CAC

Business Context and Reporting Period

Company: Camden National Corporation (Maine-based bank holding company)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2010
Share Count: 7,657,098 shares of common stock outstanding as of November 1, 2010.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income for the nine months ended September 30, 2010, increased by $794,000 (4.5%) compared to the same period in 2009. Diluted EPS rose to $2.39 from $2.29.
• Net Interest Income: Increased to $55.5 million for the nine-month period, driven by a decline in the cost of funds that outpaced the decline in yield on earning assets. Net interest margin improved to 3.59%.
• Asset Quality: Net charge-offs decreased to $3.2 million (annualized rate of 0.27%) for the nine months of 2010, compared to $4.8 million (0.42%) in 2009. Non-performing assets as a percentage of total assets remained stable at 1.03%.
• Non-Interest Income: Increased 7% year-over-year to $15.8 million. This was primarily driven by a $2.0 million legal settlement related to a 2008 investment write-down, partially offset by a decline in mortgage banking income.
• Balance Sheet: Total assets increased $72.6 million to $2.3 billion. Loans increased $9.3 million, and deposits grew $86.4 million, largely due to growth in low-cost transaction accounts and brokered deposits.

Guidance, Outlook, Risks, and Unusual Items

• Unusual Items: The financial results included a $2.0 million legal settlement gain. Additionally, the company recorded a $217,000 other-than-temporary impairment (OTTI) write-down on private issue collateralized mortgage obligations (CMOs) and a $188,000 realized loss on the sale of a downgraded CMO.
• Outlook: Management projects that if interest rates remain at current levels, net interest income may trend downward in the short term as the asset base adjusts to lower rates. However, rising rate scenarios are viewed as the best-case scenario for long-term earnings.
• Risks:
  • Interest Rate Risk: Sensitivity analysis indicates potential declines in net interest income in falling rate environments.
  • Credit Risk: Concentration in the hospitality, tourism, and recreation industries in southern Maine. Management notes that while the allowance for loan losses is currently adequate, further deterioration in economic conditions could require increased provisions.
  • Regulatory Risk: The Dodd-Frank Act introduces new capital standards, deposit insurance assessment changes, and consumer protection regulations that may impact costs and operations.
  • Investment Portfolio: $8.9 million of private issue CMOs have been downgraded to non-investment grade, though management believes the unrealized losses are temporary due to market illiquidity.

Investor Verification Checklist

• Legal Settlement Sustainability: Verify the one-time nature of the $2.0 million legal settlement gain and its impact on core operating earnings.
• Investment Portfolio Quality: Review the status of the $8.9 million in downgraded CMOs and the $5.0 million in failed auction preferred stock to assess potential future OTTI charges.
• Deposit Mix Stability: Confirm the sustainability of the shift toward low-cost transaction accounts and brokered deposits, which drove the improvement in net interest margin.
• Asset Quality Trends: Monitor the ratio of non-performing assets to total assets and the adequacy of the allowance for loan losses (currently 1.45% of total loans) given the regional economic concentration.
• Regulatory Capital: Verify compliance with new Dodd-Frank capital requirements, specifically regarding the treatment of trust preferred securities.