CAC (2019 - Q2)

Good day and welcome to the Camden National Corporation Second Quarter 2019 Earnings Conference Call. My name is Chuck, and I will be your operator for today's call. [Operator Instructions]. Please note that this presentation contains forward-looking statements, which involve significant risks and uncertainties that may cause actual results to vary materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in such forward-looking statements are described in the company's earnings press release, the company's 2018 annual report on Form 10-K and other filings with the SEC. The company does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the forward-looking statements are made. Any references in today's presentation to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in your press release. Today's 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. At this time, I would like to turn the conference over to Greg Dufour. Please go ahead, sir. Gregory

Good afternoon and welcome. Early today, we released our second quarter 2019 earnings of $13.2 million, which reflected an 8% increase over our second quarter 2018 earnings. Earnings per diluted share was $0.85 for the quarter, a 9% increase over EPS for the second quarter of 2018. Our performance ratios for the quarter were also strong, with return on average assets of 1.21%; return on average equity, 11.63%; and a non-GAAP efficiency ratio of 57.27%. This performance helped drive our first half results with earnings of $27.5 million and diluted earnings per share of $1.76, both an increase of 10% over the first half of 2018. These are record first half levels of performance for us and needless to say, something we're very pleased with. In a few minutes, Debbie will review some of the specifics on our performance, but I'd like to first provide some insights into our markets. For the past year, we've seen strong loan growth, with our portfolio growing over 8% from June 2018 to June 2019. In addition, our long-term focus on deposit generation paid off with 17.5% growth over the same period. Over the past few months, we've seen several changes in the market. Overall, loan activity in commercial areas have slowed. We've seen a continued loosening of loan structures, and we've seen significant lowering of margins. Fortunately, we've built a strong team of lending and credit professionals, so we can selectively pursue transactions. And on an increasing basis, we're stepping away from transactions where the margins are too thin for our liking. On the deposit side of the house, we're also seeing pricing pressures resulting in us being more selective. We're uniquely positioned as we have product and technology capabilities that allow us to compete against our larger competitors. At the same time, we have a great team of commercial, treasury and retail professionals on both the sales and service sides. We're seeing many competitors in the marketplace putting in place pricing strategies we believe are not in our long-term best interest. Here again, we expect to step away from some opportunities that we feel are not appropriately priced for short- and long-term market considerations. Fortunately, and with the loan-to-deposit growth we've experienced over the past year as well as our solid loan-to-deposit ratio positioning, we have the flexibility in these market conditions to remain opportunistic for the right customer and client. As you know, we don't give a lot of guidance, but I will share we feel our view of looking at the long term will serve us and our shareholders extremely well. You'll also note that our total share repurchases were 166,778 shares for the first half at an average cost of $42.62 per share. During the quarter, S&P Global Market Intelligence named Camden National Corporation to its list of the top 50 best-performing community banks with assets ranging from $3 billion to $10 billion, and Bankrate.com named Camden National as the most popular bank in Maine. Finally, we're extremely proud that our Hope@Home program, which addresses homelessness in our communities, surpassed the $400,000 giving mark for donations to homeless shelters since its inception in 2014. I'd now like to ask Debbie to review our financial performance.

Good afternoon, everyone. As Greg mentioned, we are pleased with our second quarter results with the net income up 8% over the same period last year due to strong loan and deposit growth, net interest margin expansion and an increase in fee income. When comparing results to the previous quarter, net income of $13.2 million decreased $1.1 million or 7% primarily due to a 5% increase in operating costs and a slight decline in net interest income. Operating expenses reached an expected $24 million level for the second quarter, representing an increase of $1.2 million between periods. Foreclosure and collection costs increased $716,000 between periods due to a recovery recorded in the previous quarter. In addition, personnel costs were up 4%, reflecting a full quarter of merit increases. During the quarter, we had solid loan and deposit generation and a healthy fee income growth. The loan portfolio increased $57.9 million since March 31 with 8% growth in C&I balances and residential mortgages up 2%. We are very pleased with our net C&I growth of $34.9 million, with unit volume increasing for the quarter. Commercial real estate balances and home equity balances were slightly up between the quarters. Core deposits and CD balances increased $94.3 million or 3% between quarters. When adjusting for the shift of $70 million from checking to CDs related to one large deposit relationship, checking account balances grew 2% between quarters. Despite solid loan and deposit growth for the quarter, the company's net interest income declined 1% compared to the previous quarter due to a decrease in the net interest margin of 7 basis points to 3.11%. Net interest margin compression between quarters was the result of the asset yield decreasing 2 basis points and total funding costs increasing 6 basis points for the quarter. The company's average cost of deposits was 0.86% for the second quarter. This reflects an increase of 8 basis points between quarters, which was a little higher than anticipated. We have been happy with our management of funding costs over the rising interest rate cycle. The Federal Reserve has raised its Fed funds rate 9x from December 2015 through June of this year for a total increase of 225 basis points. During this period, the company's average cost of deposits increased by 60 basis points, resulting in a full-cycle deposit beta of 27%. Given the interest rate outlook of rates lower for a longer period and the company's current balance sheet position, we have taken several actions to reduce the impact to net interest income. We have emphasized fixed-rate lending for both commercial and residential and have added duration to our investment portfolio through more recent purchases. The company also entered into a $100 million hedge during the quarter to help protect us against downward rate movement. In providing net interest margin expectations for the remainder of this year, we anticipate the 25 basis point Fed rate cut tomorrow to eliminate the benefit we normally receive from seasonal core deposits in the third and fourth quarter. We estimate the impact of this will result in our net interest margin remaining relatively flat for the second half of the year. The quality of our loan portfolio remains strong with nonperforming assets at the $15 million level for the past 3 quarters and year-to-date net charge-off of under $500,000 or just 3 basis points to average loss on an annualized basis. The increase in provision expense between quarters was largely due to loan growth. The final area worthy of mention is fee income. Our second quarter fee income topped $10 million, which is a 7% increase over last quarter and a 6% increase over the second quarter of 2018. Fee income was up over each of these periods across most fee categories. The increase over the previous quarter was largely due to seasonality. That concludes our comments on the second quarter results. We'll now open the call up for questions. Thank you.

[Operator Instructions]. The first question comes from Damon DelMonte with KBW.

So first question. Deb, I was just looking for a little bit more color on the margin. I think you said that given some actions that you guys have taken to prepare for a rate cut and the rate cut coming in, you expect to hold the margin relatively flat for the back half of the year. Is that correct?

Yes. We still are slightly asset-sensitive. And so with the Fed rate cut, normally you would see a slight decline in net interest income and margin. Keep in mind that the second half of each year, we do get around a 2% pickup in our demand deposit base. So what we're envisioning is that benefit that we have on the deposits will help offset the impact of a rate cut. When you look at our balance sheet, about 1/3 of our loan portfolio will reprice in the next 30 days versus on our deposit side. It's about 18% that will reprice within 30 days. So we certainly like -- I think most banks will feel a slight impact with the rate cut. The other thing that we're seeing in our markets, and you saw it between quarters, is deposit rates are still moving up. We did great through the whole rising rate environment, but we knew we were lagging on the rate increase on the deposit funding. And so although promotions seem to have dropped off and our acceptable exception pricing we've reduced that level by quite a bit, there's still a lot of competition in our market. So we still think we're going to feel a little pressure on some of the deposits, especially if they shift to the CD side. So what I'm hoping for is just a flat margin for the rest of this year given the deposit seasonality.

Got it. And I think you mentioned in the deposits this past quarter, you had a large borrower that moved from the interest-bearing checking accounts into CDs. Is that correct?

Yes. That is correct.

Okay. And then I guess quickly on loan growth. C&I growth this quarter was pretty strong. Any color on what drove the quarter end balance increase?

I think the great news on that, it came from all fronts. We had one larger credit of $10 million, but then when we drilled in, our unit count was up 18% compared to the first quarter. And part of that is we have MortgageTouch, I mean, a business touch, which helps automate the application process. We really saw more activity on the banking center side, retail lenders still participating on the business loan side. So across the board, happy to see that kind of volume.

And then, Greg, your initial comments about kind of some softening in the commercial general -- greater commercial market in your footprint. How does that kind of play into growth for the back half of the year?

Sure will. What I'd say, Damon, is we don't expect the first half growth to replicate obviously in the back half. However, as we've said all along, we look to mid-single-digit loan growth, and we're seeing it a little bit on the higher end. So we expect what will happen in the back end will bring us in on the year where we expect to be.

Okay. And that's kind of a mid-single-digit range?

Yes.

The next question comes from Matthew Breese with Piper Jaffray.

I just wanted to focus in on the margin and the margin outlook for the back half of the year. In years past, when I look from the second quarter to the third quarter, it can kind of vary in terms of the benefit received. And so I know the guidance is flat NIM, but without a Fed cut, what would have the margin benefit been so I get a good idea of what happens in 2020?

Yes. Matt, I think we probably would have seen 3 to 4 basis point increase in the back half of the year if we didn't have a rate cut and we weren't seeing some of this deposit competitive pricing pressure.

Right. Okay. And on both those fronts, you mentioned an increase of competition both from the loan -- on the loan front and on the deposit front. I was hoping you can provide some anecdote. For instance, if it's a C&I loan or a CRE loan that you were both -- you were being competitive on and you lost it, how much more competitive is it on a rate and structure perspective? Could you give us some color there?

Yes. Sure. And it tends to be on the larger transactions which tend to be more CRE. And again, the CRE market, especially in our markets in New England, are primarily broker-driven. And so in effect, all deals are being shopped. I would say, on some credits, we're seeing that we could be out of the market as much as on a spread basis 50, 60 basis points. Now we will get competitive for the high credit quality deals, not to say that we'd get down over our benchmark by that dramatic approach, but we will be more competitive on the pricing for better credits. But when we see 50 to 60 below, that's out of our box. And on the structure side, we still tend to see pressures to increase LTV as well as spread out amortizations. It's pretty normal to see the starting point on conversation or amortization being a 30-year mark. And again, right credit, right transaction, right market, that may be acceptable, but you can't apply that to all deals we come across the transom.

Right. Okay. And then just stepping back and looking at the numbers, I mean that kind of explains the last two quarters of commercial real estate growth. So as we think about getting to that mid-single-digit kind of growth, should we consider residential and C&I loans kind of pulling the wagon here?

They should. Of course, residential is always a big variability compared to the housing market. The conditions are whether we choose to hold them or sell them. So it's a little bit more a fungible asset that way. We do always want to see C&I grow. That's been a very long-term strategic commitment for us. We're seeing some good movement, as Debbie referenced, not just from our C&I lenders that tend to be aiming for the larger transactions, but we like those bread-and-butter small business loans coming through our retail and small business franchises. So we do want to see more of that. I think the big struggle that probably all banks in our situation has is it takes a lot of work to maybe get $5 million of growth on a C&I book of business because that could be multiple loans, and you can have one CRE deal doing 10, so we always had to monitor that.

And I will also say our mortgage pipeline, committed pipeline is really strong. It's over the $100 million mark as of June 30.

And that compares to -- what did that compare to last quarter?

Oh, last quarter, I want to say we were at under -- around $70 million.

Again, this is a seasonal brand. It should be a lot higher.

Correct. Correct. Yes. Okay. Understood. And then just going back to expenses, they picked up this quarter. And in the release, you note that there were some additional expenses tied to OREO, $360,000. So first is, is the $360,000 something that we should expect to continue? And then secondly, if we were to back that out, you're still a little bit higher than what I was expecting. Is there anything else in there that is onetime or unusual in nature?

Yes. In that line item, I would say we should -- on a normalized basis, we should see around $250,000 a quarter in that line item. So we did have something related to subservicing portfolio that hit during the quarter. So that is not recurring, and that was about $300,000.

Yes.

Okay. And then everything else was normal course of business?

Yes. Yes.

Okay. And then the last thing I just wanted to touch on is our share repurchases. Given everything you've kind of laid out in that environment, it's difficult. It's -- growth will be a little bit more challenging. Could we see the pace of repurchases pick up? And if so, to what extent do you think?

I would say that we always look at it from -- really, it's almost like making an investment that we look at. So probably like anybody else, we prefer to buy on a dip. And so we get comfortable when we're trading up. I don't want to really make a commitment of are we going to pick up the pace or not because it is just really by the prices driven. And I think on the flip side of that, Matt, when you look at overall capital management, even though the share repurchasing is a good tool and a tool we believe in, looking at the economic conditions, we do -- we're still capital focused, if you will, for whatever may pop up over the next few quarters here or several quarters.

[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.

Thank you, Chuck. I want to just say we feel pleased with the quarter, pleased with our positioning for rate declines, economic conditions. As with anything, I do want to just recognize, for those of you on the call, our shareholders and investors, really, we have a great team of people that are getting a great job done for us, positioning us well. They've put a lot of thought and a lot of hard work into that. So I just want to publicly acknowledge and recognize those efforts. With that, I also, as always, appreciate your attention and support of the company. Have a great day and look forward to talking to you all in the future.

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