Camden National Corporation

Good day and welcome to Camden National Corporation second quarter 2020 earnings conference call. My name is Kate and I will 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 the operator's assistance at any time during the call, please press and many more. 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 reference in today's presentation to non-GAAP financial measures are intended to provide information and a reconciled with gap in your press release. Today's presenters are Greg DeFore, President, Chief Executive 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 DeFore. Please go ahead, sir.

Thank you, Kate. And I want to welcome everyone to Canada National Corporation's earnings conference call for the second quarter. And I hope that you and your loved ones are safe and healthy. Earlier today, we reported second quarter net income of $10.9 million, or 17% below the second quarter of 2019, and diluted earnings per share of 73 cents, or 14% below the same period last year. On a year-to-date basis, net income was $24.4 million, 11% below prior year levels, while diluted earnings per share were $1.62 or 8% below the first six months of 2019. On a more positive note, our pre-tax, pre-provision earnings of $23.1 million second quarter 2020 was an increase of $5.4 million over the second quarter of 2019, demonstrating and the underlying operations of the company. This performance was driven by higher provision for loan losses, increased revenues from mortgage banking and revenues from our participation in the PPP program. Our CFO, Greg White, who you met last quarter, will provide additional detail into our performance in a moment, but I'd like to provide some additional insights as well. Camden National delayed its adoption of CECL as allowed by the CARES Act so we use the incurred loss model to determine the reported allowance for credit losses and resulting provision expense year to date. However, we have run both CECL and the incurred loss model in parallel and have provided additional discussion in our supplemental investor package on what our allowance for credit losses would potentially have been under CECL. We expect to provide even more discussion in our 10Q. Greg will also elaborate on this in his comments. I'd like to switch gears and discuss a few other items before turning the call over to Greg. We are closely monitoring economic conditions nationally, regionally, and locally. Maine has taken a stronger stance regarding opening up public places such as restaurants and hotels, which is negatively impacting the tourist season. But at the same time, incidents of new COVID-19 cases are favorable when compared to many other areas of the country. This is stressing our hospitality loan portfolio and retail customers. However, by utilizing the flexibility afforded to us under the CARES Act and regulatory guidance, our special asset and lending teams have been able to work with impacted customers to provide temporary debt relief while avoiding the ramifications of troubled debt restructuring accounting. Through June 30, we have seen strong residential mortgage volumes on both the refinance and purchase side, and although commercial demand is down, we've been involved in reviewing several requests. In both cases, we are very cautious from a credit perspective and will continue our strong underwriting standards which are enhanced by even stronger due diligence requirements. Canada National is also taking a measured approach in our return to working at our offices. Our retail banking centers are open but are operating under reduced hours. While we have not seen a full month yet of those centers being completely open, we are estimating our second quarter banking traffic is down 20% from last year's levels, while digital banking activity is up 33% and call center volumes are up almost 69%. Our investments in technology and digital-based products over the past several years have provided us a strong foundation and resource base to adapt to our new environment. Finally, I want to share that like many of you in other companies, we've watched with sympathy the various events over the past several weeks regarding racial injustice. The Board of Directors and Management have reaffirmed to our employees that we do not discriminate nor tolerate discrimination based on race, gender, sexual orientation, religion, or any other biases or basis. We have always taken steps to educate our employees and communities, and we are developing even more opportunities to improve inclusiveness. As a community bank, we understand and have reaffirmed that one of our most important roles is to ensure we provide banking services and products to all members of our communities. I'd like to now turn our discussion over to Greg White, our Executive Vice President and Chief Financial Officer.

Thank you, Greg. Good afternoon, everyone. Again, my name is Greg White. I've been the CFO of Camden National a little over three months now, and I'm really excited to be a part of this team. With that said, let me just jump into the second quarter results. So despite a $9.4 million provision expense, which I will comment on further in a moment, we had a strong second quarter. On a pre-tax, pre-provision earnings We were up 4.4 million or 24% on a linked quarter basis. And as Greg Dufour mentioned, up 5.4 million or 31% compared to the same quarter last year. The growth in our pre-tax, pre-provision earnings was primarily driven by a 9% increase in our net interest income in the second quarter of 2020 compared to both linked and prior year quarters. Net income was up 2.7 million in the second quarter of 2020 compared to link quarter and up 3 million compared to the second quarter of 2019. Net interest margin for the second quarter was up three basis points to 3.11% compared to 308 in the first quarter due to very effective cost of funds management strategies in this low interest rate environment. which resulted in a 42 basis point decrease in our cost of funds on a linked quarter basis. Net interest margin for the second quarter of 2020 was flat compared to the prior year quarter at 3.11%. Assuming interest rates stay around the current levels, we do expect our margin to have downward pressure and we estimate our fourth quarter net interest margin will decline to approximately three to 305% during the fourth quarter. Total loans grew by 5% or 168 million during the second quarter of 2020, excluding the 219 million in growth from the PPP loans. Our loans were down 51 million or 2% since March 31st of this year. Total deposits were up 12% or $433 million during the quarter despite our CD book declining by 21% or $114 million as a part of our funds management strategy. Non-interest bearing checking was up 33% or $176 million during the quarter. Again, net income for the second quarter 2020 was down 17% to 10.9 million and diluted earnings per share was down 14% to 73 cents per share compared to the same quarter a year ago. That decrease was driven by provision expense of 9.4 million during the second quarter due to the economic environment created by the pandemic. compared to 1.2 million for the second quarter of 2019. Our return on assets was 90 basis points for the second quarter of 2020, and our return on average tangible common equity was 11.09%. As mentioned in our first quarter 2020 earnings release, we opted not to implement CECL during the first quarter of this year. Under the terms of the CARES Act, we will now implement CECL during the fourth quarter of this year or during the third quarter if the COVID-19 national emergency is lifted during the third quarter. Under the incurred loss reserve methodology, and as mentioned previously, we recorded a $9.4 million provision expense for the second quarter of 2020. which resulted in a 23 basis point increase in our allowance for loan losses to 1.07% of loans up from 84 basis points at the end of last quarter. If we back out PPP loans from our allowance for loan losses stood at 1.14% of loans were on that basis up 30 basis points during the second quarter compared to the first quarter. As noted in the earnings release, we implemented CECL... Excuse me. As noted in the earnings release, had we implemented CECL earlier this year, we estimate that as of June 30th, our allowance for credit losses would have been between 1.20 and 1.32% of total loans, including the PPP loans. Given relatively stable non-performing loan numbers on a length quarter basis, 0.34% of total loans at June 30 compared to 0.33% of total loans at March 31st, our coverage ratio of reserves to non-performing loans increased to 3.11 times at June 30th from 2.57 times at March 31st. Net charge-offs were five basis points of average loans for both the first and second quarters of 2020. We have provided additional information on our deferred loan program on page 12 of the supplemental deck that we provided with our earnings release. including an update on balances of deferred loans as of July 23rd. At June 30th, our total deferred loans were 547 million or 16% of total loans and as of July 23rd, total loan deferments including 68 million of re-deferred loans was 351 million or 11% of total loans. We continue to work with certain customers that have returned back to their original loan terms and may possibly again re-defer their loan payments in full or in part. We continue to have a strong capital position and there is more detail on capital in the supplemental information that was provided with the earnings release. From a regulatory capital perspective, we remain well above regulatory minimums Our total risk-based capital ratio increased 75 basis points during the second quarter to 14.56% from 13.81% at the end of the first quarter. In our Tier 1 risk-based capital ratio increased by 45 basis points during the quarter to 13.01% from 12.56% at the end of the first quarter. Due to balance sheet growth, our tangible common equity did drop a little bit during the quarter. It was at 8.41% as of June 30th. Lastly, I'm happy to report our tangible book value per share was up 92 cents during the second quarter of 2020. It was at 27.31 at the end of the quarter. That concludes our comments on the second quarter. We'll now open the call up for questions. Thank you.