Camden National - Q3 2024

Transcript

Operator (participant)

Good day and welcome to Camden National Corporation's Q3 2024 Earnings Conference Call. My name's Lydia, and I'll be your operator for today's call. All participants will be in a listen-only mode during today's presentation, and 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, Chief Experience and Marketing Officer)

Thank you, Lydia. Good afternoon and welcome to Camden National Corporation's Conference Call for the Q3 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 Q3 2024 earnings release issued this morning and in other reports we file 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. Good afternoon, everyone. We appreciate you joining our call today. I'll provide a few comments on our most recent quarter and then turn it over to Mike to discuss our Q3 financial performance. We will then open up the call for Q&A. The Q3 marked a significant event for Camden National. As we announced on September 10th, we would acquire Northway Financial, a strong community bank franchise in New Hampshire. The combination provides Camden National a unique opportunity to strengthen its competitive position and build market share in Northern New England in a high-growth, contiguous market. We have filed all the bank regulatory applications for approvals required for the merger, which we expect to be completed in the Q1 of 2025.

Both Camden National and Northway teams are highly engaged in planning the integration of our companies and preparing for a seamless transition for customers and employees. As we dive deep into our preparation, we remain convinced that this merger represents a rare opportunity to combine two high-quality and culturally aligned franchises to build a premier Northern New England bank. In the midst of this significant transaction, we produced strong operating results during the Q3. Earlier this morning, we reported net income of $13.1 million or $0.90 diluted earnings per share for the Q3 of 2024, an increase of 9% and 11% respectively over the Q2 of 2024.

Excluding the merger and acquisition costs incurred through September 30th, 2024, on a non-GAAP basis, net income for the Q3 of 2024 was $13.6 million, and EPS was $0.94, an increase of 14% and 16% respectively over the Q2 of 2024. Our strong Q3 financial performance is highlighted by a 10 basis point increase in net interest margin over the previous quarter, disciplined expense management with continued franchise investment, and strong asset quality, which are the hallmarks of Camden National. These results demonstrate the strength of our franchise, and we believe they also represent critical momentum and improving operating environment as short-term interest rates are forecasted to drive lower over the coming quarters. In September, our team swiftly adjusted our rate book and developed proactive strategies to preserve and enhance our solid customer base during the downward-changing rate environment.

We proactively responded to the Fed funds rate cut in mid-September through both front and back book pricing changes. Our strong customer relationships continue to serve us well, with a 1% increase in deposits compared to the previous quarter. We continue to see a strong commercial pipeline and welcome two strategic commercial lenders in New Hampshire and one in the Lewiston-Auburn market to expand our presence in these high-growth markets. As we actively seek new commercial customers, we remain committed to our prudent customer due diligence and a disciplined pricing strategy to maintain our risk management approach. We continue to make strategic investments in our business while managing operating expenses and driving positive operating leverage. During the Q3 of 2024, our revenues increased 5% over the previous quarter, and non-interest expense increased modestly by 3% when excluding M&A expenses.

Non-interest income for the Q3 increased 7% over the previous quarter, and we benefited from seasonal mortgage activity, lower interest rates, which drove increased activity and greater saleable business into the secondary markets. Our asset quality remained strong as of September 30th. We continue to monitor our loan portfolio actively, and to date, we have not seen any signs of credit deterioration across any pockets or industries. Our lending and credit teams work to proactively manage any loan at the first sign of any challenge. This proactive approach has served and continues to serve us and our customers well. On September 30th, 2024, past due loans were just three basis points of total loans, down from five basis points the last quarter, and non-performing loans were 17 basis points of loans, down from 23 basis points at June 30th.

While asset quality remained strong across the board, we maintained an allowance for losses of 0.86% of total loans at September 30th, 2024, consistent with the previous quarter. We continue to believe this reserve level is appropriate as we balance current macroeconomic conditions, the forecasted path ahead, and our current asset quality metrics. The strategic transformation of our account opening process is on track and scheduled for a year-end launch. We have successfully completed development and are in the midst of full end-to-end testing. This will allow complete account opening and funding within minutes from mobile and online devices and is a first step towards enhancing our deposit account opening process across all channels. Our customers will be able to experience the convenience of our digital experience with the security and ease of human-backed service excellence.

As I laid out, we continue to lean into our strengths, including exceptional talent, execution capabilities, and risk management expertise. This allows us to serve our customers effectively against a complex backdrop and deliver key results for our shareholders. Looking ahead, we are very excited about the future opportunities as we merge with Northway to enhance our market position and increase our scale and capabilities. We are confident the combined entity will provide meaningful value creation for shareholders and strong pro forma profitability. Our expanded customer base will benefit from our strategic technology investments, business diversification, and larger balance sheet, which we believe will provide a more robust platform for future earnings growth. We look forward to providing you with additional details as we move through the regulatory approval process and closing. Now, Mike will provide more details about our financial results.

Michael Archer (EVP and CFO)

Thank you, Simon, and good afternoon, everyone. This morning, we reported an increase in net income for the Q3 of 9% over last quarter. Adjusting for merger-related costs, we reported an increase in core net income for the Q3 of 14% over the Q2. Our core financial results continue to demonstrate the positive momentum we are building through our actions to drive net interest margin improvement over the past several quarters, as well as our continued focus on asset quality and expense management. Through these results, many of our key financial metrics improved over last quarter. Of particular note, our core return on average assets for the Q3 was 95 basis points. Our core return on average tangible equity was 12.94%, and our efficiency ratio was 62.39%. Additionally, our tangible book value per share grew 5% in the Q3.

Certainly, one of the highlights for the Q3 of 2024 was our net interest margin expansion of 10 basis points to 2.46% on a linked quarter basis, beating our guidance provided on last quarter's call. Net interest margin expansion for the Q3 drove net interest income growth of 4% over the last quarter, highlighted by an expanding interest-earning asset yield of 11 basis points and flat funding costs, maintaining at 2.35% between quarters. Non-interest income for the Q3 of 2024 totaled $11.4 million, an increase of 7% over the Q2 of this year. We saw strong residential mortgage activity in the Q3 throughout the summer months in our markets, and we closed the Q3 with a strong residential mortgage pipeline.

We continue to sell our eligible residential mortgage production, and for the Q3, we sold 64% of our residential mortgage production, compared to 52% in the Q2. Also, contributing to the increase on a linked quarter basis was the increase in debit card income and back-to-back loan swap fees of $100,000 and $133,000, respectively. Non-interest expenses for the Q3 of 2024 totaled $28.9 million, which included costs of $727,000 associated with the recently announced planned merger with Northway Financial. As we continue to work our way through the anticipated acquisition and conversion date in the Q1 of 2025, we expect most of the estimated one-time deal costs to be incurred over the next two quarters. Excluding these merger-related costs, non-interest expenses for the Q3 were $28.2 million and increased 3% over the Q2 of 2024 as we continue to invest into our franchise.

Strong revenue growth of 5% on a linked quarter basis drove an improvement in our quarterly efficiency ratio to 62.39% for the Q3, compared to 63.53% for the Q2 of 2024. We estimate operating expenses for the Q4 before any merger-related costs will be in line with recent quarters. Now, shifting to the balance sheet, total assets of $5.7 billion as of September 30th, 2024, were relatively unchanged on a linked quarter basis. Loan balances as of September 30th were $4.1 billion, a decrease of 1% compared to the Q2 of 2024, while investment balances increased 2% as lower interest rates provided relief to investment valuations and repurchased $26 million of securities.

Total deposits as of September 30th, 2024, were $4.6 billion, an increase of 1% compared to the Q2 as we saw the lift from normal seasonal inflows and continued success within our high-yield savings deposit product, which increased another 8% this quarter and resulted in savings growth year-to-date of 16%. The credit quality of our loan portfolio continues to be very strong, supported by excellent credit quality metrics. On a linked quarter basis, we saw several key quality metrics improve at September 30th, including non-performing loans decreasing 6 basis points to 17 basis points of total loans, annualized quarterly net charge-off decreasing 1 basis point to 3 basis points of average loans, and past due loans decreasing 2 basis points to 3 basis points of total loans.

We maintained a loan loss reserve coverage ratio of 86 basis points of total loans on September 30th, consistent with the past two quarters. This reserve level continues to reflect our view on the strength of our loan portfolio, but also provides sufficient reserves for the risks that continue to persist at a macro level. During the Q3, we saw our capital levels grow at healthy levels across the board, highlighted by our total risk-based capital ratio expansion of 39 basis points to 14.85% and our TCE ratio increasing 35 basis points to 7.69% at September 30th. This concludes our comments. We'll now open the call up for questions.

Operator (participant)

Thank you, Mike. We'll now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Steve Moss with Raymond James. Please go ahead. Your line is open.

Stephen Moss (Analyst)

Good afternoon. Maybe just starting here on the margin here, curious with regard to the rate cuts we just had in September and probably more to come. What are you guys seeing for deposit pricing here and kind of how we think about that translating to the margin?

Simon Griffiths (President and CEO)

Hey, Steve. Thanks for the question. I think broadly, we see the back end of the year in line with the October net interest margin. We continue to be very, very disciplined in our pricing and demonstrated that over the last quarter when we saw the two rate cuts. We have two rate cuts in the ballpark for the back end of the year, which is pretty in line with expectations, and we'll continue to manage that very carefully as we look out towards the next couple of months.

Stephen Moss (Analyst)

Okay. Got it. And in terms of just kind of the debt restructuring that occurred here or the pay down of the BTFP and the swap use, that was a, I'm assuming, received variable pay fix? Or maybe I got my things reversed. But just talk about the structure there and kind of how that impacted your asset liability mix.

Michael Archer (EVP and CFO)

Sure. Yeah. Hey, Steve. So you're spot on. We did pay down the full remaining $170 million of the BTFP during the quarter. Essentially, what we ended up doing is we went out and did some swaps there for the FHLB, essentially, and we're able to lower our rate from, I believe it was 476 down to a weighted, I think it was 409. So immediately picking up positive carry there, but also to your point, from an interest rate risk perspective, our risk continues to be for rate higher for longer, certainly rates up. And so when we did that, we also spread that out. We did a little bit longer there, went out 12 and 18 months, also knowing that the BTFP was going to fall off for us in January 2025.

Tried to be proactive there, position ourselves a little bit better for just the risk that our balance sheet presents.

Stephen Moss (Analyst)

Okay, so between that, the positive trends you guys have seen just on loan yield improving nicely here the last couple of quarters, is it a similar pace of expansion for the upcoming quarter, or do you guys stabilize in the September month margin? Just kind of curious how to think about that.

Michael Archer (EVP and CFO)

I mean, for our margin outlook for next quarter, Steve, we're kind of probably more in the, call it three to five or two to five basis points, somewhere in the neighborhood, right around 250 is plus 250 plus or minus is what we're thinking. I think we're certainly watching just in terms of what happens with the overall curve. Certainly, the more recent rebound there on the mid and long end of the curve was certainly helpful. But I think that's the other area, of course, is we expect the rates on the short end to be down with the Fed funds cut. But I think it does matter as well, of course, on the mid and long end and how that reacts.

Stephen Moss (Analyst)

Okay. Great. And then in terms of hiring here, Simon, you mentioned, I think, two hires during the quarter, if I heard you correctly. Just curious, what kind of book of business are they bringing and kind of how you're thinking about any additional hires?

Simon Griffiths (President and CEO)

Yeah. I think as we've discussed on previous calls, we continue to see really a nice opportunity on the southern end of our market and continue to invest in those geographies. We've got, as I say, some nice momentum there. We have some nice momentum on the New Hampshire market as well and just really continue to see opportunities to push into those markets. We see nice opportunities, certainly, in the multi-family housing area. We see strong C&I demand, particularly in the equipment space right now. But really, it just continues to be, Steve, through that lens of quality. We definitely aren't sort of chasing deals. We're looking for the right deal, right relationship, and really pushing into those deep long-term strategic relationships that are long-term value for the client and long-term value to Camden National.

Stephen Moss (Analyst)

Okay. Got it. I mean, maybe just thinking about the investments you're making and the overall underlying business momentum you guys have, kind of think maybe we're on pace for maybe, let's call it, 1%-2% loan growth this year, but maybe stepping up kind of into next year?

Simon Griffiths (President and CEO)

Yeah. I think we're still seeing next year, Steve, 1%-3% loan growth, excluding Northway impact. So maybe a slight pickup. I mean, I think it's going to depend a lot on the rate environment. If the rate environment comes down, obviously, materially, we'll certainly, I think, likely see a pickup in the resi volumes. Certainly, I think it's quite competitive out there right now, and I think there's that caution, particularly with the election cycle coming up, and I think folks sitting on the sidelines. But certainly, I think it could be a slight tick up from where we are right now, but still modest loan growth overall, as I say, excluding Northway.

Stephen Moss (Analyst)

Okay. Great. I really appreciate the caller, and I'll step back in the queue here.

Simon Griffiths (President and CEO)

Thanks, Steve.

Operator (participant)

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

Damon DelMonte (Analyst)

Hey, good afternoon, guys. Thanks for taking my questions. Just to kind of keep the discussion on loans here. During the quarter, it looks like C&I loans had come down a decent amount during the quarter. Was just some larger payoffs that happened there, or what kind of was driving that?

Michael Archer (EVP and CFO)

Yeah. Hey, Damon. This is Mike. You're spot on. Just a few paydowns, primarily some of the syndication loans, just as rates came down, and a few of those just refinanced. But nothing overall from a trend perspective, just a few larger loans there.

Damon DelMonte (Analyst)

Got it. And I think the commentary on the income in mortgage banking in particular was that the residential mortgage loan pipelines remain strong kind of at quarter end. So I know there's obviously seasonal factors with weather and whatnot within your footprint. So can we expect another strong quarter out of mortgage banking to close out the year, or would you not expect it to be as strong as this quarter?

Simon Griffiths (President and CEO)

Yeah. We're definitely seeing strong pipelines right now. We've got about $72 million in the resi pipeline and about 124 approved loans in the commercial pipeline. So we certainly see some nice momentum through year-end. And yeah, I think with certainly the rates coming down, potentially another 50 basis points, I think you could certainly start to see that picking up into next year. But as I say, contingent probably on the rate environment for the degree of the momentum that we're seeing.

Damon DelMonte (Analyst)

Got it. Okay. Great. And then lastly, I think, Mike, you may have touched on the expenses, but if you kind of take out the one-time merger charges, it kind of puts you in the $28.2 million range. Is that a decent starting point to kind of model going forward to close out 2024 and kind of modest growth x the Northway deal in 2025?

Michael Archer (EVP and CFO)

Yeah. I think that's fair, Damon. I think we'll be right in that 28-ish kind of neighborhood. 28.2 is a pretty good spot right in the middle. Could be a tick higher or closer to 28, but it's a pretty good spot.

Damon DelMonte (Analyst)

Yeah. And I'll just.

Stephen Moss (Analyst)

Great.

Damon DelMonte (Analyst)

Would emphasize, Damon, that.

Simon Griffiths (President and CEO)

We continue to invest, and I think that's the nice part of the story here is we really are self-funding a lot of these investments, so I talked earlier with Steve's question relative to the investment in the commercial and putting in some commercial folk down in the southern end of our market, and that's going to be really the focus. We've got this really exciting release of this online account opening capability. Again, we're really putting those investments into our customer experience, into great people, and really continuing to build out the franchise, but managing the expenses in a really disciplined way.

Damon DelMonte (Analyst)

Excellent. Appreciate that color. That's all that I had. Thank you.

Operator (participant)

Our next question comes from David Marochnik with Stephens. Please go ahead. Your line is open.

Speaker 6

Good afternoon. This is David Marochnik. I'm from Matt Breese. To start, I would just love to hear some thoughts and expectations around your loan and deposit betas kind of into 2025 through 2025 and whether you expect those figures to be fairly similar to what they were on the way up?

Michael Archer (EVP and CFO)

Yeah. I can take that one, David. I mean, I would just say for 2025 in particular, we're still working through some budgets. I mean, the reality is our betas are certainly going to depend on what the Fed does, maybe to state the obvious. We are liability sensitive. Our expectation is rates come down, margin will expand. I can assure you that's how we're thinking about it internally, and certainly, we'll think about it that way as well from a 2025 budget perspective. I think more near-term, we do expect some Fed cuts here in the coming weeks and months, and we expect to see funding costs pull down and start to believe we'll continue to see a level of margin expansion for the Q4 as well.

Speaker 6

Great. And then just staying on that, can you talk a little bit about, I guess, since the first 50 basis points cut, maybe actions you guys have taken so far, how customers responded, and where you were successful? I know you kind of mentioned some adjustments in September and just if you had any more color there.

Simon Griffiths (President and CEO)

Yeah. I mean, I think we've certainly taken some actions, and I would just, I'm sure Michael built on this, but would just say I think we're very disciplined, very thoughtful about the client relationships. We saw a nice build in deposits in the Q3. Obviously, some of that's underlying seasonality, but we're going to continue to obviously manage that very proactively and continue to be disciplined in terms of our pricing, but also putting relationships of our customers front and center.

Michael Archer (EVP and CFO)

Yeah. I would just add, I mean, ultimately, we price, I think, right around 30% of our non-maturity deposit base. And we went in, I want to say, on a full 50 basis points. I mean, overall, we monitored those customers. We've seen the balances grow into October, so we haven't seen any significant runoff. I think to Simon's point, as we move forward, we'll certainly be thoughtful about that. And at the end of the day, we want to maintain those core customer relationships, but just while managing funding costs down.

Speaker 6

Great. I appreciate that. And last one for me is just on the securities. Can you talk about kind of securities maturities coming up and maybe where you want that securities-to-assets ratio to kind of sit at or move to in the future?

Michael Archer (EVP and CFO)

Yeah. We have about $10 million or so of monthly runoff on the investment portfolio. Ideally, we would be putting it to loan growth. As we mentioned, there's some timing items, and we did a small security purchase in the Q3 for the first time in a while, really just trying to put some assets to work there to squeak out a little bit of yield. Same thing, I would just say to that point is keeping the weighted average life and the duration of what we purchased pretty short to give us some flexibility as we move into the future as well. I think in terms of investment-to-assets ratio, historically, we've been in the 20-25%. I would say we're probably closer to the 20-ish% now, and we feel pretty good in that neighborhood. And we'll continue to monitor.

We certainly leverage our investment portfolio for liquidity purposes, and again, if commercial loan growth and other things pick up, we could see ourselves maybe going a tick down there, but certainly feel good at that level.

Speaker 6

Great. I really appreciate all the color. I'll step back.

Michael Archer (EVP and CFO)

Thanks, David.

Simon Griffiths (President and CEO)

Thanks, David.

Operator (participant)

Thank you. As we have no further questions, this concludes our question and answer session. I'd like to turn the conference back over to Simon Griffiths for any closing remarks.

Simon Griffiths (President and CEO)

Thank you, Lydia. 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.

Operator (participant)

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