Camden National Corporation
Q2 2018 Earnings Call Transcript

Published: 31 Jul 2018

[Operator:]

Good day. And welcome to the Camden National Corporation Second Quarter 2018 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 involves 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 this event is being recorded. I would now like to turn the conference over to Greg Dufour. Mr. Dufour, please go ahead.

[Gregory Dufour:]

Thank you, Anita. And welcome to Camden National Corporation's conference call to discuss our second quarter 2018 Results. I'd like to take a few moments to comment on the results and then provide an update on some of our accomplishments this year. We're pleased to report $12.2 million of net income or earnings per diluted share of $0.78 for the second quarter. Debbie will provide some background. But we're glad to see our loan growth rebound in the second quarter to $78.4 million or 11% on an annualized basis. Even with this loan growth, we kept our loan-to-deposit ratio at June 30 at 94% compared to a first quarter average in 2018 of a 104% for all Maine-based banks. We also continued to experience more adoption of our technology capabilities by our customers. On an average month, we have over 800,000 customer log-ins to our digital platform. And during this quarter, the number of unique users accessing our digital platforms through mobile phones and tablets surpassed those logging in from traditional desktops. We also saw a 25% increase in mobile deposit transactions during the second quarter of 2018 compared to the second quarter of 2017. During the quarter, we also announced a $0.05 per share dividend increase, which when combined with the $0.02 per share dividend increase we announced in December 2017 represents a 30% increase in quarterly dividends from a year ago. This reflects the benefit from lower federal tax, income tax rates, as well as our ability to generate capital through strong consistent and normal operations. I'm also pleased to announce that earlier today the Board appointed Marie McCarthy as Director of Camden National Corporation. Marie is the Chief Operations and People Officer at L.L. Bean here in Freeport, Maine. We look forward to Marie joining the Camden National family. I'd like to now turn the discussion over to Debbie.

[Deborah Jordan:]

Thank you, Greg, and good afternoon, everyone. With our net income of $12.2 million for the second quarter that translates to a return on average assets of 1.19% and a return on average tangible equity of 16.23%, net income for the quarter declined 5% compared to the previous quarter, resulting from the change in our loan loss provision of $1.5 million between the two periods. A favorable loan resolution resulted in a recovery of almost $0.5 million in the first quarter, while we recorded a standard loan loss provision of $983,000 this quarter. On a linked-quarter basis, revenue was up $1.3 million, while operating expenses increased $591,000, both an increase of 3% over the first quarter. Linked-quarter revenue growth of 3% was driven by an 8% increase in fee income and a 2% increase in net interest income. Almost all key categories were up compared to last quarter and net interest income growth was driven by solid loan and deposit growth combined with the stable net interest margin of 3.7%. Deposit generation continues to be a focus with average deposit growth of 1% between quarters and up 9% compared to the same period a year ago. Our average cost of deposits now stands at 48 basis points, which is an increase of 6 basis points on a linked-quarter basis and a 16 basis point increase compared to the second quarter of last year. Our loan portfolio grew $78.4 million between quarters or an 11% annualized growth rate. 60% of our net growth during the second quarter came from residential mortgages as we expanded our mortgage offerings and capabilities in Southern Maine and Northern Massachusetts. We are happy to see commercial real estate and C&I lending growth of almost 2% during the quarter, although market demand is less robust compared to a year ago in a very competitive environment. Our loan loss provision for the quarter of 15 basis points was primarily the result of loan growth. Asset quality remained strong with net charge-offs for the second quarter of $312,000, representing an annualized net charge-off ratio of just 4 basis points and non-performing assets were just under $20 million at quarter-end or 0.47% of total assets. Operating expenses increased 3% between quarters to $22.9 million for the second quarter. Our efficiency ratio for the second quarter is still higher than our 58% target level, but we see expenses levelling off and anticipate revenue growth to achieve an efficiency of 58% for the full year of 2018. That concludes our comments on the second quarter financial results. We'll now open the call up for questions. Anita?

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Matthew Breese with Piper Jaffray. Please go ahead.

[Matthew Breese:]

Good afternoon, everybody.

[Gregory Dufour:]

Hi, Matt.

[Matthew Breese:]

Maybe to start just the high level stuff, the margin stability was pretty solid, wanted to get your outlook there. In addition to obviously loan growth came in very strong, wanted to get a sense for the sustainability of those numbers?

[Gregory Dufour:]

Sure. I'll let Debbie dive deeper into the margin. On the loan growth side, I think there was a function of two things. Really compared quarter-to-quarter we had a slower start to the year or some of it was obviously weather-related which impacted the residential side. So, we saw that come back on the residential side and loan growth. I think that's really obviously dependent on the market and inventory that we have on the market in Maine, New Hampshire and Massachusetts. We're also seeing as far as from a sustainability perspective a balancing out that now we do have the exposure in New Hampshire and Massachusetts. So, we're not dependent just on the Maine real estate market. Commercial loan growth, that's again activity-related, call it the benefit that we're seeing there is obviously addressing the market need. As far as I think the risk to sustaining that type of growth level comes by competitive factors including pricing, as well as deal structuring. And so, we'll always remain willing to assess growth in the light of not sacrificing our credit quality.

[Matthew Breese:]

Previous quarter results, I think for the past couple of years we've always thought about kind of mid-single digit type growth rate. Does anything this quarter changed your outlook there?

[Gregory Dufour:]

No, it doesn't, Matt. I think still that mid-single digit is still the number to focus on for us. And at the very least, it reflects our cycle that we deal with here, obviously our cost of funds will reflect the higher inflow of cash coming into the Maine economy, which still drives the organization. So, that's why we still feel pretty good about that mid-single digit.

[Matthew Breese:]

Okay. And then on the margin, obviously deposit costs are pretty well contained. Just wanted to get a sense for sustainability at these levels?

[Deborah Jordan:]

Sure, Matt. How are you today?

[Matthew Breese:]

Good. Deb, how are you?

[Deborah Jordan:]

Great. Glad to see the margin at the 3.10. The second half of each year is a little easier for us as we have that seasonal deposit inflow that comes in. And I would say our deposits are little stronger than what we forecasted even just for the second quarter. So, that certainly will make a difference. We're also seeing on the loan side, the new loans we generated for the quarter were 20 basis points higher yield than what our current book yield is on the loan portfolio. So, feel pretty good that we'll be at this level for the remainder of the year. Certainly, we're starting to see more competition on the deposit and funding side. People are seeing certificate - CD promotions for the first time, certainly a lot of people - banks have been out there on the money market side. But we still have a nice core deposit base, the checking account balances will come in for the second half of the year. So, feel pretty good about the 3.10 level.

[Matthew Breese:]

Great, okay. And then a little bit nitpicky. Just focus on expenses, one item that came in higher than what I was thinking was the OREO expense. And I want to get a sense for is this a new kind of run rate level or do you think we could - to get to that 58% efficiency maybe you see that item ticked down a bit?

[Deborah Jordan:]

Yeah. I think that there were some legal costs in the second quarter. We don't anticipate it being at that level for the next two quarters. And then the other item that was a little higher in the second quarter and it happens every year on the consulting and service - professional service fee side. We do grant our directors equity compensation and it's an expense immediately. And I think that's about a $150,000 that's recorded every second quarter of each year. So, that should trend down also in the third quarter.

[Matthew Breese:]

Got it. Okay. Greg, I appreciate the commentary on the increased usage of mobile. What is it do you think the thought process on the physical footprint? Does it provide you with any flexibility there?

[Gregory Dufour:]

Well, it definitely provides us a lot of flexibility. I think when you look at the physical footprint of how we're structured and probably any organization that's in a marketplace of what we are is we are seeing lower volumes coming through our branches, which actually puts more pressure on those branches in our smaller markets. However, we still see a huge affinity for our branch network and that goes from retail customers, small business customers and even in the C&I customers. I joke, even though they may not go into our branch, they want to see that sign out on the road. When you get into commercial real estate, they are less branch dependant. So, what I view this as, as we're seeing adoption of digital which is driven by the products we're offering there, and the services is that it's giving that balanced approach. It gives us an advantage compared to our smaller competitors and it keeps us abrasive what some of the bigger competitors do, because when you're going up against as we do, BOA and TD, you have to be able to respond with good branch coverage, but also the online digital presence as well.

[Matthew Breese:]

Right, okay. Last one, just on the tax rate, been below 20% now for a couple of quarters. Should we be thinking on 2019 for a little while here or is it going to tick up?

[Deborah Jordan:]

It really depends if we have any exercise of options. So, I would use the 20% going forward.

[Matthew Breese:]

Okay. That's all I had. Thank you for taking my questions.

[Gregory Dufour:]

Great. You're welcome. Thank you, Matt.

[Deborah Jordan:]

Thank you, Matt.

[Operator:]

[Operator Instructions] Since there appears to be no further questions. This concludes our question-and-answer session. I would like to hand the conference back over to Greg Dufour for any closing remarks.

[Gregory Dufour:]

Yes. Thank you. And I just want to thank the folks that are on the call. Obviously, the attention that we get from all investors and those of you taking the time today to hear our earnings call, we very much appreciate the interest, as well as the support. Have a great day.

[Operator:]

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