Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
Cambridge Bancorp 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, formed in 1890. At December 31, 2023, the Company had total assets of approximately $5.4 billion. Currently, the Bank operates 22 banking offices in Eastern Massachusetts and New Hampshire. The Company’s Wealth Management Group has five offices, one in Boston, Massachusetts, three in New Hampshire in Concord, Manchester, and Portsmouth, and one in Southport, Connecticut. The Company’s Assets under Management and Administration as of December 31, 2023 were approximately $4.6 billion. The Bank’s clients consist primarily of small- and medium-sized businesses and retail clients in these communities and surrounding areas throughout Massachusetts and New Hampshire.
The Company’s 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 and fees earned from wealth management services and loans, operating expenses, the provision for (release of) credit losses, the impact of federal and state income taxes, and the relative levels of interest rates and economic activity.
Critical Accounting Estimates
Estimates and assumptions are necessary in the application of certain accounting policies and can be susceptible to significant change. Critical accounting policies are defined as those that involve a significant level of estimation uncertainty and have had, or could have a material impact on the Company's financial condition or results of operations. The Company considers the allowance for credit losses and income taxes to be its critical accounting estimates.
Allowance for Credit Losses
The Company evaluates the need for an allowance for credit losses on all financial assets measured at amortized cost, including loans receivable and held to maturity securities, in accordance with FASB ASC Topic 326, Financial Instruments – Credit Losses (“ASC Topic 326”), on a quarterly basis. ASC Topic 326 requires a methodology to estimate current expected credit losses (“CECL”) over the life of a loan, which incorporates applying a reasonable and supportable forecast period before reverting back to historical data. ASC Topic 326 also applies to off-balance sheet credit exposures not accounted for as insurance (i.e. loan commitments, standby letters of credit, financial guarantees, and other similar investments) and net investments in leases recognized by a lessor in accordance with Accounting Standards Update (“ASU”) 2016-02 – Leases (Topic 842).
Losses on loan receivables are estimated and recognized upon origination of the loan, based on expected credit losses for the life of the loan balance as of the period end date. The Company’s methodology for calculating the allowance for credit losses (“ACL”) on loans consists of quantitative and qualitative components.
The quantitative component of the ACL on loans is model-based and utilizes a forward-looking macroeconomic forecast. The Company uses a discounted cash flow method, incorporating probability of default and loss given default forecasted based on statistically derived economic variable loss drivers, to estimate expected credit losses. This process includes estimates which involve modeling loss projections attributable to existing loan balances, and considering historical experience, current conditions, and future expectations for homogeneous pools of loans over a reasonable and supportable forecast period. The historical information either experienced by the Company or by a selection of peer banks, when appropriate, is derived from a combination of recessionary and non-recessionary performance periods for which data is available.
The reasonable and supportable forecast period is primarily determined based upon the stability of current economic conditions at each measurement date. Management considers the accuracy level of historical loss forecast estimates, the specific loan level models and methodology utilized, and considers material changes in growth, credit strategy, and its business which may not be applicable within the current environment. For periods beyond the reasonable and supportable forecast period, we revert to historical information over a period for which comparable data is available.
The qualitative component of the ACL considers (i) the uncertainty of forward-looking scenarios; (ii) certain portfolio characteristics, such as portfolio concentrations, real estate values, changes in the number and amount of non-accrual and past due loans; and (iii) model limitations; among other factors. Qualitative adjustments are considered when management believes expected credit losses are not representative of historical loss experience alone, and should be adjusted to reflect the current
conditions and characteristics of the Company’s own portfolio. They are made at the segment level, considering any required adjustments for differences in underwriting standards, portfolio mix, and other relevant data shifts over time.
We regularly review our collection experience (including delinquencies and net charge-offs) in determining our allowance for credit losses. We also consider our historical loss experience to date based on actual defaulted loans and overall portfolio indicators including delinquent and non-accrual loans, trends in loan volume and lending terms, credit policies and other observable environmental factors, such as unemployment and interest rate changes.
The underlying assumptions, estimates and assessments we use to estimate the allowance for credit losses reflect management’s best estimate of model assumptions and forecasted conditions at that time. Changes in such estimates can significantly affect the allowance and provision for credit losses. It is possible and likely that we will experience credit losses that are different from our current estimates. Charge-offs are deducted from the allowance for credit losses when we judge the principal to be uncollectible, and subsequent recoveries are added to the allowance, generally at the time cash is received on a charged-off account.
Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to increases in the ACL on loans; conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans.
The expected credit losses for unfunded commitments are measured over the contractual period of the Company’s exposure to credit risk. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, for the risk of loss, and current conditions and expectations. Management periodically reviews and updates its assumptions for estimated funding rates based on historical rates, and factors such as portfolio growth, changes to organizational structure, economic conditions, borrowing habits, or any other factor which could impact the likelihood that funding will occur. The Company does not reserve for unfunded commitments which are unconditionally cancellable.
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, the State of Connecticut, the State of Maine, 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 income tax expense. 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
See Note 3 – Recently Issued and Adopted Accounting Standards for additional details on recently issued and adopted accounting pronouncements and their expected impact on the Company’s financial statements.
Selected Financial Highlights
The selected consolidated financial highlights set forth below do 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 within this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
December 31,
(dollars in thousands, except per share data)
Operating Data
Interest Income
Interest Expense
Net Interest and Dividend Income
Provision for (Release of) Credit Losses
Noninterest Income
Noninterest Expense
Income Before Taxes
Income Taxes
Net Income (a GAAP Measure)
Operating Net Income (a non-GAAP measure)*
Average shares outstanding, basic
Average shares outstanding, diluted
Total shares outstanding
Basic Earnings Per Share
Diluted Earnings Per Share
Operating Diluted Earnings Per Share (a non-GAAP measure)*
Dividends Declared Per Share
Dividend payout ratio (1)
Financial Condition Data
Total Assets
Total Deposits
Total Loans
Shareholders' Equity
Book Value Per Share
Tangible Book Value Per Share (a non-GAAP measure)*
Performance Ratios
Return on Average Assets
Operating Return on Average Assets (a non-GAAP measure)*
Return on Average Shareholders' equity
Operating Return on Tangible Common Equity (a non-GAAP measure)*
Total Shareholders’ Equity to Total Assets
Interest rate spread (2)
Net Interest Margin, taxable equivalent (3)
Efficiency ratio *
Operating Efficiency Ratio (a non-GAAP measure)*
Wealth Management Assets
Market Value of Assets Under Management & Administration
Asset Quality
Non-Performing Loans
Non-Performing Loans/Total Loans
Net Loan (Charge-Offs) Recoveries
Allowance/Total Loans
Capital Ratios (4) :
Total capital
Tier 1 capital
Common Equity Tier 1
Tier 1 leverage capital
Other Data:
Number of full-service offices
Full time equivalent employees
* See “GAAP to Non-GAAP Reconciliations” section below
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.
Capital ratios are for Cambridge Bancorp.
Results of Operations
Results of Operations for the years ended December 31, 2023 and 2022
General . Net income decreased by $18.8 million, or 35.5%, to $34.1 million for the year ended December 31, 2023, from $52.9 million for the year ended December 31, 2022, primarily due to a $19.4 million decrease in net interest and dividend income after provision for credit losses, a $4.8 million increase in noninterest expenses, (including $7.2 million in merger expenses), partially offset by a $6.8 million decrease in income tax expense.
Diluted earnings per share were $4.34 for the year ended December 31, 2023, representing a 40.5% decrease over diluted earnings per share of $7.30 for the year ended December 31, 2022.
Net Interest and Dividend Income. Net interest and dividend income before the provision for credit losses decreased by $22.4 million, or 15.6%, to $120.8 million for the year ended December 31, 2023, as compared to $143.2 million for the year ended December 31, 2022. This decrease was primarily due to higher costs of funds, partially offset by an increase in average earning assets and higher yields on earning assets.
Interest on loans increased by $57.6 million, or 41.9%, as a result of higher yields combined with higher average loan balances.
Interest on investment securities decreased by $228,000, or 1.0%, primarily due to a decrease in the investment portfolio.
Interest on deposits increased by $70.4 million, or 482.0%, primarily due to an increase in the cost of deposits.
Interest on borrowings increased by $10.6 million, or 485.5%, primarily due to an increase in the cost and average balances of other borrowed funds during the year.
Average interest earning assets increased by $309.7 million, or 6.3%, to $5.25 billion for the year ended December 31, 2023 from $4.94 billion in 2022, primarily due to growth within the loan portfolio from the Northmark Merger, partially offset by a lower investment portfolio. The Company’s net interest margin, on a fully tax equivalent basis, decreased 62 basis points to 2.30% for the year ended December 31, 2023, as compared to 2.92% in 2022.
Average interest-bearing liabilities increased by $566.7 million, or 18.0%, to $3.71 billion for the year ended December 31, 2023 from $3.14 billion in 2022, primarily due to growth in average deposits from the Northmark Merger, inclusive of wholesale deposits, and an increase in average borrowed funds. The Company experienced an increase in average checking account balances of $337.3 million, an increase in average retail certificates of deposit of $476.6 million, and an increase in average borrowed funds of $168.8 million. They were partially offset by decreases in average savings deposit balances of $267.7 million and a decrease in average money market accounts of $148.3 million.
The average cost of funds increased to 1.86% for the year ended December 31, 2023, as compared to 0.34% for the year ended December 31, 2022.
Interest and Dividend Income. Total interest and dividend income increased by $58.5 million, or 36.6%, to $218.5 million for the year ended December 31, 2023, as compared to $160.0 million in 2022, primarily due to higher yielding assets coupled with growth within the loan portfolio.
Interest Expense. Interest expense increased by $81.0 million, or 482.5% to $97.7 million for the year ended December 31, 2023, as compared to $16.8 million in 2022, primarily driven by an increase in the cost of deposits and higher borrowing expense.
Provision for Credit Losses. The Company recorded a provision for credit losses of $904,000 for the year ended December 31, 2023, as compared to a provision for credit losses of $3.9 million for the year ended December 31, 2022, which included $2.2 million for the recognition of the CECL merger accounting impact as a result of the Northmark merger.
The Company recorded net loan charge-offs of $70,000 or 0.00% of total loans, for the year ended December 31, 2023, as compared to net recoveries of $53,000, or 0.00% of total loans for the year ended December 31, 2022.
The allowance for credit losses for loans was $38.9 million, or 0.97% of total loans outstanding at December 31, 2023, as compared to $37.8 million, or 0.93% of total loans outstanding at December 31, 2022.
Noninterest Income . Total noninterest income decreased by $1.3 million, or 3.0%, to $41.7 million for the year ended December 31, 2023, as compared to $43.0 million for the year ended December 31, 2022. This change was primarily the result of lower bank owned life insurance (“BOLI”) income, lower other income, and lower loan related derivative income, partially offset by higher deposit account fees. Noninterest income was 25.7% and 23.1% of total revenue for the year ended December 31, 2023 and 2022, respectively.
BOLI income decreased by $1.0 million, or 57.0%, to $778,000 for the twelve months ended December 31, 2023, as compared to $1.8 million for the twelve months ended December 31, 2022, primarily due to a gain related to a death benefit claim and a policy surrender that occurred during the twelve months ended December 31, 2022, while no such benefit claims or policy surrenders occurred during the twelve months ended December 31, 2023.
Other income decreased by $448,000, or 15.6%, to $2.4 million for the twelve months ended December 31, 2023, as compared to $2.9 million for the twelve months ended December 31, 2022, primarily due to lower income associated with success fees of Innovation Banking loans recognized during the twelve months ended December 31, 2023 as compared to the twelve months ended December 31, 2022.
Loan related derivative income decreased by $226,000, or 36.2%, to $399,000 for the year ended December 31, 2023, as compared to $625,000 for the year ended December 31, 2022, primarily as a result of lower volume of loan related derivative transactions.
Deposit account fees increased by $432,000, or 14.8%, to $3.3 million for the year ended December 31, 2023, as compared to $2.9 million for the year ended December 31, 2022, primarily due to increased fee revenue from commercial deposit sweep products as a result of higher interest rates.
The categories of Wealth Management revenues are shown in the following table:
For the Year Ended December 31,
(dollars in thousands)
Wealth Management revenues:
Trust and investment advisory fees
Financial planning fees and other service fees
Total wealth management revenues
The following table presents the changes in wealth management assets under management:
For the Year Ended December 31,
(dollars in thousands)
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
Wealth AUM was comprised of approximately 58.0% equities, 28.0% fixed income, and 14.0% cash/other as of both December 31, 2023 and December 31, 2022.
Approximately 65.0% of Wealth AUM was invested in proprietary strategies, while 35.0% was invested in open architecture funds as of December 31, 2023, as compared to 68.0% proprietary strategies and 32.0% open architecture as of December 31, 2022.
The average Wealth AUM relationship size was $3.5 million as of December 31, 2023; as compared to $3.0 million as of December 31, 2022.
Full time equivalent Wealth Management employees as of December 31, 2023 consisted of 45 Sales/Service, 22 Portfolio Managers, and 13 Administrative/Support, as compared to 40 Sales/Service, 23 Portfolio Managers, and 14 Administrative/Support as of December 31, 2022.
Individual clients made up 77.0% of Wealth AUM as of December 31, 2023, as compared to 81.0% as of December 31, 2022.
Institutional clients made up 23.0% of Wealth AUM as of December 31, 2023, as compared to 19.0% as of December 31, 2022.
There were no significant changes to the average fee rates and fee structure during the years ended December 31, 2023 or 2022.
Noninterest Expense. Total noninterest expense increased by $4.8 million, or 4.4%, to $115.2 million for the year ended December 31, 2023, as compared to $110.4 million for the year ended December 31, 2022, primarily driven by an increase in non-operating expense and FDIC insurance expense, partially offset by lower professional fees, lower marketing expense, and lower salary and benefits expense.
Non-operating expenses increased by $4.1 million, or 134.7%, to $7.2 million for the twelve months ended December 31, 2023, from $3.1 million for the twelve months ended December 31, 2022, primarily due to merger expenses associated with the Eastern merger and Northmark Bank merger (“Northmark merger”).
FDIC insurance increased by $990,000, or 53.7%, to $2.8 million for the twelve months ended December 31, 2023, from $1.8 million for the twelve months ended December 31, 2022, primarily due to increase in insurance premium rates.
Professional fees decreased by $1.1 million , or 22.3%, to $3.7 million for the twelve months ended December 31, 2023, from $4.7 million for the twelve months ended December 31, 2022, primarily due to consulting fees associated with vendor contract negotiations expensed during 2022, while no such expenses occurred during the twelve months ended December 31, 2023.
Marketing expense decreased by $528,000, or 22.9%, to $1.8 million for the twelve months ended December 31, 2023, from $2.3 million for the twelve months ended December 31, 2022, primarily due to reduced marketing campaigns and promotions during the period.
Salaries and employee benefits decreased by $303,000, or 0.4%, to $69.8 million for the twelve months ended December 31, 2023, from $70.1 million for the twelve months ended December 31, 2022, due to lower performance-based compensation and savings from a reduction in head count during the year, partially offset by higher overall staffing levels associated with the Northmark merger and normal merit increases.
Income Tax Expense. The Company recorded a provision for income taxes of $12.3 million for the twelve months ended December 31, 2023, a decrease of $6.8 million, as compared to $19.1 million for the twelve months ended December 31, 2022. The effective tax rate was 26.5%, for both the twelve months ended December 31, 2023 and the twelve months ended December 31, 2022.
Results of Operations for the years ended December 31, 2022 and 2021
General . Net income decreased by $1.1 million, or 2.1%, to $52.9 million for the year ended December 31, 2022, from $54.0 million for the year ended December 31, 2021, primarily due to a $9.9 million increase in noninterest expenses including $1.9 million in merger expenses, and a $5.2 million increase in the provision for credit losses, partially offset by a $15.2 million increase in net interest and dividend income before the provision for credit losses.
Diluted earnings per share were $7.30 for the year ended December 31, 2022, representing a 5.1% decrease over diluted earnings per share of $7.69 for the year ended December 31, 2021.
Net Interest and Dividend Income. Net interest and dividend income before the provision for (release of) credit losses increased by $15.2 million, or 11.9%, to $143.2 million for the year ended December 31, 2022, as compared to $128.0 million for the year ended December 31, 2021. This increase was primarily due to an increase in average earning assets (both organic and as a result of the Northmark Merger) and higher asset yields, partially offset by a decrease in Paycheck Protection Program (“PPP”) loan income, lower loan accretion associated with merger accounting, and higher costs of funds.
Interest on loans increased by $16.2 million, or 13.4%, as a result of loan growth, partially offset by lower PPP loan income and lower loan accretion associated with merger accounting.
Interest on investment securities increased by $9.9 million, or 82.2%, primarily due to growth in the investment portfolio.
Interest on deposits increased by $9.6 million, or 193.5%, primarily due to an increase in the cost of deposits.
Interest on borrowings increased by $1.6 million, or 290.0%, primarily due to an increase in other borrowed funds during the year.
Average interest earning assets increased by $810.7 million, or 19.6%, to $4.94 billion for the year ended December 31, 2022 from $4.13 billion in 2021, primarily due to the Northmark Merger combined with organic growth within the loan and investment securities portfolios. The Company’s net interest margin, on a fully tax equivalent basis, decreased 20 basis points to 2.92% for the year ended December 31, 2022, as compared to 3.12% in 2021.
Average interest-bearing liabilities increased by $516.4 million, or 19.7%, to $3.14 billion for the year ended December 31, 2022 from $2.63 billion in 2021, primarily due to the Northmark Merger. The Company experienced an increase in average money market accounts of $400.8 million, an increase in average checking account balances of $77.2 million, an increase in average borrowed funds of $67.1 million, and an increase in retail certificates of deposit of $31.2 million, partially offset by a decrease in average savings deposit balances of $59.9 million. The average cost of funds increased to 0.34% for the year ended December 31, 2022, as compared to 0.13% for the year ended December 31, 2021.
Interest and Dividend Income. Total interest and dividend income increased by $26.5 million, or 19.8%, to $160.0 million for the year ended December 31, 2022, as compared to $133.5 million in 2021, primarily due to growth within the loans and investment securities portfolios, partially offset by lower PPP loan related income and lower loan accretion associated with merger accounting.
Interest Expense. Interest expense increased by $11.2 million, or 203.2% to $16.8 million for the year ended December 31, 2022, as compared to $5.5 million in 2021, primarily driven by an increase in the cost of deposits and higher borrowing expense.
Provision for Credit Losses. The Company recorded a provision for credit losses of $3.9 million for the year ended December 31, 2022, as compared to a release of credit losses of $1.3 million for the year ended December 31, 2021, which included $2.2 million for the recognition of the CECL merger accounting impact as a result of the Northmark merger, inclusive of unfunded commitments.
The Company recorded net recoveries of $53,000 or 0.00% of total loans, for the year ended December 31, 2022, as compared to net recoveries of $154,000, or 0.00% of total loans for the year ended December 31, 2021.
The allowance for credit losses for loans was $37.8 million, or 0.93% of total loans outstanding at December 31, 2022, as compared to $34.5 million, or 1.04% of total loans outstanding at December 31, 2021.
Noninterest Income . Inclusive of the Northmark Merger, total noninterest income decreased by $1.3 million, or 3.0%, to $43.0 million for the year ended December 31, 2022, as compared to $44.3 million the year ended December 31, 2021. This was primarily the result of lower wealth management revenue, lower loan related derivative income, and lower gains on loans sold. These items were partially offset by higher bank owned life insurance income, higher deposit account fees, and higher other income. Noninterest income was 23.1% and 25.7% of total revenue for the year ended December 31, 2022 and 2021, respectively.
Wealth Management revenue decreased by $2.0 million, or 5.7%, to $33.0 million for the year ended December 31, 2022, as compared to $35.0 million for the year ended December 31, 2021, primarily due to decline in both the bond and equity markets. Wealth Management Assets Under Management and Administration were $4.1 billion at December 31, 2022, as compared to $4.9 billion at December 31, 2021.
Loan related derivative income decreased by $1.5 million, or 70.6%, to $625,000 for the year ended December 31, 2022, as compared to $2.1 million for the year ended December 31, 2021, primarily as a result of lower floating rate loan volume.
Gain on loans sold decreased by $734,000, or 88.2%, to $98,000 for the twelve months ended December 31, 2022, as compared to $832,000 for the twelve months ended December 31, 2021, primarily due to lower refinance activity and the corresponding lower sales of residential mortgages.
Bank owned life insurance (“BOLI”) income increased by $1.0 million, or 125.7%, to $1.8 million for the twelve months ended December 31, 2022, as compared to $801,000 for the twelve months ended December 31, 2021, primarily a result of a $1.2 million gain related to a death benefit claim and policy surrender.
Deposit account fees increased by $974,000, or 50.2%, to $2.9 million for the year ended December 31, 2022, as compared to $1.9 million for the year ended December 31, 2021, primarily due to increased fee revenue from commercial deposit sweep products resulting from higher interest rates.
Other income increased by $844,000, or 41.7%, to $2.9 million for the twelve months ended December 31, 2022, as compared to $2.0 million for the twelve months ended December 31, 2021, primarily due to equity warrant revenue and success fees associated with Innovation Banking loans, in addition to gains recognized on a community development fund investment.
The categories of Wealth Management revenues are shown in the following table:
For the Year Ended December 31,
(dollars in thousands)
Wealth Management revenues:
Trust and investment advisory fees
Financial planning fees and other service fees
Total wealth management revenues
The following table presents the changes in wealth management assets under management:
For the Year Ended December 31,
(dollars in thousands)
Wealth management assets under management
Balance at the beginning of the period
Acquired wealth management assets
Gross client asset inflows
Gross client asset outflows
Net market impact
Balance at the end of the period
Weighted average management fee
There were no significant changes to the average fee rates and fee structure during the years ended December 31, 2022 or 2021.
Noninterest Expense. Total noninterest expense, inclusive of the Northmark Merger, increased by $9.9 million, or 9.9%, to $110.4 million for the year ended December 31, 2022, as compared to $100.5 million for the year ended December 31, 2021, primarily driven by increases in salaries and employee benefits expense, data processing expense, nonoperating expenses, and FDIC expense, partially offset by decreases in professional services and marketing expense.
Salaries and employee benefits increased by $5.0 million, or 7.6%, to $70.1 million for the twelve months ended December 31, 2022, from $65.1 million for the twelve months ended December 31, 2021, primarily due to increased staffing related to the Northmark Merger, normal merit increases, additions to support business initiatives, and increases in employee benefit costs.
Data processing fees increased by $1.9 million, or 21.3%, to $10.7 million for the twelve months ended December 31, 2022, from $8.8 million for the twelve months ended December 31, 2021, primarily as a result of the full year impact of a new wealth management system and the partial year impact of higher data processing fees associated the Northmark merger.
Non-operating expenses increased by $1.9 million, or 173.6%, to $3.1 million for the twelve months ended December 31, 2022, from $1.1 million for the twelve months ended December 31, 2021, primarily due to merger expenses and contractual termination costs.
FDIC insurance increased by $527,000, or 40.0%, to $1.8 million for the twelve months ended December 31, 2022, from $1.3 million for the twelve months ended December 31, 2021, primarily due to balance sheet growth.
Professional services decreased by $663,000, or 12.3%, to $4.7 million for the twelve months ended December 31, 2022, from $5.4 million for the twelve months ended December 31, 2021, primarily due to lower recruiting and temporary help expenses as well as lower consulting fees.
Marketing expense decreased by $235,000, or 9.3%, to $2.3 million for the twelve months ended December 31, 2022, from $2.5 million for the twelve months ended December 31, 2021.
Income Tax Expense. The Company recorded a provision for income taxes of $19.1 million for both the years ended December 31, 2022, and December 31, 2021. The effective tax rate was 26.5%, for the year ended December 31, 2022, as compared to 26.1% for the year ended December 31, 2021. The increase was primarily due to the tax effects of a BOLI policy surrender and death benefit claim during the second fiscal quarter of 2022 and the impact of non-deductible merger related expenses.
Changes in Financial Condition
Total Assets. Total assets decreased by $142.1 million, or 2.6%, from $5.56 billion at December 31, 2022, and were $5.42 billion as of December 31, 2023.
Cash and Cash Equivalents. Cash and cash equivalents increased by $2.3 million, or 7.4%, from $30.7 million at December 31, 2022 to $33.0 million at December 31, 2023.
Investment Securities. The Company’s total investment securities portfolio decreased by $108.2 million, or 9.0%, from $1.21 billion at December 31, 2022 to $1.10 billion at December 31, 2023, primarily due to investment paydowns during the period.
Loans. Total loans decreased by $41.3 million, or 1.0%, to $4.02 billion at December 31, 2023, from $4.06 billion at December 31, 2022.
Residential real estate loans decreased by $22.6 million, or 1.4%, to $1.63 billion at December 31, 2023, from $1.65 billion at December 31, 2022.
Commercial real estate loans increased by $17.1 million, or 0.9%, to $1.93 billion at December 31, 2023, from $1.91 billion at December 31, 2022.
Home equity loans decreased by $15.7 million, or 14.1%, to $95.6 million at December 31, 2023 from $111.4 million at December 31, 2022.
Commercial and industrial loans decreased by $6.9 million, or 2.0%, to $343.7 million at December 31, 2023, from $350.7 million at December 31, 2022.
Consumer loans decreased by $13.1 million, or 35.0%, to $24.4 million at December 31, 2023 from $37.6 million at December 31, 2022.
Bank-Owned Life Insurance. The Company invests in BOLI to help offset the costs of our employee benefit plan obligations. BOLI also generally provides noninterest income that is nontaxable. At December 31, 2023, our investment in BOLI increased by $781,000, or 2.3%, to $35.3 million, from $34.5 million at December 31, 2022, primarily due to the increases in the cash surrender value of the policies during the twelve months ended 2023.
Goodwill and Merger Related intangibles . Goodwill and merger related intangible assets totaled $71.0 million and $72.0 million at December 31, 2023 and December 31, 2022, respectively.
Other Assets . Other assets decreased by $1.9 million, or 1.8% to $103.4 million at December 31, 2023, from $105.3 million at December 31, 2022, primarily due to the change in fair value of loan level derivative assets.
Deposits. Total deposits, excluding wholesale deposits, decreased by $404.3 million, or 9.1%, to $4.03 billion at December 31, 2023, from $4.43 billion at December 31, 2022. Total deposits, inclusive of wholesale deposits, decreased by $494.2 million, or 10.3%, to $4.32 billion at December 31, 2023, as compared to $4.82 billion at December 31, 2023, primarily due to lower money market balances, lower savings account balance, and lower wholesale deposit balances.
Certificates of deposit totaled $674.4 million at December 31, 2023, an increase of $87.8 million, or 15.0%, from $586.6 million at December 31, 2022, primarily driven by higher retail certificates of deposit balances.
Total wholesale certificates of deposit, which are included within certificates of deposit, were $291.7 million at December 31, 2023 and $381.6 million at December 31, 2022. The Company migrated wholesale funding toward FHLB Boston borrowings during the quarter of 2023.
The cost of total deposits for the year ended December 31, 2023 was 1.85%, as compared to 0.32% for the year ended December 31, 2022, an increase of 153 basis points. The cost of total deposits excluding wholesale deposits was 1.54% for the year ended December 31, 2023, as compared to 0.26% for the year ended December 31, 2022, an increase of 128 basis points. At December 31, 2023, the spot cost of non-wholesale deposits was 1.88%, an increase of 108 basis points as compared to 0.80% at December 31, 2022.
Borrowings. At December 31, 2023, borrowings consisted primarily of advances from the FHLB of Boston. At December 31, 2022, borrowings consisted primarily of advances from the FHLB of Boston and reverse repurchase agreements. Total borrowings increased by $346.9 million, or 329.8%, to $452.2 million at December 31, 2023, from $105.2 million at December 31, 2022, as the Company migrated wholesale funding toward FHLB Boston borrowings.
Shareholders’ Equity. Total shareholders’ equity increased $17.0 million, or 3.3%, to $534.6 million at December 31, 2023, from $517.6 million at December 31, 2022, primarily due to net income of $34.1 million, a decrease in unrealized losses on the available for sale investment portfolio of $3.1 million, partially offset by dividend payments of $21.0 million.
The Company’s book value per share increased by $1.76 to $68.14 at December 31, 2023, as compared to $66.38 at December 31, 2022. The Company’s ratio of tangible common equity to tangible assets increased 55 basis points to 8.67% at December 31, 2023, as compared to 8.12% at December 31, 2022. Tangible book value per share grew by $1.93, or 3.4%, to $59.08 as of December 31, 2023, as compared to $57.15 as of December 31, 2022.
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 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.
The following table summarizes the calculation of the Company’s operating net income and operating diluted earnings per share:
For the Year Ended December 31,
Operating Net Income / Operating Diluted Earnings Per Share
(dollars in thousands, except share data)
Net Income (a GAAP measure)
Less: Death benefits on bank owned life insurance ("BOLI") and policy surrender
Add: Mergers and contractual termination expenses
Add: Provision for credit losses for acquired loans
Add: (Gain) loss on disposition of investment securities
Less: Tax effect of BOLI surrender
Less: Tax effect of non-operating expenses (1)
Operating Net Income (a non-GAAP measure)
Less: Dividends and Undistributed Earnings Allocated
to Participating Securities (a non-GAAP measure)
Operating Net Income Applicable to Common
Shareholders (a non-GAAP measure)
Weighted Average Diluted Shares
Operating Diluted Earnings Per Share
(a non-GAAP measure)
(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.
The following tables summarize the calculation of the Company’s tangible common equity ratio and tangible book value per share for the periods indicated:
December 31, 2023
December 31, 2022
December 31, 2021
December 31, 2020
December 31, 2019
(in thousands, except share data)
Tangible Common Equity:
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)
Tangible Common Equity Ratio (a non-GAAP measure)
Tangible Book Value Per Share:
Tangible Common Equity (a non-GAAP measure)
Common shares outstanding
Tangible Book Value Per Share (a non-GAAP measure)
The following tables summarize the calculation of the Company’s efficiency and operating ratios for the periods indicated:
For the Year Ended December 31,
(dollars in thousands)
Efficiency Ratio: (1)
Noninterest expense
Net interest and dividend income
Total noninterest income
Total revenue
Efficiency Ratio
Operating Efficiency Ratio: (2)
Noninterest expense
Mergers and contractual termination expenses (Pretax)
Operating expense (a non-GAAP measure)
Total revenue
Add:(gain) loss on disposition of investment securities
Death benefit on bank owned life insurance ( “ BOLI ” ) and policy surrender (Pretax)
Operating revenue (a non-GAAP measure)
Operating Efficiency Ratio (a non-GAAP measure)
For the Year Ended December 31,
(dollars in thousands)
Operating Return on Tangible Common Equity: (3)
Operating Net Income (a non-GAAP measure)
Average common equity
Average goodwill and merger related intangibles
Average tangible common equity (a non-GAAP measure)
Operating Return on Tangible Common Equity (a non-GAAP measure)
Operating Return on Average Assets: (4)
Operating Net Income (a non-GAAP measure)
Average assets
Operating Return on Average Assets (a non-GAAP measure)
The efficiency ratio represents noninterest expense as a percentage of the sum of net interest and dividend income and noninterest income.
Operating efficiency ratio represents operating expense as a percentage of operating revenue.
Operating return on tangible common equity represents operating net income as a percentage of average tangible common equity.
Operating return on average assets represents operating net income as a percentage of average assets.
Investment Securities
The Company’s 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”) obligations, U.S. GSE mortgage-backed securities, and corporate debt securities. These securities are carried at fair value, and unrealized gains and losses net of applicable income taxes are recognized as a separate component of shareholders’ equity.
The fair value of securities available for sale totaled $137.8 million and included gross unrealized gains of $4,000 and gross unrealized losses of $25.5 million at December 31, 2023. At December 31, 2022, the fair value of securities available for sale totaled $153.4 million and included gross unrealized gains of $7,000 and gross unrealized losses of $28.6 million.
Securities classified as held to maturity consist of certain U.S. GSE mortgage-backed securities, corporate debt securities, U.S. Treasury Notes, and state, county, and municipal securities. Securities held to maturity as of December 31, 2023 are carried at their amortized cost of $959.3 million. At December 31, 2022, the amortized cost of securities held to maturity totaled $1.05 billion.
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.
December 31,
December 31,
Amount
Percent
Amount
Percent
(dollars in thousands)
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. Treasury Notes
Mortgage-backed securities
Corporate debt securities
Municipal securities
Total securities held to maturity
Total
The following table sets 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.
December 31, 2023
Within One Year
After One, But
Within Five Years
After Five, But
Within Ten Years
After Ten Years
Total
Amortized Cost
Weighted
Average
Yield (1)
Amortized Cost
Weighted
Average
Yield (1)
Amortized Cost
Weighted
Average
Yield (1)
Amortized Cost
Weighted
Average
Yield (1)
Amortized Cost
Weighted
Average
Yield (1)
(dollars in thousands)
Available for sale
securities
U.S. GSE
obligations
Mortgage-backed
securities
Total available
for sale
securities
Held to maturity
securities
U.S. treasury Notes
Mortgage-backed
securities
Corporate debt
securities
Municipal
securities
Total held to
maturity
securities
Total
Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21% for 2023.
The Company did not record an allowance for credit losses on its investment securities as of December 31, 2023 or 2022. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary based on the composition of the portfolio at period end.
Loans
The Company’s lending activities are conducted principally in Eastern Massachusetts and Southern New Hampshire. The Company grants single- and multi-family residential loans, C&I loans, CRE loans, 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 Company’s residential loans is 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 source of repayment. For renewable energy loans, cash flow is generally dependent on energy output and is generated from the contracted sale of energy credits or wholesale energy sales as well as state mandated incentive programs. For PPP loans, the SBA generally guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount subject to program requirements. The Company’s 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 of the underlying real estate collateral typically being viewed as the primary source of repayment in the event of borrower . The Company’s construction loans are primarily made based on the borrower’s 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.
The following summary shows the composition of the loan portfolio at the dates indicated:
December 31, 2023
December 31, 2022
Total
Total
(dollars in thousands)
Residential mortgage
Mortgages - fixed rate
Mortgages - adjustable rate
Construction
Deferred costs, net of unearned fees
Total residential mortgages
Commercial mortgage
Mortgages - non-owner 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 and industrial
Commercial and industrial
PPP loans
Unearned fees, net of deferred costs
Total commercial and industrial
Consumer
Secured
Unsecured
Deferred costs, net of unearned fees
Total consumer
Total loans
Residential Mortgage . Residential real estate loans held in portfolio were to $1.63 billion at December 31, 2023, a decrease of $22.6 million, or 1.4%, from $1.65 billion at December 31, 2022 and consisted of one-to-four family residential mortgage loans, or for the construction thereof. The residential mortgage portfolio represented 40% of total loans both at December 31, 2023 and December 31, 2022, respectively.
The average loan balance outstanding in the residential portfolio was $526,000 and the largest individual residential mortgage loan outstanding was $5.5 million as of December 31, 2023. At December 31, 2023, 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 Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“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 adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which increased to $726,200 in 2023 from $647,200 in 2022, for one-unit properties. In addition, the Bank also offers loans above conforming lending limits typically referred to as “jumbo” loans and interest only 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 meets it CRA requirements. Purchases have historically been made to satisfy CRA requirements for lending to low- and moderate-income borrowers within the Bank’s CRA Assessment Area.
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 does it 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 during the life of the loan. The Company does 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 Bank’s 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 Bank’s asset/liability position, the current interest rate environment, and client preference.
Indemnification . In general, the Company does not sell loans with recourse, except to the extent that it arises from standard loan-sale contract provisions. These provisions cover violations of representations and warranties and, under certain circumstances, first payment default by borrowers. These indemnifications may include the repurchase of loans by the Company and are considered customary provisions in the secondary market for conforming mortgage loan sales. Repurchases and losses have been rare, and no provision is made for losses at the time of sale. There were no such repurchases for the year ended December 31, 2023.
The Company was servicing mortgage loans sold to others without recourse of approximately $173.9 million at December 31, 2023 and $191.9 million at December 31, 2022.
The table below presents residential real estate loan origination activity for the periods indicated:
For the Year Ended December 31,
(dollars in thousands)
Originations for retention in portfolio
Originations for sale to the secondary market
Total
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,
(dollars in thousands)
Loans sold with servicing rights retained
Loans sold with servicing rights released
Total
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 totaled $1.5 million and $1.7 million at December 31, 2023 and 2022, respectively.
Commercial Mortgage . CRE loans were $1.93 billion as of December 31, 2023, an increase of $17.1 million, or 0.9%, from $1.91 billion at December 31, 2022. The CRE loan portfolio represented 48% and 47% of total loans at December 31, 2023 and December 31, 2022, respectively. The average loan balance outstanding in this portfolio was $1.7 million and the largest individual CRE loan outstanding was $28.4 million as of December 31, 2023. At December 31, 2023, this commercial mortgage was performing in accordance with its original terms.
CRE loans are secured by a variety of property types inclusive of multi-family dwellings, retail facilities, office buildings, commercial mixed use, lodging, industrial and warehouse properties, and other specialized properties.
Generally, our CRE 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 typically 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 one-to-four family and multifamily properties.
Home Equity. The home equity portfolio totaled $95.6 million and $111.4 million at December 31, 2023 and 2022, respectively. The home equity portfolio represented 2% of total loans at December 31, 2023 and 3% at December 31, 2022. At December 31, 2023, the largest home equity line of credit was a $2.0 million line of credit and had an outstanding balance of $2.0 million at December 31, 2023. At December 31, 2023, this line of credit was performing in accordance with its original terms.
Home equity lines of credit are extended as both first and second mortgages on owner-occupied residential properties in the Bank’s 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 applicant’s 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 five and 20 years.
Commercial and Industrial (“C&I”) . The C&I portfolio totaled $343.7 million at December 31, 2023, a decrease of $6.9 million, or 2.0%, from $350.7 million at December 31, 2022. C&I loans represented 9% of total loans both at December 31, 2023 and 2022, respectively. The average loan balance outstanding in this portfolio was $395,000, and the largest individual commercial and industrial loan outstanding was $20.0 million as of December 31, 2023. At December 31, 2023, this loan was performing in accordance with its original terms.
The Company’s C&I loan clients represent various small- and middle-market established businesses involved in professional and financial services, accommodation and food services, utilities, health care, wholesale trade, manufacturing, distribution, retailing, and non-profits. Most clients are privately owned businesses 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, where regional economic strength or weakness impacts the relative risks in this loan category, in addition to renewable energy lending which is more specialized in nature. The Company has expanded its exposure within renewable energy lending but otherwise there are no significant concentrations in any one business sector, and loan risks are generally diversified among many borrowers.
At December 31, 2023, commercial solar loans totaled $114.4 million and the average loan balance outstanding in this portfolio was $2.0 million. The largest individual loan outstanding was $7.2 million, and this loan was performing in accordance with its original terms at December 31, 2023.
Consumer Loans. The consumer loan portfolio totaled $24.4 million at December 31, 2023, a decrease of $13.1 million, or 35.0%, from $37.6 million at December 31, 2022. Consumer loans represented 1% of the total loan portfolio at both December 31, 2023 and December 31, 2022. The average loan balance outstanding in this portfolio was $8,000 and the largest individual consumer loan outstanding was $2.0 million as of December 31, 2023. At December 31, 2023, this loan was performing in accordance with its original terms.
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.
Loan Portfolio Maturities. 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, 2023. 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.
December 31, 2023
One Year
or Less
One to
Five Years
After Five Years through Fifteen Years
After Fifteen Years
Total
(dollars in thousands)
Residential mortgage
Commercial mortgage
Home equity
Commercial and industrial
Consumer
Total
Loan Portfolio by Interest Rate Type. The following table summarizes the dollar amount of loans maturing over one year in our portfolio based on whether the loan has a fixed, adjustable, or floating rate of interest at December 31, 2023. Floating rate loans are tied to a market index while adjustable-rate loans are adjusted based on the contractual terms of the loan .
December 31, 2023
Fixed
Adjustable
Floating
Total
(dollars in thousands)
Residential mortgage
Commercial mortgage
Home equity
Commercial and industrial
Consumer
Total
Nonperforming Loans, MODIFICATION, and TROUBLED DEBT RESTRUCTURINGS (“TDR s” )
The composition of nonperforming loans is as follows:
December 31,
December 31,
(dollars in thousands)
Non-performing loans
Loans past due > 90 days, but still accruing
Total non-performing loans
Non-performing loans as a percentage of gross loans
Non-performing loans as a percentage of total assets
Total non-performing loans increased by $10.0 million at December 31, 2023 as compared to December 31, 2022, primarily due to an owner occupied commercial real estate loan placed on non-accrual during the fourth quarter of 2023.
The Company continues to closely monitor the portfolio of non-performing 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, 2023 and December 31, 2022, although such values may fluctuate with changes in the economy and the real estate market. In addition to the monitoring and review of loan performance internally, the Company has contracted with an independent organization to review the Company’s commercial and CRE loan portfolios. This independent review was performed in each of the past five years.
Non-accrual Loans . Loans are typically placed on non-accrual 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, or if payment in full of principal or interest is not expected. The Company monitors closely the performance of its loan portfolio. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by management.
Modifications and Restructurings. The Company adopted ASU 2022-02, which eliminates the recognition and measurement of a troubled debt restructuring (“TDR”). Due to the removal of the TDR designation, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. Loan modifications to borrowers experiencing financial difficulty that result in a change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Modification of a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection.
Modified loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on non-accrual status at the time of the modification generally remain on non-accrual status for approximately six months or longer before management considers such loans for return to accruing status. Accruing modified loans are placed into non-accrual status if and when the borrower fails to comply with the modification terms and management deems it unlikely that the borrower will return to a status of compliance in the near term.
During the year ended December 31, 2023, the Company made no loan modifications or restructurings due to borrower financial difficulty.
Allowance for CREDIT Losses
The following table summarizes the ratios related to the Company’s allowance for credit losses and certain asset quality indicators for the years indicated:
For the Year Ended December 31,
(dollars in thousands)
Period-end loans outstanding (net of unearned fees and deferred costs)
Average loans outstanding (net of unearned fees and deferred costs)
Loans on non-accrual
Allowance for credit losses balance at end of period
Net (charge-offs) recoveries to average loans outstanding- Total
Non-accrual loans to loans outstanding at year end
Ratio of allowance for credit losses on loans to loans on non-accrual
Ratio of allowance for credit losses to loans outstanding
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. 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 credit losses is adequate.
The following table presents the ratio of net charge-offs to average loans outstanding within each loan category:
For the Year Ended December 31,
Average Balance
Net (Charge-offs) Recoveries
Net (Charge-offs) Recoveries to Total Average Loans
Average Balance
Net (Charge-offs) Recoveries
Net (Charge-offs) Recoveries to Total Average Loans
Average Balance
Net (Charge-offs) Recoveries
Net (Charge-offs) Recoveries to Total Average Loans
(dollars in thousands)
Residential mortgages
Commercial mortgages
Home equity
Commercial and industrial
Consumer
Total
The following table presents the allocation of the allowance for credit losses for loans by loan category:
December 31, 2023
December 31, 2022
Allowance Amount
% of Allowance
% of Total Loans
Allowance Amount
% of Allowance
% of Total Loans
(dollars in thousands)
Residential mortgages
Commercial mortgages
Home equity
Commercial and industrial
Consumer
Total Allowance
See additional discussion regarding the allowance for credit losses in Item 7 under the caption “Critical Accounting Estimates” and in Note 7 to the Audited Consolidated Financial Statements.
Sources of Funds
General. Deposits traditionally have been the Company's primary source of funds for its investment and lending activities. The Company can also borrow from the FHLB of Boston and the Federal Reserve Bank of Boston (“FRB of Boston”), and can utilize repurchase agreements and brokered deposits to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes, and to manage our cost of funds. The Company's additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities, fee income, and proceeds from the sales of loans and securities.
Deposits . The Company accepts deposits primarily from clients in the communities in which its branches and offices are located, as well as from small- and medium-sized businesses and other clients throughout its lending area. The Company relies on its competitive pricing and products, convenient locations, and client service to attract and retain deposits. The Company offers 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 the Company's deposit growth goals. The Company may also access the wholesale deposit market for funding.
The following table sets forth the Company’s deposits for the periods indicated:
December 31, 2023
December 31, 2022
Amount
Percent
Amount
Percent
(dollars in thousands)
Demand deposits (non-interest bearing)
Interest-bearing checking
Money market
Savings
Retail certificates of deposit under $250,000
Retail certificates of deposit of $250,000 or greater
Wholesale certificates of deposit
Total
At December 31, 2023, the Company had a total of $382.7 million in certificates of deposit, excluding brokered deposits, of which $363.9 million had remaining maturities of one year or less. The Company had total brokered deposits of $291.7 million and $381.6 million at December 31, 2023 and 2022, respectively. Brokered deposits at December 31, 2023 and December 31, 2022 had remaining maturities of less than six months.
The amount of deposits above the FDIC’s limit of $250,000 was $1.42 billion and $2.50 billion as of December 31, 2023 and 2022, respectively.
Retail certificates of deposit of $250,000 or greater by maturity are as follows:
December 31, 2023
December 31, 2022
(dollars in thousands)
Within three months
Over 3 months, within six months
Over six months, within twelve months
Over twelve months.
Total
Interest expense on retail certificates of deposit of $250,000 or greater was $3.9 million, $385,000, and $551,000 for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, respectively.
The following table sets forth certificates of deposit, excluding brokered deposits, classified by interest rate as of the dates indicated:
December 31, 2023
December 31, 2022
(dollars in thousands)
Interest Rate:
Total
Borrowings. Total borrowings were $452.2 million, an increase of $346.9 million as compared to $105.2 million at December 31, 2022. The Company’s borrowings at December 31, 2023 consisted of advances from the FHLB of Boston, and the FHLB of Boston and repurchase agreements at December 31, 2022. FHLB of Boston advances are collateralized by a blanket pledge agreement on the Company’s FHLB of Boston stock and residential mortgages held in the Bank’s portfolios. The Company pledged investment securities as collateral for its repurchase agreements at December 31, 2022.
The Company’s remaining borrowing capacity at the FHLB of Boston at December 31, 2023 was approximately $522.4 million. In addition, the Company has a $10.0 million line of credit with the FHLB of Boston and a $10.0 million line of credit with a correspondent bank.
In March 2023, the Federal Reserve Board announced the creation of a new Bank Term Funding Program (“BTFP”). The BTFP offers loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par.
The Company had no borrowings outstanding with the FRB of Boston at December 31, 2023 or 2022. The Company’s remaining borrowing capacity at the FRB of Boston at December 31, 2023 was approximately $1.8 billion, inclusive of approximately $192.7 million in estimated borrowing capacity through the FRB Term Funding program, which is ending in March 2024, if the Company were to pledge assets under the BTFP .
The Company periodically enters into repurchase agreements with its larger deposit and commercial clients as part of its cash management services which are typically overnight borrowings. There were no repurchase agreements with clients at December 31, 2023. Repurchase agreements with clients totaled $5.0 million at December 31, 2022.
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 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 Company’s daily average assets, liabilities and shareholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the periods indicated:
Year Ended
December 31, 2023
December 31, 2022
December 31, 2021
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)
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 credit 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
Non-interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities & shareholders’ equity
Net interest income on a fully taxable equivalent
basis
Less taxable equivalent adjustment
Net interest income
Net interest spread (5)
Net interest margin (6)
Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for 2023, 2022, and 2021.
Non-accrual loans are included in average amounts outstanding.
Average balances of securities available for sale calculated utilizing amortized cost.
FHLB stock balance is excluded from interest-earning assets and dividend income is excluded from interest income.
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets, inclusive of PPP loans originated during 2022 and 2021, 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, inclusive of PPP loans outstanding during 2023 and 2022.
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 Company’s 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.
Year Ended December 31, 2023
Year Ended December 31, 2022
Compared with
Compared with
Year Ended December 31, 2022
Year Ended December 31, 2021
Increase/(Decrease)
Due to Change in
Increase/(Decrease)
Due to Change in
Volume
Rate
Total
Volume
Rate
Total
(dollars in thousands)
(dollars in thousands)
Interest income
Loans
Taxable
Tax-exempt
Securities available for sale
Taxable
Securities held to maturity
Taxable
Tax-exempt
Cash and cash equivalents
Total interest income
Interest expense
Deposits
Checking accounts
Savings accounts
Money market accounts
Certificates of deposit
Total interest-bearing deposits
Other borrowed funds
Total interest expense
Change in net interest income
Excluding the impact of merger-related loan accretion, the adjusted net interest margin for the year ended December 31, 2023, was 2.25%, representing a 62 basis points decrease over the adjusted net interest margin for the year ended December 31, 2022 of 2.87%.
Year Ended
December 31, 2023
Average
Balance
Interest
Income/
Expenses
Rate
Earned/
Paid
(dollars in thousands)
Total interest-earning assets (GAAP)
Net interest income on a fully taxable equivalent basis (GAAP)
Net interest margin on a fully taxable equivalent basis (GAAP)
Less: Accretion of loan fair value adjustments (GAAP)
Adjusted net interest margin on a fully taxable equivalent basis (non-GAAP)
Excluding the impact of merger-related loan accretion, the adjusted net interest margin for the year ended December 31, 2022, was 2.87%, representing a 6 basis points decrease over the adjusted net interest margin for the year ended December 31, 2021 of 2.93%.
Year Ended
December 31, 2022
Average
Balance
Interest
Income/
Expenses
Rate
Earned/
Paid
(dollars in thousands)
Total interest-earning assets (GAAP)
Net interest income on a fully taxable equivalent basis (GAAP)
Net interest margin on a fully taxable equivalent basis (GAAP)
Less: Accretion of loan fair value adjustments (GAAP)
Adjusted net interest margin on a fully taxable equivalent basis (non-GAAP)
Market Risk and Asset Liability Management
Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its investment, borrowing, lending and deposit gathering activities, and within the Company’s wealth management operations. To that end, management actively monitors and manages its interest rate risk exposure.
The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s 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 Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s 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.
The Company’s interest rate risk measurement philosophy focuses on maintaining an appropriate balance between the theoretical and the practical; especially given that the primary objective of the Company’s overall asset/liability management process is to assess the level of interest rate risk in the Company’s balance sheet.
Therefore, the Company models a set of interest rate scenarios capturing the financial effects of a range of plausible rate scenarios; the collective impact of which is designed to enable the Company to understand the nature and extent of its sensitivity to interest rate changes. Doing so necessitates an assessment of rate changes over varying time horizons and of varying/sufficient degrees such that the impact of embedded options within the balance sheet are sufficiently examined. Plausible rate scenarios are also intended to capture the notion of “rational expectations” as it relates to how the impact of rate changes “are likely” to flow through the Company’s actual earnings.
The Company has designed its interest rate risk measurement activities to include the following core elements:
interest rate ramps and shocks
parallel and non-parallel yield curve shifts
a set of “benchmark” rate scenarios
a set of alternative rate scenarios, the nature of which change based upon prevailing market conditions
The Company’s primary tools in managing Interest Rate Risk (“IRR”) are income simulation models. The income simulation models are utilized to quantify the potential impact of changing interest rates on earnings and to identify expected earnings trends given longer-term rate cycles. Standard gap reports are also utilized to provide supporting detailed information.
The Company also recognizes that a sustained environment of higher/lower interest rates will affect the underlying value of the Company’s assets, liabilities and off-balance sheet instruments since the present value of their future cash flows (and the cash flows themselves) change when interest rates change. In order to monitor the long-term structural and economic position of the balance sheet, the Asset/Liability Committee ( the “ALCO” or the “Committee”) reviews the Economic Value of Equity (“EVE”) measure on a quarterly basis.
IRR considerations include but are not limited to:
timing differences in the maturity/repricing of the Company’s assets, liabilities, and off-sheet balance sheet contracts (mismatch risk);
the effect of embedded options, such as loan prepayments, interest rate caps, and deposit/withdrawals (option risk);
unexpected shifts of the yield curve that affect both the slope and shape of the yield curve (yield curve risk); and
differences in the behavior of lending and funding rates (basis risk).
The Company has established limits for both the Company’s IRR position and EVE position as described below which are designed to monitor against both gradual and rapid changes in interest rates due to known and unknown or exogenous factors.
The Company has established the following limits for IRR:
Projected net interest income in months one through twelve will not decline by more than 10% for any scenario tested.
Projected net interest income in months 13 through 24 will not decline by more than 20% for any scenario tested.
Projected net income over the twelve month period immediately following the testing date will not decline by more than 25% given a gradual shift (i.e., over a twelve month period) in interest rates of up to -200 to +200 basis points and assuming no balance sheet growth.
The Company has established the following limits for changes to EVE:
Interest Rate Shock
(in basis points)
Maximum Sensitivity
EVE Ratio
A violation of the Company’s Investment & Asset Liability policy will only occur when both the Maximum Sensitivity threshold and the Minimum EVE Ratio are breached at the same time.
The Company evaluates its IRR and EVE limits on a periodic basis (not less frequently than annually), including in response to increases in the federal funds rate and other economic developments, and, as a result of that evaluation, will, as appropriate, modify the applicable limit. The ALCO then approves any modifications of the IRR or EVE limits.
As part of its quarterly report to the Company’s Risk Committee, the ALCO reviews the Company’s IRR position relative to the current limits noted above. All IRR exceptions are discussed and documented by the Risk Committee in its minutes and are available for review at the Board of Directors’ (the “Board”) next subsequent meeting. If any of the current limits are exceeded for more than two consecutive quarterly periods, the ALCO will discuss with the Risk Committee its plans to bring the Company back within the applicable limits, or, if no action is recommended, the ALCO will discuss why it believes no action is appropriate. In order for the Company to continue to operate outside the limits for more than two consecutive quarterly periods, approval of the Risk Committee is required. For the periods ended December 31, 2023 and December 31, 2022, the ALCO did not approve any risk profiles that do not conform to management and Board risk tolerances, including the IRR and EVE limits.
The Company believes its existing IRR and EVE limits, policies and controls are adequate at this time.
Use of interest rate derivatives. The Company utilizes derivative financial instruments with the intent of reducing economic risk, in particular interest rate risk, both in an up interest rate environment and in a down interest rate environment. The below interest rate risk simulations and EVE model outputs reflect the use of derivatives.
The Company currently uses interest rate floor derivatives as part of its interest rate risk management strategy. Interest rate floor derivatives designated as cash flow hedges involve the receipt by the Company of variable-rate amounts from the derivative counterparty if interest rates fall below the strike rate on the instrument in exchange for payment by the Company of an upfront premium. This derivative financial instrument is used to hedge the variable cash flows associated with the Company’s variable-rate assets and helps protect in a down rate environment.
Additionally, the Company uses interest rate swap derivatives to manage its exposure to changes in interest rates. The Company is exposed to changes in the fair value of certain pools of fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swap derivatives to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. The Company’s interest rate swaps designated as fair value hedges involve the payment by the Company of fixed-rate amounts to the derivative counterparty in exchange for the Company receiving variable-rate payments over the life of the instrument without the exchange of the underlying notional amount. These derivative instruments help protect in an up rate environment.
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. Responsibility for the management of the Company’s interest rate sensitivity position falls under the authority of the Company's Board which, in turn, has assigned authority for its formulation, revision and administration to the Risk Committee of the Board who reviews, approves and reports on information provided by the ALCO. 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 FRB of Boston, and certificates of deposit from institutional brokers.
The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “instantaneous shock,” in the yield curve and subjective adjustments in deposit pricing might have on the Company’s projected net interest income over the next 12 and 24 months.
As of December 31, 2023:
Year 1
Year 2
Change in Interest
Rates (in Basis Points)
Percentage Change
in Net Interest
Income
Percentage Change
in Net Interest
Income
Parallel rate shocks
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 Company’s projected net interest income over the next 12 and 24 months.
As of December 31, 2023:
Year 1
Year 2
Change in Interest
Rates (in Basis Points)
Percentage Change
in Net Interest
Income
Percentage Change
in Net Interest
Income
Gradual rate shifts
These simulations assume that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 and 24 months. The changes to net interest income shown above are in compliance with the Company’s policy guidelines.
These estimates of changes in the Company’s net interest income require us to make certain assumptions including loan- and mortgage-related investment prepayment speeds, reinvestment rates, deposit cost, deposit repricing, deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, the Company cannot precisely predict the impact of changes in interest rates on net interest income. Although the analysis provides an indication of the Company's 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 and will differ from actual results.
Economic Value of Equity Analysis. The Company also analyzes the sensitivity of the Bank’s 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 Bank’s assets and estimated changes in the present value of the Bank’s liabilities assuming various changes in current interest rates.
The Bank’s economic value of equity analysis as of December 31, 2023, estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 23.6% decrease in the economic value of equity for the next 12 months, resulting in an economic value of equity ratio of 8.0%. This shock scenario assumes an instantaneous increase in deposit and wholesale funding rates at December 31, 2023 levels with no benefit assumed of asset repricing into a higher rate environment. At the same date, the analysis estimated that, in the event of an instantaneous 200 basis point decrease in interest rates, the Bank would experience a 18.7% increase in the economic value of equity, resulting in an economic value of equity ratio of 11.0%. This shock scenario assumes an instantaneous decrease in deposit and wholesale funding rates at December 31, 2023 levels, while assets are valued in a lower rate environment. The falling rate shocks for the economic value of equity analysis result in improved valuations as the cost to replace the Bank’s core deposits is reduced but is more than offset by the increased value of the bank’s assets.
The estimates of changes in the economic value of the Company's equity require us to make certain assumptions including loan- and mortgage-related investment prepayment speeds, reinvestment rates, deposit cost, deposit repricing, deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, the Company cannot precisely predict the impact of changes in interest rates on the economic value of its equity. Although the economic value of equity analysis provides an indication of the Company's 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 the Company's equity and will differ from actual results.
LIQUIDITY AND CAPITAL RESOURCES
Impact of Inflation and Changing Prices. The Company’s 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, including the elevated inflation during the last two years, is reflected in the Company's increased cost of operations. Unlike industrial companies, the Company's assets and liabilities are primarily monetary in nature. As a result, generally speaking, changes in market interest rates have a greater impact on performance than the effects of inflation.
Liquidity . Liquidity is defined as the Company’s 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 and contractual obligations of a short-term nature. The Company’s 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.
The Company’s 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 Bank’s 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 FRB of Boston, entering into repurchase agreements, and purchasing wholesale certificates of deposit as its secondary sources. At December 31, 2023, the Company had access to funds totaling $2.55 billion, inclusive of approximately $192.7 million estimated availability as part of the FRB Boston's Bank Term Funding Program.
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, the Risk Committee reviews the Company’s liquidity needs and reports any findings (if required) to the Board.
Capital Adequacy. Total shareholders’ equity was $534.6 million at December 31, 2023, as compared to $517.6 million at December 31, 2022. The Company’s equity increased primarily due to net income of $34.1 million, partially offset by dividend payments of $21.0 million. Based on past performance and current expectations, the Company believes that cash and cash equivalents, investments, and other sources of liquidity will satisfy its currently anticipated working capital needs, capital expenditures, and other liquidity requirements associated with its operations through the next 12 months and the reasonably foreseeable future.
The Company and the Bank are subject to various regulatory capital requirements. As of December 31, 2023, the Company and the Bank exceeded the regulatory minimum levels to be considered “well-capitalized.” See Note 13 - Shareholders’ equity to the Consolidated Financial Statements for additional discussion of regulatory capital requirements.
Contractual Obligations, Commitments, and Contingencies
As of December 31, 2023 and December 31, 2022, the Company had outstanding commitments to extend credit of $994.2 million and $1.07 billion, respectively, commitments to originate loans of $18.4 million and $25.4 million, and commitments associated with outstanding letters of credit of $34.1 million and $24.2 million, respectively. Since commitments associated with commitments to extend credit and outstanding letters of credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
As of December 31, 2023, the Company had cash and cash equivalents of $33.0 million, as compared with $30.7 million at December 31, 2022, an increase of $2.3 million, or 7.4%.
In the ordinary course of business, the Company has entered into numerous contractual obligations and commitments. The following table summarizes the Company’s contractual cash obligations by maturity at December 31, 2023:
Payments Due — By Period as of December 31, 2023
CONTRACTUAL OBLIGATIONS
Total
Less Than
One Year
One to
Three
Years
Three to
Five
Years
After Five
Years
(dollars in thousands)
FHLBB advances
Retirement benefit obligations
Lease obligations
Certificates of deposit
Total contractual cash
obligations
Further discussion regarding commitments and contingencies can be found in Note 16 – financial instruments with off-balance sheet risk and 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 clients. 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.
The Company’s 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 Qualitati ve 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.”
Item 8. Financial Statement s and Supplementary Data.
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED B ALANCE SHEETS
December 31, 2023
December 31, 2022
(dollars in thousands, except share information)
Assets
Cash and cash equivalents
Investment securities
Available for sale, at fair value (amortized cost $ 163,376 and $ 182,027 , respectively)
Held to maturity, at amortized cost (fair value $ 805,428 and $ 885,586 , respectively)
Total investment securities
Loans
Residential mortgage
Commercial mortgage
Home equity
Commercial and industrial
Consumer
Total loans
Less: allowance for credit losses on loans
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 non interest bearing
Interest-bearing checking
Money market
Savings
Certificates of deposit
Total deposits
Borrowings
Operating lease liabilities
Other liabilities
Total liabilities
Shareholders’ Equity
Common stock, par value $ 1.00 ; Authorized: 10,000,000 shares; Outstanding: 7,845,452 shares and 7,796,440 shares, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
Auditor
The accompanying notes are an integral part of these consolidated financial statements.
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STAT EMENTS OF INCOME
For the Year Ended December 31,
(dollars in thousands, except per share information)
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 (release of) credit losses
Net interest and dividend income after provision for credit losses
Noninterest income
Wealth management revenue
Deposit account fees
ATM/Debit card income
Bank owned life insurance income
Gain on loans sold, net
Loan related derivative income
Other income
Total noninterest income
Noninterest expense
Salaries and employee benefits
Occupancy and equipment
Data processing
Professional services
Marketing
FDIC insurance
Non-operating expenses
Other expenses
Total noninterest expense
Income before income taxes
Income tax expense
Net income
Share data:
Weighted average shares outstanding, basic
Weighted average shares outstanding, diluted
Basic earnings per share
Diluted earnings per share
The accompanying notes are an integral part of these consolidated financial statements.
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Year Ended December 31,
(dollars in thousands)
Net income
Other comprehensive income (loss), net of tax:
Available for sale securities
Unrealized holding gains (losses)
Interest rate swaps designated as cash flow hedges
Unrealized holding losses
Less: reclassification adjustment for gains (losses) realized in net income
Total unrealized losses on interest rate swaps
Defined benefit retirement plans
Change in retirement liabilities
Other comprehensive income (loss)
Comprehensive income
The accompanying notes are an integral part of these consolidated financial statements.
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHA NGES IN SHAREHOLDERS’ EQUITY
For the Year Ended December 31,
Common
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
(Loss)
Total
Shareholders’
Equity
(dollars in thousands, except per share data)
Balance at December 31, 2020
Net income
Other comprehensive loss
Share based compensation and other share-based activity
Dividends declared ($ 2.38 per share)
Balance at December 31, 2021
Balance at December 31, 2021
Net income
Other comprehensive loss
Share based compensation and other share-based activity
Dividends declared ($ 2.56 per share)
Common stock issued for Northmark merger
Balance at December 31, 2022
Balance at December 31, 2022
Net income
Other comprehensive income
Share based compensation and other share-based activity
Dividends declared ($ 2.68 per share)
Balance at December 31, 2023
The accompanying notes are an integral part of these consolidated financial statements.
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEM ENTS OF CASH FLOWS
For the Year Ended December 31,
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (release of) credit losses
Amortization (accretion) of deferred charges and fees, net
Depreciation (accretion), and amortization, net
Bank owned life insurance income
Share-based compensation and other share-based activity
Change in accrued interest receivable
Deferred income tax expense
Change in loans held for sale
Change in other assets, net
Change in other liabilities, net
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of loans
Proceeds from principal payments of loans
Purchase of loans
Proceeds from calls/maturities of securities available for sale
Purchase of securities available for sale
Proceeds from sales of securities
Proceeds from calls/maturities of securities held to maturity
Purchase of securities held to maturity
Death benefit on bank-owned life insurance
Redemption on bank-owned life insurance
(Purchase) redemption of FHLB of Boston stock
Purchase of banking premises and equipment
Net cash acquired in business combinations
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Change in demand, interest-bearing, money market and savings accounts
Change in certificates of deposit
Change in borrowings
Cash dividends paid on common stock
Net cash (used in) provided by financing activities
Net change 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 during the period for:
Interest
Income taxes
Significant non-cash transactions
Common Stock issued to shareholders due to merger
Fair value of assets acquired, net of cash acquired
Fair value of liabilities assumed
The accompanying notes are an integral part of these consolidated financial statements.
CAMBRIDGE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2023
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 Bank’s 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. The Company is a private bank offering a full range of private banking and wealth management services to its clients. The private banking business, the Company’s 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 22 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 Bank’s private banking offices in Massachusetts and New Hampshire, and its wealth management offices located in Boston, Massachusetts, Concord, Manchester, and Portsmouth, New Hampshire, and Southport, Connecticut . 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 state’s 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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).
Use of Estimates
The preparation of consolidated 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 consolidated financial statements. Actual results could differ from those estimates. The allowance for credit losses, the valuation of deferred tax assets, and the valuation of assets acquired and liabilities assumed in business combinations are particularly subject to change.
Reclassifications
Certain amounts in the prior year’s financial statements may have been reclassified to conform with the current year’s 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 Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt Securities. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost.
Debt 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.
Purchase premiums and discounts are recognized in interest income using the effective yield or straight-line method over the term of the securities, except for callable debt securities for which the purchase premiums are recognized through the earliest call date. Gains and losses on the sale of debt securities are recorded on the trade date and determined using the specific identification method.
Allowance for Credit Losses - Held to Maturity Securities
The Company measures expected credit losses on held to maturity debt securities on a collective basis by security type and risk rating where available. The reserve for each pool is calculated based on a Probability of Default/Loss Given Default (“PD/LGD”) basis taking into consideration the expected life of each security. Held to maturity securities which are issued by the United States of America (“U.S.”) or are guaranteed by U.S. federal agencies do not currently have an allowance for credit loss as the Company determined these securities are either backed by the full faith and credit of the U.S. government and/or there is an unconditional commitment to make interest payments and to return the principal investment in full to investors when a debt security reaches maturity. The Company will evaluate this position no less than annually, however, certain items which may cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s (“GSE”) ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s implicit guarantee on such securities. For securities which are not U.S. treasury or agency backed, risk ratings are generally sourced from Moody’s or Standard & ’s. The Company updates given , probability of , and recovery rates for each security as that information becomes available but no less than annually. The expected remaining life to maturity of each applicable security is updated quarterly. Any expected credit on held to maturity securities would be presented as an allowance rather than as a direct write-down through the consolidated statements of income if the Company does not intend to sell or believes that it is more likely than not that the Company will be required to sell the security.
Allowance for Credit Losses - Available for Sale Securities
The Company measures expected credit losses on available for sale securities based upon the gain or loss position of the security. For available for sale debt securities in an unrealized loss position, which the Company does not intend to sell, or it is not more likely than not that the Company will be required to sell the security before recovery of the Company’s amortized cost, the Company evaluates qualitative criteria to determine any expected loss. This includes among other items the financial health of, and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. The Company also evaluates quantitative criteria including determining whether there has been an adverse change in expected future cash flows of the security. If the Company does not expect to recover the entire amortized cost basis of the security, an allowance for credit losses would be recorded, with a related charge to earnings, limited by the amount of the fair value of the security less its amortized cost. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, the Company recognizes the entire difference between the security’s amortized cost basis and its fair value in earnings.
Loans
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 credit losses. 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. Loans may be removed from non-accrual when they become less than 90 days past due, they have maintained current payment status for a sustained period of time, and when concern no longer exists as to the collectability of principal or interest.
Allowance for Credit Losses - Loans
Losses on loan receivables are estimated and recognized upon origination of the loan, based on expected credit losses for the life of the loan balance as of the period end date. The Company’s methodology for calculating the allowance for credit losses (“ACL”) on loans consists of quantitative and qualitative components. The Company uses a discounted cash flow method incorporating probability of default and loss given default forecasted based on statistically derived economic variable loss drivers combined with qualitative factors, to estimate expected credit losses. This process includes estimates which involve modeling loss projections attributable to existing loan balances, considering historical experience, current conditions, and future expectations for homogeneous pools of loans over the reasonable and supportable forecast period. The reasonable and supportable forecast period is determined based upon the accuracy level of historical loss forecast estimates, the specific loan level models and methodology utilized, and considers material changes in growth and credit strategy, and business changes. For periods beyond a reasonable and supportable forecast interval, the Company reverts to historical information over a period for which comparable data is available. The historical information either experienced by the Company, or by a selection of peer banks when appropriate, is derived from a combination of and non- performance periods for which data is available. Similar to the reasonable and supportable forecast period, the Company reassesses the
reversion period at the segment level, considering any required adjustments for differences in underwriting standards, portfolio mix, and other relevant data shifts over time.
The Company generally segments its loan receivable population into homogeneous pools of loans. Consistent with the Company’s other assumptions, the Company regularly reviews segmentation to determine whether the homogeneous pools remain relevant as risk characteristics change. When a loan no longer meets the criteria of its initial pooling as a result of credit deterioration or other changes, the Company may evaluate the credit for estimated losses on an individual basis if the Company determines that the credit no longer retains the same risk characteristics. To the extent that there are a multitude of these loans with new similar risk characteristics, the Company would anticipate a change to the pooling methodology. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. For loans with real estate collateral, when management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
The qualitative component of the ACL considers (i) the uncertainty of forward-looking scenarios; (ii) certain portfolio characteristics, such as portfolio concentrations, real estate values, changes in the number and amount of non-accrual and past due loans; and (iii) model limitations; among other factors. Qualitative adjustments are considered when management believes expected credit losses are not representative of historical loss experience alone, and should be adjusted to reflect the current conditions and characteristics of the Company’s own portfolio. They are made at the segment level, considering any required adjustments for differences in underwriting standards, portfolio mix, and other relevant data shifts over time.
The Company evaluates the allowance for credit losses on loans quarterly. The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for credit losses. The Company also considers its historical loss experience to date based on actual defaulted loans and overall portfolio indicators including delinquent and non-accrual loans, trends in loan volume and lending terms, credit policies and other observable environmental factors such as unemployment and interest rate changes.
The underlying assumption estimates and assessments the Company uses to estimate the allowance for credit losses reflects the Company’s best estimate of model assumptions and forecasted conditions at that time. Changes in such estimates can significantly affect the allowance and provision for (release of) credit losses. It is possible and likely that the Company will experience credit losses that are different from the current estimates.
The provision for (release of) credit losses charged to income is based on management’s judgment of the amount necessary to maintain the allowance at a level to provide for expected credit losses for the life of the loan balances as of the evaluation date. When management believes that the collectability of a loan’s principal balance, or portions thereof, is unlikely, the principal amount is charged against the allowance for credit losses. Recoveries on loans that have been previously charged off are credited to the allowance for credit losses, generally at the time cash is received on a charged-off account. 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 (release of) credit losses in the period in which they become known.
Risk characteristics relevant to each portfolio segment are as follows:
Residential mortgage and home equity loans – The Company 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 Company 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 Company 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 non-owner-occupied commercial real estate (“CRE”), and repayment is primarily dependent on the cash flows of the property (if non-owner-occupied) or of the business (if owner-occupied).
Commercial and industrial loans (“C&I”) – 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. In addition, this segment includes certain loans issued under the U. S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). These loans are guaranteed and are not evaluated for an allowance for credit losses because the Company expects the guarantees will be effective, if necessary.
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 Company’s loans are concentrated in Eastern Massachusetts and Southern 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 credit losses requires management to exercise considerable judgment regarding the risk characteristics of the loan portfolio segments and the effect of relevant internal and external factors.
Allowance for Credit Losses - Unfunded Commitments
The expected credit losses for unfunded commitments are measured over the contractual period of the Company’s exposure to credit risk. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, for the risk of loss, and current conditions and expectations. Management periodically reviews and updates its assumptions for estimated funding rates based on historical rates, and factors such as portfolio growth, changes to organizational structure, economic conditions, borrowing habits, or any other factor which could impact the likelihood that funding will occur. The Company does not reserve for unfunded commitments which are unconditionally cancellable.
Acquired Loans
Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors, including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective as they may be susceptible to significant change.
Effective January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. The Company evaluates acquired loans for deterioration in credit quality based on, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit is added to the purchase price, there is no credit expense recognized upon acquisition of a PCD loan. Any difference between the principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans.
For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as provision for credit losses. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.
Loans Held for Sale
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 sold. Gains and losses on the actual sale of the residential loans are recorded in earnings as gains on loans sold, net 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 Company to be the beneficiary of such policies. Since the Company is the primary beneficiary of the insurance policies, increases in the cash value of the policies, as well as insurance proceeds received in excess of cash surrender value, are recorded in noninterest income, and are not subject to income taxes. Applicable regulations generally limit the Company’s investment in BOLI to 25 % of its Tier 1 capital plus its allowance for credit losses. The Company 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 and certain branch locations under noncancelable operating leases, 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 Company’s 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 consists of properties formerly pledged as collateral to loans, which have been acquired by the Company 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 credit losses. Expenses and subsequent adjustments to the fair value are treated as noninterest expense through other expenses.
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 (“CDI”) 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 annual ly. There was no goodwill impairment recognized during 2023, 2022, or 2021. Identifiable intangible assets that are subject to amortizatio n 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. The Company is amortizing the CDI on a straight-line basis over a ten-year period.
Mortgage servicing rights (“MSR”) 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 generally stratified into relatively homogeneous pools based on predominant risk characteristics. Because of the small size of this asset class, and its relative homogeneity, only one stratum is used. I f the aggregate carrying value of the capitalized mortgage servicing rights for this 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 income may be negative.
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, the State of Connecticut, the state of Maine, and other states as required. For the tax year ended December 31, 2023, the Company expects to 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 income tax expenses in the period of enactment. 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.
Wealth Management Fee Revenue
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 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 also earns trust fees for servicing 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 administrative 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.
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, 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 charged to clients based on disclosures presented to these 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.
Pension and Retirement Plans
The Company sponsors a defined benefit pension plan (the “Pension Plan”) and a postretirement health care plan covering substantially all employees hired before May 2, 2011. Effective December 31, 2017, the accrual of benefits for all participants in the Pension Plan was frozen. Benefits for the postretirement health care plan are based on years of service. Expenses for the postretirement health care plan are recognized over the employee’s service life utilizing the projected unit credit actuarial cost method. Effective November 7, 2019, the postretirement health care plan was frozen for employees hired after that date.
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 executive’s retirement and continuing for at least the remainder of his or her lifetime, with such annual benefit generally based on the executive’s years of service and his or her highest three consecutive years of base salary and bonus. In 2016, the Company’s Board of Directors discontinued the use of DB SERPs for new entrants to the Company’s 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 executive’s base salary and bonus to his or her account under the Company’s non-qualified deferred compensation plan, the Executive Deferred Compensation Plan. Expense for the DB SERPs is recognized over the executive’s service life utilizing the projected unit credit actuarial cost method. Expense for the DC SERPs is recognized as incurred.
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. The Company matches employee contributions up to 100 % of the first 4 % of each participant’s salary, eligible bonus, and eligible incentive. Each year, the Company may also make a discretionary contribution to the PSP based on eligible salary, bonus, and incentive. Employees are eligible to participate in the PSP on the first day of their initial date of service. Employees are also eligible to participate in the discretionary contribution portion of the PSP on the first date of their initial date 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.
Share-Based Compensation
Share-based compensation plans provide for stock option awards, restricted stock awards, time-based restricted stock units (“RSUs”), and performance-based restricted stock units (“PRSUs”).
Compensation expense for restricted stock awards is recognized over the vesting period based on the fair value at the date of grant. RSUs and PRSUs are valued at the fair market value of the Company’s common stock as of the award date. PRSUs’ 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, 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.
Derivative Instruments and Hedging Activities
Derivatives are recognized as either assets or liabilities on the consolidated balance sheets 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.
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 fair 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 management’s 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 more dilutive 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. The Company has determined that its 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, including 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 20 - Earnings Per Share .
Subsequent Events
Management has reviewed events occurring through March 12, 2024, the date the consolidated financial statements were issued and determined that no subsequent events occurred requiring adjustment to or disclosure in these consolidated financial statements.
Recently Issued and Adopted Accounting Standards
Accounting Pronouncements Adopted in 2023
In March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors , while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. For public business entities, the amendments in this ASU require an entity to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU was effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption was permitted. The Company adopted the new standard on January 1, 2023 and the adoption did not have a material impact on the consolidated financial statements.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method . The amendments in this ASU allow multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. The amendments in this ASU also clarify the accounting for and promote consistency in the reporting of hedge basis adjustments applicable to both a single hedged layer and multiple hedged layers. These amendments are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The Company adopted the new standard on January 1, 2023 and provided the additional disclosures required for the Company's fair value hedging relationships.
Accounting Pronouncements Yet to be Adopted
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments are to enhance the transparency and decision usefulness of income tax disclosures. The ASU requires that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation, (2) provide additional information for reconciling items that meet a quantitative threshold. and also includes certain other amendments to improve the effectiveness of income tax disclosures. The amendments in this Update are effective for annual periods beginning after December 15, 2024. The Company is currently assessing the impact the adoption of this guidance will have on its consolidated financial statements and disclosures.
Mergers
Eastern Bankshares, Inc.
On September 19, 2023, the Company, the Bank, Eastern Bankshares, Inc. (“Eastern”), Eastern Bank, Eastern’s subsidiary bank, and Citadel MS 2023, Inc. a direct, wholly owned subsidiary of Eastern (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Eastern will acquire the Company and the Bank through the merger of Merger Sub with and into the Company, with the Company as the surviving entity (the “Merger”). As soon as reasonably practicable following the Merger, the Company will merge with and into Eastern, with Eastern as the surviving entity (the “Holdco Merger”). The Merger Agreement further provides that following the Holdco Merger, at a time to be determined by Eastern, the Bank will merge with and into Eastern Bank, with Eastern Bank as the surviving entity. Upon the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”) each share of Company common stock, par value $ 1.00 per share, outstanding immediately prior to the Effective Time, other than certain shares held by Eastern or the Company, will be converted into the right to receive 4.956 shares of common stock (the “Exchange Ratio”), par value $ 0.01 per share, of Eastern (“Eastern Common Stock”). Company shareholders will receive cash in lieu of fractional shares of Eastern Common Stock (the Exchange Ratio and any cash in lieu of fractional shares collectively, the “Merger Consideration”).
Northmark Bank
The Company completed its merger (the “Northmark Merger”) with Northmark Bank. (“Northmark”) on October 1, 2022 Under the terms of the Agreement and Plan of Merger, each outstanding share of Northmark common stock was converted into 0.9950 shares of the Company’s common stock. As a result of the merger, former Northmark stockholders received an aggregate of 788,137 shares of
the Company's common stock. The total consideration paid amounted to $ 62.8 million, based on the closing price of $ 79.74 of the Company’s common stock and cash paid for fractional shares on October 1, 2022.
The Company accounted for the merger using the acquisition method pursuant to ASC Topic 805, “Business Combinations.” and recorded total assets of $ 428.7 million, including $ 12.6 million in goodwill, and assumed total liabilities of $ 378.5 million.
CASH AND CASH EQUIVALENTS
At December 31, 2023 and December 31, 2022, cash and cash equivalents totaled $ 33.0 million and $ 30.7 million , respectively. There were no amounts required to be maintained at the Federal Reserve Bank of Boston (“FRB of Boston”) at December 31, 2023 and December 31, 2022. At December 31, 2023 and December 31, 2022 , 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. The Company did no t have any cash pledged as collateral to derivative counterparties at December 31, 2023 or at December 31, 2022. See Note 21 - Derivatives and Hedging Activities for a discussion of the Company’s derivative and hedging activities .
INVESTMENT SECURITIES
Investment securities have been classified in the accompanying consolidated balance sheets according to management’s intent. The carrying amounts of securities and their approximate fair values were as follows:
December 31, 2023
December 31, 2022
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. Government Sponsored
Enterprise obligations
Mortgage-backed securities
Corporate debt securities
Total available for sale securities
Held to maturity securities
U.S. Treasury Notes
Mortgage-backed securities
Corporate debt securities
Municipal securities
Total held to maturity securities
Total
All of the Company’s mortgage-backed securities have been issued by, or are collateralized by securities issued by, the Government National Mortgage Association (“Ginnie Mae” or “GNMA”), the Federal National Mortgage Association (“Fannie Mae” or “FNMA”), or the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”).
The amortized cost and fair value of investment securities, aggregated by the contractual maturity, are shown below. Municipal securities are aggregated by the earliest of call date or contractual maturity. 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.
December 31, 2023
Within One Year
After One, But
Within Five Years
After Five, But
Within Ten Years
After Ten Years
Total
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(dollars in thousands)
Available for sale securities
U.S. Government Sponsored Enterprise obligations
Mortgage-backed securities
Total available for sale securities
Held to maturity securities
U.S. Treasury Notes
Mortgage-backed securities
Corporate debt securities
Municipal securities
Total held to maturity securities
Total
The following tables show the Company’s investment securities with gross unrealized losses, for which an allowance for credit losses has not been recorded at December 31, 2023 or at December 31, 2022, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position:
December 31, 2023
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(dollars in thousands)
Available for sale securities
U.S. Government Sponsored Enterprise
obligations
Mortgage-backed securities
Total available for sale securities
Held to maturity securities
U.S. Treasury Notes
Mortgage-backed securities
Corporate debt securities
Municipal securities
Total held to maturity securities
Total
December 31, 2022
Less than 12 months
12 months or longer
Total
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
Fair
Value
Unrealized
Losses
(dollars in thousands)
Available for sale securities
U.S. Government Sponsored Enterprise
obligations
Mortgage-backed securities
Total available for sale securities
Held to maturity securities
U.S. Treasury Notes
Mortgage-backed securities
Corporate debt securities
Municipal securities
Total held to maturity securities
Total
As of December 31, 2023 , 415 debt securities had gross unrealized losses, with an aggregate depreciation of 16.3 % from the Company’s amortized cost basis. The largest unrealized dollar loss of any single security was $ 1.9 million, or 22.2 % of its amortized cost. The largest unrealized loss percentage of any single security was 36.6 % of its amortized cost, or $ 855,000 .
The Company believes that the nature and duration of unrealized losses 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) it is more likely than not that the Company will not be required to sell these securities before recovery, the Company does not expect to suffer a credit loss as of December 31, 2023.
There were no investment securities pledged as collateral for repurchase agreements at December 31, 2023.
The following table sets forth information regarding sales of investment securities and the resulting gains or losses from such sales:
For the Year Ended December 31,
(dollars in thousands)
Amortized cost of securities sold
Gross gains realized on securities sold
Gross losses realized on securities sold
Net proceeds from securities sold
The Company monitors the credit quality of certain debt securities through the use of credit rating among other factors on a quarterly basis. Credit ratings are opinions about the credit quality of a security and are utilized by the Company to make informed decisions. Investment grade securities are rated BBB-/Baa3 or higher and are generally considered to be of low risk. At December 31, 2023 and 2022 respectively, the Company’s debt securities portfolio did not contain any securities below investment grade, as reported by major credit rating agencies. At December 31, 2023 and 2022, respectively, none of the Company's investment securities were delinquent or in non-accrual status .
The following tables summarize the credit rating of the Company’s debt securities portfolio at December 31, 2023 and December 31, 2022.
December 31, 2023
Mortgage-backed Securities (1)
Corporate Debt Securities
Municipal Securities
U.S. GSE Obligations
U.S. Treasury Notes
Total
(dollars in thousands)
Available for sale securities, at fair value
AAA/AA/A
Total available for sale securities
Held to maturity securities, at amortized cost
AAA/AA/A
Total held to maturity securities
December 31, 2022
Mortgage-backed Securities (1)
Corporate Debt Securities
Municipal Securities
U.S. GSE Obligations
U.S. Treasury Notes
Total
(dollars in thousands)
Available for sale securities, at fair value
AAA/AA/A
BBB/BB/B
Total available for sale securities
Held to maturity securities, at amortized cost
AAA/AA/A
Total held to maturity securities
Includes Agency mortgage-backed pass-through securities and collateralized mortgage obligations issued by U.S. Government Sponsored Enterprises (“GSEs”) and U.S. government agencies, such as FNMA, FHLMC, and GNMA that are not rated by Moody’s or Standard & Poor's. Each security contains a guarantee by the issuing GSE or agency and therefore carries an implicit guarantee of the U.S. government. These have been categorized as AAA/AA/A.
LOANS AND THE ALLOWANCE FOR CREDIT LOSSES
Loans outstanding are detailed by category as follows:
December 31, 2023
December 31, 2022
(dollars in thousands)
Residential mortgage
Mortgages - fixed rate
Mortgages - adjustable rate
Construction
Deferred costs, net of unearned fees
Total residential mortgages
Commercial mortgage
Mortgages - non-owner 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 and industrial
Commercial and industrial
Paycheck Protection Program loans
Unearned fees, net of deferred costs
Total commercial and industrial
Consumer
Secured
Unsecured
Deferred costs, net of unearned fees
Total consumer
Total loans
Directors and officers of the Company and their associates are clients 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.
Asset Quality
The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. The Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as non-accrual loans. The Company may use discretion regarding other loans over 90 days past due if the loan is well secured and/or in process of collection.
The following tables set forth information regarding non-performing loans disaggregated by loan category:
December 31, 2023
Residential
Mortgage
Commercial
Mortgage
Home
Equity
Commercial and
Industrial
Total
(dollars in thousands)
Non-performing loans:
Non-accrual loans
Loans past due >90 days, but still accruing
Total
December 31, 2022
Residential
Mortgage
Commercial
Mortgage
Home
Equity
Commercial and
Industrial
Total
(dollars in thousands)
Non-performing loans:
Non-accrual loans
Troubled debt restructurings
Total
It is the Company’s policy to reverse any accrued interest when a loan is put on non-accrual status and, generally, to record any payments received from a borrower related to a loan on non-accrual status as a reduction of the amortized cost basis of the loan. The Company did not record any interest income on non-accrual loans during the years ended December 31, 2023 and December 31, 2022. Accrued interest reversed against interest income for the year ended December 31, 2023 and December 31, 2022 was immaterial.
There were no significant commitments to lend additional funds to borrowers whose loans were on non-accrual status at December 31, 2023 and December 31, 2022.
A financial asset is considered collateral-dependent when the debtor is experiencing financial difficulty and repayment is expected to be provided substantially through the sale or operation of the collateral. Expected credit losses for collateral-dependent loans are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
The following table presents the amortized costs basis and related reserve amount of individually analyzed collateral-dependent loans by portfolio segment.
For the Year Ended December 31,
Amortized Cost Basis
Reserve Amount
Amortized Cost Basis
Reserve Amount
(dollars in thousands)
Commercial mortgage
Commercial & Industrial
Total
Loan Modifications
Pursuant to ASU 2022-02, the Company evaluates all loan restructurings according to the accounting guidance for loan modifications to determine if the restructuring results in a new loan or a continuation of the existing loan. An assessment of whether a borrower is experiencing financial difficulty is made at the time of a modification. Loan modifications to borrowers experiencing financial difficulty that result in a change in the timing or amount of contractual cash flows include situations where there is principal forgiveness, interest rate reductions, other-than-insignificant payment delays, term extensions, and combinations of the listed modifications. Therefore, the disclosures related to loan restructurings are only for modifications that directly affect cash flows.
For the year ended December 31, 2023, the Company made no loan modifications to borrower’s experiencing financial difficulty.
Troubled Debt Restructurings (“TDRs”)
Prior to the adoption of ASU 2022-02, loans were considered restructured in a troubled debt restructuring when the Company granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may
have 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.
Restructured loans were classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which were already on non-accrual status at the time of the restructuring generally remained on non-accrual status for approximately six months or longer before management considered such loans for return to accruing status. Accruing restructured loans were placed into non-accrual status if and when the borrower failed to comply with the restructured terms and management deemed it unlikely that the borrower will return to a status of compliance in the near term. TDRs were individually evaluated for credit losses.
There were no new TDRs during the year ended December 31, 2022. As of December 31, 2022 , four loans were TDRs with a total carrying value of $ 704,000 . There were no TDR defaults during the year ended December 31, 2022.
As of December 31, 2023 and December 31, 2022 , there were no significant commitments to lend additional funds to borrowers whose loans were restructured.
Pursuant to Section 4013 of the CARES Act, financial institutions could suspend the requirements under U.S. GAAP related to TDRs for modifications made before December 31, 2020 to loans that were current as of December 31, 2019. As a result of the enactment of the Consolidated Appropriations Act, 2021, in January 2021, the suspension of TDR accounting was extended to, and expired on January 1, 2022. The requirement that a loan be not more than 30 days past due as of December 31, 2019 was still applicable. In response to the COVID-19 pandemic and its economic impact to clients, a short-term modification program that complied with the CARES Act was implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Under issued guidance, provided that these loans were current as of either year end or the date of the modification, these loans were not considered TDR loans at December 31, 2023 and will not be reported as past due during the deferral period. The Company had no loans in deferral as of December 31, 2023.
Foreclosure proceedings
As of December 31, 2023 , there were two loans in process of foreclosure with a carrying value of approximately $ 1.5 million. Both of these loans are secured by one to four family residential property. As of December 31, 2022, there were no loans in process of foreclosure.
Loans by Credit Quality Indicator
With respect to residential real estate mortgages, home equity, and consumer loans, the Company 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.
With respect to commercial real estate mortgages and commercial loans, the Company 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 client.
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.
The following tables contain period-end balances of loans receivable disaggregated by credit quality indicator:
Credit Quality Indicator - by Origination Year as of December 31, 2023
Prior
Revolving loans amortized cost basis
Total
(dollars in thousands)
Residential Mortgage:
Current
Non-performing
Total
Current-period gross write-offs
Home equity:
Current
Non-performing
Total
Current-period gross write-offs
Consumer:
Current
Non-performing
Total
Current-period gross write-offs
Credit Quality Indicator - by Origination Year as of December 31, 2023
Prior
Revolving loans amortized cost basis
Total
(dollars in thousands)
Commercial Mortgage:
Credit risk profile by internally assigned grade:
1-6 (Pass)
7 (Special Mention)
8 (Substandard)
9 (Doubtful)
10 (Loss)
Total
Current-period gross write-offs
Commercial and Industrial:
Credit risk profile by internally assigned grade:
1-6 (Pass)
7 (Special Mention)
8 (Substandard)
9 (Doubtful)
10 (Loss)
Total
Current-period gross write-offs
Credit Quality Indicator - by Origination Year as of December 31, 2022
Prior
Revolving loans amortized cost basis
Total
(dollars in thousands)
Residential Mortgage:
Current
Non-performing
Total
Home equity:
Current
Non-performing
Total
Consumer:
Current
Non-performing
Total
Credit Quality Indicator - by Origination Year as of December 31, 2022
Prior
Revolving loans amortized cost basis
Total
(dollars in thousands)
Commercial Mortgage:
Credit risk profile by internally
assigned grade:
1-6 (Pass)
7 (Special Mention)
8 (Substandard)
9 (Doubtful)
10 (Loss)
Total
Commercial and Industrial:
Credit risk profile by internally
assigned grade:
1-6 (Pass)
7 (Special Mention)
8 (Substandard)
9 (Doubtful)
10 (Loss)
Total
Loans origination dates in the tables above reflect the original date, or the date of a material modification of a previously originated loan, for both organic originations and acquired loans.
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:
December 31, 2023
30-59 Days
60-89 Days
90 Days or Greater
Total
Past Due
Current
Loans
Total
(dollars in thousands)
Residential mortgage
Commercial mortgage
Home equity
Commercial and industrial
Consumer
Total
December 31, 2022
30-59 Days
60-89 Days
90 Days
or Greater
Total
Past Due
Current
Loans
Total
(dollars in thousands)
Residential mortgage
Commercial mortgage
Home equity
Commercial and industrial
Consumer
Total
There were two loans 90 days or more past due and still accruing at December 31, 2023 totaling $ 51,000 .
There were no significant commitments to lend additional funds to borrowers whose loans were on non-accrual status at December 31, 2023 and December 31, 2022.
Allowance for Credit Losses
The following tables contain changes in the allowance for credit losses disaggregated by loan category:
For The Year Ended December 31, 2023
Residential
Mortgage
Commercial
Mortgage
Home
Equity
Commercial &
Industrial
Consumer
Unfunded Commitments
Total
(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan
portfolio:
Balance at December 31, 2022
Charge-offs
Recoveries
Provision for (release of) credit
losses - loan portfolio
Allowance for credit losses - loan portfolio
Allowance for credit losses -
unfunded commitments:
Balance at December 31, 2022
Provision for (release of) credit
losses - unfunded commitments
Allowance for credit losses-
unfunded commitments
Total allowance for credit loss
For The Year Ended December 30, 2022
Residential
Mortgages
Commercial
Mortgages
Home
Equity
Commercial &
Industrial
Consumer
Unfunded Commitments
Total
(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan
portfolio:
Balance at December 31, 2021
Provision for acquired loans
Initial allowance for PCD
Charge-offs
Recoveries
Provision for (release of) credit
losses - loan portfolio
Allowance for credit losses - loan portfolio
Allowance for credit losses -
unfunded commitments:
Balance at December 31, 2021
Acquired loan commitments
Provision for credit
losses - unfunded commitments
Allowance for credit losses-
unfunded commitments
Total allowance for credit loss
Balances of accrued interest receivable excluded from amortized cost and the calculation of allowance for credit losses amounted to $ 13.5 million, $ 11.6 million, and $ 6.8 million at December 31, 2023, December 31, 2022, and December 31, 2021, respectively.
FEDERAL HOME LOAN BANK (“FHLB”) OF BOSTON STOCK
As a voluntary member of the FHLB of Boston, the Company 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, 2023 and 2022, the Company’s investment in FHLB of Boston stock totaled $ 19.1 million and $ 6.3 million , respectively. No market exists for shares of this stock. The Company’s 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 Company’s 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, 2023 and December 31, 2022, no impairment has been recognized.
BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of property, leasehold improvements, and equipment is presented below:
December 31,
Estimated
Useful Lives
(dollars in thousands)
Land
Building and leasehold improvements
3 - 30 years
Equipment, including vaults
3 - 20 years
Work in process
Subtotal
Accumulated depreciation and amortization
Total
Total depreciation expense for the years ended December 31, 2023, 2022 , and 2021 amounted to $ 2.8 million, $ 2.7 million, and $ 2.6 million, and is included in occupancy and equipment expenses in the accompanying consolidated statements of income.
INTANGIBLE ASSETS
Core deposit intangible (“CDI”) . At December 31, 2023 and December 31, 2022, the carrying value of CDI assets totaled $ 6.5 million and $ 7.4 million, respectively. The Company recorded a mortization expense of CDI assets totaling $ 893,000 , $ 494,000 , and $ 361,000 for the years ended December 31, 2023 , December 31, 2022, and December 31, 2021, respectively. The weighted-average remaining amortization period for CDI was 7.7 years and 8.7 years at December 31, 2023 and December 31, 2022, respectively.
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, the Company provides the servicing for the loans on a per-loan fee basis. The Company was servicing mortgage loans sold to others without recourse of approxi mately $ 173.9 million a t December 31, 2023 and $ 191.9 million at December 31, 2022 . Mortgage loans sold with servicing rights retained during the years ended December 31, 2023, December 31, 2022 , and December 31, 2021 were $ 6.4 million, $ 5.8 million, and $ 25.3 million, respectively.
The following table provides an analysis of mortgage servicing rights, which are included in other assets:
Mortgage
Servicing
Rights
Valuation
Allowance
Total
(dollars in thousands)
Balance at December 31, 2020
Mortgage servicing rights capitalized
Amortization charged against servicing income
Change in impairment reserve
Balance at December 31, 2021
Balance at December 31, 2021
Mortgage servicing rights acquired as a result of the Northmark merger
Mortgage servicing rights capitalized
Amortization charged against servicing income
Balance at December 31, 2022
Balance at December 31, 2022
Mortgage servicing rights capitalized
Amortization charged against servicing income
Balance at December 31, 2023
The fair value of the Company’s mortgage servicing rights portfolio was $ 2.4 million and $ 2.3 million as of December 31, 2023 and 2022, respectively. 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 7.8 years and 7.1 years at December 31, 2023 and 2022, 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)
Thereafter
Total
DEPOSITS
Deposits are summarized as follows:
December 31, 2023
December 31, 2022
(dollars in thousands)
Demand deposits (non-interest bearing)
Interest bearing checking
Money market
Savings
Retail certificates of deposit under $250,000
Retail certificates of deposit $250,000 or greater
Brokered certificates of deposit
Total deposits
Certificates of deposit had the following schedule of maturities:
December 31, 2023
December 31, 2022
(dollars in thousands)
2028 and after
Total certificates of deposit
Related Party Deposits
Deposit accounts of directors, executive officers, and their respective affiliates tot aled $ 1.7 million an d $ 2.7 million as of December 31, 2023 and 2022 , respectively.
BORROWINGS
Federal Home Loan Bank Advances
At December 31, 2023 the Company had $ 406.0 million of short-term advances from the FHLB of Boston, with a weighted average rate of 5.38 %. For the year ended December 31, 2023 the average daily balance for short-term advances was $ 157.1 million and the highest month end balance was $ 406.0 million. At December 31, 2022 , the Company had $ 100.2 million of short-term advances from the FHLB of Boston, with a weighted average rate of 4.38 %. For the year ended December 31, 2022 the average daily balance for short-term advances was $ 68.4 million and the highest month end balance was $ 279.0 million.
At December 31, 2023 the Company had $ 46.2 million of long-term advances from the FHLB of Boston, with a weighted average rate of 4.17 %. At December 31, 2022 , the Company had no long-term advances from the FHLB of Boston.
Information relating to the Company’s borrowings, their remaining maturities, and weighted average interest rates are presented below:
For the Year Ended December 31,
Amount
Weighted Average Interest Rate
Amount
Weighted Average Interest Rate
(dollars in thousands)
Within one year
Over one year to three years
Over three years to five years (1)
Over five years (1)
Total FHLB of Boston
(1) Includes advances under the FHLB of Boston Jobs for New England (“JNE”) program, which are zero rate borrowings.
Securities Sold Under Agreements to Repurchase
The Company periodically enters into repurchase agreements with its larger deposit and commercial clients as part of its cash management services which are typically overnight borrowings. There were no repurchase agreements with clients outstanding as of December 31, 2023. Repurchase agreements with clients totaled $ 5.0 million as of December 31, 2022. The daily average balance of securities sold under agreements to repurchase during the year ended December 31, 2023 was $ 1.7 million and during the year ended December 31, 2022 was $ 1.2 million. The Company retained control of the securities underlying these agreements.
Unused Borrowing Capacity with the FHLB of Boston and FRB of Boston
All short- and long-term borrowings with the FHLB of Boston are secured by the Company’s stock in the FHLB of Boston and a blanket lien on “qualified collateral” defined principally as 60 % - 70 % of the carrying value of certain residential mortgage loans. Based upon collateral pledged, the Bank’s unused borrowing capacity with the FHLB of Boston at December 31, 2023 was approximately $ 532.0 million.
The Company also has a line of credit with the FRB of Boston. The Company did no t have any outstanding FRB borrowings at December 31, 2023 or December 31, 2022. At December 31, 2023 and December 31, 2022, the Company had pledged investment securities, CRE, and home equity loans with aggregate principal balances of approximate ly $ 2.11 billion and $ 970.1 million, respectively, as collateral for this line of credit. Based upon the collateral pledged, the Company’s unused borrowing capacity with the FRB of Boston at December 31, 2023 and 2022 was approximately $ 1.76 billion and $ 680.4 million, respectively.
INCOME TAXES
The components of income tax expense were as follows:
For the Year Ended December 31,
(dollars in thousands)
Current income tax expense
Federal
State
Total current income tax expense
Deferred income tax expense
Federal
State
Total deferred income tax expense
Total income tax expense
The following is a reconciliation of the total income tax expense, calculated at statutory federal income tax rates, to the income tax provision in the consolidated statements of income:
For the Year Ended December 31,
(dollars in thousands)
Income tax expense at statutory rate of 21.0 %
Increase/(decrease) resulting from:
State tax, net of federal tax benefit
Tax-exempt income
ESOP dividends
Bank owned life insurance
Compensation limited under 162(m)
Benefit from stock compensation
Non-deductible acquisition costs
Non-deductible expenses
BOLI surrender, death benefit
Other
Total income tax expense
The Company’s 2023 and 2022 net deferred tax assets were measured using a 27.95 % federal and state blended tax rate, respectively, and consisted of the following components:
December 31, 2023
December 31, 2022
(dollars in thousands)
Gross deferred tax assets
Allowance for credit losses
Unrealized losses on available for sale securities
Incentive compensation
Equity based compensation
Lease liabilities
ESOP dividends
Intangibles and fair value marks (merger related)
Other
Total gross deferred tax assets
Gross deferred tax liabilities
Deferred loan origination costs
Retirement benefits
Depreciation of premises and equipment
Right-of-use asset
Mortgage servicing rights
Goodwill
Derivative transactions
Total gross deferred tax liabilities
Net deferred tax asset
It is management’s 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, 2023 and December 31, 2022 for the deferred tax assets. It should be noted, however, that factors beyond management’s control, such as the general state of the economy and real estate values, can affect future levels of taxable income and that no assurance can be given that sufficient taxable income will be generated in future periods to fully absorb deductible temporary differences.
A summary of the change in the net deferred tax asset is as follows:
For the Year Ended December 31,
Balance at beginning of year:
Deferred tax expense
Merger accounting
Accumulated other comprehensive income
Balance at end of year
At December 31, 2023 and December 31, 2022 , 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 Company’s federal income tax returns are open and subject to examination from the 2020 through 2023 tax return years. The Company’s state income tax returns are open from the 2020 through 2023 tax return years based on individual states’ statute of limitations.
PENSION AND RETIREMENT PLANS
The Company has a noncontributory, defined benefit pension plan (“Pension Plan”) covering substantially all employees hired before May 2, 2011. 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”). The Company also offers postretirement health care benefits for current and future 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 employee’s years of active service. Effective November 7, 2019, the postretirement health care plan was frozen for employees hired after that date. The Company froze the accrual of benefits on the qualified defined benefit pension plan in 2017. The Company did not make any contributions to the qualified defined benefit pension plan during the years ended December 31, 2023 and December 31, 2022. The Company uses a December 31 st measurement date each year to determine the benefit obligations for these plans.
Projected benefit obligations and funded status were as follows:
Pension Plan
Supplemental
Retirement Plan
(dollars in thousands)
Change in projected benefit obligation
Obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Obligation at end of year
Change in plan assets
Fair value at beginning of year
Actual return on plan assets
Employer contribution
Benefits paid
Fair value at end of year
Funded status at end of year
The funded status of the Company’s Pension Plan is included within other assets and the funded status of the Company’s Supplemental Retirement Plan is included within other liabilities on the Company’s consolidated balance sheets at December 31, 2023 and 2022.
Pension Plan
Supplemental
Retirement Plan
(dollars in thousands)
Accumulated benefit obligation
Amounts recognized in accumulated other comprehensive income (loss) consisted of:
Pension Plan
Supplemental
Retirement Plan
(dollars in thousands)
Net actuarial (gain) loss
Total
The components of net periodic benefit cost and amounts recognized in other comprehensive income (loss) were as follows:
Pension Plan
Supplemental
Retirement Plan
(dollars in thousands)
Net periodic benefit cost
Service cost
Interest cost
Expected return on assets
Amortization of net actuarial loss
Net periodic expense (benefit)
Amounts recognized in other comprehensive income (loss)
Net actuarial loss/(gain)
Amortization of net actuarial loss
Total recognized in other comprehensive income (loss)
Total recognized in net periodic expense (benefit) and other
comprehensive income (loss)
Weighted-average assumptions used to determine projected benefit obligations are as follows:
Pension Plan
Supplemental
Retirement Plan
Discount rate
Rate of compensation increase
Weighted-average assumptions used to determine the net periodic benefit cost in each year were as follows:
Pension Plan
Supplemental
Retirement Plan
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
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.
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.
The Investment Policy guidelines suggest that the target asset allocation percentages are from 0 % to 60 % in domestic large cap equities, from 0 % to 20 % in domestic small/mid cap equities, from 0 % to 20 % in international and emerging equities, and from 20 % to 10 0 % in cash and fixed income.
The Company’s Pension Plan weighted-average asset allocations by asset category were as follows:
December 31,
Equity securities
Debt securities
Cash and equivalents
Total
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 Company’s market assumptions.
The following table summarizes the various categories of the Pension Plan’s assets:
Fair Value as of December 31, 2023
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Asset category
Cash and cash equivalents
Fixed income
Equity securities
Mutual funds
Domestic equity
International
Domestic fixed income
Total
Fair Value as of December 31, 2022
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Asset category
Cash and cash equivalents
Fixed income
Equity securities
Mutual funds
Domestic equity
International
Domestic fixed income
Total
There were no transfers between fair value levels during the years ended December 31, 2023 and December 31, 2022.
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 employee’s 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. The plan is unfunded and plan obligations were $ 489,000 and $ 424,000 at December 31, 2023 and December 31, 2022, respectively.
Benefits expected to be paid in the next ten years are as follows:
Pension
Plan
Supplemental
Retirement Plan
Postretirement
Healthcare Plan
Total
(dollars in thousands)
Year-ended December 31,
Total
Employee Profit Sharing and 401(k) Plan
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. The Company matches employee contributions up to 100 % of the first 4 % of each participant’s salary, eligible bonus, and eligible incentive. Employees are eligible to participate in the PSP on the first day of their initial date of service. The Company may also make discretionary contributions to the PSP.
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 Company’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, 2023, 2022 , and 2021 amounted to $ 2.8 million, $ 4.5 million, and $ 4.0 million, respectively.
Defined Contribution SERP Plan
For executives participating in the Defined Contribution SERP Plan (“DC SERP”) plan, the Company made a contribution of 10 % of each executive’s base salary and bonus to his or her account under the Company’s DC SERP. Total expenses related to the Company’s DC SERP for the years ended December 31, 2023, 2022 , and 2021 amounted to $ 25,000 , $ 271,000 , and $ 201,000 , respectively.
SHARE-BASED COMPENSATION
In 2017, the Company adopted the 2017 Equity and Cash Incentive Plan (the “2017 Plan”) and all future awards from date of adoption are anticipated to 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.
Restricted stock awards time-vest either over a three-year or five-year period and are 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 outstanding as of December 31, 2023 and 2022, and changes during the years ended on those dates, is presented below:
December 31, 2023
December 31, 2022
Number
of Shares
Weighted
Average
Grant Value
Number
of Shares
Weighted
Average
Grant Value
Restricted stock
Non-vested at beginning of year
Granted
Vested
Forfeited
Non-vested at end of year
Performance-based restricted stock units vest based upon the Company’s performance over a three-year period and are 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, 2023 and 2022, and changes during the years ended on those dates, is presented below:
December 31, 2023
December 31, 2022
Number
of Units
Weighted
Average
Grant Value
Number
of Units
Weighted
Average
Grant Value
Performance-based restricted stock units
Non-vested at beginning of year
Granted
Vested (Performance achieved)
Forfeited
Non-vested at end of year
Time-based restricted stock units vest over a three-year -period and are 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 non-vested time-based restricted stock units outstanding as of December 31, 2023 and December 31, 2022, and changes during the years ended on those dates, is presented below:
December 31, 2023
December 31, 2022
Number
of Shares
Weighted
Average
Grant Value
Number
of Shares
Weighted
Average
Grant Value
Time-based restricted stock units
Non-vested at beginning of year
Granted
Vested
Forfeited
Non-vested at end of year
The following table presents the amounts recognized in the consolidated statements of income for restricted stock, time-based restricted stock units, and performance-based restricted stock units:
For the Year Ended December 31,
(dollars in thousands)
Share-based compensation expense
Related income tax benefit
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 to Directors under the 2017 Plan in the years ended December 31, 2023 and December 31, 2022 were 12,195 and 7,386 , respectively.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
To meet the financing needs of its clients, the Company 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 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.
The Company’s 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 Company generally 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 include the following:
December 31, 2023
December 31, 2022
(dollars in thousands)
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
Standby letters of credit are conditional commitments issued by the Company to guarantee performance of a client to a third party. 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 clients. 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 client 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 Company evaluates each client’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of the credit is based on management’s credit evaluation of the client. Collateral held varies, but may include primary residences, accounts receivable, inventory, property, plant and equipment, and income-producing CRE.
See Note 21 - Derivatives and Hedging Activities for a discussion of the Company’s derivatives and hedging activities.
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 betw een 2022 and 2032 and, in some instances, contain options to renew for periods up to 25 years.
The Company recognizes its operating leases on its consolidated balance sheet by recording a lease liability, representing the Company’s legal obligation to make lease payments, and a ROU asset, representing the Company’s legal right to use the leased office space and banking centers. The Company does not include renewal options for leases as part of its ROU assets and lease liabilities unless they are deemed reasonably certain to exercise. The Company does not have any material sub-lease agreements as of December 31, 2023.
Operating lease expenses are comprised of operating lease costs and variable lease costs, net of sublease income, and are recognized over the lease term.
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.
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 Company’s 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:
For the Year Ended December 31,
(dollars in thousands)
Operating 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 for operating leases
Operating Lease - operating cash flows (liability reduction)
Weighted average lease term - operating leases
4.92 Years
5.45 Years
6.13 Years
Weighted average discount rate - operating leases
The total minimum lease payments due in future periods under these agreements in effect at December 31, 2023 were as follows:
Future Minimum
December 31, 2023
Lease Payments
(dollars in thousands)
Thereafter
Total minimum lease payments
Less: interest
Total lease liability
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 wa s $ 7.5 mi llion, $ 7.6 million, and $ 7.3 million for the years ended December 31, 2023, December 31, 2022, and December 31, 2021, 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.
SHAREHOLDERS’ EQUITY
Capital guidelines issued by the Federal Reserve Bank 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 Company’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 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 deductions/adjustments to regulatory 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 allowance for credit 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 capital 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”).
Additionally, the Company is required to maintain 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 %.
Management believes that as of December 31, 2023 and 2022, the Company and the Bank met all applicable minimum capital requirements and were considered “well-capitalized” by both the Federal Reserve Board and the FDIC.
The Company adopted ASU 2016-13 on January 1, 2020. The joint federal bank regulatory agencies issued an interim final rule that allows banking organizations to phase-in the effects of the CECL accounting standard in their regulatory capital, over a three-year period from January 1, 2022 through December 31, 2024. The Company did not elect to delay the adoption of CECL and did not adopt the transition period for regulatory capital.
The Company’s and the Bank’s actual and required capital measures were as follows:
Actual
Minimum Capital
Required For
Capital Adequacy Plus
Capital Conservation
Buffer
Minimum To Be
Well-Capitalized
Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
At December 31, 2023
Cambridge Bancorp:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common equity tier I capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Cambridge Trust Company:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common equity tier I capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Actual
Minimum Capital
Required For
Capital Adequacy Plus
Capital Conservation
Buffer
Minimum To Be
Well-Capitalized
Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
(dollars in thousands)
At December 31, 2022
Cambridge Bancorp:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common equity tier I capital (to risk-weighted assets)
Tier 1 capital (to average assets)
Cambridge Trust Company:
Total capital (to risk-weighted assets)
Tier 1 capital (to risk-weighted assets)
Common equity tier I capital (to risk-weighted assets)
Tier 1 capital (to average assets)
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is defined as all changes to shareholders’ equity except investments by and distributions to shareholders. Net income is a component of comprehensive income (loss), with all other components referred to in the aggregate as “other comprehensive income (loss).” The Company’s other comprehensive income (loss) consists of unrealized gains or losses on securities held at year-end classified as available for sale, cash flow hedges, and the component of the unfunded retirement liability computed in accordance with the requirements of ASC Topic 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, 2023
For the Year Ended
December 31, 2022
For the Year Ended
December 31, 2021
Before
Tax
Amount
Tax
(Expense)
or Benefit
Net-of-
tax
Amount
Before
Tax
Amount
Tax
(Expense)
or Benefit
Net-of-
tax
Amount
Before
Tax
Amount
Tax
(Expense)
or Benefit
Net-of-
tax
Amount
(dollars in thousands)
Available for sale securities
Unrealized holding gains (losses)
Reclassification adjustment for (gains) losses realized in net income (1)
Interest rate swaps designated as cash flow hedges
Unrealized holding gains (losses)
Reclassification adjustment for (gains) losses recognized in net income (2)
Defined benefit retirement plans
Net change in retirement liability
Total other comprehensive income (loss)
(1) Reported in gain (loss) on disposition of investment securities line item in the Consolidated Statements of Income.
(2) Reported in interest on payable loans line item in the Consolidated Statements of Income.
The components of accumulated other comprehensive income are as follows:
For the Year Ended
December 31, 2023
For the Year Ended
December 31, 2022
Before Tax Amount
Deferred (tax) benefit
Net-of-tax Amount
Before Tax Amount
Deferred (tax) benefit
Net-of-tax Amount
(dollars in thousands)
Available for sale securities
Interest Rate swaps designated as cash flow hedges
Defined benefit retirement plans
Total accumulated other comprehensive income
EARNINGS PER SHARE
The following represents a reconciliation between basic and diluted earnings per share:
For the Year Ended December 31,
(dollars in thousands, except per share data)
Earnings per common share - basic:
Numerator:
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:
Numerator:
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
DERIVATIVES and Hedging Activities
The Company utilizes interest rate swaps and floors to mitigate exposure to interest rate risk and to facilitate the needs of its clients. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s assets.
The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s existing credit derivatives result from loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate floors as part of its interest rate risk management strategy. 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. During 2023, such derivatives were used to hedge the variable cash flows associated with variable-rate assets.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and AOCL 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 AOCI and AOCL related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets.
During fiscal year 2024, the Company estimates that $ 391,000 will be reclassified out of AOCI into earnings, as a decrease to interest income.
Fair Value Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain pools of fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. The Company’s interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
The Company recorded the following amounts on the balance sheet related to cumulative basis adjustment for fair value hedges:
Line Item in the Statement of Financial Position in Which the Hedged Item is Included
Carrying Amount of the Hedged Assets/(Liabilities)
Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
December 31, 2023
December 31, 2022
December 31, 2023
December 31, 2022
(dollars in thousands)
Fixed rate loans
Total
These amounts include the amortized cost basis of closed portfolios of fixed rate residential loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At December 31, 2023 , the amortized cost basis of the closed portfolios used in these hedging relationships was $ 681.1 million; the cumulative basis adjustments associated with these hedging relationships was $ 1.2 million; and the notional amount of the designated hedged items were $ 500.0 million. The Company had no fair value hedges at December 31, 2022. 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. At December 31, 2023 , the Company’s fair value hedges had a weighted average remaining maturity of 1.28 years, and a weighted average fixed rate of 4.16 %.
Derivatives not designated as hedging instruments
Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain clients. For the Company’s clients, these are interest rate swaps and risk participation agreements.
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 Company 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 borrower’s fixed-rate loan payments for 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 loan related derivative income.
The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Company only enters into interest rate agreements 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.
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, and pays a fee 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 Company’s consolidated balance sheets:
December 31, 2023
Derivative Assets
Derivative Liabilities
Notional Amount
Balance Sheet
Location
Fair Value
Notional Amount
Balance Sheet
Location
Fair Value
(dollars in thousands)
(dollars in thousands)
Derivatives designated as hedging instruments
Interest rate contracts-cash flow hedging relationships
Other Assets
Other Liabilities
Interest rate contracts-fair value hedging relationships
Other Assets
Other Liabilities
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate contracts
Other Assets
Other Liabilities
Risk participation agreements-out to counterparties
Other Assets
Other Liabilities
Risk participation agreements-in with counterparties
Other Assets
Other Liabilities
Total derivatives not designated as hedging instruments
December 31, 2022
Derivative Assets
Derivative Liabilities
Notional Amount
Balance Sheet
Location
Fair Value
Notional Amount
Balance Sheet
Location
Fair Value
(dollars in thousands)
(dollars in thousands)
Derivatives designated as hedging instruments
Interest rate contracts-cash flow hedging relationships
Other Assets
Other Liabilities
Total derivatives designated as hedging instruments
Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate contracts
Other Assets
Other Liabilities
Risk participation agreements-out to counterparties
Other Assets
Other Liabilities
Risk participation agreements-in with counterparties
Other Assets
Other Liabilities
Total derivatives not designated as hedging instruments
The following tables present the changes to AOCI and AOCL as a result of cash flow hedge accounting as of the periods presented:
Twelve Months Ended December 31, 2023
Amount of Gain or (Loss) Recognized in OCI
Amount of Gain or (Loss) Recognized in OCI Included Component
Amount of Gain or (Loss) Recognized in OCI Excluded Component
Location of Gain or (Loss)
Amount of Gain or (Loss) Reclassified from AOCL into Income
Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component
Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component
(dollars in thousands)
(dollars in thousands)
Interest rate contracts
Interest Income
Twelve Months Ended December 31, 2022
Amount of Gain or (Loss) Recognized in OCI
Amount of Gain or (Loss) Recognized in OCI - Included Component
Amount of Gain or (Loss) Recognized in OCI - Excluded Component
Location of Gain or (Loss)
Amount of Gain or (Loss) Reclassified from AOCI into Income
Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component
Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
(dollars in thousands)
(dollars in thousands)
Interest rate contracts
Interest Income
The following table presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income as of the periods presented:
Amount of Gain or (Loss) Recognized in Income
For the Year Ended December 31,
Location of Gain or (Loss)
(dollars in thousands)
Other contracts
Loan-related derivative income
Credit-risk-related Contingent Features
By entering into derivative transactions, 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 Company’s 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 Company’s 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.
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 Company’s derivative transactions with institutional counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” 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 sheets as of December 31, 2023 and December 31, 2022:
Gross Amounts Not Offset
Gross Amounts Recognized
Gross Amounts Offset
Net Amounts Recognized
Financial Instruments
Collateral Pledged (Received)
Net Amount
December 31, 2023
(dollars in thousands)
Offsetting of Derivative Assets
Derivative Assets
Offsetting of Derivative Liabilities
Derivative Liabilities
Gross Amounts Not Offset
Gross Amounts Recognized
Gross Amounts Offset
Net Amounts Recognized
Financial Instruments
Collateral Pledged (Received)
Net Amount
December 31, 2022
(dollars in thousands)
Offsetting of Derivative Assets
Derivative Assets
Offsetting of Derivative Liabilities
Derivative Liabilities
At December 31, 2023 and December 31, 2022, there were no derivatives in a net liability position related to these financial instruments.
FAIR VALUE MEASUREMENTS
The following is a summary of the carrying values and estimated fair values of the Company’s significant financial instruments as of the dates indicated:
December 31, 2023
December 31, 2022
Carrying
Value
Estimated
Fair Value
Carrying
Value
Estimated
Fair Value
(dollars in thousands)
Financial assets
Cash and cash equivalents
Securities available for sale
Securities held to maturity
Loans, net
FHLB of Boston stock
Accrued interest receivable
Mortgage servicing rights
Interest rate contracts - cash flow hedge
Interest rate contracts - fair value hedge
Loan level interest rate swaps
Risk participation agreements out to counterparties
Financial liabilities
Deposits, excluding wholesale deposits
Wholesale deposits
Borrowings
Interest rate contracts - fair value hedge
Loan level interest rate swaps
Risk participation agreements in with counterparties
The Company follows ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), for financial assets and liabilities. ASC Topic 820 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements. ASC Topic 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 Topic 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 Company’s 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 Company’s market assumptions.
Under ASC Topic 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.
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.
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 loans held for sale, mortgage servicing rights, other real estate owned, and individually evaluated collateral dependent loans. The Company uses an exit price notion for its fair value disclosures.
The following tables summarize certain assets reported at fair value on a recurring basis:
Fair Value as of December 31, 2023
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Measured on a recurring basis
Securities available for sale
U.S. GSE obligations
Mortgage-backed securities
Other assets
Interest rate swaps with clients
Risk participation agreements -out to counterparties
Interest rate contracts - cash flow hedge
Interest rate contracts - fair value hedge
Other liabilities
Interest rate swaps with counterparties
Risk participation agreements-in with counterparties
Interest rate contracts - fair value hedge
Fair Value as of December 31, 2022
Level 1
Level 2
Level 3
Total
(dollars in thousands)
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 clients
Risk participation agreements-out to counterparties
Interest rate contracts
Other liabilities
Interest rate swaps with counterparties
Risk participation agreements-in with counterparties
The following table presents the carrying value of assets held at December 31, 2023 and December 31, 2022, which were measured at fair value on a non-recurring basis:
December 31, 2023
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Items recorded at fair value on a non-recurring basis
Assets
Individually evaluated collateral dependent loans
Total
December 31, 2022
Level 1
Level 2
Level 3
Total
(dollars in thousands)
Items recorded at fair value on a non-recurring basis
Assets
Individually evaluated collateral dependent loans
Total
Individually evaluated collateral dependent 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.
There were no transfers between fair value levels for the years ended December 31, 2023 and 2022.
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 Topic 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 Company’s 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.
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 Company 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 Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.
Off-Balance-Sheet Financial Instruments
In the course of originating loans and extending credit, the Company will charge fees in exchange for its commitment. While these commitment fees have value, the Company 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 Topic 820, the Company has not estimated fair values for non-financial assets such as banking premises and equipment, goodwill, the intangible value of the Company’s portfolio of loans serviced for itself, and the intangible value inherent in the Company’s deposit relationships (i.e., core deposits), among others. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
23. Condensed Financial Statements of Parent Company
The condensed balance sheets of Cambridge Bancorp, the Parent Company, as of December 31, 2023 and December 31, 2022 and the condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2023 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
December 31,
(dollars in thousands)
ASSETS
Cash and cash equivalents
Goodwill
Other assets
Investment in subsidiary
Total assets
SHAREHOLDERS’ EQUITY
Shareholders’ equity
Total shareholders’ equity
Condensed Statements of Income
For the Year Ended December 31,
(dollars in thousands)
Income
Dividends from subsidiary
Total income
Expenses
Interest expense
Other expenses
Total expenses
Income before income taxes and equity in undistributed income of subsidiary
Income tax benefit
Income of parent company
Equity in undistributed income of subsidiary
Net income
Condensed Statements of Cash Flows
For the Year Ended December 31,
(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided
by operating activities
Deferred income tax benefit
Change in other assets, net
Change in other liabilities, net
Undistributed income of subsidiary
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash used in 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
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Significant non-cash transactions
Common Stock issued to shareholders due to merger
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of 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, 2023, and 2022, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes (collectively, “the financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023, and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013, and our report dated March 12, 2024 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s 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 U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Company’s Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses– Qualitative Factors and Forecasts
Critical Audit Matter Description
As described in Notes 2 and 7 to the financial statements, the Company has recorded an allowance for credit losses for its loan portfolio in the amount of $38.9 million as of December 31, 2023 representing management’s estimate of credit losses over the remaining expected life of the Company’s loan portfolio as of that date. Management determined this amount, and corresponding provision for credit loss expense, pursuant to the application of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses .
The Company’s methodology to determine its allowance for credit losses incorporates qualitative assessments of its current loan portfolio and economic conditions, and the application of forecasted economic conditions. We determined that performing procedures relating to these components of the Company’s methodology is a critical audit matter.
The principal considerations for our determination are (i) the application of significant judgment and estimation on the part of management, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures and evaluating audit evidence obtained, and (ii) significant audit effort was necessary in evaluating management’s methodology, significant assumptions and calculations.
How the Critical Audit Matter was Addressed in the Audit
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to the Company’s determination of qualitative factors and forecasted economic conditions. These procedures also included, among others, testing management’s process for determining the qualitative reserve component, evaluating the appropriateness of management’s methodology relating to the qualitative reserve component and testing the completeness and accuracy of data utilized by management.
/s/ Wolf & Company, P.C.
Boston, Massachusetts
March 12, 2024
We have served as the Company’s auditor since 2020.
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Cambridge Bancorp:
Opinion on the Internal Control Over Financial Reporting
We have audited Cambridge Bancorp and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the December 31, 2023 consolidated financial statements of the Company and our report dated March 12, 2024 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting . Our responsibility is to express an opinion on the Company’s 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 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 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
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's 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 company's assets that could have a material effect on the financial statements.
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/ Wolf & Company, P.C.
Boston, Massachusetts
March 12, 2024
