Camden National Corporation (NASDAQ:CAC) Q1 2016 Earnings Conference Call April 26, 2016 1:00 PM ET
Greg Dufour - President, CEO and Director
Deborah Jordan - EVP, COO and CFO
Mike Archer - VP and Corporate Controller
Travis Lan - KBW
Matthew Kelley - Piper Jaffray
Good day and welcome to the Camden National Corporation First Quarter 2016 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 involve significant risks and uncertainties. Actual results could differ materially from the results discussed. The risk factors 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; Deborah Jordan, Executive Vice President, Chief Operating Officer and Chief Financial Officer; and Mike Archer, Vice President, and Corporate Controller. Please also note that today's event is being recorded.
At this time, I'd like to turn the conference over to Debi Jordan. Please go ahead.
Thank you Allison and good afternoon and welcome to our conference call today to discuss financial and operating results for the first quarter of 2016. Greg Dufour is sharing the room with me but for the first time ever, Greg is speechless, he is speechless literally. He was hoping to be able to speak today but he developed a severe case of laryngitis with a cold and you would just hear his whispers at this point. Mike Archer, our Corporate Controller will review the financial results in a few moments but I wanted to highlight a few of our first quarter accomplishments. We reported core operating earnings which excludes merger and acquisition-related expenses of $8.8 million or $0.85 per diluted share. Credit quality remains stable as reflected in our non-performing loans to total loans ratio of 0.84%, down 9 basis points from year end. In addition, loans 30 to 89 days past due were $7.6 million at quarter-end compared to $9.9 million at December 31.
Our core efficiency ratio improved to 61.23% during the first quarter compared to 64.16% in the fourth quarter of last year as well as below our first quarter 2015 ratio of 61.97%. Operationally, we've continued to execute on several strategic objectives. We are seeing the benefits of our products and geographic expansions; our mortgage banking business has performed well in light of refinancing resulting from a drop in interest rate and intense competition. Our pipelines are rapidly building both from our banking center mortgage lenders as well as our commissioned originators based in Southern Maine, and Braintree Massachusetts. Our commercial lending teams are also reporting strong pipelines and closings however we continue to see a narrowing of spreads in all of our markets. Through the establishment of a loan production office in Manchester, New Hampshire in February 2014 and expansion in Southern Maine through the acquisition, we are experiencing the benefits of operating some very strong economic areas in Northern New England.
Also during the quarter we completed the previously announced closing on Healthcare Professional Funding Corporation or HPFC in February. We have retained the HPFC loan portfolio and have seen slight credit deterioration that we continue to monitor very closely. At the same time, during the quarter, we focused a lot of energy on systems integrations that will provide future efficiencies and equally as important improve customer service levels. While much of the merger related integrations are complete, our focus is to bring the whole organization up to the next level of digital-based services in products to meet changing customer demands.
We have also taken a major strategic step forward in our wealth management area by hiring Mary Beth Haut to be President and CEO of Acadia Trust, our wealth management subsidiary. Mary Beth brings many years of executive level experience and wealth management from several large New England based financial institutions. Her experience fits well with our objective to build a strong relationship between wealth management and the other areas of the bank to provide comprehensive financial solutions to our customers that will result in stronger fee income for us in the future.
I will now turn things over to Mike for the financial review.
Thank you, Debbie and good afternoon everyone. We are pleased to report solid first quarter 2016 financial results, which is in line with our forecast for the quarter. When excluding non-core one-time merger costs, our core operating earnings of $8.8 million for the quarter increased 14% compared to the fourth quarter last year and core operating EPS of $0.85 per share for the first quarter was up 9% compared to the previous quarter.
On a core operating basis, our return on average assets was 94 basis points and our return on average tangible equity was 13.72% for the first quarter. The drivers of our core earnings increase of 14% was net interest income growth of 6% while at the same time lower operating expenses as we recognize this benefit of a full quarter as a combined organization.
Average earning assets for the first quarter of 2016 were $3.4 billion, a 5% increase over last quarter reflecting full quarter results versus the partial last quarter of the acquired Bank of Maine loans, combined with organic loan growth and a slight uptick in our investment portfolio.
Since year-end, our loan portfolio was up $2.4 million. Annualized loan growth of 5% in our commercial portfolio was offset by decline in both mortgages and home equity balances as consumers refinance due to the low interest rate environment.
Our reported net interest margin grew to 3.35% for the first quarter of 2016, up 5 basis points over the previous quarter. However, our core net interest margin was down 3 basis points between periods to 3.18% when excluding purchase accounting activity. We continue to experience pressure on the margin due to the decline of the 10-year Treasury rate as well as an increase in borrowings for the quarter as we experienced normal seasonal outflows of core deposit, which is consistent with past years.
Fee income during the first quarter of 2016 was down $547,000 from the previous quarter. Part of the decline was anticipated due to record high commercial back-to-back loan swap transactions in the fourth quarter of 2015. It translates to fee income of $861,000 versus a normal quarterly run rate of approximately $250,000. The most significant impact to fee income in the first quarter relates to a decline in our mortgage servicing assets of $587,000 since year-end. The decline in Treasury rates and corresponding mortgage interest rates impacted our mortgage servicing assets due to an increase in both loan prepayments and the prepayment speed assumptions utilized in the valuation of the asset, which resulted in valuation adjustment.
Our loan loss provision was slightly lower during the first quarter of 2016 and our annualized net charge off rate was 11 basis points. Both non-performing assets and past due loan levels have improved since year end.
Overall, our core operating expenses were down $400,000 between quarters with total core operating expenses at $22.3 million for the quarter. The first quarter includes an incremental 15 days of overhead and associated with the former Bank of Maine franchise which we were able to offset through our consolidation efforts including staff and facility rightsizing and elimination of a number of overlap services.
As of March 31, we had completed all the expense reduction activities that we believe are necessary to achieve our 37% cost save commitment and future quarters will reflect the lower expense run rate. Typically our first quarter expenses run higher than the rest of the year due to incremental payroll taxes and higher occupancy costs. When we forecast remainder of the year we anticipate our core operating expenses to run under $21.7 million per quarter.
Last investor call we indicated that we would see an additional $600,000 of merger related costs in the first half of 2016. We’ve incurred $644,000 through the first quarter and we expect another $450,000 to be recorded in the second quarter. The incremental cost in 2016 primarily relates to higher than anticipated professional fees.
Our income tax rate for the first quarter of 2016 was just under 31% and we anticipate that rate for the remainder of the year. Our focus for the remainder of 2016 is growing revenues by leveraging our expanded market reach and product capabilities while at the same time focusing on additional efficiency and productivity gains.
That concludes our comments and I'll now open up the call for questions. Operator?
[Operator Instructions] And our first question will come from Travis Lan of KBW. Please go ahead.
Yeah, thanks. Good afternoon, everyone.
Hi. I just wanted to make sure, Mike, that I heard your expense comment. Did you say that it was – you expected less than $21.7 million of expenses for the next couple of quarters?
Yes, for our core operating expenses just under the $21.7 million per quarter.
Okay, all right. That is helpful. On the deposit front, I mean I know the release indicates that there was seasonality, but I think deposits have grown by more than 1% in each of the last three first quarters. So is there anything surprising or maybe attrition from the SPM side or anything like that that contributed to the decline this quarter?
Travis, the attrition has been pretty low. Our overall attrition rate is 3% on the Bank of Maine. So we are really happy where that’s turned out. We have one large deposit relationship that comes in and out depending on tax revenues and so that's one of the components, but we typically see this outflow on the core deposits and we will start seeing an uptick in the May time frame.
Got it. Okay. All right, that's helpful. And then, Debbie, do you have specific accretion projections for the rest of the year?
Yeah, it’s a little difficult on the loan side. On the CD accretion side, it was $261,000 for the first quarter and it’s going to tail down the rest of the quarters, but it’s just under $900,000 in total for the year. On the loan accretion we're budgeting between $500,000 and $600,000 a quarter, but I will tell you this first quarter we had additional accretion and we also had recoveries on previously charged-off loans. So that ran a lot higher than the 500,000 that we anticipated. So imagine, we’re going to have -- we’ll be a little higher than what we forecasted in our budget.
Okay. All right. That’s good. And then just last thing is with the fed fund hike, I assume fully absorbed at this point, what do you think about the core margin outlook, kind of if you took the way the rate, the yield curve looked today, and you just assume no changes, what does the core NIM outlook look like for you guys?
Yeah. Because of the seasonal borrowings are a little higher, but will trend down, I think that will have a slight improvement in our cost of funds. We’re still seeing a little decline in our loan yield and certainly the investment yield and replacements are the rates where they’re at aren’t particularly good. I would say we all see the NIMs trend down slightly for the next few quarters.
[Operator Instructions] Our next question will come from Matthew Kelley of Piper Jaffray. Please go ahead.
Yeah. Hi. Just looking at the commercial loan growth during the quarter, was there any difference between some of your newer markets in New Hampshire and I guess Northern Mass versus the core Maine franchise on the commercial side?
Yeah. Matt, we did see some nice activity in the Southern Maine market, really commercial real estate focused larger transactions. The fourth quarter, we had really strong growth. The first quarter, we had good production, but we also had some refinance activity that we anticipated and we’re starting to see some nice activity in the New Hampshire market for us.
Okay. And then on your deposit service charges as a percentage of average deposits, it took a pretty good leg down during the quarter. Is that just kind of being a little less onerous on some of the new customers or from the Bank of Maine or where do you see that going over time? Is it just secular trends that remain challenging there, maybe a little bit detail on what you see in that line of business?
Yeah. There is two big components. One are the NSF overdraft fees and we have seen both our core deposits on the core legacy side decline and not seeing as much pickup on the Bank of Maine, we’ve got several initiatives in place to encourage Reg E option and things like that. So hopefully, we’ll see a recovery on the NSF side. The service charges on deposits, we have lagged any increase with the acquired deposits. We will be looking at that in the next quarter to see if there is opportunity to start service charging some accounts.
Okay, got you. And then on the mortgage banking line, obviously we should have a decent pickup in Q2 if there is not a material change in the interest rate outlook. How does the pipeline kind of set up and what have the recent trends been there as you start off the quarter on the origination side?
So we have a pipeline of $88 million between mortgages and home equity at this point. So it has built pretty rapidly. So we’re happy to see that kind of activity though. So we’re feeling pretty good about the second quarter.
As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Debbie Jordan for any closing remarks.
Thank you, Allison and on behalf of all of us here at Camden National, I want to thank you for the time today and hopefully, Greg gets better soon next quarter. Thanks everybody. Bye now.
The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect your lines.
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