Camden National Corp (CAC) Q4 2018 Earnings Conference Call Transcript
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Camden National Corp (NASDAQ: CAC)
Q4 2018 Earnings Conference Call
Jan. 29, 2019, 3:00 p.m. ET
Contents:
Prepared Remarks
Questions and Answers
Call Participants
Prepared Remarks:
Operator
Good day and welcome to the Camden National Corporation Fourth Quarter 2018 Earnings Conference Call. My name is Sean, and I will be your operator for today's call. All participants will be in listen-only mode during today's presentation. Following the presentation, 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 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 2017 annual report on Form 10-K and in 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 the 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 the GAAP in your press release.
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.
Gregory A. Dufour -- President and Chief Executive Officer
Thank you and welcome to the Camden National Corporation fourth quarter earnings call. Earlier today, we announced record annual earnings for 2018 of $53.1 million or $3.39 per diluted share and fourth quarter earnings of $14 million or $0.89 per diluted share. We're extremely pleased with these results as they reflect the culmination of several strategies we've undertaken over the past few years. One of those important strategies has been our focus on asset quality, which is reflected in our year-end performance. At December 31, 2018, non-performing assets were 0.34% of total assets, and non-performing loans were 0.48% of total loans.
During the year, we resolved two credit-related issues, including one in the fourth quarter, which resulted in net recoveries for the quarter of $1.2 million and contributed to a ratio net charge-offs to average loans of only 1 basis point. Our asset quality metrics, including having only 29 basis points of total loans past due 30 to 89 days year-end position us well from the start of 2019.
Although, we are not at the point to disclose estimates related to adoption of CECL, we are very pleased with our preparedness, as we've been focused on this major accounting change for over three years. During 2018, our credit risk group was recognized by Celent as the 2018 Model Bank for Risk Management recognizing our initiative and preparing for CECL.
During the past quarterly calls, I've shared with you some metrics around our digital banking efforts and 2018 represents major gains and adoption of those services by our customers. We had nearly 55,000 active online and mobile banking accounts, representing an 8% increase on 2017 and a 15% increase on 2016. Our customers are adopting our electronic statement capability with total electronic statements reaching over 92,000 a 15% increase from 2017 and 34% from 2016. For the first time, we exceeded over 10 million online banking logins and have seen a shift to phone and tablet which accounted for over 6.5 million logins last year. Customers continue increased usage of more deposits with over 200,000 deposits last year, a 28% increase from 2017 and 51% from 2016.
And finally, we launched our person-to-person payment product last February and we saw an increase in this digital payment method of 34% from the third quarter of '18 to the fourth quarter of '18. Our digital activity is complemented by our high touch banking centers, which continue to evolve from transaction based to a critical component of our strategy to building strong customer relationships. This is highlighted by our recently opened Waterville branch that's in a new facility that is part of the Colby College revitalization of downtown and we were the first tenant in their multi-use facility in that downtown.
One additional area I'd like to highlight is our deposit results. We experienced significant growth in deposits ending 2018 at $3.5 billion of deposits, up from $3 billion at the end of 2017. On an average year-to-date basis, deposits grew 8% enabling us to almost fully fund our average year-to-date loan growth of 9%. You will see in our earnings report our average cost of deposits for the year ended 2018 were 52 basis points, an increase of 20 basis points from '17 and much less than our average borrowing costs of 1.96% for the year ended 2018.
We've always held deposit generation as one of our top priorities, and we've done some through a variety of strategies, clean product development, purchasing Bank of America branches in 2012, acquiring the Bank of Maine in 2015 and making major investments in treasury management, personnel and systems. At the same time, our Retail Banking Group has undertaken an internal reorganization with a focus on deposit gathering. This is included redefining virtually every role in our banking center network and extensive sales training. All areas of our organization contributed to our solid deposit position and setting up -- setting us up well as we enter 2019.
And now, I'd like to turn the discussion over to Debbie, who will provide the financial overview.
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
Thank you, Greg, and good afternoon everyone. We are pleased to end the year on such a strong note with net income of $14 million for the fourth quarter of 2018, resulting in a return on average assets of 1.32% and a return on average tangible equity of 17.43% for the quarter.
Net income was in line with previous quarter results with strong loan and deposit growth fueling an increase in net interest income of 4%, which was offset by a decline in fee income and increases in operating expenses and income taxes. Compared to the previous quarter net interest income increased $1.2 million due to expansion of our net interest margin, a change in our funding mix and average loan growth of 3%. Net interest margin expanded 7 basis points in the fourth quarter with asset yield increasing 14 basis points and funding cost, increasing only 6 basis points. Fair value accretion and interest on loan recoveries increased between quarters, accounting for 3 basis points of the net interest margin expansion. The remaining 4 basis points of net interest margin expansion relates to our favorable funding mix with average low cost deposits growing $177.2 million or 7% between quarters. We had a strong quarter of loan production, with total loan growth of 4% or $117.4 million. We experienced growth in all loan categories between quarters with commercial real estate portfolio up $53.6 million and residential mortgages growing $51.4 million. Total fee income declined $913,000 between quarters due to change in investment security gains of $1.1 million. In the fourth quarter, we restructured our investment portfolio and recorded losses of $420,000 compared to gains of $664,000 the previous quarter.
Debit card income increased 31% between quarters, primarily driven by annual volume incentives received of $530,000. Mortgage banking income declined 34% due to the level of mortgages sold in the pipeline at year-end.
As Greg mentioned, asset quality throughout the year was very strong and the fourth quarter was no exception. This included net recoveries of $1.2 million in the fourth quarter upon favorable resolution of a commercial credit relationship, requiring us only to provide a nominal amount for credit losses for the quarter even with the strong loan growth.
Operating expenses increased 2% between quarters to $23.6 million for the fourth quarter with an increase in occupancy costs, marketing and legal cost on collection matters. I am happy to report that our efficiency ratio reached 56.5% for the quarter, bringing our efficiency ratio for the year to 57.7%. Our effective tax rate increased to 20% in the fourth quarter and we anticipate that rate for 2019.
That concludes our comments on the fourth quarter results. I will now turn it back to Greg to provide our outlook for 2019.
Gregory A. Dufour -- President and Chief Executive Officer
Thanks, Debbie. As we look to 2019, we continue to see the opportunity to maintain our loan growth in the mid-single digit range with deposits representing the primary source of funding. We do expect the economy to remain somewhat stable in our region, which should help us maintain our asset quality. However, the potential for one-off issues, impact from macro issues such as trade and the covenant-related matters we were concerned about the shutdown as well as if it recurs again, that could alter our view.
We'll now open up the call for questions. Operator?
Questions and Answers:
Operator
Thank you. We will now begin the question-and-answer session. (Operator Instructions) The first question comes from Matthew Breese with Piper Jaffray. Please go ahead.
Matthew Breese -- Piper Jaffray -- Analyst
Good afternoon.
Gregory A. Dufour -- President and Chief Executive Officer
Hello, Matt.
Matthew Breese -- Piper Jaffray -- Analyst
Hi. So I was hoping to gain a little bit better understanding of what happened with the VISA incentive that helped increased fee income by 530k? Can you walk us through what that was and I guess the real question is, how much of that is repeatable?
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
Sir, I'd be happy to take that question and good afternoon. We renegotiated our contract at the end of 2017. And if we reach certain activity levels, interchange levels, we become eligible for incentives and there's different tiered levels and we did anticipate that we would be getting a bonus in the fourth quarter. But we exceeded the expectation and so it was a higher bonus and we estimated. We've been running pretty favorably on the debit card and we have a lot of initiatives in -- one of our checking accounts is geared toward driving debit card activity. So I'm hopeful, we'll continue to see that trend and we'll be eligible in the fourth quarter of next year for incentives as well.
Gregory A. Dufour -- President and Chief Executive Officer
And if I could add, it's a great example of where we're leveraging some of the investments in our marketing and experience areas run by Renee Smyth. We've hired an individual to really look at business intelligence and leveraging that. As you know, the trick to debit card income is activation, as well as usage. So we're doing a lot more targeting approaches using really more data analytics to reach out to the customers, depending on where they are on that cycle. So it was a great story to tell.
Matthew Breese -- Piper Jaffray -- Analyst
Understood. Okay. And then Greg, as I think about the loan growth posted this quarter, I can't remember the last time I saw that kind of growth out of you. If you had to kind of take it apart and look at it and say, was there a rush toward the end of the year that sometimes happen where loans closed sooner than you expected, or was there just the team did a better job and took more market share?
Gregory A. Dufour -- President and Chief Executive Officer
Well, a little bit of both. If you go back at our quarterly performance, you'll see that we are -- we were somewhat flat in the second and third quarter. The team obviously really did a tremendous job, not only in sourcing transactions but getting them to close and that goes for all areas including mortgage and commercial and all. So we were really pleased to see that push now.
What we are seeing is that activity is still starting to carry forward into the first quarter. We're pleased with where our pipelines are. I won't say that they'll be at the same level of fourth quarter, but it wasn't like a rush where customers were trying to close thing as at 12/31 and we are leaving with no pipeline in January. We really crossed the year with some good activity.
Matthew Breese -- Piper Jaffray -- Analyst
Understood. Okay. And then, maybe turning to the margin, I wanted to get a sense for the outlook at least for the first half of the year. And then tied to that, if we look at broker deposit growth, last couple of quarters it's been up pretty good and then other borrowed funds down. So clearly, it seems like there is a strategic move to gain some advantages there. Are those things all tied together?
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
Sure. How about that margin for the quarter, right. Woo-hoo we were really happy. And I think a couple of things happened for this quarter. Certainly, we had some fair value accretion that was higher in this quarter, some loan -- interest on loan recovery, so that was 3 basis points. But we had solid loan growth in that -- the loan yield on that, on the new loans are going on at a higher rate than what our book yield is.
And then the deposits really -- the low cost deposits on average was up 7%. And so if we're able to swap borrowings with these lower cost deposits that certainly contributes quite a bit. So we were really happy to see the pickup in the margin. When I think of next year, we usually -- if you follow our trend we'll take a dip in the first quarter and second quarter. It's tied to some of the funding outflow that happens on the deposit side and will be swapping into either borrowings or broker deposits, which certainly is at a higher funding rate.
If I look for the year, this year versus next year, we still think we're slightly asset-sensitive. So for the year I think we'll be slightly up on NIM. We certainly will see a decline in the first quarter. It could be around 5 basis points -- 5 basis points to 7 basis points during the first quarter and then it kind of picks up the rest of the year.
Matthew Breese -- Piper Jaffray -- Analyst
Great. Okay, understood. My last one is just really tied -- go ahead, Deb.
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
I was going to say on the brokered deposits, we're always looking at the cheapest funding cost out there and so we're looking at -- overnight, we're looking at home loan bank, we're looking at brokered, even extending brokered doing money markets and CDs. So it's really just how do we optimize and reduce the cost of funds.
Matthew Breese -- Piper Jaffray -- Analyst
Understood. The last one is just tied to the buyback. There was an early -- before earnings you announced your authorization. Just curious how you might view tackling the 5% buyback? Is that a wait-and-see approach to the stock or should we expect you to complete that in near term? And then just as a follow-up, I do know that the liquidity of the stock is something you look at and so might that play a factor as well?
Gregory A. Dufour -- President and Chief Executive Officer
Sure. Well, I'll say, and I'll let Debbie comment as well, probably like a lot of things that we do, Matt, will be opportunistic and obviously seeing us trading down like with all bank stocks we do see the potential for that opportunity. However, we balance it against the other demands and you're spot on that liquidity in our stock we hear it from our investors that that's important. So it's really, I would say, will be more surgical with it, looking for that opportunity.
Matthew Breese -- Piper Jaffray -- Analyst
Understood. I'll hop out. I appreciate taking my question. Thank you.
Gregory A. Dufour -- President and Chief Executive Officer
Thank you.
Operator
Our next question comes from Damon DelMonte with KBW. Please go ahead.
Damon DelMonte -- KBW -- Analyst
Hey, good afternoon guys. How's it going today?
Gregory A. Dufour -- President and Chief Executive Officer
Great, Damon.
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
Great. Thanks.
Damon DelMonte -- KBW -- Analyst
Good. Good to hear. So the first question, can we talk a little bit about expenses and the outlook in the 2019 and kind of where you see the drivers of expenses going and what kind of increase you can expect for next year?
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
Sure, I'd be happy to do that. First, I was really glad to fall below 58% efficiency, because we are running a little hot for 2018. When I look at 2019, I do see us having that efficiency trending down lower but I don't necessarily see up hitting the 57% for 2019. The drivers for us for operating cost increases still remain the compensation and benefit area. Our health insurance we saw a pretty hefty increase on health insurance premium about 18%. So, I see that being a driver. We continue to invest in technology. So the equipment and data processing line will trend a little higher. Those are probably the two biggest growth. When I look at the fourth quarter, our operating costs were $23.6 million. I see us running 2% to 3% higher than that level for next year.
Damon DelMonte -- KBW -- Analyst
2% to 3% higher than, OK. I am sorry 2% to 3% higher than what was the level again (inaudible) ?
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
The fourth quarter level.
Damon DelMonte -- KBW -- Analyst
Fourth quarter level. Got you. Okay, all right, great. And then when you look at your lending opportunities over the next 12 months, what areas of your footprint do you feel you have the best opportunity to grow in?
Gregory A. Dufour -- President and Chief Executive Officer
Sure. Well, it really reflects the economy of Northern New England. We will see more opportunity in Southern Maine, Southern New Hampshire and leveraging our Massachusetts mortgage office, probably more in the Southern Maine and New Hampshire area that will be more geared to commercial, commercial real estate. Now in our markets north of Portland and really we've been seeing some good solid activity up there, albeit probably not as big moving or bigger projects that we see in the other areas, but no matter where we are and we have lenders throughout the state and in our regions, we're looking to build market share and that's dependent on being better than our competitors, but more importantly capturing any market growth that happens there, and we're seeing some great activity across the board.
Damon DelMonte -- KBW -- Analyst
Got it. Okay. And then could you just elaborate a little bit on the securities portfolio rebalancing, how big was that and what's the expected impact?
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
It was -- we took the opportunity to look at some of the securities that had maybe a shorter life. It wasn't like a big rebalancing. It was about $25 million and we do get a pickup in the yield of I want to (ph) say 2 basis points to 3 basis points.
Got it. Okay. I think that's all that I had. Thank you very much.
Gregory A. Dufour -- President and Chief Executive Officer
You are welcome, Damon.
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
Thank you, Damon.
Operator
(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.
Gregory A. Dufour -- President and Chief Executive Officer
Great. Thank you all for your time and attention on this as we really conclude the year and as I look at a couple of our key success factors of record earnings, it seems like just a few years ago and some even following us for a while, we were down in the $20 million, $25 million range and now $53 million. We're really pleased with it. But I think the key that it is, I just want to really say, it maybe sounds a little bit like cliche, but it's really our people, our products and our persistence. And that's one thing with the team that we have here at Camden throughout the franchise, good people with a lot of persistence get things done. And I'm just really excited that we're able to share this not only with shareholders and outside people but internally to say job well done. So thank you all for your attention and look forward to chatting with you in a few months to talk about the first quarter.
Operator
The conference has now concluded. Thank you for attending today's presentation. And you may now disconnect your lines.
Duration: 23 minutes
Call participants:
Gregory A. Dufour -- President and Chief Executive Officer
Deborah A. Jordan -- Executive Vice President, Chief Operating Officer and Chief Financial Officer
Matthew Breese -- Piper Jaffray -- Analyst
Damon DelMonte -- KBW -- Analyst
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