Camden National Corporation — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2023; comparisons are to the corresponding 2022 periods unless otherwise stated. Camden National is a Maine-based bank holding company with approximately $5.8 billion of assets, serving Maine, New Hampshire and Massachusetts through Camden National Bank.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net interest income | $32.6 million | $37.8 million | $99.6 million | $110.7 million |
| Net interest margin, fully taxable equivalent | 2.39% | 2.88% | 2.44% | 2.86% |
| Provision for credit losses | $(0.6) million credit | $2.8 million | $1.5 million | $4.0 million |
| Non-interest income | $5.1 million | $10.0 million | $25.0 million | $30.9 million |
| Non-interest expense | $26.2 million | $27.1 million | $79.5 million | $79.9 million |
| Net income | $9.8 million | $14.3 million | $34.9 million | $46.1 million |
| Diluted EPS | $0.67 | $0.97 | $2.39 | $3.12 |
| Return on average assets | 0.68% | 1.03% | 0.82% | 1.13% |
- Total assets were $5.780 billion at September 30, 2023, up 2% from $5.672 billion at December 31, 2022.
- Total loans were $4.058 billion, up 1%; residential real estate loans increased 3% and non-owner-occupied commercial real estate loans increased 4%, while commercial loans declined 7% and owner-occupied commercial real estate loans declined 9%.
- Total deposits were $4.678 billion, down 3%. Checking and savings balances declined as customers shifted toward higher-yielding money market accounts and certificates of deposit. Certificates of deposit increased 84% to $552.1 million.
- Total borrowings increased 66% to approximately $514.5 million, including $135.0 million borrowed under the Bank Term Funding Program at a fixed 4.70% rate, $125.0 million of FHLB borrowings and $210.1 million of customer repurchase agreements.
- Cash, cash equivalents and restricted cash increased to $211.5 million from $75.4 million at year-end 2022. Operating cash flow for the first nine months was $78.8 million.
- Available primary liquidity was approximately $1.539 billion, including excess cash, unpledged securities and borrowing capacity.
- Shareholders’ equity was $463.3 million, compared with $451.3 million at December 31, 2022. Tangible book value per share increased to $25.24 from $24.37.
- The quarterly dividend increased to $0.42 per share from $0.40. The company repurchased 65,692 shares during the first nine months at an average price of $30.44; no shares were repurchased in the third quarter.
Material changes versus the prior comparable periods
- Net income declined 31% in the third quarter and 24% for the first nine months. The principal recurring pressure was net interest margin compression as funding costs increased faster than asset yields.
- Third-quarter interest expense increased to $25.1 million from $6.8 million, while nine-month interest expense increased to $66.9 million from $12.8 million. Average deposit costs rose to 1.67% from 0.45% in the quarter and to 1.46% from 0.27% year to date.
- Loan yields and average loan balances increased, but these benefits did not offset higher deposit and borrowing costs. Average funding costs rose to 1.93% in the quarter and 1.74% year to date.
- Non-interest income decreased 49% in the quarter and 19% year to date. The third quarter included a $5.3 million pretax loss on the sale of investment securities. Mortgage banking income also declined year to date as higher mortgage rates reduced gain-on-sale margins.
- Management reported adjusted third-quarter net income of $14.0 million and adjusted diluted EPS of $0.96 after excluding the securities-sale loss. Nine-month adjusted net income was $40.6 million and adjusted diluted EPS was $2.77 after excluding the securities-sale loss and a $1.8 million Signature Bank bond write-off.
- The company sold $66.7 million of lower-yielding investments at a $5.3 million pretax loss, reinvested $30.0 million in securities yielding 6.06% and used the remaining proceeds to reduce higher-cost funding. Management estimates a tangible-book-value earn-back period of less than three years.
- The investment portfolio carried substantial interest-rate-related unrealized losses: approximately $182.4 million at September 30, 2023, compared with $141.5 million at December 31, 2022.
Credit quality, capital and liquidity
- The allowance for credit losses on loans was $36.4 million, or 0.90% of total loans, versus $36.9 million, or 0.92%, at year-end. The allowance for off-balance-sheet exposures was $2.7 million.
- Annualized net charge-offs were 0.03% of average loans for the first nine months, compared with 0.02% in the prior-year period. Non-performing loans were $6.6 million, or 0.16% of total loans; non-performing assets were 0.11% of total assets.
- Commercial real estate concentrations remain significant. Lessors of nonresidential buildings and lessors of residential buildings represented 13% and 12% of total loans, respectively. Office-space loans were $203.0 million, or 5% of total loans, and were reported as performing.
- The company and bank exceeded regulatory capital requirements. Camden National Bank’s common equity Tier 1 ratio was 12.51%, total risk-based capital ratio was 13.48% and leverage ratio was 8.84%; the bank continued to qualify as well capitalized.
Guidance, outlook, commentary and risks
- Management expects its balance-sheet repositioning, higher-yielding reinvestments and funding reductions to improve future net interest margin and earnings, but no formal earnings or revenue guidance was provided.
- Management expects approximately $900,000 of CEO-transition-related costs in 2023 and another $1.2 million in 2024. Approximately $600,000 had been recognized through September 30, 2023.
- President and CEO Gregory Dufour is scheduled to retire December 31, 2023, and will be succeeded by Simon Griffiths, with Dufour remaining as an advisor during the transition.
- Key risks include further deposit competition or outflows, elevated funding costs, interest-rate and securities-market volatility, commercial real estate vacancies, deterioration in loan or investment credit quality, economic weakness in New England, cybersecurity and operational risks, regulatory changes, higher FDIC assessments, litigation, and financial-services industry turmoil.
- The company reported that pending or threatened litigation was not expected to have a material adverse effect, and that disclosure controls were effective with no material change in internal control over financial reporting.
Investor verification items
- Verify the pace of deposit stabilization, the mix and cost of deposits, and the planned reduction or refinancing of borrowings, particularly the $135.0 million BTFP maturity in May 2024.
- Assess whether the securities-sale strategy and reinvestment at higher yields offset ongoing net interest margin pressure.
- Monitor unrealized securities losses, accumulated other comprehensive loss of $130.2 million, and the potential effect of higher rates on tangible capital.
- Review commercial real estate concentrations, office exposure, non-performing loans and allowance adequacy under adverse economic scenarios.
- Track CEO-transition costs, execution of the incoming CEO’s transition, dividend sustainability and remaining share-repurchase authorization.