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Nov. 5, 2020, 1:07 p.m. EST

10-Q: CAMDEN NATIONAL CORP

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The discussions set forth below and in the documents we incorporate by reference herein contain certain statements that may be considered forward-looking statements under the Private Securities Litigation Reform Act of 1995, as amended, including certain plans, exceptions, goals, projections, and statements, which are subject to numerous risks, assumptions, and uncertainties. Forward-looking statements can be identified by the use of the words "believe," "expect," "anticipate," "intend," "estimate," "assume," "plan," "target," or "goal" or future or conditional verbs such as "will," "may," "might," "should," "could" and other expressions which predict or indicate future events or trends and which do not relate to historical matters. Forward-looking statements should not be relied on, because they involve known and unknown risks, uncertainties and other factors, some of which are beyond the control of the Company. These risks, uncertainties and other factors may cause the actual results, performance or achievements of the Company to be materially different from the anticipated future results, performance or achievements expressed or implied by the forward-looking statements.

The following factors, among others, could cause the Company's financial performance to differ materially from the Company's goals, plans, objectives, intentions, expectations and other forward-looking statements:

weakness in the United States economy in general and the regional and local economies within the New England region and Maine, which could result in a deterioration of credit quality, an increase in the allowance for loan losses or a reduced demand for the Company's credit or fee-based products and services;

In addition, statements about the potential effects of the COVID-19 pandemic on the Company's businesses and results of operations and financial conditions may constitute forward-looking statements. Such statements may include, but are not limited to, statements concerning:

the continued effectiveness of our Pandemic Work Group;

These statements are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and the Company.

You should carefully review all of these factors, and be aware that there may be other factors that could cause differences, including the risk factors listed in our Annual Report on Form 10-K for the year ended December 31, 2019, as updated by the Company's quarterly reports on Form 10-Q, including this report, and other filings with the Securities and Exchange Commission. Readers should carefully review the risk factors described therein and should not place undue reliance on our forward-looking statements.

These forward-looking statements were based on information, plans and estimates at the date of this report, and we undertake no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except to the extent required by applicable law or regulation.

NON-GAAP FINANCIAL MEASURES AND RECONCILIATION TO GAAP

In addition to evaluating the Company's results of operations in accordance with GAAP, management supplements this evaluation with an analysis of certain non-GAAP financial measures, such as the return on average tangible equity, efficiency ratio; tax equivalent net interest income; pre-tax, pre-provision earnings; tangible book value per share; tangible common equity ratio; core deposits and average core deposits; and ALL to total loans, excluding SBA PPP loans. These non-GAAP financial measures are utilized for purposes of measuring performance against the Company's peer group and other financial institutions, as well as for analyzing its internal performance. The Company also believes these non-GAAP financial measures help investors better understand the Company's operating performance and trends and allows for better performance comparisons to other banks. In addition, these non-GAAP financial measures remove the impact of unusual items that may obscure trends in the Company's underlying performance. These disclosures should not be viewed as a substitute for GAAP operating results, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other financial institutions.

Return on Average Tangible Equity: Return on average tangible equity is the ratio of (i) net income, adjusted for (a) tax effected amortization of core deposit intangible assets and (b) goodwill impairment, as necessary, to (ii) average shareholders' equity, adjusted for average goodwill and core deposit intangible assets. This adjusted financial ratio reflects a shareholders' return on tangible capital deployed in our business and is a common measure within the financial services industry.







                                                              Three Months Ended                     Nine Months Ended
                                                                 September 30,                         September 30,
        (Dollars in thousands)                              2020               2019               2020               2019
        Net income, as presented                        $  16,775          $  14,488          $  41,208          $  41,965
        Add: amortization of core deposit
        intangible assets, net of tax(1)                      134                140                404                418
        Net income, adjusted for amortization of
        core deposit intangible assets                  $  16,909          $  14,628          $  41,612          $  42,383
        Average equity, as presented                    $ 512,902          $ 468,920          $ 497,564          $ 455,261
        Less: average goodwill and core deposit
        intangible assets                                 (97,794)           (98,484)           (97,967)           (98,659)
        Average tangible equity                         $ 415,108          $ 370,436          $ 399,597          $ 356,602
        Return on average equity                            13.01  %           12.26  %           11.06  %           12.32  %
        Return on average tangible equity                   16.21  %           15.67  %           13.91  %           15.89  %
        


(1) Assumed a 21% tax rate.

Efficiency Ratio. The efficiency ratio represents an approximate measure of the cost required for the Company to generate a dollar of revenue. This is a common measure within the financial services industry and is a key ratio for evaluating Company performance. The efficiency ratio is calculated as the ratio of (i) total non-interest expense, adjusted for certain operating expenses, as necessary, to (ii) net interest income on a tax equivalent basis plus total non-interest income, adjusted for certain other income items, as necessary.







                                                              Three Months Ended                     Nine Months Ended
                                                                 September 30,                         September 30,
        (Dollars in thousands)                              2020               2019               2020               2019
        Non-interest expense, as presented              $  25,221          $  23,748          $  73,291          $  70,489
        Less: legal settlement                             (1,200)                 -             (1,200)                 -
        Adjusted non-interest expense                   $  24,021          $  23,748          $  72,091          $  70,489
        Net interest income, as presented               $  34,481          $  31,923          $ 100,846          $  95,391
        Add: effect of tax-exempt income(1)                   292                264                865                752
        Non-interest income, as presented                  12,696             10,739             36,159             30,165
        Less: net gain on sale of securities                    -                 (1)                 -                (28)
        Adjusted net interest income plus
        non-interest income                             $  47,469          $  42,925          $ 137,870          $ 126,280
        Ratio of non-interest expense to total
        revenues(2)                                         53.46  %           55.67  %           53.50  %           56.14  %
        Efficiency ratio                                    50.60  %           55.32  %           52.29  %           55.82  %
        


(1) Assumed a 21% tax rate.

Net Interest Income (Fully-Taxable Equivalent). Net interest income on a fully-taxable equivalent basis is net interest income plus the taxes that would have been paid had tax-exempt securities been taxable. This number attempts to enhance the comparability of the performance of assets that have different tax liabilities. This is a common measure within the financial services industry and is used within the calculation of net interest margin on a fully-taxable equivalent basis.







                                                                      Three Months Ended                     Nine Months Ended
                                                                        September 30,                          September 30,
        (In thousands)                                             2020                2019               2020               2019
        Net interest income, as presented                      $   34,481          $  31,923          $ 100,846          $  95,391
        Add: effect of tax-exempt income(1)                           292                264                865                752
        Net interest income (fully-taxable equivalent)         $   34,773          $  32,187          $ 101,711          $  96,143
        


(1) Assumed a 21% tax rate.

Pre-tax, Pre-provision Earnings. Pre-tax, pre-provision earnings is a supplemental measure of operating earnings and performance, and is calculated as net income before provision for credit losses and income tax expense. This supplemental measure is becoming more widely used by financial institutions as a measure of financial performance for comparability across financial institutions due to the impact of the COVID-19 pandemic on the provision for credit losses, as well as the differences in accounting methodology for the allowance for credit losses currently across financial institutions as the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provided financial institutions the option to delay adoption of the new accounting methodology, commonly referred to as "CECL," as further described in "- Critical Accounting Policies" and Note 2 of the consolidated financial statements.







                                                         Three Months Ended            Nine Months Ended
                                                           September 30,                 September 30,
              (In thousands)                             2020           2019          2020           2019
              Net income, as presented               $   16,775      $ 14,488      $  41,208      $ 41,965
              Add: provision for credit losses              987           730         12,160         2,647
              Add: income tax expense                     4,194         3,696         10,346        10,455
              Pre-tax, pre-provision earnings        $   21,956      $ 18,914      $  63,714      $ 55,067
        


Allowance for loan losses to total loans, excluding SBA PPP loans. ALL to total loans, excluding SBA PPP loans, is calculated as (i) allowance for loan losses, adjusted for the allowance for loan losses allocated to SBA PPP loans, to (ii) total loans, adjusted to exclude SBA PPP loans. SBA PPP loans were provided to qualifying businesses as part of the federal government stimulus package issued in response to the COVID-19 pandemic. These loans are fully-guaranteed by the SBA, and may even be forgiven in full or in part, and, thus, present little to no credit risk to the Company. By excluding the impact of the SBA PPP loans, the ratio attempts to be more comparable with prior periods and demonstrates the level of loan loss reserves established on the Company's loans originated as part of its core operations and credit underwriting standards.







                                                                             September 30,         December 31,
        (In thousands)                                                           2020                  2019
        Allowance for loan losses, as presented                             $     36,414          $    25,171
        Less: allowance for loan losses on SBA PPP loans                            (115)                   -
        Adjusted allowance for loan losses                                  $     36,299          $    25,171
        Total loans, as presented                                           $  3,274,842          $ 3,095,023
        Less: SBA PPP loans                                                     (223,838)                   -
        Adjusted total loans                                                $  3,051,004          $ 3,095,023
        Allowance for loan losses to total loans                                    1.11  %              0.81  %
        Allowance for loan losses to total loans, excluding SBA PPP
        loans                                                                       1.19  %              0.81  %
        


Tangible Book Value per Share. Tangible book value per share is the ratio of (i) shareholders' equity less goodwill and other intangibles to (ii) total common shares outstanding at period end. Tangible book value per share is a common measure within the financial services industry to assess the value of a company, as it removes goodwill and other intangible assets generated within purchase accounting upon a business combination.

Tangible Common Equity Ratio. Tangible common equity is the ratio of (i) shareholders' equity less goodwill and other intangible assets to (ii) total assets less goodwill and other intangible assets. This ratio is a measure used within the financial services industry to assess whether or not a company is highly leveraged.







        (In thousands, except number of shares, per share data and            September 30,         December 31,
        ratios)                                                                   2020                  2019
        Tangible Book Value Per Share:
        Shareholders' equity, as presented                                   $    517,522          $   473,415
        Less: goodwill and other intangible assets                                (97,711)             (98,222)
        Tangible shareholders' equity                                        $    419,811          $   375,193
        Shares outstanding at period end                                       14,917,344           15,144,719
        Book value per share                                                 $      34.69          $     31.26
        Tangible book value per share                                        $      28.14          $     24.77
        Tangible Common Equity Ratio:
        Total assets                                                         $  5,153,793          $ 4,429,521
        Less: goodwill and other intangible assets                                (97,711)             (98,222)
        Tangible assets                                                      $  5,056,082          $ 4,331,299
        Common equity ratio                                                         10.04  %             10.69  %
        Tangible common equity ratio                                                 8.30  %              8.66  %
        


Core Deposits. Core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and lower cost. The Company calculates core deposits as total deposits (as reported on the consolidated statements of condition) less certificates of deposit and brokered deposits. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.







                                             September 30,       December 31,
        (In thousands)                            2020               2019
        Total deposits                      $    4,224,044      $  3,537,743
        Less: certificates of deposit             (405,434)         (521,752)
        Less: brokered deposits                   (291,616)         (191,005)
        Core deposits                       $    3,526,994      $  2,824,986
        


Average Core Deposits. Average core deposits are used by management to measure the portion of the Company's total deposits that management believes to be more stable and at a lower interest rate cost. The Company calculates average core deposits as total deposits (as disclosed on the Average Balance, Interest and Yield/Rate Analysis tables) less certificates of deposit. Management believes core deposits is a useful measure to assess the Company's deposit base, including its potential volatility.







                                                                Three Months Ended                         Nine Months Ended
                                                                   September 30,                             September 30,
        (In thousands)                                       2020                 2019                 2020                 2019
        Total average deposits                          $ 3,794,434          $ 3,300,599          $ 3,609,355          $ 3,187,023
        Less: average certificates of deposit              (417,788)            (533,110)            (482,076)            (498,059)
        Average core deposits                           $ 3,376,646          $ 2,767,489          $ 3,127,279          $ 2,688,964
        


CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. In preparing the Company's consolidated financial statements, management is required to make significant estimates and assumptions that affect assets, liabilities, revenues and expenses reported. Actual results could differ materially from the Company's current estimates, as a result of changing conditions and future events. Several estimates are particularly critical and are susceptible to significant near-term change, including (i) the ALL; (ii) accounting for acquisitions and the subsequent review of goodwill and core deposit intangible assets generated in an acquisition for impairment; (iii) OTTI of investments; (iv) income taxes; and (v) accounting for defined benefit and postretirement plans.

There have been no material changes to the Company's critical accounting policies as disclosed within its Annual Report on Form 10-K for the year ended December 31, 2019, with the exception of updates noted below. Refer to the Annual Report on Form 10-K for the year ended December 31, 2019, for discussion of the Company's critical accounting policies.

ALL. On March 27, 2020, the CARES Act was signed into law in response to the COVID-19 pandemic. Under Section 4014 of the CARES Act, we were permitted to delay our compliance with ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"), commonly referred to as "CECL," until the earlier of (1) the date on which the national emergency concerning the COVID-19 pandemic that the President of the United States declared on March 15, 2020 ("National Emergency") terminates, or (2) December 31, 2020. We opted to delay our compliance with CECL to devote our attention and resources to supporting our customers and communities during these unprecedented times. As the National Emergency did not terminate prior to the end of the third quarter of 2020, the Company will adopt CECL in the fourth quarter of 2020, using a modified-retrospective method effective January 1, 2020. The Company will record a one-time adjustment to shareholders' equity through retained earnings upon adoption, effective January 1, 2020, and will retrospectively restate interim period 2020 consolidated financial statements as appropriate, including net income, and basic and diluted EPS, as well as total assets, liabilities and shareholders' equity. Refer to Note 2 of the consolidated financial statements for further discussion.

Goodwill Impairment. Effective January 1, 2020, the Company adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). ASU 2017-04 eliminated "Step 2" of the goodwill impairment test. As such, upon completion of our annual (or more frequent should a trigger event be identified) assessment of goodwill for impairment, if the book value of a reporting unit exceeds its fair value, an impairment charge will be recorded, which will reduce goodwill. The carrying value of goodwill may not be less than zero. Although ASU 2017-04 simplifies the goodwill impairment test, it increases the likelihood of impairment because it no longer requires a two-step analysis. Refer to Note 2 of the consolidated financial statements for further discussion.

Refer to Note 2 of the consolidated financial statements for discussion of accounting pronouncements issued but yet to be adopted and implemented.

GENERAL OVERVIEW

Camden National Corporation (hereafter referred to as "we," "our," "us," or the "Company") is a publicly-held bank holding company, with approximately $5.2 billion in assets at September 30, 2020, incorporated under the laws of the State of Maine and headquartered in Camden, Maine. Camden National Bank (the "Bank"), a wholly-owned subsidiary of the Company, was founded in 1875. The Company was founded in 1984, went public in 1997 and is now registered with NASDAQ Global Market ("NASDAQ") under the ticker symbol "CAC."

The primary business of the Company and the Bank is to attract deposits from, and to extend loans to, consumer, institutional, municipal, non-profit and commercial customers. The Company, through the Bank, provides a broad array of banking and other financial services, including wealth management and trust services, brokerage, investment advisory and insurance services, to consumer, business, non-profit and municipal customers.

The Company competes throughout Maine, and select areas of New Hampshire and Massachusetts. We operate in 13 of Maine's 16 counties, with our primary markets and presence being throughout coastal and central Maine. The Company and the Bank generally have effectively competed with other financial institutions by emphasizing customer service, highlighted by local decision-making, establishing long-term customer relationships, building customer loyalty and providing products and services designed to meet the needs of customers.

EXECUTIVE OVERVIEW

Third Quarter 2020 Review. The challenges and uncertainty stemming from the COVID-19 pandemic persisted through the third quarter of 2020, and continue to affect global, national and local economies and markets. Although many measures used to monitor and assess the health of the U.S. economy improved throughout the third quarter of 2020, including national unemployment, national GDP, and several other metrics, we continue to be cautiously optimistic understanding markets and economies are still fragile, and that these times are truly unprecedented. The full health and economic effect of the pandemic is still unclear as waves of new information and data filter through almost daily. The Company continues to use its best efforts to respond to the pandemic, with the full support of its Board of Directors, and to support its employees and customers where possible, while also continuing to strengthen the Company's financial position and resiliency through our actions.

Operating Results. Net income for the three months and nine months ended September 30, 2020, was $16.8 million and $41.2 million, respectively, compared to $14.5 million and $42.0 million for the three and nine months ended September 30, 2019, respectively.

Key earnings drivers between quarters included:

Other key financial metrics between quarters included: . . .

Nov 05, 2020

COMTEX_374000820/2041/2020-11-05T13:07:05

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