CAC - NASDAQ

Good day and 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. [Operator Instructions] 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 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.

Thank you, Emily, and 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 $23. On an EPS basis, we reported $0.85 per diluted share, down $0.02 from the first quarter of ‘23. 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 nonperforming 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 in our last call, this was done purposefully to reduce the reliance on higher-cost borrower 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 and 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 are 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. I’d now like to introduce Mike Archer.

Thank you, Greg, and good afternoon, everyone. Earlier today, we reported quarterly earnings of $12.4 million and diluted EPS of $0.85, which were 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 to and were also down quarter-over-quarter. For the second quarter of 2023, our return on average assets was 0.87% and a 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. However, 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 30. 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 continue 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 remained 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 1, 2022, through June 30, 2023, was 27.1%. Like many others across the banking industry, we have experienced 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 salable residential mortgage volume. Loan growth for the second quarter of 2023 was 1% and we continue to move forward with our 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. Also 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 1-year funding at a rate of 4.7% through the bank term funding program rolled out by the Fed earlier this year. We view 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 1-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 30. 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 a 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 the 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 residential mortgage originations and we can continue to push more of our origination volume to salable. As of June 30, 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. Although 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% and in 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 ‘23, our capital position remains strong, measured on both a GAAP and regulatory basis. At the end of the second quarter, our TCE ratio was 6.57%, up 1 basis point from last quarter. and regulatory capital ratios continue 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 30, 2023, we are pleased to note that as of June 30, the company will 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 30 based on our closing share price on that date. Through June 30, 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 will now open the call up for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Steve Moss with Raymond James. Steve, please go ahead. Your line is now open.

Good afternoon.

Hi, Steve.

Hi, Steve.

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

Yes. So I think from a margin perspective, Steve, as you think about next quarter, we’re kind of in the sort of a 240 right now. We’re thinking flat plus or minus 5 to 10 basis points. I would say it’s probably a bit broader range than we’ve historically given. But I think part of it depends on what the Fed does here in a few days. You also were 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 item is just the deposit mix shift that we continue to see or have seen and how much does that continue? So I think right now, we feel pretty good around the 240 range, but we could see that be slightly higher or lower.

Okay. Appreciate that. And in terms of loan pricing here, just kind of curious what – where loan yields are coming on for new originations these days?

Sure. So for the Second quarter, our new originations came on, I think, on a weighted basis, around 7%, a little over 7%, I think with 7.10% out at me. From a pipeline perspective, we’re largely at 7% or over – well over 7% now. I think our commercial CRE portfolio is somewhere in the neighborhood of 7.5% plus. And I want to say the residential pipeline is 7.25% or slightly over. So as we’ve talked about, we are – 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 think 45 to 60 days, call it for these loans to come on.

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

Yes. It’s Greg. Stephen. I’d say it probably lower loan growth, single-digit. We felt pretty good, honestly, about 1%. Again, we know we are pushing ourselves away from the table primarily on pricing to really focus on the margin. So we’re not necessarily focused on the loan growth yet.

Steve, the only thing I might add there to…

Alright. Thanks very much for all the color.

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

Hey. Good afternoon guys. I hope you both are doing well today. So, I just wanted to kind of circle back on the margin – good to hear. Just wanted to circle back on the margin commentary. So, assuming that the Fed raises rates at least one more time, like tomorrow, I think its tomorrow is the meeting. Does that – 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?

I mean I think the Fed increase, it will certainly put a little more pressure on the funding side, certainly from a – both from the deposits, of course the borrowing side as well. We – some of the swaps that we have done and just the pricing will help neutralize some of that impact. But I think that’s a bit of – that 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. So, I think that’s when we think about margin for next quarter or the third quarter. I think those are the various variables that we are considering where we are saying, hey, we think 2.40% is probably a pretty good midpoint of where we may land plus or minus some basis points there. But I think it’s all those factors that we are baking in and knowing that another Fed rate I could certainly isn’t going to help from an immediate funding perspective.

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

For June, our monthly margin was 2.38%, I believe.

Okay. Great. Thank you. And then as we think about the slower pace of loan growth and we think about the strong credit quality trends you guys exhibit, should we think about minimal provisioning in the back half of this year, kind of maybe just targeting keeping that loan loss reserve flat at 90 basis points, is that reasonable?

Yes. 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.

Okay. And then on the fee income side, it sounded like you feel pretty comfortable with this quarter’s level, so that’s probably a reasonable run rate and it doesn’t seem to be a lot of noise this quarter.

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

Okay. Great. That’s all that I had. Thank you very much.

You’re welcome.

Thank you.

[Operator Instructions] The next question comes from the line of Matthew Breese with Stephens. Matthew, please go ahead. Your line is now open.

Hey. Good afternoon. 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 run off towards the end of the quarter versus the beginning or start to subside?

I don’t – I mean nothing sticks out at me, Matt. I would say one of the things that we just continue to watch is, particularly on the consumer side, just average balances, we saw that really peak or the pandemic. And one of the areas that we are seeing pressure on is just those average balances pull down in this environment. So, I think that’s one of the big variables that are out there. We are 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. And I think to that end, the other reality is we are also monitoring our accounts, and we continue to see the number of accounts grow on that basis. So, we are not seeing, call it, customer outflow in that regard.

Got it. Okay. And then maybe on the – just going back to the NIM and trying to get a little bit of a longer term outlook. The 2.40% 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? And at what point as you look at your internal models, do you start to see expansion in loan yields start to overtake incrementally higher deposit costs?

Yes. It’s a good question. 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 for us, the seasonal flows start to go a little bit the other way. So, there is a little bit of generally lumpiness in just margin between Q4 and Q1 as we get back into Q2. But I think the reality is when we start seeing rates start to go down and that inversion start to not be as steep as when we start to see that real benefit on the margin.

Okay. And then is there any sort of additional thought around additional balance sheet restructures, either securities or in the loan portfolio to help believe you at some of these NIM-related pressures and how do you think about that?

I guess what I would say, Matt, is I think we are constantly looking at everything, just part of the normal process that we go through. So, I don’t want to say anything is off the table at this point. We will continue to look at that. This is a normal do process. Understanding right now, certainly the investment portfolio is – continues to weigh down our margin. So, the short answer is yes, we will continue to look at that.

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

No, I think it’s just us being opportunistic. I mean when the time comes – we did a small tranche, and we are certainly being cautious from a capital perspective. But I think when the price makes sense for us, we will be opportunistic in the market. So, I guess that’s how I would read into that.

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

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.

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