Camden National Corporation — Fiscal 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual Form 10-K; fourth-quarter results are included in the annual and quarterly disclosures. Camden National is a Maine-based bank holding company with Camden National Bank as its wholly owned subsidiary. The Company reported $4.4 billion of assets, 60 Maine branches, one New Hampshire branch, and 639 employees at year-end.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total assets | $4.430 billion | $4.297 billion | +3% |
| Total loans | $3.095 billion | $3.026 billion | +2% |
| Total deposits | $3.538 billion | $3.464 billion | +2% |
| Shareholders’ equity | $473.4 million | $435.8 million | +9% |
| Net interest income | $127.6 million | $120.4 million | +6% |
| Non-interest income | $42.1 million | $38.2 million | +10% |
| Provision for credit losses | $2.9 million | $0.8 million | Increased |
| Non-interest expense | $95.3 million | $91.9 million | +4% |
| Net income | $57.2 million | $53.1 million | +8% |
| Diluted EPS | $3.69 | $3.39 | +9% |
| Net interest margin | 3.15% | 3.16% | Down 1 bp |
| Return on average assets | 1.30% | 1.28% | Improved |
| Return on average equity | 12.44% | 12.92% | Down |
| Efficiency ratio, non-GAAP | 55.77% | 57.71% | Improved |
Net interest income remained the primary revenue source, representing approximately 75% of total revenue. Fully taxable-equivalent net interest income was $128.7 million. Average loans increased 8%, while average deposits increased 14%; however, funding costs rose as deposit and borrowing rates increased. Management reported that the second half of 2019 included three Federal Funds rate cuts totaling 75 basis points.
Non-interest income growth was led by mortgage banking income, which increased 33% to $7.8 million, fiduciary services income, which increased 10% to $5.9 million, and debit card income, which increased 7% to $9.7 million. Mortgage loan sales and residential mortgage production also increased.
Cash and cash equivalents were $75.6 million at December 31, 2019, compared with $67.0 million at the prior year-end. Net cash provided by operating activities was $32.9 million, compared with $64.3 million in 2018. Investing activities used $55.8 million, while financing activities provided $31.6 million. The lower operating cash flow primarily reflected working-capital changes and increased mortgage loan activity.
Balance sheet, funding and capital
- Investments were $933.1 million, or approximately 21% of assets. Approximately 85% of the investment portfolio consisted of securities with the highest credit ratings or securities backed by the U.S. government and government-sponsored agencies.
- Core deposits increased to $2.825 billion from $2.657 billion. Brokered deposits declined 47% to $191.0 million, representing 5% of total deposits versus 10% in 2018.
- Total borrowings were $337.9 million at year-end, including $268.8 million of short-term borrowings, $10.0 million of long-term borrowings, and $59.1 million of subordinated debentures.
- The Company had available liquidity lines of $9.9 million from the FHLBB, $50.0 million from a correspondent bank, $114.7 million through the Federal Reserve Discount Window, and a separate $10.0 million parent-company line of credit. Management stated that liquidity exceeded internal target levels.
- The Company’s total risk-based capital ratio was 14.44%, CET1 ratio was 11.80%, and Tier 1 leverage ratio was 9.55%. Camden National Bank’s corresponding ratios were 13.45%, 12.65%, and 9.19%. The Bank remained “well capitalized.”
- The Company declared $18.9 million of dividends, or $1.23 per share, and repurchased 488,052 shares at an average price of $42.61. A new authorization for up to 750,000 shares was approved in January 2020.
Asset quality and credit risk
Asset quality remained strong, although credit-loss provisions and net charge-offs increased from unusually low 2018 levels. Non-performing assets declined to $11.2 million, or 0.25% of total assets, from $14.6 million, or 0.34%, at December 31, 2018. Non-performing loans declined to $11.1 million, or 0.36% of total loans. The allowance for loan losses increased to $25.2 million, equal to 0.81% of total loans and 226% of non-performing loans.
The 2019 provision for loan losses was $2.9 million versus $0.8 million in 2018, and net charge-offs were 0.08% of average loans versus 0.01% in 2018. Commercial real estate and commercial loans represented 54% of total loans. Approximately 76% of loans were concentrated among Maine borrowers, with additional exposure in New Hampshire and Massachusetts. Non-residential building operators represented 12% of total loans and 31% of commercial real estate loans.
Material changes and unusual items
- Revenue grew 7%, exceeding 4% expense growth and supporting record net income and diluted EPS.
- Net interest margin was broadly stable but was pressured by higher funding costs and lower purchase-accounting fair-value accretion.
- Other income included a $928,000 unrealized gain on bank stock, reflecting a change in fair value after another bank announced a planned merger.
- The Company realized a $105,000 net loss on securities sales as it restructured the investment portfolio.
- Other comprehensive income was $18.2 million, primarily reflecting an improvement in unrealized available-for-sale securities gains.
- The Company adopted the new lease accounting standard in 2019, recording right-of-use assets of $14.5 million and lease liabilities of $14.7 million at year-end; the adoption produced a $254,000 increase to retained earnings.
- Management announced that Chief Operating and Financial Officer Deborah A. Jordan intended to retire on April 30, 2020.
Outlook, risks and contingencies
The Company did not provide formal quantitative earnings guidance in the filing. Management expects net interest income to be sensitive to interest-rate movements, deposit pricing, loan repricing and prepayments. The balance sheet was described as asset sensitive over one- and two-year periods; the filing’s modeled scenarios indicated that declining rates could reduce net interest income, while the benefit from higher rates would develop more gradually.
The Company adopted the current expected credit loss standard, or CECL, on January 1, 2020. Based on a parallel calculation as of December 31, 2019, management expected an immaterial initial impact on retained earnings and regulatory capital, but warned that the new model could increase quarter-to-quarter allowance volatility.
Key risks include geographic concentration in Maine, commercial real estate and commercial-credit exposure, interest-rate and deposit-cost pressure, access to wholesale funding, competition from larger banks and fintech companies, cybersecurity and third-party vendor failures, regulatory and compliance requirements, LIBOR transition risk, potential goodwill or intangible-asset impairment, and changes in economic conditions. The filing identifies the coronavirus outbreak as a potential subsequent risk, particularly to borrowers, demand, operations and financial markets.
Pending litigation arises in the ordinary course of business. Management stated that currently pending proceedings were not expected to have a material effect on the consolidated financial statements and that no material legal reserves were maintained at year-end.
Most important facts to verify
- Whether CECL adoption produced the expected immaterial impact when reflected in first-quarter 2020 reporting.
- Subsequent trends in provision expense, net charge-offs, non-performing assets and commercial real estate credit quality.
- The effect of 2020 interest-rate changes on net interest margin, deposit pricing and liquidity.
- Execution and funding of the January 2020 authorization to repurchase up to 750,000 shares.
- Succession arrangements and potential expense or operational effects associated with the CFO retirement.
- Exposure to Maine economic conditions, non-residential building operators, uninsured or large certificates of deposit, and brokered or wholesale funding.
- Progress in replacing LIBOR-linked contracts and managing related derivative and borrowing exposures.
- Any subsequent effects from the coronavirus outbreak, cybersecurity incidents, regulatory actions or litigation not reflected in the 2019 filing.