Earnings Call Transcript - CAC Q2 2021

Operator, Operator

Good day, and welcome to Camden National Corporation's Second Quarter 2021 Earnings Conference Call. My name is Betsy, and I will be your conference operator for today. Please note that this presentation contains forward-looking statements, which involve significant risks and uncertainties that may cause actual results to differ 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.

Gregory Dufour, CEO

Great. Thank you, and welcome to Camden National's Second Quarter 2021 Earnings Call. I'd like to begin by wishing you and your loved ones good health. We are pleased to see strong vaccination rates in our communities, which has helped both businesses and people resume many normal activities, while remaining cautious about COVID. At Camden National, we announced, during the quarter, that we would operate in a hybrid environment, which allows our employees, when appropriate, more flexibility in their work schedules and locations. We have begun to have employees return to the office and expect to complete the movement to our new schedules after Labor Day. We continue to monitor many elements of this work environment, including both productivity metrics as well as employee engagement data as remote work evolves. I'm pleased to share with you that earlier today, we reported net income of $18.1 million for the second quarter of 2021, which resulted in year-to-date net income of $37.9 million. Earnings per share were $1.21 and $2.52, respectively, for those time periods. Greg White will provide more detail on our financial performance for the quarter in a moment, but I'd like to take a few minutes to highlight a couple of items. We have continued to see significant volumes in our residential mortgage business, which allowed us to take advantage of those conditions as we retain 60% of our production in the second quarter. This was higher than prior quarters, but provided us a strong return when compared to investment alternatives, as we've seen rates on the 10-year retreat over the past several months. We are pleased with this strategy. I would also point out that the investments we've made, both in the residential mortgage business as well as support areas, including our secondary sales team and financial staff, allow us to be agile in light of market conditions. We continue to analyze the interest rate environment and take the necessary steps to position us for the long term. Loan growth for the first half of 2021 was driven by residential and commercial real estate, which grew 6% and 4%, respectively. We continue to see a strengthening of our commercial real estate pipelines and commercial pipelines. But I should point out that there continues to be a significant amount of payoff activity due to the sales of properties and businesses as well as refinancing of existing debt.

Gregory White, CFO

Thank you, Greg, and good afternoon, everyone. As Greg mentioned, we reported net income of $18.1 million for the second quarter of $1.21 per diluted share, which was down slightly from our record quarterly earnings of $19.7 million or $1.31 per diluted share in the first quarter of this year. For the six months ended June 30, we earned $37.9 million or $2.52 per diluted share, which was up significantly, 55% and 56%, respectively, from the same period last year. Our pretax pre-provision income of $19.3 million for the second quarter was down on a linked quarter basis due to the strategy that Greg mentioned to hold a higher percent of residential mortgages in our loan portfolio. Adjusting for mortgage banking pretax pre-provision income was $1.1 million higher during the second quarter compared to the first quarter of this year. And our tangible common equity ratio was 16.6% for the quarter compared to 18.47% in the first quarter of this year. As Greg mentioned, during the quarter, our Board of Directors approved a quarterly dividend of $0.36, which was just under a 30% payout ratio. Our capital position remains strong as evidenced by a 15.26% total risk-based capital ratio as of June 30, which includes the effect of our $15 million subordinated debt call during the quarter and an 8.87 tangible common equity ratio. Our tangible book value per share grew 3% to $29.99 during the quarter compared to $29.12 at the end of the first quarter.

Operator, Operator

The first question comes from Damon DelMonte with KBW.

Damon DelMonte, Analyst

So first question, I just wanted to ask a little bit about fee income. I follow along with what you did with the strategy of portfolioing residential mortgages versus selling them. So that had an impact on total fee income this quarter. How do we think about that going forward? Is that going to be a strategy you'll continue to employ and look for growth in residential mortgages? Or should we start to see a pickup in mortgage banking income?

Gregory White, CFO

Yes, Damon, at least for the near term, we're going to continue to portfolio the majority of residential mortgages, but we will make at least a quarterly assessment of whether we keep that strategy based on our interest rate risk position, deposit flows, and total cash flow.

Damon DelMonte, Analyst

Got it. What are some of the characteristics of the loans that you're including in the portfolio? Are they adjustable, or are they fixed for 5, 10, or 15 years?

Gregory White, CFO

Yes. It's mainly 30-year and 15-year fixed. The majority is 30-year. And again, our balance sheet certainly supports taking the interest rate risk, which is part of the analysis that we do. Certainly, not a lot of hybrid production. But if and when that day comes, we'll certainly portfolio the majority of that product.

Damon DelMonte, Analyst

Okay. All right. So then a level similar to what we saw this quarter for fee income is reasonable, something in that, call it, $11 million to $11.5 million range.

Gregory White, CFO

Yes, that's a reasonable estimate. We did implement a deposit product redesign where we're expecting to see a little more on deposit service charges as we move forward. But that's a reasonable starting point.

Damon DelMonte, Analyst

Got it. Okay. Great. And then with respect to the outlook for the provision going forward, the reserve came down a decent amount this quarter with the provision recapture. Do you feel like you're at a point now where the provision will be covering just net charge-offs? Do you have to provide some for loan growth? Or do you think that there's still room to release reserves at least over the back half of this year?

Gregory White, CFO

Yes. We look at that frequently and certainly, our credit profile and the improvement of the economic forecast is the reason we've been releasing reserves. The new element here is the drop in interest rates; if that results in accelerated prepayment speeds that's going to shorten average lives. It's a life of the loan calculation that could create further pressure also for us to release reserves.

Damon DelMonte, Analyst

Got it, right. Because those loans won't be around as long, right?

Gregory White, CFO

Yes.

Operator, Operator

The next question comes from Matthew Breese with Stephens.

Matthew Breese, Analyst

I have a few questions. First, Greg, I think you mentioned this earlier. In the press release, you noted that you redesigned the consumer checking products and shifted some accounts from interest-bearing to noninterest-bearing. You mentioned potentially higher fees as a result of this change. Could you provide more details on what occurred, the reasons behind this decision, and how permanent you anticipate this change from interest-bearing to noninterest-bearing accounts will be?

Gregory Dufour, CEO

Yes, sure. Well, the real strategy behind it was, like a lot of banks, as we put things together in the pre-COVID world, we had a lot of grandfathered accounts. We were basically dealing with 18 different accounts, some of them were relatively low activity because they were grandfathered. So we took advantage of the excess liquidity that we had, the current interest rate environment, and we streamlined it down to four products. So we achieved operational efficiencies and a more manageable platform. With that change, we did shift, as you mentioned, some from interest-bearing to noninterest-bearing, adjusting fees; for example, we began charging for paper statements as we try to move more customers to digital statements. All in all, we moved about $220 million from interest-bearing to noninterest-bearing accounts. We expect at this time for that to remain relatively stable and for those funds to be retained in those categories. That will play out over the interest rate cycle. But as long as interest rates are as low as they are, the movement should remain steady and depend on how consumers choose to shift those later on.

Matthew Breese, Analyst

Got it. Okay. The other thing I was hoping to discuss was the duration of the asset base and the balance sheet sensitivity. So you added securities, and you moved the securities duration, which I believe the press release stated increased to 5.9 years from 5.1 years. Additionally, you're adding residential loans with 15 and 30-year durations. I just want to get a sense for your tolerance. From the 10-Q asset set today, how much are you willing to move that? And should we use that as a proxy for how much residential and securities you're willing to put on?

Gregory White, CFO

It is a good proxy. In the first quarter, our sensitivity indicated that year or two net interest income would rise about 10% in a scenario of an increase of 200 basis points. That's now about 6% given the changes we made to the balance sheet and the extension of duration on the investment portfolio while booking fixed-rate residential loans. So obviously, our exposure is still to declining rates. Some of the moves we did protected us a little bit from that type of scenario, but we still have plenty of room to add longer assets to the balance sheet from an interest rate risk perspective. I mean, we foresee that part of the investment strategy is using up excess liquidity; certainly, if deposits continue to come in, we'll continue to assess if that's a prudent strategy. But certainly, we can see it continuing in the third quarter, similar to the second quarter. The results were good.

Matthew Breese, Analyst

Okay. And could you drill down just a little bit for us the expectations around the securities portfolio? Do you think you're bulked up enough there? Or is there more growth to come?

Gregory White, CFO

We've slowed down there. Obviously, we had significant growth. What we're hoping is to utilize cash flow from the securities portfolio and any deposit growth to lend it out at this point. So if we're successful on the loan side, I would say you'd see the securities portfolio plateau or maybe even shrink a little bit between now and year-end.

Matthew Breese, Analyst

Okay. My last one is just around the pipelines, commercial and consumer. Would love some color there. What's stronger? Where are you seeing the strength? And maybe talk a little bit about the geographies that are looking the strongest.

Gregory Dufour, CEO

Yes. Sure. Maybe Greg and I can both tackle this. From a product perspective, obviously, residential is still holding strong with pipelines. We continue to see strengthening building up on the commercial side, both in commercial real estate and commercial and industrial lending. So we're really pleased with how it's building up. Activity is getting stronger as we move forward. Geography-wise, it's kind of spreading out throughout the market. Obviously, though, by units, it's a good distribution throughout our markets. But from a dollar perspective, it is oriented more towards Southern Maine and New Hampshire and in the Northeast Massachusetts market that we service. Greg, is there something else that should be added?

Gregory White, CFO

Yes. On the residential side, I spoke to one of the senior managers in that area yesterday. The pipeline is about $200 million, which is roughly 70% of the all-time peak last year. About 60% of that is refinance activity, and the margins on what we do sell are still healthy in the 2%, 2.5%, and sometimes even higher, 2.5% to 3% range. So we still have a pretty healthy pipeline.

Operator, Operator

The next question is a follow-up from Damon DelMonte with KBW.

Damon DelMonte, Analyst

So just wanted to follow up on the outlook regarding the core margin and some thoughts around that, Greg. Do you feel that the margin could be under pressure, given the addition of the residential mortgages? Or do you feel that you're finding a floor here at this point in the cycle?

Gregory White, CFO

Yes. I will point out our loan yield was stable quarter-over-quarter; it was 3.76% for both Q1 and Q2. But our yield on interest-earning assets came down as we brought in new deposits and invested them, which did occur. Damon, if rates stay here, I still think there's going to be a little grind lower on margin. Again, that's if rates stay here; if they go back up, we were starting to see a potentially favorable scenario for margin. But I think it's going to be a bit of a grind lower, just that asset yields will continue to compress a little if rates remain steady, even on the loan side, which, again, was stable quarter-over-quarter. I wouldn't expect that to hold unless rates were to rise a little.

Gregory Dufour, CEO

Yes, if I could just add, it really comes down to how much cash builds up the excess liquidity. I think you're probably finding that across most organizations; that's what's applying pressure on the margins right now.

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. And thank you, everybody. Matt and Damon, for your questions as well as everybody else for all your interest in Camden National Corporation. We wish you the best and hope for a great rest of your summers. Take care.

Operator, Operator

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