Camden National Corp (CAC) 2017 Q1 法說會逐字稿

Good day and welcome to the Camden National Corporation first-quarter 2017 earnings conference call. (Operator Instructions). Please note 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 would like to turn the conference call over to Greg Dufour. Please go ahead.

Thank you, Rocco, and welcome, everyone, to Camden National Corporation's conference call to discuss our first-quarter 2017 financial and operating results. Debbie 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 are 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. Debbie will provide a much deeper discussion about our financial results, but I would like to point out a few highlights.

We were able to tick off several solid financial ratio levels with return on average assets of 1.05%; return on average tangible equity of 14.37%; and having our efficiency ratio at 58%. We are 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 would rather pursue a prudent growth strategy.

Our asset quality remains in good shape with nonperforming assets at 0.68%, total assets and no net charge-offs per quarter. We are still working out a large credit that we discussed over the past few quarters and, while we are 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 has resulted in further automation of our mortgage process, but more importantly provides a response to at base mortgage products such as Rocket Mortgage by Quicken.

We're seeing a great response already and great performance. One customer completed their application in 13 minutes and received a prequalifying letter in under 30 minutes. We've 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 six 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 in the form 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 will be holding our annual shareholder meeting where we will announce that Craig Denekas, Chairman and CEO of the Libra Foundation based in Portland, Maine, has been named to our Board of Directors. Craig is a lawyer by training and is a highly respected leader in Maine.

The Libra Foundation is unique in that it provides direct grants to various organizations, but it is also dedicated to improving the social well-being of Maine through 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 now like to introduce Debbie 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 down 8% compared to the fourth quarter of 2016. In my financial overview I will compare first-quarter of 2017 results with the fourth-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 have 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 cost with payroll taxes and increased occupancy cost due to the winter months.

In addition to seasonal factors, our fourth quarter 2016 also included several nonrecurring items that I will highlight as I discuss changes between quarters. Net income for the first (technical difficulty) quarter of 2017 declined $826,000 compared to the previous quarter and the decline in both total income expenses 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 a 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 to 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 a 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 fee on an investment recognized in the fourth quarter that totaled $186,000; a 6 basis point decline in NIM due to increased cost of funds. This is due to higher borrowing costs related to the federal rate hike as well as the change in our funding mix with a $48 million decline in average demand and checking account balances between quarters due to seasonality.

We did get a pickup in our NIM of 3 basis points related to our loan yield as these assets reflect the re-pricing of our variables portfolio. We experienced strong loan growth during the first few months of the year, up 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 provision increased to $579,000 compared to $255,000 the previous quarter primarily due to solid loan growth. We feel good about our asset quality with our nonperforming assets at 0.68% of total assets and loans past due between 30 and 89 days at just 0.26%. During the quarter we actually had net loan recovery.

We achieved and 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 climb in OREO and collection costs mostly associated with exiting a sub servicing 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 costs due to significant snow removal efforts as well as debit card expense as our fourth-quarter 2016 debit card expense reflected reimbursement for EMV card stock.

We continue to be comfortable managing the Company at a 58% efficiency ratio. Overall we are pleased with our first-quarter financial results. We will now open the call for questions. Rocco?

(Operator Instructions). Matthew Breese, Piper Jaffray.

Maybe we could just first off talk about the new online mortgage application process. What are the implications of this, 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 have been seeing from a strategic perspective is just with Rocket Mortgage and Quicken really gaining market share, even in that Maine market let alone New Hampshire and Massachusetts; I believe right now Quicken is operating maybe at a number four market share perspective so they've been 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 is why we chose to go out with this product. Actually the implementation cost was not unreasonable, actually very, very manageable. The implementation time to get it was also very manageable for us and it is a -- 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 -- you can have a drop-down menu and pick one or you can just let it go through and then we will assign it internally. Because the real investment of it is not that material, it is 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 -- counted 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 are in? Just more color there because it was a little bit of a surprise.

Sure, I will give some of that and Debbie can jump in if she wants. It 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 of the branch network.

But we also have those in-branch residential lenders that do handle that branch network, they're more community driven. So, I think we have to 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 when you're dealing with real estate agents, which is the biggest referral source we have, once that is known in the marketplace you get to emerge to be the go-to organization.

Greg, I will just add 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 are also hiring more -- we have added two more loan originators, I think they are coming online in the next --.

Yes, in the future they will be online.

Understood, okay. Maybe you could hop to the expense of -- total expense of 21 -- close to $21.5 million this quarter. Deb, I think you noted there was 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?

I did detail one of the 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 -- it was a tough quarter for us -- in Maine at least.

We don't really forecast operating cost, but we still remain committed to that 58% efficiency ratio. Why I am pausing a little bit is we are hiring revenue generators. We are hiring commercial lenders, as Greg mentioned, the recent hire for Portsmouth. We are hiring mortgage loan originators. We're making some investments in the management side hiring business developers. So those items are going to increase a little bit over the next quarter

Yes, and if I can just jump in to add that, that really meshes 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, what I call, we are in this organic growth phase of the Company which we like to be in.

That lets us still invest into the franchise but still deliver the returns that we have 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 a two-part question on the broker deposit front. Was that more symptomatic of the seasonal outflows of core deposits?

And then two, as those deposit 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 broker deposits, they are not CDs, they are not term broker deposits, they are basically overnight brokered money markets. 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 pickup in the core deposit base.

In regards to our net interest margin outlook, we still are a little liability sensitive really depending what the Fed does, if we get another 25 basis points within the next quarter. We forecast -- we take about a 1 basis point hit over a 12-month period of the Fed fund increases.

So, I do think we are going to see the NIM hover, trend down a little lower maybe 2 to 3 basis points lower. In the fourth quarter it is usually stronger because we have a nice core deposit mix at that point. So 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 of that it will be interesting to see what the Fed and where we go with rates going forward.

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

Damon DelMonte, KBW.

Just to kind of follow up on the margin question that was just asked. So when you are talking about maybe 2 to 3 basis points of compression over the next couple quarters, is that on that core margin of [309]? And if so or kind of maybe in parallel to that or in conjunction with that, how are you looking at your projections for future accretable yield impact on the margin?

Damon, great question. That is definitely core margin. Our reported margin will continue to come down more because just that accretion will be at lower levels every quarter. I think we had about 7 -- 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 is down below $600,000 a quarter. That is quite different than a year ago. We do disclose prior year -- in the footnote to the earnings release what that component is because that certainly impacts the net interest income.

Okay, yes, that is helpful. Thank you. And then with regards to the provision expense, kind of looking ahead, I would say 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 the higher provision quarters for us. I think overall when we look out for 2015, on average around 15 to 17 basis points to average loans. Again, I think the second and third quarter will be just a little bit higher.

Okay, that is helpful, thanks.

(Multiple speakers) average that.

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. Does that differ from what you guys have kind of targeted in the past?

Yes. Last year we sold about 65%. The first quarter this year was a little unique where we actually did a portfolio -- a portion. So I just wanted to message that. We think we are 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 were around 8% for the first quarter. Would you expect to keep that level of a pace going in the upcoming quarters or how do you look at the full-year growth?

No, I think as we have 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 get a lot of variability here. So that is a pretty aggressive -- great -- as you said, great start to the quarter but it ebbs and flows.

Got you, okay, that is all that I had for now. Thanks.

(Operator Instructions). Matt Breese, Piper Jaffray.

Thanks for taking my follow-up question. Maybe you could talk about deposit betas in your market, what you are seeing. In the past you have referenced a number of folks with elevated loan to 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 new England and Northeast 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 a while there will 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, they are probably just waiting when will that really happen in a real aggressive fashion. We have got to remember, we are 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 there is -- the core deposit rates have not moved in our markets.

Got it, okay. And then on the wealth management front can you just give 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 is still around that $700 million mark. We are out there hiring, there has been a lot of internal reorganization that we have 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 my last one, what is a good tax rate to use for the rest of the year?

Yes, that is a great question. We are targeting a normalized tax rate of 31.6%. It ran a little lower this quarter, 1% lower because of these discrete windfall tax benefits and -- because of the accounting treatment of that. So I would use a 31.6% and probably anticipate maybe it running a little lower than that.

Great, very helpful. Thank you, guys.

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

Great. Well, I would like to just really thank you all for taking the time to listen into 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 is now concluded. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.