Camden National Corp (CAC) 2017 Q4 法說會逐字稿

Good day, and welcome to the Camden National Corporation Fourth 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 over to Greg Dufour. Please go ahead.

Thank you, Rachel, and welcome to Camden National Corporation's conference call to discuss our fourth quarter 2017 and year-end results.

I'd like to take a few moments to comment on our 2017 results and then provide an update on some of our accomplishments during this past year.

The Tax Cuts and Jobs Act of 2017 impacted 2017 earnings, primarily due to the revaluation of the deferred tax assets.

We recognized $14.3 million of additional tax expense in the fourth quarter, which resulted in reported net income on a GAAP basis for the year of $28.5 million or $1.82 per diluted share. In her comments, Debbie will review the financial impact of several other items we recorded in the fourth quarter as a result of the Tax Act.

Setting aside the impact of the Tax Act, our 2017 financial performance was strong. We experienced loan growth of 7% and deposit growth of 6%. Excluding the onetime tax reform charge, our adjusted operating income was $42.7 million or $2.73 per diluted share, an increase of 7% and 6%, respectively, from our 2016 results.

Our adjusted operating return on average assets was 1.07%, up from 1.04% in 2016 while our adjusted operating return on average equity was 10.51%, up from 10.47%.

Also during the quarter, we announced a 9% increase to our quarterly dividend. Last quarter, I mentioned that we continue to invest in our organization and the fourth quarter was no different. Some of those investments are more infrastructure-related like upgrading our ATMs to EMV chip technology, while others are oriented to processing efficiencies that improve both our internal work as well as our customer experience.

After several months of hard work, we implemented a new automated commercial loan underwriting platform that will improve our underwriting process while at the same time, increase our speed to answer for our business customers.

Our mortgage banking area continues to expand as we find opportunities to hire mortgage originators and we see continued adoption of our streamlined, online mortgage application process, which we've branded MortgageTouch.

I'd also like to note that last quarter, I announced we introduced a new treasury management system called TreasuryLink. This is the backbone of our commercial deposit platform and I'm pleased to share having these expanded capabilities have contributed to over $135 million in new deposits in 2017.

All of this gives us a great starting point for 2018. Our focus continues to be on deposit and loan growth while at the same time, looking to expand our noninterest-related revenue sources. Some of these activities will be introducing new products and looking for new ways to expand our reach into new geographies and customer segments. Other activities will be refining our existing opportunities and leveraging the investments that we've already made.

With that, I'd like to turn our discussion over to Debbie.

Thank you, Greg, and good afternoon, everyone. As mentioned by Greg, excluding the impact of the new tax legislation, we are pleased to report solid fourth quarter results as well as ending the year in such a strong position.

In the fourth quarter, we revalued our deferred tax assets and liabilities resulting from the lower corporate tax rate and recorded additional income tax expense of $14 -- $14.3 million.

In reviewing our operating results, we have excluded the impact of this nonrecurring event and will reference adjusted numbers.

For the fourth quarter of 2017, the company's adjusted operating income was $11.1 million and adjusted operating diluted EPS amounted to $0.71 per share.

Adjusted EPS was down 1% from the previous quarter, primarily due to the special fourth quarter bonus granted to nonexecutive employees, which resulted in additional expenses of $709,000 or $0.03 per diluted share.

For the quarter, when adjusting for the tax charge, our operating return on average assets was 1.09% and our efficiency ratio was 57.75%.

We are pleased with our fourth quarter performance, with an increase in net interest income due to a combination of loan and deposit growth that resulted in a widening net interest margin and continued credit quality improvement, translating to a lower loan loss provision.

Looking at our balance sheet between quarters, our loan portfolio was up $34 million and total deposits increased $44 million, representing an annualized growth rate of 5% for the loan portfolio and 6% for deposits.

Our deposit base benefited from our normal seasonal inflow as well as success in attracting new business deposit relationships. Comparing fourth quarter 2017 to fourth quarter 2016, average checking account balances grew 13% to $1.3 billion.

We experienced expansion in our net interest margin during the fourth quarter of 5 basis points, with our net interest margin reaching 3.24%. The factors influencing this improvement include the shift in our funding base from high-cost borrowings to checking and money market accounts, which resulted in a decline in our cost of funds of 2 basis points.

In addition, we had a pick-up in asset yield as a portion of our loan portfolio repriced, driving a 3 basis point increase in our loan yield.

Credit quality metrics remain strong, with our net charge-off ratio for both the quarter and the full year at just 7 basis points. Our provision for credit loss for the fourth quarter was $238,000.

Fee income for the quarter was $9.8 million. When excluding the third quarter investment gains of $827,000, fee income grew 4% in the fourth quarter, primarily due to growth in deposit-related fees and an increase in back-to-back loan swap income of $637,000.

Operating cost increased to $23.1 million for the fourth quarter and included the special bonus to employees of $709,000.

When excluding the bonus, total operating expenses increased 3% compared to the third quarter of 2017, as a number of technology investments came online during the fourth quarter.

Our efficiency ratio for the fourth quarter excluding the bonus was slightly under 56%.

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

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

First question, I just want to talk a little bit about the margin and kind of your expectations going forward. What was the core margin ex accretable yield this quarter?

The core margin for the fourth quarter actually, Damon, was 3.17% and that's -- so that was up 6 basis points compared to the third quarter on the core basis. And I think 2 things: one, having really good solid deposit growth helped contribute to that. We're also being very disciplined on deposit pricing, and so not moving our core rates also contributed to that.

When I look at the first quarter, we will have some outflow of our deposit base, that is pretty standard. It will be between 2% and 3% of our outflow, so I would expect to see a shift back into some borrowings, and so the cost of funds will move up a little bit. So when I look at the first quarter, I would say the margin's going to be down maybe a couple basis points.

Okay. And then if we get a rate increase, you just had one in December, obviously. If we get another one here in March, I know you guys historically have been somewhat on the liability-sensitive side. How do you see the margin performing beyond the first quarter if we get those rate moves or that rate move, I should say?

Yes, we've done a lot of things to be more asset-sensitive and so our loans actually, we have more loans that will reprice than our deposits at this point. I think the wildcard has been how aggressive will folks be, banks and other competitors, in moving core rates or CD rates. And so I think we're in a better position for the rising rate environment at this point. And again, we're going to be pretty disciplined on the funding side.

Got you, okay. And then as far as your outlook for loan growth as we go into the next year, you finished the year off -- this quarter with 5%, I think you're around 7% for the year. Do you think something in that mid-single-digit range is reasonable as you look out to '18?

Yes, Damon. I think that's a good number to work with. That was really what we were talking about throughout '17 and we feel that, that will continue in '18.

And as far as where you're sourcing that growth from, both from an asset class and geographically, could you provide a little color on that?

Sure. It's really focused on a lot of the products and the geographies that we're in. It's relatively diversified, albeit it does tend to be more in the southern-oriented part of our franchise, so Southern Maine and New Hampshire. We can move the needle on the dial with CRE transactions. However, we're seeing C&I pick up for us and we intend to really expand our C&I lending, if you will. So the way that we're doing it is, when you look at our Portland-based commercial team, we do have a commercial real estate lender there on staff, but we have 4 C&I lenders in our Portland office. And that's just there, we have others in Southern Maine that are out in some of the other banking centers. So we're putting more feet on the ground to build up that business.

Got you, okay. And then with regard to the new effective tax rate for you guys, just given the law that was put into place, what are you modeling for a new tax rate?

Damon, we're using an effective rate of 20% going forward.

20%, okay, okay. And then obviously, circle back on the margin question before. There will be some impact from the offset on the FTE adjustment, is that correct?

That is correct, and that is partly why the margin would go down for the -- in the first quarter. Yes.

The next question comes from Matthew Breese with Piper Jaffray.

Just want to talk about the yield curve and your ability to pass through higher rates onto your borrowers. I just wanted to get a sense for the extent of which you've been able to do that.

Sure, Matt. Our fourth quarter, I look at new loans coming on the books and the overall yield on the portfolio on the new production was slightly lower than the existing yield on our portfolio, and part of that is mix. Commercial real estate, we're still doing LIBOR, about 50% of our CRE was LIBOR-based instead of fixed rate. We target a spread of LIBOR over 180, we're trying to manage to that. But it is challenging. We're not really seeing rates, at least on the commercial side, go up. I think on the residential side, we actually -- our average yield was 4.25% on the mortgages that we booked in the fourth quarter, so we did get a little pick-up there.

Got it, that's helpful. And then sticking with the mortgage, you've done a lot of work there, a lot of new hires and investments. Wanted to get a sense for really 2 things: one, what is the growth profile of that line item you think in the year ahead? And then 2, on the secondary market, how should we be thinking about gain on sale from residential loans?

Sure. When I look at gross production for 2017 versus 2016, we were up 10%. So we're about $413 million of gross production for this year. We actually were -- didn't sell as much as we first forecasted because we had room on the balance sheet to put some in the portfolio, so we changed our strategy a little bit. So we sold about 54% and retained about 46%. We're looking for a significant increase in gross production for 2018 and we're targeting 60% salable. We might decide to portfolio some of that -- really good paper, that it's attractive to hold on to the balance sheet. We're still receiving a 3% gain on the salable piece and so, fingers crossed that we can maintain that spread.

Okay. No, that's really helpful. And then Greg, in your opening commentary, you mentioned that you're constantly investing in new products and maybe looking for new geographies. And just curious what those geographies are and if it's outside of your current footprint, to what extent?

Sure. And Matt, it really is still what we've been talking about before. We consider our geography and what we have existing here in Maine, with our legacy markets helping to support the growth that we want to do in Southern Maine. We continue to like and experience New Hampshire. We do have that loan production office up in Manchester. We're opening up in actually in a few weeks, another office in Portsmouth. We also target that Northern Massachusetts area and from that, I kind of define it from the low Andover area, east and north of 495. Not that we can't go down there but call it, that's our sweet spot of growth.

The way I would see us expand this way is we like to build around people. And we do go out when we're recruiting and it's a very competitive market to expand by recruiting people in from commercial lending especially, but we'll do that. So as we find those right people, they can either fit in 1 of those 2 offices. Or if it lines up with they're a very good individual in a market that we're not in, it's relatively easy for us to open up that type of model. Once we build up critical mass, then we can look to a more full service-type of location.

From a product perspective, we continue to make advances in our wealth management area to complement the bank side; that is an investment of people. One -- in our Portsmouth, New Hampshire location ultimately, we'll have a wealth manager there where we don't have one on the ground yet or we haven't had one to date in that very southern Maine -- southern New Hampshire area. The other investments that we'll be making in, let's say, in products, some of it is, at our point of a size bank we are, when I say making these investments, they can range from tens of thousands of dollars, maybe $100,000 or $200,000 when you get into a new loan system or something like that.

One example that is really kind of cost-effective broadening out our online offerings is we are now on -- we will be rolling out in a few weeks, our person-to-person payment or P2P feature on our online banking, so we'll have that. Some of those other investments is overall sales training. We'll have a major focus on that in 2018. And some of that more infrastructure investments that we make is reflecting our size and our growth is installing a new human resource information system that will dovetail into our talent management that we're trying to do as well. So that's kind of a high-level view of where we think we'll be focusing on in '18.

Right. Well let's continue that. Deb, in prior quarters, you've talked about, I think, a targeted goal of a 58% efficiency ratio. With the new tax rate, obviously, your bottom line is going to be a bit better. Does that change at all?

We ended the year just at 57% efficiency ratio. We're happy to be at that level. Last quarter, I referenced that we felt our operating costs were going to lift a little bit because we had some of these loan and deposit platform systems coming online. I would still say under 58% is where we're very comfortable operating at.

Okay. And then Greg, just to follow up. You had mentioned geographically, really I mean, from your legacy Camden markets down to Portsmouth and Manchester and Northern Massachusetts. Should I read between the lines here a little bit and think that there's going to be a little bit more focus on Northern Massachusetts? I know historically, you've kind of strayed away from going as far south as Boston, but should we see more growth from Northern Massachusetts?

Well, what I'd say and actually even today, we can service and when you look at the commercial real estate group, we do today, finance projects in that Northern Massachusetts area. I'd be remiss without mentioning that we do have our mortgage office in Braintree, Massachusetts. So on that case, we get exposed to that -- South of Boston. Those are very specific product lines that we can get into. We do have mortgage originators that are already operating and are based in call it, that Northern Massachusetts market that I have.

So we do that through, call it, people or important and defined areas like our Braintree office versus opening up a large banking center someplace. Again, we like to build a critical mass before we look at that type of investment and a fixed cost structure.

(Operator Instructions) We do have a follow-up from Damon DelMonte with KBW.

Just wanted to circle back on the expenses. Deb, could you just kind of give a little framework around what a reasonable quarterly expense rate would be -- you'd be looking for?

Yes, there is some seasonality. Our first quarter of every year will run higher because of occupancy cost. I would say on average for the year, we'd be between $22.5 million and $23.5 million.

Okay, that's helpful. And then with regard to the provision, I mean, credit trends are pretty solid. Should we just kind of factor in a provision that's more or less just covering the growth?

Yes, I think that makes a whole lot of sense at this point in the cycle. Yes.

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.

Thank you. I'd like to really just say, and I know we've had some great conversations over the past several quarters about the organization. Reaching on the adjusted operating income basis of $42.7 million is a major, major milestone for us. We're extremely pleased with those results, proud of the team that has helped deliver those. That's throughout the whole organization, not just products, but the support areas as well. And it's a great story and some of it takes a lot of support from shareholders, several of you were on the call as well as the analysts. So as we look back and look at a great year, we're also looking toward 2018 being a great year. So we thank you for your attention, have a great day.

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