Camden National - Q2 2023

Transcript

Operator (participant)

Good day, welcome to Camden National Corporation's second quarter 2023 earnings conference call. My name is Emily, 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. 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 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 and 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 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 over to Greg Dufour. Please go ahead, sir.

Greg Dufour (President and CEO)

Thank you, Emily. Welcome everyone to Camden National Corporation's second quarter 2023 earnings call. I'll provide a few opening comments and then turn the discussion over to Mike Archer. Earlier today, we reported net income of $12.4 million for the second quarter of 2023, down 3% from $12.7 million we reported for the first quarter of 2023. On an EPS basis, we reported $0.85 per diluted share, down $0.02 from the first quarter of 2023. We continue to see the impact of rising interest rates and the inverted yield curve on our operating results. As I shared at last quarter's earnings call, our focus has been on deposits and our liquidity, our margin, and asset quality. From an update perspective, our loan-to-deposit ratio remained flat at 88% when comparing the second and first quarters of 2023.

Our net interest margin was 2.4% for the quarter, within our estimates, but down from 2.54% reported during the first quarter of the year. Asset quality continues to remain strong, with non-performing assets to total assets at 9 basis points. Loan growth for the quarter was 1%, a significant decrease from growth rates seen in recent quarters. As we discussed at our last call, this was done purposefully to reduce the reliance on higher cost borrowed funds and to benefit our net interest margin, as well as to maintain our loan-to-deposit ratio. Our sales teams remain focused on deposit generation. They continue to review loan opportunities that are appropriately priced and high quality. At the same time, we are confident our sales and support teams are very well positioned to increase our lending activities when interest rates and market conditions align.

From a general perspective, like many areas in the country, we're seeing solid consumer-driven activities, including tourism, which should support our seasonal deposit activity. Business activity is also strong, but we continue to see labor challenges affecting many of our business customers. The residential mortgage market has slowed, driven by both the impact of interest rates as well as low inventory levels. Although pricing competition for deposits remains fierce, we are satisfied with our ability to retain deposits and win other relationships in this environment. It's been a while since I've used the term "keeping our powder dry" on one of our earnings calls, but I believe this is the best course of action as we see what Fed action will take over the next few months.

As I noted earlier, deposits and liquidity, the margin, and asset quality continue to be our priorities, and coupled with our strong capital levels, we believe our focus on these priorities positions us well when the interest rate environment stabilizes, the yield curve improves, and we have a clearer line of sight to overall economic activity. In short, we are managing our organization for the long term for both our shareholders and customers. Now I'd like to introduce Mike Archer.

Mike Archer (EVP and CFO)

Thank you, Greg. Good afternoon, everyone. Earlier today, we reported quarterly earnings of $12.4 million in diluted EPS of $0.85, which are down 3% and 2% respectively on a linked-quarter basis. Earnings were lower, primarily due to the net interest margin compression of 14 basis points between quarters to 2.4% for the second quarter. Our return on average assets and our return on average tangible equity followed suit and were also down quarter-over-quarter. For the second quarter of 2023, our return on average assets was 0.87%, and our return on average tangible equity was 13.55%. The decrease in our earnings and profitability reflects the current interest rate environment and inverted yield curve.

We remain on strong financial footing, backed by a strong balance sheet with sufficient levels of capital and reserves. We also continue to have a healthy liquidity position that included access to $1.4 billion of funding, which was 2x the amount of uninsured and uncollateralized deposits as of June 30th. Net interest income for the second quarter of 2023 totaled $32.7 million, a decrease of 5% compared to the first quarter of 2023. As noted earlier, our net interest margin decreased 14 basis points between quarters as funding costs continued to rise due to increased interest rates, including a 50 basis point increase in the Fed funds rate in the first quarter and another 25 basis points increase in the second quarter.

Although higher interest rates benefited our asset yield, which increased 20 basis points between quarters to 4.12% for the second quarter, the increase of funding costs due to higher interest rates more than offset the benefit. Funding costs increased 36 basis points between quarters and reached 1.81% for the second quarter of 2023, which represented a beta of 73.6% for the quarter. Our cumulative beta, measured from January 1, 2022, through June 30, 2023, was 32.4%. On the deposit side, we continue to see deposit acquisition and pricing remain very competitive throughout our markets and fully anticipate we'll continue to see pricing pressures in the near term.

Deposit costs increased 26 basis points on a linked quarter basis and reached 1.48% for the second quarter of 2023, representing a 53.9% beta for the quarter. Our cumulative deposit beta, measured from January 1st, 2022, through June 30th of 2023, was 27.1%. Like many others across the banking industry, we've experienced the effects of deposit mix shift as customers look to deploy funds into higher-yielding, interest-bearing accounts. This has, in part, led to lower average non-interest checking and savings balances, which each decreased 7% from the first quarter to second quarter, and average CD balances growing 28% over the same period. As we have said, we remain focused on optimizing net interest margin and positioning ourselves for expansion moving forward.

A few steps we have taken include slowing loan growth through higher loan pricing and driving more saleable residential mortgage volume. Loan growth for the second quarter of 2023 was 1%. We continue to move forward with this strategy in the current environment. Another is redeploying investment cash flows to fund loan growth. We're also actively campaigning for deposit acquisition while managing our existing deposits at the customer level. Through the first half of the year, we added $375 million of interest rate swap derivatives to reduce our interest rate exposure to rising interest rates. These swaps added $1.7 million of net interest income through the first half of 2023, including $1.2 million, excuse me, during the second quarter. In early July, we executed another $75 million interest rate swap with the same objective.

The last item I would like to highlight is that during the second quarter, we locked in $135 million one year funding at a rate of 4.7% through the Bank Term Funding Program rolled out by the Fed earlier this year. We viewed this as a prudent step to help manage funding costs in the current interest rate environment, while also providing us with favorable optionality as interest rates move lower over this one year period. Now, switching to credit. Our credit quality across the loan portfolio remains very strong overall. Non-performing loans were 0.13% of total loans, and delinquencies were 5 basis points of total loans as of June 30, 2023, both consistent with last quarter.

While total criticized and classified loans improved quarter-over-quarter and stood at 1.13% of total loans as of June 30th. Total loan reserves stood at 0.9% of total loans at quarter end, down 1 basis point from the first quarter, reflecting the strength of our loan portfolio, but also recognizing the ongoing risk within the broader macro environment of a potential downturn. This led to a small provision expense for the second quarter to maintain our loan reserve levels. Last quarter, we reported on our CRE office loan portfolio, which included detailed information in the supplemental earnings materials that we filed. We continue to monitor this loan portfolio closely. We have not seen any material changes in this portfolio through the second quarter.

Non-interest income for the second quarter of 2023 totaled $10.1 million, an increase of 2% over the first quarter this year. For the second quarter of 2023, we sold 34% of our residential mortgage originations, we continue to push more of our origination volume to saleable. As of June 30th, 50% of our committed residential mortgage pipeline was designated for sale. Non-interest expense for the second quarter totaled $27.1 million, which was 4% higher than last quarter. Total operating expenses increased quarter-over-quarter, total operating expenses for the second quarter were as expected and consistent with projections discussed on our last quarter's earnings call.

Our non-GAAP efficiency ratio for the second quarter was just over 63%. Our overhead ratio, which is calculated as annualized quarterly operating expenses over average quarterly assets, was 1.9%, both higher than the first quarter. As of the end of the second quarter of 2023, our capital position remained strong, measured on both a GAAP and regulatory basis. At the end of the second quarter, our TCE ratio was 6.57%, up one basis point from last quarter, and regulatory capital ratios continued to be well in excess of capital requirements.

While the calculation of our regulatory capital ratios does not include the effect of unrealized losses on investments, which totaled $138.7 million as of June 30th, 2023, we are pleased to note that as of June 30th, the company would continue to be in excess of regulatory capital requirements, even if they were calculated to include the unrealized losses on the company's investments. Through the first half of the year, we returned $14.3 million of capital to shareholders through dividends and share repurchases. Our cash dividends for the first and second quarter was $0.42 per share and represented an annualized quarterly dividend yield of 5.42% as of June 30th, based on our closing share price on that date.

Through June 30th, we repurchased 65,692 shares of our common stock at an average price of $33.36 per share. This concludes our comments on our second quarter results. We'll now open the call up for questions.

Operator (participant)

Thank you. If you would like to ask a question today, please do so now by pressing star followed by one on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then two. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. Our first question comes from the line of Steve Moss with Raymond James. Steve, please go ahead. Your line is now open.

Steve Moss (Managing Director)

Good afternoon.

Greg Dufour (President and CEO)

Hi, Steve.

Steve Moss (Managing Director)

Maybe just starting with, you know, the margin here. How's it going? You know, on the margin here, do appreciate the, you know, you guys, the derivatives have definitely helped here in moderating margin pressure, and you added another one this quarter. Just kind of curious, you know, how are you feeling about the outlook for the margin in the current deposit rate environment?

Mike Archer (EVP and CFO)

Yeah. I think from a margin perspective, Steve, as we think about next quarter, we're kind of in the so we're at 240 right now. We're thinking flat, you know, ±5-10 basis points. I would say it's probably a bit broader range than we've historically given, but, you know, I think part of it depends on what the Fed does here in a, you know, a few days. Also, we're in the seasonal deposit flows, and so we're seeing that come in. Something we're continuing to watch and monitor. I think the other, you know, the other item is just the deposit mix shift that we continue to see or have seen and, how much does that continue.

I think right now, we feel pretty good around, you know, the 240 range, but we could see that be slightly higher or lower.

Steve Moss (Managing Director)

Okay. Appreciate that. In terms of loan pricing here, just kind of curious, you know, where loan yields are coming on for new originations these days?

Mike Archer (EVP and CFO)

Sure. For the second quarter, our new originations came on, I think, on a weighted basis around seven, a little over 7%. I think it was 7.10, sticks out at me. From a pipeline perspective, we're largely, you know, at 7% or over 7%, you know, well over 7% now. I think our, you know, commercial CRE portfolio is somewhere in the neighborhood of 7.5%+. I want to say the residential pipeline is 7.25% or slightly over. You know, as we've talked about, we have been very prudent on the growth side, and anything that we're putting on our books, we're really trying to make sure that we get the right rate and price for it.

As you know, a function of that, of course, is just the lag effect, where it takes, you know, 45 to 60 days, call it, for these loans to come on.

Steve Moss (Managing Director)

Right. Okay. That's helpful. Then just one more for me, just on the loan growth. You know, it did moderate this quarter, but, you know, still not a bad pace given a more challenging environment. Just kind of curious, you know, do you think there'll be further moderation from current levels or, you know, it's low to mid single digits, annualized rate, maybe a decent run rate for the second half of the year?

Greg Dufour (President and CEO)

Yeah, it's Greg, Steve, and I'd say, you know, it probably lower loan growth, single digit. You know, we felt pretty good, honestly, about 1%. Again, we know we're pushing ourselves away from the table, you know, primarily on pricing, you know, to really focus on the margin. We're not necessarily focused on the loan growth yet.

Steve Moss (Managing Director)

Okay.

Mike Archer (EVP and CFO)

Steve, the only thing I might add.

Steve Moss (Managing Director)

All right.Thanks very much for all the color.

Mike Archer (EVP and CFO)

Just work.

Greg Dufour (President and CEO)

Yep, you're welcome.

Operator (participant)

Our next question comes from Damon DelMonte with KBW. Damon, please go ahead. Your line is now open.

Damon DelMonte (Managing Director of Equity Research)

Hey, good afternoon, guys. Hope you're both doing well today.

Mike Archer (EVP and CFO)

We are.

Damon DelMonte (Managing Director of Equity Research)

Just wanted to circle back on the margin commentary. Assuming that the Fed raises rates, at least one more time, you know, like tomorrow, I think it's tomorrow is the meeting. You know, how does that play into your commentary, Mike, about, Like, is that going to benefit the margin, or do you think that's going to put you more on the lower end of the range?

Mike Archer (EVP and CFO)

I mean, I think, you know, the Fed increasing will certainly put a little more pressure on the, on the funding side, certainly from both from a deposits, of course, the borrowing side as well. You know, some of these swaps that we've done and just the pricing will help neutralize, you know, some of that impact. I think that's a bit of, you know, that, you know, coupled with the seasonal deposit flows, we do anticipate a level of that which should help out on the lower cost deposits for this quarter, Damon.

I think that's when we think about margin for, you know, next quarter or the third quarter, I think those are the various variables that we're considering, where we're saying, hey, we think 2.40% is probably a pretty good, you know, midpoint of where we may land, you know, plus or minus some basis points there. I think it's all those factors that we're baking in and knowing that, you know, another Fed rate hike could certainly isn't going to help from an immediate funding perspective.

Damon DelMonte (Managing Director of Equity Research)

Got it. Okay. Do you happen to have the spot margin as of for the month of June?

Mike Archer (EVP and CFO)

For June, our monthly margin was 238%, I believe.

Damon DelMonte (Managing Director of Equity Research)

Okay, great. Thank you. As we think about, you know, the slower pace of loan growth, and we think about the strong credit quality trends you guys exhibit, should we think about, you know, minimal provisioning in the back half of this year? Kind of, you know, maybe just targeting, keeping that loan loss reserve flat at 90 basis points. Is that reasonable?

Mike Archer (EVP and CFO)

Yeah, I think, I mean, certainly if the macro environment stays like it is, I think that 90 basis points reserve, again, it could move up or down slightly, but I think that's a pretty good spot for us right now.

Damon DelMonte (Managing Director of Equity Research)

Okay. Okay, on the fee income side, you know, it sounded like you felt pretty comfortable with this quarter's level, so that's probably a reasonable run rate there. There didn't seem to be a lot of noise this quarter?

Mike Archer (EVP and CFO)

No, I think the $10 million is a pretty good run rate for us, kind of something like we saw this quarter.

Damon DelMonte (Managing Director of Equity Research)

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

Greg Dufour (President and CEO)

You're welcome. Thank you.

Operator (participant)

Before we take our next question, as a reminder, if you would like to ask a question today, please do so by pressing star, followed by the number one on your telephone keypads. The next question comes from the line of Matthew Breese with Stephens. Matthew, please go ahead. Your line is now open.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

Hey, good afternoon.

Mike Archer (EVP and CFO)

Hey, Matt.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

I was just curious, as you kind of monitor deposit flows throughout the quarter, was there anything that you could kind of provide more color on in regards to how demand deposit flows kind of worked their way month by month? Was there any sort of intensification of runoff towards the end of the quarter versus the beginning, or did it start to subside?

Mike Archer (EVP and CFO)

I mean, nothing sticks out at me, Matt. I'd say, you know, one of the things that we just continue to watch is, you know, particularly on the consumer side, just average balances. You know, we saw that really peak during the pandemic, and one of the areas that we're seeing pressure on is just those average balances pull down in this, in this environment. You know, I think that's one of the big, you know, the big variables that are out there. We're seeing the seasonal deposit flows on the business side, which we would expect, but one thing that we continue to monitor is the consumer side and what happens there.

I think to that end, you know, the other reality is, we are also monitoring our accounts, and we continue to see the number of accounts grow on that basis. We're not seeing, call it, customer outflow in that regards.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

Got it. Okay. Then maybe on the just going back to the NIM and trying to get a little bit of a longer-term outlook, the ±240 NIM, plus or minus, do you feel like that's a good place to model through the end of the year, maybe into early 2024? At what point, as you look at your internal models, do you start to see, you know, expansion in loan yields start to overtake, incrementally higher deposit costs?

Mike Archer (EVP and CFO)

Yeah, it's a good question. I think I think probably 2.40% is probably a pretty decent spot from a modeling perspective for the remainder of the year. As we get into the winter months, we're also seeing seasonal flows start to go a little bit the other way. There's a little bit of generally lumpiness and just margin between Q4, Q1, as we get back into Q2. I think the reality is when we start seeing rates start to go down and that inversion start to, you know, not be as steep, is when we start to see that real benefit on the margin.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

Okay. Is there any sort of additional thought around, you know, additional balance sheet restructures, either securities or in the loan portfolio, to help alleviate some of these NIM-related pressures? How do you think about that?

Mike Archer (EVP and CFO)

I guess what I would say, Matt, is, you know, I think we are constantly looking at everything. You know, just part of the normal process that we go through. I don't want to say anything's off the table at this point. You know, we'll continue to look at that just as a, you know, normal due process. Understanding right now, certainly the investment portfolio is, continues to weigh down our margin. I think the short answer is yes, we'll continue to look at that.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

Okay. Last one for me, just that I saw you repurchased a little bit of stock this quarter. Anything to read into that, or was that just managing kind of overall share count?

Mike Archer (EVP and CFO)

No, I think it's just us being opportunistic. I mean, when the time comes, you know, we did a small tranche, and we're certainly being cautious from a capital perspective. I think when the price makes sense for us, we'll be, you know, opportunistic in the market. You know, I guess that's how I would read into that.

Matthew Breese (Managing Director and Senior Equity Research Analyst)

Got it. Okay. Understood. I'll leave it there. Thanks for taking my questions.

Operator (participant)

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. Well, thank you. Everybody, I want to thank you for being on the call and taking interest in the company. Have a great day. Take care.

Operator (participant)

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