Cambridge Bancorp(CATC) - 2019 Q4 - Annual Report

PART I Business Cambridge Bancorp is a private bank in Eastern MA and Southern NH, with $2.9B assets and $3.5B AUM&A, focusing on wealth management and banking, expanding via mergers - Cambridge Bancorp is a bank holding company with one subsidiary, Cambridge Trust Company, operating as a private bank with four core services: Wealth Management, Commercial Banking, Residential Lending, and Personal Banking[10] Company Financial Snapshot (as of Dec 31, 2019) | Metric | Value | | :--- | :--- | | Total Assets | ~$2.9 billion | | Assets under Management & Administration | ~$3.5 billion | | Private Banking Offices | 16 (Eastern MA & NH) | | Wealth Management Offices | 5 (Boston, MA & NH) | - The company's revenue is primarily dependent on net interest income (the difference between interest earned on loans/securities and interest paid on deposits/borrowings) and non-interest income from its wealth management services[13] - The company completed its merger with Optima Bank & Trust Company on April 17, 2019, in a stock and cash transaction valued at $64.3 million[19] - A definitive agreement was signed in Q4 2019 for an all-stock merger with Wellesley Bancorp, Inc., which is anticipated to close in Q2 2020, pending regulatory and shareholder approvals[20] - The company faces substantial competition from a wide range of financial institutions, including larger commercial banks with greater resources, and relies on its local market knowledge and client relationships to compete effectively[25][27][29] - The company and its subsidiaries are subject to extensive regulation and supervision by multiple agencies, including the Federal Reserve, the FDIC, the Massachusetts Division of Banks (MA DOB), and the State of New Hampshire Banking Department[30][33][34] Risk Factors The company faces risks from economic downturns, interest rates, credit quality, competition, regulation, operational issues, and acquisition integration - Economic and Market Risks: The company's success is highly dependent on the local economic conditions in Massachusetts and New Hampshire. Variations in interest rates and downturns in financial markets could negatively affect net interest income and wealth management revenues[90][92][96] - Credit and Lending Risks: The loan portfolio contains higher-risk commercial, industrial, and consumer loans. The allowance for loan losses may be insufficient to cover actual losses, and the upcoming CECL accounting standard may require an increase in this allowance[97][100][102] - Regulatory and Compliance Risks: The company is subject to extensive and evolving government regulation, which can impose costs, limit business activities, and result in sanctions for non-compliance[107][108] - Operational and Technology Risks: The business is vulnerable to information security breaches, cyber-attacks, fraud, and disruptions from third-party service providers. Failure to adapt to technological changes could also harm the business[114][116][118] - Acquisition Risks: The integration of acquired entities like Optima and the proposed merger with Wellesley present significant challenges, including realizing cost savings, integrating operations, and retaining key personnel and customers[122][128] - Emerging Risks: The company identifies the planned replacement of the LIBOR benchmark interest rate and the potential negative impacts of the COVID-19 outbreak on employees, customers, and local economies as significant risks[149][154][156] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[157] Properties The company operates 16 private banking offices, an operations center, five wealth management offices, and one off-site ATM - The Company operates a total of 16 private banking offices, an operations center, five wealth management offices, and one off-site ATM[158] Legal Proceedings The company is involved in ordinary course legal claims and resolved a specific lawsuit regarding the Wellesley merger via additional disclosures - The company is party to various claims and lawsuits arising in the ordinary course of business, which management believes will not have a material adverse effect on its financial position[159] - A class action lawsuit was filed on February 25, 2020, by a Wellesley Bancorp stockholder concerning the proposed merger. The plaintiff alleged breaches of fiduciary duty and inadequate disclosures in the proxy statement[159] - To avoid litigation costs, the company and Wellesley agreed to supplement the proxy statement disclosures on March 5, 2020, leading the plaintiff to agree to dismiss the lawsuit[159] Mine Safety Disclosures This item is not applicable to the company - None[161] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on NASDAQ under 'CATC', with 5.4M shares outstanding, declared $2.04 dividends in 2019, and has no formal repurchase program - The Company's common stock began trading on the NASDAQ under the symbol "CATC" on October 18, 2017[165] Dividends Declared Per Share | Year | Dividend per Share | | :--- | :--- | | 2019 | $2.04 | | 2018 | $1.96 | - During the fourth quarter of 2019, the company repurchased 260 shares at an average price of $79.62 per share. These repurchases were related to shares tendered by employees to cover income tax liabilities on equity awards[172] - The company does not currently have a stock repurchase program or plan in place[173] Selected Financial Data The company's selected financial data for 2015-2019 shows consistent growth in assets, loans, deposits, and equity, with net income reaching $25.3M in 2019 and strong asset quality Selected Financial Data (2015-2019, in thousands, except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Operating Data | | | | | | | Net Income | $25,257 | $23,881 | $14,816 | $16,896 | $15,694 | | Diluted Earnings Per Share | $5.37 | $5.77 | $3.61 | $4.15 | $3.93 | | Dividends Declared Per Share | $2.04 | $1.96 | $1.86 | $1.84 | $1.80 | | Financial Condition Data | | | | | | | Total Assets | $2,855,563 | $2,101,384 | $1,949,934 | $1,848,999 | $1,706,201 | | Total Loans | $2,226,728 | $1,559,772 | $1,350,899 | $1,320,154 | $1,192,214 | | Total Deposits | $2,358,878 | $1,811,410 | $1,775,400 | $1,686,038 | $1,557,224 | | Shareholders' equity | $286,561 | $167,026 | $147,957 | $134,671 | $125,063 | | Performance Ratios | | | | | | | Return on Average Assets | 0.97% | 1.21% | 0.79% | 0.95% | 0.95% | | Return on Average Shareholders' equity | 11.40% | 15.35% | 10.47% | 12.77% | 12.91% | | Asset Quality | | | | | | | Non-Performing Loans/Total Loans | 0.25% | 0.04% | 0.10% | 0.13% | 0.12% | Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and operations, highlighting 2019 net income growth, asset and loan expansion, net interest margin changes, critical accounting policies, and robust liquidity and capital Results of Operations For 2019, net income increased 5.8% to $25.3M, driven by higher net interest and noninterest income, but offset by increased noninterest expenses and loan loss provisions Financial Performance Comparison (2019 vs. 2018) | Metric | 2019 | 2018 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Income | $25.3M | $23.9M | +$1.4M | +5.8% | | Diluted EPS | $5.37 | $5.77 | -$0.40 | -6.9% | | Net Interest Income | $78.7M | $63.6M | +$15.1M | +23.8% | | Noninterest Income | $36.4M | $33.0M | +$3.4M | +10.3% | | Noninterest Expense | $78.2M | $64.0M | +$14.2M | +22.2% | | Provision for Loan Losses | $3.0M | $1.5M | +$1.5M | +100% | - Operating net income, which excludes $4.7 million in non-operating expenses related to mergers and a stock offering, was $29.2 million for 2019, a 21.4% increase from 2018[202][203] - The net interest margin decreased by 11 basis points to 3.22% in 2019, as the increase in the cost of funds outpaced the yield on earning assets[205] - Wealth Management revenue increased by 5.2% to $26.5 million in 2019, driven by higher average assets under management, which grew to $3.5 billion at year-end[211][212] Changes in Financial Condition As of Dec 31, 2019, total assets grew 35.9% to $2.9B, loans 42.8% to $2.2B, deposits 30.2% to $2.4B, and shareholders' equity 71.6% to $286.6M, driven by the Optima merger and organic growth Balance Sheet Highlights (Dec 31, 2019 vs. Dec 31, 2018) | Metric | Dec 31, 2019 | Dec 31, 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $2.9B | $2.1B | +35.9% | | Total Loans | $2.2B | $1.6B | +42.8% | | Total Deposits | $2.4B | $1.8B | +30.2% | | Shareholders' Equity | $286.6M | $167.0M | +71.6% | - Excluding loans acquired from Optima, organic loan growth was $191.6 million (12.3%), driven primarily by a $188.3 million (24.8%) increase in commercial real estate loans[232][243] - Excluding deposits from Optima, organic core deposit growth was $172.0 million (10.2%) for the year[237] - Shareholders' equity was significantly impacted by net income ($25.3M), equity issued for the Optima merger ($59.4M), and a common stock offering ($38.2M net)[241] Loans and Allowance for Loan Losses The loan portfolio reached $2.23B, with commercial and residential mortgages as main components; nonperforming loans increased, and the ALL was $18.2M, reflecting loan growth and a charge-off Loan Portfolio Composition (as of Dec 31, 2019) | Loan Category | Amount ($M) | % of Total | | :--- | :--- | :--- | | Commercial mortgage | $1,060.6 | 48% | | Residential mortgage | $917.6 | 41% | | Commercial & industrial | $133.2 | 6% | | Home equity | $80.7 | 4% | | Consumer | $34.7 | 1% | | Total loans | $2,226.7 | 100% | Asset Quality Indicators | Metric | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Nonperforming Loans | $5,651k | $642k | | Nonperforming Loans / Total Loans | 0.25% | 0.04% | | Allowance for Loan Losses (ALL) | $18,180k | $16,768k | | ALL / Total Loans | 0.82% | 1.08% | - The provision for loan losses increased to $3.0 million in 2019 from $1.5 million in 2018, driven by strong loan growth and a $1.2 million charge-off on an acquired commercial real estate loan during Q3 2019[210][301] Liquidity and Capital Resources The company maintains strong liquidity from core deposits and robust capital adequacy, exceeding all regulatory minimums to be 'well capitalized' with a CET1 ratio of 12.70% - The company's primary source of liquidity is core deposits, supplemented by borrowings from the FHLB of Boston, sales of investment securities, and sales of loans[330][331] - Total shareholders' equity increased to $286.6 million at Dec 31, 2019, from $167.0 million at year-end 2018, driven by net income, the Optima merger, and a common stock offering[334] Cambridge Bancorp Capital Ratios (as of Dec 31, 2019) | Capital Ratio | Actual Ratio | Well-Capitalized Minimum | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 12.70% | 6.5% | | Tier 1 Capital | 12.70% | 8.0% | | Total Capital | 13.61% | 10.0% | | Tier 1 Leverage | 8.98% | 5.0% | Financial Statements and Supplementary Data This section includes audited consolidated financial statements for 2017-2019 and KPMG LLP's unqualified opinion on both financial statements and internal control over financial reporting Consolidated Balance Sheet Summary | (in thousands) | Dec 31, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Total Assets | $2,855,563 | $2,101,384 | | Net Loans | $2,208,548 | $1,543,004 | | Total Deposits | $2,358,878 | $1,811,410 | | Total Liabilities | $2,569,002 | $1,934,358 | | Total Shareholders' Equity | $286,561 | $167,026 | Consolidated Statement of Income Summary | (in thousands) | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net Interest Income | $78,696 | $63,588 | $57,604 | | Provision for Loan Losses | $3,004 | $1,502 | $362 | | Noninterest Income | $36,401 | $32,989 | $30,224 | | Noninterest Expense | $78,175 | $63,987 | $59,292 | | Net Income | $25,257 | $23,881 | $14,816 | - The independent registered public accounting firm, KPMG LLP, issued an unqualified opinion on the consolidated financial statements, stating they present fairly the financial position and results of operations in conformity with U.S. GAAP[638] - KPMG LLP also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2019[639][644] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of Dec 31, 2019, with no material changes, supported by KPMG LLP's unqualified report - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[653] - There were no changes in internal controls over financial reporting in 2019 that materially affected, or are reasonably likely to materially affect, these controls[655] - Management assessed internal control over financial reporting using the COSO framework and concluded it was effective as of December 31, 2019[658] - KPMG LLP, the independent registered public accounting firm, issued an unqualified report on the effectiveness of the Company's internal control over financial reporting[659] PART III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Annual Meeting of Shareholders Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the Company's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders[663] Executive Compensation Information on executive and director compensation is incorporated by reference from the 2020 Annual Meeting of Shareholders Proxy Statement - Information regarding executive compensation is incorporated by reference from the Company's definitive Proxy Statement[664] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management, and equity compensation plans, is incorporated by reference from the 2020 Proxy Statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the Company's definitive Proxy Statement[665] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2020 Annual Meeting of Shareholders Proxy Statement - Information regarding related party transactions and director independence is incorporated by reference from the Company's definitive Proxy Statement[666] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the 2020 Annual Meeting of Shareholders Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the Company's definitive Proxy Statement[667] PART IV Exhibits, Financial Statement Schedules This item lists the financial statements included in Item 8 and provides an index to all exhibits filed with the Form 10-K - This item lists the financial statements included in Item 8 and provides an index to all exhibits filed with the Form 10-K[670][673] Form 10-K Summary This item is not applicable to the company - None[675]