Business Context and Reporting Period
Camden National Corporation, a Maine-based bank holding company, filed this unaudited Form 10-Q for the quarter ended March 31, 2017. Its primary lending market is Maine, which represented 85% of the loan portfolio, followed by Massachusetts and New Hampshire. The company provides commercial, residential real estate, consumer, wealth management, mortgage banking and fiduciary services through Camden National Bank and other subsidiaries.
Financial Performance and Condition
| Metric | Q1 2017 | Q1 2016 or year-end 2016 | Change |
|---|---|---|---|
| Net interest income | $27.9 million | $28.0 million | Down 0.3% |
| Net interest margin, fully taxable equivalent | 3.18% | 3.35% | Down 17 bps |
| Provision for credit losses | $0.6 million | $0.9 million | Down $0.3 million |
| Non-interest income | $8.6 million | $7.9 million | Up 8% |
| Non-interest expense | $21.4 million | $22.9 million | Down 6% |
| Net income | $10.1 million | $8.6 million | Up 17% |
| Diluted EPS | $0.64 | $0.56 | Up 14% |
| Return on average assets | 1.05% | 0.93% | Up 12 bps |
| Return on average equity | 10.36% | 9.41% | Up 95 bps |
| Efficiency ratio, non-GAAP | 58.00% | 61.18% | Improved 318 bps |
| Total assets | $3.94 billion | $3.86 billion at Dec. 31, 2016 | Up 2% |
| Total loans | $2.65 billion | $2.59 billion at Dec. 31, 2016 | Up $50.6 million |
| Total deposits | $2.94 billion | $2.83 billion at Dec. 31, 2016 | Up $108.7 million |
| Total borrowings | $556.9 million | $599.7 million at Dec. 31, 2016 | Down $42.8 million |
| Shareholders’ equity | $397.8 million | $391.5 million at Dec. 31, 2016 | Up $6.3 million |
| Tangible book value per share | $19.14 | $18.74 at Dec. 31, 2016 | Up $0.40 |
Operating cash flow was $25.1 million, compared with $4.6 million in the prior-year quarter. Investing activities used $96.5 million, primarily from a $50.0 million net increase in loans and $44.7 million of net purchases of available-for-sale securities. Financing activities provided $61.8 million, principally from a $108.7 million increase in deposits. Cash and cash equivalents declined $9.6 million to $78.1 million.
The loan portfolio was 56% commercial and 44% retail. Commercial real estate loans increased $45.7 million, or 4%, and residential real estate loans increased $17.1 million, or 2%, from year-end. HPFC loans declined $4.5 million as the business continues to run off following the 2016 closure of its origination operations.
Material Changes Versus the Prior Comparable Period
- Net income increased $1.4 million, supported by higher fee income, lower credit-loss provision and lower operating expenses.
- Mortgage banking income increased $745,000, reflecting higher mortgage sales and improved mortgage servicing-rights results.
- Non-interest expense decreased $1.5 million. The prior-year period included $644,000 of merger and acquisition costs and higher other real estate owned and collection costs.
- Net interest margin declined because purchase-accounting loan mark accretion and collections of previously charged-off acquired loans decreased to $803,000 from $1.8 million. Higher-cost funding also pressured the margin.
- Average interest-earning assets increased 5%, driven by 5% growth in average loans and 6% growth in average investment balances.
- Brokered deposits increased $75.9 million to $348.6 million and were used to fund asset growth, while total borrowings decreased.
- Net unrealized losses on available-for-sale securities increased modestly to $6.5 million from $6.1 million at year-end; management concluded the losses were temporary and identified no other-than-temporary impairment.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management stated that liquidity exceeded internal target levels and was sufficient for current and anticipated funding needs. The Bank had no outstanding balances on its $9.9 million FHLB line, $50.0 million PNC line, $85.7 million Federal Reserve discount-window line or $10.0 million corporate line of credit at March 31, 2017.
Asset quality was described as stable. Non-performing assets were $26.7 million, or 0.68% of total assets, compared with 0.67% at year-end; non-performing loans were 0.99% of total loans. Non-accrual loans increased to $21.5 million, primarily due to an $807,000 increase in HPFC non-accrual loans. The allowance for loan losses was $23.7 million, or 0.90% of total loans, and first-quarter net recoveries were $24,000 compared with $697,000 of net charge-offs in the prior-year quarter.
Key risks include economic weakness in Maine and New England, credit deterioration, changes in interest rates and monetary policy, funding and liquidity conditions, securities-market volatility, competition, regulatory and accounting changes, technology spending and changes in consumer savings behavior. The company’s interest-rate sensitivity analysis indicated that a 200-basis-point increase could reduce first-year net interest income by 1.31%, while a 100-basis-point decrease could reduce it by 1.75%, assuming no balance-sheet growth.
Management changed its internal threshold for individually evaluating impaired loans from $250,000 to $500,000 effective January 1, 2017, without changing the qualitative impairment criteria. The company expects ASU 2016-13, the current expected credit loss standard, to have a material impact upon adoption in 2020, potentially increasing the allowance and reducing regulatory capital ratios. The company also expects lease accounting changes to materially affect the balance sheet. On April 26, 2017, it increased authorized common shares from 20 million to 40 million.
The company reported no material legal loss contingencies, no defaults on senior securities and no material changes to previously disclosed risk factors. Management concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether loan growth, especially commercial real estate growth, remains consistent with underwriting standards and asset-quality trends.
- The sustainability of the 3.18% net interest margin amid higher funding costs, brokered-deposit usage and changing interest rates.
- The level and composition of non-performing loans, particularly the increase in HPFC non-accrual loans.
- The adequacy of the $23.7 million allowance for loan losses and the potential effect of expected-credit-loss accounting in 2020.
- Liquidity dependence on brokered deposits, repurchase agreements and FHLB borrowings, including collateral requirements.
- The effect of interest-rate movements on net interest income, mortgage banking activity, securities valuations and accumulated other comprehensive loss.
- The implications of the April 2017 increase in authorized shares for future capital issuance or strategic transactions.