Camden National Corporation: 2016 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The interim financial statements are unaudited and should be read with the 2015 Form 10-K. Dollar amounts are in thousands, except per-share data.
Business Context
Camden National is a Maine-based bank holding company operating primarily through Camden National Bank and Acadia Trust. The company completed its acquisition of SBM Financial, Inc. in October 2015, materially expanding its assets, deposits, loans, customer base and branch network. Approximately 85% of the loan portfolio remained concentrated in Maine at June 30, 2016. The company closed HPFC’s operations to new loan originations effective February 19, 2016.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2016 | Three Months Ended June 30, 2015 | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|---|---|
| Net interest income | $28.5 million | $20.6 million | $56.5 million | $40.1 million |
| Non-interest income | $10.6 million | $6.3 million | $18.5 million | $12.5 million |
| Net income | $9.6 million | $7.2 million | $18.3 million | $12.8 million |
| Diluted EPS | $0.92 | $0.96 | $1.76 | $1.71 |
| Fully taxable-equivalent net interest margin | 3.34% | 3.21% | 3.34% | 3.14% |
| Provision for credit losses | $2.9 million | $0.3 million | $3.7 million | $0.7 million |
| Non-interest expense | $22.3 million | $16.2 million | $45.2 million | $33.0 million |
| Operating cash flow | Not separately reported for the quarter | Not separately reported for the quarter | $17.1 million | $14.7 million |
- Profitability: Six-month net income increased 43%, while second-quarter net income increased 34%. Diluted EPS declined $0.04 in the quarter because the share count increased significantly following the SBM acquisition, but increased $0.05 for the six-month period.
- Revenue and margins: Six-month total revenue, defined as net interest income plus non-interest income, increased approximately 43%. Reported margin benefited from purchase-accounting accretion and collections on previously charged-off acquired loans. Normalized six-month margin was 3.11%, compared with 3.14% in the prior year.
- Efficiency: The non-GAAP efficiency ratio improved to 56.53% for the quarter and 58.77% year to date, from 58.60% and 60.24%, respectively.
- Balance sheet: Total assets were $3.91 billion, up $201.0 million, or 11% annualized, from December 31, 2015. Loans were $2.59 billion, up $95.1 million, and securities were $922.0 million, up $66.0 million.
- Loan mix: Commercial real estate loans increased 10% to $1.02 billion and commercial loans increased 13% to $336.5 million. Residential real estate loans declined 2% to $800.6 million, and HPFC loans declined 9% to $70.7 million.
- Deposits and funding: Total deposits were $2.77 billion, up $47.1 million from year-end. Core deposits increased $63.5 million. Total borrowings were approximately $690.5 million, up $118.1 million, primarily to support loan growth.
- Liquidity: Cash and due from banks totaled $96.4 million. Management stated that liquidity exceeded internal target levels. Available undrawn lines included $9.9 million with the FHLB, $50.0 million with PNC Bank and $68.4 million through the Federal Reserve discount window.
- Capital: Shareholders’ equity was $384.9 million, or 9.84% of assets. The consolidated total risk-based, Tier 1 risk-based, common equity Tier 1 and Tier 1 leverage ratios were 12.94%, 11.51%, 10.25% and 8.44%, respectively. Camden National Bank continued to qualify as well capitalized.
- Cash flow: Year-to-date operating cash flow was $17.1 million. Investing activities used $160.0 million, primarily for loan growth and securities purchases, while financing activities provided $159.9 million, primarily from borrowings and deposit growth. Cash increased to $96.4 million from $79.5 million at year-end.
Material Changes Versus Prior Comparable Period
- The SBM acquisition drove much of the increase in average assets, loans, deposits, non-interest income and operating expenses. Average loans increased 41% year to date and average deposits increased 46% compared with the prior year.
- Non-interest income increased 67% in the quarter and 48% year to date. Mortgage banking income benefited from residential mortgage sales of $56.3 million in the quarter and $95.2 million year to date, compared with $7.7 million and $12.5 million in the prior-year periods.
- Non-interest expense increased 38% in the quarter and 37% year to date, primarily due to additional employees, banking centers, data-processing costs, regulatory assessments and other expenses associated with the larger organization.
- The provision for credit losses increased sharply because of loan growth and deterioration in one commercial real estate credit and one commercial credit. These two credits accounted for approximately $2.3 million of second-quarter provision expense.
- Non-accrual loans increased to $23.7 million from $18.3 million at year-end, primarily because an $11.7 million commercial real estate loan was placed on non-accrual status. Management characterized the deterioration as borrower-specific rather than systemic.
- Non-performing assets increased to $29.2 million, or 0.75% of total assets, from $24.5 million, or 0.66%, at year-end. The allowance for loan losses increased to $23.7 million, but coverage of non-performing loans declined to 85.71% from 91.30%.
- Net unrealized gains on available-for-sale securities increased to $7.3 million from a $3.8 million net unrealized loss at year-end, primarily reflecting lower interest rates. Management concluded that no other-than-temporary impairment existed.
- The company adopted ASU 2016-09 for stock compensation. The adoption increased first-quarter net income by $312,000 and second-quarter net income by $50,000; six-month net income increased by $362,000, and six-month EPS increased by $0.03.
Guidance, Outlook, Risks and Unusual Items
- No formal quantitative earnings or revenue guidance is provided in the filing.
- Management expects HPFC’s higher-yielding loan portfolio to decline through amortization and payoffs because new originations have ceased, which may reduce future net interest margin.
- Purchase-accounting fair-value mark accretion contributed $3.1 million to tax-equivalent net interest income in the first six months, and collections of previously charged-off acquired loans contributed $776,000. These items are not viewed as representative of core recurring performance.
- Bank-owned life insurance income included $394,000 of non-taxable death-benefit income. The company also invested an additional $16.7 million in BOLI during the second quarter.
- Interest-rate risk remains material. The filing states that a 200-basis-point rate increase could reduce year-one net interest income by 2.00%, while a 100-basis-point decline could reduce it by 1.33%, based on the company’s modeled assumptions.
- Key risks include regional economic weakness, credit deterioration, higher loan-loss provisions, interest-rate and securities-market volatility, funding availability, competition, regulatory and accounting changes, technology spending and the ability to realize merger-related cost savings.
- At June 30, 2016, the company had $549.5 million of lending-related commitments, including $465.0 million of home-equity commitments, and $683.8 million of contractual obligations.
- Management reported no material legal loss contingencies and no material changes to previously disclosed risk factors. Two banking centers in Bangor and Orono were announced for closure in the fourth quarter of 2016, subject to regulatory notice periods.
Facts an Investor Should Verify
- Whether the elevated provision for credit losses and the $11.7 million non-accrual commercial real estate loan lead to additional credit deterioration or provisions.
- The sustainability of reported net interest margin after purchase-accounting accretion, acquired-loan recoveries and the runoff of HPFC loans.
- Whether loan growth can continue without increasing funding costs, non-performing assets or allowance requirements.
- The recurring contribution of mortgage banking, customer loan-swap fees, BOLI income and other non-interest revenue.
- The effect of the SBM integration on expenses, branch closures, merger savings and long-term efficiency.
- Exposure to interest-rate changes, including the valuation effects on securities and cash-flow hedges and the modeled sensitivity of future net interest income.
- The future impact of ASU 2016-13 on the allowance for credit losses; management anticipates that the standard will have a material effect.