Camden National Corporation (NASDAQ:CAC) Q3 2022 Earnings Conference Call October 25, 2022 3:00 PM ET
Company Participants
Greg Dufour – President and CEO
Mike Archer – EVP and CFO
Conference Call Participants
Damon DelMonte – KBW
Matthew Breese – Stephens Inc.
Operator
Good day, and welcome to Camden National Corporation’s Third Quarter 2022 Earnings Conference Call. My name is Drew and I will be your operator for today’s call. [Operator Instructions]
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 in the forward-looking statements. Additionally 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, the company’s 2021 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 Dufour. Please go ahead.
Greg Dufour
Thank you, Drew, good afternoon, everyone. Welcome to Camden National’s Third Quarter 2022 Earnings Call.
Earlier today, we announced third quarter net income of $14.3 million and year-to-date earnings of 46.1 million. This resulted in diluted earnings per share of $0.97 for the quarter and $3.12 for the year-to-date period. Total revenues of nearly 142 million through the first nine months of 2022 were up 2% from the comparable period in ‘21 despite higher PPP loan income and record mortgage activity last year. We feel this demonstrates the flexibility and strong core operating capacity of Camden National underlying these results is our commitment to position and reposition the organization in light of the macroeconomic environment highlighted by rapidly rising interest rates, increased probability of recession and geopolitical risks.
I’d like to take a few moments to further explain some of the actions we’re taking. We’re repositioning lending activities as we see the impact of the last remnants of PPP and the slowdown in the residential mortgage markets. This repositioning has actually been going on for several quarters and includes several points. First, a build out of our small business lending efforts leveraging two major strategies. First, we’ve hired five dedicated small business lenders in our markets, and piloted a very successful training program to enhance our banking center managers capacity to generate small business loans. This effort has been driven by a complete overhaul of our small business lending process utilizing our FinTech partner Abrigo, as well as our own business process analysis group. We now have the capability to go from application to same day decision and close within one business day depending on collateral. While early, we are very, very happy with our initial results using the new process.
We also focused on streamlining our process for larger credit underwriting to build productivity and scale now and in the future. The results of these efforts allow for the expansion of capabilities in our existing markets, while providing impact tools as we look to new markets. There are several other areas where our prior investments and focus positions us well, and we’ll continue to do so. Our asset quality is extremely strong in this period of economic uncertainty, and increased probability of recession. We have continued to fortify allowance for credit losses, as demonstrated by our coverage, ACL to total loans of 95 basis points, and ACL to non-performing loans of 723%.
Our ability to be productive continues to benefit us as shown through our 57, I’m sorry, 56.43% efficiency ratio. And our focus on deposits continues to be strong through both our retail network and our corporate treasury management areas. A deposit beta, which includes quarter pauses and CVS was 14% for the first nine months of the year. These efforts are extremely critical at this point in time, as we see aggressive loan and deposit pricing throughout our various products and markets. Our priorities are to maintain asset quality within both our loan and investment portfolios, to maintain our efficient cost structure and to strengthen our balance sheet until we see economic projections turn on more favorable.
I would also highlight that we continue to focus on capital by being opportunistic and share repurchases as we repurchased just over 60,000 shares during third quarter, and provided a $0.40 dividend per common share.
During the quarter, we also announced that Rebecca Hatfield, President and CEO of Avesta Housing, based in Portland, Maine, will be joining our board on December 31, 2022. In addition to her experience of Avesta, Rebecca has a strong background in banking, both in the lending and credit areas, as well as previous experience in the technology industry.
I’d like to now turn the discussion over to our Chief Financial Officer Mike Archer.
Mike Archer
Thank you, Greg. Good afternoon, everyone. Earlier today we reported net income for the first nine months this 2022 46.1 million and diluted earnings per share of $3.12 compared to 52.5 million in diluted EPS of $3.49 for the same period a year ago. The drivers for the earnings compression between these periods can be directly traced back to the change in the global economic environment between periods, creating a dynamic and rapid shift in the operating environment for us not like not unlike other banks. Between periods we have seen interest rates rise considerably at an accelerated pace, the yield curve and brawn and mounting pressures for slowing economy, and many believe will lead to a near term recession. Through the challenges we’ve been able to maintain federal performance metrics for the first nine months of ‘22, including our return on average assets at 1.13%, return on average tangible equity of 16.27% and maintain an efficiency ratio in the mid 50s.
To further highlight the strength of our core operations and results for the nine months ended September 30, 2022 we reported an increase in non-GAAP earnings, which excludes income taxes, provision expense and SBA PPP loan income of 4.5 million or 8% over the same period last year. In regard to our performance for the most recent quarter, we reported net income of 14.3 million diluted EPS of $0.97 for the third quarter, each down 5% compared to the second quarter of 2022. On a non-GAAP basis, adjusting for income taxes provision spent in SBA PPP income earnings decreased 328,000 and 2%. Net interest income had a nice lift in the third quarter increase in 1.3 million or 4% over the second quarter.
Historically, we’ve seen an increase in our net interest margin in the third quarter each year, due to seasonal growth in deposits within our markets, which we again saw this year, the average quarter deposits increased 4% in quarter-over-quarter. The seasonality and our deposits and our shift in earning asset and nets as we continue to redeploy investment cash flows to fund loan growth, each contributed to NIM increasing four basis points between quarters to 2.88% for the third quarter. Our NIM increase for the quarter was within our prior guidance. Our yield on interest earning assets for the third quarter increased 29 basis points to 3.4% over the second quarter, and represented an asset beta of 20% for the period.
Funding costs over the same period increased 25 basis points just to 0.54%. For the third quarter of ‘22 our total deposit cost was 0.45% an increase of 24 basis points over the second quarter, and represented a deposit beta of 17% for the quarter. Year-to-date our deposit beta which includes non-interest checking and TDs was 14%. End to end loans grew 4% during the third quarter and 13% through the first nine months of 2022. Our loan growth for the quarter was driven by residential mortgage and commercial real estate. Residential mortgage balances grew 7% during the quarter and crew balances grew 2%. As noted in our earnings release at the end of the third quarter residential mortgage pipeline was approximately 110 million, and our commercial pipeline is approximately 90 million.
For the third quarter of 2022 we provision 2.8 million of expense for credit losses, which was an increase of 419,000 over last quarter. At this point in the cycle, our credit portfolio remains in excellent condition with no immediate signs of trouble or deterioration. The increase in the provisions of the credit losses this quarter was due to the combination solid loan growth and growing concerns of an economic slowdown. In the third quarter we released the remaining reserves that were established for certain modified hospitality loans totaling 768,000.
At September 30 2022, our allowance for credit losses on loans stood at 95 basis points of total loans, which was an increase of 3 basis points over last quarter and covered over seven times our non performing loans. Our reserve levels continue to incorporate our long term view of macro conditions as well as consider more local factors. We continue to proactively monitor and analyze various pockets of our portfolio to identify any leading indicators of risk and today we have not identified any trends of systemic risk or stress within our portfolio.
Non-interest income comes the third quarter of 2022 totaled 10 million and was down 11% compared to the previous quarter, as we were not immune to the effect of higher interest rates, pressuring mortgage banking income and the down markets affecting wealth management fees and bullying income. Residential mortgage production for the third quarter was down 20% compared to last quarter, and correspondingly sold production was nearly down 20% as well.
Our non-interesting income forecast for next quarter is a range of 10 million to 11 million, like previous quarters. In the fourth quarter each year, we recognize our annual debit card incentive bonus and expect to do so again next quarter. Non-interest expense for the third quarter of 2022 totaled of 27.1 million which was 2% higher than the second quarter of 2022. Our non-GAAP efficiency ratio for the third quarter of 2022 was 56.43% compared to 55.42% last quarter.
We estimate our fourth quarter expenses will be near 27 million as we’ve seen in the past quarters. Tangible book value per share decreased $0.95 or 4% during the third quarter to $22.97 at September 30 while our tangible common equity ratio decreased 38 basis points in the quarter to 6.13% as of December 30. Tangible capital decreased again due to rising interest rates, decreasing the value of our bond portfolio. Actions we took in the second quarter and move securities to HDM helped mitigate some of the impact of further rising rates on tangible capital.
The company’s regulatory capital ratio has continued to be well in excess of regulatory capital requirements as of September 30, supporting the strength of record capital position. During the third quarter we repurchased 63,689 shares of our common stock, bringing our total shares repurchased for the first nine months of ‘22 to 225,245 at a weighted average cost of $45.46 per share.
This concludes our comments on our third quarter results. I will now open call for questions.
Question-and-Answer Session
Operator
Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question today comes from Damon DelMonte from KBW. Your line is now open. Please go ahead.
Damon DelMonte
I guess first question. Just regard to the provision this quarter. Like that. I thought I heard you say you guys released the remaining 700,000 or so of COVID specific provisions or reserves that you had before. Is that what you said?
Greg Dufour
That’s correct, Damon. It is about 750,000 roughly.
Damon DelMonte
So if you didn’t have that to release this quarter can we assuming that the provision would have been closer to like around 3.5 million?
Greg Dufour
That is correct. Yes.
Damon DelMonte
So is that how we should kind of think about the level of provisioning going forward? Or do you think it’s going to be closer to this quarter’s level?
Greg Dufour
I think it on a go forward Damon, we feel pretty good right now, where we are around 95 basis points from a total loans perspective. Certainly loan growth will be a factor as we move forward in terms of what provision looks like on a go forward basis. But we’ve been pretty proactive in terms of call it setting aside reserves for potentially a looming recession or slowdown. And we’d hope that as we move forward, the level of reserve or provision needed starts to slow down with that as well. I mean, again, there’s so many factors, of course, that kind of go into play there, even into that comment, but right now, we like I said, we feel good about our reserve levels and would think that potentially there be less of an impact on a go forward basis should the macroeconomic continue to look as it does today or as we expect it to.
Damon DelMonte
And then with respect to loan growth, I’m looking two strong quarters, actually three strong quarters in a row, four strong quarters. And so for you guys, just kind of wondering how you’re how you’re looking at the year closing out and kind of what the pipeline’s indicating as we head into 2023?
Greg Dufour
Yes, I think I mean, our pipeline that at the end of the quarter are pretty strong residential home. I think I mentioned there’s about 110 million in the pipeline. We have been kind of on throughout the year portfolio, about 80% of our production in the residential. I think we’ll likely see similar number for the fourth quarter as well. So again, I would expect fairly strong residential growth there. The commercial pipeline too is very strong, continue to remain pretty stable, about 90 million. So I do think as we enter into the fourth quarter here, we’re rather close out the fourth quarter, we’ll probably have loan growth and call it the 2% to 3% range.
Damon DelMonte
And then I guess just one last question. I think your guidance for non-interest income was 10 million to 11 million in the fourth quarter. Does that include the annual decent incentive or not?
Mike Archer
It does a bit of a wildcard, if you will, there Damon more on the mortgage banking side. I think to the extent that we did have some valuation adjustments run through this quarter. And that’s kind of compressing our mortgage banking income for the third quarter to the extent that we don’t see something similar we will likely I’d say probably, hopefully on the upper end of that range, but the short answer is yes, we do have debit card income in that number as well.
Operator
Our next question today comes from Matthew Breese from Stephens Inc. Your line is now open.
Matthew Breese
Good afternoon. I wanted to follow that the composition of loan growth that it feels like it’ll continue to be weighted towards residential loans, and maybe just thinking about the overall asset sensitive profile of the bank balance sheet. Is there a broader strategy many are undergoing this, of bringing the balance sheet into a more interest rate, neutral position? How far away from you are that are you from that? And is that part of the plan here?
Greg Dufour
Well, it is this, Greg Matt. I’ll take that and Mike can add in but we’ll see that transition one, it’s going to be natural, because the residential mortgage market, like everyone’s seeing is slowing down. And that’s why we’re focusing on the commercial side and small business side. As I mentioned in my comments, we’ve been investing in that area and building that up. And so we think that will help offset call it further decline in residential.
Matthew Breese
Maybe just follow on that thread a little bit how far away do you think we are from seeing meaningful impacts to the balance sheet from SBA lending?
Mike Archer
Well, again, we generally call it we use the term more small business. So that could be SBA. We leverage the finance authority of Maine, quite a bit or just general small business loan. So I don’t want to say that it’s all going to be SBA type of lending. But really saying when that’s going across, I would just say, it’s, we’re positioning when we say, giving out growth expectations that’s built in there, that as we expect residential to drop, we expect those other areas to pick up. That’s what we’ve been seeing. You can almost see it with our existing pipelines that we shared this quarter 110 versus 90, shows how that’s building up on us. That was complemented by the other point I bring out is the larger commercial is still fairly solid business for us growth wise. And so that’s an important aspect of our strategy going forward.
Matthew Breese
And then just thinking about the outlook for deposit growth, curious, your thoughts there, the composition of it, and then in the broader scheme of funding the balance sheet, should we expect kind of a similar pace of securities run off in the quarters ahead to help fund the some of the loan growth?
Greg Dufour
Yes. Maybe the last part of that we do expect continued cash flows from the investment portfolio. I think it’s in the neighborhood call 12 million a month is what we’re seeing and it will continue to redeploy that and certainly they’re earning, higher earning assets. That’s kind of what we’ve been doing and continue to be the plan. On the deposit side we’re always focused on generating core deposits, primarily checking accounts. We’ll continue to, we’re in the middle right now, there are some promotional products out there certainly call a little bit more pricey than where we had then.
But again we are also managing from a perspective of overnight fundings and what’s cost advantageous there for us, Matt. So I think it’d be a combination as we move forward of both the non-interest checking in the money market, certainly. And then I think the other piece of the highlight in there is we continue to manage to what we’ve given from a guidance perspective to an overall funding beta of 25%. And for the first nine months, we’ve stuck to that. We’ve hit that and we continue to manage towards as we move forward.
Matthew Breese
Just to be a little bit more specific thinking about demand deposits. The composition of your deposit book is vastly improved in the wake of the pandemic demand deposits up to 27% of total. Do you expect to see much attrition or erosion in that line? Or are you seeing anybody kind of make the transition from demand into other categories and what’s been the recent drivers of growth?
Greg Dufour
Yes. So Matt I think it is the customers are, obviously interest rate sensitive, and there is that risk of moving it out of the demand because the rates more favorable. And you’re getting to a point where it’s not that people are trying to wrestle with 50 basis points versus 75. It’s now getting into a meaningful number. I think, to combat that and to keep that within call it deposit beta guidelines that we want is alternate products. First step is keep the deposits in house. We have, as Mike mentioned, some of the products that we can look at from laddering things for customers to get them through it. We’re maintaining that still in the core deposit base. However, with all of that said, not only from the retail network, but from the commercial network is our investment in corporate treasury management that we’ve made that will keep those call it business deposits, commercial deposits a lot stickier as well. So we have several levers, if you will, to help adjust to customer demand.
Matthew Breese
And then just maybe tying this all together any thoughts on the near term margin outlook, and whether or not the pace of NIM expansion we saw this quarter is something we should expect, at least in the relative near term?
Greg Dufour
Yes. I think so I mentioned this in my comments, Matt is generally Q3 is stronger quarter on the NIM side just because of some seasonal flows that we have in our market. We do anticipate in the fourth quarter we will potentially see some of those seasonal outflows which is normal for us. That said, we believe, if we were focused on margin, we’re focused on deposit betas, we are aiming to call it be flat on a quarter and for the fourth quarter from a margin perspective, understanding that there’s call it some level of downside risks there just in terms of seasonal outflows, but again, we think we can manage that, and we’ll be right around flat on the link quarter basis.
Matthew Breese
Last one for me. Just thinking about capital adequacy, and obviously, your regulatory capital ratios are very healthy thinking about the TCE to TA. Anything concerns there? Or is that popped up in conversations with regulators at all?
Greg Dufour
Well we’re obviously monitoring and Matt, we feel good about it when you take out the impact from the AFS portfolio, it jumps up 20%. So, we have good core capital. I’m not sure if I really want to comment on our conversations regulators, because we just finished our exam. But suffice it to say we feel real good about our capital even though we’re monitoring.
Operator
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.
Greg Dufour
Great. Well, thank you Drew. And I just want to thank everybody who’s taking the time of the day to listen to the call and for your interest in Camden National. Have a good afternoon. Bye now.
Operator
The conference has now completed. Thank you for attending today’s presentation. You may now disconnect.
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