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spk01: Good day and welcome to Camden National Corporation's second quarter 2023 earnings conference call. My name is Emily and I'll 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 involves 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 and 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 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 DeFore. Please go ahead, sir.
spk02: Thank you, Emily, and welcome everyone to Canada National Corporation's second quarter 2023 earnings call. I'll provide a few opening comments and then turn the discussion over to Mike Archer. Earlier today, we reported net income of $12.4 million for the second quarter of 2023, down 3% from $12.7 million we reported for the first quarter. of 23. On an EPS basis, we've reported 85 cents per diluted share, down two cents from the first quarter of 23. We continue to see the impact of rising interest rates and the inverted yield curve on our operating results. As I shared at last quarter's earnings call, our focus has been on deposits and our liquidity, our margin, and asset quality. From an update perspective, our loan-to-deposit ratio remained flat at 88% when comparing the second and first quarters of 2023. Our interest margin was 2.4% for the quarter, within our estimates, but down from 2.54% reported during the first quarter of the year. Asset quality continues to remain strong, with non-performing assets to total assets at nine basis points. Loan growth for the quarter was 1%, a significant decrease from growth rates seen in recent quarters. As we discussed at our last call, this was done purposefully to reduce the reliance on the higher cost borrower funds and to benefit our net interest margin as well as to maintain our loan to deposit ratio. Our sales teams remain focused on deposit generation and they continue to review loan opportunities that are appropriately priced and high quality. At the same time, We are confident our sales and support teams are very well positioned to increase our lending activities when interest rates and market conditions align. From a general perspective, like many areas in the country, we're seeing solid consumer-driven activities, including tourism, which should support our seasonal deposit activity. Business activity is also strong, but we continue to see labor challenges affecting many of our business customers. The residential mortgage market has slowed, driven by both the impact of interest rates as well as low inventory levels. Although pricing competition for deposits remains fierce, we are satisfied with our ability to retain deposits and win other relationships in this environment. It's been a while since I've used the term keeping our powder dry on one of our earnings calls, but I believe this is the best course of action as we see what Fed actions will take over the next few months. As I noted earlier, deposits and liquidity, the margin, and asset quality continue to be our priorities, and coupled with our strong capital levels, we believe our focus on these priorities positions us well when the interest rate environment stabilizes, the yield curve improves, and we have a clearer line of sight to overall economic activity. In short, we are managing our organization for the long term from both our shareholders and customers. I'd now like to introduce Mike Archer.
spk06: Thank you, Greg, and good afternoon, everyone. Earlier today, we reported quarterly earnings of $12.4 million and diluted EPS of $0.85, which are down 3% and 2% respectively on a linked quarter basis. Earnings were lower primarily due to the net interest margin compression of 14 basis points between quarters to 2.4% for the second quarter. Our return on average assets and our return on average tangible equity followed suit and we're also down quarter over quarter. For the second quarter of 2023, our return on average assets was 0.87% and our return on average tangible equity was 13.55%. The decrease in our earnings and profitability reflects the current interest rate environment and inverted yield curve. However, we remain on strong financial footing backed by a strong balance sheet with sufficient levels of capital and reserves. We also have to continue to have a healthy liquidity position that included access to 1.4 billion of funding, which was two times the amount of uninsured and uncollateralized deposits as of June 30th. Net interest income for the second quarter of 2023 totaled 32.7 million, a decrease of 5% compared to the first quarter of 2023. As noted earlier, our net interest margin decreased 14 basis points between quarters as funding costs continue to rise due to increased interest rates, including a 50 basis point increase in the Fed fund rate in the first quarter and another 25 basis points increase in the second quarter. Although higher interest rates benefited our asset yield, which increased 20 basis points between quarters to 4.12% for the second quarter, the increase of funding costs due to higher interest rates more than offset the benefit. Funding costs increased 36 basis points between quarters and reached 1.81% for the second quarter of 2023, which represented a beta of 73.6% for the quarter. Our cumulative beta measured from January 1st, 2022 through June 30th, 2023 was 32.4%. On the deposit side, we continue to see deposit acquisition and pricing remain very competitive throughout our markets and fully anticipate we'll continue to see pricing pressures in the near term. Deposit costs increased 26 basis points on a linked quarter basis and reached 1.48% for the second quarter of 2023, representing a 53.9% beta for the quarter. Our cumulative deposit beta measures from January 1st, 2022 through June 30th of 2023 was 27.1%. Like many others across the banking industry, we've experienced effects of deposit mix shift as customers look to deploy funds into higher yielding interest bearing accounts. This has, in part, led to lower average non-interest checking and savings balances, which each decreased 7 percent from the first quarter to second quarter, and average CD balances growing 28 percent over the same period. As we have said, we remain focused on optimizing net interest margin and positioning ourselves for expansion moving forward. A few steps we have taken include slowing loan growth through higher loan pricing and driving more saleable residential mortgage volume. Loan growth for the second quarter of 2023 was 1%, and we continue to move forward with this strategy in the current environment. Another is redeploying investment cash flows to fund loan growth. We're also actively campaigning for deposit acquisition while managing our existing deposits at the customer level. Also, through the first half of the year, we added $375 million of interest rate swap derivatives to reduce our interest rate exposure to rising interest rates. These swaps added $1.7 million of net interest income through the first half of 2023, including $1.2 million during the second quarter. In early July, we executed another $75 million interest rate swap with the same objective. The last item I would like to highlight is that during the second quarter, we locked in $135 million of one-year funding at a rate of 4.7% through the bank term funding program rolled out by the Fed earlier this year. We viewed this as a prudent step to help manage funding costs in the current interest rate environment, while also providing us with favorable optionality as interest rates move lower over this one-year period. Now, switching to credit, our credit quality across the loan portfolio remains very strong overall. Non-performing loans were 0.13 percent of total loans, and delinquencies were five basis points of total loans as of June 30, 2023, both consistent with last quarter. while total criticized and classified loans improved quarter over quarter and stood at 1.13% of total loans as of June 30th. Total loan reserves stood at 0.9% of total loans at quarter end, down one basis point from the first quarter, reflecting the strength of our loan portfolio, but also recognizing the ongoing risk within the broader macro environment of a potential downturn. This led to a small provision expense for the second quarter to maintain our loan reserve levels. Last quarter we reported on our pre-office loan portfolio, which included detailed information and the supplemental earnings materials that we filed. We continue to monitor this loan portfolio closely, but we have not seen any material changes in this portfolio through the second quarter. Non-interest income for the second quarter of 2023 totaled $10.1 million, an increase of 2% over the first quarter this year. For the second quarter of 2023, we sold 34% of our residential mortgage originations. And we continue to push more of our origination volumes to saleable. As of June 30th, 50% of our committed residential mortgage pipeline was designated for sale. Non-interest expense for the second quarter totaled $27.1 million, which was 4% higher than last quarter. Although total operating expenses increased quarter over quarter, total operating expenses for the second quarter were as expected and consistent with projections discussed on our last quarter's earnings call. Our non-GAAP efficiency ratio for the second quarter was just over 63%, and our overhead ratio, which is calculated as annualized quarterly operating expenses over average quarterly assets, was 1.9%, both higher than the first quarter. As of the end of the second quarter of 23, our capital position remained strong, measured on both a GAAP and regulatory basis. At the end of the second quarter, our TCE ratio was 6.57%, up one basis point from last quarter, and regulatory capital ratios continue to be well in excess of capital requirements. While the calculation of our regulatory capital ratios does not include the effect of unrealized losses on investments, which totaled $138.7 million as of June 30, 2023, we are pleased to note that as of June 30, the company would continue to be in excess of regulatory capital requirements, even if they were calculated to include the unrealized losses on the company's investments. Through the first half of the year, we returned 14.3 million of capital to shareholders through dividends and share repurchases. Our cash dividends for the first and second quarter was 42 cents per share and represented an annualized quarterly dividend yield of 5.42% as of June 30th, based on our closing share price on that date. Through June 30th, we repurchased 65,692 shares of our common stock at an average price of $33.36 per share. This concludes our comments on our second quarter results. We'll now open the call up for questions.
spk01: Thank you. If you would like to ask a question today, please do so now by pressing star followed by the number one on your telephone keypad. If you change your mind and would like to be removed from the queue, please press star and then two. When preparing to ask your question, please ensure that your device and your microphone are unmuted locally. Our first question comes from the line of Steve Moss with Raymond James. Steve, please go ahead. Your line is now open.
spk05: Good afternoon. Hi, Steve. Maybe just starting with, you know, the margin here. How's it going? You know, on the margin here, do appreciate, you know, the derivatives have definitely helped here, moderating margin pressure, and you added another one this quarter. Just kind of curious, you know, how are you feeling about the outlook for the margin In the current deposit rate environment.
spk06: Yeah, so I think from a margin perspective, Steve, as you think about next quarter, we're, we're kind of in the sort of 240 right now. We're thinking flat plus or minus 5 to 10 basis points. I would say it's probably a bit broader range than we've historically given, but I think part of it depends on what the fed does here in a few days. Also, also, we're in the seasonal deposit flows and so we're seeing that come in something we're continue to watch and monitor. And if the other, you know, the other item is just a deposit next shift that we continue to see, or have seen and how much does that continue? So, I think right now we feel pretty good around the 240 range, but we could see that be slightly higher or lower.
spk05: Okay, appreciate that. And in terms of loan pricing here, just kind of curious, you know, what, you know, where loan yields are coming on for, for new originations these days.
spk06: Sure. So for the, uh, second quarter, our new originations came on, I think on a weighted basis around seven, a little over 7%, it was seven, 10 sticks out at me, um, from a pipeline perspective, we're largely, you know, at 7% or over seven, you know, well over 7% now. I think our commercial CREE portfolio is somewhere in the neighborhood of seven and a half plus. I want to say the residential pipeline is seven and a quarter or slightly over. So, as we've talked about, we have been very prudent on the growth side and anything that we're putting on our books, we're really trying to make sure that we get the right rate and price for it. As you know, a function of that, of course, is just the lag effect where it takes 45 to 60 days call for these loans to come on.
spk05: right okay that's that's helpful and then just one more for me just on the loan growth you know it did moderate this quarter but you know still not a bad pace given a more challenging environment just kind of curious you know do you think it'd be further moderation from current levels or you know it's low to mid single digits annualized rate maybe a decent run rate for the second half of the year yeah it's great steven i'd say um
spk02: You know, it probably lowered loan growth single digit. You know, we felt pretty good, honestly, about 1%. Again, we know we're pushing ourselves away from the table, you know, primarily on pricing, you know, to really focus on the margin. So we're not necessarily focused on the loan growth yet.
spk06: The only thing I might add there. All right.
spk05: Thanks very much for all the color.
spk02: Yep, you're welcome.
spk01: Our next question comes from Damon Del Monte with KBWE. Damon, please go ahead. Your line is now open.
spk04: Hey, good afternoon, guys. Hope you're both doing well today. So just wanted to kind of circle back on the margin question. Oh, good to hear. Good to hear. Just want to circle back on the margin commentary. So assuming that the Fed raises rates at least one more time, you know, like tomorrow, I think it's tomorrow is the meeting. You know, does that how does that play into your commentary, Mike, about like, is that going to benefit the margin or do you think that's going to put you more on the lower end of the range?
spk06: I mean, I think. You know, the fed increase, it will certainly put a little more pressure on the, on the funding side. Certainly from both from a deposit, of course, the borrowing side as well. We, some of these swaps that we've done, and just the pricing will help neutralize some of that impact. But I think that's a bit of that coupled with the seasonal deposit flows. We do anticipate a level of that, which should help out on the lower cost deposits for this quarter Damon. Um, so I think that's when we, when we think about margin for. You know, next next quarter or the 3rd quarter, I think those are the various variables that we're considering where we're saying, hey, we think 240 is probably a pretty good. You know, mid point of where we, where we may land, you know, plus or minus and some basis points there, but. I think it's all those factors that we're, we're baking in and knowing that. Um, you know, another fed rate, I could certainly isn't isn't going to help from an immediate funding perspective.
spk04: Got it. Okay. And do you happen to have the spot margin as of the month of June?
spk06: For June, our monthly margin was 238, I believe.
spk04: Okay. Great. Thank you. And then as we think about the slower pace of loan growth and we think about the strong credit quality trends you guys exhibit, should we think about minimal provisioning in the back half of this year, kind of you know, maybe just targeting keeping that loan loss reserve flat at 90 basis points? Is that reasonable?
spk06: Yeah, I think, I mean, certainly if the macro environment stays like it is, I think that 90 basis points reserve, again, it could move up or down slightly, but I think that's a pretty good spot for us right now.
spk04: Okay. Okay. And then on the fee income side, again, It sounded like you felt pretty comfortable with this quarter's level, so that's probably a reasonable run rate. There didn't seem to be a lot of noise this quarter.
spk06: No, I think the $10 million is a pretty good run rate for us, kind of something like we saw this quarter.
spk04: Okay, great. That's all that I had. Thank you very much. You're welcome.
spk05: Thank you.
spk01: Before we take our next question, as a reminder, if you would like to ask a question today, please do so by pressing Start, followed by the number 1 on your telephone keypads. The next question comes from the line of Matthew Breeze with Stevens. Matthew, please go ahead. Your line is now open.
spk03: Hey, good afternoon. I was just curious, as you kind of monitor deposit flows throughout the quarter, was there anything that you could kind of provide more color on in regards to how demand deposit flows kind of work their way month by month? Was there any sort of intensive intensification of runoff towards the end of the quarter versus the beginning or to start to subside?
spk06: I don't, I mean, nothing sticks out at me, Matt. I say, you know, one of the things that we just continue to watch is, you know, particularly on the consumer side, just average balances. You know, we saw that really, peak during the pandemic and one of the areas that we're seeing pressure on is just those average balances pull down in this environment. So I think that's one of the big variables that are out there. We're seeing the seasonal deposit flows on the business side, which we would expect, but one thing that we continue to monitor is the consumer side and what happens there. And I think to that end, the other reality is we are also monitoring our accounts and we continue to see the number of accounts grow on that basis. we're not seeing call it customer outflow in that regard.
spk03: Got it. Okay. And then maybe on the, just going back to the name and trying to get a little bit of a longer term outlook, the two 40 NIM plus or minus, do you feel like that's a good place to model through the end of the year, maybe into early 2024? And at what point, as you look at your internal models, do you start to see, you know, expansion, loan yields start to overtake, uh, incrementally higher deposit costs?
spk06: Yeah, it's a good question. I think probably 240 is probably a pretty decent spot from a modeling perspective for the remainder of the year. As we get into the winter months for us, the seasonal flows start to go a little bit the other way. So there's a little bit generally lumpiness and just margin between Q4, Q1 as we get back into Q2. But I think the reality is when we start seeing rates start to go down and that inversion, start to, you know, not be as steep is when we start to see that real benefit on the margin.
spk03: Okay. And then is there any sort of additional thought around, you know, additional balance sheet restructures, either securities or in the loan portfolio to help alleviate some of these NIM related pressures? And how do you think about that?
spk06: I guess what I would say, Matt, is, you know, I think we, are constantly looking at everything. Um, you know, just part of the normal process that we go through. So I don't want to say anything's off the table at this point. Um, you know, we'll continue to look at that just as a normal, normal due process. Um, understanding right now, certainly the investment portfolio is, is continues to wait down, wait down our margin. So, um, I think the short answer is yes. We'll continue to look at that.
spk03: Okay. Last one for me, just so you're repurchased a little bit of stock this quarter. Anything to read into that, such as managing kind of overall share count?
spk06: No, I think it's just us being opportunistic. I mean, when the time comes, you know, we did a small tranche, and we're certainly being cautious from a capital perspective. But I think when the price makes sense for us, we'll be, you know, opportunistic in the market. So, you know, I guess that's how I would read into that.
spk03: Got it. Okay. Understood. I'll leave it there. Thanks for taking my questions.
spk01: 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.
spk02: Great. Well, thank you. And everybody, I want to thank you for being on the call and taking interest in the company. And have a great day. Take care.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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