Camden National Corporation — FY 2016 Form 10-K Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company whose principal subsidiary, Camden National Bank, provides commercial and consumer banking, mortgage banking, brokerage, insurance, trust, and wealth-management services. At December 31, 2016, the Company had approximately $3.9 billion of assets, 61 banking centers, 84 ATMs, three lending offices, and 631 employees. The filing covers the fiscal year ended December 31, 2016, with comparisons primarily to 2015.
The year represented the first full year following the October 2015 acquisition of SBM Financial, Inc., parent of The Bank of Maine. The Company completed the merger of Acadia Trust into the Bank on November 30, 2016, creating Camden National Wealth Management. HPFC ceased originating loans on February 19, 2016, and its specialized loan portfolio is expected to run off.
Financial performance and condition
| Metric | 2016 | 2015 | Change or commentary |
|---|---|---|---|
| Net income | $40.1 million | $21.0 million | Increased 91% |
| Diluted EPS | $2.57 | $1.73 | Per-share amounts reflect the September 2016 three-for-two stock split |
| Adjusted diluted EPS | $2.61 | $2.33 | Increased 12% |
| Net interest income | $113.1 million | $86.5 million | Increased 31% |
| Fully taxable equivalent net interest margin | 3.32% | 3.19% | Adjusted margin declined slightly to 3.15% from 3.16% |
| Provision for credit losses | $5.3 million | $1.9 million | Increase driven by loan growth and two deteriorating credit relationships |
| Non-interest income | $39.6 million | $27.5 million | Increased 44% |
| Non-interest expense | $89.9 million | $81.1 million | Included $866,000 of merger-related costs versus $10.4 million in 2015 |
| Efficiency ratio | 57.53% | 61.13% | Improved on a non-GAAP basis |
| Return on average assets | 1.04% | 0.70% | Improved |
| Return on average equity | 10.47% | 7.54% | Improved |
| Total assets | $3.864 billion | $3.709 billion | Increased 4% |
| Total loans, excluding loans held for sale | $2.595 billion | $2.490 billion | Organic growth of $104.4 million, or 4% |
| Total deposits | $2.829 billion | $2.726 billion | Increased 4%; brokered deposits were $272.6 million |
| Total borrowings | $599.7 million | $572.4 million | Increased 5% |
| Shareholders’ equity | $391.5 million | $363.2 million | Increased 8% |
| Cash provided by operating activities | $57.4 million | $15.9 million | Improved substantially |
| Net cash used in investing activities | $(168.0) million | $(54.7) million | Reflects securities purchases and loan growth |
| Net cash provided by financing activities | $118.8 million | $57.5 million | Supported by deposit and short-term borrowing growth |
Commercial real estate and commercial loans represented 56% of total loans at year-end. Commercial real estate loans increased 13% to $1.051 billion, while commercial loans increased 12% to $333.6 million. Residential real estate loans declined 2%, and consumer and home-equity loans declined 5%.
Mortgage banking income increased to $6.3 million from $2.0 million. The Company originated approximately $370.0 million of residential mortgages and sold approximately 65% of production, generating approximately $6.2 million of gains on mortgage loan sales.
Material changes versus the prior comparable period
- The full-year contribution from the SBM acquisition expanded assets, loans, deposits, mortgage banking activity, and fee income, while increasing operating expenses and intangible amortization.
- Net income increased primarily because of merger-related balance-sheet growth, higher net interest income, stronger mortgage banking revenue, and lower merger costs.
- Reported net interest margin benefited from $5.1 million of purchase-accounting fair-value mark accretion and $1.1 million of recoveries on previously charged-off acquired loans. Excluding these items, adjusted net interest margin was 3.15% versus 3.16% in 2015.
- Provision for credit losses increased by $3.3 million. Management cited a syndication relationship acquired in the merger, which generated $1.4 million of incremental provision expense, and a commercial real estate loan downgraded to substandard, which generated $1.3 million of incremental provision expense.
- Non-performing assets increased modestly to $26.0 million, or 0.67% of assets, from $24.5 million, or 0.66%. Non-performing loans increased to 0.97% of loans from 0.93%.
- The Company completed a three-for-two stock split and increased its quarterly dividend by 15% to $0.23 per share for the dividend payable January 31, 2017. No shares were repurchased in 2016; the existing repurchase program was 99.8% utilized.
- The Company early adopted ASU 2016-09, increasing 2016 net income by $697,000 and increasing basic and diluted EPS by $0.05 and $0.04, respectively.
Liquidity, debt, capital, outlook, and risks
Management stated that liquidity exceeded internal target levels at December 31, 2016 and was sufficient for current and expected funding needs. Deposits remained the primary funding source. Available unused lines included $9.9 million with the FHLBB, $50.0 million with PNC Bank through the Bank, and $72.3 million through the Federal Reserve Discount Window; the Company also had a $10.0 million parent-company line of credit. No balances were outstanding on these lines at year-end.
Debt and funding included $530.1 million of short-term borrowings, $10.8 million of long-term borrowings, $58.8 million of subordinated debentures, and $272.6 million of brokered deposits. The Company’s $15.0 million subordinated debt issued in 2015 bears a fixed 5.50% rate and matures in 2025. The Company and Bank exceeded regulatory capital requirements, and the Bank was classified as well capitalized. The Company’s total risk-based capital ratio was 14.04%, its common equity Tier 1 ratio was 11.27%, and its Tier 1 leverage ratio was 8.83%.
Management did not provide quantitative earnings or balance-sheet guidance in the filing. Its commentary emphasized continued organic loan and deposit growth, integration of the SBM acquisition, mortgage banking expansion, disciplined liquidity and interest-rate management, and maintaining strong capital. Management expects the HPFC portfolio to decline naturally following the cessation of new originations.
Principal risks include concentration of lending in Maine, commercial real estate and commercial-credit exposure, potential increases in loan losses, interest-rate and funding-cost volatility, liquidity risk, competition from larger banks and non-bank providers, regulatory and consumer-compliance requirements, cybersecurity and third-party technology risks, possible goodwill or intangible-asset impairment, legal and servicing-repurchase exposure, and changes in accounting standards. The Company specifically expects the future adoption of the current expected credit loss standard to materially affect allowance and potentially regulatory capital.
Pending and threatened legal actions were described as arising in the ordinary course of business and not expected to have a material adverse effect. The Company disclosed that federal income tax returns for 2013 and 2014 were under IRS examination; the filing does not provide a clear estimate of any potential assessment.
Most important facts for an investor to verify
- Whether credit deterioration in the identified syndication and commercial real estate relationships leads to additional charge-offs or provision expense.
- The sustainability of reported earnings after excluding purchase-accounting accretion, acquired-loan recoveries, merger effects, and other unusual items.
- Loan and deposit growth, particularly the 56% commercial loan mix, Maine geographic concentration, and reliance on brokered deposits and short-term funding.
- Interest-rate sensitivity, including the effect of funding-cost increases, loan prepayments, securities valuations, and derivative positions.
- The future impact of the current expected credit loss standard on the allowance for loan losses, retained earnings, and regulatory capital.
- Mortgage banking volume, gain-on-sale margins, servicing-rights valuations, and potential investor repurchase or indemnification claims.
- Dividend capacity and the Bank’s ability to continue upstreaming dividends while maintaining regulatory capital and supporting growth.
- Goodwill and other intangible assets totaling approximately $101.5 million, including $49.9 million of merger-related goodwill, and the risk of future impairment.