Earnings Call Transcript - CAC Q4 2021

Operator, Operator

Good day and welcome to Camden National Corporation's Fourth Quarter 2021 Earnings Conference Call. My name is Brea and I'll be your operator for today's call. All participants will be in a listen-only mode during today's presentation. Following the presentation, we will conduct a question-and-answer session. Please note, this presentation contains forward-looking statements which involve significant risks and uncertainties that may cause actual results to vary materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in such forward-looking statements are described in the company's earnings press release, the company's 2020 annual reports on Form 10-K and other filings with the SEC. The company does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after forward-looking statements are made. Any references in today's presentation to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in your press release. Today's presenters are Greg Dufour, President and Chief Executive Officer, and Mike Archer, Executive Vice President and Chief Financial Officer. Please note that this event is being recorded. At this time, I would like to turn the conference call over to Greg Dufour. Please go ahead, sir.

Greg Dufour, CEO

Thank you, Brea, and welcome to Camden National Corporation's fourth quarter and 2021 earnings call. Joining me today is Mike Archer, who was named Executive Vice President and Chief Financial Officer earlier this month, resulting from Greg White leaving us on January 3rd. I appreciate the work Greg did with us and wish him the best. Mike has been our Corporate Controller since 2013 and was a Manager with PWC before joining us. During his time with us, Mike has worked on virtually every major strategic initiative we've undertaken, ranging from our acquisition of the Bank of Maine in 2015 to helping to lead the organization during the pandemic. Before I turn the discussion over to Mike for a more detailed financial review of the quarter, I'd like to make a few comments regarding 2021. We're pleased to report record earnings of $69 million or $4.60 per diluted share for 2021. This represents an increase of $9.5 million or $0.65 per diluted share over our previous earnings record in 2020. In 2021, we produced over $1 billion of residential mortgage originations, which we leveraged by recognizing a $13.7 million gain on sale of that production before shifting to holding more of those mortgages in the second quarter of 2021 due to the amount of liquidity we had on our balance sheet. Overall, we saw 7% loan growth from December 31, 2020, to December 31, 2021, or 10% when excluding a $99 million decrease in PPP loans. We also experienced 15% deposit growth over the year, which includes a 61% growth in non-interest bearing deposits. We still view our core deposit base as one of our strengths, and we continue to invest in that area. In 2021, we redesigned our retail deposit product offerings, as well as experienced solid growth in our corporate treasury management area. Focusing on our customer relationships will position us for the future as the banking industry experiences changes in the amounts of deposits held by customers. Another area of strength is our asset quality. Non-performing loans as a percentage of total loans were 20 basis points at the end of 2021, compared to 32 basis points at the end of 2020. Our net charge-offs were negligible for the year at two basis points of average loans. Even though we released these reserves during the year, our overall allowance for credit losses ended the year at 97 basis points of total loans, which is slightly higher than pre-pandemic lows. The commercial market is very robust, and we're seeing good activity throughout the state. The New Hampshire and Massachusetts markets are even more active. With that said, the commercial markets are very competitive, and we continue to focus on ensuring appropriate credit structures, which have served us well in the past. We've also continued to expand our lending capabilities and reach through strategic hires. This has allowed us to add seasoned lenders in New Hampshire and Massachusetts, while at the same time, adding talent in our core Maine-based markets. During the fourth quarter, we announced a quarterly dividend of $0.40, an increase of 11% over the last quarter, and this was our second dividend increase announced during 2021, bringing total dividends paid in the year to $1.48 per share, or 32% of earnings for the year. We also repurchased nearly 218,000 common shares during the year at an average price of $46.25, which fits into our earn-back requirements. I'd be remiss if I did not recognize the hard work of the employees of Camden National throughout the year. The pandemic has impacted them significantly, and I am deeply appreciative as they've juggled their personal lives with the demands of their jobs. We've provided support to them by adopting a hybrid work environment, as well as increasing our starting pay to $17 per hour and providing every employee with a 3% or more wage increase in October. In light of the challenges over the past few years, I find it remarkable that our engagement, as measured by Gallup, has increased from 4.09 on a five-point scale before the pandemic to 4.25 this year. This speaks to the commitment of all employees, as well as their leaders. It's now my pleasure to turn the discussion over to Mike.

Michael Archer, CFO

Thank you, Greg, and good afternoon, everyone. I'm pleased to join the call as the new CFO for Camden National. Since joining the company in 2013, I've been fortunate to have worked alongside two great predecessors who have served as excellent leaders and mentors. I'm truly excited to take on this new role alongside a talented group of executives and senior managers across the company. Earlier today, we reported record earnings for the year of $69 million or $4.60 per diluted share and consolidated fourth quarter earnings of $16.5 million or $1.11 per diluted share. Net income for the year was up 16% over 2020, and fourth quarter net income was up 13% over the last quarter. Through strong earnings and certain capital deployment strategies, our return on tangible shareholders' equity for the year ended 2021 was 15.6%, and for the fourth quarter of 2021 was 14.7%. In total, the company returned over $31 million of capital to shareholders in 2021 through a combination of dividends and share buybacks. In the fourth quarter of 2021, the company announced its second dividend increase for the year, driving our quarterly dividend to $0.40 per common share, which is an increase of 21% over last year. Earlier this month, we announced the company's board of directors approved a new share repurchase program for up to 750,000 shares of the company's common stock. Subject to market conditions, the company expects to continue to buy back its common shares opportunistically through 2022. On a linked quarter basis, revenues grew $3.1 million or 7% to $48.9 million for the fourth quarter of 2021. The increase was driven by higher SBA PPP loan income of $734,000 as loan forgiveness accelerated heading into the end of the year, an increase in investment loan balances, and a pickup in debit card income of $701,000, as we receive and recognize our annual transaction volume bonus from Visa in the fourth quarter each year. Loan growth was strong in the fourth quarter of 2021 at 4%, or 5% adjusting for SBA PPP loans. The growth was primarily within the residential mortgage and commercial real estate loan portfolios, each growing 7% and 5% respectively during the fourth quarter. Through the fourth quarter, we continued with our strategy to hold more of our residential mortgage production in our loan portfolio as we look to put excess liquidity to work while managing our interest rate risk position. For the quarter, we held 67% of our residential mortgage production in the loan portfolio. Our current view of the residential mortgage business in 2022 is consistent with that of the industry, and we anticipate slowing production compared to the past two years as we come off of back-to-back record-setting years. In recent quarters, we've seen refinance activity continue to decrease as a percentage of total production, dropping from 44% and 42% for the second and third quarters of this past year, respectively, to 39% for the fourth quarter of 2021. With anticipated lower residential mortgage volumes, the ratio of mortgages held in our loan portfolio to mortgages sold will likely inch closer to a 50-50 split throughout the year, recognizing that this could shift as market conditions evolve. With that said, we currently expect that our first quarter 2022 ratio of residential mortgages held to sold will run a bit higher than a 50-50 mix as we turn to our year-end loan pipeline. Investments grew 4% during the quarter to $1.5 billion and represented 28% of total assets as of December 31, 2021, up slightly from 27% at the end of the last quarter. Investment growth throughout the year has been a primary means to deploy excess cash for higher yielding assets. While our preference continues to be deploying excess cash through loan growth and managing our funding, we will continue to use this investment strategy as needed. Net interest margin for the fourth quarter of 2021 was 2.82%, up six basis points over the third quarter of 2021, as we benefited from an increase in SBA PPP income, contributing an additional nine basis points to margin. Our core net interest margin, which excludes the impact of SBA PPP loans and excess liquidity, decreased three basis points on a linked quarter to 2.79%, driven primarily by residential mortgage loans being originated at lower yields than our current portfolio. At this point, we believe our core net interest margin has largely leveled off. Being asset sensitive, our core net margin has upside potential should the Fed increase interest rates, but we remain cautious, as it is unclear how the long end of the curve would respond. For the fourth quarter of 2021, we recorded $1.2 million of provision expense driven by our favorable loan growth during the quarter, bringing our allowance for credit losses to $33.3 million at December 31, 2021. Our allowance for credit losses at December 31 was 0.97% of total loans, which was flat with last quarter but remained elevated over pre-pandemic levels. As Greg noted earlier, our asset quality at year-end remained very strong, with non-performing assets of just 13 basis points of total assets and our allowance coverage ratio being nearly five times non-performing loans. Non-interest expense for the fourth quarter of 2021 was $27 million, an increase of 3% over the third quarter of 2021. The increase over last quarter was driven by one, our continued enhancements to our information security infrastructure, as we continue to invest in technology, systems, and processes to improve our overall posture and protect our customers; secondly, increased occupancy and other employee-related costs as many of our teams transitioned back to the office in the fall, as well as other normal seasonal costs; and lastly, higher consulting fees. Compensation-related costs were down 4% in the fourth quarter of 2021 compared to last quarter, which helped offset these higher costs. The decrease was largely the result of lower incentive accruals between quarters as employee turnover in the fourth quarter led to the release of built-up accruals. Not unlike the rest of the market, higher vacancies from employee turnover continue to persist. As discussed on our last call, we have taken certain actions to address employee retention. In October, we increased our starting wage by $2 to $17 per hour and provided a wage increase to all employees of at least 3%. The impact on fourth quarter 2021 compensation was an increase of just over $400,000, but as we move forward, this expense increase will largely be neutralized by the freezing of our profit-sharing plan. As we enter 2022, we do so from a position of strength. Our capital position remains strong, with a tangible common equity ratio of 8.22% and regulatory capital levels also in excess of requirements as of December 31, 2021. Our loan deposit ratio was 74% at year-end, slightly up from our ratio at September 30, 2021 of 72%, but still well below our historical norm. Our strong deposit growth over the past year of 15% puts us in a great position to capitalize on continued efficient growth. This concludes our comments on our fourth quarter results. We'll now open the call for questions. Thank you.

Operator, Operator

We have our first question on the line from Matthew Breese of Stephens. Please go ahead, Matthew.

Matthew Breese, Analyst

Just considering you'll be retaining less residential production this year and there's likely to be less volume as well, could you just comment a little bit on what your outlook is for loan growth this year, either measured by pipeline or what you think you're capable of, and is there enough of an offset from commercial real estate and C&I to get you back to the kind of pre-COVID growth of, call it low to mid single-digit growth?

Greg Dufour, CEO

Hey Matt. So yeah, I can take that one. So we are still projecting single mid-digit loan growth for the year. I think, to your point, we expect that mix will be certainly a little bit different than what we've been experiencing—less on the residential side and more from the commercial space. We've made investments in the commercial side, adding some strategic lenders in our Bangor market, as well as in our Southern Maine and New Hampshire market. But I do want to just highlight too for the first quarter; we are expecting that for the first quarter, our loan growth will likely be closer to, call it flat. A couple of things there: one is we’ve got the PPP loans that we are predicting or expecting to run off the remaining $35 million to $37 million in the first quarter, first to second quarter. Also, we are aware of a couple of larger commercial relationships that we expect to pay down this quarter as well. So again, I think originations are expected to be strong, but due to those two other items, we expect it to be flat in the first quarter and then pick up from there.

Matthew Breese, Analyst

Got it. Okay. And then I wanted to switch to interest rates. Obviously, I think we all expect now some level of interest rate hikes this year. It's just a matter of how many and when. If I think to your disclosures or look back at your disclosures, you guys show a plus 200 basis point shift in the curve, but more than likely we get something closer to four or five or six hikes. Could you just give me some idea what the NIM sensitivity is in a plus 100 basis points scenario or per 25 basis point hike?

Michael Archer, CFO

So we have looked at a map for a 50 basis points increase, and we are expecting from an annual impact for interest income would be a lift of $1 million to $1.5 million, which I think translates to three or five basis points.

Matthew Breese, Analyst

Okay. And then maybe just behind that, could you give me some idea of how much in the way of floating rate loans you have and then what deposit data you're assuming?

Greg Dufour, CEO

So our variable rate book is about 45% of our total portfolio.

Matthew Breese, Analyst

Okay. And then on the deposit data.

Greg Dufour, CEO

Our expectation for deposits is, at least on the onset, we’re going to lag the market. We have really no high expectations to chase deposits at this point, expecting less than 25 basis points.

Operator, Operator

We now have a question from Damon DelMonte from KDW. So Damon, please go ahead.

Unidentified Analyst, Analyst

Hi, this is Matt for Damon. How is everybody?

Greg Dufour, CEO

Good, Matt. How are you?

Unidentified Analyst, Analyst

Just a quick question about expenses. I know you said the minimum wage increase and the 3% increase would be largely offset. Do you think you guys have gotten past the wage pressures that are facing the industry or do you think there might be more potential increases during 2022?

Greg Dufour, CEO

Sure, Matt. I'll take it. It's Greg. No, I don't think we've gotten past the wage pressures. Whether we look at our vacancies or hiring, it aligns with what we’re seeing or reading on a national level from workers out there, and it goes across all levels. Now, if that means that we have to do another adjustment, call it to the starting wage and deal with those compression issues, we're not at that point yet. It could just be meeting market demand depending on the position, but even geographically where that happens, so almost on a one-off basis as we go forward for a while.

Unidentified Analyst, Analyst

Okay. Got you. And then just on the data processing cost, I know it was an annual core system upgrade, but does any of that likely to be sticky through 2022, as it relates to security infrastructure? Should we look for elevated expense there, or will it just run pretty consistently?

Greg Dufour, CEO

I think that specific to that line item, I would anticipate that we'll continue to see a normal increase. We continue to invest in our infrastructure and technology, so generally speaking, those expenses are flowing through that line.

Unidentified Analyst, Analyst

Okay. And then just lastly, just on the provision. I know you guys said you're still a little higher, I think it was like 15 basis points higher than your pre-COVID loan loss reserve level. Should we just be looking for you to grow into that as we go forward? Maybe you don't reach that level again, but is that how we should think about it?

Greg Dufour, CEO

Yeah. So I guess what I would say to that is the 97 basis points that we are right now reflects how we view our current credit risk profile. I think we're being a little bit cautious just in terms of we're not out of the woods yet. It's our view from the pandemic, and I think that could potentially level down a bit. But I do think just under the new accounting model, we're likely going to run at a higher allowance than we did pre-pandemic even in normal times.

Operator, Operator

Thank you, Matt. We now have a question from William Wallace of Raymond James. So William, please go ahead when you're ready.

William Wallace, Analyst

Hi. thanks. Good afternoon, guys. I just have I'm, I'm apologize if I'm a little bit confused, but maybe just if I could ask directly, if I look at your fourth quarter expense of right around $27 million; are you guys saying that you think you can hold expenses at that run rate for the year, or should we expect that there would be kind of normal seasonal pressures in the first quarter and then, and then kind of growing a little bit from there? I'm just, I was a little bit confused. I'm sorry.

Greg Dufour, CEO

Sure. Well, I can start and Greg can certainly jump in. What I would say in part is our expense base for the fourth quarter and even through a good chunk of 2021 was a bit elevated compared to normal times just because of incentive accrual. As we get into the first quarter, that’s going to reset from an annual performance perspective. So we're actually expecting that in the first quarter, we may see a slight dip, I'll call it $26.5 million to $27 million. But I think from there that $27 million becomes a pretty good average run rate.

Michael Archer, CFO

Yeah, with normal inflationary costs or other costs coming through, but nothing changing in the trend, right?

William Wallace, Analyst

Okay. All right. That's very helpful. Thank you. Did I hear you say that you froze your profit-sharing plan? And if I heard that right, is that just a kind of an offset to a pressure strategy, or is there something else that would drive you?

Greg Dufour, CEO

Yeah, so what we did with that, Wally, was we normally in normal times would pay up to 3% profit sharing and put that into employees' 401(k)s. After a lot of discussion, including with employees, we didn't necessarily get the full impact benefit from an employee perspective because folks would want it really in cash in their salary. So what we did was not necessarily freeze the plan, but we brought down that contribution to zero for starting this year 2022 going forward. That savings helps us offset that 3% plus merit increase that we put in for everybody last quarter.

Operator, Operator

We now have a follow-up question from Matt Breese. Matt, please go ahead. I've opened your line.

Matthew Breese, Analyst

Hey, good afternoon again. I had two follow-ups. The first one was just in regards to the securities portfolio. I would love a little color as to how we should expect that to play out this year. And then the second one tied to securities was the duration is now up to 5.9 years, and I would expect heading into a rising rate environment that we shouldn't see that extend. Is that the right thought process?

Greg Dufour, CEO

So on the latter question, yes, that's reasonable. I think as we think about the investment portfolio, we're not really looking to grow that, certainly, Matt. But we have been and will continue to manage excess liquidity, and we want to put it to work to the extent that it makes sense. As we mentioned, even in the prepared comments, we would certainly want to put that to loan growth if we can. There are some opportunities to manage some funding costs down. But to the extent that we need to tuck some away in the investment portfolio, we're not going to shy away from that either.

Matthew Breese, Analyst

And then last thing, historically Camden has been a bank that has participated in M&A. More recently, the strategy for you all has been centered on kind of Southern Maine, New Hampshire, Northern Massachusetts, but there just aren't as many targets these days as there once were. So with that in mind, how do you think about M&A geographically and size-wise for whole banks? And would you consider acquiring a bank or banks that are more in kind of the northern portions of Maine, The County, north of Camden? Certainly, we'd love some thoughts on that?

Greg Dufour, CEO

Yeah. Well, when you mention Northern Maine, there are only a few, so probably it's not appropriate to get too specific there. But I can address it generally, Matt. We would look if it made sense, and by making sense, I mean good fundamentals within the target, including market share or positioning; enough that we feel like we could grow it if we were to combine resources. Obviously, asset quality plays a big role in that. So call that our main market where we have the biggest footprint in our franchise from others. Other alternatives would be: could we get the cost savings that we needed to make it work? In summary, as we always have been, we'll be opportunistic if the numbers work, including if it's a good quality franchise with a good quality management team.

Operator, Operator

Thank you. Now, as we have no further questions, this concludes our question and answer session. I would like to turn the conference call back over to Greg Dufour for any closing remarks.

Greg Dufour, CEO

Great. Thank you. And I just want to really thank everyone, the analysts obviously attending the call, asking questions, and appreciate this for the other listeners. We thank you for your interest in the organization. It's been a great year and we're looking forward to making 2022 another great one. So, thank you all and have a great day.

Operator, Operator

Thank you. This does conclude today's call. Thank you all again for joining. You may now disconnect your lines.