, partially offset by higher funding costs. The Company reported $2.9 million of provision for loan losses in 2000 compared to $3.7 million in 1999. The allowance for loan losses increased from 1.48% of total loans at the end of 1999 to 1.54% at the end of 2000. Non-interest income increased $1.2 million from $7.7 million in 1999 to $8.9 million in 2000. The primary factors contributing to this increase were increased trust fees of $505,000 and merchant program fees of $308,000. Non-interest expenses were $25.4 million in 2000, compared to $27.6 million in 1999. The primary factors contributing to the decrease in non-interest expenses during the period were the Company's termination of its defined-benefit noncontributory pension program which resulted in a one-time expense reduction of $645,000 in 2000, and cost savings which were recognized as part of the merger of United Bank and Kingfield Savings Bank in 2000. 14 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] FINANCIAL CONDITION Overview Total assets at December 31, 2001 were $1.1 billion, an increase of $78.5 million, or 7.8%, from December 31, 2000. The change in assets consisted primarily of a $46.8 million increase in investment securities, an increase in net loans of $20.0 million, an increase of $9.5 million in cash and due from banks, an increase in premises and equipment of $1.4 million, and an increase in other assets of $0.8 million. The asset growth was supported by an increase of $42.4 million in total borrowings, a $19.2 million increase in deposits, a $2.7 million increase in other liabilities, and an increase of $14.1 million in total shareholders' equity. Investment Securities Total investment securities increased $46.8 million, or 21.6%, to $263.8 million at December 31, 2001. The Company has investment securities in both the available-for-sale and held-to-maturity categories. The largest portion is in the available-for-sale category of the investment portfolio reflecting the Company's desire for flexibility in managing liquidity and funding needs pursuant to the policies developed by the Asset/Liability Committee ("ALCO"). The available-for-sale category increased during 2001 by $103.5 million. Upon implementation of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," the Company transferred $68.2 million of its investment securities classified as held to maturity to available for sale. In addition, the Company implemented a balance sheet restructuring program that included the conversion of over $57.0 million of fixed-rate residential mortgages into mortgage-backed securities, which are classified as securities available for sale and the sale of several long-term corporate bonds previously classified as securities available for sale. The restructuring program was undertaken to take advantage of the declining interest rate environment and management's desire to provide flexibility and liquidity in the Company's balance sheet. Although these securities are available for sale, the Company has the ability to hold the debt securities in this portfolio until 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, 2001, the Company had $4.5 million of unrealized gains on securities available for sale, net of the deferred tax expense, compared to $0.8 million of unrealized losses, net of deferred tax benefits at December 31, 2000. The increase in unrealized appreciation 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. Unrealized gains and losses, net of related deferred income taxes are a component of the Company's other comprehensive income contained in the Consolidated Statement of Changes in Shareholder's Equity. Loans Loans, including loans held for sale, totaled $724.0 million at December 31, 2001, a 3.2% increase from total loans of $701.3 million at December 31, 2000. This reflects the continuation of strong loan growth experienced in the commercial loan portfolio less the $57.0 million of fixed-rate residential mortgage loans converted to securities available for sale by the Company during 2001. Residential real estate mortgage loans decreased by $18.8 million, or 8.4%, in 2001. During 2001 the Company securitized $57.0 million of fixed-rate residential mortgage loans into mortgage-backed securities, which are classified as securities available for sale. 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 loans consist of loans secured by one-to-four family residences. The Company generally retains adjustable-rate mortgages in its portfolio and 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 2001 to sell the majority of its fixed-rate residential mortgages in its loan portfolio. Commercial loans increased by $59.7 million, or 16.4%, during 2001. In 2000, commercial loans increased by $47.8 million, or 15.1%. 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 small- and medium-sized business customers within its geographic market. Consumer loans decreased by $3.9 million, or 4.3%, in 2001 as a result of consumers taking advantage of a low interest rate environment and consolidating their consumer debt into residential mortgages. In 2000, consumer loans increased by $6.4 million, or 7.6%. Consumer loans are originated by the Company 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. 15 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 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, interest income is reduced for all accrued but unpaid interest on such loans. Non-performing loans, defined as non-accrual loans plus accruing loans 90 days or more past due, totaled $8.1 million, or 1.1%, of total loans at December 31, 2001 compared to $6.5 million, or 0.9%, of total loans at December 31, 2000. Allowance for Loan Losses / Provision for Loan Losses In determining the allowance for loan losses ("ALL"), management relies primarily on its review of the loan portfolio both to ascertain whether there are specific loans to be reserved against, 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 34, for further information). During 2001, the Company recognized $3.7 million of expense to the allowance for loan losses compared to $2.9 million and $3.7 million in 2000 and 1999, respectively. Net charge-offs to average loans outstanding were 0.13% in 2001 compared to 0.24% in 2000. During 2001, economic conditions indicated potential weakening in the loan portfolio. Several large credits were downgraded resulting in the necessity to increase the provision to the ALL. Determining an appropriate level of ALL involves a high degree of judgment. Management believes that the ALL at December 31, 2001 of $13.5 million, or 1.87%, 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 1.54% in 2000. The table on the next page sets forth information concerning the activity in the Company's ALL during the periods indicated. 16 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] Five-Year Activity in the Allowance for Loan Losses
(Dollars in thousands) YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 Allowance at the beginning of period $ 10,801 $ 9,390 $ 8,092 $ 6,982 $ 5,365 Provision for loan losses 3,681 2,930 3,670 2,056 2,207 Charge-offs: Commercial loans 536 1,296 1,520 417 671 Residential real estate loans 552 432 715 415 160 Consumer loans 461 417 425 444 400 -------- -------- -------- -------- -------- Total loan charge-offs 1,549 2,145 2,660 1,276 1,231 Recoveries: Commercial loans 324 421 64 158 473 Residential real estate loans 64 29 54 35 36 Consumer loans 193 176 170 137 132 -------- -------- -------- -------- -------- Total loan recoveries 581 626 288 330 641 Net charge-offs 968 1,519 2,372 946 590 Allowance at the end of the period $ 13,514 $ 10,801 $ 9,390 $ 8,092 $ 6,982 ======== ======== ======== ======== ======== Average loans outstanding $732,460 $675,316 $605,271 $521,559 $445,599 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans outstanding 0.13% 0.22% 0.39% 0.18% 0.13% Ratio of provision for loan losses to average loans outstanding 0.50% 0.43% 0.61% 0.39% 0.50% Ratio of allowance for loan losses to total loans at end of period 1.87% 1.54% 1.48% 1.42% 1.44% Ratio of allowance for loan losses to net charge-offs 1396.07% 711.06% 395.87% 855.39% 1183.39% Ratio of allowance for loan losses to non-performing loans at end of period 167.46% 166.48% 148.32% 172.50% 162.03%
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, ------------------------------------------------------------------------------------------------------------------------------------ 2001 2000 1999 1998 1997 Percent of Percent of Percent of Percent of Percent of loans in loans in loans in loans in loans in Balance at End each each each each each 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 $11,079 60% $ 5,972 55% $5,286 52% $4,288 51% $4,672 49% Residential real estate loans 1,068 28% 2,329 32% 2,772 35% 2,166 35% 875 37% Consumer loans 1,084 12% 1,218 13% 475 13% 729 14% 657 14% Unallocated 283 N/A 1,282 N/A 857 N/A 909 N/A 778 N/A ------- --- ------- --- ------ --- ------ --- ------ --- $13,514 100% $10,801 100% $9,390 100% $8,092 100% $6,982 100% ======= === ======= === ====== === ====== === ====== ===
17 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 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 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 maintains various sources of funding and levels of liquid assets in excess of regulatory guidelines in order to satisfy its varied liquidity demands. The Company monitors its liquidity in accordance with its internal guidelines and all applicable regulatory requirements. As of December 31, 2001 and 2000, the Company's level of liquidity exceeded its target levels. Management believes that the Company currently has appropriate liquidity available to respond to liquidity demands. Sources of funds utilized by the Company 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 2001, total deposits increased by $19.2 million, or 2.6%, over 2000, ending the year at $763.6 million. The Company experienced growth in all deposit categories in 2001 except certificates of deposit. Comparing year-end balances 2001 to 2000, transaction accounts (demand deposits and NOW) increased by $20.9 million, money market accounts by $13.0 million, and savings accounts by $6.5 million. Certificates of deposit decreased by $21.3 million, in part, as a result of depositors converting to more liquid deposit instruments during a period of low interest rates. In 2000, total deposits increased by $76.6 million, or 11.5%, over 1999, ending the year at $744.4 million. Borrowings supplement deposits as a source of liquidity. In addition to borrowings from the FHLBB, the Company purchases federal funds, sells securities under agreements to repurchase and utilizes treasury tax and loan accounts. Total borrowings were $210.8 million at December 31, 2001 compared to $168.4 million at December 31, 2000, an increase of $42.4 million, or 25.2%. 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 2001 and 2000. Qualified residential real estate loans, certain investment securities and certain other assets available to be pledged secure these borrowings. 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 subsidiaries exceeded regulatory guidelines at December 31, 2001 and December 31, 2000. The Company's Tier 1 capital to risk-weighted assets was 12.9% and 11.8% at December 31, 2001 and 2000, respectively (see Note 21, "Regulatory Matters," of the Notes to Consolidated Financial Statements, on page 44, 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, 2001 and 2000 was 8.7% and 8.6%, 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 $105.1 million and $90.9 million, or 9.6% and 9.0%, of total assets at December 31, 2001 and 2000, respectively. The $14.1 million, or 15.6%, increase in shareholders' equity in 2001 was primarily attributable to net income of $15.4 million, less the costs associated with open market repurchases of approximately $1.4 million of the Company's common stock in compliance with the Company's previously announced stock repurchase policy and $5.2 million in cash dividends to the Company's shareholders, plus $5.3 million in unrealized gains on securities available for sale, net of deferred tax expense. The principal cash requirement of the Company is the payment of dividends on the Company's common stock as and when declared by the Board of Directors. Dividends paid per share during the year ended December 31, 2001 increased by 3.2% over the corresponding period in 2000. The Company is primarily dependent upon the payment of cash dividends by its subsidiaries to service its commitments. The Company, as the sole shareholder of its subsidiaries, is entitled to dividends when and as declared by each subsidiary's Board of Directors from legally available funds. Camden National Bank declared dividends in the aggregate amount of $11.5 million and $5.9 million in 2001 and 2000, respectively. UnitedKingfield Bank declared dividends in the aggregate amount of $3.3 million and $1.9 million in 2001 18 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] and 2000, respectively. As of December 31, 2001, and subject to the limitations and restrictions under applicable law, Camden National Bank and UnitedKingfield Bank had a total of $7.9 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 15, "Shareholders' Equity," of the Notes to Consolidated Financial Statements, on page 38, for additional information). Impact of Inflation and Changing Prices The Consolidated Financial Statements and the Notes to Consolidated Financial Statements presented elsewhere herein have been prepared in accordance with accounting principles generally accepted in the United States 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 subsidiaries' Boards of Directors that are reviewed and approved annually. Each subsidiary's Board of Directors delegates responsibility for carrying out the asset/liability management policies to Company's management 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 interest expenses associated with the Company's financial instruments also change, thereby impacting net interest income ("NII"), the primary component of the Company's earnings. ALCO utilizes the results of a detailed and dynamic simulation model to quantify the estimated exposure of NII to sustained interest rate changes. While ALCO routinely monitors simulated NII sensitivity over a rolling 2-year horizon, it also utilizes additional tools to monitor potential longer-term interest rate risk. The simulation model captures the impact of changing interest rates on the interest income received and interest expense paid on all interest-earning assets and interestbearing liabilities reflected on the Company's balance sheet as well as for 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. 2001 ---------------------------------------- Estimated Rate Change Changes in NII ---------------------------------------- High Low Average +200bp (4.31%) 0.95% (1.80%) -200bp 2.14% (0.24%) 0.79% 2001 ---------------------------------------- Estimated Rate Change Changes in NII ---------------------------------------- High Low Average +200bp (6.01%) (3.61%) (4.89%) -200bp 4.63% 1.96% 3.49% 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. 19 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES The most significant factors affecting the changes in market risk exposure during 2001 compared to 2000 were the decrease in interest rates market-wide, changes in the yield curve for U.S. government securities, the increase in the aggregate principal amount in fixed-rate loans extended by the subsidiary banks, and the increase of fixedrate FHLBB borrowings. With increases on the balance sheet in fixed-rate loans and borrowings, the Company reduced its opportunity to lower funding costs in a declining rate environment. Due to the current low level of market rates the Company decreased its exposure in a rising rate environment, while increasing its market risk in both a flat or declining interest rate environment. The increased risk in the flat or declining interest rate environment is well within the Company's policy limits. When appropriate, the Company may utilize derivative financial instruments, such as interest rate floors, caps and swaps, to hedge its interest rate risk position. The Board of Directors' approved hedging policy statements govern the use of these instruments by the subsidiaries. As of December 31, 2001, the Company had a notional principal of $90 million in interest rate cap agreements. In a purchased interest rate cap agreement, cash interest payments are received only if current interest rates rise above predetermined interest rates. These agreements were purchased to protect the Company's exposure to fixed rate instruments in a rising rate environment. 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 During 2001 several accounting pronouncements were promulgated by the Financial Accounting Standards Board ("FASB") which affected the operations of the Company. The following summarizes the specific pronouncements that affected the Company, while the FASB may have issued additional pronouncements which did not have a material impact on the Company. On January 1, 2001, the Company implemented SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended by SFAS No. 137 and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities." These statements set accounting and reporting standards for derivative instruments and hedging activities. They require an entity to recognize all derivatives as either assets or liabilities in the statement of condition and measure those instruments at fair value. Upon implementation of SFAS No. 133, the Company transferred all of its investment securities classified as held to maturity to available for sale. The impact of this reclassification was an increase to other comprehensive income of $2.0 million, net of applicable taxes. Comprehensive income does not impact net income or regulatory capital, but is recorded as adjustments to shareholders' equity. SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities," is effective for transfers occurring after June 30, 2001. SFAS No. 140 replaces SFAS No. 125. The Company adhered to the requirements of SFAS No. 140 upon the effective date for various transfers of financial assets after June 30, 2001. This pronouncement also includes standards for the accounting of various off-balance sheet financial vehicles, commonly referred to bankruptcy remote Special Purpose Vehicles ("SPV"). The Company has not sponsored SPVs or other similar off-balance sheet funding vehicles. During 2001, the FASB issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 improves the transparency of the accounting and reporting for business combinations by requiring that all business combinations be accounted for under a single method--the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. In recording its acquisitions of Acadia, Gouws Capital and the minority interests of Trust Company of Maine, Inc., the Company implemented this pronouncement. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement, which will be January 1, 2002. The goodwill resulting from the Company's acquisitions of Acadia, Gouws Capital and Trust Company of Maine, Inc. was accounted for under SFAS No. 142. (See Note 2 to the Consolidated Financial Statements, on page 31, for more information.) SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," were promulgated during the year. SFAS Nos. 143 and 144 provide guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets and obligations associated with the retirement of tangible long-lived assets. Management does not expect these statements to have a material effect on the Company's consolidated financial condition and results of operations. 20 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] Related Party Transactions The Company, in the normal course of business, has made loans to certain officers and directors of the Company and its subsidiaries under such terms that are consistent with the Company's lending policies. In addition to extending loans to certain officers and directors of the Company and its subsidiaries at terms consistent with the Company's lending policies, federal banking regulations also require training, audit and examination of the Company's adherence to this policy by representatives of the Company's federal, national and state regulators. As described more fully in footnote 18 on page 41, the Company has not entered into significant non-lending related party transactions. Common Stock Information 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: 2001 ----------------------------------------------------- Fourth Third Second First Quarter Quarter Quarter Quarter High $18.80 $18.99 $17.10 $17.15 Low 16.15 15.40 12.70 12.82 Close 18.70 16.58 16.00 13.55 Dividend paid 0.16 0.16 0.16 0.16 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 Information concerning restrictions on the ability of the Company's subsidiaries to transfer funds to the Company in the form of cash dividends is described in the Capital Resources section on page 18. As of December 31, 2001, there were 8,057,781 shares of the Company's common stock outstanding, held of record by approximately 1,004 shareholders. 21 Summary of Financial Performance NET INCOME (IN MILLIONS) [CHART] 1997 10.698 1998 11.451 1999 10.229 2000 13.859 2001 15.418 ASSETS (IN MILLIONS) [CHART] 1997 726.6 1998 839.3 1999 928.4 2000 1,010.9 2001 1,089.4 DEPOSITS (IN MILLIONS) [CHART] 1997 485.1 1998 641.6 1999 667.7 2000 744.4 2001 763.6 LOANS (IN MILLIONS) [CHART] 1997 483.3 1998 569.7 1999 635.4 2000 701.3 2001 724.0 EARNINGS PER SHARE (IN DOLLARS) [CHART] 1997 1.31 1998 1.40 1999 1.27 2000 1.70 2001 1.90 BOOK VALUE PER SHARE (IN DOLLARS) [CHART] 1997 9.01 1998 9.61 1999 9.51 2000 11.17 2001 13.04 22 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] Selected Five-Year Financial Data
(In thousands, except number of shares and per share data) DECEMBER 31, ------------------------------------------------------------------------------------------------------------------------- FINANCIAL CONDITION DATA 2001 2000 1999 1998 1997 Assets $1,089,355 $1,010,883 $928,350 $839,280 $726,644 Loans 724,042 701,340 635,434 569,705 483,348 Allowance for Loan Losses 13,514 10,801 9,390 8,092 6,982 Investments 263,810 217,010 216,132 202,967 188,638 Deposits 763,568 744,360 667,720 641,553 485,132 Borrowings 210,843 168,440 173,924 113,682 160,697 Shareholders' Equity 105,068 90,923 77,623 77,789 74,112
YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------------------- OPERATIONS DATA 2001 2000 1999 1998 1997 Interest Income $ 79,870 $ 79,555 $ 69,496 $ 61,591 $ 58,363 Interest Expense 35,689 40,042 30,504 27,007 27,270 ---------- ---------- --------- -------- -------- Net Interest Income 44,181 39,513 38,992 34,584 31,093 Provision for Loan Losses 3,681 2,930 3,670 2,056 2,207 ---------- ---------- -------- -------- -------- Net Interest Income after Provision for Loan Losses 40,500 36,583 35,322 32,528 28,886 Non-interest Income 13,094 8,915 7,694 6,573 4,936 Non-interest Expense 31,014 25,396 27,604 22,220 17,916 ---------- ---------- -------- -------- -------- Income before Provision for Income Tax 22,580 20,102 15,412 16,881 15,906 Income Tax Expense 7,162 6,243 5,183 5,430 5,209 ---------- ---------- -------- -------- -------- Net Income $ 15,418 $ 13,859 $ 10,229 $ 11,451 $ 10,697 ========== ========== ======== ======== ========
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------------------- OTHER DATA 2001 2000 1999 1998 1997 Basic Earnings Per Share $ 1.90 $ 1.70 $ 1.27 $ 1.40 $ 1.31 Diluted Earnings Per Share 1.89 1.69 1.27 1.38 1.27 Dividends Per Share 0.64 0.63 0.52 0.47 0.38 Book Value Per Share 13.04 11.17 9.51 9.61 9.01 Return on Average Assets 1.47% 1.40% 1.15% 1.52% 1.52% Return on Average Equity 15.55% 16.43% 13.16% 15.09% 15.11% Allowance for Loan Losses to Total Loans 1.87% 1.54% 1.48% 1.42% 1.44% Non-Performing Loans to Total Loans 1.14% 0.98% 1.00% 0.82% 0.89% Stock Dividend Payout Ratio 33.90% 37.17% 40.90% 33.74% 29.31%
23 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] Consolidated Statements of Condition
(In thousands, except number of shares and per share data) DECEMBER 31, -------------------------------------------------------------------------------------------------------- 2001 2000 Assets Cash and due from banks $ 38,861 $ 29,337 Securities available for sale, at market value 262,866 159,315 Securities held to maturity (market value $944 and $60,698 at December 31, 2001 and 2000, respectively) 944 57,695 Residential mortgages held for sale -- 12,838 Loans, less allowance for loan losses of $13,514 and $10,801 at December 31, 2001 and 2000, respectively 710,528 677,701 Premises and equipment 17,437 16,023 Other real estate owned 195 380 Interest receivable 5,054 6,959 Core deposit intangible 5,708 6,660 Other assets 47,762 43,975 ---------- ----------- Total assets $1,089,355 $ 1,010,883 ========== =========== Liabilities Deposits: Demand $ 96,162 $ 83,631 NOW 95,664 87,270 Money market 134,333 121,292 Savings 88,226 81,730 Certificates of deposit 349,183 370,437 ---------- ----------- Total deposits 763,568 744,360 Borrowings from Federal Home Loan Bank 168,832 132,348 Other borrowed funds 42,011 36,092 Accrued interest and other liabilities 9,876 6,984 Minority interest in subsidiary -- 176 ---------- ----------- Total liabilities 984,287 919,960 ---------- ----------- Commitments (Notes 4, 13, 15, 19, 20 and 21) Shareholders' Equity Common stock, no par value; authorized 10,000,000 shares, issued 8,609,898 shares in 2001 and 2000 2,450 2,450 Surplus 5,795 5,909 Retained earnings 102,630 92,292 Accumulated other comprehensive income (loss) Net unrealized gains (losses) on securities available for sale, net of tax 4,514 (812) ---------- ----------- 115,389 99,839 Less remaining obligation under: Bank recognition and retention plan 9 14 Less cost of 552,117 and 464,557 shares of treasury stock on December 31, 2001 and 2000, respectively 10,312 8,902 ---------- ----------- Total shareholders' equity 105,068 90,923 ---------- ----------- Total liabilities and shareholders' equity $1,089,355 $ 1,010,883 ========== ===========
The accompanying Notes are an integral part of these Consolidated Financial Statements. 24 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] Consolidated Statements of Income
(In thousands, except number of shares and per share data) Year Ended December 31, ------------------------------------------------------------------------------------------------- 2001 2000 1999 Interest Income Interest and fees on loans $ 62,362 $ 61,540 $ 53,771 Interest on U.S. government and agency obligations 14,659 14,753 14,041 Interest on state and political subdivision obligations 388 393 400 Interest on interest rate swap agreements 1,370 1,434 172 Interest on federal funds sold and other investments 1,091 1,435 1,112 ---------- ---------- ---------- Total interest income 79,870 79,555 69,496 ---------- ---------- ---------- Interest Expense Interest on deposits 24,895 27,066 23,187 Interest on other borrowings 9,846 11,650 7,182 Interest on interest rate swap agreements 948 1,326 135 ---------- ---------- ---------- Total interest expense 35,689 40,042 30,504 ---------- ---------- ---------- Net interest income 44,181 39,513 38,992 Provision for Loan Losses 3,681 2,930 3,670 ---------- ---------- ---------- Net interest income after provision for loan losses 40,500 36,583 35,322 ---------- ---------- ---------- Other Income Service charges on deposit accounts 3,542 2,880 2,773 Other service charges and fees 2,390 1,764 1,488 Merchant assessments 2,086 1,802 1,494 Trust fees 2,503 1,281 776 Gain on sale of derivatives 932 -- -- Gain on sale of securities 336 -- 151 Other income 1,305 1,188 1,012 ---------- ---------- ---------- Total other income 13,094 8,915 7,694 ---------- ---------- ---------- 53,594 45,498 43,016 ---------- ---------- ---------- Operating Expenses Salaries and employee benefits 14,279 11,558 12,578 Net occupancy 2,075 1,666 1,579 Furniture, equipment and data processing 2,125 2,097 2,167 Merchant program 1,995 1,778 1,488 Amortization of core deposit intangible 952 986 1,011 Acquisition related 353 232 2,046 Other 9,235 7,079 6,735 ---------- ---------- ---------- Total operating expenses 31,014 25,396 27,604 ---------- ---------- ---------- Income before income taxes 22,580 20,102 15,412 Income Taxes 7,162 6,243 5,183 ---------- ---------- ---------- Net Income $ 15,418 $ 13,859 $ 10,229 ========== ========== ========== Per Share Data Basic earnings per share $ 1.90 $ 1.70 $ 1.27 Diluted earnings per share 1.89 1.69 1.27 Weighted average number of shares outstanding 8,123,928 8,164,188 8,033,757
The accompanying Notes are an integral part of these Consolidated Financial Statements 25 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity
Net Unrealized Gains (Losses) Employee on Securities Stock (In thousands, except number Common Retained Available Ownership of shares and per share data) Stock Surplus Earnings for Sale Plan ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ 2,449 $ 5,984 $ 77,581 $ 82 $ (68) --------- ------- --------- --------- ----- 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 -- 68 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 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 tax benefit 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) $ -- --------- ------- --------- --------- ----- Net income for 2001 -- -- 15,418 -- -- Cumulative effect to record unrealized appreciation on securities held to maturity transferred to securities available for sale (net of taxes of $1,021) -- -- -- 1,982 -- Change in unrealized gains on securities available for sale, net of deferred taxes of $1.7 million -- -- -- 3,344 -- --------- ------- --------- --------- ----- Total comprehensive income -- -- 15,418 5,326 -- Purchase of treasury stock (87,560 shares) -- -- -- -- -- Exercise and repurchase of stock options (19,926 shares), net of tax benefit of $41 -- (114) -- -- -- Bank recognition and retention plan -- -- -- -- -- Acquisition of minority interest -- -- 146 -- -- Cash dividends declared ($0.64 / share) -- -- (5,226) -- -- --------- ------- --------- --------- ----- Balance at December 31, 2001 $ 2,450 $ 5,795 $ 102,630 $ 4,514 $ -- ========= ======= ========= ========= ===== Bank Recognition Total (In thousands, except number and Retention Treasury Shareholders' of shares and per share data) Plan Stock Equity --------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $ (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 -- -- 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 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 tax benefit 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 -------- -------- --------- Net income for 2001 -- -- 15,418 Cumulative effect to record unrealized appreciation on securities held to maturity transferred to securities available for sale (net of taxes of $1,021) -- -- 1,982 Change in unrealized gains on securities available for sale, net of deferred taxes of $1.7 million -- -- 3,344 -------- -------- --------- Total comprehensive income -- -- 20,744 Purchase of treasury stock (87,560 shares) -- (1,444) (1,444) Exercise and repurchase of stock options (19,926 shares), net of tax benefit of $41 -- 34 (80) Bank recognition and retention plan 5 -- 5 Acquisition of minority interest -- -- 146 Cash dividends declared ($0.64 / share) -- -- (5,226) -------- -------- --------- Balance at December 31, 2001 $ (9) $(10,312) $ 105,068 ====t=== ======== =========
The accompanying Notes are an integral part of these Consolidated Financial Statements. 26 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] Consolidated Statements of Cash Flows
(In thousands) YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------------------------- 2001 2000 1999 Operating Activities Net Income $ 15,418 $ 13,859 $ 10,229 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 3,681 2,930 3,670 Depreciation and amortization 2,545 1,371 1,089 Decrease in obligation under ESOP and BRRP 5 6 487 Decrease (increase) in interest receivable 1,905 (1,117) (551) (Increase) decrease in other assets (1,659) 2,744 (3,755) Increase (decrease) in other liabilities 2,474 (5,343) 6,004 Decrease (increase) in residential mortgage loans held for sale 12,838 (5,932) 1,322 (Decrease) increase in minority position (176) 61 25 Gain on sale of securities (336) -- (151) ----------- ----------- ----------- Net cash provided by operating activities 36,695 8,579 18,369 ----------- ----------- ----------- Investing Activities Proceeds from sales and maturities of securities held to maturity -- 10,587 29,909 Proceeds from sales and maturities of securities available for sale 39,805 8,509 20,402 Purchase of securities held to maturity (944) -- -- Purchase of securities available for sale (77,217) (12,456) (72,072) Purchase of Federal Home Loan Bank Stock -- (174) (331) Net increase in loans (36,508) (61,493) (69,424) Net decrease (increase) in other real estate owned 185 1,025 (353) Purchase of premises and equipment (3,503) (5,506) (1,421) Net decrease (increase) in federal funds sold -- 415 (415) Purchase of bank-owned life insurance -- (10,000) -- Cash paid in connection with acquisitions (4,563) -- -- Cash received through acquisitions 567 -- -- ----------- ----------- ----------- Net cash used by investing activities (82,178) (69,093) (93,705) ----------- ----------- ----------- Financing Activities Net increase in deposits 19,208 76,640 26,167 Proceeds from Federal Home Loan Bank borrowings 3,698,976 5,299,675 2,611,375 Repayments on Federal Home Loan Bank borrowings (3,662,492) (5,296,193) (2,565,421) Net increase (decrease) in other borrowed funds 5,919 (8,966) 14,288 Purchase of treasury stock (1,444) (394) (2,337) Sale of treasury stock -- -- 2,249 Proceeds from stock issuance under option plan -- 31 227 Exercise and repurchase of stock options (80) (22) (975) Acquisition of minority interest 146 -- -- Cash dividends paid (5,226) (5,150) (4,182) ----------- ----------- ----------- Net cash provided by financing activities 55,007 65,621 81,391 ----------- ----------- ----------- Net increase in cash and cash equivalents 9,524 5,107 6,055 Cash and cash equivalents at beginning of year 29,337 24,230 18,175 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 38,861 $ 29,337 $ 24,230 =========== =========== =========== Supplemental disclosures of cash flow information Cash paid during the year for: Interest $ 36,594 $ 39,516 $ 30,270 Income tax 7,878 6,320 6,057 Non-Cash transactions: Transfer from loans to other real estate owned 371 302 1,418 Securitization of mortgage loans 57,000 -- -- Transfer from securities held to maturity to available for sale 57,695 -- -- Transfer from loans held for sale to loan portfolio -- -- 24,637
See Note 2, "Acquisitions," of the Notes to Consolidated Financial Statements, on page 31, for acquisition disclosure. The accompanying Notes are an integral part of these Consolidated Financial Statements. 27 [GRAPHIC]CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 2001, 2000 and 1999 (Amounts in tables expressed in thousands, except number of shares and per share data) NATURE OF OPERATIONS. Camden National Corporation (the "Company"), as a multi-bank holding company, provides financial services to its customers through four principal subsidiaries. Camden National Bank and UnitedKingfield Bank provide traditional commercial and consumer financial services through 28 branch locations in central, southern, mid-coast and western Maine and by online access. Acadia Trust, N.A. and Trust Company of Maine, Inc. provide trust and investment management services to their clients, who are primarily located in the State of Maine, and to the clients of the Company's two banking subsidiaries. 1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies conform to accounting principles generally accepted in the United States 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 wholly owned non-bank subsidiaries, Acadia Trust, N.A. and Trust Company of Maine, Inc. All intercompany accounts and transactions have been eliminated in consolidation. Assets held by the non-bank subsidiaries in a fiduciary capacity are not assets of the Company and, therefore, are not included in the Consolidated Statement of Condition. 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 Federal Reserve Bank ("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 FRB 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 and notes 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. Premiums and discounts 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. 28 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES[GRAPHIC] 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 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, interest income is reduced for all accrued but unpaid interest. 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 with respect to $104.0 million in deposits acquired by the Company in connection with the acquisition, in 1998, of 8 branch locations is being amortized over periods ranging from 10 to 15 years using the straight-line method. Accumulated amortization of core deposit intangibles was $3,921,000 and $2,969,000 at December 31, 2001 and 2000, respectively. Amortization of software is recognized using the straight-line method over the estimated useful lives of the various software items, which primarily is 3 years. 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. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax implications attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Principal temporary differences occur with respect to pension and other postretirement benefits, depreciation and the provision for loan losses. 29 [GRAPHIC]CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 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. Financial Instruments with Off-Balance Sheet Risk. In the ordinary course of business, the Company has entered into credit related 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. Derivative Financial Instruments Designated as Hedges. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," which sets accounting and reporting standards for derivative instruments and hedging activities. The Statement, as amended by SFAS No. 138, requires the Company to recognize all derivatives in the Consolidated Statement of Condition at fair value. The Company adopted the Statement effective January 1, 2001 and transferred all of its investment securities classified as held to maturity to the available-for-sale classification. The impact of this reclassification was an increase to other comprehensive income of $2.0 million, net of applicable taxes, which was reported as a cumulative effect adjustment to other comprehensive income. Under the provisions of SFAS No. 133, the Company recognizes all derivatives in the Consolidated Statement of Condition at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"), a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value hedge") or a "held for trading" ("trading instrument") instrument. The Company formally documents relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking various hedge transactions. The Company also assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows or fair values of hedged items. Changes in fair value of a derivative that is highly effective and that qualifies as a cash flow hedge are recorded in other comprehensive income and are reclassified into earnings when the forecasted transaction or related cash flows affect earnings. Changes in fair value of a derivative that qualifies as a fair value hedge, and the change in fair value of the hedged item are both recorded in earnings and offset each other when the transaction is highly effective. Those derivatives that are classified as trading activities are recorded at fair value with changes in fair value recorded in earnings. The Company discontinues hedge accounting when it determines that the derivative is no longer highly effective in offsetting changes in the cash flows of the hedged item, that it is unlikely that the forecasted transaction will occur, or that the designation of the derivative as a hedging instrument is no longer appropriate. 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: The carrying amounts of cash and due from banks approximates its fair value. Securities held to maturity and securities available for sale: Fair values of securities held to maturity 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 Federal Home Loan Bank of Boston ("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. 30 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES[GRAPHIC] Derivative financial instruments: Fair values for interest rate swaps, floor and cap contracts are based on quoted market prices. Credit related financial instruments: 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. During 2001, the FASB issued SFAS No. 141, "Business Combinations," SFAS No. 142, "Goodwill and Other Intangible Assets," SFAS No. 143, "Accounting for Asset Retirement Obligations," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 141 requires that the purchase method be used to account for business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement on January 1, 2002. SFAS Nos. 143 and 144 provide guidance concerning the recognition and measurement of an impairment loss for certain types of long-lived assets and obligations associated with the retirement of tangible long-lived assets. Management does not expect these statements to have any material effect on 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. 2.ACQUISITIONS On July 19, 2001, the Company acquired 100% of the outstanding common stock of Acadia Trust, N.A. ("Acadia") and Gouws Capital Management, Inc. ("Gouws Capital"). Acadia, headquartered in Portland, Maine and founded in 1991, is a nationally chartered trust company offering traditional trust services and was custodian and trustee, at the date of acquisition, for approximately $300 million in assets. Gouws Capital, founded in 1984 and also headquartered in Portland, Maine, offers investment advisory services to high net worth individuals and institutions. Gouws Capital had approximately $342 million of assets under management at the date of acquisition, of which approximately $300 million was held at Acadia. The purchase of Acadia and Gouws Capital was accounted for as a "purchase" under SFAS No. 141, "Business Combinations." The Company has recognized goodwill equal to the sum of the cost of the acquisition and the difference between the fair value of the assets acquired less the liabilities assumed as follows: Cost ofacquisition $ 4,563 Fair value of assets acquired (2,479) Liabilities assumed 1,076 ------- Goodwill related to acquisition $ 3,160 ======= On October 24, 2001, the Company acquired the remaining 49% of Trust Company of Maine, Inc. ("TCOM"). The Company acquired the majority ownership (51%) of TCOM in December 1995 through the Company's merger with UnitedCorp, then the parent of TCOM. TCOM is a trust company chartered under the laws of the State of Maine and has its principal office in Bangor, Maine. TCOM provides a broad range of trust, trust-related and investment services, in addition to retirement and pension plan management services, to both individual and institutional clients. This transaction resulted in the recognition of $1.1 million in goodwill. Goodwill recorded as part of the acquisitions has not been amortized and will be measured for impairment as required by SFAS No. 142. In addition, under the purchase method of accounting, the results of operations of the acquired subsidiaries are included in the results of operations only from their respective dates of acquisition. 31 [GRAPHIC]CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 3. 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, 2001 ------------------------------------------------------------------------------------------------- AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE Available for sale U.S. Treasury securities and obligations of U.S.government corporations and agencies $ 58,204 $2,894 $ -- $ 61,098 Obligations of states and political subdivisions 8,923 21 (164) 8,780 Mortgage-backed securities 136,094 3,391 (26) 139,459 Other debt securities 41,295 826 (158) 41,963 -------- ------ ----- -------- Total debt securities 244,516 7,132 (348) 251,300 -------- ------ ----- -------- Equity securities 11,509 133 (76) 11,566 -------- ------ ----- -------- Total securities available for sale $256,025 $7,265 $(424) $262,866 ======== ====== ===== ======== Held to maturity U.S. Treasury securities and obligations of U.S.government corporations and agencies $ 944 $ -- $ -- $ 944 -------- ------ ----- -------- Total securities held to maturity $ 944 $ -- $ -- $ 944 ======== ====== ===== ========
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 -------- ------ ------- -------- Equity securities 18,464 150 (519) 18,095 -------- ------ ------- -------- Total securities available for sale $160,545 $1,417 $(2,647) $159,315 ======== ====== ======= ======== 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 ======== ====== ======= ========
32 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES[GRAPHIC] The amortized cost and fair values of debt securities by contractual maturity at December 31, 2001 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 $ 8,545 $ 8,812 Due after one year through five years 60,115 62,972 Due after five years through ten years 28,171 28,800 Due after ten years 147,685 150,716 -------- -------- $244,516 $251,300 ======== ======== AMORTIZED FAIR COST VALUE -------------------------------------------------------------------------------- Held to maturity Due in one year or less $944 $944 ---- ---- $944 $944 ==== ==== 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. Proceeds from the sale of investments classified as available for sale during 2001 were $7,356,490, which resulted in gross realized gains of $336,423. There were no sales in the held-to-maturity portfolio during 2001. There were no sales in either the available-forsale 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. At December 31, 2001 and 2000, securities with an amortized cost of $78,113,000 and $78,539,000 and a fair value of $80,934,000 and $79,504,000, respectively, were pledged to secure public deposits, securities sold under agreements to repurchase and other purposes required or permitted by law. 4.DERIVATIVE FINANCIAL INSTRUMENTS The Company has interest rate protection agreements (caps) with notional amounts of $90.0 million at December 31, 2001. These caps are used to limit the Company's exposure to a rising rate environment. Under these agreements the Company paid up front premiums of $239,000 for the right to receive cash flow payments in excess of the predetermined cap rate; thus, effectively capping its interest rate cost for the duration of the agreement. In accordance with SFAS No. 133, management designates these caps as cash-flow hedges. For a qualifying cash flow hedge, an interest rate cap will be carried on the Consolidated Statement of Condition at fair value with the time and option volatility value changes reflected in the current Consolidated Statement of Income. Any intrinsic value will be recorded in other comprehensive income and recognized in future Consolidated Statements of Income as an offset to related future interest costs. As of December 31, 2001 the caps have no fair value and therefore there was no effect on the Consolidated Statement of Income or other comprehensive income. As part of its interest rate risk management, the Company used interest rate swap agreements to hedge a portfolio of brokered certificates of deposit. These swaps were designated as a fair value hedge since they were used to convert the cost of the certificates of deposit from a fixed to a variable rate. These swaps were called during the third quarter and subsequently the Company exercised the call option on the brokered certificates of deposit offsetting the swaps. Since the hedge relationship was estimated to be 100 percent effective (gain or loss on the swap agreements will completely offset the gain or loss on the brokered certificates of deposit) there was no impact on the Consolidated Statement of Income or on the Consolidated Statement of Changes in Shareholders' Equity. On April 11, 2001 the Company sold an interest rate floor agreement and an interest rate swap agreement. The purpose of the interest rate floor was to protect net interest income from falling interest rates by "flooring" certain asset yields for a contracted period of time, and thus provide a minimum earnings level from these assets. The purpose of the interest rate swap agreement was to exchange a 33 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES variable rate asset for a fixed rate asset, thus protecting certain asset yields from falling interest rates. With a substantial decline in the interest rate environment, it was determined that it would be economically advantageous to sell both the interest rate floor agreement and the interest rate swap agreement rather than wait for the potential cash flows over the life of these instruments. In addition, subsequent to the Company having purchased these instruments, other strategies were implemented to protect the balance sheet in a declining interest rate environment including the use of short-term funding and the extension of fixed rate assets. The impact of the sale of the interest rate floor and interest rate swap agreements was an increase to net income of $614,800, net of applicable taxes. 5. LOANS The composition of the Company's loan portfolio at December 31 was as follows: 2001 2000 ------------------------------------------------------------------------------- Commercial loans $423,893 $364,169 Residential real estate loans 204,819 223,625 Consumer loans 86,375 90,231 Municipal loans 9,234 10,924 Other loans 497 462 -------- -------- Total loans 724,818 689,411 Less deferred loan fees net of costs 776 909 Less allowance for loan losses 13,514 10,801 -------- -------- $710,528 $677,701 ======== ======== The Company's lending activities are conducted in mid-coast, southern, central and western Maine. The Company makes single family and multi-family residential loans, commercial real estate loans, business loans and a variety of consumer loans. In addition, the Company makes loans for the construction of residential homes, multi-family properties and commercial real estate properties. 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, 2001 and 2000, nonaccrual loans were $7,022,000 and $4,644,000, respectively. Interest foregone was approximately $505,000, $528,000 and $408,000 for 2001, 2000 and 1999, respectively. 6. ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses were as follows: DECEMBER 31, ------------------------------------------------------------------------------- 2001 2000 1999 Beginning balance $ 10,801 $ 9,390 $ 8,092 Provision for loan losses 3,681 2,930 3,670 Recoveries 581 626 288 Loans charged off (1,549) (2,145) (2,660) -------- -------- -------- Net charge offs (968) (1,519) (2,372) -------- -------- -------- Ending balance $ 13,514 $ 10,801 $ 9,390 ======== ======== ======== Information regarding impaired loans is as follows: DECEMBER 31, ------------------------------------------------------------------------------- 2001 2000 1999 Average investment in impaired loans $ 6,030 $ 5,871 $ 5,455 Interest income recognized on impaired loans, all on cash basis 330 241 452 Balance of impaired loans 7,022 4,644 6,136 Portion of impaired loan balance for which an allowance for credit losses is allocated 7,022 4,644 6,136 Portion of allowance for loan losses allocated to the impaired loan balance 1,862 860 1,179 34 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] 7. SECURITIZATION OF MORTGAGE LOANS During September 2001, the Company implemented a balance sheet restructuring program that included the securitization, with Freddie Mac, of $57.0 million of fixed rate residential mortgages. This transaction resulted in the Company's loan balances decreasing, as those assets shifted to investment securities. The Company will receive annual servicing fees as compensation for servicing the outstanding balances. The Company has no retained interests in the securitized residential mortgage loans. In addition, $677,300 of mortgage servicing rights associated with this transaction were recognized in income during 2001. The Company did not securitize any loans during 2000 or 1999. 8. MORTGAGE SERVICING Residential real estate mortgages are originated by the Company both for portfolio and for sale into the secondary market. The sale of loans is 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. 140, the Company capitalizes mortgage servicing rights at their fair value upon sale of the related loans. Capitalized servicing rights totaled $829,000, $107,000 and $171,000 during 2001, 2000 and 1999, respectively. Amortization expense totaled $217,000, $32,000 and $22,000 for 2001, 2000 and 1999, respectively. 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 $147,232,000, $111,002,000 and $105,263,000 at December 31, 2001, 2000 and 1999, respectively. Custodial escrow balances maintained in connection with the foregoing loan servicing, and included in demand deposits, were $341,000 and $267,000 at December 31, 2001 and 2000, respectively. 9. PREMISES AND EQUIPMENT Details of premises and equipment, at cost, at December 31 were as follows: 2001 2000 ------------------------------------------------------------------------------- Land and buildings $ 15,857 $ 12,265 Furniture, fixtures and equipment 15,151 12,813 Leasehold improvements 1,222 1,186 Construction in process -- 2,524 -------- -------- 32,230 28,788 Less: Accumulated depreciation and amortization 14,793 12,765 -------- -------- $ 17,437 $ 16,023 ======== ======== Depreciation expense was $1,911,000, $1,529,000 and $1,553,000 for 2001, 2000 and 1999, respectively. 10. OTHER REAL ESTATE OWNED The transactions in other real estate owned for the years ended December 31 were as follows: 2001 2000 1999 ------------------------------------------------------------------------------- Beginning balance $ 380 $ 1,405 $ 1,052 Additions 371 302 1,418 Properties sold 554 1,180 491 Writedowns 2 147 574 -------- -------- -------- Ending balance $ 195 $ 380 $ 1,405 ======== ======== ======== 35 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 11. DEPOSITS The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was approximately $63,451,000 and $74,329,000 at December 31, 2001 and 2000, respectively. Certificates of deposit included brokered deposits in the amount of $46,196,000 and $26,931,000 at December 31, 2001 and 2000, respectively. At December 31, 2001, the scheduled maturities for all certificates of deposit were as follows: 2002 $218,511 2003 53,161 2004 50,315 2005 16,700 2006 6,066 Thereafter 4,430 -------- $349,183 ======== 12. BORROWINGS A summary of the borrowings, including the outstanding balance of lines of credit, from the FHLBB is as follows: DECEMBER 31, 2001 -------------------------------------------------------------------------------- Principal Amounts Interest Rates Maturity Date $ 24,578 4.82% - 5.19% 2002 45,000 4.24% - 6.12% 2003 12,000 3.27% - 5.19% 2004 31,254 3.97% - 5.55% 2006 12,000 4.88% - 4.97% 2009 10,000 4.95% 2010 34,000 4.07% - 5.02% 2011 -------- $168,832 ======== 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 ======== 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 $194,659,000 and $228,511,000 at December 31, 2001 and 2000, respectively. The FHLBB at its discretion can call $86,000,000 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 at December 31, 2001 and 2000. The Company had no outstanding balance on its line of credit with the FHLBB at December 31, 2001 or December 31, 2000. 36 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] The Company utilizes other borrowings in the form of 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: 2001 2000 ------------------------------------------------------------------------------- Treasury, tax and loan deposits $ 1,058 $ 1,031 Securities sold under repurchase agreements 40,953 35,061 -------- -------- Total other borrowed funds $ 42,011 $ 36,092 ======== ======== Weighted-average rate at the end of period 3.68% 4.24% 13. 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 were distributed to eligible employees during the first half of 2001. During 2000, the Company recognized $437,000 of net income due to the overaccrual of the benefit obligation at the date of plan termination. Information regarding the postretirement benefit plan is as follows: 2001 2000 1999 ------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of the year $ 724 $ 481 $ 399 Service cost 43 38 25 Interest cost 50 32 28 Actuarial (gain) loss (22) 200 50 Benefits paid (30) (27) (21) -------- -------- -------- Benefit obligation at end of year 765 724 481 -------- -------- -------- Funded status (765) (724) (481) Unrecognized net actuarial loss 237 273 77 Unrecognized net prior service cost (78) (94) (110) -------- -------- -------- Accrued benefit cost $ (606) $ (545) $ (514) ======== ======== ======== Weighted-average discount rate assumption 7.0% 7.0% 7.0% 2001 2000 1999 ------------------------------------------------------------------------------- Components of net periodic benefit cost Service cost $ 43 $ 38 $ 25 Interest cost 50 32 28 Amortization of prior service cost (16) (16) (16) Recognized net actuarial loss 14 3 -- -------- -------- -------- Net periodic benefit cost $ 91 $ 57 $ 37 ======== ======== ======== For measurement purposes, a 6.3% annual rate of increase in the per capita cost to cover health care benefits was assumed for 2002. The rate was assumed to decrease gradually to a 6.0% annual growth rate after 5 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 participants will be paid a life annuity upon retirement or death. Prior to September 1, 1999 the plan provided supplemental retirement payments over 15 years upon retirement or death. 37 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES The expense of this supplemental plan was $399,000, $347,000 and $309,000 in 2001, 2000 and 1999, respectively. The accrued liability of this plan at December 31, 2001 and 2000 was $1,562,000 and $1,318,000, respectively. 401(k) / Profit Sharing 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 and may make additional contributions subject to the discretion of the Board of Directors. For the years ended December 31, 2001, 2000 and 1999, aggregate expenses under the plan amounted to $527,000, $214,000 and $171,000, respectively. Employee Stock Ownership Plan During 1999, the Company, as successor to KSB Bancorp, Inc. ("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 in 1999. 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 for 2001 and 2000, and $9,726 for 1999. 14.SEGMENT REPORTING The Company, through its bank and non-bank subsidiaries, provides a broad range of financial services to individuals and companies in the State of Maine. These services include lending, demand deposits, savings and time deposits, cash management and trust services. While the Company's senior management team monitors operations of each subsidiary, these subsidiaries primarily 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. 15.SHAREHOLDERS' EQUITY The primary source of funds available to the Company for payment of dividends to its shareholders are dividends paid to the Company by its subsidiaries. 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 3 stock option plans accounted for under Accounting Principles Board Opinion 25 ("APB 25") and related interpretations, as permitted under SFAS No. 123, "Accounting for Stock-Based Compensation." The 1993 stock option plan, which is the plan currently available for future grants, allows the Company to grant options to employees for up to 19,732 additional shares of Company common stock. Under all 3 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. Therefore, in accordance with APB 25, 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, the Company's net income and earnings per share for 2001 and 1999 would have been reduced to the pro forma amounts indicated below. The Company's net income and earnings per share for 2000 are equal to pro forma amounts since there were no options granted during the year ended December 31, 2000. 38 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] EARNINGS PER SHARE NET INCOME BASIC DILUTED -------------------------------------------------------------------------------- 2001 As reported $15,418 $1.90 $1.89 Pro forma 15,348 1.89 1.88 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 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 2001 dividend yield of 2.6%, expected volatility of 1.35%, risk-free interest rate of 4.93%, 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 stock option plans as of December 31, 2001, 2000 and 1999, and changes during the years ended on those dates is presented below.
2001 ---------------------------------------------------------------------------------------------------- Number of Weighted-average Shares Exercise Price Outstanding at beginning of year 183,729 $14.29 Granted during the year 5,000 16.00 Exercised during the year 19,926 11.13 Forfeited during the year 21,640 16.56 ------- ------ Outstanding at end of year 147,163 $14.44 ======= ====== Exercisable at end of year 147,163 $14.44 ======= ====== Weighted-average fair value of options granted during the year $14.06
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 ======= ======
39 [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
The following table summarizes information related to options outstanding at December 31, 2001: Number Remaining Weighted-average Outstanding Contractual Life Exercise Price 10,246 1.0 $12.80 67,500 4.0 12.33 59,917 6.0 16.67 4,500 7.0 18.38 5,000 10.0 16.00 ------- ---- ------ 147,163 4.9 $14.44 ======= ==== ====== 16.EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:
2001 2000 1999 --------------------------------------------------------------------------------------------------- Net income, as reported $ 15,418 $ 13,859 $ 10,229 Weighted-average shares 8,123,928 8,164,188 8,033,757 Effect of dilutive employee stock options 33,558 14,617 33,877 Adjusted weighted-average shares and assumed conversion 8,157,486 8,178,805 8,067,634 Basic earnings per share $ 1.90 $ 1.70 $ 1.27 Diluted earnings per share $ 1.89 $ 1.69 $ 1.27
Options to purchase 10,500 and 93,908 shares of common stock at an average exercise price of $18.75 and $16.54 per share were outstanding at December 31, 2001 and 2000, 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. 17.INCOME TAXES The current and deferred components of income tax expense were as follows: 2001 2000 1999 -------------------------------------------------------------------------- Current: Federal $5,759 $4,836 $5,095 State 241 219 188 ------ ------ ------ 6,000 5,055 5,283 Deferred: Federal 1,162 1,188 (100) ------ ------ ------ $7,162 $6,243 $5,183 ====== ====== ====== 40 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] The actual expense differs from the expected tax expense computed by applying the applicable U.S. federal corporate income tax rate to earnings before income taxes, as follows:
2001 2000 1999 ---------------------------------------------------------------------------------- Computed tax expense $7,903 $7,036 $5,394 Increase (reduction) in income taxes resulting from: Tax exempt income (342) (471) (349) State taxes, net of federal benefit 157 142 122 Income from life insurance (305) (264) (92) Acquisition costs 89 27 452 Low income housing credits (303) (303) (221) Other (37) 76 (123) ------ ------ ------ $7,162 $6,243 $5,183 ====== ====== ======
Items which give rise to deferred income tax assets and liabilities and the tax effect of each are as follows:
2001 2000 ----------------------------------------------------------------------------------------------------- Asset Liability Asset Liability Allowance for possible losses on loans $4,643 $ -- $3,697 $ -- Allowance for investment losses 86 -- 86 -- Capitalized costs 175 -- 231 -- Pension and other benefits 760 -- 652 -- Depreciation 153 -- -- 183 Deferred loan origination fees -- 354 -- 226 Deferred compensation and benefits 336 -- 312 -- Unrealized (gains) losses on investments available for sale -- 2,325 418 -- Unrealized appreciation on loans held for sale 40 -- 167 -- Valuation of other real estate owned -- -- 20 -- Interest receivable 229 -- 185 -- Deposit premium 326 -- 80 -- Mortgage servicing rights -- 296 -- 82 Other 113 -- 26 -- ------ ------ ------ ---- $6,861 $2,975 $5,874 $491 ====== ====== ====== ====
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. 18.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: 2001 2000 -------------------------------------------------------------------- Balance, January 1, $14,298 $16,178 Loans made/advanced and additions 5,328 4,545 Repayments and reductions 5,089 6,425 ------- ------- Balance, December 31 $14,537 $14,298 ======= ======= 41 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES In addition to the loans noted on the previous page, the Company had deposits at December 31, 2001 and 2000 from the same individuals of $4,936,000 and $4,763,000, respectively. 19. LEGAL CONTINGENCIES Various legal claims 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. 20. FINANCIAL INSTRUMENTS Credit Related Financial Instruments In the normal course of business, the Company is a party to credit related financial instruments with off-balance sheet risk, which are not reflected in the accompanying Consolidated Statements of Condition. These financial instruments include lending commitments and letters of credit. Those instruments involve varying degrees of credit risk in excess of the amount recognized in the Consolidated Statements of Condition. 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 2001, 2000 or 1999. Derivative Financial Instruments The Company uses derivative instruments as hedges against large fluctuations in interest rates. The Company uses interest rate swap 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. At least quarterly, all financial instruments are reviewed as part of the asset/liability management process. The financial instruments are factored into the Company's overall interest rate risk position. The Company regularly reviews the credit quality of the counterparty from which the instruments have been purchased. As of December 31, 2001, the Company had $90 million (notional principal amount) in cap contracts ($20 million and $70 million) with strike rates of 7.50% and 7.00%, respectively, and both mature in 2002. During 2001, the Company had $25 million (notional principal amount) in callable interest rate swaps that were called. The Company also sold $10 million (notional principal amount) in interest rate swaps and $10 million (notional principal amount) in floor contracts during 2001. At December 31, 2001 and 2000, the contractual or notional amounts of credit related and derivative financial instruments were as follows: 2001 2000 ------------------------------------------------------------------------------ Contractual Commitments to extend credit $124,261 $99,108 Letters of credit 1,506 1,865 Notional Swaps -- 35,000 Floors -- 10,000 Caps 90,000 90,000 42 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] The estimated fair values of the Company's financial instruments reported in the Consolidated Statements of Condition were as follows:
DECEMBER 31, 2001 DECEMBER 31, 2000 ------------------------------------------------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value Financial assets: Cash and due from banks $ 38,861 $ 38,861 $ 29,337 $ 29,337 Securities available for sale 262,866 262,866 159,315 159,315 Securities held to maturity 944 944 57,695 60,698 Residential mortgages held for sale -- -- 12,838 12,838 Loans receivable 710,528 703,750 677,701 674,814 Interest receivable 5,054 5,054 6,959 6,959 Life insurance policies 17,713 17,713 16,842 16,842 Financial liabilities: Deposits $763,568 $763,298 $744,360 $745,291 Borrowings from Federal Home Loan Bank 168,832 163,834 132,348 131,680 Other borrowed funds 42,011 42,011 36,092 36,092 Interest payable 3,058 3,058 3,963 3,963
The estimated fair values of the Company's derivative financial instruments were as follows: DECEMBER 31, 2001 -------------------------------------------------------------------------------- Fair Value Notional Contract Maturity Including Principal Date Date Accruals Interest Rate Caps $ 20,000 26-Jul-00 26-Jul-02 $ -- 70,000 23-Oct-00 23-Oct-02 -- ------ ----- $ 90,000 $ -- ======== ===== 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 ======== ==== 43 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES 21. 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, 2001, the Company and its bank subsidiaries meet all capital requirements to which they are subject. As of December 31, 2001, 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 ability of the Company to pay cash dividends depends on the receipt of dividends from its subsidiaries. The Company, as the sole shareholder of its subsidiaries, is entitled to dividends from legally available funds when and as declared by each subsidiary's Board of Directors. 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, 2001 Total Capital (To Risk-Weighted Assets): Consolidated $100,533 14.2% $56,650 8.0% N/A Camden National Bank 58,979 12.4% 37,996 8.0% $47,495 10.0% UnitedKingfield Bank 26,722 11.6% 18,444 8.0% 23,055 10.0% Tier 1 Capital (To Risk-Weighted Assets): Consolidated $ 91,624 12.9% $28,325 4.0% N/A Camden National Bank 53,010 11.2% 18,998 4.0% $28,497 6.0% UnitedKingfield Bank 23,814 10.3% 9,222 4.0% 13,833 6.0% Tier 1 Capital (To Average Assets): Consolidated $ 91,624 8.7% $42,011 4.0% N/A Camden National Bank 53,010 7.7% 27,733 4.0% $34,666 5.0% UnitedKingfield Bank 23,814 6.8% 14,014 4.0% 17,517 5.0%
44 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] 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%
22. HOLDING COMPANY Following are the condensed Statements of Condition, Income and Cash Flows for the Company. Statements of Condition December 31, --------------------------------------------------------------------------------
2001 2000 Assets Cash $ 2,411 $ 216 Premises and equipment 6,034 4,731 Investment in subsidiaries: Bank subsidiaries 90,266 83,903 Other subsidiaries 4,659 184 Amounts receivable from subsidiaries 292 -- Goodwill -- 41 Other assets 2,965 2,762 -------- ------- Total assets $106,627 $91,837 ======== ======= Liabilities & Shareholders' Equity Amounts due to subsidiaries $ -- $ 663 Accrued and other expenses 1,559 251 Shareholders' equity 105,068 90,923 -------- ------- Total liabilities and shareholders' equity $106,627 $91,837 ======== =======
45 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES
Statements of Income For Years Ended December 31, -------------------------------------------------------------------------------------------- 2001 2000 1999 Operating Income Dividend income from subsidiaries $14,787 $ 7,756 $ 8,256 Fees from subsidiaries 7,999 6,300 3,579 Other income 12 70 10 ------- ------- ------- Total operating income 22,798 14,126 11,845 ------- ------- ------- Operating Expenses Salaries and employee benefits 4,537 3,698 2,158 Net occupancy 387 218 155 Furniture, equipment and data processing 893 886 709 Other operating expenses 2,275 1,558 1,353 Acquisition related expenses 271 129 1,019 ------- ------- ------- Total operating expenses 8,363 6,489 5,394 ------- ------- ------- Income before equity in undistributed earnings of subsidiaries 14,435 7,637 6,451 Equity in undistributed earnings of subsidiaries 961 6,240 3,705 ------- ------- ------- Income before income taxes 15,396 13,877 10,156 Income tax benefit (expense) 22 (18) 73 ------- ------- ------- Net Income $15,418 $13,859 $10,229 ======= ======= =======
Statements of Cash Flows For Years Ended December 31, ---------------------------------------------------------------------------------------------- 2001 2000 1999 Operating Activities Net income $15,418 $13,859 $10,229 Adjustments to reconcile net income earnings to net cash provided by operating activities: Equity in undistributed earnings of subsidiaries (961) (6,240) (3,705) Depreciation and amortization 404 299 300 Decrease in obligation under ESOP and BRRP 5 6 487 Amortization of goodwill 41 5 5 (Increase) decrease in amount receivable from subsidiaries (292) 2,367 (427) Increase in other assets (203) (131) (2,292) Increase (decrease) in payables 645 (998) (1,799) ------- ------- ------- Net cash provided by operating activities 15,057 9,167 2,798 ------- ------- ------- Investing Activities Purchase of premises and equipment (1,707) (3,497) (347) Investment in Acadia Trust, N.A (4,551) -- -- ------- ------- ------- Net cash used by investing activities (6,258) (3,497) (347) ------- ------- ------- Financing Activities Proceeds from sale of treasury stock -- -- 2,249 Exercise and repurchase of stock options (80) (22) (975) Acquisition of minority interest 146 -- -- Purchase of treasury stock (1,444) (394) (2,337) Dividends paid (5,226) (5,150) (4,182) Proceeds from stock issuance under stock option plan -- 31 227 ------- ------- ------- Net cash used by financing activities (6,604) (5,535) (5,018) ------- ------- ------- Net increase (decrease) in cash 2,195 135 (2,567) Cash at beginning of year 216 81 2,648 ------- ------- ------- Cash at end of year $ 2,411 $ 216 $ 81 ======= ======= =======
46 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] 23. QUARTERLY RESULTS OF OPERATIONS (Unaudited) The following is a summary of the quarterly results of operations for the years ended December 31, 2001 and 2000:
THREE MONTHS ENDED -------------------------------------------------------------------------------- Mar 31 June 30 Sept 30 Dec 31 2001 Interest income $20,751 $20,552 $19,989 $18,578 Interest expense 10,483 9,423 8,469 7,314 Net interest income 10,268 11,129 11,520 11,264 Provision for loan losses 714 714 789 1,464 Income before income taxes 5,382 5,992 6,460 4,746 Applicable income taxes 1,762 1,989 1,980 1,431 Net income 3,620 4,003 4,480 3,315 Per common share: Basic 0.44 0.50 0.55 0.41 Diluted 0.44 0.49 0.55 0.41
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
47 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Auditor's Letter -------------------------------------------------------------------------------- BERRY DUNN MCNELL & PARKER -------------- [LOGO] REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Shareholders and Board of Directors Camden National Corporation We have audited the accompanying consolidated statements of condition of Camden National Corporation and Subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with U.S. generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and signigicant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Camden National Corporation and Subsidaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2001, in conformity with U.S. generally accepted accounting principles. /s/ ------------------------- Portland, Maine January 22, 2002 -------------------------------------------------------------------------------- 48 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] Boards of Directors and Bank Administrations Camden National Corporation DIRECTORS 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 Investments Robert W. Daigle President & CEO, Camden National Corporation & Camden National Bank Robert J. Gagnon Civic Leader Johann H. Gouws Chairman, President & CEO, Acadia Trust, N.A. Ward I. Graffam Graffam & Associates John W. Holmes President, Consumers Fuel Company Theodore C. Johanson Managing Director, Harbor Wharf, LLC Winfield R. Robinson President, Timber Resource Group, LLC Richard N. Simoneau, CPA Tax Partner, Simoneau, Norton, Masters & Alex, P.A. Arthur E. Strout Attorney & Partner, Strout & Payson, P.A. ADMINISTRATION Robert W. Daigle President & CEO, Camden National Corporation & Camden National Bank Laurel J. Bouchard Senior Vice President, Corporate Administration Joanne T. Campbell Senior Vice President, Residential Real Estate Gregory A. Dufour Senior Vice President, Finance Jeffrey D. Smith Senior Vice President, Operations & Technology John A. Gobel Vice President, Information Technology Kimberly J. Nason Vice President, Residential Real Estate June B. Parent Vice President & Human Resource Manager Susan M. Westfall Vice President, Clerk, Treasurer & Controller Scott R. Westhrin Vice President, Loan Servicing Eric Y. Boucher, CPA Assistant Vice President & Accounting Manager Jennifer F. Mazurek Assistant Vice President, Deposit Services & Electronic Banking Timothy J. Pratt Assistant Vice President, Items Processing Kathryn M. Ryder Assistant Vice President, Asset & Liability Manager Lee Ann Szelog Assistant Vice President & Marketing Manager Robert E. Cleveland, Jr. Senior Network Administrator Ann E. Filley Training Manager Lorraine M. Ivers Quality Service Manager Jane G. Pierce Residential Real Estate Underwriter Danny L. Swindler, II Facilities & Purchasing Manager Vanessa H. Tilton Internet Banking Manager Karen W. Vaughan Call Center Manager Camden National Bank DIRECTORS 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 Civic Leader John W. Holmes President, Consumers Fuel Co. Richard N. Simoneau, CPA Tax Partner, Simoneau, Norton, Masters & Alex, P.A. Arthur E. Strout Attorney & Partner, Strout & Payson, P.A. Rosemary B. Weymouth President, Megunticook Management Co. ASSOCIATE DIRECTORS Peter T. Allen Private Investor C.R. deRochemont Realtor, C.R. deRochemont 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 John S. McCormick, Jr. Engineer & Developer, Consolidated Real Estate and Engineering 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 continued 49 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Boards of Directors and Bank Administrations Camden National Bank ADMINISTRATION Robert W. Daigle President & CEO, Camden National Corporation & Camden National Bank Michael A. McAvoy Senior Vice President, Senior Risk Management Officer John P. "Jack" Williams Senior Vice President, Senior Loan Officer Jayne Crosby-Giles Vice President, Commercial Services Group Barbara B. Hanson Vice President, Commercial Services Group Michael F. Jones Vice President, Commercial Services Group Richard E. Littlefield Vice President, Commercial Services Group Stephen J. Matteo Vice President, Credit Administration Vera E. Rand Vice President, Commercial Services Group Stephen C. Staples Vice President, Commercial Services Group Stephen C. Wallace Vice President, Retail Group Todd L. Savage Assistant Vice President, Commercial Services Group Barry J. King Credit Analyst John P. Quesnel Special Assets Officer BRANCH ADMINISTRATION Tamara J. Bryant Vice President & Manager, Main Office & Camden Square Office R. Todd Starbird Assistant Vice President & Manager, Rockland Office Judith L. Brogden Manager, Thomaston Office Laverne M. Hatch Manager, Belfast Office & Bucksport Office Emily B. Lane Manager, Vinalhaven Office Richard H. Newell, Jr. Manager, Damariscotta Office Susan L. O'Brien Manager, Union Office William H. Pusey, III Manager, Portland Office Walter C. Reynolds Manager, Waldoboro Office UnitedKingfield Bank DIRECTORS 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 John C. Witherspoon President & CEO Timothy P. Nightingale Vice President, Senior Loan Officer & Market Manager, Penobscot & Piscataquis Counties Gordon A. Flint Vice President & Market Manager, Franklin & Somerset Counties Robert D. Stone Vice President & Market Manager, Androscoggin County Valarie A. Coolong Commercial Loan Officer, Greater Bangor John B. Ellrich Commercial Loan Officer, Farmington George C. Dilts Commercial Loan Officer, Greater Bangor Cynthia C. Wheeler Commercial Loan Officer, Greater Bangor Susan H. Froehlich Retail Underwriting Manager Brenda L. Gerow Human Resources Manager & Sales Manager Joseph T. McOscar Credit Administrator BRANCH ADMINISTRATION Michael A. Durgin Regional Sales Manager, Bangor 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 Raymond B. Teixeira Regional Sales Manager, Lewiston Catherine L. Moore Branch Administrator Kathy Pelletier Employee Benefits Officer 50 CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES [GRAPHIC] Acadia Trust, N.A. Directors Johann H. Gouws Chairman, President & CEO, Acadia Trust, N.A. Ward I. Graffam Graffam & Associates John M. Albin, CPA Retired Senior Partner, Albin, Randall and Bennett Robert J. Campbell Partner, Beck, Mack & Oliver Investments Robert G. Fuller, Jr., Esq. Private Trustee Officers Johann H. Gouws Chairman, President & CEO Frank E. Kemna, Jr., Senior Vice President & Senior Trust Officer John L. Simpson Senior Vice President & Chief Investment Officer Diane M. Aston Vice President, Trust Operations Lawrence A. Blaisdell Vice President & Portfolio Manager Patricia N. O'Donnell Vice President, Marketing & Development Jan F. Macleod Vice President & Director of Research Joan M. Smith Vice President, Chief Financial Officer & Chief Operating Officer Barbara Brown Trust Tax Officer Trust Company of Maine, Inc. DIRECTORS Andrew P. Averill Retired Chairman, 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 Johann H. Gouws Chairman, President & CEO, Acadia Trust, N.A. Richard N. Simoneau, CPA Tax Partner, Simoneau, Norton, Masters & Alex, P.A. John C. Witherspoon President & CEO, UnitedKingfield Bank ADMINISTRATION Johann H. Gouws Chairman, 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 Senior Employee Benefits Officer Jana D. Hanscom Employee Benefits Officer Kathy Pelletier Employee Benefits Officer Acadia Financial Consultants Marcia Mansfield President Lisa Masters Account Executive, Camden National Bank Robert McKay Account Executive, UnitedKingfield Bank Dorothy M. Peters, Executive Assistant 51 [GRAPHIC] CAMDEN NATIONAL CORPORATION AND SUBSIDIARIES Annual Meeting of Camden National Corporation Tuesday, April 30, 2002, 3:00 p.m. The Camden Opera House The Company will provide, upon written request and without charge, a copy of Camden National Corporation's 2001 Annual Report on Securities and Exchange Commission Form 10K. Please contact: Gregory A. Dufour, Senior Vice President of Finance Camden National Corporation P.O. Box 310 Camden, Maine 04843 207-236-9131, ext. 2106 gdufour@camdennational.com Credits: Design & Layout Peggy Mason, ABC-webdesign & graphics, inc. Copy Writing Joanne Miller Photography Front and back covers ~ Thomas Mark Szelog(C)2002 Inside front cover ~ Sara Gray(C)2002 Table of Contents Birds ~ Joe Devenney(C)2002 Wreath ~ Thomas Mark Szelog(C)2002 Ship's wheel ~ Benjamin Mendlowitz(C)2002 Page 2 Birch trees ~ Michele Stapleton(C)2002 Portrait ~ Benjamin Magro(C)2002 Page 4 Flying geese ~ Thomas Mark Szelog(C)2002 Bird sculptor ~ Joe Devenney(C)2002 Page 6 Pine trees ~ Michele Stapleton(C)2002 Wreath maker ~ Thomas Mark Szelog(C)2002 Page 8 Boat sailing ~ Benjamin Mendlowitz(C)2002 Boat hull ~ Benjamin Mendlowitz(C)2002 Financial pages Various tree images ~ Michele Stapleton(C)2002 and Sara Gray(C)2002 Inside back cover ~ Thomas Mark Szelog(C)2002 Printing Spectrum Printing & Graphics Inc. 52 [RINGS OF TREE GRAPHIC APPEARS IN BACKGROUND] The rings of a tree... are the evidence of its growth and maturity. Camden National Corporation's record of financial performance... is the evidence of its consistency and strength. Constantly growing and changing, we remain dedicated to our roots, carefully crafting and delivering the best financial products and services in Maine. [GRAPHIC OF TREES APPEARS HERE]