CAC (2021 - Q1)

Good day, and welcome to Camden National Corporation’s First Quarter 2021 Earnings Conference Call. My name is , and I will 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. Please note that this presentation contains Forward-Looking Statements which will involve significant risks and uncertainties that may cause the 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 2020 annual report on Form 10-K and other filings with the SEC. Gregory

Thank you, Garrett, and welcome, everyone, to Camden National Corporation’s First Quarter 2021 Earnings Call. I’m pleased to share that earlier today we announced record quarterly earnings for the first quarter of 2021 of $19.7 million or $1.31 per diluted share. This continued the trend we saw in the latter half of 2020, strong residential mortgage activity and PPP lending. We also released $2 million of pretax of provision, reflecting our solid asset quality position and improving economic data. You may recall that we adopted the current expected credit losses of CECL model as of December 31, 2020. Greg White will review our performance in a few moments, but I would like to first provide some background and observations. Staying with the asset quality theme, we recorded approximately $10 million of non-performing assets on March 31, 2020, or just 0.2% of total assets. Loans past due 30 to 89 days were just 0.05% of total loans on that date. After our provision release, our allowance for credit losses on loans on March 31, 2021, was 1.11%, down from 1.18% at 12/31/2020, but higher than the 0.4% level we recorded on March 31, 2020, prior to the impact of the pandemic. Preliminary discussions around our market areas indicate a strong upcoming summer season, which we will expect to benefit our local economies. Overall levels of people being vaccinated, along with the governor Main proactively outlining a plan for people visiting our state has caused a significant increase in reservations in the hospitality industry, which we expect will also drive other parts of the local economy. We continue to expect loan growth in the single-digit range as loan pipelines are showing positive trends, and we also have the lever of holding additional residential mortgages if needed. I would also like to note that since we last met, we are named the S&P Global list of top Community banks and named a Raymond James Community Cup award recipient, which recognizes the top 10% of community banks.

Thank you, Greg, and good afternoon, everyone. As Greg Dufour mentioned, we had record net income of $19.7 million for the first quarter, an increase of $1.5 million compared to our previous quarterly earnings record in the fourth quarter last year of $18.3 million. Our diluted earnings per share was $1.31 compared to $1.22 in the prior quarter. Our return on tangible common equity was 18.47% for the quarter compared to 17.27% in the fourth quarter last year. During the first quarter, our Board approved a quarterly dividend of $0.36, which is 9% higher than the $0.33 approved in the prior quarter. In both quarters, the payout ratio was 27% of earnings. Our capital position remains strong, as evidenced by the 60 basis point increase in our total risk-based capital ratio to 16% at the end of the first quarter compared to 15.4% at the end of the prior quarter. Our tangible book value per share grew to $29.12 during the quarter compared to $28.96 at the end of the prior quarter. Our net interest margin decreased to 2.88% for the first quarter of this year from 3.06% the prior quarter. But adjusting for the impact of both PPP loan income and excess liquidity, our margin declined by eight basis points to 2.91% from 2.99% quarter-over-quarter on this basis. We continue to focus on driving down our cost of deposits and our overall cost of funds, both of which declined by four basis points compared to the prior quarter. Our efficiency ratio declined to 52% for the first quarter of this year from 54% in the fourth quarter of last year. Our core efficiency ratio fell to 51% from 53% during the same period. Total assets were 5.1 billion at March 31st of this year, an increase of $191 million or 4% since the end of last year. Total loans increased $17 million during the quarter, excluding PPP loans, total loans at March 31st were down 17 million compared to the prior quarter. The commercial real estate portfolio grew by 2% during the quarter, partially offsetting the decrease across other core loan portfolios. As Greg mentioned earlier, we do have the option to hold more residential real estate loans, and that is something we continue to monitor. Total deposits grew by $206 million or 5% since the fourth quarter of last year, while non-interest-bearing checking grew by $67 million or 9% during the same period. Asset quality remains strong with non-performing loans at 0.31% at the end of the quarter - I’m sorry, non-performing loans to total loans, at 0.31% at the end of the quarter, down two basis points from 0.33 at the end of the fourth quarter of last year.

Thank you Our first question comes from Damon Delmonte from KBW. Go ahead.

So first question just looking for a little perspective on the outlook for the provision going forward. Just given the health of the overall portfolio and the current level of the reserve, would you foresee taking additional negative provisions or do you think things will go back to a normal level of provisioning or what can you provide us on that?

Yes. So Damon, as you know, CECL is very forecast based and that is the reason we did have the negative provision first quarter. So if forecasts continue to improve unless there is a change in the asset quality because then you can make an argument asset quality because then you can make an argument those reserves. If the forecast keeps improving, that will be a challenge to continue to hold all the reserves that we currently have, unless we have significantly more loan growth than we have been experiencing.

Got it. Okay. And then just on that point of loan growth, I think, Greg, you had said you thought maybe mid-single digit for the year was still a reasonable outlook for growth. Is that correct?

Yes. I would probably work that in there, Damon. We have been seeing the pipelines improve, as I mentioned, on the commercial side, really from a pretty diverse source from manufacturing to some business lines. Our real estate is also picking up as well and so we have been pleased with what we are seeing there. And again, the real estate production activity is still very strong. So we can always augment that by holding more than what we have been.

Got it, okay. You guys have mentioned the holding of residential real estate a couple of times on the call. Is that something you guys are strongly considering to do in order to keep balances moving in the right direction versus production?

I will let Greg give his view. Yes, But I think, Damon, it is we look at it in a couple of different ways. Obviously, not just to have the loans, but more importantly, you have the recurring income of holding those loans. But we balance that against the interest rate outlook as well as the gains that we are going to get from selling now. So it is something that we run through both pricing and ALCO as a management team. I don’t know, Greg, if you want to weigh in as well.

Yes. The only thing I would add, Damon. So excess cash, we have been running in the 150 million to 200 million of excess cash and so if we start to hold more residential, we are also looking at what we could do on the security side, mortgage-backed securities and kind of prudent investments for the bank and looking at the pickup on the loan versus the investment yield, too.

Got it, okay. So rather than buy mortgage-backed securities, just hold residential mortgages themselves?

That is part of the assessment that we are looking at, correct.

Got you, okay. And then I guess just last question. When you look at the kind of the core margin and directionally, how it is shaping up here as we go into 2021. Do you think you are able to keep it kind of flat at this level or do you expect that the liquidity is going to continue to weigh on it and put a little bit more modest downward pressure?

Well, even if it is not liquidity based, I think we will continue to see some asset yield compression here. The cost of fund side, we did bring down four basis points last quarter, prospectively, that is going to be a little more challenging than it has been given the low level already. We are going to continue to keep doing that and probably be able to be successful, but not to the extent we have in the previous quarters. So I think asset yield does, unfortunately, will probably compress more than we are able to bring cost of funds down at least for the next few quarters here. If rates stay here.

Got it, okay. That is all that I had. Thank you very much. I appreciate the color.

Thank you Damon.

Our next question comes from William Wallace of Raymond James.

Hi thanks for taking my questions. Good afternoon. Look, just kind of to keep the line on the net interest margin. Does your expectation for some continued downward pressure, does that include any anticipation that you might be able to deploy some of the excess liquidity into the securities portfolio or -.

I mean, it does. We could certainly tomorrow, invest the excess liquidity and obviously get our stated margin up. And it is more just the - certainly, it is kind of that consumer callable, the residential portfolio and the mortgage-backed securities. That is where we have seen the compression. So again, I qualify that by rates staying here and prepayment levels staying at the levels that they have been, then we would probably continue to see little asset compression. And then we are always looking at whether or not it is a prudent time to invest that excess liquidity as well. And we have gotten a little more active there with the back-up of the 10-year recently.

Okay, okay. And the residential mortgage loans that you might supplement loan growth with, what is the nature of those from a structural perspective, are they mostly fixed rate or do you - would you only balance sheet arms, et cetera?

We would look to do both, but probably the majority of the pipeline right now is fixed rate. So that is kind of the short answer, not really too much activity in the hybrid arm market at this point, but certainly, if there is, that would be a good balance sheet product for us.

Okay. And so it is safe to assume that, that would also then add some pricing pressures in the loan portfolio if the demand on the commercial front slows?

Yes. Yes. I mean, right. So if we don’t have the pickup in demand on the commercial side that is where we would probably look to book more of the residential.

Okay. And so as it stands today, almost a third through the quarter, as the commercial pipelines have they picked up and is the payoff activity slowed or stabilized on the commercial side?

Certainly, the former part of that question, the pipelines are at record levels. I mean, they are robust on the commercial side. With that said, we do still continue to have a little bit of pressure, obviously with refinancing and so at least near-term we are still going to have that pressure as well. But the pipelines are - I spoke with our senior lenders yesterday and quoting them. When I say they are at record levels.

Okay, alright thank you. On the PPP front, I apologize if this was in the release, but how much did you all originate in the most recent round?

I’m sorry. Could you ask that again, I’m sorry.

The most recent round of PPP loans that started funding in February, how much did you all end up -.

Yes. The supplemental is as of March 31st we have 85 million out there, but we have done another 15 million cents. We are at 100 million on the most recent round of origination.

Okay. Alright thank you. And then one last question, if I can. The expense in the quarter was 24.9 million. Assuming that you get gains in your REO portfolio every quarter, is that a good run rate or were there some deferred costs associated with PPP or anything else that might come out or come back in?

That is a reasonable run rate with raises going in toward the latter part of the quarter there. But that is a good starting point.

Okay, great. Alright thank you I will hop out and let somebody else ask questions.

Thanks Wally.

Our next question comes from Jake Civiello of Janney.

Hi everyone, good afternoon. Can you identify the amount of impact on sequential tangible book value per share, that I’m assuming the negative hit to AOCI had in the quarter?

Yes. I haven’t calculated that. Let me do it back of the envelope for you. Yes. Probably - you know Jake, you could ask your next question, and I have an answer, but I just kind of want to double check it here.

Yes. Yes. No, I’m happy to ask my other question, too. Do you think that the first quarter probably represents the high watermark for mortgage banking income that you record through fee income, especially if you decide to portfolio more production?

Yes. I believe that is the case. It is very close to a record, which was second quarter last year, it is about 95% of that. So yes, that is probable. With that said, April has been strong so we wouldn’t expect much of a dip there for Q2, but it is likely.

Are you seeing any changes in geography in terms of where the originations are coming from?

No. I would say it is pretty much held consistent and - which tends to be more southern main as well as our production office out of Massachusetts and picking up in between New Hampshire. And again, it is not to say the other markets that we operate in aren’t doing well. It is just the further south you go, the average deal size is larger and more of them.

And then, Jake, on your AOCI, let me give you just a back of the envelope, reasonable estimate there that it is probably in the $0.50 to $0.70 range.

Okay, alright that helps me directionally. So thank you for that.

Yes.

That is all I have for now guys. Thanks.

Great. Thank you.

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 well thank you Garrett, thank you everyone for attending the call and for analysts for the questions and for all of you for the support and interest that you have shown the company. We are looking forward to talking to you next quarter. Take care.

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