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Camden National Corp (NASDAQ:CAC)
Q1 2020 Earnings Call
Apr 28, 2020, 1:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Camden National Corporation First Quarter 2020 Earnings Conference Call. My name is Grant, and I will be your operator for today's call. [Operator Instructions]

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, Chief Executive Officer and Director; Deborah Jordan, Executive Vice President, Chief Operating Officer; and Greg White, Executive Vice President, Chief Financial Officer. Please note that this event is being recorded.

At this time, I would like to turn the conference over to Gregory Dufour. Please go ahead, sir.

Gregory A. Dufour -- President, Chief Executive Officer and Director

Good afternoon, and thank you, Grant. I want to welcome everyone to Camden National Corporation's First Quarter 2020 Earnings Release Call. I hope you, your families 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 15, as our Executive Vice President and Chief Financial Officer; as well as recognize Debbie Jordan, who announced her intention to retire on April 30 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 and help oversee our coronavirus response work. Bill Martel also joined us as Executive Vice President of Technology and Support Services on April 30. Both Greg and Bill joined a very strong staff in 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 pandemic. At the outset of the crisis, our focus has been on our four constituents: employees, customers, communities and our owners. Believing that our employees are our 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 pay time off policies, allowing many employees to work from home or access their paid time off to care for their children or their love 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 a variety of factors, including spouses and significant others who may be laid off. To help make our work environments as safe as they could be, we moved over 300 additional employees to work-from-home status and provide a premium pay for those employees who would be working in our banking centers and other high-risk areas. Even though our employees were personally going through an extremely stressful period, I am proud of how they responded to our customers. Just some of the examples include, that we transitioned our retail banking centers to service customers by drive up or in our lobbies by appointment only.

In March, we saw our banking centers transactions declined by 13% compared to 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 Act's Paycheck Protection Program has been significant, with 1,649 loans totaling $197 million processed as of April 22. And behind the scenes, we asked over 70 lenders, portfolio managers, banking center managers and loan processing employees to be reassigned to this effort. We were also one of the first banks in Maine to offer payment deferrals and late fee waivers as well. As of April 22, we have provided payment deferrals on over 1,500 loans with outstanding loan balances of 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 communities we serve. Usually, our employees are hands-on with the many community organizations we work with, and they are frustrated by being limited during this time. But our support has included leveraging our Hope@Home efforts with local homeless shelters, which provides unrestricted funding to those who serve the homeless.

We're providing financial support to local food banks. And we initiated support to Finding Our Voices, an emerging organization that provides support to the 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 31, 2020, we had a tangible common equity ratio of 8.78%, a Tier one leverage ratio of 12.56%, and a total risk-based capital ratio of 13.81%. This provides a solid capital capacity as we enter the uncertainty of the next several weeks. Asset quality was in a strong position at March 31, 2020, with nonperforming assets at 0.23% of total assets and an annualized first quarter net charge-off of just five basis points of average loans. Our reserve for loan losses was $26.5 million at March 31, 2020, or 0.84% of total loans. During the first quarter of 2020, we provided $1.8 million of provision expense for loan losses. We decided to delay adoption of CECL as allowed by the CARES Act, so we could reallocate resources to our pandemic response activities and further support our customers during this time. We repurchased over 217,000 shares in the first quarter, before suspending the program on March 20, 2020, as the health crisis unfolded, and we prioritized capital preservation. After analyzing our capital position, we did declare a $0.33 per share dividend for the first quarter.

I'd like to now introduce Debbie, who will provide a more detailed financial review.

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Good 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 $13.5 million for the first quarter, resulting in a return on average assets of 1.21% and a return on tangible common equity of 14.35%. In comparing results to the previous quarter, net income declined $1.7 million or 11% as a result of an increase in credit provision of $1.6 million, combined with a 2% decline in revenue between periods. From a preprovision 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 C&I loans, and our total deposit base grew 1%. Net interest income of $31.8 million declined 1% from the previous quarter due to a four 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 three basis point increase in our fourth quarter margin. Back in January, 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 targeting that margin level. Despite the ongoing pressure of our loan and investment yields repricing down, we have been aggressive in reducing our funding cost. On Page six of the supplemental earnings call presentation, we reported deposit costs for the last six months including a month-over-month decline of 15 basis points in March. On a linked-quarter basis, fee income for the first quarter of $11.4 million decreased 5% compared to the fourth quarter, last quarter, we recognized equity security gains of $866,000 and our annual debit card incentive of $579,000. Mortgage banking fees increased $1.4 million between periods due to record level refinancing activity.

Our mortgage pipeline at March 31 was $258 million compared to $89 million at year-end. Operating expenses of $24.6 million for the first quarter declined 1% compared to the previous quarter, and our non-GAAP efficiency ratio for the quarter was 56.45%.As disclosed in our earnings release, the company did not adopt CECL during the first quarter as we refocused internal resources on pandemic-related activities, including the loan relief programs discussed by Greg. The company will adopt CECL as required by the CARES Act at the earlier of the termination of the national emergency concerning COVID-19 or December 31. 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. The increase in the loan loss provision for the first quarter was driven by growth in loans and the uncertainty around the current economic environment resulting from COVID-19. We would expect the level of provision for loan losses in 2020 to increase as more data becomes available regarding trends in our loan portfolio and the economic conditions in our geographic footprint. The supplemental presentation includes information related to our investment and liquidity position, our loan portfolio and regulatory capital capacity.

In particular, Pages nine and 10 of the presentation provide additional transparency into our loan mix and 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 31, 2020, lodging represented $252 million or 8% of total loans outstanding. Over half these loans are from major hotel brands 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 exposure primarily on properties located within major cities such as Portland, Portsmouth, Boston and Burlington. In addition, our top 10 clients account for almost 50% of our commercial real estate hotel exposure. Each of these sponsors have extensive hotel experience. Slides 12 and 13 of the presentation depict our strong asset quality and capital position as of March 31.

That concludes our comments on the first quarter results. We'll now open the call up for questions. Thank you.

Questions and Answers:

Operator

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

Damon DelMonte -- KBW -- Analyst

Hi, good afternoon, everyone. hope everybody's doing well today.

Gregory A. Dufour -- President, Chief Executive Officer and Director

Good. Thanks.

Damon DelMonte -- KBW -- Analyst

Great. Great. So first question, just talk a little bit more about the margin. Debbie, could you just kind of repeat 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 core margin. And you kind of feel that you could still do that at this point?

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Yes. When we forecasted the 3.05%, we didn't have the 150 basis point decline and treasury 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 reprice down. So we believe the step down in our funding cost is going to offset the step down in the on the asset side. So we're hoping for that 3.05% level.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. And so the reported was 3.08% this quarter. Was the core actually 3.05%? Like you usually have a little bit of accretion income in there, right?

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Yes. I think it's two basis points differential now. Let's see. Yes. The core margin was 3.06%. The fourth quarter margin was 3.09%.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. Great. And then just with respect to the outlook for provisioning, obviously, with the incurred model, and so you start to see some more deterioration, the provision levels will remain lower than, obviously, if you're under CECL. But do you have an idea as to where you think the loan loss reserve level should kind of trend toward? I mean, if you did three basis points this quarter, would we expect something along those lines again? Or do you expect a sizable increase in the second quarter?

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Well, a couple of things. One, most likely, we will be adopting CECL if the national emergency gets lifted. And so we under the CECL model, we have gotten pretty far along on the CECL modeling. If we had adopted as of March 31, I'll provide a range. We could have seen our allowance increase by 25% to 1/3 25% to 33% as of March 31. So yes, with CECL going live, we definitely see higher provisions for the company.

Damon DelMonte -- KBW -- Analyst

Got it. Okay. And then I guess just last question. Are you guys expecting net loan growth here in the second quarter and in the third quarter, just given what's going on in your economies? Or do you think that things kind of just hold steady as people try to kind of get the feedback underneath them?

Gregory A. Dufour -- President, Chief Executive Officer and Director

Sure. I think, Damon, we'll 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 is our customers.

Damon DelMonte -- KBW -- Analyst

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

Gregory A. Dufour -- President, Chief Executive Officer and Director

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

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

It was over 4%.

Damon DelMonte -- KBW -- Analyst

Okay, great. That's all that I had. Thank you very much.

Gregory A. Dufour -- President, Chief Executive Officer and Director

Great. Thank you, Jim.

Operator

Our next question will come from Jake Civiello with Janney. Please go ahead.

Jake Civiello -- Janney -- Analyst

Hey, good afternoon, everybody.

Gregory A. Dufour -- President, Chief Executive Officer and Director

Hi, Jake.

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Hi, Jake.

Jake Civiello -- Janney -- Analyst

Hi. So mortgage banking fees, maybe I'll start there. They were a nice surprise in the quarter, especially in what's usually a seasonally slow period. What trends are you seeing there today? And then how are you thinking about the business as we enter a time of year when sales volume normally ticks higher in conjunction with what's going on with COVID-19, of course.

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Greg, I'll take that one. We hit an all-time high of the mortgage pipeline. That is stepping down from the March 31 level. I will tell you, we will hit a record almost $100 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 as we work through a number of refinance activity. It's hard to predict the second half of the year. I mean we're we'll be working what's in the pipeline now. And 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, it really is difficult to forecast what that looks like.

Jake Civiello -- Janney -- Analyst

No, that's fair. And I can certainly appreciate that, but I appreciate the color on the second quarter, certainly. Is there related to mortgage banking revenue, is there any timing difference at all for when you recognize the revenue? And then when the corresponding incentive compensation is actually paid out?

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

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 31. And so you're right. We recognize that gain in the first quarter we'll be paying in commissions in the second quarter. So there is a little bit of timing.

Jake Civiello -- Janney -- Analyst

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

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Yes. We do have a sizable municipal deposit base at the state level and the local level. And we are normally, this time of year, we see a seasonal outflow in the first quarter. We have not seen that, and 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 at this time of year. It's hard to predict what the typically, our seasonal inflow happens in August and September. We don't anticipate that kind of pickup for this year.

Jake Civiello -- Janney -- Analyst

Okay, that's helpful. Coming back to the margin, the 3.05% that you referenced for the first half of the year, is that inclusive of the PPP loans that you have booked to date and inclusive of what you might expect to add in kind of the second tranche of funding that's come along?

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Yes, great question. It excludes the PPP. We have not run the margin with that included. Obviously, we'd get a pickup with the average fee on those PPP, and I do have to correct myself. Our average fee is 3.5%, not the 4% that I provided, Damon.

Jake Civiello -- Janney -- Analyst

Okay. So the fee is 3.5%, plus you get the 1% rate on top of it, but the timing for receiving the fee is obviously impacted by whenever the forgiveness process starts. So I'm assuming that in the short term, that your reported margin will probably be negatively impacted by the PPP due to the fact that you assuming that you don't have a meaningful amount of the loans forgiven in the second quarter. Is that fair to say?

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Yes. We'll be amortizing the fee upfront, you're right. And so the true benefit comes when the loans are forgiven.

Jake Civiello -- Janney -- Analyst

Okay, cool. Thanks. And then just one more for me, if I can. This is kind of more theoretical, I guess. So Maine's economy is generally thought to be heavily reliant on tourism, and that kind of gets amplified in the summer months. Some reports I've seen mentioned Maine as one of the most economically impacted states in the country from COVID-19. I know it's a tough question, obviously. But can you quantify what percentage of your loan portfolio do you think has outsized exposure to seasonal businesses that have some reliance on tourism?

Gregory A. Dufour -- President, Chief Executive Officer and Director

Well, I think if you look at just the tourism aspect of it, Jake, that anything is related to hospitalities, obviously, impacted by that. Then you get into the restaurant, which is about 3% of the commercial book. So you're right. We have to play out to see what happens within the, call it, not only the return to work, but people returning to normal and being back out socially.

Jake Civiello -- Janney -- Analyst

That's fair. I know it's a tough question to ask, but it's there's so much uncertainty, I guess, that any additional color that you're able to provide is helpful.

Gregory A. Dufour -- President, Chief Executive Officer and Director

What I will say is and part of the loan deferral program, our commercial team, led by Tim Nightingale and special assets, led by Al Butler, as well as our CRE team started to reach out to all the hospitality loans that we have, the sponsors, their owners to really start talking to them and getting a feel for what they're seeing. That only gets us up to this point in time. But opening up those communication channels now will help us better understand as the next few months unfold for all of them.

Jake Civiello -- Janney -- Analyst

Is most of the deferral activity to date in that kind of 13% of total loans that you identified, those the lodgings, living facilities, restaurants, things like that?

Gregory A. Dufour -- President, Chief Executive Officer and Director

Yes. 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 expect the retail residential side to pick up probably over the next coming weeks. I don't have that breakdown within hospitality, within that, call it, commercial breakdown.

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Greg, I have that. Regarding the lodging portfolio, in particular, about 70% of the balances have elected to do the 90-day deferral.

Jake Civiello -- Janney -- Analyst

Okay, great. That's it for me. Thank you for your time and see you all.

Operator

[Operator Instructions] Our next question comes from William Wallace with Raymond James. Please go ahead.

William Wallace -- Raymond James -- Analyst

Good afternoon Debbie.

Gregory A. Dufour -- President, Chief Executive Officer and Director

Hi Willy.

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Hi Willy.

William Wallace -- Raymond James -- Analyst

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

Gregory A. Dufour -- President, Chief Executive Officer and Director

Yes. Typically, we would see, call it, the shoulder season starts off, call around Memorial Day. And starts to really ramp up from 4th of July to Labor Day with the peak within August. Then typically, we should see a pretty good, solid shoulder season from Labor Day through mid- to late October. That's the, call it, the normal cycle that happens. The whole reservation industry has changed quite a bit over the past 10 years, if you will. It used to be people would book months and months ahead of time. And no matter what whether or what have you, they would always follow through in that reservation. So we're now people will change those reservations very quickly because the online feature of it. But it goes property-by-property and location. If you're looking for a place, 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 two or three months. If you're looking for a room in downtown Portland in August of last year, you probably should have been a month or two, at least ahead of time.

We it's one thing that the bookings are definitely changing right now. And first of all, I think everyone is in wait-and-see mode, Wally, that 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 not necessarily hotel, but I had that with a restaurant owner, conversation I had the other day. He's struggling, when do I open my doors? I can open them, but who's going to show up. 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 to work and opening up restaurants, hotels, that will help determine what guests and customers will do. So it's kind of a chicken and egg type of scenario right now that I think everybody is in. No one really has a clear answer.

William Wallace -- Raymond James -- Analyst

Okay. And then what at the peak, what portion of your deposits are coming from customers that rely on the tourism industry? In other words, if we're not back to some semblance of normal in Maine through July and August time, what kind of pressure might you see in your core deposit portfolio? You know how to measure that?

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

I think it is a little challenging to measure that, but you are correct that when you think of the impact of this, it's more than just the loan side. Our deposit base is we trailed the seasonality, and we get these pickups because a lot of businesses, a lot of individuals are benefiting from the summer season for us. And so sorry, I don't have a great answer for you right now, Wally, on that. It's hard to estimate.

Gregory A. Dufour -- President, Chief Executive Officer and Director

And this is where it'd be good if Debbie and I were across the table from each other, looking at each other, but we're socially distant in distant rooms, but I do recall Debbie 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, Wally, that yes, we'll still have that seasonal flow. But that our deposit isn't solely dependent on that even though it's a big part of that. But we do we have built up a really good core, albeit may be dependent on other industries.

William Wallace -- Raymond James -- Analyst

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 as kind of the amount of loans in the pipeline that you would hope to get approved in round two?

Gregory A. Dufour -- President, Chief Executive Officer and Director

Yes. We probably have, call it, about 800 loans, call it, some time earlier today that we had in our pipeline. We're still taking in applications every single day. The big concern that we have, these are the real small transactions now. And it's really yesterday was a very frustrating day for the E-Tran system from the SBA. And so now we're just everybody is just in a race to try to get the loans processed, get them approved and get the money into our customers' hands where they belong. But hopefully, by the end of the day, when we recap, it will be a better picture than what is yesterday from a system perspective.

William Wallace -- Raymond James -- Analyst

Do you know the dollar amount of those 800 loans?

Gregory A. Dufour -- President, Chief Executive Officer and Director

Yes, probably, call it, $26 million to $30 million in that range.

William Wallace -- Raymond James -- Analyst

Okay. Great. Thanks for the time. I appreciate it.

Gregory A. Dufour -- President, Chief Executive Officer and Director

My pleasure. Thank you.

Operator

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

Gregory A. Dufour -- President, Chief Executive Officer and Director

Great. First of all, I'd like to thank everyone for attending the call and listening in. And obviously, our analysts for their questions and interest and coverage of our stock. I want to conclude this time by really thanking Debbie, she's been with us for 11 years in this organization, and she joined us in the fall of 2008 and jumped into a leadership role for us in that financial crisis. And now she's providing that same level of energetic and stronger leadership in this current crisis, albeit there's a little bit of symmetry in the entrance and exit of Debbie's time with us. But I just want to publicly say, Debbie, thank you for everything you've been to this organization. We're much better off with you being here, and we wish you the best. We have some great people joining us, with Greg White and Bill Martel, really complementing a strong executive team that is really just providing excellent leadership to the company and for our shareholders. To all of you, I want to say, again, thank you for your time today. Be safe, be well and be healthy. Take care.

Operator

[Operator Closing Remarks]

Duration: 36 minutes

Call participants:

Gregory A. Dufour -- President, Chief Executive Officer and Director

Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer

Damon DelMonte -- KBW -- Analyst

Jake Civiello -- Janney -- Analyst

William Wallace -- Raymond James -- Analyst

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