Camden National Corporation — Q2 2021 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 consumer lending, deposit, wealth management, trust, brokerage, insurance and related financial services. Its primary markets are Maine, with additional activity in New Hampshire and Massachusetts. The filing covers the quarter and six months ended June 30, 2021; financial statements are unaudited.
Financial performance and key metrics
| Metric | Three months ended June 30, 2021 | Year-over-year change | Six months ended June 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Net income | $18.1 million | Up 66% | $37.9 million | Up 55% |
| Diluted EPS | $1.21 | Up 66% | $2.52 | Up 56% |
| Net interest income | $33.5 million | Down 3% | $65.9 million | Down 1% |
| Non-interest income | $11.3 million | Down 6% | $26.5 million | Up 13% |
| Non-interest expense | $25.6 million | Up 9% | $50.5 million | Up 5% |
| Credit loss provision | $(3.4) million credit | Compared with $9.4 million expense | $(5.4) million credit | Compared with $11.2 million expense |
| Fully taxable-equivalent net interest margin | 2.83% | Down 28 basis points | 2.85% | Down 25 basis points |
| Return on average assets | 1.42% | Up from 0.90% | 1.52% | Up from 1.05% |
| Return on average equity | 13.50% | Up from 8.81% | 14.24% | Up from 10.03% |
Management reported second-quarter pre-tax, pre-provision earnings of $19.3 million, down 17% year over year, indicating that the earnings increase was driven primarily by the credit-loss provision release rather than underlying operating growth. The non-GAAP efficiency ratio was 56.72% for the quarter and 53.76% year to date, compared with 50.13% and 53.17%, respectively, in the prior-year periods.
Balance sheet, cash flow, debt and liquidity
- Total assets were $5.15 billion at June 30, 2021, up 5% from $4.90 billion at December 31, 2020.
- Total loans were $3.29 billion, up 2%; loans excluding SBA PPP loans were $3.16 billion, up 2%. Residential real estate loans increased 6% and commercial real estate loans increased 4% in aggregate.
- Investments increased 25% to $1.42 billion, primarily due to $482.2 million of available-for-sale securities purchases funded by substantial deposit growth and excess liquidity.
- Total deposits increased 7% to $4.29 billion. Core deposits increased 9% to $3.68 billion. The loan-to-deposit ratio declined to 77% from 80% at year-end.
- Cash, cash equivalents and restricted cash declined to $103.7 million from $145.8 million at year-end, principally because funds were deployed into securities and loans. Net cash used in investing activities was $372.7 million, offset by $246.1 million of financing cash inflows.
- Total borrowings were approximately $214.7 million, down $32.0 million from year-end. The company repaid a $25.0 million FHLB advance and redeemed $15.0 million of subordinated debt during the period.
- Management stated that liquidity exceeded internal target levels. Available lines included $9.9 million from the FHLB, $50.0 million from a correspondent bank and $66.2 million through the Federal Reserve Discount Window, plus a $10.0 million company line of credit.
- Shareholders’ equity increased to $545.5 million from $529.3 million. Book value per share was $36.49 and tangible book value per share was $29.99 at June 30, 2021.
Material changes versus the prior comparable period
- Net income increased materially because the company recorded a $3.4 million credit for credit losses, versus a $9.4 million provision in the second quarter of 2020. Management attributed the release to strong asset quality and improved economic forecasts under CECL.
- Net interest income declined despite lower funding costs because asset yields and the net interest margin compressed in the low-rate environment. Average interest-earning cash and investment balances increased while higher-yielding loan balances declined in the quarter.
- Mortgage banking income declined 45% in the quarter to $2.6 million as the company retained more residential mortgage production. The company sold 40% of residential mortgage production in the quarter versus 65% in the prior-year quarter. Year-to-date mortgage banking income nevertheless increased 18% to $9.7 million.
- Debit card income increased 30% in the quarter and 29% year to date, reflecting higher customer spending associated in part with government stimulus programs.
- Salary and employee benefit expense increased 12% in the quarter, primarily because of higher performance-based incentive accruals. Total non-interest expense increased 9%.
- The allowance for credit losses on loans declined to $32.1 million from $37.9 million at year-end, and annualized net charge-offs were 0.03% of average loans.
- COVID-19 loan deferrals declined to zero from $26.5 million at December 31, 2020 and $546.7 million at June 30, 2020. Previously deferred loans included $1.3 million classified as non-accrual and $536,000 that were 30–89 days past due at June 30, 2021.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management expects net interest income to decline over the next year if interest rates remain near current levels, as asset repricing and replacement at low yields are expected to outweigh funding-cost benefits. A 100-basis-point decline in rates would further pressure net interest income, while a 200-basis-point increase is projected to modestly improve first-year net interest income and more substantially improve it in the second year. These are sensitivity estimates, not forecasts.
- Key risks include economic weakness in Maine and New England, deterioration in credit quality, changing interest rates, inflation, securities-market volatility, funding and liquidity conditions, competition, cybersecurity and operational risks, regulatory changes, accounting changes and the continuing effects of COVID-19.
- The loan portfolio has geographic and industry concentration risk. Maine represented 72% of total loans, and lessors of nonresidential buildings represented 14% of total loans and 32% of commercial real estate loans.
- Off-balance-sheet commitments to extend credit totaled $753.1 million, and standby letters of credit totaled $6.4 million. The related allowance for off-balance-sheet exposures was $2.5 million.
- The company reported $8.6 million of non-performing assets, or 0.17% of total assets, and $5.9 million of non-accrual loans at June 30, 2021.
- Interest-rate sensitivity analysis indicated estimated net interest income changes of 0.81% in year one and 5.86% in year two under a 200-basis-point increase, and declines of 1.27% and 11.41%, respectively, under a 100-basis-point decrease. Management cautioned that these scenarios depend on numerous assumptions.
- The company redeemed $15.0 million of subordinated debt in April 2021 and maintained capital ratios well above regulatory minimums. The company’s total risk-based capital ratio was 15.26% and its Tier 1 leverage ratio was 9.48%; Camden National Bank remained well capitalized.
- The board declared a quarterly dividend of $0.36 per share, payable July 30, 2021. A repurchase authorization for up to 750,000 shares was outstanding, but no shares were repurchased during the first six months.
Most important facts for investors to verify
- Whether future earnings normalize after the sizable CECL provision releases and whether credit-loss provisions remain favorable.
- The sustainability of the 2.83% quarterly net interest margin amid persistent low rates, elevated securities balances and deposit growth.
- Loan growth and mix, including the runoff and forgiveness of SBA PPP loans and the company’s strategy of retaining more mortgage production.
- Trends in non-performing assets, previously deferred COVID-19 loans, commercial real estate concentrations and the $32.1 million loan allowance.
- Liquidity under less favorable deposit, securities-market or wholesale-funding conditions, including the company’s pledged collateral and off-balance-sheet commitments.
- The effect of the $15.0 million debt redemption, dividends and any future share repurchases on capital and tangible book value.
- Progress in transitioning LIBOR-linked exposures to alternative reference rates and the potential effect on derivatives, loans and borrowings.