Camden National Corporation (NASDAQ:CAC) Q2 2021 Earnings Conference Call July 27, 2021 3:00 PM ET
Gregory Dufour - President, CEO & Director
Gregory White - EVP & CFO
Conference Call Participants
Damon DelMonte - KBW
Matthew Breese - Stephens Inc.
Good day, and welcome to Camden National Corporation's Second Quarter 2021 Earnings Conference Call. My name is Betsy, and I will be your conference operator for today. [Operator Instructions].
Please note that this presentation contains forward-looking statements, which involve significant risks and uncertainties that may cause actual results to differ 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 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 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.
Great. Thank you, and welcome to Camden National's Second Quarter 2021 Earnings Call. I'd like to begin by wishing you and your loved ones good health. We are pleased to see strong vaccination rates in our communities, which has helped both businesses and people resume many normal activities, while remaining cautious about COVID.
At Camden National we announced, during the quarter, that we would operate in a hybrid environment, which allows our employees, when appropriate, more flexibility in their work schedules and locations. We have begun to have employees return to the office and expect to complete the movement to our new schedules after Labor Day. We continue to monitor many elements of this work environment, including both productivity metrics as well as employee engagement data as remote work evolves.
I'm pleased to share with you that earlier today, we reported net income of $18.1 million for the second quarter of 2021, which resulted in year-to-date net income of $37.9 million. Earnings per share were $1.21 and $2.52, respectively, for those time periods. Greg White will provide more detail on our financial performance for the quarter in a moment, but I'd like to take a few minutes to highlight a couple of items.
We have continued to see significant volumes in our residential mortgage business, which allowed us to take advantage of those conditions as we retain 60% of our production in the second quarter. This was higher than prior quarters, but provided us a strong return when compared to investment alternatives, as we've seen rates on the 10-year retreat over the past several months, we are pleased with this strategy. I would also point out that the investments we've made, both in the residential mortgage business as well as support areas, including our secondary sales team and financial staff, allow us to be agile in light of market conditions. We continue to analyze the interest rate environment and take the necessary steps to position us for the long term.
Loan growth for the first half of 2021 was driven by residential and commercial real estate, which grew 6% and 4%, respectively. We continue to see a strengthening of our commercial real estate pipelines and commercial pipelines. But I should point out that there continues to be a significant amount of payoff activity due to sales of properties and businesses as we -- as well as refinancing of existing debt.
Our expertise in both CRE and C&I allows us to participate in those transactions as well as proactively support fires of assets. Shifting to our local economies. We're seeing a significant amount of tourism, continued residential purchases and other business activity. Like many areas across the country, the biggest challenges for our customers are labor shortages, wage inflation and general inflation, especially in the building and construction materials.
I would also like to welcome Matt Breese from Stephens Inc., who recently initiated coverage on Camden National Corporation. We now have 4 analysts and firms covering our stock which further strengthens our support of shareholders and provides for lively discussions.
We announced a dividend of $0.36 per common share during the quarter, which relates to an annualized dividend yield of 3.02% based on our closing stock price on June 30, 2021. Our tangible book value per share increased 3% over the past quarter and 10% over the past 12 months. And our common -- our tangible common equity ratio was 8.87% at June 30, '21 -- 2021, which provides a significant resource to have at our disposal. I'd now like to turn the discussion over to Greg White, our Executive Vice President and Chief Financial Officer.
Thank you, Greg, and good afternoon, everyone. As Greg mentioned, we reported net income of $18.1 million for the second quarter of $1.21 per diluted share, which was down slightly from our record quarterly earnings of $19.7 million or $1.31 per diluted share in the first quarter of this year. For the 6 months ended June 30, we earned $37.9 million or $2.52 per diluted share, which was up significantly, 55% and 56%, respectively, from the same period last year. Our pretax pre-provision income of $19.3 million for the second quarter was down on a linked quarter basis due to the strategy that Greg mentioned to hold more, a higher percent of residential mortgages in our loan portfolio.
Adjusting for mortgage banking pretax pre-provision income was $1.1 million higher during the second quarter compared to the first quarter of this year. And our tangible common equity ratio was 16.6% for the quarter compared to 18.47% in the first quarter of this year. As Greg mentioned, during the quarter, our Board of Directors approved a quarterly dividend of $0.36, which was just under a 30% payout ratio.
Our capital position remains strong as evidenced by a 15.26% total risk-based capital ratio as of June 30, which includes the effect of our $15 million subordinated debt call during the quarter and an 8.87 tangible common equity ratio. Our tangible book value per share grew 3% to $29.99 during the quarter compared $29.12 at the end of the first quarter.
Our net interest margin decreased 5 basis points to 2.83 for the quarter from 2.88 the prior quarter. However, adjusting for the impact of both PPP loan income and excess liquidity, our margin declined by only 2 basis points to 2.89% on a linked quarter basis. We continue to focus on driving down our cost of deposits and our overall cost of funds, both of which declined by 3 and 5 basis points, respectively compared to the first quarter.
Our net interest income was $1.2 million higher on a linked quarter basis and $1.4 million higher when adjusting for PPP loan income. PPP loan income for the second quarter was $1.7 million, which was $217,000 lower than the previous quarter. Total loans increased 2% during the quarter and grew by 3% when excluding the impact of PPP loans. The residential real estate and the commercial real estate portfolio grew by 7% and 2%, respectively, during the same period.
Total deposits grew by $82 million or 2% during the second quarter and were up $214 million or 6% on an average balance basis compared to the prior quarter. Asset quality remains strong with nonperforming loans to total loans at 0.26% at the end of the quarter, down 5 basis points from 0.31% at the end of the first quarter.
Annualized net charge-offs for the quarter and year-to-date were 3 basis points in our past due loans. 30 to 89 days fell to an all-time low of 2 basis points, down from 5 basis points the prior quarter. Due to improving economic forecast and continued strong asset quality, we released provisions of $3.4 million during the quarter.
Our allowance for credit losses on loans to total loans ended the quarter at 0.98, down from 1.11 as of the end of the prior quarter. Our coverage ratio of ACL on loans to nonperforming loans increased to 3.82x at the end of the quarter from 3.52x, as of March 31, 2021.
This concludes our comments on the first quarter results. We will now open up the call for questions. Thank you.
[Operator Instructions]. The first question comes from Damon DelMonte with KBW.
So first question, I just wanted to ask a little bit about fee income. I follow along with what you did with the strategy of portfolioing residential mortgages versus selling them. So that had an impact on total fee income this quarter. How do we think about that going forward? Is that going to be a strategy you'll continue to employ and will look for growth in resi mortgages? Or should we start to see a pickup in mortgage banking income?
Yes, Damon, at least for the near term, we're going to continue to portfolio the majority of residential mortgages, but kind of make at least a quarterly assessment of whether we keep that strategy based on our interest rate risk position and deposit flows and total cash flow.
Got it. And what kind of -- what are some of the characteristics of those loans that you're putting in the portfolio? Are they adjustable? Or are they 5-year, 10-year, 15-year fixed?
Yes. It's mainly 30 year and 15-year fixed. The majority is 30 year. And again, our balance sheet certainly supports taking the interest rate risk, which is part of the analysis that we do. Certainly, not a lot of hybrid production. But if and when that day comes, we'll certainly portfolio the majority of that product.
Okay. All right. So then a level similar to what we saw this quarter for fee income is reasonable, something in that, call it, $11 million to $11.5 million range.
Yes, that's a reasonable estimate. We did do a deposit product redesign where we're expecting to get a little more on deposit service charges as we go forward. But that's a reasonable starting point.
Got it. Okay. Great. And then with respect to the outlook for the provision going forward, the reserve came down a decent amount this quarter with the provision recapture. Do you feel like you're at a point now where provision will be covering just net charge-offs. Do you have to provide some for loan growth? Or do you think that there's still room to release reserves at least over the back half of this year?
Yes. We look at that frequently and certainly our credit profile and the improvement of the economic forecast is the reason we've been releasing and the one new element here is the drop in mortgage -- I'm sorry, in interest rates, if that results in accelerated prepayment speeds that's going to shorten average lives, and it's a life of the loan calculation that could put a little further pressure also on -- pressure to release reserves.
Got it, right. Because those loans won't be around as long, right?
The next question comes from Matthew Breese with Stephens.
I had a few questions. The first one was that, Greg, I think you just alluded to this. You mentioned in the press release that you redesigned the consumer checking products. You moved some noninterest-bearing -- sorry, interest-bearing accounts and noninterest bearing. Greg, you alluded to perhaps higher fees on the back of this. Could you just give me a bit more color as to what happened here? What was the change? Why did you do it? And how permanent do you expect that that account change will be from interest-bearing to noninterest bearing?
Yes, sure. Well, the real strategy behind it was like a lot of banks as we put things together and call it, different, call it, in the pre-COVID world, we had a lot of grandfathered count. So we were basically dealing with 18 different accounts. Some of them were relatively low activity. Again, because they were grandfathered.
So we took advantage of the excess liquidity that we had, the current interest rate environment and then we went down to 4 products. So we got operational efficiencies and just an easier platform to deal with, if you will. So with that change, we did shipped, as you mentioned, some from interest-bearing to noninterest-bearing adjusting fees and some of those fees are, for example, paying for paper statements as we try to move more and more customers to digital statements.
All in all, we moved about $220 million from interest-bearing and noninterest-bearing. We expect, at this time, for that to pretty much stay that way or have those funds be retained into those categories. That will play out over the interest rate cycle. But as long as interest rates are as low as they are, it should pretty much stay -- that movement should stay over there and see how the consumers want to shift those later on.
Got it. Okay. The other thing I was hoping to bounce off you was the duration of the asset base and the balance sheet sensitivity. So you added securities, you moved the securities duration. I think the press release said to 5.9 years from 5.1 years. And then you're adding 15- and 30-year duration residential loans. Just want to get a sense for tolerance. You are, from the 10-Q asset set today, how much are you willing to really move that? And should we use that as a proxy for how much residential and securities you're willing to put on?
It is a good proxy. And part of the answer, I believe, in the first quarter, our sensitivity, we were -- year or 2 net interest income went up about 10% in the up 200 environment. That's now about 6%, given the changes we made to the balance sheet and the extension of duration on the investment portfolio and booking the fixed rate residential.
So obviously, our exposure is still to declining rates. That -- obviously, some of the moves we did protected us a little bit from that type of scenario, but we still have plenty of room to add longer assets to the balance sheet from an interest rate risk perspective. I mean, we foresee -- obviously, part of the investment strategy was using up excess liquidity certainly if deposits continue to come in, we'll continue to assess if that's a prudent strategy. But certainly, we can see it continuing in the third quarter, similar to the second quarter. The results were good.
Okay. And could you drill down just a little bit for us the expectations around the securities portfolio? Do you think you're bulked up enough there? Or is there more growth to come?
We've slowed down there. Obviously, we had a lot of growth there. What we're hoping is to use the cash flow from the securities portfolio and any deposit growth and to lend it out at this point. So if we're successful on the loan side, I would say you'd see the security portfolio plateau maybe even shrink a little bit between now and year-end.
Okay. My last one is just around the pipelines, commercial and consumer. Would love some color there. What's stronger? Where are you seeing the strength? And maybe talk a little bit about geographies that are looking the strongest.
Yes. Sure. Maybe Greg and I can both tackle on this. From -- call it a product perspective, obviously, residential is still holding strong with pipelines. We continue to see strengthening building up on the commercial side, both in CRE and C&I lending.
So we're really pleased with how it's building up. Activity is getting stronger and stronger as we go on. Geography-wise, it's really kind of getting spread out throughout the market. Obviously, though, call it, by units, it's a good distribution throughout our markets. But from a dollar perspective, obviously, that gets oriented to Southern Maine and New Hampshire and in that Northeast Massachusetts market that we deal with. Greg, is there something else that should be added?
Yes. So on the resi side, I did speak to one of the senior managers in that area yesterday. The pipeline is about $200 million, which is roughly 70% of the all-time peak last year. About 60% of that is refi and what we do sell the margins are still healthy in the 2%, 2.5%, even higher, 2.5% to 3% range. So pretty healthy pipeline still.
[Operator Instructions]. The next question is the follow-up from Damon DelMonte with KBW.
So just wanted to follow up on the kind of the outlook on the core margin and kind of some thoughts around that, Greg. You feel that the margin could be under pressure, given the addition of the residential mortgages? Or do you feel that you're kind of finding a floor here at this point in the cycle?
Yes. So I will point out our loan yield was stable quarter-over-quarter, but -- it was 3.76%, both Q1 and Q2. But our yield on interest earning assets came down as we took deposits and -- new deposits and put it into investments, obviously, that's going to bring the interest earning asset yield down, which did occur. Damon, if rates stay here, I still think there's going to be a little grind lower on margin. Again, that's if rates stay here, if they go back up, we were starting to see potentially good scenario on margin. But I think it's going to be a little bit of a grind lower, just asset yields will continue to compress a little bit if rates stay here, even on the loan side, which again was stable quarter-over-quarter. I wouldn't think that would hold if -- unless rates were to rise a little bit.
Yes, if I could just add, it really comes down into how much cash builds up the excess liquidity. And I think you're probably finding that across most organizations, that's what's kind of pressuring the margins right now.
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.
Great. Well, thank you. And thank you, everybody. Matt and Damon, for your questions as well as everybody else for all your interest in Camden National Corporation and we wish you the best and hope for a great rest of your summers. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.