Camden National Corporation (NASDAQ:CAC) Q2 2022 Earnings Conference Call July 26, 2022 3:00 PM ET
Company Participants
Greg Dufour – President and Chief Executive Officer
Mike Archer – Executive Vice President and Chief Financial Officer
Conference Call Participants
Damon DelMonte – KBW
Matthew Breese – Stephens
Operator
Good day, and welcome to Camden National Corporation’s Second Quarter 2022 Earnings Conference Call. My name is Tia, 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. 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 Dufour. Please go ahead, sir.
Greg Dufour
Thank you, Tia, and good afternoon, everyone. Welcome to Camden 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 2022 diluted EPS. Underlying those results was a 6% increase in pretax 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 a release of $1.1 million in the first quarter. This increase in provision helped move our ratio of allowance for credit losses to total loans to 92 basis points at the end of the second quarter of 2022, 2 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 of loans passed through 30 to 89 days and $5 million of nonperforming loans out of the $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 of 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 ended 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.
Mike Archer
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, pretax 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 the higher percentage of our originations to be held in the 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 are 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 continue 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 of reserves remaining on these loans. While it’s 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 to 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 3 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 nonrecurring items that contributed approximately 3 basis points to our first quarter net interest margin. Accounting for that, our core margin expanded closer to 4 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 8 basis points over the first quarter to 0.29% led by an increase in borrowing cost of 12 basis points and deposit costs of 6 basis points. Our deposit pricing strategy has been to lag the market and so far, the increase in deposit cost 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. Noninterest 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. Noninterest 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 30, nonperforming loans were 0.16% of total loans, down 3 basis points from the end of the last quarter, and delinquencies were 0.06% of total loans at June 30th, which was 2 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 30th, 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.
Question-and-Answer Session
Operator
The first question is from the line of Damon DelMonte with KBW.
Damon DelMonte
So first question, I just wanted to talk a little bit about the margin. I think you noted that the core margin, ex PPP and liquidity drag, would have been closer to 2.85%. How should we think about excess liquidity as far as like exiting the balance sheet and kind of getting back to a more normalized level over the next couple of quarters? It seems like it’s been going down every quarter, but how much longer do you think it remains a headwind for you?
Mike Archer
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.
Damon DelMonte
And then can you kind of give a little — maybe a little 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?
Mike Archer
So what we’re thinking, again, it’s all, of course, highly dependent on what happens. But in terms of if the Fed gets to call it 3% by the end of the quarter, third quarter, and it 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 2.85% core margin that we’re speaking of.
Damon DelMonte
And then the uncertainty you guys alluded to 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 the expectation for loan growth to continue and potentially continued softening economic backdrop? 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 pulled back to less than $1 million type level.
Greg Dufour
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 even larger banks 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, we won’t be — we’ll be stabilizing, call it, the allowance. However, it will always be impacted by loan growth, which I think is a good thing. If we have loan growth, it’s a good thing to add into your provision and your allowance.
Damon DelMonte
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?
Greg Dufour
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. It tends to be on the jumbo side. But that’s obviously very interest rate driven at this point. On the call it, nonresidential, so you’re primarily getting into the commercial, including small business, we’re seeing strong activity, especially in the small business. When you look more on the industry segments out of the commercial book and CRE book, 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 areas 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.
Operator
The next question is from the line of Matthew Breese with Stephens.
Matthew Breese
I want to go back to the topic of the net interest margin. You mentioned the outlook for next quarter is up 3 to 5 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 long term over the next year or so.
Mike Archer
So from a deposit side, Matt, 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 starting — 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 yield. And again, like I said, we were expecting the 3 to 5. But again, I think 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 2.80 and we’re keeping a watchful eye on that.
Matthew Breese
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, obviously, residential real estate growth was — led the way, and it’s been leading the way for some time now, but every other category contributed. So as you think about 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?
Mike Archer
So I think certainly for next quarter, we’re going to see residential let’s 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 and the 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 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.
Matthew Breese
And then I wanted to go back to the provision and reserve discussion. I’ve asked so far all my cold weather banks this, but 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. Your winters tend to be 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?
Greg Dufour
Yes, it does. That’s the short answer. And that does influence, especially when you get into some qualitative factors and reason behind that, because that one will impact directly the consumer and that trickle through. And like I say, it’s the cold weather part in the heating fuel, if it’s $4.50 a gallon, $5 a gallon to heat a house, that’s a strong drag on our economy up here. And just as inside and I worry about it for my own employees here. However, I will say what we’re seeing now from tourism, even though gas, up until a few weeks ago, was $4.75, $4.80-plus a gallon, strong tourism. We see that pretty much any community that’s coastal or tourist related, even the inland ones, especially in the more populated ones like Portland, Southern Maine, down the kind of banks and even here in Camden, extremely, extremely busy, seeing a lot of traffic come through. So I think that wave may 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.
Operator
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 Dufour Gregory for any closing remarks.
Greg Dufour
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.
Operator
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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