Camden National Corporation — Q3 2020 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 across Maine and selected markets in New Hampshire and Massachusetts. Its principal activities are gathering deposits, commercial and residential lending, mortgage banking, wealth management, brokerage, insurance and fiduciary services. This filing covers the three and nine months ended September 30, 2020, with comparisons to the corresponding 2019 periods.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net income | $16.8 million | $14.5 million | $41.2 million | $42.0 million |
| Diluted EPS | $1.11 | $0.94 | $2.73 | $2.70 |
| Net interest income | $34.5 million | $31.9 million | $100.8 million | $95.4 million |
| Non-interest income | $12.7 million | $10.7 million | $36.2 million | $30.2 million |
| Provision for credit losses | $1.0 million | $0.7 million | $12.2 million | $2.6 million |
| Net interest margin, fully taxable equivalent | 3.00% | 3.09% | 3.06% | 3.13% |
| Return on average equity | 13.01% | 12.26% | 11.06% | 12.32% |
Q3 net income increased 16% year over year, while nine-month net income decreased 2%. Q3 diluted EPS increased 18%, aided by a lower share count. Management reported a Q3 return on average assets of 1.34%, compared with 1.29% in the prior-year quarter. The adjusted efficiency ratio, excluding the legal settlement, was 50.60% in Q3 and 52.29% for the first nine months, compared with 55.32% and 55.82%, respectively, in the comparable periods.
- Interest income and margin: Fully taxable equivalent net interest income increased 8% in Q3 and 6% year to date. Average loans grew 7% in Q3 and 6% year to date, primarily from SBA Paycheck Protection Program loans. The fully taxable equivalent net interest margin declined 9 basis points in Q3 and 7 basis points year to date due to lower asset yields and the low-rate environment.
- Fee income: Mortgage banking income increased 75% in Q3 and 128% year to date. Residential mortgage sales were $182.7 million in Q3 and $449.7 million year to date, driven by refinancing activity and historically low interest rates.
- Credit costs: The allowance for loan losses rose to $36.4 million, or 1.11% of loans, from $25.2 million, or 0.81%, at December 31, 2019. Net charge-offs were $125,000 in Q3 and $929,000 year to date.
- Balance sheet: Total assets increased 16% to $5.15 billion from December 31, 2019. Loans increased 6% to $3.27 billion, including $223.8 million of SBA PPP loans. Deposits increased 19% to $4.22 billion, while total borrowings declined 13% to $294.4 million.
- Capital and liquidity: Shareholders’ equity was $517.5 million. The Company reported a 15.15% total risk-based capital ratio and an 8.96% Tier 1 leverage ratio. Cash, cash equivalents and restricted cash totaled $346.4 million at September 30, 2020.
- Cash flow: Nine-month operating cash flow was negative $5.9 million, investing cash flow was negative $341.6 million, and financing cash flow was positive $618.3 million, principally reflecting deposit growth. Ending cash, cash equivalents and restricted cash increased to $346.4 million from $75.6 million at year-end 2019.
Material changes versus prior comparable periods
- COVID-19-related SBA PPP lending added $223.8 million to period-end loans and contributed $2.4 million of Q3 interest income, including fee accretion.
- Commercial loans increased overall because of PPP lending and commercial real estate growth, while traditional commercial, residential, home equity and consumer balances declined.
- COVID-19 payment deferrals declined materially to $181.2 million, or 5.5% of total loans, at September 30, from $546.7 million, or 16.4%, at June 30.
- Service-charge income declined 18% in Q3 and 20% year to date, primarily due to lower overdraft activity.
- The Company resumed share repurchases in September after suspending the program in mid-March. It repurchased 47,915 shares in Q3 and 264,946 shares year to date.
- Accumulated other comprehensive income improved to a $19.6 million gain from a $6.3 million loss at December 31, 2019, primarily due to unrealized gains on available-for-sale securities.
Outlook, commentary, risks and unusual items
Management remained cautiously optimistic but emphasized that the COVID-19 pandemic, economic recovery and financial markets remained fragile and highly uncertain. Management expects PPP loan balances to decline as borrowers seek forgiveness, which should accelerate recognition of unearned PPP fees but reduce loan balances and related interest income.
The Company deferred adoption of CECL under the CARES Act and expected to adopt it in the fourth quarter of 2020 using a modified-retrospective approach effective January 1, 2020. Management estimated that September 30, 2020 allowance for credit losses under CECL would have been approximately $39 million to $43 million, compared with the reported allowance for loan losses of $36.4 million. The filing states that 2020 interim financial statements may be retrospectively restated as appropriate.
Management identified lodging, senior living and care facilities, restaurants, and travel and recreation as industries particularly vulnerable to COVID-19; collectively, these industries represented 12% of total loans. Future credit deterioration, higher line utilization, loan defaults, collateral declines and additional provisions remain key risks. The Company also cited low interest rates, regional economic weakness, liquidity-market access, cybersecurity, operational disruption, regulatory changes and the transition away from LIBOR as risks.
The Company accrued a $1.2 million legal settlement in Q3, recorded in other expenses. Management stated that other pending or threatened litigation was not expected to have a material adverse effect. No goodwill impairment was recorded after a COVID-19-triggered interim assessment. Approximately $1.4 million of cash-flow hedge losses were expected to be reclassified from accumulated other comprehensive income over the next 12 months, reducing net interest income.
Important facts for investors to verify
- Actual CECL adoption effects, including the retained-earnings adjustment and any restatement of 2020 interim results.
- PPP loan forgiveness timing, remaining unearned fees and the resulting effect on loan balances, interest income and fee income.
- Performance of the $181.2 million of loans still under COVID-19 deferral arrangements as deferrals expire.
- Credit trends in commercial real estate and COVID-sensitive industries, including future criticized loans, non-performing assets, charge-offs and provision expense.
- Sustainability of elevated mortgage banking income amid refinancing conditions and historically low interest rates.
- Deposit stability, access to contingent funding and liquidity effects if customers draw credit lines or deposit balances decline.
- Impact of the LIBOR transition on loans, borrowings and derivative contracts.
- Continuation of dividends and share repurchases given economic uncertainty and evolving capital requirements.