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Edited Transcript of CAC earnings conference call or presentation 30-Oct-18 7:00pm GMT

Q3 2018 Camden National Corp Earnings Call

Camden Dec 3, 2018 (Thomson StreetEvents) -- Edited Transcript of Camden National Corp earnings conference call or presentation Tuesday, October 30, 2018 at 7:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Deborah A. Jordan

Camden National Corporation - Executive VP, CFO, COO & Principal Financial & Accounting Officer

* Gregory A. Dufour

Camden National Corporation - President, CEO & Director

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Conference Call Participants

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* Damon Paul DelMonte

Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director

* Matthew M. Breese

Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Camden National Corporation Third Quarter 2018 Earnings Conference Call. My name is Austin, 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 2017 annual report on Form 10-K and in 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 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 over to Greg Dufour. Please go ahead.

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Gregory A. Dufour, Camden National Corporation - President, CEO & Director [2]

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Good afternoon, and thank you for joining the Camden National Corporation's Third Quarter Earnings Conference Call. We're pleased to announce record quarterly earnings of $14.1 million for the third quarter of 2018 or $0.90 per diluted share. This brought year-to-date earnings to $39.1 million or $2.50 per diluted share.

We're really happy with our third quarter performance with a solid loan and deposit growth, strong asset quality and an increase in our net interest margin for the third quarter of 4 basis points to 3.14% as well as our efficiency ratio at 58.14% on a year-to-date basis.

We continue to expand our products and services during this past quarter, and we recently introduced business touch, our online loan application and instant decisioning product for small business. At this point in time we're using this for commercial loan requests up to $75,000, but it has the potential to be leveraged to higher levels as we grow into that system. This is an important part of our digital suite of products, which meets our customers' demand for online services, while at the same time provides us internal efficiencies.

I'd be remiss not to mention the recent stock market activity that has impacted all stocks and bank stocks in particular including Camden National. We believe we're positioned well in this turbulent market with strong asset quality, a focus on maximizing our net interest margin through our deposit-gathering efforts, which complements our loan teams, and a consistent ability to be efficient, which will serve us and our investors well over the long term. We've backed this up by also increasing our dividend over the past few quarters and consistently think in terms of how our actions will benefit shareholder value.

I'd now like to turn the discussion over to Debbie, who'll give you some more details on our results.

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Deborah A. Jordan, Camden National Corporation - Executive VP, CFO, COO & Principal Financial & Accounting Officer [3]

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Thank you, Greg, and good afternoon, everyone. We are pleased to report net income of $14.1 million for the third quarter of 2018, which drove a return on average assets of 1.34% and a return on average tangible equity of 17.84%.

In comparing our financial results to the second quarter of 2018, we experienced net income growth of $1.8 million or 15% as a result of total revenue growth of 5%, a lower loan loss provision and a slight increase in operating expenses. Linked quarter revenue growth of $1.8 million was due to an increase in net interest income of $942,000 and fee income of $891,000.

Net interest income was up 3% over the previous quarter due to solid average loan and deposit growth and an increase in our net interest margin of 4 basis points. Fee income growth was primarily related to an increase in security gains of $633,000.

We benefited from our deposit generation efforts as well as our seasonal deposit inflow, where we peak in deposit balances typically in the third quarter of each year. We are particularly pleased to see average demand deposit and checking account growth of $204 million or 17% compared to the third quarter of last year.

Our loan portfolio grew $41 million between quarters, representing a 6% annualized growth rate. We continue to experience growth in the residential loan portfolio, which increased $33.6 million between linked quarters due to expanded mortgage offerings and capabilities in Southern Maine and Northern Massachusetts. The commercial real estate portfolio grew $25.9 million between linked quarters, while our C&I portfolio declined $20.7 million, primarily due to one large loan payoff of $18 million.

Our loan loss provision for the quarter of 5 basis points on average loans was primarily the result of strong asset quality with net charge-offs for the third quarter of 7 basis points, combined with loan upgrades and resolutions that drove lower nonperforming asset levels. Our operating expenses increased 1% between quarters to $23.2 million for the third quarter. Our efficiency ratio of 57.3% for the quarter helped bring the year-to-date efficiency ratio closer to our 58% target level.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Matthew Breese with Piper Jaffray.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [2]

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Deb, Greg, I thought it was a pretty straightforward quarter. I don't have too, too many questions, but maybe just a couple. The first one is really pointing to some of the seasonality in the deposit lines. Non-interest-bearing deposits were up very strong this quarter.

As those roll off, could you just give us 2 ideas? One, an idea of how much we should expect to roll off? And then two, when you backfill it, what are you backfilling it with? And what kind of margin pressure do you think that could cause?

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Deborah A. Jordan, Camden National Corporation - Executive VP, CFO, COO & Principal Financial & Accounting Officer [3]

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Sure, Matt. Typically the third and fourth quarter will have higher core deposit levels and in the first quarter, we will supplement that with borrowings. So it will either be brokered deposits or overnight funding.

When I look at the quarter, about 4 basis points of the margin improvement really is due to that seasonality of the deposit upflow, and so when you look at the first quarter of next year, you could expect about a 4 basis point decline -- 3 to 5, so.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [4]

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Got it. Okay. And then going to expenses, just a hair higher than what I was anticipating, it looked like the salaries line picked up a little bit. What were the drivers there? Did it have anything to do with mortgage, which was also -- you bucked the trend there and put up a nice mortgage number.

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Deborah A. Jordan, Camden National Corporation - Executive VP, CFO, COO & Principal Financial & Accounting Officer [5]

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Yes. Expenses were -- typically the third quarter is our lowest expense base. We did see a little pickup in -- on the salary, commission and incentive side. We're also hiring lenders, not just on the mortgage side but the commercial side. So we are adding to staff, so that's contributing.

Legal fees and some consulting fees were a little higher this quarter also. And I really think we'll be above that $23 million run rate on a quarterly basis, but we're still managing to that 58% efficiency ratio.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [6]

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Okay. Can you just give us an idea of the extent you're hiring, the successes you're having and what impact? I think your longer-term loan growth outlook is like 5%, whether or not that will maintain or expand with the hires?

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Gregory A. Dufour, Camden National Corporation - President, CEO & Director [7]

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Sure, Matt. Well, again, our hiring, we look at it strategically. If we can find a good solid revenue producer whether it's a lender, mortgage originator or even a wealth manager, we'll hire them. Really that reflects the shortage of great talent that's out there, especially in our markets including New Hampshire and Massachusetts and, of course, Maine.

The other aspect -- so with that aspect, we would anticipate after a ramp-up period of those folks, that they would start contributing positively to the bottom line. So as long as we keep on having that wave of people come in, that will help. Some of that is to really just maintain the growth factor that we have.

Again we're growing -- our balance sheet is bigger than what it was just 3 years or 4 years ago. So we need more hands on deck to do that. We do monitor portfolio levels especially on the lending side to ensure that our people can maintain the customer service and experience as their portfolios grow. So we always need a churn of new people building portfolios for us.

The other aspect of hiring, of course, is in our support areas, and that's when you get into looking at technology staff and related to that. And that also is a reflection of our growth. As we bring in more digital products, that requires more technology people, more information security people. And as we know, those people are pricey in the market, so we keep up with that as well. What we try to do, though, is to look and how can we leverage that? So we look at it more in that efficiency ratio basis.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [8]

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Understood. Okay. My last one, Greg, is just you pointed to some of the recent stock action compared to the solid fundamental grounds that you look to be on. Would you think about buybacks if the stock doesn't perform the way -- or appears undervalued in your eyes?

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Gregory A. Dufour, Camden National Corporation - President, CEO & Director [9]

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We would. And if you look at our history, even though not been recently because of the trading that we've been at, we have a very good track record, I believe, of buybacks. When it's -- the opportunity is presenting itself to us in a lot of ways, as you know, first step, do we need the capital for, call it, to invest back into the business directly?

Then if that's not the case, then we look at it, is the value there on the market? And obviously when the price goes down a little bit and we're still confident in what we have, that's an opportunity for us to buy, is how we view it. So we'd always, kind of, keep that as an option and as a tool as we have in the past.

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Matthew M. Breese, Piper Jaffray Companies, Research Division - Principal & Senior Research Analyst [10]

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Understood, okay. Maybe just one more. Deb, just going back to your commentary on the deposit front, as demand deposits -- [non-instrument] demand deposits flow out in the beginning of next year, that would be a 4 basis point drag on the NIM, which might put you back to where you were on a core basis during the first half of the year, 3 or 4-ish. Is that a good place to be in 2019 or at least the first half?

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Deborah A. Jordan, Camden National Corporation - Executive VP, CFO, COO & Principal Financial & Accounting Officer [11]

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Yes.

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Operator [12]

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(Operator Instructions) And our next question will come from Damon DelMonte with KBW.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [13]

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So just to, kind of, touch on loan growth, decent quarter this quarter for you guys. Can you just talk a little bit about your outlook as you go into the end of the year? And, kind of how the pipeline is shaping up for 2019?

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Gregory A. Dufour, Camden National Corporation - President, CEO & Director [14]

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Sure. What I would say is, overall, we do give the guidance and range mid-single-digit overall loan growth, and so we'll stick with that, we're tracking to that. What we're seeing probably more from a loan activity perspective, as you probably hear from all bank CEOs, especially community bank CEOs, it's very competitive out there, a lot of different things and competitors coming into various markets looking for volume.

What I would say from our pipeline perspective, we're pleased with what we're seeing, especially as we make that final push into the fourth quarter. And then very quickly, maybe in a matter of days, we start looking and saying what's happening in the fourth quarter and how are we going to kick off the first quarter '19? And right now the pipelines look pretty good both on the commercial and retail side.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [15]

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Okay, great. And then could you help us -- Deb talked, I think a little bit about the provision and what we could expect in the upcoming quarters after this quarter's level?

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Deborah A. Jordan, Camden National Corporation - Executive VP, CFO, COO & Principal Financial & Accounting Officer [16]

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Yes, the guidance I have been saying is roughly 15 basis points. But with the improvement we had in some loans that were upgraded and some payoffs, we were able to back down the provision this quarter. When I look at 2019, I think assuming that 15 basis points makes a whole lot of sense going forward.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [17]

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Okay, great. And then I guess just lastly on the margin this quarter. I apologize if you had said this, but what was the accretion from purchase loans?

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Deborah A. Jordan, Camden National Corporation - Executive VP, CFO, COO & Principal Financial & Accounting Officer [18]

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For the quarter, third quarter, it was $434,000 for the quarter. So it's about a 5 basis point.

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Damon Paul DelMonte, Keefe, Bruyette, & Woods, Inc., Research Division - SVP and Director [19]

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And then should we, kind of, assume that same level going forward?

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Deborah A. Jordan, Camden National Corporation - Executive VP, CFO, COO & Principal Financial & Accounting Officer [20]

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That's ramping down quite a bit. And so when I take a step back and look at the year, I think it will be priced 50% of the 2018 run rate for next year.

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Operator [21]

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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.

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Gregory A. Dufour, Camden National Corporation - President, CEO & Director [22]

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Great, thank you. Well, first of all, obviously, we're very pleased with a great strong quarter. I would like to just recognize a lot of that is by the great staff that we have here, not only from the revenue side but also from the support side, and the teams that really make this happen for us. And obviously, I want to thank all of you for your interest in Camden National. Have a great day.

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Operator [23]

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