Camden National Corporation — Q3 2022 Form 10-Q Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company operating primarily through Camden National Bank. It provides consumer, residential and commercial lending, deposit services, wealth management, brokerage, insurance and related financial services across Maine and selected markets in New Hampshire and Massachusetts. This report covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods; balance-sheet comparisons are primarily to December 31, 2021.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net interest income | $37.8 million | $34.7 million | $110.7 million | $100.6 million |
| Net interest margin, fully taxable equivalent | 2.88% | 2.76% | 2.86% | 2.82% |
| Non-interest income | $10.0 million | $11.1 million | $30.9 million | $37.6 million |
| Provision for credit losses | $2.8 million | $0.9 million | $4.0 million | $(4.4) million credit |
| Non-interest expense | $27.1 million | $26.3 million | $79.9 million | $76.8 million |
| Net income | $14.3 million | $14.6 million | $46.1 million | $52.5 million |
| Diluted EPS | $0.97 | $0.97 | $3.12 | $3.49 |
| Cash dividends per share | $0.40 | $0.36 | $1.20 | $1.08 |
- Total assets were $5.55 billion at September 30, 2022, versus $5.50 billion at December 31, 2021.
- Total loans increased 13% to $3.86 billion. Residential real estate loans increased 24% to $1.62 billion, commercial loans increased 16% to $423.3 million, and SBA PPP loans declined 98% to $685,000.
- Total deposits were $4.57 billion, down 1% from year-end. Core deposits increased 3% to $4.20 billion, while brokered deposits declined to $89.8 million from $208.5 million.
- Short-term borrowings increased to $421.1 million from $211.6 million; total borrowings, including subordinated debentures, were approximately $465.4 million.
- Cash, cash equivalents and restricted cash declined to $82.0 million from $220.6 million, primarily as cash was deployed to fund loan growth. Management stated that liquidity exceeded internal targets and was sufficient for current and anticipated needs.
- Net cash provided by operating activities was $84.7 million. Investing activities used $364.4 million, primarily due to a $429.9 million net increase in loans. Financing activities provided $141.1 million. Cash decreased by $138.6 million during the first nine months.
- Shareholders’ equity declined 20% to $431.0 million, largely because of $130.2 million of after-tax other comprehensive loss, principally unrealized losses on debt securities caused by rising interest rates. Tangible common equity declined to 6.13% from 8.22% at year-end.
- Regulatory capital remained strong. At September 30, 2022, the consolidated total risk-based capital ratio was 13.81%, the common equity Tier 1 ratio was 11.72%, and the Tier 1 leverage ratio was 9.24%. Camden National Bank continued to meet the regulatory definition of well capitalized.
Material changes versus prior comparable periods
- Third-quarter net income decreased 3%, while nine-month net income decreased 12%; nine-month diluted EPS fell 11% to $3.12.
- Net interest income increased 9% in the quarter and 10% year to date. The improvement reflected higher interest rates, loan growth and redeployment of excess cash into higher-yielding assets. Interest expense rose 157% in the quarter and 52% year to date as deposit and borrowing costs increased.
- Non-interest income declined 10% in the quarter and 18% year to date. Mortgage banking income fell 67% in the quarter and 73% year to date as higher rates reduced mortgage production and secondary-market sales. Nine-month mortgage loan sales declined to $131.6 million from $389.6 million.
- Provision expense shifted materially from a $4.4 million credit in the first nine months of 2021 to a $4.0 million provision in 2022. Management cited loan growth and a softer economic outlook, partly offset by the release of $5.0 million of COVID-related hospitality reserves.
- The allowance for credit losses on loans increased to $36.5 million from $33.3 million. Net charge-offs were low at $503,000 for the first nine months, and non-performing assets improved to 0.09% of total assets from 0.13%.
- The company transferred securities with a fair value of $520.3 million from available-for-sale to held-to-maturity in June 2022 to manage capital sensitivity to rising rates. The investment portfolio had significant unrealized losses, but management attributed them to market interest-rate changes rather than credit deterioration.
- The company repurchased 225,245 shares during the first nine months under a 750,000-share authorization and increased the quarterly dividend to $0.40 per share.
Guidance, outlook, risks and unusual items
- No formal earnings or financial forecast was provided. Management expects continued Federal Reserve rate increases could slow economic activity, loan demand and loan growth.
- Management identified rising interest rates, inflation, labor-market pressures and the growing likelihood of a recession as factors that could increase credit-loss provisions and affect borrowers.
- Mortgage banking activity is expected to remain pressured by higher rates, elevated housing prices and reduced refinancing demand. The residential mortgage pipeline was $113.4 million at September 30, 2022, down 42% year over year.
- Interest-rate increases reduced the fair value of available-for-sale securities and materially lowered reported equity. Management expects these valuation declines to be temporary and does not believe they reflect underlying credit losses, but further rate increases could create additional volatility.
- Management reported adequate liquidity, including access to the Federal Home Loan Bank, correspondent-bank lines and the Federal Reserve discount window. However, deposit behavior, brokered-deposit availability and wholesale funding markets could affect liquidity.
- Off-balance-sheet commitments to extend credit and standby letters of credit totaled $881.4 million. The related allowance for credit exposures was $3.4 million.
- Management stated that pending and threatened litigation was not expected to have a material adverse effect based on currently available information. The filing disclosed no material loss contingencies.
- Other risks include securities-market volatility, cybersecurity and operational risks, competition, regulatory and accounting changes, geopolitical events, climate-related effects, and the transition away from LIBOR. The company had no LIBOR-based deposits at September 30, 2022.
Facts investors should verify
- Whether higher funding costs and additional Federal Reserve rate increases continue to expand or compress the net interest margin.
- Loan growth, deposit stability, reliance on short-term borrowings and the company’s loan-to-deposit ratio, which was 85% at September 30, 2022.
- Trends in residential mortgage production, mortgage banking income and the $113.4 million mortgage pipeline.
- Changes in the allowance for credit losses, delinquency levels and commercial real estate concentrations, including lessors of nonresidential buildings at 13% of total loans.
- Further unrealized investment-security losses, accumulated other comprehensive loss and their effect on tangible common equity and regulatory capital.
- Liquidity availability relative to $1.2 billion of deposits exceeding the FDIC insurance limit and $881.4 million of off-balance-sheet credit commitments.
- Future dividend and share-repurchase decisions in light of equity-market volatility, capital levels and funding requirements.