Camden National Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
April 25, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to 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 a listen only mode during today's presentation. Following the presentation, we will conduct a question and answer session. 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 projected in the forward looking statements.

Operator

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 ks 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 forward looking statements are made. Any references in today's presentation to non GAAP financial measures intended to provide meaningful insight 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.

Operator

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.

Speaker 1

Thank you, Danielle, and welcome to Camden National Corporation's Q1 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 $12,700,000 or $0.87 per diluted Share for the Q1 of 2023, a 17% decrease from the Q4 of 2022. This resulted in a return on average equity of 11.16% and a return on tangible capital of 14.21%. Driving these results were the impact of our normal seasonal deposit outflows, overall interest rate volatility and market based Pricing increases impacting deposit rates.

Speaker 1

We also recorded a $1,800,000 pre tax loss on a subordinated bond We held in Signature Bank, which was recorded I'm sorry, which was held in our held to maturity portfolio and that loss was recorded in our provision for credit losses line. We've reviewed our investment portfolio and feel comfortable with the positions we hold with only 3% in corporate bonds. Mike will speak to our investment portfolio in more detail in just a few minutes. The turmoil in the banking sector during the past quarter is sharpened our focus, but hasn't drastically altered. Our priorities remain the same, Deposits, margin and asset quality.

Speaker 1

Over the past several quarters, I've shared our strategies 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'll continue to lend in the current environment, but we'll 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 are expected to temper our loan growth in the near term. With that said, we ended the Q1 2023 with 4.1 $1,000,000 of loans up 2% from the end of 2022 with overall loan yields increasing 29 basis points from December.

Speaker 1

We ended the Q1 of 2023 with just over $4,400,000,000 of deposits, excluding brokered deposits, which is 5% less than balances at the end of 2022. Further adjusting for 1 large municipal depositor relationship that is discussed In our earnings release, deposit balances were down only 2% from year end. We believe these results Reflect the seasonality within our deposit base during the winter months and indicate our core customer deposit base has remained solid during the past few months. During the quarter, we also declared a dividend of $0.42 per share and did not repurchase shares during the quarter. I'll now turn the discussion over to Mike.

Speaker 2

Thank you, Greg, and good afternoon, everyone. Earlier today, we reported our quarterly earnings, which included our normal earnings release as well as a supplemental deck that provides additional information to the investor community that we believe is helpful and relevant given recent events in the banking industry. This supplemental information addresses deposits, liquidity, investments and loans in more detail than normally we provide in our earnings release. I'll speak to the salient points of each in more detail shortly. But before I do, I want to share that Canada National's financial footing remains strong based on firm fundamentals supported by our diverse deposit base, excellent asset quality that starts with our lenders and underwriters and strong capital levels.

Speaker 2

As of March 31, the company's uninsured and un collateralized deposits were 15% of total deposits compared to 16% as of December 31, 2022. This level of uninsured, unclaritalized deposits speaks to the diversification of our customer base with approximately 70% of our deposits being retail and the remaining being commercial and muni deposits. More information on our uninsured and un collateralized deposits can be found on Page 5 of the supplemental earnings materials filed this morning with the earnings release. Total deposits at March 31 were $4,600,000,000 including broker deposits, down 4% from year end and down 1% when adjusting for the large municipal depositor relationship that Greg just mentioned earlier and is discussed further in our earnings release. As discussed in our earnings release and in previous calls, we generally see some deposit During the Q1 given seasonality across our markets.

Speaker 2

The decrease seen in the Q1 of 2023 was of a similar level to those seen in the Q1 of previous years prior to the COVID-nineteen pandemic. As of March 31, the company's Primary available liquidity sources consisted of cash, securities, FHLB and FRB capacity, Total of $1,300,000,000 which is about 1.9 times our total uninsured and unclarized deposits as of March 31. You can refer to Page 5 of the supplemental earnings materials for more information on our liquidity position. Our credit quality across our loan portfolio Very strong throughout the Q1 and our credit quality metrics were consistent with or slightly better than those at year end. The allowance for credit losses was 0.91 percent of total loans at quarter end, down just 1 basis point from year end, which both reflects the strength of our asset quality and balances the risk of a future downturn in the economy.

Speaker 2

We continue to monitor our credit portfolio proactively and recently did a deep dive into our CRE office portfolio given the heightened focus on commercial real estate in this sector specifically. The results were as expected, and we confirm that there are no significant concerns within this portfolio at this time. Our CRE office portfolio represents about 5% of total loans as of March 31 and all loans are within our markets. As of quarter end, none of the CRE office portfolio was on nonaccrual status or past due. More details on this Portfolio can be found on Page 7 in the supplemental earnings material.

Speaker 2

In the Q1, we fully wrote off a $1,800,000 investment in a Signature Bank bond due to the bank's failure. This loss was recognized within provision for credit losses on the income statement and is driving the provision expense for the quarter. Our corporate and municipal bond portfolio continues to be of high credit quality and we have since reevaluated these portfolios and do not see any further credit risk at this time. We provided additional details on these portfolios on Page 8 of the supplemental earnings materials. As of March 31, our investment portfolio was in an unrealized loss position of $122,000,000 compared to an unrealized loss of $141,500,000 at December 31, 2022.

Speaker 2

At March 31, the available for sale portfolio was an unrealized loss of 91,000,000 And the health and maturity portfolio was an unrealized loss of $31,000,000 At quarter end, the duration and weighted average life of The AFS portfolio was 4.7 years 6.8 years respectively and the duration and weighted average life of the HGM portfolio with 7.1 years and 10 years respectively. As of the end of the Q1 of 2023, Our capital position remains strong measured on both a GAAP and regulatory basis. At the end of the Q1, our TCE ratio was 6.56% compared to 6.37% at year end and regulatory capital ratios continue to be well in excess of capital requirements. We did not repurchase any shares of our stock during the Q1 and continue to have 750,000 shares available for repurchase under the current repurchase program. Now to earnings.

Speaker 2

As Greg mentioned for the Q1 of 2023, we reported net income of $12,700,000 and diluted EPS of $0.87 each down 17% compared to the Q4 of 2022. On a non GAAP pretaxpreprovision basis, The company reported 1st quarter earnings of $18,000,000 down 9% from last quarter. Like many others across the banking industry, we 2 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 Q1, 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'd seen during the Q1 from non interest checking and savings into higher cost products such as money markets and CDs. The other primary driver for the lower earnings between quarters This was a write off of the Signature Bank bond discussed earlier.

Speaker 2

Net interest income on a linked quarter basis was lower by $2,700,000 or 7%. Again, the primary driver was margin compression as it declined to 2.54% for the Q1 of 2023. The speed of deposits of funding betas increased in the Q1 as short term rates continue to rise on the back of 2 additional Fed rate increases totaling 50 basis points and we absorbed the full quarter impact of 125 basis points of Federated increases in the Q4 of 2022. Over the past several months, we have seen the deposit landscape within our markets become much more competitive as interest rates have risen. We continue to manage funding costs actively through various strategies.

Speaker 2

Our deposit beta, which excludes broker deposits through the cycle thus far as 24% and for the Q1 was 44%. Included within interest income for the Q1 was $479,000 of income from execution of 300,000,000 We'll pay FX, receive floating interest rate swaps during the quarter. Loans for the Q1 of 2023 increased $62,800,000 or 2%. We've seen our committed loan pipelines for both retail and commercial each continue to hold around $50,000,000 as we look to price all new originations appropriately We are also now selling a larger percentage 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.

Speaker 2

Non interest income for Q1 of 2023 totaled $9,900,000 an increase of 1% over last quarter. The decrease in mortgage banking income on a linked quarter basis This was driven by changes in valuations between quarters. Overall, we sold 40% of our residential mortgage production for the Q1 compared to 16% in the Q4 of 2022. Our strategy has shifted to sell all qualifying residential mortgage production as we focus on optimizing net interest margin. Non interest expense for the Q1 totaled $26,200,000 down 3% from last quarter, which is favorable compared to our expected 2% to 3% increase previously communicated.

Speaker 2

We have and will continue to manage expenses prudently given However, we remain focused on our long term strategy and franchise value. Our non GAAP efficiency ratio for the Q1 of 2023 was 58.96% compared to 56.35 percent last quarter. Our overhead ratio remains strong and demonstrates our cost management practices, highlighted by a ratio of 1.84 percent for the Q1 of 2023 compared to 1.93% for the Q4 of 2022. This concludes our comments on our Q1 results. We'll now open the call for questions.

Operator

Thank you. We will now begin the question and answer session. At this time, we will pause momentarily to assemble our roster. Our first question comes from Steve Moss of Raymond James. Please proceed.

Speaker 3

Good afternoon.

Speaker 2

Hi, Steve.

Speaker 3

Maybe just starting on the margin here, Curious to see curious to get a little color around the swaps that you guys put on here In terms of maybe how long the terms and how we think about margin expectations going forward if this helps you To become maybe a little more neutral or how to think about it.

Speaker 2

Sure. No, I can take that one, Steve. Yes, so we added 300,000,000 Pay fixed, receive float 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 48, 4.90 right now. So we are getting positive carry right now.

Speaker 2

We are getting that benefit, Roughly $500,000 for the quarter and anticipate that assuming rates go up at least once more, we'll See a full quarter benefit to you as we get into the Q2, which is probably the neighborhood of 5 to 7 basis points from a margin perspective. And then I think the latter part of your question, Steve, just I think really that is really to drive some asset sensitivity. It does Get us closer to where we want to be from interest rate risk position, as well certainly particularly in the over the short term.

Speaker 3

Okay. And in terms of just the swaps for 2 or 3 years or just kind of curious how long they'll

Speaker 1

be around?

Speaker 2

Sure. We have some that are we did 3, 4, and 5 years. And again, part of the accounting on these swaps Provides us a little more flexibility to get out. There are some ramifications certainly for that as well, but provides a little bit of more flexibility than your normal cash flow

Speaker 3

And so as we think about the margin here, Everybody's seen a meaningful step up in deposit costs. Just kind of curious how are you guys thinking about a through the cycle deposit beta? And if let's say the Fed holds around 5%, where could your margin shake out by the Q4 this year?

Speaker 2

Yes. And again, a lot of unknowns there certainly. But I would say right now, from a total funding beta, I want to say we're right around 28% cumulative, anticipating we're assuming that the Fed gets up to 5.25 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.

Speaker 3

And 35% deposit beta is on total deposits or on interest bearing?

Speaker 2

Excuse me, on the funding, total funding beta. Total Funding business. Okay.

Speaker 3

Okay. That's helpful. And then in terms of Loan pricing, just curious as to what's the type of loans that came on the portfolios Came on the books this quarter, just what rate you saw and kind of how we think about the more cautious guidance around loan growth?

Speaker 2

Sure. I think I believe our call weighted average rate for new originations on books is around 670 for the quarter. Internally, we are certainly ramping up rates. Our residential is generally anywhere from 650 to north of 7 at this point on a weighted basis And commercial is certainly pricing higher than that where we're seeing rates certainly rates that start with a 7 on a weighted basis.

Speaker 3

Okay. Got it. And so it's just kind of Loan growth for the rest of the year, are you guys thinking about it relatively flattish versus the very end of the quarter or Low to mid

Speaker 2

single digits, can you just maybe flush that out a little bit?

Speaker 1

Steve, this is Greg. I'd say flat to low single digits Right now, and as I mentioned, we have capacity to lend, we'd like to lend, but we're only going to do it on rates that we feel are You know benefiting our margin right now, so we're not overstretching on the growth side.

Speaker 2

Okay.

Speaker 3

Appreciate it. That's all fair. Well, thank you very much for all

Speaker 1

the color.

Speaker 3

Appreciate it.

Speaker 4

You're welcome.

Operator

Thank you. The next question comes from the line of Damon DeMonte of KBW. Please proceed.

Speaker 5

Hey, good afternoon guys. Hope you're all doing well and thanks for taking my questions here. I just wanted to ask about the expense Look, Mike, held a pretty tight linked quarter. Just kind of wondering, kind of where we go from here? Do you see Modest growth over the coming quarters?

Speaker 2

Yes, I do, Damon. I think our run rate, normal run rate As we go out to the remaining parts of the year, here we'll be closer to 27. We had some, I'll call it, incentive Accrual type true ups that we accounted for in the Q1 that are being reflected in those numbers. So I do think on a go forward basis will be closer at 27%. But that said, and I said so in my comments, we're certainly focused on expense management, particularly with The revenue pressure that we're all under.

Speaker 5

Got it. Okay. And then on the fee income side, you've made 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? I mean like last quarter or last year you were a little bit over $1,000,000 per quarter.

Speaker 5

Do we expect that to kind of ramp North of that?

Speaker 2

No, 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 to low 30, mid-30s designated for sale. We're Continuing to drive that higher. I think ultimately a function of just the, call it, the mortgage industry with rates and With supply levels and so forth being much lower, there's just compression in overall production.

Speaker 2

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 $500,000 this quarter, probably somewhere between 0.5 to 3 quarters It's a pretty decent spot for us for now.

Speaker 5

Okay. Got it. Okay. And then, with respect to the Composition of the deposit portfolio, your non interest bearing deposits right now are 23% of total deposits and I understand you had A large relationship that moves off the books. But do we to remodel out kind of the NIB going closer Pre pandemic levels, which would probably be closer to the mid teens or do you think that based on the Composition of customers and accounts now, you could kind of keep that north of 20%.

Speaker 2

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're certainly seeing mix Just with rates where they are, we see folks moving from non interest earning to other categories that we have. But We do anticipate that to 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 sitting here today thinking that it's going to get down to mid teens again.

Speaker 5

Okay. That's helpful. And then I guess Kind of circling back on the margin. I understand the swaps are going to help the margin a bit going forward. But as we look at the Kind of the overall margin, the direction and continued decline, I mean, do you think like this quarter was kind of the Peak compression for you guys and we could see further compression but at a much slower pace?

Speaker 2

Yes, I think that last part of your statement is fair. I think that's how we're thinking about it. We do anticipate some further compression next quarter, But we are we have seen it in over just 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 points from margin is as many as probably Higher single digits as well. I think that's pretty good estimate right now.

Speaker 2

I think the mix for the deposit mix shift is something that we're keeping Close eye on internally. We're also very focused to see how seasonal deposits come back in and as we anticipate that at the call it Later in May into June and what that starts to shape up to be. At this point, I'm not trying to say no that we have concerns about Seasonal deposits coming in, I think it's more what is that mix when they do.

Operator

Got it. Okay.

Speaker 5

And do you happen to have The margin for the month of March and or, the cost of deposits for the month of March?

Speaker 2

Our margin for March was 2.51. Okay.

Speaker 5

Okay. That's helpful. All right. That's all that I had. Thank you very much.

Speaker 2

Thanks, Damon.

Operator

Thank you. And our next question comes from Matthew Breese with Stephens. Please proceed.

Speaker 4

Hi, good afternoon. Michael, I missed the last part of that margin guide. I heard the 2 basis points, but then you said something about higher single digits. Could you just repeat?

Speaker 2

Sure. Yes. So I think next quarter we'll see we anticipate anywhere from low single digit margin compression to the higher end. So I don't know if that's call it 250 to could be as low as 240. But again, I think it's Got it in that ballpark is what we're thinking right now.

Speaker 4

Okay. Okay. And then You discussed kind of a slowdown in loan growth. Totally appreciate that. What about overall deposit growth ex brokered?

Speaker 4

What are you expecting

Speaker 3

For the remainder of

Speaker 4

the year in terms of kind of core deposit growth?

Speaker 2

Yes. I think on that front, I think in the near term on core deposits, we anticipate that it will be fairly Flat for the next quarter, at least on an average basis. I do think that we'll 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 we're working the deposit channels hard. We have lots of various promotions going on internally, whether it's CDs or money market, certainly working the operating accounts and checking accounts as well.

Speaker 2

But it is hard to forecast right now, but we are I would say low to mid single digits is kind of what we're estimating or we certainly hope for.

Speaker 1

And Matt, this is Craig. Maybe just to highlight what Mike was saying and the components of it is to play out the seasonal deposit flow. We'll understand that over the next few months as well as just call it our marketing activities and sales activities ramping up With the undercurrent underneath it all, very competitive as it is for all markets that all banks are in for deposits and pricing right now.

Speaker 4

Understood. Maybe in terms of the overall securities portfolio, It's been down for the last 4, 5 quarters. Should we expect continued runoff there?

Speaker 2

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 it in terms of just paying down borrowings at this point as well.

Speaker 4

Okay. And then on the opposite side, capital management is hoping you could discuss, if the loan growth isn't there and cash flow securities are Paying down borrowings, is there any appetite for buybacks? If so, maybe discuss that?

Speaker 1

Yes. On the buyback front, Right now, we'll look at if there's any opportunity with it, looking at the stock price, it's definitely at a Call it a tempting price, but we want to measure it into overall capital planning that we see.

Speaker 4

Okay. That's all I had. I'll leave it there. Thank you.

Speaker 2

Great.

Speaker 3

Thank you.

Operator

Thank you. 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.

Speaker 1

Great. Thank you and thank 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 and margin and asset quality is truly all hands on deck on that. And I'm really proud of the team and what they're doing. So with that, thank you very much and have a great day.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Remove Ads
Powered by Quartr
Earnings Conference Call
Camden National Q1 2023
00:00 / 00:00
Remove Ads