CAC (2021 - Q3)

Good day and welcome to Camden National Corporation's Third Quarter 2021 Earnings Conference Call. My name is Iberica and I will be your operator for today’s call. [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 2020 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 Greg White Executive Vice President Chief Financial Officer. 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. And good afternoon and welcome to Camden National Corporation’s third quarter 2021 earnings conference call. As mentioned, joining me today is Greg White, the company's Executive Vice President and Chief Financial Officer. Earlier today, we announced quarterly earnings of $14.6 million for the third quarter 2021 or $0.97 per diluted share. Earnings for the quarter decreased 13% compared to the third quarter 2020 and reflect several factors that Greg will discuss in more detail in a few moments. But at a high level, the decline can be primarily attributed to lower gains on sales on residential mortgages as we are now holding more residential mortgages on our books, a strategy we discussed last quarter. Year-to-date earnings were at record levels of $52.5 million or $3.49 per diluted share, an increase of 27% and 28% respectively when compared to earnings for the first nine months of 2020. Asset quality remained strong with total nonperforming loans to total loans of 0.23% at September 30, 2021 and a one basis point annualized net charge off ratio for the third quarter. You will note that this quarter's provision for credit losses of $939,000 brought our allowance for credit losses as a percent of total loans to 0.97%, which excludes $3.2 million of allowance for credit losses for our off-balance sheet credit exposures. Nearly $700,000 of this quarter’s recorded provision expense was for the off-balance sheet credit exposures, reflecting a build-up in our loan pipelines. Like most companies and businesses we've experienced a very challenging job market to attract and retain talent and reward our employees for great work during this challenging time. In October, we've raised our starting minimum wage from $15 an hour to $17 an hour and increased all other employees' salaries by at least 3%. I'm pleased to report that over 60% of these increases went to employees earning less than $75,000 per year. From a strategic perspective, we received several recognitions that demonstrate the effectiveness and impact of our strategic plan. Coalition Greenwich, a division of S&P Global, recognized Camden National as a 2021 customer experience leader in retail banking and small business banking. This is the fourth consecutive year our retail efforts have been recognized and the second year our small business efforts have received this designation. Gallup, the global leader in employee engagement reported engagement among our employees increase to 4.25 on a scale of one to five, up from 4.09 before the pandemic. We are also named “the Best Place to Work in Maine” by the Maine chapter of the Society of Human Resources Managers and Best Places to Work Association. From a shareholder perspective, our dividend of $0.36 per share for the third quarter reflects a dividend yield of 3.01% based on our closing price of $47.90 on September 30, 2021. We also repurchased 106,502 shares of our common stock, which will provide a solid earn back on this investment and return of capital to our shareholders. I'd now like to introduce Greg White, our Chief Financial Officer, Greg?

Thank you, Greg, and good afternoon, everyone. As Greg mentioned for the nine months ended September 30 this year, we earned a record $52.5 million or $3.49 per diluted share, which was up significantly 27% and 28% respectively from the same period last year. For the third quarter this year, we reported earnings of $14.6 million or $0.97 per diluted share, which was down from $18.1 million or $1.21 per diluted share reported last year. The decrease in earning on a linked-quarter basis was driven by provision expense of $939,000 during the quarter related to loan in line pipeline growth compared to a provision release of $3.4 million during the second quarter of 2021. On a pre-tax pre-provision income for the third quarter was $19.6 million, up 2% compared to the prior quarter. As Greg mentioned, during the third quarter our Board of Directors approved a quarterly dividend of $0.36 which was a payout ratio of 37%. Our capital position remains strong as evidenced by a 15.06% total risk-based capital ratio and an 8.3% tangible common equity ratio as of September 30th. Our tangible book value per share of 1% to $30.23 during the quarter compared to $29.99 at the end of the second quarter. During the quarter we repurchase 106,502 shares at an average price of $46.13. Our net interest margin decreased 7 basis points to 2.76% for the third quarter of 2021 from 2.83% the prior quarter driven by a 3 basis point decline in our loan yield and a 12% increase in the investment portfolio on an average balance basis. Point-to-point our investment portfolio grew by 4% during the quarter. Our net interest margin adjusted for PPP loan income and excess liquidity also declined by 7 basis points to 2.82% for the third quarter of 2021 compared to 2.89% for the second quarter. We continue to focus on driving down our cost to deposits and our overall cost to funds, which declined by 1 basis point and 2 basis points respectively for the third quarter compared to the prior quarter. Despite the decline in net interest margin, net interest income was $1.1 million higher on a linked-quarter basis driven by higher average loan and investment balances and was $822,000 higher when adjusting for PPP loan income. Non-interest income for the third quarter was down $221,000 or 2% compared to the second quarter due to a decline of $685,000 and mortgage banking income largely related to our decision to hold more residential loans in our portfolio. Debit card income and deposit, service charge income for the third quarter was up 5% and 15% respectively compared to the prior quarter related to an increase in total consumer spend and our consumer deposit redesign program, which consolidated checking accounts and adjusted minimum balance and paper statement fees. Operating expenses increased by $673,000 in the third quarter compared to the second quarter; $584 of that increased – $584,000 of that increase was related to employee and salary benefit costs largely due to increases in incentive compensation. As mentioned in our press release in October all employees received a minimum salary adjustment of 3% and we're increasing our started minimum wage to $17 per hour from $15 per hour. To help pay for this increase in compensation, we will be suspending our profit sharing plan effective January 1, 2022. At a 3% funding rate for our profit sharing plan, which is the level we anticipate for 2021 calendar year we estimate that the annual cost of this off cycle wage adjustment will largely be offset by the suspension of the profit sharing plan. The company is planning to continue with its normal merit cycle in March of next year as well. Total assets increased by $351 million or 7% during the quarter to $5.5 billion at September 30th from $5.2 billion as of June 30th. Total loans increased by 1% during the third quarter and grew by 2% when excluding the impact of PPP loans. Loan growth was driven by residential real estate portfolio, which grew by 9% during the third quarter. Overall loan growth was negatively impacted by heavy prepayments and payoffs in our commercial loan portfolios during the quarter. Approximately $80 million of our commercial loan book prepaid during the quarter, primarily from high credit borrowers, either selling their businesses or using their cash balance to pay-off or pay-down their loans. Fortunately, commercial pipelines are near record levels and we're $147.1 million as of September 30th in our residential and home equity pipelines remain robust as well and stood at $222 million at the end of the quarter. Total deposits grew by $311 million or 7% during the third quarter of 2021 and we're up $239 million or 6% on an average balance basis, while bringing down our cost to deposits by 1 basis point during the quarter. Total interest in non-interest bearing checking grew by 10% during the third quarter, while our certificates of deposit declined by 3% during the quarter, our loan to deposit ratio ended the third quarter at 72% compared to 77% as a June 30th. It will certainly provide us some financial flexibility as we move forward. Asset quality remains strong with non-performing loans to total loans at 20.23% at the end of the third quarter, down 3 basis points from 0.26% at the end of the second quarter. Annualized net charge-offs were 1 basis point of average loans for the third quarter and 2 basis points year-to-date. Our allowance for credit losses on loans to total loans in September 30th was 0.97% down from 0.98% at the end of the prior quarter. Our coverage ratio of ACL on loans to non-performing loans increased to 4.23 times at the end of the third quarter from 3.82 times as of June 30th. This concludes our comments on the second quarter results. We will now open up the call for questions. Thank you.

Thank you. [Operator Instructions] And the first question we have on the phone line comes from Damon DelMonte from KDW. So please go ahead, Damon. Your line is open.

Hey, good afternoon guys. Hope you guys are doing well today.

Thank you, Damon. You too.

Thanks. So first question, could you just repeat Greg, sorry, Greg White the loan pipeline balances at quarter end for commercial and for residential mortgages?

Yes. So the residential including home equity is $222 million and the commercial is $147.1 million.

Okay. And because of the growth in these pipelines that's what led you guys to allocate a provision for the unfunded commitments? Is that correct?

Yes. Yes. Exactly. Yes.

Okay. So how do we – how do we think about the provision going forward? Credit quality is obviously pristine very, very strong. But do you see yourself releasing reserves in the coming quarters? Or do you feel like you're going to need to provide for this growth as it actually hits the balance sheet?

Yes. So it's really the answer given the way our model is, it's really sensitive to the economic forecast which because of the Delta variant the pace of improvement in the forecast slowed up a little bit. And that it was the growth in that unfunded commitment, the pipelines especially on the commercial side. When you think about it, those loans already have a reserve against them, so when they close, they don't need that much of an addition to the reserve. So if those pipelines grew which they did significantly in the third quarter, that's kind of what drove the provision expense this quarter. So the short answer to your question is the 97 basis points to total loans, we think will continue to trend down over time. We were 82 basis points pre-COVID not that that's the answer, but just given if forecasts continue to approve, we think that 97 basis points would continue to go down a little bit, whether or not that results in a release is certainly dependent on growth in pipelines and close loans as well.

Got it. Okay. That's helpful. Thank you. And then, with respect to the outlook for loan growth, the last few quarters we've had pretty sizeable residential mortgages, as you indicated you're choosing the portfolio, those are almost half the portfolio now. Do you expect to continue at this pace or do you think you've kind of taken on as much as you wanted to over the last six months?

Well, Damon, we kind of take it as the total portfolio and so one of those factors are they call it the allocation or how much residential we're holding. We don't have a hard fast number to do it. We look at – we look at that as an opportunity and what's right in the long-term balancing against liquidity needs. But with that said as commercial is improving we'll take that into assessment, but we don't have a hard fast number that we're tracking to.

Got it. Okay. And then I guess just lastly, and then I'll step back. The outlook for the core margin you feel like you've kind of reached a floor here and you've got the stability? Or do you think there's still a little bit more downward pressure?

If rates stay here, there might be a little bit of downward pressure for the next quarter or two. With that said we did grow our net interest income, as you know part of that margin decline was certainly mix this quarter as investments grew and cash balances. But I guess I pointed at loan yield went down 3 basis points is probably a better indication. And then we're confident we could continue to – the quarters to bring it down our cost to funds 4, 5, 6 basis points are gone, but we're going to continue to work that cost funds down as well.

Okay, great. That's all I had. Thank you very much.

You're welcome. Thank you.

Thank you. We now have the next question on the line from Matthew Breese from Stephens. So please go ahead, Matthew.

Good afternoon.

Hi Matt.

Hi, Matt.

Hey Greg, in the release, in the prepared remarks you discussed wage pressure, not surprised to hear that there's wage pressure just given what's going on nationwide, but I was hoping maybe you could provide some anecdotes or some background about what you've experienced in the last six to 12 months to drive this decision? And are you feeling the most pressure, is it in the branch or the back office? Is it new employees or a tenured just a little bit more color on the decision?

Sure. Well the main driver and again addressing it from a starting wage perspective was obviously in those banking centers, our call center employees that they've been under a lot of pressure, facing call it the brunt of the pandemic related items and even servicing customers through that all. But we have seen as competitors have increased their wages that it's become a tough market. I think that you'll hear that from everybody, but the best antidote is you, you drive down any road in at least in Maine and probably in America. And our competition for employees has expanded. I mean, when McDonald's, Waymart’s, et cetera, offering anywhere $17, $20 an hour it makes us less competitive, albeit we in the past we could compete by a good starting wage, good benefits, upward mobility. But what we were finding is a lot of those folks really needed to focus more on the short-term call it pay increase. So we saw that I think the big tipping point was two things; one was the right thing to do to attract people in. The second was we started to see signs where people would come in and to a manager and say, love the company but I can get $2 or $3 more an hour and in the past we could – they'd probably stay and they weren't. And then as we looked across the board we just needed to remain competitive, that's what led us to that 3% raise. As Greg said, we offset that with profit sharing and part of that was a reflection of with conversations with many employees, primarily in the lower to moderate compensated range, they wanted the cash upfront rather than to put it in profit sharing their 401(k). And that was probably the bigger struggle for us, but reflected our conversations with employees and plus they still have the ability to increase their 401(k) contribution to put that in if they want to

Understood. Is there any concern, you know, longer-term as the thinking around inflation goes from temporary to permanent that perhaps the salaries and benefits line item could just be growing at a faster pace for the foreseeable future? Is that a concern or have you guys discussed that internally?

Yes. I think it is a concern, Matt, for us, for all companies no matter what industry that you're in, there is a labor shortage that coming out of the pandemic that we're seeing and it's across the board. I think with us strategically, how we're addressing that in addition to remaining competitive pay wise we're also looking at many opportunities to automate a lot of tasks that we have through robotic process automation, we have a great team of people doing that. We're seeing some great strides in that. There's other automation opportunities that we'd have to, what I would say is allow us to scale, but more importantly to make these jobs better for people as I think earlier today, our head of technology who's overseeing the automation project, you take away that staring compare work and automated through these bots that we have, and the employees are happier because they're doing meaningful work and then we can scale as we grew up. So there's opportunities strategically for us to address the labor shortages.

Great. I appreciate that. Just drilling down a little bit more I was curious quarter-to-date, what you've seen on the prepayment payoff front, if you feel like what you saw in the third quarter is likely to continue. And then on the on the overall pipeline, what is the blended yield versus what we saw this quarter?

Let me I'll do the second question first. The overall pipeline, other than residential, most of the originations are pretty much going on at portfolio yields. You can see that in the yield rate table, except commercial came down, that was more, some LIBOR floating rate loans that went on right at the end of the second quarter, which has more than that half of the impact or that third quarter. But everything else – even commercial now is pretty much going on, except resi – resi is a mid-3 portfolio and the marginal growth is 305-ish, 310. And...

Looking at the prepayments that we saw, we really dove into that and a lot of it in summary is we're seeing a lot of the higher quality loans and customers that we're working with, they're selling businesses in May. We're seeing more hedge fund activity come in; they will come in either with cash or with prearranged financing outside of the state. We're seeing several properties being sold again to reach stork or hedge funds on that. So it's a little bit of a phenomenon that we hadn't seen before, at least in this market. As far as losing deals on rate and structure, yes, it's a competitive market, so I don't want to discount that aspect of it, but typically you can keep up with that on your pipeline because you're competitive on getting new deals in, but it's seeing some of these, again, higher quality properties transfer ownership. And as I thought about it, I said it's an indication that we are dealing with high quality and that it makes it marketable that way. I think that at the end of the day, and we're just talking about this is I think it's going to make some of this lumpier as we go forward, because you can do a good job on building your pipeline and our lenders are motivated for that, but you can come in and have somebody say I've sold my business and to XYZ and the financing is already arranged by the buyer. So again, that's something that we're getting used to, but again, I think it's just the economics and the business activity that's out there.

Understood. Okay. And then maybe just a little bit on the cash position of the balance sheet, it's still stubbornly high. I'm curious if we should expect a continued increase in the securities portfolio, especially given the rise in yields. And if that's the case, to what extent might we see the security portfolio grow?

Yes. So it's up about 30% this year. If you look our deposits year-to-date are up $600 million. Certainly, that's driving it. We expect to slow the pace of increase of the securities portfolio. With that said, you're still going to see some increases kind of to put a growth rate on it, I'd be kind of guessing a little – I'd say in the 5%-ish range is not unreasonable. And then we do have some deposit outflows coming in toward the end of the year, which makes investment growth a little less necessary. But it's tough to tell Matt if deposits keep coming in the door, like they have been over the past quarter.

And I think if I could just add there, it's kind of good news, a challenging news, if you will, I won't say bad news situation is we always prefer to make loan than to put something in the investment portfolio. But when you look at it albeit with some anticipated outflows from very large deposit customers, we're building our core deposit franchise here, and especially when you look at these numbers. And yes, the cost of that is more liquidity, more investments. But I think as a long-term strength of the organization deposits are going to be more valuable in the future. And so, we're not getting it by pricing up, obviously, where we redesigned our products and they are doing extremely well. So, I think really that's a long-term factor for us to keep the core deposits up like we are.

Got it. Okay. And Greg just to be clear on the five-ish range for growth, that's an annualized figure. So, figuring out over the next handful of quarters there would be an annualized growth rate?

Exactly Matt. Yes, good point.

Okay.

Yes.

Just last point from…

Yes.

Sorry I didn’t mean to cut you off, Greg.

Sorry, you go ahead.

Last one for me, what are remaining PPP fees? And that's all I had. Thank you.

$3.7 million.

Great. I appreciate taking my questions. Thank you.

It’s pleasure. Thank you.

Thank you. [Operator Instructions] We now have another question on the line from William Wallace of Raymond James. So, William, please go ahead.

Thank you. Good afternoon.

Hi, Wallace.

I wanted to circle back on a couple of Matt’s questions if I could. Let's just start with a kind of where the last line of questioning around deposits. If you look at all of the new customers that came on around PPP, what are you seeing, what kind of trends are you seeing with that customer base? And are you seeing the pace of deposit inflows slowing at all?

The latter part of that question about half of the deposit growth year-to-date occurred in the third quarter. I don't know about the past few weeks here, but it was a really strong quarter. And then for fourth quarter we would expect, we typically have some seasonal inflows, which is part of that third quarter answer. We would expect them to start slowing a little bit here as well. And then the PPP, we don't have detail on that Matt – Wallace sorry.

So, I mean, is there any reason not to be more aggressive and investing in the securities portfolio? Are you just worried that rates will work against you if you mixed in duration or are you worried about liquidity in wanting to stay short and liquid?

Yes. No, we're not worried about interest rate risk, or it's more just keeping our powder dry and trying to lend it out instead of having securities growth. Again, we have grown the security book 30% this year, Wally.

Yes.

So yes long-term, we'd like to lend it out and earnings are still strong even with our liquidity.

Okay. And then as far as the liquidity build on the balance sheet, what level do you guys feel comfortable from a capital ratio under TCE or leverage maybe?

TCE is eight three, and I think, we've had this organization over the past several years in the, I think you, even in the low 7 TCE range, and we feel that is adequate for us not to say, that's what we'd want to go down to but we're kind of comfortable where we are and we can adjust accordingly that way.

Okay.

And we'll handle our capital appropriately.

Okay. And then switching gears back to expense we talked about wage pressures, we talked about some of the investments that you're looking at to try to automate processes, et cetera. I'm just kind of wondering if you step back and put it all together, what kind of expense growth would you anticipate maybe over the near term? And is there reason that there might be more expense growth upfront as you invest in technologies to try to automate, to maybe have slower expense growth down the road? I’m just kind of trying to think about the moving pieces here.

Yes Wally, we really don't give kind of a specific indication of what we think our expense growth is going to be, plus, we're currently in the budgeting cycle. But what I can say to your point on call it technology from prior investments that we've made we're in that call it maintaining phase. We don't have to do a big uplift for obsolescence equipment, whether its laptops, routers, service across the board, that's part of our normal run rate because of those prior investments to staying ahead of the curve. What that means though is that when we are doing spending on technology, it is on customer facing or information security related items. And by customer facing that could be systems make us faster, close deals faster, investments in business technology. And of course, in cyber, we're always investing there and we're willing to invest in there to remain as much ahead of the curve as we can. So, kind of the short answer there is the belief that we can absorb what we need to do to be current on the technology front call it, give or take within our current run rate. And the wild card there is, if its cyber, then we'll step in and we'll invest, but that's again a business-critical item.

Okay. Okay, thank you very much. That's all I had.

Welcome.

Thanks.

Thank you. We now have another question on the line from Jake Civiello of Janney. So, Jake, I've opened your lines please go ahead when you are ready.

Good afternoon, guys.

Hi, Jake.

Hi, Jake.

With respect to the loan pipeline, can you give us any additional details about the commercial real estate by geography?

I would say by geography they're all within our franchise and by defining that as Maine New Hampshire and selective transactions in, call it, Northeast Massachusetts including the Greater Boston area. And they are spread out, call it from asset class to various asset classes, industrial, multifamily, if it's retail, it tends to be small retail, not big box. So, it’s pretty diverse exposure that were part of a diverse pipeline that we have built there.

Okay. I mean, the reason why I asked is that if deposit growth does continue at a similar rate of increase of what we've seen in 2021 how does it impact your thought process about growing loans? I mean, do you think about doing syndicated loans or extending outside of your historical areas either by maybe loan category or geography?

Sure. So, we do, do syndicated loans now, and we have for several years, and we've both from a credit as well as a lender perspective, we built up that expertise or acquired if you will, as we hired people several years ago. So that is still there. I can't remember the exact exposure we have in shared national credits, but relatively modest there, but it does work in there. As far as geographic what I would expect us is that we will lend outside of our, call it, physical geography if we have existing customer relationship. And we are working with several high-quality sponsors, businesses that if they are based in Maine, or based in New Hampshire and they are buying a property out of our region would be more than happy to work with them that way. And we can get our hands around that. As we expand geography outside of that this would be probably for me pending what our Head of Commercial Banking would do is that we like to go in markets that are adjacent to the ones that we have. We typically go in there as we have weather years and years ago in Portland, more recently though in New Hampshire, go in with a lender who we have a lot of confidence with, they know the right people to deal with. And so, it's kind of contiguous market growth versus, leapfrogging a big market. And the good news is, is that we have the people and the talent to do that, not just from the lending side, but also from the credit side. And I think that's one key and one thing that we've proven is that we maintain our quality of our credit team to understand the deals, whether it's a new asset class, kind of a new geography, or et cetera, and that's worked well in the past as you can see with our asset quality today.

No, I appreciate that, Greg. Thank you for taking the time to walk through it. One last question from me how were you thinking about, and I think you might've touched on this a little bit, but how are you thinking about capital return in particular, the buyback going forward?

Obviously, we want to make sure that we maintain enough capital for call it regulatory business reasons for other infamous “corporate reasons”. But short of that, we understand shareholders want their opportunity to use their investment. And so, whether issue dividend or the buyback those are tools that we use. Probably one nuance is that we're looking at more of an earn back perspective when we peg where we’ll repurchase and much like you would do analyzing a deal. That's how we analyze returns that we feel that we can get at an accurate price for our own investment, because that's probably the lowest risk out there for us to buy our own stock.

Okay, great. Thanks guys.

My pleasure. Thank you.

Thank you. As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back to Greg Dufour for any closing remarks.

Well, I think we've heard from all of our analysts today, which is just great and it shows interest that you have in our organization. And we very much appreciate that not only from your perspective, but also all our shareholder and owner perspectives. And really, we just are moving forward here and looking forward to a good quarter. And as we said, we've got some good pipeline information coming in and so closing deals before the end of the year. So, I thank you for your interest and have a good day.

The conference has now concluded. Thanks for attending today's presentation. You may now disconnect your lines.