Business Context and Reporting Period
Camden National Corporation is a Maine-based bank holding company whose wholly owned bank subsidiary provides commercial and consumer banking, mortgage banking, wealth management, fiduciary, brokerage and insurance services. The company operated 60 branches across Maine and lending offices in New Hampshire and Massachusetts. This Form 10-K covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015.
Total assets were $4.1 billion at year-end. Net interest income represented 75% of total revenue in 2017.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total assets | $4.065 billion | $3.864 billion | +5% |
| Loans, excluding held for sale | $2.782 billion | $2.595 billion | +7% |
| Deposits | $3.000 billion | $2.829 billion | +6% |
| Borrowings | $611.5 million | $599.7 million | +2% |
| Shareholders’ equity | $403.4 million | $391.5 million | +3% |
| Net interest income | $115.3 million | $113.1 million | +2% |
| Non-interest income | $38.6 million | $39.6 million | -3% |
| Provision for credit losses | $3.0 million | $5.3 million | -42% |
| Net income | $28.5 million | $40.1 million | -29% |
| Diluted EPS | $1.82 | $2.57 | -29% |
| Net interest margin, fully taxable equivalent | 3.23% | 3.32% | -9 basis points |
| Return on average assets | 0.71% | 1.04% | Down |
| Return on average equity | 7.00% | 10.47% | Down |
Operating cash flow was $58.3 million, compared with $58.5 million in 2016. Investing activities used $212.1 million, primarily reflecting a $187.7 million increase in loans. Financing activities provided $169.1 million, principally from deposit growth and borrowings. Cash and cash equivalents increased to $103.0 million from $87.7 million.
The company’s efficiency ratio was 57.05%, compared with 57.53% in 2016. Adjusted net income, excluding the Tax Act impact and other specified unusual items, was $42.7 million, and adjusted diluted EPS was $2.73, up 5% from 2016.
Material Changes Versus the Prior Comparable Period
- Loan growth was led by commercial real estate loans, which increased 11%; residential real estate loans increased 7% and commercial loans increased 12%.
- Low-cost deposits increased 11% to approximately $2.3 billion, while the loan-to-deposit ratio rose to 93% from 92%.
- Commercial loans and commercial real estate loans represented 57% of total loans, up from 56% in 2016.
- Asset quality improved: non-performing assets declined to $20.5 million, or 0.50% of assets, from $26.0 million, or 0.67%; non-performing loans declined to 0.73% of loans from 0.97%.
- Net charge-offs declined to $2.0 million, or 0.07% of average loans, from $3.3 million, or 0.13%.
- Net interest income increased despite higher funding costs. Interest expense rose 26% as short-term rates increased, and the cost of funds rose to 0.59% from 0.49%.
- Non-interest income declined primarily because 2016 included legal settlement proceeds, mortgage-insurance-exchange proceeds and higher loan sub-servicing income. Mortgage banking income nevertheless increased 18% to $7.4 million.
- Non-interest expense declined 2% to $88.5 million, reflecting lower OREO and collection costs, lower regulatory assessments and the absence of merger and acquisition costs recorded in 2016.
- The quarterly cash dividend increased to $0.25 per share in the fourth quarter; dividends declared for the year totaled $0.94 per share versus $0.83 in 2016.
Guidance, Outlook, Risks, Contingencies and Unusual Items
The fourth quarter included a $14.3 million deferred-tax-asset write-down following enactment of the Tax Cuts and Jobs Act, which reduced the federal corporate tax rate from 35% to 21%. The charge reduced fourth-quarter net income by approximately $0.91 per share and resulted in a quarterly net loss of $3.2 million. Management expects a lower effective tax rate in 2018.
Management stated that liquidity exceeded internal target levels and that available liquidity was sufficient for current and anticipated funding requirements. Available lines of credit included $9.9 million with the FHLBB, $50.0 million with PNC Bank and $99.8 million through the Federal Reserve Discount Window; none was outstanding at year-end. The Bank and company exceeded regulatory capital requirements, and the Bank was classified as well capitalized.
Interest-rate sensitivity remains significant. Management’s modeled estimate indicated that a 100-basis-point decline in rates would reduce net interest income by 3.06% in year one and 8.08% in year two, while a 200-basis-point increase would reduce year-one net interest income by 0.22% but increase it by 6.86% in year two. These are hypothetical sensitivity estimates, not forecasts.
- Credit exposure is concentrated geographically: 81% of loans were to borrowers in Maine. Commercial real estate and commercial lending represented 57% of total loans.
- The largest industry concentration was non-residential building operators at 11% of total loans and 27% of commercial real estate loans.
- Future credit losses could exceed the allowance if regional economic conditions, real estate values or borrower performance deteriorate. The allowance for loan losses was $24.2 million, or 0.87% of loans.
- At year-end, the company had $1.4 billion of off-balance-sheet commitments and derivative notional amounts, including $477.4 million of home equity commitments, $49.5 million of commercial commitments and $703.3 million of customer loan swaps.
- Management reported no material legal loss contingencies and no goodwill impairment. Goodwill and other identifiable intangible assets totaled $99.7 million.
- The company is preparing for adoption of the current expected credit loss standard in 2020 and had not estimated its effect; management noted that adoption could increase the allowance and reduce regulatory capital ratios.
- The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Whether adjusted earnings growth continues after excluding the one-time Tax Act charge and whether the reported 2018 tax-rate benefit offsets higher funding costs.
- Trends in net interest margin, deposit pricing, brokered deposits, borrowings and sensitivity to additional Federal Reserve rate changes.
- Credit performance in Maine commercial real estate and commercial portfolios, including concentrations, delinquencies, non-performing loans and allowance coverage.
- The effect of continued loan growth on liquidity, capital ratios and reliance on short-term or wholesale funding.
- The eventual impact of the current expected credit loss standard on the allowance, retained earnings and regulatory capital.
- Execution of mortgage banking, wealth management and deposit-growth strategies, including the effect of competition and changing digital-banking usage.