Good day and welcome to the Camden National Corporation Second Quarter 2017 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 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; as well as 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 call over to Greg Dufour. You can please go ahead..

Thank you, Brian. And welcome to Camden National Corporation’s conference call to discuss our second quarter 2017 financial and operating results. Debbie Jordan, our COO and CFO will review quarterly financial results in a few minutes, but first I wanted to provide a high level overview.

We’re pleased to share with you our results for the second quarter of 2017, highlighted by $10.2 million of net income for the quarter or $0.66 per diluted share. This brought net income for the first six months of the year to $20.3 million or $1.30 per diluted share.

We’ll dive deeper into the quarterly results in a moment, but I do want to mention for the first time we crossed the $4 billion asset threshold.

While this is a milestone for us as it reflects our long term commitment to prudently grow our franchise through organic growth complemented by opportunistic acquisitions, more importantly, we’re expanding while delivering on our financial commitments.

For example, for the first six months, we achieved an 11% growth in net income as compared to the same period year ago, a return on assets of 1.04%, a return on tangible equity of 14.16%, and efficiency ratio of 57.36%. Our tangible common equity ratio has grown to 7.79%.

Each of the ratios are important and our results reached the targets that we set for ourselves. I do want to compliment our lending teams as we had another solid quarter of loan growth with over 5% or $142 million of growth since December 31st.

We saw growth of 8% in commercial real estate and 7% in commercial and industrial loans with 4% in our residential mortgages. Whether it’s looking at growth strategies within our current business, new products or markets or acquisition opportunities, we measure those opportunities against our goal of delivering long-term sustainable growth.

Last quarter, I shared with you we introduced our online mortgage application product called MortgageTouch. Since its introduction in early April 2017, we’ve taken over 1,000 online applications. And as a result of this integration of our systems, we’re also seeing productivity improvements.

We also expanded the Camden National Wealth Management team through the hiring of two senior wealth management professionals while also expanding our investment offerings to our clients to supplement our existing proprietary investment philosophy. As that is a basis, I’d like to turn it over to Debbie..

Thank you, Greg, and good afternoon, everyone. We are pleased to report solid financial results for the second quarter of 2017 with net income of $10.2 million in diluted EPS of $0.66 per share. Net income is up 2% over the previous quarter and up 6% compared to the second quarter of last year.

For the quarter, our return on average assets was 1.03% return on average tangible equity was 13.96% and our efficiency ratio was 56.76%. The key drivers for the linked quarter net income growth included an increase to net interest income due to strong loan volume, stable net interest margin and a lift in most fee income categories.

Our loan loss provision was higher as a function of loan growth and our operating costs increased 3% over the previous quarter. Net interest income for the quarter reached $28.6 million, an increase of 3% from the previous quarter due to average earning asset growth of $70 million or 2%.

We had loan growth of $91 million during the second quarter with commercial real estate growth of 4%, C&I loans were up 8% and the residential portfolio increased 1%. We continued our strategy of portfolioing jumbo mortgages which resulted in 54% of our production sold in the secondary market during the quarter versus our target of 60% to 70%.

Our second quarter net interest margin of 3.19% increased 1 basis point between quarters. When excluding purchase accounting accretion and income from charged off acquired loans, our adjusted net interest margin was consistently between periods actually at 3.09%. We are slightly liability sensitive from an interest rate risk position.

So, I was happy to see a stable margin in light of the market increases in short-term interest rates. Fee income for the second quarter reached $9.9 million an increase of by 15% over the first quarter. We experienced growth in a number of income categories including debit card income, service fees on deposit accounts and wealth management fees.

The two biggest drivers of growth between periods were fees from our back-to-back loan swap program and mortgage banking. Our back-to-back loan swap program generated fees of $663,000 for the quarter compared to $240,000 for the first quarter. Mortgage banking income totaled $1.9 million for the quarter, up 25% compared to the previous quarter.

We have experienced solid mortgage activity with sold mortgage production up $5 million to $48 million during the second quarter as well as an increase in our pipeline which is now over $90 million. The increase in our loan loss provision to $1.4 million for the quarter was primarily a function of strong loan growth during the period.

Our asset quality remains solid with loans past due between 30 and 89 days of 32.32% at June 30th and net charge-offs for the first six months at an annualized charge-off rate of 5 basis points. Operating costs grew 3% to $22.2 million for the second quarter primarily due to increase in OREO and collection costs as well as personnel costs.

OREO and collection costs for the second quarter amounted to $344,000 compared to an unusual net recovery of $44,000 in the first quarter. Salaries and employee benefits were up 2% compared to the previous quarter, reflecting a full quarter of net increases. Our efficiency ratio for the quarter dropped below 57%.

However, we anticipate, it will turn higher as we continue to make investments in both people and technology with the focus on growing revenue. That concludes our comments on the second quarter financial results. We’ll now open up the call for questions.

Brian?.

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

Good afternoon, everybody..

Hi, Matt..

Good. Just on the loan growth this quarter, obviously very solid. Aside from the segments, I just wanted to get your sense for what drove it this quarter. Part two to that is, is it sustainable? And then, maybe stepping back, I mean, given your markets in Maine New Hampshire, mostly slow and steady.

I know, there are some pockets of good growth like Portland and Portsmouth, but can you just get us comfortable with why that -- why growth to that extend is okay and what your longer-term outlook is?.

Sure.

I think first of all, the growth that we’re seeing, reflects just the expansion of not only the franchise through the acquisition of Bank of Maine back in October 2015, but also putting more lenders on the ground, especially, Matt, as you referenced in those higher growth markets, Southern Maine and New Hampshire, really leveraging our loan production office in Manchester that we opened in 2014.

What we are seeing is that in the second quarter that growth and a lot of the new transactions are brought with funded deals, refinancing some existing properties on the CRE side which is good because then you have a solid track record to take on.

But also, what’s nice is to see the uptick in the growth on the C&I side; those tend to be smaller transactions, as you know, but also brings more of a relationship. So, that I think is very much attributable to the feet on the ground that we have, especially in Southern Maine but also maintains up in our legacy markets..

Got it. And then on the flip side, just on deposits. Deposits this quarter, the growth wasn’t the strong.

So, talk to us maybe about how you’re looking to fund future loan growth, both from a core deposit and from a borrowing/broker deposit perspective?.

Sure. Our primary focus is still on core deposit growth from our customers. We are -- you’re correct, it didn’t grow as much as we thought it would on the -- compared to the loan side of it, but we continue to put more product out on the market.

We’re beating up primarily through our treasury management side, adding not only customer facing individuals, but more importantly people in the support and service areas, which really makes those accounts very sticky. We will complement that with borrowings, broker deposits depending on what the pricing is on those.

I think as we look at the deposit markets, what we’re seeing is that we do see some of the activity heating up from a pricing perspective, especially in the municipal side here remain and that then gets into the risk reward or more of the costs of those funds what they would be over the longer time.

So with that said, our focus in treasury management is more on the corporate side than on the municipal and government business side of things..

Okay. And then maybe tying both questions together, the loan growth question, the deposit question.

Deb, what is the outlook now over the next couple of quarters on the margin?.

I’ll wave a wan and say, I think it’s going to be stable for the next two quarters. I’ve mentioned before our deposits, we do get -- we’re very cyclical in nature.

So, we are going to get a lift in the third and fourth quarter; that certainly will -- to the extent we’re funding loan grow through, that core deposits, instead of borrowing back and self help pretty significantly. So, I would say, the second half of the year, I feel pretty good about where we’re at on our core margins..

Okay. And then on the fee income front, obviously I feel like the swap line can be a little bit more volatile, mortgage banking turned the right way.

But what point, either late this year or perhaps into next year do you think we can eclipse a sustainable $10 million per quarter in fee income kind of run rate?.

Yes. I agree with you. I think the swap income, it is lumpy and compared to a year ago we have a lot more volume than we did this year. So that -0- we see that trailing down a little bit over the next few quarters. Mortgage banking, I think the great news is we’ve got really solid pipeline. We’re continuing to invest in that business.

I think we hired three or four new originators that are on the ground in really good markets. And so, I think that will be the key there to have that sustainable mortgage banking level..

And then last one for me. I know you hinted that, maybe the efficiency ratio trending a bit higher.

So, just wanted to get a little bit more detail on the absolute level of expenses, where do you see those kind of shaking out over the next two quarters? And then is the efficiency ratio heading materially higher or just more towards that previously guided to 58% kind of level?.

Yes. I don’t see it trending higher than that 58%. We are, like we’ve said before, hiring new folks. And our salary, comp line is area that is increasing at a faster pace than some others. But, we’re pretty conservative and efficient on the expense side. Even though we say higher, we’ll not get out of control..

[Operator Instructions] The next question comes from Damon DelMonte with KBW. Please go ahead..

My first question is just, could you talk a little bit about credit? There was uptick in non-performing loans and for commercial real estate.

Could you just talk a little bit about the dynamic there and what caused the increase?.

Really nothing, call it consistent, Damon, from a credit perspective, just a couple of transactions as we get nothing really alarming as you know and several of you know. Camden has always had a good quarter profile, but importantly a good credit workout area. That was really complemented by us keeping intact the work outflows from Bank of Maine.

And as you know there was a turnaround situation. And so, they’ve really -- we’re battle tested, if you will, through that and they’re intact now. So, it’s lack of anything consistent or call it a root cause, they’re pretty much individual wised, situations going on, but well in hand with the team that we’ve got..

And then, so the one commercial real estate loan, they shipped that that was -- and moved into non-performing this quarter.

How big was that?.

I can’t recall off the top of my head. We can try to get that back out later on..

And then kind of along the lines of credit as we think about the provision going forward, Deb, are you comfortable with kind of just matching charges-offs and providing a little bit extra for loan growth or something around this level expected in the upcoming quarters?.

I mean if we target, for me roughly 15 basis points on average loans for the year because we have the seasonality, we put more through this quarter. But I would say, the 15 basis-point is a good overall target for the year..

The next question -- next one comes from Matthew Breese from Piper Jaffray. Please go ahead..

Just one follow-up for me. Greg, it couldn’t help but noticing your opening commentary some significance and attention drawn to crossing $4 billion and you’ve gotten there through both organic and M&A, through acquisitions.

And I wanted to get an update on your sense for -- your look on M&A, how have discussions gone on that front, if there are any? And just give us an update on some of the markets you’re targeting?.

Obviously, I can’t give too much clearance on anything specific, Matt, except the point to our history where prior to the Bank of Maine acquisition the previous 15 years, we had 50% of our growth organically and 50% from acquisitions; we liked that model.

We feel that’s what maintains us long-term that one -- our number one priority is to grow the franchise that we have and supplement it by an acquisition. We’re obviously in more tilted right now in that historic growth to acquisition because of Bank of Maine. So, as I’ve told people, we’re really focused on the organic side.

As far as the M&A outlook in Northern and New England, and with us it’s obvious there’s probably not a target in Southern Maine that’s available, that’s what made the Bank of Maine franchise so attractive and strategically important.

Obviously, we’re making investments in Southern New Hampshire in New Hampshire as well as doing transactions in Northern Massachusetts. So, we’re getting to know those markets. Right now, as I look out, I don’t see a pressing need for us to have to grow just by acquisition. Our story is being taken really well in those markets and we’re spreading out.

And as long as we continue to put up the solid sustainable long-term growth, we’re pretty happy..

[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..

Great. Well, on behalf of all of us at Camden National Bank including the management team, employees and the Board of Directors, I want to thank all of you for your interest in hearing about our earnings. I hope you all have a great day and a great summer, and look forward to chatting with you all in three months from now..

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