Camden National Corporation — Q1 2022 Form 10-Q Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company whose wholly owned subsidiary, Camden National Bank, provides commercial and retail banking, mortgage, wealth management, trust, brokerage, advisory and insurance services. Its primary markets are Maine, with additional activity in New Hampshire and Massachusetts. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021, and the balance sheet is compared with December 31, 2021.
Key financial metrics
| Metric | Q1 2022 | Comparable period or prior date |
|---|---|---|
| Net income | $16.8 million | $19.7 million in Q1 2021 |
| Diluted EPS | $1.13 | $1.31 in Q1 2021 |
| Total revenues | $46.2 million | $47.6 million in Q1 2021 |
| Net interest income | $36.4 million | $32.4 million in Q1 2021 |
| Net interest margin, fully taxable equivalent | 2.87% | 2.88% in Q1 2021 |
| Non-interest income | $9.8 million | $15.2 million in Q1 2021 |
| Non-interest expense | $26.2 million | $24.9 million in Q1 2021 |
| Credit for credit losses | $1.1 million credit | $2.0 million credit in Q1 2021 |
| Total assets | $5.42 billion | $5.50 billion at December 31, 2021 |
| Total loans | $3.53 billion | $3.43 billion at December 31, 2021 |
| Total deposits | $4.58 billion | $4.61 billion at December 31, 2021 |
| Shareholders’ equity | $482.4 million | $541.3 million at December 31, 2021 |
| Cash, cash equivalents and restricted cash | $139.4 million | $220.6 million at December 31, 2021 |
Return on average assets was 1.26%, return on average equity was 12.96%, and return on average tangible equity was 16.01%. The efficiency ratio was 56.47%, compared with 50.96% in Q1 2021.
Operating cash flow was $42.8 million, compared with $62.1 million in Q1 2021. Investing activities used $111.2 million, primarily reflecting a $103.0 million net increase in loans. Financing activities used $12.8 million, including a $32.2 million decrease in deposits, $5.9 million of dividends paid and $0.5 million of share repurchases. Total borrowings were $282.0 million, including $237.7 million of customer repurchase agreements and $44.3 million of subordinated debentures.
Material changes versus prior comparable periods
- Net income declined 15% and diluted EPS declined 14%, principally because mortgage banking income fell $6.1 million, or 85%, as mortgage activity and loan sales slowed.
- Net interest income increased $4.0 million, or 12%, supported by 12% growth in average interest-earning assets, 7% growth in average loans and 43% growth in average investments. Lower funding costs also contributed.
- Mortgage loan sales declined to $46.6 million, or 23% of residential mortgage production, from $192.6 million, or 66%, in Q1 2021. Management shifted toward retaining more residential mortgage loans in the portfolio.
- Total loans increased $102.7 million, or 3%, during the quarter. Commercial loans increased 11% and residential real estate loans increased 7%, while SBA PPP loans declined 82% to $6.3 million as borrowers received forgiveness.
- The allowance for credit losses on loans declined $1.5 million to $31.8 million. A $1.9 million release of reserves related to certain COVID-19-modified hospitality and commercial real estate loans more than offset provisions associated with loan growth.
- Non-interest expense increased 5%, driven primarily by higher compensation costs from merit increases, an October 2021 off-cycle wage increase and labor-market pressures. The company suspended its employee profit-sharing contribution beginning January 1, 2022.
- Shareholders’ equity declined $58.8 million, primarily because the after-tax unrealized loss on available-for-sale securities increased to $74.0 million from $1.2 million as interest rates rose. The company characterized the decline as temporary and not indicative of permanent investment losses.
Guidance, outlook, risks and unusual items
- Management expects to retain the majority of residential mortgage production in coming quarters. Rising mortgage rates, limited housing inventory, local competition and slower refinancing activity are expected to continue affecting mortgage banking results.
- Management noted that rising interest rates could slow the economy and reduce loan demand. Interest-rate sensitivity analysis indicated estimated net interest income would decline 0.79% in year one under a parallel 200-basis-point increase, but increase 6.04% in year two; these scenarios are not forecasts.
- Approximately $3.2 million of additional reserves related to certain COVID-19-modified commercial loans remained at March 31, 2022, and management anticipated releasing most of these reserves over coming quarters if required performance metrics are met.
- Asset quality remained strong: non-performing assets were 0.12% of total assets, non-performing loans were 0.19% of total loans, and loans 30–89 days past due were 0.04% of total loans. Non-accrual loans totaled $4.5 million and accruing TDRs totaled $2.3 million.
- Credit risks include potential deterioration from higher interest rates, inflation, labor-market conditions, continuing COVID-19 effects, economic weakness in New England and exposure to commercial real estate. Lessors of nonresidential buildings represented 14% of total loans and 33% of commercial real estate loans.
- Available-for-sale securities had $95.5 million of gross unrealized losses at March 31, 2022. Management did not record an allowance or impairment because it did not intend, and was not required, to sell the securities before recovery and attributed the losses to interest-rate and market conditions rather than credit events.
- Liquidity exceeded internal targets. Available sources included deposits, investment and loan cash flows, FHLB and correspondent lines, the Federal Reserve Discount Window, brokered deposits and repurchase markets. Commitments to extend credit were $889.0 million and standby letters of credit were $6.8 million.
- The company and bank exceeded regulatory capital requirements, and the bank remained well capitalized. The company’s total risk-based capital ratio was 14.51% and its common equity Tier 1 ratio was 12.38% at March 31, 2022.
- The board authorized repurchases of up to 750,000 shares. The company repurchased 13,086 shares during the quarter and an additional 101,507 shares through April 28, 2022.
- Management reported no material legal loss contingencies and no material changes in disclosure controls. The company continues to manage LIBOR transition risk and expects to move toward alternative reference rates, including SOFR.
Important facts for investors to verify
- Whether mortgage banking income continues to decline as production is retained rather than sold and as rates, housing inventory and competition evolve.
- The timing and amount of releases of the remaining $3.2 million of COVID-19-related reserves, and whether loan growth or economic deterioration requires new provisions.
- The persistence and capital impact of unrealized losses in the available-for-sale securities portfolio as interest rates change.
- Deposit stability, uninsured deposits of approximately $1.3 billion, reliance on repurchase agreements and access to contingent liquidity sources.
- Commercial real estate concentrations, especially exposure to lessors of nonresidential buildings and hospitality-related borrowers.
- The effect of share repurchases and the $0.40 quarterly dividend on capital ratios and tangible book value.
- Future changes in net interest income, funding costs and deposit pricing as the Federal Reserve raises or lowers rates.