Good day, and welcome to the Camden National Corporation's Fourth Quarter 2020 Earnings Conference Call. My name is Tom and I will be your operator for today's call. All participants will be in a listen-only mode during today’s presentation. [Operator Instructions] 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 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 which -- with 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 now like to turn the conference over to Greg Dufour. Please go ahead, sir.

Great. Thank you, Tom, and good afternoon and welcome to Camden National Corporation's fourth quarter and year-end 2020 earnings call. Earlier today, we announced that we achieved record earnings in 2020 of $59.5 million or $3.95 per diluted share. Greg White will provide an overview of our performance in a few minutes, but I'd like to just take a few moments to provide my perspective on our financial performance and positioning for 2021. Our year-end results demonstrate our strong asset quality position and equally as important, the strength of our allowance for loan losses. We adopted the current expected credit loss or CECL accounting standard during the quarter effective January 1, 2020. I'll point out that we were confident that in our second quarter provision for credit losses of $9.4 million reflect both the impact of the pandemic and CECL adoption. This was proved out as our fourth quarter provision of $258,000, resulted in an allowance to total loan ratio of 1.18% at December 31, 2020, confirming our actions were on target and that we are adequately prepared for 2021. Our asset quality metrics also reflect our preparedness. Many of you were tracking a deferred loans and they end of the year at a negligible 0.8% of total loans compared to 5.5% at September 30, 2020 and 16.4% at June 30, 2020. This decrease across periods occurred without seeing a migration to non-performing status, past due status or charge-off. Non-performing assets were only 0.22% of total assets and past due loans were 0.1% of total loans at year-end, while net charge-offs for the year were just 2 basis points of average loans. With that said, we continue to monitor economic and asset quality indicators of 2021. COVID-19 and the ability to vaccinate people will be critical health and economic factors…

Thank you, Greg, and good afternoon, everyone. As Greg mentioned, we had record earnings last year and I'm happy to report the fourth quarter was a record as well. Our fourth quarter return on tangible common equity exceeded 17% and our diluted earnings per share was a $1.22 compared to $0.99 in the fourth quarter of 2019, which is a 23% increase period-over-period. On a linked-quarter basis, our diluted earnings per share increased 10% compared to $1.11 in the third quarter of 2020. During the fourth quarter, our Board of Directors approved a dividend of $0.33, which is a 27% payout ratio and we continue to repurchase shares opportunistically, while growing and strengthening our capital position. Our total risk-based capital ratio increased by 25 basis points during the quarter to 15.4% from 15.15% at September 30th. We had strong tangible book value per share growth during the quarter, increasing 3% or $0.82 to $28.96 from $28.14 as of the end of the third quarter. Our net interest margin increased to 3.06% for the fourth quarter from 3% the prior quarter, but adjusting for the impact of both PPP loan income and excess liquidity, our margin declined slightly to 2.99% from 3.03% on debt basis quarter-over-quarter. We continue to focus on driving down our cost to deposits and our overall cost of funds, which declined by 6 and 5 basis points, respectively. Excluding PPP loans, total loans at December 31, 2020 were flat compared to December 31, 2019, but were up 4% annualized during the fourth quarter. Much of that quarterly growth occurred in the commercial real estate portfolio, which grew at 11% on an annualized basis during the quarter. Average total deposits grew by $465 million or 14% compared to the fourth quarter of 2019, while average non-interest bearing checking…

Thank you. [Operator Instructions] Our first question comes from Damon DelMonte with KBW. Please go ahead.

Hey, good afternoon, guys. How are you doing today?

Good, Dam, and how you are doing?

Good, thanks. Good. So first question, just wanted to talk a little bit about the margin. Greg, you gave some color on the core margin. I think you'd said basically it declined from like 3.03% last quarter to 2.99% when you kind of strip out couple of items in there. Directionally, where -- what are you thinking at this point? Do you feel that you've kind of reached a bottom or do you think that there's still going to be additional pressure on the asset side?

There could be a little bit more pressure on the -- a little more asset yield compression. With that said, we might get a little help from the mix. Our investment portfolio grew pretty significantly last year. We don't necessarily expect that this year. Certainly, if you look at the average balance table, cash and liquidity was higher on an average balance basis in Q4 than Q3, but on a spot that basis was quite a bit lower at the end of the year than the end of the third quarter. So certainly that speaks to a little bit less of a liquidity drag as we enter the new year here. Damon, I think it's also worth mentioning, our cost of funds came down 5 basis points last quarter, 6 the quarter before. So we're still working hard and have some opportunity to offset a little bit of that asset compression if in fact it does continue a little bit here.

Got it. And then in the way of loan growth, I think, excluding the PPP balances there, you're looking at about 4% linked quarter annualized growth here in the fourth quarter. How are the pipelines looking on the commercial side and what are the thoughts as you go into 2021? Do you think that sentiment has improved with your borrowers and would you expect them to be more -- in the market for more borrowings?

Sure. I can take that one. It's Greg Dufour. Damon, we have over the past quarter to seen our commercial loan pipeline build up and we're getting pleased to it. I would say it's probably approaching maybe not the high peak's pre-COVID, but pretty in the -- much in the solid average of what we'd normally see. Looking out next year, we're call it cautiously optimistic that the pipeline should hold up and our balances and growth should hold up. And in it, so we're expecting really kind of a good solid year that way. On the residential side, we're still seeing a lot of activity. Obviously, that will drive both gain on sales as well as those mortgages that we may choose to hold. So in a way we're, like I said, optimistic about next year.

Got it. Okay, great. And then just one final question on the expense side. Greg, can you give a little color on the higher comp cost this quarter and kind of what that means for the run rate going forward in 2021?

Yeah. Sure, Damon. So, obviously, that -- most of that comp expense was incentive base, so had a strong year. So we did add quite a bit in the fourth quarter for the bonus accrual. Typically, we don't like to give too specific of guidance, but in this case, there has been a little bit of noise on the expense side. So I think for Q1 of this year kind of a reasonable range for total expenses in that $24.5 million to $25 million on the high side, $24.5 million on the low is a reasonable starting point for you and others.

Got it. Okay. That's helpful. That's all that I had for now. I'll step back. Thank you very much.

Our next question comes from William Wallace with Raymond James. Please go ahead.

Thanks. Good afternoon, Greg.

Hi, Wally, how are you?

Good, thank you. Maybe just kind of following up on that last question. It seems across the industry there is a lot of commentary about how the pandemic and work from home has changed, how not only retail, but commercial customers are using the branch. Assuming that's the same in main, is there opportunity with your branch network to maybe accelerate consolidation opportunities and could that $24.5 million to $25 million expense range, could there be potential levers for that to even decline or perhaps at least offset any kind of natural pressures from reinvesting in the business and inflation etc.?

Greg White, do you want to kick off?

Yeah, sure. I guess, I'd first of all reference, if you look we did close three branches in April of 2020. Obviously, the pandemic was going on at that point, but that analysis was done pre-pandemic. So I guess the point, Wally, is the bank is always looking to rationalize cost and those branches were either unprofitable or were low profitability, I should say. So that's kind of a good way to think about Camden National Bank I think is always. With that said, I'd also add that we're very focused on the efficiency ratio in both components revenue and expense side, making sure that that doesn't go much beyond the mid-50-ish type of level so.

Yeah. Maybe if I can jump in a little bit, and Wally, I think we agree with what you're saying and what a lot of other organizations doing and announcing branch closures and that's one aspect of it. I will point out in addition to what Greg said of call it our track record of constantly looking at our branches and trimming when we can. As I looked at some of those other announcements, especially, when you get in those larger organizations, they're dealing with a high concentration of branches, a lot of overlap, whether it's within a couple of miles or not. The main geography doesn't give us call it those somewhat more logical choices to make that. If we have two branches within five miles of each other to go through that analysis. Ours tend to be spread out a little bit more. Albeit, we always look at those opportunities where we can gain efficiency by call it closing a branch and maintaining a high level of retention of those customers. The other aspect though is we are seeing is all organizations are lot more customer behavior going into the digital channels. We're really focused on not only call it expanding on that and deepening that with our customers, but also making investments in it to make sure that we're keeping pace with what our customers want and more importantly what some of the bigger organizations can do, and the great news is we're starting with a great platform that's driven by Q2 e-banking for us. So we're looking forward to that and that will help us again, further work into, call it, the calculus of what do we do with this branch network that we have. The final piece of it that is somewhat more interesting is,…

Okay. All right. Appreciate all that commentary. I believe you said in your prepared remarks that you've taken -- I think you said 92 applications of the most recent round of PPP. What's the dollar amount of those? And ultimately, where do you think you could shake out?

Yeah. And I said I think it was 495 applications. I don't have the dial-in number off the top of my head and 90% of those give or take were second draws. Actually, right now -- and somebody just whispered in my ear is $40 million of applications so far we have. Right now, it's really kind of hard to gauge of what we expect the total volume to be. We do know it's starting off. I won't say slower because I think part of it is -- we are ready for PPP, the SBA is, more importantly, customers are, so there is not, call it that huge rush that we saw a little less than a year ago on the first round of PPP. We're prepared to do a lot more volume, but of course, it comes down to what we're going to see from our customers. But we're proactively going out there, reaching out to our existing customers who have PPP and double checking to make sure they're looking at their records in case you want to come in for a second draw. And we can't forget at the same time, we got to work through some forgiveness on the first rounds going through. So the teams involved there are relatively busy for quite a while.

Okay. And then last, as you continue to buy some shares during the quarter, is the stock -- is it still at levels that you consider attractive to utilize repurchases as the capital management tool? And if so, how do you think about maybe target or where you say your -- you have excess capital or just kind of how do you manage that part of the equation?

Yeah. We really don't give a, call it, an indication obviously what value we think we're at with. And like any bank CEO or any public company CEO, my stocks are always undervalued, no matter what level we're at, right. We do have parameters that we institute that program on that for all the right reasons are confidential. I will say when you look at our capital, we are holding lot more, I would call it at this point the dry powder phase as we're trying to see things play out economically from all the factors that we all know about. I will say when you look out over time, we have a pretty good track record of maintaining our capital levels. So this institution stay strong, but also redeploying that back to shareholders either through dividends, through repurchases or other things that we've done over the spectrum of years at least I've been here. So it's something that we constantly looked at. I will say from, call it an inside perspective, we do have a committee of the Board, that is a capital committee. So that's something that the Board is playing an active role and is how we manage those capital levels.

[Operator Instructions] Our next question comes from Jake Civiello with Janney. Please go ahead.

Hi, good afternoon, guys. First question is that you referenced mortgage banking being really strong in the quarter. Do you have the breakdown of refi versus purchase for the fourth quarter mortgage originations?

Let me see if we can gather that, while we're on the phone, I don't have it at my fingertips, Jake. But I will point out that the activity was strong. We reached a $1 billion of mortgage volume within that. I don't have that specific breakout right now, but I would say the vast majority of that -- a good majority of that was refi. However, we have seen, and as you know, being in the main market that the purchase activity was significant, but that may be something that we can come back and get out to you also you know.

Okay. I appreciate that. Thanks. And then thus far in the first quarter in January, with the move in the 10 year to over 1%, have you noticed any demand change for -- specifically for mortgage refis?

I was just chatting with Trish Rose, who runs our EVP of Retail Banking and Mortgages and we are still at a fever pitch. So we haven't seen a big drop off of that. But as you know, it's a lag. We're probably still working through stuff that was coming through the latter part of the year, but it continues to pick up on us. So it's a pretty strong market still for us.

That's good to hear.

Yeah, absolutely.

Just one more question from me. If the economic environment stays on a -- on the same trajectory or on a similar trajectory through the rest of 2021, could you envision releasing reserves at some point during the year?

Well, sorry, if I'm laughing because you're talking to an old bank who has been here probably doing in banking 30-plus years and under the incurred model and prior models, that would be an easier answer. Right now, that's all driven by CECL, now that we're on that, which is driven by economic factors and outlooks and what have you. I will say, with that said, the model does give us flexibility to look at different factors, specific factors, especially as we drive into the data on various industry segments that we have. So I guess my best answer would be Jake is when we have an opportunity to release and that aligns up with our longer-term view and we will release when those indicators say that we need to be. I was fortunate that somebody just shot me a note that in the fourth quarter on residential mortgage activity 45% was refi. So a lot lower than what we expected to that volume level. So it's good because of the rest of it, 55% is purchase, which is a great business to have.

Yeah. Most definitely. I mean, I guess, one last question would be to that last point, do you think you're taking market share or are these existing customers that you're garnering new business from?

I think we're gain -- well I know we're gaining new customers through that and I would say, when you look at the numbers, we're the third largest mortgage volume producer by the accounts that we have and so that's pretty steady to what we've been having. However, when you look at the other list, they -- like everybody else in every market you're seeing non-banks getting a bigger market share, especially, digital-based lenders as well, and so that's part of the competition that wasn't there a few years ago. And we're fortunate we have our mortgage touch, automated application process that can compete with that, but as well as provide our personal service that we have through our origination teams and branch teams that the digital lenders can offer.

As we have no further questions, this concludes our question and answer session. I would now like to turn the conference back over to Greg Dufour for any closing remarks.

Great. Well, probably the one thing I've told to lot of different audiences and especially here internally over the past couple of weeks as we've started to close the books and understand what happened in 2020. If you would have asked me eight or nine months ago, if we would be sitting here talking about record earnings, nearly $60 million of net income, I wouldn't have taken that sitting in April of 2020 at the start of the pandemic. So we're extremely grateful to be able to share these results with you. But I do want to just say, there has been a lot of hard work done here by teams whether it's folks on PPP. Obviously, in our mortgage areas. We've asked banking center employees to show up to work be in-person to serve our customers that do come in. And so it's been truly, truly a team effort. And I will just give you an aside, we take our engagement employees here very seriously and we use Gallup to measure our engagement. And through all of this and through all the trials and tribulations of the pandemic, our engagement has actually gone up in 2020 versus 2019. So, I just wanted to share publicly give thanks for the employees of Camden National and as well as say you're in good hands for folks that are caring about your investment. With that, I hope everyone stay safe and healthy and best wishes for a great 2021. Thank you all.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.