CAMDEN NATIONAL CORP quarterly report, Q3 FY2017

Camden National Corporation — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2017. Camden National Corporation is a Maine-based bank holding company whose lending is concentrated in Maine, with additional production in Massachusetts and New Hampshire. The filing is unaudited and should be read with the 2016 Form 10-K.

Key Financial Metrics

Metric	Q3 2017	Q3 2016	9M 2017	9M 2016
Net income	$11.3 million	$10.9 million	$31.6 million	$29.2 million
Diluted EPS	$0.72	$0.70	$2.02	$1.88
Net interest income	$29.2 million	$28.4 million	$85.6 million	$84.8 million
Provision for credit losses	$0.8 million	$1.3 million	$2.8 million	$5.0 million
Non-interest income	$10.3 million	$11.0 million	$28.8 million	$29.5 million
Non-interest expense	$21.8 million	$22.1 million	$65.4 million	$67.4 million
Effective tax rate	32.6%	31.6%	31.5%	30.4%

Profitability: Net income increased 4% year over year in the quarter and 9% year to date. Return on average assets was 1.12% for Q3 and 1.07% for the first nine months; return on average equity was 10.93% and 10.49%, respectively.
Margins: Tax-equivalent net interest margin was 3.19% in both Q3 and the first nine months, down from 3.24% and 3.31% in the comparable 2016 periods. Excluding purchase-accounting accretion and collections on previously charged-off acquired loans, margin was 3.11% in Q3 versus 3.10% and 3.10% year to date versus 3.11%.
Revenue mix: Net interest income represented approximately 75% of total revenue for the first nine months. Non-interest income declined 2% year to date, despite an $827,000 gain on securities sales, primarily because of lower other income and the absence of certain prior-year items.
Balance sheet: Total assets increased 5% from December 31, 2016 to $4.04 billion. Loans increased 6% to $2.75 billion, while total investments increased 2% to $916.0 million.
Deposits and debt: Total deposits increased 5% to $2.96 billion. Total borrowings, including subordinated debentures, were approximately $608.6 million, up 1% from year-end. Short-term borrowings were $539.0 million, long-term borrowings were $10.7 million, and subordinated debentures were $58.9 million.
Capital: Shareholders’ equity increased 6% to $414.4 million. The Company’s total risk-based capital ratio was 14.09% and Tier I leverage ratio was 9.01%. Camden National Bank remained well capitalized under prompt corrective action standards.
Book value: Tangible book value per share increased to $20.26 from $18.74 at year-end; tangible common equity increased to 7.98% from 7.71%.

Cash Flow and Liquidity

Operating activities generated $42.4 million of cash during the first nine months, compared with $33.0 million in the prior-year period.
Investing activities used $166.3 million, primarily because of a $153.6 million net increase in loans and securities purchases.
Financing activities provided $125.6 million, principally from a $128.1 million increase in deposits.
Cash and cash equivalents ended at $89.4 million, compared with $99.5 million at September 30, 2016.
Management stated that liquidity exceeded internal target levels. At September 30, 2017, unused lines included approximately $9.9 million at the FHLBB, $50.0 million at PNC Bank, and $98.9 million at the Federal Reserve Discount Window; none were outstanding.

Material Changes Versus Comparable Periods

Loan growth and higher loan yields increased interest income, but funding costs rose as the Federal Reserve increased rates and the Company used more FHLBB borrowings and brokered deposits.
Interest expense increased 24% in Q3 and 23% year to date, partially offsetting loan-driven interest income growth.
The provision for credit losses declined substantially, reflecting lower charge-offs and improved credit trends.
Mortgage banking income declined 14% in Q3 but increased 13% year to date. Q3 mortgage loan sales were $59.9 million, down from $71.4 million.
Other income declined 76% in Q3 and 56% year to date, partly because 2016 included $638,000 of one-time legal proceeds, lower customer loan-swap fees, and the termination of a sub-servicing contract.
Non-interest expense declined 1% in Q3 and 3% year to date. Lower OREO and collection costs, regulatory assessments, and merger-related costs more than offset higher salaries and benefits.
The Company declared dividends of $0.23 per share in each quarter of 2017, or $0.69 per share for the first nine months, compared with $0.60 per share in the comparable 2016 period.

Asset Quality, Outlook, and Risks

Non-performing loans declined to $19.8 million, or 0.72% of total loans, from $25.1 million, or 0.97%, at year-end. Non-performing assets declined to $20.1 million, or 0.50% of assets, from $26.0 million, or 0.67%.
The improvement was driven substantially by resolution of a $10.0 million commercial real estate relationship during Q3.
The allowance for loan losses was $24.4 million, or 0.89% of loans, compared with $23.1 million, or 0.89%, at year-end. Management stated that the allowance was appropriate but cautioned that deterioration in economic conditions or borrower performance could require additional provisions.
Commercial real estate exposure was the largest loan category at $1.13 billion. Non-residential building operators represented 11% of total loans and 27% of commercial real estate loans.
Management projects that, if rates remain near current levels, net interest income should increase slightly. Its interest-rate sensitivity analysis estimated that a 200-basis-point increase could increase net interest income 0.30% in year one and 7.00% in year two, while a 100-basis-point decline could reduce it 2.69% and 8.11%, respectively. These are simulations, not forecasts.
Key risks include regional economic weakness, credit deterioration, interest-rate and funding-cost changes, competition, securities-market volatility, cybersecurity and technology risks, regulatory changes, and accounting changes.
The Company had $580.3 million of lending-related commitments, including $461.7 million of home equity commitments. These commitments may not be fully drawn.
Management reported no material legal loss contingencies and no material changes to previously disclosed risk factors. The IRS completed its review of the 2013 and 2014 federal returns without material financial statement changes.
Future accounting changes, particularly the expected-loss credit model under ASU 2016-13, could increase the allowance for credit losses and negatively affect regulatory capital; the filing states that the impact had not yet been estimated.

Most Important Facts to Verify

Whether loan growth can continue without materially increasing credit losses, funding costs, or reliance on brokered deposits and borrowings.
Whether the improvement in non-performing assets is sustainable after the resolution of the large commercial real estate relationship.
The sensitivity of net interest margin to further rate increases, deposit repricing, and changes in wholesale funding costs.
The potential effect of the expected-loss credit standard on the allowance for loan losses, retained earnings, and regulatory capital.
The sustainability of non-interest income after the 2017 securities gain and the loss of prior sub-servicing and legal-proceeds income.
Liquidity availability and collateral requirements associated with short-term borrowings, repurchase agreements, and derivatives.