Camden National Corporation (CAC) Q3 2016 Earnings Report, Transcript and Summary

Good day and welcome to the Camden National Corporation Third 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 would like to turn the conference call over to Greg Dufour. Please go ahead.

Thank you, Nicole. And welcome to Camden National Corporation Conference Call to discuss financial and operating results for the third quarter of 2016. Debbie Jordan, our CLO and CFO will review financial results in a few minutes, but first, I wanted to give an update on the third quarter of 2016. Last week, we celebrated the one-year anniversary of our acquisition SBM Financial, the parent company of The Bank of Maine and equally is important the anniversary of the successful operational integration of our systems and processes. I am 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 tangible equity of almost14.6%, is tracking towards our 14.8% target and our efficiency ratio was 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 run off being within our estimates while at the same time we grown the organization organically over 2016 and well over 2016. Expanding in to the higher growth southern main markets were the experienced teams on The Bank of Maine along with the benefits of having a larger scale now that were nearly $4 billion of assets positions us extremely well for the future. As an organization, we had tremendous opportunity for growth in Southern Maine while at the same time we are 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 and New Hampshire, I am pleased to announce the hiring of a commercial vendor in that market as well. At this point in time, we expect to keep our Manchester location as a long production office complemented by our trade [remanagment] services as we see this as a strategy to build the business or on recruiting the right people to serve the customers and clients. As other opportunities arise to retain top talent, we will use this model for expansion in to other higher growing markets. This provides us flexibility as well as efficiency in our expansion strategies. Our loan pipelines remain solid that 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 vendors, 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 in our loan production center. Last quarter, I shared with you that we would be investing in our wealth management service product areas and then subsequently announce that we would 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 are awaiting regulatory approval and do expect to have that completed by November 30. Our third quarter financials included additional salary expense including severance as we reorient our wealth management efforts. In 2017, we’ll reposition under one brand which also includes our brokerage division Camden Financial Consultants. We are very happy with the year so far. There are always a few challenges that you [are wanting to weigh]. Our asset quality is favorable to peers and our historic trends but we are still working for 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 monitor 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 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 are 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 the 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 are 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 a 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 a non-performing assets of 0.67% of total assets and our loan past due over 30 days at just 17 basis points. Overall, total revenue was up $317,000 between quarters with non-interest income growth of 4% while net interest income decline less than 1%. We are very pleased with the revenue growth for the quarter given that the second quarter included several income pickups 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 received $638,000 on a legal settlement pertaining to a previously charged off acquired loan. If you recall, last quarter we had an extremely high volume of commercial back-to-back loans, swap transactions that we did not anticipate repeating at that activity level. During the third quarter, we generated fees of $443,000 on swap 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 decline $132,000 between quarters, however when adjusting for the fair value accretion from purchase accounting, as well as recoveries on charged-off acquired loan, 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 hence a slight improvement in our normalized net interest margins. Our loan portfolios 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 recovery. Although our yields 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 core deposits. We have the 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 first 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 costs in more 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 sub-servicing portfolio. Third quarter results also reflect the benefit of changes in the FDIC assessment calculation which on an annual basis translate to lower FDIC insurance costs of approximately $350,000. For the fourth quarter of 2016 we estimate one-time cost of closing two branch location of $225,000. However, we anticipate the banking center closures will translate to $0.5 million expense reduction in 2017. Overall, we are 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?

We will now begin the question and answer session. [Operator Instructions] Our first question comes from Damon DelMonte of KBW. Please go ahead.

Hey, good afternoon guys. How is it going today?

Great, Damon. How you're doing?

Good, Greg. Thank you. First question in terms of the last point that 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 of occasions, is that correct?

Yes.

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

That is correct. Yes.

All right. So, as we think about the good run rate on core expenses, is it something between low $22 million to mid $22 million per quarter, is that a reasonable expectations?

As we looked 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 some -- the benefits of several closures that we've done over the prior year. We're also shutting down our initial sub-servicing. We're exiting that business line at the end of this year. So that certainly will have reduction in the expense run rate. And then we have some offsetting factors which include higher medical insurance cost and higher compensation, 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 into next year that's what we'll be managing for.

Okay. That's helpful. Thank you. And then with respect to the accretive yield, so 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 then two, from the impact on accreteable 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 accreteable yield impact?

The net interest margin I think it was great news that we actually saw a pickup in last quarter that was really part of our funding base, seeing 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 get Greg 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. They are credible yields; it's probably the hardest thing to forecast. So, it's not just the fair value market accretion, but it's also charge-offs on previously recovered loan. So when you combined with two, we drop quite a bit between quarters. We anticipate that to drop again next quarter and then certainly be lower – 2017, I would say the fourth quarter; my estimate is maybe around 700,000 of relating to those two items together, Damon [ph].

Okay, great. I guess just lastly with your outlook for loan growth, obviously this was a favorable quarter for you guys, how do you say, I know it’s like the average loans came in at closer to 9% linked quarter annualized and the end of period came in closer to the flattish or 1%. How do your pipelines look as you head in to the fourth quarter, can we expect kind of a rebound or maybe a steadiness in the average loans from third quarter to fourth quarter?

Damon, I would say that 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. So we're – I don't want to say we're at capacity but what we're seeing the economy up here is that 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 kind of racking up the budget and estimates now, I think previously we were giving a 5% estimate on loan growth, I would say, which still 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 on the lending side as well as expanding our wealth management and fee income on that.

Okay. Great. That's all 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.

Hey, Matt.

I was hoping to learn a little bit more about the folding in of the Acadia Trust into Camden Bank or 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 in growth over the next 12 to 24 months?

Yes. Stepping back a little bit we acquired Acadia Trust in 2001, have operated in as a separate subsidiary since then. The benefit of Acadia is it does have trust powers, national trust powers, as well as a very robust investment process that is really bottoms up stock picking large fair value approach to things, and that has [Indiscernible] well. That performance in their portfolio actually is really great this year. But what we've 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 in to it, bringing it into the bank, operating at a one brand, but we expect is really going forward both internally and externally under that 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 wealth is still located here is we can have those internal synergies, referral sources internally, again, when you look at an organization like ours, it has a wealth management unit that's growing, exciting, doing well But one thing that we have versus RIAs or unaffiliated one 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, we'll 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 aligned wealth manager with the growth of the bank and that's probably 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 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 bad aspect of it, so it's really orienting Acadia or now Camden National Wealth Management, along with our brokerage division to be more of growth engine than what we’ve had in the past.

Can you please remember what the assets under management were at end of the third quarter?

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

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

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

Right now we are taking it, I think 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 kept that intact as well as complementing 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 through a liquidity event for them. They are probably good solid companies, they just need a little time here and some guidance which is now achieve through consultants and whatnot. They are two, totally different situations, but kind of tracking the same one.

Understood. Okay. And then on the mortgage banking item this quarter, it was a significant ramp-up in terms of overall revenues. Was there anything else in their besides gain on sale. Was there any sort mortgage servicing write up or just anything that was outside of the normal gain on sale?

Matt, hi, this is Debbie, mostly the mortgage gain on sales, the volume that we put through, we had an all time high pipeline I think at the end of June of $19 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 in the next quarter.

And I would just add, if you recall the first quarter as well as probably part of the second quarter, we are 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 assets sensitivity, what the impact of a fed hike would have on the margin in December?

Yes. When we look out a one year period, 25 basis points increased translates to about $400,000 impact to net interest income.

And is that in recurring guidance of heading towards the 3% core margin or not?

No, no.

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

Welcome.

[Operator Instructions] We will again pause momentarily to assemble our roster. 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 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 the time to show your interest in our company and we appreciate your efforts as well as your interest. Thank you.

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