Camden National Corporation (CAC) Earnings Call Transcript

Good day, and welcome to Camden National Corporation's conference call. My name is Lydia, and I will be your operator for today's call. [Operator Instructions] I'll now turn the call over to Renée Smyth, Executive Vice President, Chief Experience and Marketing Officer.

Thank you. Good afternoon, and welcome to Camden National Corporation's and Northway Financial's Merger Conference Call. Joining us this afternoon are members of Camden National Corporation's executive team, Simon Griffiths, President and CEO; Mike Archer, Executive Vice President and Chief Financial Officer; and Ryan Smith, Executive Vice President and Chief Credit Officer. Please note that today's presentation contains forward-looking statements, and actual results could differ materially from what is discussed on today's call. Cautionary language regarding these forward-looking statements is contained in our press release and on Pages 2 and 3 of our presentation issued this morning and in other reports we file with the SEC. All of these materials and public findings are available on our Investor Relations website at camdennational.bank. In addition, today's presentation includes a discussion of non-GAAP financial measures. Any references to non-GAAP financial measures are intended to provide meaningful insights. Certain non-GAAP measures are reconciled with GAAP in our presentation. Other non-GAAP measures are forward-looking and reconciliations are not provided because the company is unable to do so without reasonable effort due to the inherent difficulty of predicting the current and financial impact of future events. I am pleased to introduce Camden National Corporation's host, Simon Griffiths.

Thank you, Renee, and good afternoon, everyone. We appreciate you joining our call today on such short notice. I will provide some brief remarks on the strategic compelling opportunity Camden National's merger with Northway Financial provides both organizations, as well as an overview of the transaction details outlined in this morning's press release. I will then turn it over to Mike to discuss our due diligence efforts and key financial highlights of the merger. As Renee noted, we're also joined today by Ryan Smith, our Chief Credit Officer, as he is and his team were an integral part of the due diligence efforts and are here to help support any specific credit-related questions during the Q&A session after our prepared remarks. I want to start by saying that this merger represents a rare opportunity to combine 2 high-quality and culturally-aligned franchises to build a premier Northern New England bank. Over the past several years, our neighboring banking organizations have admired each other and developed a relationship through several meaningful discussions. Last year, I had the pleasure of meeting Bill Woodward, Chief Executive Officer and Chairman of Northway Financial. Bill and the Northway team have built a remarkable best-in-class $1 billion deposit franchise, almost $1 billion in loans and $1.3 billion in assets, complemented by strong credit and long-lasting customer relationships. As we got to know each other through several very constructive dialogues, it became quite evident that we are 2 strong New England franchises serving the vibrant communities of New Hampshire and Maine. As discussions progressed, we became even more confident that combining our 2 well-regarded organizations would be highly beneficial for our respective shareholders, customers, employees and communities. With increased scale and resources, we'll be able to provide expanded opportunities for employees and serve customers through an even more robust suite of solutions, while strengthening our ongoing investments in our communities. Our initial discussions centered around our complementary cultures, our matching highly-regarded strong credit and risk profiles, and adjacent geographies. During our discussions, extensive due diligence efforts and management conversations, we confirmed that Camden National and Northway have many like-minding operating philosophies, strategies and core values. Notably, we both share the same Jack Henry core operating system, similar loan portfolio mixes without any material credit concentrations, and strong core deposit franchises. We concluded that through this combination, we believe we can build on each of our strong foundations to create an enhanced, more competitive financial institution with a sincere focus on delivering an outstanding customer experience. Together, this will allow us to build upon Northway's historic franchise and leverage the brand and customer relationships Camden National has been building across New Hampshire through our commercial LPO strategy for many years. As I've mentioned on previous earnings calls, Camden National has made several strategic investments to accelerate its technology and digital road map. We have made extensive advancements in digital conveniences, process automation, data mining and risk management tools. This merger provides an opportunity to leverage our technology and capabilities across an expanded customer base in a changing and dynamic market environment where investments are crucial to accelerating growth. We see significant potential benefits for all our customers. The combination will provide greater access to capital through the combined company's larger balance sheet and access to more banking offices and products. Additionally, customers will benefit from Camden National's meaningful and modernized wealth products and services. There will be no branch closures with the exception of the consolidation of our 2 Portsmouth locations, which actually occupy the same building in an office park. All other Northway branch locations will remain, operating under the Camden National bank name, minimizing customer disruption. We are committed to the success and economic growth of our combined communities, and I am pleased that both banks have an outstanding CRA rating. We expect this combination will have an immediate positive financial impact on our shareholders. Through this merger, we expect to significantly enhance our profitability profile, propelling our projected return on average assets above 1% in 2025, generating strong GAAP earnings per share accretion of 20% in 2025, and producing top-quartile financial returns in 2025 compared to our peers based on current analyst estimates. Adjusting for AOCI and interest rate marks on a non-GAAP basis, the transaction is immediately accretive to tangible book value with no earn-back period, with cash EPS accretion for 2025 of 5% and 2026 of 12%, highlighting the real economic benefit of this transaction. Slide 6 highlights the strategic opportunity of the merger and positions Camden National with the #1 deposit market share of all community banks in Maine and New Hampshire combined. The combination provides Camden National with immediate presence in higher growth markets in a contiguous state with the strength of the franchise and brand Northway has built over many years. As shown on Slide 7, the combination demonstrates the opportunity to bolster our New Hampshire presence, including in the growing Hillsborough and Rockingham communities. Both Southern New Hampshire and Maine have benefited from population and large corporation growth, as individuals and businesses capitalize on the lower cost of living, favorable business and operating environments, and easy access to the beautiful shoreline and mountains. With our combined entities, we'll have branch coverage within a 15-mile radius of 12 of the top 20 New Hampshire household income towns and cities. With an expanded branch and brand presence, more bankers and a larger balance sheet in New Hampshire, we are primed to capture more opportunities and accelerate our previously discussed strategic growth initiatives. Slide 8 demonstrates the strength in Northway's deposit base. They have an enviable position of a strong customer base with best-in-class deposit ranking. Our strategic investments in an online account platform, scheduled to go live in Q1 2025, will provide additional opportunities to build and deepen relationships while maintaining pricing discipline. Slides 9 and 10 provide an overview of deposits and loans as a combined organization and depict the striking similarities of our 2 organizations within our core business. As of June 30, 2024, our core deposits represented 86% of our total deposit base. And on a pro forma combined basis, this would continue, representing 85% of our total deposit base and maintaining a loan-to-deposit ratio of 92%. The same story holds true for the loan portfolio. Camden National and Northway have very similar loan portfolios with strong asset quality by all measures. A strong credit culture is at the heart of each organization and has served each organization well. On a combined pro forma basis, total loans as of June 30, 2024 were $5.1 billion. Both Camden National and Northway have well-diversified loan portfolios without any significant credit concentrations. I'm excited about this incredible opportunity for our employees, customers, communities and shareholders. Camden National's merger with Northway Financial provides immediate, meaningful scale and bolsters our growth initiatives in New Hampshire and deepens our support of economic vitality within our communities. Our management team has deep acquisition experience, strong leadership and the depth to execute a seamless transaction. I'm confident in our ability to merge these 2 companies and build a premier Northern New England Bank. I will now turn it over to Mike to provide an overview of our diligence efforts and to review the financial highlights of the deal.

Thank you, Simon, and good afternoon, everyone. Slide 11 of the investor presentation provides an overview of the significant diligence work our teams performed over the past few months. Through collaborative efforts and conversations between the teams, we were able to review all of the key areas spanning the organization. I would highlight as part of our efforts, we completed a deep dive into Northways credit file with the support of an independent third party. In total, we reviewed 65% of the commercial portfolio, all criticized and classified loans, and 89% of their Office CRE portfolio. Our credit review and discussions with our management team validated the strength of Northway's asset quality and strength of its credit culture as can be seen in its performance over the most recent cycle. A summary of key asset quality metrics for Northway can be seen on Slide 12. Now we'll transition to the structure and overall financial highlights of the transaction, which can be seen on Slide 13. This is 100% all-stock deal with a fixed exchange ratio of 0.83 shares of Camden National common stock for each share of Northway Financial common stock. In total, Camden National issued approximately 2.3 million shares of its common stock, and on a pro forma basis, current Camden National shareholders will own approximately 86% and Northway Financial shareholders will own approximately 14% of the combined entity. Based on Camden National's closing share price of $37.90 on September 9, 2024, the implied purchase price is $86.6 million or 139% of Northway Financial's tangible book value and represented a 2.6% core deposit premium. Other transaction details include welcoming one Northway Financial Board member to our Board of Directors at closing, which we anticipate occurring in the first quarter of 2025. Included within our combined pro forma financial model are several key assumptions as seen on Slide 14, including interest rate marks of 8.6% of total loans, credit marks of 1.1% of total loans, creation of core deposit intangible assets of 4% of core deposits, estimated onetime transaction costs of $13.5 million and estimated cost synergies of 35%, of which 75% are estimated to be realized in 2025 and 100% in 2026. Within our pro forma financial model, we have not incorporated any revenue synergies. That said, we believe there is great opportunity for additional fee income as a combined company and to deepen Northway's commercial relationships with a stronger balance sheet. Through our financial modeling, we estimate GAAP EPS accretion of 20% in 2025 as a combined company over Camden National's current consensus analyst estimates. For 2026, we estimate GAAP EPS accretion of 33% as a combined company over current consensus analyst estimates. These details can be seen on Slide 15. At closing, the deal is estimated to be 16% dilutive to Camden National's tangible book value due to the level of interest rate marks on Northway's loan portfolio, and the estimated earn-back period is 3.3 years. Adjusting for AOCI and interest rate marks on a non-GAAP basis, the transaction is projected to be immediately accretive to tangible book value per share with no earn-back period, with cash EPS accretion for 2025 of 5% and 2026 of 12%, underlining the significant financial benefits of this transaction. As a combined organization, we believe we are positioned for significant financial upside. In 2025, we estimate our return on average assets, return on average equity and efficiency ratio all reached top quartile performance compared to peers, as shown on Slide 16. Based on Camden National's closing share price yesterday, our implied price to earnings multiple on a combined pro forma basis for 2025 is 9x, which represents a meaningful discount to peers, who currently trade at 10.6x on a median basis while the top quartile trade at 12.4x. This concludes our comments. We'll now open up the call for questions.

[Operator Instructions] Our first question today comes from Steve Moss with Raymond James.

Congratulations on the transaction, guys. I wanted to start here by asking about with the Northway franchise, where you guys want to make investments in there? Are there areas that you want to enhance or maybe expand, whether it's on the commercial lending side or other things?

Thanks, Steve. I mean just start with the just fundamentals of the strength of their franchise, Steve, if I may. I think there's just a real opportunity for us and it just creates a tremendous market opportunity, almost double the market size for us. We're going to have a much increased size of balance sheet, which is going to give us an opportunity to really deepen relationships with some of our existing clients and new clients, and of course, the clients of Northway. And then you start to sort of get into your question, Steve, I think there's tremendous opportunities from a product perspective. I think we've got a really nice wealth business here. That's obviously something that we can build and add into their business. We also see opportunities on the retail side, particularly as we start to think about some of the technology that we've talked about in some of our earnings calls previously. So you put together kind of the package of the existing franchise that Bill and team have built out, those foundations, and then add into that some of the strengths that we have in the lending space also on the technology side and the customer -- focus on the customer, I think it adds up to a very positive combination.

Got it. Appreciate that, Simon. And then just curious here, pro forma balance sheet is still pretty similar to where you're at. Are there any thoughts here as you make investments and expand the franchise about remixing any part of the balance sheet? Or just kind of curious if this caused you to make some changes to your mix?

Yes, I can take that one, Steve. Certainly, I would tell you, nothing is baked into our models at this point. I think as we move closer to a legal day 1, that's certainly something that we would evaluate further and kind of consider their opportunities to optimize, potentially balance sheet restructures or other areas. Of course, all taking that in conjunction with just our over -- overall, excuse me, ALM position and thinking about liquidity. So I think that's work to be certainly done and certainly something we'll evaluate in due course.

Okay. I appreciate that. And then one more thing, just on the loan side, just curious about Northway's average commercial and commercial real estate loan size? And what is the pro forma commercial real estate concentration here?

So generally speaking, what I would say is their average size, I don't have it in front of me right now, Steve, but certainly smaller than ours. We can try to get that here. From a concentration perspective, right around [ 630 ], we were around [ 245 ] and they were slightly higher. I think as we think about on a pre-concentration perspective, in particular, we don't have the number in front of us, but I think it was right around [ 270 ], still providing lots of ample room there. And sorry, I just got the number here, Steve. The average size is $965,000.

Next question comes from Damon Delmonte with KBW.

Congrats on the transaction. Just kind of curious if you could give a little color on the deposit portfolio that Northway brings over. As noted in the release, they have a very low cost of deposits. I'm just kind of wondering what gave them a competitive advantage across their footprint to have such a favorable level.

Damon, I appreciate the question, and thanks for joining today. Yes, this is a real credit to Bill and team. They've built certainly one of the preeminent deposit franchises in the Northeast and certainly a leading beta through the cycle, which I think is really a reflection, honestly, of just the focus they have on relationship banking, but tremendous focus on -- and we've seen it through the loan book, just to focus on relationship, focus on really strong customer relationships, and they really are embedded in the community. I think that's a real attribute to Bill and team have done a really nice job there. And I think this gives us a real platform, Damon, in terms of our own growth. We are proud of our deposit franchise and believe we have certainly a great franchise and a great opportunity to lend. And this is going to be, I think, one of the real strengths of this transaction, this combination and partnership that we're going to have over the -- hopefully, have over the coming months.

Got you. Great. And then kind of along the lines of growth opportunities, when you look at the combined bank, how do you kind of see the combined company's targeted loan growth as we go through '25, but more so into '26. Do you think because of the opportunities in maybe some of the stronger economic markets in New Hampshire, you could start to see something in the kind of upper single-digit level? Or do you think it's still like a mid-single-digit growth outlook?