Camden National Corporation — Q1 2023 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 commercial, residential and consumer lending, deposit services, wealth management, brokerage, insurance and related financial services across Maine and selected markets in New Hampshire and Massachusetts. This unaudited report covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022, and financial condition data as of March 31, 2023 compared with December 31, 2022.
Key financial metrics
| Metric | Q1 2023 | Q1 2022 or prior period | Change |
|---|---|---|---|
| Net income | $12.7 million | $16.8 million | Down 24% |
| Diluted EPS | $0.87 | $1.13 | Down $0.26 |
| Net interest income | $34.3 million | $36.4 million | Down 6% |
| Net interest margin, fully taxable equivalent | 2.54% | 2.87% | Down 33 basis points |
| Provision for credit losses | $2.0 million | $(1.1) million credit | Increase of $3.1 million |
| Non-interest income | $9.9 million | $9.8 million | Essentially flat |
| Non-interest expense | $26.2 million | $26.2 million | Essentially flat |
| Return on average assets | 0.91% | 1.26% | Down 35 basis points |
| Return on average equity | 11.16% | 12.96% | Down 180 basis points |
Interest income increased 36% to $52.7 million, driven by higher loan balances and yields, but interest expense increased to $18.4 million from $2.5 million as deposit and borrowing costs rose sharply. The efficiency ratio was 58.96%, compared with 56.47% in the prior-year quarter.
Net cash provided by operating activities was $14.5 million, compared with $42.8 million in Q1 2022. Investing activities used $45.0 million, principally reflecting $63.1 million of net loan growth and $6.7 million of net purchases of Federal Home Loan Bank stock. Financing activities provided $30.8 million, including $221.1 million of net short-term borrowing proceeds, partially offset by a $184.2 million deposit decline and $6.1 million of dividends paid. Cash, cash equivalents and restricted cash totaled $75.7 million at March 31, 2023.
Total assets were $5.72 billion, up 0.8% from year-end 2022. Loans increased 2% to $4.07 billion, while deposits declined 4% to $4.64 billion. Short-term borrowings increased to $486.3 million from $265.2 million, and total borrowings, including subordinated debentures, were $530.6 million. Shareholders’ equity increased to $464.9 million, and the tangible common equity ratio improved to 6.56% from 6.37%.
Available primary liquidity was $1.30 billion, including cash, unpledged securities, borrowing capacity and other available lines. This represented approximately 1.9 times uninsured and uncollateralized deposits of $691.5 million. The Bank remained well capitalized, with a common equity Tier 1 risk-based capital ratio of 12.19%; the consolidated company’s ratio was 11.90%.
Material changes versus the prior comparable period
- Net income declined $4.1 million, primarily because of net interest margin compression and higher credit-loss provisions.
- Average interest-earning assets increased 6%, but the average cost of funds increased to 1.45% from 0.21%, reflecting higher market rates and deposit repricing.
- Deposits shifted from lower-cost categories into certificates of deposit. Certificates of deposit increased 20% from year-end 2022 to $360.1 million, while core deposits declined to $4.07 billion.
- Loan balances increased $62.8 million, led by non-owner-occupied commercial real estate and residential real estate loans. Commercial and retail loans represented approximately 51% and 49% of the portfolio, respectively.
- The allowance for credit losses on loans increased to $37.1 million from $36.9 million, reflecting loan growth and a softer economic outlook. Annualized net charge-offs were 0.02% of average loans.
- Q1 2023 included a $1.8 million full write-off of a Signature Bank subordinated corporate bond following that bank’s failure. Q1 2022 included a $1.1 million credit to provision expense from releasing pandemic-related reserves.
- Mortgage banking income declined 31%, and mortgage production declined 58% from the prior-year quarter. The residential mortgage pipeline was $45.5 million at March 31, 2023, down 62% year over year.
- Accumulated other comprehensive loss improved by $6.5 million during the quarter as long-term interest rates declined, although the investment portfolio remained in a $122.0 million net unrealized loss position.
Guidance, outlook, commentary and risks
The filing does not provide formal earnings or revenue guidance. Management stated that the inverted yield curve and rising short-term rates are expected to continue pressuring net interest margin because funding costs are repricing faster than asset yields. The company is managing this exposure through loan and deposit pricing, interest-rate swaps, brokered deposits and retail certificates of deposit.
Management characterized liquidity, asset quality and regulatory capital as strong despite industry-wide banking-system volatility. The company reported no other exposures to failed banks as of March 31, 2023 and no identified troubled credits in its $207.2 million office-space loan portfolio. Management expects to sell a greater percentage of residential mortgage production in coming quarters to manage balance-sheet and interest-rate exposure.
Modeled interest-rate sensitivity indicated that a parallel 200-basis-point increase could reduce first-year net interest income by 2.24%, although modeled second-year net interest income would increase. These scenarios are hypothetical and are not forecasts.
Key risks include deposit outflows and funding costs, interest-rate and securities-market volatility, unrealized investment losses, commercial real estate and office exposure, deterioration in credit quality, recession risk, liquidity-market disruption, regulatory capital changes, cybersecurity and operational risks, competition, litigation, and broader geopolitical or economic developments. The company became eligible after quarter-end for up to $146.0 million of borrowing capacity under the Federal Reserve Bank Term Funding Program and had not used it as of the filing date.
The company adopted ASU 2022-01 and ASU 2022-02 effective January 1, 2023. Management reported no material effect from adoption. There were no disclosed material legal loss contingencies, and management concluded that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether deposit declines, including the reduction in one large municipal relationship, continue and how much funding must be replaced with higher-cost borrowings or brokered deposits.
- Whether net interest margin stabilizes from the reported 2.54% level as deposit pricing and asset repricing evolve.
- Credit trends in commercial real estate, office loans and the company’s concentrations in lessors of residential and nonresidential buildings.
- Potential additional credit losses in the corporate bond portfolio, particularly holdings of financial institutions, following the Signature Bank write-off.
- The market value, duration and liquidity of the securities portfolio and the effect of unrealized losses on tangible capital and regulatory capital.
- Future changes in the allowance for credit losses as economic forecasts, loan growth and asset quality change.
- Actual use and availability of FHLB, Federal Reserve, brokered-deposit and other contingent liquidity sources.
- Whether the authorized 750,000-share repurchase program is implemented, given capital, liquidity and regulatory considerations.