Camden National Corporation

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. All participants will be in the listen only mode during today's presentation. Following the presentation, we will conduct a question and answer session. If you require operator assistance at any time during the call, please press star then zero. Please note, that this presentation contains forward-looking statements which involve insignificant 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 Greg Dufour. Please go ahead, sir.

Good afternoon. Thank you, Grant. I want to welcome everyone to Canada 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 15th as our Executive Vice President and Chief Financial Officer, as well as recognized Debbie Jordan, who announced her 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 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 in their respective areas who, along with all of our leaders and employees, have done an amazing job the past several weeks. We've 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 paid time off policies, allowing many employees to work from home or access their paid time off to care for their children or 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 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 provided 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 decline 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 22nd. 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 22nd, 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 at 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 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 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 non-performing 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 on 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 20th, 2020 as the health crisis unfolded and we prioritized capital preservation. After analyzing our capital position, we did declare a 33 cent per share dividend for the first quarter. I'd like to now introduce Debbie, who will provide a more detailed financial review.

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 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 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 308. 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 305 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 costs. On page 6 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, the 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 31st 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. will adopt CECL as required by the CARES Act at the earlier of the termination of the national emergency concern in 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. 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 9 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 has extensive hotel experience. Slides 12 and 13 of the presentation depict our strong asset quality and capital position as of March 31st. That concludes our comments on the first quarter results. We'll now open the call up for questions. Thank you.