Earnings Call Transcript - CAC Q1 2024

Operator, Operator

Good day, and welcome to Camden National Corporation's First Quarter 2024 Earnings Conference Call. My name is Seth, 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, Seth. Good afternoon, and welcome to Camden National Corporation's Conference Call for the First 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 first quarter 2024 earnings release, which was issued this morning, as well as in other reports we file with the SEC. All 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 a discussion of non-GAAP financial measures. Any reference 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'm 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, and thank you for joining us on our call today. We sincerely appreciate your time and interest. I will give some comments, and then Mike will dive into our first quarter performance, and then we will open up the call for Q&A. First, I would like to report, as I'm now over 90 days into the role as President and Chief Executive Officer, I continue to be impressed with the depth and experience of the management team and the talented team members executing diligently throughout the organization. Each team member is focused on executing on our strategies including, growing our primary banking relationships and leveraging our position of strength. Earlier this morning, we reported net income of $13.3 million or $0.91 earnings per diluted share for the first quarter of 2024. Overall, we are pleased with our quarterly financial results, supported by strong capital, asset quality, and liquidity. Our regulatory capital ratios continue to be well in excess of required regulatory levels and steadily grow. As we closed the first quarter with a reported tangible common equity ratio of 7.12%, up 1 basis point since year-end. We continue to manage credit rigorously consistent with our disciplined credit culture, which continues to serve us well. For the first quarter, we reported strong asset quality, evidenced by nonperforming assets at just 13 basis points of total assets. Our commercial loan portfolio remains well balanced with no meaningful concentration risks. Our credit and special asset teams continue to proactively review our portfolio and have not found any systematic areas of concern. For example, we continue to look at areas of interest rate risk in the context of rate resets for maturing loans, lease rollover in certain asset classes, and credit score migration among other early indicators. This is a testament to our significant due diligence efforts, strong relationships with our borrowers, and in-depth knowledge of the communities that we serve. As our credit team indicates our commercial customers have depth and character which continues to fuel our strength. We continue to see moderate loan demand in our communities with our approved pipeline remaining reasonably consistent over the past few quarters. Our teams are developing new customers and relationships in both commercial and consumer categories. Expense control remains a key focus and was evident as noninterest expense for the first quarter of 2024 decreased 2% compared to the fourth quarter of 2023. During this quarter, we took actions to maintain and manage costs in response to revenue pressure caused by decreasing net interest margin. This month, our wealth management leader, Jennifer, retired after nearly 40 years in the industry. And we welcomed Garrett McKnight to the executive team to lead our wealth transformation efforts. Garrett is a former Senior Managing Director at the Northern Trust Company and has more than 20 years of experience, leading wealth management teams and serving clients and their families in the areas of investment management, financial planning, and fiduciary services. We're incredibly excited to bolster our wealth management services by adding Garrett's expertise and our recent launch of a new wealth mobile app and client portal to provide our clients with unprecedented access to market intelligence and portfolio insights anytime, anywhere. Our technology advancements also include a new state-of-the-art mobile and online account opening platform scheduled to go live at year-end, allowing customers to open, fund, and use deposit accounts within minutes whenever and wherever they choose. This is the latest milestone on our successful digital transformation road map further unifying our digital and in-person customer experience and efforts to expand our customer base. In summary, although the financial services industry continues to face economic uncertainty, we are confident in our ability to adapt to the changing landscape and deliver solid returns through the current challenges. We are well positioned to capitalize on our exceptional customer relationships and are investing in our future. Our confidence comes from having a clear strategic plan to drive profitable growth and having a talented team focused on executing it. Now Mike will provide some first quarter highlights.

Michael Archer, Executive Vice President, Chief Financial Officer

Excellent. Thank you, Simon. Good afternoon, everyone. This morning, we reported net income of $13.3 million and diluted earnings per share of $0.91 for the first quarter of 2024. Overall, we are pleased with these results as we continue to navigate through a challenging interest rate cycle. Net income for the first quarter was 57% higher than the last quarter and 4% higher than a year ago. On a non-GAAP basis, adjusting for realized investment losses and a $910,000 recovery on the sale of the Signature Bank bond that we previously wrote off in 2023. Adjusted net income increased 1% over the fourth quarter of last year and decreased 11% compared to the first quarter of 2023. Our adjusted return on average assets was up 1 basis point to 0.88% for the first quarter of 2024, and our tangible capital continues to build, highlighted by an increase in tangible book value per share of 1% during the first quarter of 2024 and an increase of 10% over the past 12 months. In the first quarter, our net interest margin decreased 10 basis points to 2.30%, which was lower than the expectations we communicated in our last earnings call. Funding costs on a linked-quarter basis increased 17 basis points to 2.27% for the first quarter and were a few basis points higher than anticipated. We experienced normal seasonal deposit outflows in our markets during the first quarter, and we continue to see the remix from lower to higher cost deposit products. Our attention continues to be on optimizing net interest margin to maintain and grow revenues and increase profitability. Through the first quarter, we continued to take calculated actions to optimize our balance sheet and net interest margin. A few examples include replacing higher cost deposits, which included $72 million of interest checking balances and $50 million of CDs with more cost advantageous funding alternatives, including the bank term funding program, brokered deposits, and the balance sheet derivative. As we look to the second quarter, we currently anticipate net interest margin will hold at or around 2.30% with possible upside as certain balance sheet derivatives mature in early June, and we anticipate normal seasonal deposit inflows picking up towards the back half of the second quarter. In response to continued pressure on our net interest margin, we took actions during the first quarter to manage expenses closely. In doing so, we were able to manage expenses lower on a linked quarter basis by 2% to $27.4 million, which is well below our previously communicated expense forecast for the first quarter of $28 million to $28.5 million. As we look forward, we do anticipate operating expenses will trend slightly higher for the rest of the year and closer in line with prior guidance. In the first quarter, loans grew 1%, driven by commercial real estate loan balances increasing by $30.6 million. We continue to be disciplined with loan pricing across our products in the current interest rate environment. Based on our current loan pipelines and strategy, we currently anticipate similar loan growth and the mix for the second quarter. Our asset quality for the first quarter continued to be very strong, supported by excellent credit quality metrics, including nonperforming loans of 0.19% of total loans, annualized net charge-offs of 2 basis points of average loans, and past due loans of 5 basis points of total loans. The strength of our current and past asset quality combined with modest loan growth and internal stress testing we have performed on certain loan segments gave us the confidence to reduce our loan loss reserve to 0.86% of total loans at March 31. This resulted in a credit for loan losses of $1.2 million for the first quarter and combined with the $910,000 recovery on the Signature Bank bond, we recognized a total negative provision expense of $2.1 million for the first quarter. Our capital and liquidity positions also continue to be strong. Our book and regulatory capital ratio has improved across the board in the first quarter. Our tangible common equity ratio was 7.12% at March 31, 2024, compared to 7.11% at December 31, 2023, and 6.56% at March 31, 2023. Our uninsured and uncollateralized deposits at March 31, 2024, were 14.8% of total deposits and our available liquidity sources were 2.1x uninsured and uncollateralized deposits, which continues to be very consistent with previous periods. This concludes our comments. We'll now open the call for questions.

Operator, Operator

Our first question comes from Steve Moss from Raymond James.

Stephen Moss, Analyst

Could you provide insights on current loan pricing in your markets? Additionally, I noticed that commercial loans decreased by about 20 basis points in yield quarter-over-quarter and I’m curious if there’s anything noteworthy regarding that change.

Michael Archer, Executive Vice President, Chief Financial Officer

Sure. Regarding loan pricing, we are currently maintaining our interest rates at a relatively high level. For the quarter, our origination yield was around 7.5% to 8%, and our pipelines remain in that range as well, Steve. We are focused on achieving that price with discipline. On the next point, I'm sorry, go ahead, Steve.

Stephen Moss, Analyst

No, go ahead, Mike, I'm sorry.

Michael Archer, Executive Vice President, Chief Financial Officer

I wanted to mention that in the commercial and industrial segment, we had one syndication loan that was refinanced during the quarter, and that was the main reason for the decline in C&I. However, there was nothing particularly unusual about that.

Stephen Moss, Analyst

Okay. Got it. And then in terms of the derivatives you referenced, Mike, it sounds like you added some during the quarter. And then just what do you have maturing come June, just to kind of help with some of the puts and takes of the balance sheet moves here.

Michael Archer, Executive Vice President, Chief Financial Officer

Sure. So we actually executed the derivative in the December time frame. I think it was with a forward start in January. I want to say it was either $50 million or $75 million off the top of my head. Really with the sole idea of replacing that more expensive CD that we had mentioned, that was $50 million. Just again, trying to be advantageous in terms of funding costs where we can. And then in terms of the derivatives rolling off in the June time frame, essentially, we have $100 million of balance sheet swaps. They've been on our books for quite some time, and that really has been compressing some of our CRE yields that are showing up in our margin tables. So we do anticipate those rolling off here, and we do anticipate that should provide 6, 7 basis points to margin on a go-forward basis once we get past that point.

Stephen Moss, Analyst

Okay. Got it. I appreciate that. So basically, kind of the margin if rates kind of hold in this range, 230-ish this quarter and then some upside as we head into the third quarter.

Michael Archer, Executive Vice President, Chief Financial Officer

Yes, I think that's a fair summary.

Stephen Moss, Analyst

Okay. I appreciate that. Regarding the mortgage side, you sold more mortgages this quarter. I'm curious about your outlook on higher volumes and business mix as you move forward with more saleable production.

Simon Griffiths, President and Chief Executive Officer

Steve, Simon. I'd say, overall, low single-digit growth is where we're seeing it. We continue to see nice demand on the resi side, which continues to reflect, I think, the strength of the economy and the consumer in general. So certainly modest growth, and that's sort of how we're positioning that within our loan growth, but certainly continue to see some strong demand out there.

Stephen Moss, Analyst

Okay. Appreciate that. And then also, Simon, just with regard to the reserve release and I heard the reference about a deeper diving in credit. Just curious, give us a little more color as to how you looked at buckets and just the dynamics that maybe gave some comfort around the reserve release this quarter. Should we expect any more reviews in the upcoming quarter or 2?

Simon Griffiths, President and Chief Executive Officer

Yes. As mentioned in the opening remarks, we have a very strong credit portfolio that is performing well. We continue to conduct stress tests, and the team has identified this opportunity. Going forward, we will evaluate it on a case-by-case basis, but this quarter certainly made sense for a release. The outlook for the remainder of the year is a significant factor that could influence any changes, especially given the current uncertainty for the latter half of the year. Overall, the team believes the credit position is robust, and we felt it was appropriate to make a release this quarter. Mike, would you like to add anything?

Michael Archer, Executive Vice President, Chief Financial Officer

Yes. I would like to mention that our credit risk team thoroughly examined some of the challenging areas we've been noticing in the news, such as rent controls and interest-only loans. They focused on debt service, loan-to-value ratios, and other interest rate factors. We remain confident in our portfolio and have not observed any systemic or significant issues in those areas. Our analysis and stress testing indicate that it's sensible to release some reserves at this time, although we will keep monitoring the situation. If macroeconomic conditions shift, we will make the necessary adjustments. Overall, we are very positive about our current position.

Operator, Operator

Our next question comes from Damon DelMonte from KBW.

Damon DelMonte, Analyst

Just to kind of follow up on the questioning on the credit and provision outlook. If you're expecting kind of low single-digit loan growth, absent any net charge-offs, should we expect a little bit of provisioning just to cover the new loan growth? And if so, like what would be kind of a targeted reserve you guys would be putting on new loans that come on the books?

Michael Archer, Executive Vice President, Chief Financial Officer

David, it's Mike. Yes. I think if we anticipate some further loan growth there, like we said in our commentary, probably low single digits for next quarter. I mean I do think just in terms of the ACL, we'll continue to hold around mid-80s where we are right now. So to that end, probably pretty low provisions. Certainly, if we have net charge-offs, again, nothing expected or anticipated size at this point, certainly. But if we were, we'll account for that accordingly. But really feel pretty strong about where we are right now at this level.

Damon DelMonte, Analyst

Great. And then I think you guys noted that you increased your BTFP drawdown before the end of the quarter. Just wondering, is that being used for actual funding purposes? Or did you guys use that as like kind of an ARB opportunity where you took the funds and put it in cash and are able to kind of clip a small spread?

Michael Archer, Executive Vice President, Chief Financial Officer

No, we didn't really use it to drive any incremental NII expansion. It was more about optimizing margin. We managed to secure $225 million locked in for a year in three different tranches at 4.76% before some program dynamics changed. Given our interest rate risk and other considerations, this arrangement is favorable, especially with the potential for rising rates. If rates decline, we can prepay. We saw an opportunity and felt it made sense to enhance our position.

Damon DelMonte, Analyst

Got it. Okay. And then just lastly, your commentary on expenses kind of ticking higher to your prior guidance. Could you just remind us if the prior guidance was like $28 million to $28.5 million per quarter?

Michael Archer, Executive Vice President, Chief Financial Officer

Yes, that's correct, Damon. To clarify, in the second quarter, we could be closer to 20, somewhere in that midrange. After that, for the second half of the year, we might be on the lower end, plus or minus. There are some seasonal factors in the second quarter, but overall, that remains a solid range.

Simon Griffiths, President and Chief Executive Officer

Yes. I would like to add that we continue to balance our short-term and long-term goals. As Mike mentioned, achieving this balance might result in a slight increase in the next quarter. Additionally, we are making significant investments in technology and are focused on the long-term health of our franchise.

Operator, Operator

The next question comes from Matthew Breese from Stephens Inc.

Matthew Breese, Analyst

I was hoping you could provide some insights on the month-over-month trends in deposit costs and margins, and if there are any early signs of stability in those areas.

Michael Archer, Executive Vice President, Chief Financial Officer

Yes. Great question, Matt. We are pleased to see that in more recent months that we're starting to see a level of maybe stabilize is or isn't the right word, but certainly the increase in deposit costs and funding costs on a month-to-month basis is slowing. So I think in part, it's starting to look like it's more in line with what we're seeing on the earning asset yield and that kind of speaks to the 2.30%, if you will, kind of staying relatively flat in the near term until we kind of start to see the seasonal inflows as well as the benefit from the derivative.

Matthew Breese, Analyst

Got it. Okay. And then on the deposit mix front, felt like reading between the lines a little bit of frustration or capitulation just in the continued mix shift out of noninterest-bearing into interest-bearing. If you have to look ahead and say, hey, here's how I think we shake out a year from now in terms of deposit mix and then deposit growth, I would love to get your thoughts on those 2 items.

Simon Griffiths, President and Chief Executive Officer

Yes. Matthew, Simon. Yes, it's a great question. And obviously, I think a lot of it depends on the rate environment and how the Fed moves. But I think generally, we've seen, as Mike indicated, sort of maturity on our customer base around sort of moving into from low no cost into higher cost. We start to see the CD certainly front book stabilizing in terms of volumes. And I think that sort of consistent trend is likely to continue, but obviously, that's going to depend a lot on the Fed and the customer. I'd say as a team, we certainly have a strong playbook around that potential downward rate environment, and we'll look to manage that very effectively with our customers with a focus on customer relationships and continuing to drive value. And that's one of the things I think the team has done extremely well as well is as we've brought in new customers into the CD portfolio. We certainly look to build those relationships, deepen those relationships. And we mentioned in the call, the earnings call at the beginning, the addition of Garrett to the team. And I think that's another tremendous opportunity for us and the communities we serve in Maine to take those relationships, deepen them and leverage the capabilities we have, both digital the new platform in wealth and then the new leader that we mentioned. So I think those are things that can be certainly leveraged going on a go-forward basis.

Matthew Breese, Analyst

I appreciate all that. And then just thinking about your NIM commentary, sound stable for the second quarter. It might be a little bit of a bump in the third quarter. If we had to look out even a couple more quarters beyond that, assuming no Fed cuts or no Fed hikes, are you more optimistic about the year forward NIM as some of these dynamics more fully flush out in terms of deposits repricing and earning asset yield expansion?

Michael Archer, Executive Vice President, Chief Financial Officer

Yes, I believe the answer is yes, Matt. We are at a bit of an inflection point. I see opportunities for us to keep increasing and start seeing margin expansion in this environment. If the Fed decides to cut rates, that would be beneficial and would add more upside if we extend the situation. I believe we are well positioned to achieve margin expansion again in the second half of the year and hopefully beyond that.

Matthew Breese, Analyst

Got it. Okay. And then just the last one for me. Cash position at quarter end was a little bit elevated versus what we've seen historically, 3% cash to assets. Is that where you want to be? Should we maintain that level of liquidity from here on out?

Michael Archer, Executive Vice President, Chief Financial Officer

No. I mean, that was just some timing of flows. I would share with you that, right now, our cash position has come down to more normal levels. So just timing really, Matt.

Operator, Operator

We have no further questions on the call. So I'll hand the floor back to Simon Griffiths.

Simon Griffiths, President and Chief Executive Officer

Thank you, Seth. I just want to thank all of you for your time today and for your interest in Camden National Corporation, and we wish you all a great rest of your day.

Operator, Operator

This concludes the conference call. Thank you all very much for joining.