Earnings Call Transcript - CAC Q1 2025

Operator, Operator

Good day. And welcome to Camden National Corporation’s First Quarter 2025 Earnings Conference Call. My name is Elliot, and I’ll be your operator for today’s call. All participants will be in listen-only mode during today’s presentation. Following the presentation, we’ll conduct a question-and-answer session. I’ll now turn the call over to Renée Smyth, Executive Vice President, Chief Experience and Marketing Officer.

Renée Smyth, EVP, Chief Experience and Marketing Officer

Thank you. Good afternoon. And welcome to Camden National Corporation’s conference call for the first quarter of 2025. Joining us this afternoon are members of Camden National Corporation’s executive team, Simon Griffiths, President and Chief Executive Officer; and Mike Archer, Executive Vice President and Chief Financial 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 first quarter 2025 earnings release issued this morning and in other reports we filed with the SEC. All of these materials and public filings are available on our Investor Relations website at camdennational.bank. Camden National Corporation trades on the NASDAQ under the symbol CAC. In addition, today’s presentation includes a discussion of non-GAAP financial measures and any references to non-GAAP financial measures are intended to provide meaningful insights and are reconciled with GAAP in our earnings release, which is also available on our Investor Relations website. I am pleased to introduce our host, President and Chief Executive Officer, Simon Griffiths.

Simon Griffiths, CEO

Thank you, Renée, and good afternoon, everyone. We appreciate you joining our call today. And thank you for your patience and flexibility with today’s earnings call. When you cut through it, we had a very solid quarter financially, highlighted by core net income of $16 million, led by strong fundamentals and continued momentum within our core operations. In a few minutes, we will discuss our financial results in more detail, and Mike will provide details of our purchase accounting before we turn to Q&A. Before we dive into our numbers, I want to take a moment to reflect on our historic accomplishments this quarter. On January 2nd, we successfully closed our merger with Northway Financial and welcomed over 28,000 new customers into our network and over 100 new team members to our franchise. 74 days later, we successfully completed the full systems integration and we are now operating on one platform. As a quarter ends, Camden National Bank grew to 73 branches across Maine and New Hampshire and reached $7 billion in assets. I’m incredibly proud of the many team members across both companies who worked tirelessly to make this a smooth and successful transition. Their dedication, obsession with the customer experience, and focus on the cultural alignment are commendable. I’m pleased to report that we are on track to achieve our previously reported annual cost-saving goal of 35% of Northway’s operating expenses, and we expect to realize 75% of this goal during 2025. We anticipate cost savings to begin materializing in the second quarter of 2025. We are also on target to likely come in under our pre-tax merger cost target of $13.5 million. We have a well-established history of prudently managing expenses and will continue to do so as a combined company to drive shareholder value. We are confident that meaningful revenue synergies will emerge over time driven by expanded capabilities and customer reach. While this growth will build gradually, we’re excited about the long-term opportunities it will unlock, and we are well underway in benefiting from the deal’s strategic and financial merits. Earlier this morning we reported GAAP net income of $7.3 million or $0.43 of diluted earnings per share for the first quarter of 2025. Excluding merger-related costs and other non-recurring items, non-GAAP core net income increased 6% over the fourth quarter of 2024, while non-GAAP core diluted EPS decreased 8% between periods. We are very pleased with our first quarter performance and believe we are well prepared to face current market uncertainty. Our franchise’s strength and soundness can be seen in our reported net interest margin, which reached 3.04% for the first quarter and benefited from the impact of purchase accounting. However, more importantly, we saw our core net interest margin expand another 11 basis points from last quarter to 2.68% for the first quarter of 2025. When we combine our core net interest margin momentum with the benefit of cost savings from the acquisition that will begin to materialize next quarter, we believe we are well positioned for solid core earnings growth moving forward. Asset quality and a well-diversified portfolio remain core strengths of our organization. As of March 2025, we continue to have strong confidence in the overall health of our loan portfolio. Our credit and special assets teams maintain active oversight and have not observed any material signs of credit deterioration across sectors or industries. Thanks to the proactive and disciplined approach of our experienced lending and credit teams, we are well positioned in all economic environments. We are able to identify and address any potential risks early and head-on, an approach that has consistently protected both the bank and our customers. The increase in our allowance to loan ratio of 9 basis points to 0.96% was not a reflection of growing concern within our credit portfolio but rather a prudent move to add reserves due to the macro environment and level of uncertainty that persisted at quarter end. We believe this positions us well regardless of how the macro factors play out. Our growing commercial team remains diligent and benefits from deep and solid relationships. Recently, we’ve seen momentum in our pipeline with solid activity throughout our markets. However, we remain selective and measured. Our mortgage pipeline is strong while inventory remains low, echoing national trends. From a business perspective, the combined impacts of tariffs and other potential federal government actions have increased economic uncertainty. While it is too early to tell, most of our clients have not seen an immediate impact, while others are taking a wait-and-see approach which may temper our loan growth in the short term. We continue to invest in and monetize our technology investments. In January, we fully launched our online consumer and business account opening platform. Through strategic marketing throughout the high-growth New Hampshire and Maine markets, we have successfully welcomed new customers. A human-backed approach will allow us to penetrate these markets further and grow our customer relationships. Looking ahead, we continue to celebrate Camden National Bank’s 150th anniversary this year. We remain focused on delivering our long-term strategy of deepening customer relationships through advice-based conversations and bolstering our New Hampshire presence in our growing contiguous market. Our current capital position and strong capital generation capability give us confidence in our ability to perform across a range of economic scenarios. The expansion of our footprint enhances access to a stable low-cost core deposit base, further strengthening our balance sheet. At the same time, our business development teams are actively pursuing opportunities to leverage our scale technology, expanded advisory capabilities, and larger balance sheets to drive growth across a broader customer base. We are well positioned to generate consistent results and support our clients regardless of the broader market or economic conditions. We remain committed to our longstanding strategic pillars of soundness, profitability, and growth, which drive sustainable long-term performance. I will now turn it over to Mike to provide more details about our first quarter financial results.

Mike Archer, CFO

Thank you, Simon, and good afternoon, everyone. With the Northway acquisition closing on January 2nd, our reported first quarter financial results include the combined outcomes of the two franchises. Since the integration took place in mid-March 2025, our first quarter results mainly reflect our operation of two franchises, and we anticipate that cost synergies will begin to appear in the second quarter. Our GAAP earnings for the first quarter of 2025 include the impact of purchase accounting for the Northway acquisition, which we will discuss in detail shortly. For the first quarter of 2025, we reported GAAP net income of $7.3 million and GAAP diluted EPS of $0.43. Our reported GAAP earnings included a pre-tax charge of $7.5 million for acquisition-related costs, a pre-tax charge of $6.5 million for one-time loan loss provisions related to the acquired loan portfolio and unfunded commitments, and a one-time tax benefit of $2.4 million from the revaluation of Camden’s legacy deferred tax assets. Excluding the effects of these items, net of tax, the company reported adjusted net income of $16 million and adjusted diluted EPS of $0.95. Compared to the previous quarter, adjusted net income increased by nearly $1 million or 6%, while adjusted diluted EPS decreased by $0.08 or 8%, reflecting the impact of nearly 2.3 million shares issued for the Northway acquisition. Overall, we had a strong start to the year and remain on track to meet our financial commitments, which include robust EPS growth and profitability moving forward. We recorded a net interest margin of 3.04% for the first quarter, an increase of 47 basis points from the previous quarter. This quarter's net interest income included $5 million of net accretion income from purchase accounting, contributing 36 basis points to net interest margin expansion quarter-over-quarter. On Page 3 of the earnings supplement we filed this morning with our earnings release, we outlined the impact of purchase accounting on net interest income for the first quarter. Adjusted for this net accretion income, our core net interest margin expanded by 11 basis points on a linked-quarter basis to 2.68% for the first quarter, continuing the positive momentum we’ve seen over the past year. This increase in our core net interest margin reflects our success in reducing funding costs as the Fed lowered interest rates in the second half of 2024. In the first quarter of 2025, we benefited fully from those actions in our funding costs. As we combine Camden and Northway’s strong low-cost deposit bases, we see the full strength of our funding base with a total funding cost of 1.94% for the first quarter of 2025. While the Fed’s future rate path is less certain, we are well-positioned regarding our interest rate risk as a combined franchise and expect to continue to take advantage of future Fed rate cuts if and when they happen. Our asset quality remains a strong point for Camden. Camden and Northway share very similar credit cultures with minimal historical charge-offs. On March 31, 2025, non-performing loans constituted just 15 basis points of total loans, and delinquent loans were merely 7 basis points of total loans. For the first quarter of 2025, net charge-offs were 8 basis points of average loans on an annualized basis. Our reported provision expense for the first quarter of 2025 amounted to $9.4 million. We categorized 88% of Northway’s acquired loan portfolio as non-purchase credit deteriorated, showcasing the quality of the acquired loan portfolio. The remaining acquired loans were designated as purchase credit deteriorated. We needed to set aside a reserve on non-PCD loans through provision expense on the acquisition date, which resulted in a one-time provision expense charge of $6.3 million. Furthermore, as we concluded the quarter, we raised our loan loss reserves by $2.6 million to account for increased macroeconomic risks. On March 31, 2025, our loan loss reserve coverage ratio stood at 96 basis points, up from 87 basis points at year-end. At this level, our loan loss reserve represents 6.4 times our non-performing loans as of March 31. Details regarding our allowance changes through the quarter can be found on Page 5 of the earnings supplement. Non-interest income for the first quarter of 2025 was $11.2 million, reflecting an 8% decline on a linked-quarter basis due to timing and seasonality within our fee income streams. As we move past the winter months and integrate Northway’s customers into our offerings, we expect non-interest income to grow throughout the year, as it historically has for us. Non-interest expenses for the first quarter of 2025 totaled $44.5 million, which included $7.5 million of acquisition-related costs and core deposit and tangible amortization expense of $1.5 million. Excluding acquisition-related costs and amortization expense, total operating expenses were $35.4 million for the first quarter, compared to $27.8 million for the fourth quarter of 2024. As mentioned earlier, we anticipate cost savings to pick up in the second quarter and continue throughout the year. We reported an income tax benefit of $1.2 million for the first quarter of 2025. With the Northway acquisition, our income allocation across states has changed, leading to a revaluation of Camden’s legacy deferred tax assets, which resulted in a one-time tax benefit of $2.4 million during the quarter. We estimate our current effective tax rate to be 20.6% and expect to move closer to that in the next quarter. Now, turning to the balance sheet, we will begin with an update on purchase accounting for the Northway acquisition. In total, we issued approximately 2.3 million shares for Northway, resulting in a purchase price of $96.5 million. More details can be found on Pages 2 and 4 of the earnings supplement. As of March 31, loans totaled $4.9 billion, which includes $775.7 million of acquired Northway loans, net of the fair value mark of $96.7 million at the acquisition date. Organic loan balances remained flat during the first quarter, which we expected due to the seasonal nature of our markets. Our loan pipelines remain healthy and have been building recently. Deposits reached $5.6 billion on March 31, 2025, including $971.7 million of acquired Northway deposits, net of the fair value mark as of the acquisition date. Similar to loans, organic deposit balances were flat during the first quarter. Overall, we were satisfied with the stability of our balances in the first quarter, given the seasonality in our markets and the anticipated decline of $62 million in temporary deposits from the fourth quarter. We continue to monitor Northway’s legacy customer base for attrition, and so far, we are very pleased with the results. Our capital ratios as of March 31 are strong after completing the acquisition in the first quarter. Our book and regulatory capital ratios either met or exceeded our initial projections at the time of the announcement, largely due to our strong performance in the second half of 2024. We expect to rebuild our capital at an accelerated pace because of the combined franchise's earnings potential moving forward. Lastly, I want to mention that we filed a shelf registration statement in March for capital planning purposes. This concludes our comments, and we will now open the call for questions.

Operator, Operator

Thank you. First question comes from Steve Moss with Raymond James. Your line is open. Please go ahead.

Steve Moss, Analyst

Good afternoon.

Simon Griffiths, CEO

Hi, Steve.

Steve Moss, Analyst

Maybe, Mike, starting off with you on the margin here, just curious as to how you’re thinking about core margin expectations for the second quarter, if we could continue to see a little bit more of a bump-up in that margin here?

Mike Archer, CFO

Yeah. Great question, Steve. Yeah. That’s our thought. We do think we’ll continue to see a level of just core net interest margin expansion from here. We’re kind of pegging it in maybe additional 2 basis points to 5 basis points, so net 270 basis points, 275 basis points range on a core basis.

Steve Moss, Analyst

Okay. Great. And then in terms of the purchase accounting accretion, you ended up with bigger marks here. Just curious if there’s a little bit more of a step-up from the call $5.1-ish million of accretion we saw this quarter?

Mike Archer, CFO

Yeah. That’s another great question, Steve. I mean, I think the reality is that that $5 million on a net basis feels like a good midpoint for us, certainly if there’s potential for things to slow. But overall, when we looked at what went through this quarter, $5 million feels like a pretty good number. Certainly, if we see acceleration of the yield curve from the longer end kind of come down, that could certainly accelerate prepays, as you know, and get some additional benefit there. But I think all intents and purposes, $5 million is a pretty good solid number for us.

Steve Moss, Analyst

Okay. Great. You mentioned that you're well-positioned for rate cuts. I'm curious about your projections regarding the benefits from a 25-basis-point Fed rate cut going forward. Are you currently more sensitive to liabilities or experiencing a more neutral stance?

Simon Griffiths, CEO

Hey. Steve, thanks for the question. Yeah. We’re a little bit liability-sensitive, but we certainly predict forecasts, we certainly see some strength on a 0.25-point rate cut and we forecast around a $1.25 million for a 0.25-point rate cut as a benefit. So, that certainly would be accretive to us going forward in addition to the underlying core momentum that we have. I think that’s some part of the story, and I’ll just expand that. I think on the expense side, we talked in the opening remarks about the strength of the expense discipline that the management team has and the philosophy we’ve shown, and feel confident around the 35% expense takeout, which starts obviously in the second quarter. So, I think you put those pieces together. I think the outlook for the next nine months through the end of the year is quite positive. Obviously, a lot going on right now in the macroeconomic environment, but I think we’re very well set up, very stable from a credit perspective as well, and I think those pieces are giving a lot of confidence to the management team.

Steve Moss, Analyst

Right. And Simon, I hear you in terms of the crosswinds with regard to the economy, your pipeline headed the right way is definitely encouraging, especially the activity continuing here now. Just kind of curious, as you think about loan growth here, maybe where you’ve seen the most, the best activity on the commercial side and is it still kind of like low single-digit type of loan growth for the current year?

Simon Griffiths, CEO

We are still anticipating low single-digit loan growth. On the residential side, we are observing positive momentum with a total pipeline of $83 million. The commercial side has also been strong, currently at a $97 million pipeline, which is one of the best figures I've seen during my time here. We're experiencing good momentum in home equity, business banking, and the commercial sector is performing well, creating a balanced outlook across different regions. We're particularly seeing growth in New Hampshire and Southern New England, and the additional scale from the team transitioning from Northway is enhancing our opportunities, leading to many exciting prospects for the team.

Steve Moss, Analyst

Okay. Great. Really appreciate the color there. I’ll step back in the queue and let others to ask questions here. Thanks.

Simon Griffiths, CEO

Thanks, Steve.

Operator, Operator

Our next question comes from Matthew Breese with Stephens. Your line is open. Please go ahead.

Matthew Breese, Analyst

Hey. Good afternoon. I was hoping to talk…

Simon Griffiths, CEO

Hey, Matt.

Matthew Breese, Analyst

... a little bit about the other areas of the P&L, maybe starting with fee income. Standalone Camden was coming in the fourth quarter at around $12 million of fees. Northway was a little over a $1 million. At what point do we get on that kind of $13 million quarterly run rate for fees? And is that a fair estimation?

Mike Archer, CFO

Yeah. I think that’s a good question, Matt. Certainly, I would just maybe just back up a moment. I think in part a little bit of the disconnect maybe being seen is, we had a really strong Camden standalone fourth quarter on the fee income base. Overall, that’s certainly a function of the timing. We had our annual debit card bonus in the fourth quarter. We also benefited as well from some derivative income and some other items that kind of are a little less predictable. But I think as we move forward here, as we think about fee income, I think we’re thinking for this next quarter as we see mortgage banking pick up and to Simon’s comments earlier, we’re seeing the production and the pipelines build there. We are kind of anticipating that we could be in the $12 million, $12.5 million range for the second quarter. And then to your comment, as we make our way to the end of the year, we would definitely, I think in my mind, start approaching that $12.5 million, $13 million from there.

Matthew Breese, Analyst

I appreciate that. I have a similar question regarding expenses. Considering the 35% cost savings along with a bit of inflation, can we assume that on a core basis, we’re looking at approximately $34 million to $35 million in quarterly expenses for the upcoming year? Is that the correct estimate, or are there additional cost savings we haven't discussed in the deal document?

Simon Griffiths, CEO

Yeah. That feels very much in line $34.5 million to $35 million before obviously M&A costs and CDI amortization. But I think that’s certainly a good kind of estimate. I don’t know, Mike, do you have anything to add.

Mike Archer, CFO

I think that in the near term as we move into the second half of 2025, we expect further consolidation to occur. It takes time to wind down systems and manage other expenses behind the scenes. By the second half of the year, we anticipate seeing the full benefits of the cost savings as we approach the fourth quarter and head into 2026. I believe that aiming for around $34 million to $35 million is reasonable for us, and there could be additional opportunities beyond 2025.

Matthew Breese, Analyst

Okay. And then maybe, Simon, I was hoping you could touch just on how overall integration is going. Camden hasn’t done a whole bank deal in some time. How is it going on the employee integration retention front, the client disruption front? And is this something we might see more of, meaning whole bank deals at Camden?

Simon Griffiths, CEO

Thank you for the question. I am very proud of the management team and the collaboration across the organization. The overall conversion process went exceptionally well. We experienced a smooth transition across all areas, including customers, employees, and clients. Employee retention has been particularly strong, which has been exceptional. Client feedback has been very positive, and engagement with our products has been high. In fact, we've received feedback that we've achieved best-in-class early engagement and activation around our online services. Deposits have been strong throughout the quarter, and we've seen very good retention of those deposits. All other indicators have also been positive. Overall, the team did a fantastic job and made a great impression, and I'm very proud of the work we accomplished. Looking ahead, as I mentioned before, we are interested in pursuing additional M&A deals. We are focused on finding the right opportunities that are beneficial for the business, culturally compatible, and preferably in contiguous markets. Those core principles remain integral to our philosophy. I believe everything went very well, and now we can take a moment to breathe and begin activating the two franchises while raising awareness of our product offerings and capabilities. I'm excited about the opportunities this will create.

Matthew Breese, Analyst

Excellent. I appreciate all that. I’ll step back. Thank you.

Simon Griffiths, CEO

Thanks, Matt.

Operator, Operator

We now turn to Damon DelMonte with KBW. Your line is open. Please go ahead.

Damon DelMonte, Analyst

Hey. Good afternoon, guys. Hope everybody’s doing well and thanks for taking my questions. Just a question on the loan growth outlook. I think, Simon, you said you guys are sticking with kind of that low single-digit guide for the year. Does that contemplate any type of run-off from the Northway side? Are there some credits that you guys might want to exit and kind of move on from that could or that maybe are factored in that growth number or they’re not factored in that number?

Simon Griffiths, CEO

Thank you for the question, Damon. We haven't factored that in. As Mike mentioned earlier, we share a similar credit philosophy and have a strong loan portfolio, which gives us confidence. We are aware of the macroeconomic challenges ahead, but we are also noticing some areas of strength. We've been in discussions with many of our clients, and while there are certainly positive aspects, there are also some concerns. However, there is an underlying desire to invest, and we believe that maintaining the low single-digit growth outlook currently seems reasonable. With more market certainty, we could see potential for improvement, but right now, that forecast appears solid.

Damon DelMonte, Analyst

Got it. Okay. And then kind of trying to draw the connection between the growth and the level of provisioning going forward and where your reserve is, you guys called out that you added to the reserve given the economic uncertainty. So, if we don’t see a material change in kind of the way things are progressing right now, should we expect kind of a little bit higher provisioning going forward to keep building that reserve off the 96-basis-point?

Simon Griffiths, CEO

We are currently assessing how things develop over the next 90 days. As always, we are taking a careful approach to provisioning. We have made some adjustments based on the macroeconomic environment and the potential for a recession, which many forecasts suggest has a likelihood of 40% to 70%. This is something we will consider in the second quarter to ensure we are properly reserved for that risk. We've taken some early steps to be conservative and cautious given the current macroeconomic outlook.

Damon DelMonte, Analyst

Got it. Okay. That’s all that I had. Everything else was asked and answered. So, thank you.

Simon Griffiths, CEO

Okay, Damon.

Operator, Operator

As we have no further questions, this concludes our question-and-answer session. I would now like to turn the conference back over to Simon Griffiths for any closing remarks.

Simon Griffiths, CEO

I just want to thank you all for your time today and interest in Camden National Corporation. We wish you all a great rest of your day. Thanks, everyone.

Operator, Operator

Conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.