Camden National Q4 2023 Earnings Call Transcript

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January 30, 2024

There are 6 speakers on the call.

Operator

Good day, and welcome to Camden National Corporation's 4th Quarter 2023 Earnings Conference Call. My name is Cole, and I'll be the 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 those projected in forward looking statements.

Operator

Additional information concerning factors that could cause actual results to differ, Supplemental earning materials, the company's 2022 annual report on form 10 ks and other filings from 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 insights and are reconciled with GAAP in your press release today. Today's presenters are Simon Griffiths, President and Chief Executive Officer and Mike Archer, Executive Vice President and Chief Financial Officer. Please note that this event is being recorded.

Operator

At this time, I would like to turn the conference over to Simon Griffiths. Please go ahead.

Speaker 1

Good afternoon. Thank you, Cole, and welcome to Camden National Corporation's 4th Quarter 2023 Earnings Call. I'd like to start by introducing myself. I joined Camden National Corporation last November and took over as the President, Chief Executive Officer on January 1st. And it's an absolute pleasure and honor to join the company.

Speaker 1

Since joining, I've been impressed with the strength of the management team and their focus on delivering an outstanding experience for our customers. As I meet with team members and their customers, I've come to realize how deeply rooted Camden National is in the communities we serve and my 1st months with the company have confirmed for me The pivotal role we play. From large commercial customers to small business owners, there is strong momentum for these businesses to grow And our teammates can deliver the products and services and have the customer relationships to guide them along the way. I'm also impressed by the robust technology advancements the company has made. The team has been driving innovation and utilizing sophisticated tools to automate process, leverage data and deliver digital products to aid our customers and our team members.

Speaker 1

Earlier this morning, we reported net income of $8,500,000 or $0.58 earnings per share diluted share for the Q4 of 2023. This included the impact of repositioning a portion of our investment portfolio, which generated a $5,000,000 pretax loss on the sale of securities. Excluding that impact, our adjusted non GAAP earnings for the quarter would have been $12,400,000 or $0.85 per diluted share. The company continues to look for opportunities to adjust and optimize the balance sheet, and we expect the changes we made in 2023 will provide future benefits to our net interest margin, earnings and capital. The strength of our balance sheet continues to position us well for growth and to capitalize on market opportunities as the broader market shows signs of normalization.

Speaker 1

Our capital position remains strong and improving, highlighted by an increase in the tangible common equity ratio to 7.11 percent at December 31, 2023 compared to 6.47% at September 30, 2023. We continue to see solid demand for loans in the communities that we serve and our pipeline remains steady. We're excited by the addition of a new Director commercial banking in New Hampshire with more than 22 years of banking experience. We're already seeing positive momentum in the market and we'll continue to look at opportunities to strengthen our team and expand our market presence. We remain focused on full relationship banking To strengthen customer loyalty, leveraging our robust balance sheet and actively managing new loan yields tightly given the decrease in the 10 year treasury yield over recent months.

Speaker 1

Personally, I'm invigorated by this opportunity to work with a talented and dedicated team to make an impact and build on their many successes. The swift actions taken throughout the year, including steps to stabilize our net interest margin, fortify our balance sheet and position the company for future earnings capacity to drive long term shareholder value. These actions have positioned us well for the future and will enable us to capitalize on opportunities within our market. Our priorities for 2024 will be to continue to manage the business with a focus on actions that prioritize long term shareholder value, while having a prudent offense mindset. We have many exciting capabilities and delivery roadmap across our technology, digital, data analytics and AI roadmap that will continue to drive growth.

Speaker 1

The team remains laser focused on our long term strategic plan to drive stability, profitability and growth with strong expense discipline complemented by a talented team. I'm confident in our ability to adapt to the changing environment and economic landscape, while continuing to provide long term shareholder value. Now I'm going to turn it over to Mike to provide some additional insights into our financial performance for the quarter.

Speaker 2

Thank you, Simon, and good afternoon, everyone. This morning we reported net income for the Q4 and annual financial results for the year ended 2023. Like many others across the banking industry, our annual financial results for the year were impacted by their macroeconomic conditions and other challenges faced during the year, which included higher short term rates in an inverted yield curve compounded by several well known larger regional bank failures bringing deposits and related pricing and to further focus across the banking industry. Our response to these market conditions events included prioritizing deposits and liquidity, taking steps to help optimize our net interest margin and maintaining our strong asset quality. We believe our capital reserve level and liquidity position us well for future growth and shareholder value creation.

Speaker 2

These priorities continue throughout the Q4 and remain key priorities today. Net income for the year ended December 31, was $43,400,000 and diluted EPS totaled $2.97 each a decrease of 29% compared 2022 annual financial results. Included within these results are pre tax investment losses of $10,300,000 As we sold lower yielding investments in the 3rd and 4th quarters this year to reposition our balance sheet with a focus on driving future earnings and improve profitability, as well as a $1,800,000 write off of a Signature Bank bond. Adjusting for these items, our annual earnings on a non GAAP basis for 2023 was $53,000,000 and a diluted EPS on a non GAAP basis of $3.63 decreases of 15% 14% respectively compared to 2022. Net income for the Q4 of 2023 was $8,500,000 and diluted EPS was $0.58 each a decrease of 13% compared to the Q3 this year.

Speaker 2

As noted in my earlier comments, we sold investments at a loss in the 3rd 4th quarters, which affected our financial results for each quarter. Adjusting for these investment losses, our earnings on a non GAAP basis for the Q4 were 12,400,000 Diluted EPS was $0.85 each a decrease of 11% on a linked quarter basis. Highlights for our 4th quarter operating results included seeing signs of our net interest margin stabilizing, improving capital ratios and finishing the year with excellent asset quality. Our net interest margin for the 4th quarter was 2.40 percent, which was up 1 basis point from last quarter. We continue to redeploy our investment cash flows primarily to fund loan originations in order to improve overall asset yields and anticipate we'll continue to do so.

Speaker 2

We believe this asset remixing should help continue to stabilize net interest margin through the winter months within our markets as we generally see a level of seasonal deposit outflows and as we continue to see pressures on funding costs from deposit mix shift. The strength of our liquidity position affords us the flexibility to continue to leverage the strategy. In order to deploy all of the proceeds from the sale securities in the 4th quarter, We also reinvested a portion of the proceeds into new securities that yielded just above 6% and that were purchased at a slight discount. As our investment portfolio continues to produce cash flow, we expect we'll continue to leverage this cash flow to support loan fundings. Our book and regulatory capital ratio has improved across the board in the Q4 and we finished the year with a TCE ratio of 7.11%, up from 6.47% at September 30, 2023 and 6.37% at December 31, 2022.

Speaker 2

Our capital position continues to be one of our strengths and it positions us Well to capitalize on market growth opportunities. Our asset quality as of December 31, 2023 remained very strong by all measures. At year end, our non performing assets to total assets were 0.13%, our past due loans were 0.12% of total loans Net charge offs for the Q4 were $358,000 or 0.04 percent of average loans on an annualized basis. The overall health of our customer base continues to be very positive, highlighted by criticized and classified assets of 1.13% of total loans at year end, which is up from 1.05% for the 3rd quarter, but down from 1.67% at December 31, 2022. We continue to monitor our loan portfolio proactively to identify any early signs of stress and today we're not seeing any systemic trends or material concerns.

Speaker 2

The increase in provision expense between the 3rd 4th quarters was $1,100,000 and contributed to the decrease in our linked quarter earnings on a GAAP and non GAAP adjusted basis. In the 3rd quarter, we recorded negative provision expense or credit, primarily driven by decrease in loan balances of 1% during the Q3. Whereas in the 4th quarter, we provisioned 569,000 driven by loan growth of 1%. Like last quarter, we maintained our loan loss reserve levels of 0.90% of total loans as we take into account our overall asset quality and with the macroeconomic forecast. Non interest income for the 4th quarter totaled $6,000,000 and was higher than reported for the 3rd quarter by 18%, primarily driven by a few non core items, including mortgage banking, fair value adjustments and a smaller loss on our sale of investment securities compared to the 3rd quarter.

Speaker 2

Adjusting for these items, non interest income for the Q4 would have been $10,600,000 which included the benefit of our annual Visa incentive bonus of 400,000 the Q4 compared to $10,500,000 of fee income for the 3rd quarter. We continue to estimate that our normal Recurring non interest income will be $9,500,000 to $10,000,000 quarterly in the near term. Non interest expense for the 4th quarter was $27,800,000 an increase of $1,600,000 or 6% on a linked quarter basis. As anticipated, operating costs increased over the last quarter given various factors including timing of the incentive accrual true ups, senior leader transition costs and normal seasonal costs during the winter months. Higher non interest expense for the 4th quarter translated into a non GAAP efficiency ratio of 63.48 percent for the quarter.

Speaker 2

As we look forward, we anticipate non interest expenses will tick higher for the Q1 of 2024 and range between $28,000,000 28,500,000 As incentive accruals reset to target levels and we continue to work through transition costs, we have taken and continue to take steps to manage costs We are focused on managing our efficiency ratio lower throughout 2024. The last item I'll touch on is our effective tax rate. We saw our effective tax rate for 2023 decrease to 19.4% compared to 20.3% for 2022. In the Q4, we participated in a renewable solar energy project, excuse me, and as a result, we are currently estimating an effective tax rate for 2024 of 18.6%. This concludes our comments.

Speaker 2

We'll now open the call for questions.

Operator

Our first question is from Steve Moss with Raymond James. Your line is now open.

Speaker 3

Good afternoon and Simon welcome aboard. Thanks Steve. Maybe just starting You're welcome. Maybe just starting on loan growth here. Just curious how you guys are feeling about the loan pipeline, Especially on the commercial side these days and how loan pricing is?

Speaker 1

Thanks for the question, Steve. I think we anticipate throughout the year low single digit loan growth for the Q1. We continue to see Solid resilience at the client level across our sectors. And we're certainly obviously going to look at the interest rate environment as a key driver of expectations as we move throughout the year. But overall, I think we see continue to see solid demand and continue to leverage our balance sheet to support our communities and deepen customer relationships and I think see a positive outlook certainly in the particularly as the year passes through.

Speaker 3

Okay. That's helpful. And just maybe in terms of the Fed probably going to cut rates this year. Just curious How you guys are thinking about the impact on the margin with rate cuts? And I realize Break test might be a couple of months out.

Speaker 3

Just how you're thinking about the margin here near term given you do see obviously some deposit pricing pressures in the second?

Speaker 2

Sure. I can take that one, Steve. I'd say on the margin on the near term, certainly, We're seeing we're at 2.40 right now end of the quarter. I think as we think about the next 3 to 6 months, would say that we're thinking about margin being flattish plus or minus a few basis points overall. Certainly in the Q1, we generally have The seasonal outflows from a deposit perspective that are impactful to us.

Speaker 2

We're also seeing some asset remix continue excuse me, deposit remix continue. So we're certainly focused on that. We've also done some things on the funding side. I'm really trying to optimize where we can to the extent that We have some higher cost, less of a relationship, if you will, on the deposit side, really trying to find alternate funding to optimize and think that should certainly help out as well in the Q1. But long story short is I think for the first half, we'll be pretty flattish.

Speaker 2

We're envisioning that when rates cuts do happen that we will see a benefit. We do think that it will certainly take some time to See that come through in the funding side. We want to be able to push certainly rates and deposit costs lower, but also recognizing that deposit with a strictly in our market, I'm sure others, it's very competitive and we'll recognizing that. But that being said, I think in the second we do anticipate to see some level of margin expansion from there.

Speaker 3

Okay, great. Appreciate that color. And just one on expenses here. I think the guide for the Q1, Mike, you mentioned was $20,000,000 to 20,500,000 with some transition costs. Just kind of curious, does it back down a little bit from there for the rest of the year?

Speaker 3

Or should we think about Maybe there's some ongoing investments and we stay closer to a $28,000,000 range for the upcoming year quarter.

Speaker 2

Yes, I think realistically at least as of right now we're probably that 28% to 28.5%. I do think we'll probably on a run rate basis be closer To 28 in normal, on the norm there, Steve. We like I think Simon spoke to in some of his comments, same in mine is, We certainly are focused on the expenses and being prudent there. And from an efficiency ratio perspective, we keep a very watchful eye on that and always have and we'll continue to do so. But we certainly were trying to balance the management of expenses short term with also making sure that we're continuing to reinvest for the long So we're trying to strike that right balance.

Speaker 2

Yes. I'll just add Steve, I think that's spot on.

Speaker 1

I think it's that short term focus and we have very specific actions Managing, obviously, our personal staffing levels and other incremental investments. And I've been really impressed with the team's work On automation, we've got some really great work on the data side and other areas that I think are allowing us to provide identify Opportunities for process improvement and efficiencies. And we just actually had our 100th process automation and that's automated over 1,000,000 transactions. And just one example, Steve, of the kind of work the team is doing that I think can drive long term productivity and efficiency in the organization. So I think that's obviously a near time focus, but leveraging some of that technology is an opportunity for us.

Speaker 3

Okay, great. I appreciate all the color.

Speaker 2

Thank you very much guys.

Speaker 4

Thanks, Dave.

Operator

Our next question is from Damon D'Amonte with KBW.

Speaker 5

Hey, good afternoon guys. Hope everybody is doing well and welcome aboard, Simon. Just wanted to follow-up on the Commentary around the margin, Mike, I appreciate the color that you gave. I'm just wondering, do you anticipate doing any additional restructurings here in the early part of 2024? Or do you think those are done?

Speaker 2

I would say nothing imminent. I would just say to that though, Damon, we're constantly evaluating opportunities to optimize if it makes sense and meet our ultimate financial parameters.

Speaker 5

Got you. Okay. And with regards to the outlook for loan growth, I think you had said low single digit for the year. Kind of how are the commercial pipelines shaping up right now and how is that kind of split between C and I and CRE? Has there been Any increase in demand on the C and I side?

Speaker 5

Or is it more real estate driven?

Speaker 1

I think we're seeing some nice strength on the C and I and the real estate side. And certainly as rates start to come down, I think the resi side as well is going to pick up particularly probably in the spring season, but we're seeing a nice demand from our clients. And that's across the footprint as well. That's certainly across the Mid Coast and then obviously into some of the southern areas, which is an area of focus for us. So there definitely is the demand out there, and I think that's a strategic strength that we have with the balance sheet and the position to continue to lend.

Speaker 1

And I think that's something we'll be very focused on this year.

Speaker 5

Okay, great. Thank you for that. And then just lastly, if I could sneak one more in here on The outlook for the provision, as you kind of look at your reserve level, it's pretty flat over the course of 2023. Do envision kind of keeping that flat and kind of low charge offs and then the provision just basically supporting the growth that you get to keep that reserve level flat?

Speaker 2

Yes, I think that's fair, Damon. I think we've right now feel good at the 90 basis points and considering our view on the macro outlook, I do think to the extent that things start to shake out and it becomes a clearer light on which The path forward from a macro position and call it normalization, there is certainly opportunity over time to potentially release reserves. I think it was before we adopted the CECL accounting method or when we did, we were around 80, 82 basis points. So I do think that we have some opportunity there. Of course, it will depend on macro conditions and just overall credit quality metrics.

Speaker 2

But right now, things certainly look good.

Speaker 5

Great. Okay. That's all that I had. Thank you very much.

Speaker 2

Thanks, Damon.

Operator

Our next question is from Matthew Breese with Stephens Inc. Your line is now open.

Speaker 2

Hey, good afternoon.

Speaker 1

Hey, Matt.

Speaker 4

Few questions for me. I first wanted to start with, Mike, you had mentioned the Tax rate this year, it sounds like it's going to be a step down in the 18% range. I'm assuming that lower range is Partly because of the tax credit investments. So one is that in fact correct? 2, from what I've seen historically when folks invest in the tax credits, there's usually some sort of expense or contract income item that flows through fees.

Speaker 4

If that's the case, could you just enlighten as to what that is and how much and is that included in the overall guidance you provided?

Speaker 2

Sure. Great question, Matt. So We anticipate our effective rate to be around 18.7. In part, the rationale Paul, before I get to the renewable energy project there, Matt, is just the makeup of our Our revenue sources, if you will, just the changing over time, as our revenues come down, some of our tax exempt is just a larger percentage and in part that's driving a lower tax rate right now. As we think about the renewable energy project, solar project, that from an accounting perspective, we will account for that all within the income tax line item.

Speaker 2

So we do not anticipate that running through any of the operating expenses. I think the new accounting method out, the proportional amortization method that we're now allowed to use for those. So I think it makes it ultimately a little bit cleaner from an overall income statement perspective and that's our intent just run it through the income tax expense.

Speaker 4

Yes, completely agree with you there. The second thing I wanted to touch on and I probably not going to get an exact answer here, but would love your thoughts. As I think about what's unfolded for Camden during this higher rate environment, You've done pretty well on the deposit front with less than 190 all in cost deposits. But the thing that's held up the margin is Loan yields have been kind of slow to reprice and there's a good chunk of loans that are in lower yielding buckets such as resi. And so as we look at the entirety of the loan portfolio, How much is yielding on the lower end of the spectrum, call it 4% or below?

Speaker 4

And as you think about that bucket and repaying and flowing to higher yielding on maturity, how long is that going to take? What is the duration of some of the lower yielding paper on your book?

Speaker 2

It's a great question, Matt. I don't have probably a direct answer for you there. But I do think, I mean, we do have Certainly a good chunk of our residential portfolio and some on the commercial side certainly to your point that during, I think it was 21 2022 in particular, we were adding quite a bit under the resi portfolio and onto our book At coupons in the 3, 3.5 call it, I do think it will take some time certainly for those from those coupons make their way off or just normal cash flow off. So we will see a bit of compression there. I do think from the long term in terms of those asset yields on the resi side picking up.

Speaker 2

We are in terms of the residential mortgages, we are trying to be very prudent in terms of what we put on now In terms of rates, that said, rates as you know, with just a 10 year dropping recently, we're seeing a lot of competitive pricing in the low sixes. Right now, we're not there from a pricing perspective on the resi side, but certainly something of an overall pressure and market perspective that is something that we're dealing with at the moment. So I don't know if I answered your question there directly, Matt, but I don't have the duration piece right in front of me at the moment.

Speaker 4

Well, I'll try it another way. There is some optimism there as we get to the back half of the year in rate cuts And assuming that continues into 2025, when do you think Candid can get back to earning an above 1% ROA that we're all kind of used to?

Speaker 2

Yes. I think it's we anticipate the back half the year we're going to see some level of margin expansion even and I think I made a comment to this earlier, set Fed rate cuts aside, we have $100,000,000 Derivatives today on the commercial real estate book, that will be falling off, that has been a drag. We anticipate that alone will be somewhere in the neighborhood of 6 to 8 basis point to margin pickup. Then you couple that with just our CD repricing. I think over 90% of our book CDs re prices over the next year.

Speaker 2

So we'll get some benefit there as those continue to re price and certainly we anticipate those re pricing down. And then just coupled with the continued investment and cash flow going into higher asset yields and really leveraging our investment book as well. So we do anticipate our margin picking up. So probably when we think about an ROA north of 1%, we're probably looking into next year realistically. But I think over the course of the year, we're making strides in the right direction to get back there.

Speaker 4

Got it. Okay. Simon, just a couple more for you, if you don't mind. First of all, welcome. As you've kind of spent time with all the various business lines, just curious, where do you see the greatest potential for change within Camden?

Speaker 4

And what or geographies are there that Camden is currently not involved in today, but could be soon?

Speaker 1

Yes. Thanks for the question, Matt. Really appreciate it. And I think look, I think from a growth perspective, I think about it in a couple of ways. I think the existing footprint, I think, offers continued opportunities To deepen our relationships in the Mid Coast and Downeast markets, we have obviously high share in those markets, but I think great opportunities to continue to strengthen.

Speaker 1

See particular opportunities around business banking. I think the Wealth business as well is a strong business for us. And I think we're looking to continue that Strength, I think there's obviously new other markets as well. We have less market share lower market share in the southern end, Portland, Portsmouth markets and some of the markets on the southern end, I think offer great opportunities for us to continue to develop relationships. We have a strong commercial as you know that operates in those markets.

Speaker 1

And I think we can continue to build out there and again along the commercial that we have and the relationships we have and look to deepen those relationships and particularly on the wealth side, home equity is another business that I think is a nice component of our residential business and I think that's another area we're looking at. But I'm excited by the footprint. It's got some nice opportunities to continue to grow. And one thing I've just been struck with in my Meeting with colleagues and customers is just the tremendous partnership that our colleagues, our stakeholders have and the relationships they have in the community. And I think that's a great foundation for us to build on.

Speaker 4

I appreciate that. Just the last one is I would love your perspective on M and A. Historically, Camden, if you look back over the last 20, 25 years is one kind of a fifty-fifty or sixty-forty mix between organic growth and M and A to drive overall balance sheet growth. And That's probably an older metric at this point, but I think it still holds true with long term. What are your thoughts on M and A?

Speaker 4

And is that something that will be part of the repertoire here going forward?

Speaker 1

Yes. Thanks, Matt. And the strength of our position obviously affords us to be opportunistic first with regard to M and A. But at the same time, I don't think we have feel pressure to do a deal unless it makes sense financially. And I think it's always going to be the right deal.

Speaker 1

We're not going to chase anything over a hill. And we have plenty of organic opportunities to grow. We've got a great team in great markets and we see tremendous opportunity there. And but if the right came along, we'll be opportunistic and that's certainly I think part of the playbook.

Speaker 4

Understood. That's all I had. I know it's a little long winded, but I appreciate taking all my questions. Thank you.

Operator

We have no further questions registered. This concludes our question and answer session. I would like to turn the conference back over to Simon for closing remarks.

Speaker 1

Thanks a lot. And I just want to thank you all for your time today and of course your interest in Camden National Corporation. We wish you all have a great rest of your day. Thanks for joining.

Operator

That concludes today's call. Thank you all for attending today's presentation. You may now disconnect your line.

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