Camden National Corporation — 2018 First-Quarter 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 lending activities are concentrated in Maine, with additional mortgage and commercial lending activity in Massachusetts and New Hampshire. The filing covers the unaudited three months ended March 31, 2018, compared primarily with the three months ended March 31, 2017 and December 31, 2017 balance-sheet amounts. The company had 15,566,603 common shares outstanding as of April 27, 2018.
Financial performance and condition
| Metric | Q1 2018 | Comparable period | Change |
|---|---|---|---|
| Net interest income | $28.9 million | $27.9 million | +4% |
| Non-interest income | $8.8 million | $8.6 million | +3% |
| Total revenue | $37.7 million | $36.4 million | +4% |
| Provision for credit losses | $(0.5) million credit | $0.6 million expense | Favorable $1.1 million |
| Non-interest expense | $22.3 million | $21.4 million | +4% |
| Pre-tax income | $15.9 million | $14.4 million | +10% |
| Net income | $12.8 million | $10.1 million | +27% |
| Diluted EPS | $0.82 | $0.64 | +28% |
| Cash dividend per share | $0.25 | $0.23 | +9% |
- Return on average assets was 1.28%, compared with 1.05%; return on average equity was 12.91%, compared with 10.36%.
- Fully taxable-equivalent net interest margin was 3.10%, down from 3.15%. Net interest income benefited from 6% average loan growth and 16% growth in average demand and interest-checking deposits, but funding costs increased.
- The efficiency ratio was 58.76%, compared with 58.00%; GAAP efficiency ratio was 59.15%, compared with 58.82%.
- The effective tax rate declined to 19.4% from 30.1%, primarily because the Tax Cuts and Jobs Act reduced the federal corporate tax rate. Management estimated a $1.9 million, or $0.12 per diluted share, benefit in the quarter.
| Balance-sheet metric | March 31, 2018 | December 31, 2017 |
|---|---|---|
| Total assets | $4.11 billion | $4.07 billion |
| Total loans | $2.79 billion | $2.78 billion |
| Total investments | $913.7 million | $907.6 million |
| Total deposits | $3.03 billion | $3.00 billion |
| Total borrowings | $622.3 million | $611.5 million |
| Shareholders’ equity | $404.1 million | $403.4 million |
| Cash, cash equivalents and restricted cash | $125.1 million | $103.0 million |
Operating activities provided $17.1 million of cash, investing activities used $26.5 million, and financing activities provided $31.6 million. Cash, cash equivalents and restricted cash increased $22.1 million during the quarter. The loan-to-deposit ratio was 92%, compared with 93% at year-end.
Material changes versus prior periods
- Net income increased primarily because of the lower tax rate, higher net interest income, stronger loan and core deposit balances, and a $1.1 million favorable swing in credit-loss provision.
- Asset quality improved following the resolution of a large non-accruing commercial real estate loan, which allowed release of a specific reserve. Non-performing loans declined to $19.3 million from $20.3 million, and non-performing assets declined to $19.4 million from $20.5 million.
- The allowance for loan losses declined to $23.0 million from $24.2 million, or 0.82% of total loans versus 0.87%. Net charge-offs were $0.7 million, compared with net recoveries of $24,000 in the prior-year quarter.
- Non-interest expense increased $0.9 million, driven by salaries and benefits, technology and data-processing costs, debit-card expenses, recruiting, marketing and benefit costs. Intangible amortization decreased because certain trust-relationship intangibles were fully amortized by December 31, 2017.
- Non-interest income included a $195,000 gain from mandatory liquidation of a reinsurance-program investment and a $35,000 unrealized loss on bank-stock equity securities. Mortgage banking income declined 10%, while brokerage and insurance commissions increased 43%.
- Accumulated other comprehensive loss increased to $28.6 million from $20.2 million, principally because of higher unrealized losses on available-for-sale securities. The company reported $27.9 million of temporary unrealized losses on debt securities and stated that it had the intent and ability to hold the securities until recovery.
- The company adopted revenue-recognition, financial-instrument, pension-presentation and cash-flow standards in the first quarter. Adoption of ASU 2016-01 resulted in a $198,000 reclassification from accumulated other comprehensive income to retained earnings; management reported no material effect from the other adoptions.
Guidance, outlook, commentary and risks
- No formal earnings or revenue guidance was provided. Management stated that the first-quarter results are not necessarily indicative of full-year results.
- Management expects the 2018 effective tax rate, excluding discrete items, to be approximately 19.9%.
- Management characterized asset quality and liquidity as strong and stated that liquidity exceeded internal targets. Available unused lines included approximately $9.9 million at the FHLB, $50.0 million at PNC Bank and $101.7 million at the Federal Reserve discount window; no balances were outstanding on these lines at quarter-end.
- The principal market risk is interest-rate risk. The company’s sensitivity analysis estimated that a 200-basis-point increase would have little first-year effect but could increase second-year net interest income by 8.85%; a 100-basis-point decrease could reduce second-year net interest income by 5.43%. These scenarios are not forecasts.
- Key risks include weakness in Maine and New England economies, credit deterioration, interest-rate and funding-cost changes, securities-market volatility, competition from banks and non-banks, cybersecurity and technology risks, regulatory and tax changes, and new accounting requirements.
- The company expects adoption of the current expected credit loss standard on January 1, 2020. It had not estimated the impact but noted that the allowance and regulatory capital ratios could be adversely affected.
- The Bank remained “well capitalized.” The consolidated total risk-based capital ratio was 14.32%, the common equity Tier 1 ratio was 11.45%, and the tangible common equity ratio was 7.59%.
- Off-balance-sheet commitments totaled approximately $1.38 billion, including $501.1 million of home-equity commitments, $708.3 million of customer loan-swap notional amounts and $36.4 million of residential loan-origination commitments. These amounts do not necessarily represent future cash requirements.
- Management reported no material loss contingencies requiring accrual and believed pending or threatened legal actions would not have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether loan growth and core-deposit growth can offset rising deposit and borrowing costs while the net interest margin remains under pressure.
- Whether the first-quarter credit provision benefit and reserve release are non-recurring and whether future credit-loss provisions normalize or increase.
- The sustainability of the lower tax rate and the company’s approximately 19.9% 2018 estimated effective tax rate.
- The duration, interest-rate sensitivity and potential capital impact of the investment portfolio’s unrealized losses.
- Future credit performance, particularly commercial real estate concentrations and the company’s ability to maintain low non-performing asset levels.
- The eventual effect of CECL adoption on the allowance for credit losses, retained earnings and regulatory capital.
- Liquidity dependence on deposits, brokered deposits, repurchase agreements and other wholesale funding sources.