catc-10q_20170930.htm

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 ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☐ No ☒

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.

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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of November 6, 2017, the registrant had 4,082,188 shares of common stock, $1.00 par value per share, outstanding.

	September 30, 2017			December 31, 2016
	(dollars in thousands, except par value)
Assets
Cash and cash equivalents	$	13,668		$	54,050
Investment securities
Available for sale, at fair value (amortized cost $215,007 and $329,726, respectively)		212,449			325,641
Held to maturity, at amortized cost (fair value $222,251 and $83,755, respectively)		219,870			82,502
Total investment securities		432,319			408,143
Loans held for sale, at lower of cost or fair value		560			6,506
Loans
Residential mortgage		537,425			534,404
Commercial mortgage		631,752			616,140
Home equity		76,007			75,051
Commercial & Industrial		65,861			59,706
Consumer		44,863			34,853
Total loans		1,355,908			1,320,154
Less: allowance for loan losses		(15,620	)		(15,261	)
Net loans		1,340,288			1,304,893
Stock in FHLB of Boston, at cost		4,938			4,098
Bank owned life insurance		30,947			30,499
Banking premises and equipment, net		9,502			10,451
Deferred income taxes, net		13,392			13,693
Accrued interest receivable		4,899			4,627
Other assets		13,718			12,039
Total assets	$	1,864,231		$	1,848,999
Liabilities
Deposits
Demand	$	465,970		$	472,923
Interest bearing checking		387,343			430,706
Money market		64,232			72,057
Savings		600,475			539,190
Certificates of deposit		158,898			171,162
Total deposits		1,676,918			1,686,038
Short-term borrowings		11,500			—
Long-term borrowings		3,621			3,746
Other liabilities		26,141			24,544
Total liabilities		1,718,180			1,714,328
Shareholders’ Equity
Common stock, par value $1.00; Authorized 10,000,000 shares; Outstanding: 4,082,188 shares and 4,036,879 shares, respectively		4,082			4,037
Additional paid-in capital		35,435			33,253
Retained earnings		115,048			107,262
Accumulated other comprehensive loss		(8,514	)		(9,881	)
Total shareholders’ equity		146,051			134,671
Total liabilities and shareholders’ equity	$	1,864,231		$	1,848,999

The accompanying notes are an integral part of these unaudited consolidated financial statements.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017			2016
	(dollars in thousands, except share data)
Interest and dividend income
Interest on taxable loans	$	13,038	$	12,322	$	37,966		$	35,796
Interest on tax-exempt loans		121		116		391			293
Interest on taxable investment securities		1,712		1,115		4,762			3,979
Interest on tax-exempt investment securities		641		688		1,966			2,071
Dividends on FHLB of Boston stock		107		52		192			132
Interest on overnight investments		54		22		170			94
Total interest and dividend income		15,673		14,315		45,447			42,365
Interest expense
Interest on deposits		809		769		2,183			2,526
Interest on borrowed funds		225		26		434			66
Total interest expense		1,034		795		2,617			2,592
Net interest and dividend income		14,639		13,520		42,830			39,773
Provision for loan losses		310		113		360			338
Net interest and dividend income after provision for loan losses		14,329		13,407		42,470			39,435
Noninterest income
Wealth management revenue		6,131		5,481		17,077			15,026
Deposit account fees		768		766		2,387			2,134
ATM/Debit card income		334		285		879			852
Bank owned life insurance income		139		149		448			474
Gain (loss) on disposition of investment securities		—		3		(3	)		438
Gain on loans held for sale		39		305		324			591
Loan related derivative income		284		392		647			1,191
Other income		282		234		890			677
Total noninterest income		7,977		7,615		22,649			21,383
Noninterest expense
Salaries and employee benefits		9,066		8,620		27,211			25,431
Occupancy and equipment		2,358		2,278		6,936			7,029
Data processing		1,111		1,279		3,830			3,744
Professional services		954		654		2,650			1,857
Marketing		355		463		1,098			1,388
FDIC Insurance		154		176		466			628
Other expenses		604		693		2,089			2,078
Total noninterest expense		14,602		14,163		44,280			42,155
Income before income taxes		7,704		6,859		20,839			18,663
Income tax expense		2,694		2,284		6,987			6,190
Net income	$	5,010	$	4,575	$	13,852		$	12,473
Share data
Weighted average number of shares outstanding, basic		4,037,026		3,996,687		4,027,378			3,982,696
Weighted average number of shares outstanding, diluted		4,070,332		4,043,651		4,062,743			4,029,281
Basic earnings per share	$	1.23	$	1.13	$	3.40		$	3.09
Diluted earnings per share	$	1.22	$	1.13	$	3.37		$	3.09

The accompanying notes are an integral part of these unaudited consolidated financial statements.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016			2017		2016
	(dollars in thousands)

Net income	$	5,010	$	4,575		$	13,852	$	12,473
Other comprehensive income, net of tax:
Unrealized gains (losses) on available for sale securities
Unrealized holding gains (losses) arising during period		286		(402	)		968		2,991
Less: reclassification adjustment for (gains) losses included in net income		-		(2	)		1		(281	)
Total unrealized gains (losses) on securities		286		(404	)		969		2,710
Defined benefit retirement plans
Change in unfunded retirement liability		133		117			398		351
Other comprehensive income (loss)		419		(287	)		1,367		3,061
Comprehensive income	$	5,429	$	4,288		$	15,219	$	15,534

The accompanying notes are an integral part of these unaudited consolidated financial statements.

	Common Stock			Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders’ Equity
	(dollars in thousands, except per share data)

Balance at December 31, 2015	$	4,000		$	30,427		$	99,064		$	(8,428	)	$	125,063
Net income		—			—			12,473			—			12,473
Other comprehensive income		—			—			—			3,061			3,061
Share based compensation		13			657			—			—			670
Exercise of stock options		36			1,148			—			—			1,184
Shares issued to ESOP and Directors		16			762			—			—			778
Dividends declared ($1.38 per share)		—			—			(5,570	)		—			(5,570	)
Shares repurchased		(30	)		(238	)		(1,163	)		—			(1,431	)
Balance at September 30, 2016	$	4,035		$	32,756		$	104,804		$	(5,367	)	$	136,228

Balance at December 31, 2016	$	4,037		$	33,253		$	107,262		$	(9,881	)	$	134,671
Net income		—			—			13,852			—			13,852
Other comprehensive income		—			—			—			1,367			1,367
Share based compensation		15			757			—			—			772
Exercise of stock options		25			740			—			—			765
Shares issued to ESOP and Directors		12			745			—			—			757
Dividends declared ($1.39 per share)		—			—			(5,663	)		—			(5,663	)
Shares repurchased		(7	)		(60	)		(403	)		—			(470	)
Balance at September 30, 2017	$	4,082		$	35,435		$	115,048		$	(8,514	)	$	146,051

The accompanying notes are an integral part of these unaudited consolidated financial statements.

	Nine Months Ended September 30,
	2017			2016
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13,852		$	12,473
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		360			338
Amortization of deferred charges and fees, net		720			1,232
Depreciation and amortization		1,470			1,554
Bank owned life insurance income		(448	)		(474	)
Loss/(gain) on disposition of investment securities		3			(438	)
Compensation expense from stock option and restricted stock grants		772			670
Change in accrued interest receivable		(272	)		47
Change in deferred income taxes		301			1,107
Change in unrealized (gain)/loss of securities available for sale, net of taxes		(557	)		(1,575	)
Change in unfunded pension liability		398			351
Change in other assets		(1,679	)		(2,905	)
Change in other liabilities		1,597			4,172
Change in loans held for sale		5,946			(3,268	)
Other, net		(1	)		38
Net cash provided by operating activities		22,462			13,322
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of loans		(257,931	)		(234,039	)
Proceeds from principal payments of loans		222,187			113,837
Proceeds from calls/maturities of securities available for sale		41,982			140,336
Proceeds from sales of securities available for sale and held to maturity		77,369			18,070
Purchase of securities available for sale		(5,091	)		(129,733	)
Proceeds from calls/maturities of securities held to maturity		27,100			8,521
Purchase of securities held to maturity		(164,684	)		(10,719	)
(Purchase) sale of FHLB of Boston stock		(840	)		1,451
Purchase of banking premises and equipment		(521	)		(1,091	)
Net cash used by investing activities		(60,429	)		(93,367	)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in demand, interest bearing, money market and savings accounts		3,144			64,519
Change in certificates of deposit		(12,323	)		2,460
Change in short-term borrowings		11,500			12,600
Repayment of long-term borrowings		(125	)		(123	)
Cash dividends paid on common stock		(5,663	)		(5,570	)
Repurchase of common stock		(470	)		(1,432	)
Proceeds from issuance of common stock		1,522			1,962
Net cash provided by financing activities		(2,415	)		74,416
Net decrease in cash and cash equivalents		(40,382	)		(5,629	)
Cash and cash equivalents at beginning of period		54,050			24,645
Cash and cash equivalents at end of period	$	13,668		$	19,016
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	2,626		$	2,612
Income taxes	$	7,305		$	6,550

The accompanying notes are an integral part of these unaudited consolidated financial statements.

The unaudited consolidated financial statements include the accounts of Cambridge Bancorp (the “Company”) and its wholly owned subsidiary, Cambridge Trust Company (the “Bank”), and the Bank’s wholly owned 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 and was incorporated in 1983. The Company is the sole shareholder of the Bank, a Massachusetts trust company chartered in 1890, which is a private bank. The Company’s lines of business consisting of wealth management services, commercial banking, and consumer banking are managed as a single strategic unit.

The unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) and disclosures necessary to present fairly the Company’s financial position, as of September 30, 2017 and December 31, 2016, respectively, and the results of operations and cash flows for the interim periods presented in accordance with U.S. generally accepted accounting principles (“GAAP”). Interim results are not necessarily reflective of the results of the entire year.

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, the fair values of financial instruments, and the valuation of deferred tax assets are particularly subject to change.

Changes to retirement plans. On October 23, 2017, the Company announced the decision to freeze the accrual of benefits effective December 31, 2017, within the defined benefit pension plan.

Management has reviewed events occurring through November 8, 2017, the date the unaudited consolidated financial statements were available to be issued, and determined that no other subsequent events occurred requiring adjustment to or disclosure in these financial statements.

Accounting Standard Update No. 2017-12 - Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). On August 28, 2017, the Financial Accounting Standards Board (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 effects of hedge accounting by:

The standard also permits hedge accounting for strategies for which hedge accounting is not permitted today and includes new alternatives for measuring the hedged item for fair value hedges of interest rate risk. Furthermore, the standard eases the requirements 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 is effective on January 1, 2019 for the Company, and early adoption is permitted.

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.

While the Company continues to assess all potential impacts of the standard, we currently expect adoption to have an immaterial impact on our consolidated financial statements.

Accounting Standards Update No. 2017-08 - Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”). On March 30, 2017, the FASB issued guidance to amend the amortization period for certain purchased callable debt securities held at a premium. The new guidance requires entities to amortize premium on callable debt securities to the earliest call date. Shortening the amortization period is generally expected to more closely align the interest income recognition with the expectations incorporated in the market pricing on the underlying securities. Under GAAP, entities generally amortize the premium as an adjustment of yield over the contractual life of the instrument. Debt securities held at a discount will continue to be amortized to maturity. The amended guidance is effective on January 1, 2020 for the Company, and early adoption is permitted. This guidance should be applied using a modified retrospective transition method. Additionally, in the period of adoption, we will provide disclosures about a change in accounting principle. 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 No. 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). On March 10, 2017, the FASB issued amended guidance primarily to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost, as discussed below. The new guidance will require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The amended guidance is effective on January 1, 2020 for the Company. This guidance should be applied using a modified retrospective transition method. We are currently assessing the impact that the adoption of this guidance will have on our consolidated balance sheets, statements of income, and cash flows.

Accounting Standards Update No. 2016-18 - Restricted Cash (“ASU 2016-18”). On November 17, 2016, the FASB issued amended guidance to require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The guidance is effective on January 1, 2018 for the Company, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. The adoption of this guidance will not have a material impact on our consolidated balance sheets, statements of income, and cash flows.

Accounting Standards Update No. 2016-15 - Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). On August 26, 2016, the FASB issued amendments to clarify guidance on the classification of certain cash receipts and payments in the statement of cash flows. This guidance is intended to reduce existing diversity in practice in how certain cash receipts and cash payments are presented and classified on the statement of cash flows. This guidance is effective for the Company for interim and annual periods beginning on January 1, 2018, and early adoption is permitted. This guidance should be applied using a retrospective transition method to each period presented. The adoption of this guidance will not have a material impact on our consolidated balance sheets, statements of income, and cash flows.

Accounting Standards Update No. 2016-13 - Financial Instruments - Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). On June 16, 2016, the FASB issued ASU 2016-13, which will significantly change how entities measure and recognize credit impairment for many financial assets. Under this standard, the new current expected credit loss model will require entities to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. This new guidance also made targeted amendments to the current impairment model for available for sale debt securities. This guidance will be effective for the Company for the fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption for fiscal years and interim periods beginning after December 15, 2018 is permitted. We are in the process of evaluating this guidance and its effect on our consolidated balance sheets, statements of income, and cash flows.

Accounting Standards Update No. 2016-09 - Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). On March 30, 2016, the FASB issued ASU 2016-09 as part of the initiative to reduce the complexity in accounting standards. The updated guidance addresses several areas for simplification, including accounting for employee share-based payment transactions and the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted the guidance on January 1, 2017 using the prospective method and recorded a tax benefit of $219,000 for the nine months ended September 30, 2017.

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 becomes effective for the Company for the interim and annual periods beginning on January 1, 2019, and early adoption is permitted. 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 No. 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). On January 5, 2016, the FASB issued amended guidance on certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. This guidance includes, but is not limited to, the following:

This guidance becomes effective for the Company for the interim and annual periods beginning on January 1, 2018, and early adoption is only permitted for certain provisions. The amendments, in general, are required to be applied by means of a cumulative-effect adjustment on the statement of condition as of the beginning of the period of adoption. The adoption of this guidance is not expected to have a material impact on our consolidated balance sheets, statements of income, and cash flows.

Accounting Standards Update No. 2014-09 - Revenue from Contracts with Customers (“ASU 2014-09”). In May 2014, the FASB issued 2014-09 as a joint project between the FASB and the International Accounting Standards Board to clarify the principles of recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. Additionally, in August 2015, the FASB issued Accounting Standards Update No. 2015-14 to defer the effective date of ASU 2014-09 to annual reporting periods beginning after December 15, 2017. We are in the process of evaluating this guidance, and at this time, do not expect its adoption will have a material impact on our consolidated balance sheets, statements of income, and cash flows.

At September 30, 2017 and December 31, 2016, cash and due from banks totaled $13.7 million and $54.1 million, respectively. Of this amount, $12.9 million and $11.2 million, respectively, were maintained to satisfy the reserve requirements of the Federal Reserve Bank of Boston (“FRB Boston”). Additionally, at September 30, 2017 and December 31, 2016, the Company pledged $500,000 and $500,000, respectively, to the New Hampshire Banking Department relating to Cambridge Trust Company of New Hampshire, Inc.’s operations in that state.

Investment securities have been classified in the unaudited consolidated balance sheets according to management’s intent. The carrying amounts of securities and their approximate fair values were as follows:

	September 30, 2017									December 31, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
Available for sale securities
U.S. GSE obligations	$	90,024	$	—	$	(844	)	$	89,180	$	140,026	$	23	$	(1,340	)	$	138,709
Mortgage-backed securities		119,272		299		(1,950	)		117,621		183,974		479		(3,154	)		181,299
Corporate debt securities		5,039

Massachusetts	04-2777442
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1336 Massachusetts Avenue Cambridge, MA	02138
(Address of principal executive offices)	(Zip Code)

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☒	(Do not check if a small reporting company)	Small reporting company	☐
			Emerging growth Company	☐

		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Unaudited Consolidated Balance Sheets	1
	Unaudited Consolidated Statements of Income	2
	Unaudited Consolidated Statements of Comprehensive Income (Loss)	3
	Unaudited Consolidated Statements of Changes in Shareholders’ Equity	4
	Unaudited Consolidated Statements of Cash Flows	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	53
PART II.	OTHER INFORMATION	54
Item 1.	Legal Proceedings	54
Item 1A.	Risk Factors	54
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	61
Item 3.	Defaults Upon Senior Securities	61
Item 4.	Mine Safety Disclosures	61
Item 5.	Other Information	61
Item 6.	Exhibits	62
Signatures		63