Camden National Corporation — Form 10-Q Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company focused primarily on community banking and lending in Maine. This quarterly report covers the three and nine months ended September 30, 2011, compared with the comparable 2010 periods; balance-sheet comparisons are primarily with December 31, 2010. The interim financial statements were reviewed, not audited, and the filing states that results for the period are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Three months ended September 30, 2011 | Three months ended September 30, 2010 | Nine months ended September 30, 2011 | Nine months ended September 30, 2010 |
|---|---|---|---|---|
| Net interest income | $18.6 million | $18.9 million | $56.8 million | $55.5 million |
| Provision for credit losses | $1.2 million | $1.3 million | $3.3 million | $5.2 million |
| Total non-interest income | $5.8 million | $6.8 million | $15.9 million | $15.8 million |
| Non-interest expense | $13.3 million | $13.5 million | $39.9 million | $39.2 million |
| Net income | $6.9 million | $7.4 million | $20.3 million | $18.3 million |
| Diluted EPS | $0.90 | $0.97 | $2.65 | $2.39 |
- Fully taxable-equivalent net interest income increased 2% for the nine-month period to $57.7 million, while net interest margin declined to 3.55% from 3.60%.
- Total assets were $2.35 billion at September 30, 2011, up $40.7 million, or 2%, from year-end 2010.
- Total loans were $1.51 billion, down $12.4 million excluding loans held for sale, primarily because of lower residential mortgage balances and mortgage sales.
- Investment securities totaled $613.9 million, up $2.3 million from December 31, 2010. A $36.1 million municipal-bond portfolio was reclassified from held-to-maturity to available-for-sale during the first quarter.
- Deposits rose to $1.64 billion from $1.52 billion, led by a $150.8 million, or 16%, increase in core deposits. Retail certificates of deposit declined $47.2 million.
- Borrowings declined to approximately $449.7 million from approximately $560.0 million at year-end, primarily because of lower FHLB advances and other borrowings.
- Cash and due from banks increased to $89.3 million from $31.0 million. Net cash provided by operating, investing and financing activities was $31.2 million, $17.7 million and $9.3 million, respectively.
- Shareholders’ equity increased to $221.9 million from $206.0 million. Book value per share was $28.91, return on average equity was 12.73%, and average equity to average assets was 9.21%.
- Regulatory capital remained well above stated minimums: Tier 1 risk-based capital was 14.80%, total risk-based capital was 16.05%, and the leverage ratio was 9.43%.
Material changes versus prior comparable periods
- Nine-month net income increased $2.0 million, or approximately 11%, while diluted EPS increased from $2.39 to $2.65.
- Third-quarter net income declined $512,000, or approximately 7%, and diluted EPS declined from $0.97 to $0.90. Management attributed the decrease primarily to lower non-interest income and slightly lower net interest income.
- The nine-month provision for credit losses declined $2.0 million, reflecting management’s view that asset quality had stabilized. Net charge-offs declined to $2.6 million, or 0.22% of average loans, from $3.2 million, or 0.27%.
- Non-interest income was broadly stable for the nine months but declined materially in the third quarter because the 2010 period included approximately $2.0 million of legal-settlement proceeds. Bank-owned life insurance income increased $665,000 for the nine months.
- Non-interest expense increased 2% for the nine months, mainly because of higher salaries and incentive compensation, partly offset by lower foreclosure, OREO and regulatory-assessment costs.
- Non-performing assets increased to $29.5 million, or 1.26% of total assets, from $24.8 million, or 1.08%, at year-end. Non-accrual loans increased to $24.4 million from $19.4 million.
- The allowance for loan losses increased to $23.0 million, or 1.52% of total loans, from $22.3 million, or 1.46%, at year-end. Coverage of non-performing loans declined to 83.03% from 99.44%.
Guidance, outlook, risks and unusual items
- No quantitative earnings guidance was provided. Management stated that net interest income could trend downward if interest rates remain near current levels, as asset yields decline and funding costs approach their floors.
- Management believes current liquidity is adequate and exceeded internal target levels. Deposits, FHLB borrowings, securities, mortgage-loan sales and other contingent sources are available to support funding needs, although access could be affected by economic conditions and market liquidity.
- Management believes the allowance for loan losses is appropriate, but warned that continued deterioration in the local economy, real estate values, unemployment or borrower performance could require additional provisions.
- Credit exposure is concentrated in Maine, including real estate and commercial borrowers, with additional exposure to hospitality, tourism and recreation industries.
- The investment portfolio included $55.7 million of securities with temporary unrealized losses, including $10.1 million of non-investment-grade private-issue CMOs. The company recorded a $61,000 third-quarter OTTI charge and held $5.0 million of auction-rate preferred stock whose auctions had failed.
- The company had a $10.9 million fair-value liability on interest-rate swaps associated with junior subordinated debentures; the swaps had $43.0 million of notional value. The company also had a $6.2 million commercial loan-level swap program.
- The company authorized a repurchase program for up to 500,000 shares through September 30, 2012, but made no repurchases during the third quarter.
- Legal matters included an appeal of a dismissed claim seeking approximately $574,000 and a separate foreclosure-related counterclaim. Management reported no loss contingencies that were both probable and estimable at September 30, 2011, and recorded no related liability.
- Management identified general economic conditions, deposit outflows, interest-rate movements, investment-security valuations, regulatory changes, credit quality, mortgage activity and potential goodwill impairment as principal risks.
Important facts for investors to verify
- Reconcile the increase in non-performing assets and non-accrual loans with the lower provision expense and assess whether 83.03% coverage of non-performing loans remains adequate.
- Review the sustainability of core-deposit growth, the decline in retail certificates of deposit and the company’s reliance on brokered deposits and wholesale funding.
- Assess sensitivity of net interest income and margin to prolonged low rates, deposit repricing, loan payoffs and changes in the yield curve.
- Evaluate the credit and liquidity risk of private-issue CMOs, downgraded securities, auction-rate preferred stock and pledged securities.
- Review the potential effect of Maine real estate conditions and commercial, hospitality, tourism and recreation concentrations on future charge-offs and provisions.
- Confirm the terms, collateralization and maturity profile of FHLB advances, repurchase agreements, junior subordinated debentures and derivative obligations.
- Consider the nonrecurring 2010 legal-settlement proceeds when comparing third-quarter and nine-month non-interest income.