Camden National Corporation

Good day and welcome to Camden National Corporation's third quarter 2024 earnings conference call. My name is Lydia and I'll be your operator for today's call. All participants will be in a listener only mode during today's presentation and following the presentation, we'll conduct a question and answer session. If you require operator assistance at any time during the call, please press start and zero. I'll now turn the call over to Renee Smith, Executive Vice President, Chief Experience and Marketing Officer.

Thank you, Lydia. Good afternoon and welcome to Camden National Corporation's conference call for the third quarter of 2024. Joining us this afternoon are members of Camden National Corporation's executive team, Simon Griffiths, President and Chief Executive Officer, and Mike Archer, Executive Vice President, Chief Financial Officer. Please note that today's presentation contains forward-looking statements and actual results could differ materially from what is discussed on today's call. Cautionary language regarding these forward-looking statements is contained in our third quarter 2024 earnings release issued this morning and in other reports we file with the SEC. All of these materials and public filings are available on our investor relations website at camdennational.bank. Camden National Corporation trades on the NASDAQ under the symbol CAC. In addition, today's presentation includes discussions of non-GAAP financial measures, Any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings release, which is also available on our Investor Relations website. I am pleased to introduce Camden National Corporation's host, President and Chief Executive Officer, Simon Griffiths.

Thank you, Renee. Good afternoon, everyone. We appreciate you joining our call today. I'll provide a few comments on our most recent quarter and then turn it over to Mike to discuss our third quarter financial performance. We will then open up the call for Q&A. The third quarter marked a significant event for Camden National as we announced on September 10th we would acquire Northway Financial, a strong community bank franchise in New Hampshire. The combination provides Camden National a unique opportunity to strengthen its competitive position and build market share in northern New England in a high growth contiguous market. We have filed all the bank regulatory applications for approvals required for the merger, which we expect to be completed in the first quarter of 2025. Both Camden National and Northway teams are highly engaged in planning the integration of our companies and preparing for a seamless transition for customers and employees. As we dive deep into our preparation, we remain convinced that this merger represents a rare opportunity to combine two high quality and culturally aligned franchises to build a premier Northern New England bank. In the midst of this significant transaction, we produced strong operating results during the third quarter. Earlier this morning, we reported net income of 13.1 million or 90 cents diluted earnings per share for the third quarter of 2024, an increase of 9% and 11% respectively over the second quarter of 2024. Excluding the merger and acquisition costs incurred through September 30th, 2024, on a non-GAAP basis, net income for the third quarter of 2024 was $13.6 million, and EPS was $0.94, an increase of 14% and 16% respectively over the second quarter of 2024. Our strong third quarter financial performance is highlighted by a 10 basis point increase in net interest margin over the previous quarter. disciplined expense management with continued franchise investment and strong asset quality, which are the hallmarks of Canada National. These results demonstrate the strength of our franchise, and we believe they also represent critical momentum and improving operating environment as short-term interest rates are forecasted to drive lower over the coming quarters. In September, our team swiftly adjusted our rate book and develop proactive strategies to preserve and enhance our solid customer base during the downward changing rate environment. We proactively responded to the Fed funds rate cut in mid-September through both front and back book pricing changes. Our strong customer relationships continue to serve us well with a 1% increase in deposits compared to the previous quarter. We continue to see a strong commercial pipeline and welcome two strategic commercial lenders in New Hampshire and one in the Lewiston Auburn market to expand our presence in these high growth markets. As we actively seek new commercial customers, we remain committed to our prudent customer due diligence and a disciplined pricing strategy to maintain our risk management approach. We continue to make strategic investments in our business while managing operating expenses and driving positive operating leverage. During the third quarter of 2024, our revenues increased 5% over the previous quarter. Non-interest expense increased modestly by 3% when excluding M&A expenses. Non-interest income for the third quarter increased 7% over the previous quarter, and we benefited from seasonal mortgage activity, lower interest rates, which drove increased activity and greater saleable business into the secondary markets. Our asset quality remains strong as of September 30th. We continue to monitor our loan portfolio actively and to date, we have not seen any signs of credit deterioration across any pockets or industries. Our lending and credit teams work to proactively manage any loan at the first sign of any challenge. This proactive approach has served and continues to serve us and our customers well. On September 30th, 2024, past due loans were just three basis points of total loans down from five basis points the last quarter, and non-performing loans were 17 basis points of loans down from 23 basis points at June 30th. While asset quality remained strong across the board, we maintained an allowance for losses of 0.86% of total loans at September 30th, 2024, consistent with the previous quarter. We continue to believe this reserve level is appropriate as we balance current macroeconomic conditions the forecasted path ahead, and our current asset quality metrics. The strategic transformation of our account opening process is on track and scheduled for a year-end launch. We have successfully completed development and are in the midst of full end-to-end testing. This will allow complete account opening and funding within minutes from mobile and online devices and is a first step towards enhancing our deposit account opening process across all channels. Our customers will be able to experience the convenience of our digital experience with the security and ease of human backed service excellence. As I laid out, we continue to lean into our strengths, including exceptional talent, execution capabilities, and risk management expertise. This allows us to serve our customers effectively against a complex backdrop and deliver key results for our shareholders. Looking ahead, we are very excited about the future opportunities as we merge with Northway to enhance our market position and increase our scale and capabilities. We are confident the combined entity will provide meaningful value creation for shareholders and strong pro forma profitability. Our expanded customer base will benefit from our strategic technology investments, business diversification, and larger balance sheet, which we believe will provide a more robust platform for future earnings growth. We look forward to providing you with additional details as we move through the regulatory approval process and closing. Now Mike will provide more details about our financial results.

Thank you Simon and good afternoon everyone. This morning we reported an increase in net income for the third quarter of 9% over last quarter. Adjusting for merger related costs, we reported an increase in core net income for the third quarter of 14% over the second quarter. Our core financial results continue to demonstrate the positive momentum we are building to our actions to drive net interest margin improvement over the past several quarters, as well as our continued focus on asset quality and expense management. Through these results, many of our key financial metrics improved over the last quarter. Of particular note, our core return on average assets in the third quarter was 95 basis points. Our core return on average tangible equity was 12.94%, and our efficiency ratio was 62.39%. Additionally, our tangible book value per share grew 5% in the third quarter. Certainly, one of the highlights for the third quarter of 2024 was our net interest margin expansion of 10 basis points to 2.46% on a linked quarter basis, beating our guidance provided on last quarter's call. Net interest margin expansion for the third quarter drove net interest income growth 4% over the last quarter, highlighted by an expanding interest earning asset yield of 11 basis points and flat funding costs, maintaining at 2.35% between quarters. Non-interest income for the third quarter of 2024 totaled $11.4 million, an increase of 7% over the second quarter of this year. We saw strong residential mortgage activity in the third quarter throughout the several months in our markets. and we closed the third quarter with a strong residential mortgage pipeline. We continue to sell our eligible residential mortgage production and for the third quarter we sold 64% of our residential mortgage production compared to 52% in the second quarter. Also contributing to the increase on a linked quarter basis was the increase in debit card income and back-to-back loan swap fees of $100,000 and $133,000 respectively. Not interest expenses for the third quarter of 2024 totaled $28.9 million, which included costs of $727,000 associated with the recent announced planned merger with Northway Financial. As we continue to work our way through the anticipated acquisition and conversion date in the first quarter of 2025, we expect most of the estimated one-time deal costs to be incurred over the next two quarters. Excluding these merger-related costs, not interest expenses for the third quarter for $28.2 million and increased 3% over the second quarter of 2024, as we continue to invest into our franchise. Strong revenue growth of 5% on a linked quarter basis drove an improvement in our quarterly efficiency ratio to 62.39% for the third quarter, compared to 63.53% for the second quarter of 2024. We estimate operating expenses for the fourth quarter before any merger-related costs will be in line with recent quarters. Now shifting to the balance sheet, total assets of $5.7 billion as of September 30th, 2024 were relatively unchanged on a linked quarter basis. Loan balances as of September 30th were $4.1 billion, a decrease of 1% compared to the second quarter of 2024, while investment balances increased 2% as lower interest rates provided relief to investment valuations, and we purchased 26 million of securities. Total deposits as of September 30, 2024 were $4.6 billion, an increase of 1% compared to the second quarter, as we saw the lift from normal seasonal inflows and continued success within our high-yield savings deposit product, which increased another 8% this quarter and resulted in savings growth year-to-date of 16%. The credit quality of our loan portfolio continues to be very strong, supported by excellent credit quality metrics. On a linked quarter basis, we saw several key quality metrics improve at September 30th, including non-performing loans decreasing six basis points to 17 basis points of total loans, annualized quarterly net charge-off decreasing one basis point to three basis points of average loans, and FAFSA loans decreasing two basis points to three basis points of total loans. We maintained a loan loss reserve coverage ratio of 86 basis points of total loans at September 30th, consistent with the past two quarters. This reserve level continues to reflect our view on the strength of our loan portfolio, but also provides sufficient reserves for the risks that continue to persist at a macro level. During the third quarter, we saw our capital levels grow at healthy levels across the board, highlighted by our total risk-based capital ratio expansion of 39 basis points to 14.85%, and our TCE ratio increasing 35 basis points to 7.69% at September 30th. This concludes our comments. We'll now open the call up for questions.

Thank you, Mike. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Steve Moss with Raymond James. Please go ahead. Your line is open.

Good afternoon. Maybe just starting here on the margin here, I'm curious with regard to the rate cut we just had in September and probably a couple more coming, what are you guys seeing for deposit pricing here and kind of how we think about that translating to the margins?

Hey, Steve, thanks for the question. You know, I think broadly, you know, we see the back end of the year in line with the October net interest margin. We continue to be very, very disciplined in our pricing and demonstrated that over the last quarter when we saw the two rate cuts. We have two rate cuts in the ballpark for the back end of the year, which is pretty in line with expectations, and we'll continue to manage that very carefully as we look out towards the next couple of months.

Okay, yeah, and in terms of just kind of the debt restructuring that occurred here, or the pay down of the BTFT and the swap use, that was a, I'm assuming, received variable pay fix, or maybe I got my things reversed, but just talk about the structure there and kind of how that impacted your asset-liability mix.

Sure, yeah. So you're spot on. We did pay down the full remaining $170 million of the BTFB during the quarter. Essentially, what we ended up doing is we went out and did some swaps there for the FHLB, essentially, and we're able to lower our rate from, I believe it was 476 down to a weighted, I think it was 409. So immediately picking up positive carry there, but also to your point, from an interest rate risk perspective, our risk continues to be for rates higher for longer, certainly rates up. And so when we did that, we also spread that out. We did a little bit longer there, went out 12 and 18 months, also knowing that the PTFP was going to fall off for us in January 2025. So try to be proactive there, position ourselves a little bit better for just the risk that our balance sheet presents.

Okay, so TAB, Mark McIntyre:" You between that the positive trends you guys have seen just on on loan you'll improving nicely here last couple quarters, you know, is it a similar pace of expansion for the upcoming quarter, or you know, or do you guys stabilizing like the September month margin just kind of curious how to think about that.

TAB, Ryan Schuchard, LGO Admissions & I mean for our margin outlook for the for next quarter see where we're kind of probably more in the you know called three to five or two to five basis points somewhere in the neighborhood right around 250 is. plus, you know, 250 plus or minus is what we're thinking. You know, I think we're certainly watching just in terms of what happens with the overall curve. Certainly the more recent rebound there on the mid and long end of the curve was certainly helpful. But I think that's the other, you know, area, of course, is we expect the rates on the short end to be down with the Fed funds cut. But, you know, I think it does matter as well, of course, on the mid and long end and how that, you know, how that reacts. Okay. Great.

And then in terms of hiring here, Simon, you mentioned, I think, two hires during the quarter, if I heard you correctly. Just curious, what kind of book of business are they bringing and kind of how you're thinking about any additional hires?

Yeah, I think as we've discussed on previous calls, we continue to see really a nice opportunity on the southern end of our market and continue to invest in those geographies. We've got, as I say, some nice momentum there. We have some nice momentum out in the New Hampshire market as well and just really continue to see opportunities to push into those markets. We see nice opportunities certainly in the multifamily housing area. We see strong C&I demand, particularly in the equipment space right now. But really, it just continues to be, Steve, through that lens of quality. We definitely aren't chasing deals. We're looking for the right deal, right relationship, and really pushing pushing into those deep, you know, long-term strategic relationships that are long-term value for the client and long-term value to Camden National.

Okay. I mean, maybe just thinking about, you know, the investments you're making and the overall, you know, underlying business momentum you guys have, kind of think maybe, you know, we're on pace for maybe let's call it one to 2% loan growth this year, but maybe stepping up kind of into next year.

Yeah, I think we're still seeing next year, Steve, you know, 1 to 3% loan growth, excluding Northway impact. So maybe a slight pick up. I mean, I think it's going to depend a lot on the rate environment. You know, if the rate environment comes down, obviously, materially, we're certainly, I think, likely see a pickup in the resi volumes. Certainly, you know, I think it's quite competitive out there right now. And I think there's that caution, particularly with the election cycle coming up. And I think focus sitting on the sidelines. But certainly, I think it could be a slight tick up from where we are right now, but still modest loan growth overall. As I say, excluding Northway.

OK. Great. I really appreciate the color and I'll step back in the queue here.

Thanks, Steve.

Our next question comes from Damon Damonte with KPW. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my questions. Just to kind of keep the discussion on loans here. During the quarter, it looks like CNI loans had come down a decent amount during the quarter. Was just some larger payoffs that happened there, or what kind of was driving that?

Yeah. Hey, Damon, this is Mike. You're caught on. Just a few paydowns, primarily some of the syndication loans, just as rates came down and a few of those just refinanced. But nothing overall from a trend perspective, just a few larger loans there.

Got it. And, and I think the, um, the commentary on, on the income in mortgage banking in particular, where that the, uh, the residential mortgage loan pipelines remain strong kind of at, at quarter end. So could we, you know, I know there's obviously seasonal factors with, with weather and whatnot, um, within your footprint. So can we expect another strong quarter out of, um, out of mortgage banking to close out the year or do you, would you not expect it to be like as strong as this quarter?

Yeah, we're definitely seeing strong, strong pipelines right now. We've got about 72 million in the resi pipeline and about 124 approved loans in the commercial pipeline. So we certainly see some nice momentum through year end. And I think with certainly the rates coming down potentially another 50 basis points, I think you could certainly start to see that picking up into next year. But as I say, contingent probably on the rate environment to the degree of the momentum that we're seeing.

Got it. Okay, great. And then lastly, I think, Mike, you may have touched on the expenses, but if you kind of take out the one-time merger charges, it kind of puts you in the $28.2 million range. Is that a decent starting point to kind of model going forward to close out 24 and kind of modest growth X the Northway deal in 25?

Yeah, I think that's fair, Damon. I think we'll be right in that $28 million. 28-ish kind of neighborhood. 28.2 is a pretty good spot right in the middle. Could be a tick higher or closer to 28, but it's a pretty good spot.

Yeah, and I just would emphasize, Damon, that we continue to invest, and I think that's the nice part of the story here is we really are self-funding a lot of these investments. We talked earlier with Steve's question relative to the investment in the commercial and putting in some commercial you know, folk down in the southern end of our market, and that's going to be really the focus. We've got this really exciting release of this online account opening capability. Again, you know, we're really putting those investments into our customer experience, into great people, and really continuing to build out the franchise, but managing the expenses in a really disciplined way.

Excellent. Appreciate that, Culler. That's all that I had. Thank you.

Our next question comes from David Miroshnik with Stephen. Please go ahead. Your line is open.

Good afternoon. This is David Miroshnik. I'm from Matt Breeze. To start, I would just love to hear some thoughts and expectations around your loan and deposit betas kind of into 2025 through 2025 and whether you expect those figures to be fairly similar to what they were on the way up.

Yeah, I can take that one, David. I mean, I would just say for 2025 in particular, we're still working through some budgets. I mean, the reality is, you know, our betas are certainly going to depend on what the Fed does, maybe to state the obvious. You know, we are, you know, liability sensitive. Our expectation is rates come down, margin will expand. I can assure you, you know, that's how we're thinking about it internally, and certainly we'll, you know, think about it that way as well from a, 2025 budget perspective. I think more near term, we do expect some Fed cuts here in the coming weeks and months. And we expect to see funding costs pull down and start to, it's believable, continue to see a level of margin expansion for the fourth quarter as well.

Great. And then just staying on that, can you talk a little bit about, I guess, since the first 50 basis point cut, maybe actions you guys have taken so far? how customers responded and where you were successful. And you kind of mentioned some adjustments in September and just if you had any more color there.

Yeah, I think we've certainly taken some actions and, you know, I would just I'm sure Michael build on this, but would just say, you know, I think we're very disciplined, very thoughtful about the client relationships. We saw a nice build in deposits in the third quarter. Obviously, some of that's underlying seasonality, but we're going to continue to obviously manage that very proactively. and continue to be disciplined in terms of our pricing, but also putting, you know, relationships of our customers front and center.

Yeah, I would just add, I mean, ultimately we repriced, I think we're at around 30% of our non-majority deposit base. And, you know, we went in, I want to say on a full 50 basis points. I mean, overall we saw, we monitored those customers. We've seen the balances grow into October. So we haven't seen any significant runoff. I think to Simon's point, as we move forward, we'll certainly be thoughtful about that. And, you know, at the end of the day, we want to maintain those core customer relationships, but, you know, just while managing funding costs down.

Great. I appreciate that. And last one for me is just on the securities. Can you talk about kind of security maturities coming up and maybe where you want that security to asset ratio to kind of sit at or move to in the future?

Yeah, we have about 10M or so of monthly runoff on the investment portfolio. Ideally, we would be putting it to loan growth. As we mentioned, there's some timing items, and we did a small security purchase in the third quarter for the first time in a while. Really just trying to put some assets to work there, trying to squeak out a little bit of yield. Same thing, I would just say to that point is keeping the weighted average life and the duration of what we purchased pretty short to give us some flexibility as we move into the future as well. I think in terms of investment to assets ratio, historically, we've been in the 20 to 25. I would say we're probably closer to the 20-ish now, and we feel pretty good in that neighborhood. And we'll continue to monitor. We certainly leverage our investment portfolio for liquidity purposes and know again if commercial loan growth and other things pick up we could see ourselves you know maybe going a tick down there but certainly feel good at that level great i really appreciate all the color i'll step back thanks david thanks thank you as we have no further questions this concludes our question and answer session i'd like to turn the conference back over to simon griffith for any closing remarks

Thank you, Lydia. I want to thank you all for your time today and your interest in Camden National Corporation. We wish you all a great rest of your day.

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