Camden National Corp (CAC) 2016 Q4 法說會逐字稿

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

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.

Earlier 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 while 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 of SBM Financial, the parent Company of the Bank of Maine, which was completed in October 2015. We are now well positioned in the two fastest growing counties in Maine, as well as developing a presence in New Hampshire and in the residential mortgage market in the Boston area.

Putting all of this growth and activity into 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 of mid-coast 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 to offer its customers 24 by 7-wide call-center assistance.

We also took actions directly benefiting shareholders, such as our 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 uptick 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 US Bank $1 billion to $5 billion index of 44%.

One of the benchmarks we've discussed on this call over the past year was whether we could reach our cost savings targets at a 58% efficiency ratio for 2016. I'm pleased to 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 and 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 a flexibility to redirect our resources and attention to higher potential markets and products.

We continued 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 was solid for 2016, highlighted by the 0.67% ratio of nonperforming assets to total assets, and a 0.13% net charge-off ratio.

We previously discussed two troubled assets, both of which are under restructuring plans, and while we're always optimistic to settle things sooner rather than later, the strength of our balance sheet allows us the flexibility to manage ourselves to maximize the value even in these situations. 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 on December 31. It has certainly been an exciting year for us in 2016, and I'd like to now introduce Debbie who will discuss our financial performance.

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 averages 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 margins of a 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 of funds of 47 basis points and investment prepayment income of $186,000. This was driven by our seasonal inflow 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 gross loan production was solid during the quarter, we experienced higher levels of prepayments with several commercial real estate loans totaling almost $30 million.

Our home equity portfolio declined over $3 million since September 30, 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 gross 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-offs of 7 basis points 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 points.

Fee income of $10.1 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 nonrecurring items, including $577,000 from the liquidation of a mortgage insurance exchange and $113,000 from life insurance proceeds. We also exited a third-party loan servicing relationship effective December 31, with servicing fees of $883,000 recognized in the fourth quarter that will not be recurring going forward.

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 expenses was due to higher incentive compensation based upon 2016 financial performance, plus incremental expenses of $335,000 associated with the conversion and transferring 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.

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

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

(Operator Instructions)

Our first question today is from Damon DelMonte with KBW. Please go ahead.

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

Good, thank you.

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

Actually, in the non-interest income section in other income, our subservicing fees that we collect for the fourth quarter, it was $883,000. 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 subservicing, roughly in expenses for the fourth quarter were about $800,000 that will not be recurring going forward.

Okay. And that $800,000 expense reduction is also for the subservicing, or is that for --?

Yes, it is, yes.

Okay.

Part of it is in the other real estate owned and collection costs, and certainly part of it's in salaries to support -- that we're supporting the subservicing portfolio.

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

Damon, I would say for 2017 from a loan growth perspective, it will probably be about what we saw in 2016 as we settled into the larger franchise.

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

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

Okay. Great. And then my last question on the margin, Debbie, can you give us a little guidance on what's driving the margin? What was the core margin this quarter and how much accretable yield was in there?

A couple 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'm feeling a little better about our net interest margin.

If you look at -- in our earnings release we do have a table 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. 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.

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

I'm not sure I'm that optimistic. 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 I 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.

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

Thank you.

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

Good afternoon, everybody.

Hello, Matt.

On the mortgage insurance exchange, a couple questions. One, what was that business? And then, number two, the gain on sale, where was that in the income statement? Was that in other income or did that fall into the mortgage banking line?

Hi, Matt. This is Deb. The mortgage insurance exchange, many banks in New England actually participated in that. It had been frozen for, I think the last five years. The association had to, quote, work with the CFPD to get approval to liquidate the insurance funds. So I imagine there's other banks in New England that are also benefiting from this final payout under the exchange. We were -- in the past, it's if we had referred on mortgages insurance coverage, we'd get a commission piece.

Understood. And so the sale, did that fall into other income?

The gain on investments? Yes, it fell into other income. That's what Mike says.

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

A couple things, the MISA, that $800,000 was for the quarter in the cost.

Oh, so it's much higher than that.

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 we're bringing on personnel to support that business line. So certainly that gets reinvested. We are seeing a little higher salary increases. 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.

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 our -- we're getting into our Southern Maine and New Hampshire build out, if you will.

Understood. Okay. Are there more branch closures to come? We've done a couple so far. How do you feel about the footprint right now and do you think there's any change to that?

We feel good with the footprint, and actually what we typically like to do is to -- and do it all at once, because it has an 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 facilitated the decision point for us. We feel good about it. However, we're constantly looking at the franchise, as well as the economic drivers in our communities, and that gets 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 these communities, but then also realizing at some point, we may have a tough decision to make. Right now, probably, especially for the next quarter, we don't see anything on the horizon that way. Things are looking where we're very pleased with what we see.

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 we 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?

Sure. Well, it's 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 that do remain are -- will probably cause us Herfindahl 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 the integration period through 2015, as well as running the bigger organization in 2016 says 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 a 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're 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.

Understood. And then just last one. How should we be thinking about the securities portfolio in 2017? Similar growth as 2016, is that a good guesstimate?

Yes, we say the range is roughly 23% to 25% of total assets is what the investment portfolio will be in. We're at 23% now. 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 point, we'll just really maintain that 23% ratio.

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

Thank you.

(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. I just really want to thank everybody for their interest, for taking the time to sign on to 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.

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