Earnings Call Transcript - CAC Q1 2021

Operator, Operator

Good day, and welcome to Camden National Corporation’s First Quarter 2021 Earnings Conference Call. My name is Garrett, 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 Dufour, CEO

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 in pretax 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 expect will benefit our local economies. Overall levels of vaccinations, along with the governor of Maine proactively outlining a plan for visitors to our state have induced 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 option of holding additional residential mortgages if needed. I would also like to note that since we last met, we have been named to S&P Global's list of top Community banks and honored as a Raymond James Community Cup award recipient, which recognizes the top 10% of community banks.

Gregory White, CFO

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 of 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 of 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% in 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, down two basis points from 0.33 at the end of the fourth quarter of last year.

Operator, Operator

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

Damon DelMonte, Analyst

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?

Gregory White, CFO

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

Damon DelMonte, Analyst

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?

Gregory Dufour, CEO

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.

Damon DelMonte, Analyst

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?

Gregory Dufour, CEO

I will let Greg give his view. Yes, but I think, Damon, 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.

Gregory White, CFO

Yes. The only thing I would add, Damon, is that we have been running with $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 evaluating prudent investments for the bank, also looking to compare the pickup on the loan versus the investment yield.

Damon DelMonte, Analyst

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

Gregory White, CFO

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

Damon DelMonte, Analyst

Got you, okay. And then I guess just the last question. When you look at the kind of the core margin and how it is shaping up 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 liquidity is going to continue to weigh on it and put a little bit more modest downward pressure?

Gregory White, CFO

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

Damon DelMonte, Analyst

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

Gregory White, CFO

Thank you, Damon.

Operator, Operator

Our next question comes from William Wallace of Raymond James.

William Wallace, Analyst

Hi thanks for taking my questions. Good afternoon. Just to keep the line open on the net interest margin. Does your expectation for continued downward pressure include any anticipation that you might be able to deploy some of the excess liquidity into the securities portfolio?

Gregory White, CFO

I mean, it does. We could certainly invest the excess liquidity tomorrow and boost our stated margin. And it is more just the consumer callable, the residential portfolio and the mortgage-backed securities. That is where we have seen the compression. So again, I would qualify that by saying if rates stay here and prepayment levels remain at the current levels, we will likely continue to see some asset compression. We are always looking at whether it is a prudent time to invest that excess liquidity as well. We have become a little more active there with the backup of the 10-year recently.

William Wallace, Analyst

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 would you consider balance sheet arms, etc.?

Gregory White, CFO

We would look to do both, but probably the majority of the pipeline right now is fixed rate. So that is the short answer. Not 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.

William Wallace, Analyst

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

Gregory White, CFO

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

William Wallace, Analyst

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

Gregory White, CFO

Certainly, the former part of that question; the pipelines are at record levels. I mean, they are robust on the commercial side. That said, we do still continue to have a little bit of pressure, obviously with refinancing. 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 when I say they are at record levels, they truly are.

Operator, Operator

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?

William Wallace, Analyst

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

Gregory White, CFO

Yes. As of March 31st, we have $85 million out there, but we have done another $15 million since. So we are now at $100 million on the most recent round of origination.

William Wallace, Analyst

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?

Gregory White, CFO

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

William Wallace, Analyst

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

Gregory White, CFO

Thanks, Wally.

Operator, Operator

Our next question comes from Jake Civiello of Janney.

Jacob Civiello, Analyst

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?

Gregory White, CFO

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

Jacob Civiello, Analyst

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?

Gregory White, CFO

Yes. I believe that is the case. It is very close to a record, which was second quarter last year, 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.

Jacob Civiello, Analyst

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

Gregory Dufour, CEO

No. I would say it has pretty much held consistent, and which tends to be more Southern Maine 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 there are more of them.

Gregory White, CFO

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.

Jacob Civiello, Analyst

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

Gregory White, CFO

Yes.

Jacob Civiello, Analyst

That is all I have for now, guys. Thanks.

Gregory White, CFO

Great. Thank you.

Operator, Operator

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.

Gregory Dufour, CEO

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.

Operator, Operator

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