Camden National Corp (CAC) 2016 Q3 法說會逐字稿

Good day and welcome to Camden National Corporation third-quarter 2016 earnings conference call.

(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 would like to turn the conference over to Greg Dufour. Please go ahead.

Thank you, Nicole and welcome to Camden National Corporation's conference call to discuss financial and operating results for the third quarter of 2016. Debbie Jordan, our COO and CFO will review finance results in a few minutes.

But, first I want to give an update on the third quarter of 2016. Last week we celebrated the one-year anniversary of our acquisition of SBM Financial, the parent company of the Bank of Maine, and equally as important, the anniversary of the successful operational integration of our systems and processes.

I'm pleased to share with you that we are meeting or exceeding our financial, operational, and strategic objectives that we set when we announced the transaction in early 2015. Our return on average assets are above 1%. Return on average of tangible equity of almost 14.6% is tracking towards our 14.8% target, and our efficiency ratio is below 58%.

Additionally all major systems and operations have been converted to a single platform providing both efficiencies as well as better customer service which has resulted in customer runoff being within our estimates. While at the same time we've grown the organization organically as well over 2016. Expanding in to the higher growth Southern Maine markets with the experienced team from the Bank of Maine along with the benefits of having a larger scale now that we're nearly $4 billion of assets, positions us extremely well for the future.

As an organization, we have tremendous opportunity for growth in Southern Maine while at the same time we're continuing to look for growth opportunities throughout northern New England and our other markets as well. In addition to our commercial real estate office in Manchester, New Hampshire, I'm pleased to announce the hiring of a commercial lender in that market as well. At this point in time we expect to keep our Manchester location as a lone production office, complimented by our treasury management services as we see this as a strategy to build a business around recruiting the right people to serve customers and clients.

As other opportunities arise to obtain top talent, we'll use this model for expansion into other higher growing markets. This provides us flexibility as well as efficiency in our expansion strategies. Our world pipelines remain solid. And as you'll see we had a good quarter of loan growth to follow up on the very strong quarter we had in the second quarter.

Residential mortgages have been very strong for us and is helping to diversify our revenue. In addition to our in-branch retail lenders, we have a dedicated group of mortgage originators in several markets including Braintree, Massachusetts. But the key to success is having a great core of underwriters, processors, and quality control staff members at our loan production center.

Last quarter I shared with you that we'd be investing in our wealth management service product areas and then subsequently announced that we'd merge our standalone wealth management subsidiary, Acadia Trust, into Camden National bank to create Camden National Wealth Management Group headed by Mary Beth Haut, who joined us in April. We're waiting regulatory approval but do expect to have that completed by November 30.

Our third-quarter financials include additional salary expense including severance as we reorient our wealth management efforts. In 2017, we'll be positioned under one brand which also includes our brokerage division, Camden Financial Consultants.

We're very happy with the year so far. There are always a few challenges or two along the way. Our asset quality is favorable to peers in our historic trends, while we are still working through two large loan matters that we discussed last quarter. At this point in time we believe the best way to preserve value is to work with these organizations and we have a strong special assets team to lead that effort.

In one case we chose to partially charge off the relationship which was reserved for at the end of the second quarter. In other words, the increase in charge-offs this quarter did not have a material impact on our third-quarter loan loss provision. We also monitored the impact of current interest rate environment as well as the escalation of cost and personnel. This will require us and all financial services companies to look for additional sources of revenues as well as other sources of efficiencies, which we believe we addressed in some of the strategies and performance we're outlining today.

Finally, before I turn the discussion over to Debbie, I want to mention our three-for-two stock split which was completed on September 30. We chose to pursue a stock split after much consideration which was driven by our desire to look for ways to increase liquidity of our common stock by aligning the trading range of our stock with our peer group. I'd like to now introduce Debbie, who will discuss our financial performance.

Thank you, Greg, and good afternoon, everyone. We're pleased to report strong financial results for the third quarter of 2016 with net income of $10.9 million and diluted EPS of $0.70 per share, both up 13% compared to the previous quarter. For the third quarter our return on average assets was 1.11% and our return on average tangible equity reached 15.61%.

The major drivers of earnings growth of 13% between quarters includes a lower loan loss provision, a 1% increase in revenue, and the slight decline in operating expenses. Last quarter we provided an incremental loan loss provision of $2.3 million related to two credit relationships. The commercial credit was partially charged off during this quarter in the amount of $1.4 million. This brings our year-to-date net charge-off ratio to 15 basis points on an annualized basis.

We feel good about our asset quality with our nonperforming assets at 0.67% of total assets and our loans past due over 30 days at just 17 basis points. Overall total revenue was up $317,000 between quarters, with noninterest income growth of 4% while net interest incomes declined less than 1%. We're very pleased with the revenue growth for the quarter given that the second quarter included several income pick-ups that we did not anticipate for this quarter.

Fee income increased by $449,000 for the third quarter as a result of very strong mortgage banking volumes with mortgage gains increasing $763,000 between quarters. We also retrieved $638,000 on a legal settlement pertaining to a previously charged off acquired loans. If you recall, last quarter we had an extremely high volume of commercial back-to-back loan swap transactions that we did not anticipate repeating at that activity level.

During the third quarter we generated fees of $443,000 on swapped transactions which was considerably less than the $1.2 million the previous quarter. Last quarter also reflected $394,000 of income associated with bank-owned life insurance benefits. Net interest income on a GAAP basis declined $132,000 between quarters. However, when adjusting for the fair-value accretion from purchase accounting as well as recoveries on charged off acquired loans, net interest income grew 3% compared to the previous quarter.

Net interest income growth was driven by the strong loan volume in the previous quarter and a slight improvement in our normalized net interest margins. Our loan portfolio's up over $100 million in 2016, or a 5% annualized growth rate. Our normalized net interest margin was up 1 basis point between periods to 3.10% when excluding fair-value accounting and recoveries.

Although our yield on the loan portfolio declined 3 basis points in the third quarter, we were able to offset by a lower rate on borrowing costs but more importantly a nice increase in core deposits. We have a seasonal deposit base where we reach a high balance mark in the second half of each year.

Our average core deposits of $2.1 billion are up approximately 7% compared to the third quarter last year when adjusted for the acquired deposit base. We were able to achieve an efficiency ratio of 56.3% for the quarter with operating expenses of $22.1 million, a decline of $181,000 from the previous quarter. Between quarters we experienced lower operating cost in most line-item categories with the exception of higher compensation due to incentives associated with higher revenue growth and an increase in loan and collection costs related to the subservicing portfolio.

Third-quarter results also reflect the benefit of changes in the FDIC assessment calculation which, on an annual basis, translates to lower FDIC insurance costs of approximately $350,000. For the fourth quarter of 2016 we estimate one-time costs of closing two branch locations of $225,000, however we anticipate the banking center closures will translate to over $0.5 million expense reduction in 2017. Overall, we're extremely pleased with our third-quarter financial results, and with that, I'll turn it back over to Greg.

Great. Thank you, Debbie, for your comments. We'll now open up the call for questions. Operator?

(Operator Instructions)

Our first question comes from Damon DelMonte of KBW. Please go ahead.

Good afternoon, guys. How's it going today?

Great, Damon, how you doing?

Good, Greg. Thank you. The first question, the last point Debbie was making about expenses. So you're expecting roughly $225,000 of one-time expenses in the fourth quarter for the closing of a couple locations, is that correct?

Yes.

Okay. And then going forward that's going to generate around $0.5 million of annual savings?

That is correct, yes.

So, as we think about a good run rate on core expenses, is it something between low-$22 millions to mid-$22 million per quarter? Is that a reasonable expectation?

As we look for the fourth quarter, I think it's very reasonable to expect that kind of run rate or pretty similar to what we had in the third quarter. We're still putting budgets together for next year. We have a lot of moving parts with the benefits of several closures that we've done over the prior year.

We're also shutting down on [lease up] subservicing. We're exiting that business line at the end of this year. That currently will have a reduction in the expense run rate.

Then we have some offsetting factors which include higher medical insurance costs and higher compensations. But we typically have provided guidance that we're targeting the 58% efficiency ratio. We think we'll be on that for 2016. And going in to next year, that's what we'll be managing towards.

Okay. That's helpful. Thank you. Then with respect to the accretable yield, the core margin actually went up a basis point, it was 310 I think versus 309 last quarter. I guess two-part question.

One, how do you look at the trend in the core margin in the upcoming quarters? And two, from the impact on accretable yield, I think it was $1.2 million this quarter down from $2.2 million in the previous quarter. What's a good approximation on a quarterly run rate for the accretable yield impact?

The net interest margin, I think it was great news that we actually saw a pickup in the quarter. That was really part of our funding base, seeing an improvement related to that. We also had, on the investment portfolio, $80,000 of a prepayment that we picked up for the quarter. So, that won't be in the run rate going forward.

Overall we believe the NIM compression will continue. When I look out, and I'll give Greg heartburn on this, when I look out a year, I think we're moving towards that 3% net interest margin rate. Because loan yields are still coming down. The accretable yield is probably the hardest thing to forecast. It's not just the fair-value mark accretion. But it's also charge-offs on previously recovered loans.

So, when you combine the two, we drop quite a bit between quarters. We anticipate that to drop again next quarter and then certainly be lower in 2017. I would say the fourth quarter, my estimate is maybe around $700,000 related to those two items together, Damon.

Okay. Great. Lastly, with your outlook for loan growth, obviously this was a favorable quarter for you guys. How would you say -- I know the average loans came in at closer to 9% linked quarter annualized, the end of period in came closer to flattish or 1%.

How do your pipelines look as you head in to the fourth quarter? Can we expect a rebound or maybe a steadiness in the average loans from third quarter to fourth quarter?

Damon, I would say it's probably more on the steadiness track than anything else. Of course the second quarter was just a big pop, so we're addressing a lot of transactions that way. Our loan pipelines look good.

The performance of our lenders across the board has been very strong. I don't want to say we're at capacity, but what we're seeing in the economy up here is the deals are getting pretty frothy, pretty tight, both in pricing and on structure. I think when we look out even to 2017, again, as Debbie mentioned, we're still just racking up the budget in estimates now.

I think previously we were giving a 5% estimate on loan growth. I'd say we'd still be within that. The other key though to that, and as well as in part to offset that 3% NIM potential, is expansion. That's why it's good when we can get top talent in on the lending side as well as expanding our wealth management and fee income on that.

Great. That's all that I had for now. Thank you very much.

You're welcome. Thank you.

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

Good afternoon, everybody.

Hi, Matt.

I was hoping to learn a little bit more about the folding in of Acadia Trust into the Camden Bank Corp, Camden National. So could you talk about what's next in terms of strategy there and how meaningful do you think the opportunity is as you invest and grow over the next 12 to 24 months?

Stepping back a little bit, we acquired Acadia Trust in 2001, have operated it as a separate subsidiary since then. The benefit of Acadia is it does have national trust powers as well as a very robust investment process that is really a bottoms up, stock-picking, large [crat] value approach to things and that has served us well. That performance and that portfolio actually is really great this year.

But what we have found over time is really three things. One, we need to expand the investment options for clients. Right now, today, we're probably a little bit more on the conservative side of things. And with Mary Beth coming in we hope to open up the architecture on that somewhat and really reflecting not only prospects but existing clients and existing potential that we have there.

Secondly, going into it, bringing it into the bank, operating out of one brand, what we expect is really, going forward both internally and externally under the one umbrella. Because what we have now, and I think part of it is reflecting the acquisition that we did, now that we have a very big commercial lending staff, banking presence in southern Maine where a lot of the wealth is still located here, is we can have those internal synergies, referral sources internally. Again, when you look at an organization like ours that has a wealth management unit that's growing, exciting, doing well, the one thing that we have versus RIAs, or unaffiliated ones, is a great referral source and our commercial book of business as well as our affluent retail customers. So we want to connect those links to it as well.

And then the other piece of that will give us some minor operating efficiencies but, again, going to the external growth we'll be able to expand our prospect base if you will, as well as better align wealth management with the growth of the bank. That's probably, Matt, further out there than probably 2017 but as we expand we need to make sure that wealth management is also expanding with us.

So is the opportunity more on the assets under management or on the margin and the efficiency or a combination of both?

Right now I would say assets under management would be the major growth point. We're pretty good on the fee side. And we can maintain our discipline on that. Acadia has been run pretty efficiently so we're not worried about that aspect of it. So it's really orienting Acadia, or now Camden National Wealth Management, along with our brokerage division to be more of a growth engine than what we've had in the past.

Got it. Can you just remind us what the assets under management were at the end of the third quarter?

At the end of the third quarter, total, call it unaffiliated assets because they manage a slight piece, is about $700 million. And then we have some obviously in Camden finished consultants, that's another couple hundred million or so.

Got it. Okay. And then on the nonperforming assets, the two credits from last quarter, could you just remind us of the size of each of those credits, the specific reserves against them and the industries that they were involved in?

Sure. One was about a $12 million credit in healthcare. And the other -- that was from our legacy portfolio. The other was about a $5 million acquired loan that was in a distribution network industry. I can't remember off the top of my head, Matt, the coverage that we have on those.

Okay. What do you think is the resolution timeframe for these?

Right now, we're taking it, I believe we have all the pieces in place, very active. And again, remember, one of the benefits from the Bank of Maine where they went through the recap, they had a very strong workout special assets group. We've kept that intact as well as complimenting it with some of the folks from our shop as well.

So, we're looking -- it's hard to say with these things. It could change on a moment's notice. But we're taking more of a longer term approach, meaning not necessarily pushing to a liquidity event for them.

Probably good solid companies that just need a little time here and some guidance which is now achieved through consultants and whatnot. Two totally different situations. But kind of tracking the same way.

Understood. Okay. Then on the mortgage banking item this quarter it was a significant ramp-up in terms of overall revenues.

Was there anything else in there besides gain on sale? Was there any sort of mortgage servicing write-up or anything that was outside of the normal gain on sale?

Matt, hi, this is Debbie. It was mostly the mortgage gains on sales; the volume that we put through. We had an all time high pipeline at the end of June of $90 million so it was working through a lot of that. I think the third quarter will be the best quarter that we have on the mortgage gain so I don't see us repeating that level of performance next quarter.

And I would just add, if you recall in the first quarter, as well as probably part of the second quarter, we were a little bit slower to ramp up than what we expected and then it just kind of hit its stride in the third quarter.

Understood. Okay. Very good. And then on the margin guidance, this is my last one. Can you just remind us in terms of asset sensitivity what the impact of a fed hike would have on your margin in December?

Yes, when we look out a one-year period, 25 basis point increase, translates to about $400,000 impact to net interest income.

Is that in the current guidance of heading towards a 3% core margin or not?

No.

No, it's not. Okay. That's all I had. Thank you.

You're welcome.

(Operator Instructions)

It seems we have no further questions. So this concludes our question-and-answer session. I would like to turn the conference back over to Greg Dufour for any closing remarks.

Thanks. What I'd like to do is really just on behalf of all of us here at Camden National, is thank all of you that have signed in on the call and have taken your time to show your interest in our Company. And we appreciate your efforts as well as your interests. Thank you.

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