CAC (2020 - Q3)

Good day and welcome to the Camden National Corporation Third Quarter 2020 Earnings Conference Call. My name is Emily, and I'll be your operator for today's call. All participants will be in listen-only mode during today's presentation. Following the 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 2019 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 to today's presentation to non-GAAP financial measures are indicated to provide meaningful insights and are reconciled with GAAP in your press release. Today's presenters are Greg Dufour, President, Chief Executive Officer; and Mike Archer, Senior Vice President, Corporate Controller. Please 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

Thank you, Emily and welcome, everyone to Camden National Corporation's third quarter 2020 earnings release conference call. I'd like to start out by wishing good health to you and your loved ones during this time. Unfortunately, Greg White, our CFO was unable to join today's call. But with us today to pinch-hit for Greg is Mike Archer, our Senior Vice President, Corporate Controller. Before I turn the discussion over to Mike, I'd like to make a few comments. Earlier today we reported third quarter 2020 net income after taxes of $16.8 million an increase of 16% compared to the third quarter of 2019. On a diluted earnings per share basis, we earned $1.11 or 18% greater than the third quarter of 2019. These results demonstrate the financial and strategic strength of our organization, the commitment of our employees and the value of the investments we've made over the years. During the quarter, we saw our COVID-19 deferred loan balances decline from 16.4% of total loans on June 30, 2020 to 5.5% of total loans on September 30, 2020. Our overall asset quality has continued to remain strong with non-performing assets at 0.22% total assets on September 30, 2020. In the second quarter of 2020, we reported a provision for credit losses of $9.4 million as we prudently built up our reserves. And then in the third quarter, we recorded another $1 million provision. These actions allowed us to expand our allowance for loan losses to 1.11% of total loans as of September 30, 2020 and that's significantly up from 0.81% reported on December 31, 2019. Our efficiency ratio for the third quarter was 50.6% and excluded a $1.2 million legal settlement expense during the quarter. Earlier this year, we were named in a lawsuit regarding overdraft fees. And while we are very confident, our overdraft practices were and are appropriate and accurately reflected in our disclosures, we faced the unfortunate decision to go through a lengthy and expensive litigation or to settle and cap our exposure. We ultimately determined to avoid the lengthy and costly litigation and settled despite our confidence in our practices. Economically Maine has benefited from a reopening of business during the third quarter, which allowed many tourist-related businesses to see a ramp-up in activity during the key summer months of July and August. This provided much welcome relief across the state. Maine's unemployment rate for September was 6.1%, down from an average of 8.8% reported for the second quarter of this year. Many of you have probably read that there are several areas of our economy that are performing extremely well as highlighted by Maine's red-hot real estate market. This has resulted in record-breaking mortgage volumes and I want to specifically point out the hard work of our residential mortgage team that they've done over the past several months to serve our customers and to close those mortgages. Like every CEO across the country, I am very proud of our employees, especially, during these challenging times. Our people and culture are the key foundational elements in delivering our strategic operation and financial results. In the past few years, we've engaged Gallup to conduct our employee engagement surveys. And in the midst of the pandemic, we surveyed our employees in August. Our latest results showed an improvement in employee engagement even during these times of remote work, hard decisions and intensity. This proves the resiliency of both our employees and our managers, especially those who are on the ground leading their teams. Finally, I'd like to point out that during the quarter, we announced that Tim Nightingale took on the position of Executive Vice President and Chief Credit Officer for the organization. Tim was previously Executive Vice President of Commercial Banking. This further deepens our credit bench. Ryan Smith who was Director of Commercial Banking for Central and Midcoast Maine before taking on the job as Senior Vice President of Credit Administration was named Executive Vice President of Commercial Banking replacing Tim. I'm very pleased to be able to tap into 2 strong internal leaders for these critical roles. Now I'd like to turn the discussion over to Mike Archer.

Thanks, Greg, and good afternoon, everyone. I hope everyone is well. As Greg discussed, we had a really strong quarter. It was actually a record earnings quarter for us with diluted earnings per share of $1.11, compared to $0.94 for the same period last year, an increase of 18% year-over-year. We paid a dividend of $0.33 during the quarter, which is a payout ratio of 30% and we're able to repurchase almost 48,000 shares opportunistically, all while continuing to grow and strengthen our capital position. Our total risk-based capital ratio increased by 59 basis points during the quarter to 15.15% at September 30. We also had strong tangible capital growth in the third quarter, highlighted by tangible book value per share growing $0.83 or 3% to $28.14 at quarter end. Our net interest margin for the third quarter was 3% compared to 3.11% last quarter. Our earning asset yield decreased 16 basis points during the quarter due to the interest rate environment as well as certain investment income differences between periods, causing a 5 basis point decrease and excess liquidity causing a decrease of 3 basis points. This is partially offset by a decrease in funding costs of 6 basis points during the quarter. As we noted in previous quarters, we continue to focus on managing funding costs down to help combat asset yield pressures. Our actions have included lowering, posted deposit rates and diligently reviewing exception pricing. Average loans for the third quarter this year grew by $220 million or 7% over the third quarter last year. Excluding SBA Paycheck Protection Program loans, average loans were flat between periods. As SBA PPP loans are forgiven over the coming quarters, we expect these loan balances will decrease at an accelerated pace. Average deposits for the third quarter of 2020 grew by $494 million or 15% over the third quarter last year, which included average growth in checking account balances of 25% over this period. Asset quality remains strong with non-performing loans to total loans at 0.34% at the end of the quarter consistent with last quarter and down from 0.43% at September 30 last year. Annualized net charge-offs to average loans was 1 basis point for the quarter, down from 5 basis points last quarter and 16 basis points for the same period a year ago. Our allowance for loan losses under the incurred loss model was 1.11% of total loans at the end of this quarter, up from 1.07% at the end of the second quarter and 0.83% at the end of the third quarter last year. As we adopted CECL as of September 30, we estimate our allowance for credit losses, which includes both the allowance for loan losses and reserve on loan commitments would have been between $39 million and $43 million or 1.19% to 1.31% of total loans. Excluding SBA PPP loans, our allowance for loan losses was 1.19% at the end of the third quarter compared to 1.14% at the end of the second quarter. Our coverage ratio of reserves to non-performing loans increased to 3.3 times at September 30 up from 3.1 times at June 30 and 1.9 times as of 9/30/2019. Lastly, we have provided additional information on deferred loans on page 9 of the supplemental deck that we provided with our earnings release. As of September 30, our loans remaining on short-term deferral were $181 million or 5.5% of total loans, down from $547 million or 16.4% of total loans at June 30. Included within our short-term deferrals at September 30 were $68 million of consumer loans for which we granted an automatic 90-day extension to the original 90-day deferral period unless the borrower had opted out. The vast majority of these loans will reach their 180-day expiration by the end of November. As the payment deferral period ends for these borrowers, the loans return to payment status. We'll continue to monitor these loans closely and will be quick to act should we see signs of payment risk or stress. This concludes our comments on the third quarter results and now we'll open up the call for questions. Thank you.

[Operator Instructions] The first question comes from Damon DelMonte from KBW. Please go ahead.

Hi. Good afternoon, guys. How are you doing today?

Good, Damon. How are you?

Good. Good to hear. So first question I just wanted to talk a little bit about the margin, probably for Mike here. Do you want to just talk maybe a little bit about kind of what you're seeing here as we progress through the fourth quarter and kind of how you think things are going to shape up for the rest of the year?

Sure. Happy to do that, Damon. I hope all is well. I think first off, I think the key right now and I spoke about it in my comments is the excess liquidity that exists on the balance sheet. And certainly this is common across the industry right now. That will certainly be a key lever for us as we manage through the margin as well as net interest income as we move forward. At quarter end, we had roughly $298 million of excess cash at quarter end. And certainly, we're working to manage that down and doing so as we even currently as we speak. Really as we think about this couple of levers that we're looking at as I spoke to in my comments, just around managing deposit outflows as well as investment purchases certainly we're looking into lowering the non-relationship deposit exception rates. Those deposit relationships are really assets -- interest rate-sensitive, excuse me. That continues to be a real focus for us and the team is working diligently to work their way through that. And as I mentioned before certainly another opportunity is investment portfolio though we all know where rates are on the investment portfolio right now. And essentially, we're looking at swapping rates at -- currently at 10 basis points in cash for approximately a little over 100 basis points. Another lever that we have and certainly we're working through I'd say right now Damon just in terms of working through budget for the 2021 -- upcoming 2021 cycle here is just around our ability to sell mortgage production. Certainly, we've sold a lot this year over 60% of our production. We sold to the secondary market. As we look forward, I think it will be a balance of -- the balance of protecting the NIM and net interest income as well as working through the fee income that we get from the sales. And the last thing maybe I'd mention too is just as we look forward, we do have -- I think it's approximately 53% of our CDs that are looking to reprice over the next six months or so. So again that's another opportunity for us as we think about margin and net interest income moving forward.

Okay. So it sounds like you guys do have some levers in front of you that could hopefully keep things relatively flat from this quarter. Is that fair?

Yes. I think we still expect a little bit of margin compression likely as we move forward. I'm not sure, we've quite bottomed out. But I think we're at 3% as I mentioned in the earnings call here. We could see that dip a little bit lower in the fourth quarter. But I think as we move forward for the -- like I mentioned for 2021, a part of this is getting some of these strategies set and finalizing it. But really it's going to be a matter of to put that excess liquidity to work. And all this is stipulated off the fact that if we get additional stimulus and so forth there -- other things kind of change in that regard. That will also be a consideration that we'll have to work through.

Right. Okay. That's helpful. Thanks for the color. And then Greg, I guess could you just give a little perspective on kind of the dynamics of the Southern Maine market? I would imagine from what I've seen here in Connecticut there's a lot of people that are looking for second homes or new homes just kind of trying to maybe get out of the more urban areas and get into the some of the -- I don't want to say safer but nicer areas of the New England marketplace. So can you talk about how maybe the housing market has been performing over the summer and kind of what that means for the local economies?

Sure. And you're right. The Southern Maine market that's where a lot of the focus is, obviously, centered around Portland. It's a very -- even before this, obviously, a very nice livable city quality of life. We are seeing as a lot of non-metropolitan markets seeing, an influx of people either buying, as you mentioned second homes or moving their primary residence into these areas. And part of it is that we're -- everyone's discovering you can work remote. And it's not just a few industries or high-tech industries or something like that. Even today probably about 70% of our non-banking center employees are working remote. So everyone's seeing that flexibility and Southern Maine is picking up on it. We're seeing that, obviously, in breaking records on mortgage volumes. We're probably two or three times more than pre-COVID records right now. So, that's really benefiting the state. And that's going to have a trickle effect ultimately, especially as things -- we move into a post-COVID, post-vaccine environment where those people stay and be proud of our communities and just lift everything up with that. The one thing that doesn't get a lot of other notice though is areas outside of Southern Maine are also seeing the same impact, albeit not as, call it, frothy as what you'd see in Southern Maine, but when you move into Central Maine and even Northern Maine where we really don't have a lot of exposure, there's still -- real estate is moving up there. So, it's kind of all pushing throughout the state in different areas. And again, it's the people taking advantage of the quality of life, safer in some people's mind in a metropolitan area and leveraging technology. So that does bode well for increasing the population of the state, which has been one of the drags that we've had for years.

Got it, okay. Good color. Thank you. And then, I guess just my third question here, just talking about credit. I mean trends have been really, really strong. The reserve has gone up throughout the course of the year. Are you guys, at a point where you're kind of comfortable with -- given the underlying risk to the portfolio and where your reserve is outside of CECL? Are you feeling comfortable with where you are? And from a provisioning standpoint, can we look for something more like the first and third quarters than what we saw in the second quarter?

Well, I started my banking career in 1987. So I've been through these things a lot. And I don't know if I'll ever say I'm comfortable with it right now. But, we're going to prudently build up our reserves as we can. CECL will be different, obviously, than historically what we've done before. But I think, as you see our actions in the second quarter, big change, we stepped up. We put in a lot of money into the reserves, building that up. $1 million dollars going in this quarter. I think obviously, not to that magnitude, but it says we're monitoring it. And what I would say is, we're hoping that the big, call it, credit forecast or those parameters are behind us. But even putting $1 million says, look, we're going to step up whenever we can. And we're always going to lean to the side to be prudent, to be conservative on our balance sheet, and that's who we are, and that's how we want to kind of move forward. As far as what that means, we're going to react accordingly. Good news is we're not seeing anything come on our books, but there's still a lot of stimulus out there that we're letting play out. But, as we've moved Tim into that Chief Credit Officer role to complement the already-strong credit and special asset people that we had, it's to say we're serious and we're going to get in front of this as we have in the past.

Got it, okay. That’s all I had. Thank you very much.

Great, thank you, Damon.

Thank you.

[Operator Instructions] Our next question comes from Jake Civiello from Janney. Please go ahead.

Hey, good afternoon guys.

Hi, Jake.

Hi, Jake.

Kind of staying on the same credit theme. Your substandard loans increased over 80% from the first quarter to the second quarter. Do you happen to have what your classified loans were in the third quarter?

I don't have those right in front of me, Jake, but that's probably something that and I'm just scanning really quick on our supplemental information. Probably the best thing is for me to say, rather than to toss something out there to try to scramble and get it is to say we'll check in on that and put that out there.

Okay. Okay. I appreciate that. Broadly speaking would you be comfortable saying that you're taking a hard look at your -- at adjusting your risk ratings and you would expect to see the classified loans continue to move higher as you come into 2021?

Oh, absolutely. We're taking a much stronger look at it. When -- if we're looking at anything, yes, it's in underwriting. They have to have it. What is their post-COVID story there we need to really understand what's going on there. And that crosses all industries, because we're all impacted by it. And here again, that's why we put the executive spotlight on it through Tim's position that the underwriting aspect of it reports up to him now. So again, we're kind of following the playbook of past recessions and downturns of really scrutinizing everything that we do.

Okay. Great. Mike, thank you for touching on some of your push and pull thoughts about the margin. Can I ask? Have you evaluated any alternatives to reduce the cost of some of your borrowings? And is any of the outstanding subordinated debt callable?

We have. I mean, from a borrowings perspective I think there's $25 million of it that's out there and callable or pre-payable what have you. With that said, I think it's a pretty hefty tax -- hefty fee to do that Jake. So, I mean, I think admittedly at this point, it hasn't been a key focus. But I would also say that everything right now is on the table as we certainly understand the need for -- from a margin perspective in interest income as we move forward.

Okay. Great. Thank you for that. Maybe just one more question for me. Do you expect to stay active with share repurchases in the fourth quarter?

I think what I would say, the best way to do it is say, we're going to be opportunistic. The market is obviously jumping around. We went back into the market, because we saw that opportunity at and what we believe was a situation being undervalued even though we can argue that even at today's levels. I think the thing to read into it is we're seeing the cash flow come in. And again the great thing about Camden is that we throw off a lot of cash flow. We want to make sure that we are prudent have enough capital, but also be able to take advantage of things like when we see there's an opportunity. So we'll be opportunistic is probably not the answer you want to hear, but probably as specific as I can get.

I understand. Appreciate the time guys. Thank you very much.

Our pleasure.

Thank you.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference over -- back over to Greg Dufour for closing remarks.

Great. Thank you. I just want to really thank everyone for attending the call and listening in from the analysts who take the time to follow our stock and do a good job analyzing that and to various other parties and investors that are also listening in. Your interest and support of the company is very much appreciated by all of us. Thank you for your time today. Be safe, be well and be healthy. Take care.

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