Business Context and Reporting Period
Camden National Corporation is a Maine-based bank holding company operating primarily through Camden National Bank, with banking, lending, wealth management, brokerage, insurance and fiduciary services across Maine and selected markets in New Hampshire and Massachusetts. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the same periods in 2020, and the balance sheet at September 30, 2021, compared with December 31, 2020.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net interest income | $34.7 million | $34.5 million | $100.6 million | $100.8 million |
| Net income | $14.6 million | $16.8 million | $52.5 million | $41.2 million |
| Diluted EPS | $0.97 | $1.11 | $3.49 | $2.73 |
| Net interest margin, fully taxable equivalent | 2.76% | 3.00% | 2.82% | 3.06% |
| Return on average assets | 1.08% | 1.34% | 1.36% | 1.15% |
| Return on average equity | 10.51% | 13.01% | 12.96% | 11.06% |
| Efficiency ratio, non-GAAP | 57.00% | 50.60% | 54.83% | 52.29% |
For the nine months, pre-tax, pre-provision earnings were $61.5 million versus $63.7 million in the prior-year period. The nine-month provision for credit losses was a $4.4 million credit, compared with a $12.2 million provision in 2020.
Balance Sheet, Liquidity and Capital
- Total assets were $5.50 billion, up 12% from $4.90 billion at December 31, 2020.
- Total deposits were $4.61 billion, up 15%; core deposits increased 19% to $3.99 billion. The loan-to-deposit ratio declined to 72% from 80%.
- Cash, cash equivalents and restricted cash were $379.7 million, compared with $145.8 million at year-end 2020. Nine-month operating cash flow was $111.7 million, while investing activities used $465.8 million and financing activities provided $588.0 million.
- Investments increased 30% to $1.47 billion, principally from $618.7 million of purchases of available-for-sale debt securities funded by excess deposits and liquidity.
- Gross loans increased 3% to $3.32 billion. Residential real estate loans increased 16% to $1.22 billion, while SBA PPP loans declined 39% to $82.0 million.
- Shareholders’ equity was $546.0 million. Book value per share was $36.77 and tangible book value per share was $30.23.
- Total risk-based capital and Tier 1 leverage ratios were 15.06% and 9.13%, respectively. The Bank remained well capitalized under applicable prompt corrective action standards.
- Borrowings totaled $255.9 million, including $211.6 million of short-term repurchase agreements and $44.3 million of subordinated debentures. The Company repaid a $25.0 million FHLB advance and redeemed $15.0 million of subordinated debentures during 2021.
Material Changes Versus Prior Comparable Period
- Third-quarter net income declined 13% and diluted EPS declined 13%, primarily because mortgage banking income fell 59% and compensation expense increased 16%.
- Nine-month net income increased 27% and diluted EPS increased 28%, primarily because the provision for credit losses changed from a $12.2 million charge to a $4.4 million credit.
- Mortgage banking income declined to $1.9 million in the third quarter and $11.6 million year to date. Management intentionally retained more residential mortgage production, selling 33% of production in the quarter and 47% year to date, compared with 69% and 62%, respectively, in 2020.
- Debit card income increased 25% in the quarter and 27% year to date, supported by higher customer spending. Brokerage and insurance commissions increased 32% in the quarter and 42% year to date.
- Net interest margin declined 24 basis points in both the quarter and year-to-date period because lower asset yields and a shift toward cash and securities more than offset lower funding costs.
- The allowance for credit losses on loans declined to $32.3 million from $37.9 million at year-end 2020, reflecting improved macroeconomic forecasts and strong asset quality. Annualized net charge-offs were 0.01% of average loans in the quarter and 0.02% year to date.
- Non-performing assets declined to $7.8 million, or 0.14% of total assets, from $10.7 million, or 0.22%, at year-end 2020. No loans remained under COVID-19 temporary payment deferral arrangements at September 30, 2021.
Outlook, Commentary, Risks and Unusual Items
- Management reported strong asset quality, liquidity and capital, but expects earnings to remain sensitive to the low-rate environment, asset repricing, deposit pricing, prepayments and the mix of loans, securities and excess cash.
- Interest-rate sensitivity analysis indicated that a 200-basis-point increase could increase net interest income by 1.68% in year one and 7.19% in year two, while a 100-basis-point decline could reduce net interest income by 1.52% in year one and 11.43% in year two. These scenarios are not forecasts.
- The Company provided a minimum 3% wage increase effective October 3, 2021 and raised its starting minimum wage to $17 per hour. Beginning in 2022, it plans to suspend profit-sharing contributions to employee 401(k) accounts partly to offset the wage adjustment.
- The SBA PPP program ended May 31, 2021. The Company had $3.7 million of unrecognized PPP loan origination fees at September 30, 2021, which will be recognized as loans are forgiven or mature.
- During the first quarter, the Company incurred a $514,000 prepayment penalty on an FHLB borrowing. The prior-year third quarter included a $1.2 million legal settlement, contributing to lower year-over-year other expenses in 2021.
- Key risks include economic weakness in Maine and New England, credit deterioration, interest-rate and securities-market volatility, liquidity and funding-market conditions, competition, cybersecurity and operational risks, regulatory and accounting changes, and the continuing effects of COVID-19 and potential virus variants.
- Off-balance-sheet commitments included $847.4 million of commitments to extend credit and $7.5 million of standby letters of credit. Management reported no material legal loss contingencies and stated that disclosure controls were effective.
Important Facts for Investors to Verify
- Whether the benefit from the 2021 credit-loss release is sustainable or primarily reflects improved forecasts and the reversal of pandemic-related reserves.
- The effect of retaining more mortgage production on future mortgage banking income, loan growth, liquidity, credit risk and net interest margin.
- The durability of deposit growth associated with government stimulus and the resulting investment portfolio expansion and interest-rate exposure.
- Whether the planned wage increases and 2022 suspension of profit sharing adequately offset rising personnel and operating costs.
- Future performance of the $1.47 billion securities portfolio, including unrealized losses, duration, prepayment risk and accumulated other comprehensive income.
- Actual credit performance in commercial real estate, particularly the 14% of total loans concentrated in lessors of nonresidential buildings.
- The impact of LIBOR transition, changing interest rates, COVID-19 developments and access to contingent liquidity sources.
- Capital availability for the $0.36 quarterly dividend and ongoing share repurchases, including the authorization to repurchase up to 750,000 shares.