Camden National - Q4 2023

Transcript

Operator (participant)

Good day, and welcome to Camden National Corporation's fourth quarter 2023 earnings conference call. My name is Cole, and I'll be the 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 at any time you require operator assistance, 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 forward-looking statements. Additional information concerning factors that could cause actual results to differ, supplemental earnings materials, the company's 2022 annual report on Form 10-K and other filings from 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. Today's presenters are Simon Griffiths, 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 this conference over to Simon Griffiths. Griffiths, please go ahead.

Simon Griffiths (President and CEO)

Good afternoon. Thank you, Cole, and welcome to Camden National Corporation's fourth quarter 2023 earnings call. I'd like to start by introducing myself. I joined Camden National Corporation last November and took over as the President and Chief Executive Officer on January first, and it's an absolute pleasure and honor to join the company. Since joining, I've been impressed with the strength of the management team and their focus on delivering an outstanding experience for our customers. As I meet with team members and their customers, I've come to realize how deeply rooted Camden National is in the communities we serve, and my first months with the company have confirmed for me the pivotal role we play.

From large commercial customers to small business owners, there is strong momentum for these businesses to grow, and our teammates can deliver the products and services and have the customer relationships to guide them along the way. I'm also impressed by the robust technology advancements the company has made. The team has been driving innovation and utilizing sophisticated tools to automate process, leverage data, and deliver digital products to aid our customers and our team members. Earlier this morning, we reported net income of $8.5 million, or $0.58 earnings per share, diluted share for the fourth quarter of 2023. This included the impact of repositioning a portion of our investment portfolio, which generated a $5 million pre-tax loss on the sale of securities.

Excluding that impact, our adjusted non-GAAP earnings for the quarter would have been $12.4 million, or $0.85 per diluted share. The company continues to look for opportunities to adjust and optimize the balance sheet, and we expect the changes we made in 2023 will provide future benefits to our net interest margin, earnings, and capital. The strength of our balance sheet continues to position us well for growth and to capitalize on market opportunities as the broader market shows signs of normalization. Our capital position remains strong and improving, highlighted by an increase in the tangible common equity ratio to 7.11% at December 31st, 2023, compared to 6.47% at September 30, 2023. We continue to see solid demand for loans in the communities that we serve, and our pipeline remains steady.

We are excited by the addition of a new director of commercial banking in New Hampshire, with more than 22 years of banking experience. We are already seeing positive momentum in the market and will continue to look at opportunities to strengthen our team and expand our market presence. We remain focused on full relationship banking to strengthen customer loyalty, leveraging our robust balance sheet and actively managing new loan yields tightly, given the decrease in the 10-year Treasury yield over recent months. Personally, I'm invigorated by this opportunity to work with a talented and dedicated team to make an impact and build on their many successes. The swift actions taken throughout the year, including steps to stabilize our net interest margin, fortify our balance sheet, and position the company for future earnings capacity to drive long-term shareholder value.

These actions have positioned us well for the future and will enable us to capitalize on opportunities within our market. Our priorities for 2024 will be to continue to manage the business with a focus on actions that prioritize long-term shareholder value while having a prudent offense mindset. We have many exciting capabilities and delivery roadmap across our technology, digital, data analytics, and AI roadmap that will continue to drive growth. The team remains laser-focused on a long-term strategic plan to drive stability, profitability, and growth with strong expense discipline, complemented by a talented team. I'm confident in our ability to adapt to the changing environment and economic landscape while continuing to provide long-term shareholder value. Now I'm going to turn it over to Mike to provide some additional insights into our financial performance for the quarter.

Mike Archer (EVP and CFO)

Thank you, Simon, and good afternoon, everyone. This morning, we reported net income for the fourth quarter and the annual financial results for the year ended 2023. Like many others across the banking industry, our annual financial results for the year were impacted by the macroeconomic conditions and other challenges faced during the year, which included higher short-term rates and an inverted yield curve compounded by several well-known larger regional bank failures, bringing deposits and related pricing into further focus across the banking industry. Our response to these market conditions and events included prioritizing deposits and liquidity, taking steps to help optimize our net interest margin, and maintaining our strong asset quality. We believe our capital reserve level and liquidity position us well for future growth and shareholder value creation. These priorities continued throughout the fourth quarter and remain key priorities today. Net income, net income for the year ended December 31st, 2023, was $43.4 million, and diluted EPS totaled $2.97. Each a decrease of 29% compared to 2022 annual financial results.

Included within these results are pre-tax investment losses of $10.3 million, as we sold lower yielding investments in the third and fourth quarters this year to reposition our balance sheet, with a focus on driving future earnings and improved profitability, as well as a $1.8 million write-off of a Signature Bank bond. Adjusting for these items, our annual earnings on a non-GAAP basis for 2023 was $53 million and a diluted EPS on a non-GAAP basis of $3.63. Decreases of 15% and 14% respectively, compared to 2022. Net income for the fourth quarter of 2023 was $8.5 million, and diluted EPS was $0.58. Each a decrease of 13% compared to the third quarter this year.

As noted in my earlier comments, we sold investments at a loss in the third and fourth quarters, which affected our financial results for each quarter. Adjusting for these investment losses, our earnings on a non-GAAP basis for the fourth quarter were $12.4 million, and diluted EPS was $0.85, each a decrease of 11% on a linked quarter basis. Highlights for our fourth quarter operating results included seeing signs of our net interest margin stabilizing, improving capital ratios, and finishing the year with excellent asset quality. Our net interest margin for the fourth quarter was 2.40%, which was up 1 basis point from last quarter. We continue to redeploy our investment cash flows primarily to fund loan originations in order to improve overall asset yields, and anticipate we'll continue to do so.

We believe this asset remixing should help continue to stabilize net interest margin through the winter months within our markets, as we generally see a level of seasonal deposit outflows and as we continue to see pressures on funding costs from deposit mix shift. The strength of our liquidity position affords us the flexibility to continue to leverage this strategy. In order to deploy all the proceeds from the sale of securities in the fourth quarter, we also reinvested a portion of the proceeds into new securities that yielded just above 6% and that were purchased at a slight discount. As our investment portfolio continues to produce cash flow, we expect we'll continue to leverage this cash flow to support loan fundings.

Our book and regulatory capital ratio has improved across the board in the fourth quarter, and we finished the year with a TCE ratio of 7.11%, up from 6.47% at September 30th, 2023, and 6.37% at December 31st, 2022. Our capital position continues to be one of our strengths, and it positions us well to capitalize on market growth opportunities. Our asset quality as of December 31st, 2023, remained very strong by all measures. At year-end, our non-performing assets to total assets were 0.13%, our past due loans were 0.12% of total loans, and net charge-offs for the fourth quarter were $358,000 or 0.04% of average loans on an annualized basis.

The overall health of our customer base continues to be very positive, highlighted by criticized and classified assets of 1.13% of total loans at year-end, which is up from 1.05% for the third quarter, but down from 1.67% at December 31st, 2022. We continue to monitor our loan portfolio proactively to identify any early signs of stress, and to date, we're not seeing any systemic trends or material concerns. The increase in provision expense between the third and fourth quarters was $1.1 million and contributed to the decrease in our linked quarter earnings on a GAAP and non-GAAP adjusted basis. In the third quarter, we reported negative provision expense or credit, primarily driven by a decrease in loan balances of 1% during the third quarter.

Whereas in the fourth quarter, we provisioned $569,000, driven by loan growth of 1%. Like last quarter, we maintained our loan loss reserve levels at 0.90% of total loans, as we take into account our overall asset quality and weigh the macroeconomic forecast. Non-interest income for the fourth quarter totaled $6 million and was higher than reported for the third quarter by 18%, primarily driven by a few non-core items, including mortgage banking, fair value adjustments, and a smaller loss on our sale of investment securities compared to the third quarter.

Adjusting for these items, non-interest income for the fourth quarter would have been $10.6 million, which included the benefit of our annual Visa incentive bonus of $400,000 in the fourth quarter, compared to $10.5 million of fee income for the third quarter. We continue to estimate that our normal recurring non-interest income will be $9.5 million-$10 million quarterly in the near term. Non-interest expense for the fourth quarter was $27.8 million, an increase of $1.6 million, or 6% on a linked quarter basis. As anticipated, operating costs increased over the last quarter, given various factors, including timing of incentive accrual true-ups, senior leader transition costs, and normal seasonal costs during the winter months.

Higher non-interest expense for the fourth quarter translated into a non-GAAP efficiency ratio of 63.48% for the quarter. As we look forward, we anticipate, we anticipate non-interest expenses will tick higher for the first quarter of 2024 and range between $28 million and $28.5 million, as incentive accruals reset to target levels, and we continue to work through transition costs. We have taken and continue to take steps to manage costs, and we are focused on managing our efficiency ratio lower throughout 2024. The last item I'll touch on is our effective tax rate. We saw our effective tax rate for 2023 decrease to 19.4%, compared to 20.3% for 2022.

In the fourth quarter, we participated in a renewable solar energy project, excuse me, and as a result, we are currently estimating an effective tax rate for 2024 of 18.6%. This concludes our comments. We'll now open the call up for questions.

Operator (participant)

If you would like to queue for a question, please press star, followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to join the queue for a question, please press star one. We'll pause here briefly as questions are registered. Our first question is from Steve Moss with Raymond James. Your line is now open.

Steve Moss (Managing Director)

Good afternoon, and Simon, welcome aboard.

Simon Griffiths (President and CEO)

Thanks, Steve.

Steve Moss (Managing Director)

You're welcome. Maybe just starting on loan growth here. Just curious, you know, how you guys are feeling about the loan pipeline, you know, especially on the commercial side these days, and you know, how loan pricing is.

Simon Griffiths (President and CEO)

Yeah, thanks for the question, Steve. You know, I think we anticipate throughout the year low single-digit loan growth for the first quarter. We continue to see, you know, solid resilience at the client level across our sectors. And we're certainly, you know, obviously gonna look at the interest rate environment as a key driver of expectations as we move throughout the year. But overall, I think we see continue to see solid demand and, you know, continue to leverage our balance sheet to support our communities and deepen customer relationships, and I think see a positive outlook, certainly in the particularly as the year passes through.

Steve Moss (Managing Director)

Okay, that's helpful. And just maybe in terms of, you know, the Fed probably gonna cut rates this year. Just curious, how you guys are thinking about the impact on the margin with rate cuts. And, you know, I realize, you know, rate cuts might be a couple of months out, just how you're thinking about the margin here, near term, given, you know, do you see obviously some deposit pricing pressures in the sector?

Mike Archer (EVP and CFO)

Sure, I can take that one, Steve. I'd say on the margin on the near term, you know, certainly, you know, we're, we're seeing it at— we're at 2.40 right now, end of the quarter. I think as we think about the next, you know, three to six months, I would say that we're thinking about margin being flattish, you know, plus or minus a few basis points overall. Certainly in the first quarter, we generally have, you know, the seasonal outflows from a deposit perspective that are impactful to us. We're also seeing some asset remix, remix continue— excuse me, deposit remix continue. So we're, you know, we're certainly focused on that. We've also done some things on the funding side.

Really trying to optimize where we can to the extent that we have some higher, higher cost, you know, less of a relationship, if you will, on the deposit side, really trying to find alternate funding to optimize and think that should certainly help out as well in the first quarter. But, you know, long story short is, I think for the first half, you know, we'll be pretty flattish. We're envisioning that when rates cuts do happen, that we will see a benefit. We do think that it, it'll certainly take some time to see that come through on the funding side.

We want to be able to push, you know, certainly rates and deposit costs lower, but, you know, also recognizing that deposits, particularly in our market, and I'm sure others, it's very competitive and, you know, we'll recognize that. But, you know, that being said, I think in the second half, we do anticipate to see some level of margin expansion from there.

Steve Moss (Managing Director)

Okay, great. Appreciate that color. And just one on expenses here. I think the guide for the first quarter, Mike, you mentioned, was $28 million-$28.5 million with some transition costs. Just kind of curious, you know, does it back down a little bit from there for the rest of the year? Or should we think about maybe there's some ongoing investments, and we stay, you know, closer to a $28 million range for the upcoming year quarter?

Mike Archer (EVP and CFO)

Yeah, I think realistically, at least as of right now, we're probably at 28%-28.5%. I do think we'll probably on a run rate basis be closer to 28% normal, you know, on the norm there, Steve. You know, we like, as I think Simon spoke to in some of his comments, keep in mind, we certainly are focused on the expenses and being prudent there. And, you know, from an efficiency ratio perspective, we keep a very watchful eye on that and always have historically, and we'll continue to do so. But we're trying to balance the management of expenses short term with also making sure that we're continuing to reinvest for the long term. So we're trying to strike that right balance.

Simon Griffiths (President and CEO)

Yeah. I'll just add, Steve, you know, I think that's, that's spot on. I think it's that short-term focus, and we have very specific actions, you know, managing, obviously, our personnel staffing levels, and other incremental investments. And I've been really impressed with the team's work on automation. You know, we've got some really great work on the data side and other areas that I think are allowing us to provide, you know, identify opportunities for process improvement and efficiencies. And we just actually had our 100th process automation, and that's automated over 1 million transactions. And just one example, Steve, of the kind of work the team's doing that I think can drive long-term productivity and efficiency in the organization.

So, I think that's obviously a near-term focus, but leveraging some of that technology is an opportunity for us.

Mike Archer (EVP and CFO)

Okay, great. I appreciate all the color. Thank you very much, guys.

Simon Griffiths (President and CEO)

Thanks, Steve.

Operator (participant)

Our next question is from Damon DelMonte with KBW. Your line is now open.

Damon DelMonte (Managing Director)

Hey, good afternoon, guys. Hope everybody's doing well, and welcome aboard, Simon. Just wanted to follow up on the commentary around the margin. Mike, appreciate the color that you gave. Just wondering, do you anticipate doing any additional restructurings here in the early part of 2024, or do you think those are done?

Mike Archer (EVP and CFO)

I would say nothing imminent. I would just say to that, though, Damon, we're constantly evaluating, you know, opportunities to optimize if it, you know, makes sense and meet our, you know, ultimate financial parameters.

Damon DelMonte (Managing Director)

Gotcha. Okay. With regards to the outlook for loan growth, I think you had said low single digit for the year. You know, kind of how are the commercial pipelines shaping up right now, and then how is that kind of split between C&I and CRE? Has there been any, you know, increase in demand on the C&I side, or is it more real estate driven?

Simon Griffiths (President and CEO)

I think we're seeing some nice strength from the C&I and the real estate side. And certainly as rates start to come down, I think the resi side as well is gonna pick up, particularly, you know, probably in the spring, season. But we're seeing a nice, nice demand from our clients, and, you know, that's across the footprint as well. You know, that's certainly across the Midcoast and then obviously into some of the southern areas, which I think is an area of, focus for us. So, you know, there definitely is the demand out there, and I think that's a strategic, strength that we have with the balance sheet and the position, to continue to lend. And, you know, I think that's, something we'll be very focused on this year.

Damon DelMonte (Managing Director)

Okay, great. Thank you for that. And then just lastly, if I could sneak one more in here on, on the outlook for the provision. You know, as you kind of look at your reserve level, you know, it's pretty flat over, over the course of 2023. Do you envision kind of keeping that flat and, you know, kind of low, low charge-offs and then the provision just basically, you know, supporting the, the growth that you get to keep that, that reserve level flat?

Mike Archer (EVP and CFO)

Yeah, I think that's fair, Damon. I think we right now feel good at the 90 basis points and considering our view on the macro outlook. I do think to the extent that you know, things start to shake out, and it becomes a clearer light on which you know, the path forward from a macro position, and call it normalization, you know, there is certainly opportunity over time to potentially release reserves. I think it was before we adopted the CECL accounting method, or when we did, we were around 80, 82 basis points. So I do think that we have some opportunity there. Of course, it will depend on macro conditions and just overall credit quality metrics, but you know, right now, things certainly look good.

Damon DelMonte (Managing Director)

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

Mike Archer (EVP and CFO)

Thanks, Damon.

Operator (participant)

Our next question is from Matthew Breese with Stephens Inc. Your line is now open.

Matt Breese (Managing Director of Equity Research)

Hey, good afternoon.

Mike Archer (EVP and CFO)

Matt-

Matt Breese (Managing Director of Equity Research)

A few questions for me. I first wanted to start with. You know, Mike, you had mentioned that the tax rate this year, it sounds like it's gonna be a step down in the 18%, kind of 18% range. I'm assuming that lower range is partly because of the tax credit investments. You know, so one, is that in fact correct? Two, from what I've seen historically, when folks invest in the tax credits, there's usually some sort of, you know, expense or contra income item that flows through fees. If that's the case, could you just enlighten us as to what that is and how much, and is that included in the overall guidance you provided?

Mike Archer (EVP and CFO)

Sure. Great question, Matt. So we anticipate our effective rate to be right around 18.7%. In part, the rationale, well, before I get to the renewable energy project there, Matt, is just the makeup of our revenue sources, if you will, just the changing over time. As our revenues come down, some of our tax-exempt income is just a larger percentage, and in part, that's driving a lower tax rate right now. As we think about the renewable energy project, solar project, that from an accounting perspective, we will account for that all within the income tax line item. So we do not anticipate that running through any of the operating expenses. I think the new accounting method out, the proportional amortization method that we're now allowed to use for those.

So, I think it makes it ultimately a little bit cleaner from an overall income statement perspective, and that's our intention, to run it through the income tax expense.

Matt Breese (Managing Director of Equity Research)

Yeah, completely agree with you there. The second thing I wanted to touch on, and I'm probably not gonna get an exact answer here, but would love your thoughts. You know, as I think about what's unfolded for Camden during this higher rate environment, you've done pretty well on the deposit front with a, you know, less than 1.90 all-in cost deposits. But the thing that's held up the margin is loan yields have been kind of slow to reprice, and there's a good chunk of loans that are in lower-yielding bus- buckets, such as resi. And so as we look at the entirety of the loan portfolio, you know, how much is yielding on the lower end of the spectrum, call it, you know, 4% or below?

As you think about that bucket and repaying and flowing to higher yielding on maturity, you know, how long is that gonna take? What is the duration of some of the lower-yielding paper?

Mike Archer (EVP and CFO)

It's a great, it's a great question, Matt. I don't have probably a direct answer for you there, but I do think, I mean, we do have certainly a good chunk of our residential portfolio and some on the commercial side, certainly, to your point, that during, I think it was 2021 and 2022 in particular, we were adding quite a, you know, quite a bit onto the resi portfolio and onto our book, at coupons in the, you know, 3-3.5, call it. I do think it'll take some time, certainly for those from those coupons to, you know, make their way off or just, you know, normal cash flow off.

So we will see a bit of compression there, I do think, from the long, you know, long term in terms of those asset yields on the resi side, you know, picking up. We are, you know, in terms of the residential mortgages, we are trying to be very prudent in terms of what we put on now, you know, in terms of rates. That said, rates, as you know, with just a 10-year dropping recently, we're seeing a lot of competitive pricing in the low sixes. Right now, we're not, you know, we're not there from a pricing perspective, on the resi side. But certainly something of an overall pressure and market perspective, that is something that we're dealing with at the moment.

I don't know if I answered your question there directly, Matt, but I don't have the duration piece right in front of me at the moment.

Matt Breese (Managing Director of Equity Research)

Well, I'll try it another way. You know, there is some optimism there as we get to the back half of the year and rate cuts, and assuming that continues into 2025, you know, when do you think, you know, Camden can get back to earning an above 1% ROA that we're all kind of used to?

Mike Archer (EVP and CFO)

Yeah, I think it's. I think it's. You know, we anticipate the back half of the year, we're going to see some level of margin expansion. Even, and, and I think I made a comment to this earlier, you know, set Fed rate cuts aside. We have $100 million of derivatives today on the commercial real estate book that will be falling off. That has been a drag. We anticipate that alone will be somewhere in the neighborhood of 6-8 basis points to margin pickup. Then you know, couple that with just our CD repricing. I think ninety, you know, over 90% of our book, the CDs reprices over the next year, so we'll get some benefit there as those continue to reprice, and certainly, we anticipate those repricing down.

Then just coupled with the continued investment and, you know, re-cash flow going into higher asset yields and, and really leveraging our investment book as well. So we do anticipate our margin picking up. So probably when we think about an ROA, you know, north of 1%, we're probably looking into next year, realistically. But I think over the course of the year, we're making strides in the right direction to get back there.

Matt Breese (Managing Director of Equity Research)

Got it. Okay. Simon, just a couple more for you, if you don't mind. You know, you know, first of all, welcome. As you've kind of spent time with all the various business lines, just curious, where do you see the greatest potential for change within Camden? And what opportunities or geographies are there that Camden is currently not involved in today, but could be soon?

Simon Griffiths (President and CEO)

Yeah, thanks for the question, Matt. Really, appreciate it. You know, I think... Look, I think from a growth perspective, you know, I think about it in a couple of ways. I think, you know, the existing footprint offers continued opportunities to deepen our relationships in the Mid-Coast and Downeast markets. We have obviously high share in those markets, but I think great opportunities to continue to strengthen. I see particular opportunities around business banking. I think the wealth business as well is a strong business for us, and I think we're looking to continue that strength. I think there's obviously new other markets as well.

We have less market share, lower market share in and the southern end, Portland, Portsmouth markets and some of the markets on the southern end, I think offer great opportunities for us to continue to develop relationships. We have a strong commercial franchise, as you know, that operates in those markets, and, you know, I think we can continue to build out there. And again, along the, you know, the, the commercial strength that we have and the relationships we have and look to deepen those relationships, and particularly on the wealth side. Home equity is another business that interests us and, you know, I think is a, is a nice component of our, of our residential business, and I think that's another area we're, we're looking at. But, you know, I'm excited by the footprint.

It's, you know, it's got some nice, you know, opportunities to continue to grow. And, you know, one thing I've just been struck with in my meeting with colleagues and customers is just the tremendous partnership that our colleagues, our stakeholders have, and the relationships they have in the community. And I think that's a great foundation for us to build on.

Matt Breese (Managing Director of Equity Research)

I appreciate that. Just the last one is, I would love your perspective on M&A. You know, historically, Camden, if you look back over the last 20-25 years, is one kind of a 50/50 or 60/40 mix between organic growth and M&A to drive overall balanced growth. And that's probably an older metric at this point, but I think it still holds true over the long term. You know, what are your thoughts on M&A, and is that something that will be part of the repertoire here going forward?

Simon Griffiths (President and CEO)

Yeah. Thanks, Matt. And, you know, the strength of our position, you know, obviously affords us to be opportunistic first with regard to M&A, but at the same time, you know, I don't think we have feel pressure to do a deal unless it makes sense financially. And I think it's always going to be the right deal. We're not going to chase anything over a hill. And we have plenty of organic opportunities to grow. We've got a great team and great markets, and we see tremendous opportunity there. And but if the right opportunity came along, we'll be opportunistic, and that's certainly, I think, part of the playbook.

Matt Breese (Managing Director of Equity Research)

Understood. That's all I had. I know it's a little long-winded, but I appreciate you taking all my questions. Thank you.

Operator (participant)

We have no further questions registered, so this concludes our question and answer session. I would like to turn the conference back over to Simon for closing remarks.

Simon Griffiths (President and CEO)

Thanks a lot, and I just want to thank you all for your time today and, of course, your, your interest in Camden National Corporation. We wish you all have a great rest of your day. Thanks for joining.

Operator (participant)

That concludes today's call. Thank you all for attending today's presentation. You may now disconnect your line.