Camden National - Q2 2024

Transcript

Operator (participant)

Good day, and welcome to Camden National Corporation's second quarter 2024 earnings conference call. My name is Lydia, 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'll conduct a question-and-answer session. If you require operator assistance at any time during the call, please press star then zero. I'll now turn the call over to Renée Smyth, Executive Vice President, Chief Experience and Marketing Officer.

Renée Smyth (EVP, CMO, and Chief Experience Officer)

Thank you, Lydia. Good afternoon, and welcome to Camden National Corporation's conference call for the second 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 second quarter 2024 earnings release issued this morning and in other reports we filed with the SEC. All of 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 discussions of non-GAAP financial measures.

Any references 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 am 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. We appreciate you joining our call today. I will provide a few comments on our most recent quarter, and then I'll turn it over to Mike to dive into our second quarter financial performance, and then we'll open up for our Q&A. I'm pleased to report, as we mark the halfway point through 2024, we continue to execute well in the uncertain environment. Despite macroeconomic headwinds, we remain committed to executing our long-term strategy of optimizing our balance sheet and deepening customer relationship through advice-based conversations and exceptional customer experience. Our team is building momentum and leveraging process automation and innovative solutions to deliver stellar advice to our loyal customer base. Early this morning, we reported net income of $12 million or $0.81 earnings per diluted share for the second quarter of 2024.

Highlights for the second quarter include a six basis point increase in net interest margin over the previous quarter. Disciplined execution and expense control, which exceeded our expectations and guidance previously communicated for the second quarter, and continued strong asset quality demonstrated by favorable credit quality metrics, which benefit from our disciplined underwriting culture and keen asset management. Our reported net interest margin increase is a result of deposit cost pressure beginning to ease during the back half of the second quarter as we started to benefit from seasonal deposit flows in our markets, are taking decisive action on certain high-cost, non-core deposit relationships, and continued asset allocation remix as we utilize investment cash flows to fund loan growth. Mike will expand on the net interest margin discussion and drivers in a few minutes.

Our team continues to focus on driving deposit growth, both through new customer acquisition and by deepening relationships with our existing customers, including by leveraging data and analytics to make informed, swift decisions. As Fed rate cuts become increasingly likely, we are ready to quickly act to manage our funding costs. As we saw, while interest rates were increasing, we expect the first 25-50 basis point rate cut likely will result in a lower beta than subsequent rate cuts as we balance customer needs and market competition. We remain focused on improving our operating leverage. During the second quarter of 2024, revenues increased 3% over the previous quarter, and non-interest expense remained flat. We continue to take disciplined actions to maintain and manage costs in response to net interest margin pressure, while also driving opportunities to increase fee income and diversify our revenue base.

Credit continues to perform in line with expectations, and by all measures, our credit metrics continue to perform better than pre-pandemic levels. We continue to manage credit rigorously, consistent with our disciplined credit culture. For the second quarter, we reported strong asset quality with just a marginal uptick in non-performing assets, which accounted for just 17 basis points of total assets as of June 30, 2024. Our commercial loan portfolio remains well-balanced, with no meaningful concentration risks. Our credit risk team continues to review our portfolio proactively and have not identified any systemic areas of concern. We continue to see moderate loan demand in our communities. Our residential mortgage pipeline has remained consistent quarter to quarter, and at the same time, we have seen a sizable uptick in our commercial loan pipeline, primarily driven by a few larger commercial real estate opportunities.

We are seeing nice momentum in fee income, spurred by a focus on investment in wealth management and brokerage services. Combined, our wealth and brokerage services generated revenue of $3.3 million in the second quarter, an increase of 11% over the first quarter of this year. The increase is driven by sales activity and continued strength in the financial markets. We have crossed over $2 billion in assets under administration as of June 30, 2024, representing an increase of 12% compared to June 30, 2023. We are well positioned to expand our advisory distribution by leveraging our new wealth operating platform and mobile app as we stay committed to full relationship banking and growing our and diversifying our fee income. We continue to make significant progress on digital roadmap and innovation ideation.

Last quarter, we shared we invested in a new online deposit account opening platform, and I'm pleased to report that it remains on schedule to go live at year-end. This new technology will enable customers to open, fund, and use deposit accounts within minutes, whenever and wherever they choose. We will leverage this technology to steer into our omni-channel approach, which aims to provide a consistent customer experience across all digital and brick-and-mortar sales and marketing channels to provide a uniform customer experience. Our robotics automation team continues to surpass expectations. We recently celebrated processing over two million support service transactions through our digital platform. At our current velocity, we will process one million transactions every six months. Additionally, our robotics automation reached a milestone with a newly developed API integration into our customer service workflow management tool.

For the first time, this allows true end-to-end automation of predictable, repeatable customer service activities, creating real capacity across multiple internal departments. Further, our data analytics team partnered on AI beta pilot with a third party for data scientist emulation, simplifying the technical skills needed to request higher-order analytic models. If successful, this has the potential to drive sophisticated analytics further into the hands of business units, and the pilot will be completed in Q4. We believe our investments in talent, technology, products, and services will continue to benefit as macroeconomic conditions improve, and that our strong foundation will permit us to generate consistent, sustainable, and long-term performance as we remain focused on execution and evolving the bank to meet customer and shareholder expectations. Now, Mike will provide some highlights from the second quarter.

Mike Archer (EVP and CFO)

Thank you, Simon, and good afternoon, everyone. This morning, we reported net income of $12 million and diluted earnings per share of $0.81 for the second quarter of 2024, and net income of $25.3 million in diluted EPS of $1.72 through the first six months of the year. We are pleased with our second quarter financial results, as they demonstrate real momentum within our core business, as highlighted by a reported non-GAAP, pre-tax, pre-provision income of $15.5 million, which is up 9% on a linked quarter basis. As a reminder, in the first quarter of this year, we recorded negative provision expense of $2 million as we released loan reserves due to the strength of our loan portfolio, and we recovered $910,000 of proceeds upon the sale of our Signature Bank bond.

With our solid earnings for the second quarter, our tangible capital position grew during the quarter. As of June 30th, 2024, on a non-GAAP basis, our tangible book value per share stood at $28.34, up 2% from the first quarter and 11% over the past 12 months. Total revenues for the second quarter of 2024 increased 3% over the first quarter of 2024. Net interest income grew 3% during the second quarter to $32.2 million, led by an increase in net interest margin of six basis points to 2.36%. In June, a $100 million balance sheet interest rate swap matured, providing approximately five basis points of lift for the partial month, and we anticipate six to seven basis points for a full month's benefit at current interest rates.

In June, we also began to see normal inflows from seasonal deposits in our market. Looking forward, we can anticipate continued net interest margin expansion during the third quarter due to the aforementioned factors, along with the continued redeployment of investment cash flows to support new loan originations at current market rates. Non-interest income for the second quarter of 2024 totaled $10.6 million, an increase of 3% over the first quarter of this year. As Simon noted in his comments, we are seeing positive momentum across our brokerage and wealth business lines. Regarding mortgage banking, we continue to sell our qualifying residential mortgage production. For the second quarter, we sold 52% of our residential mortgage production, and through the first six months, we sold 51% of our production.

As we work our way back to historical financial performance levels, we are focused on the management of operating expenses and driving positive operating leverage while continuing to invest in the organization. Non-interest expenses for the second quarter of 2024 were $27.3 million, a small decrease from the first quarter of this year. The positive combination of lower non-interest expense and revenue growth for the second quarter improved our non-GAAP efficiency ratio on a linked quarter basis. Our efficiency ratio for the second quarter of 2024 was 63.53%, compared to 65.55% for the first quarter of 2024. Based on these results, for the second quarter, we are now estimating our quarterly operating expenses will range between $27.5 million-$28 million for the remainder of the year.

Moving to the balance sheet, total loans as of June 30th, 2024, were $4.1 billion and grew less than 1% in the second quarter of 2024, and 1% through the first six months of this year. Our loan growth through the first half of 2024 has been mixed across our loan segments. We continue to maintain our loan pricing discipline across our products in the current interest rate environment. Total deposits as of June 30th, 2024, were $4.5 billion, a decrease of 1% during the second quarter of 2024, and 2% through the first half of the year. The decrease in deposits during the second quarter and the first half of the year reflects the decisive actions we took to manage and optimize net interest margin.

Through the first six months of the year, we managed out approximately $150 million of high-cost municipal interest checking and CD balances as part of this effort. Our loan and deposit products are geared towards driving full relationship banking and us being the primary bank for our customers. In the second quarter, we launched our high-yield savings product, which is a new money product requiring that the customer also maintain a checking account with us. We've been pleased with these results of the product, which include an 8% growth in savings deposits in the second quarter of 2024.

Our asset quality for the second quarter continued to be strong, supported by excellent credit quality metrics, including non-performing loans of 0.23% of total loans, annualized net charge-offs of four basis points of average loans, and past due loans of five basis points of total loans. Non-performing loans and net charge-offs modestly increased in the second quarter compared to the first quarter, but we do not believe they reflect any signs of systemic stress within our loan portfolio. The strength of our asset quality, combined with modest loan growth, gave us the confidence to hold loan loss reserves at 0.86% of total loans as of June 30th, 2024, which was consistent with a loan loss reserves coverage ratio as of the end of last quarter. Our capital and liquidity positions also continue to be strong.

Our non-GAAP tangible common equity ratio increased 22 basis points during the second quarter to 7.34% as of June 30th, 2024, which included the repurchase of 50,000 shares of common stock, totaling $1.6 million of capital. Our uninsured and uncollateralized deposits as of June 30th, 2024, were 14.6% of total deposits, and our available liquidity sources were two times uninsured and uncollateralized deposits. This concludes our comments. We'll now open the call up for questions.

Operator (participant)

Thank you. We'll now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone keypad. If you're using a speakerphone, please pick your handset up before pressing the key. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Steve Moss with Raymond James. Your line is open. Please go ahead.

Steve Moss (Managing Director)

Hi, good afternoon. Maybe start off with the margin guidance here. Hey, Simon. Start off with the margin guidance here. In terms of the, Mike, you said you had a five basis point lift from the swap expiring this quarter, and then an additional six or you expect six to seven basis points of benefit, for a full month. So am I hearing you correctly in thinking about, call it, 11 or 12 basis points of additional margin upside going forward here in the third quarter?

Mike Archer (EVP and CFO)

No, no, Steve. Good question. So as we think about margin for next quarter, we're thinking that we're probably in the neighborhood of about three to seven basis points. You know, let's call it 2.39-2.43-ish, for the third quarter, which is a, a function of what you just mentioned there. You know, the additional lift of the, $100 million loan swap that ran off, as well as some of the seasonal flows and other activity occurring.

Steve Moss (Managing Director)

Okay. And just as we think about the seasonal flows on deposit costs, I mean, definitely seeing, you know, nice seeing your guys's deposit cost increases slow down here, but definitely seeing it across, across the board. You know, curious if, if you think, like, in addition to seasonal flows, you could get a little bit more of a lift here, just given that deposit costs are likely to stabilize as you get the master repricing.

Mike Archer (EVP and CFO)

Yeah, I think, so in terms of just deposit costs, I want to say for June, we landed around 2.30, 2.36 off the top of my head for, excuse me, all-in funding costs, not deposit costs. I do anticipate that we'll continue just to hang around there, maybe up a basis point or two, but then we'll just continue to have the continued asset yield expansion as well as we move forward. So as we're thinking about our seasonal deposit flows, I do think we'll, we are seeing the benefit there. I think one of the questions is, we still see a level of remix as well.

So, you know, as we're thinking about that on a go forward, over the next few months, Steve, we think that could level itself off and call it one or two basis points up on, from a remix could be offset by the seasonal flow. So that's how we're thinking about deposits and funding cost rate at this moment.

Steve Moss (Managing Director)

Okay, great. That's helpful. And then, Simon, in your comments, you mentioned, you know, I guess like moderate loan demand, but that you're seeing some sizable, I think commercial real estate opportunities is what you said. Just kind of curious if you could give a little color around those larger, larger commercial real estate opportunities you're seeing.

Simon Griffiths (President and CEO)

Yeah. Thanks, Steve. I mean, just overall, you know, we continue to see, you know, nice demand across our business. You know, we're seeing low single-digit loan growth for the third quarter, and that's been pretty consistent with this quarter. Certainly seeing some nice opportunities, particularly on the commercial real estate side. We're also seeing on the resi side, nice pickup in our home equity business and solid demand on the resi mortgage side as well.

So overall, you know, I think it continues the theme that we've been articulating, Steve, which is, you know, we're leveraging the balance sheet, focusing on relationships, being, you know, conscious obviously of quality and broadening that out and leveraging the opportunities we have to, you know, commit to the communities that we serve and continue to lend into those communities.

Steve Moss (Managing Director)

... Got you. Are the projects, you know, multifamily in nature or, you know, industrial? Just kind of curious as to, like, where you are seeing that, the type of demand, if you will?

Simon Griffiths (President and CEO)

Yeah, it's a mix. It's definitely a mix. We definitely have some of those, you know, multifamily, a couple of. You know, we have a couple of, you know, multifamilies that particularly, we've had a couple of hotels, you know, high-quality hotel locations in some great locations as well. I'd say those are sort of probably the two kind of themes we're seeing come through.

Steve Moss (Managing Director)

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

Operator (participant)

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

Matthew Breese (Managing Director)

Good afternoon. I was hoping you could talk-

Mike Archer (EVP and CFO)

Yeah

Matthew Breese (Managing Director)

... a little bit more about the high yield savings program. You know, I guess, I guess first, what rate are you offering on that program, so long as folks meet all the criteria? Two, does it continue? And three, what's the expectation for how that program might impact, you know, deposit costs overall, but in particularly the savings category, given, you know, at least on the average balance sheet, it's still at a really low level? Just some thoughts there.

Mike Archer (EVP and CFO)

Yeah, sure. I can start off there, Matt. So we did, as I mentioned, I think our savings growth for the quarter was 8%. I want to say that was in the neighborhood of around $50 million. The majority, the vast majority of that certainly was from that high-yield product. Overall, I want to say that the weighted rate that we put on the high yield is 4.13% for the quarter. So we do have a couple, call it, tiers there, around 4%, 4.25%, 4.5%, that we're out there, you know, selling and marketing and have had good traction. And, you know, as we said, I mean, we're really trying to drive, you know, new customer acquisition along with that product as well.

I think one of the things that we're also in the back of our heads thinking about is as CDs start to reprice and start to roll off here over the coming months as well, you know, being thoughtful of trying to get the money back into a liquid product, have the ability to roll down the curve if and when that happens. So we're trying to, you know, balance all those factors and be certainly very thoughtful about that.

Simon Griffiths (President and CEO)

Hey, Matt, this is Simon.

Matthew Breese (Managing Director)

Got it.

Mike Archer (EVP and CFO)

Okay.

Simon Griffiths (President and CEO)

Just to add to that, Matt, can I just add a comment to that? It's, you know, continue to see, you know, one of the nice things about the CD roll-off, and, you know, we continue to have about 80% retention, which is very favorable. Leverage these relationships to really deepen and expand into other products as well. So we're really seeing that opportunity to engage our clients and, you know, look to opportunities to deepen, as I mentioned.

Matthew Breese (Managing Director)

I appreciate that color. Maybe just looking at the NIM, you know, it feels like we're, we're at that inflection point for you all, where deposit cost increases start to slow, while asset yields really start to reprice higher. As you extend and look at your, your outlook for, you know, beyond 2024 and into 2025, how much of the lost ground on the NIM can we recapture? Can we get back to a, you know, a, call it, a 275 type NIM, based on, you know, forward curve? I think there's three or four cuts in there. Just some overall thoughts on the longer term trajectory of the NIM, not just the next one or two quarters, but into 2025.

Mike Archer (EVP and CFO)

Yeah, it's a great question. I think to your, to your comment there, Matt, it's certainly gonna, you know, matter what the shape of the curve is. I mean, I certainly hope that we get back to, you know, margin levels that we were at, certainly, you know, a few years ago. How fast we get there is to be seen. Certainly, as we think about Fed rate cuts, hopefully over, you know, coming months and quarters, assuming that the yield curve doesn't, you know, the long end doesn't go down with it, that will certainly be beneficial to us. And I do anticipate, you know, to your, to your, to your comment there, I do anticipate us getting back to 270.

I don't know off the top of my head, you know, how fast that is, but certainly something we're certainly steering into. As we've been communicating, you know, now for years and quarters, you know, we really are focused on optimizing margin, and we want to, you know, get that... We're focused on growing the business, but we want to do it profitably, and that's top of mind for us.

Matthew Breese (Managing Director)

I appreciate that. The last one for me is just some help on the fee income front. You know, outlook for the rest of the year, but then within that, just the points where you have some additional leverage. Could you just update us on the wealth management business, assets under management, what you're doing to grow that, the mortgage banking effort as well?

Simon Griffiths (President and CEO)

Yeah, thanks for the question, Matt. On the fee income front, you know, for the third quarter, I think very much in line with what we reported this quarter. We've got an estimated range of about $10.5 million-$11 million, and certainly we think that the fourth quarter fee income might come in- will probably come in a little higher than that, about $10.75 million-$11.25 million, and that's due to the annual Visa incentive bonus that we have in the fourth quarter. So overall, I think the underlying picture for us is continuing to invest in that business and the wealth business. I think we've got some nice traction there. As we reported, we're up, you know, just over 10%, and, you know, I think we see nice mo- momentum on the brokerage side.

We brought Garrett in to lead the wealth business, and he's starting to certainly build that out, and that's certainly an area that we believe has a lot of opportunity for us, given our geography and given the momentum we have with that team. So it's an area that we continue to look to, and I think can be a nice area of growth for us going forward.

Matthew Breese (Managing Director)

Excellent. I'll leave it there. Thank you for taking all my questions.

Operator (participant)

Thank you. As a reminder, if you'd like to ask a question today, it's star, followed by one on your telephone keypad. We have no further questions, so this concludes our question and answer session. I'd now like to turn the conference back over to Simon Griffiths for any closing comments.

Simon Griffiths (President and CEO)

Well, thank you. I want to thank you all for your time today and your interest in Camden National Corporation. We wish you all a great rest of your day, and thanks for your time.

Operator (participant)

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