Camden National Corporation: 2018 Form 10-K Summary
Business context and reporting period
Camden National Corporation is a Maine-based bank holding company whose wholly owned subsidiary, Camden National Bank, provides commercial and consumer banking, mortgage banking, wealth management, trust, brokerage, investment advisory and insurance services. The company primarily serves Maine, with additional operations in New Hampshire and Massachusetts. This filing covers the fiscal year ended December 31, 2018, with comparative results for 2017 and 2016.
At year-end, the company had $4.3 billion of assets, 60 branches across 13 Maine counties, 634 employees and approximately 15.6 million shares outstanding. Net interest income remained the principal revenue source, representing 76% of total revenue.
Key financial metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total assets | $4.297 billion | $4.065 billion | +6% |
| Total loans | $3.026 billion | $2.782 billion | +9% |
| Total deposits | $3.464 billion | $3.000 billion | +15% |
| Shareholders’ equity | $435.8 million | $403.4 million | +8% |
| Net interest income | $120.4 million | $115.3 million | +4% |
| Provision for credit losses | $0.8 million | $3.0 million | Lower by $2.2 million |
| Non-interest income | $38.2 million | $38.6 million | -1% |
| Non-interest expense | $91.9 million | $88.5 million | +4% |
| Net income | $53.1 million | $28.5 million | +86% |
| Diluted EPS | $3.39 | $1.82 | +86% |
| Return on average assets | 1.28% | 0.71% | +57 basis points |
| Return on average equity | 12.92% | 7.00% | +592 basis points |
| Fully taxable-equivalent net interest margin | 3.16% | 3.19% | -3 basis points |
Cash, cash equivalents and restricted cash declined to $67.0 million from $103.0 million, principally because of lower Federal Reserve reserve requirements. Operating cash flow was $64.3 million, compared with $58.3 million in 2017. Investing activities used $276.8 million, primarily reflecting $243.8 million of net loan growth. Financing activities provided $176.5 million, largely from deposit growth, partly offset by lower short-term borrowings and dividends.
Total borrowings were $341.5 million at year-end, down from $611.5 million in 2017, as deposit growth reduced reliance on wholesale funding. The company reported liquidity above internal target levels and identified available borrowing capacity through the Federal Home Loan Bank, correspondent banks and the Federal Reserve Discount Window.
Material changes versus the prior comparable period
- Net income increased $24.6 million, driven primarily by lower income taxes, stronger net interest income, lower credit-loss provision and improved asset quality.
- The 2017 results included a $14.3 million deferred-tax revaluation charge following enactment of the Tax Cuts and Jobs Act. The effective tax rate fell to 19.3% in 2018 from 54.3% in 2017. Adjusted net income, excluding the 2017 tax charge, increased 24% to $53.1 million from $42.7 million.
- Loans grew $243.8 million, led by residential real estate growth of $134.5 million and commercial real estate growth of $105.5 million.
- Deposits grew $464.0 million. Low-cost deposits increased 15%, while brokered deposits increased 76% to $363.1 million at year-end. Management noted that approximately $75.0 million of interest-checking growth represented temporary funds expected to be withdrawn by March 31, 2019.
- Asset quality improved: non-performing loans declined to $14.4 million, or 0.48% of total loans, from $20.3 million, or 0.73%; non-performing assets declined to 0.34% of total assets from 0.50%.
- Net charge-offs fell to $0.3 million, or 0.01% of average loans, from $2.0 million, or 0.07%, helped by favorable resolution of significant commercial credit relationships.
- Non-interest income was broadly stable. Debit-card, fiduciary, brokerage and insurance income increased, but mortgage banking income declined 20% to $5.9 million and customer loan swap fees declined 39% to $1.0 million.
- GAAP efficiency ratio increased modestly to 57.98% from 57.51%, reflecting higher salaries, technology, consulting and debit-card expenses.
Guidance, outlook, management commentary and unusual items
The filing does not provide formal earnings or revenue guidance. Management expects net interest income to trend slightly upward if rates remain near year-end levels, with asset yields increasing somewhat faster than funding costs. The company reported an asset-sensitive interest-rate position: a modeled 200-basis-point rate increase was estimated to have little first-year effect and a 6.79% increase in second-year net interest income; a 200-basis-point decline was estimated to reduce net interest income by 1.63% in year one and 7.74% in year two. These are hypothetical sensitivity estimates, not forecasts.
Management emphasized continued organic growth, expansion in selected markets, digital banking investment and potential future acquisitions. The company declared $1.15 per share of dividends in 2018, up 22% from 2017. On January 22, 2019, the board authorized repurchases of up to 775,000 shares, approximately 5% of outstanding shares.
Unusual or notable items included the absence of a 2018 tax-revaluation charge, a $1.4 million recovery related to a previously charged-off commercial relationship, the sale of Visa Class B shares for a $0.9 million gain, and a $0.7 million loss on sales of certain debt investments during portfolio restructuring. The company recorded no other-than-temporary impairment on investment securities and concluded that goodwill was not impaired.
The company adopted several accounting standards in 2018, including revenue recognition, equity-investment fair-value accounting and targeted hedge-accounting amendments. It expected no material effect from lease accounting adoption on January 1, 2019. Adoption of the current expected credit loss standard was scheduled for January 1, 2020; management had not yet estimated its impact and noted that the allowance for credit losses and regulatory capital could increase.
Risks, contingencies and exposures
- Geographic concentration: 77% of loans were to borrowers in Maine, with significant exposure to Cumberland, Hancock, Kennebec, Knox, Penobscot and York counties.
- Credit concentration: commercial real estate and commercial loans represented 56% of total loans. Non-residential building operators represented 11% of total loans and 26% of commercial real estate loans.
- Funding risk: brokered deposits represented approximately 10% of total deposits, and a change in capital status could restrict their use or increase funding costs.
- Interest-rate risk: rising rates may increase funding costs and slow loan production, while declining rates may reduce loan yields and net interest income.
- Liquidity risk could arise from deposit outflows, reduced access to brokered deposits or wholesale markets, or market disruption.
- Cybersecurity, technology failures, vendor dependencies, fraud and operational disruptions could cause financial, regulatory and reputational damage.
- The company had $1.575 billion of off-balance-sheet financial instruments, including home-equity commitments, commercial commitments, loan swaps and interest-rate derivatives. These amounts do not necessarily represent future cash requirements.
- Pending legal matters arose in the ordinary course of business; management said they were not expected to have a material effect, and no material legal reserves were recorded.
- LIBOR discontinuation could affect certain long-dated interest-rate swaps and other contracts, although the company reported that its swap agreements contain alternative benchmark provisions.
- At December 31, 2018, the company and bank exceeded regulatory capital requirements, and the bank remained “well capitalized.”
Investor verification checklist
- Verify the sustainability of 2018 earnings excluding the 2017 tax-law comparison benefit and the $1.4 million credit recovery.
- Monitor deposit composition, particularly the growth and maturity of brokered deposits and the potential runoff of temporary interest-checking balances.
- Assess whether loan growth remains compatible with underwriting standards, capital levels and the 56% commercial/commercial-real-estate portfolio mix.
- Track credit metrics, charge-offs, criticized loans and the effect of adopting the expected-credit-loss model in 2020.
- Review net interest margin sensitivity as deposit pricing and borrowing costs rise or as rates decline.
- Confirm liquidity availability, collateral requirements and reliance on repurchase agreements, Federal Home Loan Bank funding and brokered deposits.
- Evaluate the effect of investment-portfolio unrealized losses, which increased to $17.8 million after tax at year-end, on tangible capital and liquidity.
- Review the new share-repurchase authorization, dividend capacity and regulatory restrictions on capital distributions.