Camden National Corporation — 2011 Q2 Form 10-Q
Reporting period: Three and six months ended June 30, 2011; comparative periods are the three and six months ended June 30, 2010. The interim financial statements were reviewed, not audited, and were filed August 8, 2011.
Business Context and Financial Position
Camden National is a Maine-focused bank holding company providing residential and commercial lending, deposit services, fiduciary services, brokerage and insurance services, mortgage banking, and related financial services. Total assets were $2.331 billion at June 30, 2011, compared with $2.306 billion at December 31, 2010.
- Total loans were $1.551 billion, up $26.7 million, or 2%, from year-end, led by a $33.8 million, or 19%, increase in commercial loans.
- Total deposits were $1.546 billion, up $29.7 million. Core deposits increased $61.4 million, while retail certificates of deposit declined $36.6 million.
- Shareholders’ equity was $218.2 million, up 6% from $206.0 million at year-end, supported by earnings and other comprehensive income, partly offset by dividends.
Revenue, Profitability, Cash Flow, Debt and Liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net interest income | $19.6 million vs. $18.6 million | $38.1 million vs. $36.6 million |
| Net interest income after provision | $18.6 million vs. $16.6 million | $36.0 million vs. $32.7 million |
| Total non-interest income | $5.0 million vs. $4.4 million | $10.1 million vs. $9.0 million |
| Non-interest expense | $13.3 million vs. $12.9 million | $26.6 million vs. $25.8 million |
| Net income | $7.1 million vs. $5.6 million | $13.4 million vs. $10.9 million |
| Diluted EPS | $0.92 vs. $0.73 | $1.75 vs. $1.42 |
- Fully taxable-equivalent net interest income increased 4% to $38.8 million for the six months. Net interest margin was 3.57%, compared with 3.59% in the prior-year period; the net interest rate spread was 3.38% versus 3.39%.
- Non-interest income growth was driven primarily by the expanded loan-servicing business, which services approximately 9,000 MaineHousing loans, and higher debit-card transaction volume.
- The efficiency ratio improved to 54.31% for the six months from 55.41%; second-quarter efficiency was 53.39% versus 54.76%.
- Net cash provided by operating activities was $19.9 million. Investing activities used $28.9 million, primarily reflecting a $29.1 million net increase in loans. Financing activities provided $7.7 million.
- Cash and due from banks totaled $29.7 million at June 30, 2011, compared with $31.0 million at year-end.
- Debt and other funding included $157.0 million of Federal Home Loan Bank advances, $341.1 million of other borrowed funds, and $43.7 million of junior subordinated debentures. Total liabilities were $2.113 billion.
- Management stated that liquidity exceeded internal target levels and regulatory guidelines. The company had no outstanding balance on its $9.9 million FHLB line of credit or its $10.0 million line of credit maturing December 22, 2011.
- Capital ratios exceeded regulatory minimums: Tier 1 risk-based capital was 14.19%, total risk-based capital was 15.45%, and the leverage ratio was 9.13% at June 30, 2011.
Material Changes Versus Prior Comparable Period
- Six-month net income rose $2.5 million, or approximately 23%, and diluted EPS increased from $1.42 to $1.75.
- The provision for loan losses declined to $2.1 million from $3.9 million, reflecting management’s assessment that asset quality had stabilized.
- Net charge-offs declined to $1.4 million, or 0.18% of average loans, from $1.9 million, or 0.25%.
- Non-interest income increased 13%, while non-interest expense increased 3%. Salary and incentive compensation increased, partly offset by lower OREO and foreclosure costs and lower FDIC assessments.
- Average earning assets increased $90.5 million, but earning-asset yields declined 41 basis points in the low-interest-rate environment. The cost of funds declined 40 basis points, primarily because of a shift toward lower-cost core deposits and wholesale funding.
- Non-performing loans increased to $25.0 million, or 1.61% of total loans, from $22.4 million, or 1.47%. Non-performing assets increased to $26.8 million, or 1.15% of total assets, from $24.8 million, or 1.08%.
- The allowance for loan losses increased to $23.0 million from $22.3 million, while coverage of non-performing loans declined to 92.22% from 99.44%.
Outlook, Commentary, Risks and Unusual Items
- Management indicated that net interest income could trend downward if rates remain near current levels, because investment and loan cash flows may be reinvested at lower yields without sufficient funding-cost offsets. Rising-rate scenarios may initially pressure earnings because funding costs reprice faster than asset yields.
- Interest-rate sensitivity remained within company policy limits. A 200-basis-point increase was estimated to reduce first-year net interest income by 2.00%; a 100-basis-point decrease was estimated to reduce it by 0.22%. These are hypothetical sensitivity estimates, not forecasts.
- The company recorded a $27,000 other-than-temporary impairment charge in the second quarter on two private-issue collateralized mortgage obligations. At June 30, $10.6 million of private-issue CMOs had been downgraded to non-investment grade, although the company held senior tranches.
- The company held $5.0 million of auction-rate preferred stock whose auctions had failed since 2008. Management considered the impairment temporary and continued to collect contractual amounts.
- Management identified risks from Maine and broader economic weakness, declining real estate values, credit concentrations in southern Maine and hospitality, tourism and recreation industries, interest-rate movements, deposit declines, securities valuations, regulatory changes, and possible increases in credit-loss provisions.
- Loans restructured due to borrower difficulties and currently performing totaled $3.4 million, up from $2.3 million at December 31, 2010. Management stated that the allowance was appropriate but that further economic deterioration could require increased provisions.
- Pending litigation 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; no liability was accrued.
- The company had $255.8 million of lending-related commitments, including $249.1 million of home-equity commitments, and $545.3 million of contractual obligations, including borrowings and leases.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes were reported to the risk factors in the 2010 Form 10-K.
Important Facts for Investors to Verify
- Whether non-performing loans and non-performing assets continue to rise and whether allowance coverage remains adequate as a percentage of problem loans.
- The performance, valuation, ratings and future impairment exposure of private-issue CMOs and auction-rate preferred stock.
- The sustainability of net interest income and margin given low rates, reinvestment risk and the company’s funding mix.
- Growth and credit performance in the commercial and commercial real estate portfolios, particularly in Maine’s hospitality, tourism and recreation sectors.
- Liquidity availability, deposit composition, reliance on brokered deposits and wholesale borrowings, and upcoming debt maturities.
- The status and potential financial exposure of the disclosed legal proceedings and off-balance-sheet commitments.
- Whether subsequent adoption of accounting guidance on troubled debt restructurings, fair value, and comprehensive income materially changes disclosures or reported results.