Q1 2023 Camden National Corporation Earnings Call
Right.
Okay.
Good day and welcome to the Camden National Corporation's first quarter 2023 earnings Conference call. My name is Danielle and I will be your operator for today's call.
All participants will be in listen 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 uncertainties that may cause actual results to vary materially from the from.
From the projected.
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 are made.
Any references in today's presentation to non-GAAP financial measures are intended to provide meaningful insight and are reconciled with GAAP in.
In your press release.
Today's presenters are Greg do for President and Chief Friday, 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.
Okay.
Thank you Danielle and welcome to Camden National Corporation's first quarter 2023 earnings call.
Before I turn the discussion over to Mike I'd like to make a few opening comments.
We reported net income of $12 7 million or <unk> 87 per diluted share for the first quarter of 2023, a 17% decrease from the fourth quarter of 2022.
This resulted in a return on average equity of 11, 1% to 6%.
Turn on tangible capital of $14 two 1%.
Driving these results were the impact of our normal seasonal deposit outflows.
Overall interest rate volatility and market based pricing increases impacting deposit rates.
We also recorded a $1 eight.
Million pretax loss on our subordinated bond we held in signature bank, which was recorded.
Im sorry, which was held.
Maturity portfolio.
That loss was recorded in our provision for credit losses line.
We've reviewed.
Investment portfolio and feel comfortable with the positions, we hold with only 3% in corporate bonds.
We will speak to our investment portfolio in more detail in just a few minutes.
The turmoil in the banking sector during the past quarter has sharpened our focus but hasn't drastically alt.
Our priorities remain the same deposits margin and asset quality.
Over the past several quarters I've shared our strategy is to leverage our retail franchise through sales management and training outlined investments. We've made in corporate Treasury management, and just last quarter I shared our view regarding loan pricing.
Our asset quality continues to be strong and it starts with a strong credit culture and maintaining underwriting standards through all cycles.
Lending continues to be important to us and we will continue to lend in the current environment, but we will do so with a focus on maximizing our margins.
We have the capacity to lend, but we will be selective as the interest rate environment and the need to focus on margins.
Expected to temper our loan growth in the near term with that said we ended the first quarter 2023 with $4 1 billion of loans up 2% from the end of 2022 with overall loan yields increasing 29 basis points from December .
Basis, the company reported first quarter earnings of $18 million down 9% from last quarter.
Like many others across the banking industry, we too were affected by rising deposit and borrowing costs driving lower net interest income and net interest margin.
And although we communicated in January that we anticipated further net interest margin compression in the first quarter. The decrease between quarters of 22 basis points was beyond the 10% to 15 basis points. We had estimated primarily due to the deposit mix shift we've seen during the first quarter from noninterest checking and savings into higher cost product.
Such as money markets and Cds.
The other primary driver for the lower earnings between quarters was the write off of the signature bank bonds discussed earlier.
Net interest income on a linked quarter basis was lower by $2 7 million or 7% again. The primary driver was margin compression as it declined to 254% for the first quarter of 'twenty three.
The speed of deposits or funding betas increased in the first quarter. Our short term rates continue to rise on the back of two additional fed rate increases totaling 50 basis points and we absorbed the full quarter impact of 125 basis points fed rate increases in the fourth quarter of 2002.
For the past several months, we have seen that deposit landscape within our markets become much more competitive as interest rates have risen.
We continue to manage funding costs actively through various strategies, our deposit beta which excludes brokered deposits through the cycle. Thus far is 24% and for the first quarter was 44%.
Included within interest income for the first quarter was 479000 of income from execution of $300 million.
Pay fix receive floating interest rate swaps during the quarter.
Loans for the first quarter of 'twenty, three increased $62 8 million or 2% <unk>.
We've seen our committed loan pipelines for both retail and commercial each continue to hold around $50 million.
As we look to price all new originations appropriately in the current interest rate environment.
We are also now selling a larger percentage of our.
Of our originated residential mortgages as a result, we anticipate loan growth to be lower this year than what we've seen in recent years.
Noninterest income for the first quarter of 'twenty, three totaled $9 9 million, an increase of 1% over last quarter.
The decrease in mortgage banking income on a linked quarter basis was driven by changes in valuations between quarters. Overall, we sold 40% of our residential mortgage production for the first quarter compared to 16% in the fourth quarter of 2002.
Our strategy has shifted to sell all qualifying residential mortgage production as we focus on optimizing net interest margin.
Noninterest expense for the first quarter totaled $26 2 million down 3% from last quarter, which is favorable compared to our expected 2% to 3% increase previously communicated.
We have and will continue to manage expenses prudently given the pressure on net interest margin and revenues. However, we remain focused on our long term strategy and franchise value.
Our non-GAAP efficiency ratio for the first quarter of 2023 was 50, 896% compared to $56 three 5% last quarter.
Our overhead ratio remains strong and demonstrates our cost management practices.
Delighted by a ratio of 184% for the first quarter of 2023 compared to 193% for the fourth quarter of 2022.
This concludes our comments on our first quarter results, we'll now open the call up for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone keypad if you.
We are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Steve Moss of.
Of Raymond James Please proceed.
And good afternoon.
Hi, Steve.
Maybe just starting on the margin here.
Yeah.
Curious to see as you give more color around the swaps that you guys put on here.
In terms of maybe how long the terms and how.
How we think about.
Margin expectations going forward. It just helps you become maybe a little more neutral or how to.
Think about it.
Sure ill take that one Steve.
Yes, we added $300 million.
Pay fixed receive flowed swaps essentially hedging part of our residential real estate book.
The weighted average rate on that that we're paying is $3 65.
And essentially receiving fed funds overnight excuse me the OIS rate, which is I think closer to 480 490 right now.
So we are getting positive carry right now we are getting that benefit roughly $5 million for the quarter and.
Anticipate that assuming rates go up at least once once more we will see a full quarter benefit to you as we get into the second quarter, which is probably in the neighborhood of five to seven basis points from the margin perspective.
And then I think your latter part of your question, Steve just I think it really that is really to drive some some asset sensitivity. It does.
Get us closer to where we want to be from a from.
From an interest rate risk position.
As well certainly, particularly in the dish over the short term.
Okay and in terms of just the swaps are there are two or three years or just kind of curious how long it will be around.
Sure. We have some that are we did three four and five.
Three or four and five years.
Again part of the accounting on the swaps provides us a little more flexibility to get out there are some ramification certainly for that as well but.
Provides a little more flexibility than your normal cash flow hedge as well.
Got it yes, and so as we think about.
The margin here.
Everybody has seen a meaningful step up in deposit cost just kind of curious how are you guys thinking about through the cycle deposit beta.
And if let's say the fed holds around five where could your margin shake out by the fourth quarter of this year.
Yes.
And a lot of a lot of unknowns, there certainly, but I would say right now.
From a total funding data I want to say, we're right around 28% cumulative anticipating.
Assuming that we're assuming that the fed gets up to five and a quarter hangs out there for the rest of the year based on that modeling, we're kind of in the neighborhood of 35% plus or minus.
And 35% deposit betas on total deposits on interest bearing.
Excuse me on the funding total funding data.
That's helpful funding okay.
Okay.
And then in terms of loan pricing just curious as to whats the type of.
Loans that came on the portfolios came on the books. This quarter just what rate you saw and kind of how are you.
How do we think about the more cautious guidance on loan growth.
Sure I think I believe our call at weighted average rate for new originations.
<unk> 70.
For the quarter.
Internally, we are certainly ramping up rates.
Our residential is generally anywhere from $6 50 to north of seven at this point on a weighted basis.
Commercial is certainly pricing higher than that where we're seeing rates certainly rates to start with a seven on a weighted basis.
Okay.
And so it's just.
So it just kind of.
Loan growth for the rest of year are you guys thinking about it relatively flattish.
Versus where you ended the quarter or.
Low to mid single digits.
A plus.
Steve This is Greg I would say flat to low single digits right now.
And as I mentioned.
Capacity to line, we'd like to learn but we're only going to do it on on rates that we feel are.
Benefiting our margin right now so we're not overstretching on on the cold side.
Okay.
I appreciate it that's all.
Well. Thank you very much part of the color I appreciate it.
Youre welcome.
Thank you. The next question comes from the line of Damon Delmonte of <unk>. Please proceed.
Hey, good afternoon, guys hope, you're all doing well and.
Thanks for taking my questions here.
Just wanted to ask about the expense outlook Mike.
No.
How is it pretty tight linked quarter, just kind of wondering.
Kind of where we go from here do you see modest growth over the coming quarters.
Yes, I do Damon.
I think I think our run rate normal run rate as we go through the remaining parts of the year year will be closer to 2007.
We had some.
Incentive accrual type true ups that we accounted for in the first quarter that are.
Being reflected in those numbers. So I do think in a go forward basis will be closer to 27%, but that said you know and I said so in my comments, we're certainly focused on expense management, particularly with the.
The revenue pressure that we're all under.
Got it okay.
And then on the fee income side.
The prepared remarks include commentary around kind of a shift in residential mortgage strategy of trying to sell more of those loans.
Should we expect to see.
Somewhat of a pickup in the mortgage banking line.
Like last quarter or last year you were.
A little bit over $1 million per quarter, do we expect that to kind of ramp up.
North of that.
No I don't I don't believe so I think we will certainly sell more as a higher percentage than what we've been doing I would say I think right now our pipeline is currently 30%.
Low <unk> mid <unk>.
Designated for sale, we'll continue we're continuing to drive that higher.
I think ultimately a function of just the.
Call it the mortgage the mortgage industry with rate.
With supply levels, and so forth being much lower theres just compression in overall production. So I do think we'll do higher as a percentage, but I think our production is certainly coming down.
So I think from a guidance perspective, I think we're right around half a little over $5 million this quarter.
Probably somewhere between half to three quarters is a pretty decent spot for us for now.
Okay.
Got it Okay and then with.
With respect to the composition of the deposit portfolio.
Your noninterest bearing deposits right now are 23% of total deposits and I understand you had the large relationship that moved off the books, but.
Do we should we model out kind of the niv going closer to <unk>.
Pre pandemic levels.
It would probably be closer to the mid teens or do you think that.
Based on the composition of of customers and accounts now you could kind of keep that north of 20%.
Yeah.
Yes, I think internally, we're not certainly not anticipating it to go that low pre pandemic levels as of right now certainly Damon we did we certainly seen mix shifts.
Just with the rates where they are.
We see folks moving from.
Noninterest, earning to the other categories or we have but we do anticipate that hopefully stabilize.
So again I don't have a good number for you in terms of what that percentage might be but certainly we're not we're not sitting here today thinking that is going to get down to the mid.
Mid teens again.
Okay. That's helpful and then I guess kind of circling back on the margin.
I understand the.
The swaps are going to.
Help the margin a bit.
Going forward, but as we look at the kind of the overall margin direction and continued decline I mean do you think like this quarter was was kind of the peak compression for you guys and we could see further compression, but at a much slower pace.
Yes, I think I think that last part of your statements Fair I think that's how we're thinking about it is we do anticipate some further compression next quarter.
We are we have seen it in recent months starting to slow a little bit which is a positive sign.
So as we think about second quarter, we're probably.
Down a few basis few basis points of margin is as many as probably higher.
Higher single digits as well I think that.
Pretty good estimate right now I think the mix for the deposit mix shift is something that we're keeping a close eye on internally.
We're also very focused to see how seasonal deposits come back in and as we anticipate that at that.
Call. It later.
Later in May and into June and what that starts to shape up to be that disappoint I'm not trying to signal that we are concerned about.
Seasonal deposits coming in and I think it's more what where does that mix when they do.
Got it Okay and do you happen to have the the margin for the month of March.
Or.
Cost of deposits for the month of March.
Our margin for March was $2 51.
Okay.
Okay. That's helpful.
Alright, that's all I had thank you very much okay. Thank you Devin.
Thank you and our next question comes from Matthew Breese with Stephens. Please proceed.
Hi, good afternoon.
Michael I missed the last part of that margin guide I heard the two basis points, but then.
You said something about higher single digits could you just repeat.
Sure Yeah. So I think I think next quarter, we will see we anticipate anywhere from low single digit margin compression to the higher end.
I don't know if thats.
Call it $2 52.
It could be as low as $2 40, but again I think it's.
It's kind of in that ballpark is what we're thinking right now.
Okay.
And then.
You discussed kind of a slowdown in loan growth totally appreciate that.
What about overall deposit growth ex brokered what are you expecting for for the remainder of the year in terms of kind of core deposit growth.
Yes, I think on that front.
I think in the near term on our core deposits, we anticipate that it will be fairly flat for the next quarter or at least on an average basis.
Do you think that will.
Potentially see some of that start to pick up from an end to end just as we get the seasonal inflows in.
I think realistically I mean again I would tell you that where we are.
We're working that deposit channels hard.
We have lots of various promotions going on internally, whether its <unk> or money market certainly working the operating accounts and checking accounts as well.
But it is it is hard to forecast right now, but we are I would say low to.
Low to mid single digits is kind of what we're estimating or certainly hope for it.
Matt This is Greg maybe just to highlight what Mike was saying on the components of it is is to play out the seasonal deposit flow.
Yes.
Understand that over the next few months.
Well as just call it our marketing activities and sales activities ramping up.
With the current underneath it all very competitive as it is for all markets at all thanks Ram for for deposits and pricing right now.
Understood.
Maybe in terms of.
The overall securities portfolio, it's been down for the last four or five quarters.
Should we expect continued run off there.
Yes, I think in the near term the short answer is yes, Matt we continue to redeploy those cash flows to fund the level of loan growth to help fund the level of loan growth that we have but I think we're also thinking about in terms of just paying down borrowings at this point as well.
Okay and then on.
On the opposite side capital management is hoping you could discuss.
If the loan growth isn't there in casual securities or pain paying down borrowings or is there any appetite for buybacks. If so maybe discuss that.
Yeah on the buyback front.
Right now will we will look at if there's any opportunity.
Looking at.
The stock price.
Definitely.
Call it a tempting price, but we want to measure it into overall capital planning that we see.
Okay.
Okay.
All I had I'll leave it there thank you.
Great. Thank you.
Okay.
Thank you.
We have no further questions. This concludes our question and answer session I would like to turn the conference back over to Greg to four for any closing remarks.
Great. Thank you.
Steve Damon Matt for questions and all the participants here as I close I do want to thank you all for your interest in Camden National but also.
To recognize the employees of Camden National that are really doing some stellar work here across the board.
As we talk about our priorities.
Deposits in margin and asset quality is truly all hands on deck on that and I'm really proud of the team and what they are doing so with that thank you very much and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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