Welcome to Camden National Corporation's Q4 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 * then 0. 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.
Thank you, welcome everyone to Camden National Corporation's Q4 2022 earnings call. For the Q4 of 2022, we reported net income of $15.4 million, or earnings per diluted share of $1.05, which was 8% better than the Q3 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 Q4 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 Q4 is part of a balance sheet restructuring that Mike will describe during his comments. Operating expenses of $27 million in the quarter was as we expected and resulted in a 56.4% non-GAAP efficiency ratio. Finally, our provision for credit losses was $466,000, down from $2.8 million recorded in the Q3 . 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 Q4 . We're 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 non-performing 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 Q4 , down 12 basis points from 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 Q4 , 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 are 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 Q4 .
Finally, we recognize that we're operating in a hyper-competitive environment, and we see loan deals at an unknown 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 Q4 , and we're already seeing processing efficiency improvements ranging from 30% to 35% efficiency. Our overall efficiency ratio for the total organization is within our target range of 55% to 58%. 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.
Thank you, Greg. Good afternoon, everyone. Earlier today, we reported net income for the year ended 2022 of $61.4 million and Diluted EPS of $4.17. 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 through a mix of dividends and share repurchases. Our dividend payout ratio for the year ended 2022 was 39%, which included a $0.02 or 5% increase in our quarterly dividend that we announced in the Q4 . 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 Q4 , each an increase of 8% over last quarter.
Many of our key financial metrics that we track remain solid for the Q4, 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 Q4 were $19.8 million, a 4% decrease from the Q3 . 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 Q4 decreased 2% from the Q3 , 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 Q4 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 Q3 . 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 Q4 , 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 Q4 , 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 Q4 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 markets continues to heat up. We have considered and continue to look at other alternative borrowing strategies. During the quarter, we entered into a laddered brokered CD strategy that stretches over 12 months.
Doing so allowed us to lock in approximately $100 million in 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 target. We do anticipate further net interest margin compression in the Q1 of 2023, as we are in the peak of normal seasonal outflows combined with expected further rate hikes by the Fed in the Q1 . 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 Q4 , we completed an investment restructure whereby we sold approximately $28 million of securities at a loss of $903,000 and repurchased approximately $28 million securities with higher yields. The expected earn back is about 1 year and expected to provide 1 to 2 basis points of net interest margin lift with a full quarter benefit. Last week, we executed on 2 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 expectation of the Fed funds.
We currently estimate a full quarter net interest margin lift of 4-5 basis points should market expectation on Fed funds hold true. For the Q4 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. Minimum net charge-offs and delinquent loans totaling 6 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 forecast and 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 3 basis points from last quarter. We believe this reserve level is appropriate given the strength of our credit quality 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 Q4 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 Q4 each year, we recognize 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 Q4 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 Q4 was down 28% and our sold production was down 45% compared to last quarter. Our non-interest income forecast for next quarter is $9 million to $9.5 million. Non-interest expense for the Q4 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 Q1 of 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 31, 2022, supporting the strength of our core capital position. Tangible book value per share increased to $0.40 or 6% during the Q4 to $24.37 at December 31, 2022. Our tangible common equity ratio increased 24 basis points in the quarter to 6.37% at December 31. This concludes our comments on our Q4 results. I'll now turn the call back to Greg.
Thanks, Mike. 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 the 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 deposits 6% in 2022. Also, as we mentioned, our efficiency ratio is within our normal operating range of 56%. From our risk perspective, we're also well-positioned.
Tangible common equity ratio, 6.37%, and is complemented by an ACL to total loan ratio of 92 basis points and 7 times coverage on non-performing assets. With that as a backdrop, we'll open it up for questions, please.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press * then 1 on your touchtone phone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press * then 2 . 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.
Good afternoon.
Hi, Steve, and welcome to the call.
Thank you. Thanks. Thanks, Greg. 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 5 and holds throughout the rest of the year, just kind of how you're thinking about the margin.
I'll take that, Steve. It's Mike. I think in terms of the deposit side, you know, we're expecting, and you know, particularly in the Q1 , Fed continues to hike. We'll continue to see the deposit beta probably in the 30% to 35% range. You know, it's call it close to where we were, maybe slightly up. I think the other, you know, 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, you know, 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 Q1 . You know, overall, we're thinking, you know, 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. All in, we're thinking, you know, that margin would probably be around 265 ± 2-3 basis points on either end. You know, from there, I would just again, probably not in a spot to give forward guidance after Q1 just with all the factors at play here.
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 to slow down on rates and loans continuing to reprice, and as Greg mentioned too, is just the strong loan pipelines that we have in terms of rates, we anticipate that margin from there would start to rebound.
Okay. That's helpful. 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 will you expect to drive growth in 2023?
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. 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. 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.
That leverages the re-engineering that we did and new software that we have, especially on the small business side. 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.
Okay. Great. Thank you very much. Appreciate all the color here.
You're welcome, Steve. Thank you.
Thank you.
Our next question comes from the line of Damon Del Monte with KBW. Damon, your line is now open.
Hey, good afternoon, guys. I hope you're doing well, and thanks for taking my questions.
Thanks, Damon.
Just wanted to get a little perspective here on the outlook for provision. You know, you noted that at 92 basis points you feel pretty good about that reserve level. It's over 7 times covering NPLs, I believe. With the expectation of loan growth slowing, you know, and the health of the portfolio remaining intact as of today, would you expect a similar level of provisioning like we saw in the Q4 as we start off in 2023 for at least the H1 of the year?
Yeah, I can take that 1, Damon. I guess in terms of provision, maybe the way I would talk about it is, you know, 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. Assuming we stand and it kind of hold to where we are, and as we mentioned, no signs of credit issues ahead. You know, assuming everything holds constant, I would say that, you know, 92, 95, you know, somewhere in there we could continue to hover.
Okay. Okay, that's helpful. Thank you. Could you just go back to the 2 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 of securities, and then you reinvested those proceeds. Is that correct?
That's right, yes. We essentially, I think those yields on those securities were around 2.60%. Then we essentially purchased another $28 million with around a 6% yield.
Okay. What kind of securities were those?
It was a mix of corporates and MBS. Primarily, I believe corporate.
Got it. Okay. Then the 2 swap agreements, could you just go over those specifics again?
Sure. We did $200 million notional in total. There was a $150 million 3-year. I always have to think about this to get this right. Received, pay fixed, receive variable. I think the pay amount on that was. I got my notes here, 1 second. The pay amount on that was 3.71%. Then we did another $50 million for a 5-year swap, and the pay amount on that was 3.34%. Both of those are receiving Fed funds OIS.
Got it. Okay. All right, great. Thank you. I guess on the, you know, the expense outlook, you said, 2% to 3%, from the Q4 into the Q1. I mean, do you expect 2% to 3% for the entire year, or is that just like from the Q1 and then another lift after that?
That guidance was generally for the Q1 . I listed a couple factors in there, 1 in the FDIC fees and just normal merit.
Mm-hmm.
So call it, you know, I would say that's about $27.5 million to about a $500,000 . The 1 item I would just highlight is, you know, historically we've continued to manage within a efficiency ratio range of, call it 55% to 58%. You know, we'll certainly do that throughout the year and that's our expectation.
Got it. Okay. That's helpful. That's all that I had. Thanks so much.
Thank you.
Our next question comes from the line of Matthew Breese with Stephens Inc. Matthew, your line is now open.
Hey, good afternoon.
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, you know, Camden was operating in kind of a 10% to 15% range pre-Great Financial Crisis. Just curious, where do you think this figure goes during this tightening cycle, and what structurally keeps you know, around your estimates?
Yeah. We're trying to pull that number, Matt. I would just comment that we have seen some pressure in terms of, you know, some of the bigger commercial, you know, sophisticated commercial customers looking for interest. We've seen some mix shift, if you will, from DDA over to now our interest checking. We've seen some of that shift occur. You know, I think that's become more common. You know, certainly we're managing that internally having the proactive conversations with our, you know, primarily our business customers. Certainly there is more pressure on that.
As we think.
Matt, we can-
I'm sorry, Michael, go ahead.
I was gonna say, we can connect too offline and get you some thoughts on that, the DDA specifically.
Okay. Do you expect deposit growth in 2023? If so, what areas? Maybe you could comment on further reliance on broker deposits.
Sure. I'll take the last 1 first. We haven't executed. We are looking at some broker deposits, additional $90 million to $100 million, we are looking at right now, just to supplement funding and having it be a, you know, more cost effective, particularly as we anticipate, you know, Fed funds is gonna continue to move higher. 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, Matt, what was the first part of your question there?
What kind of deposit growth, yeah, the outlook for the year.
Yeah. I believe, it was in mid-single digits from a deposit growth perspective is what we had. Yeah.
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, you know, through incentives, through internal promotions, external promotions, you know, 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. That's another lever set of tools that we have.
You know, we have a great team within that we are very much focused on deposit growth. You know, with that said, you know, call it from a sales management perspective, that's where we're focused on. The more we can drive down that rate or stabilize that rate, you know, it just, you know, 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. You know, that's our focus and, you know, we'll do it prudently.
Understood. Just assisting with loan growth for the year, I'd assume we continue to see securities growth. Michael, you'd mentioned that in your remarks. What is the monthly kind of cash flow from the securities portfolio at this point?
It's generally $9 million 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, you know, funding or you know, call it overnight funding borrowings or into, you know, fund loan growth realistically, just, you know, based on current yields. Something we'll continue to monitor throughout the year.
Last 1 for me is just on the renewed repurchase authorization. I think it was 750,000 shares. You've been pretty active recently. At these levels, is that something we should expect you to continue to execute on?
No, you know, 1, that's just our, you know, our annual renewal to make sure that we have that capability on the shelf to use. You know, right now, as always, we kind of balance out capital needs, as well as you know, use of capital. I feel our position right now is we wanna make sure that we're, you know, focused on building capital, especially on the TCE. That's more call it from a, a what if economic potential, you know, factor recession coming up. I'd rather be building capital than deploying it right now. I wouldn't put a lot on that lever for us.
Understood. That's all I had. Thanks for taking my questions. Appreciate it.
Thank you.
There are no further questions waiting at this time. As a brief reminder, it is * 1 on your telephone keypad to register a question. 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. Thank you. I wanna just thank, you know, obviously our analysts that are following our stock as well as all the other callers that are taking an interest into Camden National. Rest assured, and hopefully you have the feeling that we're, as always, focused on long-term growth, long-term franchise value. We appreciate your interest and wish you a good day. Bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.