CAMDEN NATIONAL CORP quarterly report, Q3 FY2019

Camden National Corporation — Form 10-Q Summary

Reporting period: Three and nine months ended September 30, 2019. Camden National Corporation is a Maine-based bank holding company operating primarily through Camden National Bank, with banking, wealth management, trust, brokerage, insurance and related services across Maine and selected markets in New Hampshire and Massachusetts. The interim financial statements are unaudited.

Financial Performance and Condition

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Net interest income	$31.9 million	$30.4 million	$95.4 million	$88.8 million
Non-interest income	$10.7 million	$10.4 million	$30.2 million	$28.7 million
Total revenues, as derived	$42.7 million	$40.8 million	$125.6 million	$117.5 million
Provision for credit losses	$0.7 million	$0.4 million	$2.6 million	$0.8 million
Non-interest expense	$23.7 million	$23.2 million	$70.5 million	$68.4 million
Net income	$14.5 million	$14.1 million	$42.0 million	$39.1 million
Diluted EPS	$0.94	$0.90	$2.70	$2.50
Net interest margin, fully taxable equivalent	3.09%	3.14%	3.13%	3.11%
GAAP efficiency ratio	55.67%	56.76%	56.14%	58.18%

Profitability: Net income increased 3% year over year in the quarter and 7% for the first nine months. Diluted EPS increased 4% and 8%, respectively, aided by lower share count from repurchases.
Revenue drivers: Net interest income benefited from loan and deposit growth. Mortgage banking income increased 52% in the quarter and 19% year to date; fiduciary services income increased 8% and 9%, respectively. Net securities gains were substantially lower than in 2018.
Margins and expenses: Third-quarter fully taxable equivalent net interest margin declined five basis points because of lower market rates and higher deposit funding costs. Year-to-date margin increased two basis points. Management attributed the 3% expense increase to investments in employees and technology. Efficiency improved from the prior-year periods.
Balance sheet: Total assets were $4.52 billion at September 30, 2019, up from $4.30 billion at December 31, 2018. Total loans increased 3% to $3.11 billion, led by residential real estate and commercial loans. Total deposits increased 4% to $3.62 billion, and the loan-to-deposit ratio improved to 86% from 87%.
Capital: Shareholders’ equity was $471.7 million versus $435.8 million at year-end 2018. Tangible book value per share was $24.52, compared with $21.61. The Company’s common equity Tier 1 ratio was 11.36% and the Bank’s was 12.16%; the Bank remained well capitalized.
Credit quality: The allowance for loan losses was $25.7 million, or 0.83% of total loans, compared with 0.82% at year-end 2018. Non-performing assets were $13.5 million, or 0.30% of total assets, versus $14.6 million and 0.34%. Annualized net charge-offs to average loans were 0.16% in the quarter and 0.07% year to date.
Debt and liquidity: Short-term borrowings were $273.5 million, long-term borrowings were $10.0 million and subordinated debentures were $59.0 million. Cash, cash equivalents and restricted cash totaled $137.5 million, compared with $67.0 million at year-end 2018. Management stated that liquidity exceeded internal target levels and was sufficient for current and anticipated funding needs.
Cash flow: Net cash provided by operating activities was $2.9 million for the first nine months, compared with $53.5 million in 2018. Investing activities used $57.0 million, while financing activities provided $124.7 million, primarily from deposit growth. Cash increased $70.5 million during the period.

Material Changes Versus the Prior Comparable Period

Loan growth and higher loan yields increased interest income, but deposit costs rose materially as average deposit balances and rates increased.
Provision for loan losses increased to $2.7 million year to date from $0.8 million. Management cited the absence of a favorable $968,000 commercial real estate provision reversal recorded in the first quarter of 2018 and two residential mortgage foreclosures in the third quarter of 2019.
Mortgage loan sales increased to $164.5 million year to date from $155.6 million, while related gains declined to $3.9 million from $4.1 million.
Available-for-sale securities shifted from a $17.8 million net unrealized loss at December 31, 2018 to a $7.5 million net unrealized gain at September 30, 2019, primarily reflecting lower long-term interest rates.
The Company repurchased 404,213 shares for $17.2 million during the first nine months, leaving 370,787 shares authorized for repurchase. It declared dividends of $0.30 per share in the third quarter and $0.90 per share year to date.
The Company adopted the new lease standard on January 1, 2019, recognizing approximately $12.1 million of operating and finance right-of-use assets and $12.3 million of lease liabilities at adoption. The impact was not material and included a $254,000 increase to opening retained earnings.

Outlook, Risks, Contingencies and Unusual Items

No formal earnings or revenue guidance is provided in the filing. Management expects results to remain sensitive to interest rates, deposit pricing, loan growth, credit quality and economic conditions.
The Company described its interest-rate position as asset sensitive. Its modeling indicated that a 100-basis-point rate decline would reduce net interest income by 0.51% in year one and 4.33% in year two; a 200-basis-point increase would reduce year-one net interest income by 0.51% but increase it by 4.54% in year two. These are hypothetical sensitivity estimates, not forecasts.
The Company entered into a $100 million interest-rate swap on variable-rate commercial real estate loans to mitigate exposure to falling rates. It also maintains $43 million of swaps related to junior subordinated debt.
Credit risks include borrower financial condition, real estate values, economic weakness in Maine and New England, loan concentration, and the possibility that the allowance for loan losses may prove inadequate. Lessors of nonresidential buildings represented 12% of total loans and 31% of commercial real estate loans.
The Company planned to adopt the current expected credit loss standard, ASU 2016-13, on January 1, 2020. Management had not estimated the financial impact and warned that the adoption could increase the allowance, affect provisions and earnings, reduce shareholders’ equity, and negatively affect regulatory capital ratios.
Off-balance-sheet commitments included $755.7 million of commitments to extend credit, $5.8 million of standby letters of credit and $1.01 billion of derivative notional amounts excluding customer loan swaps. These amounts do not necessarily represent future cash requirements.
Management stated that pending and threatened legal actions were not expected to have a material adverse effect, and that there were no material accrued or reportable loss contingencies.
Other risks include competition, market and securities volatility, liquidity access, cybersecurity and operational risks, regulatory and accounting changes, and the transition away from LIBOR after 2021.

Important Facts for Investors to Verify

Assess whether loan and deposit growth can continue without further compression of the net interest margin as funding costs rise or rates decline.
Review the expected January 1, 2020 impact of CECL adoption on the allowance, retained earnings and regulatory capital.
Monitor commercial real estate exposure, particularly the nonresidential lessor concentration, criticized loans and non-performing trends.
Evaluate the sustainability of mortgage banking gains, securities gains and other non-interest income components.
Confirm the effects of ongoing share repurchases and dividends on capital ratios and per-share earnings.
Review liquidity availability, collateralized borrowings, deposit composition and the sizable credit commitments and derivative exposures.
Compare future results with the filing’s interest-rate sensitivity assumptions and the Company’s planned LIBOR transition.