Q2 2021 Camden National Corp Earnings Call

Good day and welcome to Camden National.

Corp, second quarter 2021 earnings conference call. My name is Betsy and I will be your conference operator for today.

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Please note that this presentation contains forward looking statements, which involve significant risks and uncertainties that may cause actual results to differ differ materially from those projected in the forward looking statements additional information.

Formation 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 are intended to provide meaningful insights and are reconciled with GAAP in your press release.

Today's presenters are Doug to for President Chief Executive Officer, and Greg White Executive Vice President Chief Financial Officer. Please.

Note that this event is being recorded at.

At this time I would like to turn the conference over to Greg Dufour. Please go ahead Sir.

Great. Thank you and welcome to Camden National second quarter 2021 earnings call.

To begin by wishing you and your loved ones of go to health, we were pleased to see strong vaccination rates.

Each of our communities, which is help both businesses and people resuming the normal activities, while remaining cautious about COVID-19.

At Camden National we announced during the quarter that we would operate in the hybrid environment, which allows our employees when appropriate more flexibility in the work schedules and locations.

We've begun to happen.

Employees return to the office and expect to complete the movement to a new schedule is after labor day, we continue to monitor many elements of this work environment, including both productivity metrics as well as employee engagement data as of 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, who will provide more detail on our financial performance.

<unk> for the quarter in a moment.

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 retained 60 per cent of our production in the second quarter.

This was higher than prior quarters are provided.

This is strong return when compared to the investment alternatives as we've seen rates on the 10 year retreat over the past several months, we are pleased with the strategy.

I would also point out that the investments we've made both on the residential mortgage business as well as support areas, including our secondary sales team and financial.

The staff's 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 for.

Scent 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 to the sales of properties and businesses as we as well as refinancing of existing debt.

Expertise.

And both Cree and C&I allows us to participate in those transactions as well as proactively support fires of assets.

Shifting to our local economies.

Seeing a significant amount of tourism continued residential purchases and other business activity.

Like many areas across the country.

<unk> the biggest challenges for our customers.

Our labor shortages wage inflation and general inflation, especially in the building and construction materials.

I would also like the welcome Matt Breese from Stephens, Inc, who recently initiated coverage on Camden National Corporation.

We now have for analyst and firms covering our stock.

Stock, which further strengthens our support of shareholders and provides for a lively discussions.

We announced the dividend of 36 per common share during the quarter, which relates to an annualized dividend yield of 3.02% based on our closing stock price on June 32021.

Tangible book value per.

Per share increased 3% over the past quarter and 10% over the past 12 months and our common.

Our tangible common equity ratio was 887% on June 30, 'twenty, 1.2021 which provides a significant resource to have at our disposal.

I'd now like to turn the discussion over to Craig.

White, our executive Vice President and Chief Financial Officer.

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.

For the 6 months ended June 30th we earned $37.9 million or of $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 hold more a higher percent of residential mortgages in our loan portfolio.

Adjusting for mortgage banking pretax pre provision income was.

Was $1.1 million of 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 point for 7% in the first quarter of this year.

As Greg mentioned during the quarter.

For our board of directors approved a quarterly dividend of 36, <unk>, which was just under a 30% payout ratio our capital position remains strong as evidenced by a $15.2 6% total risk based capital ratio as of June 30th which includes the effect of our 15 million subordinated debt call during the.

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 the $29.12 at the end of the first quarter.

Our net interest margin decreased 5 basis points.

Points to 283 for the quarter from 2.8 the prior quarter. However, adjusting for the impact of both PPP loan income in excess liquidity, our margin declined by only 2 basis points to 289% on a linked quarter basis.

We continue to focus on driving down.

On our cost of deposits on our overall cost of funds, both of which declined by 3 and 5 basis points, respectively compared to the first quarter.

Our net interest income was $1.2 million higher on a linked quarter basis of 1.4 million higher when adjusting for PPP loan income.

The PPP loan income for the second quarter was $1.7 million, which was 217000 lower than the previous quarter.

Total loans increased 2% during the quarter on book grew by 3% when excluding the impact of PPP loans.

The residential real estate in the commercial real estate.

Estate portfolio grew by 7.2%, respectively. During the same period.

Total deposits grew by $82 million of 2% during the second quarter and were up $214 million of 6% on an average balance basis compared to the prior quarter.

Assets.

Asset quality remains strong with nonperforming loans to total loans at <unk>, 6% at the end of the quarter down 5 basis points from point of 3.1 at the end of the first quarter.

Annualized net charge offs for the quarter and year to date were 3 basis points in our past due loans 30 to 89 days fell.

And of all time low of 2 basis points down from 5 basis points for the prior quarter.

Due to improving economic forecasts and continued strong asset quality, we released provisions of $3.4 million during the quarter.

Our allowance for credit losses on loans to total loans ended the quarter.

Well 2 of 9.8 down from 111 as of the end of the prior quarter.

Our coverage ratio of ACL on loans to nonperforming loans increased to 382 times at the end of the quarter from 352 times debt as of March 31.2021.

Quarter of this concludes our comments on the first quarter results. We will now open up the call for questions. Thank you.

We will now begin the question and answer session.

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At this time, we will pause momentarily to assemble our roster.

The first question comes from Damon Delmonte with K B W. Please go ahead.

Hey, good afternoon guys.

You're doing today.

Thanks, Dan.

So first question just wanted to ask a little bit about fee income.

Follow along with what you do with the strategy of of portfolio residential mortgages versus selling them. So that had the impact on the on total fee income this quarter, how do we think about that going forward is.

So the branch strategy will continue to employ and we will look for for growth and raise the mortgages or should we start to see a pickup in the mortgage banking income.

Yeah, Dan on at least for the near term, we're going to continue the portfolio. The majority of residential mortgages, but kind of make a.

That kind of at least the quarterly assessment of whether we keep that strategy based on our interest rate risk position and deposit flows in total cash flow.

Got it and what kind of.

What are some of the characteristics of those loans that youre, putting in the portfolio or the adjustable or are they.

5 years 10 years.

The 10 year fixed.

Yeah, it's mainly 30 year and 15 year fixed the majority of his 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 of lot of hybrid production.

Sure.

If and when that day comes we'll certainly.

Portfolio of the majority of that product.

Okay. All right. So then the <unk>.

Level similar to what we saw this quarter for fee income is reasonable something on that call. It 11 to $11.5 million range.

Yes, that's a reasonable estimate.

We did do a deposit of product redesign, where we're expecting to get a little more on on deposit service charges as we go forward but.

That's that's a reasonable.

Starting point.

Okay, Great and then.

With respect to the the the outlook for the provision.

Division going forward.

Reserve came down a decent amount this quarter with the with the provision recapture do you feel like youre out of pointing our provision will be covering.

Net charge offs, you have to provide them for loan growth or do you think that there's still room to release reserves.

At least over the back half of this year.

Yeah, we.

Look at that frequently and.

Certainly on our our credit profile and the improvement of the economic forecast is the reason we've been releasing and the 1 new element here is the drop in mortgage I'm sorry in interest rates.

That results in accelerated prepayment speeds, that's going to shorten the average lives and it has a life of the loan a calculation that could put a little further pressure also.

On the pressure to release reserves through the got it right because those loans off of year round of law right.

If the.

That's all that I had for now I'll hop out of let somebody else jump on.

Youre welcome. Thanks.

Yeah.

The next question comes from Matthew Breese with Stephens. Please go ahead.

Good afternoon, Hi, Matt.

I appreciate the warm welcome I had a few questions.

Okay. The first 1 was that.

Greg I think you just alluded to this you mentioned in the press release that you've redesigned the consumer checking products you moved from noninterest bearing sort of interest bearing accounts of noninterest bearing Greg you alluded to perhaps higher fees on the back of this can you just give me a bit more color as to what happened to you of what was the change why did you do it.

How permits do you expect debt.

The account change will be from interest bearing to noninterest bearing.

Yes sure.

The real strategy behind it was like a lot of banks as we put things together and call it different.

Call it in the pre Covid world.

We have a lot of grandfathered accounts. So we're basically dealing with the 18 different accounts some of them were relatively low activity.

Again, because they were grandfathered. So we took advantage of the excess liquidity that we had the current interest rate environment and then we went down to for products. So we've got operational efficiency.

And CS.

And just an easier platform the deal with if you will so.

So.

With that that change.

We did shift as you mentioned some from interest bearing the noninterest bearing adjusting fees and some of those fees are for example.

Efficient for paper statements as we're trying to move more and more customers too.

Uh huh to digital.

Statements on.

All in all we moved about $220 million from interest bearing the noninterest bearing.

We expect at this time for that to pretty much.

Paint day that way or have those funds be retained into those categories.

That will play out over the interest rate cycle, but as long as interest rates as low as they are it should pretty much day.

You know.

That movement of should stay over there and.

And see how the consumers are willing to share.

Sort of later on.

Got it okay.

The other thing I was hoping to bounce off he was.

Of the duration of.

Of the asset base and the balance sheet sensitivity so.

You added Securities you moved the Securities duration I think the press release said to 5.9 years from 5.1 years.

And then Youre, adding 15, and 30 year duration of residential loans, just wanted to get a sense for tolerance.

You are from the 10-Q assets today, how much of you're willing to really move that and should we use out of as a proxy for how much residential in securities Youre willing to put on.

Uh huh.

It is a good proxy and part of the answer I believe in the first quarter our sensitivity we were.

Year to net interest income went up about 10% in the up 200 environment. That's now about 6% given the changes.

We made to the balance sheet and the extension of duration on the investment portfolio and booking the fixed rate residential.

So obviously, our exposure is still to declining rates.

That.

Obviously some of the moves we did protected us.

It's 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.

Can we foresee obviously part of the investment strategy was using up excess liquidity.

Certainly.

If deposits continue to come in we will continue to assess if that's the prudent strategy.

But certainly we can see it continuing in the third quarter similar to the second quarter of the results were good.

Okay and could you drill down on just a little bit for us.

The expectations around the securities portfolio do you think Youre bulked up enough there was or more growth to come.

Where we've slowed down there obviously, we had a lot of growth there.

We're hoping is to use the cash flow from the securities portfolio, and any deposit growth and lend it out.

At this point.

So for successful on the loan side I would say you'd see the security portfolio of plateau, maybe even shrink a little bit between now and year end.

Okay.

My last 1 is just around the pipeline of commercial and consumer.

All of it love some color there, what's stronger where youre seeing the strength and maybe talk a little bit about geographies.

That are looking to the strongest.

Yes.

Sure.

Greg and I can both tackle on this for.

Call it of product perspective, obviously residential is still holding strong with.

With.

We continue to see strengthening building up on the commercial side.

Both both inquiry and in C&I lending. So we're really pleased with how it's building up activity is getting stronger and stronger as we go on geography wise.

You know it.

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Really kind of getting spread out throughout the market obviously, though.

Followed by units, it's a good distribution throughout our markets, but from a dollar perspective, obviously that gets oriented to southern Maine, and New Hampshire and in the northeast, Massachusetts market that we deal with.

Is there something else.

Yeah. So on the resi side I did speak to 1 of the.

Senior managers in that area yesterday that the.

Pipeline is about $200 million, which is roughly 70% of the all time peak last last year.

Great.

About 60% of that is refi.

And what.

What we do sell of the margins are still healthy and the.

2.2 and a half even higher I share 2 and a half the 3% range. So.

You know.

But the pipeline still.

Great Okay.

I will I will back out for now.

Uh huh.

That's all I had thank you Youre welcome.

As a reminder, if you have a question. Please press Star then 1 do we joined into the queue.

Okay.

And the next question is a follow up from Damon Delmonte with <unk> W. Please go ahead.

Hey, guys.

Wanted to follow up on the kind of the outlook on the core margin and kind of some thoughts around that Greg.

Do you feel that the.

The margin to be under.

Pressure given the the addition of the residential mortgages or do you feel that.

You kind of found the floor here at this point of the cycle.

Yeah.

So I will point out of our loan yield was stable.

Quarter over quarter.

It was $3.76, both Q1 and Q2.

But are.

Yield on interest, earning assets came down because of as we took deposits in new deposits and put it into investments obviously, that's going to bring the.

The interest, earning asset yield down which did occur.

But.

Damned 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.

Ill.

Potentially good scenario on margin.

But I think it's going to be a little bit of a grind lower just.

The asset yields will continue to compress a little bit if rates stay here.

Even on the loan side, which again was stable quarter over quarter I wouldn't think that would hold if.

Unless rates where the.

There is a little bit if I could just add.

It comes down into how much cash builds.

The excess liquidity.

And I think you probably finding that across.

The most organizations, that's what's kind of pressuring the the.

The margins right now.

Gotcha, Okay, Alright, that's all of that I had thank you.

Welcome. Thank you.

We have no further questions. This concludes our question and answer session I would like to turn the conference back over to Greg fewer with for.

Any closing remarks.

Great well, thank you and thank you everybody.

You know, Matt Damon for your questions as well as everybody else for all your interest and Camden National Corporation.

<unk> and we wish you the best and hope for a great rest of your summers take care.

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