krblokhin
Earnings of Camden National Corporation (NASDAQ:CAC) will most probably decline this year because of margin shrinkage. On the other hand, subdued loan growth will offer some support to the bottom line. Overall, I’m expecting Camden National to report earnings of $3.39 per share for 2023, down 19% year-over-year. Compared to my last report on the company, I’ve reduced my earnings estimate as I’ve decreased my margin estimate. Camden National is offering a high dividend yield of over 5%, as well as an attractive price upside. Therefore, I’m maintaining a buy rating on Camden National Corporation.
Expecting Loan Growth to Stabilize at a Slightly Lower Level
Loan growth continued to slow down for the second quarter of 2023. Camden National reported loan growth of 4.5% (annualized) for the first half of the year, which was mostly in line with my expectations. The management is planning to intentionally slow down loan growth and focus on the margin instead, as mentioned in the August presentation. Therefore, it’s likely that the balance of loans added in the second half will be lower than the balance added in the first half.
I’m expecting the residential loan segment to be the biggest contributor to a slowdown as it is highly sensitive to borrowing costs (i.e. interest rates). Residential loans are an important focus area for Camden National as residential real estate loans and home equity lines of credit make up around 49% of total loans. Due to the segment’s large size, the slowdown in the residential loan segment will have a significant effect on the total loan portfolio.
The outlook for commercial loan growth is much better. Camden National mainly operates in Maine with some presence in New Hampshire and Massachusetts. As shown below, the unemployment rates of all three states are quite low compared to the national average.
Considering these factors, I’m expecting the loan portfolio to grow by 4.0% annualized in the second half of this year. To be a bit conservative, I’m assuming that loan growth will continue at around the same rate next year, even though the anticipated rate cuts should lead to a higher loan growth rate. Further, I’m expecting deposits to grow in line with loans. The following table shows my balance sheet estimates.
| Financial Position | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
| Net Loans | 3,070 | 3,182 | 3,398 | 3,973 | 4,145 | 4,313 |
| Growth of Net Loans | 2.3% | 3.7% | 6.8% | 16.9% | 4.3% | 4.1% |
| Other Earning Assets | 985 | 1,271 | 1,710 | 1,289 | 1,273 | 1,312 |
| Deposits | 3,538 | 4,005 | 4,609 | 4,827 | 4,788 | 4,983 |
| Borrowings and Sub-Debt | 338 | 247 | 256 | 310 | 500 | 515 |
| Common equity | 473 | 529 | 541 | 451 | 480 | 508 |
| Book Value Per Share ($) | 30.6 | 35.2 | 36.2 | 30.7 | 32.8 | 34.8 |
| Tangible BVPS ($) | 24.3 | 28.7 | 29.7 | 24.1 | 26.3 | 28.2 |
| Source: SEC Filings, Author’s Estimates(In USD million unless otherwise specified) | ||||||
Margin to Trend Upwards from Next Year
Camden National Corporation’s net interest margin shrank for a third consecutive quarter during the second quarter of 2023. The margin has declined by 36 basis points in the first half of this year as the surge in funding costs has far outpaced the growth of asset yields. The first half’s performance was worse than my previous expectation.
The management’s focus on originating new loans at high rates (discussed above) will likely benefit the margin in the remainder of the year. On the other hand, the rising rate environment is likely to pressure the margin. Loans that will re-price within twelve months represent just 20% of total loans, as mentioned in the presentation. At the same time, variable-rate deposits make up 64% of total deposits. As a result, the margin will likely continue to suffer as long as rates keep rising.
The results of the management’s rate-sensitivity analysis given in the presentation show that a 200 basis points hike in rates could increase the net interest income by 16.57% in the second year of the rate hike. Therefore, next year can be expected to be better than this year as the up-rate cycle is likely to end in 2023.
August Presentation
Considering these factors, I’m expecting the net interest margin to dip by four basis points in the second half of this year and then rise by eight basis points in 2024. Compared to my last report on the company, I’ve reduced my margin estimate for the second half of this year because the up-rate cycle is now likely to last longer than I previously anticipated. Further, the margin has already shrunk by more than I anticipated during the first half of this year.
Expecting Earnings to Plunge by 19%
Earnings of Camden National Corporation will likely decrease this year because of the pressure on the margin. On the other hand, loan growth will support the bottom line. Overall, I’m expecting the company to report earnings of $3.39 per share for 2023, down 19% year-over-year. For 2024, I’m expecting earnings to grow by 6% to $3.60 per share. The following table shows my income statement estimates.
| Income Statement | FY19 | FY20 | FY21 | FY22 | FY23E | FY24E |
| Net interest income | 128 | 136 | 137 | 148 | 132 | 136 |
| Provision for loan losses | 3 | 12 | (3) | 5 | 4 | 4 |
| Non-interest income | 42 | 50 | 50 | 41 | 40 | 41 |
| Non-interest expense | 95 | 100 | 104 | 107 | 106 | 107 |
| Net income – Common Sh. | 57 | 59 | 69 | 61 | 50 | 53 |
| EPS – Diluted ($) | 3.69 | 3.95 | 4.60 | 4.17 | 3.39 | 3.60 |
| Source: SEC Filings, Earnings Releases, Author’s Estimates(In USD million unless otherwise specified) | ||||||
In my last report, I estimated earnings to decrease by 1.4% year-over-year to $4.11 per share. I’ve now reduced my earnings estimate mostly because I’ve slashed my margin estimate.
Risks are not a Concern
Camden National’s risk level appears low due to the following factors.
- Uninsured and uncollateralized deposits were just 15% of total deposits at the end of the last quarter, as mentioned in the presentation. Available primary liquidity was 2.0x the uninsured and uncollateralized deposits.
- Unrealized losses on the Available-for-Sale securities portfolio amounted to $99.8 million, which is 21% of the total equity book value. This isn’t too bad considering Camden National’s equity market value has dipped by 20.51% year-to-date.
- The loan portfolio’s credit quality is quite good. Non-performing loans made up just 0.13% of total loans at the end of June, as mentioned in the 10-Q filing.
High Total Expected Return Justifies a Buy Rating
Camden National is offering a dividend yield of 5.1% at the current quarterly dividend rate of $0.42 per share. The earnings and dividend estimates suggest a payout ratio of 49.5% for 2023, which is higher than the five-year average of 32%. Although the anticipated payout ratio is higher than the historical average, I’m not expecting a cut in the dividend level because 49.5% is easily sustainable.
I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Camden National. The stock has traded at an average P/TB ratio of 1.61 in the past, as shown below.
| FY19 | FY20 | FY21 | FY22 | Average | ||
| T. Book Value per Share ($) | 24.3 | 28.7 | 29.7 | 24.1 | ||
| Average Market Price ($) | 43.3 | 35.1 | 45.9 | 45.5 | ||
| Historical P/TB | 1.78x | 1.22x | 1.55x | 1.89x | 1.61x | |
| Source: Company Financials, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/TB multiple with the forecast tangible book value per share of $26.3 gives a target price of $42.2 for the end of 2023. This price target implies a 27.0% upside from the September 1 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.
| P/TB Multiple | 1.41x | 1.51x | 1.61x | 1.71x | 1.81x |
| TBVPS – Dec 2023 ($) | 26.3 | 26.3 | 26.3 | 26.3 | 26.3 |
| Target Price ($) | 37.0 | 39.6 | 42.2 | 44.9 | 47.5 |
| Market Price ($) | 33.3 | 33.3 | 33.3 | 33.3 | 33.3 |
| Upside/(Downside) | 11.2% | 19.1% | 27.0% | 34.9% | 42.8% |
| Source: Author’s Estimates |
The stock has traded at an average P/E ratio of around 10.4x in the past, as shown below.
| FY19 | FY20 | FY21 | FY22 | Average | ||
| Earnings per Share ($) | 3.69 | 3.95 | 4.60 | 4.17 | ||
| Average Market Price ($) | 43.3 | 35.1 | 45.9 | 45.5 | ||
| Historical P/E | 11.7x | 8.9x | 10.0x | 10.9x | 10.4x | |
| Source: Company Financials, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/E multiple with the forecast earnings per share of $3.39 gives a target price of $35.2 for the end of 2023. This price target implies a 5.8% upside from the September 1 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
| P/E Multiple | 8.4x | 9.4x | 10.4x | 11.4x | 12.4x |
| EPS 2023 ($) | 3.39 | 3.39 | 3.39 | 3.39 | 3.39 |
| Target Price ($) | 28.4 | 31.8 | 35.2 | 38.6 | 42.0 |
| Market Price ($) | 33.3 | 33.3 | 33.3 | 33.3 | 33.3 |
| Upside/(Downside) | (14.6)% | (4.4)% | 5.8% | 16.0% | 26.2% |
| Source: Author’s Estimates |
Equally weighting the target prices from the two valuation methods gives a combined target price of $38.7, which implies a 16.4% upside from the current market price. Adding the forward dividend yield gives a total expected return of 21.5%. Hence, I’m maintaining a buy rating on Camden National Corporation.
