Camden National Corporation

Good day and welcome to the Camden National Corporation third quarter's 2020 earnings conference call. My name is Emily 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 assistance at any time during the call, please press star then zero. Please note that this presentation contains forward-looking statements which involve significant risk 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 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. Today's presenters are Greg DeFore, President, Chief Executive Officer, and Mike Archer, 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 DeFore. Please go ahead, sir.

Thank you, Emily, and welcome everyone to Camden National Corporation's third quarter 2020 earnings release conference call. I'd like to start out by wishing good health to you and your loved ones during this time. Unfortunately, Greg White, our CFO, was unable to join today's call, but with us today to pinch hit for Greg is 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 $1.11 or 18% greater than the third quarter of 2019. These results demonstrate the financial and strategic strength of our organization, the 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 decline from 16.4% of total loans on June 30, 2020 to 5.5% of total loans on September 30, 2020. Our overall asset quality has continued to remain strong with non-performing assets at 0.22% of total assets on September 30, 2020. In 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, 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 30th, 2020. And that's significantly up from 0.81% reported on December 31st, 2019. Our efficiency ratio for the third quarter is 50.6% and excluded a $1.2 million legal settlement expense during the quarter. Earlier this year, we were named in a lawsuit regarding overdraft fees, and while we were 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. We ultimately determined to avoid the lengthy and costly litigation and settle despite our confidence in our practices. Economically, Maine has benefited from a reopening of business during the third quarter, which allowed many tourist-related businesses to see a ramp up in activity during the key summer months of July and August. This provided much welcomed relief across the state. Maine's 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 are performing extremely well, as highlighted by Maine's 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've done over the past several months to serve our customers and to close those mortgages. Like every CEO across the country, I am very proud of our employees, especially during these challenging times. Our people and culture are the key 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 the pandemic, we surveyed our employees in August. Our latest results showed an improvement in employee engagement even during these times of 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 their teams. 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 of Commercial Banking. This further deepens our credit bench. Ryan Smith, who was Director of Commercial Banking for Central and Midcoast Maine, before taking on the job as Senior Vice President of Credit Administration, was named Executive Vice President of 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 $0.94 for the same period last year. and more. We also had strong tangible capital growth in the third quarter highlighted by tangible book value per share growing 83 cents or 3% to $28.14 at quarter end. Our net interest margin for the third quarter was 3% compared to 3.11 last quarter. Our earning asset yield decreased 16 basis points 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 is partially offset by a decrease in funding costs of six basis points during the quarter. As we noted in previous quarters, we continue to focus on managing funding costs down to help combat asset yield pressures. Our actions have included lowering posted 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 SBA Paycheck Protection Program loans, average loans were flat between periods. As SBA PPP loans are forgiven 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 remains 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 point 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 under 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. As we adopted CECL as of September 30th, we estimate our allowance for credit losses, which includes both the allowance for loan losses and reserve on loan commitments, would have been between $39 million and $43 million, or 1.19% to 1.31%, of Total Loans. Excluding SBA PPP 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 30th, up from 3.1 times at June 30th, and 1.9 times as of 9-30-2019. Lastly, we have provided additional information on deferred loans on page 9 of the supplemental deck that we provided with earnings release. As of September 30th, our loans remaining on short-term deferral were $181 million, or 5.5% of total loans, down from $547 million, or 16.4% of total loans, at June 30th. Included within our short-term deferrals of September 30th were 68 million of consumer loans for which we granted an automatic 90-day extension to their original 90-day deferral period unless the borrower had opted out. The vast majority of these loans will reach their 180-day expiration by the end of November. As the payment deferral period ends for these borrowers, the loans return to payment status. We'll continue to monitor these loans closely and we'll be quick to act should we see signs of payment risk or stress. This concludes our comments on the third quarter results, and now we'll open up the call for questions. Thank you.