CAMDEN NATIONAL CORP quarterly report, Q2 FY2014

Camden National Corporation — 2014 Q2 Form 10-Q Summary

Business context and reporting period

Camden National Corporation is a Maine-based bank holding company whose primary activities are commercial and residential lending, deposit-taking, investment securities, wealth management, fiduciary services, brokerage and insurance services. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, with comparisons to June 30, 2013 and December 31, 2013. The interim financial statements received a review, not an audit; the independent accountants reported no material modifications were identified.

Financial performance and condition

Metric	Three months ended June 30, 2014	Six months ended June 30, 2014	Comparison
Total revenue, defined as net interest income plus non-interest income	$25.8 million	$49.8 million	Q2 up 1%; six months down 3%
Net interest income	$19.2 million	$37.7 million	Q2 essentially flat; six months down $0.8 million
Non-interest income	$6.5 million	$12.2 million	Q2 up 2%; six months down 4%
Net income	$6.3 million	$12.0 million	Q2 down $15,000; six months up $38,000
Diluted EPS	$0.85	$1.60	Up $0.03 and $0.04, respectively
Net interest margin, tax-equivalent	3.11%	3.09%	Down 12 and 16 basis points, respectively
Non-GAAP efficiency ratio	61.49%	62.07%	Compared with 60.30% and 62.08%
Return on average equity	10.92%	10.45%	Compared with 10.71% and 10.26%

• Total assets were $2.692 billion at June 30, 2014, up $87.9 million, or 3%, from year-end 2013. Loans increased $116.4 million to $1.697 billion, with growth concentrated in commercial real estate and commercial loans.
• Total deposits were $1.857 billion, up $43.6 million from year-end. Core deposits declined $28.9 million, while brokered deposits increased $85.0 million to $184.3 million.
• Total borrowings were approximately $564.9 million, including $56.1 million of FHLB advances, $464.9 million of other borrowed funds and $44.0 million of junior subordinated debentures.
• Shareholders’ equity was $237.7 million, or 8.83% of assets. Tangible book value per share was $25.46, compared with $23.98 at December 31, 2013.
• Regulatory capital remained well above minimum requirements: total risk-based capital was 15.31%, Tier 1 capital was 14.06%, and the Tier 1 leverage ratio was 9.09%.
• Cash and due from banks were $51.5 million. Management stated that liquidity exceeded internal target levels and that available liquidity was adequate for current and anticipated needs. The company had undrawn FHLB and other credit lines totaling at least $19.9 million at June 30, 2014.
• Operating cash flow for the first six months was $14.6 million. Investing activities used $81.6 million, principally because of $118.3 million of net loan growth. Financing activities provided $67.1 million, primarily through deposit growth and increased other borrowings. Cash increased $110,000 to $51.5 million.

Material changes versus comparable periods

• Loan growth offset lower asset yields and the effect of the 2013 divestiture of five Franklin County branches. Average loans increased 5% in the second quarter and 3% year-to-date, but loan yields declined as new loans were originated at lower rates and existing loans repriced or refinanced.
• Cost of funds improved to 0.50% in the second quarter and 0.51% year-to-date, but the tax-equivalent net interest margin compressed to 3.11% and 3.09%.
• Mortgage banking income fell 88% year-to-date to $142,000, as mortgage loan sales declined to $399,000 from $19.8 million in the prior-year period. Management attributed the decline primarily to higher mortgage rates reducing refinance activity.
• Non-interest income benefited from $451,000 of securities-sale gains year-to-date and $196,000 of derivative fee income recognized in the second quarter, partially offsetting lower deposit service fees and mortgage banking income.
• Non-interest expense declined 4% year-to-date to $30.9 million, reflecting lower other expenses, occupancy costs and the absence of 2013 branch-acquisition costs. Second-quarter expense increased 1%, partly because of higher salaries, consulting fees and OREO and collection costs.
• Asset quality improved. Non-performing assets declined to $28.3 million, or 1.05% of assets, from $30.6 million, or 1.18%, at year-end. Non-performing loans declined to $26.1 million, or 1.54% of loans, from $28.4 million, or 1.80%.
• The allowance for loan losses increased to $21.9 million, or 1.29% of loans. Year-to-date net charge-offs declined to $826,000 from $1.1 million, and the provision for credit losses declined to $1.1 million from $1.4 million.
• The company repurchased 181,355 shares for $7.2 million during the first six months. At June 30, 2014, 249,500 shares had been repurchased under the 2013 program, leaving authorization for 500 shares.
• Accumulated other comprehensive loss improved to $7.2 million from $12.3 million at year-end, primarily because of higher fair values for available-for-sale securities as long-term interest rates declined.

Outlook, commentary, risks and unusual items

• No formal earnings or financial guidance was provided. Management described modest improvement in Maine commercial borrowers, real estate values and unemployment, but expects consumer pressures to persist and noted that Maine’s recovery may lag the national recovery until 2016 or 2017.
• Management expects continued pressure on net interest income if assets reprice into lower-rate products while funding costs have limited room to decline. In a rising-rate scenario, short-term funding costs may increase before asset yields adjust upward.
• Interest-rate sensitivity modeling indicated that a 200-basis-point increase could reduce first-year net interest income by 5.31%, while a 100-basis-point decline could reduce it by 0.63%. These are hypothetical sensitivity estimates, not forecasts.
• Credit risk remains concentrated primarily in Maine and in commercial real estate, including non-residential building operators and lodging. Management stated that the allowance was appropriate but warned that deterioration in borrower finances, real estate values or economic conditions could require higher provisions.
• Available-for-sale securities had $10.0 million of gross unrealized losses at June 30, 2014, largely in government-sponsored mortgage-backed securities and CMOs. Management considered the losses temporary and recorded no additional other-than-temporary impairment on non-agency securities during the period.
• Other material judgment areas include allowance adequacy, collateral valuations, OREO, goodwill impairment, investment-security impairment, derivative effectiveness, postretirement obligations, stock compensation and income taxes.
• Legal proceedings arise in the ordinary course of business. Management reported no loss contingencies that were both probable and reasonably estimable and believed pending matters would not have a material adverse effect.
• The company adopted a revised allowance methodology for overdrawn checking accounts, transferring $165,000 from allocated to unallocated reserves without changing the total allowance. It also issued $106,000 of director equity compensation expense in the second quarter.

Most important facts for an investor to verify

1. Whether rapid commercial and commercial real estate loan growth can be sustained without reversing the recent improvement in non-performing loans and charge-offs.
2. The effect of continued net interest margin compression and reliance on brokered deposits and borrowings to fund loan growth.
3. The adequacy of the $21.9 million allowance in light of Maine economic conditions, commercial real estate concentrations and collateral-dependent impaired loans.
4. The durability of non-interest income, given the contribution from securities gains and one-time or transaction-related derivative fee income, versus weakness in mortgage banking revenue.
5. The sensitivity of earnings and capital to interest-rate changes, deposit outflows, funding costs and securities-market volatility.
6. The company’s ability to maintain liquidity and regulatory capital if core deposits continue to decline or wholesale funding becomes less available.
7. The status of the remaining share-repurchase authorization, dividend capacity and the company’s continued dependence on subsidiary dividends to meet holding-company obligations.