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spk01: Good day and welcome to Camden National Corporation's fourth quarter 2022 earnings conference call. My name is Forum 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 risks 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 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 DeFore. Please go ahead, sir.
spk02: Thank you and welcome everyone to Camden National Corporation's fourth quarter 2022 earnings call. For the fourth quarter of 2022, we reported net income of $15.4 million or earnings per diluted share of $1.05, which was 8% better than the third quarter of 2022. This resulted in total annual earnings for 2022 of $61.4 million, an 11% decrease from our record earnings of $69 million recorded in 2021, and a 9% decrease in diluted earnings per share over the same period. We were pleased with our fourth quarter performance in several areas. Non-interest income, excluding a $903,000 pre-tax security loss was $10.7 million and was on the higher end of our expectations. The security loss recorded in the fourth quarter is part of a balance sheet restructuring that Mike described during his comments. Operating expenses of $27 million in the quarter was as we expected and resulted in a 56.4% non-gap efficiency ratio. Finally, our provision for credit losses was $466,000, down from $2.8 million recorded in the third quarter. At our earnings call last quarter, we signaled we could see our allowance and provision levels begin to stabilize should asset quality remain strong and no significant changes in the economic outlook occurring during the fourth quarter. We were pleased to see this materialize as asset quality remained very strong by all measures to close the year. We ended the year with an allowance to total loans of 0.92%, 92 basis points, and our reserve levels covering nonperforming assets 7.2 times. We feel we are well positioned at those levels on our current loan portfolio. We also continue to see the negative impact of the significant and prolonged inverted yield curve, which contributed to a 2.76% net interest margin for the fourth quarter, down 12 basis points for the prior quarter. You'll recall at last quarter's conference call, we indicated our expectation for margin was to remain relatively flat to slightly down during the fourth quarter, which did not materialize. Mike will provide a more detailed explanation during his comments. What I'd like to share at this point is where our strategic focus will be for the coming quarters. First, we have focused on net interest income and net interest margin through several strategies. First and foremost, We are focused on pricing of both loans and deposits. As of year end, our deposit beta through the cycle so far was just over 20%, and our total funding beta was 21%, while our earning asset beta was just over 18%. As you've seen us do in the past, the primary objective will be on strengthening our existing relationships and developing new ones versus chasing transactions for both loans and deposits. Secondly, We have pursued and will continue to pursue opportunities to logically reposition our balance sheet based on both the current and future interest rate cycle. We'll analyze opportunities that make long-term sense, as well as those that fit into our risk profile, such as the restructuring that was done in the fourth quarter. Finally, we recognize that we're operating in a hyper-competitive environment, and we see loan deals that are done in prices which we're not comfortable with, Accordingly, we anticipate loan growth to be on the lower side of our mid-single digits for the year, and we'll accept that in order to focus on the long term. Turning to asset quality, it continues to be a major focus of ours. While strong today, we do not take it for granted. Today we're enjoying the benefits of our strong underwriting, but we complement that with our risk management structure to look for potential signs of weakness. Those efforts may include analysis such as migration of FICO scores, all the way to swiftly working with customers at the first sign of distress. Another focus area is our expense structure. While we're operating within our expected parameters, our previous investments in process automation have helped make many areas more efficient and productive. For example, I previously shared our efforts to streamline our small business and commercial loan processing efforts. That effort hit its stride in the fourth quarter And we're already seeing processing efficiency improvements ranging from 30 to 35 percent efficiency. And our overall efficiency ratio for the total organization is within our target range of 55 to 58 percent. Finally, as we always have been, we are focused on our capital and our 2022 earnings of $61.4 million provides us ample resources to grow capital as we reward shareholders including our 5% dividend increase announced in December. I'll pause here and let Mike provide his review and comments.
spk04: Thank you, Greg, and good afternoon, everyone. Earlier today, we reported net income for the year ended 2022 of $61.4 million and diluted EPS to $4.17. And while down from last year's record earnings, we're certainly pleased with these annual results, particularly in light of the significant change in market dynamics between years. On a non-GAAP, pre-tax, pre-provision basis, the company recorded earnings of $81.5 million for the year, down 2% from last year. In addition, adjusting for SBA PPP loan income, earnings totaled $80.3 million, a 7% increase over last year. These core results make us confident in navigating today's short-term challenges while remaining focused on the long-term. We continue to focus on generating shareholder returns through strong, sustainable core earnings and strategies. and deploying capital to organically grow the franchise. We also continue to prudently return capital to shareholders for a mix of dividends and share repurchases. Our dividend payout ratio for the year ended 2022 was 39%, which included a two cent or 5% increase in our quarterly dividend that we announced in the fourth quarter. And we repurchased 225,245 shares of our common stock throughout the year. On a linked quarter basis, we reported net income of $15.4 million and diluted EPS of $1.05 for the fourth quarter, each an increase of 8% over last quarter. Many of our key financial metrics that we track remain solid for the fourth quarter, including a return on average assets of 1.09%, a return on average tangible equity of 18.2%, and an efficiency ratio of 56.4%. On a non-GAAP basis, pre-tax, pre-provision earnings for the fourth quarter were $19.8 million, a 4% decrease from the third quarter. Not unlike other banks, we too have felt the impact of the inverted yield curve with short-term rates rising quickly throughout 2022. Net interest income for the fourth quarter decreased 2% from the third quarter, despite average interest earning assets growing 2%, as net interest margin compressed 12 basis points on a linked quarter basis. Our interest earning asset yield grew 27 basis points during the fourth quarter to 3.67% as we continue to see our loan and investment yields increase. Generally, we continue to leverage investment cash flow to fund loan growth and anticipate continuing to do so over the coming quarters. As Greg mentioned in his comments, we anticipate loan growth to moderate in 2023 in the current environment as we manage our net interest margin and protect long-term franchise value. To that end, we have seen our loan pipelines drop considerably from the end of the third quarter. More recently, committed residential mortgage and commercial loan pipelines have been hovering around $50 million each and have weighted average rates in these portfolios ranging from 6.4% to 6.7%. In the fourth quarter, we put into portfolio 84% of our residential mortgage production. Through strategies and actions taken, our current residential mortgage pipeline designated for sale has grown to 30%. In the fourth quarter, deposit costs grew 39 basis points to 0.84%, representing a deposit beta of 29%. While our deposit costs grew at a faster rate during the fourth quarter than it had in previous quarters, it was not unexpected as the Fed raised rates another 125 basis points during the quarter. And deposit competition throughout our market Markets continues to heat up. We have considered and continue to look at other alternative borrowing strategies. During the quarter, we entered into a ladder broker CD strategy that stretches over 12 months. Doing so allowed us to lock in approximately $100 million of funding, and based on current short-term rate forecasts, should benefit us over coming quarters. Overall, for the year-ended 2022, our deposit beta was 20.2%, and our all-in funding beta was 21%, which continue to be within our targets. We do anticipate further net interest margin compression in the first quarter of 23 as we are in the peak of normal seasonal outflows combined with expected further rate hikes by the Fed in the first quarter. We have and continue to review strategies to optimize net interest income and net interest margin. Recently, we have executed on the following strategies. In the fourth quarter, we completed an investment restructure whereby we sold approximately 28 million of securities had a loss of $903,000 and repurchased approximately 28 million securities with higher yields. The expected earned back is about one year and expected to provide one to two basis points of net interest margin lift with a full quarter benefit. Last week, we executed on two interest rate swap strategies, swapping $200 million of fixed rate cash flows on loans for variable rate cash flows tied to Fed funds rate. Based on the current swap curve, these swaps provide additional interest income immediately and is anticipated to provide additional benefit over the year based on the market's current expectations of Fed funds. We currently estimate a full quarter net interest margin lift of four to five basis points should market expectation on Fed funds hold true. For the fourth quarter of 2022, we provisioned $466,000 of expense for expected credit losses, which is a decrease of $2.3 million compared to last quarter. Our credit portfolio remains in pristine condition, supported by non-performing loans of 0.13% of total loans at December 31, 2022, consistent with last quarter, minimal net charge-off, and delinquent loans totaling six basis points of total loans at December 31, 2022, compared to 12 basis points last quarter. We continue to actively monitor and assess our loan portfolios for signs of distress based on current and forecasted market conditions. However, we've not identified any such trends to date. At December 31st, 2022, our allowance to total loans ratio stood at 0.92%, down three basis points from last quarter. We believe this reserve level is appropriate given the strength of our credit and knowing it provides us with 7.2 times coverage over total non-performing loans at December 31st, 2022, which is consistent with last quarter. Non-interest income for the fourth quarter of 2022 totaled $9.8 million, including the $903,000 loss on the investment trade discussed earlier. On a linked quarter basis, non-interest income was down 2%, but excluding the investment trade loss, non-interest income would have been 7% higher. In the fourth quarter each year, we recognized our annual debit card volume-based incentive. This year, that incentive was $806,000, and drove the increase in debit card income between quarters. Mortgage banking income also increased in the fourth quarter compared to last quarter. The increase was a result of the change in the fair value on our locked saleable residential loan pipeline between quarters. Otherwise, mortgage banking income would have decreased between quarters as residential mortgage production for the fourth quarter was down 28% and our sole production was down 45% compared to last quarter. Our non-interest income forecast for next quarter is $9 to $9.5 million. Non-interest expense for the fourth quarter totals $27 million, slightly down from last quarter. Our non-GAAP efficiency ratio for the quarter was 56.4%, was also consistent with last quarter. We estimate our first quarter 2023 expenses will tick up 2% to 3%, factoring the impact of the FDIC assessment increase that takes effect for all insured banks, and partial quarter impact of normal merit increases. The company's regulatory capital ratios continue to be well in excess of regulatory capital requirements as of December 31st, 2022, supporting the strength of our core capital position. Tangible book value per share increased $1.40 or 6% during the fourth quarter to $24.37 at December 31st, 2022. And our tangible common equity ratio increased 24 basis points in the quarter to 6.37% at December 31st. That concludes our comments on our fourth quarter results, and now I'll turn the call back to Greg. Thanks, Mike.
spk02: Before opening the call up for questions, I'd like to point out a few closing thoughts here. Mike described some strategies we've executed, including investment portfolio restructure and swap strategy. We're equally, if not more so, focused on organic strategies to improve our positioning in this environment. Some of those are demonstrated in the yields in our loan pipelines that are above 6.5%, which is strong considering we're routinely competing against pricing in the low 5% range, if not lower. Our loan deposit ratio, 83%, demonstrates our franchise value, along with growing core deposit 6% in 2022. Also, as we mentioned, our efficiency ratio is within our normal operating range of 56%. And from our risk perspective, we're also well-positioned. Tangible common equity ratio, 6.37%, and is complemented by an ACL, the total loan ratio of 92 basis points and seven-time coverage on non-performing assets. With that as a backdrop, we'll open it up for questions, please.
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your touch-tone phone keypad. If you are using a speakerphone, Please pick up your handset before pressing the keys, and to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from the line of Steve Moss with Raymond James. Steve, your line is now open.
spk03: Good afternoon.
spk02: Hi, Steven, and welcome to the call.
spk03: Thank you. Thanks, Greg. And then maybe just start off on the margin here. Just kind of curious, you know, how you guys are thinking about, you know, any updated thoughts you may have around deposit pricing as we go through the cycle here. You know, maybe if the Fed goes to five and holds throughout the rest of the year, just kind of how you're thinking about the margin.
spk04: Yeah, so I'll take that, Steve. This is Mike. I think in terms of the deposit side, you know, we're expecting, you know, particularly in the first quarter, that continues to hike will continue to see the deposit beta probably in the 30 to 35% range. You know, it's close to where we were maybe slightly up. I think the other factor there certainly on the deposit side is just the competition. I think both myself and Greg alluded to just in our comments. We are certainly seeing that pick up. We've seen that over the last quarter as local market competitors and others are certainly looking for liquidity. in the current market. Overall, from a margin perspective, we are, I think I mentioned in my comments, expecting that to see some compression likely for the first quarter. Overall, we're thinking, and I would say it's heavily caveated by a lot of factors that we all know in terms of what the Fed actually does, as well as some of the market competition, but also some of the strategies that we put into place. But all in, we're thinking that competition margin would probably be around 265 plus or minus two to three basis points on either end. You know, from there, I would just, again, probably not in the spot to give forward guidance after first quarter, just all the factors at play here. But, you know, thinking that from there with normal seasonal inflows starting to come in, as well as the hopes that the Fed starts to stabilize and slow down on rates and loans continue to reprice, and as Greg mentioned too, is just as strong loan pipelines that we have in terms of rates, we anticipate that margin from there would start to rebound.
spk03: Okay. That's helpful. And maybe just in terms of, you know, the loan demand you guys are seeing these days, just curious on, you know, how you're thinking about the, what parts of the portfolio you expect to drive growth in 2023?
spk02: Sure. You know, what I'd say is that we're seeing a shift really, you know, previously, obviously residential was driving it. That market is lower, you know, partly because of call it just the overall real estate market, but our pricing. We're pricing higher than competitors. So we're seeing and experiencing really the shift over the commercial and small business side. And, you know, within the commercial, that's where You know, our balance sheet size, you know, for the markets that we're in, our ability to structure helps us and helps, you know, justify a higher rate. And on the small business side, you know, really that's been a great startup product that is ramping up for us, and they tend to run higher balances. And that leverages the reengineering that we did and new software that we have, especially on the small business side. So now we can, you know, instant decision, depending on collateral close, you know, within a few days, which is really serving the customer need and helps us, you know, command a higher yield on that.
spk03: Okay, great. Thank you very much. Appreciate all the color here.
spk02: You're welcome, Steve. Thank you. Thank you.
spk01: Our next question comes from the line of Damon Del Monte with KBW. Damon, your line is now open.
spk05: Hey, good afternoon, guys. I hope you're doing well, and thanks for taking my questions. Thanks, Damon. So I just wanted to get a little perspective here on the outlook for provision. You noted that at 92 basis points, you feel pretty good about that reserve level. It's over seven times covering NPLs, I believe. So with the expectation of loan growth slowing and the health of the portfolio remaining intact as of today, Would you expect a similar level of provisioning like we saw in the fourth quarter as we start off in 23 for at least the first half of the year?
spk04: Yeah, I can take that one, David. So I guess in terms of provision, maybe the way I would talk about it is, you know, so we're at 92 basis points right now. We feel pretty good about that. You know, again, I think in part it's going to depend on the economics and the economic outlook if that should change. But assuming we stand and kind of hold to where we are and, As we mentioned, no signs of credit issues ahead, but assuming everything holds constant, I would say that 92, 95, somewhere in there we could continue to hover. Okay.
spk05: Okay. That's helpful. Thank you. And then could you just go back to the two steps you took to try to preserve the margin here? The first you mentioned, the little repositioning with the 28 million. You said you sold, right, 28 million in securities, and then you reinvested those proceeds. Is that correct? That's right, yes.
spk04: So we essentially, I think those yields on those securities were around 260. Then we essentially purchased another 28 million with around a 6% yield.
spk05: Okay. And what kind of securities were those?
spk04: It was a mix of corporates and MBS, primarily, I believe, corporates.
spk05: Got it. Okay. And then the two swap agreements, could you just go over those specifics again?
spk04: Sure. So we did $200 million notional in total. It was $150 million three-year. I always have to think about this, get this right. Received pay fixed, received variable. I think the pay amount on that was 371. And then we did another 50 million for a five-year swap. And the pay amount on that was 334. And both of those are receiving Fed Funds OIS.
spk05: Got it. Okay. All right. Great. Thank you. And then I guess on the You know, the expense outlook, you said 2% to 3% from the fourth quarter into the first. Overall, do you expect 2% to 3% for the entire year, or is that just like from the first quarter and then another lift after that?
spk04: So that guidance was generally for the first quarter. I listed a couple of factors in there, one in the FDIC fees and just normal merit. So call it, you know, I'd say that's about 27 and a half. It's about a half a million. The one item I would just highlight is, you know, historically we've continued to manage within our efficiency ratio range of call it 55 to 58. And, you know, we'll certainly do that throughout the year and that's our expectation.
spk05: Got it. Okay. That's helpful. That's all that I had. Thanks so much. Thank you.
spk01: Our next question comes from the line of Matthew Bracey with Stevens Inc. Matthew, your line is now open.
spk06: Hey, good afternoon.
spk07: Hi, Matt. Just thinking about the overall NIM forecast, you know, within that, I was curious, where do you have demand deposits going down to this quarter, you know, end of the year at 24%? Pre-COVID, I think it was at 16% if you go further back. Camden was operating in kind of a 10% to 15% range pre-great financial crisis. So just curious, where do you think this figure goes during this tightening cycle and what structurally keeps you around your estimates?
spk04: Yeah, so we're trying to pull that number, Matt. But I would just comment, we have seen some pressure in terms of some of the bigger commercial, sophisticated commercial customers looking for interest, so we've seen some mixed shift, if you will, from DDA over to now we're interest checking, so we've seen some of that shift occur. I think that's become more common. Certainly we're managing that internally, having the proactive conversations with primarily our business customers, but certainly there is more pressure on that.
spk07: As we think about... I'm sorry, Michael. Go ahead.
spk04: I was going to say, we can connect to you offline and get you some thoughts on that, the DDA specifically.
spk07: Okay. Do you expect deposit growth in 23? If so, what areas? And maybe you could comment on further reliance on broker deposits.
spk04: Sure. I'll take the last one first. So, We haven't executed. We are looking at some broker deposits, additional 90 to 100 million we are looking at right now just to supplement funding and having it be more cost effective, particularly as we anticipate Fed funds is going to continue to move higher. So we are looking at that. We'll likely look at a ladder CD like we just spoke about, kind of stretching out over 12 months there. And I apologize. That was the first part of your question there.
spk06: What kind of deposit growth? Yeah, the outlook for the year.
spk04: Yeah, I believe it was mid-single digits from a deposit growth perspective.
spk02: And I would say strategically, Matt, to keep in mind a couple of things is that we still have a very strong retail franchise, and that gets back into my comment of, you know, focusing on relationships. The team has done a great job. You know, although... Deposits have always been a focus of ours, as you know, through incentives, through internal promotions, external promotions, strengthening that at this time to build the relationship side. The other thing within our deposit focus is what has ramped up more over the past few years is on the treasury management side that we have. And Mike alluded to some of the big commercial depositors that we have. So that's another lever set of tools that we have. We have a great team within that that we are very much focused on deposit growth. And with that said, call it from a sales management perspective, that's where we're focused on. And the more we can drive down that rate or stabilize that rate, it just gives us more flexibility on the lending side. With all of that said, I'll note that, you know, in our markets we are seeing, I think I even said hyper-competitive markets on the deposit side and the loan side. But, you know, that's our focus and, you know, we'll do it prudently.
spk07: Understood. And then just assisting with loan growth for the year, I'd assume we continue to see securities growth. Michael, you mentioned that in your remarks. What is the monthly kind of cash flow from the securities portfolio at this point?
spk04: Yeah, it's generally 9 to 10 million on average we're seeing on the cash flow. I think realistically, Matt, we'll probably redeploy those investment cash flows into either offsetting funding or call it overnight funding borrowings or into fund loan growth realistically just based on current yields. But something we'll continue to monitor throughout the year.
spk07: Okay. Um, last one for me is just on, on the, uh, uh, the renewed repurchase authorization. I think it was 750,000 shares. You've been pretty active recently, uh, at these levels. Is that something we should expect you to continue to execute on?
spk02: No, I, you know, one, that's just our, uh, you know, our annual renewal to make sure that we have that capability on the shelf to use, you know, right now, um, As always, we kind of balance out capital needs as well as use of capital. I feel our position right now is we want to make sure that we're focused on building capital, especially on the TCE. That's more call it from a what-if economic potential factor recession coming up. I'd rather be building capital than deploying it right now. So I wouldn't put a lot on that lever for us.
spk06: Okay, understood. That's all I had. Thanks for taking my questions. Appreciate it.
spk02: Thank you.
spk01: There are no further questions waiting at this time. So as a brief reminder, it is star 1 on your telephone keypad to register a question. 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.
spk02: Great, thank you. I want to just thank, you know, obviously our analysts that are following our stock, as well as all the other callers that are taking an interest in Camden National. Rest assured, and hopefully you have the feeling that we're As always, focused on long-term growth, long-term franchise value. And we appreciate your interest and wish you a good day. Goodbye.
spk01: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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