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spk01: Good day and welcome to Camden National Corporation second quarter 2022 earnings conference call. My name is Tia and I will 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 risk 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. The company's 2021 annual report on Form 10-K and other feelings 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 Defar, 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 Defar. Please go ahead, sir.
spk06: Thank you, Tia, and good afternoon, everyone. Welcome to Canada National's second quarter 2022 earnings call. Like many companies, our second quarter was highly influenced by the uncertain economic outlook. Earlier today, we reported net income of $15 million for the second quarter of 2022, or $1.02 per diluted share, which represents a decrease of 11% when compared to the first quarter of 2022 net income and a 10% decrease compared to the first quarter of 2022 diluted EPS. Underlying those results was a 6% increase in pre-tax, pre-provision earnings compared to the first quarter results. During the second quarter, we took certain measures to fortify our balance sheet during these uncertain and volatile times, which included increasing our allowance for credit losses by recording a provision for credit losses of $2.3 million in the second quarter compared to our release of $1.1 million in the first quarter. This increase and provision help move our ratio of allowance for credit losses to total loans to 92 basis points at the end of the second quarter of 2022, two basis points higher than the end of the first quarter. This increase is due to loan growth as well as being proactive in light of economic conditions and forecasts. Our asset quality continues to remain strong as demonstrated by just over $2 million in loans past due 30 to 89 days and $5 million in non-performing loans out of a $3.7 billion loan portfolio. In addition, during the second quarter, we also took certain steps designed to preserve and protect shareholders' capital by transferring a portion of our investment portfolio from available for sale to held to maturity. Mike will get into more of the details in a few moments, but we believe this is the right action to help protect capital from further dilution should interest rates continue to rise. We were pleased with our reported loan growth for the second quarter 5%, but we have been starting to see a slight downtick in activity driven by higher interest rates. However, I will share that we typically see a bit of a slowdown in the summer months normally. With that said, our loan pipelines remain healthy at or above pre-pandemic levels. Loans into the quarter $3.7 billion, 13% higher than a year ago and 9% higher than December 31, 2021. Before turning the discussion over to Mike, I'd like to highlight that we paid a dividend of $0.40 per share during the quarter, which translates to a 3.6% dividend yield. We also repurchased 148,470 shares during the quarter at an average price of $45.83 per share. I'd like to now introduce Mike Archer, our Executive Vice President and Chief Financial Officer.
spk05: Thank you, Greg. Good afternoon, everyone. We reported net income of $15 million for the second quarter of 2022 and diluted EPS of $1.02, which was a decrease of 11% and 10%, respectively, compared to the first quarter this year. On a non-GAAP basis, pre-tax, pre-provision earnings for the second quarter grew 6% over the first quarter. And if adjusted further to remove SBA PPP income, earnings were up 11% between quarters. As mentioned earlier, loans grew 5% during the second quarter and 9% through the first half of the year. We've seen solid loan growth across our segments, led by residential mortgage and commercial. Much of our residential mortgage production through the first half of 2022 has been in jumbo products, which in part has driven a higher percentage of our originations to be held in portfolio. For the second quarter, we held 80% of our residential mortgage loans in our loan portfolio and anticipate we'll see a similar level next quarter as well. We're also pleased with our positive momentum within our C&I portfolio. C&I loans for the second quarter grew 4% and through the first half of 2022 grew 16%. For the second quarter of 2022, we provisioned $2.3 million of expense for expected credit losses which was an increase of 3.4 million over the first quarter of 2022. While asset quality through the second quarter and as of June 30th continued to be very strong, additional loan loss reserves were provided for given our strong loan growth and the uncertain and volatile environment in which we continue to find ourselves. The impact of the increased allowance for credit losses was partially offset by the release of 2.4 million of reserves that were established during the pandemic on certain COVID-modified hospitality loans. As of June 30th, there was less than 1 million reserves remaining on these loans. While it is certainly challenging to predict the timing and severity of a possible downturn in the credit cycle, our philosophy is to manage the risk proactively and establish appropriate reserves to protect our balance sheet and capital position. In doing so, we increased our ACL, the total loans ratio, this quarter from 90 basis points at March 31st to 92 basis points at June 30th. Net interest income for the second quarter was $36.5 million, up just slightly over the first quarter, as SBA PPP loan income for the second quarter was $868,000 lower than the first quarter. Lower SBA PPP loan income largely accounted for the decrease in net interest margin of three basis points between periods to 2.84% for the second quarter of 2022. On a non-GAAP basis, adjusted for SBA, PPP loan income, and excess liquidity, net interest margin for the second quarter was 2.85%, compared to 2.84% last quarter. However, remember that last quarter we had the additional benefit from certain non-recurring items that contributed approximately three basis points to our first quarter net interest margin. Accounting for that, our core margin expanded closer to four basis points. We anticipate net interest margin will continue to expand over the coming quarters in the current interest rate environment. During the second quarter, our total funding costs rose eight basis points over the first quarter to 0.29%, led by an increase in borrowing costs of 12 basis points and deposit costs of six basis points. Our deposit pricing strategy has been to lag the market, and so far, the increase in deposit costs has largely been driven by repricing of index deposits. As noted in our earnings release, Our all-in funding cost beta was below 11% for the first six months of the year. Non-interest income for the second quarter of 2022 was $11.1 million, which was 13% higher than the first quarter of 2022. Increases in mortgage banking income, brokerage fees, and debit card income led the way. Non-interest expense for the second quarter of 2022 was $26.6 million, which is 1% higher than the first quarter of 2022. Our non-GAAP efficiency ratio for the second quarter of 2022 was 55.42% compared to 56.47% for the first quarter. We continue to estimate quarterly run rate operating expenses will be near 27 million for the remainder of the year. As noted earlier, our credit quality across our loan portfolio continues to be very strong. At June 30th, non-performing loans were 0.16% of total loans, down three basis points from the end of the last quarter, and delinquencies were 0.06% of total loans at June 30th, which was two basis points below the end of last quarter, but still well below historic norms. During the second quarter of 2022, we transferred certain investment securities that are more sensitive to further interest rate movements from available for sale to held to maturity to protect shareholders' capital from further decreasing should interest rates continue to rise. Tangible book value per share decreased 9% during the second quarter to $23.92 at June 30, 2022, while our tangible common equity ratio decreased 74 basis points in the quarter to 6.51%. We continue to be confident that the decrease in tangible capital is interest rate related and temporary. The company's regulatory capital ratios continue to be well in excess of regulatory capital requirements as of June 30, supporting the strength of our core capital position. During the second quarter, we repurchased 148,470 shares of our common stock, bringing our total shares repurchased through the first half of 2022 to 161,556 shares. This concludes our comments on our second quarter results. We'll now open the call up for questions.
spk02: Thank you. We will now begin the question and answer session.
spk01: To ask a question, you may press star, then 1 on your touch-tone keypad. If you are 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 will pause momentarily to assemble our roster. The first question is from the line of Damon Del Monte with KBW. You may proceed.
spk04: Hey, good afternoon, guys. Hope you guys are doing well today.
spk01: We are.
spk04: I hope you are too, David. I am. Thank you. So first question, I just want to talk a little bit about the margin. I think you noted that the core margin, XPPP and liquidity drag would have been closer to 285. How should we think about excess liquidity as far as exiting the balance sheet and kind of getting back to a more normalized level over the next couple quarters? It seems like it's been going down every quarter, but how much longer do you think it remains a headwind for you?
spk05: I think we're kind of at that tipping point, honestly, Damon. I think as we move forward, the concept of excess liquidity starts to be muted and go away.
spk04: Okay, great. And then can you kind of give a little bit more guidance as far as how you think the core margin is going to react with the 75 basis points we saw in June? You get a full quarter impact of that, and then kind of what we're expecting, probably another 75 later this week, how the margin could shape up in the back half of the year.
spk05: Sure. So what we're thinking, again, is all, of course, highly dependent on what happens. But in terms of if the Fed gets to call 3% by the end of the quarter, third quarter, and keeps moving forward to 3.5 by the end of the year, we're thinking for the third quarter, we're going to see margin expansion in the neighborhood of 3 to 5 basis points. And that's off of our 285 core margin that we're speaking of. Okay.
spk04: All right. Great. That's helpful. And then, you know, the uncertainty you guys alluded to, you know, with the economic backdrop and kind of the decision to add a couple of basis points to the reserve. How do we think about the reserve from this level going forward with, you know, the expectation for loan growth to continue and potentially, you know, continue softening economic backdrops? Should we look for provisioning to be something in the level of this range that you had this quarter, or do you think it kind of, pulls back to less than a million dollars type level.
spk06: Sure, Damian. This is Greg. I'll take that, and Mike can add some color if he wants to. I think it's really all dependent on the economic forecast, and we have a very robust CECL model that we use. Obviously, there's two factors that we can add into that, but I think it's really, in my mind, what we're seeing and reading from You know, even larger banks, you know, really the potential and risk of a recession and how that impacts us. And we're always going to err on the side in this situation of being prudent and add when possible and if needed. With that said, if things improve, you know, we won't be, you know, we'll be stabilizing, call it the allowance period. However, it will always be impacted by loan growth, which I think is a good thing. If you have loan growth, it's a good thing to add into your provision and your allowance.
spk04: Got it. Got it. Okay. And then are there any areas, any lending areas, not so much geographic, but any segments that you are seeing early signs of softness or weakening, whether it be hospitality or commercial real estate or manufacturing or something like that?
spk06: No, not anything that I would say to start trending off from, call it from a softening perspective. Obviously, residential real estate, that is slowing down. That's happening nationally through all the markets. We're still seeing good activity tends to be on the jumbo side. But, you know, that's obviously very interest rate driven at this point. On the call it non-residential, so you're primarily getting into, you know, the commercial, including small business. And we're seeing strong activity, especially in the small business. When you look more in the industry segments out of the commercial book and Cree book, you know, they're all operating pretty good. There's nothing that I would say is shutting down right now. We see some good activity in our specialized lending area of senior housing, good activity in the warehouse spaces that we're seeing, and so it's out there. As I mentioned, we saw a little bit of softening this month, but we usually see that in July and August. However, even with that, our pipelines are above pre-pandemic levels, which is a great sign.
spk04: Got it. Okay. Great. That's all that I have for now. Thank you. Great.
spk06: Thank you, now. Thank you.
spk01: Thank you. The next question is from the line of Matthew Brees with Stevens. You may proceed.
spk03: Good afternoon. I want to go back to the topic of the net interest margin. You mentioned the outlook for next quarter is up three to five basis points. I'm curious, what does that contemplate for loan yields and deposit betas? And maybe you could just give us some color on your expectations around deposit betas longer. long-term over the next year or so.
spk05: Sure. So from a deposit side, Matt, we have, you know, we're expecting to see deposit, certainly deposit costs rise next quarter. Again, all this is predicated on the fact that the Fed moves. But we're expecting somewhere in 15, 20 basis points. So call it next quarter all in probably 45 to 50 is kind of what we're looking at from a funding side. With that said, we're also expecting to see, as mentioned, yields start to rise at a faster clip. In part, we had floors on our home equity products. We've now tipped the scale there, and we're going to start to see those reprice and start getting the full benefit there. Our loans, loan book, we're starting to see, again, from a pipeline perspective, our rates now are 4.5%, closer to 5%. that we're seeing so we're going to start seeing the rise in the yields um you know and again like i said we were expecting the the three to five but again i think you know all this is clearly driven off what happens with rates the 10-year we're seeing that move around still we've seen that dip a little bit now closer to 280 and we're keeping a watchful eye on that understood okay
spk03: And maybe you could just give us a sense for how that pipeline looks. I mean, one of the things that struck me this quarter was, you know, obviously residential real estate growth was, you know, led the way, and it's been leading the way for some time now, but every other category contributed. So as you think about, you know, the rest of the year, do you think we see a similar kind of breakdown of loan growth? Or where do you think we'll see the most slowdown from?
spk05: So I think certainly for next quarter, we're going to see residential call be fairly consistent. As Greg mentioned, the pipeline is softening a little bit, but certainly still robust there. And we're not seeing any signs in terms of that mix between portfolio and sale changing. So I do think for the third quarter in particular, we'll continue to see a strong quarter there from the resi side, residential side. The commercial side, again, we've seen that pull back from a pipeline perspective. But one of the things as we go through the second half of the year, we do have some construction funding lined up. So that will help balance, help support some of that loan growth as we go into the second half. But I don't, you know, I certainly don't foresee our loan growth being what it was, what we saw during the first half of 9%. That's certainly pretty robust. Yep.
spk03: Okay. And then I wanted to go back to the provision and reserve discussion. You know, I've asked, you know, so far all my, quote, cold weather banks this, but, you know, is there any concern around just the overall rise in heating and fuel costs? I mean, per the most recent CPI, home heating costs are up 100% year over year. You know, your winters tend to be, you know, longer and harsher than a lot of other areas of the country. Does that play into your thinking as we head into the colder months?
spk06: Matt, I'm glad you asked that. Yes, it does. It's a short answer. And that does influence, you know, especially when you get into some qualitative factors and reasoning behind that, because that one will, you know, impact directly the consumer and that trickles through. And I like how you say it's the cold weather part and the heating fuel. If it's $4.50 a gallon, $5 a gallon to each house, that's a strong drag on on our economy up here. And just as an aside, and I worry about it for my own employees here. However, I will say what we're seeing now from tourism, even though gas, you know, up until a few weeks ago was 475, 480 plus a gallon, strong tourism. We see that, you know, pretty much any community, you know, that's coastal or tourist related, even the inland ones, especially the more populated ones like You know, Portland, Southern Maine, down the Kennebunks, and even here in Camden, extremely, extremely busy, seeing a lot of traffic come through. So I think that wave may, you know, help get those small businesses and people related to the tourism industry, get them over that hump to help soften that. But we are monitoring fuel costs for the coming winter.
spk03: Got it. Okay. That's all I had. I appreciate you taking my questions. Thank you. Our pleasure. Thank you.
spk01: Thank you. As we have no further questions, this concludes our question and answer session. I would like to turn the conference back over to Greg DeBar for any closing remarks. Sure.
spk06: Well, Damon, Matt, thanks for asking questions and your interest. Other people that are joining the call, thank you very much for taking the time out of your day to hear the Camden National story. We hope you all have a good day. Bye now.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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