Camden National Corporation
Q4 2016 Earnings Call Transcript

Published: 1 Feb 2017

[Operator:]

Good day and welcome to the Camden National Corporation Fourth 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; 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'd like to turn the conference call over to Greg Dufour. Please go ahead.

[Greg Dufour:]

Great. Thank you, Anita. And welcome to the Camden National Corporation's Conference Call to discuss our fourth quarter and year end 2016 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 review of 2016. Early today we announced full year earnings of $40.1 million or $2.57 per diluted share, which is a milestone for us with record earnings for Camden National Corporation and demonstrating our investment proposition of focusing on generating organic earnings or opportunistically pursuing attractive acquisitions. Our 2016 performance also reflects several strategic, operational and financial accomplishments. In 2016, job one was to deliver on fulfilling the commitments from our acquisition SBM Financial, the parent company of The Bank of Maine, which was completed in October 2015. We are now well positioned of the two fastest growing counties in Maine, as well as developing our presence in New Hampshire and in the residential mortgage market in the Boston area. To putting all of this growth and activity is a solid operational infrastructure that effectively and efficiently supports our growth and is scalable for the future. Additionally, we strengthened our market presence in Central Maine, solidified our positions within our home region in Midcoast Maine, as well as other areas. Another important priority for us was to continue to invest in the organization to keep up with changing customer demands and desires. This included introducing EMV chip-based debit cards, enhancing internal and customer facing security measures, launching digital payment platforms like Apple Pay and being the first bank headquartered in Maine that offers customers 24X7 live call-center systems. We also took actions directly benefiting shareholders, such as a three-for-two stock split in the third quarter and a 15% increase in our dividend in the fourth quarter. We have seen a significant up-tick in the liquidity of our stock and we benefited from the post-election market increase as well, as our 2016 total return to shareholders of 55% surpasses the S&L U.S. Bank $1 billion to $5 billion index of 44%. One of the benchmarks we discussed on this call the past year, was whether we could reach our cost savings targets and 58% efficiency ratio for 2016. I am pleased say we have reached that goal by capturing both revenue enhancements and cost savings in our larger franchise. While much of that hard work was done by our strong core of managers the leaders, as they go through their daily work, we also made several difficult decisions, including closing two branches in 2016, and the announcement of closing one other one in late 2016, which will close in early 2017. These actions will allow us to have the flexibility to redirect our resources and attention to higher potential markets and products. We continue to invest to develop new and expanded sources of revenues, as we continue the expansion of our treasury management services and our commitment to wealth management as we merged our standalone subsidiary, Acadia Trust into Camden National Bank to create Camden National Wealth Management. Both teams are integrating exceedingly well with all the parts of the organization. Our total loans were $2.6 billion at the end of 2016, up from $2.5 billion at the end of 2015, due to the hard work of our lending teams, but also represents the acceptance of our value proposition by customers. Our asset quality is solid for 2016, highlighted by the 0.67% ratio of non-performing assets to total assets under 0.13% net charge-off ratio. We previously discussed two troubled assets, both of which are under restructuring plans and while we are always optimistic to settle things sooner rather than later, the strength of our balance sheet allow us the flexibility to manage ourselves to maximize the value even in these situations. I'm always - I'm also very pleased by our focus on deposits, as we saw our balances increase over $100 million during the year, ending at over $2.8 billion in December 31. It is certainly been an exciting year for us in 2016 and I'd like to now introduce Debbie, who will discuss our financial performance.

[Deborah Jordan:]

Thank you, Greg. And good afternoon, everyone. We are pleased to report strong financial results for the fourth quarter of 2016 with net income of $10.9 million and diluted EPS of $0.70 per share, which mirrors our financial performance for the third quarter of 2016. For the fourth quarter, our return on average assets was 1.12% and our return on average tangible equity was over 15%. We were happy to see earnings at the same level as the previous quarter, given that we peaked in mortgage banking gains last quarter and that we experienced modest loan growth in the second half of the year. Net interest income for the quarter was $28.2 million, down 128,000 from the previous quarter, with an increase in our net interest margin by the decline in our average earning assets of 1% between quarters. Our net interest margin decreased 2 basis points to 3.26% during the fourth quarter, due to a lower overall cost to fund of 47 basis point, and investment prepayment income of $186,000. This was driven by our seasonal inflows of core deposits which averaged $2.1 billion during the quarter, representing a $50 million or 2% increase over last quarter. Our loan portfolio, excluding loans held for sale totaled $2.6 billion at year-end with net growth of $2.6 million during the fourth quarter. Although growth loan production was solid during the quarter, we experienced higher levels of prepayment with several commercial real estate loans totaling almost $30 million. Our home equity portfolio declined over $3 million since September 30th, but we expect to see renewed interest in home equities over the next six months with higher mortgage rates, and a more focused effort at the bank. In 2016, our retail lending efforts were concentrated on mortgage banking, which resulted in growth production of $370 million, of which 65% was sold to investors. Our fourth quarter loan loss provision was $255,000 compared to $1.3 million in the third quarter, primarily due to lower net annualized charge-off of 7 basis point, compared to 26 basis points last quarter. The other factor contributing to our lower provision is the upgrade of certain loans. We feel good about our asset quality with our non-performing assets at 0.67% of total assets and loans past due between 30 and 89 days at just 24 basis point. Fee income of $10.10 million for the fourth quarter was down 8% compared to the previous quarter. The most significant factor was the decline in mortgage banking income of over $1 million, as we experienced a 33% decline in the mortgage pipeline, which includes loans held for sale and mortgage commitments. Fee income for the fourth quarter includes non-recurring items, including 577,000 from the liquidation of the mortgage insurance exchange and 113,000 from life insurance proceeds. We also exited a third party loan servicing relationship effective December 31st, with servicing fees of 883,000 recognized in the fourth quarter that will not be recurring current going. We were able to achieve an efficiency ratio of 57.9% for the quarter, with operating expenses increasing 2% between quarters to $22.5 million. The increase in were due higher incentive compensation based on – based upon 2016 financial performance, plus incremental expenses of $335,000 associated with the conversion and transferring the sub-servicing relationship. As mentioned by Greg, branch consolidation has resulted in two closed banking centers in the fourth quarter of 2016 and another scheduled in early 2017. This will translate to an $800,000 expense reduction in 2017. Overall, we are extremely pleased with our fourth quarter financial results. And with that, I will turn it back over to Greg.

[Greg Dufour:]

Great. Thanks, Debbie. We'll now open the call for questions. Operator, if you would please?

[Operator:]

We will begin the question-and-answer session. [Operator Instructions]. Our first question today is from Damon DelMonte with KBW. Please go ahead.

[Damon DelMonte:]

Good afternoon, guys. How you're going today?

[Greg Dufour:]

Good. Thank you.

[Damon DelMonte:]

That's good. So my first question was just kind of some housekeeping items. Debbie, I think you were mentioning on the expenses, you said there was a $783,000 expense that is non-recurring, is that correct?

[Deborah Jordan:]

Actually in the non-interest income section and other income, our sub-servicing fees that we collect for the fourth quarter over the $883,000, and so we closed out of that relationship at 12 31. So that won't be in the run rate. And then on the expense side related to the sub-servicing, roughly expenses for the fourth quarter were about $800,000 that will not be recurring going forward.

[Damon DelMonte:]

Okay. In that 800,000 your expense reduction is also for the sub-servicing or is that for…

[Deborah Jordan:]

Yes. It is.

[Damon DelMonte:]

Okay…

[Deborah Jordan:]

Part of it is in the other real estate owned and collection costs and certainly part of its in salaries to support that - that was supporting the sub-servicing portfolio.

[Damon DelMonte:]

Okay. Okay, that's helpful. Thank you. And then with regards to the loan growth, you know, I think a common theme we've seen with a lot of banks is this quarter there is been some unexpected payoffs as the quarter kind of wound down. How does that kind of change your outlook if all first for 2017, do you feel like your pipelines are rebuilding early in the quarter here and you can see you know, decent amount of growth in the upcoming year or you think that things are kind of slowing down?

[Greg Dufour:]

Damon, I would say for 2017 from a logo perspective, you will probably be about what we saw in 2016 as we you know settled into a larger franchise.

[Damon DelMonte:]

Okay. And to quantify that, is that somewhere in the mid single digit range?

[Greg Dufour:]

Yes, that would be a good working number to use.

[Damon DelMonte:]

Okay. Great. And then just my last question on the margin, Debbie, can you give us a little guidance on kind of what's driving the margin, what was the core margin this quarter? I mean, how much accreteable yield was in there?

[Deborah Jordan:]

A couple of things, a lot has changed between quarters, we have a steepening of the yield curve. And so I had been a little conservative in the forecast on the NIM, but if we can keep the shape of the yield curve, I am feeling a little better about our net interest margin. If you look at in our earnings release, we do have a table area at the very end that details what our adjusted net interest margin is, which is backing out the fair value mark and the recoveries of loans. And so, our reported margin for the quarter was 3.26%, our adjusted margin 3.14%, so that actually went up 4 basis points between quarters.

[Damon DelMonte:]

Got you. Okay. So assuming that we get a couple more rate hikes in 2017, are you comfortable, you could see some upward trend in the margin as we progress through the year?

[Deborah Jordan:]

I am not sure I am that optimistic, Damon. I had said, I thought we could see 3% by the end of 2017. I think we'll trend down, but I don’t think we'll be at that level. So think we'll still – fourth quarter was a good margin, I think it will be a little lower in the first quarter, but it’s going to be pretty stable I think.

[Damon DelMonte:]

Okay. All right. That all that I had for now. Thanks.

[Greg Dufour:]

Great. Thank you.

[Operator:]

Our next question comes from Matthew Breese with Piper Jaffray. Please go ahead.

[Matthew Breese:]

Good afternoon, everybody.

[Greg Dufour:]

Hello, Matt.

[Matthew Breese:]

On the mortgage insurance exchange, couple of questions, one, just what was that business and then number two, the gain on sale, where was that income statement, was that in other income or did that fall into the mortgage banking line?

[Deborah Jordan:]

Hi, Matt. This is Deb. The mortgage insurance exchange, many banks in New England actually participated in that and it had been frozen for ago [ph] I think the last five years, this association had to work with the CFPD to get approval, to liquidate the insurance fund. So I imagine there is other banks in New England that are also benefiting from this final payout under the exchange. We were – in the past if we had referred on mortgages insurance coverage we get a commission fee.

[Matthew Breese:]

Understood. And so…

[Deborah Jordan:]

And then…

[Matthew Breese:]

Does that fall into other income?

[Deborah Jordan:]

The gain on investment, yes, the fell into other income. That’s what Mike says.

[Matthew Breese:]

Okay. Okay, and then just trying to sum up some of the parts here, so we have a couple of branches closing, its going to save 800,000. We have the services business that no longer will be there and that 800,000, so total of call it 1.6 million saves. As we think about full year 2017 that’s a pretty good amount. How much of that fall to the bottom line, how much gets reinvested and where you thinking its expense growth will fall for the full year?

[Deborah Jordan:]

A couple of things, [indiscernible] that 800,000 was for the quarter in the cost and it was higher….

[Matthew Breese:]

It’s much higher than that…

[Deborah Jordan:]

Yes, and so certainly part of it comes to the bottom line, but as we've talked about in the past, we are investing in the Camden National Wealth Management, which will bring on personnel to support that business line. So certainly that gets reinvested. We are seeing a little higher salary increases you know, we're not providing guidance on our operating costs for next year, but we're committed to being under that 58% on an annual basis.

[Greg Dufour:]

And I would just add, from a reinvestment perspective, outside of wealth management, as Debbie mentioned is, we're looking to put more feet on the ground, especially from revenue generating folks, whether it's originators on the mortgage side or commercial lenders, especially as – we are getting into our southern Maine and New Hampshire build out if you will.

[Matthew Breese:]

Understood. Okay. Are there more branch closures to come. I mean, we've done a couple so for, how do you feel about the footprint right now and do you think there is any change in that?

[Greg Dufour:]

We feel good with a footprint and actually what we typically like to do is to – and do it all at once because that has internal impact to - obviously in 2016 we chose not to because of things that drove things and honestly, primarily they were like expiring leases on buildings which kind of facilitated the decision point for us. We feel good about it. However, you know, we're constantly looking at the franchise, as well as the economic drivers in our communities and that is a little bit difficult when you're looking at some of the smaller rural communities. So it's really trying to strike that balance of being that community bank, fulfilling those needs of some of those communities, but then also realizing at some point we may have a tough decision to make. Right now you know, probably especially for this quarter, we don't see anything on the horizon that way, things are looking you know, where we are very pleased with what we see.

[Matthew Breese:]

Got it. And then just going back to your initial commentary about the full year, regarding driving organic performance and then also some bolt-on acquisitions. If you look out over the next 12, 24 months. Can you just give us an idea of your overall view of the company in terms of profitability aspirations and then in terms of geography, where that next acquisition would be and how do you feel about your ability to pursue it?

[Greg Dufour:]

Sure. Well, it’s kind of easy looking at potential targets. There were really none left for us in Maine. We have very few publicly traded or stock banks left and those - do remain our – we'll probably call it – cause us [indiscernible] or market concentration issues. Southern New Hampshire is obviously call it a target area, but even then those targets, scarce numbers and then you get into the valuations which tend to be pretty high for a while. So again, going back to how we try to position the company is, first and foremost organic growth, and then if something attractive comes up, we can execute on a potential acquisition, just like with Bank of Maine and what we've shown over you know, the integration period through 2015, as well as running the bigger organization, 2016. So as we can get it done if an opportunity arises. You may recall for some of us that we've talked to over the past several quarters, we've shown graph where over the past 15 years, half of our growth came from organic sources, half came from acquired sources. We like that model. Obviously right now we are skewed more to acquisition because of SBM Financial, The Bank of Maine. So I look at this as now a time to really focus on the organic, that's why we have some areas to build out in Southern Maine and New Hampshire, as well as building out some of our products, like Treasury Management and Wealth Management, leveraging brokerage more. So I think we have some good prospects on the organic side and that gives us a lot of flexibility to be opportunistic.

[Matthew Breese:]

Understood. And then just last one, how should we think about the securities portfolio in 2017, a similar growth as 2016, is that a good guesstimate?

[Deborah Jordan:]

Yes. We say the range is roughly 23% to 25% of total assets is what the investment portfolio will be in, we are at 23% now. You know, the one thing, we have every month significant cash flow, so if we decide to deleverage we have the ability to do that fairly quickly. But at this we'll just really maintain that 23% ratio.

[Matthew Breese:]

Understood. That’s all I had. Thank you very much.

[Greg Dufour:]

Thank you.

[Operator:]

[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.

[Greg Dufour:]

Great. Well, I just really want to thank everybody for of their interest, taking the time to sign on this call and take the time to hear our story. We feel we have a really great one and we are looking forward to a very solid 2017. I hope you all have a great day. Thank you very much.

[Operator:]

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