Camden National Corporation — Q2 2020 Form 10-Q Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company operating primarily through Camden National Bank. It provides consumer, commercial, municipal and nonprofit banking, mortgage, wealth management, trust, brokerage, advisory and insurance services across Maine and selected markets in New Hampshire and Massachusetts. This unaudited Form 10-Q covers the three and six months ended June 30, 2020, with results materially affected by the COVID-19 pandemic and related federal relief programs.
Key financial metrics
| Metric | Q2 2020 | Six months 2020 | Comparable period |
|---|---|---|---|
| Net income | $10.9 million | $24.4 million | $13.2 million and $27.5 million, respectively |
| Diluted EPS | $0.73 | $1.62 | $0.85 and $1.76, respectively |
| Net interest income | $34.5 million | $66.4 million | $31.6 million and $63.5 million, respectively |
| Provision for credit losses | $9.4 million | $11.2 million | $1.2 million and $1.9 million, respectively |
| Non-interest income | $12.1 million | $23.5 million | $10.0 million and $19.4 million, respectively |
| Non-interest expense | $23.5 million | $48.1 million | $24.0 million and $46.7 million, respectively |
| Fully taxable-equivalent net interest margin | 3.11% | 3.10% | 3.11% and 3.14%, respectively |
| Return on average assets | 0.90% | 1.05% | 1.21% and 1.27%, respectively |
| Return on average equity | 8.81% | 10.03% | 11.63% and 12.36%, respectively |
| Non-GAAP efficiency ratio | 50.13% | 53.17% | 57.27% and 56.07%, respectively |
Net interest income increased 9% in the quarter and 5% year to date on a fully taxable-equivalent basis, primarily from higher average earning assets, lower funding costs and PPP loan growth. Mortgage banking income increased 169% in the quarter and 175% year to date as mortgage originations and sales accelerated in the low-rate environment.
Total assets were $4.96 billion at June 30, 2020, up from $4.43 billion at December 31, 2019. Total loans were $3.33 billion, up 7%, including $218.8 million of SBA PPP loans. Total deposits were $4.00 billion, up 13%, while core deposits increased to $3.34 billion. The loan-to-deposit ratio declined to 83% from 87%.
Cash, cash equivalents and restricted cash totaled $155.8 million, compared with $75.6 million at year-end. Six-month operating cash flow was negative $19.5 million, investing cash flow was negative $333.0 million, and financing cash flow was positive $432.7 million, primarily reflecting deposit growth. Borrowings totaled $330.2 million, consisting of $246.0 million of short-term borrowings, $25.0 million of long-term borrowings and $59.2 million of subordinated debentures.
Shareholders’ equity was $506.5 million, compared with $473.4 million at year-end. The common equity ratio was 10.21% and the tangible common equity ratio was 8.41%. The Bank remained well capitalized, with a total risk-based capital ratio of 13.75%, common equity Tier 1 ratio of 12.65% and leverage ratio of 8.71%.
Material changes versus prior comparable periods
- Net income declined 17% in the quarter and 11% for the first six months, primarily because of substantially higher credit-loss provisions related to COVID-19 risk.
- The allowance for loan losses increased to $35.5 million, or 1.07% of total loans, from $25.2 million, or 0.81%, at December 31, 2019.
- Average loans increased 8% in the quarter and 6% year to date, driven largely by PPP lending. The Company originated 2,919 PPP loans totaling $237.0 million during the second quarter.
- Average deposits increased 16% in the quarter and 12% year to date, while deposit costs declined materially as interest rates fell.
- Mortgage banking income benefited from $197.8 million of residential mortgage sales in the quarter, compared with $49.6 million in the prior-year quarter.
- Service charges on deposit accounts declined 39% in the quarter, primarily because of lower overdraft fees and changes in customer transaction behavior.
- The Company repurchased 217,031 shares during the first quarter at a weighted-average price of $36.74 and suspended the repurchase program on March 20, 2020 to preserve capital.
- The quarterly dividend increased to $0.33 per share from $0.30 per share in the prior-year quarter.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings guidance. Management stated that the duration and economic effects of COVID-19 remain uncertain. The Company expects potential credit deterioration, particularly in lodging, senior living and care facilities, restaurants, and travel and recreation, which represented approximately 13% of total loans at June 30, 2020.
At June 30, 2020, 1,763 loans totaling $546.7 million, or approximately 16% of total loans, remained under COVID-related payment modifications. As of July 23, 2020, 1,201 loans totaling $351.0 million remained on deferment, including 469 loans totaling $68.1 million receiving a second modification. Future defaults, additional payment deferrals, higher line utilization and collateral deterioration could increase provisions and credit losses.
The Company elected to delay adoption of CECL under the CARES Act. It expects to adopt CECL by December 31, 2020, or earlier if the national emergency ends. Management estimated that the CECL allowance would have been approximately $40.0 million to $44.0 million at June 30, 2020, compared with the reported $35.5 million allowance under the incurred-loss method. Adoption is expected to result in a cumulative-effect adjustment to retained earnings and may require restatement of 2020 interim financial statements, including net income and EPS.
Management completed an interim goodwill impairment assessment after identifying a COVID-related triggering event. Goodwill was not impaired as of May 31, 2020, and management identified no subsequent information requiring a revised conclusion as of June 30, 2020.
Management reported liquidity above internal targets and identified available contingent sources including FHLBB, correspondent-bank and Federal Reserve Discount Window lines. Key risks include the pandemic, regional economic weakness, credit losses, interest-rate compression, liquidity and funding-market conditions, cybersecurity, operational disruptions, regulatory changes, securities-market volatility and the transition away from LIBOR.
There were no material legal contingencies disclosed, and management concluded that disclosure controls and procedures were effective. Remote-work arrangements did not materially affect internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether COVID-related loan modifications convert into higher delinquencies, nonperforming assets, charge-offs and provisions after deferral periods expire.
- The ultimate CECL adoption adjustment, including its effect on retained earnings, capital ratios, 2020 interim results and EPS.
- The sustainability of elevated mortgage banking income and PPP-related fee and interest income after refinancing activity and PPP forgiveness decline.
- Deposit retention, liquidity availability and borrowing costs if stimulus-driven deposit growth reverses.
- Exposure and performance of commercial real estate and industries most affected by COVID-19.
- Whether the Company resumes share repurchases and maintains the $0.33 quarterly dividend as earnings, capital and regulatory conditions evolve.
- Future goodwill impairment testing results and the effect of prolonged market or economic weakness.