Good day, and welcome to Camden National Corporation's Fourth Quarter 2022 Earnings Conference Call. My name is [Fouram] 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.

Thank you, and welcome everyone to Camden National Corporation's Fourth Quarter 2022 Earnings Call. For the fourth quarter of 2022, we reported net income of $15.4 million or earnings per diluted share of $1.05, which was 8% better than the third quarter of ‘22. This resulted in total annual earnings for 2022 of $61.4 million, an 11% decrease from our record earnings of $69 million recorded in 2021 and a 9% decrease in diluted earnings per share over the same period. We were pleased with our fourth quarter performance in several areas. Non-interest income, excluding a $903,000 pre-tax security loss was $10.7 million and was on the higher end of our expectations. The security loss record in the fourth quarter is part of a balance sheet restructuring that Mike described during his comments. Operating expenses of $27 million in the quarter was as we expected, and resulted in a 56.4% non-GAAP efficiency ratio. Finally, our provision for credit losses was $466,000, down from $2.8 million recorded in the third quarter. At our earnings call last quarter, we signaled we could see our allowance from provision levels begin to stabilize should asset quality remain strong and no significant changes in the economic outlook occurring during the fourth quarter. 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 that we are well positioned at those levels on our current loan portfolio. We also continue to see the negative impact of the significant and prolonged inverted yield curve, which contributed to a 2.76% net interest margin for the fourth quarter, down 12 basis points for the prior…

Thank you, Greg, and good afternoon, everyone. Earlier today, we reported net income for the year ended 2022 of $61.4 million and diluted EPS of $4.17 and 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 pretax pre-provision basis, the company recorded earnings of $81.5 million for the year, down 2% from last year. In addition, adjusting for SBA PPP loan income, earnings totaled $80.3 million, a 7% increase over last year. These core results make us confident in navigating today's short term challenges while remaining focused on the long term. We continue to focus on generating shareholder returns through strong sustainable core earnings and strategies and deploying capital to organically grow the franchise. We also continue to prudently return capital to shareholders for a mix of dividends and share repurchases. Our dividend pay 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 fourth quarter, and we repurchased 225,245 shares of our common stock throughout the year. On a linked quarter basis, we reported net income of $15.4 million and diluted EPS of $1.05 for the fourth quarter, each an increase of 8% over the last quarter. Many of our key financial metrics that we track remain solid for the fourth quarter, including a return on average assets of 1.09%, a return on average tangible equity of 18.2% and an efficiency ratio of 56.4%. On a non-GAAP basis, pre-tax pre-provision earnings for the fourth quarter were $19.8 million, a 4% percent decrease from the third quarter. Not unlike other banks, we too have felt the impact of the inverted yield curve with short term rates rising…

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 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 have 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 to deposit ratio of 83% demonstrates our franchise value along with growing core deposit 6% in 2022. Also, as we mentioned, our efficiency ratio is within our normal operating range of 56% and from our risk perspective, we're also well positioned. Tangible common equity ratio is 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.

[Operator Instructions] Our first question comes from the line of Steve Moss with Raymond James.

Maybe just start off on the margin here. Just kind of curious how you guys are thinking about, any updated thoughts you may have around deposit pricing as we go through the cycle here. And 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 think in terms of the deposit side, we're expecting, particularly in the first quarter, Fed continues to hike, we'll continue to see the deposit beta probably in the 30%, 35% range. Let's call it close to where we were, maybe slightly up. I think the other factor there, certainly on the deposit side is just the competition. And I think both myself and Greg alluded to just in our comments, we are certainly seeing that pick up. We have seen that over the last quarter as local market competitors and others are certainly looking for liquidity in the current market. But overall from a margin perspective, we are and I think I mentioned in my comments, expecting that to see some compression likely for the first quarter. Overall, we're thinking -- and I would say it's heavily caveated by a lot of factors that we all know in terms of what the Fed actually does as well some of the market competition, but also some of the strategies that we put into place. But all in, we're thinking that that margin would probably be around 265, plus or minus 2 to 3 basis points on either end. From there, I would just, again, probably not in a spot to give forward guidance after first quarter just all the factors at play here. But thinking that from there with normal seasonal inflows starting to come in as well as the hopes that the Fed starts to stabilize and slowdown on rates and loans continuing to reprice. And as Greg mentioned, too, is just a strong loan pipelines that we have in terms of rates, we anticipate that margin from there would start to rebound.

And maybe just in terms of the loan demand you guys are seeing these days. Just curious on how you're thinking about what parts of the portfolio you expect to drive growth in 2023?

What I'd say is that we're seeing a shift really. Previously, obviously, residential is driving it. That market is lower, partly because of, call it, just the overall real estate market. But our pricing, we're pricing higher than competitors. So we're seeing and experiencing really the shift over the commercial and small business side. And within the commercial, that's where our balance sheet size for the markets that we're in, our ability to structure helps us and helps justify a higher rate. And on the small business side, really, that's been a great start up product that is ramping up for us and they tend to run higher balances. And that leverages the reengineering that we did and new software that we have especially on the small business side. So now we can instant decision, depending on collateral close within a few days, which is really serving the customer need and helps us command a higher yield on that.

Our next question comes from the line of Damon DelMonte with KBW.

So I just wanted to get a little perspective here on the outlook for provision. You noted that at 92 basis points, you feel pretty good about that reserve level. It's over 7 times covering NPLs, I believe. So with the expectation of loan growth slowing, and the health of the portfolio remaining intact as of today. Would you expect a similar level of provisioning like we saw in the fourth quarter as we start off in '23 for at least the first half of the year?

So I guess in terms of -- maybe the way I would talk about it is, so we're at 92 basis points right now, we feel pretty good about that. Again, I think in part, it's going to depend on the economics and the economic outlook if that should change. But assuming we stand and kind of hold to where we are and as we mentioned, no signs of credit issues ahead. But assuming everything holds constant, I would say that 92, 95, somewhere in there, we could continue to hover.

And then could you just go back to the two steps you took to try to preserve the margin here? The first, you mentioned the little repositioning with the $28 million. You said you sold $28 million of securities and then you reinvested those proceeds. Is that correct?

That's right, yes. So we essentially -- I think those yields on those securities were around [260], and then we essentially purchased another $28 million with around a 6% yield.

And what kind of securities were those?

It was a mix of corporates and MBS, primarily, I believe, corporate.

And then the two swap agreements, could you just go over those specifics again?

So we did $200 million notional in total, it was $150 million three year, I always have to think about this, get this right, received pay fixed, receive variable. I think the pay amount on that was -- the payout on that was $371 million and then we did another $50 million for a five year swap and the pay amount on that was $334 million, and both of those are receiving Fed fund OIS.

And then I guess on the expense outlook, you said 2% to 3% from the fourth quarter into the first. Overall, do you expect 2% to 3% for the entire year or is that just like from the first quarter and then another lift after that?

So that guidance was generally for the first quarter. I listed a couple of factors in there in the FDIC fees and just normal merit. So call it, I would say that's about $27.5 million, so about half million. The one item I would just highlight is, historically, we've continued to manage within our efficiency ratio range of call it, 55% to 58%, and we'll certainly do that throughout the year and that's our expectation.

Our next question comes from the line of Matthew Breese with Stephens Inc.

Just thinking about the overall NIM forecast. Within that, I was curious where do you have demand deposits going down to in this quarter, end of the year at 24%. Pre-COVID, think it was at 16%. If you go further back, Camden was operating in kind of a 10% to 15% range pre great financial crisis. So just curious where do you think this figure goes during this tightening cycle, and what structurally keeps you around your estimates?

So we're trying to pull that number, Matt. But I would just comment that we have seen some pressure in terms of some of the bigger commercial -- sophisticated commercial customers looking for interest. So we've seen some mix shift, if you will, from DDA over to now or interest checking. So we've seen some of that shift occur. I think that's become more common. Certainly, we're managing that internally, having the proactive conversations with our -- primarily our business customers. But certainly, there is more pressure on that.

As we think about…

I was going to say, we can connect to offline and give you some thoughts on that, the DDA specifically.

Do you expect deposit growth in '23? If so, what areas? And maybe you could comment on further reliance on broker deposits?

So 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 more cost effective, particularly as we anticipate Fed funds is going to continue to move higher. So we are looking at that. We'll likely look at a laddered CD like we just spoke about kind of stretching out over 12 months there. And I apologize, what was the first part of your question there?

What kind of deposit growth, the outlook for the year?

I believe it was mid single digits from a deposit growth perspective.

And I would say, strategically, Matt, to keep in mind a couple of things is that we still have a very strong retail franchise, and that gets back into my comment of focusing on relationships. The team has done a great job. Although deposits have always been a focus of ours, as you know, through incentives, through internal promotions, external promotions, strengthening that at this time to build the relationship side. The other thing within our deposit focus is what has ramped up more over the past few years is on the treasury management side that we have, and Mike alluded to some of the big commercial depositors that we have. So that's another lever set of tools that we have. We have a great team within that, that we are very much focused on deposit growth. And with that said, call it, from a sales management perspective, that's where we're focused on. And more we can drive down that rate or stabilize that rate, it just gives us more flexibility on the lending side. With all of that said, I'll note that in our markets, we are seeing, I think I even said hypercompetitive markets on the deposit side and the loan side. But that's our focus and we'll do it prudently.

And then just assisting with loan growth for the year, I’d assume we continue to see securities growth. Michael, you had 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 funding or call it, overnight funding borrowings or into fund loan growth realistically, just based on current yields, but something we'll continue to monitor throughout the year.

Last one 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?

That's just our annual renewal to make sure that we have that capability on the shelf to use. Right now, as always, we kind of balance out capital needs as well as use of capital. I believe I feel our position right now is we want to make sure that we're focused on building capital, especially on the TCE. That's more, call it, from a of what if economic potential factor recession coming up, I'd rather be building capital than deploying it right now. So I wouldn't put a lot on that lever for us.

There are no further questions leading at this time [Operator Instructions]. 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. Thank you. I want to just thank, 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 will have the feeling that we're as always focused on long term growth, long term franchise value. And we appreciate your interest and wish you a good day. Goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.