Camden National Corporation

Good day and welcome to Camden National Corporation's fourth quarter 2023 earnings conference call. My name is Cole and I'll be the 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 at any time you require operator assistance, please press star then zero. 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 and forward-looking statements, additional information concerning factors that could cause actual results to differ, supplemental earning materials to the company's 2022 annual report on Form 10-K and other filings from 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 and your press release today. Today's presenters are Simon Griffiths, 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 Simon Griffiths. Please go ahead.

Good afternoon. Thank you, Cole, and welcome to Camden National Corporation's fourth quarter 2023 earnings call. I'd like to start by introducing myself. I joined Camden National Corporation last November and took over as the president chief executive officer on January 1st, and it's an absolute pleasure and honor to join the company. Since joining, I've been impressed with the strength of the management team and their focus on delivering an outstanding experience for our customers. As I meet with team members and their customers, I've come to realize how deeply rooted Camden National is in the communities we serve, and my first months with the company have confirmed for me the pivotal role we play. From large commercial customers to small business owners, there is strong momentum for these businesses to grow, and our teammates can deliver the products and services and have the customer relationships to guide them along the way. I'm also impressed by the robust technology advancements the company has made. The team has been driving innovation and utilizing sophisticated tools to automate process, leverage data and deliver digital products to aid our customers and our team members. Earlier this morning, we reported net income of 8.5 million or 58 cents earnings per share, diluted share for the fourth quarter of 2023. This included the impact of repositioning a portion of our investment portfolio which generated a $5 million pre-tax loss on the sale of securities. Excluding that impact, our adjusted non-GAAP earnings for the quarter would have been $12.4 million or $0.85 per diluted share. The company continues to look for opportunities to adjust and optimize the balance sheet, and we expect the changes we made in 2023 will provide future benefits to our net interest margin, earnings, and capital. The strength of our balance sheet continues to position us well for growth and to capitalize on market opportunities as the broader market shows signs of normalization. Our capital position remains strong and improving, highlighted by an increase in the tangible common equity ratio to 7.11% at December 31st, 2023, compared to 6.47% at September 30, 2023. We continue to see solid demand for loans in the communities that we serve and our pipeline remains steady. We're excited by the addition of a new director of commercial banking in New Hampshire with more than 22 years of banking experience. We're already seeing positive momentum in the market and will continue to look at opportunities to strengthen our team and expand our market presence. We remain focused on full relationship banking to strengthen customer loyalty leveraging our robust balance sheet and actively managing new loan yields tightly given the decrease in the 10-year treasury yield over recent months. Personally, I'm invigorated by this opportunity to work with a talented and dedicated team to make an impact and build on their many successes. The swift actions taken throughout the year, including steps to stabilize our net interest margin, fortify our balance sheet, and position the company for future earnings capacity to drive long-term shareholder value. These actions have positioned us well for the future and will enable us to capitalize on opportunities within our market. Our priorities for 2024 will be to continue to manage the business with a focus on actions that prioritize long-term shareholder value while having a prudent offense mindset. We have many exciting capabilities and delivery roadmap across our technology, digital, data analytics, and AI roadmap that will continue to drive growth. The team remains laser-focused on a long-term strategic plan to drive stability, profitability, and growth with strong expense discipline complemented by a talented team. I'm confident in our ability to adapt to the changing environment and economic landscape while continuing to provide long-term shareholder value. Now I'm going to turn it over to Mike to provide some additional insights into our financial performance for the quarter.

Thank you, Simon. Good afternoon, everyone. This morning, we reported net income for the fourth quarter and annual financial results for the year ended 2023. Like many others across the banking industry, our annual financial results for the year were impacted by the macroeconomic conditions and other challenges faced during the year, which included higher short-term rates and an inverted yield curve, compounded by several well-known larger regional bank failures, bringing deposits and related pricing into further focus across the banking industry. Our response to these marketing conditions and events included prioritizing deposits and liquidity, taking steps to help optimize our net interest margin, and maintaining our strong asset quality. We believe our capital, reserve level, and liquidity position us well for future growth and shareholder value creation. These priorities continue throughout the fourth quarter and remain key priorities today. Net income for the year ended December 31st, 2023 was 43.4 million in diluted EPS total of $2.97. Each a decrease of 29% compared to 2022 annual financial results. Included within these results are pre-tax investment losses of 10.3 million as we sold lower yielding investments in the third and fourth quarters this year to reposition our balance sheet with a focus on driving future earnings and improved profitability. as well as a $1.8 million write-off of a signature bank bond. Adjusting for these items, our annual earnings on a non-GAAP basis for 2023 was $53 million, and a diluted EPS on a non-GAAP basis of $3.63, decreases of 15% and 14%, respectively, compared to 2022. Net income for the fourth quarter of 2023 was $8.5 million, and diluted EPS was 58 cents. each a decrease of 13% compared to the third quarter this year. As noted in my earlier comments, we sold investments at a loss in the third and fourth quarters, which affected our financial results for each quarter. Adjusting for these investment losses, our earnings on a non-GAAP basis for the fourth quarter were $12.4 million, and diluted EPS was $0.85, each a decrease of 11% on a linked quarter basis. Highlights for our fourth quarter operating results included seeing signs of our net interest margin stabilizing, improving capital ratios, and finishing the year with excellent asset quality. Our net interest margin for the fourth quarter was 2.40%, which was up one basis point from last quarter. We continue to redeploy our investment cash flows primarily to fund loan originations in order to improve overall asset yields and anticipate we'll continue to do so. We believe this asset remixing should help continue to stabilize net interest margin through the winter months within our markets as we generally see a level of seasonal deposit outflows and as we continue to see pressures on funding costs from deposit mix shift. The strength of our liquidity position affords us the flexibility to continue to leverage the strategy. In order to deploy all of the proceeds from the sales securities in the fourth quarter, We also reinvested a portion of the proceeds into new securities that yielded just above 6%, and that were purchased at a slight discount. As our investment portfolio continues to produce cash flow, we expect to continue to leverage this cash flow to support loan fundings. Our book and regulatory capital ratio has improved across the board in the fourth quarter, and we finished the year with a TCE ratio of 7.11%, up from 6.47% at September 30th, 2023. and 6.37% at December 31st, 2022. Our capital position continues to be one of our strengths, and it positions us well to capitalize on market growth opportunities. Our asset quality as of December 31st, 2023 remained very strong by all measures. At year end, our non-performing assets to total assets were 0.13%, our past due loans were 0.12% of total loans, Net charge-offs for the fourth quarter were $358,000, or 0.04% of average loans on an annualized basis. The overall health of our customer base continues to be very positive, highlighted by criticized and classified assets of 1.13% of total loans at year-end, which is up from 1.05% for the third quarter, but down from 1.67% at December 31, 2022. We continue to monitor our loan portfolio proactively to identify any early signs of stress. And to date, we're not seeing any systemic trends or material concerns. The increase in provision expense between the third and fourth quarters was $1.1 million and contributed to the decrease in our linked quarter earnings on a GAAP and non-GAAP adjusted basis. In the third quarter, we recorded negative provision expense or credit, primarily driven by a decrease in loan balances of 1% during the third quarter. Whereas in the fourth quarter, we provisioned $569,000 driven by loan growth of 1%. Like last quarter, we maintained our loan loss reserve levels at 0.90% of total loans as we take into account our overall asset quality and with the macroeconomic forecast. Non-interest income for the fourth quarter totaled $6 million and was higher than reported for the third quarter by 18%. primarily driven by a few non-core items, including mortgage banking, fair value adjustments, and a smaller loss on our sales investment securities compared to the third quarter. Adjusting for these items, non-interest income for the fourth quarter would have been $10.6 million, which included the benefit of our annual Visa incentive bonus of $400,000 in the fourth quarter compared to $10.5 million of fee income for the third quarter. We continue to estimate that our normal recurring non-interest income will be $9.5 to $10 million quarterly in the near term. Non-interest expense for the fourth quarter was $27.8 million, an increase of $1.6 million or 6% on a lean quarter basis. As anticipated, operating costs increased over the last quarter given various factors, including timing of the incentive accrual through-ups, senior leader transition costs, and normal seasonal costs during the winter months. Higher non-interest expense for the fourth quarter translated into a non-GAAP efficiency ratio of 63.48% for the quarter. As we look forward, we anticipate non-interest expenses will tick higher for the first quarter of 2024 and range between $28 and $28.5 million as incentive accruals reset to target levels and we continue to work through transition costs. We have taken and continue to take steps to manage costs and we are focused on managing our efficiency ratio lower throughout 2024. The last item I'll touch on is our effective tax rate. We saw our effective tax rate for 2023 decrease to 19.4% compared to 20.3% for 2022. In the fourth quarter, we participated in a renewable solar energy project, and as a result, we are currently estimating an effective tax rate for 2024 of 18.6%. This concludes our comments. We'll now open the call for questions.