Earnings Call Transcript - CAC Q4 2020

Operator, Operator

Good day, and welcome to the Camden National Corporation's Fourth Quarter 2020 Earnings Conference Call. My name is Tom and I will be your operator for today's call. All participants will be in a listen-only mode during today’s presentation. 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 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 and Chief Executive Officer, and Greg White, Executive Vice President and Chief Financial Officer. Please note that this event is being recorded. At this time, I would now like to turn the conference over to Greg Dufour. Please go ahead, sir.

Greg Dufour, CEO

Great. Thank you, Tom, and good afternoon and welcome to Camden National Corporation's fourth quarter and year-end 2020 earnings call. Earlier today, we announced that we achieved record earnings in 2020 of $59.5 million or $3.95 per diluted share. Greg White will provide an overview of our performance in a few minutes, but I'd like to just take a few moments to provide my perspective on our financial performance and positioning for 2021. Our year-end results demonstrate our strong asset quality position and equally as important, the strength of our allowance for loan losses. We adopted the current expected credit loss or CECL accounting standard during the quarter effective January 1, 2020. I'll point out that we were confident that our second-quarter provision for credit losses of $9.4 million reflected both the impact of the pandemic and CECL adoption. This was proved out as our fourth-quarter provision of $258,000 resulted in an allowance to total loan ratio of 1.18% at December 31, 2020, confirming our actions were on target and that we are adequately prepared for 2021. Our asset quality metrics also reflect our preparedness. Many of you were tracking deferred loans, which ended the year at a negligible 0.8% of total loans compared to 5.5% at September 30, 2020, and 16.4% at June 30, 2020. This decrease across periods occurred without seeing a migration to non-performing status, past due status, or charge-off. Non-performing assets were only 0.22% of total assets and past due loans were 0.1% of total loans at year-end, while net charge-offs for the year were just 2 basis points of average loans. With that said, we continue to monitor economic and asset quality indicators of 2021. COVID-19 and the ability to vaccinate people will be critical health and economic factors for the nation and our markets. Our teams are in constant contact with our borrowers and commercial customers, which provides us insight into the local economies and helps us to determine how to be proactive if our borrowers or commercial customers face financial difficulties. Our team kicked off the next round of PPP lending on January 19th and through the end of last week, we had received 495 applications, of which about 92% were second requests. Since the first round of PPP loans, we've strengthened our technology and deepened our training for our staff as well as remaining confident that we'll be positioned to help our customers through this process. While we're proud of our strong financial performance during 2020, we understand many businesses and people have not had the same experience this past year. I believe our efforts in deferring payments on many loans and participating in the PPP programs reflected our concern as well as our willingness to help our customers in their time of need. We've supported many community organizations, addressing needs such as homelessness and victims of domestic violence. We've also supported our hardworking employees, including those who work with the public in our banking centers to ensure a safe and healthy work environment. Finally, our donations committee led an effort where we've made donations to community organizations where our employees volunteered their time and expertise during 2020. These funds helped more than 50 local non-profits in our market areas. It's now my pleasure to turn over the discussion to our CFO, Greg White, who will provide further insights into our financial performance.

Greg White, CFO

Thank you, Greg, and good afternoon, everyone. As Greg mentioned, we had record earnings last year and I'm happy to report the fourth quarter was a record as well. Our fourth-quarter return on tangible common equity exceeded 17% and our diluted earnings per share was $1.22 compared to $0.99 in the fourth quarter of 2019, which is a 23% increase period-over-period. On a linked-quarter basis, our diluted earnings per share increased 10% compared to $1.11 in the third quarter of 2020. During the fourth quarter, our Board of Directors approved a dividend of $0.33, which is a 27% payout ratio, and we continue to repurchase shares opportunistically while growing and strengthening our capital position. Our total risk-based capital ratio increased by 25 basis points during the quarter to 15.4% from 15.15% at September 30th. We had strong tangible book value per share growth during the quarter, increasing 3% or $0.82 to $28.96 from $28.14 as of the end of the third quarter. Our net interest margin increased to 3.06% for the fourth quarter from 3% the prior quarter, but adjusting for the impact of both PPP loan income and excess liquidity, our margin declined slightly to 2.99% from 3.03% on a debt basis quarter-over-quarter. We continue to focus on driving down our cost to deposits and our overall cost of funds, which declined by 6 and 5 basis points, respectively. Excluding PPP loans, total loans at December 31, 2020, were flat compared to December 31, 2019, but were up 4% annualized during the fourth quarter. Much of that quarterly growth occurred in the commercial real estate portfolio, which grew at 11% on an annualized basis during the quarter. Average total deposits grew by $465 million or 14% compared to the fourth quarter of 2019, while average non-interest bearing checking grew by $242 million or 43% during the same period. During the fourth quarter, despite $44 million of time deposit runoff, total average deposits grew by $42 million or 4% annualized, and average non-interest bearing checking grew by $59 million or 32% on an annualized basis. Asset quality remained strong with non-performing loans to total loans at 0.33% at the end of the quarter, down 1 basis point from the end of the third quarter and down from 0.36% at the end of 2019. We also had annualized net recoveries of 2 basis points of average loans during the fourth quarter, and net charge-offs for the full year were 2 basis points of average loans. During the fourth quarter, we adopted CECL with an effective date of January 1, 2020. Our total provision for credit losses for the quarter was $258,000 and our allowance for loan losses, excluding PPP loans at December 31, 2020, was 1.23% compared to 1.19% at the end of the third quarter and 0.81% at December 31, 2019. Our coverage ratio of reserves to non-performing loans increased to 3.6 times at December 31, 2020, up from 3.3 times at September 30, 2020, and 2.3 times at December 31, 2019. Lastly, we've provided additional information on our deferred loans on Page 9 of the supplemental deck that we provided with our earnings release. As of December 31, 2020, our loans remaining on short-term deferrals were $26.5 million, whereas Greg Dufour mentioned 0.8% of total loans, down from $181 million or 5.5% of loans as of September 30th. That concludes our comments on the fourth quarter. We'll now open up the call for questions. Thank you.

Operator, Operator

Thank you. [Operator Instructions] Our first question comes from Damon DelMonte with KBW. Please go ahead.

Damon DelMonte, Analyst

Hey, good afternoon, guys. How are you doing today?

Greg White, CFO

Good, D'Am, and how are you doing?

Damon DelMonte, Analyst

Good, thanks. Good. So first question, I just wanted to talk a little bit about the margin. Greg, you provided some color on the core margin. I believe you said it declined from 3.03% last quarter to 2.99% when you kind of strip out a couple of items in there. Directionally, where are you thinking at this point? Do you feel that you've kind of reached a bottom, or do you think that there's still going to be additional pressure on the asset side?

Greg White, CFO

There could be a little bit more pressure on the asset yield compression. With that said, we might get a little help from the mix. Our investment portfolio grew pretty significantly last year. We don't necessarily expect that this year. Certainly, if you look at the average balance table, cash and liquidity was higher on an average balance basis in Q4 than Q3, but on a spot basis was quite a bit lower at the end of the year than at the end of the third quarter. So certainly that speaks to a little bit less of a liquidity drag as we enter the new year here. Damon, I think it's also worth mentioning that our cost of funds came down 5 basis points last quarter and 6 the quarter before. So we're still working hard and have some opportunity to offset a little bit of that asset compression if indeed it continues a little bit here.

Damon DelMonte, Analyst

Got it. And then in the way of loan growth, I think that excluding the PPP balances there, you're looking at about 4% linked quarter annualized growth here in the fourth quarter. How are the pipelines looking on the commercial side and what are the thoughts as you go into 2021? Do you think that sentiment has improved with your borrowers and would you expect them to be more in the market for more borrowings?

Greg Dufour, CEO

Sure. I can take that one. It's Greg Dufour. Damon, we have seen our commercial loan pipeline build up over the past quarter and we're pleased with it. I would say it's probably approaching maybe not the high peaks pre-COVID, but it's pretty much in the solid average of what we'd normally see. Looking out next year, we’re cautiously optimistic that the pipeline should hold up and our balances and growth should remain steady. Furthermore, we're expecting a good solid year that way. On the residential side, we're still seeing a lot of activity. Obviously, that will drive both gain on sales as well as those mortgages that we may choose to hold. So, in a way, we're optimistic about next year.

Damon DelMonte, Analyst

Got it. Okay, great. And then just one final question on the expense side. Greg, can you give a little color on the higher compensation costs this quarter and what that could mean for the run rate going forward in 2021?

Greg White, CFO

Yeah, sure, Damon. So, obviously, most of that comp expense was incentive-based, so we had a strong year. We did add quite a bit in the fourth quarter for the bonus accrual. Typically, we don't like to give too specific guidance, but in this case, there has been a little bit of noise on the expense side. I think for Q1 of this year, a reasonable range for total expenses is in the $24.5 million to $25 million on the high side, $24.5 million on the low is a reasonable starting point for you and others.

Damon DelMonte, Analyst

Got it. Okay. That's helpful. That's all I had for now. I'll step back. Thank you very much.

Operator, Operator

Our next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace, Analyst

Thanks. Good afternoon, Greg.

Greg Dufour, CEO

Hi, Wally, how are you?

William Wallace, Analyst

Good, thank you. Maybe just following up on that last question. It seems across the industry there is a lot of commentary about how the pandemic and work from home has changed how not only retail but also commercial customers are using branches. Assuming that's the same in Maine, is there an opportunity with your branch network to maybe accelerate consolidation opportunities? Could that $24.5 million to $25 million expense range, could there be potential levers for that to even decline or perhaps at least offset any natural pressures from reinvesting in the business and inflation, etc.?

Greg White, CFO

Yeah, sure. I guess I'd first of all reference that we did close three branches in April of 2020. Obviously, the pandemic was ongoing at that point, but that analysis was done pre-pandemic. So I guess the point, Wally, is the bank is always looking to rationalize costs, and those branches were either unprofitable or low profitability, I should say. So that's kind of a good way to think about Camden National Bank. With that said, I’d also add that we're very focused on the efficiency ratio in both components revenue and expense side, making sure that that doesn't go much beyond the mid-50-ish type of level.

Greg Dufour, CEO

Yeah. Maybe if I can jump in a little bit, and Wally, I think we agree with what you're saying and what a lot of other organizations are doing by announcing branch closures, and that's one aspect of it. I will point out, in addition to what Greg said about our track record of constantly looking at our branches and trimming when we can. As I looked at some of those other announcements, especially when you get into larger organizations, they're dealing with a high concentration of branches with a lot of overlap, whether it's within a couple of miles or not. The Maine geography doesn't give us the logical choices to make that call, given that we don't have two branches within five miles of each other to analyze. Ours tend to be spread out a little more, albeit we always look at those opportunities where we can gain efficiency by closing a branch and maintaining a high level of retention of those customers. The other aspect is we're seeing that all organizations are seeing a lot more customer behavior going into the digital channels. We're really focused on not only expanding on that and deepening our offerings with our customers, but also making investments in it to make sure that we're keeping pace with what our customers want and, more importantly, what some of the bigger organizations can do, and the great news is we're starting with a strong platform that's driven by Q2 e-banking for us. So we're looking forward to that and that will help us further analyze what we do with this branch network that we have. The final piece of it is, as we're looking at the return to work, we are still in our non-banking staffing level or non-in-person branches. About 80% of our remaining employees are working remotely, with those remaining 20% varying from being in the office five days a week to as little as one day a week, and we're tracking that quite a bit. We're operating really well with the results we've put up here. As time goes on, this will allow us to really analyze, like a lot of organizations in banking and elsewhere, what the structure of our workforce looks like. And that, I think, is going to be an interesting analysis where we evaluate our non-banking or non-branch locations. Again, this raises questions about our real estate needs and whether we can reduce that fixed cost associated with running offices, etc. All of that is on the table. Our teams are considering these factors, but with a lot of variables in play, especially due to the COVID-19 vaccination impacts, we're not yet prepared to estimate the upside from all those aspects, but it's certainly within the scope of what we're looking at strategically.

William Wallace, Analyst

Okay. All right. Appreciate all that commentary. I believe you said in your prepared remarks that you've taken, I think you said 92 applications of the most recent round of PPP. What's the dollar amount of those? Ultimately, where do you think you could shake out?

Greg Dufour, CEO

Yeah. And I said I think it was 495 applications. I don't have the dollar amount off the top of my head, but about 90% of those were second draws. Actually, right now, and somebody just whispered in my ear, it's $40 million of applications so far we have. Right now, it's difficult to gauge what we expect the total volume to be. We do know it's starting off. I won't say slower, because I think part of it is we are ready for PPP, the SBA is, more importantly, customers are, so there is not that huge rush that we experienced a little less than a year ago on the initial round of PPP. We're prepared to handle a lot more volume, but of course, it comes down to what our customers need. But we're proactively reaching out to our existing customers who have PPP and ensuring they're checking their records in case they want to apply for a second draw. And we must also remember we need to work through the forgiveness process on the first rounds. So the teams involved are incredibly busy for quite a while.

William Wallace, Analyst

Okay. And then lastly, as you continue to buy some shares during the quarter, is the stock still at levels that you consider attractive to utilize repurchases as a capital management tool? And if so, how do you think about maybe target or where you see your excess capital or how do you manage that part of the equation?

Greg Dufour, CEO

Yeah. We really don't provide indications obviously on what value we think we're at with. Like any bank CEO or any public company CEO, my stocks are always undervalued, no matter what level we're at, right? We do have parameters that we institute that program for, and for all the right reasons, those are confidential. I will say when you look at our capital, we are holding a lot more, I would call it, as we assess things economically from all the factors that we all know about. I will say we have a solid track record of maintaining our capital levels, ensuring that this institution stays strong, but also redeploying that back to shareholders either through dividends, through repurchases, or through other initiatives that we've undertaken over the years since I've been here. So it's something that we consistently look at. I will say from my perspective, we do have a Board committee called the capital committee. So that's something that the Board is playing an active role in how we manage those capital levels.

Operator, Operator

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

Jake Civiello, Analyst

Hi, good afternoon, guys. First question is that you referenced mortgage banking being really strong in the quarter. Do you have the breakdown of refi versus purchase for the fourth-quarter mortgage originations?

Greg Dufour, CEO

Let me see if we can gather that while we're on the phone. I don't have it at my fingertips, Jake. But I will point out that the activity was strong. We reached $1 billion of mortgage volume within that. I don't have that specific breakout right now, but I would say a good majority of that was refi. However, we have seen, and as you know, being in the Maine market, that the purchase activity was significant, but that may be something that we can come back and get back to you with.

Jake Civiello, Analyst

Okay. I appreciate that. Thanks. And then thus far in the first quarter in January, with the move in the 10-year to over 1%, have you noticed any demand change for -- specifically for mortgage refis?

Greg Dufour, CEO

I was just chatting with Trish Rose, who runs our EVP of Retail Banking and Mortgages, and we're still at a fever pitch. So we haven't seen a big drop off, but, as you know, it's a lag. We're probably still working through stuff that was coming through the latter part of the year, but it continues to be a pretty strong market for us.

Jake Civiello, Analyst

That's good to hear.

Greg Dufour, CEO

Yeah, absolutely.

Jake Civiello, Analyst

Just one more question from me. If the economic environment stays on a similar trajectory throughout the rest of 2021, could you envision releasing reserves at some point during the year?

Greg Dufour, CEO

Sorry, I'm laughing because you're talking to an old banker who has been here probably doing banking for over 30 years. Under the incurred model and prior models, that would be an easier answer. Right now, with CECL, the rules are driven by economic factors and outlooks. I will say, with that said, the model does give us flexibility to look at different specific factors, especially as we review the data on various industry segments. So my best answer would be, Jake, is we will release reserves when those indicators align with our longer-term view and we will do so when those indicators suggest that it's appropriate. I was fortunate that someone just informed me that in the fourth quarter of residential mortgage activity, 45% was refi, which is lower than expected, and the remaining 55% was purchase, which is a fantastic balance to have.

Jake Civiello, Analyst

Most definitely. I mean, I guess, one last question would be to that last point: do you think you're taking market share, or are these existing customers that you're garnering new business from?

Greg Dufour, CEO

I think we're gaining new customers through that, and I would say when you look at the numbers, we're the third-largest mortgage volume producer by the accounts that we have. So that's pretty steady to what we've been having. However, when you look at the other lists, non-banks are gaining bigger market share, especially digital-based lenders, and that's part of the competition that wasn't present a few years ago. We're fortunate we have our mortgage touch and automated application process that can compete with that, but we also provide our personal service through our origination and branch teams, which the digital lenders cannot offer.

Operator, Operator

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

Greg Dufour, CEO

Great. Well, probably the one thing I've mentioned to a lot of different audiences, especially here internally over the past couple of weeks, as we've started to close the books and understand what happened in 2020: If you would have asked me eight or nine months ago if we would be sitting here talking about record earnings of nearly $60 million of net income, I wouldn't have believed it sitting in April of 2020 at the start of the pandemic. So we're extremely grateful to share these results with you. However, I want to acknowledge that there has been a lot of hard work done here by teams, whether it's folks on PPP, or in our mortgage areas. We've asked our banking center employees to show up to work, being in-person to serve our customers who do come in. It's been truly a team effort. I just wanted to share publicly our gratitude for the employees of Camden National and I would say you're in good hands with folks who care about your investment. With that, I hope everyone stays safe and healthy and best wishes for a great 2021. Thank you all.

Operator, Operator

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