Business Context and Reporting Period
Camden National Corporation is a Maine-based bank holding company serving primarily Maine, with additional activity in New Hampshire and Massachusetts. Its principal businesses are commercial and consumer banking, wealth management, trust, brokerage, insurance and mortgage banking. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, compared with the same 2018 periods.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Year-over-Year Change | Six Months Ended June 30, 2019 | Year-over-Year Change |
|---|---|---|---|---|
| Net interest income | $31.6 million | +7% | $63.5 million | +9% |
| Non-interest income | $10.0 million | +6% | $19.4 million | +6% |
| Provision for credit losses | $1.2 million | +$0.2 million | $1.9 million | +$1.4 million |
| Net income | $13.2 million | +8% | $27.5 million | +10% |
| Diluted EPS | $0.85 | +9% | $1.76 | +10% |
| GAAP efficiency ratio | 57.58% | Improved from 58.73% | 56.39% | Improved from 58.94% |
| Fully taxable-equivalent net interest margin | 3.11% | +1 basis point | 3.14% | +4 basis points |
Return on average assets was 1.21% for the quarter and 1.27% year to date. Return on average equity was 11.63% and 12.36%, respectively; return on average tangible equity was 15.00% and 16.01%, respectively.
Balance Sheet, Capital and Liquidity
- Total assets were $4.45 billion at June 30, 2019, up 3.5% from December 31, 2018.
- Total loans were $3.10 billion, up $74.1 million, or 2%, from year-end. Commercial loans increased 12% and residential real estate loans increased 4%; commercial real estate loans declined 1%.
- Total deposits were $3.59 billion, up 4%. Short-term and long-term borrowings totaled $251.6 million, down from $282.4 million at year-end. The loan-to-deposit ratio improved to 86% from 87%.
- Cash, cash equivalents and restricted cash were $86.2 million, compared with $67.0 million at December 31, 2018. Management stated that liquidity exceeded internal target levels.
- Shareholders’ equity was $467.8 million, compared with $435.8 million at year-end. The tangible common equity ratio was 8.49%, compared with 8.02%.
- The Bank remained “well capitalized.” At June 30, 2019, its total risk-based capital ratio was 13.10%, common equity Tier 1 ratio was 12.27% and Tier 1 leverage ratio was 9.12%.
Cash Flow and Capital Allocation
- Six-month operating cash flow was negative $6.3 million, compared with positive $31.2 million in 2018, primarily reflecting changes in other assets and liabilities and mortgage loan activity.
- Investing cash flow used $55.8 million, including a $74.6 million net increase in loans.
- Financing cash flow provided $81.3 million, primarily from a $127.2 million increase in deposits.
- Cash increased by $19.2 million during the first six months.
- The company declared $0.60 per share in dividends and repurchased 166,778 shares for approximately $7.1 million at a weighted-average price of $42.62. As of June 30, 2019, 608,222 shares remained available under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Net income growth reflected higher net interest income, increased fee income and improved operating efficiency.
- Interest income increased as average interest-earning assets and loan balances grew approximately 7% and 9%, respectively, while loan yields increased. Higher deposit pricing and competition increased interest expense, partially offsetting the benefit.
- Average core deposits increased 16% year over year for the first six months, while average borrowings declined 17%.
- The provision for credit losses increased largely because of loan growth and the absence of a favorable 2018 resolution of a large commercial real estate loan that had produced a $968,000 provision reversal.
- Non-interest expense increased 5% in the quarter and 3% year to date, primarily because of investments in personnel and technology. Second-quarter other real estate owned and collection expense included $360,000 related to one matter.
- Other comprehensive income improved materially because of changes in the fair value of available-for-sale securities. Accumulated other comprehensive loss narrowed to $4.5 million from $24.4 million at year-end.
- The company adopted lease accounting standard ASU 2016-02 on January 1, 2019, recording right-of-use assets of $12.1 million and lease liabilities of $12.3 million at adoption, with a $254,000 cumulative increase to retained earnings. Management reported no material overall impact.
Outlook, Commentary, Risks and Unusual Items
The filing does not provide formal earnings or revenue guidance. Management expects to continue leveraging investments in people and technology to support revenue growth and process efficiency. It reported an asset-sensitive interest-rate position and stated that falling rates could reduce net interest income. To mitigate this exposure, the company has increased fixed-rate lending and investment duration and entered into a $100.0 million interest-rate swap.
- Asset quality remained strong, but non-accrual loans increased to $11.4 million from $10.5 million at year-end. Non-performing assets were $15.1 million, or 0.34% of total assets.
- The allowance for loan losses was $26.2 million, or 0.84% of total loans, compared with 0.82% at year-end. Annualized net charge-offs were 0.03% of average loans for both the quarter and year-to-date period.
- Commercial real estate exposure to lessors of nonresidential buildings represented 12% of total loans and 31% of commercial real estate loans.
- The company expects adoption of the current expected credit loss standard, ASU 2016-13, on January 1, 2020. Management had not estimated the financial impact but warned that adoption could increase the allowance, reduce earnings or retained earnings, and negatively affect regulatory capital ratios.
- Commitments to extend credit totaled $737.4 million and standby letters of credit totaled $5.9 million. The company also had $1.75 billion of disclosed derivative and lending-related notional exposures.
- Management stated that pending and threatened legal actions were not expected to have a material adverse effect, and no material loss contingencies requiring accrual were reported.
- Key risks include regional economic weakness, credit deterioration, interest-rate and market volatility, deposit competition, liquidity access, cybersecurity and operational risk, regulatory and accounting changes, and potential impairment of goodwill or investments.
Important Facts for Investors to Verify
- Assess the eventual balance-sheet and regulatory-capital impact of CECL adoption on January 1, 2020.
- Monitor deposit pricing, brokered-deposit dependence, funding costs and the sustainability of the 3.14% year-to-date net interest margin.
- Review trends in commercial real estate concentrations, non-accrual loans, criticized loans, charge-offs and allowance coverage.
- Evaluate the sensitivity of earnings to declining or rising interest rates, including the effect of the $100.0 million interest-rate swap.
- Confirm whether loan growth, mortgage banking activity and fee diversification offset higher personnel, technology and deposit costs.
- Consider the effect of share repurchases and dividends on capital ratios, tangible book value and future per-share earnings.