Corporate Headquarters
Harvard Square
1336 Massachusetts Avenue
Cambridge, MA 02138
617-876-5500
Private Banking Offices
Massachusetts
Beacon Hill
65 Beacon Street
Boston, MA 02108
617-523-3551
Belmont
361 Trapelo Road
Belmont, MA 02478
617-484-0892
Concord
75 Main Street
Concord, MA 01742
978-369-9909
Harvard Square
1336 Massachusetts Avenue
Cambridge, MA 02138
617-876-5500
Huron Village
353 Huron Avenue
Cambridge, MA 02138
617-661-1317
Kendall Square
415 Main Street
Cambridge, MA 02142
617-441-0951
Lexington
1690 Massachusetts Avenue
Lexington, MA 02420
781-863-0976
Porter Square
1720 Massachusetts Avenue
Cambridge, MA 02138
617-661-0398
South End
565 Tremont Street
Boston, MA 02118
617-236-2247
Weston
494 Boston Post Road
Weston, MA 02493
781-893-5500
New Hampshire
Bedford
99 South River Road
Bedford, NH 03110
603-488-6040
Dover
920 Central Avenue
Dover, NH 03820
603-516-1175
North Hampton
26 Lafayette Road
North Hampton, NH 03862
603-433-9633
Portsmouth
143 Daniel Street
Portsmouth, NH 03801
603-433-9611
Portsmouth - Pease Tradeport
20 International Drive
Portsmouth, NH 03801
603-433-9655
Stratham
17 Portsmouth Avenue
Stratham, NH 03885
603-773-5222
Wealth Management Offices
Massachusetts
Boston
75 State Street, 18th Floor
Boston, MA 02109
617-876-5500
New Hampshire
Concord
49 South Main Street, Suite 203
Concord, NH 03301
603-226-1212
Manchester
1000 Elm Street, Suite 201
Manchester, NH 03101
603-657-9015
Portsmouth
Two Harbour Place, First Floor
Portsmouth, NH 03801
603-373-6010
2019 Annual Report
Parent of Cambridge Trust Company
NASDAQ: CATC
cambridgetrust.com
PRIVATE BANKING
WEALTH MANAGEMENT
2019 Annual Report
Cambridge Bancorp Board of Directors
(Front row from left to right): Thalia Meehan, Mark D. Thompson, Linda Whitlock, Denis K. Sheahan,
Sarah G. Green, Edward F. Jankowski, Laila Partridge.
(Back row from left to right): Pamela H. Hamlin, Daniel R. Morrison, Jody A. Rose, Christine Fuchs,
Leon A. Palandjian, R. Gregg Stone, Cathleen A. Schmidt, Hambleton Lord, Jeanette G. Clough.
Financial Highlights
(Dollars in thousands, except per share data)
Selected Year-End Data
Net Income
Operating Net Income*
Total Assets
Total Loans
Total Deposits
Total Shareholder’s Equity
Assets Under Management and/or Administration
Per Common Share
Diluted Earnings Per Share
Diluted Earnings Per Share (Operating)*
Dividend Declared Per Share
Book Value Per Share
Tangible Book Value Per Share*
Financial Ratios
Net Interest Margin, FTE
Return/Average Assets
Return/Average Assets (Operating)*
Return/Average Equity
Return/Average Equity (Operating)*
Return/Average Tangible Common Equity (Operating)*
Asset Quality
Non-Performing Loans
Non-Performing Loans/Total Loans
Net (Charge-Offs)/Recoveries
Net (Charge-Offs)/Average Loans
Allowance/Total Loans
Non-Performing Assets/Assets
*GAAP to Non-GAAP Reconciliation on pages 12 & 13
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2019
25,257
29,156
2,855,563
2,226,728
2,358,878
286,561
3,452,852
5.37
6.20
2.04
53.06
46.66
3.22%
0.97%
1.12%
11.40%
13.16%
14.80%
5,651
0.25%
(1,592)
0.08%
0.82%
0.20%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
23,881
24,024
2,101,384
1,559,772
1,811,410
167,026
2,876,702
5.77
5.80
1.96
40.67
40.57
3.33%
1.21%
1.21%
15.35%
15.44%
15.49%
642
0.04%
(54)
0.00%
1.08%
0.03%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
14,816
18,687
1,949,934
1,350,899
1,775,400
147,957
3,085,669
3.61
4.56
1.86
36.24
36.14
3.25%
0.79%
1.00%
10.47%
13.21%
13.25%
1,298
0.10%
(303)
0.02%
1.13%
0.07%
$29M
$192M
$172M
OPERATING NET INCOME
21.4% Growth
LOANS (EXCLUDING MERGER)
12.3% Growth
CORE DEPOSITS (EXCLUDING MERGER)
10.2% Growth
At Cambridge Trust, we work with individuals
and families, business owners, entrepreneurs,
nonprofits, and successful men and women in
every industry to deliver sound advice and holistic
solutions to help build and protect their wealth for
what really matters to them.
Our aim is always to deliver the
most important return of all: trust.
2019 Annual Report
2019 Annual Report
Page 1
2019 Annual Report 2019 Letter to Shareholders
As we enter our 130th year, I reflect on the past year as one of significant
progress and continued momentum. We achieved strong earnings
performance, deepened our presence in existing markets, delivered robust
organic loan and deposit growth, and raised over $40 million in new capital to
fund growth well into the future. With the completion of the merger with
New Hampshire–based Optima Bank and the announcement of our merger with
Wellesley Bank in Massachusetts, we hope to capitalize on the opportunities
available in the attractive Greater Boston and New Hampshire markets.
Our success reflects the close attention we pay to each of our stakeholders:
the Cambridge Trust team, our loyal clients, communities, and shareholders.
Page 2
2019 Annual Report
2019 Annual Report
The Cambridge Trust Team
I frequently hear from clients their stories of how an employee exceeded
their expectations by their responsiveness and personal attention. It
demonstrates our employees’ commitment to our core values by always
doing what is in the best interest of our clients – it’s in our DNA. Because
of these efforts and dedication to service, our clients are highly satisfied,
which sustains our growth and continues to provide attractive returns year
after year.
I thank my colleagues profusely, both employees and directors, for their
incredible effort in achieving both the financial performance and the
successful integration of Optima Bank during the year. The ink was barely
dry from Optima when we announced another merger with Wellesley Bank.
I fully recognize the effort this will also take and, while the team is excited,
I realize I am asking much. I am, however, very confident in their ability to
deliver another successful merger and remain proud of their dedication and
hard work.
Clients
A recently retired colleague told me in humor, after 36 years at Cambridge
Trust, she “knew more about her clients than she should.” We are friends
with our clients and strive to build deep, lasting relationships. As a result,
clients trust us with both their professional and personal financial lives.
They rely on us to put their interests first and to provide sound advice and
exceptional personal service. It’s the foundation of every relationship, and
we remain committed to delivering on those expectations.
Page 3
2019 Annual Report “
In 2019, our charitable giving supported 269 organizations
in Greater Boston and New Hampshire.
”
Communities
Our communities have supported us for 130 years, and we are increasingly
focused on giving back. In 2019, our charitable giving supported 269
organizations in Greater Boston and New Hampshire. We hosted nine
separate companywide volunteer events where employees engaged directly
in supporting nonprofits throughout our communities.
Our activities also reflect a commitment to affordable housing. The
Massachusetts Housing Partnership recognized Cambridge Trust as a top
lender in 2019, ranking 4th out of 46 financial institutions for loans originated
under the One Mortgage program. This commitment is also reflected in the
Cambridge Trust Financial Wellness programs that are taught to youths and
adults in our markets.
Cambridge Trust also provides community development financing and
expertise to assist nonprofits. During the year, we provided tax-exempt bond
financing to a local redevelopment authority, which allowed eight nonprofits
to remain in operation and avoid displacement due to the pressure of real
estate development in Greater Boston.
Shareholders
I am thankful for the support of our shareholders, their counsel, advice,
and commitment. This was evident when we recently issued $40 million of
common equity to support growth, and I appreciate their continued support.
Page 4
2019 Annual Report
2019 Annual Report
“
The merger will bring almost $1 billion in banking
assets, as well as $350 million in wealth assets, to
Cambridge Trust.
”
Merger Activity
In April, the merger of Optima Bank with Cambridge Trust was completed.
Optima added six banking offices, mainly located on the New Hampshire
seacoast, with approximately $500 million in assets. This merger nicely
complemented the $1.1 billion in client wealth assets we manage in the
Granite State and allows us to offer a full suite of banking and wealth
management services to our existing and prospective clients.
In December, we announced a strategically compelling merger with
Wellesley Bank, headquartered in Wellesley, Massachusetts. The addition of
Wellesley will expand Cambridge Trust’s Greater Boston presence with six
full-service banking offices, bringing our total banking office locations to 22,
serving clients in both Massachusetts and New Hampshire.
Financially, the merger will bring almost $1 billion in banking assets, as well
as $350 million in wealth assets, to Cambridge Trust. We anticipate a legal
close in the second quarter of 2020, followed by a systems conversion during
the fourth quarter of this year. I look forward to welcoming the Wellesley
team to Cambridge Trust and, in particular, I welcome Tom Fontaine, CEO of
Wellesley Bank, who will be joining us as Chief Banking Officer.
Page 5
2019 Annual Report “
This year’s performance was driven by strong growth
in loans, deposits, and wealth management assets.
”
Financial Performance
In 2019, Cambridge Bancorp reported net income of $25.3 million, an
increase of 6% compared to the $23.9 million for the year ending
December 31, 2018. Net income, as reported above, includes the impact
of merger charges in both periods and the costs of capital issuance in
2019. When excluding these items to provide a more comparable view of
operations, operating net income was $29.2 million, or $6.20 per share, for
the year-ended December 31, 2019, as compared to $24.0 million, or $5.80
per share as of December 31, 2018.
This year’s performance was driven by strong growth in loans, deposits,
and wealth management assets. Organically, excluding the impact of the
merger with Optima, loans and core deposits grew $191.6 million and
$172.0 million, respectively, or 12.3% and 10.2%, respectively. Wealth assets
increased by $576.2 million, or 20%, from 2018, which was primarily a result
of the strong equity market performance in 2019.
The company’s profitability ratios remained sound, though less than
the prior year, as interest rate volatility proved a significant challenge to
maintaining the net interest rate margin. The return on average assets and
Page 6
2019 Annual Report
2019 Annual Report
average tangible common equity in 2019, when excluding the merger
and capital issuance charges as referenced above, were 1.12% and 14.80%,
respectively, as compared to 1.21% and 15.49%, respectively, in the prior year.
The path of interest rates remains unpredictable, and the impact of
monetary policy, economic outlook, and global investment has played
material roles in the direction of near- and longer-term interest rates. This
means a continuation of low borrowing and deposit rates for clients. Our
role is to continue to plot an appropriate course through these choppy
times, always with a long-term perspective, an approach to which we’ve
continually adhered.
The outcome of this financial performance is reflected in the stock
performance chart below. In 2019, the stock underperformed broader
market indices and outperformed over the long term.
Cambridge Bancorp (CATC) Price Change % vs. Market Benchmarks
NASDAQ:CATC: 82.16%
SNL U.S. Bank and Thrift 58.01%
KBW Nasdaq Bank Index: 57.56%
100
75
50
25
0
-25
Jun 2015 Dec 2015
Jun 2016 Dec 2016
Jun 2017 Dec 2017
Jun 2018 Dec 2018
Jun 2019 Dec 2019
Page 7
)
%
(
e
g
n
a
h
C
e
c
i
r
P
2019 Annual Report
Wealth Management
Cambridge Trust’s wealth management team achieved revenue growth of
5% in a volatile, but strong, equity market. Investment performance remained
excellent versus benchmarks, as the investment team continues to manage
through market volatility for clients. Additionally, we have evaluated our
wealth management systems and plan to invest meaningful resources to
enhance the client experience and provide scale to our business with new
technology-enabled systems.
Business development will continue to be a focus for the company in 2020.
Despite adequate client inflows in 2019, total wealth assets grew primarily
through market performance. Fee revenue represented 32% of total revenue
in 2019, and revenue from wealth management services is its largest
component. The company is committed to growing our wealth management
business by offering a wider range of investment options and asset classes.
Wealth Management Assets 5-Year CAGR 7.1%
$3,086
$2,877
$3,453
$2,449
$2,689
2015
2016
2017
2018
2019
Managed Assets
Custody Assets
)
s
n
o
i
l
l
i
M
n
I
(
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$-
Page 8
“
Commercial loans grew by $198 million, or 23%,
a rate certainly above our typical growth.
”
Commercial Banking
Excluding the impact of the merger with Optima, 2019 represented
another year of strong growth by the Commercial Banking team.
Commercial loans grew by $198 million, or 23%, a rate certainly above our
typical growth. We experienced meaningful growth in the second half of
2019 and are optimistic that we will sustain growth in 2020. Funding this
growth is important, and the team’s business deposit development efforts
continued in 2019 with business deposits representing 42.8% of total
deposits at year end.
)
s
n
o
i
l
l
i
M
n
I
(
$1,400
$1,200
$1,000
$800
$600
$400
$200
$-
Commercial Loans 5-Year CAGR 16.6%
$1,194
$852
$553
$676
$699
2015
2016
2017
2018
2019
2019 Annual Report
2019 Annual Report
Page 9
2019 Annual Report
Residential Lending
Excluding the impact of the merger with Optima, the residential real estate
loan portfolio was essentially flat to the prior year end, by design. The
team executed on $75 million of loan sales, recognizing $1.2 million in
fee revenue, while helping to improve overall balance sheet liquidity and
capital. New originations provided the company with new clients and new
opportunities to deepen relationships. Residential lending may be the first
interaction a client has with Cambridge Trust, and we are working hard to
ensure it is not their last.
Deposits
Excluding the impact of the merger, total deposits grew by $70 million, or
4%. Importantly, core deposits grew by $172 million, or 10%, as we continue
to focus on relationship deposits. Core deposits represent over 92% of total
deposits. An important element in the success of the Optima and Wellesley
mergers will be our ability to remix the funding of the acquired balance
sheets to better reflect core deposits while de-emphasizing wholesale
funding. We are focused on this task and understand balance sheet growth
without proper funding doesn’t create value.
Page 10
2019 Annual Report
2019 Annual Report
Our Board of Directors and Commitment
to Diversity
There has been significant change in our Board of Directors in 2019 and
more to come in 2020. The transitions are all part of a normal process,
either retirement or relocation, and I am delighted to report the addition of a
talented group of directors to replace those leaving us.
In 2019, four independent directors left, and I thank them for their years of
service and dedication to Cambridge Trust: Anne Thomas (40 years), David
Warner (20 years), Donald Briggs (6 years), and Susan Windham-Bannister
(3 years). We added five talented independent directors in 2019, namely,
Christine Fuchs, Pam Hamlin, Thalia Meehan, Laila Partridge, and
Jody Rose, all of whom bring a diverse set of skills to the board, and I
welcome their contributions. The board also welcomed Daniel Morrison
as a non-independent director following the Optima merger.
We continued our commitment to diversity and inclusion in 2019. Our
Board of Directors and Management Team reflect this commitment with
strong representation by women, people of color, and people with diverse
ethnic backgrounds.
I am proud of our history and the great foundation that we build upon today.
In 2019, the company had solid performance, and we are taking strides to
create meaningful growth opportunities for the future.
I thank my colleagues for their commitment and dedication to Cambridge
Trust, our clients, and our shareholders.
Denis K. Sheahan
Chairman & CEO
March 19, 2020
Page 11
2019 Annual Report GAAP to Non-GAAP Reconciliation
(Dollars in thousands except per share data)
* Statement on Non-GAAP Measures: The Company believes the presentation of the following non-GAAP financial measures provides useful
supplemental information that is essential to an investor’s proper understanding of the results of operations and financial condition of the Company.
Management uses non-GAAP financial measures in its analysis of the Company’s performance. These non-GAAP measures should not be viewed as
substitutes for the financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures
that may be presented by other companies. Please see the following tables for a reconciliation of such non-GAAP financial measures to the most
directly comparable GAAP measure.
For the Year-Ended December 31
Operating Diluted EPS
Net Income (a GAAP measure)
Merger Expenses (Pretax)
(Gain)/Loss on Disposition of Investment Securities
Tax Effect of Merger-Expenses and Gain (Loss) on Disposition of Investment Securities(1)
Impact of the Tax Cuts and Jobs Act of 2017(2)
Operating Net Income (a non-GAAP measure)
Less: Dividends and Undistributed Earnings Allocated to Participating Securities (GAAP)
Operating Income Applicable to Common Shareholders (a non-GAAP measure)
Weighted Average Diluted Shares
Operating Diluted Earnings Per Share (a non-GAAP measure)
Return on Average Assets (Operating)
Net Income (Operating) (a non-GAAP measure)
Average Assets (GAAP)
2019
2018
2017
$
25,257
$
23,881
$
$14,816
4,721
79
(901)
-
29,156
(243)
28,913
4,661,720
6.20
$
$
$
$
201
(2)
(56)
-
24,024
(239)
23,785
3
(1)
3,869
18,687
(157)
18,530
4,098,633
4,065,754
5.80
$
4.56
$
29,156
$
24,024
$
18,687
$ 2,600,316
$ 1,980,580
$ 1,875,136
Return on Avg. Assets (Operating) (a non-GAAP measure)
1.12%
1.21%
1.00%
Return on Average Equity (Operating)
Net Income (Operating) (a non-GAAP measure)
Average Equity (GAAP)
$
$
29,156
221,617
$
$
24,024
155,546
$
$
Return on Avg. Equity (Operating) (a non-GAAP measure)
13.16%
15.44%
18,687
141,488
13.21%
(1) The net tax benefit associated with non-operating items is determined by assessing whether each non-operating item is included or excluded
from net taxable income and applying the Company’s combined marginal tax rate to only those items included in net taxable income.
(2) Income tax adjustment related to the re-measurement of re-deferred tax assets due to the Tax Cuts and Jobs Act.
Page 12
GAAP to Non-GAAP Reconciliation (continued)
(Dollars in thousands except per share data)
2019 Annual Report
2019 Annual Report
For the Year-Ended December 31
2019
2018
2017
Return on Average Tangible Common Equity (Operating)
Operating Net Income (a non-GAAP measure)
Average Shareholders’ Equity (GAAP)
Less: Average Goodwill and Merger-Related Intangibles (GAAP)
$
29,156
$
$24,024
$
18,687
221,617
(24,578)
155,546
141,488
(412)
(412)
Tangible Common Equity (a non-GAAP measure)
$
197,039
$
155,134
$
141,076
Operating Return on Tangible Common Equity (a non-GAAP measure)
14.80%
15.49%
13.25%
Tangible Common Equity
Shareholders' Equity (GAAP)
Less: Goodwill and Merger-Related Intangibles (GAAP)
Tangible Common Equity (a non-GAAP measure)
Total Assets (GAAP)
Less: Goodwill and Merger-Related Intangibles (GAAP)
$
286,561
$
167,026
$
147,957
(34,544)
252,017
2,855,563
(34,544)
(412)
(412)
166,614
147,545
2,101,384
1,949,934
(412)
(412)
Tangible Assets (a non-GAAP measure)
$
2,821,019
$ 2,100,972
$ 1,949,522
Tangible Common Equity Ratio (a non-GAAP measure)
8.93%
7.93%
7.57%
Tangible Book Value Per Share
Tangible Common Equity (a non-GAAP measure)
Common Shares Outstanding
Tangible Book Value Per Share (a non-GAAP measure)
$
$
252,017
$
166,614
5,400,868
4,107,051
46.66
$
40.57
$
$
147,545
4,082,188
36.14
Page 13
2019 Annual Report UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
⌧ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
(cid:4) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM
TO
Commission File Number 001-38184
CAMBRIDGE BANCORP
(Exact name of Registrant as specified in its Charter)
Massachusetts
(State or other jurisdiction of
incorporation or organization)
1336 Massachusetts Avenue
Cambridge, MA
(Address of principal executive offices)
04-2777442
(I.R.S. Employer
Identification No.)
02138
(Zip Code)
Registrants telephone number, including area code: (617) 876-5500
Securities registered pursuant to Section 12(b) of the Act:
Common Stock
(Title of each class)
CATC
(Trading symbol)
NASDAQ
(Name of each exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES (cid:4) NO ⌧
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES (cid:4) NO ⌧
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days. YES ⌧ NO (cid:4)
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
Registrant was required to submit). YES ⌧ NO (cid:4)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting
company, and emerging growth company in Rule 12b-2 of the Exchange Act.
Large accelerated filer (cid:4)
(cid:4)
Non-accelerated filer
⌧
Accelerated filer
Smaller reporting company (cid:4)
Emerging growth company (cid:4)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. (cid:4)
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES (cid:4) NO ⌧
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing
price of the shares of common stock on The NASDAQ Stock Market on June 30, 2019, was $361.1 million. The number of shares of
Registrants Common Stock outstanding as of March 12, 2020 was 5,412,221.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May
18, 2020, are incorporated by reference into Part III of this Report.
Table of Contents
PART I ...........................................................................................................................................................................................
Item 1.
Business ....................................................................................................................................................................
Item 1A. Risk Factors...............................................................................................................................................................
Item 1B. Unresolved Staff Comments .....................................................................................................................................
Properties ..................................................................................................................................................................
Item 2.
Legal Proceedings .....................................................................................................................................................
Item 3.
Mine Safety Disclosures ...........................................................................................................................................
Item 4.
PART II..........................................................................................................................................................................................
Item 5.
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ...................................................................................................................................................................
Selected Financial Data.............................................................................................................................................
Item 6.
Managements Discussion and Analysis of Financial Condition and Results of Operations ...................................
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..................................................................................
Financial Statements and Supplementary Data.........................................................................................................
Item 8.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure..................................
Item 9A. Controls and Procedures ...........................................................................................................................................
Item 9B. Other Information .....................................................................................................................................................
PART III ........................................................................................................................................................................................
Item 10. Directors, Executive Officers and Corporate Governance........................................................................................
Executive Compensation...........................................................................................................................................
Item 11.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................
Item 12.
Certain Relationships and Related Transactions, and Director Independence .........................................................
Item 13.
Principal Accounting Fees and Services ...................................................................................................................
Item 14.
PART IV ........................................................................................................................................................................................
Exhibits, Financial Statement Schedules ..................................................................................................................
Form 10-K Summary ................................................................................................................................................
Signatures........................................................................................................................................................................................
Item 15.
Item 16.
Page
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i
PART I
Unless the context requires otherwise, all references to the Company, we, us, and our, refer to Cambridge Bancorp.
Forward-Looking Statements
This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-
looking statements about the Company and its industry involve substantial risks and uncertainties. Statements other than statements of
current or historical fact, including statements regarding the Companys future financial condition, results of operations, business
plans, liquidity, cash flows, projected costs, and the impact of any laws or regulations applicable to the Company, are forward-looking
statements. Words such as anticipates, believes, estimates, expects, forecasts, intends, plans, projects, may, will,
should, and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to
factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the
following:
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national, regional and local economic conditions may be less favorable than expected, resulting in, among other things,
increased charge offs of loans, higher provisions for credit losses and/or reduced demand for the Companys services;
disruptions to the credit and financial markets, either nationally or globally;
weakness in the real estate market, including the secondary residential mortgage market, which can affect, among other
things, the value of collateral securing mortgage loans, mortgage loan originations and delinquencies, and profits on sales
of mortgage loans;
legislative, regulatory or accounting changes, including changes resulting from the adoption and implementation of the
Dodd-Frank Act, which may adversely affect our business and/or competitive position, impose additional costs on the
Company or cause us to change our business practices;
the Dodd-Frank Acts consumer protection regulations which could adversely affect the Companys business, financial
condition or results of operations;
disruptions in the Companys ability to access capital markets which may adversely affect its capital resources and
liquidity;
the Companys heavy reliance on communications and information systems to conduct its business and reliance on third
parties and affiliates to provide key components of its business infrastructure, any disruptions of which could interrupt the
Company's operations or increase the costs of doing business;
that the Companys financial reporting controls and procedures may not prevent or detect all errors or fraud;
the Companys dependence on the accuracy and completeness of information about clients and counterparties;
the fiscal and monetaryrr policies of the federal government and its agencies;
the failure to satisfy capital adequacy and liquidity guidelines applicable to the Company;
downgrades in the Companys credit rating;
changes in interest rates which could affect interest rate spreads and net interest income;
costs and effects of litigation, regulatory investigations or similar matters;
the inability to realize expected cost savings or implement integration plans and other adverse consequences associated
with the merger with Optima Bank & Trust Company (Optima);
the failure to complete the proposed merger with Wellesley Bancorp, Inc. (Wellesley), the imposition of adverse
regulatory conditions in connection with regulatory approval of the proposed Merger (as defined below) with Wellesley,
disruption to the parties businesses as a result of the announcement and pendency of the Merger, the inability to realize
expected cost savings or to implement integration plans and other adverse consequences associated with the merger with
Wellesley;
a failure by the Company to effectively manage the risks the Company faces, including credit, operational and cyber
security risks;
increased pressures from competitors (both banks and non-banks) and/or an inability by of the Company to remain
competitive in the financial services industry, particularly in the markets which the Company serves, and keep pace with
technological changes;
unpredictable natural or other disasters, which could adversely impact the Companys customers or operations;
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a loss of customer deposits, which could increase the Companys funding costs;
the disparate impact that can result from having loans concentrated by loan type, industry segment, borrower type or
location of the borrower or collateral;
changes in the creditworthiness of customers;
increased loan losses or impairment of goodwill and other intangibles;
negative public opinion which could damage the Companys reputation and adversely impact business and revenues;
the Company depends on the expertise of key personnel, and if these individuals leave or change their roles without
effective replacements, operations may suffer;
the Company may not be able to hire or retain additional qualified personnel, including those acquired in previous
acquisitions, and recruiting and compensation costs may increase as a result of turnover, both of which may increase costs
and reduce profitability and may adversely impact the Companys ability to implement the Companys business strategies;
and
changes in the Companys accounting policies or in accounting standards which could materially affect how the Company
reports financial results and condition.
Except as required by law, the Company does not undertake, and specifically disclaims any obligation, to publicly release the result of
any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or
circumstances after the date of such statements. You are cautioned not to place undue reliance on these forward-looking statements.
Item 1. Business.
The Company
Cambridge Bancorp (together with its bank subsidiary, unless the context otherwise requires, the Company) is a Massachusetts
state-chartered, federally registered bank holding company headquartered in Cambridge, Massachusetts. The Company is a
Massachusetts corporation formed in 1983 and has one bank subsidiary, Cambridge Trust Company (the Bank), formed in 1890. On
October 18, 2017, shares of the Companys common stock commenced trading on the NASDAQ Stock Market under the symbol
CATC. Prior to this date, the Companys shares traded on the over the counter market. As of December 31, 2019, the Company had
total assets of approximately $2.9 billion. Currently, the Bank operates 16 private banking offices in Eastern Massachusetts and New
Hampshire. As a private bank, we focus on four core services that center around client needs. Our core services include Wealth
Management, Commercial Banking, Residential Lending, and Personal Banking. The Banks customers consist primarily of
consumers and small- and medium-sized businesses in these communities and surrounding areas throughout Massachusetts and New
Hampshire. The Companys Wealth Management Group has five offices, two in Boston, Massachusetts and three in New Hampshire
in Concord, Manchester, and Portsmouth. As of December 31, 2019, the Company had Assets under Management and Administration
trust
of approximately $3.5 billion. The Wealth Management Group offers comprehensive investment management, as well as
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administration, estate settlement, and financial planning services. Our wealth management clients value personal service and de
on the commitment and expertise of our experienced banking, investment, and fiduciary professionals.
The Wealth Management Group customizes investment portfolios to help clients meet their long-term financial goals. Through
development of an appropriate asset allocation and disciplined security selection, the Companys in-house investment team targets
long-term capital growth while seeking to minimize downside risk. Our internally developed, research-driven process is managed by
our skilled team of portfolio managers and analysts. We build portfolios consisting of our best investment ideas, focusing on
individual global equities, fixed income securities, exchange-traded funds, and mutual funds.
The Company offers a wide range of services to commercial enterprises, non-profit organizations, and individuals. The Company
emphasizes service to consumers and small- and medium-sized businesses in its market area. The Company makes commercial loans,
commercial real estate loans, construction loans, consumer loans, and real estate loans (including one-to-four family and home equity
lines of credit), and accepts savings, money market, time, and demand deposits. In addition, the Company offers a wide range of
commercial and personal banking services which include cash management, online banking, mobile banking, and global payments.
The Companys results of operations are largely dependent on net interest income, which is the difference between the interest earned
on loans and securities and interest paid on deposits and borrowings, and non-interest income largely from its wealth management
services. The results of operations are affected by the level of income and fees from loans, deposits, as well as operating expenses, the
provision for loan losses, the impact of federal and state income taxes, the relative levels of interest rates, and local and national
economic activity.
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Through the Bank, the Company focuses on wealth management, the commercial banking business and private banking for clients,
including residential lending and personal banking. Within the commercial loan portfolio, the Company has traditionally been a
commercial real estate lender and in recent years has diversified commercial operations within the areas of commercial and industrial
lending to include Innovation Banking, which specializes in working with primarily New England-based entrepreneurs, and asset
based lending that helps companies throughout New England and New York grow by borrowing against existing assets. The
Innovation Banking Group has a narrow client focus for lending and provides a local banking option for technology and
entrepreneurial companies within our market area that are primarily serviced by out-of-market institutions. Personal banking focuses
on providing exceptional service to clients and in deepening relationships.
Cambridge Trust Company
The Bank offers a full range of commercial and consumer banking services through its network of 16 private banking offices in
Eastern Massachusetts and New Hampshire. The Bank is engaged principally in the business of attracting deposits from the public and
investing those deposits. The Bank invests those funds in various types of loans, including residential and commercial real estate, and
a variety of commercial and consumer loans. The Bank also invests its deposits and borrowed funds in investment securities and has
two wholly-owned Massachusetts security corporations, CTC Security Corporation and CTC Security Corporation III, for this
purpose. Deposits at the Bank are insured by the Federal Deposit Insurance Corporation (the FDIC) for the maximum amount
permitted by FDIC regulations.
Investment management and trust services are offered through our two wealth management offices located in Boston and three wealth
management offices located in New Hampshire. The Bank also utilizes its subsidiary and non-depository trust company, Cambridge
Trust Company of New Hampshire, Inc., to provide wealth management services in New Hampshire. The assets held for wealth
management customers are not assets of the Bank and, accordingly, are not reflected in the Companys consolidated balance sheets.
The Bank is active in the communities we serve. The Bank makes contributions to various non-profits and local organizations,
investments in community development lending, and investments in low-income housing all of which strive to improve the
communities that our employees and customers call home.
Merger with Optima Bank & Trust Company
In the fourth quarter of 2018, the Company, the Bank, and Optima Bank & Trust Company (Optima) entered into a definitive
agreement pursuant to which Optima merged with and into the Bank in a stock and cash transaction. The Company completed its
merger with Optima on April 17, 2019. Under the terms of the Agreement and Plan of Merger, each outstanding share of Optima
common stock was converted into $32.00 in cash or 0.3468 shares of the Companys common stock, with the consideration for the
transaction structured as 95% common stock and 5% cash. As a result of the merger with Optima, former Optima shareholders
received an aggregate of 722,746 shares of the Companys common stock and an aggregate of approximately $3.5 million in cash. The
total consideration paid in the merger with Optima amounted to $64.3 million.
Merger with Wellesley Bancorp, Inc.
In the fourth quarter of 2019, the Company, the Bank, Wellesley, and Wellesley Bank, Wellesleys subsidiary bank, entered into a
definitive agreement pursuant to which Wellesley will merge with and into the Company and Wellesley Bank will merge with and into
the Bank in an all-stock transaction (the Merger), which is anticipated to close during the second quarter of 2020. The Merger is
subject to regulatory approval, approval by the Companys and Wellesleys shareholders, and the completion of other customary
closing conditions. Under the terms of the merger agreement, Wellesley shareholders will receive 0.580 shares of the Companys
common stock for each share of Wellesley common stock they own on the effective date of the Merger. This strategically compelling
transaction is expected to enhance and expand the Companys Greater Boston presence with the addition of Wellesleys six full-
service banking offices in the Norfolk, Middlesex, and Suffolk Counties of Massachusetts.
Market Area
The Company operates in Eastern Massachusetts and Southern New Hampshire. Our primary lending market includes Middlesex and
Suffolk Counties in Massachusetts. We benefit from the presence of numerous institutions of higher learning, medical care and
research centers, a vibrant innovation economy in life sciences and technology, and the corporate headquarters of several significant
financial service companies within the Boston area. Eastern Massachusetts also has many high technology companies employing
personnel with specialized skills. These factors affect the demand for wealth management services, residential homes, multi-family
apartments, office buildings, shopping centers, industrial warehouses, and other commercial properties.
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Our lending area is primarily an urban market area with a substantial number of one-to-four unit residential properties, some of which
are non-owner occupied, as well as apartment buildings, condominiums, office buildings, and retail space. As a result, our loan
portfolio contains a significantly greater number of multi-family and commercial real estate loans compared to institutions thataa operate
in non-urban markets.
Our market area is located largely in the Boston-Cambridge-Quincy, Massachusetts/New Hampshire Metropolitan Statistical Area
(MSA). The United States Census Bureau estimates that as of April 2019, the Boston metropolitan area is the 10th largest
metropolitan area in the United States. Located adjacent to major transportation corridors, the Boston metropolitan area provides a
highly diversified economic base, with major employment sectors ranging from services, education, manufacturing, and
wholesale/retail trade, to finance, technology, and medical care. According to the United States Department of Labor, in November
2019, the Boston-Cambridge-Quincy, Massachusetts/New Hampshire MSA had an unemployment rate of 2.1% compared to the
national unemployment rate of 3.5%.
Competition
The financial services industry is highly competitive. The Company experiences substantial competition with other commercial banks,
savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies,
money market funds, credit unions, and other non-bank financial service providers in attracting deposits, making loans, and attracting
wealth management customers. The competing major commercial banks have greater resources that may provide them a competitive
advantage by enabling them to maintain numerous branch offices and mount extensive advertising campaigns. The increasingly
competitive environment is the result of changes in regulation, changes in technology and product delivery systems, additional
financial service providers, and the accelerating pace of consolidation among financial services providers.
The financial services industry has become even more competitive as a result of legislative, regulatory, and technological changes and
continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding
company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency
and underwriting), and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer
products and services traditionally provided by banks, such as automatic transfer and automatic payment systems.
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Some of the Companys non-banking competitors have fewer regulatory constraints and may have lower cost structures. In addition,
some of the Companys competitors have assets, capital and lending limits greater than that of the Company, greater access to capital
markets, and offer a broader range of products and services than the Company. These institutions may have the ability to finance
wide-ranging advertising campaigns and may also be able to offer lower rates on loans and higher rates on deposits than the Companym
can offer. Some of these institutions
offer services, such as international banking, which the Company does not directly offer.
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Various in-state market competitors and out-of-state banks continue to enter or have announced plans to enter or expand their presence
in the market areas in which the Company currently operates. With the addition of new banking presences within our market, the
Company expects increased competition for loans, deposits, and other financial products and services.
The Bank is a private bank, stressing the holistic client relationship, and relies upon local promotional activities, personal relationships
established by officers, directors, and employees with their customers, and specialized services tailored to meet the needs of the
communities served. While the Banks position varies by market, management believes that it can compete effectively as a result of local
market knowledge, local decision making, and awareness of customer needs.
Supervision and Regulation
General
Banking is a complex, highly regulated industry. Consequently, the performance of the Company and the Bank can be affected not
only by management decisions and general and local economic conditions, but also by the statutes enacted by the U.S. Congress and
state legislatures, and the regulations and policies of, various governmental regulatory authorities. These authorities include, but are
not limited to, the Board of Governors of the Federal Reserve System (the Federal Reserve), the Massachusetts Division of Banks
(the MA DOB), the State of New Hampshire Banking Department, and the FDIC.
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The primary goals of bank regulation are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary
policy. In furtherance of these goals, the U.S. Congress and the Commonwealth of Massachusetts have created largely autonomous
regulatory agencies that oversee and have enacted numerous laws that govern banks, bank holding companies, and the banking
industry. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework
for the entities respective operations and is intended primarily for the protection of the Banks depositors and the public, rather than
the shareholders and creditors. The following summarizes the significant laws, rules, and regulations governing banks and bank
holding companies, including the Company and the Bank, but does not purport to be a complete summary of all applicable laws, rules,
and regulations governing bank holding companies and banks or the Company or the Bank. The descriptions are qualified in their
entirety by reference to the specific statutes, regulations, and policies discussed. Any change in applicable laws, regulations, or
regulatory policies may have a material effect on our businesses, operations and prospects. The Company is unable to predict the
nature or extent of the effects that economic controls or new federal or state legislation may have on our business and earnings in the
future.
Regulatory Agencies
The Company is a legal entity separate and distinct from its first tier bank subsidiary, the Bank, and its second tier subsidiaries,
Cambridge Trust Company of New Hampshire, Inc., a New Hampshire state-chartered non-depository trust company, CTC Security
Corporation and CTC Security Corporation III, which are used to invest the Banks deposits and borrowed funds in investment
securities. As a bank holding company, the Company is regulated under the Bank Holding Company Act of 1956, as amended (BHC
Act), Massachusetts laws applying to bank holding companies and Massachusetts corporations more generally. The Company is
subject to inspection, examination, and supervision by the Federal Reserve and the MA DOB.
As a Massachusetts state-chartered insured depository institution, the Bank is subject to supervision, periodic examination, and
regulation by the MA DOB as its chartering authority, and by the FDIC as its primary federal regulator. The prior approval of the MA
DOB and the FDIC is required, among other things, for the Bank to establish or relocate any additional branch offices, assume
deposits, or engage in any merger, consolidation, purchase, or sale of all or substantially all of the assets of any insured depository
institution.
Cambridge Trust Company of New Hampshire, Inc. is subject to supervision, periodic examination and regulation by The State of
New Hampshire Banking Department.
Bank Holding Company Regulations Applicable to the Company
The BHC Act and other federal laws and regulations subject bank holding companies to particular restrictions on the types of activities
in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for
violations of laws and regulations. As a Massachusetts corporation and bank holding company, the Company is also subject to certarr
in
limitations and restrictions under applicablea Massachusetts law.
Mergers & Acquisitions
The BHC Act, the Bank Merger Act, the laws of the Commonwealth of Massachusetts applicable to financial institutions, and other
federal and state statutes regulate acquisitions of banks and their holding companies. The BHC Act generally limits acquisitions by
bank holding companies to banks and companies engaged in activities that the Federal Reserve has determined to be so closely related
to banking as to be a proper incident thereto. The BHC Act requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring more than 5% of the voting stock of any bank or other bank holding company, (ii) acquiring all or
substantially all of the assets of any bank or bank holding company, or (iii) merging or consolidating with any other bank holding
company.
In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities generally consider,
among other things, the competitive effect and public benefits of the transactions, the financial and managerial resources and future
prospects of the combined organization (including the capital position of the combined organization), the applicants performance
record under the Community Reinvestment Act (see Community Reinvestment Act), fair housing laws, and the effectiveness of the
subject organizations in combating money laundering activities.
Non-bank Activities
Generally, bank holding companies are prohibited, under the BHC Act, from engaging in, or acquiring direct or indirect control of
more than 5% of the voting shares of any company engaged in, any activity other than (i) banking or managing or controlling banks or
(ii) an activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of
banking. The Federal Reserve has the authority to require a bank holding company to terminate an activity or terminate control of, or
liquidate or divest, certain subsidiaries or affiliates when the Federal Reserve believes the activity or the control of the subsidiary
or
affiliate constitutes a significant risk to the financial safety, soundness, or stability of any of its bank subsidiaries.
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A bank holding company that qualifies and elects to become a financial holding company is permitted to engage in additional
activities that are financial in nature or incidental or complementary to financial activity. The Company currently has no plans to make
a financial holding company election.
Bank holding companies and their non-banking subsidiaries are prohibited from engaging in activities that represent unsafe and
unsound banking practices. For example, under certain circumstances the Federal Reserves Regulation Y requires a holding company
to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities if the consideration to be paid,
together with the consideration paid for any other redemptions or repurchases in the preceding year, is equal to 10% or more of the
bank holding companys consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction
would constitute an unsafe or unsound practice or would violate a regulation. As another example, a bank holding company is
prohibited from impairing its subsidiary banks soundness by causing the bank to make funds available to non-bank subsidiaries or
their customers if the Federal Reserve believes it is not prudent to do so. The Federal Reserve has the power to assess civil money
penalties for knowing or reckless violations if the activities leading to a violation caused a substantial loss to a depository institution.
Potential penalties can reach as high as almost $2.0 million for each day such activity continues.
Source of Strength
In accordance with Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to the
Bank. Section 616 of the Dodd-Frank Act codifies the requirement that bank holding companies serve as a source of financial strength
to their subsidiary depository institutions. Under this policy, the holding company is expected to commit resources to supportrr its
including at times when the holding company may not be in a financial position to provide it. As discussed below, the
bank subsidiary,rr
Company could be required to guarantee the capital plan of the Bank if it becomes undercapitalized for purposes of banking
regulations. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to
certain other indebtedness of such subsidiary bank. The BHC Act provides that, in the event of a bank holding companys bankruptcy,
any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be
assumed by the bankruptcy trustee and entitled to priority of payment.
Regulatory agencies have promulgated regulations to increase the capital requirements for bank holding companies to a level that
matches those of banking institutions. See Capital Adequacy and Prompt Corrective Action and Safety and Soundness.
Annual Reportingtt
& Examinations
The Company is required to file annual and periodic reports with the Federal Reserve and such additional information as the Federal
Reserve may require. The Federal Reserve may examine a bank holding company and any of its subsidiaries and charge the Company
for the cost of such an examination.
Imposition of Liability for Undercapitalized Subsidiaries
Pursuant to Section 38 of the Federal Deposit Insurance Act (the FDIA) federal banking agencies are required to take prompt
corrective action should an insured depository institution fail to meet certain capital adequacy standards. In the event an institution
becomes undercapitalized, it must submit a capital restoration plan. The capital restoration plan will not be accepted by the
the undercapitalized institution has guaranteed the subsidiarys compliance with
regulators unless each company having control offf
the capital restoration plan until it has been adequately capitalized on average during each of four consecutive calendar quarters.
For
purposes of this statute, the Company has control of the Bank. Under the FDIA, the aggregate guarantee liability of all companies
controlling a particular institution is limited to the lesser of 5% of the depository institutions total assets at the time it became
undercapitalized or the amount necessary to bring the institution into compliance with applicable capital standards. The FDIA grants
greater powers to the federal banking agencies in situations where an institution becomes significantly or critically
undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can
be required to obtain prior Federal Reserve approval of proposed distributions or might be required to consent to a merger or to divest
the troubled institution or other affiliates. See Capital Adequacy and Prompt Corrective Action and Safety and Soundness.
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Dividends
Dividends from the Bank are the Companys principal source of cash revenues. The Companys earnings and activities are affected by
legislation, regulations, and local legislative and administrative bodies and decisions of courts in the jurisdictions in which we conduct
business. These include limitations on the ability of the Bank to pay dividends to the Company and our ability to pay dividends to our
shareholders. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only
out of income available over the past year and only if prospective earnings retention is consistent with the organizations expected
future needs and financial condition. This policy provides that bank holding companies should not maintain a level of cash dividends
that undermines the bank holding companys ability to serve as a source of strength to its bank subsidiary. Consistent with such
policy, a banking organization should have comprehensive policies on dividend payments that clearly articulate the organizations
objectives and approaches for maintaining a strong capital position and achieving the objectives of the policy statement. The Company
has a comprehensive dividend policy in place.
The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of
dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will
result in the bank failing to meet its applicable capital requirements on a pro forma basis. Under applicable Massachusetts law, the
Banks board may declare from net profits cash dividends annually, semi-annually or quarterly, but not more frequently, and noncash
dividends at any time, although no dividends may be declared, credited or paid so long as there is any impairment of capital stock. The
MA DOB Commissioners approval is required in order to authorize the payment of a dividend, if the total dividends declared in a
calendar year exceed that years net profits combined with retained net profits for the preceding two years, less any required transfer to
surplus or a fund for the retirement of any preferred stock.
Federal Reserve System
Federal Reserve regulations require depository institutions to maintain reserves against certain types of deposits and other liabilities,
including transaction accounts, such as interest-bearing and regular checking accounts. The Banks required reserves can be in the
form of vault cash. If vault cash does not fully satisfy the required reserves, the reserves can be in the form of a balance maintained
with the Federal Reserve Bank of Boston. For 2020, the Banks transaction accounts up to and including $16.9 million are exempt and
subject to a zero percent reserve requirement. Any amount of transaction accounts greater than $16.9 million up to and including
$127.5 million have a reserve requirement of 3%, and any amount of transaction accounts greater than $127.5. million have a reserve
requirement of 10%. The Federal Reserve generally makes annual adjustments to the tiered reserves. The Bank is in compliance with
these reserve requirements.
Transactions with Affiliates
Transactions between a bank and its affiliates are subject to certain restrictions under Sections 23A and 23B of the Federal Reserve
Act (the FRA) and the Federal Reserves implementing Regulation W. The Company is considered an affiliate of the Bank under
these sections. Generally, Sections 23A and 23B: (1) limit the extent to which an insured depository or its subsidiaries may engage in
covered transactions (a) with an affiliate (as defined in such sections) to an amount equal to 10% of such institutions capital and
surplus and (b) with all affiliates, in the aggregate, to an amount equal to 20% of such capital and surplus; and (2) require all
transactions with an affiliate, whether or not covered transactions, to be on terms substantially the same, or at least as favorable to the
institution or subsidiary, as the terms provided or that would be provided to a non-affiliate. The term covered transaction includes
the making of loans to an affiliate, purchase securities issued by an affiliate, purchase of assets from an affiliate, issuance of a
guarantee on behalf of an affiliate, and other similar types of transactions.
Capital Adequacy
In July 2013, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the FDIC approved final rules (the
Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The Capital Rules generally
implement the Basel Committee on Banking Supervisions (the Basel Committee) December 2010 final capital framework referred
to as Basel III for strengthening international capital standards. The Capital Rules revise the definitions and the components of
regulatory capital, as well as address other issues affecting the numerator in banking institutions regulatory capital ratios. The Capital
Rules also address asset risk weights and other matters affecting the denominator in banking institutions regulatory capital ratios and
replace the existing general risk-weighting approach with a more risk-sensitive approach.
The Capital Rules: (i) include Common Equity Tier 1 (CET1) and related regulatory capital ratio of CET1 to risk-weighted assets;
(ii) specify that Tier 1 capital consists of CET1 and Additional Tier 1 capital instruments meeting certain revised requirements; (iii)
mandate that most deducd tions/adjud stments to regulatoryrr capital measures be made to CET1 and not to the other components of capital;
and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital
Rules, for most banking organizations, including the Company, the most common form of Additional Tier 1 capital is non-cumulative
perpetual preferred stock, and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan
and lease losses, in each case, subject to the Capital Rules specific requirements.
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Pursuant to the Capital Rules, effective January 1, 2015, the minimum capital ratios are as follows:
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4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capita
a
l plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (called leverage
ratio).
The Capital Rules also include a capital conservation buffer, composed entirely of CET1, in addition to these minimum risk-
weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking
institutions that do not hold the requisite capital conservation buffer will face constraints on dividends, capital instrument repurchases,
interest payments on capital instruments and discretionary bonus payments based on the amount of the shortfall. Thus, the capital
standards applicable to the Company include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in
minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to
risk-weighted assets of at least 8.5%, and (iii) total capital to risk-weighted assets of at least 10.5%.
The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement
that mortgage servicing assets, deferred tax assets arising from temporary differences that could not be realized through net operating
loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that anynn one
In November 2017, the Federal
such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
Reserve finalized a rule pausing the phase-in of these deductions and adjustments for non-advanced approaches institutions. In July
2019, the Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC adopted a final rule intended to simply
the Capital Rules described above for non-advanced approaches institutions. Institutions may implement the provisions of the
simplification rule beginning on January 1, 2020 and must implement them by April 1, 2020. The transition provisions to the Capital
Rules issued by these agencies in November 2017 will cease to apply to an institution in the quarter in which it adopts the
simplification rule.
In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss items
included in shareholders equity (for example, mark-to-market of securities held in the available for sale portfolio) under U.S.
generally accepted accounting principles (GAAP) are reversed for the purposes of determining regulatory capital ratios. Pursuant to
the Capital Rules, the effects of certain of the above items are not excluded. However, banking organizations, including the Company,
that are not subject to the advanced approaches rule, could make a one-time permanent election to exclude these items. The Company
made the one-time permanent election to exclude these items.
The Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies
Tier 1 capital, although bank holding companies that had total consolidated assets of less than $15 billion at December 31, 2009 may
include trust preferred securities issued prior to May 19, 2010 as a component of Tier 1 capital.
The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on
the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 1,250% for certain credit exposures,
and resulting in higher risk weights for a variety of asset classes.
In September 2019, the Office of the Comptroller of the Currency, the Federal Reserve Board and the FDIC adopted a final rule that is
intended to further simply the Capital Rules for depository institutions and their holding companies that have less than $10 billion in
total consolidated assets, such as us, if such institutions meet certain qualifying criteria. This final rule became effective on January 1,
2020. Under this final rule, if we meet the qualifying criteria, including having a leverage ratio (equal to tier 1 capital divided by
average total consolidated assets) of greater than 9 percent, we will be eligible to opt into the community bank leverage ratio
framework. If we opt into this framework, we will be considered to have satisfied the generally applicable risk-based and leverage
capital requirements in the Capital Rules (as modified pursuant to the simplification rule) and will be considered to have met the well-
capitalized ratio requirements for PCA purposes. The Bank is currently evaluation the requirements of this framework.
The Company and the Bank are in compliance with the currently applicable capital requirements.
8
Prompt Corrective Action and Safety and Soundness
Pursuant to Section 38 of the FDIA, federal banking agencies are required to take prompt corrective action should a depositoryrr
institution fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution
is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits,
restrictions or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. For example, well-
capitalized institutions are permitted to accept brokered deposits, but banks that are not well-capitalized are generally restricted
or
prohibited from accepting such deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized
categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must
guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately
capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking
agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice
warrants such treatment.
tt
a
For purposes of prompt corrective action, to be: (i) well-capitalized, a bank must have a total risk-based capital ratio of at least 10%, a
Tier 1 risk-based capital ratio of at least 8%, a CET1 risk-based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%;
(ii) adequately capitalized, a bank must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least
6%, a CET1 risk-based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4% (but not otherwise meet all of the
criteria to be considered well-capitalized); (iii) undercapitalized, a bank would have a total risk-based capital ratio of less than 8%,
a Tier 1 risk-based capital ratio of less than 6%, a CET1 risk-based capital ratio of less than 4.5%, or a Tier 1 leverage ratio of less
than 4% (but not otherwise meet all of the criteria to be considered significantly or critically undercapitalized); (iv) significantly
undercapitalized, a bank would have a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a
CET1 risk-based capital ratio of less than 3%, or a Tier 1 leverage ratio of less than 3% (but not otherwise meet the criterion to be
considered critically undercapitalized); and (v) critically undercapitalized, a bank would have a ratio of tangible equity to total
assets that is less than or equal to 2%.
The Bank is currently well-capitalized, under the prompt corrective action standards.
Bank holding companies and insured banks also may be subject to potential enforcement actions of varying levels of severity by the
federal banking agencies for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation,
condition imposed in writing by the agency or term of a written agreement with the agency. In more serious cases, enforcement
actions may include: issuances of directives to increase capital; issuances of formal and informal agreements; impositions of civil
monetary penalties; issuances of a cease and desist order that can be judicially enforced; issuances of removal and prohibition orders
against officers, directors, and other institution−affiliated parties; terminations of the banks deposit insurance; appointment of a
conservator or receiver for the bank; and enforcements of such actions through injunctions or restraining orders based upon a judicial
determination that the agency would be harmed if such equitable relief was not granted.
The Volcker Rule
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as the
Company and the Bank, from: (i) engaging in proprietary trading and (ii) investing in or sponsoring certain types of funds
(Covered Funds), subject to certain limited exceptions. Under the Volcker Rule, the term Covered Fund includes any issuer that
would be an investment company under the Investment Company Act of 1940 (the ICA) but for the exemptions in section 3(c)(1)
and 3(c)(7) of the ICA. Collateralized loan obligation (CLO) and collateralized debt obligation securities are generally considered
ownership interests in Covered Funds, but the Volcker Rule provides, among other exemptions, an exemption for CLOs meeting
certain requirements. The Company is in compliance with the Volcker Rule.
Deposit Insurance
The Banks deposit accounts are fully insured by the Deposit Insurance Fund (the DIF) of the FDIC up to the deposit insurance limit
of $250,000 per depositor, per insured institution, per ownership category, in accordance with applicable laws and regulations.
The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that accounts for a banks
capital level and supervisory rating (CAMELS rating). The risk matrix uses different risk categories distinguished by capital levels
and supervisory ratings. The base for deposit insurance assessments is average consolidated total assets less average tangible
equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. The FDIC may
increase or decrease the assessment rate schedule in order to manage the DIF to prescribed statutory target levels. An increase in the
risk category for the Bank or in the assessment rates could have an adverse effect on the Banks, and consequently the Companys
earnings. The FDIC may terminate deposit insurance if it determines the institution involved has engaged in or is engaging in unsafe
or unsound banking practices, is in an unsafe or unsound condition, or has violated applicable laws, regulations, or orders. The Bank
is not aware of any practice, condition, or violation that might lead to the termination of its deposit insurance.
9
The FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew or roll over any
brokered deposit unless the institutions capital category is well capitalized or, with the FDICs approval, adequately capitalized.
Depository institutions that have brokered deposits in excess of 10% of total assets are subject to increased FDIC deposit insurance
premium assessments. However, for institutions that are well capitalized and have a CAMELS composite rating of 1 or 2, reciprocal
deposits are deducted from brokered deposits. Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act
(the Economic Growth Act), which was enacted in 2018, amends the FDIA to exempt a capped amount of reciprocal deposits from
treatment as brokered deposits for certain insured depository institutions.
Depositor Preference
The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of
depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative
expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured
depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured,
non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such
insured depository institution.
Consumer Financial Protection
The Company and the Bank are subject to a number of federal and state consumer protection laws that govern their relationship with
customers. These laws include the Consumer Financial Protection Act of 2010, Equal Credit Opportunity Act, the Fair Credit
Reporting Act, the Truthrr
in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability
Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection
Practices Act, the Right to Financial Privacy Act, the Servicemembers Civil Relief Act, and these laws respective state-law
counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws,
among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights,
prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections,
prohibit unfair, deceptive and abusive practices, restrict the Banks ability to raise interest rates, and subject the Bank to substantial
regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation
brought by customers, including actual damages, restitution, and attorneys fees.
Further, the Consumer Financial Protection Bureau (CFPB) has broad rulemaking authority for a wide range of consumer financial
laws that apply to all banks, including, among other things, the authority to prohibit unfair, deceptive or abusive acts and practices.
While there are no statutory definitions for those terms, the CFPB has found an act or practice to be unfair when: (i) it causes
or is
likely to cause substantial injury to consumers; (ii) the injury is not reasonably avoidable by consumers; and (iii) the injury is not
outweighed by countervailing benefits to consumers or to competition. Deceptive acts or practices occur when (i) the act or
practice misleads or is likely to mislead the consumer; (ii) the consumers interpretation is reasonable under the circumstances; and
(iii) the misleading act or practice is material. Finally, an act or practice is abusive when it: (i) materially interferes with the
ability of a consumer to understand a term or condition of a consumer financial product or service; or (ii) takes unreasonable
advantage of (a) a consumers lack of understanding of the material risks, costs, or conditions of the product or service; (b) a
consumers inability to protect his or her interests in selecting or using a consumer financial product or service; or (c) a consumers
reasonable reliance on a covered person to act in his or her interests.
a
Neither the Dodd-Frank Act, nor the individual consumer financial protection laws prevent states from adopting stricter consumer
protection standards.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (the CRA), requires depository institutions to assist in meeting the credit needs of their
market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the
credit needs of its market areas by, among other things, providing credit to low and moderate income individuals and communities.
These factors are also considered in evaluating mergers, acquisitions and applications to open a branch or facility. The applicable
federal banking agencies regularly conduct CRA examinations to assess the performance of financial institutions and assign one of
four ratings to the institutions records of meeting the credit needs of its community. The Bank received a Satisfactory rating during
its last examination in August 2017.
10
Insider Credit Transactions
Section 22(h) of the FRA and its implementing Regulation O restricts loans to directors, executive officers, and principal shareholders
of a bank or its affiliates, and companies and political or campaign committees controlled by such persons (insiders). Under Section
22(h), a loan by a bank to any insider may not exceed, together with all other outstanding loans to such person and any company or
political or campaign committee controlled by such person, the banks loan-to-one-borrower limit. Loans to insiders above specified
amounts must receive the prior approval of the board of directors. Further, under Section 22(h) of the FRA, loans to insiders must be
made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive
preferential loans made under a benefit or compensation program that is widely available to the banks (or, if applicable, the bank
affiliates) employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional
limitations on loans to executive officers. A violation of these restrictions may result in the assessment of substantial civil monetary
penalties on the affected bank or any officer, director, employee, agent, or other person participating in the conduct of the affairs
of
that bank, the imposition of a cease and desist order, and other regulatory sanctions.
ff
Financial Privacy
The Company is subject to federal laws, including the Gramm-Leach-Bliley Act (the GLBA), and certain state laws containing
consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose
nonpublic information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer
information received from non-affiliated financial institutions. These provisions require notice of privacy policies to customers and, in
some circumstances, allow consumers to prevent disclosure of certain nonpublic personal information to affiliates or non-affiliated
third parties by means of opt out or opt in authorizations.
Financial Data Security
SS
The GLBA requires that financial
include
administrative, technical, and physical safeguards to protect consumer information. Further, pursuant to interpretive guidance issued
under the GLBA and certain state laws, financial institutions are required to notify customers and regulators of security breaches that
result in unauthorized access to their nonpublic personal information.
institutions implement comprehensive written information security programs that
ff
Incentive Compensation
The Dodd-Frank Act requires the federal banking agencies and the Securities and Exchange Commission (the SEC) to establish
joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including the
Company and the Bank, with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an
executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to
material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but
the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in
which executive compensation is structured.
The Dodd-Frank Act also requires publicly traded companies to give shareholders a non-binding vote on executive compensation and
on so-called golden parachute payments in connection with approvals of mergers and acquisitions.
Anti-Money Laundering Initiatives and the USA PATRIOT Act
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers,
prevent money laundering, monitor customer transactions, and report suspicious activity to U.S. law enforcement agencies. Financial
institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies.
Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial
institutions from the privacy provisions of the GLBA and other privacy laws. Financial institutions that hold correspondent accounts for
foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain
foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from
dealing with foreign shell banks and persons from jurisdictions of particular concern. The primary federal banking agencies and the
Secretary of the U.S. Department of the Treasury have adopted regulations to implement several of these provisions. All financial
institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in
combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank
Merger Act. The Company has a Bank Secrecy Act and USA PATRIOT Act compliance program commensurate with its risk profile.
aa
11
The Fair Credit Reporting Acts Red Flags Rule requires financial institutions with covered accounts (e.g., consumer bank accounts
and loans) to develop, implement, and administer an identity theft prevention program. This program must include reasonable policies
and procedures to detect suspicious patterns or practices that indicate the possibility of identity theft, such as inconsistencies in
personal information or changes in account activity.
Office of Foreign Assets Control (OFAC) Regulation
The Office of Foreign Assets Control (OFAC) of the U.S. Department of the Treasury administers and enforces economic and trade
sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists,
international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other
threats to the national security, foreign policy, or economy of the United States. OFAC publishes lists of individuals and companies
owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists
and narcotics traffickers, designated under programs that are not country-specific. These are typically known as the OFAC rules based
on their administration by the OFAC. The OFAC-administered sanctions targeting countries take many different forms. Generally,
they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including
prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in
financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country;
and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest by
prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked
assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC.
Failure to comply with these sanctions could have serious legal and reputational consequences.
Available Information
The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC.
Our Internet website is http://www.cambridgetrust.com. You can obtain on our website, free of charge, a copy of our Annual Report
on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports, as soon as
reasonably practicable after we electronically file such reports or amendments with, or furnish them to, the SEC. Our Internet website
and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
Employees
As of December 31, 2019, the Company had 312 full-time and 9 part-time employees. The Companys employees are not represented
by any collective bargaining unit. The Company believes that its employee relations are good.
Item 1A. Risk Factors.
Deterioration in local economic conditions may negatively impact our financial performance.
The Companys success depends primarily on the general economic conditions in Eastern Massachusetts and New Hampshire and the
specific local markets in which the Company operates. Unlike larger national or other regional banks that are more geographically
diversified, the Company provides banking and financial services to customers primarily in Massachusetts and New Hampshire. The local
economic conditions in these areas have a significant impact on the demand for the Companys products and services as well as the
ability of the Companys customers to repay loans, the value of the collateral securing loans, and the stability of the Companys deposit
funding sources.
A downturn in our local economy may limit funds available for deposit and may negatively affect our borrowers ability to repay their
loans on a timely basis, both of which could have an impact on our profitability.
Variations in interest rates may negatively affect our financial performance.
The Companys earnings and financial condition are largely dependent upon net interest income, which is the difference between
interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could
adversely affect the Companys earnings and financial condition. The Company cannot predict with certainty, or control, changes in
interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the
Federal Reserve, affect interest income and interest expense. High interest rates could also affect the amount of loans that the
Company can originate because higher rates could cause customers to apply for fewer mortgages or cause depositors to shift funds
from accounts that have a comparatively lower cost to accounts with a higher cost. The Company may also experience customer
12
attrition due to competitor pricing. If the cost of interest-bearing deposits increases at a rate greater than the yields on interest-earning
assets increase, then net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest
income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable rate assets to reset to lower
rates. If the Company is not able to reduce its funding costs sufficiently, due to either competitive factors or the maturity schedule of
existing liabilities, then the Companys net interest margin will decline.
Although management believes it has implemented effective asset and liability management strategies to mitigate the potential adverse
effects of changes in interest rates on the Companys results of operations, any substantial or unexpected change in, or prolonged
change in market interest rates could have a material adverse effect on the Companys financial condition and results of operations.
Changes in the economy or the financial marketstt could materially affect our financial performance.
Downturns in the United States or global economies or financial markets could adversely affect the demand for and income received
from the Companys fee-based services. Revenues from the Wealth Management Group depend in large part on the level of assets
under management and administration. Market volatility that leads customers to liquidate investments, as well as lower asset values,
can reduce our level of assets under management and administration and thereby decrease our investment management and
administration revenues.
Our loan portfolio includes loans with a higher risk of loss.
The Bank originates commercial and industrial loans, commercial real estate loans, consumer loans, and residential mortgage loans
primarily within our market area. Our lending strategy focuses on residential real estate lending, as well as servicing commercial
customers, including increased emphasis on commercial and industrial lending, and commercial deposit relationships. Commercial
and industrial loans, commercial real estate loans, and consumer loans may expose a lender to greater credit risk than loans secured by
residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition,
commercial real estate and commercial and industrial loans may also involve relatively large loan balances to individual borrowers or
groups of borrowers. These loans also have greater credit risk than residential real estate for the following reasons:
•
•
•
Commercial Real Estate Loans. Repayment is dependent on income being generated in amounts sufficient to cover
operating expenses and debt service.
Commercial and Industrial Loans. Repayment is generally dependent upon the successful operation of the borrowers
business.
Consumer Loans. Consumer loans are collateralized, if at all, with assets that may not provide an adequate source of
payment of the loan due to depreciation, damage or loss.
Any downturn in the real estate market or local economy could adversely affect the value of the properties securing the loans or
revenues from the borrowers businesses thereby increasing the risk of non-performing loans.
We may experience losses and expenses if security interests granted for loans are not enforceable.
When the Company makes loans it sometimes obtains liens, such as real estate mortgages or other asset pledges, to provide the
Company with a security interest in collateral. If there is a loan default, the Company may seek to foreclose upon collateral and
enforce the security interests to obtain repayment and eliminate or mitigate the Companys loss. Drafting errors, recording errors,
other defects or imperfections in the security interests granted to the Company and/or changes in law may render liens granted to the
e.
Company unenforceable. The Company may incur losses or expenses if security interests granted to the Company are not enforceabl
ff
If our allowance for loan losses is not sufficient to cover actual loan losses, then our earnings will decrease.
The Banks loan customers may not repay their loans according to their terms and the collateral securing the payment of these loans
may be insufficient to pay any remaining loan balance. The Bank therefore may experience significant loan losses, which could have a
material adverse effect on our operating results. Material additions to our allowance for loan losses would materially decrease our net
income, and the charge-off of loans may cause us to increase the allowance. The Bank makes various assumptions and judgments
about the collectability of the loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other
assets serving as collateral for the repayment of many of our loans. We rely on our loan quality reviews, our experience, and our
evaluation of economic conditions, among other factors, in determining the amount of the allowance for loan losses. If our
assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio,
resulting in additions to our allowance.
13
A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on
our financial condition and results of operations.
The Financial Accounting Standards Board has issued Accounting Standards Update 2016-13, which will be effective for the
Company for the first quarter of 2020. This standard, often referred to as CECL (reflecting a current expected credit loss model),
will require companies to recognize an allowance for credit losses based on estimates of losses expected to be realized over the
contractual lives of the loans. Under current U.S. GAAP, companies generally recognize credit losses only when it is probable that a
loss has been incurred as of the balance sheet date. This new standard will require us to collect and review increased types and
amounts of data for us to determine the appropriate level of the allowance for loan losses, and may require us to increase our
allowance for loan losses. It also could produce higher volatility in future provisions for credit losses than our current process and
may adversely impact our results of operations.
Strong competition withintt
our industry and market area could hurt our performance
rr
and slow our growth.
The Company operates in a competitive market for both attracting deposits, which is our primary source of funds, and originating
loans. Historically, our most direct competition for deposits has come from savings and commercial banks. Our competition for loans
comes principally from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual
funds, insurance companies, and investment banking firms. We also face additional competition from internet-based institutions and
brokerage firms. Competition for loan originations and deposits may limit our future growth and earnings prospects.
The Companys ability to compete successfully depends on a number of factors, including, among other things:
•
•
•
•
•
•
•
the ability to develop, maintain, and build upon long-term customer relationships based on service quality, high ethical
standards and reputation;
the ability to expand the Companys market position;
the scope, relevance, and pricing of products and services offered to meet customer needs and demands;
the rate at which the Company introduces new products, services, and technologies relative to its competitors;
customer satisfaction with the Companys level of service;
industry and general economic trends; and
the ability to attract and retain talented employees.
Failure to perform in any of these areas could significantly weaken the Companys competitive position, which could adversely affect
the Companys growth and profitability, which, in turn, could have a material adverse effect on the Companys financial condition and
results of operations.
ff
The Company is subject to extensive government regulation and supervision, which may interfere with its ability to conduct its
business and may negatively impactm
its financial results.
The Company, primarily through the Bank, Cambridge Trust Company of New Hampshire, Inc., and certain non-bank subsidiaries,
are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors
funds, the DIF and the safety and soundness of the banking system as a whole, not shareholders. These laws and regulations affect the
Companys lending practices, capital structure, investment practices, dividend policy, and growth, among other things. Congress and
federal and state banking agencies continually review banking laws, regulations, and policies for possible changes. Changes to
statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies,
could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit
the types of financial services and products the Company may offer, and/or limit the pricing the Company may charge on certain
banking services, among other things. Compliance personnel and resources may increase our costs of operations and adversely impact
our earnings.
Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation
damage, which could have a material adverse effect on our business, financial condition, and results of operations. While the Company has
policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.
14
State and federal banking agencies periodically conduct examinations of our business, including for compliance withtt
laws and
regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such
examinations may adversely affect our business.
Federal and state regulatory agencies periodically conduct examinations of our business, including our compliance with laws and
regulations. If, as a result of an examination, an agency were to determine that the financial, capital resources, asset quality,tt
earnings
prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory or violates any law or
regulation, such agency may take certain remedial or enforcement actions it deems appropriate to correct any deficiency. Remedial or
enforcement actions include the power to enjoin unsafe or unsound practices, to require affirmative actions to correct any conditions
resulting from any violation or practice, to issue an administrative order that can be judicially enforced against a bank, to direct an
increase in the banks capital,
to restrict the banks growth, to assess civil monetary penalties against a banks officers or directors, and
to remove officers and directors. In the event that the FDIC concludes that, among other things, our financial condition cannot be
corrected or that there is an imminent risk of loss to our depositors, it may terminate our deposit insurance. The CFPB also has
authority to take enforcement actions, including cease-and desist orders or civil monetary penalties, if it finds that we offer consumer
financial products and services in violation of federal consumer financial protection laws.
a
If we are unable to comply with future regulatory directives, or with the terms of any future supervisory requirements to which we
may become subject, then we could become subject to a variety of supervisory actions and orders, including cease and desist orders,
prompt corrective actions, memoranda of understanding, and other regulatory enforcement actions. Such supervisory actions could,
among other things, impose greater restrictions on our business, as well as our ability to develop any new business. The Company
could also be required to raise additional capital, or dispose of certain assets and liabilities within a prescribed time period, or both.
Failure to implement remedial measures as required by financial regulatory agencies could result in additional orders or penalties from
federal and state regulators, which could trigger one or more of the remedial actions described above. The terms of any supervisory
action and associated consequences with any failure to comply with any supervisory action could have a material negative effect on
our business, operating flexibility, and overall financial condition.
The Company is subject to liquidity risk, which could adversely affect net interest income and earnings.
The purpose of the Companys liquidity management is to meet the cash flow obligations of its customers for both deposits and loans.
The primary liquidity measurement the Company utilizes is called basic surplus, which captures the adequacy of the Companys access to
reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of
balancing levels of cash flow liquidity from short- and long-term securities with the availability of dependable borrowing sources which
can be accessed when necessary. However, competitive pressure on deposit pricing could result in a decrease in the Companys deposit
base or an increase in funding costs. In addition, liquidity will come under additional pressure if loan growth exceeds deposit growth.
These scenarios could lead to a decrease in the Companys basic surplus measure below the minimum policy level of 5%. To manage
this risk, the Company has the ability to purchase brokered certificates of deposit, borrow against established borrowing facilities with
other banks (Federal funds), and enter into repurchase agreements with investment companies. Depending on the level of interest rates,
the Companys net interest income, and therefore earnings, could be adversely affected.
Our ability to service our debt, pay dividends, and otherwise pay our obligations as they come due is substantially dependent on
capital distributions from our subsidiary.
The Company is a separate and distinct legal entity from its subsidiary, the Bank. It receives substantially all of its revenue from
dividends from the Bank. These dividends are the principal source of funds to pay dividends on the Companys common stock.
Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Company. Also, the
Companys right to participate in a distribution of assets upon a subsidiarys liquidation or reorganization is subject to the prior claims
of the subsidiarys depositors and certain other creditors. In the event the Bank is unable to pay dividends to the Company, the
Company may not be able to service debt, pay obligations, or pay dividends on the Companys common stock. The inability to receive
dividends from the Bank could have a material adverse effect on the Companys business, financial condition, and results of
operations.
A breach of information security, including cyber-attacks, could disrupt our business and impact our earnings.
The Company depends upon data processing, communication, and information exchange on a variety of computing platforms and
In addition, we rely on the services of a variety of vendors to meet our data processing and
networks and over the internet.
s are free from vulnerabilityy to attack or
communication needs. Despite existing safegguards,, we cannot be certain that all of our systemy
other technologicag
to continue
and we expectp
, none of which has been material to the Company to date, and we may be unable to
p
to experience
pprotect sensitive data and the integrity of our systems. If information security is breached or difficulties or failures occur, despite the
controls we and our third party vendors have instituted, information can be lost or misappropriated, resulting in financial loss or costs
to us, reputational harm, or damages to others. Such costs or losses could exceed the amount of insurance coverage, if any, which
would adversely affect our earnings.
l difficulties or failures. Duringg the normal course of our business,, we have experienced
to breach our systems,
attemptsp
p
y
15
The Company may be adversely affected by fraud.
The Company is inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, customers, and
other third parties targeting the Company and/or the Companys customers or data. Such activity mayy take manyy forms,, includingg
check fraud,, electronic fraud,, wire fraud,, phishing,
rour
bbusiness,, we have been subjected
to and we expect to continue to be subject to theft and fraudulent activity, none of which has been
material to the Company to date.
g, and other dishonest acts. Duringg the normal course of
g, social engineering,
p
g
j
The Company continually encounters technological change and the failure to understand and adapt to these changes could hurt
its business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-
driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve
customers and to reduce costs. The Companys future success depends, in part, upon its ability to address the needs of its customers by
using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the
Companys operations. Many of the Companys competitors have substantially greater resources to invest
in technological
improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful
in marketing these products and services to its customers. Failure to successfully keep pace with technological changes affecting the
financial services industry could have a material adverse impact on the Companys business and, in turn, the Companys financial
condition and results of operations.
The Company relies on third parties to provide key components of its business infrastructure.
The Company relies on third parties to provide key components for its business operations, such as data processing and storage,
recording and monitoring transactions, online banking interfaces and services, internet connections, and network access. While the
Company selects these third-party vendors carefully, it does not control their actions. Any problems caused by these third parties,
ns in communication services provided by a vendor, failure of a vendor to
including those resulting from breakdowns or other disruptio
handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any
reason, or poor performance of services by a vendor, could adversely affect the Companys ability to deliver products and services to
its customers and otherwise conduct its business. Financial or operational difficulties of a third-party vendor could also hurt the
Companys operations if those difficulties interfere with the vendors ability to serve the Company. Replacing these third-partytt
vendors could create significant delays and expense that adversely affect the Companys business and performance.
u
The possibility of the economys return to recessionary conditions and the possibility of further
markets would likely have an adverse effect on our business, financial position, and results of operations.
ff
turmoil or volatility in the financial
The economy in the United States and globally has experienced volatility in recent years and may continue to experience such
volatility for the foreseeable future. There can be no assurance that economic conditions will not worsen. Unfavorable or uncertain
economic conditions can be caused by declines in economic growth, business activity, or investor or business confidence, limitations
of
on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impactm
changing governmental policies, natural disasters, epidemics / pandemics, such as coronavirus disease 2019 (COVID-19), terrorist
attacks, acts of war, or a combination of these or other factors. A worsening of business and economic conditions could have adverse
effects on our business, including the following:
dd
ff
•
•
•
•
•
•
•
investors may have less confidence in the equity markets in general and in financial services industry stocks in particular,
which could place downward pressure on the Companys stock price and resulting market valuation;
economic and market developments may further affect consumer and business confidence levels and may cause declines
in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates;
the Companys ability to assess the creditworthiness of its customers may be impaired if the models and approaches the
Company uses to select, manage, and underwrite its customers become less predictive of future behaviors;
the Company could suffer decreases in demand for loans or other financial products and services or decreased deposits or
other investments in accounts with the Company;
customers of the Companys Wealth Management Group may liquidate investments, which together with lower asset
values, may reduce the level of assets under management and administration, and thereby decrease the Companys
investment management and administration revenues;
competition in the financial services industry could intensify as a result of the increasing consolidation of financial
services companies in connection with current market conditions or otherwise; and
the value of loans and other assets or collateral securing loans may decrease.
16
The Company is subject to other-than-temporary
tt
impairment risk, which could negatively impact our financial performance.
The Company recognizes an impairment charge when the decline in the fair value of equity, debt securities, and cost-method
investments below their cost basis are judged to be other-than-temporary. Significant judgment is used to identify events or
circumstances that would likely have a significant adverse effect on the future use of the investment. The Company considers various
factors in determining whether an impairment is other-than-temporary, including the severity and duration of the impairment,
forecasted recovery, the financial condition and near-term prospects of the investee, whether the Company has the intent to sell and
whether it is more likely than not it will be forced to sell the security in question. Information about unrealized gains and losses is
subject to changing conditions. The values of securities with unrealized gains and losses will fluctuate, as will the values of securities
that we identify as potentially distressed. Our current evaluation of other-than-temporary impairments reflects our intent to hold
securities for a reasonable period of time sufficient for a forecasted recovery of fair value. However, our intent to hold certain of these
securities may change in future periods as a result of facts and circumstances impacting a specific security. If our intent to hold a
security with an unrealized loss changes and we do not expect the security to fully recover prior to the expected time of disposition,
we will write down the security to its fair value in the period that our intent to hold the security changes.
The risks presented by acquisitions, such as the acquisition of Optima and the proposed merger with Wellesley, could adversely
affect our financial condition and results of operations.
The business strategy of the Company may include growth through acquisition such as the acquisition of Optima and the proposed
merger with Wellesley. Any such future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These
risks may include, among other things:
•
•
•
•
•
our ability to realize anticipated cost savings;
the difficulty of integrating operations and personnel, and the loss of key employees;
the potential disruption of our or the acquired companys ongoing business in such a way that could result in decreased
revenues, the inability of our management to maximize our financial and strategic position;
the inability to maintain uniform standards, controls, procedures, and policies; and
the impairment of relationships with the acquired companys employees and customers as a result of changes in
ownership and management.
The Company cannot provide any assurance that we will be successful in overcoming these risks or any other problems encountered in
connection with acquisitions. Our inability to overcome these risks could have an adverse effect on the achievement of our business
strategy and results of operations.
The Merger with Wellesley is subject to the receipt ofo consents and approvals from governmental authorities that may delay the
date of completion of the Merger or imposem
conditions that could have an adverse effect on the Company.
Before the Merger may be completed, various consents, approvals, waiver or non-objections must be obtained from state and federal
governmental authorities, including the FDIC, the Federal Reserve, the Massachusetts Commissioner of Banks, the Massachusetts
Housing Partnership, and the Co-Operative Central Bank. Satisfying the requirements of these governmental authorities may delay the
date of completion of the Merger. In addition, these governmental authorities may include conditions on the completion of the merger,
or require changes to the terms of the Merger. While the Company and Wellesley do not currently expect that any such conditions or
changes would result in a material adverse effect on the Company, there can be no assurance that they will not, and such conditions or
changes could have the effect of delaying completion of the Merger, or imposing additional costs on or limiting the revenues of the
Company following the Merger, any of which might have a material adverse effect on the Company following the Merger. The parties
are not obligated to complete the Merger should any regulatory approval contain a non-standard condition, restriction or requirement
that the Companys board of directors reasonably determines in good faith would, individually or in the aggregate, materially reduce
the benefits of the Merger to such a degree that the Company would not have entered into the merger agreement had such condition,
restriction or requirement been known at the date of the merger agreement.
17
Failure to complete the Merger with Wellesley could negatively impact the stock price of the Company and future businesses and
financial results of the Company.
If the Merger is not completed, the ongoing businesses of the Company may be adversely affected,
several risks, including the following:
ff
ff
and the Company will be subject to
•
•
the Company will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as
legal, accounting, financial advisor and printing fees; and
matters relating to the Merger may require substantial commitments of time and resources by management of the
Company, which could otherwise have been devoted to serving existing customers or other opportunities that may have
been beneficial to the Company as an independent company.
In addition, if the Merger is not completed, the Company may experience negative reactions from the financial markets, and the
Company may experience negative reactions from its customers and employees. The Company also could be subject to litigation
related to any failure to complete the Merger or to enforcement proceedings commenced against the Company to perform its
obligations under the merger agreement. If the Merger is not completed, the Company cannot assure shareholders that the risks
described above will not materialize and will not materially affect the business, financial results and stock price of the Company.
The integration of the Company, Optima, and the proposed Merger with Wellesley will present significant challenges that may
result in the combined business not operating as effectively as expected or in the failure to achieve some or all of the anticipated
benefits of the transaction.
ii
The benefits and synergies expected to result from the Merger with Wellesley will depend in part on whether the operations of
Wellesley can be integrated in a timely and efficient manner with those of the Company. The Company will face challenges in
consolidating its functions with those of Wellesley, and integrating the organizations, procedures and operations of the two businesses.
The integration of the Company and Wellesley will be complex and time-consuming, and the management of both companies will
have to dedicate substantial time and resources to it. These efforts could divert managements focus and resources from serving
existing customers or other strategic opportunities and from day-to-day operational matters during the integration process. Failure to
successfully integrate the operations of the Company and Wellesley could result in the failure to achieve some of the anticipated
benefits from the transaction, including cost savings and other operating efficiencies, and the Company may not be able to capitalize
on the existing relationships of Wellesley to the extent anticipated, or it may take longer, or be more difficult or expensive than
expected to achieve these goals. This could have an adverse effect on the business, results of operations, financial condition or
prospects of the Company and/or the Bank after the transaction.
Unanticipated costs relatingii
to the Merger with Wellesley could reduce the Companys future earnings per share.
The Company and the Bank believe that each has reasonably estimated the likely costs of integrating the operations of the Bank and
Wellesley, and the incremental costs of operating as a combined company. However, it is possible that unexpected transaction costs
such as taxes, fees or professional expenses or unexpected future operating expenses such as increased personnel costs or increased
taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on the results of operations
and financial condition of the combined company. If unexpected costs are incurred, the Merger Wellesley could have a dilutive effect
on the Companys earnings per share. In other words, if the Merger is completed, the earnings per share of the Companys common
stock could be less than anticipated or even less than if the Merger had not been completed.
ff
Following the Merger, the Company may not continue to pay dividends at or above the rate currently paid by the Company.
Following the Merger, the Companys shareholders may not receive dividends at the same rate that they did prior to the merger for
various reasons, including the following:
•
•
•
the Company may not have enough cash to pay such dividends due to changes in its cash requirements, capital spending
plans, cash flow or financial position;
decisions on whether, when and in what amounts to make any future dividends will remain at all times entirely at the
discretion of the Companys board of directors, which reserves the right to change the Companys dividend practices at
any time and for any reason; and
the amount of dividends that the Companys subsidiaries may distribute to the Company may be subject to restrictions
imposed by state law and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries
may incur.
The Companys shareholders will have no contractual or other legal right to dividends that have not been declared by the Companys
board of directors.
18
The Companys earnings may not grow if we are unable to successfully attract core deposits and lending opportunities and execute
opportunities to generate fee-based income.
The Company has experienced growth, and our future business strategy is to continue to expand. Historically, the growth of our loans
and deposits has been the principal factor in our increase in net-interest income. In the event that we are unable to execute our
business strategy of continued growth in loans and deposits, our earnings could be adversely impacted. The Companys ability to
continue to grow depends, in part, upon our ability to expand our market share, to successfully attract core deposits and identify loan
and investment opportunities, as well as opportunities to generate fee-based income. Our ability to manage growth successfully will
also depend on whether we can continue to effff iff ciently fund
asset growth and maintain asset quality and cost controls, as well as on
factors beyond our control, such as economic conditions and interest-rate trends.
ff
There are substantial risks and uncertainties associated with the introduction or expansion of lines of business or new products
and services within existing lines
of business.
ii
From time to time, the Company may implement new lines of business or offer new products and services within existing lines of
business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not
fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest
significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or
services may not be achieved and price and profitability targets may not prove attainable. External factors, such as compliance with
regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of
business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant
impact on the effectiveness of the Companys system of internal controls. Failure to successfully manage these risks in the
development and implementation of new lines of business or new products or services could have a material adverse effect on the
Companys business, results of operations, and financial condition.
Accounting standards periodically change and the application of our accounting policies and methods may require management to
make estimates about matters that are uncertain.
The regulatory bodies that establish accounting standards, including, among others, the Financial Accounting Standards Board
(FASB) and the SEC, periodically revise or issue new financial accounting and reporting standards that govern the preparation of
our consolidated financial statements. The effect of such revised or new standards on our financial statements can be difficult to
predict and can materially impact how we record and report our financial condition and results of operations.
In addition, management must exercise judgment in appropriately applying many of our accounting policies and methods so they
comply with generally accepted accounting principles. In some cases, management may have to select a particular accounting policy
or method from two or more alternatives. In some cases, the accounting policy or method chosen might be reasonable under the
circumstances and yet might result in our reporting materially different amounts than would have been reported if we had selected a
different policy or method. Accounting policies are critical to fairly presenting our financial condition and results of operations and
may require management to make difficult, subjective or complex judgments about matters that are uncertain.
Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance
policies. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only
reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and
procedures or failure to comply with regulations related to could have a material adverse effect on our business, results of operations
and financial condition.
Legal proceedings to which we are subject or may become subject may have a matett rial adverse impactm
and results of operations.
on our financial position
Like many banks and other financial services organizations in our industry, we are from time to time involved in various legal
proceedings and subject to claims and other actions related to our business activities brought by customers, employees and others. All
such legal proceedings are inherently unpredictable and, regardless of the merits of the claims, litigation is often expensive, time-
consuming, disruptive to our operations and resources, and distracting to management. If resolved against us, such legal proceedings
could result in excessive verdicts and judgments, injunctive relief, equitable relief, and other adverse consequences that may affect our
financial condition and how we operate our business. Similarly, if we settle such legal proceedings, it may affect our financial
condition and how we operate our business. Future court decisions, alternative dispute resolution awards, matters arising due to
In some cases,
business expansion, or legislative activity may increase our exposure to litigation and regulatory investigations.
substantial non-economic remedies or punitive damages may be sought. Although we maintain liability insurance coverage, there can
be no assurance that such coverage will cover any particular verdict, judgment, or settlement that may be entered against us, that such
coverage will prove to be adequate, or that such coverage will continue to remain available on acceptable terms, if at all. Legal
proceedings to which we are subject or may become subject may have a material adverse impact on our financial position and results
of operations.
19
The Company is exposed to risk of environmental liabilitiestt
with respect to properties to which we obtain title.
A significant portion of our loan portfolio is secured by real estate. In the course of our business, we may foreclose and take title to
real estate and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a
government entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties
in connection with environmental contamination or may be required to clean up hazardous or toxic substances or chemical releases at
a property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or
former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting
from environmental contamination emanating from the property. These costs and claims could adversely affect our business, results of
operations, and prospects.
The Company may be adversely affected by the soundness of other financial institutions, including the FHLB of Boston.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other
financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships.
The Company has exposure to different industries and counterparties, and we routinely execute transactions with counterparties in the
financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other
institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the
financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other
institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our
credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full
t
amount of the loan or derivative exposure due us. There is no assurance that any such losses would not materially and adversely affecff
our business, financial condition, or results of operations.
t
The Company owns common stock of FHLB of Boston in order to qualify for membership in the FHLB system, which enables it to
borrow funds under the FHLB of Bostons advance program. The carrying value and fair market value of our FHLB of Boston
common stock was $7.9 million as of December 31, 2019. There are 11 branches of the FHLB, including Boston, which are jointly
liable for the consolidated obligations of the FHLB system. To the extent that one FHLB branch cannot meet its obligations to pay its
share of the systems debt, other FHLB branches can be called upon to make the payment. Any adverse effects on the FHLB of
Boston could adversely affect the value of our investment in its common stock and negatively impact our results of operations.
The Companys common stock price may fluctuate significantly.
The market price of the Companys common stock may fluctuate significantly in response to a number of factors including, but not
limited to:
•
•
•
•
•
•
•
•
•
•
•
the political climate and whether the proposed policies of the current presidential administration in the U.S. that have
affected market prices for financial institution stocks are successfully implemented;
changes in securities analysts recommendations or expectations of financial performance;
volatility of stock market prices and volumes;
incorrect information or speculation;
changes in industry valuations;
announcements regarding proposed acquisitions;
variations in operating results from general expectations;
actions taken against the Company by various regulatory agencies;
changes in authoritative accounting guidance;
changes in general domestic economic conditions such as inflation rates, tax rates, unemployment rates, labor and
healthcare cost trend rates, recessions, and changing government policies, laws, and regulations; and
severe weather, natural disasters, epidemics / pandemics such as COVID-19, acts of war or terrorism, and other external
events.
20
The issuance of our common stock in the Merger will have a dilutive effect and will reduce the voting power and relative
percentage interests of current common stockholders in our earnings and market value, and there may be future sales or other
dilution of the Companys equity,yy which may adversely affect the market price of thett Companys stock.
The consideration payable in the Merger includes up to an aggregate of 1,579,725 of our common stock, based on the maximum
possible number of shares of Wellesley common stock that may be exchanged or cancelled in the Merger. The issuances of shares of
our common stock in the Merger will have a dilutive effect and will reduce the voting power and relative percentage interests of
current common stockholders in our earnings and market value.
ff
Additionally, the Company is not restricted from issuing additional common stock, including any securities that are convertible into or
exchangeable for,
or that represent the right to receive, common stock. The Company also grants shares of common stock to
employees and directors under the Companys incentive plan each year. The issuance of any additional shares of the Companys
common stock or securities convertible into, exchangeable for or that represent the right to receive common stock, or the exercise of
such securities could be substantially dilutive to shareholders of the Companys common stock. Holders of the Companys common
stock have no preemptive rights that entitle such holders to purchase their pro rata share of any offering of shares or any class or
series. Because the Companys decision to issue securities in any future offering will depend on market conditions, its acquisition
activity and other factors, the Company cannot predict or estimate the amount, timing, or nature of its future offerings. Thus, the
Companys shareholders bear the risk of the Companys future offerings reducing the market price of the Companys common stock
and diluting their stock holdings in the Company.
The Company depends on its executive officers and key personnel to continue the implementation of our long-term business
strategy and could be harmed by the loss of their services.
The Company believes that its continued growth and future success will depend in large part upon the skills of our management team.
The competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel, or an inability
to continue to attract or retain and motivate key personnel could adversely affect our business. We cannot provide any assurance that
we will be able to retain our existing key personnel, attract additional qualified personnel, or effectively manage the succession of key
personnel. We have change of control agreements with our actively employed named executive officers, and the loss of the services of
one or more of our executive officers or key personnel could impair our ability to continue to develop our business strategy.
The Company may be subject to more stringent capital requirements.
The Bank and the Company are each subject to capital adequacy guidelines and other regulatory requirements specifying minimum
amounts and types of capital which each of the Bank and the Company must maintain. From time to time, the regulators implement
changes to these regulatory capital adequacy guidelines. If we fail to meet these minimum capital guidelines and other regulatory
requirements, then our financial condition would be materially and adversely affected. Any changes to regulatory capital requirements
could adversely affect our ability to pay dividends, or could require us to reduce business levels or to raise capital, including in ways
that may adversely affect our financial condition or results of operations.
Replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of
operations.
In 2017,
the United Kingdoms Financial Conduct Authority (FCA), which regulates the London Interbank Offered Rate
(LIBOR), announced that the FCA intends to stop persuading or compelling banks to submit the rates required to calculate LIBOR
after 2021. This announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after
2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide submissions
for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable
market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or
alternatives may be on the markets for LIBOR-indexed financial instruments.
ff
We have a significant number of loans, derivative contracts, borrowings and other financial instruments with attributes that are either
directly or indirectly dependent on LIBOR. The transition from LIBOR, or any changes or reforms to the determination or supervision
of LIBOR, could have an adverse impact on the market forff
or value of any LIBOR-linked securities, loans, and other financial
obligations or extensions of credit held by or due to us, could create considerable costs and additional risk and could have an adverse
impact on or overall financial condition or results of operations. Since proposed alternative rates are calculated differently, payments
under contracts referencing new rates will differ from those referencing LIBOR. The transition will change our market risk profileff
s,
requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to
adequately manage this transition process with our customers could adversely impact our reputation. Although we are currently unable
to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a
material adverse effect on our business, financial condition and results of operations.
21
Natural disasters, acts of war or terrorism, the impact of health epidemics and other adverse external events could
detrimentally affect our financial condition and results of operations.
Natural disasters, acts of war or terrorism, and other adverse external events could have a significant negative impact on our ability to
conduct business or upon third parties who perform operational services for us or our customers. Such events also could affect the
stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans,
cause significant property damage, result in lost revenue or cause us to incur additional expenses.
The recent COVID-19 outbreak could negatively impact the ability of our employees and customers to engage in banking and other
financial transactions in the geographic areas in which the Company operates. The Company also could be adversely affected if key
personnel or a significant number of employees were to become unavailable due to a coronavirus outbreak in our market areas.
Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and
safeguards will be effective. In the event of a natural disaster, the spread of the coronavirus to our market areas or other adverse
external events, our business, services, asset quality, financial condition and results of operations could be adversely affecff
ted.
dd
The effects of widespread public health emergencies may negatively affect our local economies or disrupt our operations,
which would have an adverse effect on our business or results of operations.
Widespread health emergencies, such as the recent coronavirus outbreak, can disrupt our operations through their impact on our
employees, customers and their businesses, and the communities in which we operate. Disruptions to our customers could result in
increased risk of delinquencies, defaults, foreclosures and losses on our loans, negatively impact regional economic conditions, result
in a decline in local loan demand, loan originations and deposit availability and negatively impact the implementation of our growth
strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition and results
of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The Company conducts its business through 16 private banking offices, including its main banking office and headquarters in
Cambridge, Massachusetts, its operations center in Burlington, Massachusetts, five wealth management offices and one off-site ATM.
Item 3. Legal Proceedings.
From time to time, the Company and its subsidiaries may be parties to various claims and lawsuits arising in the ordinary course of
their normal business activities. Although the ultimate outcome of these suits, if any, cannot be ascertained at this time, it is the
opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effeff ct on
the Companys consolidated financial position.
On February 25, 2020, one purported stockholder of Wellesley Bancorp, Inc. filed a putative derivative and class action lawsuit
against Wellesley, the members of the Wellesley board of directors, Wellesley Bank, the Company and the Bank in the Circuit Courtu
for Baltimore City, Maryland, on behalf of himself and similarly situated Wellesley stockholders, and derivatively on behalf of
Wellesley, captioned Parshall v. Fontaine et al., Case No. 24-C-20-001127 (the Merger Litigation). The plaintiff generally alleges
that the Wellesley board of directors breached its fiduciary obligations by approving the terms of the Agreement and Plan of Merger,
dated December 5, 2019, by and among Wellesley, the Company, the Bank and Wellesley Bank, which provides for, among other
things, the merger of Wellesley with and into the Company. The plaintiff further alleges inadequate merger consideration. Lastly, the
plaintiff alleges that the joint proxy statement/prospectus for the Merger filed with the SEC on February 4, 2020 and first mailed to
Wellesley stockholders on February 6, 2020 contained materially incomplete disclosures about the Merger. The plaintiff seeks
injunctive relief, rescission of the Merger or rescissory damages, other unspecified damages, and an award of attorneys fees and
expenses. On March 5, 2020, solely to avoid the costs, risks and uncertainties inherent in litigation, the Company and Wellesley
agreed to make additional disclosures to supplement the disclosures contained in the joint proxy statement/prospectus. These
additional disclosures moot plaintiffff s disclosure claims asserted in the Mergerg Litigatig
on and, as a result, the plaintiff has agrg eed to
dismiss the Merger Litigation with prejudice as to their individual claims and without prejudice to the claims of the putative members
of the class.
22
Item 4. Mine Safety Disclosures.
None.
23
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
On October 18, 2017, shares of the Companys common stock commenced trading on the NASDAQ Stock Market under the symbol
CATC. Prior to this date, the Companys shares traded on the over the counter market.
As of February 29, 2020, there were 5,412,221 shares of the Companys common stock outstanding held by 423 holders of record.
The number of record-holders may not reflect the number of persons or entities holding stock in nominee name through banks,
brokerage firms, and other nominees. The closing price of the Companys common stock on December 31, 2019 was $80.15. The
Company declared cash dividends of $2.04 and $1.96 per share in 2019 and in 2018, respectively.
The continued payment of dividends depends upon our profitability, debt and equity structure, earnings, financial condition, need for
capital and other factors, including economic conditions, regulatory restrictions, and tax considerations. We cannot guarantee the
payment of dividends or that, if paid, that dividends will not be reduced or eliminated in the future.
ff
The only funds available for the payment of dividends on our capital stock will be cash and cash equivalents held by us, dividends
paid to us by the Bank, and borrowings. The Bank will be prohibited from paying cash dividends to us to the extent that any such
levels.
payment would reduce the Banks capital below required capital
a
The Companys primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of
the restrictions on the advance of funds or payments of dividends by the Bank to the Company is included in Supervision and
Regulation Dividends.
Stock Performance Graph
The following compares the cumulative total shareholder return on the Companys common stock against the cumulative total returnrr
of the NASDAQ Composite Index and the SNL Bank NASDAQ Index from December 31, 2014 to December 31, 2019. The results
presented assume that the value of the Companys common stock and each index was $100.00 on December 31, 2014. The total
return assumes reinvestment of dividends.
24
Indexee
NASDAQ:CATC:TT
SNL U.S. Bank and Thrift: 58.01 %
KBW Nasdaq Bank Index: 57.56 %
82.16 %
Jun '15
4.43
7.39
7.28
0.00
0.00
0.00
Period Ending
Dec '15
7.73
3.50
1.57
Jun '16
5.89
-7.28
-9.85
Dec '16
41.57
27.66
27.57
Jun'17
52.84
32.00
32.87
Dec '17
81.36
47.39
48.31
Jun '18
96.68
42.83
44.40
Dec '18
89.20
19.94
19.23
Jun '19
85.23
36.54
36.19
Dec '19
82.16
58.01
57.56
Source: S&P Global Market Intelligence © 2020
This performance graph shall not be deemed filed for the purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or incorporated by reference into any filing by us under the Securities Act of 1933, as amended, or the Securities Exchange
Act, except as shall be expressly set forth by specific reference in such filing.
Issuer Purchase of Equity Securities
The following table sets forth the information regarding the Companys repurchases of its common stock during the three months
ended December 31, 2019:
Period
October 1 to October 31, 2019
November 1 to November 30, 2019
December 1 to December 31, 2019
Total
Total Number of
Shares Repurchased (1)
Weighted Average
Price Paid Per Share
$
260
$
$
260
79.62
(1)
Shares repurchased by the Company relate to shares tendered by employees to pay their income tax liability on current period
equity award vestings.
The Company does not currently have a stock repurchase program or plan in place.
Recent Sales of Unregistered Securities
There were no unregistered sales of equity securities during the year ended December 31, 2019.
25
Item 6. Selected Financial Data.
The selected consolidated financial data set forth below does not purport to be complete and should be read in conjunction with, and is
qualified in its entirety by, the more detailed information including the Consolidated Financial Statements and related Notes and the
section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations.
p
p
g Data
Operating
Interest Income
Interest Expense
NNet interest and dividend Income
Provision for Loan Losses
NNoninterest Income
NNoninterest Expense
Income Before Taxes
Income Taxes
NNet Income (a( GAAP Measure))
p
p
Operating
Averageg shares outstanding,g basic
Averageg shares outstanding,g diluted
Total shares outstandingg
Basic Earningsg Per Share
Diluted Earningsg Per Share
Operating
Dividends Declared Per Share
Dividend payout
ratio (1)( )
p y
p
g Net Income (a( non-GAAP measure)*)
g Diluted Earningsg Per Share (a( non-GAAP measure)*)
p
Financial Condition Data
Total Assets
Total Deposits
Total Loans
Shareholders' equity
y
Book Value Per Share
g
Tangible
q
Book Value Per Share (a( non-GAAP measure)*)
g Return on Averageg Assets (a( non-GAAP measure)*)
q
y (a( non-GAAP measure)*)
p
p
Performance Ratios
Return on Averageg Assets
Operating
Return on Averageg Shareholders' equity
y
q
Operating
Total Shareholders Equity
Interest rate spread
p
NNet Interest Margin,g
Efficiencyy ratio (4)( )
Operating
g Return on Tangg Common Equity
y to Total Assets
q
taxable equivalent
q
(2)( )
(3)( )
p
g Efficiencyy Ratio (a( non-GAAP measure)*)
Wealth Management
Market Value of Assets Under Management
Assets
g
g
& Administration
Qualityy
y
Asset
Non-Performingg Loans
Non-Performing
Non-Performingg Loans/Total Loans
Non-Performing
NNet (Charge-Offs)/Recoveries
)
g
Allowance/Total Loans
(
Ratios (5):
( )
Capitalp
p
Total capital
Tier 1 capital
p
Common Equity
y Tier 1
q
Tier 1 leverageg capitp al
Other Data:
NNumber of full service offices
Full time qequivalent
employees
p y
$
$
$
$
$
$
$
$
$
$
$
$
2019
2018
(
(dollars
December 31,
2017
in thousands, exceptp perpp
2016
share data))
2015
$
$
$
$
$
$
$
$
$
$
$
$
96,339
17,643
78,696
3,004
36,401
78,175
33,918
8,661
25,257
29,156
4,629,255
4,661,720
5,400,868
5.41
5.37
6.20
2.04
38%
2,855,563
2,358,878
2,226,728
286,561
53.06
46.66
0.97%
1.12%
11.40%
14.80%
10.04%
2.93%
3.22%
67.92%
63.78%
3,452,852
5,651
0.25%
))
0.82%
(
(1,592
13.61%
12.70%
12.70%
8.98%
16
303
$
$
$
$
$
$
$
$
$
$
$
$
69,055
5,467
63,588
1,502
32,989
63,987
31,088
7,207
23,881
24,024
4,061,529
4,098,633
4,107,051
5.82
5.77
5.80
1.96
34%
2,101,384
1,811,410
1,559,772
167,026
40.67
40.57
1.21%
1.21%
15.35%
15.49%
7.95%
3.19%
3.33%
66.25%
66.05%
2,876,702
642
0.04%
(54(
))
1.08%
13.25%
12.07%
12.07%
8.49%
10
252
$
$
$
$
$
$
$
$
$
$
$
$
61,191
3,587
57,604
362
30,224
59,292
28,174
13,358
14,816
18,687
4,030,530
4,065,754
4,082,188
3.64
3.61
4.56
1.86
51%
1,949,934
1,775,400
1,350,899
147,957
36.24
36.14
0.79%
1.00%
10.47%
13.24%
7.59%
3.16%
3.25%
67.51%
67.51%
3,085,669
1,298
0.10%
(303
))
(
1.13%
13.75%
12.50%
12.50%
8.06%
11
239
$
$
$
$
$
$
$
$
$
$
$
57,028
3,355
53,673
132
28,661
56,750
25,452
8,556
16,896
16,896
3,990,343
4,028,944
4,036,879
4.19
4.15
4.15
1.84
44%
1,848,999
1,686,038
1,320,154
134,671
33.36
33.26
0.95%
0.95%
12.77%
12.81%
7.28%
3.12%
3.21%
68.93%
68.93%
2,689,103
1,676
0.13%
(62(
))
1.16%
13.14%
11.89%
11.89%
7.95%
11
238
54,341
2,694
51,647
1,075
25,865
53,192
23,245
7,551
15,694
15,694
3,938,117
3,993,599
4,000,181
3.94
3.93
3.93
1.80
46%
1,706,201
1,557,224
1,192,214
125,063
31.26
31.16
0.95%
0.95%
12.91%
12.91%
7.33%
3.24%
3.32%
68.62%
68.62%
2,449,139
1,481
0.12%
(153
))
(
1.27%
13.05%
11.80%
11.80%
7.75%
12
228
* See GAAP to Non-GAAP reconciliations in Item 7
(1)
(2)
(3)
(4)
(5)
Dividend payout ratio represents per share dividends declared divided by diluted earnings per share.
The interest rate spread represents the difference between the fully taxable equivalent weighted-average yield on interest-earning assets and
the weighted-average cost of interest-bearing liabilities for the period.
The net interest margin represents fully taxable equivalent net interest income as a percent of average interest-earning assets for the period.
The efficiency ratio represents noninterest expense as a percentage of the sum of net interest income and noninterest income.
Capital ratios are for Cambridge Bancorp.
26
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
Cambridge Bancorp (together with its bank subsidiary, unless the context otherwise requires, the Company) is a Massachusetts
state-chartered, federally registered bank holding company headquartered in Cambridge, Massachusetts. The Company is a
Massachusetts corporation formed in 1983 and has one banking subsidiary, Cambridge Trust Company (the Bank), formed in 1890.
At December 31, 2019, the Company had total assets of approximately $2.9 billion. Currently, the Bank operates 16 private banking
offices in in Eastern Massachusetts and New Hampshire. The Companys Wealth Management Group has five offices, two in Boston,
Massachusetts and three in New Hampshire in Concord, Manchester, and Portsmouth. The Companys Assets under Management and
Administration as of December 31, 2019 were approximately $3.5 billion. The Banks clients consist primarily of small- and
medium-sized businesses and retail customers in these communities and surrounding areas throughout Massachusetts and New
Hampshire.
The Companys results of operations are largely dependent on net interest income, which is the difference between the interest earned
on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income
of
and fees from wealth management services, loans, deposits, as well as operating expenses, the provision for loan losses, the impactm
federal and state income taxes, and the relative levels of interest rates and economic activity.
CRITICAL ACCOUNTING POLICIES
Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact
on the carrying value of certain assets and impact income, are considered critical accounting policies.
The Company considers allowance for loan losses and income taxes to be its critical accounting policies.
Allowance for loan losses
Arriving at an appropriate level of allowance for loan losses involves a high degree of judgment. Management maintains an allowance
for loan losses to absorb losses inherent in the loan portfolio. The allowance is based on assessments of the probable estimated losses
inherent in the loan portfolio. Managements methodology for assessing the appropriateness of the allowance consists of several key
elements, which include the specific allowances, if appropriate, for identified problem loans, formula allowance, and possibly an
unallocated allowance.
The provision for loan losses and the level of the allowance for loan losses reflects managements estimate of probable loan losses
inherent in the loan portfolio at the balance sheet date. Management uses a systematic process and methodology to establish the
allowance for loan losses each quarter. To determine the total allowance for loan losses, management estimates the allowance needed
for each of the following segments of the loan portfolio: (1) residential mortgage loans, (2) commercial mortgage loans, including
multi-family loans and construction loans, (3) home equity loans and lines of credit, (4) commercial & industrial loans, and (5)
consumer loans.
The establishment of the allowance for each portfolio segment is based on a process that evaluates the risk characteristics relevant to
each portfolio segment and takes into consideration multiple internal and external factors.
Internal factors include, but are not limited to:
(a) the loss emergence period,
(b) historic levels and trends in the number and amount of loans on non-accrual and past due, charge-offs, delinquencies, risk
ratings, and foreclosures,
(c) level and changes in industry, geographic, and credit concentrations,
(d) underwriting policies and adherence to such policies,
(e) the growth and vintage of the portfolios, and
(f) the experience of, and any changes in, lending and credit personnel.
External factors include, but are not limited to:
(a) conditions and trends in the local and national economy and
(b) levels and trends in national delinquent and non-performing loans.
27
The Bank evaluates certain loans individually for specific impairment. A loan is considered impaired when, based on current
information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfall
s
generally are not classified as impaired. Loans are selected for evaluation based upon internal risk rating, delinquency status, or non-
accrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the
amount of the probable loss is able to be estimated. Estimates of loss may be determined by the present value of anticipated future
cash flows, the loans observable fair market value, or the fair value of the collateral, if the loan is collateral dependent.
ff
In addition, the adoption of Accountingg Standards Update (ASU) 2016-13, Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments, as amended, on January 1, 2020 will impact our methodology for estimating
the allowance for loan losses. See NOTE 3 - RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS in the notes to
consolidated
d
financial statements included in Item 8. Financial Statements and Supplementary Data elsewhere in this report.
Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, the Commonwealth of Massachusetts, the
State of New Hampshire, and other states as required. Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are
adjusted through the provision for income taxes. Deferred tax assets are reviewed quarterly and reduced by a valuation allowance if,
based upon the information available, it is more likely than not that some or all of the deferred tax assets will not be realized. Interest
and penalties related to unrecognized tax benefits, if incurred, are recognized as a component of income tax expense.
Recent Accounting Developments
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments (ASU 2016-13). ASU 2016-13 replaced the previous GAAP method of calculating credit losses. Previously,
GAAP required the use of the incurred loss methodology, which used a higher threshold at which probable losses were calculated and
recorded. ASU 2016-13 requires the use of an expected loss methodology, referred to as the current expected credit loss (CECL)
methodology, which requires institutions to account for probable losses that previously would not have been part of the calculation.
The CECL methodology incorporates future forecasting in addition to historical and current measures. For public entities that file with
the SEC, ASU 2016-13 becomes effective for the fiscal years beginning after December 15, 2019, including interim periods within
those fiscal years.
ASU 2016-13 must be applied to held to maturity (HTM) debt securities, available for sale (AFS) debt securities, and loans held
for portfolio. A modified-retrospective approach will be applied cumulatively to retained earnings. Early adoption was permitted as of
the fiscal years beginning after December 15, 2018. In November 2018, FASB issued ASU 2018-19 to clarify that operating lease
receivables are not in scope of the credit losses standard. The Company will adopt ASU 2016-13 on January 1, 2020. The
measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost,
including loan receivables, and HTM debt securities.
CECL also applies to off-balance sheet credit exposure not accounted for as insurance (loan commitments, standby letters of credit,
financial guarantees and other similar investment) and net investments in leases recognized by a lessor in accordance with Topic 842
on leases. In addition, ASU 2016-13 made changes to the accounting for AFS debt securities. One such change is to require credit
losses to be presented as an allowance rather than as a write-down on AFS debt securities that management does not intend to sell or
believes that is more likely than not they will be required to sell.
The Company assembled a cross-functional project team that met regularly to address the additional data requirements, to determine
the approach for implementation and to identify new internal controls over enhanced accounting processes upon the adoption of ASU
2016-13. This included assessing the adequacy of existing loan and loss data, as well as assessing models for default and loss
estimates.
The Company has completed the development of its CECL methodology. To estimate the allowance for loans and off-balance sheet
credit exposures, such as unfunded loan commitments, the Company will utilize a discounted cash flow model that contains additional
assumptions to calculate credit losses over the estimated life of financial assets and off-balance sheet credit exposures and will include
the impact of forecasted economic conditions. The estimate will also include qualitative factors that may not be reflected in
quantitatively derived results to ensure that the ACL reflects a reasonable estimate of current expected credit losses.
28
The project team completed limited trial runs and analytical reviews through the year ended December 31, 2019. The Company
expects to complete independent model validation and to finalize its documentation of the new processes and controls in the first
quarter of 2020.
Upon adoption of ASU 2016-13 on January 1, 2020, the Company currently expects to recognize a total increase in the allowance for
credit loss for loans (a contra-asset) and for off-balance sheet credit exposures (a liability) in the range of $200,000 to $1.5 million,
and a one-time cumulative-effect adjustment that decreases retained earnings in the range of $144,000 to $1.1 million (net of tax). The
Company does not expect to record a reserve for its HTM debt securities. The adoption of ASU 2016-13 is not expected to have aa
material impact on our regulatory capital ratios.
See Note 3 RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS to the Audited Consolidated Financial Statements for
additional details on other recently issued and adopted accounting pronouncements and their expected impact on the Companys
financial statements.
COVID-19
In December 2019, a novel strain of coronavirus was reported in Wuhan, China. The World Health Organization has declared the
outbreak to constitute a Public Health Emergency of International Concern. The COVID-19 outbreak is disrupting supply chains
and affecting production and sales across a range of industries. The extent of the impact of COVID-19 on our operational and financial
performance will depend on certain developments, including the duration and spread of the outbreak, impact on our customers,
employees and vendors all of which are uncertain and cannot be predicted. At this point, the extent to which COVID-19 may impact
our financial condition or results of operations is uncertain.
RESULTS OF OPERATIONS
Results of Operations for the years ended December 31, 2019 and 2018
General. Net income increased by $1.4 million, or 5.8%, to $25.3 million for the year ended December 31, 2019, from $23.9 million
for the year ended December 31, 2018, primarily due to a $13.6 million increase in net interest and dividend income after the
provision for loan losses and a $3.4 million increase in noninterest income . These increases were partially offset by a $14.2 million
increase in noninterest expense and higher provision for income taxes of $1.5 million. Diluted earnings per share were $5.37 for
2019, representing a 6.9% decrease over diluted earnings per share of $5.77 for 2018. Net income for 2019 included non-operating
expenses of $4.7 million related to costs associated with the Companys December common stock offering and merger related
expenses resulting from the completed merger with Optima Bank & Trust Company (Optima) and the pending merger with
Wellesley Bancorp, Inc. (Wellesley).
Excluding non-operating expenses, operating net income was $29.2 million for the year ended December 31, 2019, an increase of $5.1
million, or 21.4%, as compared to operating net income of $24.0 million for 2018. Operating diluted earnings per share were $6.20 for
2019, representing a 7% increase over operating diluted earnings per share of $5.80 for 2018.
Net Interest and Dividend Income. Net interest and dividend income before provision for loan losses increased by $15.1 million, or
23.8%, to $78.7 million for the year ended December 31, 2019, as compared to $63.6 million for the year ended 2018, primarily due to
loan growth, both organic and as a result of the Optima merger and higher levels of interest-earning assets.
•
•
Interest on loans increased by $26.7 million, or 45.7%, primarily due to organic loan growth and the impact of loan
balances acquired related to the Optima merger.
Interest on deposits increased $10.6 million, or 211.4%, due to an increase in cost primarily as a result of the impact of the
cost of deposits acquired from our merger with Optima and growth within our higher cost savings products.
Total average interest-earning assets increased by $532.0 million , or 27.7%, to $2.5 billion for the year ended December 31, 2019
from $1.9 billion in 2018. The Companys net interest margin, on a fully tax equivalent basis, decreased 11 basis points to 3.22% for
the year ended December 31, 2019, as compared to 3.33% in 2018, and the net interest rate spread decreased 26 basis points to 2.93%
for the year ended December 31, 2019, as compared to 3.19% in 2018.
Interest and Dividend Income. Total interest and dividend income increased by $27.3 million, or 39.5%, to $96.3 million for the year
ended December 31, 2019, from $69.1 million in 2018, primarily due to a $26.7 million increase in interest income on loans.
Interest Expense. Interest expense increased by $12.2 million, or 222.7% to $17.6 million for the year ended December 31, 2019,
from $5.5 million in 2018, primarily as a result of the impact of the cost of deposits acquired from our merger with Optima and growth
within our higher cost savings products.
29
Average interest-bearing liabilities increased $462.6 million to $1.7 billion at December 31, 2019 from $1.3 billion, which contributed
to a 44 basis points increase in the average cost of funds of 0.72% from 0.28%. The increase in average interest-bearing liabilities was
primarily driven by higher average savings account balances of $202.9 million, higher average money market accounts of $96.4
million, higher average certificates of deposits of $87.3 million, and higher average other borrowed funds of $68.0 million.
Provision for Loan Losses. The Company recorded a provision for loan losses of $3.0 million for the year ended December 31, 2019,
compared to a provision for loan losses of $1.5 million in 2018. The increase is the result of strong loan growth and a $1.2 million
charge-off on an acquired commercial real estate loan during the third quarter of 2019. The charge-off was taken upon receipt of
information indicating misstatements of fact and potential borrower fraud. We believe this to be an isolated incident and do not have
any additional exposure to the borrower. We recorded net charge-offs of $1.6 million for the year ended December 31, 2019, as
compared to net charge-offs of $54,000 during the same period in 2018. The allowance for loan losses was $18.2 million, or 0.82% of
total loans outstanding at December 31, 2019, as compared to $16.8 million, or 1.08% of total loans outstanding at year end 2018.
Noninterest Income. Noninterest income increased by $3.4 million, or 10.3%, to $36.4 million for the year ended December 31,
2019, as compared to $33.0 million for the same period in 2018, primarily as a result of higher Wealth Management revenue, higher
gains on loans sold and higher loan prepayment income. Total noninterest income was 31.6% of total revenue for the year ended
December 31, 2019.
•
•
•
Wealth Management revenue increased by $1.3 million, or 5.2%, for the year ended December 31, 2019, as compared to
the year ended December 31, 2018, due to higher average assets under management during the period and higher average
fees. Assets under Management combined with Assets under Administration were $3.5 billion at December 31, 2019, as
compared to $2.9 billion at December 31, 2018.
Gain on loans sold increased by $1.1 million as compared to the same period in 2018 primarily due to the sale of
residential mortgages totaling $90.0 million during 2019.
Other income increased $658,000 during the year ended 2019 primarily as a result of higher loan prepayment income
during the year.
The categories of Wealth Management revenues are shown in the following table:
Wealth Management revenues:
Trust and investment advisory fees
Asset-based revenues
Financial planning fees and other service fees
Total wealth management revenues
For the Year Ended December 31,
2019
2018
(dollars in thousands)
$
$
25,544
25,544
955
26,499
$
$
24,126
24,126
1,065
25,191
The following table presents the changes in wealth management assets under management:
Wealth Management Assets under Management
Balance at the beginning of the period
Gross client asset inflows
Gross client asset outflows
Net market impact
Balance at the end of the period
Weighted average management fee
For the Year Ended December 31,
2019
2018
(dollars in thousands)
$
$
2,759,547
343,477
(348,938)
533,285
3,287,371
0.84%
$
$
2,971,322
313,629
(490,094)
(35,310)
2,759,547
0.81%
There were no significant changes to the average fee rates and fee structure for the year ended December 31, 2019 and 2018.
Noninterest Expense. Noninterest expense increased by $14.2 million, or 22.2%, to $78.2 million for the year ended December 31,
2019, as compared to $64.0 million for the year ended December 31, 2018, primarily driven by an increase in non-operating expenses,
salaries and employee benefit expense, occupancy and equipment expense, data processing fees, and professional service fees. The
increase to noninterest expense was partially offset by lower marketing, and FDIC insurance expenses.
30
•
•
•
•
Non-operating expense of $4.7 million were primarily related to professional fees, compensation and severance payments,
and contract termination costs associated with the Optima merger combined with expenses associated with the pending
Wellesley merger and the December 2019 common equity offering.
Salaries and employee benefit increases of $6.3 million were primarily the result of the merger with Optima, increased
staffing to support business initiatives, and higher employee benefit costs.
Occupancy and equipment expense increases of $1.8 million were primarily due to the merger with Optima and additional
office space in Boston, Massachusetts.
Data processing expense increases of $1.1 million were primarily due to increased transaction volume related to the
merger with Optima and investments made in technology.
Income Tax Expense. The Company recorded a provision for income taxes of $8.7 million for the year ended December 31, 2019, as
compared to $7.2 million for the same period in 2018, reflecting effective tax rates of 25.5% and 23.2%, respectively. The increase in
the effective tax rate was primarily driven by the costs associated with the Optima merger, the pending Wellesley merger and the
common stock offering completed during the fourth
quarter of 2019, as some of these items were nondeductible for tax purposes.
ff
Results of Operations for the years ended December 31, 2018 and 2017
General. Net income increased by $9.1 million, or 61.2%, to $23.9 million for the year ended December 31, 2018, from $14.8 million
for the year ended December 31, 2017, primarily due to a $4.8 million increase in net interest and dividend income after the provision
for loan losses, a $2.8 million increase in noninterest income, and lower income tax expense of $6.2 million. These increases were
partially offset by a $4.7 million increase in noninterest expense. The reduction in income tax expense was mainly due to the
enactment of the Tax Cuts and Jobs Act of 2017, which required a one-time non-cash write-down of our net deferred tax assets of $3.9
million in 2017 and reduced the Companys statutory federal tax rate from 35% to 21% effective in 2018.
Net Interest and Dividend Income. Net interest and dividend income after provision for loan losses increased by $4.8 million, or 8.5%
to $62.1 million for the year ended December 31, 2018, from $57.2 million for the year ended 2017. The increase was driven by a
combination of the impact of rising interest rates and earning asset growth. Interest on loans increased by $6.6 million, or 12.7% for
the year ended December 31, 2018, as compared to the same period in 2017. Total average interest-earning assets increased $106.1
million, or 5.8%, to $1.9 billion for the year ended December 31, 2018 from $1.8 billion in 2017. The Companys net interest margin,
on a fully tax equivalent basis, increased eight basis points to 3.33% for the year ended December 31, 2018, as compared to 3.25% in
2017, and the net interest rate spread increased three basis points to 3.19% for the year ended December 31, 2018, as compared to
3.16% in 2017.
Interest and Dividend Income. Total interest and dividend income increased by $7.9 million, or 12.9%, to $69.1 million for the year
ended December 31, 2018, from $61.2 million in 2017, primarily due to a $6.6 million increase in interest income on loans and a
$940,000 increase in interest income on investment securities.
Interest Expense. Interest expense increased by $1.9 million, or 52.4% to $5.5 million for the year ended December 31, 2018, from
$3.6 million in 2017, primarily due to a combination of higher interest rates and higher average interest-bearing liabilities. Average
cost of funds increased eight basis points to 0.28% for the year ended December 31, 2018, from 0.20% in 2017. Average interest
bearing liabilities increased $42.6 million to $1.3 billion at December 31, 2018, primarily driven by an increase in average savings
account balances of $52.8 million, higher average money market accounts of $24.6 million, higher average checking accounts of
$15.0 million, partially offset by lower average certificates of deposits of $32.4 million, and lower average other borrowed funds of
$17.4 million. We experienced an increase in the average cost of savings and money market accounts during 2018, as the Company
continues to offer competitively priced products to attract new clients and deepen existing client relationships.
Provision for Loan Losses. The Company recorded a provision for loan losses of $1.5 million for the year ended December 31, 2018,
compared to a provision for loan losses of $362,000 in 2017. The increase in the provision was primarily driven by strong loan growth
during the year totaling $208.9 million. We recorded net charge-offs of $54,000 for the year ended December 31, 2018, as compared
to net charge-offs of $303,000 during the same period in 2017. The allowance for loan losses was $16.8 million, or 1.08% of total
loans outstanding at December 31, 2018, as compared to $15.3 million, or 1.13% of total loans outstanding at year end 2017.
31
Noninterest Income. Noninterest income increased by $2.8 million, or 9.1%, to $33.0 million for the year ended December 31, 2018,
as compared to $30.2 million for the same period in 2017, primarily as a result of higher wealth management revenue and higher loan
e for
related derivative income associated with the Companys interest rate risk strategy. Noninterest income was 34.2% of total revenuee
the year ended December 31, 2018. The Companys wealth management revenue is the largest component of noninterest income and
increased by $2.2 million, or 9.4%, to $25.2 million for the year ended 2018, as compared $23.0 million in 2017, due to higher
average assets under management during the period. Assets under Management combined with Assets under Administration were $2.9
billion at December 31, 2018, as compared to $3.1 billion at December 31, 2017. Loan related derivative income increased $871,000
for the year ended December 31, 2018, as compared to the same period in 2017, due to the volume of loan related derivative
transactions executed in 2018.
The categories of Wealth Management revenues are shown in the following table:
Wealth Management revenues:
Trust and investment advisory fees
Asset-based revenues
Financial planning fees and other service fees
Total wealth management revenues
For the Year Ended December 31,
2018
2017
(dollars in thousands)
$
$
24,126
24,126
1,065
25,191
$
$
21,850
21,850
1,179
23,029
The following table presents the changes in wealth management assets under management:
Wealth management assets under management
Balance at the beginning of the period
Gross client asset inflows
Gross client asset outflows
Net market impact
Balance at the end of the period
g
gWeighted
average management fee
For the Year Ended December 31,
2018
2017
(dollars in thousands)
$
$
2,971,322
313,629
(490,094)
(35,310)
2,759,547
0.81%
$
$
2,572,760
445,125
(371,274)
324,711
2,971,322
0.80%
There were no significant changes to the average fee rates and fee structure for the year ended December 31, 2018 and 2017.
Noninterest Expense. Noninterest expense increased by $4.7 million, or 7.9%, to $64.0 million for the year ended December 31,
2018, as compared to $59.3 million in 2017, primarily driven by increases in salaries and employee benefits expense, marketing
expense, data processing expense, and merger related expenses. The increase in salaries and employee benefiff ts expense of $4.8
million was driven by the combination of increased staffing to support business initiatives, higher employee benefit costs including
performance-based equity compensation, and the adoption of ASU 2017-07 for the presentation of net periodic pension costs and net
periodic postretirement benefit costs in 2018. The retrospective application of ASU 2017-07 for the twelve months ended December
31, 2017 resulted in a decrease in salaries and employee benefits and an increase in other expenses of approximately $252,000. The
increase of $609,000 in marketing was due to costs related to the Banks rebranding efforts, which included the development of a new
brand, website, and advertising campaign. The increase of $221,000 in data processing expense was due to investments made in
technology. The merger expenses of $201,000 were professional services related to the pending acquisition of Optima.
Noninterest expense increases were partially offset by lower other expenses of $880,000, primarily due to the other components of net
periodic pension cost, and net periodic postretirement benefit cost recorded in other expenses for the twelve months ended
December 31, 2018, as compared to the twelve months ended December 31, 2017.
Income Tax Expense. In accordance with the Tax Cuts and Jobs Act of 2017, the Companys federal statutory corporate tax rate
decreased from 35% to 21% effective January 1, 2018. The Company recorded a provision for income taxes of $7.2 million for the
year ended December 31, 2018, as compared to $13.4 million for the same period in 2017, reflecting effective tax rates of 23.2% and
47.4%, respectively.
32
CHANGES IN FINANCIAL CONDITION
Total Assets. Inclusive of the merger with Optima and organic growth, total assets increased $754.2 million, or 35.9%, from
December 31, 2018 and were $2.9 billion as of December 31, 2019. The increase was primarily the result of a $667.0 million increase
in total loans, a $42.9 million increase in cash and cash equivalents, right-of-use assets of $33.6 million associated with the
Companys operating leases, goodwill of $30.8 million associated with the Optima merger, partially offset by lower investment
securities of $52.5 million.
Cash and Cash Equivalents. Cash and cash equivalents increased by $42.9 million to $61.3 million at December 31, 2019, from
$18.5 million at December 31, 2018.
Investment Securities. The carrying value of total investment securities decreased by $52.5 million to $398.5 million at December 31,
2019, from $451.0 million at December 31, 2018, as cash flows were used to reduce wholesale funding.
Loans. Inclusive of the merger with Optima and organic growth, total loans increased by $667.0 million, or 42.8%, to $2.2 billion at
December 31, 2019, from $1.6 billion at December 31, 2018.
•
•
•
Residential real estate loans increased $313.2 million to $917.6 million at December 31, 2019, from $604.3 million at
December 31, 2018.
Commercial real estate loans increased $302.6 million to $1.1 billion at December 31, 2019, from $758.0 million at
December 31, 2018.
Commercial & industrial loans increased $39.5 million to $133.2 million at December 31, 2019, from $93.7 million at
December 31, 2018.
Excluding the impact of the merger with Optima, organic loan growth during 2019 consisted of:
•
•
•
Commercial real estate loans increased $188.3 million, or 24.8%, from December 31, 2018.
Commercial and industrial loans increased $9.3 million, or 9.9%, from December 31, 2018.
Residential mortgage loans decreased $1.3 million from December 31, 2018. The Company had total residential mortgage
loan sales of $90.0 million of residential mortgages in 2019.
For further details, see the Organic Loan and Deposit Growth table at the end of this section.
Insurance. The Company invests in bank-owned life insurance to help offset the costs of our employee benefit plan
Bank-Owned Lifei
obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. At December 31, 2019, our
investment in bank-owned life insurance was $37.3 million, a $6.4 million increase from $30.9 million at December 31, 2018,
primarily due to additional policies associated with the Optima merger.
Goodwill and merger related intangibles. The Company recorded additional goodwill of $30.8 million and other merger related
intangibles of $3.6 million during the second quarter of 2019, due to the merger with Optima. Goodwill and merger related intangible
assets were $31.2 million and $3.3 million, respectively, at December 31, 2019.
Right of use assets. At December 31, 2019, the Company had right-of-use assets related to its operating leases of $33.6 million due to
the adoption of new lease accounting guidance in 2019.
Other assets. Other assets increased $14.7 million, or 53.1%, to $42.3 million at December 31, 2019, from $27.6 million at
December 31, 2018, primarily due to an increase in loan related derivative assets and retirement plan assets.
Deposits. Inclusive of Optima, total deposits grew by $547.5 million, or 30.2%, to $2.4 billion at December 31, 2019, from $1.8
billion at December 31, 2018, primarily driven by a combination of the impact of the Optima merger and organic core deposit growth.
•
•
•
Core deposits, which the Company defines as all deposits other than certificates of deposit, increased by $486.6 million,
or 28.8%, to $2.2 billion from $1.7 billion at December 31, 2018.
Excluding the impact of the Optima merger, organic growth in core deposits was $172.0 million, or 10.2%, at
December 31, 2019. Growth in core deposits during 2019 was attributable to successful deposit campaigns, as we strived
to attract and deepen client relationships.
The cost of total deposits for the year ended December 31, 2019 was 0.70%, as compared to 0.28% for the same period in
2018, driven by the impact of higher deposit rates associated with the Optima merger and the promotional deposit
campaigns described above.
33
Certificates of deposit, which totaled $182.3 million at December 31, 2019, increased by $60.9 million from $121.4 million at
December 31, 2018, primarily due to the merger with Optima. Total brokered certificates of deposit, which are included within
certificates of deposit, were $7.1 million and $27.5 million at December 31, 2019 and December 31, 2018, respectively.
For further details on the loans and deposits acquired, see the Organic Loan and Deposit Growth table provided at the end of this
section.
Borrowings.n
At December 31, 2019, borrowings consisted of advances from the FHLB of Boston. Total borrowings increased $42.3
million to $135.7 million at December 31, 2019, from $93.4 million at December 31, 2018 as the Company utilized short-term
borrowings to fund loan growth.
Shareholders Equity. Total shareholders equity increased $119.5 million, or 71.6%, to $286.6 million at December 31, 2019, from
$167.0 million at December 31, 2018, primarily due to net income of $25.3 million, $59.4 million of equity increase as a result of the
Optima merger, $38.2 million (net of underwritingg fees) from the Companyys fourth quarter 2019 common stock offering, and stock-
based compensation during 2019. Increases in equity were partially offset by regular dividend payments of $9.5 million paid during
the year.
The Companys ratio of tangible common equity to tangible assets increased 12.6%, to 8.93%, at December 31, 2019 from 7.93% at
December 31, 2018, primarily due to receipt of proceeds from the December 2019 equity offering, partially offset by growth and the
impact of goodwill and acquisition related intangibles recorded as a result of the merger with Optima. Tangible book value per share
grew by $6.09, or 15.0%, to $46.66 as of December 31, 2019, as compared to $40.57 as of December 31, 2018.
Organic Loan and Deposit Growth (dollars in thousands)
p
g
Loans
Residential mortgage
Commercial mortgage
Home equity
Commercial & Industrial
Consumer
Total loans
Deposits
Demand
Interest bearing checking
Money market
Savings
Core deposits
Certificates of deposit
Total deposits
December 31,
2019
December 31,
2018
Balance
Acquired
December 2018 vs December 2019
Organic
Organic
Growth/(Loss) %
Growth/(Loss) $
$
$
$
$
917,566
1,060,574
80,675
133,236
34,677
2,226,728
630,593
450,098
181,406
914,499
2,176,596
182,282
2,358,878
$
$
$
$
604,331
757,957
69,336
93,712
34,436
1,559,772
494,492
431,702
135,585
628,212
1,689,991
121,419
1,811,410
$
$
$
$
314,552
114,338
15,452
30,215
849
475,406
58,722
49,454
68,183
138,285
314,644
162,545
477,189
$
$
$
$
(1,317)
188,279
(4,113)
9,309
(608)
191,550
77,379
(31,058)
(22,362)
148,002
171,961
(101,682)
70,279
(0.2%)
24.8%
(5.9%)
9.9%
(1.8%)
12.3%
15.6%
(7.2%)
(16.5%)
23.6%
10.2%
(83.7%)
3.9%
34
GAAP to Non-GAAP Reconciliations (dollars in thousands except per share data)
Statement on Non-GAAP Measures: The Company believes the presentation of the following non-GAAP financial measures provides
useful supplemental information that is essential to an investors proper understanding of the results of operations and financial
condition of the Company. Management uses non-GAAP financial measures in its analysis of the Companys performance. These
non-GAAP measures should not be viewed as substitutes for the financial measures determined in accordance with GAAP, nor are
they necessarily comparable to non-GAAP performance measures that may be presented by other companies.
Operating Net Income / Operating Diluted EPS
p
p
g
g
NNet Income (a GAAP measure)
Add: Merger and Capital Raise Expenses (Pretax)
Add: (Gain)/loss on disposition of investment securities
Tax effect of Merger and Capital Raise Expenses, and Gain (loss) on
disposition of investment securities(1)
Add: Impact of the tax cuts and jobs act of 2017(2)
Operating Net Income (a non-GAAP measure)
Less: Dividends and Undistributed Earnings Allocated to Participating
Securities (GAAP)
Operating Income Applicable to Common Shareholders (a non-GAAP
measure)
Weighted Average Diluted Shares
Operating Diluted earnings per share (a non-GAAP measure)
2019
For the Year Ended December 31,
2016
2017
2018
2015
(in thousands, except share
data)
$
$
25,257
4,721
79
(901)
29,156
$
$
23,881
201
(2)
(56)
24,024
$
$
14,816
3
(1)
3,869
18,687
$
$
16,896
16,896
$
$
15,694
15,694
(243)
(239)
(157)
(181)
$
$
28,913
4,661,720
6.20
$
$
23,785
4,098,633
5.80
$
$
18,530
4,065,754
4.56
$
$
16,715
4,028,944
4.15
$
$
15,694
3,993,599
3.93
(1)
(2)
The net tax benefit associated with non-operating items is determined by assessing whether each noncore item is included or excluded from
net taxable income and applying the Companys combined marginal tax rate to only those items included in net taxable income.
Income tax adjustment related to the re-measurement of net deferred tax assets due to the Tax Cuts and Jobs Act.
The following tables summarize the calculation of the Companys tangible common equity ratio and tangible book value per share for
the periods indicated:
December 31,
2019
December 31,
2018
December
31, 2017
(in thousands, except share data)
December
31, 2016
December
31, 2015
g
q
Tangible Common Equity:
y
Shareholders' equity (GAAP)
Less: Goodwill and acquisition related intangibles (GAAP)
Tangible Common Equity (a non-GAAP measure)
Total assets (GAAP)
Less: Goodwill and acquisition related intangibles (GAAP)
Tangible assets (a non-GAAP measure)
$ 286,561
(34,544)
252,017
2,855,563
(34,544)
$ 2,821,019
$ 167,026
(412)
166,614
2,101,384
(412)
$ 2,100,972
$ 147,957
(412)
147,545
1,949,934
(412)
$1,949,522
$ 134,671
(412)
134,259
1,848,999
(412)
$1,848,587
$ 125,063
(412)
124,651
1,706,201
(412)
$1,705,789
Tangible Common Equity Ratio (a non-GAAP measure)
8.93%
7.93%
7.57%
7.26%
7.31%
g
Tangible Book Value Per Share:
Tangible Common Equity (a non-GAAP measure)
Common shares outstanding
Tangible Book Value Per Share (a non-GAAP measure)
$ 252,017
5,400,868
46.66
$
$ 166,614
4,107,051
40.57
$
$ 147,545
4,082,188
36.14
$
$ 134,259
4,036,879
33.26
$
$ 124,651
4,000,181
31.16
$
INVESTMENT SECURITIES
The Companys securities portfolio consists of securities available for sale (AFS) and securities held to maturity (HTM). The
largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. government agencies or
U.S. government-sponsored enterprises.
Securities available for sale consist of certain U.S. Government Sponsored Enterprises (GSE) and U.S. GSE mortgage-backed
securities, corporate debt securities, and mutual funds. These securities are carried at fair value, and unrealized gains and losses net of
35
applicable income taxes are recognized as a separate component of shareholders equity. The fair value of securities available for sale
totaled $140.3 million and included gross unrealized gains of $231,000 and gross unrealized losses of $1.0 million at December 31,
2019. At December 31, 2018, the fair value of securities available for sale totaled $168.2 million and included gross unrealized gains
of $118,000 and gross unrealized losses of $4.2 million.
Securities classified as held to maturity consist of certain U.S. GSE and U.S. GSE mortgage-backed securities, corporate debt
securities, and state, county, and municipal securities. Securities held to maturity as of December 31, 2019 are carried at their
amortized cost of $258.2 million. At December 31, 2018, the amortized cost of securities held to maturity totaled $282.9 million.
The following table sets forth the fair value of available for sale investment securities, the amortized costs of held to maturity, and the
percentage distribution at the dates indicated:
Available for sale securities
U.S. GSE obligations
Mortgage-backed securities
Corporate debt securities
Total securities available for sale
Held to maturity securities
U.S. GSE obligations
Mortgage-backed
Corporate debt securities
Municipal securities
g g
securities
Total securities held to maturity
Total
December 31,
2019
December 31,
2018
Amount
Percent
Amount
Percent
(dollars in thousands)
$
$
$
$
$
37,848
102,482
140,330
5,000
161,759
6,980
84,433
258,172
398,502
27% $
73%
0%
100% $
2% $
63%
3%
32%
100% $
100% $
74,039
89,268
4,856
168,163
32,571
168,118
6,972
75,208
282,869
451,032
44%
53%
3%
100%
12%
59%
2%
27%
100%
100%
The following tables set forth the composition and maturities of investment securities. Actual maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Within One Year
Amortized
Cost
Weighted
Average
Yield (1)
After One, But
Within Five Years
After Five, But
Within Ten Years
Amortized
Cost
Weighted
Average
Yield (1)
Amortized
Cost
Weighted
Average
Yield (1)
(dollars in thousands)
After Ten Years
Total
Amortized
Cost
Weighted
Average
Yield (1)
Amortized
Cost
Weighted
Average
Yield (1)
$ 5,000
1.4% $ 20,000
1.5% $
5,000
2.3% $
8,000
2.6% $ 38,000
1.8%
37
5.4% 36,393
1.9% 66,679
2.1% 103,109
2.0%
$ 5,000
1.4% $ 20,037
1.5% $ 41,393
1.9% $ 74,679
2.1% $141,109
2.0%
$ 5,000
1.6% $
$
$
$
5,000
1.6%
3,270
2
6,980
4.6% 10,606
5.6% 48,088
2.6%
4.2% 45,201
2.7% 113,669
3.7% 25,356
2.6% 161,759
6,980
3.4% 84,433
At December 31, 2019
Available for sale securities
U.S. GSE obligations
Mortgage-backed
securities
Corporate debt securities
Total available for
sale securities
Held to maturity securities
U.S. GSE obligations
Mortgage-backed
securities
Corporate debt securities
Municipal securities
Total held to maturity
securities
Total
$ 8,270
$ 13,270
2.8% $ 17,588
2.3% $ 37,625
3.6% $ 93,289
2.4% $134,682
3.2% $139,025
2.8% $213,704
2.8% $258,172
2.5% $399,281
36
2.6%
2.6%
3.7%
3.0%
2.6%
2.8%
2.6%
3.9%
3.1%
2.5%
Within One Year
Amortized
Cost
Weighted
Average
Yield (1)
After One, But
Within Five Years
Amortized
Cost
Weighted
Average
Yield (1)
After Five, But
Within Ten Years
Amortized
Cost
Weighted
Average
Yield (1)
(dollars in thousands)
After Ten Years
Total
Amortized
Cost
Weighted
Average
Yield (1)
Amortized
Cost
Weighted
Average
Yield (1)
$ 10,004
1.1% $ 65,000
1.5% $
$
$ 75,004
1.4%
2,008
1.5%
78
3,007
5.4% 33,768
2.5%
1.8% 58,425
2.0% 92,271
5,015
1.9%
2.1%
$ 12,012
1.1% $ 68,085
1.5% $ 33,768
1.8% $ 58,425
2.0% $172,290
1.7%
$ 5,001
1.4% $ 27,570
2.5% $
$
$ 32,571
2.4%
50
4,630
4.2%
6,972
4.8% 13,259
34,434
2.6%
4.4% 41,390
2.4% 133,634
3.8% 15,929
2.9% 168,118
6,972
3.6% 75,208
At December 31, 2018
Available for sale securities
U.S. GSE obligations
Mortgage-backed
securities
Corporate debt securities
Total available for
sale securities
Held to maturity securities
U.S. GSE obligations
Mortgage-backed
securities
Corporate debt securities
Municipal securities
Total held to maturity
securities
Total
$ 9,681
$ 21,693
3.1% $ 47,801
2.0% $115,886
3.1% $ 75,824
2.2% $109,592
3.2% $149,563
2.7% $207,988
3.0% $282,869
2.7% $455,159
(1) Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21% for 2018 and 2019.
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis and more frequently when
economic or market conditions warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the
fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
As of December 31, 2019, 68 debt securities had gross unrealized losses, with an aggregate depreciation of 0.74% from the
Companys amortized cost basis. The largest unrealized loss percentage of any single security was 3.15%, or $63,000, of its amortized
cost. The largest unrealized dollar loss of any single security was $96,000, or 1.93%, of its amortized cost.
As of December 31, 2018, 142 debt securities had gross unrealized losses, with an aggregate depreciation of 2.05% from the
Companys amortized cost basis. The largest unrealized loss percentage of any single security was 9.79%, or $98,000, of its amortized
cost. The largest unrealized dollar loss of any single security was $189,000, or 5.34%, of its amortized cost.
LOANS
The Companys lending activities are conducted principally in Eastern Massachusetts and New Hampshire. The Company grants
single- and multi-family residential loans, commercial & industrial (C&I), commercial real estate (CRE), construction loans, and
a variety of consumer loans. Most of the loans granted by the Company are secured by real estate collateral. Repayment of the
Companys residential loans are generally dependent on the health of the employment market in the borrowers geographic areas and
of
that of the general economy with liquidation of the underlying real estate collateral being typically viewed as the primary sourceu
repayment in the event of borrower default. The repayment of C&I loans depends primarily on the cash flow and credit worthiness of
the borrower and secondarily on the underlying collateral provided by the borrower. As borrower cash flow may be difficult to predict,
liquidation of the underlying collateral securing these loans is typically viewed as the primary source of repayment in the event of
borrower default. However, collateral typically consists of equipment, inventory, accounts receivable, or other business assets that
may fluctuate in value, so the liquidation of collateral in the event of default is often an insufficient source of repayment. The
Companys CRE loans are primarily made based on the cash flow from the collateral property and secondarily on the underlying
collateral provided by the borrower, with liquidation of the underlying real estate collateral typically being viewed as the primary
source of repayment in the event of borrower default. The Companys construction loans are primarily made based on the borrowers
expected ability to execute and the future completed value of the collateral property, with sale of the underlying real estate collateral
typically being viewed as the primary source of repayment.
37
The following summary shows the composition of the loan portfolio at the dates indicated:
g g
Residential mortgage
Mortgages - fixed rate
Mortgages - adjustable rate
Construction
Deferred costs net of unearned fees
Total residential mortgages
Commercial mortgage
Mortgages - nonowner occupied
Mortgages - owner occupied
Construction
Deferred costs net of unearned fees
Total commercial mortgages
Home equity
Home equity - lines of credit
Home equity - term loans
Deferred costs net of unearned fees
Total home equity
Commercial & industrial
Commercial & industrial
Deferred costs net of unearned fees
Total commercial & industrial
Consumer
Secured
Unsecured
Deferred costs net of unearned fees
Total consumer
Total loans
2019
% of
Total
2018
% of
Total
December 31,
2017
% of
Total
(dollars in thousands)
2016
% of
Total
2015
% of
Total
$ 430,877
467,139
17,374
2,176
917,566
870,047
114,095
76,288
144
1,060,574
73,880
6,555
240
80,675
133,337
(101)
133,236
19% $ 293,267
309,656
21%
1%
1,408
0%
604,331
41%
19% $ 298,851
239,027
20%
0%
1,042
0%
538,920
39%
22% $ 305,404
228,028
18%
0%
972
0%
534,404
40%
23% $ 338,576
206,835
17%
0%
0%
834
546,245
40%
40%
5%
3%
0%
48%
3%
1%
0%
4%
6%
0%
6%
654,394
59,335
44,146
82
757,957
63,421
5,665
250
69,336
93,728
(16)
93,712
42%
4%
3%
0%
49%
4%
0%
0%
4%
6%
0%
6%
562,203
35,343
35,904
199
633,649
70,326
3,863
255
74,444
65,305
(10)
65,295
41%
3%
3%
0%
47%
5%
0%
0%
5%
5%
0%
5%
513,578
43,932
58,406
224
616,140
70,883
3,925
243
75,051
59,638
68
59,706
39%
3%
4%
0%
46%
6%
0%
0%
6%
5%
0%
5%
422,923
43,265
44,624
259
511,071
59,676
3,630
216
63,522
42,209
175
42,384
29%
17%
0%
0%
46%
35%
4%
4%
0%
43%
5%
0%
0%
5%
4%
0%
4%
33,453
1,199
25
34,677
$2,226,728
1%
0%
0%
1%
33,252
1,171
13
34,436
100% $1,559,772
2%
0%
0%
2%
37,272
1,303
16
38,591
100% $1,350,899
3%
0%
0%
3%
33,386
1,451
16
34,853
100% $1,320,154
3%
0%
0%
3%
27,390
1,585
17
28,992
100% $1,192,214
2%
0%
0%
2%
100%
o amounted to $917.6 million at December 31, 2019, an increase of
Residential Mortgage. Residential real estate loans held in portfoli
$313.2 million, or 51.8%, from $604.3 million at December 31, 2018 and consisted of one-to-four family residential mortgage loans.
The residential mortgage portfolio represented 41% and 39% of total
loans at December 31, 2019 and December 31, 2018,
respectively.
ff
The average loan balance outstanding in the residential portfolio was $390,000 and the largest individual residential mortgage loan
outstanding was $9.0 million as of December 31, 2019. At December 31, 2019, this loan was performing in accordance with its
original terms.
The Bank offers fixed and adjustable rate residential mortgage and construction loans with maturities up to 30 years. One-to-four
family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to
loans that conform to such guidelines as conforming loans. The Bank generally originates and purchases both fixed and adjustablea
rate mortgage loans in amounts up to the maximum conforming
loan limits as established by the Federal Housing Finance Agency,
which increased to $484,350 in 2019 from $453,100 in 2018, for one-unit properties. In addition, the Bank also offers loans above
conforming lending limits typically referred to as jumbo
loans. These loans are typically underwritten to jumbo conforming
guidelines, however, the Bank may choose to hold a jumbo loan within its portfolio with underwriting criteria that does not exactly
match conforming guidelines. The Bank may also, from time to time, purchase residential loans that are either jumbo, conforming, or
meet our Community Reinvestment Act (CRA) requirements. Purchases have historically been made to satisfy CRA requirements
for lending to low and moderate income borrowers within the Banks CRA Assessment Area.
ff
Generally, our residential construction loans are based on complete value per plans and specifications, with loan proceeds used to
construct the house for single family primary residence. Loans are provided for terms up to 12 months during the construction phase,
with loan-to-values that generally do not exceed 80% on as complete basis. The loans then convert to permanent financing at terms up
to 360 months.
The Company does not offer reverse mortgages, nor do we offer loans that provide for negative amortization of principal, such as
Option ARM loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance
38
during the life of the loan. We do not offer subprime loans (loans that are made with low down payments to borrowers with
weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or
borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined
as loans having less than full documentation).
Residential real estate loans are originated both for sale to the secondary market, as well as for retention in the Banks loan portfolio.
The decision to sell a loan to the secondary market or retain within the portfolio is determined based on a variety of factors including
but not limited to the Banks asset/liability position, the current interest rate environment, and customer preference.
The Company was servicing mortgage loans sold to others without recourse of approximately $159.6 million at December 31, 2019
and $90.2 million at December 31, 2018.
The table below presents residential real estate loan origination activity for the periods indicated:
Originations for retention in portfolio
Originations for sale to the secondary market
Total
$
$
2019
For the Year Ended December 31,
2018
(dollars in thousands)
135,468
9,431
144,899
$
$
$
$
229,163
17,537
246,700
2017
101,307
15,663
116,970
Loans are sold with servicing retained or released. The table below presents residential real estate loan sale activity for the periods
indicated:
For the Year Ended December 31,
2019
2018
2017
Loans sold with servicing rights retained
Loans sold with servicing rights released
Total
$
$
82,932
7,006
89,938
$
(dollars in thousands)
1,605
7,826
9,431
$
$
$
11,906
10,338
22,244
Loans sold with the retention of servicing typically result in the capitalization of servicing rights. Loan servicing rights are included in
other assets and subsequently amortized as an offset to other income over the estimated period of servicing. The net balance of
capitalized servicing rights amounted to $1.3 million, $666,000, and $793,000 at December 31, 2019, December 31, 2018, and
December 31, 2017, respectively.
Commercial Mortgage. Commercial real estate loans were $1.1 billion as of December 31, 2019, an increase of $302.6 million, or
39.9%, from $758.0 million at December 31, 2018. The commercial real estate loan portfolio represented 48% and 49% of total loans
at December 31, 2019 and December 31, 2018, respectively. The average loan balance outstanding in this portfolio was $1.3 million
and the largest individual commercial real estate loan outstanding was $24.0 million as of December 31, 2019. At December 31, 2019,
this commercial mortgage was performing in accordance with its original terms.
Commercial real estate loans are secured by a variety of property types, with approximately 87.2% of the total at December 31, 2019
composed of multi-family dwellings, retail facilities, office buildings, commercial mixed use, lodging, and industrial and warehouse
properties.
Generally, our commercial real estate loans are for terms of up to 10 years, with loan-to-values that generally do not exceed 75%.
Amortization schedules are long term, and thus, a balloon payment is generally due at maturity. Under most circumstances, the Bank
will offer to rewrite or otherwise extend the loan at prevailing interest rates.
Generally, our commercial construction loans are speculative in nature, with loan proceeds used to acquire and develop real estate
property for sale or rental. Loans are provided for terms up to 36 months during the construction phase, with loan-to-values that
generally do not exceed 75% on both an as is and as complete and stabilized basis. Construction projects are primarily for the
development of residential property types, inclusive of 1-4 family and multifamily properties.
p
Home Equity.tt The home equity portfolio totaled $80.7 million and $69.3 million at December 31, 2019 and December 31, 2018,
loans at December 31,, 2019 and December 31,, 2018. At
respectively.
December 31,, 2019,, our largestg
y line of credit was a $2.0 million line of credit and had no outstanding balance tat
December 31, 2019. At December 31, 2019, this line of credit was performing in accordance with its original terms.
y The home equity portfolio represented 4% of total
home equity
q
39
Home equity lines of credit are extended as both first and second mortgages on owner-occupied residential and one-to-four family
investment properties in the Banks market area. Home equity lines of credit are generally underwritten with the same criteria that we
use to underwrite one-to-four family residential mortgage loans.
Our home equity lines of credit are revolving lines of credit, which generally have a term between 15 and 20 years, with draws
available for the first 10 years. Our 15-year lines of credit are interest only during the first 10 years and amortize on a five-year basis
thereafter. Our 20-year lines of credit are interest only during the first 10 years and amortize on a 10-year basis thereafter. We
generally originate home equity lines of credit with loan-to-value ratios of up to 80% when combined with the principal balance of the
existing first mortgage loan, although loan-to-value ratios may occasionally exceed 80% on a case-by-case basis. Maximum combined
loan-to-values are determined based on an applicants loan/line amount and the estimated property value. Lines of credit above $1.0
million generally will not exceed combined loan-to-value of 75%. Rates are adjusted monthly based on changes in a designated
market index. We also offer home equity term loans, which are extended as second mortgages on owner-occupied residential
properties in our market area. Our home equity term loans are fixed-rate second mortgage loans, which generally have a term between
5 and 20 years.
tt
Commercial and Industrial (C&I). The commercial and industrial portfolio totaled $133.2 million at December 31, 2019, an increase
of $39.5 million, or 42.2%, from $93.7 million at December 31, 2018. C&I loans represented 6% of total loans at December 31, 2019
and December 31, 2018. The average loan balance outstanding in this portfolio was $209,000 and the largest individual commercial
and industrial loan outstanding was $10.5 million as of December 31, 2019. At December 31, 2019, this loan was performing in
accordance with its original terms.
The Companys Innovation Banking and asset-based loans are reported within the C&I portfolio.
•
•
At December 31, 2019, Innovation Banking loans totaled $30.3 million and the average loan balance outstanding in this
portfolio was $1.3 million. The largest individual loan outstanding was $5.7 million and this loan was performing in
accordance with its original terms.
At December 31, 2019, asset-based loans totaled $23.2 million and the average loan balance outstanding in this portfolio
was $2.3 million. The largest individual loans outstanding was $10.5 million and this loan was performing in accordance
with its original terms.
The Companys C&I loan customers represent various small- and middle-market established businesses involved in professional
services, accommodation and food services, health care, wholesale trade, manufacturing, distribution, retailing, and non-profits. Most
clients are privately owned with markets that range from local to national in scope. Many of the loans to this segment are secured by
liens on corporate assets and the personal guarantees of the principals. The Company also makes loans to entrepreneurial and
technology businesses. The regional economic strength or weakness impacts the relative risks in this loan category. There is little
concentration in any one business sector, and loan risks are generally diversified among many borrowers.
Consumer.rr The consumer loan portfolio totaled $34.7 million at December 31, 2019, an increase of $241,000, or 0.7%, from $34.4
million at December 31, 2018. Consumer loans represented 1% and 2% of the total loan portfolio at December 31, 2019 and
December 31, 2018, respectively. Consumer loans include secured and unsecured loans, lines of credit, and personal installment loans.
Unsecured consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real
estate, particularly consumer loans that are secured by rapidly depreciable assets. The secured consumer loans and lines portfolio are
generally fully secured by pledged assets such as bank accounts or investments.
The following table summarizes the dollar amount of loans maturing in our portfolio based on their loan type and contractual terms to
maturity at December 31, 2019. The table does not include any estimate of prepayments, which can significantly shorten the average
life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no
stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.
One Year
or Less
December 31, 2019
One to
Five Years
Over Five
Years
Residential mortgage
Commercial mortgage
Home equity
Commercial & Industrial
Consumer
Total
$
$
5,441
49,781
265
43,761
34,413
133,661
$
$
$
(dollars in thousands)
12,389
297,723
960
65,292
145
376,509
899,736
713,070
79,450
24,183
119
$ 1,716,558
Total
$
917,566
1,060,574
80,675
133,236
34,677
$ 2,226,728
The following table summarizes the dollar amount of loans maturing in our portfolio based on whether the loan has a fixed or variable
rate of interest at December 31, 2019:
December 31, 2019
Fixed
Adjustable
Floating
Total
Residential mortgage
Commercial mortgage
Home equity
Commercial & Industrial
Consumer
Total
$
$
447,334
404,100
6,777
48,076
788
907,075
$
$
NONPERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
The composition of nonperforming loans is as follows:
$
$
(dollars in thousands)
470,232
287,332
6,468
606
764,638
369,142
73,898
78,692
33,283
555,015
$
917,566
1,060,574
80,675
133,236
34,677
$ 2,226,728
NNonaccruals
Loans past due > 90 days, but still accruing
Troubled debt restructurings
Total nonperforming loans
Accruing troubled debt restructured loans
Nonperforming
Nonperforming loans as a percentage of gross loans
NNonperforming loans as a percentage of total assets
$
$
$
$
4,160
1,264
227
5,651
$
$
0.25%
0.20%
2019
2018
December 31,
2017
(dollars in thousands)
$
$
525
117
642
6
0.04%
0.03%
$
$
1,148
150
1,298
29
0.10%
0.07%
$
$
2016
2015
$
1,023
232
421
1,676
$
$
0.13%
0.09%
1,481
1,481
0.12%
0.09%
At December 31, 2019, 2018, and 2017 impaired loans had specific reserves of $87,000, $0, and $93,000 respectively.
Nonaccrual Loans. Loans are typically placed on nonaccrual status when any payment of principal and/or interest is 90 days or more
past due, unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The
Company monitors closely the performance of its loan portfolio. In addition to the monitoring and review of loan performance
internally, the Company has contracted with an independent organization to review the Companys commercial and commercial real
estate loan portfolios. This independent review was performed in each of the past five years. The status of delinquent loans, as well as
situations identified as potential problems, is reviewed on a regular basis by senior management.
Troubled Debt Restructurings. Loans are considered restructured in a troubled debt restructuring when the Company has granted
concessions to a borrower due to the borrowers financial condition that it otherwise would not have considered. These concessions
may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance,
reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt mayaa be
bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the
collection of the loan may benefit the Company by increasing the ultimate probability of collection.
Restructured loans are classified as accruing or non-accruing based on managements assessment of the collectability of the loan.
Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately
six months or longer before management considers such loans for return to accruing
restructured loans are placed into
nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the
borrower will return to a status of compliance in the near term.
status. Accruing
r
r
Troubled debt restructurings are classified as impaired loans. The Company identifies loss allocations for impaired loans on an
individual loan basis.
Nonperforming loans increased during 2019 from 2018 primarily due to an increase in loans on nonaccrual at December 31, 2019.
Nonperforming loans decreased during 2018 from 2017 primarily as a result of a decrease in loans on nonaccrual at December 31,
2018, as compared to December 31, 2017.
41
The Company continues to monitor closely the portfolio of nonperforming loans for which management has concerns regarding the
ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral
value to cover the loan balances at December 31, 2019 and December 31, 2018, although such values may fluctuate with changes in
the economy and the real estate market.
ALLOWANCE FOR LOAN LOSSES
The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the
loans, loan performance, financial condition of borrowers, the value of collateral securing loans, and other relevant factors. We
provide for loan losses based upon the consistent application of our documented allowance for loan loss methodology. All loan losses
are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are
provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable
losses. We regularly review the loan portfolio, including a review of our classified assets, and make provisions for loan losses in order
to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists primarily of two
components:
1.
2.
specific allowances established for impaired loans, as defined by GAAP. The amount of impairment provided for as a
specific allowance is measured based on the deficiency, if any, between the present value of expected future cash flows
discounted at the loans effective interest rate at the time of impairment or, as a practical expedient, at the loans observable
market price or the fair value of the collateral if the loana is collateral-dependent, and the carrying value of the loan; and
general allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans.aa
The portfolio is grouped into homogenous pools by similar risk characteristics, primarily by loan type and regulatory
classification. We apply an estimated incurred loss rate to each loan group. The loss rates applied are based upon our
historical loss experience over a designated look back period adjusted, as appropriate, for the quantitative, qualitative, and
environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be
susceptible to significant revisions based upon changes
in economic and real estate market conditions.
a
Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material
negative effect on our financial results.
The adjustments to historical loss experience are based on our evaluation of several quantitative, qualitative, and environmental
factors, including:
•
•
•
•
•
•
•
•
the loss emergence period which represents the average amount of time between when loss events occur for specific loan
types and when such problem loans are identified and the related loss amounts are confirmed through charge-offs;
changes in any concentration of credit (including, but not limited to, concentrations by geography, industry, or collateral
type);
changes in the number and amount of non-accrual loans and past due loans;
changes in national, state, and local economic trends;
changes in the types of loans in the loan portfolio;
changes in the experience and ability of personnel;
changes in lending strategies; and
changes in lending policies and procedures.
In addition, we may establish an unallocated allowance to provide for probable losses that have been incurred as of the reporting date
but are not reflected in the allocated allowance.
We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the
loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated
probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the
allowance for loan losses methodology results in a lower dollar amount of estimated probable losses than would be the case without
the decrease. Periodically, management conducts an analysis to estimate the loss emergence period for various loan categories based
on samples of historical charge-offs. Model output by loan category is reviewed to evaluate the reasonableness of the reserve levels in
comparison to the estimated loss emergence period applied to historical loss experience.
42
We evaluate the loan portfolio on a quarterly basis and the allowance is adjusted accordingly. While we use the best information
available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the
information used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process,
will periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on
their analysis of information available to them at the time of their examination.
The following table summarizes the changes in the Companys allowance for loan losses for the years indicated:
Period-end loans outstanding (net of unearned
discount and deferred loan fees)
Average loans outstanding (net of unearned
discount and deferred loan fees)
Balance of allowance for loan losses at the
g
beginning
g of yeary
Loans charged-off:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home Equity
Consumer
Total loans charged-off
Recovery of loans previously charged-off:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home Equity
Consumer
Total recoveries of loans previously
charged-off:
NNet loan (charge-offs) recoveries
Provision charged to operating expense
Balance at end of period
Ratio of net (charge-offs) recoveries during
the yeay r to averageg loans outstandingg
Ratio of allowance for loan losses to loans
outstanding
2019
2018
Years Ended December 31,
2017
(dollars in thousands)
2016
2015
$ 2,226,728
$1,559,772
$1,350,899
$1,320,154
$1,192,214
$ 1,969,696
$1,417,237
$1,333,341
$1,262,497
$1,144,965
$
16,768
$
15,320
$
15,261
$
15,191
$
14,269
(338)
(1,270)
(48)
(1,656)
53
11
64
(1,592)
3,004
18,180
$
$
$
(73)
(36)
(109)
48
7
55
(54)
1,502
16,768
$
$
$
(284)
(39)
(323)
13
7
20
(303)
362
15,320
$
$
$
(71)
(33)
(104)
14
7
13
1
7
42
(62)
132
15,261
$
$
$
(124)
(37)
(1)
(16)
(178)
4
8
13
25
(153)
1,075
15,191
$
$
$
(0.08)%
(0.00)%
(0.02)%
(0.00)%
(0.01)%
0.82%
1.08%
1.13%
1.16%
1.27%
The level of charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in
charge-offs being higher than historical levels. The allowance for loan losses increased primarily due to continued loan growth and
changes in the portfolio composition. Although the allowance is allocated between categories, the entire allowance is available to
absorb losses attributable to all loan categories. Management believes that the allowance for loan losses is adequate.
SOURCES OF FUNDS
General. Deposits traditionally have been our primary source of funds for our investment and lending activities. The Company also
borrows from the FHLB of Boston to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk
management purposes, and to manage our cost of funds. Our additional sources of funds are scheduled payments and prepayments of
principal and interest on loans and investment securities and fee income and proceeds from the sales of loans and securities.
Deposits. The Company accepts deposits primarily from customers in the communities in which our branches and offices are located,
as well as from small- and medium-sized businesses and other customers throughout our lending area. We rely on our competitive
pricing and products, convenient locations, and client service to attract and retain deposits. We offer a variety of deposit accounts with
a range of interest rates and terms. Our deposit accounts consist of relationship checking for consumers and businesses, statement
savings accounts, certificates of deposit, money market accounts, interest on lawyer trust accounts, commercial and regular checking
accounts, and individual retirement accounts. Deposit rates and terms are based primarily on current business strategies, market
interest rates, liquidity requirements, and our deposit growth goals. The Bank may also access the brokered deposit market for
funding.
43
At December 31, 2019, we had a total of $175.2 million in certificates of deposit, excluding brokered deposits, of which
$141.3 million had remaining maturities of one year or less. Based on historical experience and our current pricing strategy, we
believe the Bank will retain a large portion of these accounts upon maturity. The Bank had total brokered deposits of $7.1 million,
$27.5 million and $52.7 million at December 31, 2019, 2018, and 2017, respectively.
The following table sets forth the average balances of the Banks deposits for the periods indicated:
Demand deposits (non-interest bearing)
Interest bearing checking
Money Market
Savings
Retail certificates of deposit under
$100,000
Retail certificates of deposit of
$100,000 or greater
Wholesale certificates of deposit
Total
December 31,
2019
Average
Balance
Percent
Weighted
Average
Average
Rate
Balance
(dollars in thousands)
December 31,
2018
Weighted
Average
Rate
Percent
$
567,500
417,226
189,836
827,279
25.5%
18.8%
8.5%
37.3%
$
0.09%
1.06%
0.97%
521,091
409,178
93,449
624,421
29.2%
23.0%
5.2%
35.1%
0.08%
1.14%
0.78%
58,677
2.6%
1.13%
36,408
2.0%
0.69%
111,018
51,604
$ 2,223,140
5.0%
2.3%
100%
59,226
1.42%
38,373
1.82%
0.61% $ 1,782,146
3.3%
2.2%
100%
1.27%
1.69%
0.44%
Retail certificates of deposit of $100,000 or greater by maturity are as follows:
Less than 3 months remaining
3 to 5 months remaining
6 to 11 months remaining
12 months or more remaining
Total
2019
35,054
32,245
27,119
24,178
118,596
$
$
$
December 31,
2018
(dollars in thousands)
7,807
7,361
14,078
28,446
57,692
$
2017
22,995
10,535
6,361
29,202
69,093
$
$
Retail certificates of deposit of $100,000 or greater totaled $118.6 million, $57.7 million, and, $69.1 million at December 31, 2019,
2018, and 2017, respectively. Interest expense on retail certificates of deposit of $100,000 or greater was $2.1 million, $467,000, and,
$446,000 for the years ended December 31, 2019, 2018, and 2017, respectively.
The following table sets forth certificates of deposit classified by interest rate as of the dates indicated:
Interest Rate:
Less than 1.00%
1.00% to 1.99%
2.00% to 2.99%
Total
2019
December 31,
2018
(dollars in thousands)
2017
$
$
51,306
62,986
67,990
182,282
$
$
49,360
52,888
19,171
121,419
$
$
75,284
84,546
159,830
Borrowings.n
The Banks borrowings consisted primarily of FHLB of Boston advances collateralized by a blanket pledge agreement
on the Banks FHLB of Boston stock and residential mortgages held in the Banks portfolios. The Banks borrowings with the FHLB
to $93.4 million at December 31,, 2018.
of Boston totaled $135.7 million at December 31,, 2019,, an increase of $42.3 million compared
p
The Banks remainingg borrowingg capacity
y at the FHLB of Boston at December 31, 2019 was approximately $345.5 million. nIn
addition, the Bank has a $10.0 million line of credit with the FHLB of Boston. See Note 12, BORROWINGS, for a schedule, including
related interest rates and other information.
p
NET INTEREST MARGIN
Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding
sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest-
earning assets and the average rate paid on total interest-bearing liabilities. Net interest margin is the amount of net interest income, on
44
a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets
is the amount of annualized taxable equivalent interest income expressed as a percentage of average earning assets. The average rate
paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities.
The following table sets forth the distribution of the Companys average assets, liabilities and shareholders equity, and average rates
earned or paid on a fully taxable equivalent basis for each of the periods indicated:
December 31, 2019
Year Ended
December 31, 2018
December 31, 2017
Average
Balance
Interest
Income/
Expenses (1)
Rate
Earned/
Paid (1)
Average
Balance
Interest
Income/
Expenses (1)
Rate
Earned/
Paid (1)
Average
Balance
Interest
Income/
Expenses (1)
Rate
Earned/
Paid (1)
(dollars in thousands)
$1,952,374 $ 84,382
740
17,322
4.32% $1,407,079 $ 57,941
469
10,158
4.27
4.12% $1,318,284 $ 51,238
764
15,057
4.62
3.89%
5.07
154,256
2,884
1.87
194,419
3,202
1.65
248,787
4,011
1.61
5,079
2,897
731
96,713
204,909
75,432
50,839
2,455,132
162,529
(17,345)
$2,600,316
4,255
3,043
595
69,505
189,120
2.48
76,966
3.84
1.44
45,365
3.94% 1,923,107
73,330
(15,857)
$1,980,580
111,452
2.25
81,528
3.95
41,888
1.31
3.61% 1,816,996
73,532
(15,392)
$1,875,136
2,310
4,000
291
62,614
2.07
4.91
0.69
3.45%
$ 417,226 $
827,279
189,836
221,299
440
8,708
2,481
4,012
0.11% $ 409,178 $
1.05
1.31
1.81
624,421
93,449
134,007
1,655,640
86,712
15,641
2,002
0.94% 1,261,055
18,671
2.31
247
2,900
597
1,279
5,023
444
0.06% $ 394,132 $
0.46
0.64
0.95
571,659
68,891
166,410
0.40% 1,201,092
36,074
2.38
131
1,457
103
1,434
3,125
462
0.03%
0.25
0.15
0.86
0.26%
1.28
1,742,352
17,643
1.01% 1,279,726
5,467
0.43% 1,237,166
3,587
0.29%
ASSETS
Interest-earning assets
Loans (2)
Taxable
Tax-exempt
Securities available for sale (3)
Taxable
Securities held to maturity
Taxable
Tax-exempt
Cash and cash equivalents
Total interest-earning assets (4)
Non interest-earning assets
Allowance for loan losses
Total assets
LIABILITIES AND
SHAREHOLDERS EQUITY
Interest-bearing deposits
Checking accounts
Savings accounts
Money market accounts
Certificates of deposit
Total interest-bearing
deposits
Other borrowed funds
Total interest-bearing
liabilities
NNon-interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Shareholders equity
Total liabilities & shareholders
equity
$2,600,316
ff
NNet interest income on a fully
taxable equivalent basis
Less taxable equivalent adjustment
NNet interest income
NNet interest spread (5)
NNet interest margin (6)
567,500
68,847
2,378,699
221,617
521,091
24,217
1,825,034
155,546
$1,980,580
470,871
25,611
1,733,648
141,488
$ 1,875,136
79,070
(764)
$ 78,306
64,038
(737)
$ 63,301
59,027
(1,668)
$ 57,359
2.93%
3.22%
3.19%
3.33%
3.16%
3.25%
(1) Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for 2019 and 2018 and 35% for 2017.
(2) Nonaccrual loans are included in average amounts outstanding.
(3) Average balances of securities available for sale calculated utilizing amortized cost.
(4)
Federal Home Loan Bank stock balance and dividend income is excluded from interest-earning assets.
(5)
(6)
Interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
Net interest margin represents net interest income on a fully tax equivalent basis as a percentage of average interest-earning assets.
Rate/Volume Analysis
The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and
interest-bearing liabilities have affected the Companys interest income and interest expense during the periods indicated. Information
is provided in each category with respect to: (i) changes attributable to changes in volumes (changes in average balance multiplied by
prior year average rate), (ii) changes attributable to changes in rate (change in average interest rate multiplied by prior year average
balance), and (iii) changes attributable to the combined impact of volumes and rates have been allocated proportionately to separate
volume and rate categories.
ff
Year Ended December 31, 2019
Compared with
Year Ended December 31, 2018
Increase/(Decrease)
Due to Change in
Rate
(dollars in thousands)
Year Ended December 31, 2018
Compared with
Year Ended December 31, 2017
Increase/(Decrease)
Due to Change in
Rate
(dollars in thousands)
Volume
Total
Volume
Total
Interest income
Loans
Taxable
Tax-exempt
Securities available for sale
Taxable
Securities held to maturity
Taxable
Tax-exempt
Cash and due from banks
Total interest income
Interest expense
Deposits
Checkingg accounts
Savings accounts
Money market accounts
Certificates of deposit
Total interest-bearing deposits
Other borrowed funds
Total interest expense
Change in net interest income
$
23,441
308
$
$
3,000
(37)
26,441
271
$
$
3,560
(231)
$
3,143
(64)
6,703
(295)
(716)
398
(318)
(894)
85
(809)
372
(60)
76
23,421
5
1,186
936
1,148
3,275
1,571
4,846
18,575
$
$
$
$
$
$
452
(86)
60
3,787
$
824
(146)
136
27,208
188
4,622
948
1,585
7,343
(13)
7,330
$
(3,543) $
193
5,808
1,884
2,733
10,618
1,558
12,176
15,032
$
$
$
1,732
(214)
26
3,979
$
213
(743)
278
2,912
5
146
49
(299)
(99)
(292)
(391) $
$
4,370
111
1,297
445
144
1,997
274
2,271
641
$
$
$
1,945
(957)
304
6,891
116
1,443
494
(155)
1,898
(18)
1,880
5,011
MARKET RISK AND ASSET LIABILITY MANAGEMENT
Market risk is the risk of loss from adverse changes in market prices and rates. The Companys market risk arises primarily from
interest rate risk inherent in its lending and deposit-taking activities. To that end, management actively monitors and manages its
interest rate risk exposure.
The Companys profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates mayaa
adversely impact the Companys earnings to the extent that the interest rates borne by assets and liabilities do not change at the same
speed, to the same extent or on the same basis. The Company monitors the impact of changes in interest rates on its net interest
income using several tools.
The Companys primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the
Companys net interest income and capital, while structuring the Companys asset-liability structure to obtain the maximum yield-cost
spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk.
Interest Rate Sensitivity. The Company actively manages its interest rate sensitivity position. The objectives of interest rate risk
management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable
growth in net interest income. The Companys Asset Liability Committee (ALCO), using policies and procedures approved by the
46
Companys board of directors, is responsible for the management of the Companys interest rate sensitivity position. The Company
manages interest rate sensitivity by changing the mix, pricing, and re-pricing characteristics of its assets and liabilities, through the
management of its investment portfolio, its offerings of loan and selected deposit terms, and through wholesale funding. Wholesale
funding consists of, but is not limited to, multiple sources including borrowings with the FHLB of Boston, the Federal Reserve Bank
of Bostons discount window, and certificates of deposit from institutional brokers.
The Company uses several tools to manage its interest rate risk including interest rate sensitivity analysis, or gap analysis, market
value of portfolio equity analysis, interest rate simulations under various rate scenarios, and net interest margin reports. The results of
these reports are compared to limits established by the Companys ALCO policies and appropriate adjustments may be made if the
results are outside the established limits.
The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest
rate shift, or shock, in the yield curve and subjective adjustments in deposit pricing might have on the Companys projected net
interest income over the next 12 months and 24 months.
As of December 31, 2019:
Change in Interest
Rates (in Basis Points)
Parallel rate shocks
+400
+300
+200
+100
100
Year 1
Percentage Change
in Net Interest
Income
(6.9)
(5.1)
(3.4)
(1.8)
1.5
Year 2
Percentage Change
in Net Interest
Income
4.3
3.3
2.1
0.5
(6.1)
The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a gradual interest
rate shift in the yield curve and subjective adjustments in deposit pricing might have on the Companys projected net interest income
over the next 12 months and 24 months.
As of December 31, 2019:
These simulations assume that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 months and
24 months. The changes to net interest income shown above are in compliance with the Companys policy guidelines.
Change in Interest
Rates (in Basis Points)
Gradual rate shifts
+200
100
Year 1
Percentage Change
in Net Interest
Income
(2.6)
1.7
Year 2
Percentage Change
in Net Interest
Income
(0.7)
(3.0)
Economic Value of Equity Analysis. The Company also analyzes the sensitivity of the Banks financial condition to changes in
interest rates through our economic value of equity model. This analysis measures the difference between estimated changes in the
present value of the Banks assets and estimated changes in the present value of the Banks liabilities assuming various changes in
current interest rates.
The Banks economic value of equity analysis as of December 31, 2019 estimated that, in the event of an instantaneous 200 basis
point increase in interest rates, the Bank would experience a 5.4% increase in the economic value of equity for the next 12 months,
and a 11.0% increase in the economic value of equity for the next 24 months. At the same date, our analysis estimated that, in the
event of an instantaneous 100 basis point decrease in interest rates, the Bank would experience a 16.7% increase in the economic
value of equity over the next 12 months, and a 11.4% increase in the economic value of equity for the next 24 months. The estimates
within the economic value of equity calculation are significantly impacted by managements assumption that the value of non-
maturity deposits do not fall below their stated balance as of December 31, 2019. This assumption has the impact of increasing the
Banks economic value of equity in the falling rate scenario as lower market rates increase the value of the loan and investment
portfolios while the value of the non-maturity deposit base remains static. The Company believes retaining customer relationships is
the most desirable strategy over the long term.
47
The estimates of changes in the economic value of our equity require us to make certain assumptions including loan- and mortgage-
related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently
uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity.
Although our economic value of equity analysis provides an indication of our interest rate risk exposure at a particular point in time,
such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the
economic value of our equity and will differ from actual results.
q
LIQUIDITY AND CAPITAL RESOURCES
Impact of Inflation and Changing Prices. Our Consolidated Financial Statements and related notes have been prepared in
accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical
dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation
is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in
nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.
Liquidity. Liquidity is defined as the Companys ability to generate adequate cash to meet its needs for day-to-day operations and
material long- and short-term commitments. Liquidity risk is the risk of potential loss if the Company were unable to meet its funding
requirements at a reasonable cost. The Company manages its liquidity based on demand and specific events and uncertainties to meet
current and future financial obligations of a short-term nature. The Companys objective in managing liquidity is to respond to the
needs of depositors and borrowers, as well as increase to earnings enhancement opportunities in a changing marketplace.
t
The Companys liquidity position is managed on a daily basis as part of the daily settlement function and continuously as part of the
formal asset liability management process. The Banks liquidity is maintained by managing its core deposits as the primary source,
selling investment securities, selling loans in the secondary market, borrowing from the FHLB of Boston, and purchasing wholesale
certificates of deposit as its secondary sources.
The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company.
The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and
restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the Bank to the Company.
Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements.
Quarterly, ALCO reviews the Companys liquidity needs and reports any findings (if required) to the Board of Directors.
Capital Adequacy. Total shareholders equity was $286.6 million at December 31, 2019, as compared to $167.0 million at
December 31, 2018. The Companys equity increased primarily due to net income of $25.3 million, $59.4 million of equity increase as
a result of the Optima merger, $38.2 million (net of underwriting fees) from the Companys fourth quarter 2019 common stock
offering, and stock-based compensation during 2019. The ratio of total equity to total assets was 10.04% and 7.95% at December 31,
2019 and December 31, 2018, respectively. Book value per share was $53.06 and $40.67, at December 31, 2019 and 2018,
respectively.
The Company and the Bank are subject to various regulatory capital requirements. As of December 31, 2019, the Company and the
Bank exceeded the regulatory minimum levels to be considered well capitalized. See Note 18 SHAREHOLDERS EQUITY to the
Consolidated Financial Statements for additional discussion of regulatory capital
requirements.
a
CONTRACTUAL OBLIGATIONS, COMMITMENTS, AND CONTINGENCIES
The Company has entered into contractual obligations and commitments. The following tables summarize the Companys contractual
cash obligations and other commitments by maturity at December 31, 2019:
CONTRACTUAL OBLIGATIONS
Total
FHLBB advances
Retirement benefit obligations
Lease obligations
Certificates of deposit
Total contractual cash
obligations
$
$
y
y
Less Than
One Year
Payments Due By Period as of December 31, 2019
Three to
One to
Five
Three
Years
Years
(dollars in thousands)
$
$
$
$
135,691
27,728
40,301
182,282
135,691
2,375
5,478
139,565
5,022
10,894
37,894
5,465
9,376
4,823
After Five
Years
14,866
14,553
386,002
$
283,109
$
53,810
$
19,664
$
29,419
48
OTHER COMMITMENTS
Total
Amounts of Commitments Expiring By Period as of December 31, 2019
One to
Three
Years
(dollars in thousands)
Three to
Five
Years
Less Than
One Year
After Five
Years
Unused portion of existing lines of
credit
Standby letters of credit
Originations of new loans
Total commitments
$
$
428,020
9,150
24,413
461,583
$
$
169,719
8,527
24,413
202,659
$
$
105,881
623
106,504
$
$
40,450
40,450
$
$
111,970
111,970
On October 23, 2017, the Company announced its decision to freeze the accrual of benefits within the Pension Plan, effective
December 31, 2017. Further discussion regarding commitments and contingencies can be found in Note 17 COMMITMENTS AND
CONTINGENCIES to the Consolidated Financial Statements.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is party to financial instruments
with off-balance-sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit,
unused lines of credit, and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit
and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.
r
The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan
commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of
those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-
balance-sheet instruments.
Off-Balance-Sheet Arrangements. Our significant off-balance-sheet arrangements consist of the following:
•
•
•
•
•
•
•
commitments to originate and sell loans,
standby and commercial letters of credit,
unused lines of credit,
unadvanced portions of construction loans,
unadvanced portions of other loans,
loan related derivatives, and
risk participation agreements.
Off-balance-sheet arrangements are more fully discussed in Note 16 FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK to
the Consolidated Financial Statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information required by this item is included in Item 7 of this report under Market Risk and Asset Liability Management.
49
Item 8. Financial Statements and Supplementary Data.
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Cash and cash equivalents
Investment securities
Assets
Available for sale, at fair value (amortized cost $141,109 and $172,290, respectively)
Held to maturity, at amortized cost (fair value $264,114 and $281,310, respectively)
Total investment securities
Loans held for sale, at lower of cost or fair value
Loans
Residential mortgage
Commercial mortgage
Home equity
Commercial & Industrial
Consumer
Total loans
Less: allowance for loan losses
Net loans
Federal Home Loan Bank of Boston Stock, at cost
Bank owned life insurance
Banking premises and equipment, net
Right-of-use asset operating leases
Deferred income taxes, net
Accrued interest receivable
Goodwill
Merger related intangibles, net
Other assets
Total assets
Liabilities
Deposits
Demand
Interest bearing checking
Money market
Savings
Certificates of deposit
Total deposits
Short-term borrowings
Long-term borrowingsg
Operating lease liabilities
Other liabilities
Total liabilities
Shareholders Equity
Common stock, par value $1.00; Authorized: 10,000,000 shares; Outstanding: 5,400,868
shares and 4,107,051 shares, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders equityy
Total liabilities and shareholders equity
December 31, 2019
December 31, 2018
(dollars in thousands, except par value)
$
61,335
$
18,473
140,330
258,172
398,502
1,546
917,566
1,060,574
80,675
133,236
34,677
2,226,728
(18,180)
2,208,548
7,854
37,319
14,756
33,587
8,229
7,052
31,206
3,338
42,291
2,855,563
630,593
450,098
181,406
914,499
182,282
2,358,878
135,691
35,054
39,379
2,569,002
5,401
136,766
146,875
(2,481)
286,561
2,855,563
$
$
$
168,163
282,869
451,032
604,331
757,957
69,336
93,712
34,436
1,559,772
(16,768)
1,543,004
6,844
30,933
8,578
8,717
5,762
412
27,629
2,101,384
494,492
431,702
135,585
628,212
121,419
1,811,410
90,000
3,409
29,539
1,934,358
4,107
38,271
131,135
(6,487)
167,026
2,101,384
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
50
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
2019
For the Year Ended December 31,
2018
(dollars in thousands, except share data)
2017
Interest and dividend income
Interest on taxable loans
Interest on tax-exempt loans
Interest on taxable investment securities
Interest on tax-exempt investment securities
Dividends on FHLB of Boston stock
Interest on overnight investments
Total interest and dividend income
Interest expense
Interest on deposits
Interest on borrowed funds
Total interest expense
Net interest and dividend income
Provision for Loan Losses
Net interest and dividend income after provision for
loan losses
NNoninterest income
Wealth management revenue
Deposit account fees
ATM/Debit card income
Bank owned life insurance income
Gain (loss) on disposition of investment securities
Gain on loans sold
Loan related derivative income
Other income
Total noninterest income
NNoninterest expense
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional services
Marketing
FDIC insurance
Nonoperating expenses
Other expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Share data:
Weighted average number of shares outstanding, basic
Weighted average number of shares outstanding, diluted
Basic earnings per share
Diluted earnings per share
$
$
$
$
84,382
584
7,963
2,289
390
731
96,339
15,641
2,002
17,643
78,696
3,004
75,692
26,499
3,185
1,413
612
(79)
1,170
1,674
1,927
36,401
47,494
10,855
6,232
3,623
1,760
291
4,721
3,199
78,175
33,918
8,661
25,257
4,629,255
4,661,720
5.41
5.37
$
$
$
$
57,941
371
7,457
2,404
287
595
69,055
5,023
444
5,467
63,588
1,502
62,086
25,191
3,071
1,180
526
2
99
1,651
1,269
32,989
41,212
9,072
5,177
3,258
2,229
574
201
2,264
63,987
31,088
7,207
23,881
4,061,529
4,098,633
5.82
5.77
$
$
$
$
51,238
496
6,321
2,600
245
291
61,191
3,125
462
3,587
57,604
362
57,242
23,029
3,142
1,182
584
(3)
355
780
1,155
30,224
36,455
9,114
4,956
3,374
1,620
629
3,144
59,292
28,174
13,358
14,816
4,030,530
4,065,754
3.64
3.61
The accompanying notes are an integral part of these consolidated financial statements.
51
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
NNet income
Other comprehensive income/(loss), net of tax:
Unrealized gains/(losses) on available for sale securities
Unrealized holding gains/(losses) arising during period
Less: reclassification adjustment for losses/(gains)
included in net income
Total unrealized gains/(losses) on securities
Derivatives
Change in interest rate contracts
Defined benefit retirement plans
Change in retirement liabilities
Other comprehensive income/(loss)
Comprehensive income
2019
For the Year Ended December 31,
2018
(dollars in thousands)
2017
$
25,257
$
23,881
$
14,816
2,500
62
2,562
821
(242)
(2)
(244)
751
128
1
129
623
4,006
29,263
$
89
596
24,477
$
3,871
4,000
18,816
$
The accompanying notes are an integral part of these consolidated financial statements.
52
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS EQUITY
Balance at December 31, 2016
Net income
Other comprehensive income (loss)
Share based compensation
Dividends declared ($1.86 per share)
Balance at December 31, 2017
Balance at December 31, 2017
Cumulative effect of accounting changes
NNet income
Other comprehensive income (loss)
Share based compensation
Dividends declared ($1.96 per share)
Balance at December 31, 2018
Balance at December 31, 2018
NNet income
Other comprehensive income (loss)
Share based compensation
Dividends declared ($2.04 per share)
Common stock issued for merger
Common stock offering
Balance at December 31, 2019
Common
Stock
4,037
45
4,082
4,082
25
4,107
4,107
20
723
551
5,401
$
$
$
$
$
$
$
$
$
$
Accumulated
Other
Comprehensive
(Loss ) /
Income
$
Additional
Retained
Paid-In
Capital
Earnings
(dollars in thousands, except per share data)
107,262
14,816
(403)
(7,582)
114,093
33,253
2,410
35,663
(9,881) $
4,000
(5,881) $
$
$
$
35,663
2,608
38,271
$
38,271
2,150
58,694
37,651
$ 136,766
$
$
$
$
114,093
1,202
23,881
(8,041)
131,135
131,135
25,257
(9,517)
146,875
$
$
$
$
(5,881) $
(1,202)
596
(6,487) $
(6,487) $
4,006
(2,481) $
Total
Shareholders
Equity
134,671
14,816
4,000
2,052
(7,582)
147,957
147,957
23,881
596
2,633
(8,041)
167,026
167,026
25,257
4,006
2,170
(9,517)
59,417
38,202
286,561
The accompanying notes are an integral part of these consolidated financial statements.
53
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES
NNet income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses
Amortization of deferred charges and fees, net
Net (Accretion)/Amortization of merger-related intangibles
Depreciation and amortization
Bank owned life insurance income
Loss/(gain) on disposition of investment securities
Share based compensation
Change in accrued interest receivable
Deferred income tax expense/(benefit)
Change in other assets, net
Change in other liabilities, net
Change in loans held for sale
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of loans
Proceeds from principal payments of loans
Proceeds from principal loan pool sales
Purchase of securities available for sale
Proceeds from calls/maturities of securities available for sale
Proceeds from sales of securities available for sale and held to maturity
Proceeds from calls/maturities of securities held to maturity
Purchase of securities held to maturity
Proceeds from settlement of bank owned life insurance policies
Redemption/(purchase) of FHLB of Boston stock
Purchase of banking premises and equipment
Net cash acquired in business combinations
Net cash (used in) provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Change in demand, interest bearing,g moneyy market and savings accounts
Change in certificates of deposit
Change in borrowings
Proceeds from common stock offering (net of underwriting fees)
Cash dividends paid on common stock
Net cash provided by (used in) financing activities
NNet (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid duringg the period for:
Interest
Income taxes
Significant non-cash transactions
Right-of-use assets for lessee operating leases
Right-of-use liabilities for lessee operating leases
Transfer of other real estate owned
Common Stock issued to Optima shareholders
Fair value of assets acquired, net of cash acquired
Fair value of liabilities assumed
2019
For the Year Ended December 31,
2018
(dollars in thousands)
2017
$
25,257
$
23,881
$
14,816
3,004
166
(1,176)
2,004
(612)
79
2,170
(162)
110
(11,667)
11,166
(1,546)
28,793
(790,097)
524,907
74,412
(23,450)
49,832
26,552
72,655
(48,906)
456
(1,896)
2,063
(113,472)
171,961
(101,928)
28,823
38,202
(9,517)
127,541
42,862
18,473
61,335
17,918
7,770
33,587
35,054
163
59,417
548,801
491,447
$
$
1,502
777
1,888
(526)
(2)
2,633
(634)
(721)
(12,231)
7,455
24,022
(596,259)
387,537
35,415
702
33,064
(84,261)
676
(2,602)
(1,155)
(226,883)
74,421
(38,467)
89,830
(8,041)
117,743
(85,118)
103,591
18,473
5,457
8,330
$
$
362
972
1,948
(584)
3
2,052
(501)
2,687
(758)
2,264
6,506
29,767
(354,657)
323,632
(5,091)
47,955
77,369
34,488
(184,505)
(144)
(807)
(61,760)
100,694
(11,411)
(167)
(7,582)
81,534
49,541
54,050
103,591
3,579
10,100
$
$
The accompanying notes are an integral part of these consolidated financial statements.
54
CAMBRIDGE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2019
1.
THE BUSINESS
The accompanying consolidated financial statements include the accounts of Cambridge Bancorp (the Company) and its wholly-
owned subsidiary, Cambridge Trust Company (the Bank), and the Banks subsidiaries, Cambridge Trust Company of New
Hampshire, Inc., CTC Security Corporation, and CTC Security Corporation III. References to the Company herein relate to the
consolidated group of companies. All significant intercompany accounts and transactions have been eliminated in preparation of the
consolidated financial statements.
The Company is a state-chartered, federally registered bank holding company headquartered in Cambridge, Massachusetts,
incorporated in 1983. The Company is the sole shareholder of the Bank, a Massachusetts trust company chartered in 1890 which is a
commercial bank. We are a private bank offering a full range of private banking and wealth management services to our clients. The
private banking business, the Companys only reportable operating segment, is managed as a single strategic unit.
As a private bank, the Company focuses on four core services that center around client needs. The core services include Wealth
Management, Commercial Banking, Residential Lending, and Personal Banking. The Bank offers a full range of commercial and
consumer banking services through its network of 16 private banking offices in Massachusetts and New Hampshire. The Bank is
engaged principally in the business of attracting deposits from the public and investing those deposits. The Bank invests those funds in
various types of loans, including residential and commercial real estate, and a variety of commercial and consumer loans. The Bank
also invests its deposits and borrowed funds in investment securities and has two wholly-owned Massachusetts security corporations,
CTC Security Corporation and CTC Security Corporation III, for this purpose. Deposits at the Bank are insured by the Federal Deposit
Insurance Corporation (FDIC) for the maximum amount permitted by FDIC Regulations.
Trust and investment management services are offered through the Banks private banking offices in Massachusetts and New
Hampshire, and its wealth management offices located in Boston, Concord, Manchester, and Portsmouth New Hampshire. The Bank
also has a non-depository trust company, Cambridge Trust Company of New Hampshire, Inc., which allows non-New Hampshire
residents the opportunity to take advantage of the states favorable trust laws. The assets held for wealth management clients are not
assets of the Bank and, accordingly, are not reflected in the accompanying consolidated balance sheets.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been prepared in conformity with U.S. generally accepted accounting principles (GAAP).
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.
Actual results could differ from those estimates. The allowance for loan losses and the valuation of deferred tax assets are particularly
subject to change.
Reclassifications
Certain amounts in the prior years financial statements may have been reclassified to conformff
with the current years presentation.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand, amounts due from banks, and overnight investments.
Investment Securities
Investment securities are classified as either held to maturity or available for sale in accordance with the Financial Accounting
Standards Boards (FASB) Accounting Standards Codification (ASC) 320, Investments
Debt and Equity Securities. Debt
securities that management has the positive intent and ability to hold to maturity are classified as held to maturity. Held to maturity
securities are carried at cost and adjusted for the amortization of premiums and the accretion of discounts using the effective-yield or
straight line method. U.S. Government Sponsored Enterprises (GSE) and U.S. Government Agency obligations represent debt
securities issued by the Federal Farm Credit Bank, the Federal Home Loan Banks (FHLB), the Government National Mortgage
55
Association (GNMA), the Federal National Mortgage Association (FNMA), or the Federal Home Loan Mortgage Corporation
(FHLMC). Mortgage-backed securities represent Pass-Through Certificates and Collateralized Mortgage Obligations either issued
by, or collateralized by securities issued by GNMA, FNMA, or FHLMC. Mortgage-backed securities are adjusted for amortization of
premiums and accretion of discounts, using the effecff
tive-yield method over the estimated average lives of the investments.
Debt and equity securities not classified as held to maturity are classified as available for sale and carried at fair value with unrealized
after-tax gains and losses reported net as a separate component of shareholders equity. The Company classifies its securities based on
its intention at the time of purchase.
Declines in the fair value of investment securities below their amortized cost that are deemed to be other-than-temporary are reflected
in earnings as realized losses to the extent the impairment is related to credit losses. The amount of the impairment related to other
factors is recognized in other comprehensive income. In estimating other-than-temporary impairment losses, management considers:
prospects
(1) the length of time and the extent to which the fair value has been less than cost; (2) the financial condition and near-termr
of the issuer; and (3) the Companys intent to sell the security or whether it is more likely than not that the Company will be required
to sell the debt security before its anticipated recovery.
Loans and the Allowance for Loan Losses
Loans are reported at the amount of their outstanding principal, including deferred loan origination fees and costs, reduced by
unearned discounts, and the allowance for loan losses. Loan origination fees, net of related direct incremental loan origination costs,
are deferred and amortized as an adjustment to yield over the life of the related loans. Unearned discount is recognized as an
adjustment to the loan yield, using the interest method over the contractual life of the related loan. When a loan is paid off, the
unamortized portion of net fees or unearned discount is recognized as interest income.
Loans are considered delinquent when a payment of principal and/or interest becomes past due 30 days following its scheduled
payment due date.
Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest income is
discontinued when concern exists as to the collectability of principal or interest or typically when a loan becomes over 90 days
delinquent. Additionally, when a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed
against current period income. Loans are removed from non-accrual when they become less than 90 days past due and when concern
no longer exists as to the collectability of principal or interest. Interest collected on non-accruing loans is either applied against
principal or reported as income according to managements judgment as to the collectability of principal.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect
the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Under certain
circumstances, the Company may restructure the terms of a loan as a concession to a borrower. These restructured loans are generally
also considered impaired loans. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash
flows discounted at the loans effective interest rate, the loans obtainable market price, or the fair value of the collateral if the loan is
collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment.
The provision for loan losses and the level of the allowance for loan losses reflects managements estimate of probable loan losses
inherent in the loan portfolio at the balance sheet date. Management uses a systematic process and methodology to establish the
allowance for loan losses each quarter. To determine the total allowance for loan losses, an estimate is made by management of the
allowance needed for each of the following segments of the loan portfolio: (a) residential mortgage loans, (b) commercial mortgage
loans, (c) home equity loans, (d) commercial & industrial loans, and (e) consumer loans. Portfolio segments are further disaggregated
into classes of loans. The establishment of the allowance for each portfolio segment is based on a process that evaluates the risk
characteristics relevant to each portfolio segment and takes into consideration multiple internal and external factors. Internal factors
include, but are not limited to, (a) historic levels and trends in charge-offs, delinquencies, risk ratings, and foreclosures, (b) level and
changes in industry, geographic, and credit concentrations, (c) underwriting policies and adherence to such policies, (d) the growth
and vintage of the portfolios, and (e) the experience of,ff and any changes in, lending and credit personnel. External factors include, but
are not limited to, (a) conditions and trends in the local and national economy and (b) levels and trends in national delinquentnn and non-
performing loans.
The Bank evaluates certain loans individually for specific impairment. A loan is considered impaired when, based on current
information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Loans that experience insignificant payment delays and payment shortfall
s
generally are not classified as impaired. Loans are selected for evaluation based upon internal risk rating, delinquency status, or non-
accrual status. A specific allowance amount is allocated to an individual loan when such loan has been deemed impaired and when the
amount of the probable loss is able to be estimated. Estimates of loss may be determined by the present value of anticipated future
cash flows, the loans observable fair market value, or the fair value of the collateral, if the loan is collateral dependent.
ff
56
Risk characteristics relevant to each portfolio segment are as follows:
Residential mortgage and home equity loans The Bank generally does not originate loans in these segments with a loan-to-value
ratio greater than 80%, unless covered by private mortgage insurance, and in all cases not greater than a loan-to-value ratio of 97%.
The Bank does not originate subprime loans. Loans in these segments are secured by one-to-four family residential real estate, and
repayment is primarily dependent on the credit quality of the individual borrower.
Commercial mortgage loans This includes multi-family properties and construction. The Bank generally does not originate loans in
this segment with a loan-to-value ratio greater than
75% Loans in this segment are secured by owner-occupied and nonowner-
occupied commercial real estate, and repayment is primarily dependent on the cash flows of the property (if nonowner-occupied) or of
the business (if owner-occupied).
.
Commercial loans Loans in this segment are made to businesses and are generally secured by equipment, accounts receivable, or
inventory, as well as the personal guarantees of the principal owners of the business, and repayment is primarily dependent on the cash
flows generated by the business.
Consumer loans Loans in this segment are made to individuals and can be secured or unsecured. Repayment is primarily dependent
on the credit quality of the individual borrower.
The majority of the Banks loans are concentrated in Eastern Massachusetts and New Hampshire and therefore the overall health of
the local economy, including unemployment rates, vacancy rates, and consumer spending levels, can have a material effect on the
credit quality of all of these portfolio segments.
The process to determine the allowance for loan losses requires management to exercise considerable judgment regarding the risk
characteristics of the loan portfolio segments and the effecff
t of relevant internal and external factors.
The provision for loan losses charged to income is based on managements judgment of the amount necessary to maintain the
allowance at a level to provide for probable inherent loan losses as of the evaluation date. When management believes that the
collectability of a loans principal balance, or portions thereof, is unlikely, the principal amount is charged against the allowance for
loan losses. Recoveries on loans that have been previously charged off are credited to the allowance for loan losses as received. The
allowance is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in
the results of operations through the provision for loan losses in the period in which they become known.
Residential mortgage loans originated and intended for sale in the secondary market are classified as held for sale at the time of their
origination and are carried at the lower of cost or fair value on an individual loan basis. Changes in fair value relating to loans held for
sale below the loans cost basis are charged against gain on loans held for sale. Gains and losses on the actual sale of the residential
loans are recorded in earnings as net gains (losses) on loans held for sale on the consolidated statements of income.
Bank Owned Life Insurance
Bank owned life insurance (BOLI) represents life insurance on the lives of certain active and former employees who have provided
positive consent allowing the Bank to be the beneficiary of such policies. Since the Bank is the primary beneficiary of the insurance
policies, increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other noninterest income,
and are not subject to income taxes. Applicable regulations generally limit our investment in bank-owned life insurance to 25% of our
Tier 1 capital plus our allowance for loan losses. The Bank reviews the financial strength of the insurance carriers prior to the
purchase of BOLI and at least annually thereafter.
Banking Premises and Equipment
Land is stated at cost. Buildings, leasehold improvements, and equipment are stated at cost, less accumulated depreciation and
amortization, which is computed using the straight-line method over the estimated useful lives of the assets or the terms of the leases,
if shorter. The cost of ordinary maintenance and repairs is charged to expense when incurred.
Leases
The Company leases office space, certain branch locations under noncancelable operating leases, and an ATM location, several of
which have renewal options to extend lease terms. Upon commencement of a new lease, the Company will recognize a right of use
("ROU") asset and corresponding lease liability. The Company makes the decision on whether to renew an option to extend a lease by
considering various factors. The Company will recognize an adjustment to its ROU asset and lease liability when lease agreements are
amended and executed. The discount rate used in determining the present value of lease payments is based on the Companys
57
incremental borrowing rate for borrowings with terms similar to each lease at commencement date. The Company has lease
agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease
components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included
in the measurement of the lease liability since they are generally able to be segregated.
Marketing Expense
Advertising costs are expensed as incurred.
Other Real Estate Owned
Other real estate owned (OREO) consists of properties formerly pledged as collateral to loans, which have been acquired by the
Bank through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Upon transfer of a loan to foreclosure status, an
appraisal is obtained and any excess of the loan balance over the fair value, less estimated costs to sell, is charged against the
allowance for loan losses. Expenses and subsequent adjustments to the fair value are treated as other operating expense.
Goodwill, Core Deposit Intangibles, and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Core deposit
intangible represents a premium paid to acquire the core deposits of an institution and is recorded as an intangible asset. Goodwill and
intangible assets that are not amortized are tested for impairment, based on their fair values, at least annually. Identifiable intangible
assets that are subject to amortization are also reviewed for impairment based on their fair value. Any impairment is recognized as a
charge to earnings and the adjusted carrying amount of the intangible asset becomes its new accounting basis. The remaining useful
life of an intangible asset that is being amortized is also evaluated each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of amortization.
Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial
assets with servicing rights retained. The fair value of the servicing rights is determined by estimating the present value of future net
cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs, and other economic factors. For
purposes of measuring impairment, the underlying loans are stratified into relatively homogeneous pools based on predominant risk
characteristics which include product type (i.e., fixed or adjustable) and interest rate bands. If the aggregate carrying value of the
capitalized mortgage servicing rights for a stratum exceeds its fair value, MSR impairment is recognized in earnings through a
valuation allowance for the difference. As the loans are repaid and net servicing revenue is earned, the MSR asset is amortized as an
offset to loan servicing income. Servicing revenues are expected to exceed this amortization expense. However, if actual prepayment
experience or defaults exceed what was originally anticipated, net servicing revenues may be less than expected and mortgage
servicing rights may be impaired.
Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, the Commonwealth of Massachusetts, the
state of New Hampshire, and other states as required. For the year 2019, the Company will file taxes in Massachusetts, New
Hampshire, and Maine.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are reflected at currently
enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
Deferred tax assets are reviewed quarterly and reduced by a valuation allowance if, based upon the information available, it is more
likely than not that some or all of the deferred tax assets will not be realized.
Interest and penalties related to unrecognized tax benefits, if incurred, are recognized as a component of income tax expense.
The Tax Cuts and Jobs Act of 2017 was enacted on December 22, 2017. Effective in 2018, the changeg in tax law reduced the
Companyp ys statutoryy federal tax rate froff m 35% to 21%. The Companyp y recorded a one-time non-cash write-down of net deferred tax
assets of $3.9 million as these deferred tax assets were required to be re-measured using the new lower tax rate in 2017.
58
Fee Revenue
Wealth management revenues include asset-based revenues (trust and investment advisory fees) that are primarily accrued as earned
based upon a percentage of asset values under management, or administration. Also included in wealth management revenues are
transaction-based revenues (financial planning fees and other service fees), which are recognized as revenue to the extent that services
have been completed. Fee revenue from deposit service charges is generally recognized when earned.
Pension and Retirement Plans
The Company sponsored a defined benefit pension plan (the Pension Plan) and a postretirement health care plan covering
substantially all employees hired before May 2, 2011. On October 23, 2017, the Company announced its decision to freeze the accrual
of benefits for all participants in the Pension Plan, effective as of December 31, 2017. Benefits for the Pension Plan were based
primarily on years of service and the employees average monthly pay during the five highest consecutive plan years of the
employees final 10 years. Benefits for the postretirement health care plan are based on years of service. Expense for both of these
plans is recognized over the employees service life utilizing the projected unit credit actuat
rial cost method.
The Company also sponsors non-qualified retirement programs that provide supplemental retirement benefits to certain current and
former executives. Prior to 2016, the Company provided individual non-qualified defined benefit supplemental executive retirement
plans (DB SERPs) to certain executives. The DB SERPs generally provide for an annual benefit payable in equal monthly
installments following the executives retirement and continuing for at least the remainder of his or her lifetime, with such annual
benefit generally based on the executives years of service and his or her highest three consecutive years of base salary and bonus. In
2016, the Companys Board discontinued the use of DB SERPs for new entrants to the Companys non-qualified retirement
programs. Instead, new entrants are provided with individual non-qualified defined contribution supplemental executive retirement
plans (DC SERPs). Under the DC SERPs, the Company may contribute an amount equal to 10% of the executives base salary and
bonus to his or her account under the Companys non-qualified deferred compensation plan, the Executive Deferred Compensation
Plan. Expense for the DB SERPs is recognized over the executives service life utilizing the projected unit credit actuarial cost
method. Expense for the DC SERPs is recognized as incurred.
The Companyy maintains a Profit Sharingg Plan (PSP) that provides for deferral of federal and state income taxes on employee
contributions allowed under Section 401(k) of federal law. Beginning in 2018, the Company matched employee contributions up to
100% of the first 4% of each participants salary, eligible bonus, and eligible incentive, up from 3% in 2017. Each year, the Company
may also make a discretionary contribution to the PSP of up to 4% salary, eligible bonus and eligible incentive. Employees are eligible
to participate in the PSP on the first day of their initial date of service. In 2018, employees were eligible to participate in the
discretionary contribution portion of the PSP after completing 12 months of employment, and 1,000 hours of service. The employee
must be employed on the last day of the calendar year, or retire at the normal retirement age of 65 during the calendar year to receive
the discretionary contribution. Effective in 2019, employees are eligible to participate in the discretionary contribution portion of the
PSP on the first day of their initial date of service.
Share-Based Compensation
Share-based compensation plans provide for stock option awards, restricted stock awards, nonvested time based share units, and
nonvested performance based share units.
Compensation expense for nonvested restricted stock awards is recognized over the service period based on the fair value at the date
of grant. Awards of nonvested time based share units and nonvested performance share units are valued at the fair market value of the
Companys common stock as of the award date. Nonvested performance share unit compensation expense is based on the most recent
performance assumption available and is adjusted as assumptions change. If the goals are not met, vesting does not occur and no
compensation cost will be recognized and any recognized compensation costs will be reversed. Stock-based awards that do not require
future service are expensed in the year of grant.
qq
Derivative Instruments and Hedging Activities
Derivatives are recognized as either assets or liabilities on the balance sheet and are measured at fair value. The accounting for
changes in the fair value of such derivatives depends on the intended use of the derivative and resulting designation. For derivatives
not designated as hedges, changes in fair value of the derivative instruments are recognized in earnings in noninterest income.
For derivatives designated as fair value hedges, changes in the fair value of such derivatives are recognized in earnings together
with
the changes in the fair value of the related hedged item. The net amount, if any, represents hedge ineffectiveness and is reflected in
earnings.
t
59
For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded in other
comprehensive income (loss) and recognized in earnings when the hedged transaction affects earnings. The ineffective portion of
changes in the fair value of cash flow hedges is recognized directly in earnings.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The Company measures the fair values of its financial instruments in accordance with
accounting guidance that requires an entity to base fair value on exit price and maximize the use of observable inputs and minimize
the use of unobservable inputs to determine the exit price.
ASC 820, Fair Value Measurements and Disclosures establishes a fair value hierarchy that gives the highest priority to quoted
prices in active markets and the lowest priority to unobservable data and requires fair value measurements to be disclosed by level
within the hierarchy. The three broad levels defined by the faff ir value hierarchy are as follows:
Level 1 Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of
financial instruments included in Level 1 are highly liquid cash instruments with quoted prices such as government or agency
securities, listed equities and money market securities, as well as listed derivative instruments.
Level 2 Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of
the reported date. The nature of these financial instruments includes cash instruments for which quoted prices are available
but traded less frequently, derivative instruments whose fair value has been derived using a model where inputs to the model
are directly observable in the market, or can be derived principally from or corroborated by observable market data, and
instruments that are fair valued using other financial instruments, the parameters of which can be directly observed.
Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal
bonds and over-the-counter derivatives.
Level 3 Instruments that have little to no pricing observability as of the reported date. These financial instruments do not
have two-way markets and are measured using managements best estimate of fair value, where the inputs into the
determination of fair value require significant management judgment to estimation. Instruments that are included in this
category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, non-
investment grade residual interests in securitizations, as well as certain highly structured over-the-counter derivative
contracts.
Earnings per Common Share
Earnings per common share is computed using the two-class method prescribed under ASC Topic 260, Earnings Per Share. ASC
Topic 260 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents
(whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the
two-class method. We have determined that our outstanding non-vested stock awards are participating securities.
Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the
weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities.
Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per
common share computation plus the dilutive effect of common stock equivalents. A reconciliation of the weighted-average shares
used in calculating basic earnings per common share and the weighted average common shares used in calculating diluted earnings per
common share for the reported periods is provided in Note 22 - Earnings Per Share.
Subsequent Events
Management has reviewed events occurring through March 16, 2020, the date the consolidated financial statements were issued and
determined that no subsequent events occurred requiring adjustment to or disclosure in these financial statements.
3.
RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS
Accounting Standards Update 2018-16 - Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap
(OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes (ASU 2018-16). On October 25, 2018, the FASB
issued ASU 2018-16 to introduce OIS Rate based on the SOFR as an acceptable US benchmark interest for the purpose of applying
hedge accounting under Topic 815. This update is effective for interim and annual reporting periods beginning after December 15,
2018 because the Company has already adopted ASU 2017-12 - Derivatives and Hedging: Targeted Improvements to Accounting for
Hedging Activities. The Company adopted this update on January 1, 2019, and the update did not have a material impact on the
consolidated financial statements.
60
Accounting Standards Update 2018-15 - Customers Accounting for Implementation Costs Incurred in a Cloud Computing
Arrangement That Is a Service Contract (ASU 2018-15). On August 29, 2018, the FASB issued amended guidance to align the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements
for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an
internal use software license). The ASU is effective for fiscal years beginning after December 15, 2019, including interim periods
within those fiscal years; early adoption is permitted and should be applied either retrospectively or prospectively to all
implementation costs incurred after the date of adoption. The Company adopted the amended guidance on January 1, 2020, and it did
not have a material impact on the consolidated financial statements.
Accounting Standards Update 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans (ASU 2018-14). On
August 28, 2018, the FASB issued guidance to remove, add, and clarify certain disclosures for defined benefit plans. The ASU is
effective for fiscal years ending after December 15, 2020; early adoption is permitted and should be applied using the retrospective
method to all periods presented. We are currently assessing the impact the adoption of this guidance will have on our consolidated
balance sheets, statements of income, and cash flows.
Accounting Standards Update 2018-13 - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). On
August 28, 2018, the FASB issued guidance to remove, add, and clarify certain disclosures for fair value measurement. The ASU is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019; early adoption is permitted
and should be applied using either retrospective method or the prospective method as specified in the ASU. The adoption of this
g
guidance
on our consolidated balance sheets, statements of income, and cash flows.
is not expep cted to have a material impactp
Accounting Standards Update 2018-07 - Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). On June
20, 2018, the FASB issued ASU 2018-07 to align the accounting for share-based payment awards issued to employees and
nonemployees. The new guidance also clarifies that any share-based payment awards issued to customers should be evaluated under
ASC 606, Revenue from Contracts with Customers. Currently, the accounting for nonemployee share-based payments differs from
that applied to employee awards, particularly with regard to the measurement date and the impact of performance conditions. Under
the new guidance, the existing employee guidance will apply to nonemployee share-based transactions, with certain exceptions. The
cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. The ASU is
effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year,
and early adoption is permitted. The adoption of this guidance did not have a material impact on our consolidated balance sheets,
statements of income, and cash flows.
Accounting Standard Update No. 2017-12 - Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities
(ASU 2017-12). On August 28, 2017, the FASB issued a new standard that allows companies to better align their hedge accounting
and risk management activities. The new standard will also reduce the cost and complexity of applying hedge accounting. The
standard requires companies to change the recognition and presentation of the effecff
ts of hedge accounting by:
•
•
eliminating the requirement to separaa tely measure and report hedge ineffeff ctiveness; and
requiring companies to present all of the elements of hedge accounting that affeff ct earnings in the same income statement
line as the hedged item.
The standard also permits hedge accounting for strategies for which hedge accounting was not historically permitted and includes new
fair value hedges of interest rate risk. Furthermore, the standard eases the requirements
alternatives for measuring the hedged item forff
for effectiveness testing, hedge documentation, applying the critical terms match method, and introduces new alternatives that will
permit companies to reduce the risk of material error corrections if they misapply the shortcut method. The new accounting standard
was effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.
qq
The new standard requires a modified retrospective transition method in which the Company will recognize the cumulative effect of
the change on the opening balance of each affected component of equity in the statement of financial position as of the date of
adoption. The Company early adopted the standard during the fourth quarter of 2018, using a modified retrospective transition
method, and it did not have an effect on our consolidated balance sheets, statements of income, and cash flows. See NOTE 23
DERIVATIVE AND HEDGING ACTIVITIES.
61
Accounting Standards Update No. 2016-02 - Leases (ASU 2016-02). On February 25, 2016, the FASB issued guidance that requires
recognition of lease assets and lease liabilities on the statement of condition and disclosure of key information about leasing
arrangements. In particular, this guidance requires a lessee of operating or finance leases to recognize on the statement of condition a
liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. However,
for leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets
and lease liabilities. Under previous GAAP, a lessee was not required to recognize lease assets and lease liabilities arising from
operating leases on the statement of condition. The guidance became effective for the Company on January 1, 2019. Also in July
Improvements (ASU 2018-11), to allow an optional
2018, the FASB issued Accounting Standards Update No. 2018-11, Targeted
transition method in which the provisions of Topic 842 would be applied upon the adoption date and would not have to be
retroactively applied to the earliest reporting period presented in the consolidated financial statements. Using the optional transition
method discussed above, the Company adopted the new lease guidance on January 1, 2019 and recorded a right-of-use asset of $32.9
million and a corresponding net lease liability. SEE NOTE 17 COMMITMENTS AND CONTINGENCIES.
r
Accounting Standards Update No. 2014-09 - Revenue from Contracts with Customers (ASU 2014-09). On May 28, 2014, the FASB
issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, which requires an entity to
recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The
new guidance supersedes current U.S. GAAP guidance on revenue recognition and requires the use of more estimates and judgments
than the current revenue standards. Topic 606 does not apply to revenue associated with financial instruments, including revenue from
loans and securities. In addition, certain noninterest income streams, such as fees associated with mortgage servicing rights, financial
guarantees, derivatives, and certain credit card fees, are also not in scope of the new guidance.
On January 1, 2018, the Company adopted ASU No. 2014-09 and all subsequent ASUs that modified Topic 606. Topic 606 is
applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, and
merchant income. The Company completed its overall assessment of revenue streams and review of related contracts potentially
affected by the ASU, including trust and asset management fees, deposit related fees, and other income within noninterest income.
Based on this assessment, the Company concluded that ASU 2014-09 did not materially change the method in which the Company
currently recognizes revenue for these revenue streams. The Company adopted ASU 2014-09 and its related amendments utilizing the
modified retrospective approach. Since there was no net income impact upon adoption of the new guidance, a cumulative effect
adjustment to opening retained earnings was not deemed necessary. Noninterest income considered in-scope of Topic 606 is discussed
below.
Wealth Management and Trust Fees
The Company earns wealth management fees for providing investment management, trust administration, and financial planning
services to clients. The Companys performance obligation under these contracts is satisfied over time as the wealth management
services are provided. Fees are recognized monthly based on the monthly value of the assets under management and the applicable feeff
rate, or at a fixed annual rate, depending on the terms of the contract. No performance-based incentives are earned on wealth
management contracts.
The Company earns trust fees for serving as trustee for certain clients. As trustee, the Company serves as a fiduciary, administers the
clients trust, and in some cases, manages the assets of the trust. The Companys performance obligation under these agreements is
satisfied over time as the administration and management services are provided. Fees are recognized monthly based on a percentage of
the market value of the account or at a fixed annual rate as outlined in the agreement. The Company also earns fees for trust related
activities. The Companys performance obligation under these agreements is satisfied at a point in time and recognized when these
services have been performed.
All of the wealth management and trust
rr
fee income on the consolidated statement of income is considered in-scope of Topic 606.
Other Banking Fee Income
The Company charges a variety of fees to its clients for services provided on the deposit and deposit management related accounts.
Each fee is either transaction-based or assessed monthly. The types of fees include service charges on accounts, overdraft fees, wire
transfer fees, maintenance fees, ATM fee charges, and other miscellaneous charges related to the accounts. These fees are not
governed by individual contracts with clients. They are charges to clients based on disclosures presented to clients upon opening these
accounts along with updated disclosures when changes are made to the fee structures. The transaction-based fees are recognized in
revenue when charged to the client based on specific activity on the clients account. Monthly service and maintenance charges are
recognized in the month they are earned and are charged directly to the clients account.
62
4.
MERGERS
Optima Bank & Trust Company
The Company completed its merger with Optima Bank & Trust Company (Optima) on April 17, 2019. Under the terms of the
Agreement and Plan of Merger, each outstanding share of Optima common stock was converted into $32.00 in cash or 0.3468 shares
of the Companys common stock, with the consideration for the transaction structured as 95% common stock and 5% cash. As a
result of the merger with Optima, former Optima shareholders received an aggregate of 722,746 shares of the Companys common
stock and an aggregate of approximately $3.5 million in cash. The total consideration paid amounted to $64.3 million.
The Company accounted for the merger with Optima using the acquisition method pursuant to the Business Combinations Topic of
the FASBs Accounting Standards Codification (ASC). Accordingly, for the year ended December 31, 2019 and 2018, the Company
recorded merger expenses of $3.9 million and $201,000 related to the merger with Optima. Additionally, the acquisition method
requires the acquirer to recognize the assets acquired and the liabilities assumed at their fair values as of the acquisition date. The
following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of the acquisition:
Assets
Cash and cash equivalents
Investments
Loans
Premises and equipment
Goodwill
Core deposit and other intangibles
Other assets
Total assets acquired
Liabilities
Deposits
Borrowings
Other liabilities
Total liabilities assumed
Purchase price
Net Assets Acquired
at Fair Value
(dollars in thousands)
6,902
23,298
475,406
6,286
30,794
3,609
9,408
555,703
477,189
13,459
799
491,447
64,256
$
$
Fair value adjustments to assets acquired and liabilities assumed are generally accreted/amortized using either an effective yield or
straight-line basis over periods consistent with the average life, useful life, and/or contractual
term of the related assets and liabilities.
t
Fair values of the majora
categories of assets acquired and liabilities assumed were determined as follows:
Cash and Cash Equivalents
The fair values of cash and cash equivalents approximate the respective carrying amounts because the instruments are payable on
demand or have short-term maturities.
Investments
The fair values of securities were based on quoted market prices for identical securities received from an independent, nationally-
recognized, third-party pricing service. Prices provided by the independent pricing service were based on recent trading activity and
other observable information including, but not limited to, market interest rate curves, referenced credit spreads, and estimated
prepayment rates where applicable.
63
Loans
The loans acquired were recorded at fair value without a carryover of the allowance for loan losses. Fair value of the loans portfolio is
determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows
expected to be collected, as adjusted for an estimate of future credit losses and prepayments, and then applying a market-based
discount rate to those cash flows. The overall discount on the loans acquired in this transaction was due to anticipated credit loss, as
well as considerations for liquidity and market interest rates.
Premises and Equipment
The fair value of the premises, including buildings and improvements, was determined based upon appraisals by licensed real estate
appraisers. The appraisals were based upon the best and highest use of the property with final values determined based upon an
analysis of the cost, sales comparison, and income capitalization approaches for each property appraised.
Core Deposit Intangible
The fair value of the core deposit intangible is derived by comparing the interest rate and servicing costs that the financial institution
pays on the core deposit liability versus the current market rate for alternative sources of financing, while factoring in estimates over
the remaining life and attrition rate of the deposit accounts. The intangible asset represents the stable and relatively low cost source of
funds that the deposits and accompanying relationships provide the Company, when compared to alternative funding sources.
Deposits
The fair value of acquired savings and transaction deposit accounts was assumed to approximate the carrying value as these accounts
have no stated maturity and are payable on demand. The fair value of time deposits were determined based on the present value of the
contractual cash flows over the remaining period to maturity using a market interest rate.
Borrowings
Federal Home Loan Bank (FHLB) borrowings were recorded at their carrying
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value which approximates fair value.
5.
CASH AND CASH EQUIVALENT
At December 31, 2019 and December 31, 2018, cash and due from banks totaled $61.3 million and $18.5 million, respectively. Of this
amount, $31.5 million and $12.7 million, respectively, were maintained to satisfy the reserve requirements of the Federal Reserverr
Bank of Boston (FRB Boston). Additionally, at December 31, 2019 and 2018, the Company pledged $500,000 to the New
Hampshire Banking Department relating to Cambridge Trust Company of New Hampshire, Inc.s operations in that state.
64
6.
INVESTMENT SECURITIES
Investment securities have been classified in the accompanying consolidated balance sheets according to managements intent. The
carrying amounts of securities and their approximate fair values were as follows:
December 31, 2019
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Amortized
Cost
December 31, 2018
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Fair
Value
Fair
Value
(dollars in thousands)
Amortized
Cost
Available for sale securities
U.S. GSE obligations
Mortgage-backed securities
Corporate debt securities
Total available for sale securities
$ 38,000 $
103,109
$141,109 $
$
231
231 $ (1,010) $140,330 $172,290 $
(152) $ 37,848 $ 75,004 $
(858) 102,482
92,271
5,015
(965) $ 74,039
$
89,268
(3,121)
118
4,856
(159)
118 $ (4,245) $168,163
Held to maturity securities
U.S. GSE obligations
Mortgage-backed securities
Corporate debt securities
Municipal securities
Total held to maturity securities
Total
$
$
5,000 $
5,000 $ 32,571 $
2,751
116
3,252
161,759
6,980
84,433
(238) $ 32,333
(2,290) 165,962
6,865
76,150
(66)
$258,172 $ 6,119 $
(177) $264,114 $282,869 $ 1,431 $ (2,990) $281,310
$399,281 $ 6,350 $ (1,187) $404,444 $455,159 $ 1,549 $ (7,235) $449,473
(111) 164,399
7,096
87,619
$
134
1,297
168,118
6,972
75,208
(107)
(355)
All of the Companys mortgage-backed securities have been issued by, or are collateralized by securities issued by, either Government
National Mortgage Association (Ginnie Mae), Federal National Mortgage Association (Fannie Mae), or Federal Home Loan Mortgage
Corporation (Freddie Mac).
ee
The amortized cost and fair value of debt investments, aggregated by contractual maturity, are shown below. Maturities of mortgage-
backed securities do not take into consideration scheduled amortization or prepayments. Actual maturities may differ from contractual
maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Within One Year
Fair
Value
Amortized
Cost
After One, But
Within Five Years
Fair
Value
Amortized
Cost
After Five, But
Within Ten Years
Fair
Value
Amortized
Cost
(dollars in thousands)
After Ten Years
Fair
Value
Amortized
Cost
Total
Amortized
Cost
Fair
Value
$ 5,000 $ 4,997 $ 20,000 $19,939 $
5,000 $
4,934 $
8,000 $
7,978 $ 38,000 $ 37,848
37
38
36,393
35,997
66,679
66,447 103,109 102,482
$ 5,000 $ 4,997 $ 20,037 $19,977 $ 41,393 $ 40,931 $ 74,679 $ 74,425 $141,109 $140,330
$ 5,000 $ 5,000 $
$ $
$
$
$
$
5,000 $
5,000
3,270
2
6,980
2
7,096
10,606 10,902
3,291
48,088
45,201
49,117 113,669 115,280 161,759 164,399
7,096
87,619
6,980
84,433
25,356
47,523
25,903
At December 31, 2019
Available for sale securities
U.S. GSE obligations
Mortgage-backed
securities
Corporate debt securities
Total available for
sale securities
Held to maturity securities
U.S. GSE obligations
Mortgage-backed
securities
Corporate debt securities
Municipal securities
Total held to maturity
securities
Total
$ 8,270 $ 8,291 $ 17,588 $18,000 $ 93,289 $ 96,640 $139,025 $141,183 $258,172 $264,114
$ 13,270 $13,288 $ 37,625 $37,977 $134,682 $137,571 $213,704 $215,608 $399,281 $404,444
65
The following tables show the Companys securities with gross unrealized losses, aggregated by investment category and length of
time that individual securities have been in a continuous loss position:
Temporarily Impaired Securities
Available for sale securities
U.S. GSE obligations
Mortgage-backed
Corporate debt securities
securities
g g
Total available for sale securities
Held to maturity securities
U.S. GSE obligations
Mortgage-backed securities
Corporate debt securities
Municipal securities
Total held to maturity securities
Total temporarilyy impaired securities
Temporarily Impaired Securities
Available for sale securities
U.S. GSE obligations
Mortgage-backed
Corporate debt securities
securities
g g
Total available for sale securities
Held to maturity securities
U.S. GSE obligations
Mortgage-backed securities
Corporate debt securities
Municipal securities
Total held to maturity securities
Total temporarilyy impaired securities
Less than 12 months
Fair
Value
Unrealized
Losses
December 31, 2019
g
12 months or longer
Unrealized
Fair
Value
Losses
(dollars in thousands)
Total
Fair
Value
Unrealized
Losses
$ 12,912
33,381
$ 46,293
$
$
(88) $
(265)
(353) $
24,936
50,766
75,702
$
$
14,838
4,934
$ 19,772
$ 66,065
$
$
$
(27)
(66)
(93) $
(446) $
5,000
12,928
17,928
93,630
$
$
$
$
$
(64) $
(593)
37,848
84,147
(657) $ 121,995
5,000
$
27,766
(84)
4,934
(84) $
37,700
(741) $ 159,695
$
$
$
$
$
(152)
(858)
(1,010)
(111)
(66)
(177)
(1,187)
Less than 12 months
Fair
Value
Unrealized
Losses
December 31, 2018
g
12 months or longer
Unrealized
Fair
Value
Losses
(dollars in thousands)
Total
Fair
Value
Unrealized
Losses
$
$
$
$
$
$
902
902
$
74,039
$
86,815
(98)
3,954
(98) $ 164,808
4,995
30,719
6,865
8,484
51,063
51,965
$
$
$
(5) $
27,338
93,225
(216)
(107)
(82)
8,313
(410) $ 128,876
(508) $ 293,684
$
$
$
$
$
(965) $
(3,121)
(61)
74,039
86,815
4,856
(4,147) $ 165,710
(233) $
(2,074)
(273)
32,333
123,944
6,865
16,797
(2,580) $ 179,939
(6,727) $ 345,649
$
$
$
$
$
(965)
(3,121)
(159)
(4,245)
(238)
(2,290)
(107)
(355)
(2,990)
(7,235)
Securities are evaluated by management for other-than-temporary impairment on at least a quarterly basis, and more frequently when
economic or market conditions warrant such evaluation. Consideration is given to: (1) the length of time and the extent to which the
fair value has been less than cost; (2) the financial condition and near-term prospects of the issuer; and (3) the intent and ability of the
Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.
As of December 31, 2019, 68 debt securities had gross unrealized losses, with an aggregate depreciation of 0.74% from the
Companys amortized cost basis. The largest unrealized loss percentage of any single security was 3.15%, or $63,000, of its amortized
cost. The largest unrealized dollar loss of any single security was $96,000, or 1.93%, of its amortized cost.
As of December 31, 2018, 142 debt securities had gross unrealized losses, with an aggregate depreciation of 2.05% from the
Companys amortized cost basis. The largest unrealized loss percentage of any single security was 9.79%, or $98,000, of its amortized
cost. The largest unrealized dollar loss of any single security was $189,000, or 5.34%, of its amortized cost.
The Company believes that the nature and duration of impairment on its debt security positions are primarily a function of interest rate
movements and changes in investment spreads and does not consider full repayment of principal on the reported debt obligations to be
at risk. Since nearly all of these securities are rated investment grade and a) the Company does not intend to sell these securities
before recovery and b) that it is more likely than not that the Company will not be required to sell these securities before recovery, the
Company does not consider these securities to be other-than-temporarily impaired as of December 31, 2019 and 2018.
The following table sets forth information regarding sales of investment securities and the resulting gains or losses from such sales:
Amortized cost of securities sold
Gain/(loss) realized on securities sold
Net proceeds from securities sold
2019
For the Year Ended December 31,
2018
(dollars in thousands)
2017
$
$
26,631
(79)
26,552
$
$
700
2
702
$
$
77,372
(3)
77,369
67
7.
LOANS AND ALLOWANCE FOR LOAN LOSSES
The Companys lending activities are conducted primarily in Eastern Massachusetts. The Company grants single- and multi-family
residential loans, commercial & industrial (C&I), commercial real estate (CRE), construction loans, and a variety of consumer
loans. Most of the loans granted by the Company are secured by real estate collateral. Repayment of the Companys residential loans
are generally dependent on the health of the employment market in the borrowers geographic areas and that of the general economy
with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of
borrower default. The repayment of C&I loans depends primarily on the cash flow and credit worthiness of the borrower and
secondarily on the underlying collateral provided by the borrower. As borrower cash flow may be difficult to predict, liquidation of
the underlying collateral securing these loans is typically viewed as the primary source of repayment in the event of borrower default.
However, collateral typically consists of equipment, inventory, accounts receivable, or other business assets that may fluctuate in
value, so the liquidation of collateral in the event of default is often an insufficient source of repayment. The Companys CRE loans
are primarily made based on the cash flow from the collateral property and secondarily on the underlying collateral provided by the
borrower, with liquidation of the underlying real estate collateral typically being viewed as the primary source of repayment in the
event of borrower default. The Companys construction loans are primarily made based on the borrowers expected ability to execute
and the future completed value of the collateral property, with sale of the underlying real estate collateral typically being viewed as the
primary source of repayment.
Loans outstanding are detailed by category as follows:
Residential mortgage
Mortgages - fixed rate
Mortgages - adjustable rate
Construction
Deferred costs net of unearned fees
Total residential mortgages
Commercial mortgage
Mortgages - nonowner occupied
Mortgages - owner occupied
Construction
Deferred costs net of unearned fees
Total commercial mortgages
Home equity
Home equity - lines of credit
Home equity - term loans
Deferred costs net of unearned fees
Total home equity
Commercial & industrial
Commercial & industrial
Deferred costs (fees) net of unearned fees
Total commercial & industrial
Consumer
Secured
Unsecured
Deferred costs net of unearned fees
Total consumer
Total loans
68
December 31, 2019
December 31, 2018
(dollars in thousands)
$
$
$
430,877
467,139
17,374
2,176
917,566
870,047
114,095
76,288
144
1,060,574
73,880
6,555
240
80,675
133,337
(101)
133,236
293,267
309,656
1,408
604,331
654,394
59,335
44,146
82
757,957
63,421
5,665
250
69,336
93,728
(16)
93,712
33,453
1,199
25
34,677
2,226,728
$
33,252
1,171
13
34,436
1,559,772
Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the
normal course of business. All loans and commitments included in such transactions were made on substantially the same terms,
including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve
more than normal risk of collection or present other unfavorable features. At December 31, 2019 and December 31, 2018, total loans
outstanding to such directors and officers were $3,000 and $488,000, respectively. During the year ended December 31, 2019,
$85,000 of additions and $570,000 of repayments and other adjustments were made to these loans. There were $139,000 of additions
and $167,000 of repayments during the year ended December 31, 2018. At December 31, 2019 and 2018, all of the loans to directors
and officers were performing according to their original terms.
The following tables set forth information regarding non-performing loans disaggregated by loan category:
.
Residential
Mortgages
g g
Commercial
Mortgages
g g
December 31, 2019
Commercial
&
Industrial
Home
y
Equity
(dollars in thousands)
Consumer
Total
NNon-performing loans:
Non-accrual loans
Loans past due >90 days, but still accruing
Troubled debt restructurings
Total
NNon-performing loans:
Non-accrual loans
Loans past due >90 days, but still accruingg
Troubled debt restructurings
Total
$
$
1,298
527
99
1,924
$
$
2,800
486
3,286
$
$
12
12
$
$
50
251
128
429
$
$
$
$
4,160
1,264
227
5,651
Residential
Mortgages
Commercial
Mortgages
December 31, 2018
Commercial
&
Industrial
Home
Equity
(dollars in thousands)
Consumer
Total
$
$
512
111
623
$
$
$
$
13
13
$
$
$
6
6
$
$
$
525
117
642
There were no commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31, 2019
and December 31, 2018.
Troubled Debt Restructurings (TDRs)
Loans are considered restructured in a troubled debt restructuring when the Company has granted concessions to a borrower due to the
borrowers financial condition that it otherwise would not have considered. These concessions may include modifications of the terms
of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate
other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for
each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the
Company by increasing the ultimate probability of collection.
Restructured loans are classified as accruing or non-accruing based on managements assessment of the collectability of the loan.
Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately
restructured loans are placed into
six months or longer before management considers such loans for return to accruing
nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the
borrower will return to a status of compliance in the near term.
status. Accruing
r
r
Troubled debt restructurings are classified as impaired loans. The Company identifies loss allocations for impaired loans on an
individual loan basis.
During the year ended December 31, 2019, the Company modified one loan with a carrying value of $128,000. At December 31,
2019, three loans were determined to be TDRs with a total carrying value of $227,000. One TDR loan was paid off during the first
quarter of 2019. There were no TDR defaults during the year ended December 31, 2019 .
69
As of December 31, 2018 three loans were determined to be TDRs with a total carrying value of $117,000. There were no TDR
defaults during the year ended December 31, 2018.
The allowance for loan losses includes a specific reserve for these TDRs of approximately $87,000 as of December 31, 2019. There
were no specific reserves for the troubled debt restructurings at December 31, 2018 .
As of December 31, 2019 and 2018, there were no significant commitments to lend additional funds to borrowers whose loans were
restructured.
Loans by Credit Quality Indicator. The following tables contain period-end balances of loans receivable disaggregated by credit
quality indicator:
Residential
Mortgages
g g
December 31, 2019
Home
y
Equity
(dollars in thousands)
Consumer
Credit risk profile based on payment activity:
Performing
Non-performing
Total
$
$
915,642
1,924
917,566
Credit risk profile by internally assigned grade:
1-6 (Pass)
7 (Special Mention)
8 (Substandard)
9 (Doubtful)
10 (Loss)
Total
$
$
$
$
80,663
12
80,675
Commercial
Mortgages
g g
1,050,037
7,360
3,177
1,060,574
Residential
Mortgages
December 31, 2018
Home
Equity
(dollars in thousands)
Credit risk profile based on payment activity:
Performingg
Non-performing
Total
$
$
603,708
623
604,331
Credit risk profile by internally assigned grade:
1-6 (Pass)
7 (Special Mention)
8 (Substandard)
9 (Doubtful)
10 (Loss)
Total
$
$
$
$
69,323
13
69,336
Commercial
Mortgages
753,338
4,619
757,957
$
$
$
$
$
$
$
$
34,677
34,677
Commercial &
Industrial
123,900
4,289
5,047
133,236
Consumer
34,436
34,436
Commercial &
Industrial
85,821
4,186
3,705
93,712
With respect to residential real estate mortgages, home equity, and consumer loans, the Bank utilizes the following categories as
indicators of credit quality:
•
•
Performing These loans are accruing and are considered having low to moderate risk.
Non-performing These loans are on non-accrual, or are past due more than 90 days but are still accruing, or are
restructured. These loans may contain greater than average risk.
70
With respect to commercial real estate mortgages and commercial loans, the Bank utilizes a 10 grade internal loan rating system as an
indicator of credit quality. The grades are as follows:
•
•
•
•
•
Loans rated 1-6 (Pass) These loans are considered pass rated with low to moderate risk.
Loans rated 7 (Special Mention) These loans have potential weaknesses warranting close attention, which, if left
uncorrected, may result in deterioration of the credit at some future date.
Loans rated 8 (Substandard) These loans have well-defined weaknesses that jeopardize the orderly liquidation of the
debt under the original loan terms. Loss potential exists but is not identifiable in any one customer.
Loans rated 9 (Doubtful) These loans have pronounced weaknesses that make full collection highly questionable and
improbable.
Loans rated 10 (Loss) These loans are considered uncollectible and continuance as a bankable asset is not warranted.
Delinquencies
The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due
when one scheduled payment is due and unpaid for 30 days or more. Loan delinquencies can be attributed to many factors, such as but
not limited to, a continuing weakness in, or deteriorating, economic conditions in the region in which the collateral is located, the loss
of a tenant or lower lease rates for commercial borrowers, or the loss of income for consumers and the resulting liquidity impacts on
the borrowers.
The following tables contain period-end balances of loans receivable disaggregated by past due status:
Residential Mortgages
Commercial Mortgages
Home Equity
Commercial & Industrial
Consumer loans
Total
Residential Mortgages
Commercial Mortgages
Home Equity
Commercial & Industrial
Consumer loans
Total
30-59 Days
Past Due
60-89 Days
Past Due
90 Days
or Greater
Total
Past Due
Current
Loans
Total
December 31, 2019
$
$
$
$
8,710
811
57
272
4
9,854
30-59 Days
Past Due
1,034
108
1,142
$
$
$
$
1,089
12
226
5
1,332
60-89 Days
Past Due
121
121
$
$
$
$
(dollars in thousands)
1,047
3,161
251
4,459
$
$
10,846
3,972
69
749
9
15,645
$
906,720
1,056,602
80,606
132,487
34,668
$ 2,211,083
$
917,566
1,060,574
80,675
133,236
34,677
$ 2,226,728
December 31, 2018
90 Days
or Greater
Total
Past Due
(dollars in thousands)
Current
Loans
Total
351
351
$
$
1,506
108
1,614
$
602,825
757,957
69,336
93,712
34,328
$ 1,558,158
$
604,331
757,957
69,336
93,712
34,436
$ 1,559,772
There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at December 31,
2019.
Foreclosure Proceedings
Other Real Estate Owned (OREO)
As of December 31, 2019, the Company recorded other real estate owned assets of $163,000. OREO consists of real estate properties,
which have primarily served as collateral to secure loans that are controlled or owned by the Bank. These properties are recorded at
fair value less estimated costs to sell at the date control is established, resulting in a new cost basis. The amount by which the recorded
investment in the loan exceeds the fair value (net of estimated costs to sell) of the foreclosed asset is charged to the allowance
for loan
losses. Subsequent declines in the fair value of the foreclosed asset below the new cost basis are recorded through the use of a
valuation allowance. Subsequent increases in the fair value are recorded as reductions in the valuation allowance, but not below zero.
All costs incurred thereafter in maintaining the property are generally charged to noninterest expense.
a
In Process of Foreclosure
As of December 31, 2019 and 2018 loans secured by one- to four-family residential property amounting to $344,000 and $351,000,
respectively, were in process of foreclosure.
Impaired Loans
Impaired loans are loans for which it is probable that the Company will not be able to collect all amounts due according to the
contractual terms of the loan agreements and loans restructured in a troubled debt restructuring. The recorded investment in impaim red
loans consists of unpaid principal balance, net of charge-offs, interest payments received applied to principal, and unamortized
deferred loan origination fees and costs.
The following is information pertaining to impaired loans:
Carrying
Value
Average
Carrying
Value
For the Year Ended December 31, 2019
Unpaid
Principal
Balance
(dollars in thousands)
Related Allowance
Interest
Income
g
Recognized
With no required reserve recorded:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home equity
Total
With required reserve recorded:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home equity
Total
Total:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home equity
Total
$
$
$
$
3,161
765
93
4,019
128
128
128
3,161
765
93
4,147
$
1,385
691
96
2,172
59
59
59
1,385
691
96
2,231
$
$
4,376
940
133
5,449
167
167
167
4,376
940
133
5,616
$
$
87
87
87
87
$
35
5
1
41
35
5
1
41
72
With no required reserve recorded:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home equity
Total
With required reserve recorded:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home equity
Total
Total:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home equity
Total
With no required reserve recorded:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home equity
Total
With required reserve recorded:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home equity
Total
Total:
Commercial and industrial
Commercial mortgage
Residential mortgage
Home equity
Total
Carrying
Value
6
634
100
740
6
634
100
740
Carrying
Value
29
213
904
86
1,232
64
64
29
213
968
86
1,296
$
$
$
$
$
$
$
$
Interest
Income
g
Recognized
g
Interest
Income
Recognized
1
4
1
6
1
4
1
6
2
3
5
1
1
2
3
1
6
Average
Carrying
Value
For the Year Ended December 31, 2018
Unpaid
Principal
Balance
(dollars in thousands)
Related Allowance
17
647
104
768
17
647
104
768
$
$
6
786
135
927
6
786
135
927
$
$
$
$
Average
Carrying
Value
For the Year Ended December 31, 2017
Unpaid
Principal
Balance
(dollars in thousands)
Related Allowance
36
224
931
91
1,282
66
66
36
224
997
91
1,348
$
$
29
227
1,103
116
1,475
64
64
29
227
1,167
116
1,539
$
$
$
93
93
93
93
$
73
Allowance for Loan Losses
The Company maintains an allowance for loan losses in an amount determined by management on the basis of the character of the
loans, loan performance, financial condition of borrowers, the value of collateral securing loans, and other relevant factors. We
provide for loan losses based upon the consistent application of our documented allowance for loan loss methodology. All loan losses
are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are
provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable
losses. We regularly review the loan portfolio, including a review of our classified assets, and make provisions for loan losses in order
to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists primarily of two
components:
1.
2.
Specific allowances established for impaired loans, as defined by GAAP. The amount of impairment provided for as a
specific allowance is measured based on the deficiency, if any, between the present value of expected future cash flows
discounted at the loans effective interest rate at the time of impairment or, as a practical expedient, at the loans
observable market price, or the fair value of the collateral if the loan is collateral-dependent, and the carrying value of the
loan; and
General allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired
loans. The portfolio is grouped into homogenous pools by similar risk characteristics, primarily by loan type and
regulatory classification. We apply an estimated incurred loss rate to each loan group. The loss rates applied are based
upon our historical loss experience over a designated look back period adjusted, as appropriate, for the quantitative,
qualitative, and environmental factors discussed below. This evaluation is inherently subjective, as it requires material
estimates that may be susceptible to significant revisions based upon changes in economic and real estate market
conditions.
Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material
negative effect on our financial results.
The adjustments to historical loss experience are based on our evaluation of several quantitative, qualitative, and environmental
factors, including:
•
•
•
•
•
•
•
•
the loss emergence period, which represents the average amount of time between when loss events occur for specific loan
types and when such problem loans are identified and the related loss amounts are confirmed through charge-offs;
changes in any concentration of credit (including, but not limited to, concentrations by geography, industry, or collateral
type);
changes in the number and amount of non-accrual loans and past due loans;
changes in national, state, and local economic trends;
changes in the types of loans in the loan portfolio;
changes in the experience and ability of personnel;
changes in lending strategies; and
changes in lending policies and procedures.
In addition, we may establish an unallocated allowance to provide for probable losses that have been incurred as of the reporting date
but are not reflected in the allocated allowance.
We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally, when the
loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated
probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the
allowance for loan losses methodology results in a lower dollar amount of estimated probable losses than would be the case without
the decrease. Periodically, management conducts an analysis to estimate the loss emergence period for various loan categories based
on samples of historical charge-offs. Model output by loan category is reviewed to evaluate the reasonableness of the reserve levels in
comparison to the estimated loss emergence period applied to historical loss experience.
We evaluate the loan portfolio on a quarterly basis and the allowance is adjusted accordingly. While we use the best information
available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the
information used in making the evaluations. In addition, various regulatory agencies, as an integral part of their examination process,
will periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on
their analysis of information available to them at the time of their examination.
74
The following tables contain changes in the allowance for loan losses disaggregated by loan type for the periods noted:
Allowance for loan losses:
Balance at December 31, 2018
Charge-offs
Recoveries
Provision for (Release of)
Balance at December 31, 2019
Allowance for loan losses:
Balance at December 31, 2017
Charge-offs
Recoveries
Provision for (Release of)
Balance at December 31, 2018
Allowance for loan losses:
Balance at December 31, 2016
Charge-offs
Recoveries
Provision for (Release of)
Balance at December 31, 2017
Residential
Mortgages
g g
Commercial
Mortgages
g g
$
$
4,946
195
5,141
$
9,626
(1,270)
2,549
$ 10,905
Residential
Mortgages
Commercial
Mortgages
$
$
5,047
(101)
4,946
$
$
8,289
1,337
9,626
Residential
Mortgages
Commercial
Mortgages
$
$
4,898
149
5,047
$
$
8,451
(162)
8,289
$
$
$
$
$
$
For the Year Ended December 31, 2019
Commercial &
Home
y
Equity
Industrial
(dollars in thousands)
Consumer
Impaired
Total
517
(56)
461
$
$
1,415
(338)
53
258
1,388
$
$
264
(48)
11
(29)
198
$
$
$ 16,768
(1,656)
64
3,004
87
$ 18,180
87
For the Year Ended December 31, 2018
Commercial &
Home
Industrial
Equity
(dollars in thousands)
Consumer
Impaired
Total
630
(113)
517
$
$
946
(73)
48
494
1,415
$
$
315
(36)
7
(22)
264
$
$
$ 15,320
93
(109)
55
(93)
1,502
$ 16,768
For the Year Ended December 31, 2017
Commercial &
Home
Industrial
Equity
(dollars in thousands)
Consumer
Impaired
Total
651
(21)
630
$
$
807
(284)
13
410
946
$
$
264
(39)
7
83
315
$
$
190
(97)
93
$ 15,261
(323)
20
362
15,320
$
The following tables contain period-end balances of the allowance for loan losses and related loans receivable disaggregated by
impairment method:
Residential
Mortgages
Commercial
Mortgages
$
$
5,141
5,141
$
10,905
10,905
December 31, 2019
Home
Equity
Commercial &
Industrial
(dollars in thousands)
$
461
461
$
87
1,388
1,475
92
80,583
80,675
$
$
128
133,108
133,236
Consumer
Total
$
$
$
$
$
198
198
$
87
18,093
18,180
$
4,145
2,222,583
$2,226,728
34,677
34,677
$
$
$
Allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Loans receivable
$
$
Individually evaluated for impairment
Collectively evaluated for impairment
Total
$
764
916,802
$ 917,566
$
3,161
1,057,413
$1,060,574
75
Allowance for loan losses
Individually evaluated for impairment
Collectively evaluated for impairment
Total
Loans receivable
$
$
Residential
Mortgages
Commercial
Mortgages
December 31, 2018
Home
Equity
Commercial &
Industrial
(dollars in thousands)
Consumer
Total
$
$
$
$
$
517
517
$
1,415
1,415
264
264
$
16,768
16,768
4,946
4,946
9,626
9,626
$
$
$
$
757,957
$ 757,957
$
$
$
$
Individually evaluated for impairment
Collectively evaluated for impairment
Total
$
647
603,684
$ 604,331
88
69,248
69,336
$
$
5
93,707
93,712
$
740
1,559,032
$1,559,772
34,436
34,436
As discussed in Note 2, Summary of Significant Accounting Policies, the provision for loan losses is evaluated on a periodic basis by
management in order to determine the adequacy of the allowance for loan losses.
8.
FEDERAL HOME LOAN BANK OF BOSTON STOCK
As a voluntary member of the FHLB of Boston, the Bank is required to invest in stock of the FHLB of Boston (which is considered a
restricted equity security) in an amount based upon its outstanding advances from the FHLB of Boston. At December 31, 2019 and
December 31, 2018, the Banks investment in FHLB of Boston stock totaled $7.9 million and $6.8 million, respectively. No market
exists for shares of this stock. The Banks cost for FHLB of Boston stock is equal to its par value. Upon redemption of the stock,
which is at the discretion of the FHLB of Boston, the Bank would receive an amount equal to the par value of the stock. At its
discretion, the FHLB of Boston may also declare dividends on its stock.
The Banks investment in FHLB of Boston stock is reviewed for impairment at each reporting date based on the ultimate
recoverability of the cost basis of the stock. As of December 31, 2019 and December 31, 2018, no impairment has been recognized.
9.
BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of property, leasehold improvements, and equipment is
presented below:
Land
Building and leasehold improvements
Equipment, including vaults
Work in process
Subtotal
Accumulated depreciation and amortization
Total
December 31,
2019
2018
(dollars in thousands)
Estimated
Useful Lives
$
$
1,116
17,817
13,686
550
33,169
(18,413)
14,756
$
$
1,116
12,175
11,613
84
24,988
(16,410)
8,578
3-30 years
3-20 years
Total depreciation expense for the years ended December 31, 2019, 2018, and 2017 amounted to approximately $2.0 million, $1.9
million and $1.9 million, respectively, and is included in occupancy and equipment expenses in the accompanying consolidated
statements of income.
10. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill.ll At December 31, 2019 and 2018, the carrying value of goodwill, which is included in other assets, totaled $31.2 million
and $412,000, respectively. Goodwill is tested for impairment, based on its fair value, at least annually. As of December 31, 2019 and
2018, no goodwill impairment has been recognized.
76
Core deposit intangibles. The Company recorded an asset for the core deposit intangible (CDI) of $3.6 million related to the
Optima merger. Amortization of CDI assets totaled $270,000
for the twelve months ended December 31, 2019. As of December 31,
2019, the carrying value of CDI assets totaled $3.3 million . The weighted-average remaining amortization period for CDI was
approximately nine years at December 31, 2019.
Mortgage servicing rights. Periodically, the Company sells certain residential mortgage loans to the secondary market. Generally,
these loans are sold without recourse or other credit enhancements.
The Company sells loans and either releases or retains the servicing rights. For loans sold with servicing rights retained, we provide
the servicing for the loans on a per-loan fee basis. Mortgage loans sold and servicing rights retained during the years ended
December 31, 2019, 2018, and 2017 were $82.9 million, $1.6 million, and $11.9 million, respectively, with net gains recognized in
gain on loan sales of $685,000, $36,000, and $182,000, respectively.
An analysis of mortgage servicing rights, which are included in other assets, follows:
Balance at December 31, 2016
Mortgageg g servicingg rightsg
Amortization charged against servicing income
Change in impairment reserve
capitalized
Balance at December 31, 2017
Mortgage servicing rights capitalized
Amortization charged against servicing income
Change in impairment reserve
Balance at December 31, 2018
Mortgage servicing rights acquired as a result of the merger
Mortgage servicing rights capitalized
Amortization charged against servicing income
Change in impairment reserve
Balance at December 31, 2019
Mortgage
Servicing
g
Rights
Valuation
Allowance
(dollars in thousands)
Total
$
$
$
$
842
132
(151)
823
20
(147)
(30)
666
334
618
(271)
1,347
$
$
$
$
(30) $
(30) $
30
$
(26)
(26) $
812
132
(151)
793
20
(147)
666
334
618
(271)
(26)
1,321
The fair value of our mortgage servicing rights (MSR) portfolio was $1.5 million and $1.0 million as of December 31, 2019 and
2018. The fair value of mortgage servicing rights is estimated based on the present value of expected cash flows, incorporating
assumptions for discount rate, prepayment speed, and servicing cost.
The weighted-average amortization period for mortgage servicing rights portfolio was 5.2 years and 7.5 years at December 31, 2019
and December 31, 2018, respectively.
The estimated aggregate future amortization expense for mortgage servicing rights for each of the next five years and thereafter is as
follows:
Future Amortization Expense
(dollars in thousands)
202
166
135
110
89
619
1,321
2020
2021
2022
2023
2024
Thereafter
Total
$
$
77
11. DEPOSITS
Deposits are summarized as follows:
Demand deposits (non-interest bearing)
Interest bearing checking
Money market
Savings
Retail certificates of deposit under $100,000
Retail certificates of deposit $100,000 or greater
Wholesale certificates of deposit
Total deposits
December 31, 2019
December 31, 2018
$
$
$
(dollars in thousands)
630,593
450,098
181,406
914,499
56,602
118,596
7,084
2,358,878
$
494,492
431,702
135,585
628,212
36,223
57,692
27,504
1,811,410
Certificates of deposit had the following schedule of maturities:
December 31, 2019
December 31, 2018
Less than 3 months remaining
3 to 5 months remaining
6 to 11 months remaining
12 to 23 months remainingg
24 to 47 months remaining
48 months or more remaining
Total certificates of deposit
$
$
$
(dollars in thousands)
52,883
47,701
38,981
31,501
9,448
1,768
182,282
$
24,219
17,486
37,987
28,529
9,652
3,546
121,419
Interest expense on retail certificates of deposit $100,000 or greater was $2.1 million, $467,000, and $446,000 for the years ended
December 31, 2019, 2018, and 2017, respectively.
The aggregate amount of certificates of deposit in denominations that meet or exceed the FDIC insurance limit of $250,000 at
December 31, 2019 and 2018 was $60.8 million and $31.8 million, respectively.
Related Party Depositstt
Deposit accounts of directors, executive officers, and their respective affiliates totaled $7.2 million and $6.8 million as of
December 31, 2019 and 2018, respectively.
12. BORROWINGS
Information relating to short-term borrowings is presented below:
FHLB of Boston short-term advances
Ending balance
Averageg dailyy balance
Highest month-end balance
Weighted average interest rate
Information relating to long-term borrowings is presented below:
For the Year Ended December 31,
2018
2019
(dollars in thousands)
$
$
135,691
84,414
135,691
2.31%
90,000
15,183
90,000
2.47%
FHLB of Boston long-term advances
Due 09/01/2020; amortizing
December 31, 2019
Amount
Rate
December 31, 2018
Amount
Rate
(dollars in thousands)
$
0.00% $
3,409
1.94%
78
All short- and long-term borrowings with the FHLB of Boston are secured by the Banks stock in the FHLB of Boston and a blanket
lien on qualified collateral defined principally as 95% of the market value of certain U.S. Government and GSE obligations and
75% of the carrying value of certain residential mortgage loans. Based upon collateral pledged, the Banks unused borrowing capacity
with the FHLB of Boston at December 31, 2019 was approximately $345.5 million.
The Bank also has a line of credit with the FRB Boston. At December 31, 2019 and 2018, the Bank had pledged commercial real
estate and commercial & industrial loans with aggregate principal balances of approximately $316.4 million and $291.7 million,
respectively, as collateral for this line of credit. Based upon the collateral pledged, the Banks unused borrowing capacity with the
FRB Boston at December 31, 2019 and 2018 was approximately $134.9 million and $167.5 million, respectively.
13.
INCOME TAXES
In accordance with the Tax Cuts and Jobs Act of 2017, the Companys statutory federal tax rate decreased from 35% to 21% effective
January 1, 2018. The change in tax law required a one-time non-cash write down of our net deferred tax assets of $3.9 million in
2017.
The components of income tax expense were as follows:
Current
Federal
State
Deferred
Federal
State
Total deferred
Total income tax expense
2019
For the Year Ended December 31,
2018
(dollars in thousands)
2017
$
$
5,954
2,597
8,551
(63)
173
110
8,661
$
$
5,524
2,404
7,928
(490)
(231)
(721)
7,207
$
$
8,446
2,225
10,671
2,948
(261)
2,687
13,358
The following is a reconciliation of the total income tax provision, calculated at statutory federal income tax rates, to the income tax
provision in the consolidated statements of income:
Provision at statutory rates
Increase/(decrease) resulting from:
State tax, net of federal tax benefit
Tax-exempt income
ESOP dividends
Bank owned life insurance
Benefit from stock compensation
Non-deductible Acquisition Costs
Impact of Tax Cuts and Jobs Act
Other
Total income tax expense
2019
Rate
For the Year Ended December 31,
2018
Rate
(dollars in thousands)
2017
Rate
$
7,123
21.00% $
6,528
21.00% $
9,861
35.00%
2,188
(599)
(124)
(129)
(150)
236
116
8,661
$
6.45
(1.77)
(0.37)
(0.38)
(0.44)
0.70
0.34
25.53% $
1,717
(580)
(127)
(140)
(168)
(23)
7,207
1,277
5.52
(1,079)
(1.87)
(216)
(0.41)
(205)
(0.45)
(190)
(0.54)
3,870
(0.07)
40
23.18% $ 13,358
4.53
(3.83)
(0.77)
(0.73)
(0.67)
13.74
0.15
47.42%
79
The Companys 2019 and 2018 net deferred tax assets were measured using a 27.86% and 28.11% tax rate, respectively, and consisted
of the following components:
Gross deferred tax assets
Allowance for loan losses
Accrued retirement benefits
Unrealized losses on AFS securities
Incentive compensation
Equity based compensation
Lease Liabilityy
ESOP dividends
Loss carryforwards as a result of the Optima merger
Intangibles (merger related)
Other
Total gross deferred tax assets
Gross deferred tax liabilities
Deferred loan origination costs
Depreciation of premises and equipment
Right of Use Asset
Mortgage servicing rights
Goodwill
Derivative transactions
Total gross deferred tax liabilities
Net deferred tax asset
December 31, 2019
December 31, 2018
(dollars in thousands)
$
$
5,029
1,592
171
1,248
1,034
9,765
165
877
472
252
20,605
(911)
(1,021)
(9,356)
(368)
(113)
(607)
(12,376)
8,229
$
$
4,715
2,082
957
1,189
849
333
169
155
10,449
(459)
(678)
(187)
(114)
(294)
(1,732)
8,717
It is managements belief, that it is more likely than not, that the reversal of deferred tax liabilities and results of future operations will
generate sufficient taxable income to realize the deferred tax assets. Therefore, no valuation allowance was required at either
December 31, 2019 and 2018 for the deferred tax assets. It should be noted, however, that factors beyond managements control, such
levels of taxable income and that no assurance can be
as the general state of the economy and real estate values, can affect future
given that sufficient taxable income will be generated in future periods to fully absorb deductible temporary differences.
ff
At December 31, 2019 and 2018, the Company had no unrecognized tax benefits or any uncertain tax positions. The Company does
not expect the total amount of unrecognized tax benefits to significantly increase in the next 12 months.
The Companys federal income tax returns are open and subject to examination from the 2016 tax return year and forward. The
Companys state income tax returns are open from the 2016 and later tax return years based on individual state statute of limitations.
to Employee Share-Based
m
On January 1, 2017, The Company adopted Accounting Standards Update No. 2016-09 - Im
Payment Accounting (ASU 2016-09). ASU 2016-09 requires that excess tax benefits or tax deficiencies be recognized as income
tax benefit or expense in earnings in the period that they occur. During the year ended December 31, 2019, 2018, and 2017, the
Company recognized a tax benefit of $199,000, $225,000, and $221,000 respectively.
provements
14. PENSION AND RETIREMENT PLANS
The Company has a noncontributory, defined benefit pension plan (Pension Plan) covering substantially all employees hired beforeff
May 2, 2011. Employees in positions requiring at least 1,000 hours of service per year were eligible to participate upon the attainment
of age 21 and the completion of 12 months of service. Benefits are based primarily on years of service and the employees average
monthly pay during the five highest consecutive plan years of the employees final ten years. On October 23, 2017, the Company
announced its decision to freeze the accrual of benefits within the Pension Plan, effective December 31, 2017. The Company also
provides supplemental retirement benefits to certain current and former executive officers of the Company under the terms of
Supplemental Executive Retirement Agreements (Supplemental Retirement Plan). Prior to 2016, the Company provided individual
non-qualified defined benefit supplemental executive retirement plans (DB SERPs) to certain executives. The DB SERPs generally
provide for an annual benefit payable in equal monthly installments following the executives retirement and continuing for at least
the remainder of his or her lifetime, with such annual benefit generally based on the executives years of service and his or her highest
three consecutive years of base salary and bonus. In 2016, the Companys Board discontinued the use of DB SERPs for new entrants
80
to the Companys non-qualified retirement programs. Instead, new entrants are provided with individual non-qualified defined
contribution supplemental executive retirement plans (DC SERPs). Under the DC SERPs, the Company may contribute an amount
equal to 10% of the executives base salary and bonus to his or her account under the Companys non-qualified deferred compensation
plan, the Executive Deferred Compensation Plan. The Company also offers postretirement health care benefits for current and futurett
retirees of the Bank. Certain employees receive a fixed monthly benefit at age 65 toward the purchase of postretirement medical
coverage. The benefit received is based on the employees years of active service. The Company uses a December 31 measurement
date each year to determine the benefit obligations for these plans.
aa
Projected benefit obligations and funded status were as follows:
Changeg in projected
j
benefit obligation
Obligation at beginning of year
Service cost
Interest cost
Actuarial loss/(gain)
Benefits paid
Obligation at end of year
Change in plan assets
Fair value at beginning of year
Actual return on plan assets
Employery
Benefits paid
contribution
Fair value at end of year
Funded status at end of year
Amounts recognized in the consolidated balance sheets consisted of:
Other assets/(liabilities)
Pension Plan
Supplemental
Retirement Plan
2019
2018
2019
2018
(dollars in thousands)
$
$
40,522
1,680
4,670
(1,471)
45,401
42,648
8,954
(1,471)
50,131
4,730
$
$
43,943
1,557
(3,659)
(1,319)
40,522
45,247
(1,280)
(1,319)
42,648
2,126
$
$
$
8,830
283
349
770
(610)
9,622
610
(610)
(9,622) $
9,204
354
309
(499)
(538)
8,830
538
(538)
(8,830)
Pension Plan
Supplemental
Retirement Plan
2019
2018
2019
2018
(dollars in thousands)
$
4,730
$
2,126
$
(9,622) $
(8,830)
Amounts recognized in accumulated other comprehensive loss consisted of:
NNet actuarial loss/(gain)
Prior service (benefit)
Total
Pension Plan
Supplemental
Retirement Plan
2019
2018
2019
2018
$
$
3,709
(7)
3,702
$
$
(dollars in thousands)
5,427
(12)
5,415
$
$
1,128
1,128
$
$
358
358
Certain disaggregated information related to our retirement plans were as follows:
Pension Plan
Supplemental
Retirement Plan
2019
2018
2019
2018
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Funded status at end of year
$
$
45,401
45,401
50,131
4,730
81
$
(dollars in thousands)
40,522
40,522
42,648
2,126
9,622
9,207
(9,622)
$
8,830
8,567
(8,830)
The components of net periodic benefit cost and amounts recognized in other comprehensive income/ (loss) were as follows:
NNet periodic benefit cost
Service cost
Interest cost
Expected return on assets
Amortization of prior service credit
Amortization of net actuarial loss/(gain)
Net periodic benefit cost
Amounts recognized in other comprehensive income/( loss)
Net actuarial loss/(gain)
Amortization of prior service credit
Amortization of net actuarial gain
Total recognized in other comprehensive income/( loss)
Total recognized in net periodic benefit cost and other
Pension Plan
Supplemental
Retirement Plan
2019
2018
2019
2018
(dollars in thousands)
$
$
$
1,680
(2,721)
(4)
154
(891)
(1,563)
4
(154)
(1,713)
1,557
(2,891)
(4)
106
(1,232)
512
4
(106)
410
$
283
349
632
770
770
354
309
4
667
(499)
(4)
(503)
comprehensive income/( loss)
$
(2,604) $
(822) $
1,402
$
164
Weighted-average assumptions used to determine projected benefit obligations are as follows:
Discount rate
Rate of compensation increase
Pension Plan
Supplemental
Retirement Plan
2019
2018
2019
2018
3.22%
N/A
4.23%
N/A
3.04%
4.00%
4.10%
4.00%
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
ff
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
Pension Plan
Supplemental
Retirement Plan
2019
2018
2019
2018
4.23%
6.50%
N/A
3.58%
6.50%
N/A
4.10%
N/A
4.00%
3.39%
N/A
4.00%
To develop the expected long-term rate of return on assets assumption for the Pension Plan, the Company considered the historical
returns and the future expectations for returns for each asset class, as well as target asset allocations of the pension portfolio. Based on
this analysis, the Company selected 6.50% as the long-term rate of return on asset assumption.
The Company maintains an Investment Policy for its Pension Plan. The objective of this policy is to seek a balance between capital
appreciation, current income, and preservation of capital, with a longer term weighting towards equities because of the extended time
horizon of the Pension Plan.
The Investment Policy guidelines suggest that the target asset allocation percentages are from 30% to 60% in domestic large cap
equities, from 5% to 20% in domestic small/mid cap equities, from 0% to 20% in international equities, and from 20% to 50% in cash
and fixed income.
The Companys Pension Plan weighted-average asset allocations by asset category were as follows:
Equity securities
Debt securities
Other
Cash and equivalents
Total
December 31,
2019
2018
53%
36
3
8
100%
60%
35
1
4
100%
82
The three broad levels of fair values used to measure the Pension Plan assets are as follows:
•
•
•
Level 1 Quoted prices for identical assets in active markets.
Level 2 Quoted prices for similar assets in active markets; quoted prices for identical or similar assets in inactive
markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active
markets.
Level 3 Valuations derived from techniques in which one or more significant inputs or significant value drivers are
unobservable in the markets and which reflect the Companys market assumptions.
The following table summarizes the various categories of the Pension Plans assets:
Asset category
Cash and cash equivalents
Fixed Income
Equity securities
Common Stock
Large cap core
Mid cap core
Small cap core
Mutual funds
Domestic Equity
International
Domestic Fixed Income
Preferred Stock
Total
Asset category
Cash and cash equivalents
Fixed Income
Equity securities
Common Stock
Large cap core
Mid cap core
Small cap core
Mutual funds
Domestic Equity
International
Domestic Fixed Income
Preferred Stock
Total
Fair Value as of December 31, 2019
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
$
4,834
$
7,197
$
4,834
7,197
17,180
2,627
3,931
3,650
10,712
42,934
7,197
$
$
$
17,180
2,627
3,931
3,650
10,712
50,131
Fair Value as of December 31, 2018
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
3,520
$
6,534
$
3,520
6,534
16,127
2,090
4,320
3,409
6,648
36,114
6,534
$
$
$
16,127
2,090
4,320
3,409
6,648
42,648
$
$
$
83
There were no transfers between fair value levels during the years ended December 31, 2019 and 2018.
The Company offers postretirement health care benefits for current and future retirees of the Bank. Employees receive a fixed monthly
benefit at age 65 toward the purchase of postretirement medical coverage. The benefit received is based on the employees years of
active service. The Company uses a December 31 measurement date each year to determine the benefit obligation for this plan. On
November 7, 2019, the Company announced its decision to freeze the accrual
of benefits to new hires within the plan.
r
Projected benefit obligations and funded status were as follows:
Changeg in projected
j
benefit obligation
Obligation at beginning of year
Service cost
Interest cost
Actuarial loss/(gain)
Benefits paid
Obligation at end of year
Change in plan assets
Fair value at beginning of year
Actual return on plan assets
Employery
Benefits paid
contribution
Fair value at end of year
Funded status at end of year
Amounts recognized in the consolidated balance sheets consisted of:
Other liabilities
Amounts recognized in accumulated other comprehensive loss consisted of:
NNet actuarial (gain)/loss
Prior service cost
Total
Postretirement
Healthcare Plan
2019
2018
(dollars in thousands)
598
25
25
76
(35)
689
35
(35)
(689)
$
$
617
23
22
(30)
(34)
598
33
(33)
(598)
Postretirement
Healthcare Plan
2019
2018
(dollars in thousands)
(689)
$
(598)
Postretirement
Healthcare Plan
2019
2018
(dollars in thousands)
(34)
(34)
$
$
(113)
(113)
$
$
$
$
$
Information for retirement plans with an accumulated benefit obligation in excess of plan assets:
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
Postretirement
Healthcare Plan
2019
2018
(dollars in thousands)
$
$
689
689
598
598
The components of net periodic benefit cost and amounts recognized in other comprehensive income were as follows:
NNet periodic benefit cost
Service cost
Interest cost
Expected return on assets
Amortization of prior service credit
Amortization of net actuarial gain
Net periodic benefit cost
Amounts recognized in other comprehensive income/( loss)
Net actuarial (gain) loss
Amortization of prior service credit
Amortization of net actuarial gain
Total recognized in other comprehensive income/( loss)
Total recognized in net periodic benefit cost and
other comprehensive income/( loss)
Postretirement
Healthcare Plan
2019
2018
(dollars in thousands)
$
$
25
25
(3)
47
76
3
79
$
126
$
23
22
45
(30)
(30)
15
Weighted-average assumptions used to determine projected benefit obligations are as follows:
Discount rate
Rate of compensation increase
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
ff
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
Assumed health care cost trend rates are as follows:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
Year that the rate reaches the ultimate trend rate
Postretirement
Healthcare Plan
2019
2018
3.26%
N/A
4.22%
N/A
Postretirement
Healthcare Plan
2019
2018
4.22%
N/A
N/A
Postretirement
Healthcare Plan
2019
2018
4.00%
4.00%
2019
3.58%
N/A
N/A
4.00%
4.00%
2018
Assumed health care trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point
change in assumed health care cost trend rates would have the following effects:
Effect on total service and interest cost
Effect on postretirement benefit obligation
One Percentage Point
Increase
Decrease
$
(dollars in thousands)
$
2
(2)
85
Benefits expected to be paid in the next ten years are as follows:
Year-ended December 31,,
2020
2021
2022
2023
2024
2025-2029 inclusive
Ten year total
Pension
Plan
Supplemental
Retirement Plan
Postretirement
Healthcare Plan
Total
(dollars in thousands)
$
$
1,751
1,813
1,948
2,061
2,135
11,784
21,492
$
$
594
591
609
605
602
2,916
5,917
$
$
30
30
31
31
31
166
319
$
$
2,375
2,434
2,588
2,697
2,768
14,866
27,728
The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost during
2019 are as follows:
Prior service cost
NNet (gain)/loss
Total
Employee Profit Sharing and 401(k) Plan
Pension
Plan
Supplemental
Retirement Plan
Postretirement
Healthcare Plan
Total
$
$
(4) $
(4) $
(dollars in thousands)
$
$
$
$
(4)
(4)
The Company maintains a Profit Sharing Plan (PSP) that provides for deferral of federal and state income taxes on employee
contributions allowed under Section 401(k) of federal law. Beginning in 2018, the Company matched employee contributions up to
100% of the first 4% of each participants salary, eligible bonus, and eligible incentive, up from 3% in 2017. Employees are eligible to
participate in the PSP on the first day of their initial date of service. Each year, the Company may also make a discretionary
contribution to the PSP. In 2018, employees were eligible to participate in the discretionary contribution portion of the PSP after
completing 12 months of employment, and 1,000 hours of service. The employee must be employed on the last day of the calendar
year, or retire at the normal retirement age of 65 during the calendar year to receive the discretionary contribution. Effective in 2019,
employees are eligible to participate in the discretionary contribution portion of the PSP on the first day of their initial date of service.
ff
Employee Stock Ownership Plan
The Company has an Employee Stock Ownership Plan (ESOP) for its eligible employees. Employees are eligible to participate upon
the attainment of age 21 and the completion of 12 months of service consisting of at least 1,000 hours. Purchases of the Companynn s stock
by the ESOP will be funded by employer contributions or reinvestment of cash dividends.
Total expenses related to the Profit Sharing and ESOP Plans for the years ended December 31, 2019, 2018 and 2017, amounted to
approximately $2.8 million, $2.6 million, and $1.5 million, respectively.
Defined Contribution SERP Plan (DC
SERP)
For executives participating in the DC SERP plan, the Company made a discretionary contribution of 10% of each executives base
salary and bonus to his or her account under the Companys DC SERP, the Executive Deferred Compensation Plan. Total expenses
related to the Companys DC SERP for the years ended December 31, 2019, 2018 and 2017, amounted to approximately $167,000,
$209,000, and $126,000, respectively.
86
15.
SHARE-BASED COMPENSATION
In 1993, the Company adopted a Stock Option Plan for key employees as an incentive for them to assist the Company in achieving
long-range performance goals. During 2005, the Companys shareholders amended the plan to permit the issuance of restricted stock,
restricted stock units, and stock appreciation rights.
In 2017, the Company adopted the 2017 Equity and Cash Incentive Plan (the 2017 Plan) and all future awards will be made under
the 2017 Plan. The 2017 plan permits the issuance of restricted stock, restricted stock units (both time and performance-based), stock
options, and stock appreciation rights.
Stock options time-vest over a five-year period. All options expire ten years from the date granted and have been issued at faff ir value at
the date of grant which, in some instances, may be less than publicly traded values. There were no outstanding stock options at
December 31, 2019. A summary of stock option transactions for the year ended December 31, 2018 is presented below:
Stock Options
Outstanding at beginning of year
Granted
Forfeited
Expired
Exercised
Outstanding at end of year
Exercisable at end of year
2019
2018
Number
of Options
Weighted
Average
Exercise Price
Number
of Options
Weighted
Average
Exercise Price
$
$
$
$
16,377
(2,600)
(13,777)
$
$
29.21
29.21
29.21
Restricted stock awards time-vest either over a three-year or five-year period and have been fair valued as of the date of grant. The
holders of restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend
rights. A summary of restricted stock transactions for the periods of December 31, 2019 and 2018, and changes during the years ended
on those dates, is presented below:
Restricted stock
Non-vested at beginning of year
Granted
Vested
Forfeited
Non-vested at end of year
2019
2018
Number
of Shares
Weighted
Average
Grant Value
Number
of Shares
Weighted
Average
Grant Value
41,311
11,330
(14,642)
(1,878)
36,121
$
$
65.10
75.67
60.55
65.33
70.25
43,240
17,373
(15,760)
(3,542)
41,311
$
$
53.13
80.43
50.10
60.84
65.10
Performance-based restricted stock units vest based upon the Companys performance over a three-year period and have been fair
valued as of the date of grant. The holders of performance-based restricted stock units do not participate in the rewards of stock
ownership of the Company until vested. A summary of non-vested performance-based restricted stock units outstanding as of
December 31, 2019 and 2018, and changes during the years ended on those dates, is presented below:
Performance-based restricted stock units
Non-vested at beginning of year
Granted
Vested (Performance achieved)
Forfeited
Expired (Performance not achieved)
Non-vested at end of yyear
2019
2018
Number
of Units
Weighted
Average
Grant Value
Number
of Units
Weighted
Average
Grant Value
41,411
28,542
(12,697)
57,256
$
$
66.39
73.00
46.00
72.82
21,613
23,511
(3,713)
41,411
$
$
56.05
76.56
70.68
66.39
Time based restricted stock units vest over a three-year-period and have been fair valued as of the date of the grant. The holders of
time based restricted stock units do not participate in the rewards of stock ownership of the company until vested. A summary of
nonvested time based restricted stock units outstanding as of December 31, 2019 and 2018, and changes during the years ended on
those dates, is presented below:
Time-based restricted stock units
Non-vested at beginning of year
Granted
Vested
Forfeited
Non-vested at end of yyear
2019
2018
Number
of Shares
Weighted
Average
Grant Value
Number
of Shares
Weighted
Average
Grant Value
6,777
8,132
(2,251)
12,658
$
$
76.56
73.00
76.56
74.27
$
7,839
(225)
(837)
6,777
$
76.56
76.56
76.56
76.56
The following table presents the amounts recognized in the consolidated income statement for restricted stock awards, time-based
restricted stock units, and performance-based restricted stock units:
Share-based compensation expense
Related income tax benefit
2019
$
$
2,632
733
December 31,
2018
(dollars in thousands)
$
$
2,592
729
$
$
2017
1,045
427
The 2017 Plan allows Directors of the Company to receive their annual retainer fee in the form of stock in the Company. Total shares
issued under the 2017 Plan in the years ended December 31, 2019 and 2018 were 4,484 and 4,164, respectively.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
To meet the financing needs of its customers, the Bank is a party to financial instruments with off-balance-sheet risk in the normal
course of business. These financial instruments
are primarily comprised of commitments to extend credit, commitments to sell
residential real estate mortgage loans, risk participation agreements, and standby letters of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
rr
The Banks exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments
and standby letters of credit is represented by the contractual amount of those instruments assuming that the amounts are fully
advanced and that collateral or other security is of no value. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Off-balance-sheet financial instruments with contractual amounts that present credit risk included the following:
Financial instruments whose contractual amount
represents credit risk:
Commitments to extend credit:
Unused portion of existing lines of credit
Origination of new loans
Standby letters of credit
Financial instruments whose notional amount exceeds
the amount of credit risk:
Commitments to sell residential
mortgage loans
g g
December 31, 2019
December 31, 2018
(dollars in thousands)
$
$
428,020
24,413
9,150
368,410
24,505
8,752
3,909
Standby letters of credit are conditional commitments issued by the Bank to guarantee performance of a customer to a third party.tt
Those guarantees are primarily issued to support public and private borrowing arrangements. Most guarantees extend for one year.
The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.
The collateral supporting those commitments varies and may include real property, accounts receivable, or inventory.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since
some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained
upon extension of the credit is based on managements credit evaluation of the customer. Collateral held varies, but may include
primary residences, accounts receivable, inventory, property, plant and equipment, and income-producing commercial real estate.
See Note 23 - DERIVATIVES AND HEDGING ACTIVITIES for a discussion of the Companys derivatives and hedging activities.
17. COMMITMENTS AND CONTINGENCIES
Lease Commitments. The Company is obligated under various lease agreements covering its main office, branch offices, and other
locations. These agreements are accounted for as operating leases and their terms expire between 2019 and 2030 and, in some
instances, contain options to renew for periods up to 30 yea .rs
The Company adopted Accounting Standards Update No. 2016-02 - Leases (ASU 2016-02) during the first quarter of 2019 and
began recognizing its operating leases on its balance sheet by recording a lease liability, representing the Companys legal obligation
to make lease payments, and a Right-Of-Use (ROU) Asset, representing the Companys legal right to use the leased office space and
banking centers. The Company, by policy, does not include renewal options for leases as part of its right-of-use assets and lease
liabilities unless they are deemed reasonably certain to exercise. The Company does not have any material sub-lease agreements.
The following table summarizes information related to the Companys right-of-use asset and net lease liability:
Right-of-use asset
Lease liability
December 31, 2019
g
Operating Leases
Balance Sheet Location
(dollars in thousands)
$
$
33,587
35,054
Right-of-use asset operating leases
Operating lease liabilities
Operating lease expenses are comprised of operating lease costs and variable lease costs, net of sublease income. The pattern and
measurement of expense recognition of these costs were not significantly impacted by ASU 2016-02 and subsequent ASUs issued to
amend this Topic.
Variable lease payments that are not dependent on an index or a rate or changes in variable payments based on an index or rate after
the commencement date are excluded from the measurement of the lease liability, recognized in the period incurred and included
within variable lease costs below.
89
The Company determines whether a contract contains a lease based on whether a contract, or a part of a contract, conveys the right to
control the use of an identified asset for a period of time in exchange for consideration. The discount rate is determined as either the
rate implicit in the lease or when a rate cannot be readily determined, the Companys incremental borrowing rate. The incremental
borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term.
The components of operating lease cost and other related information are as follows:
Operating lease cost
Short-term lease cost
Variable lease cost (Cost excluded from lease payments)
Sublease income
Total Operating Lease Cost
Other Information
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows from
operating leases
Operating Lease - Operating Cash Flows (Liability reduction)
Right-of-use assets obtained in exchange for new operating lease liabilities
Weighted average lease term - operating leases
Weighted average discount rate - operating leases
$
$
$
Twelve Months Ended
December 31,
2019
(dollars in thousands)
5,280
2
(64)
5,218
5,027
3,868
37,728
8.15 Years
3.39%
The total minimum lease payments due in future periods under these agreements in effect at December 31, 2019 and December 31,
2018 were as follows:
Year Ended
December 31, 2019
2020
2021
2022
2023
2024
Thereafter
Total minimum lease payments
Less: interest
Total lease liability
Year Ended
December 31, 2018
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Future Minimum
Lease Payments
(dollars in thousands)
Future Minimum
Lease Payments
(dollars in thousands)
5,478
5,523
5,371
5,021
4,355
14,553
40,301
(5,247)
35,054
4,448
4,661
4,662
4,553
4,455
17,128
39,907
$
$
$
$
Several lease agreements contain clauses calling for escalation of minimum lease payments contingent on increases in real estate
taxes, gross income adjustments, percentage increases in the consumer price index, and certain ancillary maintenance costs. Total
rental expense was $5.7 million, $4.7 million, and $4.7 million for the years ended December 31, 2019, 2018 and 2017, respectively.
Change in Control Agreements. The Company has entered into agreements with its Chief Executive Officer and with certain other
senior officers, whereby, following the occurrence of a change in control of the Company, if employment is terminated (except
because of death, retirement, disability, or for cause as defined in the agreements) or is voluntarily terminated for good reason, as
defined in the agreements, said officers will be entitled to receive additional compensation, as defined in the agreements.
90
18.
SHAREHOLDERS EQUITY
Capital guidelines issued by the Federal Reserve Bank (the FRB) and by the FDIC require that the Company and the Bank maintain
minimum capital levels for capital adequacy purposes. These regulations also require banks and their holding companies to maintain
higher capital levels to be considered well-capitalized. Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companym
s
financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, there are specific
capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The risk-based capital rules are designed to make regulatory capital more sensitive to differences in
risk profiles among bank and bank holding companies, to account for off-balance-sheet exposure, and to minimize disincentives for
holding liquid assets.
a
In July 2013, the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the FDIC approved final rules (the
Capital Rules) establishing a new comprehensive capital framework for U.S. banking organizations. The Capital Rules generally
implement the Basel Committee on Banking Supervisions (the Basel Committee) December 2010 final capital framework referred
to as Basel III for strengthening international capital standards. The Capital Rules revise the definitions and the components of
regulatory capital, as well as address other issues affecting the numerator in banking institutions regulatory capital ratios. The Capital
Rules also address asset risk weights and other matters affecting the denominator in banking institutions regulatory capital ratios and
replace the existing general risk-weighting approach with a more risk-sensitive approach.
The Capital Rules: (i) include Common Equity Tier 1 (CET1) and related regulatory capital ratio of CET1 to risk-weighted assets;
(ii) specify that Tier 1 capital consists of CET1 and Additional Tier 1 capital instruments meeting certain revised requirements; (iii)
mandate that most deducd tions/adjud stments to regulatoryrr capital measures be made to CET1 and not to the other components of capital;
and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital
Rules, for most banking organizations, including the Company, the most common form of Additional Tier 1 capital is non-cumulative
perpetual preferred stock, and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for loan
and lease losses, in each case, subject to the Capital Rules specific requirements.
Pursuant to the Capital Rules, effective January 1, 2015, the minimum capital ratios are as follows:
•
•
•
•
4.5% CET1 to risk-weighted assets;
6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets;
8.0% Total capital (that is, Tier 1 capita
a
l plus Tier 2 capital) to risk-weighted assets; and
4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (called leverage
ratio).
The Capital Rules also include a capital conservation buffer, composed entirely of CET1, in addition to these minimum risk-
weighted asset ratios. The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking
institutions that do not hold the requisite capital conservation buffer will face constraints on dividends, capital instrument repurchases,
interest payments on capital instruments and discretionary bonus payments based on the amount of the shortfall. Thus, the capital
standards applicable to the Company include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in
minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to
risk-weighted assets of at least 8.5%, and (iii) total capital to risk-weighted assets of at least 10.5%.
The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement
that mortgage servicing assets, deferred tax assets arising from temporary differences that could not be realized through net operating
loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that anynn one
such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1.
In November 2017, the Federal
Reserve finalized a rule pausing the phase-in of these deductions and adjustments for non-advanced approaches institutions. In July
2019, the OCC, the Federal Reserve Board and the FDIC adopted a final rule intended to simply the Capital Rules described above for
non-advanced approaches institutions. Institutions may implement the provisions of the simplification rule beginning on January 1,
2020 and must implement them by April 1, 2020. The transition provisions to the Capital Rules issued by these agencies in Novemberm
2017 will cease to apply to an institution in the quarter in which it adopts the simplification rule.
In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss items
sale portfolio) under U.S.
included in shareholders equity (for example, mark-to-market of securities held in the available forff
generally accepted accounting principles (GAAP) are reversed for the purposes of determining regulatory capital ratios. Pursuant to
the Capital Rules, the effects of certain of the above items are not excluded. However, banking organizations, including the Company,
that are not subject to the advanced approaches rule, could make a one-time permanent election to exclude these items. The Company
made the one-time permanent election to exclude these items.
91
The Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies
Tier 1 capital, although bank holding companies that had total consolidated assets of less than $15 billion at December 31, 2009 may
include trust preferred securities issued prior to May 19, 2010 as a component of Tier 1 capital.
The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on
the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 1,250% for certain credit exposures,
and resulting in higher risk weights for a variety of asset classes.
Management believes that as of December 31, 2019 and 2018, the Company and the Bank met all applicable minimum capital
requirements and were considered well-capitalized by both the FRB and the FDIC. There have been no events or conditions since
the end of the year that management believes would have changed the Companys or the Banks category. In September 2019, the
OCC, the Federal Reserve Board and the FDIC adopted a final rule that is intended to further simply the Capital Rules for depository
institutions and their holding companies that have less than $10 billion in total consolidated assets, such as us, if such institutions meet
certain qualifying criteria. This final rule became effective on January 1, 2020. Under this final rule, if we meet the qualifying criteria,
including having a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, we will
be eligible to opt into the community bank leverage ratio framework. If we opt into this framework, we will be considered to have
satisfied the generally applicable risk-based and leverage capital requirements in the Capital Rules (as modified pursuant to the
simplification rule) and will be considered to have met the well-capitalized ratio requirements for PCA purposes. We are currently
evaluating the requirements of this rule.
The Companys and the Banks actual and required capital measures were as follows:
At December 31, 2019
Cambridge Bancorp:
Total capital (to risk-weighted
assets)
Tier I capital
a
assets)
(to risk-weighted
Common equity tier I capital
(to risk-weighted assets)
Tier I capital (to average
assets)
Cambridge Trust Company:
Total capital (to risk-weighted
assets)
Tier I capital (to risk-weighted
assets)
Common equity tier I capital
(to risk-weighted assets)
Tier I capital (to average
assets)
Actual
Amount
Ratio
Minimum Capital
Required For
Capital Adequacy Plus
Capital Conservation Buffer (1)
Amount
Ratio
(dollars in thousands)
Minimum To Be
Well-Capitalized
Under
Prompt Corrective
Action Provisions
Amount
Ratio
$
272,727
13.6% $
210,342
10.5%
254,497
254,497
254,497
12.7%
170,277
12.7%
140,228
9.0%
113,365
8.5%
7.0%
4.0%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
$
271,034
13.5% $
210,341
10.5% $
200,325
10.0%
252,804
252,804
252,804
12.6%
170,276
12.6%
140,227
8.9%
113,364
8.5%
7.0%
4.0%
160,260
130,211
141,705
8.0%
6.5%
5.0%
(1) The 2013 Capital Rules adopted by the Federal Reserve, Office of the Comptroller of the Currency, and the Federal Deposit
Insurance Corporation implementing Basel III were fully phased-in effecff
tive January 1, 2019.
92
Actual
Amount
Ratio
Minimum Capital
Required For
Capital Adequacy
Ratio
Amount
Minimum Capital Required
For Capital
Adequacy Plus
Capital Conservation Buffer
Basel III Phase-In Schedule
Amount
Ratio
(dollars in thousands)
Minimum Capital Required
For Capital
Adequacy Plus
Capital Conservation Buffer
Basel III Fully Phased In
Amount
Ratio
Minimum To Be
Well-Capitalized
Under
Prompt Corrective
Action Provisions
Ratio
Amount
At December 31, 2018
Cambridge Bancorp:
Total capital (to risk-weighted
assets)
$189,888
13.2% $ 114,666
8.0% $ 141,541
9.875%$ 150,500
10.5%
N/A
Tier I capital (to risk-weighted
assets)
173,070
12.1% 86,000
6.0% 112,875
7.875% 121,833
8.5%
N/A
Common equity tier I capital
(to risk-weighted assets)
Tier I capital (to average
assets)
Cambridge Trust Company:
Total capital (to risk-weighted
173,070
12.1% 64,500
4.5%
91,375
6.375% 100,333
7.0%
N/A
173,070
8.5% 81,507
4.0%
81,507
4.000%
81,507
4.0%
N/A
N/A
N/A
N/A
N/A
assets)
$185,507
12.9% $ 114,666
8.0% $ 141,541
9.875%$ 150,500
10.5%$ 143,333
10.0%
Tier I capital (to risk-weighted
assets)
168,689
11.8% 86,000
6.0% 112,875
7.875% 121,833
8.5% 114,666
8.0%
Common equity tier I capital
g
(to risk-weighted
assets)
168,689
11.8% 64,500
4.5%
91,375
6.375% 100,333
7.0% 93,166
6.5%
Tier I capital (to average
assets)
168,689
8.3% 81,507
4.0%
81,507
4.000%
81,507
4.0% 101,884
5.0%
19. OTHER INCOME
The components of other income were as follows:
Safe deposit box income
Loan fee income
Miscellaneous income
Total other income
20. OTHER OPERATING EXPENSES
The components of other operating expenses were as follows:
Director fees
Charitable donations & sponsorships
Printing and supplies
Travel and entertainment
Dues and memberships
Physical security
Postage and mailing
Miscellaneous expense
Total other operating expenses
2019
For the Year Ended December 31,
2018
(dollars in thousands)
2017
333
1,030
564
1,927
$
$
342
358
569
1,269
$
$
348
473
334
1,155
2019
For the Year Ended December 31,
2018
(dollars in thousands)
2017
527
575
437
579
412
86
246
337
3,199
$
$
724
518
272
456
293
131
201
(331)
2,264
$
$
576
432
251
339
260
172
229
885
3,144
$
$
$
$
Miscellaneous expense in 2018 and 2017 includes the reclassification adjustment for retirement plan expenses as required upon
adoption of ASU 2017-07.
93
21. OTHER COMPREHENSIVE INCOME
Comprehensive income is defined as all changes to equity except investments by and distributions to shareholders. Net income is a
component of comprehensive income, with all other components referred to in the aggregate as other comprehensive income. The
Companys other comprehensive income consists of unrealized gains or losses on securities held at year-end classified as availablea
for
sale and the component of the unfunded retirement
liability computed in accordance with the requirements of ASC 715,
Compensation Retirement Benefits. The before-tax and after-tax amount of each of these categories, as well as the tax
(expense)/benefit of each, is summarized as follows:
For the Year Ended
December 31, 2019
Tax
(Expense)
or Benefit
Before
Tax
Amount
Net-of-
tax
Amount
For the Year Ended
December 31, 2018
Tax
(Expense)
or Benefit
Before
Tax
Amount
Net-of-
tax
Amount
For the Year Ended
December 31, 2017
Tax
(Expense)
or Benefit
Before
Tax
Amount
Net-of-
tax
Amount
(dollars in thousands)
Unrealized (losses)/gains on available for sale
securities
Unrealized holding (losses)/gains arising
duringg the period
Reclassification adjustment for (gains)/losses
recognized in net income
Derivatives
Change in interest rate contracts
Defined benefit retirement plans
Net change in retirement liability
Total Other Comprehensive Income/(Loss)
$ 3,267
$
(767) $ 2,500
$ (231) $
(11) $ (242) $
187
$
(59) $
128
81
(19)
62
(2)
(2)
1,134
(313)
821
1,045
(294)
864
$ 5,346
(241)
623
$ (1,340) $ 4,006
$
124
936
$
(35)
(340) $
751
89
596
3
(2)
1
6,545
$ 6,735
(2,674)
3,871
$ (2,735) $ 4,000
Reclassifications out of accumulated other comprehensive income (AOCI) are presented below:
Details about Accumulated Other
Comprehensive Income (Loss) Components
Unrealized gains and losses on
available for sale securities
Tax benefit or (expense)
Net of tax
For the Year Ended December 31,
2019
2018
(dollars in thousands)
2017
$
$
(81) $
19
(62) $
2
2
$
$
Affected Line Item in the Statement
where Net Income is Presented
(Loss) gain on disposition of
investment securities
Provision for income taxes
NNet income
(3)
2
(1)
94
22. EARNINGS PER SHARE
The following represents a reconciliation between basic and diluted earnings per share:
Earnings per common share - basic:
NNumerator:
Net income
Less dividends and undistributed earnings allocated
to participating securities
Net income applicable to common shareholders
Denominator:
Weighted average common shares outstanding
Earnings per common share - basic
Earnings per common share - diluted:
NNumerator:
Net income
Less dividends and undistributed earnings allocated
to participating securities
Net income applicable to common shareholders
Denominator:
Weighted average common shares outstanding
Dilutive effect of common stock equivalents
Weighted average diluted common shares outstanding
Earnings per common share - diluted
23. DERIVATIVES AND HEDGING ACTIVITIES
2019
For the Year Ended December 31,
2018
(dollars in thousands, except per share data)
2017
$
$
$
$
$
$
25,257
(210)
25,047
4,629
5.41
25,257
(210)
25,047
4,629
33
4,662
5.37
$
$
$
$
$
$
23,881
(239)
23,642
4,062
5.82
23,881
(239)
23,642
4,062
37
4,099
5.77
$
$
$
$
$
$
14,816
(157)
14,659
4,031
3.64
14,816
(157)
14,659
4,031
35
4,066
3.61
The Company utilizes interest rate swaps and floors to mitigate exposure to interest rate risk and to facilitate the needs of our
customers. The Companys derivative financial instruments are used to manage differences in the amount, timing, and duration of the
Companys known or expected cash receipts principally related to the Companys assets.
Cash Flow Hedges of Interest Rate Risk
The Company uses interest floors to manage its exposure to interest rate movements. Interest rate floors designated as cash flow
hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in
exchange for an up-front premium. The Company executed an interest rate floor with a notional value of $150.0 million during the
fourth quarter of 2018. The Company did not execute any new cash flow hedges in 2019.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in
accumulated other comprehensive income and subsequently reclassified into interest income in the same period(s) during which the
hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment
of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded
components is presented in interest income. Amounts reported in accumulated other comprehensive income related to derivatives is
reclassed to interest income as the Company receives interest payments on its variable-rate assets.
Non-designated Hedges
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. For the
Companys customers, these are interest rate swaps and risk participation agreements.
95
Interest Rate Swaps. The Company enters into interest rate swap contracts to help commercial loan borrowers manage their interest
rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating-rate loan payments to fixed-
rate loan payments. When the Bank enters into an interest rate swap contract with a commercial loan borrower, it simultaneously
enters into a mirror swap contract with a third party. The third party exchanges the clients fixed-rate loan payments forff
floating-rate
loan payments. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Because
these derivatives have mirror-image contractual terms, the changes in fair value substantially offset each other through earnings. Fees
earned in connection with the execution of derivatives related to this program are recognized in earnings through other loan related
derivative income.
ff
The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Company enters
into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts
of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure.
Risk Participation Agreements. The Company enters into risk participation agreements (RPAs) with other banks participating in
commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. RPAs
are derivative financial instruments and are recorded at fair value. These derivatives are not designated as hedges and therefore,
changes in fair value are recognized in earnings with a corresponding offset within other assets or other liabilities.
Under a risk participation-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with
the interest rate swap position executed with the commercial borrower, for a fee paid to the participating bank. Under a risk
participation-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with
the interest rate swap position with the commercial borrower and receives a fee from the other bank.
The following tables present the notional amount, the location, and fair values of derivative instruments in the Companys
Consolidated Balance Sheets:
Derivatives designated as hedging instruments
Interest rate contracts
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate swaps with customers
Mirror swaps with counterparties
Risk participation agreements out to counterparties
Risk participation agreements in with counterparties
Total derivatives not designated as hedging instruments
Derivatives designated as hedging instruments
Interest rate contracts
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate swaps with customers
Mirror swaps with counterparties
Risk participation agreements out to counterparties
Risk participation agreements in with counterparties
Total derivatives not designated as hedging instruments
December 31, 2019
Derivative Liabilities
Fair Value
Notional
Amount
Balance Sheet
Location
Fair Value
(dollars in thousands)
$
$
$
$
$
2,911
2,911
Other Liabilities $
$
12,980
21
13,001
Other Liabilities $
241,187
Other Liabilities
Other Liabilities
Other Liabilities
88,489
$
12,980
250
13,230
December 31, 2018
Derivative Liabilities
Fair Value
Notional
Amount
Balance Sheet
Location
Fair Value
(dollars in thousands)
$
$
$
$
$
$
1,970
1,970
5,782
28
5,810
Other Liabilities $
$
Other Liabilities $
150,489
Other Liabilities
Other Liabilities
Other Liabilities
63,825
$
5,782
179
5,961
Notional
Amount
Derivative Assets
Balance Sheet
Location
(dollars in thousands)
150,000
Other Assets
241,187
19,000
Other Assets
Other Assets
Other Assets
Other Assets
Notional
Amount
Derivative Assets
Balance Sheet
Location
(dollars in thousands)
150,000
Other Assets
150,489
19,000
Other Assets
Other Assets
Other Assets
Other Assets
96
The following tables presents the effect of cash flow hedge accounting on AOCI as of the periods presented:
Amount of
Gain or (Loss)
Recognized in
OCI
Amount of
Gain or (Loss)
Recognized in
OCI Included
Component
2019
(dollars in thousands)
Amount of
Gain or (Loss)
Recognized in
OCI Excluded
Component
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Location of Gain
or (Loss)
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Included
Component
2019
(dollars in thousands)
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Excluded
Component
Interest rate contracts
Total
$
$
984
984
$
$
2,120
2,120
$
$
(1,136)
(1,136)
Interest Income $
$
(194) $
(194) $
$
$
(194)
(194)
Amount of
Gain or (Loss)
Recognized in
OCI
Amount of
Gain or (Loss)
Recognized in
OCI Included
Component
2018
(dollars in thousands)
Amount of
Gain or (Loss)
Recognized in
OCI Excluded
Component
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Location of Gain
or (Loss)
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Included
Component
2018
(dollars in thousands)
Amount of
Gain or (Loss)
Reclassified
from AOCI
into Income
Excluded
Component
Interest rate contracts
Total
$
$
1,002
1,002
$
$
$
$
1,002
1,002
Interest Income $
$
(43) $
(43) $
$
$
(43)
(43)
During 2019, the Company estimates that an additional $295,000 will be reclassified out of AOCI into earnings, as a reduction to
interest income.
The following table presents the effect of the Companys derivative financial instruments on the Income Statement as of the periods
presented:
Year Ended December 31,
2019
Interest Income
(dollars in thousands)
Year Ended December 31,
2018
Interest Income
(dollars in thousands)
Total amount of income presented in the income
statement in which the effects of fair value or cash flow hedges are recorded
$
(194)
$
The effects of fair value and cash flow hedging:
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest rate contracts
Amount of gain or (loss) reclassed from AOCI into income
Amount of gain or (loss) reclassed from AOCI
into income - Included Component
Amount of gain or (loss) reclassed from AOCI
into income - Excluded Component
$
$
(194)
$
(194)
$
(43)
(43)
(43)
The following table presents the effect of the Companys derivative financial instruments that are not designated as hedging
instruments on the Income Statement as of the periods presented:
Amount of Gain or (Loss) Recognized in Income on Derivative
Year Ended December 31
2019
Year Ended December 31
2018
Year Ended December 31
2017
Other contracts
Total
Location of Gain or
(Loss)
Other income
$
$
(dollars in thousands)
311
311
$
$
276
276
$
$
426
426
97
Credit-risk-related Contingent Features
By using derivatives, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform
as required. Should a counterparty fail to perform under the terms of a derivative contract, the Companys credit exposure on interest
rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to
minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate.
Institutional counterparties must have an investment grade credit rating and be approved by the Companys Board of Directors. As
such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.
The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its
indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could
also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative
counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the
counterparty could terminate the derivative position(s), and the Company would be required to settle its obligations under the
agreements.
As of December 31, 2019 and December 31, 2018, the fair value of derivatives in a net liability position, which includes accrued
interest but excludes any adjustment for nonperformance risk, related to these agreements was $9.6 million and $811,000,
respectively. As of December 31, 2019 and December 31, 2018, the Company has minimum collateral posting thresholds with certain
of its derivative counterparties and has posted cash collateral of $10.4 million and $260,000, respectively. If the Company had
breached any of these provisions at December 31, 2019 or December 31, 2018, it could have been required to settle its obligations
under the agreements at their termination value of $ 9.6 million and $811,000, respectively.
Balance Sheet Offsetting
Certain financial instruments may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements
or similar agreements. The Companys derivative transactions with institutional counterparties are generally executed under
International Swaps and Derivative Association (ISDA) master agreements which include right of set-offff provisions. In such
cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts
on a net basis. Generally, the Company does not offset such financial instruments for financial reporting purposes.
The following tables present the information about financial instruments that are eligible for offset in the consolidated balance sheet as
December 31, 2019 and December 31, 2018:
Gross Amounts of
g
Recognized
Gross Amounts
Offset
Net Amounts
g
Recognized
Financial
Instruments
Collateral
Pledged
(Received)
Net Amount
Gross Amounts Not Offset
December 31, 2019
(dollars in thousands)
Offsetting of Derivative Assets
g
g
Derivative Assets
Offsetting of Derivative Liabilities
g
Derivative Liabilities
$
$
15,912
$
$
15,912
$
3,128
$
$
12,784
13,230
$
$
13,230
$
3,128
$
9,645
$
457
Gross Amounts of
Recognized
Gross Amounts
Offset
Net Amounts
Recognized
Financial
Instruments
Collateral
Pledged
(Received)
Net Amount
Gross Amounts Not Offset
December 31, 2018
(dollars in thousands)
Offsetting of Derivative Assets
g
Derivative Assets
Offsetting of Derivative Liabilities
g
Derivative Liabilities
$
$
7,780
$
$
7,780
$
3,099
$
(743) $
3,938
5,961
$
$
5,961
$
3,099
$
260
$
2,602
98
24. FAIR VALUE MEASUREMENTS
The following is a summary of the carrying values and estimated fair values of the Companys significant financial instruments as of
the dates indicated:
Financial assets
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Loans, net
Loans held forff
sale
FHLB Boston stock
Accrued interest receivable
Mortgage servicing rights
Interest rate contracts
Loan level interest rate swaps
Risk participation agreements out to counterparties
Financial liabilities
Deposits
Short-term borrowings
Long-term borrowings
Loan level interest rate swaps
Risk participation agreements in with counterparties
December 31, 2019
December 31, 2018
Carrying
Value
Estimated
Fair Value
Carrying
Value
(dollars in thousands)
Estimated
Fair Value
$
61,335
140,330
258,172
2,208,548
1,546
7,854
7,052
1,321
2,911
12,980
21
2,358,878
135,691
12,980
250
$
61,335
140,330
264,114
2,160,087
2,051
7,854
7,052
1,526
2,911
12,980
21
2,358,089
135,744
12,980
250
$
18,473
168,163
282,869
1,543,004
6,844
5,762
666
1,970
5,782
28
1,811,410
90,000
3,409
5,782
179
$
18,473
168,163
281,310
1,484,905
6,844
5,762
941
1,970
5,782
28
1,809,051
90,000
3,363
5,782
179
Value Measurements and Disclosures, forff
The Company follows ASC 820, Fair
financial assets and liabilities. ASC 820 defines
fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements.
ASC 820, among other things, emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and
states that a fair value measurement should be determined based on the assumptions the market participants would use in pricing the
asset or liability. In addition, ASC 820 specifies a hierarchy of valuation techniques based on whether the types of valuation
information (inputs) are observable or unobservable. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect the Companys market assumptions. These two types of inputs have created the following fair value
hierarchy:
•
•
•
Level 1 Quoted prices for identical assets or liabilities in active markets.
Level 2 Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or
liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers
are observable in active markets.
Level 3 Valuations derived from techniques in which one or more significant inputs or significant value drivers are
unobservable in the markets and which reflect the Companys market assumptions.
Under ASC 820, fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When available, the Company uses quoted market prices to
determine fair value. If quoted prices are not available, fair value is based upon valuation techniques, such as matrix pricing or other
models that use, where possible, current market-based or independently sourced market parameters, such as interest rates. If
observable market-based inputs are not available,
the Company uses unobservable inputs to determine appropriate valuation
adjustments using methodologies applied consistently over time.
Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters, such as
the amount and timing of future cash flows and the selection of discount rates that may appropriately
reflect market and credit risks.
a
Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a
specific point in time, they are susceptible to material near-term changes. The fair values disclosed do not reflect any premium or
discount that could result from offering significant holdings of financial instruments at bulk sale, nor do they reflect the possible tax
ramifications or estimated transaction costs. Changes in economic conditions may also dramatically affect the estimated fair values.
99
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value
disclosures. Securities available for sale, derivative instruments, and hedges are recorded at fair value on a recurring basis.
Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as
collateral dependent impaired loans. In accordance with the requirements of ASU 2016-01, the Company uses an exit price notion for
its fair value disclosures.
The following tables summarize certain assets reported at faff ir value on a recurring basis:
Measured on a recurring basis
Securities available for sale
U.S. GSE obligations
Mortgage-backed securities
Corporate debt securities
Other assets
Interest rate swaps with customers
Risk participation agreements out to counterparties
Interest rate contracts
Other liabilities
Mirror swaps with counterparties
Risk participation gagreements in with counterparties
Measured on a recurring basis
Securities available for sale
U.S. GSE obligations
Mortgage-backed securities
Corporate debt securities
Other assets
Interest rate swaps with customers
Risk participation agreements out to counterparties
Interest rate contracts
Other liabilities
Mirror swaps with counterparties
Risk participation agreements in with counterparties
$
$
Fair Value as of December 31, 2019
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
$
37,848
102,482
$
37,848
102,482
12,980
21
2,911
12,980
250
12,980
21
2,911
12,980
250
Fair Value as of December 31, 2018
Level 1
Level 2
Level 3
Total
(dollars in thousands)
$
$
74,039
89,268
4,856
$
5,782
28
1,970
5,782
179
74,039
89,268
4,856
5,782
28
1,970
5,782
179
The following table presents the carrying value of assets held at December 31, 2019, which were measured at fair value on a non-
recurring basis:
Items recorded at fair value on a non-recurring basis
Assets
Collateral dependent impaired loans
Loans held for sale
Other real estate owned
Total
Level 1
December 31, 2019
Level 2
Level 3
(dollars in thousands)
Total
$
$
$
1,546
1,546
$
$
$
2,541
163
2,704
$
$
2,541
1,546
163
4,250
Collateral dependent impaired loans. Collateral dependent loans are carried at the lower of cost or fair value of the collateral less
estimated costs to sell which approximates fair value. The Company uses the appraisal value of the collateral and applies certain
adjustments depending on the nature, quality, and type of collateral securing the loan.
100
Loans held for sale. Loans held for sale are carried at the lower of faiff
fees).
r value or carrying value (unpaid principal and unamortized loans
Other Real Estate Owned. These properties are carried at fair value less estimated costs to sell. There were no assets measured at fair
value on a non-recurring basis during the year ended December 31, 2018.
There were no transfers between fair value levels for the years ended December 31, 2019 and 2018.
The following is a description of the principal valuation methodologies used by the Company to estimate the fair values of its financial
instruments.
Investment Securities
For investment securities, fair values are primarily based upon valuations obtained from a national pricing service which uses matrix
pricing with inputs that are observable in the market or can be derived from, or corroborated by, observable market data. When
available, quoted prices in active markets for identical securities are utilized.
Loans Held for Sale
For loans held for sale, fair values are estimated using projected future cash flows, discounted at rates based upon either trades of
similar loans or mortgage-backed securities, or at current rates at which similar loans would be made to borrowers with similar credit
ratings and for similar remaining maturities.
Loans
For most categories of loans, fair values are estimated using projected future cash flows, discounted at rates based upon current rates
at which similar loans would be made to borrowers with similar credit ratings, and for similar remaining maturities. Projected
estimated cash flows are adjusted for prepayment assumptions, liquidity premium assumptions, and credit loss assumptions. Loans
that are deemed to be impaired in accordance with ASC 310, Receivables, are valued based upon the lower of cost or fair value of
the underlying collateral.
FHLB of Boston Stock
The fair value of FHLB of Boston stock equals its carrying value since such stock is only redeemable at its par value.
Deposits
The fair value of non-maturity deposit accounts is the amount payable on demand at the reporting date. This amount does not take into
account the value of the Banks long-term relationships with core depositors. The fair value of fixed-maturity certificates of deposit is
estimated using a replacement cost of funds approach and is based upon rates currently offered for deposits of similar remaining
maturities.
Long-Term Borrowings
For long-term borrowings, fair values are estimated using future cash flows, discounted at rates based upon current costs for debt
securities with similar terms and remaining maturities.
Other Financial Assets and Liabilities
Cash and cash equivalents, accrued interest receivable, and short-term borrowings have fair values which approximate their respective
carrying values because these instruments are payable on demand or have short-term maturities and present relatively low credit risk
and interest rate risk.
Derivative Instruments and Hedges
The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis
on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to
maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Bank incorporates credit
valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements. In adjusting the fair value of its
derivative contracts for the effect of nonperformance risk, the Bank has considered the impact of netting and any applicable credit
enhancements, such as collateral postings.
101
Off-Balance-Sheet Financial Instruments
In the course of originating loans and extending credit, the Bank will charge fees in exchange for its commitment. While these
commitment fees have value, the Bank has not estimated their value due to the short-term nature of the underlying commitments and
their immateriality.
Values Not Determined
In accordance with ASC 820, the Company has not estimated fair values for non-financial assets such as banking premises and
equipment, goodwill, the intangible value of the Banks portfolio of loans serviced for itself, and the intangible value inherent in the
Banks deposit relationships (i.e., core deposits), among others. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
25. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
2019 Quarters
Fourth
Third
Second
First
Interest and Dividend Income
Interest Expense
Net Interest and Dividend Income
Provision for (Release of) Loan Losses
Net Interest and Dividend Income after Provision for
Loan Losses
NNoninterest Income
NNoninterest Expense
Income Before Taxes
Income Taxes
Net Income
Share Data:
Average Shares Outstanding, Basic
Average Shares Outstanding, Diluted
Basic Earnings Per Share
Diluted Earnings Per Share
2018 Quarters
Interest and Dividend Income
Interest Expense
Net Interest and Dividend Income
Provision for (Release of) Loan Losses
Net Interest and Dividend Income after Provision for
Loan Losses
NNoninterest Income
NNoninterest Expense
Income Before Taxes
Income Taxes
Net Income
Share Data:
Average Shares Outstanding, Basic
Average Shares Outstanding, Diluted
Basic Earnings Per Share
Diluted Earnings Per Share
$
$
$
$
$
$
$
$
26,415
4,807
21,608
331
21,277
9,933
21,428
9,782
2,673
7,109
4,939,973
4,980,439
1.43
1.42
$
(dollars in thousands, except share data)
24,470
$
4,694
19,776
596
26,336
5,285
21,051
2,170
18,881
10,366
18,863
10,384
2,708
7,676
4,815,020
4,842,965
1.58
1.57
$
$
$
19,180
8,145
21,513
5,812
1,540
4,272
4,682,109
4,715,724
0.91
0.90
$
$
$
Fourth
Third
Second
18,385
1,975
16,410
715
15,695
8,038
16,842
6,891
1,585
5,306
4,065,681
4,102,546
1.29
1.28
$
(dollars in thousands, except share data)
16,936
$
1,082
15,854
(79)
17,602
1,431
16,171
457
15,714
8,929
15,879
8,764
2,105
6,659
4,064,620
4,101,378
1.62
1.61
$
$
$
15,933
7,844
15,765
8,012
1,901
6,111
4,059,927
4,094,489
1.49
1.48
$
$
$
$
$
$
$
$
$
$
$
19,118
2,857
16,261
(93)
16,354
7,957
16,373
7,938
1,740
6,198
4,072,805
4,106,658
1.51
1.49
First
16,132
979
15,153
409
14,744
8,178
15,501
7,421
1,616
5,805
4,053,355
4,071,975
1.42
1.41
26. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY
The condensed balance sheets of Cambridge Bancorp, the Parent Company, as of December 31, 2019 and 2018 and the condensed
statements of income and cash flows for each of the years in the three-year period ended December 31, 2019 are presented below. The
statements of changes in shareholders equity are identical to the consolidated statements of changes in shareholders equity and are
therefore not presented here.
CONDENSED BALANCE SHEET
ASSETS
Cash and cash equivalents
Other assets
Investment in subsidiary
Total assets
SHAREHOLDERS EQUITY
Shareholders equity
Total shareholders equity
Income
Dividends from subsidiary
Total income
Expenses
Other expenses
Total expenses
December 31,
2019
2018
(dollars in thousands)
$
$
$
$
1,680
13
284,868
286,561
286,561
286,561
$
$
$
$
4,412
162,614
167,026
167,026
167,026
CONDENSED STATEMENTS OF INCOME
2019
For the Year Ended December 31,
2018
(dollars in thousands)
2017
$
$
10,732
10,732
$
$
8,615
8,615
132
132
10,600
(36)
10,636
14,621
25,257
$
116
116
8,499
(32)
8,531
15,350
23,881
$
8,052
8,052
8,052
8,052
6,764
14,816
Income before income taxes and equityy in undistributed income of subsidiary
Income tax benefit
Income of parent company
Equity in undistributed income of subsidiary
Net income
103
CONDENSED STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities
Change in other assets, net
Undistributed income of subsidiary
Net cash provided byy operatingg activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in business combinations
Investment in subsidiary
Net cash (used in)/provided by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of common stock
Repurchase of common stock
Cash dividends paid on common stock
Net cash provided by/(used in) financing activities
Net increase (decrease) in cash
Cash at beginning of year
Cash at end of year
2019
For the Year Ended December 31,
2018
(dollars in thousands)
2017
$
25,257
$
23,881
$
14,816
(13)
(14,621)
10,623
(3,525)
(38,202)
(41,727)
38,576
(687)
(9,517)
28,372
(2,732)
4,412
1,680
$
(15,350)
8,531
761
(574)
(8,041)
(7,854)
677
3,735
4,412
$
$
(6,764)
8,052
1,522
(470)
(7,582)
(6,530)
1,522
2,213
3,735
104
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cambridge Bancorp:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Cambridge Bancorp and subsidiaries (the Company) as of
December 31, 2019 and 2018, the related consolidated statements of income, comprehensive income (loss), changes in shareholders
equity, and cash flows for each of the years in the three-year period ended December 31, 2019, and the related notes (collectively, the
consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the
financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Companys internal control over financial reporting as of December 31, 2019, based on criteria established in Internal
Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our
report dated March 16, 2020 expressed an unqualified opinion on the effectiveness of the Companys internal control over financial
reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the appl
rules and regulations of the Securities and Exchange Commission and the PCAOB.
a
icable
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether duedd
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
to
/s/ KPMG LLP
We have served as the Companys auditor since 2006.
Boston, Massachusetts
March 16, 2020
105
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Cambridge Bancorp:
Opinion on Internal Control Over Financial Reporting
We have audited Cambridge Bancorp and subsidiaries (the Company) internal control over financial reporting as of December 31,
2019, based on criteria established in Internal Control Integrated Framework
Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on criteria established in Internal Control Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
(2013) issued by the Committee of Sponsoring
FF
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2019 and 2018, the related consolidated statements of
income, comprehensive income (loss), changes in shareholders equity, and cash flows for each of the years in the three-year period
ended December 31, 2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 16,
2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Companys management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Companys internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
y of
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliabilit
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect
on the financial statements.
a
ff
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Boston, Massachusetts
March 16, 2020
106
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has evaluated, with the participation of
management, including the Chief Executive Officer and the Chief Financial Officer, as of the end of the period covered by this report,
the effectiveness of the design and operation of its disclosure controls and procedures.
Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and
procedures were effective as of December 31, 2019 in ensuring that material information required to be disclosed by the Company,
including its consolidated subsidiaries:
a)
b)
was made known to the certifying officers by others within the Company and its consolidated subsidiaries in the reports
that it files or submits under the Exchange Act; and
is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange
Commission rules and forms.
On a quarterly basis, the Company evaluates the disclosure controls and procedures and may, from time to time, make changes aimed
at enhancing their effff eff ctiveness and to ensure that the Companys systems evolve with its business.
Changes in Internal Controls over Financial Reporting
There have been no changes in the Companys internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, the Companys internal controls over financial reporting in 2019.
Managements Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control (as defined in Rule 13a-
15(f) under the Securities Exchange Act of 1934, as amended) over financial reporting. The Companys internal control over financial
reporting is a process designed to provide reasonable assurance to the Companys Chief Executive Officer and Chief Financial Officer
regarding the reliability of financial reporting and preparation of the Companys financial statements in accordance with accountiu
ng
principles generally accepted in the U.S.
ff
In designing and evaluating the Companys disclosure controls and procedures, the Company and its management recognize that any
controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired
control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and
procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial
statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may deteriorate.
The Companys management assessed the effectiveness of the Companys internal control over financial reporting as of December 31,
Framework (2013) issued by
2019. In making this assessment, management used the criteria set forth in Internal Controlll
the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on managements assessment, the
Company believes that, as of December 31, 2019, the Companys internal control over financial reporting is effective based on the
criteria established by Internal Controlll
Framework (2013) issued by COSO.
Integrated
Integrated
KPMG LLP, an independent registered public accounting firm, has audited the Companys consolidated financial statements included
in this Annual Report on Form 10-K and, as part of its audit, has issued its report, included herein on page 105, on the effectiveness of
the Companys internal control over financial reporting.
Item 9B. Other Information.
None.
107
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
The information required by this Item is incorporated herein by reference to the captions Proposal 1: Election of Directors,
Committees of the Board of Directors Audit Committee, Information about the Companys Executive Officers Who are not
Directors, and Code of Ethics in the Companys definitive proxy statement for the 2020 Annual Meeting of Shareholders (the
Proxy Statement), which will be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual
Report on Form 10-K.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the captions Compensation Discussion and Analysis,
Director Compensation, Executive Compensation Tables, Compensation Committee Interlocks and Insider Participation, and
Compensation Committee Report in the Companys Proxy Statement, which are incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference to the caption Security Ownership of Certain Beneficial
Owners and Management and Securities Authorized for Issuance Under Equity Compensation Plans in the Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated herein by reference to the captions Transactions with Related Persons and
Corporate Governance Board of Directors Independence in the Companys Proxy Statement.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated herein by reference to the caption Independent Registered Public Accounting
Firm Fees and Services in the Proxy Statement.
108
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) Documents filed as a Part of this Annual Report on Form 10-K:
(1) Financial StatementsIncluded in Item 8 of this Annual Report on Form 10-K.
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2019 and 2018 ....................................................................................................
Consolidated Statements of Income for the Years Ended December 31, 2019, 2018, and 2017 ......................................................
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2018, and 2017 .............................
Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2019, 2018, and 2017 .................................
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018, and 2017 ................................................
Notes to Consolidated Financial Statements ......................................................................................................................................
Report of Independent Registered Public Accounting Firm ..............................................................................................................
50
51
52
53
54
55
105
(2) Financial Statement Schedules
1.
2.
3.
Financial Statements. The financial statements of the Company required in response to this item are listed in response to Part
II, Item 8 of this Annual Report on Form 10-K.
Financial Statement Schedules. There are no financial statement schedules that are required to be filed as part of this form
since they are not applicable or the information is included in the consolidated financial statements.
Exhibits. The following exhibits are included as part of this Form 10-K.
(3) Index to Exhibits.
Exhibit
Number
Description
2.1
2.2
3.1
3.2
4.1
Agreement and Plan of Merger, dated December 5, 2018, by and between Cambridge Bancorp, Cambridge Trust
Company and Optima Bank & Trust Company (incorporated by reference to Exhibit 2.1 of the Form 8-K filed with
the SEC on December 6, 2018)
Agreement and Plan of Merger, dated December 5, 2019, by and between Cambridge Bancorp, Cambridge Trust
Company, Wellesley Bancorp, Inc. and Wellesley Bank (incorporated by reference to Exhibit 2.1 of the Form 8-K
filed with the SEC on December 5, 2019)
Articles of Organization (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on June 19,
2018)
Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of Amendment No. 2 of the Registration
Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017)
Specimen stock certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 2 of the Registration
Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017)
4.2*
10.1**
10.1(a) **
10.1(b) **
Description of Cambridge Bancorp Securities Registered under Section 12 of the Securities Exchange Act of 1934.
Cambridge Bancorp Amended 1993 Stock Option Plan (incorporated by reference to Exhibit 10.1 of Amendment No.
2 of the Registration Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017)
Cambridge Bancorp Amended 1993 Stock Option Plannn Form of Restricted Stock Agreement (incorporated by
reference to Exhibit 10.1(a) of Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed
with the SEC on October 4, 2017)
Cambridge Bancorp Amended 1993 Stock Option Plannn Form of Restricted Stock Unit Agreement (incorporated by
reference to Exhibit 10.1(b) of Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed
with the SEC on October 4, 2017)
109
Exhibit
Number
10.1(c) **
10.1(d) **
10.2**
10.3**
10.4**
10.5**
10.6**
10.7**
10.8**
10.9**
10.10**
10.11**
10.12**
10.13**
10.14**
10.15**
10.16**
10.17**
Description
Cambridge Bancorp Amended 1993 Stock Option Plannn Form of Nonstatutory Stock Option Agreement
(incorporated by reference to Exhibit 10.1(c) of Amendment No. 2 of the Registration Statement File No. 1-38184 on
Form 10 filed with the SEC on October 4, 2017)
Cambridge Bancorp Amended 1993 Stock Option Plannn Form of Incentive Stock Option Agreement (incorporated by
reference to Exhibit 10.1(d) of Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed
with the SEC on October 4, 2017)
Cambridge Bancorp 2017 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.2 of Amendment No.
Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017)
2 of the Registration
g
Cambridge Bancorp Director Stock Plan, amended as of April 25, 2011 (incorporated by reference to Exhibit 10.3 of
Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed witht
the SEC on October 4, 2017)
2016 Annual Incentive Plan (incorporated by reference to Exhibit 10.4 of Amendment No. 2 of the Registration
Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017)
The Executive Nonqualified Excess Plan of Cambridge Trust Companya
Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed witht
(incorporated by reference to Exhibit 10.5 of
the SEC on October 4, 2017)
Cambridge Trust Company Amended and Restated Supplemental Executive Retirement Agreement for Denis K.
Sheahan, dated July 7, 2017 (incorporated by reference to Exhibit 10.6 of Amendment No. 2 of the Registration
Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017)
Cambridge Trust Company Supplemental Executive Retirement Agreement for Lynne M. Burrow, dated February 27,
2008 (incorporated by reference to Exhibit 10.7 of Amendment No. 2 of the Registration Statement File No. 1-38184
on Form 10 filed with the SEC on October 4, 2017)
Cambridge Trust Company Supplemental Executive Retirement Agreement for Albert R. Rietheimer, dated
February 21, 2008 (incorporated by reference to Exhibit 10.8 of Amendment No. 2 of the Registration Statement File
No. 1-38184 on Form 10 filed with the SEC on October 4, 2017)
Cambridge Trust Company Supplemental Executive Retirement Agreement for Michael A. Duca, dated August 14,
2008 (incorporated by reference to Exhibit 10.9 of Amendment No. 2 of the Registration Statement File No. 1-38184
on Form 10 filed with the SEC on October 4, 2017)
First Amendment to Cambridge Trust Company Supplemental Executive Retirement Agreement for Michael A Duca,
dated December 22, 2016 (incorporated by reference to Exhibit 10.10 of Amendment No. 2 of the Registration
Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017)
Cambridge Trust Company Supplemental Executive Retirement Agreement for Martin B. Millane, Jr., dated
January 1, 2016 (incorporated by reference to Exhibit 10.11 of Amendment No. 2 of the Registration Statement File
No. 1-38184 on Form 10 filed with the SEC on October 4, 2017)
Change in Control Agreement with Denis K. Sheahan, dated December 21, 2015 (incorporated by reference to Exhibit
10.12 of Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed witht
2017)
the SEC on October 4,
Change in Control Agreement with Lynnenn M. Burrow,
uu
10.13 of Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed witht
2017)
dated September 16, 2008 (incorporated by reference to Exhibit
the SEC on October 4,
Agreement with Mr. Michael Carotenuto, dated April 26, 2019 (incorporated by reference to Exhibit 10.1 of the Form
8-K filed with the SEC on April 29, 2019)
Agreement with Mr. Martiaa n Millane, dated April 26, 2019 (incorporated by reference to Exhibit 10.2 of the Form 8-K
filed with the SEC on April 29, 2019)
Change in Control Agreement with Mark D. Thompson, dated September 17, 2017 (incorporated by reference to
Exhibit 10.1 of the Form 8-K filed with the SEC on November 30, 2017)
Agreement with Ms. Jennifer Pline, dated April 26, 2019 (incorporated by reference to Exhibit 10.3 of the Form 8-K
filed with the SEC on April 29, 2019)
110
Exhibit
Number
10.18**
10.19**
10.20**
10.21**
10.22**
10.23**
10.24**
10.25**
10.26**
10.27**
10.28**
21*
23.1*
31.1*
31.2*
32.1*
32.2*
Change in Control Agreement with Daniel R. Morrison, dated December 5, 2018 (incorporated by reference to Exhibit
10.18 of the Form 10-K filed with the SEC on March 18, 2019))
Description
Cambridge Trust Companya
p
p
(
2017 (
(incorporated
Supplemental Executive Retirement Agreement for Mark D. Thompson, dated September 25,
ybyy reference to Exhibit 99.1 of the Form 8-K filed with the SEC on November 30,
2017))
)
Offer Letter for Mark D. Thompson, dated September 17, 2017 (incorporated by reference to Exhibit 10.18 of the
Form 10-K filed with the SEC on March 21, 2018))
Offer Letter for Jennifer A. Pline, dated November 7, 2016 (incorporated by reference to Exhibit 10.19 of the Form
10-K filed with the SEC on March 21, 2018)
Cambridge Trust Company Supplemental Executive Retirement Agreement for Jennifer A. Pline, dated January 30,
2017 (incorporated by reference to Exhibit 10.22 of the Form 10-K filed with the SEC on March 18, 2019)
Offer Letter for Daniel R. Morrison, dated December 5, 2018 (incorporated by reference to Exhibit 10.23 of the Form
10-K filed with the SEC on March 18, 2019))
Offer Letter for Pamela A. Morrison, dated December 5, 2018 (incorporated by reference to Exhibit 10.24 of the Form
10-K filed with the SEC on March 18, 2019)
Offer Letter for William D. Young, dated December 5, 2018 (incorporated by reference to Exhibit 10.25 of the Form
10-K filed with the SEC on March 18, 2019))
Long-Term Incentive Plan, effective January 1, 2018 (incorporated by reference to Exhibit 10.21 of the Form 10-Q
filed with the SEC on Augustg
9, 2018))
Short-Term Incentive Plan (effective January 1, 2019) (incorporated by reference to Exhibit 10.20 of the Form 10-Q
filed with the SEC on Mayy 9, 2019))
Long-Term Incentive Plan (effective January 1, 2019) (incorporated by reference to Exhibit 10.21 of the Form 10-Q
filed with the SEC on Mayy 9, 2019))
Subsidiaries of the Registra
g
nt
Consent of KPMG LLP dated March 16, 2020
Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as Adoptedp
Pursuant to Section 302 of the Sarbanes-Oxleyy Act of 2002
Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange
Act of 1934, as Adoptedp
Pursuant to Section 302 of the Sarbanes-Oxleyy Act of 2002
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxleyy Act of 2002
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 fof
the Sarbanes-Oxleyy Act of 2002
101.INS
101.SCH
101.CAL
101.DEF
XBRL Instance Document
XBRL Taxonomyy Extension Schema Document
XBRL Taxonomyy Extension Calculation Linkbase Document
XBRL Taxonomyy Extension Definition Linkbase Document
101.LAB
XBRL Taxonomyy Extension Definition Linkbase Document
101.PRE
XBRL
Taxonomy Extension Presentation Linkbase Document
y
Filed herewith.
*
** Management Compensatory plans or arrangements.
Item 16. Form 10-K Summary.
None.
111
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
SIGNATURES
March 16, 2020
March 16, 2020
CAMBRIDGE BANCORP
By:
/s/ Denis K. Sheahan
Denis K. Sheahan
Chairman, Chief Executive Officer
By:
/s/ Michael F. Carotenuto
Michael F. Carotenuto
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following
persons on behalf of the Registrant in the capacities and on the dates indicated.
Name
/s/ Denis K. Sheahan
Denis K. Sheahan
/s/ Michael F. Carotenuto
Michael F. Carotenuto
g
/s/ Jeanette G. Clough
Jeanette G. Cloughg
/s/ Christine Fuchs
Christine Fuchs
/s/ Sarah G. Green
Sarah G. Green
/s/ Pamela A. Hamlin
Pamela A. Hamlin
/s/ Edward F. Jankowski
Edward F. Jankowski
/s/ Hambleton Lord
Hambleton Lord
/s/ Thalia M. Meehan
Thalia M. Meehan
/s/ Daniel R. Morrison
Daniel R. Morrison
/s/ Leon A. Palandjian
Leon A. Palandjianj
j
g
/s/ Laila S. Partridge
Laila S. Partridgeg
y
/s/ Jody A. Rose
Jodyy A. Rose
/s/ Cathleen A. Schmidt
Cathleen A. Schmidt
/s/ R. Gregg Stone
R. Gregggg Stone
gg
/s/ Mark D. Thompson
Mark D. Thompsonp
p
/s/ Linda A. Whitlock
Linda A. Whitlock
Title
Chairman, Chief Executive Officer
p Executive Officer))
(
(Principal
Chief Financial Officer
(Principal Financial Officer and
Principalp Accountingg Officer))
Director
Director
Director
Director
Director
Director
Director
Chief Executive Officer New
p
Hampshire
Market and Director
Director
Director
Director
Director
Director
President and Director
Director
112
Date
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16,2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
March 16, 2020
(cid:40)(cid:69)(cid:81)(cid:70)(cid:86)(cid:77)(cid:72)(cid:75)(cid:73)(cid:3)(cid:56)(cid:86)(cid:89)(cid:87)(cid:88)(cid:3)(cid:41)(cid:77)(cid:86)(cid:73)(cid:71)(cid:88)(cid:83)(cid:86)(cid:87)(cid:3)(cid:69)(cid:82)(cid:72)(cid:3)(cid:52)(cid:509)(cid:71)(cid:73)(cid:86)(cid:87)
Directors
Jeanette G. Clough
(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:400)(cid:177)(cid:315)(cid:218)(cid:400)(cid:26)(cid:282)(cid:286)(cid:229)(cid:252)(cid:400)(cid:41)(cid:452)(cid:229)(cid:207)(cid:419)(cid:402)(cid:286)(cid:445)(cid:229)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:377)(cid:216)(cid:400)
(cid:50)(cid:83)(cid:89)(cid:82)(cid:88)(cid:3)(cid:38)(cid:89)(cid:70)(cid:89)(cid:86)(cid:82)(cid:3)(cid:45)(cid:83)(cid:87)(cid:84)(cid:77)(cid:88)(cid:69)(cid:80)
Christine Fuchs
(cid:127)(cid:229)(cid:402)(cid:286)(cid:377)(cid:229)(cid:218)(cid:400)(cid:41)(cid:365)(cid:419)(cid:286)(cid:402)(cid:453)(cid:400)(cid:1)(cid:315)(cid:177)(cid:302)(cid:453)(cid:382)(cid:402)(cid:400)(cid:177)(cid:315)(cid:218)(cid:400)(cid:132)(cid:229)(cid:207)(cid:402)(cid:327)(cid:377)(cid:400)(cid:123)(cid:327)(cid:377)(cid:402)(cid:252)(cid:327)(cid:302)(cid:286)(cid:327)(cid:400)(cid:97)(cid:177)(cid:315)(cid:177)(cid:271)(cid:229)(cid:377)(cid:216)(cid:400)
(cid:59)(cid:73)(cid:80)(cid:80)(cid:77)(cid:82)(cid:75)(cid:88)(cid:83)(cid:82)(cid:3)(cid:50)(cid:69)(cid:82)(cid:69)(cid:75)(cid:73)(cid:81)(cid:73)(cid:82)(cid:88)
Sarah G. Green
(cid:127)(cid:229)(cid:402)(cid:286)(cid:377)(cid:229)(cid:218)(cid:400)(cid:26)(cid:282)(cid:286)(cid:229)(cid:252)(cid:400)(cid:107)(cid:356)(cid:229)(cid:377)(cid:177)(cid:402)(cid:286)(cid:315)(cid:271)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:377)(cid:216)(cid:400)
(cid:43)(cid:73)(cid:72)(cid:73)(cid:86)(cid:69)(cid:80)(cid:3)(cid:55)(cid:73)(cid:87)(cid:73)(cid:86)(cid:90)(cid:73)(cid:3)(cid:39)(cid:69)(cid:82)(cid:79)(cid:3)(cid:83)(cid:74)(cid:3)(cid:55)(cid:77)(cid:71)(cid:76)(cid:81)(cid:83)(cid:82)(cid:72)
Pamela A. Hamlin
(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)
(cid:61)(cid:83)(cid:86)(cid:79)(cid:3)(cid:40)(cid:86)(cid:73)(cid:69)(cid:88)(cid:77)(cid:90)(cid:73)(cid:3)(cid:40)(cid:83)(cid:80)(cid:80)(cid:73)(cid:71)(cid:88)(cid:77)(cid:90)(cid:73)
Edward F. Jankowski
Retired Senior Vice President-Residential Lending
(cid:177)(cid:315)(cid:218)(cid:400)(cid:26)(cid:327)(cid:377)(cid:356)(cid:327)(cid:377)(cid:177)(cid:402)(cid:229)(cid:400)(cid:26)(cid:327)(cid:311)(cid:356)(cid:302)(cid:286)(cid:177)(cid:315)(cid:207)(cid:229)(cid:216)(cid:400)
(cid:55)(cid:83)(cid:71)(cid:79)(cid:80)(cid:69)(cid:82)(cid:72)(cid:3)(cid:56)(cid:86)(cid:89)(cid:87)(cid:88)(cid:3)(cid:40)(cid:83)(cid:81)(cid:84)(cid:69)(cid:82)(cid:93)
Hambleton Lord
Managing Director, rr
(cid:49)(cid:69)(cid:89)(cid:82)(cid:71)(cid:76)(cid:84)(cid:69)(cid:72)(cid:3)(cid:58)(cid:73)(cid:82)(cid:88)(cid:89)(cid:86)(cid:73)(cid:3)(cid:44)(cid:86)(cid:83)(cid:89)(cid:84)
Co-Founder, rr
(cid:8)(cid:73)(cid:86)(cid:69)(cid:74)
Thalia M. Meehan
Retired Team Lead and Portfolio Manager, rr
(cid:53)(cid:89)(cid:88)(cid:82)(cid:69)(cid:81)(cid:3)(cid:46)(cid:82)(cid:90)(cid:73)(cid:87)(cid:88)(cid:81)(cid:73)(cid:82)(cid:88)(cid:87)
Daniel R. Morrison
(cid:26)(cid:282)(cid:286)(cid:229)(cid:252)(cid:400)(cid:41)(cid:452)(cid:229)(cid:207)(cid:419)(cid:402)(cid:286)(cid:445)(cid:229)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:377), (cid:377)(cid:377)
(cid:40)(cid:69)(cid:81)(cid:70)(cid:86)(cid:77)(cid:72)(cid:75)(cid:73)(cid:3)(cid:56)(cid:86)(cid:89)(cid:87)(cid:88)(cid:3)(cid:51)(cid:73)(cid:91)(cid:3)(cid:45)(cid:69)(cid:81)(cid:84)(cid:87)(cid:76)(cid:77)(cid:86)(cid:73)
Leon A. Palandjian
Managing Member, rr
(cid:46)(cid:82)(cid:88)(cid:73)(cid:86)(cid:71)(cid:83)(cid:82)(cid:88)(cid:77)(cid:82)(cid:73)(cid:82)(cid:88)(cid:69)(cid:80)(cid:3)(cid:40)(cid:69)(cid:84)(cid:77)(cid:88)(cid:69)(cid:80)(cid:3)(cid:50)(cid:69)(cid:82)(cid:69)(cid:75)(cid:73)(cid:81)(cid:73)(cid:82)(cid:88)(cid:17)(cid:3)(cid:49)(cid:49)(cid:40)
Laila Partridge
Contingent Managing Director, rr
(cid:56)(cid:73)(cid:71)(cid:76)(cid:87)(cid:88)(cid:69)(cid:86)(cid:87)(cid:17)(cid:3)(cid:46)(cid:82)(cid:71)
.
Jody Rose
President,
(cid:51)(cid:73)(cid:91)(cid:3)(cid:42)(cid:82)(cid:75)(cid:80)(cid:69)(cid:82)(cid:72)(cid:3)(cid:58)(cid:73)(cid:82)(cid:88)(cid:89)(cid:86)(cid:73)(cid:3)(cid:40)(cid:69)(cid:84)(cid:77)(cid:88)(cid:69)(cid:80)(cid:3)(cid:38)(cid:87)(cid:87)(cid:83)(cid:71)(cid:77)(cid:69)(cid:88)(cid:77)(cid:83)(cid:82)
Cathleen A. Schmidt
Executive Director & CEO,
(cid:50)(cid:71)(cid:49)(cid:69)(cid:82)(cid:73)(cid:3)(cid:50)(cid:77)(cid:72)(cid:72)(cid:80)(cid:73)(cid:88)(cid:83)(cid:82)(cid:3)(cid:53)(cid:86)(cid:83)(cid:74)(cid:73)(cid:87)(cid:87)(cid:77)(cid:83)(cid:82)(cid:69)(cid:80)(cid:3)(cid:38)(cid:87)(cid:87)(cid:83)(cid:71)(cid:77)(cid:69)(cid:88)(cid:77)(cid:83)(cid:82)
Denis K. Sheahan
(cid:26)(cid:282)(cid:177)(cid:286)(cid:377)(cid:311)(cid:177)(cid:315)(cid:216)(cid:400)(cid:26)(cid:282)(cid:286)(cid:229)(cid:252)(cid:400)(cid:41)(cid:452)(cid:229)(cid:207)(cid:419)(cid:402)(cid:286)(cid:445)(cid:229)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:377)(cid:216)
(cid:40)(cid:69)(cid:81)(cid:70)(cid:86)(cid:77)(cid:72)(cid:75)(cid:73)(cid:3)(cid:39)(cid:69)(cid:82)(cid:71)(cid:83)(cid:86)(cid:84)(cid:3)(cid:69)(cid:82)(cid:72)(cid:3)(cid:40)(cid:69)(cid:81)(cid:70)(cid:86)(cid:77)(cid:72)(cid:75)(cid:73)(cid:3)(cid:56)(cid:86)(cid:89)(cid:87)(cid:88)(cid:3)(cid:40)(cid:83)(cid:81)(cid:84)(cid:69)(cid:82)(cid:93)
R. Gregg Stone
(cid:88)(cid:229)(cid:177)(cid:218)(cid:400)(cid:37)(cid:286)(cid:377)(cid:229)(cid:207)(cid:402)(cid:327)(cid:377)(cid:216)
(cid:40)(cid:69)(cid:81)(cid:70)(cid:86)(cid:77)(cid:72)(cid:75)(cid:73)(cid:3)(cid:39)(cid:69)(cid:82)(cid:71)(cid:83)(cid:86)(cid:84)(cid:3)(cid:69)(cid:82)(cid:72)(cid:3)(cid:40)(cid:69)(cid:81)(cid:70)(cid:86)(cid:77)(cid:72)(cid:75)(cid:73)(cid:3)(cid:56)(cid:86)(cid:89)(cid:87)(cid:88)(cid:3)(cid:40)(cid:83)(cid:81)(cid:84)(cid:69)(cid:82)(cid:93)
(cid:97)(cid:177)(cid:315)(cid:177)(cid:271)(cid:229)(cid:377)(cid:216)
(cid:48)(cid:73)(cid:87)(cid:88)(cid:86)(cid:73)(cid:80)(cid:3)(cid:50)(cid:69)(cid:82)(cid:69)(cid:75)(cid:73)(cid:81)(cid:73)(cid:82)(cid:88)(cid:17)(cid:3)(cid:49)(cid:49)(cid:40)
Mark D. Thompson
(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)(cid:400)
(cid:40)(cid:69)(cid:81)(cid:70)(cid:86)(cid:77)(cid:72)(cid:75)(cid:73)(cid:3)(cid:39)(cid:69)(cid:82)(cid:71)(cid:83)(cid:86)(cid:84)(cid:3)(cid:69)(cid:82)(cid:72)(cid:3)(cid:40)(cid:69)(cid:81)(cid:70)(cid:86)(cid:77)(cid:72)(cid:75)(cid:73)(cid:3)(cid:56)(cid:86)(cid:89)(cid:87)(cid:88)(cid:3)(cid:40)(cid:83)(cid:81)(cid:84)(cid:69)(cid:82)(cid:93)
Linda Whitlock
(cid:127)(cid:229)(cid:402)(cid:286)(cid:377)(cid:229)(cid:218)(cid:400)(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:400)(cid:177)(cid:315)(cid:218)(cid:400)(cid:26)(cid:282)(cid:286)(cid:229)(cid:252)(cid:400)(cid:41)(cid:452)(cid:229)(cid:207)(cid:419)(cid:402)(cid:286)(cid:445)(cid:229)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:377)(cid:216)
(cid:39)(cid:83)(cid:93)(cid:87)(cid:3)(cid:11)(cid:3)(cid:44)(cid:77)(cid:86)(cid:80)(cid:87)(cid:3)(cid:40)(cid:80)(cid:89)(cid:70)(cid:87)(cid:3)(cid:83)(cid:74)(cid:3)(cid:39)(cid:83)(cid:87)(cid:88)(cid:83)(cid:82)
(cid:56)(cid:327)(cid:419)(cid:315)(cid:218)(cid:229)(cid:377)(cid:400)(cid:177)(cid:315)(cid:218)(cid:400)(cid:123)(cid:377)(cid:286)(cid:315)(cid:207)(cid:286)(cid:356)(cid:177)(cid:302)(cid:216)
(cid:56)(cid:76)(cid:73)(cid:3)(cid:59)(cid:76)(cid:77)(cid:88)(cid:80)(cid:83)(cid:71)(cid:79)(cid:3)(cid:44)(cid:86)(cid:83)(cid:89)(cid:84)
(cid:52)(cid:509)(cid:71)(cid:73)(cid:86)(cid:87)
Michael F. Carotenuto
(cid:132)(cid:229)(cid:315)(cid:286)(cid:327)(cid:377)(cid:400)(cid:154)(cid:286)(cid:207)(cid:229)(cid:400)(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)(cid:400)(cid:26)(cid:282)(cid:286)(cid:229)(cid:252)(cid:400)(cid:56)(cid:286)(cid:315)(cid:177)(cid:315)(cid:207)(cid:286)(cid:177)(cid:302)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:377)(cid:400)
& Corporate Secretary
Martin B. Millane, Jr.
(cid:41)(cid:452)(cid:229)(cid:207)(cid:419)(cid:402)(cid:286)(cid:445)(cid:229)(cid:400)(cid:154)(cid:286)(cid:207)(cid:229)(cid:400)(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)(cid:400)(cid:26)(cid:282)(cid:286)(cid:229)(cid:252)(cid:400)(cid:88)(cid:229)(cid:315)(cid:218)(cid:286)(cid:315)(cid:271)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:377)
Kerri A. Mooney
(cid:132)(cid:229)(cid:315)(cid:286)(cid:327)(cid:377)(cid:400)(cid:154)(cid:286)(cid:207)(cid:229)(cid:400)(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)(cid:400)(cid:37)(cid:286)(cid:377)(cid:229)(cid:207)(cid:402)(cid:327)(cid:377)(cid:400)(cid:327)(cid:252)(cid:400)(cid:123)(cid:377)(cid:286)(cid:445)(cid:177)(cid:402)(cid:229)
(cid:24)(cid:177)(cid:315)(cid:299)(cid:286)(cid:315)(cid:271)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:382)
Puneet Nevatia
(cid:132)(cid:229)(cid:315)(cid:286)(cid:327)(cid:377)(cid:400)(cid:154)(cid:286)(cid:207)(cid:229)(cid:400)(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)(cid:400)(cid:26)(cid:282)(cid:286)(cid:229)(cid:252)(cid:400)(cid:70)(cid:315)(cid:252)(cid:327)(cid:377)(cid:311)(cid:177)(cid:402)(cid:286)(cid:327)(cid:315)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:377)
Jennifer A. Pline
(cid:41)(cid:452)(cid:229)(cid:207)(cid:419)(cid:402)(cid:286)(cid:445)(cid:229)(cid:400)(cid:154)(cid:286)(cid:207)(cid:229)(cid:400)(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)(cid:400)(cid:66)(cid:229)(cid:177)(cid:218)(cid:400)(cid:327)(cid:252)(cid:400)(cid:156)(cid:229)(cid:177)(cid:302)(cid:402)(cid:282)(cid:400)(cid:97)(cid:177)(cid:315)(cid:177)(cid:271)(cid:229)(cid:311)(cid:229)(cid:315)(cid:402)
Pilar Pueyo
(cid:132)(cid:229)(cid:315)(cid:286)(cid:327)(cid:377)(cid:400)(cid:154)(cid:286)(cid:207)(cid:229)(cid:400)(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)(cid:400)(cid:37)(cid:286)(cid:377)(cid:229)(cid:207)(cid:402)(cid:327)(cid:377)(cid:400)(cid:327)(cid:252)(cid:400)(cid:66)(cid:419)(cid:311)(cid:177)(cid:315)(cid:400)(cid:127)(cid:229)(cid:382)(cid:327)(cid:419)(cid:377)(cid:207)(cid:229)(cid:382)
John J. Sullivan
(cid:132)(cid:229)(cid:315)(cid:286)(cid:327)(cid:377)(cid:400)(cid:154)(cid:286)(cid:207)(cid:229)(cid:400)(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)(cid:400)(cid:37)(cid:286)(cid:377)(cid:229)(cid:207)(cid:402)(cid:327)(cid:377)(cid:400)(cid:327)(cid:252)(cid:400)(cid:26)(cid:327)(cid:315)(cid:382)(cid:419)(cid:311)(cid:229)(cid:377)(cid:400)(cid:88)(cid:229)(cid:315)(cid:218)(cid:286)(cid:315)(cid:271)
Jennifer M. Willis
(cid:132)(cid:229)(cid:315)(cid:286)(cid:327)(cid:377)(cid:400)(cid:154)(cid:286)(cid:207)(cid:229)(cid:400)(cid:123)(cid:377)(cid:229)(cid:382)(cid:286)(cid:218)(cid:229)(cid:315)(cid:402)(cid:216)(cid:400)(cid:26)(cid:282)(cid:286)(cid:229)(cid:252)(cid:400)(cid:97)(cid:177)(cid:377)(cid:299)(cid:229)(cid:402)(cid:286)(cid:315)(cid:271)(cid:400)(cid:107)(cid:254)(cid:207)(cid:229)(cid:377)
2019 Annual Report
Cambridge Bancorp Board of Directors
(Front row from left to right): Thalia Meehan, Mark D. Thompson, Linda Whitlock, Denis K. Sheahan,
Sarah G. Green, Edward F. Jankowski, Laila Partridge.
(Back row from left to right): Pamela H. Hamlin, Daniel R. Morrison, Jody A. Rose, Christine Fuchs,
Leon A. Palandjian, R. Gregg Stone, Cathleen A. Schmidt, Hambleton Lord, Jeanette G. Clough.
Financial Highlights
(Dollars in thousands, except per share data)
Selected Year-End Data
Net Income
Operating Net Income*
Total Assets
Total Loans
Total Deposits
Total Shareholder’s Equity
Assets Under Management and/or Administration
Per Common Share
Diluted Earnings Per Share
Diluted Earnings Per Share (Operating)*
Dividend Declared Per Share
Book Value Per Share
Tangible Book Value Per Share*
Financial Ratios
Net Interest Margin, FTE
Return/Average Assets
Return/Average Assets (Operating)*
Return/Average Equity
Return/Average Equity (Operating)*
Return/Average Tangible Common Equity (Operating)*
Asset Quality
Non-Performing Loans
Non-Performing Loans/Total Loans
Net (Charge-Offs)/Recoveries
Net (Charge-Offs)/Average Loans
Allowance/Total Loans
Non-Performing Assets/Assets
*GAAP to Non-GAAP Reconciliation on pages 12 & 13
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2019
25,257
29,156
2,855,563
2,226,728
2,358,878
286,561
3,452,852
5.37
6.20
2.04
53.06
46.66
3.22%
0.97%
1.12%
11.40%
13.16%
14.80%
5,651
0.25%
(1,592)
0.08%
0.82%
0.20%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018
23,881
24,024
2,101,384
1,559,772
1,811,410
167,026
2,876,702
5.77
5.80
1.96
40.67
40.57
3.33%
1.21%
1.21%
15.35%
15.44%
15.49%
642
0.04%
(54)
0.00%
1.08%
0.03%
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
14,816
18,687
1,949,934
1,350,899
1,775,400
147,957
3,085,669
3.61
4.56
1.86
36.24
36.14
3.25%
0.79%
1.00%
10.47%
13.21%
13.25%
1,298
0.10%
(303)
0.02%
1.13%
0.07%
$29M
$192M
$172M
OPERATING NET INCOME
21.4% Growth
LOANS (EXCLUDING MERGER)
12.3% Growth
CORE DEPOSITS (EXCLUDING MERGER)
10.2% Growth
Corporate Headquarters
Harvard Square
1336 Massachusetts Avenue
Cambridge, MA 02138
617-876-5500
Private Banking Offices
Massachusetts
Beacon Hill
65 Beacon Street
Boston, MA 02108
617-523-3551
Belmont
361 Trapelo Road
Belmont, MA 02478
617-484-0892
Concord
75 Main Street
Concord, MA 01742
978-369-9909
Harvard Square
1336 Massachusetts Avenue
Cambridge, MA 02138
617-876-5500
Huron Village
353 Huron Avenue
Cambridge, MA 02138
617-661-1317
Kendall Square
415 Main Street
Cambridge, MA 02142
617-441-0951
Lexington
1690 Massachusetts Avenue
Lexington, MA 02420
781-863-0976
Porter Square
1720 Massachusetts Avenue
Cambridge, MA 02138
617-661-0398
South End
565 Tremont Street
Boston, MA 02118
617-236-2247
Weston
494 Boston Post Road
Weston, MA 02493
781-893-5500
New Hampshire
Bedford
99 South River Road
Bedford, NH 03110
603-488-6040
Dover
920 Central Avenue
Dover, NH 03820
603-516-1175
North Hampton
26 Lafayette Road
North Hampton, NH 03862
603-433-9633
Portsmouth
143 Daniel Street
Portsmouth, NH 03801
603-433-9611
Portsmouth - Pease Tradeport
20 International Drive
Portsmouth, NH 03801
603-433-9655
Stratham
17 Portsmouth Avenue
Stratham, NH 03885
603-773-5222
Wealth Management Offices
Massachusetts
Boston
75 State Street, 18th Floor
Boston, MA 02109
617-876-5500
New Hampshire
Concord
49 South Main Street, Suite 203
Concord, NH 03301
603-226-1212
Manchester
1000 Elm Street, Suite 201
Manchester, NH 03101
603-657-9015
Portsmouth
Two Harbour Place, First Floor
Portsmouth, NH 03801
603-373-6010
2019 Annual Report
Parent of Cambridge Trust Company
NASDAQ: CATC
cambridgetrust.com
PRIVATE BANKING
WEALTH MANAGEMENT