Good day, and welcome to Camden National Corporation's third quarter 2022 earnings conference call. My name is Drew, 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 Asterisk then zero. 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. Additionally, 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 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'd like to turn the conference over to Greg Dufour. Please go ahead.
Thank you, Drew, and good afternoon, everyone. Welcome to Camden National's third quarter 2022 earnings call. Earlier today, we announced third quarter net income of $14.3 million and year-to-date earnings of $46.1 million. This resulted in diluted earnings per share of $0.97 for the quarter and $3.12 for the year-to-date period. Total revenues of nearly $142 million through the first nine months of 2022 were up 2% from the comparable period in 2021, despite higher PPP loan income and record mortgage activity last year. We feel this demonstrates the flexibility and strong core operating capacity of Camden National. Underlying these results is our commitment to position and reposition the organization in light of the macroeconomic environment, highlighted by rapidly rising interest rates, increased probability of recession, and geopolitical risk.
I'd like to take a few moments to further explain some of the actions we're taking. We're repositioning our lending activities as we see the impact of the last remnants of PPP and the slowdown in the residential mortgage markets. This repositioning has actually been going on for several quarters and includes several points. First, a build-out of our small business lending efforts, leveraging two major strategies. First, we've hired five dedicated small business lenders in our markets and piloted a very successful training program to enhance our banking center managers' capacity to generate small business loans. This effort has been driven by a complete overhaul of our small business lending process, utilizing our fintech partner, Abrigo, as well as our own business process analysis group. We now have the capability to go from application to same-day decision and close within one business day, depending on collateral.
While early, we are very, very happy with our initial results using the new process. We also focused on streamlining our process for larger credit underwriting to build productivity and scale now and in the future. The results of these efforts allow for the expansion of capabilities in our existing markets while providing impactful tools as we look to new markets. There are several other areas where our prior investments and focus have positioned us well and will continue to do so. Our asset quality is extremely strong in this period of economic uncertainty and increased probability of recession. We have continued to fortify our allowance for credit losses, as demonstrated by our coverage of ACL to total loans of 95 basis points and ACL to non-performing loans of 777%.
Our ability to be productive continues to benefit us, as shown through our 56.43% efficiency ratio. Our focus on deposits continues to be strong through both our retail network and our corporate treasury management areas. Our deposit beta, which includes core deposits and CDs, was 14% through the first nine months of the year. These efforts are extremely critical at this point in time as we see aggressive loan and deposit pricing throughout our various products and markets. Our priorities are to maintain asset quality within both our loan investment portfolios, to maintain our efficient cost structure, and to strengthen our balance sheet until we see economic projections turn more favorable.
I would also highlight that we continue to focus on capital by being opportunistic in share repurchases as we repurchased just over 60,000 shares during the third quarter and provided a $0.40 dividend per common share. During the quarter, we also announced that Rebecca Hatfield, President and CEO of Avesta Housing based in Portland, Maine, will be joining our board on December 31, 2022. In addition to her experience at Avesta, Rebecca has a strong background in banking, both in the lending and credit areas, as well as previous experience in the technology industry. I'd like to now turn the discussion over to our Chief Financial Officer, Mike Archer.
Thank you, Greg. Good afternoon, everyone. Earlier today, we reported net income for the first nine months of 2022 of $46.1 million and diluted earnings per share of $3.12, compared to $52.5 million in diluted EPS of $3.49 for the same period a year ago. The drivers for the earnings compression between these periods can be directly traced back to the change in the global economic environment between periods, creating a dynamic and rapid shift in the operating environment for us, not unlike other banks. Between periods, we have seen interest rates rise considerably at an accelerated pace, the yield curve invert, and mounting pressures for a slowing economy that many believe will lead to a near-term recession.
Through the challenges, we've been able to maintain favorable performance metrics through the first nine months of 2022, including a return on average assets of 1.13%, a return on average tangible equity of 16.27%, and maintain an efficiency ratio in the mid-50s. To further highlight the strength of our core operations and results for the nine months ended September 30, 2022, we reported an increase in non-GAAP earnings, which excludes income taxes, provision expense, and SBA PPP loan income of $4.5 million, or 8%, over the same period last year. In regards to our performance for the most recent quarter, we reported net income of $14.3 million and diluted EPS of $0.97 for the third quarter, each down 5% compared to the second quarter of 2022.
On a non-GAAP basis, adjusting for income taxes, provision expense, and SBA PPP income, earnings decreased $328,000, or 2%. Net interest income had a nice lift in the third quarter, increasing $1.3 million, or 4%, over the second quarter. Historically, we have seen an increase in our net interest margin in the third quarter each year due to seasonal inflows of deposits within our markets, which we again saw this year as average core deposits increased 4% quarter-over-quarter. The seasonality in our deposits and our shift in earning asset nets as we continue to redeploy investment cash flows to fund loan growth each contributed to NIM increasing 4 basis points between quarters to 2.88% for the third quarter. Our NIM increase for the quarter was within our prior guidance.
Our yield on interest earning assets for the third quarter increased 29 basis points to 3.4% over the second quarter and represented an asset beta of 20% for the period. Funding costs over the same period increased 25 basis points to 0.54%. For the third quarter of 2022, our total deposit cost was 0.45%, an increase of 24 basis points over the second quarter and represented a deposit beta of 17% for the quarter. Year to date, our deposit beta, which includes noninterest checking and CDs, was 14%. End-of-period loans grew 4% during the third quarter and 13% through the first nine months of 2022. Our loan growth for the quarter was driven by residential mortgage and commercial real estate.
Residential mortgage balances grew 7% during the quarter and CRE balances grew 2%. As noted in our earnings release, at the end of the third quarter, our residential mortgage pipeline was approximately $110 million and our commercial pipeline was approximately $90 million. For the third quarter of 2022, we provisioned $2.8 million of expense for credit losses, which was an increase of $419,000 over last quarter. At this point in the cycle, our credit portfolio remains in excellent condition with no immediate signs of trouble or deterioration. The increase in the provision for the credit losses this quarter was due to the combination of solid loan growth and growing concerns of an economic slowdown. In the third quarter, we released the remaining reserves that were established for certain COVID-modified hospitality loans totaling $768,000.
At September 30, 2022, our allowance for credit losses on loans stood at 95 basis points of total loans, which was an increase of 3 basis points over last quarter and covered over 7 times our non-performing loans. Our reserve levels continue to incorporate our long-term view of macro conditions as well as consider more local factors. We continue to proactively monitor and analyze various pockets of our portfolio to identify any leading indicators of risk, and to date, we have not identified any trends of systemic risk or stress within our portfolio. Non-interest income for the third quarter of 2022 totaled $10 million and was down 11% compared to the previous quarter as we were not immune to the effect of higher interest rates pressuring mortgage banking income and the down markets affecting wealth management fees and BOLI income.
Residential mortgage production for the third quarter was down 20% compared to last quarter, and correspondingly, sold production was nearly down 20% as well. Our non-interest income forecast for next quarter is a range of $10 million-$11 million like previous quarters. In the fourth quarter each year, we recognize our annual debit card incentive bonus and expect to do so again next quarter. Non-interest expense for the third quarter of 2022 totaled $27.1 million, which was 2% higher than the second quarter of 2022. Our non-GAAP efficiency ratio for the third quarter of 2022 was 56.43% compared to 55.42% last quarter. We estimate our fourth quarter expenses will be near $27 million as we've seen in the past quarters.
Tangible book value per share decreased 95 cents or 4% during the third quarter to $22.97 at September 30, while our tangible common equity ratio decreased 38 basis points in the quarter to 6.13% at September 30. Tangible capital decreased again due to rising interest rates further decreasing the value of our bond portfolio. Actions we took in the second quarter to move securities to HTM helped mitigate some of the impact of further rising rates on tangible capital.
The company's regulatory capital ratios continue to be well in excess of regulatory capital requirements as of September 30, supporting the strength of our core capital position. During the third quarter, we repurchased 63,689 shares of our common stock, bringing our total shares repurchase through the first nine months of 2022 to 225,245 at a weighted average cost of $45.46 per share. This concludes our comments on our third quarter results. We'll now open the call up for questions.
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question today comes from Damon DelMonte from KBW. Your line is now open. Please go ahead.
Hey, good afternoon, guys. How are you guys doing today?
Hey, Damon.
Good, thanks.
Good. Good. I guess first question, just, you know, regards to the provision this quarter, Mike, I thought I heard you say you guys released the remaining $700,000 or so of COVID-specific provisions or reserves that you had had before. Is that what you had said?
That's correct, Damon. It was about $750,000, roughly.
If you didn't have that release this quarter, can we assume then that the provision would have been closer to, like, around $3.5 million?
That is correct, yes.
Okay. Is that how we should kind of think about the level of provisioning going forward? Or do you think, you know, it's gonna be closer to this quarter's level?
I think that on a go-forward, Damon, you know, we feel pretty good right now where we are around 95 basis points from a total loans perspective. You know, certainly loan growth will be a factor as we move forward in terms of what provision looks like on a go-forward basis. You know, we've been pretty proactive in terms of you know, call it setting aside reserves for you know, potentially a looming recession or slowdown, and would hope that as we move forward, the level of reserve or provision needed starts to slow down with that as well. I mean, again, there are so many factors, of course, that kind of go into play there, even into that comment.
You know, right now like I said, we feel good about our reserve levels and would think that potentially there'd be less of an impact on a go-forward basis should, you know, the macroeconomic continue to look as it does today or as we expect it to.
Got it. Okay. That's helpful. Thank you. With respect to loan growth, you know, two strong quarters, actually three strong quarters in a row, four strong quarters in a row for you guys. Just kind of wondering, you know, how you're looking at the year closing out and kind of what the pipelines are indicating as we head into 2023.
Yeah, I think I mean, our pipelines at the end of the quarter were pretty, you know, pretty strong. You know, residential held, you know, I think I mentioned there's about $110 million in the pipeline. We have been kind of on, throughout the year, portfolioing about 80% of our production in the residential. I think we'll likely see similar number for the fourth quarter as well. Again, I would expect, you know, fairly strong residential growth there. The commercial pipeline too is fairly strong, you know, continues to remain pretty stable, about $90 million.
I do think as we enter into the fourth quarter here or rather close out the fourth quarter, we'll probably have loan growth in the, you know, call it the 2%-3% range.
Got it. Okay. Great. I guess just one last question. I think your guidance for non-interest income was $10 million-$11 million in the fourth quarter. Does that include the annual Visa incentive or not?
It does. You know, a bit of the wild card, if you will, there, Damon, is more on the mortgage banking side. I think to the extent that we did have some valuation adjustments run through this quarter, and that's kind of compressing our mortgage banking income for the third quarter. To the extent that we don't see something similar, we'll likely, you know, I'd say probably be hopefully on the upper end of that range. I think the short answer is yes, we do have debit card income in that number as well.
Great. Okay. That's all that I had. Thank you very much.
Thank you.
Our next question today comes from Matthew Breese from Stephens Inc. Your line is now open.
Good afternoon.
Good afternoon.
I wanted to follow the composition of loan growth. It feels, you know, like it'll continue to be weighted towards residential loans. Maybe just thinking about the overall asset sensitive profile of the bank, the balance sheet. You know, is there a broader strategy many are undergoing of bringing the balance sheet into a more interest rate neutral position? You know, how far away are you from that? Is that part of the plan here?
Well, it is, Greg, Matt, I'll take that, and Mike can add in. You know, we'll see that transition. One, it's gonna be natural because the residential mortgage market, like everyone's seeing, is slowing down. That's why we're focusing on the commercial side and small business side. You know, as I mentioned in my comments, we've been investing in that area and building that up. We think that will, you know, help offset, you know, call it further decline in residential.
Maybe just following that thread a little bit. You know, how far away do you think we are from seeing, you know, meaningful impacts to the balance sheet from SBA lending?
Well, again, we generate, call it, we use the term more small business, so that could be SBA. We leverage the Finance Authority of Maine quite a bit or just, you know, general small business loans. I, you know, don't wanna say that it's all gonna be SBA type of lending. You know, really saying when that's gonna cross, I would just say it's we're positioning when we say giving out growth expectations that's built in there, that as we expect residential to drop, we expect those other areas to pick up. That's what we've been seeing. You know, you can almost see it with our existing pipelines that we shared this quarter, 110 versus 90, shows how that's building up on us.
As well as complemented by, you know, the other point I'd bring out is that the local commercial is still fairly solid business for us, growth-wise. That's an important aspect too of our strategy going forward.
Okay. Then just thinking about, you know, the outlook for deposit growth, curious your thoughts there, the composition of it. Then, you know, in the broader scheme of funding the balance sheet, should we expect, you know, kind of a similar pace of securities run off in the quarters ahead to help fund the, some of the loan growth?
Yeah. Maybe the last part of that. We do expect, you know, continued, you know, cash flows from the investment portfolio. I think it's in the neighborhood of, call it $12 million a month is what we're seeing. Yeah, we'll continue to redeploy that and certainly to earning, you know, higher earning assets. That's kind of what we've been doing and continue to be the plan. On the deposit side, you know, we're always focused on generating core deposits, primarily checking accounts. You know, we'll continue to. You know, we're in the middle right now. There are some promotional products out there, certainly call it a little bit more pricey than where we had been.
You know, we are also managing from a perspective of you know overnight fundings and what's cost advantageous there for us, Matt. You know, I think it'll be a combination as we move forward of both the you know the non-interest checking you know the money market certainly. I think the other piece just to highlight in there is we continue to manage to what we've given from a guidance perspective to an overall funding beta of 25%. You know, through the first nine months, we've stuck to that, we've hit that, and we continue to manage towards that as we move forward.
Okay. Maybe just being a little bit more specific, thinking about demand deposits. You know, the composition of your deposit book is vastly improved in the wake of the pandemic. Demand deposits up to 27% of total. Do you expect to see much attrition or erosion in that line? Or, you know, are you seeing anybody kind of, you know, make the transition from demand into other categories? What's been the recent drivers of growth?
Yeah. Matt, yeah, I think it is. You know, the customers are obviously interest rate sensitive, and there is that risk of, you know, moving it out of demand because you know, the rates are more favorable. You're getting to a point where, you know, it's not that people are trying to wrestle with 50 basis points versus 75. You know, it's now getting into a meaningful number. I think to combat that and to keep that within, call it our deposit beta guidelines that we want is alternate products. First step is keep the deposits in-house. We have, as Mike mentioned, some other products that we can look at from, you know, laddering things for customers to get them through it. We're maintaining that still in the core deposit base.
However, with all of that said, not only from the retail network, but from the commercial network, is our investment in corporate treasury management that we've made that will keep those, call it business deposits, commercial deposits, a lot stickier, as well. So we have several levers, if you will, to help, you know, help adjust to, you know, customer demand.
Okay. Just maybe tying this all together, you know, any thoughts on the near-term margin outlook and whether or not, you know, the pace of NIM expansion we saw this quarter is something we should expect at least in the relative near term?
Yeah, I think so, and I mentioned this in my comments, Matt. You know, generally Q3 is a stronger quarter on the NIM side just because of some seasonal flows that we have in our market. We do anticipate in the fourth quarter we'll potentially see some of those seasonal outflows, which is normal for us. You know, that said, you know, we believe, you know, if we, you know, we're focused on margin, we're focused on deposit betas, you know, we are, you know, aiming to call it, you know, be flat on a quarter, you know, for the fourth quarter from a margin perspective. Understanding that there's, you know, call it some level of downside risk there just in terms of seasonal outflows.
You know, again, we think we can manage that, and we'll be right around flat on a linked-quarter basis.
Okay. Last one from me. You know, just thinking about capital adequacy, and obviously your regulatory capital ratios are very healthy. Thinking about the TCE, the TA, any concerns there, or has that popped up in conversations with regulators at all?
Well, you know, we're obviously monitoring it, Matthew. We feel good about it. When you take out, you know, the impact from the AFS portfolio, you know, it jumps up to about 8%. We have good core capital. You know, I'm not sure if I really wanna comment, you know, on our conversation with regulators because we just finished our exam. Suffice it to say, we feel real good about our capital, even though we're monitoring.
Okay. Got it. Understood. That's all I had. Thanks for taking my questions.
You're welcome.
Thanks, Matt.
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.
Great. Well, thank you, Drew. I just wanna thank everybody who's taken the time out of their day to listen to the call and for your interest in Camden National. Have a good afternoon. Bye now.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.