Camden National Corporation — 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. Its principal activities are attracting deposits, making consumer and commercial loans, and providing wealth management, fiduciary, brokerage, and insurance services across Maine, New Hampshire, and Massachusetts. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods, and financial condition compared with December 31, 2017.
Financial performance and key metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|
| Total revenue | $40.8 million | $39.5 million | $117.5 million | $114.4 million |
| Net interest income | $30.4 million | $29.2 million | $88.8 million | $85.6 million |
| Non-interest income | $10.4 million | $10.3 million | $28.7 million | $28.8 million |
| Provision for credit losses | $0.4 million | $0.8 million | $0.8 million | $2.8 million |
| Net income | $14.1 million | $11.3 million | $39.1 million | $31.6 million |
| Diluted EPS | $0.90 | $0.72 | $2.50 | $2.02 |
| Net interest margin, fully taxable equivalent | 3.14% | 3.16% | 3.11% | 3.16% |
| Non-GAAP efficiency ratio | 57.33% | 55.72% | 58.14% | 56.80% |
- Net income increased 24% in both the quarter and nine-month period. Management estimated that the lower federal corporate tax rate contributed approximately $2.4 million, or $0.15 per diluted share, to third-quarter net income and $6.8 million, or $0.43 per diluted share, to nine-month net income.
- Average loans increased 5% year over year in both reported periods. Average deposits excluding brokered deposits increased 10% in the quarter and 9% year to date.
- Net interest income benefited from loan and deposit growth, but margin declined because of lower purchase-accounting mark accretion and reduced tax-equivalent adjustments.
- Non-interest expense increased 6% in the quarter and 5% year to date, led by salaries and benefits, technology and data-processing costs, consulting fees, and other operating expenses.
Financial condition, liquidity, debt, and capital
| Balance-sheet item | September 30, 2018 | December 31, 2017 | Change |
|---|
| Total assets | $4.192 billion | $4.065 billion | +$126.2 million |
| Total loans | $2.909 billion | $2.782 billion | +$126.4 million |
| Total deposits | $3.221 billion | $3.000 billion | +$220.3 million |
| Total borrowings | $479.5 million | $611.5 million | -$132.0 million |
| Shareholders’ equity | $417.5 million | $403.4 million | +$14.1 million |
| Cash, cash equivalents, and restricted cash | $98.3 million | $103.0 million | -$4.6 million |
- Loan growth was concentrated in residential real estate, up 10%, and commercial real estate, up 4%. HPFC loans declined 18% as the business ceased originating new loans in 2016.
- The loan-to-deposit ratio improved to 90% from 93%. Management stated that liquidity exceeded internal targets and was sufficient for current and expected funding needs.
- Available liquidity sources included deposits, FHLB and other borrowings, securities and mortgage-loan sales, and available lines of credit. At September 30, 2018, the Bank had lines with the FHLB, PNC Bank, and the Federal Reserve Discount Window; it had $45.7 million outstanding with PNC Bank.
- The allowance for loan losses was $23.5 million, or 0.81% of total loans, compared with $24.2 million, or 0.87%, at year-end 2017. Net charge-offs for the first nine months were $1.5 million, or 0.07% of average loans.
- Non-performing loans were $18.9 million, or 0.65% of total loans, compared with $20.3 million, or 0.73%, at December 31, 2017. Non-performing assets were $19.1 million, or 0.46% of total assets.
- The Company’s total risk-based capital ratio was 14.55% and its Tier 1 leverage ratio was 9.42%. Camden National Bank remained well capitalized under prompt corrective action standards.
- Cash dividends declared were $0.30 per share in the third quarter and $0.85 per share for the first nine months, compared with $0.23 and $0.69, respectively, in the prior-year periods.
Cash flow and investment portfolio
- For the first nine months of 2018, operating activities provided $53.5 million of cash, investing activities used $133.7 million, and financing activities provided $75.5 million. Cash and restricted cash decreased $4.6 million to $98.3 million.
- Net cash used in investing activities primarily reflected a $126.9 million increase in loans and $148.8 million of available-for-sale securities purchases, partly offset by securities proceeds and maturities.
- Available-for-sale securities totaled $780.3 million and held-to-maturity securities totaled $92.9 million at September 30, 2018.
- Unrealized losses on available-for-sale securities increased to $26.2 million, net of tax, from $10.3 million at year-end, primarily reflecting higher interest rates. Management considered the losses temporary and stated it had the intent and ability to hold the affected securities until recovery.
Material changes, outlook, risks, and unusual items
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21%, materially lowering the effective tax rate to 18.7% in the quarter and 19.1% year to date, versus 32.6% and 31.5% in the prior-year periods. Management estimated a 2018 annual effective tax rate of 19.3% excluding discrete items.
- The Company adopted revenue-recognition and financial-instrument standards during 2018. Management reported no material cumulative-effect impact from revenue recognition. Equity investment fair-value changes now flow through earnings rather than accumulated other comprehensive income.
- Mortgage banking income declined 15% in both the quarter and nine-month period. Nine-month mortgage sales increased to $155.6 million, but gains on sale and fair-value results were lower.
- Third-quarter net gain on sale of securities included a $939,000 gain from the sale of Visa Class B shares, partly offset by a $275,000 loss on sales of mortgage-backed and collateralized mortgage securities. The nine-month period also included a $195,000 gain from liquidation of a reinsurance investment.
- Management expects net interest income to increase slightly if rates remain near current levels. Its interest-rate sensitivity analysis estimated that a 200-basis-point increase would increase net interest income 0.68% in year one and 8.71% in year two, while a 100-basis-point decline would reduce it 0.98% and 1.59%, respectively. These are hypothetical scenarios, not forecasts.
- Key risks include economic weakness in Maine and New England, credit deterioration, interest-rate and securities-market volatility, deposit and wholesale-funding availability, competition, cybersecurity and technology risks, regulatory changes, and changes in accounting standards.
- Off-balance-sheet commitments totaled $1.469 billion, including $495.1 million of home-equity commitments, $44.6 million of residential loan commitments, $29.4 million of commercial commitments, and $793.2 million of customer loan-swap notional amounts.
- Management reported no material legal loss contingencies and no material changes to previously disclosed risk factors. The filing states that disclosure controls and procedures were effective and that no material change occurred in internal control over financial reporting.
Important facts for investors to verify
- Whether continued deposit growth can fund loan expansion and reduce reliance on brokered deposits and short-term borrowings.
- The sustainability of net interest margin as deposit costs rise and purchase-accounting accretion declines.
- Credit performance in the commercial real estate portfolio and the effect of economic or real-estate-market weakness on the allowance for loan losses.
- The potential effect of rising rates on accumulated other comprehensive losses, securities values, mortgage banking activity, and funding costs.
- The recurring earnings contribution versus one-time or unusual items, including the Visa gain, reinsurance-investment gain, lower tax rate, and reduced credit-loss provision.
- The eventual effect of the expected-current-credit-loss standard, scheduled for adoption January 1, 2020; the Company had not yet estimated its impact but warned that the allowance and regulatory capital ratios could be affected.
