Camden National Corporation — 2018 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Camden National Corporation is a Maine-based bank holding company whose primary subsidiary, Camden National Bank, conducts lending and deposit activities principally in Maine, with loan production offices in Massachusetts and New Hampshire. This unaudited Form 10-Q covers the three and six months ended June 30, 2018, filed August 3, 2018. All dollar amounts below are in thousands unless otherwise noted.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|---|---|
| Net interest income | $29,481 | $28,626 | $58,383 | $56,481 |
| Provision for credit losses | $983 | $1,401 | $486 | $1,980 |
| Non-interest income | $9,501 | $9,888 | $18,305 | $18,460 |
| Non-interest expense | $22,895 | $22,158 | $45,199 | $43,586 |
| Net income | $12,217 | $10,234 | $25,037 | $20,310 |
| Diluted EPS | $0.78 | $0.66 | $1.60 | $1.30 |
| Net interest margin, fully taxable equivalent | 3.10% | 3.16% | 3.10% | 3.15% |
| Return on average assets | 1.19% | 1.03% | 1.24% | 1.04% |
| Return on average equity | 12.10% | 10.17% | 12.50% | 10.27% |
- Second-quarter net income increased 19% and diluted EPS increased 18% year over year. Six-month net income increased 23% and diluted EPS increased from $1.30 to $1.60.
- Total assets were $4.194 billion at June 30, 2018, up 3% from December 31, 2017. Loans were $2.868 billion, up $85.1 million, or 3%, led by residential real estate, commercial real estate and commercial loan growth.
- Total deposits were $3.056 billion, up $55.6 million from year-end. Short-term borrowings were $591.6 million, long-term borrowings were $10.8 million, and subordinated debentures were $59.0 million.
- Shareholders’ equity was $409.9 million, compared with $403.4 million at December 31, 2017. Tangible book value was $19.94 per share versus $19.57 at year-end.
- Cash, cash equivalents and restricted cash totaled $117.1 million at June 30, 2018, compared with $103.0 million at December 31, 2017.
- Cash flow from operating activities was $31.2 million for the six months, while investing activities used $114.3 million, primarily because of loan growth and purchases of available-for-sale securities. Financing activities provided $97.3 million, primarily from deposit and borrowing increases.
- The loan-to-deposit ratio was 94%, compared with 93% at December 31, 2017. Management stated that liquidity exceeded internal target levels and that available funding was sufficient for current and expected requirements.
- The Bank remained well capitalized. Camden National Corporation reported a 14.33% total risk-based capital ratio, 12.99% Tier 1 risk-based capital ratio, 11.49% common equity Tier 1 ratio and 9.30% Tier 1 leverage ratio.
Material Changes Versus Prior Comparable Period
- Net interest income increased 3% in both the quarter and six-month period, supported by approximately 5% average loan growth and growth in low-cost deposits. Rising funding costs partially offset asset growth; average borrowing costs increased to 1.96% in the second quarter from 1.33% in the prior-year quarter.
- Net interest margin declined six basis points in the quarter and five basis points year to date, primarily due to lower purchase-accounting mark accretion, lower recoveries on previously charged-off acquired loans and the effect of the lower federal tax rate on tax-equivalent income.
- Non-interest income declined 4% in the quarter and 1% year to date. Mortgage banking income and fees from back-to-back commercial loan swaps decreased, while brokerage and insurance commissions and debit card income increased.
- Non-interest expense increased 3% in the quarter and 4% year to date, driven primarily by salaries and employee benefits, technology costs, consulting and professional fees, and employee-related expenses.
- Provision for credit losses decreased $418 thousand in the quarter and $1.5 million year to date, reflecting improved asset quality and the favorable resolution of a large non-accruing commercial real estate loan in the first quarter.
- The effective tax rate decreased to 19.1% for the quarter and 19.2% year to date from 31.6% and 30.9%, respectively, due principally to the Tax Cuts and Jobs Act reduction in the federal corporate tax rate. Management estimated the resulting net income benefit at approximately $1.8 million for the quarter and $3.6 million year to date.
- The second-quarter dividend increased to $0.30 per share from $0.23 per share; dividends declared for the first six months were $0.55 per share versus $0.46 in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings guidance. It stated that the estimated 2018 annual effective tax rate, excluding discrete items, was approximately 19.9%.
- Management expects net interest income to increase slightly if rates remain near current levels. Its interest-rate sensitivity analysis indicated modest first-year benefit from a 200-basis-point rate increase and a first-year decline from a 100-basis-point decrease; these scenarios are not forecasts.
- Key risks include economic weakness in Maine and New England, deterioration in credit quality, changes in interest rates, deposit pricing and funding costs, securities-market volatility, competition, cybersecurity and technology risks, regulatory and tax changes, and changes in accounting standards.
- Unrealized losses on available-for-sale and held-to-maturity debt securities totaled $31.7 million at June 30, 2018, compared with $14.5 million at year-end. Management considered the losses temporary and attributed them primarily to higher market interest rates rather than credit deterioration.
- The company recorded a $195 thousand gain from the mandatory liquidation of a reinsurance-program investment and a $31 thousand gain on the sale of investment securities during the six months.
- Off-balance-sheet commitments totaled $1.424 billion, including $499.6 million of home equity commitments, $47.6 million of residential loan commitments, $35.2 million of commercial commitments and $728.2 million of customer loan-swap notional amounts. These amounts do not necessarily represent future cash requirements.
- Management reported no material loss contingencies requiring accrual or disclosure. Pending and threatened legal actions were described as routine and not expected to have a material adverse effect.
- The company adopted several accounting standards in 2018, including revenue recognition and financial-instrument guidance. The company expects the future credit-loss standard, scheduled for adoption January 1, 2020, could increase the allowance for credit losses and negatively affect regulatory capital, but had not estimated the impact.
Important Facts Investors Should Verify
- Whether loan growth can continue without further margin compression as deposit and wholesale funding costs rise.
- The sustainability of earnings growth after the one-time tax benefit and other unusual items.
- Credit performance, particularly commercial real estate concentrations, non-accrual loans, TDRs and the adequacy of the allowance for loan losses.
- The duration and potential earnings or capital effects of the $31.7 million in temporary investment-security unrealized losses.
- Liquidity sensitivity to deposit outflows, brokered deposits, repurchase agreements and FHLB borrowings.
- The ultimate capital and allowance impact of adoption of the expected-credit-loss standard in 2020.
- Execution and costs associated with technology investments, strategic initiatives and employee-related expense growth.