Camden National Corporation — First Quarter 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Camden National Corporation is a Maine-based bank holding company operating primarily through Camden National Bank across Maine and selected markets in New Hampshire and Massachusetts. The filing reflects the initial effects of the COVID-19 pandemic, which intensified during March 2020.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 / Prior Period | Change |
|---|---|---|---|
| Total assets | $4.595 billion | $4.430 billion at Dec. 31, 2019 | Up 4% |
| Total loans | $3.158 billion | $3.095 billion at Dec. 31, 2019 | Up 2% |
| Total deposits | $3.564 billion | $3.538 billion at Dec. 31, 2019 | Up 1% |
| Net interest income | $31.8 million | $31.9 million | Down 0.2% |
| Non-interest income | $11.4 million | $9.4 million | Up 21% |
| Net income | $13.5 million | $14.3 million | Down 5% |
| Diluted EPS | $0.89 | $0.91 | Down 2% |
| Net interest margin, fully taxable equivalent | 3.08% | 3.18% | Down 10 basis points |
| Return on average assets | 1.21% | 1.33% | Down 12 basis points |
| Return on average equity | 11.30% | 13.13% | Down 183 basis points |
| Return on average tangible equity | 14.35% | 17.08% | Down 273 basis points |
Total reported revenue, consisting of net interest income and non-interest income, was approximately $43.2 million, compared with $41.3 million in the prior-year quarter. The increase in non-interest income was more than offset by higher operating expenses and a larger provision for credit losses.
Material Changes Versus the Prior Comparable Period
- Mortgage banking income increased 182% to $3.5 million, supported by residential mortgage sales of $69.2 million versus $28.0 million in Q1 2019 and increased mortgage pipeline activity following the decline in interest rates.
- Interest expense declined 17% to $8.4 million, primarily because of lower funding costs, deposit growth and Federal Funds rate cuts. Loan yields and the overall interest-earning asset yield declined, compressing the net interest margin.
- Non-interest expense increased 8% to $24.6 million, driven mainly by salaries and employee benefits, debit card expense, equipment and data processing, and occupancy costs. The efficiency ratio increased to 56.45% on a non-GAAP basis from 54.86%.
- The provision for credit losses increased to $1.8 million from $744,000. Management added $800,000 to the allowance for loan losses through a COVID-19-related qualitative adjustment.
- The allowance for loan losses increased to $26.5 million from $25.2 million at December 31, 2019. Net charge-offs were $422,000, compared with $261,000 in Q1 2019.
- Shareholders’ equity increased to $492.7 million from $473.4 million, aided by net income and an $18.3 million after-tax increase in accumulated other comprehensive income, primarily from unrealized gains on available-for-sale securities.
- The company repurchased 217,031 shares for $8.0 million before suspending repurchases on March 20, 2020 to preserve capital.
Cash Flow, Debt and Liquidity
- Cash, cash equivalents and restricted cash declined to $54.2 million from $75.6 million at year-end. Operating cash flow was negative $33.0 million and investing cash flow was negative $84.2 million, partly offset by $95.8 million of financing cash flow.
- Total borrowings were $420.9 million, comprising $326.7 million of short-term borrowings, $35.0 million of long-term borrowings and $59.2 million of subordinated debentures. Borrowings increased $83.0 million, or 25%, from December 31, 2019.
- The company entered into new Federal Home Loan Bank advances, including a $25.0 million five-year advance and a $50.0 million 90-day advance, and entered into two $50.0 million interest-rate swaps to hedge borrowing costs.
- Management stated that liquidity exceeded internal target levels. Available funding sources included Federal Home Loan Bank, correspondent bank and Federal Reserve Discount Window lines, although access to wholesale funding and deposit markets could be affected by the pandemic.
- Off-balance-sheet commitments to extend credit totaled $764.4 million, and standby letters of credit totaled $5.0 million.
- The company and bank exceeded applicable regulatory capital requirements. At March 31, 2020, the company’s total risk-based capital ratio was 13.81%, common equity Tier 1 ratio was 11.27%, and Tier 1 leverage ratio was 9.53%. The bank remained well capitalized.
Guidance, Outlook, Commentary and Risks
- Management shifted its strategic focus from earnings growth to capital preservation as the pandemic developed. It formed a Pandemic Work Group, moved more than half of employees to remote work, modified branch operations, provided premium pay to certain front-line employees and temporarily suspended layoffs for 90 days.
- As of April 22, 2020, the company had approved payment deferrals on 1,732 loans totaling $547.7 million, or 17% of the March 31 loan portfolio. The company stated that none of these COVID-19-related modifications were treated as troubled-debt restructurings.
- As of April 22, 2020, the company had approved 1,649 SBA Paycheck Protection Program loans totaling $197.4 million for funding. These loans carry a 1.0% fixed rate, are fully guaranteed by the SBA and generate SBA-paid origination fees.
- The company elected to delay adoption of CECL under the CARES Act until the earlier of the end of the national emergency or December 31, 2020. Management estimated that CECL would have increased the allowance by approximately $2.0 million to $4.0 million over the December 31, 2019 allowance and by approximately $2.5 million to $8.7 million over the March 31, 2020 allowance. Adoption is expected to require a retrospective restatement of 2020 interim financial statements and a retained-earnings adjustment.
- Management expects credit quality deterioration and higher losses could emerge as the pandemic affects borrowers, particularly in lodging, senior living and care facilities, restaurants, travel and recreation. These industries represented approximately 13% of total loans.
- The company identified significant risks from the pandemic, including loan defaults, collateral deterioration, increased credit-line utilization, payment deferrals, reduced lending revenue, market volatility, funding pressure, operational disruption, cybersecurity threats and potential goodwill impairment. No goodwill impairment triggering event was identified as of March 31, 2020.
- The quarterly cash dividend increased 10% year over year to $0.33 per share. Future dividends and capital actions remain subject to earnings, regulatory requirements, economic conditions and the company’s capital-preservation strategy.
Important Facts for Investors to Verify
- Actual performance of the $547.7 million portfolio subject to COVID-19 payment deferrals and the volume of subsequent defaults or charge-offs.
- The ultimate CECL adoption date, allowance increase, retained-earnings impact and required restatement of 2020 interim results.
- Changes in non-performing loans, criticized assets, net charge-offs and allowance coverage as pandemic-related relief periods expire.
- Funding and liquidity trends, including deposit stability, short-term borrowings, wholesale funding access and utilization of available contingent liquidity.
- Economic performance and credit exposure in commercial real estate and the identified vulnerable industries.
- Whether mortgage banking gains and SBA-related fees offset future margin compression, higher provisions and pandemic-related operating costs.
- Continuation of the $0.33 quarterly dividend and the status of the suspended share-repurchase program.