Q4 2022 Camden National Corp Earnings Call
Yeah.
Good day, and welcome to Camden National Corporation's fourth quarter of 2022 earnings conference call. My name is for them and I will be your 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 you require operator assistance at any time during the call. Please press Star then zero. Please note that this presentation contains forward looking statements, which involve significant risks and <unk>.
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 thousands such forward. Looking statements are described in the company's earnings press release, the company's 2021 annual report on form.
<unk> 10-K, and other filings with the S. E C. 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.
Full 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 and welcome everyone to Camden National Corporation's fourth quarter 'twenty to 2022 earnings call.
For the fourth quarter of 2022, we reported net income of $15 $4 million or earnings per diluted share of $1.05, which was 8% better than the third quarter of 'twenty to.
This resulted in total annual earnings for 2022 of $61 4 million, an 11% decrease from our record earnings of $69 million recorded in 2021, and a 9% decrease in diluted earnings per share over the same period.
Well, we were pleased with our fourth quarter performance in several areas noninterest income excluding $903000 pretax security laws.
What was $10 $7 million and it was on the higher end of our expectations. The security loss recorded in the fourth quarter as part of our balance sheet restructuring that Mike described during his comments operating expenses of $27 million in the quarter was as we expected and resulted in a 56.
4% non-GAAP efficiency ratio finally, our provision for credit losses was $466000 down from $2 $8 million recorded in the third.
At our earnings call last quarter, we signaled we could see our allowance and provision levels begin to stabilize should asset quality remained strong and no significant changes in the economic outlook occurring during the fourth quarter. We're pleased to see this materialize.
Asset quality remained very strong by all measures to close the year. We ended the year with an allowance to total loans of 92% 92 basis points.
And our reserve levels covering nonperforming assets seven two times, we feel that we are well positioned at those levels on a current loan portfolio.
We also continue to see the negative impact of the significant and prolonged inverted yield curve, which contributed to a $2 seven 6% net interest margin for the fourth quarter down 12 basis points from the prior quarter.
You'll recall that last quarter's conference call. We indicated our expectation for margin was to remain relatively flat to slightly down during the fourth quarter, which did not materialize.
Mike will provide a more detailed explanation during his comments.
I'd like to share at this point is where our strategic focus will be for the coming quarters.
First we are focused on net interest income and net interest margin through several strategies.
First and foremost we are focused on pricing of both loans and deposits.
As of yearend, our deposit beta through the cycle. So far was just over 20% and our total funding beta was 21%, while our earning asset beta was just over 18%.
Have you as you've seen us do in the past the primary objective will be on strengthening our existing relationships and developing new ones versus chasing transactions for both loans and deposits.
Secondly, we have pursued and will continue to pursue opportunities to logically reposition our balance sheet based on both the current and future interest rate cycle, we will analyze opportunities that make long term sense as well as those that fit into our risk profile such as the restructuring that was done in the fourth quarter.
Finally, we recognize that we're operating in a hyper competitive environment and.
And we see loan deals so they're not in prices, which were not comfortable with accordingly, we anticipate loan growth to be on the lower side of our mid single digits for the year and we will accept that in order to focus on the long term.
Turning to asset quality. It continues to be a major focus of ours, while strong today, we do not take it for granted.
Today, we are enjoying the benefits of our strong underwriting, but we complement that with our risk management structure to look for potential signs of weakness. Those efforts may include analysis, such as migration of FICO scores all the way to swiftly working with customers at the first sign of distress.
Another focus area is our expense structure.
We're operating with our within our expected parameters our previous investments in process automation.
I will make many areas more efficient and productive for example, I previously shared our efforts to streamline our small business and commercial loan processing efforts that effort hit its stride in the fourth quarter, and we're already seeing processing efficiency improvements ranging from 30% to 35% efficiency.
And our overall efficiency ratio for the total organization is within our target range of 55% to 58%.
Finally, as we always have been we're focused on our capital and our 'twenty to 2022 earnings of $61 4 million provides us ample resources to grow capital as we reward shareholders, including a 5% dividend increase announced in December.
Pause here and let Mike provide his review and comments.
Thank you Greg and good afternoon, everyone earlier today, we reported net income for the year ended 2022 61.
And diluted EPS of $4.17 and while down from last year's record earnings. We're certainly pleased with these annual result, particularly in light of the significant change in market dynamics between years.
On a non-GAAP pretax pre provision basis. The company recorded earnings of $81 5 million for the year down 2% from last year. In addition, adjusting for SBA PPP loan income earnings totaled $80 3 million, a 7% increase over last year.
These core results make us confident in navigating today's short term challenges while remaining focused on the long term.
We continue to focus on generating shareholder return through strong sustainable core earnings that strategies and deploying capital to organically grow. The franchise. We also continue to prudently returning capital to shareholders through a mix of dividends and share repurchases our dividend payout ratio for the year ended 2022 was 39% which included a.
Two sand or a 5% increase in our quarterly dividend that we announced in the fourth quarter and we repurchased 225245 shares of our common stock throughout the year.
On a linked quarter basis, we reported net income of $15 4 million and diluted EPS of $1 five for the fourth quarter, each an increase of 8% over last quarter. Many of our key financial metrics that we track remain solid for the fourth quarter, including a return on average assets of one point O 9% return on average tangible equity.
<unk> of 18, 2% and an efficiency ratio of 56, 4% on a non-GAAP basis pre tax pre provision earnings for the fourth quarter were $19 8 million, 4% decrease from the third quarter.
Unlike other banks, we too have felt the impact of the inverted yield curve with short term rates rising quickly throughout 2022.
Net interest income for the fourth quarter decreased 2% from the third quarter, Despite average interest earning assets growing 2%.
Net interest margin compressed 12 basis points on a linked quarter basis.
Our interest, earning asset yield grew 27 basis points during the fourth quarter to 367% as we continue to see our loan and investment yields increase generally we continue to leverage investment cash flow to fund loan growth and anticipate continuing to do so over the coming quarters.
As Greg mentioned in his comments, we anticipate loan growth to moderate in 2023, and the current environment as we manage our net interest margin and protect long term franchise value.
To that end, we have seen our loan pipelines dropped considerably from the end of the third quarter.
More recently more recently committed residential mortgage and commercial loan pipelines have been hovering around $50 million each.
And have a weighted average rates in these portfolios ranging from six 4% to six 7%.
Fourth quarter, we put into the into portfolio 88.
84% of our residential mortgage production through strategies and actions taken our current residential mortgage pipeline designated for sale has grown to 30%.
In the fourth quarter deposit costs grew 39 basis points to zero point, 84%, representing a deposit beta of 29%.
While our deposit costs grew at a faster rate during the fourth quarter than it had in previous quarters. It was not unexpected as the fed raise rates another 125 basis points during the quarter and deposit competition throughout our market.
Markets continues to heat up.
We have considered and continue to look at other alternative borrowings strategies during the quarter, we entered into a ladder brokered CD strategy that stretches over 12 months.
So allowed us to lock in approximately 100 million of funding and based on current short term rate forecast should benefit us over coming quarters.
Overall for the year ended 2022, our deposit beta was 22% and they're all in funding beta was 21% which continues to be within our target.
We do anticipate further net interest margin compression in the first quarter of 23 as we are in the peak of normal seasonal outflows combined with expected further rate hikes by the fed in the first quarter, we have and continue to review strategies to optimize net interest income and net interest margin recent.
Recently, we have executed on the following strategies.
In the fourth quarter, we completed an investment in restructure whereby we sold approximately 28 million of securities had a loss of 903000 and repurchased approximately 28 million securities with higher yields.
We expect to earn back is about one year and is expected to provide one to two basis points of net interest margin lift with a full quarter benefit.
Last week, we executed on two interest rate swaps strategies swapping $200 million of fixed rate cash flows on loans were variable rate cash flows tied to fed funds rate.
Based on the current swap curve. These swaps provide additional interest income immediately.
Dissipated to provide additional benefit over the year based on the market markets current expectations of fed funds.
I mean currently estimated a full quarter of net interest margin after four to five basis points should market expectation of fed funds hold true.
For the fourth quarter of 2022, we provisioned 466000 of expense or expected credit losses, which is a decrease of $2 3 million compared to last quarter. Our credit portfolio remains pristine condition supported by non performing loans at 0.13% of total loans at December 31 2022.
Consistent with last quarter minimal net charge offs and delinquent loans totaling six basis points of total loans at December 31, 2022, compared to 12 basis points last quarter.
We continue to actively monitor and assess our loan portfolio for signs of distress based on current and forecasted market conditions.
However, we've not identified any such trends to date.
At December 31, 2022, our allowance to total loans ratio stood at zero point, 92% down three basis points from last quarter.
We believe this reserve level is appropriate given the strength of our credit quality and knowing it provides us with seven two times cover Joe over total nonperforming loans at December 31, 2022, which is consistent with last quarter.
Noninterest income for the fourth quarter of 2022 totaled $9 8 million, including the 903000 loss on the investment trade discussed earlier.
On a linked quarter basis, noninterest income was down 2%, but excluding the investment grade loss.
Noninterest income would have been 7% higher.
In the fourth quarter each year, we recognize our annual debit card volume based incentives. This year that incentive was 806000 and drove the increase in debit card income between quarters.
Mortgage banking income also increased in the fourth quarter compared to last quarter the.
The increase was a result of the change in the fair value on our locks are locked favorable residential loan pipeline between quarters, otherwise mortgage banking income would've decreased between quarters as residential mortgage production for the fourth quarter was down 28% and our sole production was down 45% compared to last quarter.
Our noninterest income forecast for next quarter is $90 million to $95 million.
Noninterest expense for the fourth quarter totaled 27 million slightly down from last quarter, our non-GAAP efficiency ratio for the quarter was 56, 4% was also consistent with last quarter. We estimate our first quarter 2023 expenses will tick up 2% to 3%.
Factoring in the impact of the FDIC assessment increase that takes effect for all insured banks and partial quarter impact from normal merit increases.
Regulatory capital ratios continue to be well in excess of regulatory capital requirements as of December 31, 2022.
Supporting the strength of our core capital position.
Tangible book value per share increased to $1 40.
Or 6% during the fourth quarter to $24 37 at December 31, 2022, and our tangible common equity ratio increased 24 basis points in the quarter to $6 three 7% at December 31.
This concludes our comments on our fourth quarter results and I will turn the call back to Greg. Thanks, Mike before opening the call up for questions I'd like to play out a few closing thoughts here, Mike described some strategies that we've executed.
<unk> investment portfolio restructure and swap strategy, we are equally if not more so focused on organic strategies to improve our positioning in this environment.
Some of those are demonstrated in the yields on our loan pipelines that are above 6%, which is strong considering we're routinely competing against pricing in the low 5% range if not lower.
Our loan to deposit ratio of 83% demonstrates our franchise value along with growing core deposits, 6% in 2022.
Also as we mentioned our efficiency ratio is within our normal operating range of 56%.
And from a risk perspective, we're also well positioned tangible common equity ratio of 637% and as Commvault complemented by an ACL to total loan ratio of 92 basis points and seven times coverage on nonperforming assets with that as a backdrop, we will open it up for questions. Please.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys and to withdraw your question. Please press Star then two at this time.
Pause momentarily to assemble our roster.
Our first question comes from the line of Steve Moss with Raymond James Your line is now open.
Okay.
Good afternoon.
Hi, Steven.
For the call.
Thank you.
Thanks, Greg and then maybe just start off on the margin here just kind of curious.
How you guys are thinking about any updated thoughts you may have around deposit pricing as we go through a cycle here and maybe if the fed goes to five and holds throughout the rest of the year.
How youre thinking about the margin.
Yeah, So I'll take that Steve its Mike.
I think in terms of the deposit side, we're expecting and particularly in the first quarter.
Fed continues to hike will continue to see the deposit beta is probably in the 30% to 35% range.
Let's call it.
Close to where we were maybe slightly up.
Factor there certainly on the deposit side is just the competition I think both myself and Greg alluded to just in our comments.
We're certainly seeing that pick up we've seen that over the last quarter.
As local market competitors and others are certainly looking for liquidity.
In the current market overall from a margin perspective.
We are I think I mentioned in my comments expecting any of that to see some compression likely for the first quarter.
Overall, we're thinking.
I'd say its heavily caveat it by a lot of factors that we all know in terms of what the fed actually does is awesome the market competition.
Some of the strategies that we put into place but.
All in we're thinking that that margin would probably be around $2 65, plus or minus two to three basis points on either end.
From there I would just again, probably not in a spot to give for guidance after first.
The first quarter just for all the factors.
At play here, but thinking that from there with normal seasonal inflow is starting to come in as well as the hopes that the fed starts to stabilize to slow down on rates and launch continuing to reprice and as Greg mentioned too is just as strong loan pipelines that we have in terms of rates, we anticipate that margin from there would start to.
Rebound.
Okay. That's helpful.
Maybe just in terms of.
So loan demand you guys just seeing these days just curious I'm on.
How youre thinking about the what parts of the portfolio would you expect to drive growth in 2023.
Sure.
What I'd say is that we're seeing a shift really.
Previously obviously residential is driving it that market is lower partly because of call. It just the overall real estate market, but our pricing.
Where we're.
We're pricing higher than competitors. So we are seeing and experiencing really the shift over to the commercial and small business side.
And.
Within the commercial that's where our balance sheet size for the markets that were in our ability to structure.
<unk> us and helps justify a higher rate.
And on the small business side.
Really that's been a great startup type product that is ramping up for us and they tend to run higher balances and that leverages. The reengineering that we did in new software that we have.
Especially on the small business side. So now we can.
Instant decision, depending on collateral close within a few days, which is really serving the customer need and.
And it helps us.
I think you know command a higher yield on that.
Okay, great. Thank you very much appreciate all the color here.
Youre welcome Steve Thank you.
Our next question comes from the line as Damon Delmonte with <unk> W. Damon Your line is now open.
Hey, good afternoon, guys, I hope, you're doing well and thanks for taking my questions.
Thanks, Dan So just wanted to I just wanted to go.
Yellow perspective here on the outlook for provision.
You noted that 92 basis points, you feel pretty good about that reserve level, it's over seven times covering npls I believe so.
So with the expectation of loan growth slowing.
And the health of the portfolio of remaining intact as of today.
What do you expect a similar level of provisioning like we saw in the fourth quarter as we start off in 'twenty three for at least the first half of the year.
Yeah.
Yes, I can take that one David.
So I guess in terms of maybe the way I would talk about it is.
So we're at 92 basis points right now we feel pretty good about that.
Again, I think in part it's going to depend on the economics and the economic outlook that that should change, but assuming we stand in a kind of hold to where we are and as we mentioned no signs of credit issues are ahead, but you know.
Assuming everything holds constant I would say that 90 to 95 somewhere in there we could continue to hover.
Okay.
Okay. That's helpful. Thank you.
And then could you just.
Go back to the.
The two steps you took to try to preserve the margin here. The first you mentioned that the little repositioning with the $28 million.
You said you sold 28 million of Securities and then you reinvested those proceeds is that correct.
That's right, yes, so we essentially I think those yields on those securities were around $2 60.
Then we essentially purchased another $28 million with around a 6% yield.
Okay.
And what kind of securities with us.
Ah is a mix of corporates and in MBS, primarily I believe corporate.
Got it Okay, and then the two swap agreements.
Could you just go over those specifics again.
Sure. So we did 200 million notional and in total it was a.
$150 million three year.
You always have to think about this get this rate received.
Pay fixed receive received variable.
I think the.
Pay amount on that was my notes here one second.
The Tam out on that was $3 71.
And then we did another $50 million for a five year swap and to pay them out on that was $3 34 in both of those are.
Receiving fed funds OIS.
Okay.
Got it okay.
Alright, great. Thank you.
And then I guess on the.
The expense outlook, you said, 2% to 3%.
From the fourth quarter into into the first.
Overall, do you expect 2% to 3% for the entire year or is that.
Just like from the first quarter and then another lift after that.
So that that guidance was generally for the first quarter.
I listed a couple of factors in there won't be an FDIC fees and just normal merit.
So call. It I would say, that's about 27, and a half sort of $5 million.
The one item I would just highlight is.
Historically, we've continued to manage within our rate efficiency ratio range of call. It 55 to 58 and <unk>.
We'll certainly do that throughout the year and that's our expectation.
Got it okay.
That's helpful. That's all that I had thanks so much.
Thank you.
Our next question comes from the line of Matthew Breese with Stephens, Inc. Matthew Your line is now open.
Hey, good afternoon.
Hi, Matt.
Thinking about the the.
The overall NIM forecast within that I was curious.
Where do you have demand deposits going down to this quarter ended the year at 24% pre Covid I think it was at 16%. If you go further back you know Camden was operating in kind of a 10% to 15% range pre great financial crisis. So just curious where do you think this figure goes during this tightening cycle and what structurally keeps you.
<unk> around your estimates.
Yeah. So we're trying to pull that that number Matt, but I would just comment on what we have seen some pressure in terms of <unk>.
Some are the bigger commercial sophisticated commercial customers looking for interest so we've seen some.
The mix shift if you will from DDA over to now or interest checking. So we've seen some of that that shift occur.
I think thats become more common.
Certainly, where we're managing that internally, having proactive conversations with our primarily our business customers.
But certainly there is there is more pressure on that.
As we think about.
I'm sorry, Mike Michael go ahead.
I was just I was going to say, we can connect to offline and get you that gives you some thoughts on that the DDA specifically.
Hey.
Do you.
Our deposit growth in 'twenty, three if so what areas and maybe you could comment on.
Further reliance on broker deposits.
Sure I'll take the last one first so we.
We havent executed we are looking at some broker deposits additional $90 million to $100 million. We're looking at right now just to supplement funding and having it be more cost effective, particularly as we anticipate the.
Fed funds is going to continue to move higher.
So we are looking at that we'll likely look at ladders.
<unk> like we just spoke about which kind of stretching out over 12 months there.
I apologize that was the first part of your question there.
What kind of deposit growth.
The outlook for the year.
Yeah I believe it was.
Mid single digits from a deposit growth perspective.
And I would say strategically Matt to keep in mind, a couple of things is that we still have a very strong retail franchise and that gets back into my comment of <unk>.
Focusing on relationships.
The team has done a great job.
Although deposits have always been a focus of ours as you know.
Through incentives through internal promotions external promotions strengthening of that at this time.
To build the relationship side the other thing within our deposit focus is what has ramped up more over the past few years is on the Treasury management side that we have and Mike alluded to some of the big commercial borrower crush depositors that we have so that's another lever set of tools that we have.
We have a great team within that that we are very much focused on deposit growth and with that said.
You know call it from a sales management perspective, that's where we're focused on.
And.
Or we can drive down that rate or stabilize that rate.
You know it just.
It gives us more flexibility on the lending side.
With all of that said I'll note that.
In our markets, we are seeing I think I, even said hyper competitive markets.
On the deposit side and the loan side, but.
That's our that's our focus in <unk>.
And you know well.
We'll do it prudently.
Understood and then just assisting with loan growth for the year to assume we continue to see securities growth. Michael you had mentioned that in your your.
Remarks.
What is the the monthly kind of cash flow from the securities portfolio at this point.
Yes, it's generally $9 million to $10 million on an average we're seeing on the cash flow.
I think realistically, we'll probably redeploy those investment cash flows into either offsetting funds.
Funding or call it overnight funding borrowings or into fund loan growth realistically just based on current yield, but something we will continue to monitor throughout the year.
Okay.
Last one for me is just on on the.
At these levels is that something we should expect you to continue to execute on.
No.
One that's just art.
Our annual renewal to make sure that we have that capability on the shelf to us right now.
As always we kind of balance out capital needs as.
As well as the <unk>.
Use of capital.
I believe our <unk>.
<unk> our position right now is we want to make sure that we're focused on building capital, especially on the TCE that's more call it from a.
What if economic.
Potential factor recession, coming up I'd, rather be building capital and then deploying it right now.
So I wouldn't put a lot on that lever.
For us.
Okay understood.
That's all I had thanks for taking my questions I appreciate it.
Thank you.
There are no further questions waiting at this time so as a brief reminder, it is star one on your telephone keypad to register a question.
Yeah.
Yeah.
Yeah.
As we have no. Further question. This concludes our question and answer session I would like to turn the conference back over to Greg Dufour for any closing remarks.
Great. Thank you I wanted to just think obviously are our analysts that are following our stock as well as all the other colors that are taking an interest.
Into Camden National.
Rest assure and hopefully you would have the feeling that we are as always focused on long term growth long term franchise value.
And we appreciate your interest and wish you a good day goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.