Q2 2023 Camden National Corporation Earnings Call
Good day and welcome to Camden National Corporation second quarter 2023 earnings Conference call.
My name is M&A and I'll be your operator for today's call.
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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 Companys earnings press release and supplemental earnings material. The company's 2020 to your 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.
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 <unk> 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, the second quarter of 2023 down 3% from $12 $7 million, we reported for the first quarter of 'twenty three.
On an EPS basis, we reported <unk> 85 per diluted share down <unk> <unk>.
From the first quarter of 'twenty three.
We continue to see the impact of rising interest rates and the inverted yield curve on our operating results as I shared at last quarters earnings call. Our focus has been on deposits in 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.
Net interest margin was two 4% for the quarter within our estimates, but down from 254% reported during the first quarter of the year.
Asset quality continues to remain strong with nonperforming assets to total assets at nine 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 borrowed funds and to benefit our net interest margin as well as to maintain our loan to deposit ratio.
Our sales teams remained focused on deposit generation.
And they continue to review loan opportunities that are appropriately priced and high quality.
At the same time, we are causing our sales and support teams are very well positioned to increase our lending activities when interest rates and market conditions allow.
From a general perspective like many areas of the country, we're 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.
Paulo, although pricing competition for deposits remains fierce we are satisfied with our ability to retain deposits.
Other relationships in this environment.
It's been awhile since I've used the term keeping our powder dry on one of our earnings calls.
I believe this is the best course of action as we see what Fedex that 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 clear line of sight 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 <unk> 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 two 4% for the second quarter.
Our return on average assets and our return on average tangible equity followed suit and were also down quarter over quarter.
For the second quarter of 2023, a return on average assets was <unk>, 87% and our return on average tangible equity was 13, 5%.
The decrease in our earnings and profitability reflects the current interest rate environment and inverted yield curve.
Ever we remain on strong financial footing backed by a strong balance sheet with sufficient levels of capital and reserves.
We also have to continue to have a healthy liquidity position that included access to $1 4 billion of funding, which was two times 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.
Another 25 basis points increase in the second quarter.
Although higher interest rates benefitted, our asset yield, which increased 20 basis points between quarters to four 2% for the second quarter. The increase in funding costs due to higher interest rates more than offset the benefit.
Funding cost increased 36 basis points between quarters and reached 181% for the second quarter of 2023, which represented a beta 73, 6% for the quarter.
Our cumulative beta and measured from January one 2022 through June 32023 was 32, 4%.
On the deposit side, we continue to see deposit acquisition and pricing remain very competitive throughout our markets and fully anticipate we will continue to see pricing pressures in the near term.
Deposit cost increased 26 basis points on a linked quarter basis and reached 148% for the second quarter of 2023, representing a 53, 9% beta for the quarter.
Our cumulative deposit beta measured from January one 2022 through June 30 of 2023 was 27, 1%.
Like many others across the banking industry, we have experienced the 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 noninterest checking and savings balances, which decreased 7% from the first quarter 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.
Loan growth for the second quarter of 2023 was 1% and we continue to move forward with our strategy in the current environment. Another it's 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.
We reduced our interest rate exposure to rising interest rates.
These swaps added $1 7 million in 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 one year funding at a rate of four 7% through the bank term funding program rolled out by the fed earlier this year we.
We view this as a prudent step to help manage funding costs and the current interest rate environment, while also providing us with favorable optionality as interest rates move lower over this one year period.
Now switching to credit our credit quality across our loan portfolio remains very strong overall.
Non performing loans were 0.13% of total loans and delinquencies were five basis points of total loans as of June 32023, both consistent with last quarter, while total criticized and classified loans improved quarter over quarter and stood at 113% of total loans as of June 30.
Total loan reserves stood at <unk>, 9% of total loans at quarter end down one basis point from the first quarter, reflecting the strength of our loan portfolio, but also recognizing the ongoing risk within the broader macro environment 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 Cree office loan portfolio, which included a detailed information in our supplemental earnings materials that we filed we continue to monitor as loan portfolio closely we have not seen any material changes in the portfolio through the second quarter.
Noninterest income for the second quarter of 2023 totaled $10 1 million, an increase of 2% over the first quarter of this year for the second quarter of 2023, we sold 34% of our residential mortgage originations.
We continue to push more of our origination volumes available as.
As of June 30th 50% of our committed residential mortgage pipeline is designated for sale.
Noninterest expense for the second quarter totaled $27 1 million, which was 4% higher than last quarter.
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 our overhead ratio, which is calculated as annualized quarterly operating expenses over average quarterly assets was one 9% both higher than the first quarter.
As of the end of the second quarter of 'twenty three our capital position remains strong measured on both a GAAP and regulatory basis at.
At the end of the second quarter, our TCE ratio was six 5%, 7% up one basis point from last quarter and regulatory capital ratios continued 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 32023, we are pleased to note that as of June 30. The company will continue to be in excess of regulatory capital requirement. 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 <unk> 42 per share and represented an annualized quarterly dividend dividend yield of 542% as of June 30, based on our closing share price.
On that date.
Through June 30, we repurchased 65692 shares of our common stock at an average price of $33 36 per share.
This concludes our comments on our second quarter results will now open the call up for questions.
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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 maybe just starting with you.
The margin here.
How's it going.
On the margin here depreciate.
Got the derivatives have definitely helped here.
Moderate 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 rate environment.
Yes, so I think from a margin perspective, Steve as we think about next quarter, we're kind of in the $2 40, 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.
A few days.
We also also we are in the seasonal deposit flows and so we're seeing that come in and something we're continuing to watch and monitor and I think the other 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 $2 40 range, but we could see that be slightly higher or lower.
Yes.
Okay.
I appreciate that and in terms of loan pricing here just kind of curious.
What where loan yields are coming on for new origination of these days.
Sure so for the second quarter, our new originations came on I think on a weighted basis around seven little over 7% with 710.
Fix out I may.
From a pipeline perspective, we're largely at 7% or over seven well over 7% now.
Think our commercial creep portfolio of somewhere in the neighborhood of seven five plus.
I wanted to say the residential pipeline is $70 a quarter slightly over so.
As we've talked about we are we have been very prudent on the 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 the right rate and price for it as you know a function of that of course is just the lag effect, where it takes 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.
Did 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 here.
Steve the only the only thing I might add alright, there just thanks very much for all the color.
Okay.
Yes.
Our next question comes from Damon Delmonte with <unk> Daemon. Please go ahead. Your line is now open.
Yes.
Hey, good afternoon, guys hope, you're both doing well today.
So just wanted to kind of circle back on the margin.
Good to hear good there just wanted to circle back on the margin commentary.
So assuming that the fed raises rates.
At least one more time.
Tomorrow I think its tomorrow is.
The meeting.
Does that how does that play into your commentary Mike about.
Is that going to benefit the margin or do you think that's going to put some more on the lower end of the range.
I mean I think.
The fed increase and we will certainly put a little more pressure on the funding side certainly from a both from a deposits of course, the borrowing side as well.
We some of the swaps that we've 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.
I think that's when we think about margins for next.
Next next quarter or the third quarter I think those are the various variables that we're considering where we're saying hey, we think <unk> is probably a pretty good.
Midpoint of where we were we may land, plus or minus and some basis points there, but I think it's all of those factors that we're baking in knowing that.
Another fed rate hike could certainly isn't isn't going to help from an immediate funding perspective.
Got it Okay and do you happen to have the spot margin as of.
The month of June .
For June our monthly margin was $2 38 I believe.
Okay, great. Thank you.
And then as we think about.
Sure.
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 losses are 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.
Okay, and then on the fee income side.
It sounded like you felt pretty comfortable with this quarter's level. So that's probably a reasonable run rate then it didn't seem to be a lot of noise this quarter.
No I think Thats I think the $10 million is a pretty good run rate or is kind of something like we saw this quarter.
Yeah.
Okay.
Okay, Great. That's all that I had thank you very much.
Youre welcome. Thank you.
That's where we take our next question as a reminder, if you'd like to ask a question today. Please do so by pressing star followed by the number one on your telephone keypad.
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 work their way month by month was there any sort of intensive intensification of run off towards the end of the quarter versus the beginning or does it start to subside.
Yeah.
Okay.
I don't I mean, nothing sticks out at me, Matt I'd say one of the things that we just continue to watch us.
Particularly on the consumer side, just average balances we saw that really peaked during the pandemic and one of the areas that we're seeing pressure on it's just those average balances pulled out in this in this environment. So yes.
I think thats one of the big the big variables that are out there we are seeing the seasonal deposit flows on the business side.
You would expect but one thing that we can see that monitors that consumer side and what happens there.
And I think to that end. The other reality is that we are also monitoring our accounts and we continue to see the number of accounts grow at that basis. So we're 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 240, NIM plus or minus do you feel like Thats 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.
Thank you.
I think probably 240.
It's probably a pretty decent spot from a modeling perspective for.
The remainder of the year as we get into the winter months for us to see seasonal flows start to go a little bit the other way so theres a little bit generally lumpy lumpiness in jest.
Margin between Q4 Q1, as we get back into Q2, but I think the reality is 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 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 some to help alleviate 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 off the table at this point.
Well continue to look at that just as in normal normal due process.
Standing right now certainly the investment portfolio is continues to weigh down we're down on margin. So.
I think the short answer is yes, we will continue to look at that.
Okay last one from me just show you repurchased a little bit of stock this quarter.
Anything to read into that or is that just managing kind of overall share count.
No I think it's just us being opportunistic when that when the time com.
A small tranche and where it's certainly being cautious from a capital perspective, but I think when that when the price makes sense for us we'll be opportunistic in the market. So.
I guess, that's how I would read into that.
Got it okay.
Understood I'll leave it there thanks for taking my questions.
Yeah.
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.
Everybody I want to thank you for being on the call and taking interest in the company.
And have a great day take care.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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