Q3 2020 Camden National Corp Earnings Call
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Good day and welcome to the Camden National Corporation third quarter was 2020 <unk> earnings Conference call. My name is family and I'll 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. If you require operator.
Last month at any time during the call. Please press Star then zero. 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 Companys 2019 annual report on form 10-K, and other filings with the SCC. 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 to today's presentation to non-GAAP financial measures are indicated to provide meaningful insights and are reconciled with GAAP in your press release todays presentation are Greg Dufour, President Chief Executive Officer, and Mike Archer.
<unk> Senior Vice President corporate controller. 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.
Thank you Emily and welcome everyone to Camden National Corporation third quarter 2020 earnings release Conference call.
I'd like to start off by wishing good health to you and your loved ones. During this time before.
Unfortunately, Greg White, our CFO, who is unable to join todays call, but with us today to pinch hit for Gregg as Mike Archer, Our senior Vice President corporate controller.
Before I turn the discussion over to Mike I'd like to make a few comments.
Earlier today, we reported third quarter 2020, net income after taxes of $16.8 million, an increase of 16% compared to the third quarter of 2019.
On a diluted earnings per share basis, we earned one dollar an 11 cents or 18% greater than the third quarter of 2019.
These results demonstrate the financial and strategic strength of our organization.
Commitment of our employees and the value of the investments we've made over the years.
During the quarter, we saw our COVID-19 deferred loan balances declined from 16.4% of total loans on June 32020% to 5.5% of total loans on September 32020.
Our overall asset quality has continued to remain strong with nonperforming assets at 0.22% total assets on September 32020.
And the second quarter of 2020, we reported a provision for credit losses of $9.4 million as we prudently built up our reserves and then in the third quarter, we recorded another million dollars provision.
These actions allowed us to expand our allowance for loan losses to 1.11% of total loans as of September Thirtyth 2020.
And that's significantly up from 0.81% reported on December 31, 2019.
Our efficiency ratio for the third quarter was 50.6% and excluded a $1.2 million legal settlement expense during the quarter.
Early this year, we were named in the lawsuit regarding overdraft fees and while we are very confident our overdraft practices were and are appropriate and accurately reflected in our disclosures. We faced the unfortunate decision to go through a lengthy and expensive litigation or to settle and cap our exposure.
Ultimately determined to avoid the lengthy and costly litigation and settle despite our confidence in our practices.
Economically main has benefited from a reopening of business during the third quarter, which allowed many tours related businesses to see a ramp up in activity during the key summer months of July and August.
This provided much welcome relief across the state.
Means unemployment rate for September was 6.1% down from an average of 8.8% reported for the second quarter of this year.
Many of you have probably read that there are several areas of our economy that performing extremely well as highlighted by means of Red Hot real estate market.
This has resulted in record breaking mortgage volumes.
And I want to specifically point out the hard work of our residential mortgage team that they have done over the past several months to serve our customers and to close those mortgages.
Like every CEO across the country I'm very proud of our employees, especially during these challenging times, our people and culture are the key fundamental foundational elements in delivering our strategic operation and financial results.
For the past few years, we've engaged Gallup.
To conduct our employee engagement surveys.
And in the midst of pandemic, we surveyed our employees in August our latest results showed an improvement in employee engagement. Even during these times are remote work hard decisions and intensity.
This proves the resiliency of both our employees and our managers, especially those who are on the ground leading that.
Finally, I'd like to point out that during the quarter, we announced that Tim Nightingale took on the position of executive Vice President and Chief Credit Officer for the organization.
Tim was previously executive Vice President commercial banking. This further deepens, our credit bench, Brian Smith, who is director of commercial banking for central and Midcoast, Maine before taking on the job as senior Vice President President of credit administration.
Was named Executive Vice President commercial banking, replacing Tim.
I'm very pleased to be able to tap into two strong internal leaders for these critical roles.
Now I'd like to turn the discussion over to Mike Archer.
Thanks, Greg and good afternoon, everyone I hope everyone is well as Greg discussed we had a really strong quarter. It was actually a record earnings quarter for us with diluted earnings per share of $1.11.
Compared to 94 cents for the same period last year, an increase of 18% year over year.
We paid a dividend of 33 cents during the quarter, which is a payout ratio of 30% and were able to repurchase almost 48000 shares opportunistically, all while continuing to grow and strengthen our capital position.
Our total risk based capital ratio increased by 59 basis points during the quarter to 15.15% at September Thirtyth.
We also had strong tangible capital growth in the third quarter highlighted by tangible book value per share growing 83 cents or 3% to $28028 at 14 cents at quarter end.
Our net interest margin for the third quarter was 3% compared to 311 last quarter.
Earning asset yields decreased 16 basis point during the quarter due to the interest rate environment as well as certain investment income differences between periods, causing a five basis point decrease and excess liquidity, causing a decrease of three basis points. This.
This is partially offset by a decrease in funding costs and six basis points during the quarter.
As we noted in previous quarters, we continue to focus on managing funding cost down to help combat asset yield pressures.
Our actions included lowering both the deposit rates and diligently reviewing exception pricing.
Average loans for the third quarter. This year grew by $220 million or 7% over the third quarter last year.
Excluding SP, a paycheck protection program loans average loans were flat between periods as SP, a PPP loans or forgive and over the coming quarters. We expect these loan balances will decrease at an accelerated pace.
Average deposits for the third quarter of 2020 grew by $494 million or 15% over the third quarter last year, which included average growth in checking account balances of 25% over this period.
Asset quality remained strong with non performing loans to total loans at 0.34% at the end of the quarter consistent with last quarter and down from 0.43% at September 30 last year.
Annualized net charge offs to average loans was one basis points for the quarter down from five basis points last quarter, and 16 basis points for the same period a year ago.
Our allowance for loan losses on the incurred loss model was 1.11% of total loans at the end of this quarter up from 1.07% at the end of the second quarter and 0.83% at the end of the third quarter last year.
I'd be adopted see so as of September Thirtyth, we estimate our allowance for credit losses, which includes both the allowance for loan losses and reserve on loan commitments would event between $39 million and 43 million or 1.19% to 1.31% of total loans.
Excluding ESB loans, our allowance for loan losses was 1.19% at the end of the third quarter compared to 1.14% at the end of the second quarter.
Our coverage ratio of reserves to non performing loans increased to 3.3 times at September Thirtyth upfront.
Up from 3.1 times at June Thirtyth, and 1.9 times as of 932019.
Lastly, we have provided additional information on deferred loans on page nine of the supplemental deck that we provided with our earnings release as of September Thirtyth, our loans remaining on short term deferral or $181 million or 5.5% of total loans down from $547 million or 16.4% of total.
Loans at June Thirtyth.
Included with our short term deferral as of September Thirtyth were $68 million of consumer loans for which we granted an automatic 90 day extension to the original 90 day deferral period, unless the borrower had opted out.
The vast majority of these loans will reach the 180 day expiration by the end of November.
As the payment deferral period ends for these borrowers the loans return to payment status will continue to monitor these loans closely and will be quick to action, we see signs of payment risk our stress test.
This concludes our comments on the third quarter results and our open up the call for questions. Thank you.
Okay.
We will now begin the question and answer session.
And a question you May press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys if.
Any time your question.
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This time, we will pause momentarily to assemble our roster.
The first question comes from Damon Delmonte from KBW. Please go ahead.
Hey, good afternoon, guys I was gone today.
Good David are you.
Good good to hear.
So first question just want to talk a little about the margin.
Oh, probably for Mike here, you are just talking a little bit about kind of what you're seeing here as we as we progress through the fourth quarter and kind of how you think things are going to it's going to shape up for the rest of the year.
Sure happy to do that in any help as well.
I think I think first off I think the key right now and spoke about in my comments is the excess liquidity that exist on the balance sheet.
And certainly this is common across the industry right now that will certainly be a key lever for us as we manage through the margin as well as net interest income as we move forward.
No at at quarter end, we had roughly $298 million of excess cash at quarter end and certainly we are working to manage manage that down and doing so as we even currently as we speak.
No really as we think about this couple of levers that we're looking at is that I spoke to in my comments just around managing your deposit outflows as well as investment purchases certainly yes.
Certainly we are looking into lowering the non relationship deposits exception rate those deposit relationships are really asset sensitive interest rate sensitive excuse me on the line that continues to be a real focus for us and the team's working diligently to go to work their way through that.
Yeah, and I think as I mentioned before is certainly another opportunity is invest in portfolio, though we all know where rates are on the investment portfolio right now and so.
Essentially we are looking at swapping rate data for as currently at 10 basis points in cash for approximately a little over a 100 basis points.
Yeah. Another lever that we have and certainly were working through I would say right now Dave and just in terms of working through budget for the 2021.
Upcoming 2021 cycle here is just around our our bill.
Billy to sell mortgage production certainly we've sold a lot this year over 60% of our production.
We saw the secondary market as we look forward I think it'd be a balance of.
The balance of the protections in NIM and net interest income as well as working through.
The fee income or is that we get from the from the sales.
The last thing maybe I'd mention too is just as we look forward. We do have about me as I think it's approximately 53% of our Cds.
They are looking to reprice over the next six six months or so.
So again, that's another opportunity for us as we think about margin net interest income moving forward.
Okay. So it sounds like you guys do had some levers in front of you that good.
Hopefully keep things relatively flat from from this quarter.
That's fair.
Yeah, I think when we we still expect a little bit of margin compression likely as we move forward I'm not sure we've quite quite bottomed out but I.
I think we're at 3% as I mentioned.
In their earnings call here.
We could see that dip a little bit lower in the fourth quarter, but it's I think as we move forward for the you know like I mentioned for 2021, a part of this is me off can.
And in some of these strategy set and finalizing it but it really is going to be a matter of beyond the put that excess liquidity or can you.
Well. This is stipulated off in fact, if if we had additional stimulus and so forth. There other things kind of change in that regard that will also be a consideration that we'll have to work through.
Right right. Okay. That's.
That's helpful. Thanks for the color.
Then Greg I guess, you know can you just give a little perspective on kind of the dynamics of the of the southern Maine market.
I would imagine.
From what I've seen here in Connecticut, you know, there's a lot of people that are looking for first second homes or new homes, just kind of trying to get out of the more urban areas and get into that some of the.
Oh safer, but nice area of the new England marketplace. So can you talk about how maybe how the market has has been performing over the summer and kind of what that means for the local economies.
Sure and.
And you're right the southern Maine market, that's where a lot of the focus is obviously centered around Portland.
It's a very.
Even before this obviously very nice liveable city.
The quality of life. We are seeing is as you know a lot of non metropolitan markets are seeing.
Influx of people either buying as you mentioned second homes or are moving their primary residence.
You know into these areas and part of it is that we're everyone's discovering is going to work remote.
And it's not just.
A few industries, our high tech industries or something like that.
Even today.
Probably about 70% of our non banking center employees are working remote.
So everyone seeing that flexibility and southern means picking up on it we're.
We're seeing that obviously in.
Breaking records on mortgage volumes were probably two or three times more than pre Colcord records right now.
So that's really benefiting the state and that's going to have a trickle effect ultimately, especially as things.
We move into a post co bid.
Post vaccine.
No environment, where those.
Those people stay and be part of our communities and just lift everything up with that.
The one thing that doesn't get a lot of other notice though is areas outside of southern Maine are also seeing the same impact, albeit not as.
Call it frothy as what you'd see.
In southern Maine, but when you move into central Maine, and even northern Maine, where we really don't have a lot of exposure there.
Theres still real estate is moving up there.
So it's kind of all pushing through.
Throughout the state in different areas and again, it's it's people taking advantage of the quality of life safe.
Safer in some People's mind in a metropolitan area and leveraging technology, so that that does bode well for.
Increasing the population of the state, which as you know.
And one of the drags that we've had for years.
Got it okay. Good color. Thank you.
Gives us but my third question here just talking about credit trends have been has been really really strong there.
The reserve has has gone up throughout.
Throughout the course of the year you guys at a point, where you kind of comfortable with given the underlying risk to the portfolio and where your reserve is.
Outside of Stifel, you feel uncomfortable with where where you are in it from a provision standpoint, you know can we look for something more like the first and third quarters the than what we saw in the second quarter.
Well I I started my banking career 1987, so I've been through these things a lot and I don't know if I'll ever say I'm comfortable with it right now.
But.
You know, we're going to prudently build up our our reserves as we can you know seasonal will be different obviously than historically, what we've done before but.
Well I think.
As you see our actions in the second quarter.
Change we stepped up we you.
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Put in a lot of money in into the reserves building that up.
Million dollars going in this quarter I think.
Lastly, not to that magnitude, but it says we're monitoring it and Hum Pete.
You know what I would say is.
No.
We're hoping that the big.
The big call it credit.
Forecast or those parameters are behind us, but even putting in a million dollars is look we're going to step up whenever we can and we're always going to lean to the site to be prudent.
To be conservative on our balance sheet, and that's who we are and.
And Thats, how we want to kind of move forward as far as what that means.
We are going to react.
Accordingly.
Good news is we're you know we're not seeing anything come on our books, but there's still a lot of stimulus out there.
We're letting it play out but.
As we have more Tim into that Chief credit officer role to complement the already strong credit and special asset people that we had its say, we're we're serious and we're going to we're going to get in front of this as a as we have in the past.
Got it okay.
That's all I had thank you very much great. Thank you Dan.
Thank you.
Again, if you have a question. Please press Star then one our next question comes from Shane Safalow from Janney.
Please go ahead.
Hey, good afternoon guys.
Hi, Jake Hi, Jake.
Staying on the same credit theme here.
Your substandard loans increased over 80% from the first quarter to the second quarter do you happen to have what your classified loans were in the third quarter.
I don't have those right in front of me, Jay, but thats, probably something that.
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And Im just scanning really quick in our supplemental information.
Probably the best thing is front for me to say rather than to toss something out there trying to scramble and get it is to to say, we'll we'll check in on that and put that out there.
Okay. Okay I appreciate that.
Broadly speaking would you would you be comfortable saying that you're taking a hard look at your at adjusting your risk ratings and you would expect to see as the classified loans continued to move higher as you come into 2021 Oh.
Oh, but.
Absolutely, we're taking a much stronger look at it.
When you.
If we're looking at anything yeah. It's.
Underwriting they have to have it what what is their post Colvin story, there we need to really understand what's going on there that crosses all all industries because were all impacted by it and here again, that's why we put the lead.
The executive spotlight on it through Tim's position that the underwriting aspect of it.
Reports up to him now so.
So again, you know we're kind of following the playbook of past recessions and downturns.
Have you know really scrutinizing everything that we do.
Great great.
Mike. Thank you Kurt touching on some of your push and pull thoughts about the margin.
Can I ask you have you evaluated any alternatives to reduce the cost of some of your borrowings.
And is any of the outstanding subordinated debt.
Callable.
We have made from a borrowings perspective, I think there's 25 million of it that's out there and.
Yeah Collin.
Callable are pre payable or what have you.
With that said I think it's a pretty hefty hefty tag hefty fee to do that Jake So I mean, I think admittedly at this point it hasn't been a key.
A key focus but I would also say that everything right now is on the table as we certainly understand the need for from a margin perspective and interest income as we move forward.
Okay, great. Thank you for that.
One more question for me.
You expect to stay active with share repurchases in the fourth quarter.
No I think what I would say the best way to do it and say we're going to be opportunistic you know the market is.
Obviously jumping around a we went back into the market because we saw that opportunity and what we believe was a.
Situation being undervalued, even though we could argue that even at today's levels. You know I think the thing to read into it is.
You know, we're seeing the cash flow come in and again, the great thing about cans and is that we throw off a lot of cash flow.
We want to make sure that we are prudent have enough capital but.
You know also be able to take advantage of things like when we see there's an opportunity so.
You know, we'll we'll be opportunistic as probably probably not the answer you want to hear but probably as specific as I can get [laughter].
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I understand I appreciate the time guys. Thank you very much our pleasure. Thank you.
Once again, if you have a question. Please press Star then one.
Okay.
This concludes our question and answer session I would like to turn the conference over.
Back over to Greg before for closing remarks, great. Thank you I just want to really thank everyone for attending the call and.
And listening in from.
The analysts who take the time to follow our stock in and do a good job analyzing that tend to various other parties investors that are also listening in.
Your your interest and support of the company is very much appreciated by all of US. Thank you for your time today be safety, well and be healthy take care.
This conference is now concluded. Thank you for attending today's presentation you may now disconnect.