CAMDEN NATIONAL CORP annual report, FY2013

Business Context and Reporting Period

Camden National Corporation is a Maine-based bank holding company operating Camden National Bank and Acadia Trust. The company provides commercial and consumer banking, lending, deposits, brokerage, insurance, fiduciary and investment-management services through 44 Maine branches. This Form 10-K covers the fiscal year ended December 31, 2013, including fourth-quarter results.

Total assets were approximately $2.6 billion at year-end. The 2013 results reflect the full-year impact of the October 2012 acquisition of 15 branches from Bank of America and the October 2013 divestiture of five Franklin County branches.

Key Financial Metrics

Metric	2013	2012
Total assets	$2.604 billion	$2.565 billion
Loans	$1.580 billion	$1.564 billion
Deposits	$1.814 billion	$1.929 billion
Borrowings	$530.1 million	$360.2 million
Shareholders’ equity	$231.1 million	$233.8 million
Net interest income	$75.5 million	$73.7 million
Provision for credit losses	$2.0 million	$3.8 million
Non-interest income	$27.8 million	$23.4 million
Non-interest expense	$66.3 million	$59.0 million
Net income	$22.8 million	$23.4 million
Diluted EPS	$2.97	$3.05
Net interest margin	3.20%	3.36%
Return on average assets	0.88%	0.98%
Return on average equity	9.74%	10.31%
Non-GAAP efficiency ratio	62.78%	57.45%

Cash Flow, Debt and Liquidity

Operating activities generated $29.7 million of cash in 2013, compared with $42.3 million in 2012.
Investing activities used $166.9 million, primarily reflecting $208.3 million of available-for-sale securities purchases and $67.8 million of net loan growth.
Financing activities provided $130.2 million, principally from a $170.2 million increase in other borrowed funds, partially offset by lower deposits, dividends and share repurchases.
Cash and cash equivalents declined to $51.4 million from $58.3 million.
Total borrowings increased $169.9 million to $530.1 million, including $430.1 million of other borrowed funds and $43.9 million of junior subordinated debentures.
Management stated that liquidity exceeded internal target levels at year-end. Available sources included deposits, Federal Home Loan Bank advances, securities and loan cash flows, brokered deposits, repurchase markets and the Federal Reserve discount window.
The company had $311.99 million of lending-related commitments and letters of credit outstanding, including $276.7 million of home-equity commitments.

Material Changes Versus the Prior Comparable Period

Net income declined $645,000, or approximately 3%, and diluted EPS declined $0.08.
Net interest income increased 2% on 7% growth in average interest-earning assets, but the net interest margin fell 16 basis points because asset yields declined faster than funding costs.
Average deposits increased 15% during the year due to the acquired branch franchise, while average borrowings declined 9%; year-end borrowings nevertheless increased because of higher short-term funding.
Non-interest income increased 19%, primarily from a full year of deposit-related fees, higher mortgage banking income and a $2.7 million pre-tax gain on the branch divestiture.
Non-interest expense increased 12%, driven by the full-year operating costs of the acquired branches, approximately 75 additional employees, higher occupancy and technology costs, and a $2.8 million goodwill impairment charge.
Commercial real estate loans increased 7% to $541.1 million. Commercial and commercial real estate loans together represented 46% of total loans.
Non-performing assets increased to $30.6 million, or 1.18% of total assets, from $29.1 million, or 1.13%. Non-performing loans were 1.80% of total loans versus 1.78%.
The allowance for loan losses declined to $21.6 million, or 1.37% of loans, from $23.0 million, or 1.48%. Net charge-offs declined to $3.5 million from $3.8 million.
Accumulated other comprehensive income changed from a $3.0 million gain to a $12.3 million loss, primarily because rising interest rates reduced the fair value of available-for-sale securities.

Fourth-Quarter Results and Unusual Items

Metric	Q4 2013	Q4 2012
Net interest income	$18.35 million	$18.56 million
Provision for credit losses	$(6,000) release	$1.11 million
Non-interest income	$8.61 million	$7.39 million
Non-interest expense	$18.99 million	$18.76 million
Net income	$4.42 million	$4.18 million
Diluted EPS	$0.58	$0.55

The fourth quarter included a non-cash $2.8 million goodwill impairment charge for the financial services reporting unit. The charge was not tax deductible and reduced annual net income by the full amount.
The branch divestiture generated a $2.7 million pre-tax gain, or approximately $1.5 million after tax including related costs.
The fourth-quarter allowance assessment produced a $945,000 release of allocated reserves associated with a discontinued pool of smaller-balance non-performing residential loans.
No other-than-temporary impairment charges were recorded on securities in 2013, compared with $39,000 in 2012.
The company repurchased 68,145 shares under its 2013 plan at an average price of $40.78, leaving 181,855 shares authorized for repurchase at year-end.

Outlook, Management Commentary and Risks

Management emphasized long-term growth from the expanded branch network, organic loan growth and increased customer relationships, while acknowledging that branch integration and repositioning affected near-term earnings. The filing provides no formal earnings or revenue guidance.

The low-interest-rate environment continued to pressure loan and investment yields, margins and reinvestment returns. Management expected continued pressure if asset cash flows reprice into lower-yielding assets.
Interest-rate sensitivity analysis indicated that, under the company’s modeled one-year scenarios, net interest income could decline 5.10% with either a 200- or 400-basis-point increase and 0.50% with a 100-basis-point decrease. These are hypothetical risk estimates, not forecasts.
The company expects to comply with the Basel III Final Capital Rule beginning January 1, 2015. New capital requirements and the capital conservation buffer could constrain dividends, repurchases or growth if capital levels fall short.
At year-end, the company and Bank were categorized as well capitalized. Company capital ratios included a 16.45% total risk-based ratio, 15.20% Tier I risk-based ratio and 9.43% Tier I leverage ratio.
Credit risk is concentrated in Maine, particularly in real estate-secured lending and commercial real estate industries such as non-residential building operators and lodging.
Other principal risks include economic weakness, regional real estate deterioration, competition, liquidity and funding access, regulatory changes, cybersecurity and systems failures, counterparty exposure, goodwill impairment and legal or regulatory proceedings.
Management reported no legal contingencies that were both probable and reasonably estimable and stated that pending claims were not expected to have a material adverse effect.

Important Facts for Investors to Verify

Determine whether post-divestiture deposit trends and increased borrowing requirements are consistent with the company’s stated liquidity strategy.
Assess recurring earnings excluding the $2.8 million goodwill impairment, the branch-divestiture gain and other acquisition or divestiture-related items.
Monitor the net interest margin, asset yields and funding costs as interest rates and loan and securities prepayments change.
Review credit quality trends, including non-performing assets, commercial real estate concentrations, troubled-debt restructurings and allowance coverage.
Evaluate the effect of the 2015 Basel III implementation on capital allocation, dividends, share repurchases and balance-sheet growth.
Reassess the carrying value of the remaining financial services goodwill and other intangible assets, which totaled approximately $49.3 million at year-end.
Confirm future deposit retention, branch-network performance and the ability to convert acquired customer relationships into sustainable loan and fee growth.