Camden National Corporation

Good day and welcome to Camden National Corporation's first quarter 2023 earnings conference call. My name is Donyell and I will be your operator for today's call. All participants will be in a listen only mode during today's presentation. Following the presentation, we will conduct a question and answer session. If you require operator assistance at any time during the call, please press star then zero. Please note that this presentation contains forward-looking statements which involve significant risk and uncertainties that may cause actual results to vary materially from the 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 as supplemental earnings material. the company's 2022 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 forward-looking statements are made. Any references in today's presentation to non-GAAP financial measures are intended to provide meaningful insight and are reconciled with GAAP in your press release. Today's presenters are Greg Dufour, President and Chief Executive Officer, and Mike Archer, Executive Vice President and Chief Financial Officer. 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, Donyell, and welcome to Camden National Corporation's first quarter 2023 earnings call. Before I turn the discussion over to Mike, I'd like to make a few opening comments. We reported an income of $12.7 million or 87 cents per diluted share for the first quarter of 2023, a 17% decrease from the fourth quarter of 2022. This resulted in a return on average equity of 11.16% and a return on tangible capital of 14.21%. Driving these results were the impact of our normal seasonal deposit outflows overall interest rate volatility, and market-based pricing increases impacting deposit rates. We also recorded a $1.8 million pre-tax loss on a subordinated bond we held in Signature Bank, which was held in our health and maturity portfolio, and that loss was recorded in our provision for credit losses line. We've reviewed our investment portfolio and feel comfortable with the positions we hold with only 3% in corporate bonds. Mike will speak to our investment portfolio in more detail in just a few minutes. The turmoil in the banking sector during the past quarter has sharpened our focus, but hasn't drastically altered. Our priorities remain the same, deposits, margin, and asset quality. Over the past several quarters, I've shared our strategies to leverage our retail franchise through sales management and training, outlined investments we've made in corporate treasury management, and just last quarter, I shared our view regarding loan pricing. Our asset quality continues to be strong, and it starts with a strong credit culture and maintaining underwriting standards through all cycles. Lending continues to be important to us, and we'll continue to lend in the current environment, but we'll do so with a focus on maximizing our margins. We have the capacity to lend, but we'll be selective as the interest rate environment and the need to focus on margins are expected to temper our loan growth in the near term. With that said, we ended the first quarter of 2023 with $4.1 billion of loans up 2% from the end of 2022, with overall loan yields increasing 29 basis points from December. We ended the first quarter of 2023 with just over $4.4 billion of deposits, excluding broker deposits, which is 5% less than balances at the end of 2022. Further adjusting from one large municipal deposit relationship that is discussed in our earnings release, deposit balances were down only 2% from year end. We believe these results reflect the seasonality within our deposit base during the winter months and indicate our core customer deposit base has remained solid during the past few months. During the quarter, we also declared a dividend of 42 cents per share and did not repurchase shares during the quarter. I'll now turn the discussion over to Mike.

Thank you, Greg, and good afternoon, everyone. Earlier today, we reported our quarterly earnings, which included our normal earnings release, as well as a supplemental deck that provides additional information to the investor community that we believe is helpful and relevant given recent events in the banking industry. This supplemental information addresses deposits, liquidity, investments, and loans in more detail than normally we provide in our earnings release. I'll speak to the salient points of each in more detail shortly, but before I do, I want to share that Canada National's financial footing remains strong based on firm fundamentals supported by a diverse deposit base, excellent asset quality that starts with our lenders and underwriters, and strong capital levels. As of March 31st, the company's uninsured and uncollateralized deposits were 15% of total deposits compared to 16% as of December 31st, 2022. This level of uninsured, uncollateralized deposits speaks to the diversification of our customer base with approximately 70% of our deposits being retail and the remaining being commercial and muni deposits. More information on our uninsured and uncollateralized deposits can be found on page five of the supplemental earnings material filed this morning with the earnings release. Total deposits at March 31st were $4.6 billion, including broker deposits, down 4% from year end and down 1% when adjusting for the large municipal deposit relationship that Greg just mentioned earlier and is discussed further in our earnings release. As discussed in our earnings release and in previous calls, we generally see some deposit outflows during the first quarter given seasonality across our markets. The decrease seen in the first quarter of 2023 was of a similar level to those seen in the first quarter of previous years prior to the COVID-19 pandemic. As of March 31st, the company's primary available liquidity sources consisted of cash, securities, FHLB, and FRB capacity, totaled $1.3 billion, which is about 1.9 times our total uninsured and uncollateralized deposits as of March 31st. You can refer to page five of the supplemental earnings materials for more information on our liquidity position. Our credit quality across our loan portfolio remained very strong throughout the first quarter, and our credit quality metrics were consistent with or slightly better than those at year end. The allowance for credit losses was 0.91 percent of total loans at quarter end, down just one basis point from year end, which both reflects the strength of our asset quality and balances the risk of a future downturn in the economy. We continue to monitor our credit portfolio proactively and recently did a deep dive into our CRE office portfolio given the heightened focus on commercial real estate in this sector specifically. The results were as expected and we confirmed that there are no significant concerns within this portfolio at this time. Our CRE office portfolio represents about 5% of total loans as of March 31st and all loans are within our markets. As of quarter end, none of the CRE office portfolio was on non-accrual status or past due. More details on this portfolio can be found on page seven in the supplemental earnings material. In the first quarter, we fully wrote off a $1.8 million investment in a signature bank bond due to the bank's failure. This loss was recognized within provision for credit losses on the income statement and is driving the provision expense for the quarter. Our corporate and municipal bond portfolio continues to be of high credit quality, and we have since reevaluated these portfolios and do not see any further credit risk at this time. We provided additional details on these portfolios on page 8 of the Supplemental Earnings Materials. As of March 31st, our investment portfolio was in the unrealized loss position of $122 million compared to an unrealized loss of $141.5 million at December 31st, 2022. On March 31st, the Available for Sale portfolio was an unrealized loss of $91 million, and the Health and Maturity portfolio was an unrealized loss of $31 million. At quarter end, the duration and weighted average life of the AFS portfolio was 4.7 years and 6.8 years, respectively, and the duration and weighted average life of the HTM portfolio was 7.1 years and 10 years, respectively. At the end of the first quarter of 2023, our capital position remained strong, measured on both a GAAP and regulatory basis. At the end of the first quarter, our TCE ratio was 6.56% compared to 6.37% at year end, and regulatory capital ratios continue to be well in excess of capital requirements. We did not repurchase any shares of our stock during the first quarter and continue to have 750,000 shares available for repurchase under the current repurchase program. Now to earnings. As Greg mentioned, for the first quarter of 23, we reported net income of $12.7 million and diluted EPS of $0.87, each down 17% compared to the fourth quarter of 22. On a non-GAAP pre-tax, pre-provision basis, the company reported first quarter earnings of $18 million, down 9% from last quarter. Like many others across the banking industry, we too were affected by rising deposit and borrowing costs. driving lower net interest income and net interest margin. And although we communicated in January that we anticipated further net interest margin compression in the first quarter, the decrease between quarters of 22 basis points was beyond the 10 to 15 basis points we had estimated, primarily due to the deposit mix shift we'd seen during the first quarter from non-interest checking and savings into higher cost products such as money markets and CDs. The other primary driver for the lower earnings between quarters was the write-off of the signature bank bond discussed earlier. Net interest income on a linked quarter basis was lowered by $2.7 million or 7%. Again, the primary driver was margin compression as it declined to 2.54% for the first quarter of 23. The speed of deposits of funding betas increased in the first quarter as short-term rates continued to rise on the back of two additional Fed rate increases totaling 50 basis points, and we absorbed the full quarter impact of 125 basis points of Fed rate increases in the fourth quarter of 22. Over the past several months, we have seen the deposit landscape within our markets become much more competitive as interest rates have risen. We continue to manage funding costs actively through various strategies. Our deposit beta, which includes broker deposits through the cycle thus far is 24%, and for the first quarter was 44%. Included within interest income for the first quarter was $479,000 of income from execution of $300 million of pay fix received floating interest rate swaps during the quarter. Loans for the first quarter of 23 increased $62.8 million or 2%. We've seen our committed loan pipelines for both retail and commercial each continue to hold around $50 million. as we look to price all new originations appropriately in the current interest rate environment. We are also now selling a larger percentage of our originated residential mortgages. As a result, we anticipate loan growth to be lower this year than what we've seen in recent years. Non-interest income for the first quarter of 23 totaled $9.9 million, an increase of 1% over the last quarter. The decrease in mortgage banking income on a linked quarter basis was driven by changes in valuations between quarters. Overall, we sold 40% of our residential mortgage production for the first quarter compared to 16% in the fourth quarter of 22. Our strategy has shifted to sell all qualifying residential mortgage production as we focus on optimizing net interest margin. Non-interest expense for the first quarter totaled $26.2 million, down 3% from last quarter, which is favorable compared to our expected 2% to 3% increase previously communicated. We have and will continue to manage expenses prudently given the pressure on net interest margin and revenues. However, we remain focused on our long-term strategy and franchise value. Our non-GAAP efficiency ratio for the first quarter of 2023 was 58.96% compared to 56.35% last quarter. Our overhead ratio remains strong and demonstrates our cost management practices. highlighted by a ratio of 1.84% for the first quarter of 2023 compared to 1.93% for the fourth quarter of 2022. This concludes our comments on our first quarter results. We'll now open the call for questions.