Camden National Corp (CAC) 2017 Q3 法說會逐字稿

Good day, and welcome to the Camden National Corporation Third Quarter 2017 Earnings Conference Call. (Operator Instructions)

Please note that this presentation contains forward-looking statements which involve significant risks and are described in the company's annual report on Form 10-K and in 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, sir.

Thank you, Rachel, and welcome, everyone, to Camden National Corporation's conference call to discuss our third quarter 2017 financial and operating results. Debbie Jordan, our COO and CFO, will give a more detailed review of quarterly financial results in a few moments.

We're pleased to share with you our results for the third quarter of 2017, highlighted by $11.3 million of net income for the quarter or $0.72 per diluted share. This brought year-to-date net income to $31.6 million or $2.02 per diluted share. As Debbie will explain in a few moments, we're very pleased with our performance measured by our return on assets, return on equity, efficiency and asset quality.

Before that though, I would like to provide an update on a few strategic items. We continue to invest in technology to ensure we're strengthening our infrastructure as we grow as well as evolving to meet the needs of our consumers, customers and clients.

During the quarter, we introduced our treasury management technology, which we call TreasuryLink, which provides more services for our large commercial depositors as well as a strong package of online tools. We've already on-boarded several new deposit relationships.

We also expanded our call center services by introducing online and mobile chat capabilities. These services are provided through our secure online banking suite and complement our 24/7 call center services we introduced almost a year ago.

Finally on the technology front, we continue to invest in our branches, to streamline distribution and improve customer experiences by implementing a new account opening platform working with our core processor, Jack Henry.

I highlight these projects to demonstrate that by operating to a 50% efficiency ratio, we're able to provide strong returns to our shareholders while at the same time, investing in our organization for the future.

A few weeks ago, the FDIC released its annual Summary of Deposits report based on June 30, 2017, data. We're pleased to share that Camden National Bank now has the second-largest deposit market share in Maine at 10.6%, and the largest of any bank headquartered in the state.

Also during the quarter, we announced several leadership changes. We welcome Trish Rose as Executive Vice President of Retail and Mortgage Banking; and Jennifer Mirabile as Managing Director of Camden National Wealth Management. Larry Sterrs was named Chair of the Board of Directors as Karen Stanley, our previous chair, reached the board's mandatory retirement age of 72. John Holmes, another Director, also reached the mandatory retirement age in September. We're grateful for Karen and John's leadership and are looking forward to Larry's new role.

I'd now like to turn the discussion over to Debbie.

Thank you, Greg, and good afternoon, everyone. We are pleased to report solid financial results for the third quarter of 2017, with net income of $11.3 million and diluted EPS of $0.72 per share. Net income is up 11% over the previous quarter and up 4% compared to the third quarter of last year.

For the quarter, our return on average assets reached 1.12%, our return on average tangible equity was 14.85% and our efficiency ratio was 55.72%. The key drivers for net income growth over the previous quarter included: an increase in net interest income due to the average loan balances and a stable net interest margin; improved credit quality translating to a lower loan loss provision; and lower operating costs.

Our loan portfolio was up slightly since June 30, bringing our year-to-date loan growth rate to 6%. The loan surge in the second quarter of this year was reflected in average loan balances for the third quarter, driving a 2% increase in net interest income between quarters. We also experienced a 2% increase in average deposits between the linked quarters.

Our net interest margin was 3.19% for both the second and third quarter, however, when excluding purchase accounting accretion and income from charged off acquired loans, our adjusted net interest margin improved by 2 basis points to 3.11% for the third quarter. The increase in the adjusted net interest margin is primarily due to growth in low-cost deposits as we enter the bank's seasonal deposit cycle, combined with a slight shift on the asset side of the balance sheet, with investment security cash flows being reinvested in the loan portfolio via jumbo residential mortgages.

The resolution of 1 large commercial real estate loan during the quarter improved our asset quality metrics, with nonperforming assets at $20 million or 50 basis points of total assets as of September 30. Our loan loss provision for the third quarter was $817,000 or 12 basis points to average loans.

Fee income for the third quarter reached $10.3 million, an increase of 4% over the second quarter. The third quarter includes gains on investment securities of $827,000 as we liquidated securities with small remaining balances. In addition, we recorded fees of just $17,000 on our back-to-back loan swap program compared to $662,000 for the previous quarter. Mortgage banking income totaled $2.1 million for the quarter, up 7% compared to the second quarter.

Operating cost declined to $21.8 million for the quarter, resulting in an efficiency ratio of 55.72%. Between quarters, we experienced decreases in a number of expense categories, including consulting and professional fees, occupancy costs and OREO inflection cost. Our year-to-date efficiency ratio remains under 57%, however, we anticipate it will trend higher as we continue to make investments in both people and technology with a focus on growing revenue.

That concludes our comments on the third quarter financial results. We'll now open the call for questions. Rachel?

(Operator Instructions) The first question comes from Damon DelMonte with KBW.

So first question, just dealing with loan growth. Just wondering if you could talk a little bit about what you guys saw this quarter. I know residential mortgages kind of led the way there, up around 10% but on the commercial side, it looks like CRE and C&I have pulled back. Any color on what's going on there and what the outlook looks like?

Damon, probably the best way to summarize it is that we've seen the market temper a little bit, especially during the summer months. And then really from a competitive perspective, it gets down to some pricing competition that we're seeing that you can only chase so far, if you will.

Okay. And so how are you kind of looking at the balance of the year and as you head into 2018? I think previously, you guys were kind of looking at around 5% annualized growth, does that still hold?

Yes, that still holds. We do anticipate what we've seen the past couple of years, it tends to be a little bit of a flurry of activity to get things closed prior to year-end, and that's what we're starting to see tee up now.

Okay, great. With regards to the margin, Debbie, what was the actual accretable yield this quarter?

Damon, the accretable yield for the third quarter is in the earnings release.

Sorry about that, I must've missed it.

That's okay. There's 2 line items when you look at the quarterly average balances. So I have the net interest margin reported, and then I have the core adjusted net interest margin. So for the third quarter, the accretable was 8 basis points, so our core margin was 3.11%.

Okay. Perfect.

And so a 2-basis-point pickup compared to the second quarter was good news, and I think the one thing that makes me happy is if you look at year-ago, third quarter of 2016, we were up 1 basis point. So I think it's very good news on the margin front. And over the last few years, we've made strides to reduce our liability exposure, and the latest net interest incomes and A/L run that we have is we're slightly asset-sensitive for the first time. And so we're seeing that benefit in the third quarter of this year.

Okay. So as we kind of look ahead to the core margin going forward, I mean, it does look like you're seeing a lot of pressure on deposit pricing. So would you be comfortable in saying that the core margin could expand a little bit from this level?

Well, I would say flat to slightly up. I think the one thing, and I'm sure you're talking to all the bankers on, we have held our rates for a long period of time. At some point -- and the Wall Street Journal articles don't help. At some point, we will all have pressure to do above them. So when we're doing modeling, I think our deposit beta for simulation modeling is up 200, we'd increase overall deposit rates by 30%. So...

Okay. One more question and then I can hop out. But on the expenses this quarter, good expense control, lower than I think what we were looking for at least. You alluded to the fact that you could see some increase in expenses, just given ongoing investments in the franchise. Can you kind of frame out what a good run rate would be for us to kind of look towards in the coming quarters?

Sure. Usually, the third quarter is our best quarter. Usually, where the net interest is -- the revenue is up and our expenses typically dip down on the third quarter. We also thought some of these investments, technology investments that we're going to do, would go live in the third quarter but they're kind of going to hit in the fourth quarter. And so when I look at for 2017, I think we'll be around the 57.5% on them. Going forward, our commitment is to manage under that 58%. So you're going to see a bump in operating expenses next quarter and then thereafter.

The next question comes from Matthew Breese with Piper Jaffray.

Debbie, just on your margin commentary, it sounds a little bit more optimistic than the last few quarters. As we think about the moving parts there, is that driven by just the better deposit cost outlook or on the loan yield side? And with the loan yield side, I was hoping you could just share with us may be your pipeline rate versus the average rate that we saw this quarter.

Yes, I think it's a combination. Certainly, holding our core deposit rates down have helped us. But over the last few years, we booked a lot more on the variable loan rate side, LIBORs and prime, and we've done a lot of back-to-back loan swaps. So that certainly has helped us from turning slightly asset-sensitive. On the loan yield for the third quarter, I think the loan -- the residential portfolio is roughly a little over 4% was the average yield booked. On the commercial side, I don't have that because it's been a mix of the variable and the fixed rate. So I'd have to get back to you on that.

Okay. And then you did note in your commentary that some of the margin expansion this quarter was driven by a mix shift in earning assets from securities into loans. Do you think that will continue? As I look back, securities have been roughly 23% to 24% of total assets for some time. Is that about to change at all or do you think that will hold up roughly around historical levels?

I think -- well, 20% to 23% on the investment side. We are portfolio-ing more on the mortgage side [because that's eventual] real estate side than we have in the last 1.5 years or so. So certainly swapping out at 2.30% to 4% handle is beneficial and we'll continue to do a little bit of that.

Okay. And then staying on the residential side, you saw some really good gain-on-sale volume this quarter. I was hoping you could just frame for us, is that a product of more people and investments on the technology front? Or is there anything you would say was unusual this quarter to drive that? And just taking that one step further, it just seems like a step up in terms of the rate of revenue. Is this a level we should be working off of going forward, understanding 3Q is a seasonally strong quarter?

So yes, yes, and no. The first yes, is we did bring on new lenders in the year, and so we're starting to see that benefit. We also launched the blend, the MortgageTouch, which is the application to make it quicker and easier to apply for a mortgage. So I think those 2 things are positives that have helped us. We're not forecasting -- the third quarter volume was the highest that we've had, actually. So we don't believe we're -- I'm going to be conservative, we're not going to sustain that rate, but I think we'll see -- we did about $120 million of production that closed in the third quarter. I would think it's going to be around $90 million to $100 million in the fourth quarter.

Okay. And then my last question is really on the hiring front. I know early in the year, we had a departure on the wealth side and that's been filled. Can you just talk about that business and some of the trends going on? And whether or not we should see any sort of change from an operating perspective and a revenue and expense perspective?

Yes, Matt. Well, the change that we had was due to a personal reason from the person that was in the job. We were fortunate that we had a person on staff, Jennifer Mirabile, who could step into it, who's been in the Maine wealth market for probably 25, 30 years, so very well connected. So in many ways, we have that bench and we're not missing a beat. We continue to be looking at Wealth Management as a very important future revenue stream for us. We're seeing some of the things come in as far as new business and all. But I think when we look out to it is we'll continue to invest in that business. We have to broaden the investment offerings that we have as well as probably bring in some more people from the business development front, as well as some of the support areas from -- relationship managers and portfolio managers. So what I would say is probably on the top line, we should see incrementally that build up over the next couple of quarters, but we'll be reinvesting back into that business quite a bit. The other major change that we had, I mentioned Trish Rose joined us. She was formerly with Citizens Bank. She's running -- she's EVP of Retail and Mortgage Banking for us, has brought in a very strong retail administration perspective, but more excitingly for us is a sales management and sales culture perspective. So we're looking forward to deepening that area and that expertise in the sales side, especially as we get into those more competitive, Southern Maine, Southern New Hampshire markets.

Got it, okay. And can you just remind us what assets under management ended the quarter at versus a year ago or last quarter?

Sure. Under the Wealth Management, our total under management at September 30 was a little over $800 million, which is flat compared to a year ago. But included in assets under management are Camden National Bank funds, and that's actually down $10 million year-over-year. So we've had, if you just look at clients under management, a 1% increase or a $10 million increase.

(Operator Instructions) 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 all for the time that you've taken to hear the story about our quarterly earnings. On behalf of all of us at Camden National Bank, I want to thank you all for your attention this afternoon as well as for your support, and I look forward to talking to you soon. Take care.

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