Earnings Call Transcript - CAC Q2 2024

Operator, Operator

Good day, and welcome to Camden National Operations Second Quarter 2024 Earnings Conference Call. My name is Lydia, and I will be your operator for today's call. I will now turn the call over to Renée Smyth, Executive Vice President, Chief Experience and Marketing Officer.

Renée Smyth, Executive Vice President, Chief Experience and Marketing Officer

Thank you, Lydia. Good afternoon, and welcome to Camden National Corporation's conference call for the second quarter of 2024. Joining us this afternoon are members of Camden National Corporation's executive team Simon Griffiths, President and Chief Executive Officer; and Mike Archer, Executive Vice President, Chief Financial Officer. Please note that today's presentation contains forward-looking statements and actual results could differ materially from what is discussed on today's call. Cautionary language regarding these forward-looking statements is contained in our second quarter 2024 earnings release issued this morning and in other reports we file with the SEC. All of these materials and public filings are available on our Investor Relations website at camdennational.bank. Camden National Corporation trades on the NASDAQ under the symbol CAC. In addition, today's presentation includes discussions of non-GAAP financial measures. Any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings release which is also available on our Investor Relations website. I am pleased to introduce Camden National Corporation's host, President and Chief Executive Officer, Simon Griffiths.

Simon Griffiths, President and Chief Executive Officer

Thank you, Renée, and good afternoon, everyone. We appreciate you joining our call today. I will provide a few comments on our most recent quarter, and then I'll turn it over to Mike to dive into our second quarter financial performance, and then we'll open up for Q&A. I'm pleased to report, as we mark the halfway point through 2024, we continue to execute well in the uncertain environment. Despite macroeconomic headwinds, we remain committed to executing our long-term strategy of optimizing our balance sheet and deepening customer relationships through advice-based conversations and exceptional customer experience. Our team is building momentum and leveraging process automation and innovative solutions to deliver stellar advice to our loyal customer base. Earlier this morning, we reported net income of $12 million or $0.81 earnings per diluted share for the second quarter of 2024. Highlights for the second quarter include a 6 basis point increase in net interest margin over the previous quarter. Disciplined execution and expense control, which exceeded our expectations and guidance previously communicated for the second quarter, and continued strong asset quality demonstrated by favorable credit quality metrics, which benefit from our disciplined underwriting culture and keen asset management. Our reported net interest margin increase as a result of deposit cost pressure beginning to ease during the back half of the second quarter as we started to benefit from seasonal deposit flows in our markets, taking decisive action on certain high-cost, noncore deposit relationships, and continued asset allocation remix as we utilize investment cash flows to fund loan growth. Mike will expand on the net interest margin discussion and drivers in a few minutes. Our team continues to focus on driving deposit growth, both through new customer acquisition and by deepening relationships with our existing customers. This includes leveraging data and analytics to make informed, swift decisions. As Fed rate cuts become increasingly likely, we are ready to quickly act to manage our funding costs. As we saw while interest rates were increasing, we expect the first 25 to 50 basis point rate cut likely will result in a lower beta than subsequent rate cuts as we balance customer needs and market competition. We remain focused on improving our operating leverage. During the second quarter of 2024, revenues increased 3% over the previous quarter, and noninterest expense remained flat. We continue to take disciplined actions to maintain and manage costs in response to net interest margin pressure while also driving opportunities to increase fee income and diversify our revenue base. Credit continues to perform in line with expectations, and by all measures, our credit metrics continue to perform better than pre-pandemic levels. We continue to manage credit rigorously consistent with our disciplined credit culture. For the second quarter, we reported strong asset quality with just a marginal uptick in nonperforming assets, which accounted for just 17 basis points of total assets as of June 30, 2024. Our commercial loan portfolio remains well balanced with no meaningful concentration risk. Our credit risk team continues to review our portfolio proactively and have not identified any systemic areas of concern. We continue to see moderate loan demand in our communities. Our residential mortgage pipeline has remained consistent quarter-to-quarter. At the same time, we have seen a sizable uptick in our commercial loan pipeline, primarily driven by a few larger commercial real estate opportunities. We are seeing nice momentum in fee income spurred by a focus on investment in wealth management and brokerage services. Combined, our wealth and brokerage services generated revenue of $3.3 million in the second quarter, an increase of 11% over the first quarter of this year. The increase is driven by sales activity and continued strength in the financial markets. We have crossed over $2 billion in assets under administration as of June 30, 2024, representing an increase of 12% compared to June 30, 2023. We are well positioned to expand our advisory distribution by leveraging our new wealth operating platform and mobile app as we stay committed to full relationship banking and growing and diversifying our fee income. We continue to make significant progress on our digital roadmap and innovation ideation. Last quarter, we shared that we invested in a new online deposit account opening platform, and I'm pleased to report that it remains on schedule to go live at year-end. This new technology will enable customers to open, fund, and use deposit accounts within minutes whenever and wherever they choose. We will leverage this technology to steer into our omnichannel approach which aims to provide a consistent customer experience across all digital and brick-and-mortar sales and marketing channels to ensure a uniform customer experience. Our robotics automation team continues to surpass expectations. We recently celebrated processing over 2 million support service transactions through our digital platform. At our current velocity, we will process 1 million transactions every six months. Additionally, our robotics automation reached a milestone with a newly developed API integration into our customer service work management tool. For the first time, this allows true end-to-end automation of predictable, repeatable customer service activities creating real capacity across multiple internal departments. Furthermore, our data analytics team partnered on an AI beta pilot with a third party for data scientist simulation, simplifying the technical skills needed to request higher-order analytic models. If successful, this has the potential to drive sophisticated analytics further into the hands of business units, and the pilot will be completed in Q4. We believe our investments in talent, technology, products, and services will continue to benefit as macroeconomic conditions improve, and that our strong foundation will permit us to generate consistent, sustainable, and long-term performance as we remain focused on execution and evolving the bank to meet customer and shareholder expectations. Now Mike will provide some highlights from the second quarter.

Mike Archer, Executive Vice President, Chief Financial Officer

Thank you, Simon, and good afternoon, everyone. This morning, we reported a net income of $12 million and diluted earnings per share of $0.81 for the second quarter of 2024 and net income of $25.3 million and diluted EPS of $1.72 through the first six months of the year. We are pleased with our second quarter financial results as they demonstrate real momentum within our core business, as highlighted by our reported non-GAAP pretax pre-provision income of $15.5 million, which was up 9% on a linked quarter basis. As a reminder, in the first quarter of this year, we recorded a negative provision expense of $2 million as we released loan reserves due to the strength of our loan portfolio, and we recovered $910,000 of proceeds upon the sale of our Signature Bank bond. With our solid earnings for the second quarter, our tangible capital position grew during the quarter. As of June 30, 2024, on a non-GAAP basis, our tangible book value per share stood at $28.34, up 2% from the first quarter and 11% over the past 12 months. Total revenues for the second quarter of 2024 increased 3% over the first quarter of 2024. Net interest income grew 3% during the second quarter to $32.2 million, led by an increase in net interest margin of 6 basis points to 2.36%. In June, a $100 million balance sheet interest rate swap matured, providing approximately 5 basis points of lift for the partial month, and we anticipate 6 to 7 basis points for a full month's benefit at current interest rates. In June, we also began to see normal inflows from seasonal deposits in our market. Looking forward, we anticipate continued net interest margin expansion during the third quarter due to the aforementioned factors, along with the continued redeployment of investment cash flows to support new loan originations at current market rates. Noninterest income for the second quarter of 2024 totaled $10.6 million, an increase of 3% over the first quarter of this year. As Simon noted in his comments, we are seeing positive momentum across our brokerage and wealth business lines. Regarding mortgage banking, we continue to sell our qualifying residential mortgage production. For the second quarter, we sold 52% of our residential mortgage production. Through the first six months, we sold 51% of our production. As we work our way back to historical financial performance levels, we are focused on the management of operating expenses and driving positive operating leverage while continuing to invest in the organization. Noninterest expenses for the second quarter of 2024 were $27.3 million, a small decrease from the first quarter of this year. The positive combination of lower noninterest expense and revenue growth for the second quarter improved our non-GAAP efficiency ratio on a linked-quarter basis. Our efficiency ratio for the second quarter of 2024 was 63.53% compared to 65.55% for the first quarter of 2024. Based on these results for the second quarter, we are now estimating our quarterly operating expenses will range between $27.5 million to $28 million for the remainder of the year. Moving to the balance sheet. Total loans as of June 30, 2024, were $4.1 billion and grew less than 1% in the second quarter of 2024 and 1% through the first six months of this year. Our loan growth for the first half of 2024 has been mixed across our loan segment. We continue to maintain our loan pricing discipline across our products in the current interest rate environment. Total deposits as of June 30, 2024, were $4.5 billion, a decrease of 1% during the second quarter of 2024 and 2% through the first half of the year. The decrease in deposits during the second quarter and the first half of the year reflects the decisive actions we took to manage and optimize the net interest margin. Through the first six months of the year, we managed out approximately $150 million of high-cost municipal interest checking and CD balance as part of this effort. Our loan and deposit products are geared towards driving full relationship banking and positioning us as the primary bank for our customers. In the second quarter, we launched our high-yield savings product, which is a new money product requiring that the customer also maintain a checking account with us. We've been pleased with the results of the product, which includes an 8% growth in savings deposits in the second quarter of 2024. Our asset quality for the second quarter continued to be strong, supported by excellent credit quality metrics, including nonperforming loans of 0.23% of total loans, annualized net charge-offs of 4 basis points of average loans, and past due loans of 5 basis points of total loans. Nonperforming loans and net charge-offs modestly increased in the second quarter compared to the first quarter, but we do not believe they reflect any signs of systemic stress within our loan portfolio. The strength of our asset quality, combined with modest loan growth, gave us the confidence to hold loan loss reserves at 0.86% of total loans as of June 30, 2024, which was consistent with our loan loss reserve coverage ratio as of the end of last quarter. Our capital and liquidity positions also continue to be strong. Our non-GAAP tangible common equity ratio increased 22 basis points from the second quarter to 7.34% as of June 30, 2024, which included the repurchase of 50,000 shares of common stock totaling $1.6 million of capital. Our uninsured and uncollateralized deposits as of June 30, 2024, were 14.6% of total deposits, and our available liquidity sources were 2 times uninsured and uncollateralized deposits. This concludes our comments. We'll now open the call for questions.

Operator, Operator

Our first question comes from Steve Moss with Raymond James. Your line is open. Please go ahead.

Steve Moss, Analyst

Good afternoon. To start with the margin guidance, Mike, you mentioned that there was a 5 basis point lift from the swap expiring this quarter, and you anticipate an additional 6 to 7 basis points of benefit for a full month. Am I understanding correctly that we can expect 11 or 12 basis points of additional margin upside in the third quarter?

Mike Archer, Executive Vice President, Chief Financial Officer

No. No, Steve. Good question. So as we think about margin for next quarter, we're thinking that we're probably in the neighborhood of 3 to 7 basis points, let's call it, 2.39 to 2.43-ish for the third quarter, which is a function of what you just mentioned there, the additional lift of the $100 million loan swap that ran off as well as some of the seasonal flows and other activity occurring.

Steve Moss, Analyst

Okay. As we consider the seasonal trends in deposit costs, it's encouraging to see that the increases are starting to slow down overall. I'm curious if, in addition to these seasonal trends, you anticipate seeing a bit more of an increase due to the stabilization of deposit costs and the significant repricing.

Mike Archer, Executive Vice President, Chief Financial Officer

Yes. In terms of deposit costs, for June, we landed on 230 or 236 for overall funding costs. I expect that we'll remain around that level, perhaps increasing by one or two basis points, but we will continue to see asset yield expansion moving forward. Regarding our seasonal deposit flows, we believe we are experiencing some benefits there. One aspect to consider is that we still observe a level of remix. As we look ahead over the next few months, we think this could stabilize with an increase of one or two basis points from remix, which might be offset by seasonal flows. This is our perspective on deposits and funding cost rates at this time.

Steve Moss, Analyst

That's helpful. Simon, you mentioned moderate loan demand, but that you're noticing significant commercial real estate opportunities. Can you provide more details about those larger commercial real estate opportunities?

Simon Griffiths, President and Chief Executive Officer

Yes, thanks, Steve. Overall, we continue to see strong demand across our business. We're experiencing low single-digit loan growth for the third quarter, which has been consistent with this quarter. We are particularly noticing some good opportunities in commercial real estate. On the residential side, we have seen a nice increase in our home equity business and strong demand in residential mortgages as well. Overall, this reinforces the approach we've been discussing, which is to leverage the balance sheet, build relationships, maintain a focus on quality, and expand our commitment to the communities we serve while continuing to lend in those areas.

Steve Moss, Analyst

Got you. And are the projects multifamily in nature or industrial? Just kind of curious as to like where you're seeing the type of demand, if you will.

Simon Griffiths, President and Chief Executive Officer

Yes, it's definitely a mix. We have some multifamily developments, and a couple of our multifamily projects really stand out. Additionally, we've had a few high-quality hotel locations in great areas. Those are probably the two main types of projects we've seen come through.

Steve Moss, Analyst

Okay, great. I appreciate all the color. And I'll step back in the queue here. Thank you.

Operator, Operator

Our next question comes from Matthew Breese with Stephen. Please go ahead.

Matthew Breese, Analyst

Good afternoon. I was hoping you could talk a little bit more about the high-yield savings program. I guess, first, what rate are you offering on that program so long as folks meet all the criteria? Two, does it continue? And three, what's the expectation for how that program might impact deposit cost overall, but in particular the savings category, given at least on the average balance sheet, still at a really low level, just some thoughts there.

Mike Archer, Executive Vice President, Chief Financial Officer

Sure, I can begin. For the quarter, our savings growth was 8%, amounting to around $50 million. Most of this growth came from our high-yield product. The weighted rate for that product was 4.13% this quarter. We have a few tiers available, ranging from around 4% to 4.5%, which we are actively promoting and have seen good interest in. Our goal is to drive new customer acquisition with this product. Additionally, we are considering how CD rolls will reprice and are being strategic about reinvesting funds into illiquid products, allowing us the flexibility to adjust our approach when necessary. We are carefully balancing these factors.

Simon Griffiths, President and Chief Executive Officer

Matt, this is Simon. So just adding to that, I want to note that we continue to see one of the nice things about the CD roll off. We are achieving about 80% retention, which is very favorable. This allows us to leverage these relationships to dig deeper and expand into other products. So we're seeing great opportunities to engage our clients and seek further ways to deepen those relationships as I mentioned.

Matthew Breese, Analyst

I appreciate that color. Maybe just looking at the NIM, it feels like we're at that inflection point for you all where deposit cost increases start to slow, while asset yields really start to reprice higher. As you extend and look at your outlook for beyond '24 and into 2025, how much of the lost ground on the NIM can we recapture? Can we get back to a, call it, a 2.75 type NIM based on forward curve. I think there's three or four cuts in there. Just some overall thoughts on the longer-term trajectory of the NIM, not just the next one or two quarters but in the '25.

Mike Archer, Executive Vice President, Chief Financial Officer

Yes, it's a great question. I think to your comment there, Matt, is certainly going to matter what the shape of the curve is. I mean, I certainly hope that we get back to margin levels that we were at certainly a few years ago. How fast we get there remains to be seen. Certainly, as we think about Fed rate cuts, hopefully over the coming months and quarters, assuming that the long end of the yield curve doesn't decline with it, that will certainly be beneficial to us. To your point, I do anticipate us getting back to a 270 basis point NIM; I don't know off the top of my head how fast that is, but it's certainly something we are steering towards. As we have been communicating now for years and quarters, we really are focused on optimizing margin, and we want to achieve that while growing the business profitably; that's top of mind for us.

Matthew Breese, Analyst

I appreciate that. The last one for me is just some help on the fee income front. Outlook for the rest of the year. But then within that, just to point where you have some additional leverage. Could you just update us on the wealth management business, assets under management, what you're doing to grow that, the mortgage banking effort as well?

Simon Griffiths, President and Chief Executive Officer

Yes. Thanks for the question, Matt. On the fee income front, for the third quarter, I think we are looking at a range of about $10.5 million to $11 million in line with what we reported this quarter. We believe that the fourth quarter fee income might come in a little higher than that, about $10.75 million to $11.25 million, because of the annual leisure incentive bonus that we have in the fourth quarter. Overall, I think the underlying picture for us is continuing to invest in that business and the wealth sector. I believe we have some great traction there. As we mentioned, we were up just over 10%, and I think we see nice momentum on the brokerage side. We brought Garrett in to lead the wealth business, and he's certainly starting to build that out. That's definitely an area that we believe has a lot of opportunity for us given our geography and the momentum we have with our team. So it's an area that we continue to focus on and think can be a significant growth area for us going forward.

Matthew Breese, Analyst

Excellent. I'll leave it there. Thank you for taking all my questions.

Operator, Operator

Thank you. We have no further questions, so this concludes our question-and-answer session. I would now like to hand the conference back to Simon Griffiths for any closing remarks.

Simon Griffiths, President and Chief Executive Officer

Well, thank you. I want to thank you all for your time today and your interest in Camden National Corporation. We wish you all a great rest of your day, and thanks for your time.

Operator, Operator

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