Cambridge Bancorp(CATC) - 2023 Q4 - Annual Report

PART I Business Cambridge Bancorp, a bank holding company, provides wealth management, commercial, and personal banking services, with $5.4 billion in assets and a pending merger - Cambridge Bancorp is a bank holding company headquartered in Cambridge, MA, with one bank subsidiary, Cambridge Trust Company. As of December 31, 2023, it had total assets of approximately $5.4 billion and operated 22 banking offices[274] - The company's core services include Wealth Management, Commercial Banking, and Personal Banking. As of December 31, 2023, the Wealth Management Group had approximately $4.6 billion in Assets under Management and Administration[274] - On September 19, 2023, the Company entered into a merger agreement with Eastern Bankshares, Inc. Upon completion, each share of Cambridge Bancorp common stock will be converted into 4.956 shares of Eastern Common Stock[305] - The merger with Northmark Bank was completed on October 1, 2022. The company acquired total assets of $428.7 million, assumed liabilities of $378.5 million, and recorded $12.6 million in goodwill[10][279] - The company is subject to supervision and regulation by multiple governmental authorities, including the Federal Reserve, the Massachusetts Division of Banks (MA DOB), the State of New Hampshire Banking Department, and the FDIC[13] Risk Factors The company faces significant risks from the pending Eastern Merger, acquisition integration, economic downturns, interest rate volatility, and cybersecurity threats - The pendency of the Eastern Merger could disrupt business, affect relationships with customers and employees, and divert significant management resources, regardless of whether the merger is completed[50][51] - Failure to complete the Eastern Merger could negatively impact the company's stock price and financial results, and the company would have to recognize substantial incurred expenses without realizing the expected benefits[57][60] - The integration of Northmark presents challenges, and failure to integrate efficiently could result in not achieving anticipated benefits like cost savings and operating efficiencies, potentially having an adverse effect on the company's business and results[79] - The company's financial performance is sensitive to interest rate variations. Rising interest rates have decreased the value of the held-to-maturity securities portfolio, and the company would realize losses if required to sell them to meet liquidity needs[35][363] - Cybersecurity breaches pose a significant risk. The company depends on data processing and vendor services, and a breach could lead to information loss, financial costs, and reputational harm[100] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[26] Cybersecurity The company's cybersecurity program, based on NIST framework and overseen by the Board's Risk Committee, includes 24/7 monitoring, with no material threats identified to date - The Company's cybersecurity program is based on the National Institute of Standards and Technology (NIST) Cybersecurity Framework and is integrated into the Enterprise Risk Management (ERM) program[28] - The Board's Risk Committee has primary oversight for cybersecurity risks. Management, including the CIO and Director of Information Security, reports to the Board at least quarterly[40] - The company maintains a security operations center with 24/7 monitoring and a Cybersecurity Incident Response Plan (CSIRP) to manage and respond to threats[28][243] - Management has not identified any risks from cybersecurity threats, including from previous incidents, that have materially affected or are reasonably likely to materially affect the company's business, operations, or financial condition[29] Properties The company operates from 22 banking offices, including its Cambridge headquarters, and additional operations and wealth management centers - The Company operates through 22 banking offices, with its headquarters in Cambridge, Massachusetts. It also has operations centers in Burlington, MA, and Portsmouth, NH, and five wealth management offices[245] Legal Proceedings The company is not currently a party to any material pending legal proceedings, with management believing no current claims will have a material adverse effect - The Company is not currently party to any material pending legal proceedings[246] Mine Safety Disclosures This item is not applicable to the company - None[247] 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 7.8 million shares outstanding and $2.68 cash dividends per share in 2023, but its stock performance has lagged indices - The Company's common stock trades on the NASDAQ under the symbol "CATC". As of March 8, 2024, there were 7,846,510 shares outstanding[43][44] Dividend and Stock Information | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Cash Dividends Declared per Share | $2.68 | $2.56 | | Closing Stock Price (Dec 31) | $69.40 | N/A | Stock Performance Comparison (Cumulative Total Return) | Index | 12/31/18 | 12/31/23 | | :--- | :--- | :--- | | Cambridge Bancorp | $100.00 | $98.22 | | S&P U.S. BMI Banks Index | $100.00 | $147.41 | | KBW NASDAQ Bank Index | $100.00 | $131.57 | - In March 2023, the Board authorized a new share repurchase program for up to 5.0% of outstanding shares. No shares were repurchased under this program during the year ended December 31, 2023[425] Reserved This item is reserved - Item 6 is reserved[92] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, with net income falling to $34.1 million in 2023 due to rising funding costs, and details critical accounting estimates, portfolio breakdowns, and risk management - The company's results are largely dependent on net interest income and non-interest income from wealth management services. Key factors affecting results include interest rate levels, operating expenses, and provision for credit losses[93] - The company considers its critical accounting estimates to be the allowance for credit losses and income taxes, which involve significant judgment and are susceptible to change[397] Key Financial Highlights (2023 vs 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $34.1 million | $52.9 million | | Diluted EPS | $4.34 | $7.30 | | Net Interest Margin | 2.30% | 2.92% | | Total Assets (Year-End) | $5.42 billion | $5.56 billion | | Total Deposits (Year-End) | $4.32 billion | $4.82 billion | Results of Operations Net income for 2023 decreased by 35.5% to $34.1 million due to a $22.4 million drop in net interest income from rising funding costs, while 2022 net income also saw a slight decrease Comparison of Operations (2023 vs. 2022) | Metric | 2023 | 2022 | | :--- | :--- | :--- | | Net Income | $34.1 million | $52.9 million | | Diluted EPS | $4.34 | $7.30 | | Net Interest Income | $120.8 million | $143.2 million | | Provision for Credit Losses | $0.9 million | $3.9 million | | Noninterest Income | $41.7 million | $43.0 million | | Noninterest Expense | $115.2 million | $110.4 million | - The decrease in 2023 net interest income was primarily due to higher costs of funds, which increased to 1.86% from 0.34% in 2022, partially offset by higher yields on earning assets[152][433] - Wealth management revenues remained stable at $33.0 million for both 2023 and 2022. Assets under management increased to $4.33 billion at year-end 2023 from $3.88 billion in 2022, driven by positive net market impact[155][124] - For 2022 vs. 2021, net income decreased by $1.1 million (2.1%) to $52.9 million. This was due to a $9.9 million increase in noninterest expenses (including merger costs) and a $5.2 million increase in the provision for credit losses, which offset a $15.2 million rise in net interest income[437] Financial Condition As of December 31, 2023, total assets decreased by 2.6% to $5.42 billion, driven by declines in investment securities and loans, while deposits fell by 10.3%, leading to increased borrowings Balance Sheet Summary (Year-End) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Total Assets | $5.42 billion | $5.56 billion | | Net Loans | $3.98 billion | $4.03 billion | | Total Investment Securities | $1.10 billion | $1.21 billion | | Liabilities & Equity | | | | Total Deposits | $4.32 billion | $4.82 billion | | Total Borrowings | $452.2 million | $105.2 million | | Total Shareholders' Equity | $534.6 million | $517.6 million | - Total loans decreased by $41.3 million (1.0%) to $4.02 billion, with decreases seen across residential, home equity, C&I, and consumer loan portfolios, slightly offset by an increase in commercial real estate loans[443] - Total deposits decreased by $494.2 million (10.3%), primarily due to lower money market, savings, and wholesale deposit balances. Uninsured deposits decreased to $1.42 billion from $2.50 billion in 2022[444][215] - Total borrowings increased by $346.9 million (329.8%) to $452.2 million, as the Company shifted wholesale funding towards FHLB Boston borrowings[474] - Tangible book value per share grew by 3.4% to $59.08 as of December 31, 2023, from $57.15 a year prior[166] Liquidity and Capital Resources The company manages liquidity primarily through core deposits and borrowings, with $2.55 billion in available funds and capital levels exceeding regulatory minimums for a "well-capitalized" institution - The company's primary source of liquidity is core deposits, with secondary sources including borrowings from the FHLB of Boston and FRB of Boston. At December 31, 2023, total available funds were $2.55 billion[535] - As of December 31, 2023, the Company and the Bank exceeded all regulatory minimum capital levels to be considered "well-capitalized"[232] - The company had outstanding commitments to extend credit of $994.2 million and standby letters of credit of $34.1 million as of December 31, 2023[260] Contractual Obligations as of Dec 31, 2023 | Obligation | Total | Less Than 1 Year | 1 to 3 Years | 3 to 5 Years | After 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | FHLBB advances | $452.2 million | $406.0 million | $45.0 million | $0.7 million | $0.4 million | | Certificates of deposit | $674.4 million | $655.3 million | $17.3 million | $1.8 million | $0 | | Lease obligations | $27.1 million | $7.0 million | $10.7 million | $5.5 million | $3.9 million | Quantitative and Qualitative Disclosures About Market Risk The company manages interest rate risk, its primary market risk, through income simulation and EVE analysis, with policy limits for rate changes, showing a 4.0% decrease in net interest income for a +200 bps shock - The Company's primary market risk is interest rate risk. Management actively monitors and manages this exposure through tools like income simulation models and Economic Value of Equity (EVE) analysis[192][251] Net Interest Income Sensitivity (Parallel Rate Shocks, Year 1) | Change in Interest Rates (bps) | % Change in Net Interest Income | | :--- | :--- | | +300 | (5.9)% | | +200 | (4.0)% | | +100 | (1.9)% | | -100 | 1.8% | | -200 | 2.5% | - The company uses interest rate derivatives, including swaps and floors, to manage its exposure to changes in interest rates in both rising and falling rate environments[225][530] - An EVE analysis at year-end 2023 estimated that an instantaneous +200 bps rate increase would decrease the economic value of equity by 23.6%, while a -200 bps decrease would increase it by 18.7%[256] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2021-2023, including balance sheets, income statements, and cash flows, along with detailed notes and the independent auditor's unqualified opinion Consolidated Balance Sheet (Year-End) | (in thousands) | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Total Assets | $5.42 billion | $5.56 billion | | Liabilities & Equity | | | | Total Deposits | $4.32 billion | $4.82 billion | | Total Liabilities | $4.88 billion | $5.04 billion | | Total Shareholders' Equity | $534.6 million | $517.6 million | Consolidated Statement of Income | (in thousands) | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net Interest Income | $120.8 million | $143.2 million | $128.0 million | | Provision for Credit Losses | $0.9 million | $3.9 million | ($1.3 million) | | Noninterest Income | $41.7 million | $43.0 million | $44.3 million | | Noninterest Expense | $115.2 million | $110.4 million | $100.5 million | | Net Income | $34.1 million | $52.9 million | $54.0 million | - The independent auditor, Wolf & Company, P.C., issued an unqualified opinion on the consolidated financial statements and on the effectiveness of the company's internal control over financial reporting[985][1045] Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[1048] Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2023, with no material changes - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of December 31, 2023[1024] - Management assessed internal control over financial reporting using the COSO 2013 framework and concluded it was effective as of December 31, 2023[1026] - There were no changes in the Company's internal control over financial reporting in 2023 that materially affected, or are reasonably likely to materially affect, these controls[1049] Other Information This item is not applicable - Not applicable[1052] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable - Not applicable[1028] PART III Directors, Executive Officers and Corporate Governance This section provides information on the company's 16-member Board of Directors and executive officers, detailing Board committee structures, director independence, and the adopted Code of Ethics - The Board is comprised of 16 members, divided into three classes. The report provides biographical information for each director[1029] - The Board has determined that all directors are independent under NASDAQ Listing Rules, with the exception of CEO Denis K. Sheahan and Daniel R. Morrison due to their employment history[643] - The Board has four primary committees: Audit, Compensation, Governance, and Risk. The report lists the members and chair of each committee[1067] - The company has adopted a Code of Ethics applicable to all employees, officers, and directors. A copy is available on the company's website[1113] Executive Compensation This section details executive compensation, aligning pay with performance, with 2023 annual incentive payouts below target, a rebalanced long-term incentive plan, and a 17:1 CEO-to-median-employee pay ratio - The company's compensation philosophy is to provide competitive pay that rewards performance, with a majority of 2023 target total direct compensation for NEOs being performance-based[1125][1143] 2023 Incentive Plan Company Performance | Company Performance Measure | Target | Actual Performance | Achievement | | :--- | :--- | :--- | :--- | | Operating ROTCE | 10.57% | 8.86% | 59.53% | | Operating Income | $62.2 million | $53.6 million | 65.25% | | Total Achievement | | | 62.39% | - The 2021-2023 Performance-Based Restricted Stock Unit (PRSU) cycle vested at 50.5% of target based on the company's performance against its comparator group[561][1171] - The CEO pay ratio for 2023 was 17:1, with the CEO's total compensation at $1,823,987 and the median employee's at $106,376[585][617][1224] - The company maintains double-trigger change in control agreements with its NEOs, designed to promote stability and align management's interests with shareholders during potential transactions[582][1175] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section discloses beneficial ownership, with BlackRock, Inc. holding 8.1% of common stock and directors and executive officers as a group owning 4.4% as of March 8, 2024 - As of March 8, 2024, BlackRock, Inc. is the only known beneficial owner of more than 5% of the Company's common stock, holding 633,933 shares, or 8.1%[590][1228] - As of March 8, 2024, all directors and executive officers as a group (25 individuals) beneficially owned 341,939 shares, representing 4.4% of the outstanding common stock[1263] Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining for Future Issuance | | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | 137,853 | 148,339 | Certain Relationships and Related Transactions, and Director Independence The company has procedures for reviewing related-person transactions, with no disclosures required in 2023, and the Board has determined all continuing directors are independent under NASDAQ rules, except for two executives - The Company has a policy requiring that any transaction with a related person must be on terms comparable to those with an unrelated third party and be approved in advance by the Governance Committee[685] - During 2023, there were no related person transactions that required disclosure under SEC rules. All transactions with directors and officers were made in the ordinary course of business on substantially the same terms as those prevailing for comparable transactions with other persons[686] - The Board has determined that all of its continuing directors are independent under NASDAQ Listing Rules, except for Denis K. Sheahan (President & CEO) and Daniel R. Morrison (former CEO of Cambridge Trust New Hampshire)[643] Principal Accounting Fees and Services The company's independent auditor, Wolf & Company, P.C., received $655,488 in total fees for 2023, covering audit, audit-related, tax, and other services, all pre-approved by the Audit Committee Fees Paid to Wolf & Company, P.C. | Fee Type | 2023 | 2022 | | :--- | :--- | :--- | | Audit Fees | $360,000 | $365,000 | | Audit Related Services | $54,200 | $36,680 | | Tax Fees | $57,500 | $42,000 | | All Other Fees | $183,788 | $219,792 | | Total | $655,488 | $663,472 | - The Audit Committee pre-approved 100% of the services performed by the independent registered public accounting firm[655] PART IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Annual Report on Form 10-K, including financial statements, the merger agreement with Eastern Bankshares, Inc., and various executive compensation and certification documents - The financial statements required for this item are included in Item 8 of the report[667] - Key exhibits filed with the report include the Agreement and Plan of Merger with Eastern Bankshares, Inc., various executive compensation plans and agreements, and certifications by the Principal Executive and Financial Officers[666][662][664] Form 10-K Summary This item is not applicable - None[682]