Camden National Corp (CAC) 2015 Q4 法說會逐字稿

Good morning and welcome to the Camden National Corporation Fourth Quarter 2015 Earnings Conference Call. All participants will be in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) Please note this event is being recorded.

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, Chief Operating Officer and Chief Financial Officer. Our first presenter is Greg Dufour. Please go ahead.

Thank you. Good morning and welcome to our fourth quarter earnings conference call. We're very pleased that in addition to closing on the acquisition of SBM Financial, the parent company of The Bank of Maine. And we're also reporting record core operating earnings of $28.2 million for 2015, with a core return on tangible equity of 13.2% and core return on assets of 0.94%.

In a few moments, Debbie will walk you through our fourth quarter results as well as various accounting adjustments related to the acquisition, but from a high level, our core earnings performance excludes one-time acquisition costs, but does include the impact of 2.5 months of earnings from SBM Financial.

Last quarter's conference call was only a few days after the closing of the transaction and conversion of the systems of SBM, and I reported that a very successful conversion of systems, resources and people occurred. I'm pleased to say as of today that initial success was sustained, allowing us to focus on wrapping up 2015 and laying the groundwork to deliver on the commitments made when we announced the transaction. You'll hear from Debbie momentarily that we're on target to achieve the cost savings targets in 2016 and we're within range of our estimates of one-time costs associated with the transaction.

As we've gotten to know each other better, we work together to address some strategic matters that we feel will properly align current and future resources. We performed initial review of our branch network and even though we consolidated four branches in October, we recently announced that we will consolidate the former Camden National Bank, Milk Street, Portland, Maine branch into our new location at 2 Canal Plaza in Portland that we acquired during the acquisition.

Existing staff will be reassigned to fill vacant positions and while we'll utilize existing branch space to help house our growing Portland-based presence, we'll have a small amount of cost savings as we consolidate two branches as we're just a few blocks from each other.

We also review the health professional funding Corporation or HPFC, which is a wholly-owned subsidiary of the Bank of Maine. After an extensive analysis, it was determined that at this time, the capital and operational resources required to allow HPFC to scale up to its full potential did not align with our need to focus on ensuring that we meet the profitability targets of the merger. Operations of HPFC will be discontinued during the first quarter 2016. The company will continue to earn revenues from the HPFC loan portfolio as it naturally runs off over the next five to 10 years. Many of the cost to close HPFC including severance were recorded in our 2015 results.

Today, we are a $3.7 billion financial institution, with a broad set of products and services, ranging from consumer and loan-related products. Commercial products that can serve micro and small businesses all the way to complex, commercial lending transactions. We have brokerage and wealth management services, cash management treasury services, and a comprehensive residential mortgage platform. We're delivering these services through 64 banking centers, 85 ATM locations, Acadia Trust based in Portland, Maine, a commercial loan production office in Manchester, New Hampshire and a mortgage origination office based outside of Boston, Massachusetts.

Our scale allows us to provide similar products equivalent to larger organizations, while our network of banking centers and offices along with empowering our people in the field allow us to [fulfill] our capabilities in a genuine local-based fashion. Since the acquisition, any runoff of customers have been well within our due diligence estimates, which I attribute to the hard work of the people at Camden National as well as loyal customers of both organizations. Even though markets remain highly competitive, the impact of the acquisition did not stop us from seeing significant growth.

I'll now hand the meeting over to Debby.

Thank you, Greg. And good morning, everyone. We are pleased to report a strong finish to the year with solid loan and deposit growth during the fourth quarter. When excluding non-core one-time merger cost, our core operating earnings of $7.7 million for the quarter increased 26% compared to the fourth quarter last year. Our fourth quarter results include the benefit of 2.5 months of the former Bank of Maine. Core operating EPS of $0.78 per share for the fourth quarter declined 5% compared to the same period a year ago as a result of the issuing 2.7 million shares in connection with the acquisition as well as the timing of cost saves from combining the two organizations.

On a core operating basis, our return on average assets was 86 basis points and our return on average tangible equity was 11.96% for the quarter. As a result of the merger in mid-October, our revenue increased 37% over the fourth quarter of last year, while operating expenses were up 39% for the same period. We are really pleased with the growth experienced on both the loan and deposit fronts during the fourth quarter. When excluding the acquired loans, our loan portfolio grew organically $45 million, which is an annualized growth rate of 10%. [Organic] core deposits were up $75 million for the quarter or a 21% annualized rate, while CD and brokered deposits declined 7% during the quarter.

We had a healthy fee income growth for the quarter driven by mortgage banking income of over $1 million as we realized the benefit of an expanded mortgage origination platform with a network of originators and office locations in Falmouth, Maine, and Braintree, Massachusetts. In addition, we recorded customer loan derivative income of $861,000 during the quarter as we swapped longer-term fixed rates on new commercial real estate transactions to LIBOR-based pricing. Our loan loss provision was slightly higher in the fourth quarter, primarily due to higher level of loan charge-offs, resulting from the timing of options. For the quarter, our annualized net charge-off rate was 16 basis points, bringing our annual charge-off rate to 10 basis points for the year. Non-performing assets increased by $9 million from September 30 as a result of the SPM acquisition as we designated $11 million of loans as non- accrual. In addition, we transferred $1 million into OREO in connection with former branch facilities that were closed and/or acquired. At year-end, non- performing assets represent just 66 basis points of total assets.

Operating costs were up 39% for the quarter after excluding merger expenses with the increase related to 168 additional employees, 24 new locations and 55,000 new customers. We made significant progress in reducing cost and we remain on track to achieve our 37% cost save projections by the end of the second quarter of 2016. In addition to the HPFC wind down and one branch closure that Greg mentioned earlier, we are also closing one operation center. Our efficiency ratio was slightly over 64% for the fourth quarter. We are forecasting the efficiency ratio to trend lower each quarter and feel confident of a 58% ratio for 2016.

As mentioned by Greg, we couldn't be more pleased with the execution of The Bank of Maine merger. There was limited customer impact and deposit attrition has been minimal with a 2% outflow of balances and a 6% account attrition rate. During the fourth quarter, we took the opportunity to reduce our exposure to rising interest rates. This was achieved through a combination of the acquired loans and deposits, reducing borrowing, selling long-term fixed-rate mortgages and the continued CRE loan swap program.

Our investment portfolio currently stands at 23% of total assets, a decline from 29% just a quarter ago. Our income tax rate for 2015 was 32.1% and we expect it will increase slightly to 32.5% for 2016. We are much in line with our projections related to the merger. Tangible common equity of 7.18% exceeds our 7% estimate, and our total risk-based capital ratio of 12.98% is slightly below our 13% forecast. Total merger and acquisition costs are estimated to run 5% higher than the $15 million forecasted, which includes $600,000 that will be incurred in the first half of 2016.

Goodwill and intangible assets are 6% lower than anticipated, translating to lower tangible book value dilution of just 12% compared to our original estimate of 14%. The lower goodwill amount relates to the deferred tax asset on the acquired net operating loss carry-forward. In our original forecast, we established a valuation allowance of $10 million that we deemed wasn't necessary at year-end.

Earnings per share accretion for 2016 is anticipated at 11% compared to our original estimate of 14%. This difference in EPS accretion is primarily related to the elimination of the deferred tax asset valuation allowance, that was modeled to reverse into income each year. Our dilution earnback on the SBM transaction still stands at a five-year earnback. We just swapped lower tangible book value dilution for lower earnings per share accretion. But overall, no material change in economics from what was originally modeled. We remain confident in the importance of the SBM transaction and what we can accomplish as a combined organization with the added scale and market expansion.

That concludes my comments and we'll now open up the call for questions.

We will now begin the question-and-answer section.

(Operator Instructions)

Matt Kelley, Piper Jaffray.

Yes, good morning.

Good morning.

Just a question on the cost saves in the SBM transaction. When I go back and look at what they were running at, they were running at about $7.5 million a quarter, so call it a $30 million annualized of a run rate, 37% expenses, should be $11 million in terms of the dollar amount of cost saves. Is that the right bogie from a dollar amount perspective?

Yes, that is correct, Matt. $11 million is what we targeted as cost saves.

I was just going to ask, what is the dollar amount of cost savings from electing to discontinue HPFC, closing the location on Milk Street and then I think you said there was one other branch that I know you were closing on the Camden side. What is the combined cost save number for those three items?

That will be -- I would have to do the math on those three combined.

Okay.

We're targeting the HPFC wind down in the first quarter, some of that cost will still continue to be incurred as we support that business line in run-off mode. I'll have to get back to you on that, Matt.

Okay, no worries, no worries. And then, second item on the margin, on the 3.21% core margin, you reported this quarter ex-accretion, what would you expect the outlook to be in the current rate environment off of that 3.21%?

Our core margin, as you said, was 3.21%. Our interest rate risk position changed quite a bit for the fourth quarter. As you know, our filings before we had a rising rate exposure above 5% of our net interest income that we're almost a neutral position now. So when we forward look at 2016, we see that core margin coming down slightly, but not very much going forward.

Okay. And then, on the accretion side, the 9 basis points you had this quarter, how quickly will that run down? I mean where will that be by fourth quarter of 2016? Any thoughts there?

We estimate about 7 basis points coming from accretion for next year, for [2016].

Okay. Got it. And last question, on the securities portfolio, should we expect that to stay about same level at $850 million or is that going to come down as you remix further?

Yes, our target has been 23% to 25% of total assets, the investment portfolio and we're at 23% right now. As we grow total assets, we envision keeping that pretty consistent percentage of total assets going forward.

(Operator Instructions) Travis Lan, KBW.

Thanks. Good morning, everyone.

Good morning.

If we think about the outlook for loan growth with the benefits of SBM included, you put up 6% organic growth for the year and then 10% in the quarter. Is an outlook for 2016 kind of in-between the two? Is that a reasonable expectation or is there anything that would kind of push it one way or the other?

Travis, I think your comment is between the two points that I would say that would be correct. The driver of it is two things. One, we just saw a very strong fourth quarter. How to maintain call it within that range really reflects in our existing lending that we're doing through the call it the legacy franchise as well as recall, we not only expanded into Southern Maine, but we have a very seasoned, experienced team down there that there is not a ramp-up of lenders, if you will. So that 6% to 10% should be achievable for us from what we see today.

Okay. Good. That's helpful. On the provision, or I guess, the outlook for the reserve, would you expect to be building reserve to loans going forward as kind of the acquired SBM loans run off and are replaced with newly originated loans? How do you think about just the outlook for the reserve to loan ratio?

When we look at the provision for 2016, we built it based on estimated charge-offs and then ramping up with the growth that we anticipate on the loan side. And so I would anticipate to start seeing that reserve increase for 2016.

Okay. Alright. That's helpful. And then. the outlook for mortgage banking, is that something I think you'll -- or I shouldn't say like that, will you kind of extend the SBM mortgage banking model across your legacy footprint as well? So what do you kind of think about the potential momentum on the mortgage banking side?

The momentum is strong, not only from call it the origination side of it, which obviously SBM invested quite a bit in it. We have a very seasoned staff on the origination side. The real benefit of it will be as we take call it the more sophisticated approach that SBM gets including their secondary sales process, that's what's going to be leveraged through our legacy areas through not only originations within that legacy franchise but also through the branch network.

Okay. Okay. That's helpful. And then, last one is just if you have a comment on deposit pricing pressure in the markets, have you seen any kind of impact from the Fed fund hike or if there is any kind of promotional pricing going on in the market?

It's been spotty so far, Travis. There is always pressure to increase deposit rates. What we're seeing is it's competitive, but there is not at least a call it a group of competitors that are kind of breaking out of the pack right now. Things seems to have settled down, especially after the Fed rate hike. How we do expect though to grow deposits is really through the new product set that we rolled out, Promise Rewards on the checking side post- merger and that was one of those things that we did in addition to acquiring an institution, we put out an all-new consumer product set for us, and we also expect to see some return on our investments in treasury management services to help that growth there.

Great. Okay. Thank you, all, very much.

Thanks, Travis.

Matt Kelley, Piper Jaffray.

Yes. Just a quick one. I think you said that the total deal charges is going to be 5% higher, that would put it at $16 million, is that correct?

Yes, just under $16 million. Yes.

Okay. And so the remaining $7 million, will that occur in Q1 or is that spread over Q1 and Q2 or is it -- how should we expect that to play out?

That total $16 million was actually [sat] in several places. Some of it was recorded on SBM books before the opening balance sheet occurred. Some of it hit equity, some of it hit Camden National's P&L. So all that, you'll see for -- all if it has been occurred, except for the $600,000 that we expect in 2016.

Okay. So just $600,000 in Q1, I assume then? Got it.

Yes.

And then, on a core earnings basis, in the fourth quarter, if you just back out the $9 million charge, you're about $23 million. For the first quarter, will it be flat, up or down compared to that level?

Well, typically, we see a lot -- yes, we're pausing because we really, as you know, Matt, we don't get into specific estimates for the quarter. But I think what you do is, if you probably go back and see the seasonality that we see by quarter, you'll see some impact and that can probably help you in your estimates or anybody in their estimates of what the first quarter will look like. I don't believe that the bringing in SBM would really change the seasonality that we've seen in the past.

Okay. I guess another way to look at it is, that 58% efficiency ratio target, that's the full year, correct? Full-year 2016 (inaudible)?

That is correct.

Okay.

Yes, that is correct.

Thank you very much.

You're welcome.

Thanks, Matt.

(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, thank you. First of all, I want to thank everybody for their interest and taking the time to sign on to the conference call. Needless to say, we've had a great quarter and a great year achieving really a transformation of the organization that really gives us the critical mass, not only for 2016 but also beyond that. We're very excited about the future of the organization and we appreciate all your support.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your line. Have a great day.