Cambridge Bancorp(CATC) - 2023 Q3 - Quarterly Report

PART I—FINANCIAL INFORMATION This section provides the unaudited financial statements and management's discussion and analysis of Cambridge Bancorp's financial condition and results of operations Item 1. Financial Statements (Unaudited) This section presents the unaudited consolidated financial statements for Cambridge Bancorp as of September 30, 2023, and for the three and nine-month periods then ended Unaudited Consolidated Balance Sheets As of September 30, 2023, total assets decreased to $5.45 billion from $5.56 billion at year-end 2022, primarily due to reductions in investment securities and loans Consolidated Balance Sheet Highlights (Unaudited) | Account | Sep 30, 2023 ($ millions) | Dec 31, 2022 ($ millions) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | 25.35 | 30.72 | | Total investment securities | 1,116.84 | 1,205.41 | | Net loans | 3,989.77 | 4,025.08 | | Total assets | 5,452.03 | 5,559.74 | | Liabilities & Equity | | | | Total deposits | 4,565.93 | 4,815.38 | | Borrowings | 233.91 | 105.21 | | Total liabilities | 4,926.00 | 5,042.19 | | Total shareholders' equity | 526.03 | 517.55 | Unaudited Consolidated Statements of Income Net income significantly decreased for both the third quarter and nine-month period of 2023, primarily due to a substantial increase in interest expense compressing net interest income Consolidated Income Statement Highlights (Unaudited) | Metric | Q3 2023 ($ millions) | Q3 2022 ($ millions) | Nine Months 2023 ($ millions) | Nine Months 2022 ($ millions) | | :--- | :--- | :--- | :--- | :--- | | Net interest and dividend income | 28.65 | 36.28 | 92.66 | 102.33 | | Provision for credit losses | 0.20 | 0.61 | 0.34 | 0.20 | | Total noninterest income | 10.55 | 10.44 | 31.29 | 32.95 | | Total noninterest expense | 29.65 | 26.34 | 88.32 | 78.51 | | Net income | 6.54 | 14.62 | 26.08 | 41.59 | | Diluted earnings per share | $0.83 | $2.07 | $3.32 | $5.90 | Unaudited Consolidated Statements of Comprehensive Income Comprehensive income for Q3 2023 decreased to $3.8 million, reflecting lower net income and unrealized losses on available-for-sale securities and interest rate swaps Comprehensive Income (Unaudited) | Metric | Q3 2023 ($ millions) | Q3 2022 ($ millions) | Nine Months 2023 ($ millions) | Nine Months 2022 ($ millions) | | :--- | :--- | :--- | :--- | :--- | | Net income | 6.54 | 14.62 | 26.08 | 41.59 | | Other comprehensive income (loss) | (2.78) | (6.54) | (2.76) | (21.11) | | Comprehensive income | 3.76 | 8.08 | 23.32 | 20.48 | Unaudited Consolidated Statements of Changes in Shareholders' Equity Total shareholders' equity increased to $526.0 million at September 30, 2023, driven by net income partially offset by cash dividends and other comprehensive loss Changes in Shareholders' Equity (Nine Months Ended Sep 30, 2023) | Component | Amount ($ millions) | | :--- | :--- | | Balance at Dec 31, 2022 | 517.55 | | Net income | 26.08 | | Other comprehensive loss | (2.76) | | Share based compensation | 0.89 | | Dividends declared ($2.01/share) | (15.73) | | Balance at Sep 30, 2023 | 526.03 | Unaudited Consolidated Statements of Cash Flows For the nine months ended September 30, 2023, net cash decreased by $5.4 million, with operating and investing activities providing cash while financing activities used cash Cash Flow Summary (Nine Months Ended) | Activity | Sep 30, 2023 ($ millions) | Sep 30, 2022 ($ millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | 24.43 | 23.35 | | Net cash provided by (used in) investing activities | 106.93 | (386.86) | | Net cash (used in) provided by financing activities | (136.72) | 214.90 | | Net change in cash and cash equivalents | (5.37) | (148.61) | Notes to Unaudited Consolidated Financial Statements This section provides detailed disclosures supporting the primary financial statements, covering accounting policies, investment securities, loans, credit quality, capital adequacy, and fair value measurements - The Company adopted ASU 2022-02, which eliminated the accounting guidance for troubled debt restructurings (TDRs) and enhanced disclosure requirements for loan modifications to borrowers experiencing financial difficulty; the adoption on January 1, 2023, did not have a material impact on the financial statements[12] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting decreased net income due to net interest margin compression and providing details on the pending merger - On September 19, 2023, the Company entered into a merger agreement with Eastern Bankshares, Inc., where each share of Cambridge Bancorp common stock will be converted into the right to receive 4.956 shares of Eastern Common Stock[437] - The company's critical accounting estimates, which involve significant judgment and could materially impact financial results, are identified as the allowance for credit losses and income taxes[132] Results of Operations Net income significantly declined for both the third quarter and nine-month period of 2023, primarily due to decreased net interest income and increased noninterest expense Quarterly Performance (Q3 2023 vs Q3 2022) | Metric | Q3 2023 ($ millions) | Q3 2022 ($ millions) | Change | | :--- | :--- | :--- | :--- | | Net Income | 6.5 | 14.6 | -55.2% | | Diluted EPS | $0.83 | $2.07 | -59.9% | | Net Interest Income | 28.6 | 36.3 | -21.0% | | Noninterest Expense | 29.6 | 26.3 | +12.6% | Nine-Month Performance (2023 vs 2022) | Metric | Nine Months 2023 ($ millions) | Nine Months 2022 ($ millions) | Change | | :--- | :--- | :--- | :--- | | Net Income | 26.1 | 41.6 | -37.3% | | Diluted EPS | $3.32 | $5.90 | -43.7% | | Net Interest Income | 92.7 | 102.3 | -9.5% | | Noninterest Expense | 88.3 | 78.5 | +12.5% | Changes in Financial Condition Total assets decreased by $107.7 million to $5.45 billion, while total deposits declined by $249.5 million, and shareholders' equity grew to $526.0 million - Total loans decreased by $34.9 million (0.9%) to $4.03 billion at September 30, 2023[169] - Total deposits decreased by $249.5 million (5.2%) to $4.57 billion, with deposits excluding wholesale CDs decreasing by $351.2 million (7.9%)[170] - Tangible book value per share increased to $57.96 at September 30, 2023, from $57.15 at December 31, 2022[171] Investment Securities The total investment securities portfolio decreased by 7.3% to $1.12 billion, comprising available-for-sale and held-to-maturity securities with significant unrealized losses on AFS Investment Securities Portfolio Composition | Category | Sep 30, 2023 (Amortized Cost in $ millions) | Dec 31, 2022 (Amortized Cost in $ millions) | | :--- | :--- | :--- | | Available for Sale | 167.9 | 182.0 | | Held to Maturity | 980.6 | 1,050.0 | | Total | 1,148.5 | 1,232.0 | - The Company did not record an allowance for credit losses on its investment securities as of September 30, 2023, as it does not expect to suffer a credit loss and does not intend to sell securities before recovery[176][67] Loans The total loan portfolio was $4.03 billion, with commercial mortgages and residential mortgages representing the largest segments Loan Portfolio Composition | Loan Category | Sep 30, 2023 ($ millions) | % of Total | | :--- | :--- | :--- | | Commercial mortgage | 1,922.46 | 48% | | Residential mortgage | 1,627.46 | 40% | | Commercial and industrial | 355.80 | 9% | | Home equity | 93.36 | 2% | | Consumer | 28.89 | 1% | | Total loans | 4,027.97 | 100% | - The company does not offer subprime, Alt-A, Option ARM, or reverse mortgage loans[230] Asset Quality and Allowance for Credit Losses Non-performing loans increased to $7.8 million, and the allowance for credit losses on loans stood at $38.2 million, or 0.95% of total loans Asset Quality Metrics | Metric | Sep 30, 2023 ($ millions) | Dec 31, 2022 ($ millions) | | :--- | :--- | :--- | | Non-performing loans | 7.8 | 6.5 | | Non-performing loans / Gross loans | 0.19% | 0.16% | | Allowance for credit losses (ACL) | 38.2 | 37.8 | | ACL / Total loans | 0.95% | 0.93% | - Following the adoption of ASU 2022-02, the company no longer recognizes Troubled Debt Restructurings (TDRs); as of September 30, 2023, the company had no loan modifications or restructurings due to borrower financial difficulty[241][240] Liquidity and Capital Resources The company maintains a strong liquidity position with $2.61 billion in available funding and exceeds all regulatory capital requirements to be considered 'well-capitalized' - At September 30, 2023, the Company had access to funds totaling $2.61 billion, including borrowing capacity from the FHLB of Boston and the Federal Reserve's Bank Term Funding Program (BTFP)[322] - The Company and the Bank were considered 'well-capitalized' as of September 30, 2023, exceeding all minimum regulatory capital requirements[112][299] - Total shareholders' equity increased to $526.0 million at September 30, 2023, from $517.6 million at December 31, 2022, primarily due to net income of $26.1 million, partially offset by dividend payments of $15.7 million[276] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with simulations projecting significant impacts on the economic value of equity from rate changes Economic Value of Equity (EVE) Sensitivity Analysis (as of Sep 30, 2023) | Rate Shock | Change in EVE | Resulting EVE Ratio | | :--- | :--- | :--- | | +200 bps | -18.9% | 10.1% | | -200 bps | +15.4% | 12.8% | Item 4. Controls and Procedures The company's disclosure controls and procedures were deemed effective as of September 30, 2023, with no material changes in internal controls over financial reporting during the quarter - Management concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023[327] - No changes in internal controls over financial reporting that have materially affected or are reasonably likely to materially affect the controls were identified during the quarter[328] PART II. OTHER INFORMATION This section covers legal proceedings, new risk factors related to the pending merger, unregistered sales of equity securities, and other miscellaneous disclosures Item 1. Legal Proceedings The company is not currently a party to any material pending legal proceedings, with management expecting no material adverse effects from ordinary course claims - The Company is not currently party to any material pending legal proceedings[330] Item 1A. Risk Factors New risks related to the pending merger with Eastern Bankshares, Inc. include potential business disruptions, regulatory approval uncertainties, and the impact of a termination fee - The pendency of the merger could adversely affect business, results of operations, and financial condition due to disruptions and uncertainty[306][332] - The merger is subject to regulatory approvals which may delay completion or impose adverse conditions[309][334] - Failure to complete the merger could negatively impact the company's stock price and future financial results[311][336] - A termination fee of $21.0 million payable to Eastern in specified circumstances may discourage other acquisition proposals[314][350] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2023, the company repurchased 160 shares of common stock for employee tax liabilities, with no repurchases under the formal program Share Repurchases (Q3 2023) | Period | Total Shares Repurchased | Weighted Average Price Paid Per Share | | :--- | :--- | :--- | | July 2023 | 0 | $ - | | August 2023 | 160 | $56.16 | | September 2023 | 0 | $ - | | Total | 160 | $56.16 | - The Company did not repurchase any shares under its formal 2023 Repurchase Program during the three months ended September 30, 2023[341] Other Items (Defaults, Mine Safety, Other Info, Exhibits) The company reported no defaults on senior securities, confirmed mine safety disclosures are not applicable, and listed exhibits including the merger agreement - No defaults upon senior securities were reported[352] - A list of exhibits filed with the 10-Q is provided, including the Agreement and Plan of Merger with Eastern Bankshares, Inc[355]