Q3 2022 Camden National Corp Earnings Call
Our events.
The forward looking statements are made any references in today's present presentation to non GAA financial measures are intended to provide meaningful insights and reconciled with G. A a P. In your press release today's presenters are Greg Dufour, President and Chief Executive Officer, and Mike <unk>, Our executive Vice President and Chief financial.
Also please note. This event is being recorded at this time I'd like to turn the conference over to Greg before please go ahead.
Thank you Joe and good afternoon, everyone and welcome to Camden, National's third quarter 2022 earnings call.
Earlier today, we announced third quarter net income of $14 $3 million and year to date earnings of $46 $1 million.
This resulted in diluted earnings per share of <unk> 97.
For the quarter and $3 12 for the year to date period.
Total revenues of nearly $142 million through the first nine months of 2022 were up 2% from the comparable periods in 'twenty, one despite higher PPP loan income and record mortgage activity last year.
We feel this demonstrates the flexibility and strong core operating capacity of Camden National.
Underlying these results is our commitment to positioning and repositioning the organization in light of the macroeconomic environment highlighted by rapidly rising interest rates increase.
Increased probability of recession and geopolitical risk I.
I'd like to take a few moments to further explain some of the actions we're taking.
We're repositioning our lending activities as we see the impact of the last remnants of PPP and the slowdown in the residential mortgage market. This repositioning has actually been going on for several quarters that includes several points.
First our buildout of our small business lending efforts leveraging two major strategies first we've hired five dedicated small business lenders in our markets and piloted a very successful training program to enhance our banking center managers capacity to generate small business loans.
This effort has been driven by a complete overhaul of our small business lending process utilizing our fintech partner of <unk> as well as our own business process analysis group.
We now have the capability to go from application to same day decision and close within one business day, depending on collateral.
While early we are very very happy with our initial results using the new process. We are also focused on streamlining our process for larger credit underwriting to build productivity and scale now and in the future.
The results of these efforts allow for the expansion of capabilities in our existing markets, while providing impact tools as we look to new markets.
There are several other areas, where our prior investments and focus have positioned us well and will continue to do so our asset quality is extremely strong this period of economic uncertainty and increased profitability of recession.
We have continued to fortify our allowance for credit losses as demonstrated by our coverage ACL to total loans of 95 basis points and ACL to nonperforming loans of $7 723 person.
<unk>.
Our ability to be productive continues to benefit us as shown through our 57.
I am sorry, 50, 643% efficiency ratio.
And our focus on deposits continues to be strong through both our retail network and our corporate Treasury management areas of deposit beta which include deposits and Cds was 14% through the first nine months of the year.
These efforts are extremely critical at this point in time, as we see aggressive loan and deposit pricing throughout our various products and markets.
Priorities are to maintain asset quality within both our loan and investment portfolios to maintain our efficient cost structure and to strengthen our balance sheet until we see economic projections turned more favorable.
I would also highlight that we continue to focus on capital by being opportunistic in share repurchases as we repurchased just over 60000 shares during the third quarter and provided a <unk> 40 dividend per common share.
During the quarter, we also announced that Rebecca Hatfield, President and CEO of the Vesta housing based in Portland, Maine will be joining our board on December 31 2022.
In addition to her experience at Avista, Rebecca has a strong background in banking, both in the lending and credit areas as well as previous experience in the technology industry.
I'd like to now turn the discussion over to our Chief Financial Officer, Mike Archer.
Thank you Greg Good afternoon, everyone earlier today, we reported net income for the first nine months of 2020 to $46 1 million and diluted earnings per share of $3 12.
Compared to $52 5 million and diluted EPS of $3 49 for the same period a year ago.
The drivers for their earnings compression between these periods can be directly traced back to the change in the global economic environment between periods, creating a dynamic and rapid shift in the operating environment for us not like not unlike other banks.
Between periods, we have seen interest rates rise considerably at an accelerated pace yield curve and bird and mounting pressures for strong economy than many believe will lead to a near term recession.
Through the challenges, we've been able to maintain favorable performance metrics through the first nine months of 2002 <unk>.
Including a return on average assets of 113% our return on average tangible equity of 16, 7% and maintain an efficiency ratio in the mid fifties.
To further highlight the strength of our core operations and results for the nine months ended September 32022, we reported an increase in non-GAAP earnings, which excludes income taxes provision expense in SBA PPP loan income of $4 5 million or 8% over the same period last year.
In regard to our performance for the most recent quarter. We reported net income of $14 3 million diluted EPS of <unk> 97 for the third quarter, each down 5% compared to the second quarter of 2000 2022.
On a non-GAAP basis adjusting for income taxes provision expense in SBA PPP income earnings decreased 328000 or 2%.
Net interest income had a nice lift in the third quarter, increasing $1 3 million or 4% over the second quarter. Historically, we've seen an increase in our net interest margin in the third quarter each year.
The seasonal inflows of deposits within our markets, which we again saw this year as average core deposits increased 4% quarter over quarter.
Seasonality in our deposits and our shift in earning asset mix as we continue to redeploy investment cash flows to fund loan growth.
Each contributed to NIM increased four basis points between quarters to 288% for the third quarter.
Our NIM increased for the quarter was within our prior guidance.
Our yield on interest, earning assets for the third quarter increased 29 basis points to three 4% over the second quarter and represented an asset beta of 20% for the period.
Running costs over the same period increased 25 basis points to <unk>, 54% for.
For the third quarter of 2002, our total deposit cost was <unk>, 45%, an increase of 24 basis points over the second quarter and represented a deposit beta at 17% for the quarter.
Year to date, our deposit beta which includes noninterest checking in Cds was 14%.
And to end loans grew 4% during the third quarter and 13% through the first nine months of 2022.
Our loan growth for the quarter was driven by residential mortgage and commercial real estate residential.
Residential mortgage balances grew 7% during the quarter and Cree balances grew 2%.
As noted in our earnings release at the end of the third quarter, our residential mortgage pipeline was approximately $110 million and our.
Pipeline was approximately $90 million for the <unk>.
Third quarter of 2020 to be provision $2 8 million of expense for credit losses, which was an increase of 419000 over last quarter at this point in the cycle, our credit portfolio remains in excellent condition with no immediate signs of trouble or deterioration.
The increase in the provision for credit losses. This quarter was due to the combination of solid loan growth and growing concerns of an economic slowdown.
In the third quarter, we released the remaining reserves that were established for certain carbon modified hospitality loans totaling 768000.
At September 32020 to our allowance for credit losses on loans stood at 95 basis points of total loans, which was an increase of three basis points over last quarter and covered over seven times or our nonperforming loans.
Our reserve levels continue to incorporate our long term view of macro conditions as well as consider more local factors.
We continue to proactively monitor and analyze various pockets of our portfolio to identify any leading indicators of risk.
And to date, we have not identified any trends of systemic risk or stress within our portfolio.
Noninterest income for the third quarter of 2022 totaled $10 million and was down 11% compared to the previous quarter.
As we were not immune to the effects of higher interest rates pressure in mortgage banking income in the down markets affecting wealth management fees and bully income.
Residential mortgage production for the third quarter was down 20% compared to last quarter and correspondingly coal production was nearly down 20% as well.
Our net our noninterest income forecast for next quarter is a range of $10 million to $11 million like previous quarters.
In the fourth quarter each year, we recognize our annual debit card incentive bonus and expect to do so again next quarter.
Noninterest expense for the third quarter of 2022 totaled $27 1 million, which was 2% higher than the second quarter of 2022.
Our non-GAAP efficiency ratio for the third quarter of 2020 to 50, 643% compared to 50, 514% and last quarter, we estimate our fourth quarter expenses will be near $27 million as we've seen in the past quarters.
Tangible.
Book value per share decreased 95, or 4% during the third quarter to $22 97 at September 30, while our tangible common equity ratio decreased 38 basis points in the quarter to $6 one 3% at September 30.
Tangible capital decreased again due to rising interest rates decreasing the value of our bond portfolio.
Actions, we took in the second quarter to move securities to HTM helped mitigate some of the impact of further rising rates on tangible capital.
The Companys regulatory capital ratios continue to be well in excess of regulatory capital requirements as of September 30th supporting the strength of our core capital position.
During the third quarter, we repurchased 63689 shares of our common stock, bringing our total shares repurchased through the first nine months.
Of 22 to 225245 at a weighted average cost of $45 46 per share.
This concludes our comments on our third quarter results, we'll now open the call up for questions.
Thank you we will now begin the question answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset.
Keith.
Your question. Please press star empty at this time, we will pause momentarily to assemble all of us.
Our first question today comes from David Damon Delmonte from <unk>. Your line is now open. Please go ahead.
Hey, good afternoon, guys. How are you guys doing today.
Thanks.
Good good.
I guess the first question.
Just regard to the provision this quarter.
Mike I thought I heard you say you guys release, the remaining 700000 or so of Covid specific.
Provisions or reserves that you have.
Before.
Is that what you said.
That's correct David is about 750000 roughly.
So in a if you didn't have that you released this quarter can we assume then that the provision would have been closer to like around $3 5 million.
That is correct yes.
Okay. So is that how we should kind of think about the level of provisioning going forward or do you think.
It's going to.
Closer to this quarter's level.
I think on a go forward demand.
We feel pretty good right now, where we are around 95 basis points for them from a total loans perspective.
Certainly the loan growth will be a factor as we move forward in terms of what provision it looks like on a go forward basis, but.
We've been pretty proactive in terms of.
Setting aside reserves for.
Essentially a looming recession or slowdown.
And would hope that as we move forward the level of reserve and provision needed starts to slow down with that as well I mean again there are so many factors of course that kind of go into play there even into that comment but.
Right now like I said, we feel good about our AR reserve levels.
Think that potentially there be less of an impact on a go forward basis should the.
The macroeconomics continue to look as it does today or as we expect it to.
Got it okay. That's helpful. Thank you.
Then with respect to loan growth.
Two strong quarters is actually three strong quarters in a row.
Four strong quarters for you guys just kind of wondering how you're how you're looking at the year.
<unk> out and kind of what the pipeline.
Indicating as we head into 2023.
Yes, I think I mean, our pipelines at the end of the quarter, we're pretty pretty strong residential held.
I think I mentioned it was about $110 million in the pipeline, where we have been kind of on throughout the year portfolio about 80% of our production in the residential.
I think we will likely see a similar number for the fourth quarter as well.
So again I would expect.
Really strong residential growth there the commercial pipeline too is fairly strong.
Continues and we remain pretty stable about $90 million. So I do think as we enter into the fourth quarter here were rather close out the fourth quarter, we'll probably have loan growth.
I'll call it the two year, 2% to 3% range.
Got it okay.
Great and then I guess just one last question I think your guidance for noninterest income was $10 million to $11 million in the fourth quarter does that include the annual diesel incentive or not.
It does.
A bit of the wildcard if you will there is more on the mortgage banking side I think to the extent that.
But we did have some valuation adjustments run through this quarter.
And thats kind of compressing our mortgage banking income for the third quarter to the extent that we don't see something similar.
We'll likely I'd say, probably hopefully on the upper end of that range, but I think the short answer is yes, we do a debit card income in that number as well.
Great. Okay. That's all that I had thank you very much.
Thank you.
Our next question today comes from Matthew Breese from Stephens, Inc. Your line is now open.
Hey, good afternoon.
I wanted to follow that the composition of loan growth. It feels like it will continue to be weighted towards residential residential loans and maybe just thinking about the overall asset sensitive profile of the bank. The balance sheet is there a broader strategy many are undergoing this.
Bringing the balance sheet between more interest rate neutral position.
How far away from you or that are you from that and is that part of the plan here.
Well this is Greg, Matt I'll take that and Mike can add in but.
We'll see that transition one it's going to be natural because the residential mortgage market.
Everyone is seeing is slowing down and that's why we're focusing on the commercial side and small business side.
As I mentioned in my comments, we've been investing in that area and building that up and so we think that will.
To help offset.
Call. It further decline in residential.
The residential.
Maybe just follow on that thread a little bit how far away do you think we are from seeing.
Meaningful impacts to the balance sheet from SBA lending.
Well again, we generate call. It we use the term more small business so that could be SBA.
We leveraged the finance authority of Maine, quite a bit or just general small business alone site I don't want to say, that's all going to the SBA.
Type of lending.
Yes.
Really saying when thats going to cross I would just say.
We're positioning when we say, giving your outgrowth expectations thats built in there that as we expect residential to drop we expense those other areas to pick up that's what we've been seeing you can almost see it with our existing pipelines that we share for this quarter 110 versus 90 shows how that's building up on us.
As well as complemented by.
The other point that is playing out as larger commercial is still.
Fairly solid business for us and growth wise.
And so that's an important aspect to them.
Of our strategy going forward.
Okay, and then just thinking about the outlook for deposit growth curious your thoughts there what the composition of it and then.
In the broader scheme of funding the balance sheet should we expect kind.
Kind of a similar pace of securities runoff in the quarters ahead to help fund the loan growth.
Yes, maybe the last part of that we do expect continued.
Cash flows from the investment portfolio I think it's in the neighborhood of call. It $12 million a month is what we're seeing and.
It will continue to redeploy that and certainly the earning higher earning assets that's kind of what we've been doing and continue to be the plan on the on the deposit side.
But we focus on generating core deposits primarily checking accounts.
We will continue to we're in the middle right now there are some promotional products out there.
I'll turn the call a little bit more pricey than where we had been.
But again, we are also managing from a perspective of overnight fundings and what's what's cost advantageous there.
For Us Matt.
I think it will be a combination as we move forward.
Both.
Noninterest noninterest checking.
The money market, certainly and I think the other piece of it the highlight in there as we continue to manage to what we've given from a guidance perspective overall funding beta of 25% in through.
Through the first nine months, we stuck to that we've hit that and we continue to manage towards as we move forward.
Okay.
Maybe just being a little bit more specific thinking about demand deposits.
Composition of your deposit book is vastly improved and the <unk>.
The pandemic demand deposits up to 27% of total.
Do you expect to see much attrition or erosion in that line or.
Are you seeing anybody kind of.
The transition from demand into other categories and whats been the recent drivers of growth.
Yes, so Matt I think it is.
The customers are obviously interest rate sensitive and there is that risk of <unk>.
Moving it out of demand because.
Yes.
The rates are more favorable and youre getting to a point where.
Stop that people are trying to wrestle with 50 basis points versus 75%.
It's now getting into a meaningful number.
I think to combat that and to keep that within.
Toller deposit beta guidelines that we won.
As alternate products first step is to keep the deposits in house we have.
Mike mentioned some of the products that we can look at from laterally things for customers to get them through it.
We are maintaining that still are the core deposit base, however, with all of that said.
Not only from the retail network that's on the commercial.
Network is our investment in corporate Treasury management that we've made that will keep those.
Business deposits commercial deposits a lot stickier.
As well so.
We have several levers if you will to help.
Help adjust to.
Customer demand.
Okay.
And then just maybe tying this all together.
Any thoughts on the near term margin outlook, and whether or not the pace of NIM expansion. We saw this quarter is something we should expect at least in the relative near term.
Yes, I think so.
This is my comments, Matt is generally Q3 is a stronger quarter on the on the NIM side.
Because of some seasonal fluids that we have in our market.
We do anticipate in the fourth quarter, we will potentially see some of the seasonal outflows, which is which is normal for us.
That said we believe.
We're focused on margin we're focused on deposit betas.
We are aiming to be flat.
On a quarter and for the fourth quarter from a margin perspective understanding that there is some level of downside risk there just in terms of.
Seasonal outflows, but again, we think we can manage that and we'll be right around flat on a linked quarter basis.
Okay.
Last one from me.
Just thinking about capital adequacy, and obviously your regulatory capital ratios are very healthy.
Thinking about the TCE to Ta.
Any concerns there or is that popped up in conversations with regulators at all.
Well.
We're obviously monitoring and Matt we feel good about it when you take out.
The impact from.
Sure.
Portfolio.
It jumps up to about 8%. So we have a good core capital.
I'm not sure if I really want to comment.
Our conversation with regulators because we just finished our exam.
But suffice it to say, we feel real good about our capital even though we are monitoring.
Got it understood. That's all I had thanks for taking my questions.
Youre welcome Matt.
Sure.
As we have no further questions. This concludes our question and answer session I would like to turn the conference back over to Greg could default for any closing remarks.
Great well, thank you drew and I just wanted to thank everybody who has taken the time of the day too.
Listening to the calling for your interest into Camden National.
Have a good afternoon by now.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.