Camden National Corporation

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.

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.

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.