Camden National Corporation 2020 Form 10-K Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company for Camden National Bank, providing commercial and consumer banking, mortgage banking, wealth management, trust, brokerage, insurance and investment advisory services. The filing covers the fiscal year ended December 31, 2020, with comparative information for 2019 and 2018. The Company reported approximately $4.9 billion of assets and operated 57 branches in Maine plus offices in New Hampshire and Massachusetts.
Net interest income remained the primary revenue source, representing 73% of total revenue in 2020. The year was materially affected by the COVID-19 pandemic, government stimulus programs, the SBA Paycheck Protection Program and historically low interest rates.
Key financial metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total assets | $4.899 billion | $4.430 billion | +11% |
| Net income | $59.5 million | $57.2 million | +4% |
| Diluted EPS | $3.95 | $3.69 | +7% |
| Net interest income | $136.3 million | $127.6 million | +7% |
| Provision for credit losses | $12.4 million | $2.9 million | +$9.6 million |
| Non-interest income | $50.5 million | $42.1 million | +20% |
| Non-interest expense | $100.0 million | $95.3 million | +5% |
| Net interest margin, fully taxable equivalent | 3.09% | 3.15% | -6 basis points |
| Return on average assets | 1.23% | 1.30% | Down |
| Return on average equity | 11.81% | 12.44% | Down |
| Efficiency ratio | 53.52% | 56.15% | Improved |
Management’s non-GAAP pre-tax, pre-provision earnings increased 17% to $86.8 million. Adjusted efficiency ratio was 52.56%, compared with 55.77% in 2019.
Balance sheet, liquidity and capital
- Total loans increased 4% to $3.220 billion, including $135.1 million of SBA PPP loans at year-end. Commercial loans represented 59% of total loans, and retail loans represented 41%.
- Deposits increased 13% to $4.005 billion, driven primarily by government stimulus-related balances. Core deposits increased 19% to $3.364 billion, while certificates of deposit declined 31% to $357.7 million. Brokered deposits were $283.6 million, or 7% of total deposits.
- Cash, cash equivalents and restricted cash increased to $145.8 million from $75.6 million. Management stated that liquidity exceeded internal target levels and was sufficient for current and anticipated funding needs.
- Short-term borrowings declined to $162.4 million from $268.8 million. Long-term borrowings were $25.0 million and subordinated debentures totaled $59.3 million.
- Total shareholders’ equity increased 12% to $529.3 million. Book value per share was $35.50 and tangible book value per share was $28.96.
- The Company’s total risk-based capital ratio was 15.40%, Tier 1 risk-based capital ratio was 13.78%, common equity Tier 1 ratio was 12.45% and Tier 1 leverage ratio was 9.13%. Camden National Bank remained well capitalized.
- Operating cash flow was $18.2 million, compared with $32.9 million in 2019. Investing activities used $294.5 million, while financing activities provided $346.4 million, primarily from deposit growth.
Material changes versus the prior comparable period
- Net interest income increased $8.7 million, substantially due to $7.8 million of fees and interest associated with SBA PPP loans and lower funding costs. The average cost of funds declined 56 basis points to 0.49%.
- Mortgage banking income increased 136% to $18.5 million. Residential mortgage originations reached a record $1.0 billion, up 79%, and mortgage loan sales increased to $625.8 million.
- Provision for credit losses increased 334% to $12.4 million as management incorporated pandemic-related risks and adopted the current expected credit loss model.
- The allowance for credit losses on loans increased 50% to $37.9 million, or 1.18% of total loans, from 0.81% in 2019. The total allowance, including off-balance-sheet exposures, was $40.4 million.
- Asset quality remained strong: non-performing assets were 0.22% of total assets versus 0.25% in 2019, past-due loans were 0.10% of total loans versus 0.17%, and net charge-offs were 0.02% of average loans versus 0.08%.
- Non-interest expense included a $1.2 million legal settlement. Excluding that item, the adjusted efficiency ratio was 52.56%.
- The Company adopted CECL in the fourth quarter, effective January 1, 2020, resulting in a $2.8 million reduction to retained earnings. Interim 2020 periods were not restated.
- The Company repurchased 274,354 shares for $9.7 million at an average price of $35.36. A new authorization for up to 750,000 shares was approved in February 2021.
Guidance, outlook, management commentary and risks
Management described itself as cautiously optimistic but noted that economic conditions remained fragile and the effects of COVID-19 were uncertain. The Company continued participating in SBA PPP lending in 2021 and expected to manage growth, capital and liquidity conservatively.
- At December 31, 2020, loans under temporary COVID-19 payment deferrals totaled $26.5 million, or 0.8% of loans, down from $546.7 million, or 16.4%, at June 30, 2020. Management cautioned that government stimulus and temporary relief programs could mask future credit deterioration.
- Material credit exposures include Maine, which represented 73% of the loan portfolio; commercial real estate and commercial loans, which represented 57% of loans excluding SBA PPP loans; and industries affected by COVID-19, including lodging, senior living, restaurants and travel.
- The Company was asset sensitive over one- and two-year periods. Management indicated that lower rates could reduce net interest income, while higher rates could increase income but also slow loan production and increase repayment and credit risks.
- Net interest income remained vulnerable to continued low rates, excess liquidity, deposit repricing, loan prepayments and the eventual repricing of assets.
- Cybersecurity, remote work, third-party vendors, regulatory compliance, litigation, competition from fintechs and potential changes in banking regulation were identified as significant risks.
- The Company held $97.5 million of goodwill and other identifiable intangible assets. No goodwill impairment was recorded despite pandemic-related triggering events and an interim impairment test.
- In February 2021, the Company terminated a $25.0 million FHLBB borrowing and incurred a $514,000 prepayment penalty. In March 2021, it announced plans to call $15.0 million of subordinated debt on April 16, 2021.
- Pending legal proceedings were not expected to have a material effect, and no material legal claim reserves were maintained at year-end.
Most important facts for investors to verify
- Whether credit quality remains stable after the expiration of pandemic relief programs and government stimulus, particularly in commercial real estate, lodging and other affected industries.
- Whether the $37.9 million loan allowance adequately reflects lifetime expected losses under CECL and whether future economic forecasts require additional provisioning.
- The sustainability of elevated mortgage banking income and SBA PPP-related fees after refinancing activity and PPP loan forgiveness normalize.
- The effect of prolonged low interest rates, excess cash balances and deposit repricing on net interest margin and net interest income.
- The composition, stability and cost of deposits, including the reliance on brokered deposits and stimulus-related deposit growth.
- The effect of the planned subordinated-debt call and FHLBB borrowing termination on capital ratios, interest expense and liquidity.
- Exposure to LIBOR transition, cybersecurity incidents, vendor disruptions, regulatory changes and potential litigation or government scrutiny.
- The filing reports effective disclosure controls and internal control over financial reporting, with an unqualified audit opinion; investors should nevertheless review the critical audit matter concerning the allowance for credit losses.