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Section 1: 10-Q (10-Q)

catc-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

OR

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

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)

Registrant’s telephone number, including area code: (617) 876-5500

 

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 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 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.

 

Large accelerated filer

 

 

 

  

Accelerated filer

 

Non-accelerated filer

 

 

 

  

Small reporting company

 

 

 

 

 

 

 

Emerging growth Company

 

 

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  

 

Common Stock

CATC

NASDAQ

(Title of each class)

(Trading symbol)

(Name of each exchange on which registered)

 

As of April 30, 2019, the registrant had 4,846,250 shares of common stock, $1.00 par value per share, outstanding.

 

 

 

 


 

Table of Contents

CAMBRIDGE BANCORP AND SUBSIDIARIES

 

 

 

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

33

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

Item 4.

Controls and Procedures

51

PART II.

OTHER INFORMATION

52

Item 1.

Legal Proceedings

52

Item 1A.

Risk Factors

52

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

Item 3.

Defaults Upon Senior Securities

52

Item 4.

Mine Safety Disclosures

52

Item 5.

Other Information

52

Item 6.

Exhibits

53

Signatures

54

 

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

(dollars in thousands, except par value)

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

37,006

 

 

$

18,473

 

Investment securities

 

 

 

 

 

 

 

 

Available for sale, at fair value (amortized cost $147,377 and $172,290, respectively)

 

 

144,762

 

 

 

168,163

 

Held to maturity, at amortized cost (fair value $300,607 and $281,310, respectively)

 

 

298,830

 

 

 

282,869

 

Total investment securities

 

 

443,592

 

 

 

451,032

 

Loans held for sale, at lower of cost or fair value

 

 

 

 

 

 

Loans

 

 

 

 

 

 

 

 

Residential mortgage

 

 

613,254

 

 

 

604,331

 

Commercial mortgage

 

 

749,835

 

 

 

757,957

 

Home equity

 

 

68,849

 

 

 

69,336

 

Commercial & Industrial

 

 

90,172

 

 

 

93,712

 

Consumer

 

 

33,044

 

 

 

34,436

 

Total loans

 

 

1,555,154

 

 

 

1,559,772

 

Less: allowance for loan losses

 

 

(16,652

)

 

 

(16,768

)

Net loans

 

 

1,538,502

 

 

 

1,543,004

 

Federal Home Loan Bank of Boston Stock, at cost

 

 

2,672

 

 

 

6,844

 

Bank owned life insurance

 

 

31,060

 

 

 

30,933

 

Banking premises and equipment, net

 

 

8,719

 

 

 

8,578

 

Deferred income taxes, net

 

 

7,167

 

 

 

8,717

 

Accrued interest receivable

 

 

6,012

 

 

 

5,762

 

Other assets

 

 

63,818

 

 

 

28,041

 

Total assets

 

$

2,138,548

 

 

$

2,101,384

 

Liabilities

 

 

 

 

 

 

 

 

Deposits

 

 

 

 

 

 

 

 

Demand

 

$

490,649

 

 

$

494,492

 

Interest bearing checking

 

 

385,605

 

 

 

431,702

 

Money market

 

 

146,925

 

 

 

135,585

 

Savings

 

 

709,940

 

 

 

628,212

 

Certificates of deposit

 

 

169,264

 

 

 

121,419

 

Total deposits

 

 

1,902,383

 

 

 

1,811,410

 

Short-term borrowings

 

 

 

 

 

90,000

 

Long-term borrowings

 

 

3,366

 

 

 

3,409

 

Other liabilities

 

 

60,531

 

 

 

29,539

 

Total liabilities

 

 

1,966,280

 

 

 

1,934,358

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Common stock, par value $1.00; Authorized 10,000,000 shares; Outstanding: 4,123,618

   shares and 4,107,051 shares, respectively

 

 

4,124

 

 

 

4,107

 

Additional paid-in capital

 

 

38,239

 

 

 

38,271

 

Retained earnings

 

 

135,235

 

 

 

131,135

 

Accumulated other comprehensive loss

 

 

(5,330

)

 

 

(6,487

)

Total shareholders’ equity

 

 

172,268

 

 

 

167,026

 

Total liabilities and shareholders’ equity

 

$

2,138,548

 

 

$

2,101,384

 

 

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

1


 

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(dollars in thousands, except share data)

 

Interest and dividend income

 

 

 

 

 

 

 

 

Interest on taxable loans

 

$

16,284

 

 

$

13,378

 

Interest on tax-exempt loans

 

 

89

 

 

 

96

 

Interest on taxable investment securities

 

 

1,980

 

 

 

1,714

 

Interest on tax-exempt investment securities

 

 

571

 

 

 

622

 

Dividends on FHLB of Boston stock

 

 

76

 

 

 

51

 

Interest on overnight investments

 

 

118

 

 

 

271

 

Total interest and dividend income

 

 

19,118

 

 

 

16,132

 

Interest expense

 

 

 

 

 

 

 

 

Interest on deposits

 

 

2,501

 

 

 

962

 

Interest on borrowed funds

 

 

356

 

 

 

17

 

Total interest expense

 

 

2,857

 

 

 

979

 

Net interest and dividend income

 

 

16,261

 

 

 

15,153

 

Provision for Loan Losses

 

 

(93

)

 

 

409

 

Net interest and dividend income after provision for

   loan losses

 

 

16,354

 

 

 

14,744

 

Noninterest income

 

 

 

 

 

 

 

 

Wealth management revenue

 

 

6,124

 

 

 

6,126

 

Deposit account fees

 

 

738

 

 

 

750

 

ATM/Debit card income

 

 

276

 

 

 

271

 

Bank owned life insurance income

 

 

127

 

 

 

128

 

Gain (loss) on disposition of investment securities

 

 

(87

)

 

 

 

Gain on loans held for sale

 

 

16

 

 

 

27

 

Loan related derivative income

 

 

436

 

 

 

472

 

Other income

 

 

327

 

 

 

404

 

Total noninterest income

 

 

7,957

 

 

 

8,178

 

Noninterest expense

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

10,827

 

 

 

10,073

 

Occupancy and equipment

 

 

2,330

 

 

 

2,227

 

Data processing

 

 

1,346

 

 

 

1,230

 

Professional services

 

 

807

 

 

 

887

 

Marketing

 

 

404

 

 

 

438

 

FDIC insurance

 

 

 

 

 

151

 

Merger expenses

 

 

91

 

 

 

 

Other expenses

 

 

568

 

 

 

495

 

Total noninterest expense

 

 

16,373

 

 

 

15,501

 

Income before income taxes

 

 

7,938

 

 

 

7,421

 

Income tax expense

 

 

1,740

 

 

 

1,616

 

Net income

 

$

6,198

 

 

$

5,805

 

Share data:

 

 

 

 

 

 

 

 

Weighted average number of shares outstanding, basic

 

 

4,072,805

 

 

 

4,053,355

 

Weighted average number of shares outstanding, diluted

 

 

4,106,658

 

 

 

4,071,975

 

Basic earnings per share

 

$

1.51

 

 

$

1.42

 

Diluted earnings per share

 

$

1.49

 

 

$

1.41

 

 

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

2


 

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

Net income

 

$

6,198

 

 

$

5,805

 

Other comprehensive income/(loss), net of tax:

 

 

 

 

 

 

 

 

Unrealized gains/(losses) on available for sale securities

 

 

 

 

 

 

 

 

Unrealized holding gains/(losses) arising during period

 

 

1,095

 

 

 

(1,352

)

Less: reclassification adjustment for losses/(gains)

  included in net income

 

 

66

 

 

 

 

Total unrealized gains/(losses) on securities

 

 

1,161

 

 

 

(1,352

)

Derivatives

 

 

 

 

 

 

 

 

Change in interest rate contracts

 

 

(30

)

 

 

 

Defined benefit retirement plans

 

 

 

 

 

 

 

 

Change in retirement liabilities

 

 

26

 

 

 

10

 

Other comprehensive income/(loss)

 

 

1,157

 

 

 

(1,342

)

Comprehensive income

 

$

7,355

 

 

$

4,463

 

 

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

3


 

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

 

 

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

(Loss ) /

Income

 

 

Total

Shareholders’

Equity

 

 

 

(dollars in thousands, except per share data)

 

Balance at December 31, 2017

 

$

4,082

 

 

$

35,663

 

 

$

114,093

 

 

$

(5,881

)

 

$

147,957

 

Cumulative effect of accounting changes

 

 

 

 

 

 

 

 

1,266

 

 

 

(1,266

)

 

 

 

Net income

 

 

 

 

 

 

 

 

5,805

 

 

 

 

 

 

5,805

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

(1,342

)

 

 

(1,342

)

Share based compensation

 

 

19

 

 

 

402

 

 

 

 

 

 

 

 

 

421

 

Dividends declared ($0.48 per share)

 

 

 

 

 

 

 

 

(1,968

)

 

 

 

 

 

(1,968

)

Balance at March 31, 2018

 

$

4,101

 

 

$

36,065

 

 

$

119,196

 

 

$

(8,489

)

 

$

150,873

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

$

4,107

 

 

$

38,271

 

 

$

131,135

 

 

$

(6,487

)

 

$

167,026

 

Net income

 

 

 

 

 

 

 

 

6,198

 

 

 

 

 

 

6,198

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

1,157

 

 

 

1,157

 

Share based compensation

 

 

17

 

 

 

(32

)

 

 

 

 

 

 

 

 

(15

)

Dividends declared ($0.51 per share)

 

 

 

 

 

 

 

 

(2,098

)

 

 

 

 

 

(2,098

)

Balance at March 31, 2019

 

$

4,124

 

 

$

38,239

 

 

$

135,235

 

 

$

(5,330

)

 

$

172,268

 

 

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

4


 

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

 

 

(dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

6,198

 

 

$

5,805

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

(93

)

 

 

409

 

Amortization of deferred charges and fees, net

 

 

199

 

 

 

163

 

Depreciation and amortization

 

 

393

 

 

 

464

 

Bank owned life insurance income

 

 

(127

)

 

 

(128

)

Loss on disposition of investment securities

 

 

87

 

 

 

 

Share based compensation

 

 

(15

)

 

 

421

 

Change in accrued interest receivable

 

 

(250

)

 

 

69

 

Deferred income tax (benefit)/expense

 

 

1,202

 

 

 

770

 

Change in other assets, net

 

 

(35,439

)

 

 

(4,944

)

Change in other liabilities, net

 

 

30,638

 

 

 

2,371

 

Net cash provided by operating activities

 

 

2,793

 

 

 

5,400

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Origination of loans

 

 

(107,949

)

 

 

(131,953

)

Proceeds from principal payments of loans

 

 

112,585

 

 

 

101,197

 

Proceeds from calls/maturities of securities available for sale

 

 

8,825

 

 

 

5,208

 

Proceeds from sales of securities available for sale

 

 

15,913

 

 

 

 

Proceeds from calls/maturities of securities held to maturity

 

 

14,882

 

 

 

7,777

 

Purchase of securities held to maturity

 

 

(30,966

)

 

 

(40,125

)

Proceeds from settlement of bank owned life insurance policies

 

 

 

 

 

676

 

Sale of FHLB of Boston stock

 

 

4,172

 

 

 

 

Purchase of banking premises and equipment

 

 

(534

)

 

 

(470

)

Net cash provided by (used in) investing activities

 

 

16,928

 

 

 

(57,690

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Change in demand, interest bearing, money market and savings accounts

 

 

43,128

 

 

 

20,575

 

Change in certificates of deposit

 

 

47,825

 

 

 

(13,601

)

Change in short-term borrowings

 

 

(90,000

)

 

 

 

Repayment of long-term borrowings

 

 

(43

)

 

 

(42

)

Cash dividends paid on common stock

 

 

(2,098

)

 

 

(1,968

)

Net cash provided by (used in) financing activities

 

 

(1,188

)

 

 

4,964

 

Net (decrease)/increase in cash and cash equivalents

 

 

18,533

 

 

 

(47,326

)

Cash and cash equivalents at beginning of period

 

 

18,473

 

 

 

103,591

 

Cash and cash equivalents at end of period

 

$

37,006

 

 

$

56,265

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

2,763

 

 

$

975

 

Income taxes

 

$

970

 

 

$

 

 

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

5


 

CAMBRIDGE BANCORP AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1.

BASIS OF PRESENTATION

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 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 Company’s only reportable operating segment is 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 March 31, 2019 and December 31, 2018, 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.

 

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission.

2.

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

3.

Subsequent Events

Optima Merger. 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 (the “Merger Agreement”), each outstanding share of Optima common stock was converted into $32.00 in cash or 0.3468 shares of the Company’s common stock, with the transaction structured as 95 percent common stock and 5 percent cash.  As a result of the merger, former Optima shareholders received an aggregate of approximately 722,746 shares of the Company’s common stock and an aggregate of approximately $3.5 million in cash.

Management has reviewed events occurring through May 9, 2019, 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.

4.

Recently Issued and Adopted Accounting Guidance

 

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 Financial Accounting Standards Board (“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. The Company adopted this update on January 1, 2019, and the update did not have a significant impact on the consolidated financial statements.

 

Accounting Standards Update 2018-15 - Customer’s 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. We are currently assessing the impact the adoption of this guidance will have on our consolidated balance sheets, statements of income, and cash flows.

6


 

 

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. 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 2018-07 - 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 effects of hedge accounting by:

 

eliminating the requirement to separately measure and report hedge ineffectiveness; and

 

requiring companies to present all of the elements of hedge accounting that affect 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 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 was effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years.  

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.

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, 2019, 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. We have developed an implementation plan which includes assessment of processes, portfolio segmentation, model development, system requirements, and the identification of data and resource needs to implement this standard.

7


 

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 2018, the FASB issued Accounting Standards Update No. 2018-11, “Targeted Improvements” (“ASU 2018-11”), to allow an optional 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.

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 Company’s performance obligation under these contracts is satisfied over time as the wealth management services are provided. Fees are recognized monthly based on the average monthly value of the assets under management and the applicable fee 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 client’s trust and, in some cases, manages the assets of the trust. The Company’s 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 Company’s 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 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 client’s account. Monthly service and maintenance charges are recognized in the month they are earned and are charged directly to the client’s account.

8


 

5.

Cash and cash equivalents

At March 31, 2019 and December 31, 2018, cash and cash equivalents totaled $37.0 million and $18.5 million, respectively. Of this amount, $12.0  million and $12.7 million, respectively, were maintained to satisfy the reserve requirements of the Federal Reserve Bank of Boston (“FRB Boston”). Additionally, at March 31, 2019 and December 31, 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.

6.

Investment Securities

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:

 

 

 

March 31, 2019

 

 

December 31, 2018

 

 

 

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

 

$

55,000

 

 

$

 

 

$

(572

)

 

$

54,428

 

 

$

75,004

 

 

$

 

 

$

(965

)

 

$

74,039

 

Mortgage-backed securities

 

 

88,367

 

 

 

137

 

 

 

(2,145

)

 

 

86,359

 

 

 

92,271

 

 

 

118

 

 

 

(3,121

)

 

 

89,268

 

Corporate debt securities

 

 

4,010

 

 

 

 

 

 

(35

)

 

 

3,975

 

 

 

5,015

 

 

 

 

 

 

(159

)

 

 

4,856

 

Total available for sale securities

 

$

147,377

 

 

$

137

 

 

$

(2,752

)

 

$

144,762

 

 

$

172,290

 

 

$

118

 

 

$

(4,245

)

 

$

168,163

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. GSE obligations

 

$

27,571

 

 

$

 

 

$

(130

)

 

$

27,441

 

 

$

32,571

 

 

$

 

 

$

(238

)

 

$

32,333

 

Mortgage-backed securities

 

 

191,679

 

 

 

891

 

 

 

(1,122

)

 

 

191,448

 

 

 

168,118

 

 

 

134

 

 

 

(2,290

)

 

 

165,962

 

Corporate debt securities

 

 

6,974

 

 

 

13

 

 

 

(1

)

 

 

6,986

 

 

 

6,972

 

 

 

 

 

 

(107

)

 

 

6,865

 

Municipal securities

 

 

72,606

 

 

 

2,157

 

 

 

(31

)

 

 

74,732

 

 

 

75,208

 

 

 

1,297

 

 

 

(355

)

 

 

76,150

 

Total held to maturity securities

 

$

298,830

 

 

$

3,061

 

 

$

(1,284

)

 

$

300,607

 

 

$

282,869

 

 

$

1,431

 

 

$

(2,990

)

 

$

281,310

 

Total

 

$

446,207

 

 

$

3,198

 

 

$

(4,036

)

 

$

445,369

 

 

$

455,159

 

 

$

1,549

 

 

$

(7,235

)

 

$

449,473

 

 

All of the Company’s 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).

The following tables show the Company’s securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position:

 

 

 

March 31, 2019

 

 

 

Less than 12 months

 

 

12 months or longer

 

 

Total

 

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

Fair

Value

 

 

Unrealized

Losses

 

 

 

(dollars in thousands)

 

Temporarily Impaired Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available for sale securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. GSE obligations

 

$

 

 

$

 

 

$

54,428

 

 

$

(572

)

 

$

54,428

 

 

$

(572

)

Mortgage-backed securities

 

 

 

 

 

 

 

 

83,979

 

 

 

(2,145

)

 

 

83,979

 

 

 

(2,145

)

Corporate debt securities

 

 

 

 

 

 

 

 

3,975

 

 

 

(35

)

 

 

3,975

 

 

 

(35

)

Total available for sale securities

 

$

 

 

$

 

 

$

142,382

 

 

$

(2,752

)

 

$

142,382

 

 

$

(2,752

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held to maturity securities