Good day, and welcome to Camden National Corporation's Q4 2021 Earnings Conference Call. My name is Brica, and I'll 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 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 2020 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 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 call over to Greg Dufour. Please go ahead, sir.
Thank you, Brica, and welcome to Camden National Corporation's Q4 and 2021 earnings call. Joining me today is Mike Archer who was named Executive Vice President and Chief Financial Officer earlier this month, resulting from Greg White leaving us on January 3rd. I appreciate the work Greg did with us and wish him the best. Mike has been our corporate controller since 2013 and was a manager with PwC before joining us. During his time with us, Mike has worked on virtually every major strategic initiative we've undertaken, ranging from our acquisition of the Bank of Maine in 2015 to helping to lead the organization during the pandemic. Before I turn the discussion over to Mike for a more detailed financial review of the quarter, I'd like to make a few comments regarding 2021.
We're pleased to report record earnings of $69 million or $4.60 per diluted share for 2021. This represents an increase of $9.5 million or $0.65 per diluted share over our previous earnings record in 2020. In 2021, we produced over $1 billion of residential mortgage originations, which we leveraged by recognizing $13.7 million gain on sale of that production before shifting to holding more of those mortgages in the Q2 of 2021 due to the amount of liquidity we had on our balance sheet. Overall, we saw 7% loan growth from December 31st, 2020- December 31st, 2021, or 10% when excluding a $99 million decrease in PPP loans. We also experienced 15% deposit growth over the year, which includes a 61% growth in non-interest-bearing deposits.
We still view our core deposit base as one of our strengths, and we continue to invest in that area. In 2021, we redesigned our retail deposit product offerings, as well as experienced solid growth in our corporate treasury management area. Focusing on our customer relationships will position us for the future as the banking industry experiences changes in the amounts of deposits held by customers. Another area of strength is our asset quality. Non-performing loans to total loans were 20 basis points at the end of 2021 compared to 32 basis points at the end of 2020. Our net charge-offs were negligible for the year at two basis points of average loans. Even though we released reserves during the year, our overall allowance for credit losses ended the year at 97 basis points of total loans, which is slightly higher than pre-pandemic levels.
The main commercial market is very robust, and we're seeing good activity throughout the state. The New Hampshire and Massachusetts markets are even more active. With that said, the commercial markets are very competitive, and we continue to focus on ensuring appropriate credit structures, which has served us well in the past. We've also continued to expand our lending capabilities and reach through strategic hires. This has allowed us to add seasoned lenders in New Hampshire and Massachusetts, while at the same time adding talent in our core Maine-based markets. During the Q4, we announced a quarterly dividend of $0.40, an increase of 11% over the last quarter, and this was our second dividend increase announced during 2020 and brought total dividends paid in the year to $1.48 per share or 32% of earnings for the year.
We also repurchased nearly 218,000 common shares during the year at an average price of $46.25, which fits into our earn back requirements. I'd be remiss if I did not recognize the hard work of the employees of Camden National throughout the year. The pandemic has impacted them significantly, and I'm deeply appreciative as they've juggled their personal lives with the demands of their jobs. We've provided support to them by adopting a hybrid work environment as well as increasing our starting pay to $17 per hour and providing every employee with a 3% or more wage increase in October.
In light of the challenges over the past few years, I find it remarkable that our engagement, as measured by Gallup, has increased from 4.09 on a 5-point scale before the pandemic to 4.25 this year. This speaks to the commitment of all employees as well as their leaders. It's now my pleasure to turn the discussion over to Mike.
Thank you, Greg, and good afternoon, everyone. I'm pleased to join the call as the new CFO for Camden National. Since joining the company in 2013, I've been fortunate to have worked alongside two great predecessors that have served as great leaders and mentors. I'm truly excited to take on this new role alongside a talented group of executives and senior managers across the company. Earlier today, we reported record earnings for the year of $69 million or $4.60 per diluted share, and solid Q4 earnings of $16.5 million, or $1.11 per diluted share. Net income for the year was up 16% over 2020, and Q4 net income was up 13% over the last quarter.
Through strong earnings and certain capital deployment strategies, our return on tangible shareholders' equity for the year ended 2021 was 15.6%. Our return on tangible shareholders' equity for the Q4 of 2021 was 14.7%. In total, the company returned over $31 million of capital to shareholders in 2021 through a combination of dividends and share buybacks. In the Q4 of 2021, the company announced its second dividend increase for the year, driving our quarterly dividend to $0.40 per common share, which is an increase of 21% over last year. Earlier this month, we announced the company's board of directors approved a new share repurchase program for up to 750,000 shares of the company's common stock. Subject to market conditions, the company expects to continue to buy back its common shares opportunistically through 2022.
On a linked-quarter basis, revenues grew $3.1 million or 7% to $48.9 million for the Q4 of 2021. The increase was driven by higher SBA PPP loan income of $734 thousand, as loan forgiveness accelerated heading into the end of the year, an increase in investments and loan balances, and a pickup in debit card income of $701 thousand as we receive and recognize our annual transaction volume bonus from Visa in the Q4 each year. Loan growth was strong in the Q4 of 2021 at 4% or 5% adjusting for SBA PPP loans. The growth was primarily within the residential mortgage and commercial real estate loan portfolios, each growing 7% and 5%, respectively, during the Q4.
Through the Q4, we continued with our strategy to hold more of our residential mortgage production in our loan portfolio as we look to put excess liquidity to work while managing our interest rate risk position. For the quarter, we held 67% of our residential mortgage production in the loan portfolio. Our current view of the residential mortgage business in 2022 was consistent with that of the industry, and we anticipate slowing production compared to the past two years as we come off of back-to-back record-setting years. In recent quarters, we've seen refinance activity continue to decrease as a percentage of total production, dropping from 44% and 42% for the second and Q3s this past year, respectively, to 39% for the Q4 of 2021.
With anticipated lower residential mortgage volumes, the ratio of mortgages held in our loan portfolio to mortgages sold will likely inch closer to 50/50 throughout the year. Recognizing that this could shift as market conditions move. With that said, we currently expect that our Q1 of 2022 ratio of residential mortgages held to sold will run a bit higher than a 50/50 mix as we turn to our year-end loan pipeline. Investments grew 4% during the quarter to $1.5 billion and represented 28% of total assets as of December 31st, 2021, up slightly from 27% as of the end of the last quarter. Investment growth throughout the year has been a primary means to deploy excess cash in return for higher-yielding assets.
While our preference continues to be deploying excess cash through loan growth and managing our funding, we will continue to use this investment strategy as needed. Net interest margin for the Q4 of 2021 was 2.82%, up 6 basis points over the Q3 of 2021, as we benefited from an increase in SBA PPP income, contributing an additional 9 basis points to margin. Our core net interest margin, which excludes the impact of SBA PPP loans and excess liquidity, decreased 3 basis points on a linked quarter to 2.79%, driven primarily by residential mortgage loans being originated at lower yields than our current portfolio. At this point, we believe our core net interest margin has largely leveled off.
Being asset sensitive, our core net margin has upside potential should the Fed increase interest rates, but we remain cautious, as it is unclear how the long end of the curve will respond. For the Q4 of 2021, we recorded $1.2 million in provision expense driven by our favorable loan growth during the quarter, bringing our allowance for credit losses to $33.3 million at December 31st, 2021. Our allowance for credit losses at December 31st was 0.97% of total loans, which was flat with last quarter but remains elevated over pre-pandemic levels. As Greg noted earlier, our asset quality at year-end remained very strong, with non-performing assets of just 13 basis points of total assets and our allowance coverage ratio being nearly five times non-performing loans.
Non-interest expense for the Q4 of 2021 was $27 million, an increase of 3% over the Q3 of 2021. The increase over last quarter was driven by, one, our continued enhancements to our information security infrastructure as we continue to work to invest in technology systems and processes to improve our overall posture and protect our customers. Secondly, increased occupancy and other employee related costs as many of our teams transition back to the office in the fall months, as well as other normal seasonal costs. Last, higher consulting fees. Compensation related costs were lower 4% in the Q4 of 2021 compared to last quarter, which helped offset these higher costs. The decrease was largely the result of lower incentive accruals between quarters as employee turnover in the Q4 led to the release of built up accruals.
Not unlike the rest of the market, higher vacancies from employee turnover continues to persist. As discussed on our last call, we have taken certain actions to address employee retention. In October, we increased our starting wage by $2- $17 per hour and provided a wage increase to all employees of at least 3%. The impact of Q4 2021 compensation was an increase of just over $400,000. As we move forward, this expense increase will largely be neutralized by the freezing of our profit sharing plan. As we enter 2022, we do so from a position of strength. Our capital position remains strong with a tangible common equity ratio of 8.22% and regulatory capital levels well in excess of requirements as of December 31st, 2021.
Our loan deposit ratio was 74% at year-end, slightly up from our ratio at September 30th, 2021 of 72%, but still well below our historical norm. Our strong deposit growth over the past year, 15%, puts us in a great position to capitalize on continued efficient growth. This concludes our comments on our Q4 results. We'll now open the call up for questions. Thank you.
Thank you. We will now begin the question and answer session. We have our first question on the line from Matthew Breese of Stephens. Matthew, please go ahead.
Good afternoon.
Hi, Matt.
Matt.
Hey, just, you know, considering you'll be retaining less residential production this year and there's likely to be less volume as well, could you just comment a little bit on what your outlook is for loan growth this year? You know, either measured by pipeline or what you think you're capable of. Is there enough of an offset from commercial real estate and C&I to get you back to the kind of pre-COVID growth of, you know, call it low- to mid-single-digit growth?
Hey, Matt. Yeah, I can take that one. We are still projecting single mid-digit loan growth for the year. I think to your point, we expect that mix will be certainly a little bit different than what we've been experiencing, less on the resi and more from the commercial space picking that up. We have made investments in the commercial side, adding some strategic lenders, you know, in our Bangor market as well as in our Southern Maine, New Hampshire markets as well. I do wanna just highlight too for the Q1. We are expecting that for the Q1, our loan growth will likely be closer to, you know, call it flattish. A couple things there.
One is we got the PPP income or excuse me, PPP loans that we, you know, are predicting or expecting that those are gonna run off the remaining, you know, $35-$37 million in the Q1 or Q2. Also we are aware of a couple of larger commercial relationships that we expect to pay down this quarter as well. Again, I think originations are expected to be strong, but for two of those other items, we expect it to be flattish in the Q1 and then pick up from there.
Got it. Okay. I wanted to switch to interest rates. You know, obviously, I think we all expect now, you know, some level of interest rate hikes this year. It's just a matter of how many and when. If I turn to your disclosures or look back at your disclosures, you guys show a +200 basis point shift in the curve, but more than likely we get, you know, something closer to four, five, or six hikes. Could you just give me some idea of what the NIM sensitivity is in a +100 basis point scenario or per 25 basis point hike?
We have looked at it, Matt, from up 50 basis points. We are expecting from an annual impact fee, an interest income would be a lift of $1 million-$1.5 million, which I think translates to three or five basis points.
Okay. Maybe just behind that, you know, could you give me some idea of how much in the way of floating rate loans you have and then what deposit beta you're assuming?
Our variable rate book is, I think, 45% of our total portfolio.
Okay. On the deposit beta?
Our expectation for deposits is at least on the, you know, on the onset, is we're gonna lag the market. We have really no high you know no expectation to chase deposits at this point. You know we expecting a less than 25 beta.
Great. Perfect. That's all I had. I'll leave it there. Thank you.
Thank you.
Thank you . We now have a question from Damon Dumont from KBW. Damon, please go ahead.
Hi, this is Matt Rank, Solomon for Damon. How is everybody?
Good, Matt. How are you?
Good. How are you?
Good, good. Just a quick question about expenses. I know you said the minimum wage increase and 3% increase will be largely offset. Do you think you guys have gotten past the wage pressures that are facing the industry, or do you think there might be more potential increases during 2022?
Sure, Matt. I'll take it. It's Greg. No. I don't think we've gotten past the wage pressures, if you will. Whether we look at our vacancies, hiring, and it aligns with what, you know, we're seeing or reading on a national level, you know, just from workers out there. It goes across all levels. Now, if that means that we have to do another, you know, adjustment, call it, to the starting wage and deal with those compression issues, we're not at that point yet, and it could be just meeting market demand, depending on not only the position, but even geographically where that happens. Almost on a one-off basis as we go forward for a while.
Okay. Gotcha. Just on the data processing cost, I know it was an annual core system upgrade, but is any of that likely to be sticky through 2022 as it relates to, like, security infrastructure? Should we look for elevated expense there, or will it just run pretty consistently?
I think that, I mean, specific to that line item, I would anticipate that will continue just to see normal increase, if you will. I mean, we continue to invest in our infrastructure and technology, so, you know, generally speaking, those expenses are flushing through that line item.
Okay.
I think you
Oops, sorry, go ahead.
I was gonna say, specifically your question about the reference to the core system upgrade, that's really a seasonal thing. That's a timing item.
Okay. Then just, lastly, just on the provision, I know you guys said you're still a little higher. I think it was like 15 basis points higher than your pre-COVID loan loss reserve level. Should we just be looking for you to grow into that as we go forward? Maybe you don't reach that level again, but, is that how we should think about it?
Yeah. Well, I guess what I would say to that is, I mean, you know, the 97 basis points that we are right now I think reflects what we, you know, how we're viewing our current, you know, credit risk profile. I think we're being a little bit cautious just in terms of, you know, we're not out of the woods yet, is our view, you know, just from the pandemic. I think that could potentially level down a bit, but I do think just under the, you know, the new accounting model, we're likely gonna run at a higher, allowance than we maybe did pre-pandemic and even in normal times.
Okay. That's it for me. Thank you.
Great. Thank you, Matt.
Thank you, Matt. We now have a question from William Wallace of Raymond James. William, please go ahead when you're ready.
Hi. Thanks. Good afternoon, guys.
Hi, Wally.
Wally.
I apologize if I'm a little bit confused, but maybe just if I could ask directly. If I look at your Q4 expense of right around $27 million, are you guys saying that you think you can hold expense at that run rate for the year, or would we expect that there would be kind a normal seasonal pressures in the Q1 and then kind a you know growing a little bit from there? I was a little bit confused. I'm sorry.
Sure, Wally. I can start, and Greg can certainly jump in. I would say in part is our expense base for the, you know, Q4, and even through a good chunk of 2021 was a bit elevated than, call it normal times, just because of incentive accruals. As we get into the Q1, that's gonna reset just from an annual performance perspective. We're actually expecting that in the Q1 we may see a bit, a slight dip. I'll call it $26.5 million-$27 million. But I think from there, you know, that $27 million becomes a pretty good average run rate.
Yeah. With the normal inflationary cost or other type of costs coming through, Wally, but nothing.
Oh, okay.
Change in the trend. Right?
Okay. All right. That's very helpful. Thank you. Did I hear you say that you froze your profit share plan? If I heard that correctly, is that just a kind of an offset of pressure strategy, or is there something else that would drive that decision?
Yeah. What we did with that, Wally, was, we normally in normal times would pay up to 3% profit sharing and put that into employees' 401(k)s. After a lot of discussion, including with employees, we didn't necessarily get the full impact benefit from an employee perspective because folks would want it really in cash in their salary. What we did is that we not necessarily freezing the plan, but brought down that contribution to zero for, you know, starting this year, 2022, going forward. That savings helps us offset that 3% plus merit increase that we put in for everybody last quarter.
Okay. Gotcha. Makes sense. That's all I had. I appreciate the time. Thank you.
Yeah, our pleasure. Thank you.
Thank you.
Thank you. We now have a follow-up question from Matthew Breese. Matt, please go ahead. I've opened your line.
Hey, good afternoon again. I had two follow-ups. The first one was just in regards to the securities portfolio. Would love a little color as to how we should expect that to play out this year. The 2nd one tied to securities was the duration is now up to 5.9 years, and I would expect heading into a rising rate environment that we shouldn't see that extend. Is that the right thought process?
On the latter question, yes, that's reasonable. I think as we think about the investment portfolio, we, you know, we're not really looking to grow that, certainly, Matt. We are gonna, you know, we have been, and we continue to manage excess liquidity, and we wanna, you know, put it to work to the extent that it makes sense. As we mentioned, even in the prepared comments, you know, we certainly want to put that to loan growth if we can. There's some opportunity to manage some deposits down or funding costs rather funding down. To the extent that we need to, you know, tuck some away in the investment portfolio, we're not gonna shy away from that either.
Okay. Last thing. You know, historically, Camden has been a bank that has participated in M&A. More recently, the strategy for you all has been centered on kind of southern Maine, New Hampshire, northern Massachusetts. There just simply aren't as many targets these days as there once was. With that in mind, how do you think about M&A geographically and size-wise for whole banks? Would you consider acquiring a bank or banks that are, you know, more in kind of the northern portions of Maine, the county north of Camden, certainly? We'd love some thoughts on that.
Yeah, look, well, when you mention northern Maine, there's only a few, so probably it's not appropriate to kind of get too specific there. I guess to address it generally, Matt, we would look if it made sense, and by making sense is, you know, good fundamentals within the target, including market share or positioned enough that we feel like we could grow it, you know, if we were combined resources. Obviously, you know, asset quality plays, you know, a big role in that. You know, call it Maine market where we have the biggest, as you know, footprint in our franchise. From others, we'd be looking for other alternatives would be could we get the cost saves that we needed to have it make sense.
I think just to really summarize, as we always have been, we'll be opportunistic if the numbers work, including it being a good quality franchise, including good quality management team.
Great. That's all I had. Thank you.
You're welcome. Thank you.
Thank you. I would like to turn the conference call back over to Greg Dufour for any closing remarks.
Great. Thank you. I just wanna really thank everyone, the analysts obviously attending the call, asking questions and appreciate the support. The other listeners in, we thank you for your interest in the organization. It's been a great year, and we're looking forward to making 2022 another great one. Thank you all, and have a great day.
Thank you. This does conclude today's call. Thank you all again for joining. You may now disconnect your lines.