Camden National Corporation — 2017 Q2 Form 10-Q Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company whose primary subsidiary, Camden National Bank, conducts lending primarily in Maine, with additional production offices in Massachusetts and New Hampshire. The unaudited filing covers the three and six months ended June 30, 2017, compared with the corresponding 2016 periods. The company reported 15,512,914 common shares outstanding as of July 28, 2017.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $28.6 million | $28.5 million | $56.5 million | $56.5 million |
| Provision for credit losses | $1.4 million | $2.9 million | $2.0 million | $3.7 million |
| Non-interest income | $9.9 million | $10.6 million | $18.5 million | $18.5 million |
| Non-interest expense | $22.2 million | $22.3 million | $43.6 million | $45.2 million |
| Net income | $10.2 million | $9.6 million | $20.3 million | $18.3 million |
| Diluted EPS | $0.66 | $0.62 | $1.30 | $1.18 |
| Net interest margin, fully taxable equivalent | 3.19% | 3.34% | 3.19% | 3.34% |
| Efficiency ratio, non-GAAP | 56.76% | 55.97% | 57.36% | 58.46% |
Return on average assets was 1.03% for the quarter and 1.04% year to date. Return on average equity was 10.17% and 10.27%, respectively. The effective tax rate was 31.6% for the quarter and 30.9% year to date.
At June 30, 2017, total assets were $4.04 billion, up 4% from December 31, 2016. Loans were $2.74 billion, up 5%, led by commercial real estate loans up 8% and commercial loans up 11%. Investments were $932.3 million, up 4%. Total deposits were $2.94 billion, up 4%, including brokered deposits of $351.8 million, up 29%. Total borrowings were $641.7 million, up 7%.
Shareholders’ equity was $407.0 million, or 10.08% of assets. Tangible book value per share was $19.75, compared with $18.74 at year-end 2016. The company declared dividends of $0.23 per share in each quarter, or $0.46 per share for the first six months.
Six-month operating cash flow was $33.9 million, compared with $17.1 million in the prior-year period. Investing activities used $175.3 million, primarily reflecting $141.4 million of net loan growth and $97.3 million of securities purchases. Financing activities provided $146.7 million, principally from deposit and borrowing growth. Cash and due from banks ended at $93.0 million.
Material changes versus prior comparable periods
- Quarterly net income increased 6% and six-month net income increased 11%; diluted EPS rose 6% and 10%, respectively.
- The provision for credit losses declined by $1.5 million in the quarter and $1.7 million year to date. The prior-year periods included approximately $2.3 million of specific provision related to two loans that did not recur in 2017.
- Net interest income was essentially flat despite approximately 5% average loan growth because the net interest margin declined 15 basis points. Lower purchase-accounting accretion and collections on previously charged-off acquired loans reduced reported margin.
- Non-interest income declined 6% in the quarter but was essentially unchanged year to date. Q2 declines reflected lower commercial loan-swap fees, the absence of prior-year bank-owned life insurance death-benefit income, and the exit from a sub-servicing contract. Mortgage banking income increased.
- Six-month non-interest expense decreased 4%, primarily because merger and acquisition expenses and sub-servicing costs incurred in 2016 did not recur. The non-GAAP efficiency ratio improved to 57.36% from 58.46%.
- Loan growth was concentrated in commercial real estate and commercial lending. The HPFC portfolio declined 15% because the company stopped originating HPFC loans in February 2016.
- Non-accrual loans increased to $25.7 million from $20.7 million at year-end, and non-performing assets increased to $30.9 million from $26.0 million. Management attributed much of the commercial real estate increase to one relationship.
Guidance, outlook, risks, contingencies and unusual items
The filing does not provide formal earnings or revenue guidance. Management states that liquidity exceeded internal target levels and that current liquidity is sufficient for expected funding requirements. Available liquidity sources include deposits, Federal Home Loan Bank borrowings, cash flows, securities and mortgage-loan sales, and unused borrowing lines.
The company and bank exceeded regulatory capital requirements. At June 30, 2017, the company’s total risk-based capital ratio was 13.87% and Tier 1 leverage ratio was 8.92%. Camden National Bank was classified as well capitalized, with a total risk-based capital ratio of 12.73% and leverage ratio of 8.56%.
Key risks include economic weakness in Maine and New England, credit deterioration, commercial real estate concentrations, changes in interest rates and funding costs, securities-market volatility, competition, regulatory and tax changes, technology spending, and changes in accounting standards. Non-residential building operators represented 12% of total loans and 28% of commercial real estate loans.
Interest-rate sensitivity analysis indicated that a hypothetical 200-basis-point increase could reduce net interest income by 1.32% in year one but increase it by 3.78% in year two; a 100-basis-point decrease could reduce net interest income by 1.86% in year one and 7.74% in year two. These scenarios are not forecasts.
The allowance for loan losses was $24.4 million, or 0.89% of total loans, compared with $23.1 million at year-end. Net charge-offs were $706,000 for the first six months, and management stated that the allowance was appropriate but could increase if conditions deteriorate. The company changed its internal threshold for individual impairment evaluations from $250,000 to $500,000 effective January 1, 2017.
The company reported no material legal loss contingencies requiring accrual or disclosure and no material changes to previously disclosed risk factors. It completed its securities review and concluded that no other-than-temporary impairment existed. The company expects approximately $1.3 million before tax to be reclassified from accumulated other comprehensive income to interest expense over the next 12 months in connection with cash-flow hedges.
Future accounting changes include expected adoption of revenue-recognition guidance in the first quarter of 2018 and the credit-loss standard in 2020. Management anticipates that the credit-loss standard will materially affect the allowance for loan losses and may negatively affect regulatory capital ratios.
Important facts for investors to verify
- Whether commercial real estate and commercial loan growth remains credit-positive given the increase in non-accrual loans and the concentration in one commercial real estate relationship.
- The sustainability of earnings as purchase-accounting accretion and unusual collections decline and funding costs rise.
- The effect of brokered-deposit and Federal Home Loan Bank borrowing growth on liquidity, interest expense and net interest margin.
- Future changes in the allowance for loan losses, including the impact of the expected-loss accounting standard and the revised impairment-assessment policy.
- Interest-rate sensitivity, particularly the projected downside from lower rates and the first-year pressure from higher short-term funding costs.
- The company’s ability to maintain capital and dividend levels while funding continued loan growth.
- The assumptions supporting fair values for mortgage servicing rights, impaired loans, other real estate owned and derivative instruments.