Good day, and welcome to the Camden National Corporation's Third Quarter 2021 Earnings Conference Call. My name is Brica, and I'll be your operator for today's call. All participants will be in a 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 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 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 statement 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 to GAAP in your press release. Today's presenters are Greg Dufour, President and Chief Executive Officer, and Greg White, Executive Vice President and 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.
Thank you. Good afternoon, and welcome to Camden National Corporation's third quarter 2021 earnings conference call. As mentioned, joining me today is Greg White, the company's Executive Vice President and Chief Financial Officer. Earlier today, we announced quarterly earnings of $14.6 million for the third quarter of 2021 or $0.97 per diluted share. Earnings for the quarter decreased 15% compared to the third quarter 2020 and reflects several factors that Greg will discuss in more detail in a few moments. At a high level, the decline can be primarily attributed to lower gains on sales of residential mortgages as we're now holding more residential mortgages on our books, a strategy we discussed last quarter.
Year-to-date earnings are at record levels of $52.5 million, or $3.49 per diluted share, an increase of 27% and 28% respectively when compared to earnings for the first nine months of 2020. Asset quality remains strong, with total non-performing loans to total loans of 0.23% at September 30, 2021, and a 1 basis point annualized net charge-off ratio for the third quarter. You'll note that this quarter's provision for credit losses of $939,000 brought our allowance for credit losses as a percent of total loans to 0.97%, which excludes $3.2 million of allowance for credit losses for off-balance sheet credit exposures. Nearly $700,000 of this quarter's recorded provision expense was for the off-balance sheet credit exposures, reflecting a build-up in our loan pipelines.
Like most companies and businesses, we've experienced a very challenging job market. To attract and retain talent and reward our employees for great work during this challenging time, in October, we raised our starting minimum wage from $15 an hour to $17 an hour and increased all other employees' salaries by at least 3%. I'm pleased to report that over 60% of these increases went to employees earning less than $75,000 per year. From a strategic perspective, we received several recognitions that demonstrate the effectiveness and impact of our strategic plan. Coalition Greenwich, a division of S&P Global, recognized Camden National as a 2021 Customer Experience Leader in retail banking and small business banking. This is the fourth consecutive year our retail efforts have been recognized and the second year our small business efforts have received this designation.
Gallup, the global leader in employee engagement, reported engagement among our employees increased to 4.25 on a scale of 1 to 5, up from 4.09 before the pandemic. We're also named the best place to work in Maine by the Maine Chapter Society of Human Resource Managers and Best Places to Work Association. From a shareholder perspective, our dividend of $0.36 per share for the third quarter reflects a dividend yield of 3.1% based on our closing price of $47.90 on September 30, 2021. We also repurchased 106,502 shares of our common stock, which will provide a solid earn back on this investment and return of capital to our shareholders. I'd now like to introduce Greg White, our Chief Financial Officer. Greg.
Thank you, Greg, and good afternoon, everyone. As Greg mentioned, for the nine months ended September 30 this year, we earned a record $52.5 million or $3.49 per diluted share, which was up significantly 27% and 28% respectively from the same period last year. For the third quarter this year, we reported earnings of $14.6 million or $0.97 per diluted share, which was down from $18.1 million or $1.21 per diluted share reported last year. The decrease in earnings on a linked quarter basis was driven by provision expense of $939,000 during the quarter related to loan pipeline growth, compared to a provision release of $3.4 million during the second quarter of 2021.
Our pre-tax, pre-provision income for the third quarter was $19.6 million, up 2% compared to the prior quarter. As Greg mentioned, during the third quarter, our board of directors approved a quarterly dividend of $0.36, which was a payout ratio of 37%. Our capital position remains strong, as evidenced by a 15.06% total risk-based capital ratio and an 8.3% tangible common equity ratio as of September 30th. Our tangible book value per share grew 1% to $30.23 during the quarter, compared to $29.99 at the end of the second quarter. During the quarter, we repurchased 106,502 shares at an average price of $46.13.
Our net interest margin decreased 7 basis points to 2.76% for Q3 2021 from 2.83% in the prior quarter, driven by a 3 basis point decline in our loan yield and a 12% increase in the investment portfolio on an average balance basis. Point to point, our investment portfolio grew by 4% during the quarter. Our net interest margin adjusted for PPP loan income and excess liquidity also declined by 7 basis points to 2.82% for Q3 2021 compared to 2.89% for the second quarter. We continue to focus on driving down our cost of deposits and our overall cost of funds, which declined by 1 and 2 basis points respectively for the third quarter compared to the prior quarter.
Despite the decline in net interest margin, net interest income was $1.1 million higher on a linked-quarter basis, driven by higher average loan and investment balances, and was $822 ,000 higher when adjusting for PPP loan income. Non-interest income for the third quarter was down $221 ,000 or 2% compared to the second quarter due to a decline of $685 ,000 in mortgage banking income, largely related to our decision to hold more residential loans in our portfolio. Debit card income and deposit service charge income for the third quarter was up 5% and 15% respectively compared to the prior quarter related to an increase in total consumer spend in our consumer deposit redesign program, which consolidated checking accounts and adjusted minimum balance and paper statement fees.
Operating expenses increased by $673,000 in the third quarter compared to the second quarter. $584,000 of that increase was related to employee and salary benefit costs, largely due to increases in incentive compensation. As mentioned in our press release, in October, all employees received a minimum salary adjustment of 3%, and we're increasing our starting minimum wage to $17 per hour from $15 per hour. To help pay for this increase in compensation, we will be suspending our profit sharing plan effective January 1st, 2022.
At a 3% funding rate for our profit sharing plan, which is the level we anticipate for 2021 calendar year, we estimate that the annual cost of this off-cycle wage adjustment will largely be offset by the suspension of the profit sharing plan. The company is planning to continue with its normal merit cycle in March of next year as well. Total assets increased by $351 million or 7% during the quarter to $5.5 billion at September 30th from $5.2 billion as of June 30th. Total loans increased by 1% during the third quarter and grew by 2% when excluding the impact of PPP loans. Loan growth was driven by residential real estate portfolio, which grew by 9% during the third quarter.
Overall, loan growth was negatively impacted by heavy prepayments and payoffs in our commercial loan portfolios during the quarter. Approximately $80 million of our commercial loan book prepaid during the quarter, primarily from high credit borrowers either selling their businesses or using their cash balance to pay off or pay down their loans. Fortunately, commercial pipelines are near record levels, and we're $147.1 million as of September 30th, and our residential and home equity pipelines remain robust as well and stood at $222 million at the end of the quarter. Total deposits grew by $311 million or 7% during the third quarter of 2021, and were up $239 million or 6% on an average balance basis while bringing down our cost of deposits by one basis point during the quarter.
Total interest and non-interest bearing checking grew by 10% during the third quarter, while our certificates of deposit declined by 3% during the quarter. Our loan-to-deposit ratio ended the third quarter at 72%, compared to 77% as of June 30th. It will certainly provide us some financial flexibility as we move forward. Asset quality remains strong with non-performing loans to total loans at 0.23% at the end of the third quarter, down 3 basis points from 0.26% at the end of the second quarter. Annualized net charge-offs were 1 basis point of average loans for the third quarter and 2 basis points year to date. Our allowance for credit losses on loans to total loans at September 30th was 0.97%, down from 0.98% at the end of the prior quarter.
Our coverage ratio of ACL on loans to non-performing loans increased to 4.23 x at the end of the third quarter from 3.82 x as of June 30th. This concludes our comments on the second quarter results. We will now open up the call for questions. Thank you.
Thank you. If you would like to ask a question today, please press star one on your telephone keypads now. If you change your mind at any time, please press star two to remove the question. As a reminder, it is star one to ask any questions today. The first question we have on the phone lines comes from Damon DelMonte from KBW. Please go ahead, Damon. Your line is open.
Hey, good afternoon, guys. Hope you guys are doing well today.
Thank you, Damon. You too.
Thanks. First question, could you just repeat, Greg, probably Greg White, the loan pipeline balances at quarter end for commercial and residential mortgages?
Yeah. The residential, including home equities, is $222 million, and the commercial is $147.1 million.
Okay. Because of these growth in these pipelines, that's what led you guys to allocate a provision for the unfunded commitments. Is that correct?
Yeah. Yeah, exactly. Yes.
Okay. How do we think about the provision going forward? You know, credit quality is obviously pristine, very, very strong. But, you know, do you see yourself releasing reserves in the coming quarters, or do you feel like you're gonna need to provide for this growth as it actually hits the balance sheet?
It's really the answer, given the way our model is, it's really sensitive to the economic forecast, which because of the Delta variant, you know, the pace of improvement in the forecast slowed up a little bit, and that it was the growth in that unfunded commitments, the pipelines, especially on the commercial side. You know, when you think about it, those loans already have a reserve against them, so when they close, they don't need that much of an addition to the reserve. If those pipelines grew, which they did significantly in the third quarter, that's kind of what drove the provision expense this quarter. The short answer to your question is the 97 basis points to total loans, we think will continue to trend down over time. We were 82 basis points pre-COVID.
Not that that's the answer, but just given if forecasts continue to improve, we think that 97 basis points would continue to go down a little bit. Whether or not that results in a release is certainly dependent on growth in pipelines and closed loans as well.
Got it. Okay. That's helpful. Thank you. You know, with respect to the outlook for loan growth, you know, the last few quarters, you've had pretty sizable residential mortgages. As you indicated, you're, you know, choosing to portfolio those. You know, those are almost half the portfolio now. Do you expect to continue at this pace, or do you think you've kind of taken out as much as you wanted to over the last six months?
Well, Damon, you know, we kind of take it as, you know, the total portfolio. One of those factors are, you know, they call it the allocation or how much residential we're holding. We don't have a hard, fast number to do it. We look at that as an opportunity and what's right in the long term, balancing against liquidity needs. With that said, you know, as commercial is improving, you know, we'll take that into assessment. You know, we don't have a hard, fast number that we're tracking to.
Got it. Okay. I guess, just lastly, and then I'll step back. You know, the outlook for the core margin, do you feel like you've kind of reached a floor here and you've got some stability, or do you think there's still a little bit more downward pressure?
If rates stay here, there might be a little bit of downward pressure for the next quarter or two. You know, with that said, we did grow our net interest income, as you know.
Yep.
You know, part of that margin decline was you know, certainly mix this quarter as investments grew and cash balances. You know, I guess I'd point out that the loan yield went down 3 basis points is probably a better indication. We're confident we could continue to. You know, the quarters are bringing down our cost of funds. 4, 5, 6 basis points are gone, but we're gonna continue to you know, work that cost of funds down as well.
Okay, great. That's all that I had. Thank you very much.
You're welcome. Thank you.
Thank you. We now have the next question on the line from Matthew Breese from Stephens. Please go ahead, Matthew.
Good afternoon.
Hi, Matt.
Hey, Matt.
Hey, Greg. You know, in the release, in the prepared remarks, you discussed wage pressure. I'm not surprised to hear that there's wage pressure, just given, you know, what's going on nationwide. I was hoping maybe you could provide some anecdotes or some background about what you've experienced the last 6-12 months to drive this decision. Are you feeling the most pressure? Is it in the branch or the back office? Is it new employees or tenure? Just a little bit more color on the decision.
Sure. Well, the main driver, and again, you know, addressing it from a starting wage perspective was obviously in those banking centers and call center employees that, you know, have been under a lot of pressure, you know, facing, call it, the brunt of the pandemic-related items and even, you know, servicing customers through it all. We have seen as competitors have increased their wages that, you know, it's become a tough market. I think that's. You'll hear that from everybody. You know, the best antidote is you drive down any road in, you know, at least in Maine and probably in America, and, you know, our competition for employees has expanded.
I mean, when you know, McDonald's, Walmart, et cetera, are offering, you know, anywhere $17-$20 an hour, it makes us less competitive, albeit in the past, we could compete by a good starting wage, good benefits, upward mobility. What we were finding is a lot of those folks really needed to focus more on the short term, you know, call it pay increase. We saw that. I think the big tipping point was two things. One was the right thing to do to attract people in.
The second was we started to see signs where people would come in and to a manager and say, "Love the company, but, you know, I can get $2 or $3 more an hour." In the past, we could, you know, they'd probably, you know, stay, and they weren't. As we looked across the board, we just needed to remain competitive. That's what led us to that 3% raise. As Greg said, we offset that with profit sharing, and part of that was a reflection of conversations with many employees, primarily in the lower to moderate compensated range. They wanted the cash upfront rather than to put it in profit sharing, their 401(k).
That was probably the bigger struggle for us, but you know reflected our you know our conversations with employees, and plus they still have the ability to increase their 401(k) contribution to put that in if they wanted to.
Understood. Is there any concern, you know, longer term as the thinking around inflation goes from temporary to permanent, that perhaps, you know, the salaries and benefits line item could just be growing at a faster pace, you know, for the foreseeable future? Is that a concern, or have you guys discussed that internally?
Yeah. I think it is a concern, Matt, for us, for all companies, no matter what industry that you're in. You know, there is a labor shortage that's coming out of the pandemic that we're seeing, and it's across the board. You know, I think with us strategically, how we're addressing that, in addition to remaining competitive pay-wise, we're also looking at many opportunities to automate a lot of tasks that we have through robotic process automation. We have a great team of people doing that. We're seeing some great strides in that.
You know, there's other automation opportunities that we have to, you know, what I would say is allow us to scale, but more importantly, to make these jobs better for people as I think earlier today, our head of technology who's you know overseeing the automation project, you know you take away that stare and compare work and automate it through these bots that we have, and the employees are happier because they're doing meaningful work, and then we can scale as we grow. There's opportunities strategically for us to address the labor shortages.
Great. I appreciate that. You know, just drilling down a little bit more, I was curious, quarter to date, what you've seen on the prepayment and payoff front, if you feel like what you saw in the third quarter is likely to continue. On the overall pipeline, what is the blended yield versus what we saw, this quarter?
Let me... I'll do the second question first. The overall pipeline, other than residential, most of the originations are pretty much going on at portfolio yields. You could see that in the yield rate table, except commercial came down. That was more some LIBOR floating rate loans that went on right at the end of the second quarter, which had more than half of the impact during that third quarter. Everything else, even commercial now is pretty much going on, except resi. Resi is a mid-3% portfolio, and the marginal growth is, you know, 3.05%-ish- 3.10%.
Looking at the prepayments that we saw, we really dove into that. A lot of it, in summary, is you know, we're seeing you know, a lot of the higher quality loans and customers that we're working with, you know, they're selling businesses. In Maine, we're seeing more hedge fund activity come in. They will come in either with cash or with prearranged financing outside of the state. We're seeing you know, several properties being sold, again, to REITs or hedge funds on that. It's a little bit of a phenomenon that you know, we hadn't seen before, at least in this market.
You know, as far as, you know, losing deals on rate and structure, yeah, you know, it's a competitive market, so I don't wanna discount that aspect of it. Typically you can keep up with that on your pipeline because you're competitive on getting new deals in. It's seeing some of these, you know, again, higher quality properties transfer ownership. As I thought about it, I said, you know, it's an indication that, you know, we are dealing with high quality and it makes it marketable that way.
You know, I think at the end of the day and we were just talking about this is I think it's gonna make some of this lumpier as we go forward, you know, because you know, you can do a good job on building your pipeline, and our lenders are motivated for that. You know, you can come in and have somebody say, I've sold my business and you know to XYZ and the financing's already arranged by the buyer. Again, that's something that we're getting used to, but again, I think it's just the economics and the business activity that's out there.
Understood. Okay. Maybe just a little bit on the cash position of the balance sheet, you know, it's still stubbornly high. Curious if we should expect a continued increase in the securities portfolio, especially given the rise in yields. If that's the case, to what extent might we see the securities portfolio grow?
Yeah. It's up about 30% this year. You know, if you look, our deposits year to date are up $600 million. You know, certainly that's driving it. We expect to slow the pace of increase of the securities portfolio. With that said, you're still gonna see some increases. Kinda to put a growth rate on it, you know, I'd be kinda guessing a little. I'd say in the 5%-ish range is not unreasonable. Then we do have some deposit outflows coming in, you know, toward the end of the year, which makes investment growth a little less necessary. With that, you know, it's tough to tell, Matt, if deposits keep coming in the door like they have been over the past quarter here.
I think if I could just add that it's kind of a good news, challenging news, if you will. I won't say bad news situation is we always prefer to make a loan than to put something in the investment portfolio. When you look at it, albeit with some, you know, anticipated outflows from very large, deposit customers. You know, we're building our core deposit franchise here, and especially when you look at these numbers. Yes, the cost of that is, you know, more liquidity, more investments. I think as the long-term strength of the organization, deposits are gonna be more valuable in, you know, in the future. You know, we're not getting it by pricing up, obviously. We've redesigned our products, and they're doing extremely well.
I think it's really that's a long-term factor for us to keep the core deposits up like we are.
Got it. Okay. Greg, just to be clear on the 5%-ish growth, you know, range for growth, that's an annualized figure. So, you know, figure out over the next handful of quarters, that'd be an annualized growth rate.
Yeah, exactly, Matt. Yes. Good point.
Okay.
Yeah. Yeah.
Just one from
Yeah.
Sorry, I didn't mean to cut you off, Greg.
Oh, sorry.
Last one for me.
Go ahead, Matt.
Just what are remaining PPP fees? That's all I had. Thank you.
$3.7 million.
Great. I appreciate you taking my questions. Thank you.
Oh, my pleasure. Thank you.
Thank you. As a reminder, it is star followed by one on the touch-tone phone pad if you would like to ask a question. We now have another question on the line from William Wallace of Raymond James. William, please go ahead.
Thank you. Good afternoon.
Hi, Wally.
I wanted to circle back on a couple of Matt's questions. Let's just start with kinda where the last line of questioning around deposits. If you look at all of the new customers that came on around PPP, what are you seeing? What kind of trends are you seeing with that customer base? And are you seeing the pace of deposit inflows slowing at all?
The latter part of that question, about half of the deposit growth year to date has occurred in the third quarter. I don't know about the past few weeks here, but it was a really strong quarter. You know, for fourth quarter, we would expect we typically have some seasonal inflows, which is part of that third quarter answer. We would expect them to start slowing a little bit here as well. The PPP, we don't have detail on that, Matt.
Okay.
Wally, sorry.
I mean, is there any reason not to be more aggressive in investing in the securities portfolio, or are you just worried that rates will work against you if you extend duration? Or, are you worried about liquidity and wanting to stay short and liquid?
Yeah. No, we're not worried about
Interest rate risk, it's more just keeping our powder dry and trying to lend it out instead of having securities growth. Again, we have grown the security book 30% this year, Wally. Yeah. So, you know, we're yeah, long term, we'd like to lend it out, and earnings are still strong even with our liquidity.
Okay. As far as the liquidity build on the balance sheet, what level do you guys feel comfortable with from a capital ratio or TCE or leverage maybe?
TCE is 8.3, and you know, I think yeah.
We've had this organization over the past several years, you know, I think even in the low 7 TCE range, and we feel that is adequate for us. Not to say that's what we'd wanna go down to, but you know, we're kinda comfortable where we are, and we can adjust accordingly that way.
Okay.
You know, we'll handle our capital appropriately.
Okay. Switching gears back to expense. You know, we talked about wage pressures. We talked about some of the investments that you're looking at to try to automate processes, et cetera. I'm just kind of wondering if you step back and put it all together, what kind of expense growth would you anticipate maybe over the near term?
Is there a reason that there might be more expense growth upfront as you invest in technologies to try to automate to maybe have slower expense growth down the road? I'm just kind of trying to think about the moving pieces here.
Yeah, Wally, we really don't give kind of a specific indication of what we think our expense growth is going to be. Plus, you know, we're currently in the budgeting cycle. But what I can say to your point on, call it technology, from prior investments that we've made, you know, we're in that, you know, call it maintaining phase. We don't have to do a big uplift for obsolete equipment, you know, or whether it's laptops, routers, servers across the board.
That's part of our normal run rate, you know, because of those prior investments and staying ahead of the curve. What that means, though, is that when we are doing spending on technology, it is on, you know, customer facing or information security related items. By customer facing, that could be, you know, systems that make us faster, close deals faster, investments in business technology. Of course, you know, in cyber, we're always investing there, and we're willing to invest in there to remain as much ahead of the curve as we can. You know, kind of the short answer there is, you know, the belief that we can absorb what we need to do to be current, on the technology front, you know, call it give or take within our current run rate.
You know, the wild card there is if it's cyber, then we'll step in and we'll invest, but that's again, you know, a business critical item.
Okay. Okay. Thank you very much. That's all I have.
You're welcome.
Thanks.
Thank you. We now have another question on the line from Jake Civiello from Janney. Jake, I've opened your line. Please go ahead when you're ready.
Good afternoon, guys.
Hi, Jake. Good afternoon, Jake.
With respect to the loan pipeline, can you give us any additional details about the commercial and commercial real estate by geography?
You know, I would say by geography, you know, they're all, you know, within our franchise and by defining that as Maine, New Hampshire and, you know, selective transactions in, call it Northeast Massachusetts, including the Greater Boston area. You know, they're spread out, you know, call it from asset class to, you know, various asset classes, industrial, multifamily. You know, if it's retail, it tends to be small retail, not big box. It's a pretty diverse pipeline that we have built there.
Okay. I mean, the reason why I ask is that if deposit growth does continue at a similar rate of increase as what we've seen in 2021, you know, how does it impact your thought process about growing loans? I mean, do you think about doing syndicated loans or extending outside of your historical areas, either by maybe loan category or geography?
Sure. We do syndicated loans now, and we have for several years, and we've, you know, both from a credit as well as a lender perspective, we built up that expertise or acquired it, if you will, as we hired people several years ago. That is still there. I can't remember the exact exposure we have in shared national credits, but it's relatively modest there, but it does work in there. As far as geography, you know, what I would expect is that we will lend outside of our, call it physical geography if we have an existing customer relationship.
We are working, you know, with several high quality sponsors, you know, businesses that, you know, if they're based in Maine or based in New Hampshire and they're buying a property out of our region, we'd be more than happy to work with them that way, and we can get our hands around that. As we expand geography outside of that, this would be probably for me, pending, you know, what our head of commercial banking would do is that, you know, we like to go in markets, you know, that are adjacent to the ones that we have. We typically go in there as we have whether years and years ago in Portland, more recently, though, in New Hampshire, go in with a lender who we have a lot of confidence with.
They know the right people to deal with. It's kind of contiguous market growth versus, you know, leapfrogging, you know, a big market. You know, the good news is that, you know, we have the people and the talent to do that, not just from the lending side, but also from the credit side. I think that's one key that and one thing that we've proven is that we maintain our quality of our credit team to understand the deals, whether it's a new asset class, kind of a new geography, et cetera. That's worked well in the past, as you can see with our asset quality today.
No, I appreciate that, Greg. Thank you for taking the time to walk through it. One last question from me. How are you thinking about and I think you might have touched on this a little bit, but how are you thinking about capital return and in particular, the buyback going forward?
You know, obviously we're, you know, want to make sure that, you know, we maintain enough capital for, call it regulatory business reasons for other, infamous quote-unquote, corporate reasons. Short of that, we understand, you know, shareholders, you know, want the opportunity to use their investment. Whether it's through dividend or the buyback, those are tools that we use. You know, probably one nuance is that we're, you know, looking at more of an earn back perspective when we peg, you know, where we'll repurchase. You know, much like you would do, you know, analyzing a deal, that's how we analyze returns that we feel that we can get at an adequate price for our own investment, because that's probably the lowest risk out there for us to buy our own stock.
Okay, great. Thanks, Greg.
My pleasure. Thank you.
Thank you. As we have no further questions, this concludes our question and answer session. I would like to turn the conference back to Greg Dufour for any closing remarks.
Right. Well, I think we've heard from all of our analysts today, which is just great. It shows interest that you have in our organization. We very much appreciate that not only from your perspectives, but also, you know, all our shareholder and owner perspectives. You know, really we just are moving forward here, and looking forward to a good quarter. As we said, we've got some good pipeline information coming in, and so closing deals before the end of the year. I thank you for your interest, and have a good day.
The conference has now concluded. Thanks for attending today's presentation. You may now disconnect your line.