Camden National Corporation (CAC) Earnings Call Transcript & Summary

Good day, and welcome to Camden National Corporation's Fourth Quarter 2022 Earnings Conference Call. My name is [ Foran, ] and I will be your operator for today's call. [Operator Instructions] Please note that this presentation contains forward-looking statements, which involve significant risks and uncertainties that may cause actual results to vary materially from those projected in the forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in such forward-looking statements are described in the company's earnings press release, the company's 2021 annual report on Form 10-K and other filings with the SEC. The company does not undertake any obligation to update any forward-looking statements to reflect circumstances or events that occur after the forward-looking statements 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's presenters are Greg Dufour, President and Chief Executive Officer; and Mike Archer, Executive Vice President and Chief Financial Officer. Please note that this event is being recorded. At this time, I would like to turn the conference over to Greg Dufour. Please go ahead, sir.

Thank you, and welcome, everyone, to Camden National Corporation's fourth quarter 2022 Earnings Call. For the fourth quarter of 2022, we reported net income of $15.4 million or earnings per diluted share of $1.05, which was 8% better than the third quarter of '22. This resulted in total annual earnings for 2022 of $61.4 million, an 11% decrease from our record earnings of $69 million recorded in 2021 and a 9% decrease in diluted earnings per share over the same period. We were pleased with our fourth quarter performance in several areas. Noninterest income, excluding a $903,000 pretax security loss was $10.7 million and was on the higher end of our expectations. The security loss recorded in the fourth quarter is part of the balance sheet restructuring that Mike will describe during his comments. Operating expenses of $27 million in the quarter was as we expected and resulted in a 56.4% non-GAAP efficiency ratio. Finally, our provision for credit losses was $466,000, down from $2.8 million recorded in the third quarter. At our earnings call last quarter, we signaled -- we could see our allowance and provision levels begin to stabilize should asset quality remain strong and no significant changes in the economic outlook occurring during the fourth quarter. We are pleased to see this materialize as asset quality remain very strong by all measures to close of the year. We ended the year with an allowance to total loans of 0.92%, 92 basis points and our reserve levels covering nonperforming assets, 7.2x. We feel that we are well positioned at those levels in our current loan portfolio. We also continue to see the negative impact of the significant and prolonged inverted yield curve, which contributed to a 2.76% net interest margin for the fourth quarter, down 12 basis points from the prior quarter. You'll recall that last quarter's conference call, we indicated our expectation for margin was to remain relatively flat to slightly down during the fourth quarter, which did not materialize. Mike will provide a more detailed explanation during his comments. What I'd like to share at this point is where our strategic focus will be for the coming quarters. First, we are focused on net interest income and net interest margin through several strategies. First and foremost, we are focused on pricing of both loans and deposits. As of year-end, our deposit beta through the cycle so far was just over 20% and our total funding beta was 21%, while our earning asset beta was just over 18%. As you've seen us do in the past, the primary objective will be on strengthening our existing relationships and developing new ones versus chasing transactions for both loans and deposits. Secondly, we have pursued and will continue to pursue opportunities to logically reposition our balance sheet based on both the current and future interest rate cycle. We'll analyze opportunities that make long-term sense as well as those that fit into our risk profile, such as the restructuring that was done in the fourth quarter. Finally, we recognize that we're operating in a hypercompetitive environment. And we see loan deals that are [ not in ] prices, which we're not comfortable with. Accordingly, we anticipate loan growth to be on the lower side of our mid-single digits for the year, and we'll accept that in order to focus on the long term. Turning to asset quality. It continues to be a major focus of ours. While strong today, we do not take it for granted. Today, we're enjoying the benefits of our strong underwriting, but we complement that with our risk management structure to look for potential signs of weakness. Those efforts may include analysis such as migration of FICO scores, all the way to swiftly working with customers at the first sign of distress. Another focus area is our expense structure. While we're operating within our expected parameters, our previous investments in process automation have helped make many areas more efficient and productive. For example, I previously shared our efforts to streamline our small business and commercial loan processing efforts. That effort hit its stride in the fourth quarter, and we're already seeing processing efficiency improvements, ranging from 30% to 35% efficiency. And our overall efficiency ratio for the total organization is within our target range of 55% to 58%. Finally, as we always have been, we are focused on our capital and our 2022 earnings of $61.4 million provides us ample resources to grow capital as we reward shareholders, including our 5% dividend increase announced in December. I'll pause here and let Mike provide his review and comments.

Thank you, Greg, and good afternoon, everyone. Earlier today, we reported net income for the year ended 2022 of $61.4 million and diluted EPS of $4.17 and -- and while down from last year's record earnings, we're certainly pleased with these annual results, particularly in light of the significant change in market dynamics between years. On a non-GAAP pretax pre-provision basis, the company recorded earnings of $81.5 million for the year, down 2% from last year. In addition, adjusting for SBA PPP loan income, earnings totaled $80.3 million, a 7% increase over last year. These core results make us confident in navigating today's short-term challenges while remaining focused on the long term. We continue to focus on generating shareholder returns through strong sustainable core earnings and strategies and deploying capital to organically grow the franchise. We also continue to prudently return capital to shareholders for a mix of dividends and share repurchases. Our dividend payout ratio for the year ended 2022 was 39%, which included a $0.02 or 5% increase in our quarterly dividend that we announced in the fourth quarter. And we repurchased 225,245 shares of our common stock throughout the year. On a linked quarter basis, we reported net income of $15.4 million and diluted EPS of $1.05 for the fourth quarter, each an increase of 8% over last quarter. Many of our key financial metrics that we track remain solid for the fourth quarter, including a return on average assets of 1.09%, a return on average tangible equity of 18.2% and an efficiency ratio of 56.4%. On a non-GAAP basis, pretax pre-provision earnings for the fourth quarter were $19.8 million, a 4% decrease from the third quarter. Not unlike other banks, we too have felt the impact of the inverted yield curve with short-term rates rising quickly throughout 2022. Net interest income for the fourth quarter decreased 2% from the third quarter despite average interest-earning assets growing 2% and as net interest margin compressed 12 basis points on a linked quarter basis. Our interest-earning asset yield grew 27 basis points during the fourth quarter to 3.67% as we continue to see our loan and investment yields increase. Generally, we continue to leverage investment cash flow to fund loan growth and anticipate continuing to do so over the coming quarters. As Greg mentioned in his comments, we anticipate loan growth to moderate in 2023 in the current environment as we manage our net interest margin and protect long-term franchise value. To that end, we have seen our loan pipelines drop considerably from the end of the third quarter. More recently, committed residential mortgage and commercial loan pipelines have been hovering around $50 million each and our weighted average rates in these portfolios ranging from 6.4% to 6.7%. In the fourth quarter, we put into portfolio 84% of our residential mortgage production through strategies and actions taken, our current residential mortgage pipeline designated for sale has grown to 30%. In the fourth quarter, deposit costs grew 39 basis points to 0.84%, representing a deposit beta of 29%. While our deposit costs grew at a faster rate during the fourth quarter than it had in previous quarters. It was not unexpected as the Fed raised rates another 125 basis points during the quarter and deposit competition throughout our markets continues to heat up. We have considered and continue to look at other alternative borrowing strategies. During the quarter, we entered into a laddered brokered CD strategy that stretches over 12 months. Doing so allowed us to lock in approximately $100 million of funding and based on current short-term rate forecast, should benefit us over coming quarters. Overall, for the year ended 2022, our deposit beta was 20.2% and our all-in funding beta was 21%, which continue to be within our target. We do anticipate further net interest margin compression in the first quarter of '23 as we are in the peak of normal seasonal outflows combined with expected further rate hikes by the Fed in the first quarter. We have and continue to review strategies to optimize net interest income and net interest margin. Recently, we have executed on the following strategies. In the fourth quarter, we completed an investment restructure, whereby we sold approximately $28 million of securities, had a loss of $903,000 and repurchased approximately $28 million in securities with higher yields. The expected earn back is about 1 year and expected to provide 1 to 2 basis points of net interest margin lift with a full quarter benefit. Last week, we executed on 2 interest rate swap strategies, swapping $200 million of fixed rate cash flows on loans for variable rate cash flows tied to Fed funds rate. Based on the current swap curve, these swaps provide additional interest income immediately and is anticipated to provide additional benefit over the year based on the market's current expectations of Fed funds. We currently estimate a full quarter net interest margin lift to 4 to 5 basis points should market expectation on Fed funds hold true. For the fourth quarter of 2022, we provisioned $466,000 of expenditure expected credit losses, which is a decrease of $2.3 million compared to last quarter. Our credit portfolio remains in pristine condition supported by nonperforming loans to 0.13% of total loans at December 31, 2022, consistent with last quarter. Minimal net charge-offs and delinquent loans totaling 6 basis points of total loans at December 31, 2022, compared to 12 basis points last quarter. We continue to actively monitor and assess our loan portfolio for signs of distress based on current and forecasted market conditions. However, we've not identified any such trends to date. At December 31, 2022, our allowance to total loans ratio stood at 0.92%, down 3 basis points from last quarter. We believe this reserve level is appropriate given the strength of our credit [ volume and knowing it ] provides us with 7.2x coverage over total nonperforming loans at December 31, 2022, which is consistent with last quarter. Noninterest income for the fourth quarter of 2022 totaled $9.8 million, including the $903,000 loss on the investment trade discussed earlier. On a linked-quarter basis, noninterest income was down 2%, but excluding the investment trade loss, noninterest income would have been 7% higher. In the fourth quarter, each year, we recognized our annual debit card volume-based incentives. This year, that incentive was $806,000 and drove the increase in debit card income between quarters. Mortgage banking income also increased in the fourth quarter compared to last quarter. The increase was a result of the change in the fair value on our lock salable residential loan pipeline between quarters. Otherwise, mortgage banking income would have decreased between quarters as residential mortgage production for the fourth quarter was down 28% and our sold production was down 45% compared to last quarter. Our noninterest income forecast for next quarter is $9 million to $9.5 million. Noninterest expense for the fourth quarter totaled $27 million, slightly down from last quarter. Our non-GAAP efficiency ratio for the quarter was 56.4%, was also consistent with last quarter. We estimate our first quarter 2023 expenses will tick up 2% to 3%, factoring the impact of the FDIC assessment increase that takes effect for all insured banks and partial quarter impact of normal merit increases. The company's regulatory capital ratios continue to be well in excess of regulatory capital requirements as of December 31, 2022, supporting the strength of our core capital position. Tangible book value per share increased to $1.40 or 6% during the fourth quarter to $24.37 at December 31, 2022, and our tangible common equity ratio increased 24 basis points in the quarter to 6.37% at December 31. This concludes our comments on our fourth quarter results. And now I'll turn the call back to Greg.

Thanks, Mike. Before opening the call for questions, I'd like to point out a few closing thoughts here. Mike described some strategies we've executed, including the investment portfolio restructure and swap strategy. We equally, if not more so focused on organic strategies to improve our positioning in this environment. Some of those have demonstrated in the yields in our loan pipelines that are above 6.5%, which is strong considering we're routinely competing against pricing in the low 5% range, if not lower. Our loan-to-deposit ratio 83% demonstrates our franchise value, along with growing core deposits 6% in 2022. Also, as we mentioned, our efficiency ratio is within our normal operating range of 56%. And from a risk perspective, we're also well positioned. Tangible common equity ratio 6.37% and is complemented by an ACL to total loan ratio of 92 basis points and 7x coverage on nonperforming assets. With that as a backdrop, we'll open it up for questions, please.

[Operator Instructions] Our first question comes from the line of Steve Moss with Raymond James.

And then maybe just start off on the margin here. Just kind of curious how you guys are thinking about -- any updated thoughts you may have around deposit pricing as we go through the cycle here. Maybe if the Fed goes to 5 and holds throughout the rest of the year, just kind of how you're thinking about the margin?

Yes. So I'll take that, Steve. This is Mike. I think in terms of the deposit side, we're expecting, particularly in the first quarter, Fed continues to hike, we'll continue to see the deposit beta probably in the 30% to 35% range. Let's call it close to where we were, maybe slightly up. I think the other factor there, certainly on the deposit side is just the competition, I think, both myself and Greg alluded to just in our comments. We are certainly seeing that pick up. We have seen that over the last quarter as local market competitors and others are certainly looking for liquidity in the current market. Overall, from a margin perspective, we are -- I think I mentioned in my comments, expecting that to see some compression likely for the first quarter. Overall, we're thinking -- and I would say it's heavily caveated by a lot of factors that we all know in terms of what the Fed actually does and as well as from the market competition, but also some of the strategies that we put into place. But all in, we're thinking that margin would probably be around 265, plus or minus 2 to 3 basis points on either end. From there, I would just, again, probably not in a spot to give forward guidance after first quarter just for all the factors at play here. But thinking that from there with normal seasonal inflows starting to come in as well as the hopes that the Fed starts to stabilize the slowdown on rates and loans continuing to reprice. And as Greg mentioned, too, is just a strong loan pipeline that we have in terms of rates, we anticipate that margin from there would start to rebound.

Okay. That's helpful. And maybe just in terms of the loan demand you guys are seeing these days. Just curious on how you're thinking about the -- what parts of the portfolio you expect to drive growth in 2023?

Sure. What I'd say is that we're seeing a shift really -- previously, obviously, residential was driving it. That market is lower, partly because of, call it, just the overall real estate market, but our pricing. We're pricing higher than competitors. So we're seeing and experiencing really the shift over the commercial and small business side. And within the commercial, that's where our balance sheet size for the markets that we're in, our ability to structure helps us and helps justify a higher rate. And on the small business side, really, that's been a great start-up product that is ramping up for us and they tend to run higher balances. And that leverages the reengineering that we did and new software that we have especially on the small business side. So now we can instant decision, depending on collateral close within a few days, which is really serving the customer need and helps us command a higher yield on that.

Our next question comes from the line of Damon DelMonte with KBW.

I just wanted to get a little perspective here on the outlook for provision. You noted that at 92 basis points, you feel pretty good about that reserve level. It's over 7x covering NPLs, I believe. So with the expectation of loan growth slowing, the health of the portfolio remaining intact as of today, would you expect a similar level of provisioning like we saw in the fourth quarter as we start off in '23 for at least the first half of the year?

Yes, I can take that one, Damon. So I guess in terms of maybe the way I would talk about it is -- so we're at 92 basis points right now. We feel pretty good about that. Again, I think in part, it's going to depend on the economics and the economic outlook if that should change. But assuming we stand and kind of hold to where we are and as we mentioned, no signs of credit issues ahead. But assuming everything holds constant, I would say that 92, 95 basis points somewhere in there, we could continue to hover.

Okay, okay that's helpful. And then could you just go back to the 2 steps you took to try to preserve the margin here? The first, you mentioned that little repositioning with the $28 million. You said you sold the right $28 million of securities and then you reinvested those proceeds, is that correct?

That's right, yes. So we essentially -- I think those yields on those securities were around 260, then we essentially purchased another $28 million with around a 6% yield.

Okay. And what kind of securities were those?

It is a mix of corporate and MBS, primarily, I believe, corporate.

Got it. Okay. And then the 2 swap agreements, could you just go over those specifics again?

Sure. So we did $200 million notional in total. It was $150 million 3-year, I always have to think about this, get this right, received pay fixed, receive variable. I think the pay amount on that was -- my notes here, 1 second. The pay amount on that was $371 million and then we did another $50 million for a 5-year swap and the pay amount on that was $334 million, and both of those are receiving Fed fund OIS.

Got it. Okay. All right. Great. And then I guess on the expense outlook, you said 2% to 3% from the fourth quarter into the first. Overall, do you expect 2% to 3% for the entire year? Or is that just like from the first quarter and then another lift after that?

So that guidance was generally for the first quarter. I listed a couple of factors in there -- in the FDIC fees and just normal merit. So call it, I would say that's about [indiscernible] The one item I would just highlight is, historically, we've continued to manage within our efficiency ratio range of call it, 55% to 58%, and we'll certainly do that throughout the year, and that's our expectation.

Our next question comes from the line of Matthew Breese with Stephens Inc.

Just thinking about the overall NIM forecast. Within that, I was curious where do you have demand deposits going down to in this quarter, end of the year at 24%? Pre-COVID, think it was at 16%, if you go further back, Camden was operating in kind of a 10% to 15% range pre great financial crisis. So just curious where do you think this figure goes during this tightening cycle? And what structurally keeps you around your estimates?

Yes. So we're trying to pull that number, Matt. But I would just comment that we have seen some pressure in terms of some of the bigger commercial -- sophisticated commercial customers looking for interest. So we've seen some mix shift, if you will, from DDA over to now interest checking. So we've seen some of that shift occur. I think that's become more common. Certainly, we're managing that internally, having the proactive conversations with our -- primarily our business customers. But certainly, there is more pressure on that.

As we think about -- I'm sorry, Mike, go ahead.

I was going to say we can connect to off-line and give you some thoughts on that -- on the DDA specifically.

Okay. Do you expect deposit growth in '23? If so, what areas? And maybe you could comment on further reliance on broker deposits?

Sure. I'll take the last one first. So we haven't executed. We are looking at some broker deposits, additional $90 million to $100 million we are looking at right now just to supplement funding and having it be more cost effective, particularly as we anticipate Fed funds is going to continue to move higher. So we are looking at that. We'll likely look at a later CD like we just spoke about kind of stretching out over 12 months there. And I apologize, what was the first part of your question there?

What kind of deposit growth? Yes, the outlook for the year?

Yes. I believe it was mid-single digits from a deposit growth perspective, what we had...

And I would say, strategically, Matt, to keep in mind a couple of things is that we still have a very strong retail franchise, and that gets back into my comment of focusing on relationships. The team has done a great job, although deposits have always been a focus of ours, as you know, through incentives, through internal promotions, external promotions, strengthening that at this time to build the relationship side. The other thing within our deposit focus is what has ramped up more over the past few years, is on the treasury management side that we have, and Mike alluded to some of the big commercial depositors that we have. So that's another lever set of tools that we have. We have a great team within that, that we are very much focused on deposit growth. And with that said, call it, from a sales management perspective, that's where we're focused on. And more we can drive down that rate or stabilize that rate, it just gives us more flexibility on the lending side. With all of that said, I'll note that in our markets, we are seeing, I think I even said hypercompetitive markets on the deposit side and the loan side. But that's our focus. And we'll do it prudently.

Understood. And then just assisting with loan growth for the year, I would assume we continue to see securities growth? Michael, you had mentioned that in your remarks. What is the monthly kind of cash flow from the securities portfolio at this point?

Yes. It's generally $9 million to $10 million on average we're seeing on the cash flow. I think realistically, Matt, we'll probably redeploy those investment cash flows into either offsetting funding or call it, overnight funding, borrowings or into fund loan growth realistically, just based on current yields, but something we'll continue to monitor throughout the year.

Okay. Last one for me is just on the renewed repurchase authorization, I think it was 750,000 shares. You've been pretty active recently at these levels. Is that something we should expect you to continue to execute on?

No. One, that's just our annual renewal to make sure that we have that capability on the shelf to use. Right now, as always, we kind of balance out capital needs as well as use of capital. I believe I feel our position right now is we want to make sure that we're focused on building capital, especially on the TCE. That's more, call it, from a -- of what if economic potential factor recession coming up, I'd rather be building capital than deploying it right now. So I wouldn't put a lot on that lever for us.

There are no further questions leading at this time. [Operator Instructions] As we have no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Greg Dufour for any closing remarks.

Great. Thank you. I want to just thank, obviously, our analysts that are following our stock as well as all the other callers that are taking an interest into Camden National. Rest assured and hopefully, you would have the feeling that we're as always focused on long-term growth, long-term franchise value. And we appreciate your interest, and wish you a good day. Goodbye.

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