Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended March 31, 2009
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Commission
File
No. 0-28190
CAMDEN
NATIONAL CORPORATION
(Exact
name of registrant as specified in its charter)
MAINE
|
|
01-0413282
|
(State
or other jurisdiction of
|
|
(I.R.S.
Employer
|
incorporation
or organization)
|
|
Identification
No.)
|
2
ELM STREET, CAMDEN, ME
|
|
04843
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (207) 236-8821
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes
x No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Yes ¨ No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer ¨
|
|
Accelerated filer x
|
Non-accelerated filer ¨
(Do not check if a smaller reporting
company)
|
|
Smaller reporting company ¨
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes ¨ No
x
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practical date:Outstanding at May 6,
2009: Common stock (no par value) 7,641,074 shares.
CAMDEN
NATIONAL CORPORATION
FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 2009
TABLE
OF CONTENTS OF INFORMATION REQUIRED IN REPORT
|
|
PAGE
|
|
|
|
|
PART
I. FINANCIAL INFORMATION
|
|
|
|
|
ITEM
1.
|
FINANCIAL
STATEMENTS
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
3
|
|
|
|
|
Consolidated
Statements of Condition
March
31, 2009 and December 31, 2008
|
4
|
|
|
|
|
Consolidated
Statements of Income
Three
Months Ended March 31, 2009 and 2008
|
5
|
|
|
|
|
Consolidated
Statements of Changes in Shareholder’s Equity
Three
Months Ended March 31, 2009 and 2008
|
6
|
|
|
|
|
Consolidated
Statements of Cash Flows
Three
Months Ended March 31, 2009 and 2008
|
7
|
|
|
|
|
Notes to
Consolidated Financial Statements
Three
Months Ended March 31, 2009 and 2008
|
8-20
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|
|
|
|
|
|
ITEM
2.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
21-32
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|
|
|
ITEM
3.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
|
33-34
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|
|
|
ITEM
4.
|
CONTROLS
AND PROCEDURES
|
34
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|
|
|
PART
II. OTHER INFORMATION
|
|
|
|
|
ITEM
1.
|
LEGAL
PROCEEDINGS
|
34
|
|
|
|
ITEM 1A.
|
RISK
FACTORS
|
34
|
|
|
|
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
35
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|
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
35
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|
|
|
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
35
|
|
|
|
ITEM
5.
|
OTHER
INFORMATION
|
35
|
|
|
|
ITEM
6.
|
EXHIBITS
|
36
|
|
|
|
SIGNATURES
|
37
|
|
|
EXHIBIT
INDEX
|
38
|
|
|
EXHIBITS
|
|
PART
I. FINANCIAL INFORMATION
ITEM
1. FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The
Shareholders and Board of Directors
Camden
National Corporation
We have
reviewed the accompanying interim consolidated financial information of Camden
National Corporation and Subsidiaries as of March 31, 2009, and for the
three-month periods ended March 31, 2009 and 2008. These financial
statements are the responsibility of the Company's management.
We
conducted our reviews in accordance with standards of the Public Company
Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit in
accordance with standards of the Public Company Accounting Oversight Board
(United States), the objective of which is to express an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on
our reviews, we are not aware of any material modifications that should be made
to the accompanying financial statements for them to be in conformity with
accounting principles generally accepted in the United States of
America.
Berry,
Dunn, McNeil & Parker
Bangor,
Maine
May 8,
2009
CAMDEN
NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CONDITION
|
|
March 31,
|
|
December 31,
|
(In Thousands, Except Number of Shares and per Share Data)
|
|
2009
|
|
2008
|
ASSETS
|
|
|
|
|
|
|
|
|
Cash
and due from banks
|
|
$
|
28,765
|
|
|
$
|
35,195
|
|
Securities
|
|
|
|
|
|
|
|
|
Securities
available for sale, at fair value
|
|
|
590,666
|
|
|
|
606,031
|
|
Securities
held to maturity, at amortized cost (fair value $41,376 and $41,954 at
March 31, 2009 and December 31, 2008, respectively)
|
|
|
41,515
|
|
|
|
42,040
|
|
Federal
Home Loan and Federal Reserve Bank stock, at cost
|
|
|
21,969
|
|
|
|
21,969
|
|
Total
securities
|
|
|
654,150
|
|
|
|
670,040
|
|
Loans
held for sale
|
|
|
8,964
|
|
|
|
—
|
|
Loans
|
|
|
1,469,520
|
|
|
|
1,500,908
|
|
Less
allowance for loan losses
|
|
|
(17,691
|
)
|
|
|
(17,691
|
)
|
Net
loans
|
|
|
1,451,829
|
|
|
|
1,483,217
|
|
Goodwill
|
|
|
41,780
|
|
|
|
41,857
|
|
Bank-owned
life insurance
|
|
|
40,854
|
|
|
|
40,459
|
|
Premises
and equipment, net
|
|
|
25,307
|
|
|
|
25,872
|
|
Interest
receivable
|
|
|
8,385
|
|
|
|
8,325
|
|
Core
deposit intangible
|
|
|
4,393
|
|
|
|
4,518
|
|
Other
real estate owned
|
|
|
3,183
|
|
|
|
4,024
|
|
Other
assets
|
|
|
25,910
|
|
|
|
27,989
|
|
Total
assets
|
|
$
|
2,293,520
|
|
|
$
|
2,341,496
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Demand
|
|
$
|
170,974
|
|
|
$
|
180,407
|
|
Interest
checking, savings and money market
|
|
|
618,634
|
|
|
|
632,664
|
|
Retail
certificates of deposit
|
|
|
592,604
|
|
|
|
593,013
|
|
Brokered
deposits
|
|
|
98,978
|
|
|
|
83,433
|
|
Total
deposits
|
|
|
1,481,190
|
|
|
|
1,489,517
|
|
Federal
Home Loan Bank advances
|
|
|
216,480
|
|
|
|
258,925
|
|
Other
borrowed funds
|
|
|
356,188
|
|
|
|
359,470
|
|
Junior
subordinated debentures
|
|
|
43,435
|
|
|
|
43,410
|
|
Accrued
interest and other liabilities
|
|
|
24,231
|
|
|
|
23,774
|
|
Total
liabilities
|
|
|
2,121,524
|
|
|
|
2,175,096
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
Equity
|
|
|
|
|
|
|
|
|
Common
stock, no par value; authorized 20,000,000 shares, issued and outstanding
7,641,074 and 7,638,713 shares on March 31, 2009 and December 31, 2008,
respectively
|
|
|
2,973
|
|
|
|
2,851
|
|
Surplus
|
|
|
46,133
|
|
|
|
46,133
|
|
Retained
earnings
|
|
|
122,862
|
|
|
|
118,564
|
|
Accumulated
other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
Net
unrealized gains (losses) on securities available for sale, net of
tax
|
|
|
1,236
|
|
|
|
(89
|
)
|
Net
unrealized losses on derivative instruments, net of tax
|
|
|
(165
|
)
|
|
|
—
|
|
Net
unrecognized losses on postretirement plans, net of tax
|
|
|
(1,043
|
)
|
|
|
(1,059
|
)
|
Total
accumulated other comprehensive income (loss)
|
|
|
28
|
|
|
|
(1,148
|
)
|
Total
shareholders’ equity
|
|
|
171,996
|
|
|
|
166,400
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
2,293,520
|
|
|
$
|
2,341,496
|
|
See
Report of Independent Registered Public Accounting Firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
CAMDEN
NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
Three Months Ended March 31,
|
(In Thousands, Except Number of Shares and per Share Data)
|
|
|
2009
|
|
|
|
2008
|
|
Interest
Income
|
|
|
|
|
|
|
|
|
Interest
and fees on loans
|
|
$
|
21,621
|
|
|
$
|
25,314
|
|
Interest
on U.S. government and sponsored enterprise obligations
|
|
|
7,240
|
|
|
|
6,148
|
|
Interest
on state and political subdivision obligations
|
|
|
645
|
|
|
|
676
|
|
Interest
on federal funds sold and other investments
|
|
|
30
|
|
|
|
771
|
|
Total
interest income
|
|
|
29,536
|
|
|
|
32,909
|
|
Interest
Expense
|
|
|
|
|
|
|
|
|
Interest
on deposits
|
|
|
6,394
|
|
|
|
8,942
|
|
Interest
on borrowings
|
|
|
3,934
|
|
|
|
6,052
|
|
Interest
on junior subordinated debentures
|
|
|
713
|
|
|
|
752
|
|
Total
interest expense
|
|
|
11,041
|
|
|
|
15,746
|
|
Net
interest income
|
|
|
18,495
|
|
|
|
17,163
|
|
Provision
for Loan Losses
|
|
|
1,730
|
|
|
|
500
|
|
Net
interest income after provision for loan losses
|
|
|
16,765
|
|
|
|
16,663
|
|
Non-Interest
Income
|
|
|
|
|
|
|
|
|
Service
charges on deposit accounts
|
|
|
1,233
|
|
|
|
1,227
|
|
Other
service charges and fees
|
|
|
613
|
|
|
|
639
|
|
Income
from fiduciary services
|
|
|
1,354
|
|
|
|
1,677
|
|
Brokerage
and insurance commissions
|
|
|
358
|
|
|
|
318
|
|
Mortgage
banking income (loss), net
|
|
|
455
|
|
|
|
(130
|
)
|
Bank-owned
life insurance
|
|
|
395
|
|
|
|
293
|
|
Net
investment securities gains
|
|
|
—
|
|
|
|
180
|
|
Other
income
|
|
|
152
|
|
|
|
199
|
|
Total
non-interest income
|
|
|
4,560
|
|
|
|
4,403
|
|
Non-Interest
Expenses
|
|
|
|
|
|
|
|
|
Salaries
and employee benefits
|
|
|
5,658
|
|
|
|
6,652
|
|
Net
occupancy
|
|
|
1,123
|
|
|
|
1,089
|
|
Furniture
and equipment
|
|
|
837
|
|
|
|
852
|
|
Consulting
and service fees
|
|
|
711
|
|
|
|
714
|
|
Other
real estate owned and collection costs
|
|
|
880
|
|
|
|
227
|
|
Regulatory
assessments
|
|
|
872
|
|
|
|
161
|
|
Amortization
of core deposit intangible
|
|
|
125
|
|
|
|
310
|
|
Other
expenses
|
|
|
2,085
|
|
|
|
2,256
|
|
Total
non-interest expenses
|
|
|
12,291
|
|
|
|
12,261
|
|
Income
before income taxes
|
|
|
9,034
|
|
|
|
8,805
|
|
Income
Taxes
|
|
|
2,820
|
|
|
|
2,611
|
|
Net
Income
|
|
$
|
6,214
|
|
|
$
|
6,194
|
|
|
|
|
|
|
|
|
|
|
Per
Share Data
|
|
|
|
|
|
|
|
|
Basic
earnings per share – common stock
|
|
$
|
0.81
|
|
|
$
|
0.81
|
|
Basic
earnings per share – unvested share-based payment awards
|
|
|
0.81
|
|
|
|
0.80
|
|
Diluted
earnings per share – common stock
|
|
|
0.81
|
|
|
|
0.80
|
|
Diluted
earnings per share– unvested share-based payment awards
|
|
$
|
0.81
|
|
|
$
|
0.80
|
|
Weighted
average number of shares outstanding
|
|
|
7,639,169
|
|
|
|
7,692,726
|
|
See
Report of Independent Registered Public Accounting Firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
CAMDEN
NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In Thousands, Except Number of
Shares and per Share Data)
|
|
Common
Stock
|
|
Surplus
|
|
Retained
Earnings
|
|
Net
Unrealized
(Losses)
Gains
on Securities
Available for
Sale
|
|
Net
Unrealized
Losses on
Derivative
Instruments
|
|
Net
Unrecognized
Losses on
Postretirement
Plans
|
|
Total
Shareholders’
Equity
|
Balance
at December 31, 2007
|
|
$
|
2,522
|
|
|
$
|
2,629
|
|
|
$
|
114,289
|
|
|
$
|
1,516
|
|
|
$
|
—
|
|
|
$
|
(753
|
)
|
|
$
|
120,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
6,194
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,194
|
|
Change
in unrealized gains on securities available for sale, net of taxes of
($1,615)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,000
|
|
Change
in unrecognized losses on postretirement plans, net of taxes of
($212)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
393
|
|
|
|
393
|
|
Total
comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
6,194
|
|
|
|
3,000
|
|
|
|
—
|
|
|
|
393
|
|
|
|
9,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
issued during acquisition of Union Bankshares Company (1,222,497
shares)
|
|
|
—
|
|
|
|
43,523
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,523
|
|
Equity
compensation expense
|
|
|
—
|
|
|
|
34
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
34
|
|
Exercise
of stock options and issuance of restricted stock (total 9,291
shares)
|
|
|
280
|
|
|
|
(148
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
132
|
|
Common
stock repurchase (41,343 shares)
|
|
|
—
|
|
|
|
(51
|
)
|
|
|
(1,288
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,339
|
)
|
Balance
at March 31, 2008
|
|
$
|
2,802
|
|
|
$
|
45,987
|
|
|
$
|
119,195
|
|
|
$
|
4,516
|
|
|
$
|
—
|
|
|
$
|
(360
|
)
|
|
$
|
172,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2008
|
|
$
|
2,851
|
|
|
$
|
46,133
|
|
|
$
|
118,564
|
|
|
$
|
(89
|
)
|
|
$
|
—
|
|
|
$
|
(1,059
|
)
|
|
$
|
166,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
6,214
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
6,214
|
|
Change
in unrealized gains on securities available for sale, net of taxes of
($713)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,325
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,325
|
|
Change
in unrealized losses on derivative instruments, net of taxes of
$89
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(165
|
)
|
|
|
—
|
|
|
|
(165
|
)
|
Change
in net unrecognized losses on postretirement plans, net of taxes of
($8)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
16
|
|
|
|
16
|
|
Total
comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
6,214
|
|
|
|
1,325
|
|
|
|
(165
|
)
|
|
|
16
|
|
|
|
7,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
compensation expense
|
|
|
—
|
|
|
|
93
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
93
|
|
Exercise
of stock options and issuance of restricted stock (total 2,361
shares)
|
|
|
122
|
|
|
|
(93
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
29
|
|
Cash
dividends declared ($0.25 per share)
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,916
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,916
|
)
|
Balance
at March 31, 2009
|
|
$
|
2,973
|
|
|
$
|
46,133
|
|
|
$
|
122,862
|
|
|
$
|
1,236
|
|
|
$
|
(165
|
)
|
|
$
|
(1,043
|
)
|
|
$
|
171,996
|
|
See
Report of Independent Registered Public Accounting Firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
CAMDEN
NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Three Months Ended March 31,
|
(In Thousands)
|
|
2009
|
|
2008
|
Operating Activities
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
6,214
|
|
|
$
|
6,194
|
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
Provision
for loan losses
|
|
|
1,730
|
|
|
|
500
|
|
Depreciation
and amortization
|
|
|
667
|
|
|
|
464
|
|
Equity
compensation expense
|
|
|
93
|
|
|
|
34
|
|
(Increase)
decrease in interest receivable
|
|
|
(60
|
)
|
|
|
57
|
|
Amortization
of core deposit intangible
|
|
|
125
|
|
|
|
310
|
|
Net
investment securities gains
|
|
|
—
|
|
|
|
(180
|
)
|
Originations
of mortgage loans held for sale
|
|
|
(29,119
|
)
|
|
|
—
|
|
Proceeds
from the sale of mortgage loans
|
|
|
20,155
|
|
|
|
—
|
|
Gain
on sale of mortgage loans
|
|
|
(112
|
)
|
|
|
—
|
|
Liquidation
of defined benefit pension plan
|
|
|
(735
|
)
|
|
|
—
|
|
Decrease
in other assets
|
|
|
2,334
|
|
|
|
845
|
|
Increase
in other liabilities
|
|
|
388
|
|
|
|
476
|
|
Net
cash provided by operating activities
|
|
|
1,680
|
|
|
|
8,700
|
|
Investing
Activities
|
|
|
|
|
|
|
|
|
Acquisition
of Union Bankshares Company
|
|
|
—
|
|
|
|
(29,028
|
)
|
Proceeds
from maturities of securities held to maturity
|
|
|
500
|
|
|
|
—
|
|
Proceeds
from sales and maturities of securities available for sale
|
|
|
47,830
|
|
|
|
67,252
|
|
Purchase
of securities held to maturity
|
|
|
—
|
|
|
|
(39
|
)
|
Purchase
of securities available for sale
|
|
|
(30,469
|
)
|
|
|
(70,447
|
)
|
Net
decrease (increase) in loans
|
|
|
30,074
|
|
|
|
(6,876
|
)
|
Proceeds
from the sale of other real estate owned
|
|
|
175
|
|
|
|
—
|
|
Premium
received on sale of branch
|
|
|
—
|
|
|
|
1,400
|
|
Purchase
of premises and equipment
|
|
|
(194
|
)
|
|
|
(522
|
)
|
Net
cash provided (used) by investing activities
|
|
|
47,916
|
|
|
|
(38,260
|
)
|
Financing
Activities
|
|
|
|
|
|
|
|
|
Net
decrease in deposits
|
|
|
(8,336
|
)
|
|
|
(43,294
|
)
|
Proceeds
from Federal Home Loan Bank long-term advances
|
|
|
—
|
|
|
|
155,810
|
|
Repayments
on Federal Home Loan Bank long-term advances
|
|
|
(42,445
|
)
|
|
|
(133,392
|
)
|
Net
change in short-term Federal Home Loan Bank borrowings
|
|
|
(31,185
|
)
|
|
|
35,060
|
|
Net
increase in other borrowed funds
|
|
|
27,828
|
|
|
|
33,249
|
|
Increase
in due to broker
|
|
|
—
|
|
|
|
1,875
|
|
Decrease
in note payable
|
|
|
(5
|
)
|
|
|
(10,000
|
)
|
Common
stock repurchase
|
|
|
—
|
|
|
|
(1,339
|
)
|
Proceeds
from exercise of stock options
|
|
|
29
|
|
|
|
132
|
|
Cash
dividends paid on common stock
|
|
|
(1,912
|
)
|
|
|
(1,566
|
)
|
Net
cash (used) provided by financing activities
|
|
|
(56,026
|
)
|
|
|
36,535
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(6,430
|
)
|
|
|
6,975
|
|
Cash
and cash equivalents at beginning of year
|
|
|
35,195
|
|
|
|
28,790
|
|
Cash
and cash equivalents at end of period
|
|
$
|
28,765
|
|
|
$
|
35,765
|
|
Supplemental
information
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
11,341
|
|
|
$
|
15,168
|
|
Income
taxes paid
|
|
|
—
|
|
|
|
229
|
|
Common
stock issued in acquisition
|
|
|
—
|
|
|
|
43,523
|
|
Transfer
from loans to loans held for sale
|
|
|
8,964
|
|
|
|
4,265
|
|
Transfer
from loans to other real estate owned
|
|
|
—
|
|
|
|
34
|
|
See
Report of Independent Registered Public Accounting Firm.
The
accompanying notes are an integral part of these consolidated financial
statements.
CAMDEN
NATIONAL CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts
in Tables Expressed in Thousands, Except Number of Shares and per Share
Data)
NOTE
1 - BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements were prepared in
accordance with instructions for Form 10-Q and, therefore, do not include all
disclosures required by accounting principles generally accepted in the United
States of America for complete presentation of financial
statements. In the opinion of management, the consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) necessary to present fairly the consolidated statements of condition
of Camden National Corporation (the “Company”) as of March 31, 2009 and December
31, 2008, the consolidated statements of income for the three months ended March
31, 2009 and 2008, the consolidated statements of changes in shareholders'
equity for the three months ended March 31, 2009 and 2008, and the consolidated
statements of cash flows for the three months ended March 31, 2009 and
2008. All significant intercompany transactions and balances are
eliminated in consolidation. Certain items from the prior year were
reclassified to conform to the current year presentation. The income
reported for the three-month period ended March 31, 2009 is not necessarily
indicative of the results that may be expected for the full year. The
information in this report should be read in conjunction with the consolidated
financial statements and accompanying notes included in the December 31, 2008
Annual Report on Form 10-K.
NOTE
2 – EARNINGS PER SHARE
Basic
earnings per share (“EPS”) is calculated by dividing net income available to
common shareholders by the weighted average number of common shares outstanding
for the period. Unvested restricted shares and stock options outstanding are not
included in common shares outstanding. Diluted EPS reflects the potential that
could occur if contracts to issue common stock (such as stock options) were
exercised or converted into common shares that would then share in the earnings
of the Company. Diluted EPS is computed by dividing net income by the weighted
average number of common shares outstanding for the period, plus an incremental
number of common-equivalent shares computed using the treasury stock method. In
June 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities,
which became effective in 2009 via retrospective application. Under the FSP,
unvested share-based payment awards that contain non-forfeitable rights to
dividends or dividend equivalents are participating securities and, therefore,
are included in computing earnings per share pursuant to the two-class method.
The two-class method determines earnings per share for each class of common
stock and participating securities according to dividends or dividend
equivalents and their respective participation rights in undistributed earnings.
The Company’s restricted share grants and management stock purchase grants
receive non-forfeitable dividends at the same rate as common stock. The
following table sets forth the computation of basic and diluted earnings per
share under the two-class method:
|
|
Three Months Ended March 31,
|
|
|
2009
|
|
2008
|
Net
income, as reported
|
|
$
|
6,214
|
|
|
$
|
6,194
|
|
Weighted-average
common shares outstanding – basic
|
|
|
7,639,169
|
|
|
|
7,692,726
|
|
Dilutive
effect of stock-based compensation
|
|
|
3,536
|
|
|
|
2,007
|
|
Weighted-average
common and potential common shares – diluted
|
|
|
7,642,705
|
|
|
|
7,694,733
|
|
Basic
earnings per share – common stock
|
|
$
|
0.81
|
|
|
$
|
0.81
|
|
Basic
earnings per share – unvested share-based payment awards
|
|
|
0.81
|
|
|
|
0.80
|
|
Diluted
earnings per share – common stock
|
|
|
0.81
|
|
|
|
0.80
|
|
Diluted
earnings per share– unvested share-based payment awards
|
|
$
|
0.81
|
|
|
$
|
0.80
|
|
At March
31, 2009 and 2008, options to purchase 134,800 and 95,450 shares, respectively,
of common stock were not considered in the computation of potential common
shares for purposes of diluted EPS, since the exercise prices of the options
were greater than the average market price of the common stock for the
respective periods.
NOTE
3 – SECURITIES
The
following tables summarize the amortized costs and fair values of securities
available for sale and held to maturity, as of the dates indicated:
|
|
Amortized
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair
Value
|
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. government sponsored enterprises
|
|
$
|
4,527
|
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
4,584
|
|
Obligations
of states and political subdivisions
|
|
|
24,499
|
|
|
|
147
|
|
|
|
(245
|
)
|
|
|
24,401
|
|
Mortgage-backed
securities issued or guaranteed by U.S. government sponsored
enterprises
|
|
|
500,518
|
|
|
|
15,995
|
|
|
|
(212
|
)
|
|
|
516,301
|
|
Private
issue collateralized mortgage obligations
|
|
|
54,220
|
|
|
|
5
|
|
|
|
(12,452
|
)
|
|
|
41,773
|
|
Total
debt securities
|
|
|
583,764
|
|
|
|
16,204
|
|
|
|
(12,909
|
)
|
|
|
587,059
|
|
Equity
securities
|
|
|
5,000
|
|
|
|
—
|
|
|
|
(1,393
|
)
|
|
|
3,607
|
|
Total
securities available for sale
|
|
$
|
588,764
|
|
|
$
|
16,204
|
|
|
$
|
(14,302
|
)
|
|
$
|
590,666
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political subdivisions
|
|
$
|
41,515
|
|
|
$
|
272
|
|
|
$
|
(411
|
)
|
|
$
|
41,376
|
|
Total
securities held to maturity
|
|
$
|
41,515
|
|
|
$
|
272
|
|
|
$
|
(411
|
)
|
|
$
|
41,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of U.S. government sponsored enterprises
|
|
$
|
4,539
|
|
|
$
|
64
|
|
|
$
|
—
|
|
|
$
|
4,603
|
|
Obligations
of states and political subdivisions
|
|
|
25,457
|
|
|
|
105
|
|
|
|
(215
|
)
|
|
|
25,347
|
|
Mortgage-backed
securities issued or guaranteed by U.S. government sponsored
enterprises
|
|
|
514,049
|
|
|
|
11,339
|
|
|
|
(52
|
)
|
|
|
525,336
|
|
Private
issue collateralized mortgage obligations
|
|
|
57,123
|
|
|
|
1
|
|
|
|
(10,347
|
)
|
|
|
46,777
|
|
Total
debt securities
|
|
|
601,168
|
|
|
|
11,509
|
|
|
|
(10,614
|
)
|
|
|
602,063
|
|
Equity
securities
|
|
|
5,000
|
|
|
|
—
|
|
|
|
(1,032
|
)
|
|
|
3,968
|
|
Total
securities available for sale
|
|
$
|
606,168
|
|
|
$
|
11,509
|
|
|
$
|
(11,646
|
)
|
|
$
|
606,031
|
|
Held
to maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political subdivisions
|
|
$
|
42,040
|
|
|
$
|
213
|
|
|
$
|
(299
|
)
|
|
$
|
41,954
|
|
Total
securities held to maturity
|
|
$
|
42,040
|
|
|
$
|
213
|
|
|
$
|
(299
|
)
|
|
$
|
41,954
|
|
For the
first quarter of 2009, there were no sales in the available for sale portfolio.
Unrealized gains on securities available for sale arising during the first
quarter of 2009 and included in other comprehensive income amounted to $1.3
million, net of deferred taxes of $713,000.
At March
31, 2009, securities with an amortized cost of $469.1 million and a fair value
of $476.7 million were pledged to secure Federal Home Loan Bank (“FHLB”)
advances, public deposits, securities sold under agreements to repurchase and
other purposes required or permitted by law.
Management
reviews the investment portfolio on a periodic basis to determine the cause,
magnitude and duration of declines in the fair value of each security. Thorough
evaluations of the causes of the unrealized losses are performed to determine
whether the impairment is temporary or other than temporary in nature.
Considerations such as the ability of the securities to meet cash flow
requirements, levels of credit enhancements, risk of curtailment, recoverability
of invested amount over a reasonable period of time and the length of time the
security is in a loss position, for example, are applied in determining other
than temporary impairment.
The
following table shows the gross unrealized losses and fair values of investment
securities at March 31, 2009 and December 31, 2008, by length of time that
individual securities in each category have been in a continuous loss
position.
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
March
31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political subdivisions
|
|
$
|
32,136
|
|
|
$
|
(656
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
32,136
|
|
|
$
|
(656
|
)
|
Mortgage-backed
securities
|
|
|
14,777
|
|
|
|
(210
|
)
|
|
|
2,713
|
|
|
|
(2
|
)
|
|
|
17,490
|
|
|
|
(212
|
)
|
Private
issue collateralized mortgage obligations
|
|
|
5,027
|
|
|
|
(406
|
)
|
|
|
33,493
|
|
|
|
(12,046
|
)
|
|
|
38,520
|
|
|
|
(12,452
|
)
|
Equity
securities
|
|
|
3,607
|
|
|
|
(1,393
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,607
|
|
|
|
(1,393
|
)
|
Total
|
|
$
|
55,547
|
|
|
$
|
(2,665
|
)
|
|
$
|
36,206
|
|
|
$
|
(12,048
|
)
|
|
$
|
91,753
|
|
|
$
|
(14,713
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations
of states and political subdivisions
|
|
$
|
32,393
|
|
|
$
|
(477
|
)
|
|
$
|
770
|
|
|
$
|
(37
|
)
|
|
$
|
33,163
|
|
|
$
|
(514
|
)
|
Mortgage-backed
securities
|
|
|
18,440
|
|
|
|
(38
|
)
|
|
|
4,407
|
|
|
|
(14
|
)
|
|
|
22,847
|
|
|
|
(52
|
)
|
Private
issue collateralized mortgage obligations
|
|
|
37,106
|
|
|
|
(6,193
|
)
|
|
|
9,652
|
|
|
|
(4,154
|
)
|
|
|
46,758
|
|
|
|
(10,347
|
)
|
Equity
securities
|
|
|
3,968
|
|
|
|
(1,032
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
3,968
|
|
|
|
(1,032
|
)
|
Total
|
|
$
|
91,907
|
|
|
$
|
(7,740
|
)
|
|
$
|
14,829
|
|
|
$
|
(4,205
|
)
|
|
$
|
106,736
|
|
|
$
|
(11,945
|
)
|
At March
31, 2009, $91.8 million of the Company’s investment securities had unrealized
losses that are considered temporary. The majority of the unrealized loss was
related to the private issue collateralized mortgage obligations (“CMOs”), which
are all rated as Triple-A except for one rated Double-B, although the Company’s
share of this CMO is in the senior tranche. Management believes the unrealized
loss for the CMOs is the result of current market illiquidity and the
underestimation of value in the market. Including the CMOs, there were 18
securities with a fair value of $36.2 million in the portfolio which had
unrealized losses for twelve months or longer. Management currently has the
intent and ability to retain these investment securities with unrealized losses
until the decline in value has been recovered.
At March
31, 2009, the Company held Duff & Phelps Select Income Fund Auction
Preferred Stock with an amortized cost of $5.0 million which has failed at
auction. The security is rated Triple-A by Moody’s and Standard and Poor’s.
Management believes the failed auctions are a temporary liquidity event related
to this asset class of securities. The Company is currently collecting all
amounts due according to contractual terms and have the ability and intent to
hold the securities until they clear auction, are called, or mature; therefore,
the securities are not considered other than temporarily impaired.
NOTE
4 – LOANS AND ALLOWANCE FOR LOAN LOSSES
The
composition of the Company’s loan portfolio, including residential loans held
for sale, at March 31, 2009 and December 31, 2008 was as follows:
|
|
March 31,
|
|
December 31,
|
|
|
2009
|
|
2008
|
Residential
real estate loans
|
|
$
|
619,538
|
|
|
$
|
620,956
|
|
Commercial
real estate loans
|
|
|
391,523
|
|
|
|
400,312
|
|
Commercial
loans
|
|
|
206,306
|
|
|
|
213,683
|
|
Consumer
loans
|
|
|
261,172
|
|
|
|
265,865
|
|
Deferred
loan fees net of costs
|
|
|
(55
|
)
|
|
|
92
|
|
Total
loans
|
|
$
|
1,478,484
|
|
|
$
|
1,500,908
|
|
Non-accrual
loans at March 31, 2009 were $17.3 million, or 1.17% of total loans, compared to
$12.5 million, or 0.83% of total loans, at December 31, 2008. Non-accrual loans
at March 31, 2009 were comprised of $5.7 million in commercial loans, $5.1
million in commercial real estate loans, $5.0 million in residential real estate
loans, and $1.5 million in consumer loans. Non-accrual loans at December 31,
2008 consisted of $5.0 million in commercial real estate loans, $4.0 million in
residential real estate loans, $2.4 million in commercial loans, and $1.1
million in consumer loans.
For the
quarter ended March 31, 2009, the Company sold $20.0 million of residential
mortgage loans to the secondary market, which resulted in a gain on the sale of
$112,000 and an increase in mortgage servicing income of $213,000 due to the
recognition of the related mortgage servicing asset.
The
allowance for loan losses (“ALL”) is management’s best estimate of inherent risk
of loss in the loan portfolio as of the balance sheet date. Management makes
various assumptions and judgments about the collectibility of the loan portfolio
and provides an allowance for potential losses based on a number of factors. If
the assumptions are wrong, the ALL may not be sufficient to cover losses and may
cause an increase in the allowance in the future. Among the factors that could
affect the Company’s ability to collect loans and require an increase to the
allowance in the future are: general real estate and economic conditions;
regional credit concentration; industry concentration, for example in the
hospitality, tourism and recreation industries; and a requirement by the Federal
and state regulators to increase the provision for loan losses or recognize
additional charge-offs.
The
following is a summary of activity in the allowance for loan
losses:
|
|
For the Quarter Ended
|
|
|
March 31, 2009
|
|
March 31, 2008
|
Balance at
beginning of year
|
|
$
|
17,691
|
|
|
$
|
13,653
|
|
Acquired
from Union Bankshares
|
|
|
—
|
|
|
|
4,369
|
|
Loans
charged off
|
|
|
(1,827
|
)
|
|
|
(1,592
|
)
|
Recoveries
on loans previously charged off
|
|
|
97
|
|
|
|
49
|
|
Net
charge-offs
|
|
|
(1,730
|
)
|
|
|
(1,543
|
)
|
Provision
for loan losses
|
|
|
1,730
|
|
|
|
500
|
|
Balance
at end of period
|
|
$
|
17,691
|
|
|
$
|
16,979
|
|
NOTE
5 – GOODWILL, CORE DEPOSIT AND TRUST RELATIONSHIP INTANGIBLE
During
the first quarter of 2008, the Company acquired $37.8 million of goodwill, $5.0
million of core deposit intangible and $753,000 of Trust Relationship intangible
related to the acquisition of Union Bankshares Company (“Union Bankshares”).
During the quarter ended March 31, 2009, the Company completed its final
adjustments to the goodwill related to the Union Bankshares
acquisition. The changes in goodwill, core deposit intangible and
trust relationship intangible for the quarter ended March 31, 2009 are shown in
the table below:
|
|
Goodwill
|
|
|
|
Banking
|
|
Financial
Services
|
|
Total
|
|
Balance at December 31,
2008
|
|
$
|
34,797
|
|
|
$
|
7,060
|
|
|
$
|
41,857
|
|
2009
activity
|
|
|
(77
|
)
|
|
|
—
|
|
|
|
(77
|
)
|
Balance
at March 31, 2009
|
|
$
|
34,720
|
|
|
$
|
7,060
|
|
|
$
|
41,780
|
|
|
|
Core Deposit Intangible
|
|
|
|
Total
|
|
Accumulated
Amortization
|
|
Net
|
|
Balance at December 31, 2008
|
|
$
|
14,444
|
|
|
$
|
(9,926
|
)
|
|
$
|
4,518
|
|
2009
activity
|
|
|
—
|
|
|
|
(125
|
)
|
|
|
(125
|
)
|
Balance
at March 31, 2009
|
|
$
|
14,444
|
|
|
$
|
(10,051
|
)
|
|
$
|
4,393
|
|
|
|
Trust Relationship Intangible
|
|
|
|
Total
|
|
Accumulated
Amortization
|
|
Net
|
|
Balance at
December 31, 2008
|
|
$
|
753
|
|
|
$
|
(75
|
)
|
|
$
|
678
|
|
2009
activity
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
Balance
at March 31, 2009
|
|
$
|
753
|
|
|
$
|
(94
|
)
|
|
$
|
659
|
|
During
the fourth quarter of 2008, the Company completed its annual impairment
evaluation of goodwill and did not identify any impairment.
The
following table reflects the expected amortization schedule for intangible
assets at March 31, 2009:
|
|
Trust Relationship
|
|
|
Core Deposit
|
|
|
|
Intangible
|
|
|
Intangible
|
|
2009
|
|
$
|
56
|
|
|
$
|
377
|
|
2010
|
|
|
75
|
|
|
|
502
|
|
2011
|
|
|
75
|
|
|
|
502
|
|
2012
|
|
|
75
|
|
|
|
502
|
|
2013
|
|
|
75
|
|
|
|
502
|
|
Thereafter
|
|
|
303
|
|
|
|
2,008
|
|
Total
unamortized intangible
|
|
$
|
659
|
|
|
$
|
4,393
|
|
NOTE
6 – OTHER REAL ESTATE OWNED
The
transactions in other real estate owned (“OREO”) were as follows:
|
|
|
|
|
|
March 31, 2009
|
|
Balance at beginning of year
|
|
$
|
4,024
|
|
Additions
|
|
|
—
|
|
Increase
in OREO valuation allowance
|
|
|
(666
|
)
|
Properties
sold
|
|
|
(175
|
)
|
Balance
at end of period
|
|
$
|
3,183
|
|
The OREO
balance at March 31, 2009 consisted of eight properties, including three
residential properties, three commercial/mixed use properties, and two parcels
of raw land. The OREO valuation allowance relates to a parcel of raw
land that was included in OREO at December 31, 2008, at which time the Company
was relying on the appraised value and an offer to purchase the land contingent
upon obtaining acceptable financing. The sale of the property did not occur and
due to the continued deterioration in the real estate market, the value of the
property was reassessed during the first quarter of 2009, which resulted in a
$666,000 increase in the valuation allowance.
NOTE
7 – MORTGAGE SERVICING
Residential
real estate mortgages are originated by the Company both for portfolio and for
sale into the secondary market. The Company may sell its loans 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
is less than the interest rate the Company receives from the borrower. The
Company retains the difference as a fee for servicing the residential real
estate mortgages. The Company capitalizes mortgage servicing rights at their
fair value upon sale of the related loans, amortizes the asset over the
estimated life of the serviced loan, and periodically assesses the asset for
impairment. The balance of capitalized mortgage servicing rights, net of a
valuation allowance, included in other assets at March 31, 2009 and 2008 and
December 31, 2008 was $352,000, $1.1 million, and $139,000, respectively. At
these dates, the fair market value of the mortgage servicing rights approximated
$453,000, $1.4 million, and $174,000, respectively. In evaluating the
reasonableness of the carrying values of mortgage servicing rights, the Company
obtains third party valuations based on loan level data including note rate,
type and term of the underlying loans. The model utilizes a variety of
assumptions, the most significant of which are loan prepayment assumptions and
the discount rate used to discount future cash flows. Prepayment assumptions,
which are impacted by loan rates and terms, are calculated using a three-month
moving average of weekly prepayment data published by the Public Securities
Association and modeled against the serviced loan portfolio by the third party
valuation specialist. The discount rate is the quarterly average 10-year US
Treasury rate plus 5.0%. Other assumptions include delinquency rates,
foreclosure rates, servicing cost inflation, and annual unit loan cost. All
assumptions are adjusted periodically to reflect current circumstances.
Amortization of the mortgage servicing rights, as well as write-offs of
capitalized rights due to prepayments of the related mortgage loans, are
recorded as a charge against mortgage servicing fee income.
Mortgage
loans serviced for others are not included in the accompanying Consolidated
Statements of Condition of the Company and amounted to $196.9 million and $206.3
million at March 31, 2009 and 2008, respectively.
The
following summarizes mortgage servicing rights capitalized and amortized, along
with the activity in the related valuation allowance:
|
|
Three Months Ended March 31,
|
|
|
2009
|
|
|
2008
|
|
Mortgage
Servicing Rights:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
139
|
|
|
$
|
142
|
|
Acquired
from Union Bankshares
|
|
|
—
|
|
|
|
1,199
|
|
Capitalized
mortgage servicing rights
|
|
|
213
|
|
|
|
—
|
|
Amortization
charged against mortgage
banking income
|
|
|
(368
|
)
|
|
|
(241
|
)
|
Valuation
adjustment
|
|
|
368
|
|
|
|
(31
|
)
|
Balance
at end of period
|
|
$
|
352
|
|
|
$
|
1,069
|
|
Valuation
Allowance:
|
|
|
|
|
|
|
|
|
Balance
at beginning of year
|
|
$
|
(469
|
)
|
|
$
|
(1
|
)
|
Increase
in impairment reserve
|
|
|
—
|
|
|
|
(31
|
)
|
Reduction
of impairment reserve
|
|
|
368
|
|
|
|
—
|
|
Balance
at end of period
|
|
$
|
(101
|
)
|
|
$
|
(32
|
)
|
NOTE
8 – EMPLOYEE BENEFIT PLANS
Pension
Plan
The
Company, through its acquisition of Union Bankshares, had a qualified
noncontributory defined benefit pension plan covering substantially all
permanent full-time employees of the former Union Bankshares. Effective May 15,
2005, benefits accrued under this defined benefit plan were frozen based on
participants’ then current service and pay levels. During the fourth quarter of
2008 and the first quarter of 2009, the plan was liquidated. On
January 12, 2009, the Company paid out the remaining $735,000 liability related
to this plan.
Supplemental
Executive Retirement Plan and Other Postretirement Benefit Plan
The
components of net period benefit cost and other amounts recognized in other
comprehensive income for the three months ended March 31, 2009 and 2008 were as
follows:
|
|
|
SERP
|
|
|
|
Other Postretirement
Benefits
|
|
|
|
2009
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2008
|
|
Net
Period Benefit Cost Recognized in Net Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
$
|
51
|
|
|
$
|
46
|
|
|
$
|
16
|
|
|
$
|
16
|
|
Interest
cost
|
|
|
104
|
|
|
|
65
|
|
|
|
34
|
|
|
|
34
|
|
Recognized
net actuarial loss
|
|
|
19
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
Recognized
prior service cost
|
|
|
5
|
|
|
|
5
|
|
|
|
—
|
|
|
|
—
|
|
Net
period benefit cost
|
|
|
179
|
|
|
|
116
|
|
|
|
51
|
|
|
|
50
|
|
Changes
in Funded Status Recognized in Other Comprehensive Loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
actuarial loss
|
|
|
—
|
|
|
|
(606
|
)
|
|
|
—
|
|
|
|
6
|
|
Reclassifications
to net period benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of net unrecognized actuarial loss
|
|
|
(19
|
)
|
|
|
—
|
|
|
|
(1
|
)
|
|
|
—
|
|
Amortization
of prior service cost
|
|
|
(5
|
)
|
|
|
(5
|
)
|
|
|
—
|
|
|
|
—
|
|
Net
deferred tax expense (benefit)
|
|
|
8
|
|
|
|
214
|
|
|
|
1
|
|
|
|
(2)
|
|
Recognized
in other comprehensive loss
|
|
|
(16
|
)
|
|
|
(397
|
)
|
|
|
—
|
|
|
|
4
|
|
Total
recognized in net period benefit cost and other comprehensive
loss
|
|
$
|
163
|
|
|
$
|
(281
|
)
|
|
$
|
51
|
|
|
$
|
54
|
|
The
amounts in accumulated other comprehensive loss that have not been recognized as
components of net period benefit cost as of March 31, 2009 and 2008 are as
follows:
|
|
SERP
|
|
Other Postretirement
Benefits
|
|
|
2009
|
|
2008
|
|
2009
|
|
2008
|
Unrecognized
net actuarial loss
|
|
$
|
1,192
|
|
|
$
|
304
|
|
|
$
|
280
|
|
|
$
|
95
|
|
Unrecognized
prior service cost
|
|
|
132
|
|
|
|
155
|
|
|
|
—
|
|
|
|
—
|
|
Net
deferred tax benefit
|
|
|
(463
|
)
|
|
|
(161
|
)
|
|
|
(98
|
)
|
|
|
(33
|
)
|
Total
accumulated other comprehensive loss
|
|
$
|
861
|
|
|
$
|
298
|
|
|
$
|
182
|
|
|
$
|
62
|
|
NOTE
9 – SHAREHOLDERS’ EQUITY
Dividends
The
primary source of funds available to the Company for payment of dividends to its
shareholders is dividends paid to the Company by its subsidiaries. The Company’s
subsidiaries are subject to certain requirements imposed by 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 subsidiaries to the Company. Under regulations prescribed by the Office
of the Comptroller of the Currency (the “OCC”), without prior OCC approval a
bank subsidiary may not declare dividends in any year in excess of the bank’s
(i) net income for the current year, (ii) plus its retained net income for the
prior two years. Due to the large dividends paid in the fourth quarter of 2007
to fund the Union Bankshares acquisition, the Bank sought and obtained OCC
approval to pay dividends in the first quarter of 2009 in excess of its current
and retained net income for the period from January 1, 2007 through December 31,
2008. The Company expects this OCC approval to remain in place until the Bank’s
retained net income meets the required regulatory levels and approval is no
longer necessary. The Company paid $1.9 million and $1.6 million in dividends to
shareholders for the quarters ended March 31, 2009 and 2008,
respectively.
Common
Stock Repurchase
In June
2008, the Company’s Board of Directors approved the 2008 Common Stock Repurchase
Program. Under the program, the Company is authorized to repurchase up to
750,000 shares of its outstanding common stock for a one-year period, expiring
July 1, 2009. Under the 2008 Plan, the Company repurchased 50,000 shares of
common stock at an average price of $32.00 during the second half of 2008 and
made no repurchases in the first quarter of 2009.
NOTE
10 – STOCK-BASED COMPENSATION PLANS
Stock-Based
Compensation
On April
29, 2003, the shareholders of the Company approved the 2003 Stock Option and
Incentive Plan (the “Plan”). The maximum number of shares of stock reserved and
available for issuance under the Plan is 800,000. Awards may be granted in the
form of incentive stock options, non-qualified stock options, stock appreciation
rights, restricted stock, deferred stock, unrestricted stock, performance share
and dividend equivalent rights, or any combination of the preceding, and the
exercise price shall not be less than 100% of the fair market value on the date
of grant in the case of incentive stock options, or 85% of the fair market value
on the date of grant in the case of non-qualified stock options. Prior to April
29, 2003, the Company had various stock option plans with options vesting
immediately upon grant and expiring ten years from the date of the option grant.
The exercise price of all options equaled the market price of the Company’s
stock on the date of grant.
Stock
Option Awards
Stock
options (“options”) granted under the current Plan have been incentive stock
options. Options granted vest based on five years of continuous service and have
ten year contractual terms. On the date of each grant, the fair value of each
award is estimated using the Black-Scholes option pricing model.
The
following table presents the option pricing assumptions and the estimated fair
value of the options using these assumptions.
|
|
Three Months Ended March 31,
|
|
|
2009
|
|
2008
|
Dividend
yield
|
|
|
4.09
|
%
|
|
|
3.00
|
%
|
Weighted
average risk-free interest rate
|
|
|
1.60
|
%
|
|
|
2.98
|
%
|
Weighted
average expected volatility
|
|
|
42.48
|
%
|
|
|
27.09
|
%
|
Weighted
average expected life in years
|
|
|
5.22
|
|
|
|
5.70
|
|
Weighted
average fair value of options granted
|
|
$
|
6.62
|
|
|
$
|
6.73
|
|
Compensation
expense is recognized on a straight-line basis over the option vesting period
and totaled $33,000 and $10,000 for the quarters ended March 31, 2009 and 2008,
respectively. Unrecognized compensation cost for nonvested stock options, which
reflects estimated annualized forfeiture rate of 5% per year over the vesting
period, totaled $498,000 at March 31, 2009, and is expected to be recognized
over the remaining weighted-average vesting period of 2.6 years. There were no
options exercised during the three months ended March 31, 2009. Option activity
for the quarter ended March 31, 2009 is as follows:
|
|
Number of
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
($000)
|
|
Options
outstanding at December 31, 2008
|
|
|
91,600 |
|
|
$ |
36.73 |
|
|
|
|
|
|
|
Granted
|
|
|
50,000 |
|
|
|
24.46 |
|
|
|
|
|
|
|
Forfeited
|
|
|
(2,300 |
) |
|
|
37.94 |
|
|
|
|
|
|
|
Options
outstanding at March 31, 2009
|
|
|
139,300 |
|
|
$ |
32.31 |
|
|
|
8.0 |
|
|
$ |
— |
|
Options
exercisable at March 31, 2009
|
|
|
50,700 |
|
|
$ |
36.04 |
|
|
|
6.3 |
|
|
$ |
— |
|
A summary
of the status of the Company’s nonvested stock options as of March 31, 2009 and
changes during the quarter then ended is presented below:
|
|
Awards
|
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Nonvested
at January 1, 2009
|
|
|
53,500
|
|
|
$
|
9.05
|
|
Granted
|
|
|
50,000
|
|
|
|
6.62
|
|
Vested
|
|
|
(14,900
|
)
|
|
|
9.08
|
|
Nonvested
at March 31, 2009
|
|
|
88,600
|
|
|
$
|
7.68
|
|
The fair
value of the stock options vested during 2009 was $340,000 measured at the March
31, 2009 closing price of $22.85.
Restricted
Stock Awards and Management Stock Purchase Plan
The
Company issues restricted stock awards to certain key employees. Employees
become fully vested in these shares generally after a three-year period, with
requisite service conditions and no performance-based conditions to such
vesting. The Company provides a Management Stock Purchase Plan (the “MSPP”) to
provide an opportunity for management employees to receive restricted shares of
the Company’s common stock in lieu of their annual incentive bonus. Restricted
shares under the MSPP are granted at a discount of one-third of the fair market
value of the stock on the date of grant and fully vest two years after the grant
date. During the vesting period, dividends are accrued on the restricted stock
and the recipients are entitled to vote these restricted shares.
Compensation
expense recognized in connection with the restricted stock awards and MSPP is
presented in the following table:
|
|
Three Months Ended
March 31,
|
|
|
|
2009
|
|
|
2008
|
|
Restricted
stock awards
|
|
$
|
52
|
|
|
$
|
16
|
|
MSPP
grants
|
|
|
8
|
|
|
|
8
|
|
Total
compensation expense
|
|
$
|
60
|
|
|
$
|
24
|
|
Related
income tax benefit
|
|
$
|
21
|
|
|
$
|
8
|
|
Fair
value of grants vested
|
|
$
|
54
|
|
|
$
|
107
|
|
The
following table presents a summary of the activity related to restricted stock
awards and stock purchase grants for the period indicated:
|
|
Restricted Stock
|
|
|
Stock Purchase (MSPP)
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Grant
Date Fair
Value
|
|
Nonvested
at January 1, 2009
|
|
|
7,406
|
|
|
$ |
37.99 |
|
|
|
3,262
|
|
|
$ |
11.29 |
|
Granted
|
|
|
2,000
|
|
|
|
24.46 |
|
|
|
3,339
|
|
|
|
6.56
|
|
Vested
|
|
|
(1,600 |
) |
|
|
44.15 |
|
|
|
(761 |
) |
|
|
13.64
|
|
Nonvested
at March 31, 2009
|
|
|
7,806
|
|
|
$ |
30.76 |
|
|
|
5,840
|
|
|
$ |
8.28 |
|
At March
31, 2009, unrecognized compensation cost related to nonvested restricted stock
awards and stock purchase grants was $149,000 and is expected to be recognized
over a weighted average period of 1.5 years.
Defined
Contribution Retirement Plan
Approved
during the first quarter of 2008, the Defined Contribution Retirement Plan (the
“DCRP”) is an unfunded deferred compensation plan for the benefit of certain
senior management employees of the Company. The Company’s Compensation Committee
determines eligibility in the plan and annually participants will receive a
credit to an account administered by the Company of 10% of each participant’s
annual base salary and bonus for the prior performance period. Annual credits to
a participant’s account will be denominated in Deferred Stock Awards (the right
to receive a share of common stock of the Company upon the satisfaction of
certain restrictions) based on the fair market value of the common stock of the
Company on the date of grant. Vesting occurs ratably from the date of
participation until the participant reaches the age of 65, at which time the
participant is 100% vested. Upon retirement or termination of employment, the
participant will receive shares of common stock equal to the Deferred Stock
Awards in the account multiplied by the vested percentage, reduced by the amount
to be withheld for income taxes. During the first quarter of 2009, the Company
granted 1,310 Deferred Stock Awards under the DCRP, none of which have been
forfeited. At March 31, 2009, the Company has 1,852 nonvested
Deferred Stock Awards outstanding under the DCRP.
NOTE
11 – FAIR VALUE
The
Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements,
framework defines fair value as the exchange price that would be received for an
asset or paid to transfer a liability in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants at the measurement date. Accordingly, SFAS No. 157 requires an
“exit price” approach to value and establishes a fair value hierarchy which
prioritizes the inputs used to measure fair value, requiring entities to
maximize the use of market or observable inputs (as more reliable measures) and
minimize the use of unobservable inputs. Observable inputs reflect market data
obtained from independent sources, while unobservable inputs generally require
significant management judgment. The Company, in estimating its fair value
disclosures, uses the following methods and assumptions:
Securities Available for
Sale: The fair value of securities available for sale is reported at fair
value utilizing prices provided by an independent pricing service based on
recent trading activity and other observable information including, but not
limited to, dealer quotes, market spreads, cash flows, market interest rate
curves, market consensus prepayment speeds, credit information, and the bond’s
terms and conditions. The fair value of equity securities was calculated using a
discounted cash flow analysis using observable information including, but not
limited to, cash flows, risk-adjusted discount rates and market
spreads.
Derivatives: Derivatives are
reported at fair value utilizing Level 2 inputs obtained from third parties to
value interest rate caps and swaps.
Impaired Loans: In accordance
with the provisions of SFAS No. 114, Accounting by Creditors for
Impairment of a Loan, loan impairment is deemed to exist when full
repayment of principal and interest according to the contractual terms of the
loan is no longer probable. Under SFAS No. 114, impaired loans are reported
based on one of three measures: the present value of expected future cash flows
discounted at the loan’s effective interest rate; the loan’s observable market
price; or the fair value of the collateral if the loan is collateral dependent.
If the fair value measure is less than an impaired loan’s recorded investment,
an impairment loss is recognized as part of the ALL.
OREO: OREO property is
recorded individually at the lower of the book value of the loan satisfied or
its net realizable value on the date of acquisition. Upon acquisition of a
property, a current appraisal or broker’s opinion must substantiate market value
for the property. At the acquisition date, if the net realizable value of the
property is less than the book value of the loan, a charge to the ALL is
recorded. If, after the initial acquisition, the value of the property becomes
permanently impaired as determined by an appraisal or an evaluation in
accordance with our appraisal policy, we will record the decline by charging the
impairment against current earnings.
Mortgage Servicing
Rights: Mortgage servicing rights are evaluated regularly for
impairment based upon the fair value of the servicing rights as compared to
their amortized cost. The fair value of mortgage servicing rights is based on a
valuation model that calculates the present value of estimated net servicing
income. The Company obtains a third party valuation based upon loan level data
including note rate, type and term of the underlying loans. The model utilizes a
variety of observable inputs for its assumptions, the most significant of which
are loan prepayment assumptions and the discount rate used to discount future
cash flows. Other assumptions include delinquency rates, servicing cost
inflation, and annual unit loan cost.
The
following table summarizes assets and liabilities measured at fair value on a
recurring basis:
March
31, 2009
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
Assets
held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$
|
—
|
|
|
$
|
590,666
|
|
|
$
|
—
|
|
|
$
|
590,666
|
|
Derivatives
instruments
|
|
|
—
|
|
|
|
(254
|
)
|
|
|
—
|
|
|
|
(254
|
)
|
December
31, 2008
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
Assets
held at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available for sale
|
|
$
|
—
|
|
|
$
|
606,031
|
|
|
$
|
—
|
|
|
$
|
606,031
|
|
Derivatives
instruments (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
The
fair value was less than $1,000
|
The following table
summarizes assets and liabilities measured at fair value on a nonrecurring
basis:
March
31, 2009
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
—
|
|
|
$
|
15,326
|
|
|
$
|
—
|
|
|
$
|
15,326
|
|
Other
real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
3,183
|
|
|
|
3,183
|
|
Mortgage
servicing rights
|
|
|
—
|
|
|
|
453
|
|
|
|
—
|
|
|
|
453
|
|
December
31, 2008
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired
loans
|
|
$
|
—
|
|
|
$
|
11,158
|
|
|
$
|
—
|
|
|
$
|
11,158
|
|
Other
real estate owned
|
|
|
—
|
|
|
|
—
|
|
|
|
4,024
|
|
|
|
4,024
|
|
Mortgage
servicing rights
|
|
|
—
|
|
|
|
174
|
|
|
|
—
|
|
|
|
174
|
|
NOTE
12 – COMMITMENTS AND CONTIGENCIES
Legal
Contingencies
Various
legal claims arise from time to time in the normal course of business, which in
the opinion of management, are not expected to have a material effect on the
Company’s Consolidated Financial Statements.
Financial
Instruments
In the
normal course of business, the Company is a party to both on-balance sheet and
off-balance sheet financial instruments involving, to varying degrees, elements
of credit risk and interest rate risk in addition to the amounts recognized in
the Consolidated Statements of Condition. For further information, refer to the
Contractual Obligations and Commitments section within Item 2, Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Lending-Related
Instruments
The
contractual amounts of the Company’s lending-related financial instruments do
not necessarily represent future cash requirements since certain of these
instruments may expire without being funded and others may not be fully drawn
upon. These instruments are subject to the Company’s credit approval process,
including an evaluation of the customer’s creditworthiness and related
collateral requirements. Commitments generally have fixed expiration dates or
other termination clauses.
Derivative
Financial Instruments
The
Company uses derivative financial instruments for risk management purposes and
not for trading or speculative purposes. The Company controls the credit risk of
these instruments through collateral, credit approvals and monitoring
procedures.
The
Company has an interest rate cap agreement with a cap rate of 5.50%, notional
amount of $20.0 million, and an expiration date of March 15, 2010. The fair
value of the cap agreement at March 31, 2009 was less than $1,000 and was
recorded in other assets. The Company considers this instrument to be an
economic hedge; thus, changes in fair value are recorded in the Statement of
Income.
The
Company has a forward interest rate swap agreement on its junior subordinated
debentures with a notional amount of $10.0 million and a maturity date of June
30, 2021. As the interest rate on these debentures converts from a fixed
interest rate to a variable rate on June 30, 2011, the Company swapped a portion
of the variable cost for a fixed cost of 5.09% for ten years. The fair value of
the swap agreement at March 31, 2009 was a loss of $254,000 and, as this
instrument qualifies as a highly effective cash flow hedge, the change in fair
value was recorded in other comprehensive income, net of tax, and other
liabilities.
As part
of originating residential mortgage and commercial loans, the Company may enter
into rate lock agreements with customers and may issue commitment letters to
customers, which are considered interest rate lock or forward commitments under
SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities. At March 31, 2009 and
December 31, 2008, based upon the pipeline of mortgage loans with rate lock
commitments and commercial loans with commitment letters, and the fair value of
those commitments, the Company determined the impact was not
material.
NOTE
13 – RECENT ACCOUNTING PRONOUNCEMENTS
In
February 2008, the FASB issued FSP FAS 157-2, Effective Date of FASB Statement No.
157, which delays the effective date for all nonfinancial assets and
nonfinancial liabilities, except those that are recognized or disclosed at fair
value on a recurring basis (at least annually) to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years. Although this
Statement does not require any new fair value measurements, it has expanded fair
value disclosures.
In
October 2008, FASB issued FSP FAS 157-3, Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active. FSP FAS
157-3 clarifies the application of SFAS No. 157 in a market that is not active
and provides an example to illustrate key considerations in determining the fair
value of a financial asset when the market for that financial asset is not
active. Management has adopted FSP FAS 157-3 and there was no material
impact on the financial statements of the Company.
In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability has Significantly
Decreased and Identifying Transactions that are Not Orderly, which provides
guidance in determining when and how to use modeled values, as opposed to broker
price quotes. The FSP should result in a greater use of models for
estimating fair value, as well as more consistent approaches in modeling.
Management does not expect implementation of FSP 157-4 during the second quarter
of 2009 to have a material impact on the financial statements of the
Company.
In April
2009, the FASB issued FSP FAS 115-2, Recognition and Presentation of
Other-Than-Temporary-Impairments, which changes how
entities will recognize other than temporary impairment (“OTTI”) of the value of
debt securities. Under the FSP, for many securities with OTTI, only the amount
of the estimated credit loss is recorded through earnings, while the remaining
mark-to-market loss is recognized through other comprehensive income. The change
is retroactive, meaning entities will reclassify amounts back into retained
earnings related to non-credit-related market losses on certain investments held
at the beginning of the period. Management does not expect implementation of FSP
115-2 during the second quarter of 2009 to have a material impact on the
financial statements of the Company.
In April
2009, the FASB issued FSP FAS 107-1, Interim Disclosures About Fair Value
of Financial Instruments, which requires the current public company
disclosures of fair value to be reported each quarter, in additon to annually.
Management will implement FSP FAS 107-1 during the second quarter of 2009, which
will expand the fair value disclosure of the Company’s interim
reports.
In March
2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an Amendment of FASB Statement
No. 133. SFAS No. 161 is intended to enhance the current disclosure
framework in SFAS No. 133. This Statement has the same scope as SFAS No. 133,
which requires that objectives for using derivative instruments be disclosed in
terms of underlying risk and accounting designation. SFAS No. 161 better conveys
the purpose of derivative use in terms of the risk that the entity is intending
to manage, disclosing the fair values of the derivative instruments and their
gains and losses in a tabular format, as well as disclosing information about
credit-risk-related contingent features. This Statement is effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. Management implemented SFAS No. 161, which did not have a
material impact on the financial statements of the Company.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION
AND
RESULTS OF OPERATIONS
FORWARD-LOOKING
STATEMENTS
The
discussions set forth below and in the documents we incorporate by reference
herein contain certain statements that may be considered forward-looking
statements under the Private Securities Litigation Reform Act of 1995. The
Company may make written or oral forward-looking statements in other documents
we file with the Securities Exchange Commission, in our annual reports to
shareholders, in press releases and other written materials and in oral
statements made by our officers, directors or employees. You can identify
forward-looking statements by the use of the words “believe,” “expect,”
“anticipate,” “intend,” “estimate,” “assume,” “will,” “should” and other
expressions which predict or indicate future events or trends and which do not
relate to historical matters. You should not rely on forward-looking statements,
because they involve known and unknown risks, uncertainties and other factors,
some of which are beyond the control of the Company. These risks, uncertainties
and other factors may cause the actual results, performance or achievements of
the Company to be materially different from the anticipated future results,
performance or achievements expressed or implied by the forward-looking
statements.
Some
of the factors that might cause these differences include, but are not limited
to, the following:
|
|
general,
national, regional or local economic conditions which are less favorable
than anticipated, including fears of global recession and continued
sub-prime and credit issues, impacting the performance of the Company’s
investment portfolio, quality of credits or the overall demand for
services;
|
|
|
changes
in loan default and charge-off rates could affect the allowance for loan
losses;
|
|
|
declines
in the equity and financial markets which could result in impairment of
goodwill;
|
|
|
reductions
in deposit levels could necessitate increased and/or higher cost borrowing
to fund loans and investments;
|
|
|
declines
in mortgage loan refinancing, equity loan and line of credit activity
which could reduce net interest and non-interest
income;
|
|
|
changes
in the domestic interest rate environment and inflation, as substantially
all of the assets and virtually all of the liabilities are monetary in
nature;
|
|
|
further
actions by the U.S. government and Treasury Department, similar to the
Federal Home Loan Mortgage Corporation conservatorship, which could have a
negative impact on the Company’s investment portfolio and
earnings;
|
|
|
misalignment
of the Company’s interest-bearing assets and
liabilities;
|
|
|
increases
in loan repayment rates affecting interest income and the value of
mortgage servicing rights; and
|
|
|
changes
in accounting rules, Federal and State laws, Internal Revenue Service
regulations, and other regulations and policies governing financial
holding companies and their subsidiaries which may impact our ability to
take appropriate action to protect our financial interests in certain loan
situations.
|
You
should carefully review all of these factors, and be aware that there may be
other factors that could cause differences, including the risk factors listed in
Item 1A. Risk Factors within our Annual Report on Form 10-K for the year ended
December 31, 2008. Readers should carefully review the risk factors
described therein and should not place undue reliance on our forward-looking
statements.
These
forward-looking statements were based on information, plans and estimates at the
date of this report, and we do not promise to update any forward-looking
statements to reflect changes in underlying assumptions or factors, new
information, future events or other changes.
CRITICAL
ACCOUNTING POLICIES
In
preparing the Consolidated Financial Statements, management is required to make
significant estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses. Actual results could differ from our
current estimates, as a result of changing conditions and future events. Several
estimates are particularly critical and are susceptible to significant near-term
change, including the allowance for loan losses (“ALL”), accounting for
acquisitions and review of goodwill and other identifiable intangible assets for
impairment, valuation of other real estate owned, other than temporary
impairment of investments, accounting for postretirement plans and income taxes.
Our significant accounting policies and critical estimates are summarized in
Note 1 of our Annual Report on Form 10-K for the year ended December 31,
2008.
Allowance for Loan
Losses. In preparing the Consolidated Financial Statements, the ALL
requires the most significant amount of management estimates and assumptions.
The ALL, which is established through a charge to the provision for loan losses,
is based on our evaluation of the level of the allowance required in relation to
the estimated loss exposure in the loan portfolio. We regularly evaluate the ALL
for adequacy by taking into consideration, among other factors, local industry
trends, management’s ongoing review of individual loans, trends in levels of
watched or criticized assets, an evaluation of results of examinations by
regulatory authorities and other third parties, analyses of historical trends in
charge-offs and delinquencies, the character and size of the loan portfolio,
business and economic conditions and our estimation of probable
losses.
In
determining the appropriate level of ALL, we use a methodology to systematically
measure the amount of estimated loan loss exposure inherent in the loan
portfolio. The methodology includes four elements: (1) identification of loss
allocations for certain specific loans, (2) loss allocation factors for certain
loan types based on credit grade and loss experience, (3) general loss
allocations for other environmental factors, and (4) unallocated allowance. The
specific component relates to loans that are classified as doubtful, substandard
or special mention. For such loans that are also classified as impaired, an
allowance is established when the discounted cash flows (or collateral value or
observable market price) of the impaired loan is lower than the carrying value
of that loan. The methodology is in accordance with accounting principles
generally accepted in the United States of America (“US GAAP”), specifically,
Statement of Financial Accounting Standards (“SFAS”) No. 114, Accounting by Creditors for
Impairment of a Loan — an amendment of FASB Statements No. 5 and
15. We use a risk rating system to determine the credit quality of our
loans and apply the related loss allocation factors. In assessing the risk
rating of a particular loan, we consider, among other factors, the obligor’s
debt capacity, financial condition and flexibility, the level of the obligor’s
earnings, the amount and sources of repayment, the performance with respect to
loan terms, the adequacy of collateral, the level and nature of contingencies,
management strength, and the industry in which the obligor operates. These
factors are based on an evaluation of historical information, as well as
subjective assessment and interpretation of current conditions. Emphasizing one
factor over another, or considering additional factors that may be relevant in
determining the risk rating of a particular loan but which are not currently an
explicit part of our methodology, could impact the risk rating assigned to that
loan. We periodically reassess and revise the loss allocation factors used in
the assignment of loss exposure to appropriately reflect our analysis of loss
experience. Portfolios of more homogenous populations of loans including
residential mortgages and consumer loans are analyzed as groups taking into
account delinquency rates and other economic conditions which may affect the
ability of borrowers to meet debt service requirements, including interest rates
and energy costs. We also consider the results of regulatory examinations,
historical loss ranges, portfolio composition, and other changes in the
portfolio. An additional allocation is determined based on a judgmental process
whereby management considers qualitative and quantitative assessments of other
environmental factors. For example, a significant portion of our loan portfolio
is concentrated among borrowers in southern Maine and a substantial portion of
the portfolio is collateralized by real estate in this area. Another portion of
the commercial and commercial real estate loans are to borrowers in the
hospitality, tourism and recreation industries. Finally, an unallocated portion
of the total allowance is maintained to allow for shifts in portfolio
composition.
Since the
methodology is based upon historical experience and trends as well as
management’s judgment, factors may arise that result in different estimations.
Significant factors that could give rise to changes in these estimates may
include, but are not limited to, changes in economic conditions in our market
area, concentration of risk, declines in local property values, and results of
regulatory examinations. While management’s evaluation of the ALL as of March
31, 2009 determined the allowance to be appropriate, under adversely different
conditions or assumptions, we may need to increase the allowance. The Corporate
Risk Management group reviews the ALL with the Camden National Bank Board of
Directors on a monthly basis. A more in-depth review of the ALL, including the
methodology for calculating and allocating the ALL, is reviewed with the
Company’s Board of Directors, as well as the Camden National Bank Board of
Directors, on a quarterly basis.
Accounting for Acquisitions and
Review of Goodwill and Identifiable Intangible Assets for
Impairment. We are required to record assets acquired and
liabilities assumed at their fair value, which is an estimate determined by the
use of internal or other valuation techniques. These valuation estimates result
in goodwill and other intangible assets and are subject to ongoing periodic
impairment tests and are evaluated using various fair value techniques.
Impairment evaluations are required to be performed annually and may be required
more frequently if certain conditions indicating potential impairment exist. If
we were to determine that our goodwill was impaired, the recognition of an
impairment charge could have an adverse impact on our results of operations in
the period that the impairment occurred or on our financial position. Goodwill
is evaluated for impairment using several standard valuation techniques
including discounted cash flow analyses, as well as an estimation of the impact
of business conditions. The use of different estimates or assumptions could
produce different estimates of carrying value.
Valuation of Other Real Estate Owned
(“OREO”). Periodically, we acquire property in connection with
foreclosures or in satisfaction of debt previously contracted. The valuation of
this property is accounted for individually at the lower of the “book value of
the loan satisfied” or its net realizable value on the date of acquisition. At
the acquisition date, if the net realizable value of the property is less than
the book value of the loan, a charge or reduction in the ALL is recorded. If the
value of the property becomes permanently impaired, as determined by an
appraisal or an evaluation in accordance with our appraisal policy, we will
record the decline by charging against current earnings. Upon acquisition of a
property, a current appraisal or broker’s opinion must substantiate market value
for the property.
Other Than Temporary Impairment of
Investments. We record an investment impairment charge at the point
we believe an investment has experienced a decline in value that is other than
temporary. In determining whether an other than temporary impairment has
occurred, we review information about the underlying investment that is publicly
available, analysts’ reports, applicable industry data and other pertinent
information, and assess our ability to hold the security for the foreseeable
future. The investment is written down to its current market value at the time
the impairment is deemed to have occurred. Future adverse changes in market
conditions, continued poor operating results of underlying investments or other
factors could result in further losses that may not be reflected in an
investment’s current carrying value, possibly requiring an additional impairment
charge in the future.
Accounting for Postretirement
Plans. We use a December 31 measurement date to determine the
expenses for our postretirement plans and related financial disclosure
information. Postretirement plan expense is sensitive to changes in eligible
employees (and their related demographics) and to changes in the discount rate
and other expected rates, such as medical cost trend rates. As with the
computations of plan expense, cash contribution requirements are also sensitive
to such changes.
Income Taxes. We account
for income taxes by deferring income taxes based on estimated future tax effects
of differences between the tax and book basis of assets and liabilities
considering the provisions of enacted tax laws. These differences result in
deferred tax assets and liabilities, which are included in the Consolidated
Statement of Condition. We must also assess the likelihood that any deferred tax
assets will be recovered from future taxable income and establish a valuation
allowance for those assets determined not likely to be recoverable. Judgment is
required in determining the amount and timing of recognition of the resulting
deferred tax assets and liabilities, including projections of future taxable
income. Although we have determined a valuation allowance is not required for
all deferred tax assets, there is no guarantee that these assets will be
recognizable. Although not currently under review, income tax returns for the
years ended December 31, 2005 through 2007 are open to audit by federal and
Maine authorities. If we, as a result of an audit, were assessed interest and
penalties, the amounts would be recorded through other non-interest
expense.
RESULTS
OF OPERATIONS
Executive
Overview
For
the three months ended March 31, 2009:
Net
income of $6.2 million for the three-month period ended March 31, 2009 increased
$20,000, compared to the three-month period ended March 31, 2008. Net
income per diluted share increased 1.3% to $0.81, compared to $0.80 per diluted
share earned during the first three months of 2008. The following were major
factors contributing to the results of the first three months of 2009 compared
to the same period of 2008:
|
·
|
Net
interest income on a fully-taxable equivalent basis for the first quarter
of 2009 increased 7.5% to $18.9 million due to lower funding costs and an
improvement in the net interest
margin.
|
|
·
|
The
provision for loan losses of $1.7 million increased $1.2 million in the
first three months of 2009 compared to the same period of 2008 as a result
of an increase in net charge-offs and non-performing
assets.
|
|
·
|
For
the three months ended March 31, 2009, net charge-offs totaled $1.7
million, or an annualized rate of 0.46% of average loans, compared to $1.5
million, or 0.41%, for the same period of 2008. Non-performing assets as a
percentage of total assets amounted to 0.89% and 0.70% at March 31, 2009
and 2008, respectively.
|
|
·
|
Non-interest
income for the first three months of 2009 was $4.6 million, a 3.6%
increase over the first quarter of 2008. The increase was driven by an
increase in mortgage banking income, including mortgage-servicing income
and gains on the sale of loans, in part offset by a decline in income from
fiduciary services at Acadia Trust, N.A.
(“AT”).
|
|
·
|
We
recorded net gains on our investment securities portfolio totaling
$180,000 in the first quarter of 2008 primarily due to a restructuring of
the portfolio acquired from Union Bankshares Company (“Union
Bankshares”).
|
|
·
|
Non-interest
expense for the first three months of 2009 was $12.3 million, an increase
of $30,000, or 0.25%, over the first quarter of the prior year, which was
primarily due to an increase in regulatory assessments and in foreclosed
properties and collection costs, in part offset by a 14.9% decline in
salary and benefit costs and a decrease in the amortization of the core
deposit intangible.
|
Financial
condition at March 31, 2009 compared to December 31, 2008:
|
·
|
Total
loans at March 31, 2009 were $1.5 billion, a decrease of $22.4 million
compared to December 31, 2008. The decline in loan balances was primarily
in the commercial and commercial real estate
portfolios.
|
|
·
|
Investment
securities declined $15.9 million at March 31, 2009 compared to December
31, 2008 due to security
prepayments.
|
|
·
|
Total
liabilities at March 31, 2009 of $2.1 billion decreased $53.6 million, or
2.5%, as borrowings decreased $45.7 million, primarily in FHLB borrowings,
due to the decline in earning asset
balances.
|
|
·
|
Shareholders’
equity increased 3.4% due to current year earnings and other comprehensive
income, in part offset by dividends
declared.
|
Net
Interest Income
Net
interest income is our largest source of revenue and accounts for approximately
80% of total revenues. Net interest income reflects revenues generated through
income from earning assets plus loan fees, less interest paid on
interest-bearing deposits and borrowings. Net interest income is affected by
changes in interest rates, by loan and deposit pricing strategies and
competitive conditions, the volume and mix of interest-earning assets and
interest-bearing liabilities, and the level of non-performing
assets.
Net
interest income was $18.9 million on a fully-taxable equivalent basis for the
three months ended March 31, 2009, compared to $17.6 million for the first
quarter of 2008, an increase of $1.3 million or 7.5%. The increase in net
interest income is largely due to an improvement of 25 basis points in the net
interest margin (“NIM”), to 3.58%, for the first three months of 2009. The
increase in the net interest margin resulted from a decrease in the cost of
funds, offset in part by a decrease in income on earning assets, both of which
were caused by the decline in the rate environment over the 12 month period.
Average interest-earning assets increased by $15.4 million for the quarter ended
March 31, 2009 compared the same period in 2008, primarily due to increases in
investment securities and consumer loans, partly offset by declines in balances
in all other loan types. The yield on earning assets for the first quarter of
2009 decreased 63 basis points, reflecting a decline in the interest rate
environment impacting both the investment and loan yields. Average
interest-bearing liabilities increased $33.2 million for the quarter ended March
31, 2009 compared to the same period in 2008, primarily due to an increase in
retail certificate of deposit accounts, in part offset by declines in money
market deposit accounts. Total cost of funds decreased 101 basis points due to
the decline in short-term interest rates.
The
following table presents, for the periods noted, average balance sheets,
interest income, interest expense, and the corresponding average yields earned
and rates paid, as well as net interest income, net interest rate spread and
NIM.
Average
Balance, Interest and Yield/Rate Analysis
|
|
March 31, 2009
|
|
|
March 31, 2008
|
|
(Dollars in Thousands)
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
|
Average
Balance
|
|
|
Interest
|
|
|
Yield/
Rate
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities – taxable
|
|
$ |
586,207 |
|
|
|
7,270 |
|
|
|
5.03 |
% |
|
$ |
540,221 |
|
|
$ |
6,911 |
|
|
|
5.15 |
% |
Securities – nontaxable
(1)
|
|
|
67,156 |
|
|
|
992 |
|
|
|
5.99 |
% |
|
|
71,063 |
|
|
|
1,040 |
|
|
|
5.89 |
% |
Federal
funds sold
|
|
|
— |
|
|
|
— |
|
|
|
— |
% |
|
|
1,071 |
|
|
|
8 |
|
|
|
3.00 |
% |
Loans
(1)
(2)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential
real estate
|
|
|
616,602 |
|
|
|
9,194 |
|
|
|
6.05 |
% |
|
|
630,368 |
|
|
|
9,549 |
|
|
|
6.09 |
% |
Commercial
real estate
|
|
|
398,901 |
|
|
|
6,301 |
|
|
|
6.41 |
% |
|
|
423,375 |
|
|
|
7,621 |
|
|
|
7.24 |
% |
Commercial
|
|
|
187,005 |
|
|
|
2,601 |
|
|
|
5.64 |
% |
|
|
213,909 |
|
|
|
4,044 |
|
|
|
7.60 |
% |
Municipal
|
|
|
21,587 |
|
|
|
255 |
|
|
|
4.79 |
% |
|
|
16,547 |
|
|
|
238 |
|
|
|
5.78 |
% |
Consumer
|
|
|
265,320 |
|
|
|
3,346 |
|
|
|
5.11 |
% |
|
|
230,821 |
|
|
|
3,929 |
|
|
|
6.85 |
% |
Total
loans
|
|
|
1,489,415 |
|
|
|
21,697 |
|
|
|
5.91 |
% |
|
|
1,515,020 |
|
|
|
25,381 |
|
|
|
6.74 |
% |
Total
interest-earning assets
|
|
|
2,142,778 |
|
|
|
29,959 |
|
|
|
5.67 |
% |
|
|
2,127,375 |
|
|
|
33,340 |
|
|
|
6.30 |
% |
Cash
and due from banks
|
|
|
27,409 |
|
|
|
|
|
|
|
|
|
|
|
37,804 |
|
|
|
|
|
|
|
|
|
Other
assets
|
|
|
154,854 |
|
|
|
|
|
|
|
|
|
|
|
138,078 |
|
|
|
|
|
|
|
|
|
Less:
ALL
|
|
|
(17,963 |
) |
|
|
|
|
|
|
|
|
|
|
(17,796 |
) |
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
2,307,078 |
|
|
|
|
|
|
|
|
|
|
$ |
2,285,461 |
|
|
|
|
|
|
|
|
|
LIABILITIES
& SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
accounts
|
|
$ |
184,008 |
|
|
|
226 |
|
|
|
0.50 |
% |
|
$ |
189,181 |
|
|
|
465 |
|
|
|
0.99 |
% |
Savings
accounts
|
|
|
133,173 |
|
|
|
118 |
|
|
|
0.36 |
% |
|
|
134,635 |
|
|
|
225 |
|
|
|
0.67 |
% |
Money
market accounts
|
|
|
294,653 |
|
|
|
896 |
|
|
|
1.23 |
% |
|
|
366,341 |
|
|
|
2,636 |
|
|
|
2.89 |
% |
Certificates
of deposit
|
|
|
589,286 |
|
|
|
4,625 |
|
|
|
3.18 |
% |
|
|
493,344 |
|
|
|
4,835 |
|
|
|
3.94 |
% |
Total
retail deposits
|
|
|
1,201,120 |
|
|
|
5,865 |
|
|
|
1.98 |
% |
|
|
1,183,501 |
|
|
|
8,161 |
|
|
|
2.77 |
% |
Broker
deposits
|
|
|
83,247 |
|
|
|
529 |
|
|
|
2.58 |
% |
|
|
70,384 |
|
|
|
781 |
|
|
|
4.46 |
% |
Junior
subordinated debentures
|
|
|
43,423 |
|
|
|
713 |
|
|
|
6.66 |
% |
|
|
43,331 |
|
|
|
752 |
|
|
|
6.98 |
% |
Borrowings
|
|
|
617,206 |
|
|
|
3,934 |
|
|
|
2.58 |
% |
|
|
614,532 |
|
|
|
6,052 |
|
|
|
3.96 |
% |
Total
wholesale funding
|
|
|
743,876 |
|
|
|
5,176 |
|
|
|
2.82 |
% |
|
|
728,247 |
|
|
|
7,585 |
|
|
|
4.19 |
% |
Total
interest-bearing liabilities
|
|
|
1,944,996 |
|
|
|
11,041 |
|
|
|
2.30 |
% |
|
|
1,911,748 |
|
|
|
15,746 |
|
|
|
3.31 |
% |
Demand
deposits
|
|
|
173,130 |
|
|
|
|
|
|
|
|
|
|
|
178,507 |
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
21,070 |
|
|
|
|
|
|
|
|
|
|
|
27,190 |
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
167,882 |
|
|
|
|
|
|
|
|
|
|
|
168,016 |
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
2,307,078 |
|
|
|
|
|
|
|
|
|
|
$ |
2,285,461 |
|
|
|
|
|
|
|
|
|
Net
interest income (fully-taxable equivalent)
|
|
|
|
|
|
|
18,918 |
|
|
|
|
|
|
|
|
|
|
|
17,594 |
|
|
|
|
|
Less:
fully-taxable equivalent adjustment
|
|
|
|
|
|
|
(423 |
) |
|
|
|
|
|
|
|
|
|
|
(431 |
) |
|
|
|
|
|
|
|
|
|
|
$ |
18,495 |
|
|
|
|
|
|
|
|
|
|
$ |
17,163 |
|
|
|
|
|
Net
interest rate spread (fully-taxable equivalent)
|
|
|
|
|
|
|
|
|
|
|
3.37 |
% |
|
|
|
|
|
|
|
|
|
|
2.99 |
% |
Net
interest margin (fully-taxable equivalent)
|
|
|
|
|
|
|
|
|
|
|
3.58 |
% |
|
|
|
|
|
|
|
|
|
|
3.33 |
% |
|
(1)
|
Reported
on tax-equivalent basis calculated using a rate of
35%.
|
|
(2)
|
Loans
held for sale and non-accrual loans are included in total average
loans.
|
Provision
and Allowance for Loan Losses
The ALL
is our best estimate of inherent risk of loss in the loan portfolio as of the
balance sheet date. The ALL was $17.7 million, or 1.20% of total loans, at March
31, 2009, compared to $17.7 million, or 1.18% of total loans, at December 31,
2008. For the quarter ended March 31, 2009, our provision for loan losses
charged to earnings amounted to $1.7 million, compared to $500,000 for the first
quarter of 2008. The increase in the provision was based on management’s
assessment of various factors affecting the loan portfolio, including, among
others, our ongoing evaluation of credit quality, with particular emphasis on
the commercial and commercial real estate portfolio, and general economic
conditions. For the three months ended March 31, 2009, net charge-offs totaled
$1.7 million, or an annualized rate of 0.46% of average loans, compared to $1.5
million, or 0.41%, for the same period of 2008. Year-to-date charge-off activity
for 2009 is centered in commercial and commercial real estate loans. See
additional ALL discussion under the caption “Asset Quality.”
Non-Interest
Income
Non-interest
income increased to $4.6 million for the quarter ended March 31, 2009, compared
to $4.4 million for the same period of 2008, resulting from increases in
mortgage banking income of $585,000 due to the loan sales in the first quarter
of 2009 and $102,000 in earnings on bank-owned life insurance due to policy
purchases in 2008. Income from fiduciary services at AT decreased $323,000, or
19.3%, resulting from market value declines in assets under administration.
During the first quarter of 2008, the Company recorded a $180,000 gain on
security sales resulting from the restructuring of certain investment securities
acquired from Union Bankshares.
Non-Interest
Expenses
Total
non-interest expense increased $30,000, or 0.25%, for the quarter ended March
31, 2009 compared to the same period of 2008. The increase was due to a $711,000
increase in regulatory assessments related to the increase in the FDIC deposit
insurance assessment rate and the full utilization, in 2008, of assessment
credits, and a $653,000 increase in foreclosed properties and collection costs
primarily related to the $666,000 valuation allowance on other real estate
owned. The increases were offset by a $994,000, or 14.9%, decline in salary and
benefit costs as the first quarter of 2008 included higher staffing levels to
facilitate the Union Bankshares merger. Also, the amortization of the core
deposit intangible decreased $185,000 as the 1998 branch purchases were fully
amortized in 2008.
FINANCIAL
CONDITION
Overview
Total
assets at March 31, 2009 were $2.3 billion, a decrease of $48.0 million, or
2.0%, from December 31, 2008. The change in assets consisted primarily of a
$22.4 million decrease in loans, a $15.9 million decrease in investments, and a
$6.4 million decrease in cash and due from banks. Total liabilities decreased
$53.6 million as borrowings decreased $45.7 million and total deposits
(including brokered deposits) decreased $8.3 million. Total shareholders’ equity
increased $5.6 million, which was a result of current year earnings and other
comprehensive income, partially offset by dividends declared to
shareholders.
During
the first three months of 2009, average assets of $2.3 billion increased $21.6
million, or 0.9%, compared to the same period in 2008. This increase
was primarily the result of a $42.1 million increase in the investment
securities portfolio, partially offset by a decline in average loans of $25.6
million. Average liabilities increased $21.8 million for the three months ended
March 31, 2009 compared to the same period of 2008, primarily due to a $25.1
million increase in average deposits (including brokered deposits).
Assets
Investments. At March 31,
2009, investment security balances of $654.2 million decreased $15.9 million
from December 31, 2008 primarily due to normal pay-downs partially offset by
purchases of mortgage-backed securities issued or guaranteed by US government
sponsored enterprises. Our portfolio is primarily comprised of obligations of US
government sponsored enterprises. The remaining 20% of the portfolio
is invested as follows:
|
·
|
$65.9
million of obligations of states and political subdivisions rated
investment grade and 98% of the portfolio rated A or better by at least
one of the three rating agencies (Moody’s, Standard & Poor’s and
Fitch);
|
|
·
|
$34.6
million and $7.1 million of private issue collateralized mortgage
obligations rated Triple-A and Double-B, respectively, by at least one of
the three rating agencies;
|
|
·
|
$21.0
million of Federal Home Loan Bank (“FHLB”) of Boston stock which has
suspended quarterly dividend payments. Given the extended time frame
the FHLB of Boston has to redeem the stock, and the Company’s ability and
intent to hold the stock until redeemed, management believes that the
stock is not impaired; and
|
|
·
|
$3.6
million of Duff & Phelps Select Income Fund Auction Preferred Stock
which has failed at auction. We believe the failed auctions are a
temporary liquidity event related to this asset class of securities. The
security is rated Triple-A by Moody’s and Standard and Poor’s. We are
currently collecting all amounts due according to contractual terms and
have the ability and intent to hold the securities until they clear
auction, are called, or mature; therefore, the securities are not
considered other than temporarily
impaired.
|
Loans. At March 31, 2009, net
loans of $1.5 billion decreased $22.4 million from December 31, 2008 primarily
due to declines in the commercial and commercial real estate portfolios of $7.4
million and $8.8 million, respectively. The declines in the
commercial portfolios are the result of normal pay-downs and decreased demand.
As a result of recent declines in mortgage rates, residential real estate loan
activity during the first quarter of 2009 has been strong; however, residential
real estate loans decreased $1.4 million from December 31, 2008 primarily as a
result of $20.0 million in loans sold.
Asset
Quality
Non-Performing
Assets. Non-performing assets include non-accrual loans,
accruing loans 90 days or more past due and property acquired through
foreclosure or repossession. The following table sets forth the amount of our
non-performing assets as of the dates indicated:
|
|
March 31,
|
|
|
December 31,
|
|
(Dollars in Thousands)
|
|
2009
|
|
|
2008
|
|
Non-accrual
loans
|
|
$
|
17,250
|
|
|
$
|
12,501
|
|
Accruing
loans past due 90 days
|
|
|
—
|
|
|
|
206
|
|
Total
non-performing loans
|
|
|
17,250
|
|
|
|
12,707
|
|
Other
real estate owned
|
|
|
3,183
|
|
|
|
4,024
|
|
Total
non-performing assets
|
|
$
|
20,433
|
|
|
$
|
16,731
|
|
Non-performing
loans to total loans
|
|
|
1.17
|
%
|
|
|
0.85
|
%
|
Allowance
for loan losses to non-performing loans
|
|
|
102.55
|
%
|
|
|
139.22
|
%
|
Non-performing
assets to total assets
|
|
|
0.89
|
%
|
|
|
0.71
|
%
|
Allowance
for loan losses to non-performing assets
|
|
|
86.58
|
%
|
|
|
105.73
|
%
|
Non-accrual
loans at March 31, 2009 were $17.3 million, or 1.17% of total loans, compared to
$12.5 million, or 0.83% of total loans, at December 31, 2008. Non-accrual loans
at March 31, 2009 were comprised of $5.7 million in commercial loans, $5.1
million in commercial real estate loans, $5.0 million in residential real estate
loans, and $1.5 million in consumer loans. Non-accrual loans at December 31,
2008 consisted of $5.0 million in commercial real estate loans, $4.0 million in
residential real estate loans, $2.4 million in commercial loans, and $1.1
million in consumer loans.
The OREO
balance at March 31, 2009 consisted of eight properties, including three
residential properties, three commercial/mixed use properties, and two parcels
of raw land. During the first quarter of 2009, the Company recorded an OREO
valuation allowance related to a parcel of raw land that was included in OREO at
December 31, 2008, at which time the company was relying on the appraised value
and an offer to purchase the land contingent upon obtaining acceptable
financing. The sale of the property did not occur and due to the continued
deterioration in the real estate market, the value of the property was
reassessed during the first quarter of 2009, which resulted in a $666,000
increase in the valuation allowance. The OREO balance is higher than we have
historically experienced, and in light of the current economic environment and
limited bid activity at the point of auction, we anticipate the level of OREO to
continue to be at a higher than normal level.
Potential Problem
Loans. Potential problem loans consist of classified accruing
commercial and commercial real estate loans that were between 30 and 89 days
past due. Such loans are characterized by weaknesses in the financial condition
of borrowers or collateral deficiencies. Based on historical experience, the
credit quality of some of these loans may improve due to changes in collateral
values or the financial condition of the borrowers, while the credit quality of
other loans may deteriorate, resulting in some amount of loss. These loans are
not included in the analysis of non-accrual loans above. At March 31, 2009,
potential problem loans amounted to approximately $2.9 million, or 0.20% of
total loans, compared to $4.1 million, or 0.27% of total loans at December 31,
2008. The reduction was attributed in part to the migration of a portion of
potential problem loans at December 31, 2008 to non-accrual status during the
first quarter of 2009.
Past Due Loans. Past due
loans consist of accruing loans that were between 30 and 89 days past due. The
following table sets forth information concerning the past due loans at the date
indicated.
|
|
March 31,
|
|
December 31,
|
|
(Dollars in Thousands)
|
|
2009
|
|
|
2008
|
|
Loans
30-89 days past due:
|
|
|
|
|
|
|
|
|
Residential
real estate loans
|
|
$
|
1,196
|
|
|
$
|
2,880
|
|
Commercial
real estate
|
|
|
2,878
|
|
|
|
2,314
|
|
Commercial
loans
|
|
|
1,105
|
|
|
|
3,601
|
|
Consumer
loans
|
|
|
583
|
|
|
|
829
|
|
Total
loans 30-89 days past due
|
|
$
|
5,762
|
|
|
$
|
9,624
|
|
|
|
|
|
|
|
|
|
|
Loans
30-89 days past due to total loans
|
|
|
0.39
|
%
|
|
|
0.64
|
%
|
Allowance for Loan
Losses. We use a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the loan portfolio for purposes of
establishing a sufficient ALL. Through the first three months of 2009, there
were no significant changes to the allowance assessment methodology. The ALL is
management’s best estimate of the probable loan losses as of the balance sheet
date. The allowance is increased by provisions charged to earnings and by
recoveries of amounts previously charged off, and is reduced by charge-offs on
loans.
The
following table sets forth information concerning the activity in our ALL during
the periods indicated.
|
|
Three Months Ended March 31,
|
|
(Dollars in Thousands)
|
|
2009
|
|
|
2008
|
|
Allowance
at the beginning of period
|
|
$
|
17,691
|
|
|
$
|
13,653
|
|
Acquired
from Union Bankshares
|
|
|
—
|
|
|
|
4,369
|
|
Provision
for loan losses
|
|
|
1,730
|
|
|
|
500
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
Residential
real estate loans
|
|
|
26
|
|
|
|
40
|
|
Commercial
real estate
|
|
|
846
|
|
|
|
704
|
|
Commercial
loans
|
|
|
719
|
|
|
|
641
|
|
Consumer
loans
|
|
|
236
|
|
|
|
206
|
|
Total
loan charge-offs
|
|
|
1,827
|
|
|
|
1,591
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
Residential
real estate loans
|
|
|
7
|
|
|
|
—
|
|
Commercial
real estate loans
|
|
|
8
|
|
|
|
—
|
|
Commercial
loans
|
|
|
19
|
|
|
|
10
|
|
Consumer
loans
|
|
|
63
|
|
|
|
38
|
|
Total
loan recoveries
|
|
|
97
|
|
|
|
48
|
|
Net
charge-offs
|
|
|
(1,730
|
)
|
|
|
(1,543
|
)
|
Allowance
at the end of the period
|
|
$
|
17,691
|
|
|
$
|
16,979
|
|
Average
loans outstanding
|
|
$
|
1,489,415
|
|
|
$
|
1,515,020
|
|
Net
charge-offs (annualized) to average loans outstanding
|
|
|
0.46
|
%
|
|
|
0.41
|
%
|
Provision
for loan losses to average loans outstanding
|
|
|
0.47
|
%
|
|
|
0.13
|
%
|
Allowance
for loan losses to total loans
|
|
|
1.20
|
%
|
|
|
1.12
|
%
|
Allowance
for loan losses to net charge-offs
|
|
|
252.11
|
%
|
|
|
273.58
|
%
|
Allowance
for loan losses to non-performing loans
|
|
|
102.55
|
%
|
|
|
109.18
|
%
|
Allowance
for loan losses to non-performing assets
|
|
|
86.58
|
%
|
|
|
105.43
|
%
|
During
the first three months of 2009, we provided $1.7 million of expense to the ALL
compared to $500,000 for the same period of 2008. The determination of an
appropriate level of ALL, and subsequent provision for loan losses, which
affects earnings, is based on our analysis of various economic factors and
review of the loan portfolio, which may change due to numerous factors including
loan growth, payoffs of lower quality loans, recoveries on previously
charged-off loans, improvement in the financial condition of the borrowers, risk
rating downgrades/upgrades and charge-offs. We utilize a comprehensive approach
toward determining the ALL, which includes an expanded risk rating system that
enables us to adequately identify the risks being undertaken, as well as
migration within the overall loan portfolio. The increase in the provision for
loan losses was primarily a result of an increase in net charge-offs mainly
associated with commercial real estate and commercial loans. Non-performing
assets as a percentage of total assets amounted to 0.89% at March 31, 2009,
compared to 0.70% and 0.71% at March 31, 2008 and December 31, 2008,
respectively, primarily resulting from an increase in non-accrual loans. At
March 31, 2009, the ALL of $17.7 million, or 1.20% of total loans outstanding
and 102.6% of total non-performing loans, was appropriate given the current
economic conditions in our service area and the condition of the loan portfolio,
although if conditions continue to deteriorate, more provision may be needed.
The ALL was 1.12% of total loans outstanding and 109.2% of total non-performing
loans at March 31, 2008, and 1.18% of total loans outstanding and 139.2% of
total non-performing loans at December 31, 2008.
Liabilities
and Shareholders’ Equity
Total
liabilities have decreased $53.6 million, or 2.5%, since December 31, 2008, to
$2.1 billion at March 31, 2009. Total deposits (including brokered
deposits) decreased $8.3 million primarily due to $9.4 million and
$14.0 million in seasonal declines in demand deposit accounts and interest
checking, savings and money market accounts, respectively. Brokered deposits
increased $15.5 million, primarily in brokered certificates of deposit (“CDs”),
as $25.0 million deposited in a short-term CD was offset by $9.5 million in
maturities. To balance the decrease in assets, borrowings declined $45.7 million
which was comprised primarily of a decrease of $42.4 million in advances from
the FHLB.
Total
shareholders' equity at March 31, 2009 increased $5.6 million, or 3.4%, over the
balance at December 31, 2008, as a result of current year net income of $6.2
million, a $1.2 million increase in other comprehensive income primarily due to
an increase in the unrealized gain position of the available for sale investment
portfolio, partially offset by $1.9 million dividend declared to
shareholders.
LIQUIDITY
Liquidity
needs require the availability of cash to meet the withdrawal demands of
depositors and credit commitments to borrowers. Liquidity is defined as our
ability to maintain availability of funds to meet customer needs, as well as to
support our asset base. The primary objective of liquidity management is to
maintain a balance between sources and uses of funds to meet our cash flow needs
in the most economical and expedient manner. Due to the potential for unexpected
fluctuations in both deposits and loans, active management of liquidity is
necessary. We maintain various sources of funding and levels of liquid assets in
excess of regulatory guidelines in order to satisfy their varied liquidity
demands. We monitor liquidity in accordance with internal guidelines and all
applicable regulatory requirements. As of March 31, 2009 and 2008, our level of
liquidity exceeded target levels. We believe that we currently have appropriate
liquidity available to respond to liquidity demands. Sources of funds that we
utilized consist of deposits, borrowings from the FHLB 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 our primary source of funds. For the first three months of
2009, average deposits (including brokered deposits) of $1.5 billion increased
$25.1 million compared to the same period of 2008. Comparing average deposits
for the first quarter of 2009 to the same period of 2008, average retail
certificates of deposit increased $95.9 million, while average checking, savings
and money market account balances declined $10.6 million, $1.5 million and $71.7
million, respectively. Average brokered deposits increased $12.9 million.
Included in the money market deposit category are deposits from AT, representing
client funds. The balance in the AT client money market account, which was $74.5
million on March 31, 2009, could increase or decrease depending upon changes in
the portfolios of the clients of AT. The shift from money market accounts to
retail certificates of deposit was the result of changes in market rates, while
the decline in checking and savings accounts reflects an increase in seasonal
outflows due to the current economic environment.
Borrowings
are used to supplement deposits as a source of liquidity. In addition to
borrowings from the FHLB, we purchase federal funds, sell securities under
agreements to repurchase and utilize treasury tax and loan accounts. Average
borrowings and long-term debt for the first quarter of 2009 was $660.6 million,
an increase of $2.8 million from the first quarter of 2008. We secure borrowings
from the FHLB, whose advances remain the largest non-deposit-related funding
source, with qualified residential real estate loans, certain investment
securities and certain other assets available to be pledged. The carrying value
of loans pledged as collateral at the FHLB was $679.1 million and $704.4 million
at March 31, 2009 and 2008, respectively. The carrying value of securities
pledged as collateral at the FHLB was $100.7 million and $140.7 million at March
31, 2009 and 2008, respectively. Through our bank subsidiary, we have an
available line of credit with the FHLB of $9.9 million at March 31, 2009 and
2008. We had no outstanding balance on the line of credit with the FHLB at March
31, 2009. The Company also has a $10.0 million line of credit through a
correspondent bank available to us through December 28, 2009. We had
no outstanding balance on this line of credit at March 31, 2009.
We
believe the investment portfolio and residential loan portfolio provide a
significant amount of contingent liquidity that could be accessed in a
reasonable time period through sales of those portfolios. We also believe that
we have additional untapped access to the brokered deposit market, commercial
reverse repurchase transaction market and the Federal Reserve Bank (“FRB”)
discount window. These sources are considered as liquidity alternatives in our
contingent liquidity plan. We believe that the level of liquidity is sufficient
to meet current and future funding requirements. However, changes in economic
conditions, including consumer saving habits and availability or access to the
national brokered deposit and commercial repurchase markets, could significantly
impact our liquidity position.
CAPITAL
RESOURCES
Under FRB
guidelines, we are required to maintain capital based on risk-adjusted assets.
These capital requirements represent quantitative measures of our assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. Our capital classification is also subject to qualitative
judgments by our regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require us 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). These guidelines apply to us 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 (as defined). Our risk-based ratios, and those of our
bank subsidiary, exceed regulatory guidelines at March 31, 2009 and 2008. Our
Tier 1 capital to risk weighted assets was 11.7% and 11.1% at March 31, 2009 and
2008, respectively. 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. Our leverage ratio was 7.4% and 7.3% at March 31,
2009 and 2008, respectively.
Although
the junior subordinated debentures are recorded as a liability on our Statement
of Condition, we are permitted, in accordance with regulatory guidelines, to
include, subject to certain limits, the trust preferred securities in our
calculation of risk-based capital. At March 31, 2009, $43.0 million of the trust
preferred securities was included in Tier 1 and total risk-based
capital.
As part
of our goal to operate a safe, sound and profitable financial organization, we
are committed to maintaining a strong capital base. Shareholders’ equity totaled
$172.0 million and $172.1 million at March 31, 2009 and 2008, respectively,
which amounted to 7.5% of total assets on both dates.
Our
principal cash requirement is the payment of dividends on our common stock, as
and when declared by the Board of Directors. We paid dividends to shareholders
in the aggregate amount of $1.9 million and $1.6 million for the quarter ended
March 31, 2009 and 2008, respectively. Our Board of Directors approves cash
dividends on a quarterly basis after careful analysis and consideration of
various factors, including the following: a) capital position relative to total
assets, b) risk-based assets, c) total classified assets, d) economic
conditions, e) growth rates for total assets and total liabilities, f) earnings
performance and projections and g) strategic initiatives and related capital
requirements. All dividends declared and distributed by the Company will be in
compliance with applicable state corporate law and regulatory
requirements.
We are
primarily dependent upon the payment of cash dividends by our subsidiaries to
service our commitments. We, as the sole shareholder of our subsidiaries, are
entitled to dividends, when and as declared by each subsidiary’s Board of
Directors from legally available funds. CNB declared dividends in the aggregate
amount of $3.0 million for both the first quarter of 2009 and the first quarter
of 2008. Under regulations prescribed by the Office of the Comptroller of the
Currency (“OCC”), without prior OCC approval our bank subsidiary may not declare
dividends in any year in excess of the each bank’s (i) net income for the
current year, (ii) plus its retained net income for the prior two years. Due to
the large dividends paid in the fourth quarter of 2007 to fund the Union
Bankshares acquisition and a loss in the third quarter of 2008 related to the
investment securities losses, CNB sought and obtained OCC approval to pay
dividends in excess of its current and retained net income for the required
period. We expect this OCC approval to remain in place until CNB’s net income
meets the required levels and approval is no longer necessary. However, if we
are required to use dividends from CNB to service unforeseen commitments in the
future we may be required to reduce the dividends paid to our shareholders going
forward.
In June
2008, the Board of Directors voted to authorize us to purchase up to 750,000
shares of outstanding common stock for a period of one year, expiring July 1,
2009. The authority may be exercised from time to time and in such amounts as
market conditions warrant. Any purchases are intended to make appropriate
adjustments to our capital structure, including meeting share requirements
related to employee benefit plans and for general corporate purposes. As of
March 31, 2009, we repurchased 50,000 shares of common stock at an average price
of $32.00 under the current plan, all of which were purchased during
2008.
CONTRACTUAL
OBLIGATIONS AND COMMITMENTS
In the
normal course of business, we are a party to credit related financial
instruments with off-balance sheet risk, which are not reflected in the
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. We follow the same credit policies in making
commitments to extend credit and conditional obligations as we do for on-balance
sheet instruments, including requiring similar collateral or other security to
support financial instruments with credit risk. Our 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. At March 31, 2009, we had the following levels of
commitments to extend credit.
|
|
Total Amount
Committed
|
|
Commitment Expires in:
|
|
(Dollars in Thousand)
|
|
|
|
<1 Year
|
|
|
1 – 3 Years
|
|
|
4 – 5 Years
|
|
|
>5 Years
|
|
Letters
of Credit
|
|
$
|
1,546
|
|
|
$
|
1,088
|
|
|
$
|
458
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Commercial
Commitment Letters
|
|
|
26,434
|
|
|
|
26,434
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Residential
Loan Origination
|
|
|
33,453
|
|
|
|
33,453
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Home
Equity Line of Credit Commitments
|
|
|
156,010
|
|
|
|
3,559
|
|
|
|
1,164
|
|
|
|
61
|
|
|
|
151,226
|
|
Other
Commitments to Extend Credit
|
|
|
119,354
|
|
|
|
79,930
|
|
|
|
22,355
|
|
|
|
1,588
|
|
|
|
15,481
|
|
Total
|
|
$
|
336,797
|
|
|
$
|
144,464
|
|
|
$
|
23,977
|
|
|
$
|
1,649
|
|
|
$
|
166,707
|
|
We are a
party to several off-balance sheet contractual obligations through lease
agreements on a number of branch facilities. We have an obligation and
commitment to make future payments under these contracts. At March 31, 2009, we
had the following levels of contractual obligations.
|
|
Total Amount
of Obligations
|
|
Payments Due per Period
|
(Dollars in Thousands)
|
|
|
|
<1 Year
|
|
|
1 – 3 Years
|
|
|
4 – 5 Years
|
|
|
>5 Years
|
|
Operating Leases
|
|
$
|
5,737
|
|
|
$
|
795
|
|
|
$
|
1,513
|
|
|
$
|
892
|
|
|
$
|
2,537
|
|
Capital
Leases
|
|
|
1,238
|
|
|
|
39
|
|
|
|
86
|
|
|
|
85
|
|
|
|
1,028
|
|
Construction
Contracts
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Borrowings
from the FHLB
|
|
|
345,630
|
|
|
|
180,547
|
|
|
|
97,055
|
|
|
|
26,378
|
|
|
|
41,650
|
|
Commercial
Repurchase Agreements
|
|
|
126,549
|
|
|
|
10,000
|
|
|
|
10,000
|
|
|
|
101,000
|
|
|
|
5,549
|
|
Other
Borrowed Funds
|
|
|
100,308
|
|
|
|
100,308
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Junior
Subordinated Debentures
|
|
|
43,435
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,435
|
|
Note
Payable
|
|
|
181
|
|
|
|
23
|
|
|
|
52
|
|
|
|
53
|
|
|
|
53
|
|
Other
Contractual Obligations
|
|
|
1,185
|
|
|
|
231
|
|
|
|
954
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
624,263
|
|
|
$
|
291,943
|
|
|
$
|
109,660
|
|
|
$
|
128,408
|
|
|
$
|
94,252
|
|
Borrowings
from the FHLB consist of short- and long-term fixed and variable rate borrowings
and are collateralized by all stock in the FHLB and a blanket lien on qualified
collateral consisting primarily of loans with first mortgages secured by
one-to-four family properties, certain pledged investment securities and other
qualified assets. Other borrowed funds include treasury, tax and loan deposits
and securities sold under repurchase agreements. We have an obligation and
commitment to repay all borrowings and debentures. These commitments,
borrowings, junior subordinated debentures and the related payments are made
during the normal course of business.
We may
use derivative instruments as partial hedges against large fluctuations in
interest rates. We may also use fixed-rate interest rate swap and floor
instruments to partially hedge against potentially lower yields on the variable
prime rate loan category in a declining rate environment. If rates were to
decline, resulting in reduced income on the adjustable rate loans, there would
be an increased income flow from the interest rate swap and floor instruments.
We may also use variable-rate interest rate swap and cap instruments to
partially hedge against increases in short-term borrowing rates. If rates were
to rise, resulting in an increased interest cost, there would be an increased
income flow from the interest rate swap and cap instruments. These financial
instruments are factored into our overall interest rate risk position. We
regularly review the credit quality of the counterparty from which the
instruments have been purchased. At March 31, 2009, the Company had an interest
rate cap agreement with a notional amount of $20.0 million which expires on
March 15, 2010, and a forward interest rate swap, with a notional amount of
$10.0 million, related to the junior subordinated debentures, which expires on
June 30, 2021.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURE
ABOUT
MARKET RISK
MARKET
RISK
Market
risk is the risk of loss in a financial instrument arising from adverse changes
in market rates/prices, such as interest rates, foreign currency exchange rates,
commodity prices and equity prices. Our primary market risk exposure is interest
rate risk. The ongoing monitoring and management of this risk is an important
component of our asset/liability management process, which is governed by
policies established by the CNB Board of Directors, and are reviewed and
approved annually. The Board of Directors’ Asset/Liability Committee (“Board
ALCO”) delegates responsibility for carrying out the asset/liability management
policies to the Management Asset/Liability Committee (“Management ALCO”). In
this capacity, Management ALCO develops guidelines and strategies impacting our
asset/liability management-related activities based upon estimated market risk
sensitivity, policy limits and overall market interest rate levels/trends. The
Management ALCO and Board ALCO jointly meet on a quarterly basis to review
strategies, policies, economic conditions and various activities as part of the
management of these risks.
Interest
Rate Risk
Interest
rate risk represents the sensitivity of earnings to changes in market interest
rates. As interest rates change, the interest income and expense streams
associated with our financial instruments also change, thereby impacting net
interest income (“NII”), the primary component of our earnings. Board and
Management ALCO utilize the results of a detailed and dynamic simulation model
to quantify the estimated exposure of NII to sustained interest rate changes.
While Board and Management ALCO routinely monitor simulated NII sensitivity over
a rolling 2-year horizon, they also utilize additional tools to monitor
potential longer-term interest rate risk.
The
simulation model captures the impact of changing interest rates on the interest
income received and interest expense paid on all interest-earning assets and
interest-bearing liabilities reflected on our Statement of Condition, as well as
for derivative financial instruments, if any. None of the assets used in the
simulation were held for trading purposes. This sensitivity analysis is compared
to ALCO policy limits, which specify a maximum tolerance level for NII exposure
over a 1-year horizon, assuming no balance sheet growth, given a 200 basis point
(“bp”) upward and 200 bp downward shift in interest rates. Although our policy
specifies a downward shift of 200 bp, this could result in negative rates as
many benchmark rates are currently below 2.00%. A parallel and pro rata shift in
rates over a 12-month period is assumed. Using this approach, we are able to
produce reports that illustrate the effect that both a gradual change of rates
(year-1) and a “rate shock” (year-2 and beyond) has on margin
expectations. In the down 100bp scenario, Fed Funds and Treasury
yields are floored at .01% while Prime is floored at 3.00%. All other
market rates are floored at 0.25%. During the first quarter of 2009,
our NII sensitivity analysis reflected the following changes to NII assuming no
balance sheet growth and a parallel shift in interest rates over a 1-year
horizon.
Rate Change
|
|
Estimated Change in NII
|
+200
bp
|
|
|
(1.0
|
)%
|
-100
bp
|
|
|
0.0
|
%
|
The
preceding sensitivity analysis does not represent a forecast and should not be
relied upon as being indicative of expected operating results. These
hypothetical estimates are based upon numerous assumptions including, among
others, the nature and timing of interest rate levels, yield curve shape,
prepayments on loans and securities, deposit decay rates, pricing decisions on
loans and deposits and reinvestment/replacement of asset and liability cash
flows. While assumptions are developed based upon current economic and local
market conditions, we cannot make any assurances as to the predictive nature of
these assumptions, including how customer preferences or competitor influences
might change.
The most
significant factors affecting the changes in market risk exposure during the
first quarter of 2009 were the decrease in the loan portfolio and an increase in
lower cost overnight borrowings that resulted in an overall reduction in the
cost of funds that outpaced the drop in the yield on average
assets. The increased spread and lower rollover rates for the funding
base resulted in higher projected levels of net interest income in all scenarios
except for the rising rates scenario due to the aforementioned increased
overnight borrowing position. If rates remain at or near current
levels and the balance sheet mix remains similar, net interest income is
projected to trend slightly downward during the first two years as funding
relief cannot offset declining asset yields. Once asset yield
reductions slow and eventually reach their floors, net interest income levels
stabilize. In a falling interest rate environment, net interest
income is also expected to trend downward. The main driver of this
trend is mortgage-based assets cycling into lower market rates causing ongoing
pressure to margins and driving net interest income lower. This trend
is projected to remain throughout the entire simulation horizon as funding costs
stabilize while the asset base continues to be reset lower. As rates
rise, net interest income levels will be impacted by funding costs resetting
upward which are expected to outpace asset yield improvements. As
increases in funding costs subside, the asset base continues to be replaced into
the higher rate environment, expanding margins and driving net interest income
levels higher. If the yield curve were to flatten as rates rise, this
would result in lower net interest income levels. The risk in the
various rate scenarios is well within our policy limits.
Periodically,
if deemed appropriate, we use interest rate swaps, floors and caps, which are
common derivative financial instruments, to hedge interest rate risk position.
The Board of Directors has approved hedging policy statements governing the use
of these instruments. As of March 31, 2009, we had a notional principal amount
of $20.0 million in an interest rate cap agreement and a notional principal
amount of $10.0 million in an interest rate swap agreement related to the junior
subordinated debentures. Board and Management ALCO monitor derivative activities
relative to its expectation and our hedging policies.
ITEM
4. CONTROLS AND PROCEDURES
As
required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”), the Company’s management conducted an evaluation with the
participation of the Company’s Chief Executive Officer and Chief Financial
Officer (Principal Financial & Accounting Officer), regarding the
effectiveness of the Company’s disclosure controls and procedures, as of the end
of the last fiscal quarter covered by this report. In designing and
evaluating the Company’s disclosure controls and procedures, the Company and its
management recognize that any controls and procedures, no matter how well
designed and operated, can provide only a reasonable assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating and implementing possible controls and
procedures. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer (Principal Financial & Accounting Officer)
concluded that they believe the Company’s disclosure controls and procedures are
effective to ensure that information required to be disclosed by the Company in
the reports it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission’s rules and forms. The Company intends to
continue to review and document the disclosure controls and procedures,
including the internal controls and procedures for financial reporting, and may
from time to time make changes to the disclosure controls and procedures to
enhance their effectiveness and to ensure that the systems evolve with the
Company's business.
There was
no change in the internal control over financial reporting that occurred during
the period covered by this Quarterly Report on Form 10-Q that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART
II. OTHER INFORMATION
ITEM
1.
|
LEGAL
PROCEEDINGS
|
No
material litigation.
There has
been no material changes in the Risk Factors described in Item 1A. of the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
ITEM
2.
|
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
|
(a)
None
(b)
None
(c) In
June 2008, the Board of Directors of the Company voted to authorize the Company
to purchase up to 750,000 shares of its authorized and issued common stock. The
authority, which expires on July 1, 2009, may be exercised from time to time and
in such amounts as market conditions warrant. Any repurchases are intended to
make appropriate adjustments to the Company's capital structure, including
meeting share requirements related to employee benefit plans and for general
corporate purposes. During the first quarter of 2009, we made no purchases under
this plan:
|
|
|
|
|
|
(c)
|
|
(d)
|
|
|
|
|
|
|
|
Total Number of
|
|
Maximum Number
|
|
|
|
(a)
|
|
(b)
|
|
Shares Purchased
|
|
of Shares that May
|
|
|
|
Total Number
|
|
Average
|
|
as Part of Publicly
|
|
Yet Be Purchased
|
|
|
|
of Shares
|
|
Price Paid
|
|
Announced Plans
|
|
Under the Plans
|
|
Period
|
|
Purchased
|
|
per Share
|
|
or Programs
|
|
or Programs
|
|
|
|
|
|
|
|
|
|
|
|
1/1/09
– 3/31/09
|
|
-
|
|
$ |
-
|
|
-
|
|
700,000
|
|
ITEM
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
None
ITEM
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
None
ITEM
5.
|
OTHER
INFORMATION
|
None
(a) Exhibits
(3.i.1)
The Articles of Incorporation of Camden National Corporation (incorporated by
reference to Exhibit 3.1 to the Company’s Form 10-Q filed with the Securities
and Exchange Commission on August 10, 2001)
(3.i.2)
Articles of Amendment to the Articles of Incorporation of Camden National
Corporation, as amended to date (incorporated by reference to Exhibit 3.3 to the
Company’s Form 10-Q filed with the Securities and Exchange Commission on May 9,
2003)
(3.i.3)
Articles of Amendment to the Articles of Incorporation of Camden National
Corporation, as amended to date (incorporated by reference to Exhibit 3.i.3 to
the Company’s Form 10-Q filed with the Securities and Exchange Commission on May
4, 2007)
(3.ii)
The Bylaws of Camden National Corporation, as amended to date (incorporated by
reference to Exhibit 99.1 to the Company’s Form 8-K filed with the Securities
and Exchange Commission on March 10, 2008)
(10.1)
Change in Control Agreement for the Company’s CEO (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and Exchange
Commission on April 14, 2009)
(10.2)
Change in Control Agreement for the Company’s Named Executive Officers
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed with
the Securities and Exchange Commission on April 14, 2009)
(11.1)
Statement re computation of per share earnings (Data required by SFAS No. 128,
Earnings Per Share, is
provided in Note 2 to the consolidated financial statements in this
report)
(23.1)
Consent of Berry, Dunn, McNeil & Parker relating to the financial statements
of Camden National Corporation*
(31.1)
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934*
(31.2)
Certification of Chief Financial Officer, Principal Financial & Accounting
Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934*
(32.1)
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
(32.2)
Certification of Chief Financial Officer, Principal Financial & Accounting
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002*
* Filed
herewith
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
|
CAMDEN NATIONAL CORPORATION
|
|
(Registrant)
|
|
|
|
|
|
|
|
/s/ Gregory A. Dufour
|
|
May 8, 2009
|
|
Gregory A. Dufour
|
|
Date
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
/s/ Deborah A. Jordan
|
|
May 8, 2009
|
|
Deborah A. Jordan
|
|
Date
|
|
Chief Financial Officer and Principal
|
|
|
Financial & Accounting Officer
|
|
|
Exhibit
Index
|
|
Page
|
(3.i.1)
|
The
Articles of Incorporation of Camden National Corporation (incorporated by
reference to Exhibit 3.1 to the Company’s Form 10-Q filed with the
Securities and Exchange Commission on August 10, 2001)
|
-
|
|
|
|
(3.i.2)
|
Articles
of Amendment to the Articles of Incorporation of Camden National
Corporation, as amended to date (incorporated by reference to Exhibit 3.3
to the Company’s Form 10-Q filed with the Securities and Exchange
Commission on May 9, 2003)
|
-
|
|
|
|
(3.i.3)
|
Articles
of Amendment to the Articles of Incorporation of Camden National
Corporation, as amended to date (incorporated by reference to Exhibit
3.i.3 to the Company’s Form 10-Q filed with the Securities and Exchange
Commission on May 4, 2007)
|
-
|
|
|
|
(3.ii)
|
The
Bylaws of Camden National Corporation, as amended to date (incorporated by
reference to Exhibit 3.ii to the Company’s Form 10-Q filed with the
Securities and Exchange Commission on May 4, 2007)
|
-
|
|
|
|
(10.1)
|
Change
in Control Agreement for the Company’s CEO (incorporated by reference to
Exhibit 10.1 to the Company’s Form 8-K filed with the Securities and
Exchange Commission on April 14, 2009)
|
-
|
|
|
|
(10.2)
|
Change
in Control Agreement for the Company’s Named Executive Officers
(incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed
with the Securities and Exchange Commission on April 14,
2009)
|
-
|
|
|
|
(11.1)
|
Statement
re computation of per share earnings (Data required by SFAS No. 128, Earnings Per Share, is
provided in Note 2 to the consolidated financial statements in this
report)
|
-
|
|
|
|
(23.1)
|
Consent
of Berry, Dunn, McNeil & Parker relating to the financial statements
of Camden National Corporation
|
39
|
|
|
|
(31.1)
|
Certification
of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934
|
40
|
|
|
|
(31.2)
|
Certification
of Chief Financial Officer, Principal Financial & Accounting Officer
pursuant to Rule 13a-14(a) of the Securities Exchange Act of
1934
|
41
|
|
|
|
(32.1)
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
42
|
|
|
|
(32.2)
|
Certification
Chief Financial Officer, Principal Financial & Accounting Officer
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
|
43
|