Cambridge Bancorp(US:CATC)2023-03-16 11:01PART I Item 1. Business Cambridge Bancorp is a Massachusetts-based bank holding company operating 22 banking and 5 wealth management offices with $5.6 billion in assets and $4.1 billion AUM - Cambridge Bancorp is a bank holding company operating 22 banking and 5 wealth management offices in Eastern Massachusetts and New Hampshire through its subsidiary, Cambridge Trust Company631 Company Financial Snapshot (as of Dec 31, 2022) | Metric | Value | | :--- | :--- | | Total Assets | ~$5.6 billion | | Assets under Management & Administration | ~$4.1 billion | - The company completed its merger with Northmark Bank in October 2022, acquiring $428.7 million in assets and recording $12.6 million in goodwill, following the Wellesley Bancorp merger in June 2020678679680 - The company is extensively regulated by the Federal Reserve, MA DOB, and FDIC, impacting its operations, capital structure, and dividend policies688691692 Supervision and Regulation The company and its banking subsidiary are subject to a comprehensive regulatory framework, including capital adequacy rules, dividend restrictions, and consumer protection laws, aimed at protecting depositors and the banking system - The Company is expected to act as a source of financial and managerial strength for its subsidiary Bank, potentially requiring resource commitment702 - Dividends from the Bank are the Company's main cash source, with Federal Reserve policy restricting payments to past year's income and requiring support for the subsidiary5 Minimum Capital Ratios (including Capital Conservation Buffer) | Capital Ratio | Minimum Requirement | | :--- | :--- | | Common Equity Tier 1 (CET1) to risk-weighted assets | 7.0% | | Tier 1 capital to risk-weighted assets | 8.5% | | Total capital to risk-weighted assets | 10.5% | | Tier 1 leverage ratio | 4.0% | - The Bank's deposit accounts are insured by the FDIC's DIF up to $250,000 per depositor, and the Bank is rated "well-capitalized" under PCA standards7876 Human Capital As of December 31, 2022, the company employed 447 individuals, with a focus on diversity, equity, and inclusion, and supports employee development through various programs Workforce Diversity (as of Dec 31, 2022) | Group | Overall Workforce | VP & Above | | :--- | :--- | :--- | | Female | 51% | 41% | | Racially/Ethnically Diverse | 22% | 11% | - The company requires all Vice President level and above searches to include at least one racially or ethnically diverse candidate and one female candidate125 Item 1A. Risk Factors The company faces various risks including economic downturns, interest rate volatility, loan portfolio credit risk, extensive regulation, cybersecurity threats, and acquisition integration challenges - The company's success is highly dependent on economic conditions in Eastern Massachusetts and New Hampshire due to limited geographic diversification130 - Interest rate variations can negatively affect financial performance by narrowing spreads and impacting net interest income132454 - The company's loan portfolio, including commercial real estate and commercial & industrial loans, carries greater credit risk than residential mortgages134455 - Extensive government regulation, potential capital requirement changes, and the LIBOR transition pose significant legal and operational risks192197198 - Cybersecurity threats, including data breaches and fraud, could disrupt operations, and the company faces risks integrating acquisitions, such as realizing cost savings207210 Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None258 Item 2. Properties The company operates 22 banking offices and five wealth management offices, with its headquarters in Cambridge, Massachusetts - The Company operates 22 banking offices, with its main office and headquarters in Cambridge, Massachusetts259 Item 3. Legal Proceedings The company is not currently a party to any material pending legal proceedings, with no expected material adverse effects from ordinary course claims - The Company is not currently party to any material pending legal proceedings260 Item 4. Mine Safety Disclosures This item is not applicable to the company - None261 PART II Item 5. 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 7.83 million shares outstanding as of March 2023, and an active share repurchase program alongside declared cash dividends - The Company's common stock trades on the NASDAQ Stock Market under the symbol "CATC"265 Shareholder and Dividend Information | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Dividends Declared Per Share | $2.56 | $2.38 | - The Board authorized a share repurchase program for up to 5.0% of outstanding common stock in March 2022, replaced by a similar 2023 program in March 2023274275 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net income decreased to $52.9 million despite an 11.9% rise in net interest income, as total assets grew to $5.56 billion and loans to $4.06 billion, largely influenced by the Northmark merger Key Financial Highlights (2022 vs 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | $52.9 million | $54.0 million | | Diluted EPS | $7.30 | $7.69 | | Net Interest Income | $143.2 million | $128.0 million | | Total Assets | $5.56 billion | $4.89 billion | | Total Loans | $4.06 billion | $3.32 billion | | Total Deposits | $4.82 billion | $4.33 billion | - The increase in total assets, loans, and deposits in 2022 was significantly influenced by the acquisition of Northmark Bank550551555 - The net interest margin decreased by 20 basis points to 2.92% in 2022 from 3.12% in 2021, impacted by higher funding costs371 - Noninterest income decreased by 3.0% to $43.0 million in 2022, primarily due to a $2.0 million decline in wealth management revenue from market downturns375376 Critical Accounting Estimates The company's critical accounting estimates are the Allowance for Credit Losses (ACL) and Income Taxes, both requiring significant management judgment and susceptible to change - The company's critical accounting estimates are the Allowance for Credit Losses (ACL) and Income Taxes, involving significant judgment and susceptibility to change311 - The ACL methodology under CECL uses a discounted cash flow method incorporating probability of default and loss given default, based on a reasonable forecast period312314 - Qualitative adjustments to the ACL account for factors not fully captured by quantitative models, such as portfolio concentrations and underwriting changes316 Results of Operations Net income decreased to $52.9 million in 2022 due to higher noninterest expenses and credit loss provisions, despite a $15.2 million increase in net interest income Comparison of Operations (2022 vs. 2021) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income | $52.9M | $54.0M | | Diluted EPS | $7.30 | $7.69 | | Net Interest Income | $143.2M | $128.0M | | Provision for (Release of) Credit Losses | $3.9M | ($1.3M) | | Noninterest Income | $43.0M | $44.3M | | Noninterest Expense | $110.4M | $100.5M | - The increase in net interest income was primarily due to growth in average earning assets and higher asset yields, partially offset by lower PPP loan income and higher deposit costs332 - Noninterest expense increased by 9.9%, driven by higher salaries and benefits ($5.0 million increase), data processing fees ($1.9 million increase), and non-operating merger expenses ($1.9 million increase)378379380 Changes in Financial Condition As of December 31, 2022, total assets grew 13.7% to $5.56 billion, and total loans increased 22.4% to $4.06 billion, largely due to the Northmark merger and organic growth - Total assets increased by $668.2 million (13.7%) to $5.56 billion at year-end 2022550 - Total loans grew by $743.8 million (22.4%), with organic growth (excluding the Northmark merger) accounting for $440.5 million (13.3%)551552 - Total deposits increased by $484.2 million (11.2%), but organic core deposits decreased by $216.8 million (5.2%) due to the rising interest rate environment555556 Key Equity Metrics (per share) | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Book Value | $66.38 | $62.83 | | Tangible Book Value (Non-GAAP) | $57.15 | $55.01 | Liquidity and Capital Resources The company manages liquidity through core deposits and wholesale funding, with $1.5 billion in funding capacity, and both the company and Bank exceeded regulatory capital requirements, maintaining a "well capitalized" status - The Company's primary liquidity source is core deposits, supplemented by FHLB borrowings and other wholesale funding, with total available funding capacity of $1.5 billion at December 31, 2022599 - Total shareholders' equity increased to $517.6 million at year-end 2022 from $437.8 million at year-end 2021, mainly due to the Northmark Merger equity issuance and net income602 Company Capital Ratios (as of Dec 31, 2022) | Ratio | Actual | Well-Capitalized Minimum | | :--- | :--- | :--- | | Total Capital | 13.52% | 10.0% (Bank) | | Tier 1 Capital | 12.45% | 8.0% (Bank) | | Common Equity Tier 1 | 12.45% | 6.5% (Bank) | | Tier 1 Leverage | 8.51% | 5.0% (Bank) | Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, managed by ALCO using simulation modeling to assess impacts on net interest income and economic value of equity under various rate shock scenarios - The company's main market risk is interest rate risk, managed by the Asset/Liability Committee (ALCO) to control exposure of net interest income and capital581584 Net Interest Income Sensitivity (Instantaneous Rate Shock, as of Dec 31, 2022) | Rate Change (bps) | Year 1 % Change | Year 2 % Change | | :--- | :--- | :--- | | +300 | (1.8%) | 16.6% | | +200 | (1.3%) | 13.8% | | +100 | (0.5%) | 11.7% | | -100 | 1.6% | 6.6% | | -200 | 0.8% | 1.3% | - An EVE analysis at year-end 2022 estimated a 5.6% decrease for an instantaneous +200 basis point rate increase, and a 1.3% increase for a -100 basis point decrease590 Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2022 and prior years, along with detailed notes and an unqualified auditor's opinion on both financial statements and internal controls Notes to Consolidated Financial Statements The notes detail accounting policies and financial results, including CECL adoption, merger specifics, investment and loan portfolio compositions, derivatives, fair value measurements, and capital adequacy - The company's allowance for credit losses on loans was $37.8 million as of December 31, 2022, calculated under the CECL methodology234374 Investment Securities Portfolio (Amortized Cost, Dec 31, 2022) | Category | Amortized Cost | | :--- | :--- | | Available for Sale | $182.0 million | | Held to Maturity | $1,052.0 million | | Total | $1,234.0 million | Loan Portfolio Composition (Dec 31, 2022) | Loan Type | Amount | % of Total | | :--- | :--- | :--- | | Commercial Mortgage | $1,914.4M | 47% | | Residential Mortgage | $1,648.8M | 40% | | Commercial & Industrial | $350.7M | 9% | | Home Equity | $111.4M | 3% | | Consumer | $37.6M | 1% | | Total Loans | $4,062.9M | 100% | - The company uses interest rate swaps and floors to mitigate interest rate risk, with $250.0 million in notional hedging derivatives and $499.6 million in non-designated interest rate contracts as of December 31, 2022416564 Item 9A. Controls and Procedures Management concluded the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with new controls implemented for the Northmark Bank integration - The CEO and CFO concluded the company's disclosure controls and procedures were effective as of December 31, 2022502 - Changes to internal controls were made during Q4 2022 to integrate the Northmark Merger504 - Management assessed internal controls over financial reporting as effective based on the COSO 2013 framework, affirmed by the independent auditor508510 PART III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance, including the Audit Committee and Code of Ethics, is incorporated by reference from the 2023 Proxy Statement - The information required for this item is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement514 Item 11. Executive Compensation Detailed information on executive and director compensation is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement - The information required for this item is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement515 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management, and equity compensation plan details, is incorporated by reference from the 2023 Proxy Statement - The information required for this item is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement729 Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related person transactions and Board of Directors' independence is incorporated by reference from the 2023 Proxy Statement - The information required for this item is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement730747 Item 14. Principal Accounting Fees and Services Information on fees paid to and services provided by the independent registered public accounting firm is incorporated by reference from the 2023 Proxy Statement - The information required for this item is incorporated by reference from the company's 2023 Annual Meeting of Shareholders Proxy Statement744 PART IV Item 15. Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed with the Form 10-K report, including merger agreements, corporate governance documents, and certifications - This section lists all financial statements, schedules, and exhibits filed with the annual report, with financial statements located in Item 8717718 - Exhibits filed include merger agreements for Northmark Bank and Wellesley Bancorp, corporate governance documents, and various executive compensation and retirement plans720721 Item 16. Form 10-K Summary The company has not provided a summary for this item - None724749