Camden National Corporation (CAC) Q1 2017 Earnings Report, Transcript and Summary

Good day and welcome to the Camden National Corporation First Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this presentation contains forward-looking statements which involve significant risks and uncertainties. Actual results could differ materially from the results discussed. The risk factors are described in the Company's Annual Report on Form 10-K and other filings with the SEC. Today's call presenters are Greg Dufour, President, Chief Executive Officer and Director; and Deborah Jordan, Executive Vice President, Chief Operating Officer and Chief Financial Officer. Please also note that today's event is being recorded. At this time, I'd like to turn the conference call over to Greg Dufour. Please go ahead.

Thank you, Rako, and welcome everyone to Camden National Corporation’s conference call to discuss our first quarter 2017 financial and operating results. Debi Jordan, our COO and CFO will review quarterly financial results in a few minutes, but first I want to provide a high-level overview. We’re very pleased to announce first quarter 2017 earnings of $10.1 million, a 17% increase over the first quarter of 2016. This resulted in diluted earnings per share of $0.64, a 14% increase over the first quarter of 2016. Debi will provide a much deeper discussion about our financial results, but I would like to point out a few highlights. We’re able to tick off several solid financial ratio levels with a return on average assets of 1.05%, return on average tangible equity of 14.37% and having our efficiency ratio at 58%. We're very comfortable with those performance ratios. Our loan growth was on the higher end of our expectations during the first quarter at an annualized rate of 8%. While we saw good growth in the first quarter, we still remain cautious about the credit cycle and are being selective in our approach in credit underwriting. We aren't seeing any specific trends at this point, but as is our typical approach we'd rather pursue a prudent growth strategy. Our asset quality remains in good shape with a non-performing assets of 0.68% of total assets and no net charge off a quarter. We're still working out a large credit that we've discussed over the past few quarters and while we're impatient to settle it, it is a complex situation, but luckily we have our expert special asset group handling it. Strategically, we also made several investments in our business. Late in the first quarter, we introduced MortgageTouch, our online residential mortgage application just in time for the spring buying season. This is in partnership with a fintech company that is resulted in further automation of our mortgage process, but more importantly provides a response to app based mortgage products such as rocket mortgage by Quicken. We're seeing a great response already and great performance. One customer completed their application of 13 minutes and received their pre-qualifying letter in under 30 minutes. We continued our organic growth strategy by hiring a commercial lender in the Seacoast area of New Hampshire as well as one in Manchester. We intend to open a loan production office in Portsmouth, New Hampshire. This will bring our total New Hampshire based staff to 6 individuals as we also have the loan production office in Manchester. Our efforts in wealth management also continued as we've made personnel changes including providing some excellent opportunities for existing staff members. Over the next several quarters, our investment in that business line will be employment of additional staff and product offerings. This highlights how broad our product set is from commercial, residential and retail banking to wealth management and brokerage. Later this afternoon, we'll be holding our annual shareholder meeting where we’ll announce that Craig Denekas, Chairman and CEO of the Libra Foundation based in Portland, Maine, has been Maine to our board of directors. Craig is a lawyer by training and is a highly respected leader in Maine. The Libra Foundation is unique and that it provides direct grants to various organizations, but is also dedicated to improving the social wellbeing of Maine to economic development. One of Libra’s most recent efforts has been Pineland Farms, which provides many agricultural based products ranging from organic beef to natural cheeses. It also just recently sold its Northern Maine potato-processing plant to Bob Evans Foods. We want to welcome Craig to the board. I would like to now introduce Debi, who will discuss our financial performance.

Thank you Greg and good afternoon everyone. We are pleased to report solid financial results for the first quarter of 2017 with net income of $10.1 million and diluted EPS of $0.64 per share. Net income is up 17% over the first quarter of last year and is down 8% compared to the fourth quarter of 2016. In my financial overview, I will compare first quarter 2017 results with the first quarter of 2016. Typically, the first quarter of each year tends to be our lowest earnings quarter. Our low cost deposit base is seasonal with balances peaking in the fourth quarter and has historically trended 2% to 3% lower in the first quarter, which results in higher borrowing levels in the first half of each year. The first quarter is also impacted by higher operating costs with payroll taxes and increased occupancy costs due to the winter months. In addition to seasonal factors, our fourth quarter 2016 also included several non-recurring items that I will highlight as I discuss changes between the quarters. Net income for the first quarter of 2017 declined $826,000 compared to the previous quarter with a decline in both total linked percentages of 5% each as well as an increase in our loan loss provision for the quarter. Revenue was 5% lower with a decrease in fee income of $1.6 million and the decline in net interest income of $389,000. The decline in fee income from the previous quarter relates to non-recurring income of $1.6 million recognized in the fourth quarter pertaining through the subservicing contract, proceeds from liquidation of a mortgage insurance exchange and life insurance proceeds. Despite an increase in interest rates and a softening in mortgage refinance activity, we were pleased that our mortgage banking income was up slightly from the previous quarter. Net interest income for the quarter was $27.9 million down $389,000 from the previous quarter due to decline in our net interest margin of 8 basis points to 3.18%. Partially offsetting the margin compression was an increase in average earning assets of 2%. Our adjusted net interest margin declined 5 basis points between quarters due to a 2 basis point decline in our NIM relating to a prepayment speed on an investment recognized in the fourth quarter that totaled $186,000, a 6 basis points decline in NIM due to increased cost of funds. This is due to higher borrowing costs related to the federal rate hikes as well as the change in our funding mix with a $48 million decline in average demand in checking account balances between quarters due to seasonality. We did get a pick up in our NIM of 3 basic points related to our loan yield as these assets reflect the repricing of our variable portfolio. We experienced strong loan growth during the first three months of the years of about almost $51 million or an 8% annualized growth rate. Our growth was centered in real estate both commercial and residential mortgages. For the first quarter, we decided to portfolio $45 million of mortgages instead of selling them through the secondary market. On a go forward basis, we anticipate selling between 60% to 65% of our mortgage production. Our first quarter loan loss provisions increased to $579,000 compared to $255,000 from previous quarter primarily due to solid loan growth. We feel good about our asset quality with our non-performing assets at 0.68% of total assets and loan past due between 30 and 89 days at just 0.26%. During the quarter, we actually had net loan recoveries. We achieved an efficiency ratio of 58% for the first quarter with operating expenses decreasing 5% between quarters to $21.4 million. This is primarily related to a $1.1 million decline in OREO and collection cost mostly associated with exiting our subservicing contract. For the remainder of the year, I would anticipate this line item OREO and collection cost to run between $200,000 to $300,000 a quarter. Compensation expense was also lower than the previous quarter with a 2% reduction driven by lower incentive expenses and a reduction in staffing levels partially offset by higher payroll taxes as well as an 18% premium increase in our health insurance cost for 2017. Operating expenses that were higher this quarter include occupancy cost to significant snow removal assets as well as debit card expense as our fourth quarter 2016 debit card expense reflected reimbursement for EMV card stop. We continue to be comfortable managing the company at a 58% efficiency ratio. Overall, we are pleased with our first quarter financial results. We’ll now open the call for questions. Rako?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And today's first question comes from Matthew Breese of Piper Jaffray. Please go ahead.

Good afternoon.

Hi, Matt.

Maybe we could just first ask – talk about the new online mortgage application process. What are the implications of the goals financial impacts and kind of the follow up to that? Does this change your appetite in terms of hiring new mortgage originators?

Sure, actually Matt what we've been seeing from a strategic perspective is just with rocket mortgage in Quicken really gaining market share even in the Maine market level on [ph], New Hampshire and Massachusetts. I believe right now Quicken is operating maybe in a four – number four market share perspectives, so that it’s gaining a lot of ground. So we knew that we needed something to complement our mortgage loan origination efforts as well as our in-branch efforts. So that's why we chose to go out with this product. Actually the implementation cost was not unreasonable very actually very, very manageable. The implementation time to get it was also very manageable for us. And it's really a product level that we could be first to market in here. What we view this is really more complementing our in-branch and our originator based mortgages. So basically you can go online if you work with a retail lender or mortgage originator, you can select them. Or if you can have a dropdown menu and pick one or you can just let it go through and then we'll assign it internally. Because the real investment of it is not that material, it's really going to be covered through just the overall objectives that we have for residential mortgages for this year.

Okay. And then with that maybe you could walk me through some of the items that led to counter to a lot of your peers, an increase in mortgage banking this quarter. Have there been new hires were you just more successful in the markets that you're in? Just more color there because it was a little bit of a surprise.

Sure. I'll give some of that and Debi can jump in if she wants. But it's really I think speaks to the dual approach that we have. As I said, we have commission mortgage loan originators. They tend not to really be dependent on our branch franchise, so they are probably very aggressively out there in the market seeking out residential mortgage traffic outside the branch network. But we also have those in-branch residential lenders that dual-handle that branch network and more community driven. So I think we have that model that covers both bases if you will. The additional aspect of it is that we have really nailed down our processing in the area. We are at a 46 day close rate overall on average actually just chatting with the folks in our loan production center. We are at the point where we can close before the contractual close date of a lot of purchase and sales agreements. So that really gets out there. So we’re dealing with real estate agents, which is the biggest referral source we have. Once that's known to the marketplace, you get to emerge to be the go-to organization.

Greg, I will just add. No, the refinance activity has slowed down. The majority of our activity was purchase – new purchase money. And so we weren’t as impacted with the rate increase kicking up. We're also hiring more – we’ve added two mortgage loan originators. I think they're coming online.

Yes. In the future, they will be online.

Understood, okay. Maybe you could hop to the expense of total close to $21.5 million this quarter. Debi, I think you noted there are some higher payroll taxes this quarter, some seasonal items, OREO. So kind of netting that out, what would core expenses have been and is that a good number to work off of for 2Q?

You know I did detailed, one of big items was a shift in the OREO and collection cost. And so if you normalize, I certainly would add back $300,000 on that line item as part of the run rate going forward. Occupancy will be lower because of the snow removal was the tough quarter for us in Maine I believe. We don't really forecast operating cost, but we still remain committed to that 58% efficiency ratio. Why I'm pausing a little bit is we are hiring revenue generators. We’re hiring commercial lenders as Greg mentioned that we should hire in Portsmouth. We’re hiring mortgage loan originators. We’re making some investments in the wealth management side, hiring business developers. So those items are going to increase a little bit over the next quarter.

Yeah, and if I can just jump-in to add that. If that really messes in our strategy that coming off the acquisition of The Bank of Maine in late 2015, the integration in 2016, we feel that 58% allows us as we're – what I call we're in this organic growth phase of the company, which we like to be in. That lets us still invest in the franchise. We still deliver the returns that we've wanted to. So it lets us really bring more feet on the ground in a lot of the markets especially the ones that are more southern oriented for us to build market share.

Okay, that makes sense. And then on the margin, I know there are some shifts in the deposit base and then slightly higher broker deposits this quarter and so on. Two part question on the broker deposit front. Was that more systematic of the seasonal outflows of core deposits? And then two as those deposits flow back in, should we see somewhat of a pickup in the margin over the next couple of quarters? Or maybe you could comment on your outlook for the margin for the remainder of the year.

Sure, I would be happy to. The brokerage deposits, they’re not CDs. They're not term broker deposits. They’re basically overnight brokered money market. And so we use that like wholesale funding when we have the seasonal outflow. We will see that pick up. And so we will see some of that start trending down as we get the pick up in the core deposit base. In regards to our net interest margin outlook, we’re – we still little liability sensitive, really depending what the fed does if we get another 25 basis point within the next quarter. We forecast that we take about a 1 basis point hit if over a 12-month period of the Fed funds increases. So I do think we're going to see the NIM. However, it’s trending down a little lower and maybe two to three basis points lower than the fourth quarter, which is usually stronger because we have a nice core deposit mix at that point. So not, not a big change, but I don't see it bouncing back up. Last quarter, we had a steeper yield curve. The 10-year treasury was having a lot of success with the backing down of that. It'll be interesting to see what the Fed and where we go with rates going forward.

Okay. I’ll hop back in the queue and let someone else ask questions. Thank you.

Great. Thanks, Matt.

And our next question comes from Damon DelMonte of KBW. Please go ahead.

Hey good afternoon, how is it going today?

Good. Thanks.

Good. Just to kind of follow-up on the margin question that was just asked. So when you're talking about maybe two to three basis points of compression over the next couple quarters, is that on the core margin of 309? And if so or kind of maybe in parallel to that or in conjunction with that, what – how are you looking at your projections for future accreteable yield impact on the margin?

Damon, great question, that’s definitely core margin. Our reported margin will continue to come down more because just that accretion it will be at lower level every quarter. I think we have about seven – a little over 700,000 of fair value accretion this quarter that will continue to trend lower maybe by the end of the year it’s down below 600,000 a quarter. That's quite different than a year ago. We do disclose the prior year in the footnotes in the earnings release what that component is because that certainly impacts the net interest income.

Okay, yes that's helpful. Thank you. And then with regards to the provision expense I kind of looking ahead, obviously credit trends are very favorable. How should we think about upcoming quarter provision levels, something similar to what we saw this quarter or do you think it trends a little bit higher for continued loan growth?

Yes I think it will trend higher. The second and third quarters tend to be to the higher provision quarters for us. I think overall when we look out for 2015 on average around 15 to 17 basis points the average loans. Again I think that second and third quarter will be just a little bit higher.

Okay, that's helpful. Thank you.

[Indiscernible] yes.

And then just on loan growth obviously a strong start to the year. I think you had mentioned Greg like 60% to 65% of the residential mortgage production will be sold. Is that differed from you guys have kind of tried to get in the past.

Yes, last year we felt about 65%. The first quarter of this year was a little unique where we actually did portfolio – a proportion. So I just want to message that we think we're going to go back to that target of 60% to 65%.

Okay. And then so as you look at overall loan growth for the year, I think you're on 8% for the first quarter. Would you expect to keep that level of a pace growing in the upcoming quarters or how do you look at the full year growth?

I think as we've been discussing we say in that mid-single-digit range. And as I mentioned that 8% is on the high end of that range again we have a lot of variability here. So that's a pretty aggressive, great – you say a great start to the quarter, but it has ebbs and flows.

Got you, okay. That's all I had for now. Thanks.

Thank you.

[Operator Instructions] Our next question is a follow-up from Matt Breese from Piper Jaffray. Please go ahead.

Hey thanks for taking my follow-up question. Maybe you could talk about deposit baiters in your market where you're seeing in the past you've referenced a number of folks with elevated loan, the deposit ratios being a bit more competitive. And I want to get a sense for how that has changed or how things have moved since the Fed has hiked twice in the past three or four months?

Actually Matt still the same dynamic that you see in the New England and Northeast, and especially northern New England the loan-to-deposit ratios stay up. Right now I would say we don’t see anything really breaking out typically we see that more the first wave comes on CDs. Every once in while there’ll be somebody with a CD special out there, but it may be more just testing the waters. I think from a consumer perspective where there is talk about a rate increase probably just waiting when will that really happen in a really aggressive fashion? We got to remember we’re still dealing with very low deposit rates. So a little uptick here and there isn’t really driving consumer behavior yet.

Yes Greg to follow-up, the only increase, we have seen increases on CDs with our competitors but the core deposit rates have not moved in our market.

Got it, okay. And then on the wealth management front could you give us an update on balances, assets under management and then any changes in terms of hiring or things that Mary Beth has done to improve things.

Yes sure, I think our AUM still around that $700 million mark, we are out there hiring. There’s been a lot of internal reorganization that we’ve been doing. Fortunately we had some very strong existing players that now have more responsibilities, more client facing responsibilities. What we anticipate though is now looking more externally especially for wealth management business development individuals.

Okay. And then may be last one what’s the good tax rate to use for the rest of the year?

Yes that’s a great question. We are targeting a normalized tax rate of 31.6%. It ran a little lower this quarter, one – a little 1% lower because of these discrete windfall tax benefits and because of the panel treatment of that. So I would use the 31.6% and probably anticipate maybe it’s running a little lower than that. [Indiscernible]

Great, it’s very helpful. Thank you guys.

Yes.

Great you’re welcome.

[Operator Instructions] As we have no further questions this concludes your question-and-answer session. I’d like to turn the conference back over to Greg Dufour for any closing remarks.

Great. Well I’d like to just really thank you all for taking the time to listen in the conference call. And Damon and Matt thank you for your participation and great questions. And also thank you all for your support. Take care.

Thank you sir. Today’s conference has now concluded. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day.