Camden National - Q1 2023

Transcript

Operator (participant)

Good day, welcome to Camden National Corporation's first quarter 2023 earnings conference call. My name is Danielle, I will 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. If you require operator assistance at any time during the call, please press Star, then zero. Please note that this presentation contains forward-looking statements which involve significant risk and uncertainties that may cause actual results to vary materially from the 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 as supplemental earnings material. The company's 2022 annual report 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 the forward-looking statements are made. Any references in today's presentation to non-GAAP financial measures are intended to provide meaningful insight 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 over to Greg Dufour. Please go ahead, sir.

Greg Dufour (President and CEO)

Thank you, Danielle, and welcome to Camden National Corporation's first quarter 2023 earnings call. Before I turn the discussion over to Mike, I'd like to make a few opening comments. We reported a net income of $12.7 million or $0.87 per diluted share for the first quarter of 2023, a 17% decrease from the fourth quarter of 2022. This resulted in a return on average equity of 11.16% and a return on tangible capital of 14.21%. Driving these results were the impact of our normal seasonal deposit outflows, overall interest rate volatility, and market-based pricing increases impacting deposit rates.

We also recorded a $1.8 million pre-tax loss on a subordinated bond we held in Signature Bank, which was held in a held to maturity portfolio, and that loss was recorded in our provision for credit losses line. We've reviewed our investment portfolio and feel comfortable with the positions we hold with only 3% in corporate bonds. Mike will speak to our investment portfolio in more detail in just a few minutes. The turmoil in the banking sector during the past quarter has sharpened our focus but hasn't drastically altered it. Our priorities remain the same: deposits, margin, and asset quality. Over the past several quarters, I've shared our strategies to leverage our retail franchise through sales management and training, outlined investments we've made in corporate treasury management, and just last quarter, I shared our view regarding loan pricing.

Our asset quality continues to be strong, and it starts with a strong credit culture, and maintaining underwriting standards through all cycles. Lending continues to be important to us, and we'll continue to lend in the current environment, but we'll do so with a focus on maximizing our margins. We have the capacity to lend, but we'll be selective as the interest rate environment, and the need to focus on margins are expected to temper our loan growth in the near term. With that said, we ended the first quarter of 2023 with $4.1 billion of loans, up 2% from the end of 2022, with overall loan yields increasing 29 basis points from December.

We ended the first quarter of 2023 with just over $4.4 billion of deposits, excluding broker deposits, which was 5% less than balances at the end of 2022. Further adjusting for one large municipal depositor relationship that is discussed in our earnings release, deposit balances were down only 2% from year-end. We believe these results reflect a seasonality within our deposit base during the winter months, and indicate our core customer deposit base has remained solid during the past few months. During the quarter, we also declared a dividend of $0.42 per share and did not repurchase shares during the quarter. I'll now turn the discussion over to Mike.

Mike Archer (EVP and CFO)

Thank you, Greg. Good afternoon, everyone. Earlier today, we reported our quarterly earnings, which included our normal earnings release as well as a supplemental deck that provides additional information to the investor community that we believe is helpful and relevant given recent events in the banking industry. This supplemental information addresses deposits, liquidity, investments ,and loans in more detail than normally we provide in our earnings release. I'll speak to the salient points of each in more detail shortly. Before I do, I want to share that Camden National's financial footing remains strong based on firm fundamentals supported by a diverse deposit base, excellent asset quality that starts with our lenders and underwriters, and strong capital levels.

As of March 31st, 2022, the company's uninsured and uncollateralized deposits were 15% of total deposits, compared to 16% as of December 31st, 2022. This level of uninsured, uncollateralized deposits speaks to the diversification of our customer base, with approximately 70% of our deposits being retail and the remaining being commercial and muni deposits. More information on our uninsured and uncollateralized deposits can be found on page 5 of the supplemental earnings material filed this morning with the earnings release. Total deposits at March 31st were $4.6 billion, including broker deposits, down 4% from year-end, and down 1% when adjusting for the large municipal depositor relationship that Greg just mentioned earlier, and is discussed further in our earnings release.

As discussed in our earnings release and in previous calls, we generally see some deposit outflows during the first quarter, given the seasonality across our markets. The decrease seen in the first quarter of 2023 was of a similar level to those seen in the first quarter of previous years prior to the COVID-19 pandemic. As of March 31st, the company's primary primary available liquidity sources consisted of cash, securities, FHLB and FRB capacity, totaled $1.3 billion, which is about 1.9x our total uninsured and uncollateralized deposits as of March 31st. You can refer to page five of the supplemental earnings materials for more information on our liquidity position. Our credit quality across our loan portfolio remained very strong throughout the first quarter, and our credit quality metrics were consistent with or slightly better than those at year-end.

The allowance for credit losses was 0.91% of total loans at quarter-end, down just 1 basis point from year-end, which both reflects the strength of our asset quality and balances the risk of a future downturn in the economy. We continue to monitor our credit portfolio proactively, and recently did a deep dive into our CRE office portfolio, given the heightened focus on commercial real estate in this sector specifically. The results were as expected. We confirmed that there are no significant concerns within this portfolio at this time. Our CRE office portfolio represents about 5% of total loans as of March 31st, and all loans are within our markets. As of quarter-end, none of the CRE office portfolio was on non-accrual status or past due. More details on this portfolio can be found on page seven in the supplemental earnings material.

In the first quarter, we fully wrote off the $1.8 million investment in a Signature Bank bond due to the bank's failure. This loss was recognized within provision for credit losses on the income statement and is driving the provision expense for the quarter. Our corporate and municipal bond portfolio continues to be of high credit quality, and we have since reevaluated these portfolios, and do not see any further credit risk at this time. We provided additional details on these portfolios on page eight of the supplemental earnings materials. As of March 31st, our investment portfolio was in an unrealized loss position of $122 million compared to an unrealized loss of $141.5 million at December 31st, 2022.

At March 31st, the available for sale portfolio was an unrealized loss of $91 million, and the held to maturity portfolio was an unrealized loss of $31 million. At quarter end, the duration and weighted average life of the AFS portfolio was 4.7 years and 6.8 years respectively, and the duration and weighted average life of the HTM portfolio was 7.1 years and 10 years respectively. As of the end of the first quarter of 2023, our capital position remained strong, measured on both a GAAP and regulatory basis. At the end of the first quarter, our TCE ratio was 6.56% compared to 6.37% at year-end, and regulatory capital ratios continued to be well in excess of capital requirements.

We did not repurchase any shares of our stock during the first quarter and continue to have 750,000 shares available for repurchase under the current repurchase program. To earnings. As Greg mentioned, for the first quarter of 2023, we reported net income of $12.7 million and diluted EPS of $0.87, each down 17% compared to the fourth quarter of 2022. On a non-GAAP pre-tax, pre-provision basis, the company reported first quarter earnings of $18 million, down 9% from last quarter. Like many others across the banking industry, we too were affected by rising deposit and borrowing costs, driving lower net interest income and net interest margin.

Although we communicated in January that we anticipated further net interest margin compression in the first quarter, the decrease between quarters of 22 basis points was beyond the 10-15 basis points we had estimated, primarily due to the deposit mix shift we'd seen during the first quarter from non-interest checking and savings into higher cost products such as money markets and CDs. The other primary driver for the lower earnings between quarters was the write-off of the Signature Bank bond discussed earlier. Net interest income on a linked quarter basis was lower by $2.7 million or 7%. The primary driver was margin compression as it declined to 2.54% for the first quarter of 2023.

The speed of deposits of funding betas increased in the first quarter as short-term rates continued to rise on the back of two additional Fed rate increases totaling 50 basis points, and we absorbed the full quarter impact of 125 basis points of Fed rate increases in the fourth quarter of 2022. Over the past several months, we have seen the deposit landscape within our markets become much more competitive as interest rates have risen. We continue to manage funding costs actively through various strategies. Our deposit beta, which excludes broker deposits, has cycled as far as 24% and for the first quarter was 44%.

Included within interest income for the first quarter was $479,000 of income from execution of $300 million of pay fixed, receive floating interest rate swaps during the quarter. Loans for the first quarter of 2023 increased $62.8 million or 2%. We've seen our committed loan pipelines for both retail and commercial each continue to hold around $50 million as we look to price all new originations appropriately in the current interest rate environment. We are also now selling a larger percentage of our originated residential mortgages. As a result, we anticipate loan growth to be lower this year than what we've seen in recent years. Non-interest income for the first quarter of 2023 totaled $9.9 million, an increase of 1% over last quarter.

The decrease in mortgage banking income on a linked-quarter basis were driven by changes in valuations between quarters. Overall, we sold 40% of our residential mortgage production for the first quarter compared to 16% in the fourth quarter of 2022. Our strategy has shifted to sell all qualifying residential mortgage production as we focus on optimizing net interest margin. Non-interest expense for the first quarter totaled $26.2 million, down 3% from last quarter, which is favorable compared to our expected 2%-3% increase previously communicated. We have and will continue to manage expenses prudently given the pressure on net interest margin and revenues. However, we remain focused on a long-term strategy and franchise value. Our non-GAAP efficiency ratio for the first quarter of 2023 was 58.96% compared to 56.35% last quarter.

Our overhead ratio remains strong and demonstrates our cost management practices, highlighted by a ratio of 1.84% for the first quarter of 2023 compared to 1.93% for the fourth quarter of 2022. This concludes our comments on our first quarter results. We'll now open the call for questions.

Operator (participant)

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Steve Moss of Raymond James. Please proceed.

Steve Moss (Equity Research Analyst)

Good afternoon.

Mike Archer (EVP and CFO)

Hi, Steve.

Operator (participant)

Steve.

Steve Moss (Equity Research Analyst)

Maybe just starting on the margin here. You know, curious to get a little color around the swaps that you guys put on here, in terms of maybe how long the terms and, how we think about, you know, margin expectations going forward, if this helps you to become maybe a little more neutral or how to think about it.

Mike Archer (EVP and CFO)

Sure. No, I can take that one, Steve. We added $300 million pay fixed, receive floating swaps, essentially hedging part of our residential real estate book. The weighted average rate on that we're paying is 3.65%, and essentially receiving Fed funds overnight. Excuse me, the OIS rate, which is I think closer to 4.80%-4.90% right now. We are getting positive carry right now. We are getting that benefit, roughly half a million for the quarter and anticipate that assuming rates go up at least once more, we'll see a full quarter benefit too as we get into the second quarter, which is probably in the neighborhood of 5-7 basis points from a margin perspective.

I think you, your latter part of your question, Steve, just I think really the idea is really to drive some asset sensitivity. It does get us closer to where we want to be from an interest rate risk position, as well, certainly, particularly over the short term.

Steve Moss (Equity Research Analyst)

Okay. In terms of just the swaps, are they like for two or three years or, you know, just kind of curious how long they'll be around?

Mike Archer (EVP and CFO)

Sure. We have some we did three, four, and five. Three, four, and five years. Again, part of the accounting on these swaps provides us a little more flexibility to get out. There are some ramifications certainly for that as well. Provides a little bit of more flexibility than your normal cash flow hedge as well.

Steve Moss (Equity Research Analyst)

Got it. As we think about, you know, the margin here, you know, everybody's seeing a meaningful step-up in deposit costs. Just kind of curious, how are you guys thinking about a through the cycle deposit beta? You know, if let's say the Fed holds around 5%, where could your margin shake out by the fourth quarter of this year?

Mike Archer (EVP and CFO)

Yeah. Again, a lot of unknowns there certainly. I would say right now, you know, from a total funding beta, I want to say we're right around 28% cumulative, you know, we're assuming that the Fed gets up to five and a quarter and hangs out there for the rest of the year. Based on that modeling, we're kind of in the neighborhood of ±35% .

Steve Moss (Equity Research Analyst)

35%, deposit beta is on total deposits or on interest bearing?

Mike Archer (EVP and CFO)

Excuse me. On the funding, total funding beta.

Steve Moss (Equity Research Analyst)

Oh, total funding beta. Okay. That's helpful. Then in terms of loan pricing, just curious as to, you know, what the type of, you know, what loans that came on the portfolios came on the books this quarter, just what rate you saw, and kind of how we think about, you know, the more cautious guidance around loan growth.

Mike Archer (EVP and CFO)

Sure. I believe our call weighted average rate for new originations, you know, on books was right around 6.70% for the quarter. You know, internally we are certainly ramping up rates. You know, our residential is generally anywhere from 6.50% to north of 7% at this point on a weighted basis. You know, commercial certainly pricing higher than that, where we're seeing rates, certainly rates that start with a 7% on a weighted basis.

Steve Moss (Equity Research Analyst)

Okay. In terms of just kind of loan growth for the rest of the year, are you guys thinking about it relatively flattish versus towards the end of the quarter or, you know, low to mid-single digits? Kind of just maybe flush that out further.

Greg Dufour (President and CEO)

Yeah. Steve, this is Greg. I'd say flat to low single digits right now in. As I mentioned, you know, we have the capacity to lend, we'd like to lend, but we're only gonna do it on rates that we feel are, you know, benefiting our margin right now. We're not overstretching on the growth side.

Steve Moss (Equity Research Analyst)

Okay. Appreciate it. Yep, that's all fair. Well, thank you very much for all the color. Appreciate it.

Greg Dufour (President and CEO)

You're welcome.

Steve Moss (Equity Research Analyst)

Thanks, Steve.

Operator (participant)

Thank you. The next question comes from the line of Damon DelMonte of KBW. Please proceed.

Damon DelMonte (Managing Director and Equity Research Analyst)

Hey, good afternoon, guys. Hope you're all doing well, and thanks for taking my questions here. I just wanted to ask about the expense outlook, Mike. You know, held it pretty tight, you know, linked quarter. Just kind of wondering, kind of where we go from here. Do you see modest growth over the coming quarters?

Mike Archer (EVP and CFO)

I do, Damon. I think our run rate, normal run rate as we go out to the remaining, you know, parts of the year will be closer to $27 million. We had some, I'll call it incentive accrual type true ups that we accounted for in the first quarter that are, you know, being reflected in those numbers. I do think on a go-forward basis, we'll be closer to $27 million. You know, that said, you know, and I said so in my comments, we're certainly focused on expense management, particularly with the, you know, the revenue pressure that we're all under.

Damon DelMonte (Managing Director and Equity Research Analyst)

Got it. Okay. On the fee income side, you know, the prepared remarks include commentary around kind of a shift in residential mortgage strategy of trying to sell more of those loans. Should we expect to see, you know, somewhat of a pickup in the mortgage banking line? I mean, like last quarter or last year, you were, you know, a little bit over $1 million per quarter. Do we expect that to kind of ramp up out north of that?

Mike Archer (EVP and CFO)

I don't believe so. I think we will certainly sell more as a higher percentage than what we've been doing. I would say, you know, I think right now our pipeline is currently 30% to, you know, both 30%, mid-30s, designated for sale. We're, you know, continuing to drive that higher. I think ultimately a function of just the, you know, call it the mortgage, you know, the mortgage industry with rates, andwith supply levels and so forth being much lower, there's just compression in overall production. I do think we'll do higher as a percentage, but I think our production is certainly coming down. I think from a guidance perspective, I think we're right around half, a little over half million this quarter.

Probably somewhere between 1/2-3/4 is a pretty decent spot for us for now.

Damon DelMonte (Managing Director and Equity Research Analyst)

Got it. Okay. Then, with respect to the composition of the deposit portfolio, you know, your non-interest-bearing deposits right now are 23% of total deposits. I understand you had that large relationship that moved off the books. Should we model out kind of the NIB going closer to, you know, pre-pandemic levels, which would probably be, you know, closer to the mid-teens? Or do you think that based on the composition of customers and accounts now, you could kind of keep that north of 20%?

Mike Archer (EVP and CFO)

Yeah. I think, you know, internally, we're not, certainly not ex-anticipating it to go that low pre-pandemic levels as of right now, certainly, Damon. You know, we've certainly seen mix shift, you know, just with rates where they are. You know, we see folks moving from, you know, non-interest earning to other categories where we have. We do anticipate that to, you know, hopefully stabilize. Again, I don't have a good number for you in terms of what that percentage might be. You know, certainly we're not, we're not sitting here today thinking that it's going to get down to mid-teens again.

Damon DelMonte (Managing Director and Equity Research Analyst)

Okay. That's helpful. Then I guess kind of circling back on the margin. I understand, the swaps are gonna help the margin a bit going forward. As we look at the kind of the overall margin and the direction and continued decline, I mean, do you think like this quarter was kind of the peak compression for you guys, and we could see further compression but at a much slower pace?

Mike Archer (EVP and CFO)

Yeah. I think that last part of your statement is fair. I think that's how we're thinking about it, is we do anticipate some further compression next quarter. We have seen it over just, you know, recent months starting to slow a little bit, which is a positive sign. As we think about second quarter, we're probably, you know, down a few basis points from margin as many as probably, you know, higher, you know, higher single digits as well. I think that's pretty good estimate right now. I think the deposit mix shift is something that we're keeping a close eye on internally.

We're also very focused to see how seasonal deposits come back in, and as we anticipate that at the, you know, call it later in May into June, and what that starts to shape up to be. At this point, I'm not trying to signal that we have concerns about seasonal deposits coming in. I think it's more what is that mix when they do.

Damon DelMonte (Managing Director and Equity Research Analyst)

Got it. Okay. Do you happen to have the margin for the month of March and/or the cost of deposits for the month of March?

Mike Archer (EVP and CFO)

Our margin for March was 2.51%.

Damon DelMonte (Managing Director and Equity Research Analyst)

Helpful. That's all that I had. Thank you very much.

Greg Dufour (President and CEO)

Great. Thank you.

Thanks, Damon.

Operator (participant)

Thank you. Our next question comes from Matthew Breese with Stephens. Please proceed.

Matthew Breese (Equity Research Analyst)

Hi, good afternoon.

Greg Dufour (President and CEO)

Matt.

Matthew Breese (Equity Research Analyst)

Michael, I missed the last part of that margin guide. I heard the 2 basis points. You said something about higher single digits. Could you just repeat?

Mike Archer (EVP and CFO)

Sure. Yeah, I think next quarter we'll anticipate anywhere from low single digit margin compression to the higher end, you know. I don't know if that's called 2.50% to, you know, could be as low as 2.40%. Again, I think it's kind of in that ballpark is what we're thinking right now.

Matthew Breese (Equity Research Analyst)

Okay. Okay. Then, you discussed kind of a slowdown in loan growth. Totally appreciate that. What about overall deposit growth ex brokered? What are you expecting for, you know, for the remainder of the year in terms of kind of core deposit growth?

Mike Archer (EVP and CFO)

I think on that front, I think in the near term on core deposits, we anticipate that it will be fairly flat for the next quarter, at least on an average basis. I do think that we'll, you know, potentially see some of that start to pick up, you know, from an end-to-end just as we get the seasonal inflows in. I think realistically, I mean, again, I would tell you that you know, we're working the deposit channels hard. We have lots of various promotions going on internally, whether it's CDs or money markets, certainly working the operating accounts and checking accounts as well. It is, it is hard to forecast right now.

I would say low to, you know, low to mid-single digits is kind of what we're estimating or would certainly hope for.

Greg Dufour (President and CEO)

Matt, this is Greg.Maybe just to highlight what Mike was saying, and the components of it is to play out the seasonal deposit flow. We'll understand that over the next few months. As well as, just calling our marketing activities and sales activities ramping up, with the undercurrent underneath it all, very competitive as it is for all markets and all banks are in for deposits and pricing right now.

Matthew Breese (Equity Research Analyst)

Understood. Maybe in terms of the overall securities portfolio, it's been down for the last, you know, four or five quarters. Should we expect continued runoff there?

Mike Archer (EVP and CFO)

Yeah. I think in the near term, the short answer is yes, Matt. We continue to redeploy those cash flows to fund the level of loan growth, to help fund the level of loan growth that we have. I think we're also thinking about it in terms of just paying down borrowings at this point as well.

Matthew Breese (Equity Research Analyst)

Okay. You know, on the opposite side, capital management is hoping you could discuss, you know, if the loan growth isn't there and cash flows from securities are paying down borrowings, is there any appetite for buybacks? If so, maybe discuss that.

Mike Archer (EVP and CFO)

Yeah. On the buyback front, you know, right now we'll look at if there's any opportunity with it, you know, looking at the stock price. It's definitely at a, call it a tempting price, but we want to measure it into, you know, overall capital planning that we see.

Matthew Breese (Equity Research Analyst)

Okay. Okay. that's all I had. I'll leave it there. Thank you.

Greg Dufour (President and CEO)

Great. Thank you.

Thank you.

Operator (participant)

Thank you. 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.

Greg Dufour (President and CEO)

Great. Thank you, and thank Steve, Damon, Matt for questions and all the participants here. As I close, I do want to thank you all for your interest in Camden National, but also to recognize the employees of Camden National that are really doing some stellar work here across the board, as we talk about our priorities in deposits and margin and asset quality. It's truly all hands on deck on that. I'm really proud of the team, and what they're doing. With that, thank you very much and have a great day.

Operator (participant)

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