Camden National - Q1 2024

Transcript

Operator (participant)

Good day, and welcome to Camden National Corporation's First Quarter 2024 Earnings Conference Call. My name is Seb, and 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. I will now turn the call over to Renée Smyth, Executive Vice President, Chief Experience and Marketing Officer.

Renée Smyth (EVP, Chief Experience and Marketing Officer)

Thank you, Seb. Good afternoon, and welcome to Camden National Corporation's Conference Call for the First Quarter of 2024. Joining us this afternoon are members of Camden National Corporation's executive team, Simon Griffiths, President and Chief Executive Officer, and Mike Archer, Executive Vice President, Chief Financial Officer. Please note that today's presentation contains forward-looking statements, and actual results could differ materially from what is discussed on today's call. Cautionary language regarding these forward-looking statements is contained in our first quarter 2024 earnings release, which was issued this morning, as well as in other reports we filed with the SEC. All these materials and public filings are available on our investor relations website at camdennational.bank. Camden National Corporation trades on the Nasdaq under the symbol CAC. In addition, today's presentation includes discussion of non-GAAP financial measures.

Any reference to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings release, which is also available on our investor relations website. I'm pleased to introduce Camden National Corporation's host, President and Chief Executive Officer, Simon Griffiths.

Simon Griffiths (President and CEO)

Thank you, Renée, and good afternoon, everyone. Thank you for joining us on our call today. We sincerely appreciate your time and interest. I will give some comments, and then Mike will dive into our first quarter performance, and then we will open up the call for Q&A. First, I would like to report, as I'm now over 90 days into the role as President and Chief Executive Officer, I continue to be impressed with the depth and experience of the management team and the talented team members executing diligently throughout the organization. Each team member is focused on executing on our strategies, including growing our primary banking relationships and leveraging our position of strength. Earlier this morning, we reported net income of $13.3 million or $0.91 earnings per diluted share for the first quarter of 2024.

Overall, we are pleased with our quarterly financial results, supported by strong capital, asset quality, and liquidity. Our regulatory capital ratios continue to be well in excess of required regulatory levels and steadily grow. As we close the first quarter with a reported tangible common equity ratio of 7.12%, up 1 basis point since year-end. We continue to manage credit rigorously, consistent with our disciplined credit culture, which continues to serve us well. For the first quarter, we reported strong asset quality, evidenced by non-performing assets at just 13 basis points of total assets. Our commercial loan portfolio remains well-balanced, with no meaningful concentration risks. Our credit and special asset teams continue to proactively review our portfolio and have not found any systematic areas of concern.

For example, we continue to look at areas such as interest rate risk in the context of rate resets on maturing loans, lease rollover in certain asset classes, and credit score migration, amongst other early indicators. This is a testament to our significant due diligence efforts, strong relationships with our borrowers, and in-depth knowledge of the communities that we serve. As our credit team indicates, our commercial customers have depth and character, which continues to fuel our strength. We continue to see moderate loan demand in our communities, with our approved pipeline remaining reasonably consistent over the past few quarters. Our teams are developing new customers and relationships in both commercial and consumer categories. Expense control remains a key focus and was evident as non-interest expense for the first quarter of 2024 decreased 2% compared to the fourth quarter of 2023.

During this quarter, we took actions to maintain and manage costs in response to revenue pressure caused by decreasing net interest margin. This month, our wealth management leader, Jennifer, retired after nearly 40 years in the industry, and we welcomed Garrett McKnight to the executive team to lead our wealth transformation efforts. Garrett is a former senior managing director at the Northern Trust Company and has more than 20 years of experience leading wealth management teams and serving clients and their families in the areas of investment management, financial planning, and fiduciary services. We're incredibly excited to bolster our wealth management services by adding Garrett's expertise and our recent launch of a new wealth mobile app and client portal to provide our clients with unprecedented access to market intelligence and portfolio insight anytime, anywhere.

Our technology advancements also include a new state-of-the-art mobile and online account opening platform, scheduled to go live at year-end, allowing customers to open, fund, and use deposit accounts within minutes, whenever and wherever they choose. This is the latest milestone on our successful digital transformation roadmap, further unifying our digital and in-person customer experience and efforts to expand our customer base. In summary, although the financial services industry continues to face economic uncertainty, we are confident in our ability to adapt to the changing landscape and deliver solid returns through the current challenges. We are well-positioned to capitalize on our exceptional customer relationships and are investing in our future. Our confidence comes from having a clear strategic plan to drive profitable growth and having a talented team focused on executing it. Now, Mike will provide some first-quarter highlights.

Mike Archer (EVP and CFO)

Excellent. Thank you, Simon. Good afternoon, everyone. This morning, we reported net income of $13.3 million and diluted earnings per share of $0.91 for the first quarter of 2024. Overall, we are pleased with these results as we continue to navigate through a challenging interest rate cycle. Net income for the first quarter was 57% higher than the last quarter and 4% higher than a year ago. On a non-GAAP basis, adjusting for realized investment losses and a $910,000 recovery on the sale of the Signature Bank bond that we previously wrote off in 2023, adjusted net income increased 1% over the fourth quarter of last year and decreased 11% compared to the first quarter of 2023.

Our adjusted return on average assets was up 1 basis point to 0.88% for the first quarter of 2024, and our tangible capital continues to build, highlighted by an increase in tangible book value per share of 1% during the first quarter of 2024, and an increase of 10% over the past twelve months. In the first quarter, our net interest margin decreased 10 basis points to 2.30%, which was lower than the expectations we communicated at our last earnings call. Funding costs on a linked quarter basis increased 17 basis points to 2.27% for the first quarter and was a few basis points higher than anticipated.

We experienced normal seasonal deposit outflows in our markets during the first quarter, and we continue to see the remix from lower to higher cost deposit products. Our attention continues to be on optimizing net interest margin to maintain and grow revenues and increase profitability. Through the first quarter, we continued to take calculated actions to optimize our balance sheet and net interest margin. A few examples included replacing higher cost deposits, which included $72 million of interest checking balances and $50 million of CDs with more cost advantageous funding alternatives, including the Bank Term Funding Program, broker deposits, and the balance sheet derivatives.

As we look to the second quarter, we currently anticipate net interest margin will hold at or around 2.30%, with possible upside as certain balance sheet derivatives mature in early June, and we anticipate normal seasonal deposit inflows picking up towards the back half of the second quarter. In response to continued pressure on our net interest margin, we took actions during the first quarter to manage expenses closely. In doing so, we were able to manage expenses lower on a linked quarter basis by 2% to $227.4 million, which is well below our previously communicated expense forecast for the first quarter of $28 million-$28.5 million. As we look forward, we do anticipate operating expenses will trend slightly higher for the rest of the year and closer in line with prior guidance.

In the first quarter, loans grew 1%, driven by commercial real estate loan balances, increasing by $30.6 million. We continue to be disciplined with loan pricing across our products in the current interest rate environment. Based on our current loan pipelines and strategy, we currently anticipate similar loan growth and a mix for the second quarter. Our asset quality for the first quarter continued to be very strong, supported by excellent credit quality metrics, including non-performing loans of 0.19% of total loans, annualized net charge-offs of two basis points of average loans, and past due loans of five basis points of total loans.

The strength of our current and past asset quality, combined with modest loan growth and internal stress testing we have performed on certain loan segments, gave us the confidence to reduce our loan loss reserves to 0.86% of total loans at March 31. This resulted in a credit for loan losses of $1.2 million for the first quarter, and combined with the $910,000 recovery on the Signature Bank bond, we recognized a total negative provision expense of $2.1 million for the first quarter. Our capital and liquidity positions also continue to be strong. Our book and regulatory capital ratios improved across the board in the first quarter.

Our tangible common equity ratio was 7.12% at March 31, 2024, compared to 7.11% at December 31, 2023, and 6.56% at March 31, 2023. Our uninsured and uncollateralized deposits at March 31, 2024, were 14.8% of total deposits, and our available liquidity sources were 2.1x uninsured and uncollateralized deposits, which continues to be very consistent with previous periods. This concludes our comments. We'll now open the call for questions.

Operator (participant)

Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two. Our first question comes from Steve Moss from Raymond James. Please go ahead.

Steve Moss (Managing Director - Banking)

Good afternoon. Steve, maybe just starting with loan pricing here. You know, curious as to what you're getting for loan pricing in your markets these days. And also, along that front, I noticed commercial loans went down by about 20 basis points in yield quarter-over-quarter. Just kind of curious what if there's anything unique there?

Mike Archer (EVP and CFO)

Sure. Just on your first part there, in terms of loan pricing, what we're currently seeing. We continue to hold really, you know, pretty steady in terms of keeping rates, or keeping some of our interest rates higher. We originated, I think, for the quarter in the neighborhood of 7.5%-8%, was our origination yield, and our pipelines continue to be right in that neighborhood too, Steve. So we continue to be very focused on that, and where we can, getting that price and being disciplined. On the second piece-

Steve Moss (Managing Director - Banking)

Okay.

Mike Archer (EVP and CFO)

Oh, sorry, go ahead, Steve.

Steve Moss (Managing Director - Banking)

Oh, no, go ahead, Mike. I'm sorry.

Mike Archer (EVP and CFO)

So I was just going to say, on the C&I piece, we did have one syndication loan that essentially repriced, or refinanced rather, during the quarter, and that's the primary driver for the C&I decrease, but nothing really atypical or abnormal there.

Steve Moss (Managing Director - Banking)

Okay. Got it. And then in terms of the derivatives you referenced, Mike, it sounds like you added some during the quarter, and then just, what do you have maturing come June, just to kind of help with some of the puts and takes as the balance sheet moves here?

Mike Archer (EVP and CFO)

Sure. So we actually executed the derivative in the December timeframe, I think it was, with a forward start in January. I want to say it was either $50 million or $75 million off the top of my head. Really with the sole idea of replacing that more expensive CD that we had mentioned, that was $50 million. Just again, trying to be advantageous in terms of funding costs where we can. And then in terms of the derivatives rolling off in the June timeframe, essentially, we have $100 million of balance sheet swaps. They've been on our books for quite some time, and that really has been compressing some of our CRE yields that are showing up in our margin tables.

We do anticipate those rolling off here, and we do anticipate that should provide 6-7 basis points to margin on a go-forward basis once we get past that point.

Steve Moss (Managing Director - Banking)

Okay. Got it. Appreciate that. So basically, kind of the margin, if rates kind of hold in this range, 2.30-ish this quarter, and then, you know, some upside as we head into the third quarter.

Mike Archer (EVP and CFO)

Yeah, I think that's a fair summary.

Steve Moss (Managing Director - Banking)

Okay. Appreciate that. In terms of just on the mortgage side here, you guys, I saw sold more mortgages this quarter. Just kind of curious, you know, your appetite or the business mix. Should we think about just higher volumes given more saleable production here going forward?

Simon Griffiths (President and CEO)

Yeah. Hey, Steve, Simon. You know, I'd say overall, you know, low single digit growth is where we're seeing it. We continue to see nice demand on the resi side, which is, you know, continues to reflect, I think, the strength of the economy and the consumer in general. So, you know, certainly modest growth, and that's sort of how we're positioning that within our loan growth. But, you know, certainly continue to see some strong demand out there.

Steve Moss (Managing Director - Banking)

Okay. Appreciate that. And then also, Simon, just with regard to the reserve release, and I heard the reference about a deeper dive in credit. Just curious, you know, give us a little more color as to, you know, how you looked at buckets and just the dynamics that maybe gave some comfort around the reserve release this quarter. And, you know, should we expect any more reviews in the upcoming quarter or two?

Simon Griffiths (President and CEO)

Yeah, I think, look, it, it, you know, as we talked about in the opening remarks, you know, we just have a very strong credit portfolio and see just very strong performance and continue to stress test. And, I think the team identified this opportunity. I think going forward, we're going to just look at it as a case-by-case, but certainly felt this quarter certainly made sense. Obviously, the outlook for the rest of the year, I think, is a key driver of, of how that potentially could change. And, you know, there's, there's obviously a lot of uncertainty right now in terms of the back half of the year. But I think overall, the team feels just the credit position is a very strong position, and we felt it was appropriate for a release on this quarter.

I don't know, Mike, you want to add anything?

Mike Archer (EVP and CFO)

Yeah, I would just say specifically, you know, our, our credit, excuse me, our credit risk team really dove into some of the, I'll call it, some of the problem headline areas that we're seeing in the news, you know, around rent controls and some of the interest-only loans and, and so forth, Steve, just as examples. And, you know, stressing debt service and LTVs and other factors there from an interest rate perspective, we, we just felt really. You know, we continue to have a very strong book. We're not seeing anything systemic or any material issues there across those portfolios.

I think just coupled with, like I said in commentary, is where we've been and how we've performed, combined with, you know, our own stress testing and how we're continuing to monitor, we just felt it was prudent and appropriate, you know, at this time to release some of the reserves. But we'll continue to monitor, and if, you know, macroeconomic factors change, et cetera, we'll adjust accordingly. But certainly, we feel, very, very good at this level.

Steve Moss (Managing Director - Banking)

Okay, great. Really appreciate all the color, and I'll step back in the queue.

Simon Griffiths (President and CEO)

Thanks, Steve.

Operator (participant)

Our next question comes from Damon DelMonte from KBW. Please go ahead.

Damon DelMonte (Managing Director, Equity Research)

Hey, good afternoon, guys. Hope you're all doing well. Just to kind of follow up on the questioning on the credit and provision outlook. You know, if you're expecting kind of like low single-digit loan growth, you know, absent any net charge-offs, should we expect a little bit of provisioning just to cover the new loan growth? And if so, like, what would be like, kind of a targeted reserve you guys would be putting on new loans that come on the books?

Mike Archer (EVP and CFO)

Hey, Damon, it's Mike. Yeah, I think if, you know, if we anticipate some further loan growth there, like we said in our commentary, probably, you know, low single digits for next quarter. I mean, I do think just in terms of the ACL, we'll continue to hold around mid, you know, mid-eighties where we are right now. You know, so to that end and probably pretty low provisions. Certainly, if we have net charge-offs, again, nothing expected or anticipated of size at this point, certainly. But if we were, we'll account for that accordingly. But really feel pretty strong about where we are right now at this level.

Damon DelMonte (Managing Director, Equity Research)

Great. Thank you for that. And then I think you guys noted that you increased your BTFP drawdown before the end of the quarter. Just wondering, is that being used for actual funding purposes, or did you guys use that as, like, kind of an arb opportunity, where you took the funds and put it in cash and are able to kind of clip a small spread?

Mike Archer (EVP and CFO)

No, we didn't really use it for that in that regard, to drive any incremental, call it NII expansion. It was more from a just optimization of margin, truly. We were able to get into that before some of the program dynamics changed. So, you know, at this point, we have $225 million locked in for a year in three different tranches at 4.76. And honestly, from an interest rate risk position and some of those other considerations, it's just really favorable, given our, you know, any risk to rising rates, it proves beneficial. Rates come down, we can prepay or, you know. And so again, we just saw the opportunity and thought it made sense to really bolster that.

Damon DelMonte (Managing Director, Equity Research)

Got it. Okay. And then just lastly, your commentary on expenses kind of ticking higher to your prior guidance. Could you just remind us, was the prior guidance like $28 million-$28.5 million per quarter?

Mike Archer (EVP and CFO)

Yes, that's right, Damon.

Damon DelMonte (Managing Director, Equity Research)

Okay.

Mike Archer (EVP and CFO)

Just to provide some additional clarity, I think in the second quarter, we could see it closer to the 20 somewhere in that mid-range there. And I think after that, in this back half of the year, probably on the lower end, again, ±. But just some of the seasonality items that flush through in the second quarter. But that is certainly a good range still.

Simon Griffiths (President and CEO)

And if I can just add, Damon we continue to balance the short term with the longer term, and getting that balance right, as Mike said, pushes us probably up a little bit in the next quarter. But you know, we've got a, as we mentioned, some great investments on the technology side and continue to invest in the long-term health and health of the franchise.

Damon DelMonte (Managing Director, Equity Research)

Okay, great. That's all that I had. Thank you.

Mike Archer (EVP and CFO)

Thanks, Damian.

Operator (participant)

The next question comes from Matthew Breese, from Stephens Inc. Please go ahead.

Matthew Breese (Managing Director - Financial Services)

Hey, good afternoon, everybody.

Mike Archer (EVP and CFO)

Hey, Matt.

Matthew Breese (Managing Director - Financial Services)

I was hoping you could help me out with kind of the month-over-month trends in deposit costs and the margin, and whether or not there are any signs of, you know, early signs of stability in either those items.

Mike Archer (EVP and CFO)

Yeah, great, great question, Matt. You know, we are pleased to see that in more recent months, that we're starting to see a level of, you know, maybe stabilize, is, is or isn't the right word. But certainly, the increase in deposit costs and funding costs on a month-to-month basis is slowing. So, you know, I think in part, it's starting to look like it's more in line with what we're seeing on the earning asset yield, and that kind of speaks to the, the 2.30, if you will, kind of staying relatively flat in the near term until we kind of start to see the seasonal inflows as well as the benefit from the derivatives.

Matthew Breese (Managing Director - Financial Services)

Got it. Okay. And then, you know, on the deposit mix front, you know, it felt like reading between the lines, a little bit of, you know, frustration or capitulation just in the continued mix shift out of non-interest bearing into interest bearing. If you have to look ahead and say, "Hey, here's how I think we shake out a year from now in terms of deposit mix and then deposit growth," I would love to get your thoughts on those two items.

Simon Griffiths (President and CEO)

Yeah. Hey, Matthew, Simon. Yeah, it's a great question. And obviously, I think a lot of it depends on the rate environment, and you know, how the Fed moves. But I think generally, you know, we've seen, as Mike indicated, sort of maturity in our customer base around sort of moving into from low, no cost into higher cost. We start to see the CD, you know, certainly front book, stabilizing in terms of volumes, and I think that sort of consistent sort of trend is likely to continue. But obviously, that's going to depend a lot on the, the Fed and the, and the customer. I'd say as a team, we're, we're certainly, have a strong playbook around that potential downward rate environment.

We'll look to manage that very effectively with our customers, with a focus on customer relationships and, you know, continuing to drive value. That's one of the things I think the team's done extremely well as well, is as we've, you know, brought in new customers into the CD portfolio. We've certainly looked to build those relationships, deepen those relationships. You know, we mentioned in the call, the earnings call at the beginning, the addition of Garrett to the team, and I think that's another tremendous opportunity for us and the communities we serve in Maine to take those relationships, deepen them, and leverage the capabilities we have, both digital, the new platform in Wealth, and then the new leader that we mentioned.

I think those are things that can be certainly leveraged going on a go-forward basis.

Matthew Breese (Managing Director - Financial Services)

I appreciate all that. Then just thinking about your NIM commentary, sounds stable for the second quarter. There might be a little bit of a bump in the third quarter. If we had to look out even a couple more quarters beyond that, assuming no Fed cuts or no Fed hikes, are you more optimistic about the year forward NIM as some of these dynamics, you know, more fully flush out in terms of deposits repricing and earning asset yield expansion?

Mike Archer (EVP and CFO)

Yeah. I think the short answer is yes, Matt. I think we're kind of at a little bit of that inflection point, honestly. I think for us, I do see, you know, opportunity for us to continue to increase, even in this environment, to start seeing margin expansion from here. So I think, you know, certainly if the Fed were to make cuts, that would be beneficial and call it, add, you know, be added upside. If we hold here for longer, I still. I think we're well positioned to see margin expansion to get in the second half and certainly hopefully beyond.

Matthew Breese (Managing Director - Financial Services)

Got it. Okay. And then just the last one for me. Cash position at quarter end was a little bit elevated versus what we've seen historically, 3% cash to assets. Is that where you want to be? Should we, you know, maintain that level of liquidity from here on out?

Mike Archer (EVP and CFO)

No. I mean, admittedly, that was just some timing of flows. I would share with you that, you know, right now our cash positions come down to more normal levels. So just timing really, Matt.

Matthew Breese (Managing Director - Financial Services)

That's all I had. I appreciate you for my questions. Thank you.

Simon Griffiths (President and CEO)

Thanks, Matt.