Camden National Corporation — Form 10-Q Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company whose principal subsidiary, Camden National Bank, provides commercial and retail banking, mortgage, wealth management, brokerage, investment advisory, and insurance services across Maine and selected markets in New Hampshire and Massachusetts. This report covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods; balance-sheet comparisons are primarily to December 31, 2021.
Key financial metrics
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Net interest income | $36.5 million | $33.5 million | $72.9 million | $65.9 million |
| Non-interest income | $11.1 million | $11.3 million | $21.0 million | $26.5 million |
| Net income | $15.0 million | $18.1 million | $31.8 million | $37.9 million |
| Diluted EPS | $1.02 | $1.21 | $2.15 | $2.52 |
| Net interest margin | 2.84% | 2.83% | 2.85% | 2.85% |
| Return on average assets | 1.11% | 1.42% | 1.18% | 1.52% |
| Efficiency ratio, non-GAAP | 55.42% | 56.72% | 55.94% | 53.76% |
At June 30, 2022, total assets were $5.47 billion, loans were $3.72 billion, deposits were $4.53 billion, shareholders’ equity was $446.4 million, and cash, cash equivalents, and restricted cash were $76.4 million. The loan-to-deposit ratio was 82%, compared with 74% at year-end 2021.
Six-month operating cash flow was $69.5 million, compared with $84.5 million in 2021. Investing activities used $272.1 million, principally reflecting a $293.3 million net increase in loans. Financing activities provided $58.4 million, including $159.9 million of net proceeds from borrowings, partly offset by $81.8 million of deposit runoff, $11.8 million of dividends paid, and $7.4 million of share repurchases.
The allowance for credit losses on loans was $34.2 million, or 0.92% of total loans, compared with $33.3 million, or 0.97%, at December 31, 2021. The total allowance, including off-balance-sheet exposures, was $37.4 million. Non-performing assets were $5.8 million, or 0.11% of total assets.
Regulatory capital remained strong. At June 30, 2022, the company’s total risk-based capital ratio was 14.10%, common equity Tier 1 ratio was 11.99%, and Tier 1 leverage ratio was 9.25%. Camden National Bank’s corresponding ratios were 13.30%, 12.32%, and 8.67%, and the Bank continued to qualify as well capitalized.
Material changes versus prior comparable periods
- Second-quarter net income declined 17% and six-month net income declined 16%, primarily because of higher credit-loss provision expense and lower mortgage banking income.
- Net interest income increased 9% in the second quarter and 11% year to date, supported by growth in average loans and investments. Average loans increased 11% in the quarter and 9% year to date.
- Non-interest income decreased 2% in the quarter and 21% year to date. Mortgage banking income fell 42% in the quarter and 74% year to date as rising interest rates reduced mortgage production and secondary-market sales.
- The company recorded a $2.3 million provision for credit losses in the second quarter and a $1.3 million provision for the first six months, compared with credits of $3.4 million and $5.4 million, respectively, in 2021. Management cited a softer economic outlook, rising rates, and loan growth.
- Loans increased 9% from year-end, led by residential real estate loans up 16% and commercial loans up 16%. SBA PPP loans declined 93% to $2.5 million as borrowers received forgiveness.
- Shareholders’ equity decreased 18% from year-end, primarily because of $108.7 million of after-tax other comprehensive loss related largely to falling values of available-for-sale debt securities. Tangible book value per share declined to $23.92 from $30.15.
- During the second quarter, the company transferred securities with a fair value of $520.3 million from available-for-sale to held-to-maturity. The transfer isolated approximately $56.0 million of after-tax unrealized losses in accumulated other comprehensive income for amortization over the securities’ remaining lives.
- Deposits declined 2% from year-end, while borrowings increased 62% to $415.8 million as the company substituted alternative funding, including overnight and Federal Home Loan Bank borrowings, for brokered deposits and supported loan growth.
Outlook, risks, contingencies, and unusual items
Management stated that liquidity exceeded internal target levels and was sufficient for current and anticipated funding needs. Available liquidity sources included deposits, Federal Home Loan Bank and other borrowings, loan and investment cash flows, approximately $9.9 million of Federal Home Loan Bank availability, a $50.0 million correspondent-bank line, and a $46.0 million Federal Reserve Discount Window line.
Management expects economic uncertainty, inflation, sharply higher interest rates, labor-market pressures, and a potential economic slowdown to affect loan demand, credit quality, funding costs, and the allowance for credit losses. The allowance remains sensitive to changes in economic forecasts, qualitative factors, prepayment assumptions, and actual loss experience.
Interest-rate sensitivity analysis indicated that a parallel 200-basis-point increase could reduce net interest income by 2.43% in year one but increase it by 6.05% in year two, assuming no balance-sheet growth. A 100-basis-point decrease was projected to increase net interest income by 0.47% in year one and 3.50% in year two. These are hypothetical scenarios, not forecasts.
Other significant risks identified by the company include COVID-19 effects, the war in Ukraine and other geopolitical events, securities-market volatility, deterioration in investment values, cybersecurity and technology risks, competition, regulatory and accounting changes, climate-related effects, litigation, and liquidity-market disruptions.
Off-balance-sheet commitments totaled $890.1 million, including $881.6 million of commitments to extend credit and $8.5 million of standby letters of credit. The company reported no material loss contingencies and stated that pending litigation was not expected to have a material adverse effect. The filing provides no quantitative earnings or revenue guidance.
Important facts for investors to verify
- Whether loan growth and higher interest rates offset the continuing decline in mortgage banking income and the potential for higher deposit and borrowing costs.
- Whether the $114.9 million after-tax decline in accumulated other comprehensive income is temporary, as management believes, or results in sustained pressure on tangible capital and book value.
- Future credit-loss provisions, particularly given management’s recession concerns, commercial real estate exposure, inflation, and rising interest rates.
- Liquidity and funding trends, including the 2% deposit decline, 62% increase in borrowings, uninsured deposits of approximately $1.2 billion, and pledged collateral.
- Performance of the residential mortgage portfolio after the company retained 80% of funded production during the first half of 2022.
- Progress and potential effects of the planned transition from LIBOR to alternative reference rates before the remaining U.S. dollar LIBOR settings cease after June 30, 2023.
- Continuation of the $0.40 quarterly dividend and the authorized repurchase program, which permits repurchases of up to 750,000 shares; 161,556 shares had been repurchased through June 30, 2022.