Camden National Corporation

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.

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.

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.