Q1 2020 Earnings Call

Good afternoon, and thank you grant.

I want to welcome everyone to can the national corporations first quarter 2020 earnings of these call. I hope you your family's and Associates are healthy and safe during this very trying time. I'd like to welcome to the call Greg White who joined us on April 15th is our Executive Vice President and Chief Financial Officer as well as recognized Debbie Jordan went off intention to retire on April 30th from the company last October but has agreed to stay on as EVP and Chief Operating Officer until early June to help assist with the transition off and help oversee. Our coronavirus response work Bill Martel also joined us as Executive Vice President of technology and support services on April 30th.

Both Greg and Bill join a very strong staff and their respective areas who along with all of our leaders and employees have done an amazing job the past several weeks. We provided a presentation for your review in addition to our normal earnings release information. But before we review that I'd like to provide a few comments regarding our approach and response to the coronavirus pin.

At the outset of the crises our Focus has been on our for constituents employees customers communities and our owners believing that our employees took a company's greatest asset. We took several actions to ensure their safety wellness and economic well-being.

As our local schools closed we took immediate action to revise our paid time off policies allowing many employees to work from home or access their paid time off to care for their children are the loved ones. We also announced we would provide financial support once PTO was exhausted.

We added $100,000 to our employee emergency relief fund to help those employees that may experience Financial stress due to our variety of factors, including spouses and significant others who may be laid off.

To help make our work environment as safe as they could be we moved over 300 additional employees to work from home status and provided premium pay for those employees who would be working off and our banking centers and the other high-risk areas.

Even though our employees personally going through an extremely stressful. I am proud of how they responded to our customers. Just some of the examples include that we transitioned our faith banking centers to service customers broad drive up or in our lobbies by appointment only in March. We saw a banking centers transactions declined by 13% compared with the same month last year while our digital banking activity increased 14% And calls to our customer care center increased by 16%

Our response to the cares acts paycheck Protection Program has been significant with 1649 loans, totaling $196 million dollars processed as of April 22nd and behind-the-scenes. We asked over 70 lenders portfolio managers banking center managers and loan processing employees wage assigned to this effort.

You're also one of the first Banks of Maine to offer payment deferrals and late fee waivers as well. As of April 22nd. We have provided payment deferrals on over 1,500 loans, but I was standing along balances of all almost $550 million.

We asked nine individuals to shift from their normal work duties to assist our special assets and collection teams equally as important is our role in the community we serve

Usually our employees are Hands-On with many Community organizations we work with and they are frustrated by being limited during this time. But our support is included leveraging our Hopatcong efforts with local homeless shelters, which provides unrestricted funding to those who serve the homeless or providing financial support to local food banks, and we initiated supposed to finding our voices and emerging organization that provides support to victims of domestic violence an issue, which is increasing during this time of isolation.

Our focus on our owners our shareholders is equally as strong.

In addition to our financial results, which Debbie will discuss. I'd like to point out a few highlights on our current Financial strength and position.

As of March 31st 2020. We had a tangible common equity ratio of 8.78% a tier 1 leverage ratio of 12.56% and a total Capital ratio of 13.81% This provides a solid Capital capacity as we enter the uncertainty in the next several weeks.

Asset quality was in a strong position at March 31st, 2020 with non-performing assets at 3% of total assets and an annualized first-quarter net worth of just five basis points of average loans.

I reserve for loan losses was 26 and 1/2 million dollars in March 31st, 2020 or .84% of total loans.

During the first quarter of 2020. We provided one point eight million dollars provision expense for loan losses. We decided to delay add option to Cecil as Allowed by the cares act so we could allocate resources to our pendemic response activities and further support our customers during this time.

We repurchased over 200,000 shares in the first quarter before suspending the program on March 20th, 2020 as a Health crisis unfolded and we prioritized Capital preservation after analyzing our Capital position. We did Claire a thirty-three cent per share dividend for the first quarter. I'd like to now introduce Devi bulb a more detailed financial review.

Afternoon, everyone. We appreciate you joining us for the call today. I will spend a few minutes reviewing first quarter operating results as well as highlight a few items included in the supplemental earnings call presentation that was included within our release earlier today. Net income was thirteen point five million dollars for the first quarter resulting in a return on on average assets of 1.21 per month and then return on tangible common Equity a 14.35% and comparing results to the previous quarter. Net income declined one point seven million dollars or 11% off as a result of an increase in credit provision of one point six million dollars combined with a 2% decline in revenue between periods from a pre-provision perspective. We had a solid quarter of operating results since year-end our loan portfolio grew 2% with increases in both commercial real estate and see my loans and our total deposit base grew 1% off.

That interesting, 31.8 million dollars declined 1% from the previous quarter due to a 4 basis-point decrease in our net interest. Margin to 3:08. We are very pleased with our margin at this level which was nearly flat compared to the previous quarter when excluding prepayment fees that drove a 3 basis point increase in our fourth quarter margin back in June we forecasted net interest margin to be around 3:05 in the first half of 2020. Obviously, the interest rate environment has changed significantly since then but we are still Target are acting that margin level despite the ongoing pressure of our loan and investment yields repricing down. We have been aggressive in reducing our funding costs on page six of the supplemental earnings call participation. We reported deposit the cost for the last six months including a month-over-month decline of 15 basis points in March.

On a linked quarter basis the income for the first quarter of eleven point four million dollars decrease 5% compared to the fourth quarter last quarter. We recognize Equity security gains of $866,000 and our annual debit card incentive of $579,000 Mortgage Banking fees increase one point four million dollars between periods due to read level refinancing activity. Our mortgage pipeline at March 31st was $258 compared to $89 at year-end operating expenses of 64.6 million for the first quarter declined 1% compared to the previous quarter and our non-gaap efficiency ratio for the quarter was 56.45%

It's disclosed in our earnings release. The company did not adopt Cecil during the first quarter as we were focused internal resources on pandemic related activities, including the loan relief programs discussing. The company will adopt Cecil as required by the cares act at the earlier of the termination of the National Emergency concerning covid-19 or December 31st. This will likely have the effect of increasing the allowance for loan losses and reducing shareholders Equity the company expects to continue to exceed regulatory Capital requirements under current regulatory calculations wage increase in the loan loss provision for the first quarter was driven by growth and loans and the uncertainty around the current economic environment and resulting from covid-19. We would expect the level provision for loan losses in 2022 increase as more data becomes available regarding Trends in our loan portfolio and the economic conditions in our Geographic footprint the supplemental present wage.

includes information related to our

And liquidity position our loan portfolio and Regulatory Capital capacity in particular page is nine and ten of the presentation provide additional transparency Home Alone mix in Industry concentrations. It is difficult to quantify the covid-19 impact to our customers. We have however disclosed segments of our portfolio that we believe are more susceptible to the impact of covid-19 as of March 31st, 2020 lodging represented 252 million dollars or 8% of total loans outstanding over half a the loans are four major Hotel Brands and and most of the properties are managed and owned by operators as their primary business. The total exposure in this segment is within New England with our major exposed to primarily on properties located within major cities such as Portland and Portsmouth Boston and Burlington in addition our top ten clients account for almost 50% of our commercial real estate Hotel wage.

Bossier each of these bombs are set extensive Hotel experience five twelve and thirteen of the presentation depict are strong asset quality in capital position as of March 31st off that concludes our comments on the first quarter results. Well now open the call up for questions. Thank you.

Thank you. We will now begin the question-and-answer session ask you a question. You may press * then 1 on your touchtone phone keypad. If you're using a speaker phone, please pick up your handset before pressing the keys will draw your question, please press * then two at this time. We will pause momentarily to assemble our roster.

Our first question will come from David Damon Delmont with KBW, please go ahead.

Good afternoon, everyone. Hope everybody's doing well today good. Thanks. Great. Great. So first question just to talk a little bit more about the the margin could you just kind of repeat your your thoughts on the margin? You said the last quarter? You said your expectation for the first half of the year was to try to hold it around 3:05 for the court margin and you kind of feel that you could still do that at that point. Yeah, you know when we we forecasted the 305 we didn't have the hundred fifty basis point Decline and Treasurer and rates coming down. And so normally I would say we'd see more margin compression, but we were fairly aggressive on our deposit pricing and that's why in the supplement. We provided the monthly deposit cost because we really even haven't felt the full effect of our deposit repricing strategy in March so that will continue to Trend down and then we have index funding that's also going to reprogram

so we believe

The step down in our funding cost is going to offset the step down and in the on the asset side, so we're we're hoping for that 3:05 level.

Got it. Okay, and and so the reporter was 308 this quarter was the core actually 305 like usually have a little bit of accretion income in there, right?

Yeah.

I think it's two basis points differential now.

Yeah, it's the core margin was 306 the fourth quarter. Got it. Okay, great. And then, you know just with respect to the page for provisioning, you know, obviously with the incurred model until you start to see some some more deterioration, you know, the provision levels will form a lower than obviously if you were under Cecil, but you know, would you do you have an idea as to where you think the the loan loss Reserve level should should kind of trend towards I mean he did three basis points. This quarter would be expect something along those lines again, or you expect the sizable increase in the second quarter.

well a couple of things one most likely we will be adopting Cecil if

So you National Emergency gets lifted. And so we under the Cecil model. We have gotten pretty far along on the Cecil modeling if we had adopted a Thursday March 31st, I'll provide a range we could have seen our allowance increase by 25 to 1/3 twenty-five to Thirty 3% as of March 31st. So, yes, it would see so going live. We definitely see higher Provisions for the company.

Got it. Okay. Okay, and then I guess it's last question, you know, are you guys expecting that loan growth here in the second quarter? And then the third quarter just give him what's going on in in your economy or do you think that things kind of Just Hold Steady as as people try to kind of get the feedback underneath them?

Sure, I think Damon will be happy with it holding steady. And honestly, a lot of our focus is just on the loan deferral and PPP programs right now as long as is our customers.

Got it. Okay, and then I guess one last quick question on the PPP. What was the the average rate for those loans like the average fee?

All the average fee. I don't I don't have that. I don't know if you do Debbie.

Was over 4% Okay, great. That's all that I had. Thank you very much.

Our next question will come from Jake with Jenny, please. Go ahead.

Very good afternoon everybody. Hi Jake. I so Mortgage Banking fees. Maybe I'll start there. They were a nice surprise in the course, especially in what's usually a seasonally slow. What trends are you seeing there today? And then how are you thinking about the business as we enter a time of year when Sarah sales volume normally kicks off in conjunction with what's going on with covid-19. Of course.

Craig I'll take that one. You know, we hit an all-time high of the mortgage pipeline that is stepping down from the March 31st level. I will tell you we will hit a record almost a hundred million of mortgage closings in the month of April compared to we did what 500 million last year. So we do see that pipeline coming down at home. We worked through a number of refinance activity. Um, you know, it's hard to predict the second half of the year. I mean, we're will be working. What's in the pipeline now and well, we do have new applications coming in. It's mostly refinance activity as you would expect. So I think the first half is going to be really solid the second half is it really is difficult to forecast what that looks like?

Now that's fair and I can certainly appreciate that but appreciate the color on the second quarter. Certainly is there, you know related to Mortgage Banking revenue. Is there is there any timing difference at all for when you recognize the revenue and then when the corresponding incentives compensate compensation is actually paid out.

There is a little timing and of course at quarter-end you have you do a fair value mark on the commitment. So it's not a cash gain as of March 31st. And so you're right. We recognize that game in the first quarter will be paying Commissions in the second quarter. So there is a little bit of timing.

Okay. All right. Thanks for that with respect to kind of the deposit side. How much do you have in Municipal deposit? And then is there any meaningful impact that you can see to um funding timing? I guess maybe is the way the best way to put it as many cities and towns are potentially delaying their real estate and property tax payments.

Yeah, we do have a sizable Municipal deposit base at the state level and and the local level and we are normal this time of year. We see a seasonal outflow in the first quarter. We have not seen that in some of that is certainly related to the municipal side governments are getting more money. And so that has resulted in a little higher cash level than we would expect that this time of year. It's it's hard to predict what the you know, typically our seasonal inflow happens in June and September. We don't anticipate that kind of pick up for this year.

Okay, that's helpful helpful color. Thank you very much coming back to the margin the 305 that you referenced for the first half of the year at inclusive of the PPP loans that you have booked to date and inclusive of what you might expect to add and kind of the second transfer funding. That's come along. Yeah great question. It excludes the we have we have not run the margin with that included. Obviously we get pick up with the the average fee on those p p p and I do have to correct myself our average fees 3 and 1/2 not the 4% that I am.

Okay. So the fee is three and half plus you get the 1% rate on top of it. But the timing for receiving the fee is obviously impacted by when ever the Forgiveness process starts. So I'm assuming that in the short-term. Um, it's that you're reported margin will probably be negatively impacted by the PPP due to the fact that you assumed that you don't have the meaningful amount of the loans forgiven in the second quarter. Is that fair to say? Yeah, we'll be amortizing the month the the fee upfront you're right. And so the true benefit comes when the the loans are forgiven.

Okay, cool. Thanks one more for me. If I if I can this is kind of more theoretical I guess so, you know economy generally thoughts heavily reliant on tourism and that kind of gets Amplified in the summer months some reports I've seen mentioned name is one of the most economically impacted states in the country from from covid-19 off. I know it's a tough question obviously, but can you quantify what percentage of your loan portfolios you think has outsized exposure to seasonal businesses that have some Reliance on tours?

No, I think if you look at just the tourism aspect of it Jake that you know, anything is related to a Hospitality obviously, you know impacted by that, you know, then you get into the restaurant which is about 3% of the of the commercial book. So you're right, you know, we have to play out to see what happens within, you know within the call it not only the return to work but people returning to normal and off and being back out socially dead.

It's fair. I know I know it's a tough question to ask but it's there's so much uncertainty. I guess that any any additional color that you're able to provide is what I will say that is in in part of the loan deferral program, you know our our commercial team, you know led by Tim Nightingale and and special assets that by Albert life as well as our team started to reach out to all the the hospitality loans that we have their sponsors their their their job is to really start talking to them and and getting a feel for what they're seeing. You know, that only gets us up to this point in time. But opening up those Communication channel now will help us better understand as the next few months unfold for all of them.

Is most of the deferral activity to date in that kind of 13% of total loans that you identified the the lodgings and there wasn't sort of the restaurant like that. I don't have that broken down by within the commercial book. I can say right now the deferrals are leaning a little bit more to the commercial side. We inspect the retail residential side to pick up, you know, probably over the next coming weeks. I don't have that breakdown within you know hospital within that call at commercial break down Craig. I have a regarding the lodging portfolio in particular about 70% of the balances have elected to do the 90-day deferral.

Okay, great. That's it for me. Thank you for thank you for your time and you will.

Again, if you have a question, it is farther than 1 * then 1 ask a question.

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

Good afternoon, Debbie Craig Wali Wali as a follow-up to the last line of questioning since I'm kind of new to the name and newer to me. Can you talk a little bit about the tourist season when it starts to pick up winter? Maybe the peak months and then I'm curious to know how far in advance in the lodging sector two people book trips to Maine. And and if it is say two two or three months in advance or or those trips being canceled or are we in wait-and-see mode?

Yeah, typically we would see you know call it the shoulder season starts up call it around Memorial Day and starts to really wrap up from Fourth of July to Labor Day with a peek, you know with in August then typically we should see a pretty good solid shoulder season from Labor Day through mid-to-late October. That's the the normal cycle that happens and you know, the whole reservation industry has changed quite a bit over the past ten years. If you will it used to be people would book months and months ahead of time and no matter what weather or what-have-you. They would always follow through on that reservation. So we're now people will change those reservations very quickly, you know, because the the online feature of it

but

It goes property by property and location. If you're looking for a place, you know, Coastal Maine, there are some higher-end properties that you got to be a year ahead of time. There are some that you can be you know, two or three months months. You're looking for a room in downtown Portland. And in August of last year. You probably should have been a month or two at least ahead of time. We you know, it's one thing that the the the bookings are definitely changing right now. And first of all, I think everyone's in a weakness. In fact that you know, the, you know, first of all the hotels have to open up and to figure out if the guests are going to show up and that's where everybody is wait and see and I know I'm not necessarily hotel, but I had that with a restaurant owner conversation. I had the other day, you know, he's struggling. When do I open my doors, you know, I can open them, but he was going to show up and down.

And that's the big question right now and I think as we get clarity around return to work and you're seeing this even in the big cities and what those terms are in return home work and and opening up restaurants hotels that will help determine what Gaston customers will do. So it's kind of a month, you know, a chicken and egg type of scenario right now that I I think everybody's in no one really has a clear answer.

Okay, and then what at the peak what what portion are your deposits are coming from from customers that rely on the tourism industry in in in other words, if we're not back if we're not back to some semblance of normal in in Maine through July and August month. What kind of what kind of

Pressure might you see in your your core deposit portfolio.

Your way to measure that.

I think it is challenging to measure that but you are correct that you know, when you think of the impact of this it's more than just the loan sided or deposit based off. We trailed the seasonality and we get these pickups because a lot of businesses are a lot of individuals are are benefiting from the summer season for us. And so I'm sorry I don't have a great answer for you right now Wiley on that. It's hard to estimate understood. This is where it says would be good of Debbie and I were across the table from each other looking at each other, but we're socially distant distant rooms, but I do recall you saying in a few calls ago. Our deposit base has shifted dramatically over the past five years.

We have a lot more commercial deposits.

That we have built up as well as retail deposits and Debbie. I remember you saying that even though we've expanded it. We have very big commercial customers that aren't necessarily related to tourism but we still have that seasonal flow. And so I would just say well that yeah, we'll still have that seasonal flow but that our deposit isn't solely dependent on that even though you know, it's a big part of that but you know, we do we have built up a really good core albeit may be dependent on other Industries.

Okay. All right. Thank you. Last question is as it relates to PPP with the second part of it opening up this week. Can you give us a sense of its kind of the amount of loan pipeline that that you would hope to get approved and around 2? Yeah, we

you know, we probably have a call in about 800 loans, you know call it at some time earlier today that that we had in our pipeline a you know, we're still taking in applications, you know every single day the big concern that we have. These are the real small transactions now and it's real life yesterday was a very frustrating day for the e-trans system from the SPCA. And so now we're just everybody is just in a race to try to get get off the the loans process get them approved and get the money into you know, a customer's hands where they belong but, you know, hopefully by the end of the day when we recap it will be a better picture than a month yesterday from a systems perspective.

You know the dollar amount of those 800 loans. Yeah, probably call it twenty six to Thirty million dollars in that range. Okay. Thanks for the timer. My pleasure. Thank you.

Again, if you were with Jenny KBW or Raymond James, it is star that won to ask a question * then 1 ask your question.

as we have

No further questions. This concludes our question-and-answer session. I would like to turn the conference back over to Greg D for any closing remarks. First of all, I'd like to thank God, you know everyone for attending the call and listening in and obviously our analysts for their their questions and interests and coverage of our stock. I'm only conclude This Time by really thinking she's been with us for 11 years and this organization and she joined us in the fall of 2008 and jumped into a leadership role for us and that Financial crises and not provide that same level of energetic and strong leadership leadership in this current crises albeit. There's a little bit of symmetry in the entrance and exit of Debbie's time with God, but I just want to publicly say Debbie. Thank you for everything. You've done to this organization. We're much better off with you being here and we wish you the best. You know, we have wage.

Some great people joining us with Paraguay.

Bill Martel really complementing a strong executive team that is really just providing excellent leadership to the company and and for our shareholders money to all of you I want to say again. Thank you for your time today. Be safe be well and be healthy. Take care.

The conference has now concluded thank you for attending. Today's presentation may now disconnect.