Camden National Corporation: 2019 Q1 Form 10-Q Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company for Camden National Bank, serving consumer, commercial, municipal, nonprofit and institutional customers primarily in Maine, with additional activity in New Hampshire and Massachusetts. The filing covers the unaudited three months ended March 31, 2019, compared with the three months ended March 31, 2018, and balance-sheet information at March 31, 2019 compared with December 31, 2018.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 or prior period | Change |
|---|---|---|---|
| Total assets | $4.421 billion | $4.297 billion at Dec. 31, 2018 | 3% increase |
| Net interest income | $31.895 million | $28.902 million | 10% increase |
| Non-interest income | $9.389 million | $8.804 million | 7% increase |
| Net income | $14.273 million | $12.820 million | 11% increase |
| Diluted EPS | $0.91 | $0.82 | 11% increase |
| Net interest margin, fully taxable equivalent | 3.18% | 3.10% | 8 basis-point increase |
| Return on average assets | 1.33% | 1.28% | Increase |
| Return on average equity | 13.13% | 12.91% | Increase |
| GAAP efficiency ratio | 55.19% | 59.15% | Improved |
| Cash dividends declared per share | $0.30 | $0.25 | 20% increase |
Average loans increased 10% year over year to approximately $3.054 billion, while average deposits increased 13% to approximately $3.087 billion excluding brokered deposits. Asset yields increased 42 basis points to 4.20%, while funding costs increased 35 basis points to 1.07%.
Loans totaled $3.042 billion at March 31, 2019, up 1% from year-end 2018. Net loans were $3.017 billion after a $25.201 million allowance for loan losses. Deposits totaled $3.578 billion, up $113.7 million from year-end, while total borrowings were $325.2 million, down $16.4 million. The loan-to-deposit ratio improved to 85% from 87%.
Cash, cash equivalents and restricted cash were $139.6 million at March 31, 2019, compared with $67.0 million at year-end. Operating activities used $4.6 million of cash, investing activities used $15.0 million, and financing activities provided $92.2 million, producing a net cash increase of $72.6 million. Management stated that liquidity exceeded internal target levels and was sufficient for current and anticipated funding needs.
Shareholders’ equity increased to $453.7 million from $435.8 million. Tangible book value per share rose to $22.81 from $21.61, and the tangible common equity ratio increased to 8.21% from 8.02%. The Company repurchased 55,557 shares at an average price of $41.51 under a program authorizing up to 775,000 shares.
Material changes versus the prior comparable period
- Revenue, defined as net interest income plus non-interest income, increased approximately 9%, supported by loan and deposit growth.
- Net interest income benefited from higher average balances and improved fully taxable equivalent net interest margin.
- The provision for credit losses was $744,000, compared with a $497,000 credit in Q1 2018. The prior-year credit largely reflected the favorable resolution of a large commercial real estate loan and a provision release of approximately $968,000.
- Non-interest expense increased 2% to $22.783 million. Compensation expense increased 3%, while a $378,000 reimbursement of prior legal costs contributed to a $307,000 net recovery in other real estate owned and collection costs.
- Customer loan swap fee income increased to $525,000 from $87,000, primarily due to stronger commercial real estate originations using the back-to-back loan swap program.
- Mortgage banking income declined 10% to $1.252 million, and brokerage and insurance commissions declined 10%.
- Net charge-offs were $261,000, compared with $681,000 in Q1 2018. Non-accrual loans decreased to $10.153 million from $10.530 million at year-end, while total non-performing assets were broadly stable at $14.611 million.
- Accumulated other comprehensive loss improved by $10.1 million, primarily because unrealized losses on available-for-sale securities declined with changes in interest rates.
Guidance, outlook, management commentary, risks and unusual items
The filing does not provide formal earnings or revenue guidance. Management described first-quarter results as strong and indicated that, if interest rates remain near current levels, net interest income is projected to increase slightly as asset yields improve while funding costs remain relatively stable.
Management expects interest-rate sensitivity to be asymmetric. A 200-basis-point increase was estimated to increase net interest income by 0.47% in year one and 6.87% in year two, while a 200-basis-point decline was estimated to reduce net interest income by 2.00% in year one and 11.77% in year two. These are hypothetical sensitivity estimates, not forecasts.
- Credit risk remains concentrated in commercial real estate; lessors of nonresidential buildings represented 12% of total loans and 28% of commercial real estate loans.
- The allowance for loan losses was 0.83% of total loans and 180.81% of non-performing loans. Management stated that the allowance was appropriate, but noted that deterioration in borrower, real estate or economic conditions could require additional provisions.
- The Company had $669.2 million of commitments to extend credit and $5.9 million of standby letters of credit. A substantial portion of commitments may expire unfunded or was unconditionally cancellable.
- The Company had $1.553 billion of derivative notional amounts, primarily customer loan swaps and interest-rate risk-management instruments. These instruments are used for risk management rather than trading.
- The Company adopted the new lease standard on January 1, 2019, recording $12.1 million of right-of-use assets and $12.3 million of lease liabilities at adoption. The adoption produced a $254,000 increase to opening retained earnings and was not material to reported results.
- The Company expects to adopt the current expected credit loss standard on January 1, 2020. Management had not estimated the financial impact but anticipated that adoption could increase allowances and negatively affect regulatory capital ratios.
- Available-for-sale securities had $13.8 million of gross unrealized losses at quarter-end. Management considered the losses temporary and stated it had the intent and ability to hold the affected securities until recovery.
- Management reported no material legal loss contingencies, no material changes to previously disclosed risk factors, and no material changes affecting internal control over financial reporting.
- The Company and Bank exceeded regulatory capital requirements; the Bank continued to qualify as well capitalized. The Bank’s total risk-based capital ratio was 13.31% and its common equity Tier 1 ratio was 12.49%.
Important facts for investors to verify
- Verify the sustainability of margin expansion as deposit pricing and brokered-deposit usage increase.
- Monitor the allowance for loan losses and asset quality, particularly commercial real estate concentrations and any increase in non-performing assets.
- Assess the eventual January 1, 2020 impact of the expected credit loss standard on retained earnings, allowances and regulatory capital.
- Review liquidity dependence on core deposits, brokered deposits, repurchase agreements and available borrowing lines.
- Evaluate the effect of interest-rate changes on net interest income, including the downside exposure shown in the Company’s sensitivity analysis.
- Distinguish recurring operating performance from unusual items, including the prior-year commercial real estate provision release and the current-year reimbursement of collection-related legal costs.
- Review the terms, collateral and counterparty exposure associated with the Company’s derivative portfolio and off-balance-sheet commitments.