Camden National Corporation — 2016 First-Quarter Form 10-Q Summary
Business Context and Reporting Period
Camden National Corporation, a Maine-based bank holding company, reported unaudited results for the three months ended March 31, 2016. The results include the effects of the October 16, 2015 acquisition of SBM Financial, Inc., parent of The Bank of Maine. The Company primarily serves Maine and other New England markets through banking, mortgage banking, fiduciary, brokerage, insurance, and specialized commercial lending businesses.
Following the SBM integration, the Company closed HPFC’s operations effective February 19, 2016, consolidated two banking centers, terminated a Boston office lease, and continued other integration initiatives. Management targeted $11.4 million of merger-related cost savings by year-end 2016.
Financial Performance and Key Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net interest income | $28.0 million | $19.4 million | 44% increase |
| Net interest income, tax-equivalent | $28.5 million | $19.8 million | 44% increase |
| Provision for credit losses | $0.9 million | $0.4 million | Increase |
| Non-interest income | $7.9 million | $6.1 million | 29% increase |
| Non-interest expense | $22.9 million | $16.8 million | 36% increase |
| Net income | $8.3 million | $5.6 million | 49% increase |
| Diluted EPS | $0.81 | $0.75 | 8% increase |
| Net interest margin, tax-equivalent | 3.35% | 3.07% | 28 basis-point increase |
| Return on average assets | 0.90% | 0.82% | Increase |
| Return on average equity | 9.07% | 9.19% | Decrease |
Excluding purchase-accounting accretion and collections of previously charged-off acquired loans, management reported an underlying first-quarter net interest margin of 3.18%, compared with the reported 3.35% margin. Core operating earnings were $8.8 million, or $0.85 of core diluted EPS, versus $6.3 million, or $0.84 of core diluted EPS, in the prior-year quarter.
Mortgage banking income increased to $0.8 million from $0.2 million. The Company sold $38.9 million of residential mortgage loans and recognized $0.8 million of net gains, compared with $4.8 million of sales and $0.1 million of gains in the prior-year quarter.
Balance Sheet, Liquidity, Debt, and Capital
| Metric | March 31, 2016 | December 31, 2015 |
|---|---|---|
| Total assets | $3.76 billion | $3.71 billion |
| Total loans | $2.49 billion | $2.49 billion |
| Investment securities | $909.6 million | $856.0 million |
| Total deposits | $2.67 billion | $2.73 billion |
| Total borrowings | $659.1 million | $572.4 million |
| Shareholders’ equity | $375.5 million | $363.2 million |
| Cash and due from banks | $72.2 million | $79.5 million |
Deposits declined $51.5 million from year-end, largely because a $30.0 million government account matured and was not renewed. Borrowings increased $86.7 million, primarily through higher Federal Home Loan Bank overnight and short-term advances. Management stated that liquidity exceeded internal target levels and regulatory guidelines. Available unused lines included $9.9 million from the FHLB, $50.0 million from PNC Bank, and $65.6 million from the Federal Reserve discount window; none were outstanding at March 31, 2016.
The Company reported strong regulatory capital ratios: total risk-based capital of 13.08%, Tier 1 risk-based capital of 11.69%, common equity Tier 1 capital of 10.37%, and Tier 1 leverage capital of 8.42%. Camden National Bank remained classified as well capitalized. The Company declared a quarterly dividend of $0.30 per share.
Tangible book value per share was $26.48 at March 31, 2016, compared with $25.33 at December 31, 2015. The tangible common equity ratio was 7.43%, compared with 7.18% at year-end.
Material Changes Versus Comparable Periods
- The SBM acquisition increased average interest-earning assets by 31%, average loans by 40%, average deposits excluding brokered deposits by 46%, and the average employee base by approximately 160 employees.
- Net interest income benefited from the larger balance sheet, higher-yielding HPFC loans, $1.1 million of purchase-accounting accretion, and $0.4 million of collections on previously charged-off acquired loans.
- Non-interest income benefited from approximately 30,000 acquired checking accounts, higher debit-card and ATM fees, and expanded mortgage production.
- Non-interest expense increased because of acquired employees, banking centers, data-processing costs, occupancy, customer-related expenses, and other operating costs. Merger and acquisition costs declined to $0.6 million from $0.7 million.
- Total loans increased only $2.4 million from year-end, as commercial real estate growth was largely offset by declines in residential, commercial, consumer, and HPFC loans.
- Asset quality improved: non-performing loans declined to $20.0 million from $23.2 million, non-accrual loans declined to $15.4 million from $18.3 million, and non-performing loans to total loans improved to 0.80% from 0.93%.
- The allowance for loan losses increased to $21.3 million from $21.2 million. Net charge-offs increased to $0.7 million from $0.3 million, and the provision for loan losses increased to $0.9 million from $0.4 million.
Guidance, Outlook, Risks, and Unusual Items
Management did not provide formal earnings guidance in the filing. It stated that integration efforts were expected to continue through the second quarter and that the Company remained focused on achieving its $11.4 million cost-savings target by year-end.
Management projected that net interest income would be approximately flat if interest rates remained near current levels. Its sensitivity analysis estimated that a 200-basis-point rate increase could reduce first-year net interest income by 2.58%, while a 100-basis-point decrease could reduce it by 1.48%. In the second year, the modeled effects were an increase of 0.54% under the higher-rate scenario and a decrease of 7.86% under the lower-rate scenario.
- Credit risk remains sensitive to economic conditions in Maine and New England, borrower financial conditions, real estate values, and commercial real estate concentrations. Non-residential building operators represented 11% of total loans and 29% of commercial real estate loans.
- Potential problem loans increased to $3.8 million from $0.6 million at year-end, while special-mention loans increased by $8.7 million to $43.5 million.
- The Company had $3.6 million of residential mortgage loans in foreclosure proceedings. Maine foreclosure processes typically require 18 to 24 months.
- The Company had $599.7 million of lending commitments and letters of credit, including $484.5 million of home equity commitments.
- Interest-rate exposure includes $43.0 million of junior subordinated debt swaps, $50.0 million of forecasted FHLB borrowing swaps, and $159.8 million of customer loan swaps. The Company expects approximately $2.1 million of pre-tax hedge losses to be reclassified from accumulated other comprehensive income into interest expense during the following twelve months.
- The Company recorded no other-than-temporary impairment on its investment portfolio and reported no material legal loss contingencies. Management stated that goodwill and other intangible assets showed no impairment indicators.
- Future accounting changes include the leases standard, which the Company expects to have a material effect on its financial statements; the filing does not provide a quantified estimate of that effect.
Most Important Facts for Investors to Verify
- Whether the Company achieves the $11.4 million merger-related cost-savings target and whether integration costs decline as planned.
- The sustainability of reported net interest margin after excluding purchase-accounting accretion and acquired-loan recoveries.
- Deposit retention and funding costs following the $51.5 million quarterly deposit decline and $86.7 million increase in borrowings.
- Whether the increase in potential problem and special-mention loans leads to higher provisions, charge-offs, or allowance requirements.
- The performance of the expanded mortgage banking platform and the effect of mortgage prepayments on mortgage servicing rights.
- Interest-rate sensitivity, including the impact of higher short-term funding costs and the Company’s hedge positions.
- The final accounting for acquired SBM loans and deferred tax assets, which remained provisional at March 31, 2016.