CAC (2020 - Q1)

Good day and welcome to the Camden National Corporation First Quarter 2020 Earnings Conference Call. My name is Grant, and I will be your operator for today's call. All participants will be in a listen-only mode during today's presentation. Following presentation, we will conduct a question-and-answer session. [Operator Instructions] Please note that this presentation contains forward-looking statements, which involve significant risks and uncertainties that may cause actual results to vary materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in such forward-looking statements are described in the company's earnings press release, the company's 2018 annual report on Form 10-K and other filings with the SEC. The company does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the forward-looking statements are made. Any references in today's presentation to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in your press release. Today's presenters are Greg Dufour, President, Chief Executive Officer and Director; Deborah Jordan, Executive Vice President, Chief Operating Officer; and Greg White, Executive Vice President, Chief Financial Officer. Please also note that this event is being recorded. At this time, I would like to turn the conference over to Greg Dufour. Please go ahead, sir. Greg Duf

Good afternoon, and thank you Grant. I want to welcome everyone to Camden National Corporation's first quarter 2020 earnings release call. I hope you, your families and associates are healthy and safe during this very trying time. I'd like to welcome to the call Greg White who joined us on April 15 as our Executive Vice President and Chief Financial Officer, as well as recognized Debbie Jordan, who announced her intention to retire on April 30 from the company last October, but has agreed to stay on as EVP and Chief Operating Officer until early June to help to assist with the transition and help oversee our coronavirus response work. Bill Martel also joined us as Executive Vice President of Technology and Support Services on April 30. Both Greg and Bill joined with a very strong stat in their respective areas, who along with all of our leaders and employees have done an amazing job the past several weeks. We provided a presentation for your review in addition to our normal earnings release information. But before we review that, I'd like to provide a few comments regarding our approach and response to the coronavirus pandemic. At the outset of the crises, our focus has been on our four constituents, employees, customers, communities and our owners. Believing that our employees are a company's greatest asset, we took several actions to ensure their safety, wellness and economic wellbeing. As our local schools closed, we took immediate action to revise our paid time off policies, allowing many employees to work-from-home or access their paid time off to care for their children or the loved ones. We also announced, we would provide financial support, once BTO was exhausted. We added $100,000 to our Employee Emergency Relief Fund to help those employees that may experience financial stress due to a variety of factors including spouses and significant others, who may be laid off. To help make our work environments as safe as they could be, we moved over 300 additional employees to work-from-home status and provided premium pay for those employees would be working in our banking centers and the other high risk areas. Even though our employees personally going through an extremely stressful period, I am proud of how they responded to our customers. Just some of the examples include that, we transitioned our retail banking centers to service customers by drive up or in our lobbies by appointment-only. In March, we saw our banking centers transactions declined by 13% compared to the same month last year, while our digital banking activity increased 14% and calls to our customer care center increased by 16%. Our response to the CARES Act, Paycheck Protection Program has been significant with 1,649 loans totaled $197 million processed as of April 22, and behind the scenes, we asked over 70 lenders, portfolio managers, banking center managers and loan processing employees to be reassigned to this effort. We were also one of the first banks of main to offer payment deferrals and late fees waivers as well. As of April 22, we have provided payment deferrals on over 1,500 loans with outstanding loan balances of almost $550 million. We asked 9 individuals to shift from their normal work duties to assist our special assets and collection teams. Equally as important is our role in the communities we serve. Usually, our employees are hands on with the many community organizations we work with and they are frustrated by being limited during this time, but our support is included leveraging our hope and home efforts with local homeless shelters, which provides unrestricted funding to those who serve the homeless. We're providing financial support to local food banks and we initiated support to Finding Our Voices, an emerging organization that provides support to victims of domestic violence, an issue which is increasing during this time of isolation. Our focus on our owners, our shareholders is equally as strong. In addition to our financial results, which Debbie will discuss, I'd like to point out a few highlights on our current financial strength and position. As of March 31, 2020, we had a tangible common equity ratio of 8.78%, our Tier 1 leverage ratio of 12.56%, and a total risk-based capital ratio of 13.81%. This provides a solid capital capacity as we enter the uncertainty in the next several weeks. Asset quality was in a strong position at March 31, 2020 but nonperforming assets at 0.23% of total assets and an annualized first quarter net charge off of just 5 basis points of average loans. Our reserve for loan losses was $26.5 million at March 31, 2020 or 0.84% of total loans. During the first quarter of 2020, we provided $1.8 million provision expense for loan losses. We decided to delay adoption of CECL as allowed by the CARES Act so we can reallocate resources to our pandemic response activities and further support our customers during this time. We repurchased over 217,000 shares in the first quarter before suspending the program on March 20, 2020 as health crisis unfolded and we prioritized capital preservation. After analyzing our capital position, we did declare a $0.33 per share dividend for the first quarter. I'd like to now introduce Debbie who will provide a more detailed financial review.

Good afternoon everyone. We appreciate you joining us for the call today. I will spend a few minutes reviewing first quarter operating results, as well as highlight a few items included in the supplemental earnings call presentations that was included within our release earlier today. Net income was $13.5 million for the first quarter, resulting in a return on average assets of 1.21%, and return on tangible common equity of 14.35%. In comparing results to the previous quarter, net income declined $1.7 million or 11%, as a result of an increase in credit provision of $1.6 million combined with a 2% decline in revenue between periods. From a pre-provision perspective, we had a solid quarter of operating results. Since year-end, our loan portfolio grew 2% with increases in both commercial real estate and C&I loans, and our total deposit base grew 1%. Net interest income of $31.8 million, declined 1% from the previous quarter due to a 4 basis point decrease in our net interest margin to 308. We are very pleased with our margin at this level which was nearly flat compared to the previous quarter when excluding prepayment fees that drove 3 basis point increase in our fourth quarter margin. Back in January, we forecasted net interest margin to be around 305 in the first half of 2020. Obviously, the interest rate environment has changed significantly since then, but we are still targeting that margin level. Despite the ongoing pressure of our loan and investment yields re-pricing down, we have been aggressive in reducing our funding cost. On Page 6 of the supplemental earnings call presentation; we've reported deposit of costs for the last six months, including a month-over-month decline of 15 basis points in March. On a linked quarter basis, the income for the first quarter of $11.4 million decreased 5% compared to the fourth quarter. Last quarter we recognize equity security gains of $866,000 and our annual debit card incentive of $579,000. Mortgage banking fees increased $1.4 million between periods due to record level refinancing activity. Our mortgage pipeline at March 31 was $258 million compared to $89 million at year-end. Operating expenses of $24.6 million for the first quarter declined 1% compared to the previous quarter, and our non-GAAP efficiency ratio for the quarter was 56.45%. As disclosed in our earnings release, the company did not adopt CECL during the first quarter as we refocused internal resources on pandemic-related activities, including the loan relief programs discussed by Greg. The company will adopt CECL as required by the CARES Act at the earlier of determination of the national emergency concerning COVID-19 or December 31. This will likely have the effect of increasingly allowance for loan losses and indecent shareholders' equity. The company expects to continue to exceed regulatory capital requirements under current regulatory calculations. The increase in the loan loss provisions for the first quarter was driven by growth in loans and the uncertainty around the current economic environment and resulting from COVID-19. We would expect the level of provision for loan losses in 2020 to increase as more data becomes available regarding trends in our loan portfolio and the economic conditions in our geographic footprint. The supplemental presentation includes information related to our investment in low liquidity position our loan portfolio and regulatory capital capacity. In particular, Pages 9 and 10 of the presentation provide additional transparency into our loan mix and industry concentrations. It is difficult to quantify the COVID-19 impacts to our customers. We have, however disclose segments of our portfolio that we do believe are more susceptible to the impact of COVID-19. As of March 31, 2020, lodging represented $252 million, or 8% of total loans outstanding. Over half these loans are from major hotel brands and most of the properties are managed and owned by operators as their primary business. The total exposure in this segment is within New England, with our major exposure primarily on properties located within major cities such as Portland, Portsmouth, Boston and Burlington. In addition, our top 10 clients account for almost 50% of our commercial real estate hotel exposure. Each of these sponsors had extensive hotel experience. Slide 12 and 13 of the presentation depict our strong asset quality and capital position as of March 31. That concludes our comments on the first quarter results. We’ll now open the call up for questions. Thank you.

Thank you. [Operator Instructions] Our first question will come from Damon DelMonte with KBW. Please go ahead.

Hey. Good afternoon everyone. Hope everybody's doing great today.

Good. Thanks.

So first question is, can just talk a little bit more about the margin. Debbie, could you just kind of repeat your thoughts on the margin. Last quarter, you said your expectation for the first half of the year was to try to hold it around 305 for the core margin, and you kind of feel that you could still do that at this point.

Yes. When we forecasted the 305, we didn't have the 150 basis point decline in treasury rates coming down. And so, normally I would say, we'd see more margin compression, but we were fairly aggressive on our deposit pricing, and that's why in the supplement we provided the monthly deposit costs, because we really even haven't felt the full effect of our deposit re-pricing strategy in March. So that will continue to trend down. And then, we have index funding that's also going to re-price down. So, we believe the step down in our funding cost is going to offset the step down on the asset side. So, we're hoping for that 305 levels.

And so, the reported was 308 this quarter, was the core actually 305 like you usually have a little bit of accretion income in there, right?

Yes. I think it's 2 basis points differential there. Yes. The core margin was 306, the fourth quarter core margin was 309.

Got it. Okay, great. And then, just with respect to the outlook for provisioning, obviously with the incurred model until you start to see some more deterioration as provision levels will remain lower than obviously if you were under CECL. So, would you, do you have idea to where you think the loan loss reserve level should kind of trend towards? I mean, you did 2 basis points this quarter, would we expect something along those lines again? Or do you expect a sizeable increase in the second quarter?

Well, a couple of things. One most likely we will be drafting CECL as national emergency gets lifted. And so under the CECL model, we have gotten pretty far along on the CECL modeling. If we had adopted as of March 31, I'll provide a range. We could have seen our allowance increase by 25 to one-third, 25% to 33% as of March 31. So, yes, with CECL going live, we definitely see higher provisions for the company

Okay. And then just as last question. Are you guys expecting net loan growth here in the second quarter and in the third quarter? Just given what's going on in your economy? Or do you think that things kind of just hold steady as the people try to kind of get the feedback underneath them?

Sure. I think, Damon, we'll be happy with an holding steady and honestly a lot of our focus is just on the deferral and PPP programs right now as our customers.

Okay, and I guess one last quick question on the PPP. What would be the average rate for those loans, like average fee?

The average fee, I don't have that. I don't know if you do Debbie.

With over 4%.

Over 4%. Okay, great. That's all that I had. Thank you very much.

The next question will come from Jake Civiello with Janney. Please go ahead.

So mortgage banking fees. Maybe I'll start there. There were nice surprises in the quarter, especially in what's usually a seasonally slow period. What trends do you seeing there today? And then how are you thinking about the businesses we enter a time of year when sales volume normally ticks higher in conjunction with what's going on with COVID-19 of course.

I'll take that one. We get an all time high on the mortgage pipeline that is stepping down from the March 31 level. I will tell you we will hit record almost $100 million of mortgage closings in the month of April compared to we did what $500 million last year. So we do see that pipeline coming down as we work through a number of refinance activity. It's hard to predict the second half of the year. I mean, we’ll be working what's in the pipeline now. And we do have new applications coming in. It's mostly refinance activity as you would expect. So I think the first half is going to be really solid. The second half is it really is difficult to forecast what that looks like.

That's fair. And I can certainly appreciate that. Appreciate the color in the second quarter certainly. Is there -- related to mortgage banking revenue. Is there any timing difference at all for when you recognize the revenue and then when the corresponding incentive compensation is actually paid out?

There is a little timing. And, of course at quarter ends you have you do a fair value mark on the commitments. So it's not a cash gain as of March 31. And so you're right. We recognize that gain in the first quarter, we'll be paying commissions in the second quarter. So there is a little bit of timing.

Okay. All right. Thanks for that. With respect to kind of the deposit side, how much do you have in municipal deposits? And then is there any meaningful impacts that you can see to funding timing I guess? Maybe the best way to put it. As many cities and towns are potentially delaying their real estate and property tax payments.

Yes. We do have a sizable municipal deposit base at the state level and the local level. And we are normally this time of year, we see a seasonal outflow in the first quarter. We have not seen that and some of that is certainly related to the municipal side. Governments are getting more money and so that has resulted in a little higher cash level than we would expect at this time a year. It's hard to protect what, typically our seasonal inflow happens in August and September, we don't anticipate that kind of pickup for this year.

Okay. That's helpful color. Thank you very much. Coming back to the margins, the 305 that you referenced for the first half of the year, is that inclusive of the PPP loans that you have booked to-date and inclusive of what you might expect to add in kind of a second tranche of funding that's come along?

Yes, great question. It excludes the PPP. We have not run the margin with that included. Obviously, we got a pickup with the average fee on those PPP and I do have to correct myself, our average fee is 3.5% not the 4% that I provided to Damon.

Okay. So the fee is 3.5% plus you get the 1% rate on top of it. But the timing for receiving the fee is obviously impacted by when ever the forgiveness process starts. So, I'm assuming that in the short-term, that your reported margin will probably be negatively impacted by the PPP due to the fact that you assuming that you don't have a meaningful amount of the loans forgiven in the second quarter. Is that fair to say?

Yes. We'll be amortizing the fee upfront. You're right. And so, the true benefit comes when the loans are forgiven.

Okay. Cool. Thanks. One more for me if I can. This is kind of more theoretical I guess. So the main economy is generally thought to be heavily reliant on tourism that kind of gets amplified in the summer months. Some reports I've seen mentioned meaning as one of the most economically impacted states in the country from COVID-19. I know it's a tough question obviously, but can you quantify what percentage of your loan portfolios you're seeing has outsized exposure to seasonal businesses that have some reliance on tourism?

Well, I think if you look at just the tourism aspect of Jake that anything related to hospitality is obviously impacted by that. When you get into the restaurant, which is about 3% of the commercial book. So, you're right, we have to play out to see what happens within the call it not only the return to work, but people returning to normal and being back out socially.

That's fair. And I know, it's a tough question to ask, but if so much uncertainty, I guess that any additional color that you're able to provide is helpful.

What I will say is, and in part of the loan deferral program, our commercial team led by Tim Nightingale and special assets by Al Butler, as well as our CRE team started to reach out to all the hospitality loans that we have is sponsors, their owners to really start talking to them and getting a feel for what they're seeing. Now that only gets us up to this point in time by opening up those communication channels now will help us better understand is the next few months unfold for all of them.

Is most of the deferral activity to be in that kind of 13% of total loans that you identified for lodgings, living facilities, restaurants things like that?

Yes, I don't have that broken down by within the commercial book. I can say right now that referrals are leaning a little bit more to the commercial side. We expect the retail residential side to pick up probably over the next coming weeks. I don't have that breakdown within hospitality within that commercial breakdown.

Greg, I have that. Regarding the lodging portfolio in particular, about 70% of the balances, have elected to do the 90-day deferral.

Okay, great. That's it for me. Thank you for -- thanks for your time. And thank you to all.

[Operator Instructions] Our next question comes from William Wallace with Raymond James. Please go ahead.

Good afternoon, Debbie, Greg. As a follow-up to the last line of questioning. Some kind of new to them a newer to make. Can you talk a little bit about the tourist season when it starts to pick up? When or maybe the peak months? And then I'm curious to know, how far in advance in the lodging sector to people book trips to Maine. And if it is, say two to three months in advance, are those trips being canceled? Or are we in wait and see mode?

Yes, typically, we would see your call to shoulder season starts off call around on Memorial Day, and starts to really ramp up after from July 4 to Labor Day with the peak within August. Then typically we should see a pretty good solid shoulder season from Labor Day through the mid-to-late October. That's the normal cycle that happens. The whole reservation industry has changed quite a bit over the past 10 years if you will. It used to be people would book months and months ahead of time. And no matter what, -- whether or what have you. They would always fall within that reservation. So we're now people will change those reservations very quickly because the online feature of it. But it goes property by property and location. If you're looking for a place Coastal Maine, there were some higher end properties that you got to be a year ahead of time. There are some that you can be two or three months. If you're looking for a room in downtown Portland in August of last year, you probably should have been a month or two at least ahead of time. It's one thing that the bookings are definitely changing right now. And first of all, I think everyone is in a wait-and-see mode. First of all the hotels have to open up and to figure out if the guests are going to show up. And that's where everybody is waiting to see, and I know, not necessarily hotel, but I had that with a restaurant owner conversation I had the other day, we struggling when do I open my doors? I can open them, but who's going to show up? And, that's a big question right now. And I think as we get clarity around return to work and you're seeing this even in the big cities and what those terms are in return to work, and opening up restaurants, hotels, that will help to determined what guests and customers will do. So it's kind of a chicken and egg type of scenario right now that I think everybody is in. No one really has a clear answer.

Okay. And then at the peak, what portion of your deposits are coming from customers that rely on the tourism industry. In other words, if we're not back to some semblance of normal in Maine through July and August, what kind of pressure might you see in your core deposit portfolio? Any way to measure that?

I think it is a little challenging to measure that, but you are correct that, when you think of the impact of this, It's more than just the loan side. Our deposit base, If we trail the seasonality and we get these pickups because a lot of businesses and a lot of individuals are benefiting from the summer season for us. And so, sorry we don't have a great answer for you right now while we on that. It's hard to estimate.

Understood.

And this is where it'd be good if Debbie and I were across the table from each other looking at each other, but we're socially distant rooms. But I do recall Debbie saying a few calls ago, our deposit base has shifted dramatically over the past five years. We have a lot more commercial deposits that we have built up as well as retail deposits. And Debbie, I remember you saying that, even though, we've expanded it, we have very big commercial customers that aren't necessarily related to tourism, but we still have that seasonal flow. And so, I would just say while in that, we still have that seasonal flow, but our deposit isn't solely dependent on that even though, it's a big part of that. But we have built up a really good core. Albeit it may be dependent on other industries.

Okay. All right. Thank you. Last question as it relates to PPP with the second part of it opening up this week, can you give us a senses as kind of the amount of loans in the pipeline that you would hope to get approved soon.

Yes. We probably have call it about 800 loans, call it sometime earlier today that we had in our pipeline. We're still taking in applications every single day, the big concern that we have. These are the real small transactions now. And it's really yesterday it was a very frustrating day for the e-trans system from the SBA. And so now we're just, everybody is just in a race to try to get the loans process get them approved and get the money into our customer’s hands where they belong. But, hopefully by the end of the day when we recap, it will be a better picture than it was yesterday from a system perspective.

Do you know the dollar amount of those 800 loans?

Yes. Probably calling $26 million to $30 million in that range.

Okay. Thanks for time guys. Appreciate.

My pleasure. Thank you.

[Operator Instructions] As we have no further questions. This concludes our question and answer session. I would like to turn the conference back over to Greg Dufour for any closing remarks.

Great. First of all, I'd like to thank everyone for attending the call and listening in and obviously, our analysts for their questions and interest in coverage of our stock. I want to conclude this time by really thinking, Debbie she's been with us for 11 years in this organization. And she joined us in the fall of 2008, and jumped into a leadership role for us and that financial crisis. And now she's providing that same level of energetic and strong leadership in this current crisis. I'll be at there's a little bit of symmetry in the interest in accident of Debbie's time with us. But, I just want to publicly say, Debbie, thank you for everything you've done to this organization. We're much better off with you being here. And we wish you the best. We have some great people joining us are Craig White and Bill Martel, really complementing a strong executive team that is really just providing excellent leadership to the company and for our shareholders. To all of you I want to say, again, thank you for your time today. Be safe, be well, be healthy. Take care.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.