CAMBRIDGE BANCORP
ANNUAL REPORT
2012
The mission of the Cambridge Trust Company is to maintain a level of
growth and earnings that will yield a superior return to Stockholders while
retaining its position as a responsible, active and socially sensitive member
of its communities. To achieve this, the Bank will develop and support
intelligent and proficient employees. Through
friendly, responsible and
trustworthy services, the Bank will provide sound financial help to existing and
prospective customers. The Bank will continue to provide services to individual,
retail and commercial customers located within its present community and also
within areas identified for expansion.
ROBERT J. BETTACCHI
DIRECTORS
Principal/Owner
RJB Consulting
Retired Senior Vice President of
W.R. Grace & Company and
President of Grace Performance Chemicals
JEANETTE G. CLOUGH
President and Chief Executive Officer
Mount Auburn Hospital
HAMBLETON LORD
JEAN K. MIXER
Managing Director
Launchpad Venture Group
Chief Executive Officer
Mixer Consulting
LEON A. PALANDJIAN
Managing Member
ROBERT S. PETERKIN
Intercontinental Capital Management, LLC
Portfolio Manager
Techari Global Healthcare Fund
Professor of Practice Emeritus
Harvard Graduate School of Education
Principal
Peterkin Consulting Group
JOSEPH V. ROLLER II
President and Chief Executive Officer
Cambridge Bancorp and Cambridge Trust Company
R. GREGG STONE
Manager
Kestrel Management, LLC
ANNE M. THOMAS
DAVID C. WARNER
LINDA WHITLOCK
Retired Special Counsel
City of Somerville
Partner
J. M. Forbes & Co. LLP
Lead Director
Cambridge Bancorp and Cambridge Trust Company
Principal
The Whitlock Group
KATHRYN A. WILLMORE
Retired Vice President and Secretary of the Corporation
Massachusetts Institute of Technology
BYRON E. WOODMAN, JR. President
Monument Financial Advisors, LLC
Woodman & Eaton, P.C.
If we could first know where we are, and whither we are tending,
we could then better judge what to do and how to do it.
—Abraham Lincoln
For Lincoln, good judgment about what to do and how to do it
follows from knowledge of where we are and of where we are going. That
sounds reasonable enough. But how is such knowledge to be acquired and
sustained over time? For institutions, as much as for individuals, it begins
with thinking about what we are capable of doing. What we are capable of
doing is best understood in light of what we aim to do and how we plan to
pursue our aims. But the first task is to know our own capabilities, so that
we will be better positioned to benefit from and to build upon them.
Since 2008, financial institutions have been faced with the
necessity of making the most of current capabilities and actively fostering
the growth of new ones under difficult conditions. Where the Bank is now
reflects in part, then, where we have been over the past four years. We
have been operating in a post-recession economy characterized by slow
growth, low interest rates, and broad uncertainty. Throughout this period,
I am pleased to report that we have thrived. The Bank has adapted to a
challenging environment in a way that corresponds with our long-term
vision of where we aim to be, as well as with our underlying principles.
In a time marked by widespread concern about bank asset quality and
liquidity, Cambridge Trust Company performed admirably and, just as
importantly, consistently.
The year ending December 31, 2012 was a record year for
Cambridge Trust Company, as the Bank continued to benefit from
1
investments made in prior years and remained focused on executing
its business plans. Net income for the year ending December 31, 2012
of $13,403,000 compared favorably to earnings for the year ended
December 31, 2011 of $12,477,000. The $926,000 increase in year-over-
year earnings was 7.4%.
Diluted earnings per share (EPS) were $3.45 for the year ended
December 31, 2012, compared to $3.25 diluted EPS for the prior year.
There were many factors that contributed to the Bank’s sustained
earnings growth in a year when net interest margins remained under
downward pressure. For the fourth consecutive year, deposits grew by
more than $100 million. In fact, the $155.7 million growth in deposits in
2012 represented a record for the Bank. In addition, total loans increased
$69.0 million in 2012. The combined effect of the Bank’s balance sheet
growth produced net interest income for 2012 of $45,875,000 compared
to $43,732,000 for the year ended December 31, 2011 – an increase of
$2,143,000 (4.9%) – during a period when the Bank’s net interest margin
declined to 3.58% from 3.90% in 2011.
Year End
2008
2009
2010
2011
2012
4.11 %
4.27 %
$ 993,808
$ 568,568
$ 872,767
$ 537,933
Deposits (in thousands) ....... $ 767,654
Total Loans (in thousands) .. $ 471,814
Net Interest Margin .............
Noninterest Income
(in thousands)(A)................. $ 16,848
$
$ 19,877
$ 16,618
$
$ 13,254
$ 10,277
9,613
Net Income (in thousands) .. $
$
3.53
$
2.75
$
2.56
Basic Earnings/Share .......... $
$
1.40
$
1.34
$
Dividends Declared ............. $
1.28
23.73
21.95
20.29
Book Value .......................... $
$
$
$
1.25 %
1.06 %
Return/Average Assets ........
1.09 %
14.98 %
13.09 %
13.46 %
Return/Average Equity ........
4.15 %
$ 1,125,654
$ 673,265
$ 1,281,333
$ 742,249
3.90 %
3.58 %
$
18,147
$
12,477
$
3.29
$
1.42
25.39
$
1.06 %
13.26 %
20,489
13,403
3.49
1.50
27.21
1.00 %
13.39 %
(A) Includes $2.8 million pre-tax gain on disposition of merchant services portfolio in 2010
Another important driver for Cambridge Trust’s earnings growth,
especially in 2012, was noninterest income. This diversified revenue
source, which accounts for just over 30 percent of total revenues, grew
by $2.3 million (12.9%) in 2012 compared to 2011. The upturn was
particularly helpful at a time of margin pressure. Wealth Management,
which achieved its own revenue record in 2012, accounted for the
2
majority of noninterest income. Other revenue streams were generated by
corporate cash management, the sale of 30-year conforming mortgages
in the secondary market, interchange from debit card usage, gains on the
disposition of investment securities, and fees from other bank services.
This past year, we introduced a new brand platform built around
the theme of “Life’s Bank.” This campaign aims to capture the ethos
of responsiveness and personal attention that characterizes the Bank’s
approach to customers. Most financial transactions with a bank do not
require personal assistance. There are times, however, when life happens
and the intervention of an experienced and engaged professional is
necessary. This is where Cambridge Trust excels. We will build on this
brand message more robustly in 2013.
Earnings returns achieved by Cambridge Trust continue to position
the Bank favorably in the industry. The return on average equity in 2012
was 13.39%, and the return on average assets in the same year was 1.00%.
It is important that shareholders benefit from the Bank’s consistently strong
earnings performance. In that regard, the quarterly dividend was increased
by 5.4% to $0.39 per share.
Consumer Banking
Momentum continues to increase in the Bank’s consumer banking
business, as earlier investments in capabilities and infrastructure attract
new relationships from customers who gravitate to Cambridge Trust’s
customer-centric approach to banking. One way to measure success is by
the growth in core checking, savings, and money market account balances.
In 2012, these balances grew by $100.3 million (15.5%).
We are mindful that convenience and access are hallmarks of a
remarkable customer experience. To that end, customers need to have
access to the Bank on their terms. Some prefer a branch and others, a
phone call to the Customer Resource Center (CRC). A growing number
use internet and mobile banking. This past year Cambridge Trust’s internet
banking platform was enhanced to provide online loan statements, eBills,
3
customer alerts, and risk notifications. Most recently, the Bank introduced
remote deposit capture that takes convenience to another level. This
feature enables customers using mobile banking to take a photograph of
a check with a mobile device and transmit the image securely to the Bank
for deposit.
Activity in the residential mortgage lending business continued
to grow in 2012 as customers sought to refinance mortgages in order to
take advantage of historically low interest rates. In 2012, the Bank took
significant steps to raise its presence and improve its competitive position,
while maintaining its service differentiation.
Cambridge Trust has traditionally held and serviced all of its
residential mortgage loans. We adjusted this position in 2012 as it pertained
to 30-year conforming mortgages. The Federal Reserve Bank was actively
purchasing mortgage-backed securities – essentially buying down rates –
to provide stimulus to the economy. In the first half of the year, the Bank
began to sell 30-year conforming mortgages in the secondary market, while
still retaining servicing of the loans. If our customers have questions about
one of their most important financial commitments, they should have the
ability to contact a trusted partner.
We enhanced our mortgage banking capabilities further in 2012
by introducing an online application system. This added a new level of
convenience for customers, offering them the opportunity to apply for a
mortgage online at any time of day or night. The new service streamlines the
process for the customer and the Bank. Susan Barry’s leadership has been
critical to the enhancement of the Bank’s mortgage banking capabilities.
To promote and support the Bank’s residential loan growth
strategy, the Bank added to its mortgage banking team. We were delighted
that Todd Spoor, Vice President, Private Mortgage Banking, and Jim Zurn,
Consumer Loan Officer, joined the Bank. Todd will focus on business
development, and Jim will strengthen our underwriting team.
4
We were pleased to note in an earlier quarterly report that the
Bank opened its twelfth full-service branch in 2012. It is located at
565 Tremont Street in Boston’s South End. We have been warmly received
in this vibrant and exciting neighborhood. Its residents, businesses, and
varied organizations have seen that Cambridge Trust is a good community
partner. Branch Manager, John Chambers, who joined the Bank in June,
provides the leadership and engagement necessary to achieve success.
It was with mixed feelings that we bid farewell to Helen Van
Nostrand, Harvard Square Branch Manager, and Donna Petro, Beacon
Hill Branch Manager, who retired in December. Both set high standards
for customer service, branch operations, and leadership. We are grateful
for their service and for ensuring a smooth management transition. Jo-Ann
Bussiere joined the Bank in 2012 and succeeded Helen. Basharat Sheikh,
who has been a presence in the Beacon Hill branch for many years, was
promoted to Branch Manager.
Business Banking
The protracted period of low interest rates, characterized in 2012
by a federal funds rate trading at 25 basis points and 10-year treasury rates
between 1.5%-2.0%, places considerable pressure on net interest margins.
Proceeds from maturing securities investments and commercial loans that
were made a few years ago are now reinvested at much lower rates. During
such periods, it is crucial for the Bank to maintain steady commercial loan
growth and to deepen its banking relationships by marketing deposit and
cash management services. We achieved positive outcomes on all fronts.
Our commercial lending team had another successful year,
producing for the second consecutive year over $50 million in loan
growth. The dynamics of building the Bank’s loan portfolio are interesting
and challenging. Given that loans are regularly amortizing or maturing,
new business of $2.00 is required in order to increase loan outstandings
by $1.00. To help meet the challenge, the Bank added to its bench two
veteran lenders, Steven Mead, Vice President, and Edward Fitzgerald, Vice
5
President. We also recognized the contributions of one of our portfolio
managers and promoted Mark Earnest to Banking Officer.
Critical to the success of any bank’s lending business is the loan
underwriting process. This is especially true during periods of portfolio
growth and changing economic circumstances. Underwriting standards
and credit risk management have been hallmarks at Cambridge Trust and
continued in 2012. Net charge-offs were only $11,000. The Bank’s non-
performing loans increased modestly from $1,204,000 at the end of 2011
to $1,570,000 in the year ended 2012. The Allowance for Loan Losses
was $10,948,000 on December 31, 2012 or 1.47% of total loans. In 2011,
it was $10,159,000 and 1.51%, respectively. We are pleased that Karina
Pinella, Senior Credit Analyst Officer, joined the Credit Department in
2012 to strengthen the commercial loan underwriting team.
Deepening commercial loan relationships by offering deposit
account and cash management services is the responsibility of our business
banking and cash management teams. They collaborate with lenders and
branch managers not to sell products, but rather to address customer
needs. Judging by the $56.9 million increase in commercial deposits and
the uptrend in cash management fees, the group experienced considerable
success in 2012. Gene Kalaw, Assistant Vice President, joined the business
banking team in 2012, bringing to the Bank his extensive experience and
knowledge of Cambridge and surrounding communities. Additionally, in
recognition of her customer relationship skills and contributions, Kate
Carlson was promoted to Vice President.
While Cambridge Trust has many opportunities to grow the
business, some have greater potential than others. Selecting those
opportunities with the most potential is important. In this context, in-
depth knowledge of the Bank’s capabilities vis-à-vis key markets in the
community makes a difference, as we have found over the past two years.
During this time, the Bank has made significant inroads into the innovation
sector through its establishment of an active presence in the locus of
entrepreneurial, idea-centered, and technology-driven activity that is
Kendall Square. In the 2011 Annual Report, I observed that “the challenge
6
of differentiating Cambridge Trust and demonstrating value in an industry
that has become commoditized is formidable.” While that remains the case
with respect to the banking industry, our effort to participate in and add
value to the innovation sector, beginning with the opening of an office
in the Cambridge Innovation Center (CIC) in 2011, has steadily gained
momentum and reached a new level of operation.
Jane Mason, Vice President, has elevated the Bank’s presence
in the innovation sector and attracted new deposit relationships and loan
business. New business necessitates appropriate resource allocation,
including management oversight. We took the occasion in 2012 to fine-
tune our organization to bring the necessary resources and management
focus to those key areas, in keeping with our sense of priorities. Robert
Davis, Senior Vice President, who has been the Bank’s Chief Lending
Officer, was appointed Chief Credit Officer; Bob will continue to oversee
and develop the Bank’s innovation initiative. Martin Millane, Senior Vice
President, was appointed Chief Lending Officer, with responsibility for all
of the Bank’s business banking activities.
Wealth Management
Wealth Management had an exemplary year in 2012, benefitting
from the consistent enhancement of its investment management and
trust services capabilities. The Department’s steady focus on its clients
and prospective clients has produced noteworthy growth in assets under
management (AUM) and revenues. AUM reached a new high of $1.79
billion at the end of 2012, increasing $327 million (22.3%) from December
2011. Likewise, revenues experienced a healthy uptrend, increasing
$958,000 (7.3%) in 2012.
Year
2008
2009
2010
2011
2012
Wealth Management
Gross Revenues
(in thousands)
Managed Assets
(in millions)
$ 11,749
$ 11,353
$ 12,364
$ 13,152
$ 14,110
7
$ 1,210
$ 1,383
$ 1,507
$ 1,468
$ 1,795
New Hampshire had an especially strong year. The new
Portsmouth office has enhanced the Bank’s presence in the Granite State
and reaffirms our commitment to grow. In addition, the Bank’s subsidiary,
Cambridge Trust Company of New Hampshire, Inc., formed in 2010 to
take advantage of new trust statutes, has begun to gain traction. What we
call “The New Hampshire Advantage” entails offering financial planning
opportunities and options for residents and non-residents. The addition in
2012 of Judy Goodnow, Senior Vice President and Trust Officer, to the
team was important to our continued growth.
In Massachusetts, we have continued to present Thought Series®
events and Wealth Management forums. These have been well received
by both clients and prospective clients, with whom we wish to begin a
conversation. Toward the end of 2012, we initiated a new program series
targeted toward the entrepreneur and small business owner. We will build
on this in 2013.
During the year, we recognized the talent and contributions of Alice
Flanagan and Kathryn Hersey, who were promoted to Trust Officer and
Assistant Vice President and Investment Officer, respectively. In addition,
David Strachan was promoted to Senior Vice President and now oversees
Trust Administration. He succeeds Melinda Donovan who retired in June
after 19 years of dedicated service to Cambridge Trust. We will miss her
leadership and professionalism and are grateful to her for developing a
solid Trust team.
The coming year will bring at least one important change to
Wealth Management – its address. This is a positive development for
our employees and, most importantly, our clients. The move to 75 State
Street in Boston’s Financial District will accommodate the Department’s
continued growth and provide an attractive and convenient location for
client visits. We expect this move to occur in early summer.
* * *
I want to take this time to acknowledge some other employees at
Cambridge Trust who were promoted in 2012. Their talents helped us to
8
add new features to mobile and internet banking, improve production and
efficiency in statement operations, and protect the security of our customers
and that of the Bank. They are Pooja Bhandary, Assistant Operations
Officer, Renèe Daniell, Assistant Operations Officer, and Medard Kadima,
Information Security Officer. In addition, I want to acknowledge the
retirement of Nancy Zuzolo, Operations Officer, and thank her for her
keen oversight of the Deposit Risk Management area.
* * *
Cambridge Trust has consistently benefitted from an engaged and
dynamic Board of Directors. At no time has this been more important than
during the period of 2008-2012, when the broad economy was in decline
and the financial services industry was under threat. The Bank’s Board,
with its diversity of experience and capabilities, provided insight and
guidance during a challenging period.
In 2012, Jane Barrett, founder of J. M. Barrett & Co., Inc., in
Concord, Massachusetts, one of the area’s leading real estate companies,
retired from the Board. Jane has provided leadership in the community and
highly valuable support to the Bank. We will miss her sound judgment and
advice.
The Bank welcomed a new member to the Board during the year.
Hambleton “Ham” Lord is the Managing Director of Launchpad Venture
Group, the largest angel investing group in the Northeast. Ham brings more
than 25 years’ experience in the software industry and deep understanding
of the innovation sector to Cambridge Trust. This is particularly timely as
the Bank builds its capabilities and presence in the Kendall Square and
Boston innovation clusters.
* * *
The year ahead will present similar challenges to those encountered
in 2012. We feel well prepared and look to 2013 with enthusiasm and
confidence. That confidence is built on knowledge of the Bank’s capabilities
and especially the talents of its employees. I am very grateful for their
dedication and their immense contributions.
9
As 2013 unfolds and with the anticipated relocation of Wealth
Management to 75 State Street in Boston, we will take the opportunity to
renovate the Bank’s Harvard Square headquarters. This will include major
construction on both the first floor and lower level. The work will take most
of 2013 to finish. When complete, the Bank will have banking premises
that better suit the current and future servicing needs of our customers.
In closing, I want to acknowledge and thank our shareholders for
their sustained support and confidence in Cambridge Trust Company. We
will strive to maintain the high levels of performance you have come to
expect, while always operating with integrity.
Respectfully submitted,
Joseph V. Roller II
President and CEO
March 1, 2013
10
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Cambridge Bancorp:
Report on the Financial Statements
We have audited the accompanying consolidated financial statements of Cambridge Bancorp and its
subsidiaries, which comprise the consolidated balance sheets as of December 31, 2012 and 2011, and
the related consolidated statements of income, changes in stockholders’ equity, and cash flows for the
years then ended, and the related notes to the consolidated financial statements.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with U.S. generally accepted accounting principles; this includes the design,
implementation, and maintenance of internal control relevant to the preparation and fair presentation
of consolidated financial statements that are free from material misstatement, whether due to fraud or
error.
Auditors’ Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our
audits. We conducted our audits in accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free from material misstatement.
REPORT OF INDEPENDENT AUDITORS
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the consolidated financial statements. The procedures selected depend on the auditors’ judgment,
including the assessment of the risks of material misstatement of the consolidated financial statements,
whether due to fraud or error. In making those risk assessments, the auditor considers internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in
To the Board of Directors and Stockholders of Cambridge Bancorp:
order to design audit procedures that are appropriate in the circumstances. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of significant
We have audited the accompanying consolidated balance sheets of Cambridge Bancorp and
subsidiaries (the “Corporation”) as of December 31, 2011 and 2010, and the related consolidated
accounting estimates made by management, as well as evaluating the overall presentation of the
statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for
consolidated financial statements.
the years then ended. These consolidated financial statements are the responsibility of the
Corporation’s management. Our responsibility is to express an opinion on these consolidated
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
financial statements based on our audits.
for our audit opinion.
We conducted our audits in accordance with auditing standards generally accepted in the United
Opinion
States of America. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
In our opinion, the consolidated financial statements referred to above present fairly, in all material
statements. An audit also includes assessing the accounting principles used and significant estimates
respects, the financial position of Cambridge Bancorp and its subsidiaries as of December 31, 2012
made by management, as well as evaluating the overall financial statement presentation. We believe
and 2011, and the results of their operations and their cash flows for the years then ended in accordance
that our audits provide a reasonable basis for our opinion.
with U.S. generally accepted accounting principles.
In our opinion, the consolidated financial statements referred to above present fairly, in all material
respects, the financial position of the Corporation as of December 31, 2011 and 2010, and the results
Report on Other Legal and Regulatory Requirements
of their operations and their cash flows for the years then ended in conformity with U.S. generally
accepted accounting principles.
We also have examined in accordance with attestation standards established by the American Institute
of Certified Public Accountants, Cambridge Trust Company’s internal control over financial reporting
We also have examined in accordance with attestation standards established by the American
Institute of Certified Public Accountants, the Corporation’s internal control over financial reporting
as of December 31, 2012, based on criteria established in Internal Control – Integrated Framework
as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and
our report dated March 1, 2013 expressed an unqualified opinion on the effectiveness of Cambridge
our report dated March 2, 2012 expressed an unqualified opinion on the effectiveness of the Bank’s
internal control over financial reporting.
Trust Company’s internal control over financial reporting.
Boston, Massachusetts
Boston, Massachusetts
March 2, 2012
March 1, 2013
11
December 31,
2012
2011
(In thousands)
59,923
$
—
59,923
$
—
22,512
22,512
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Cash and due from banks .............................................................
Overnight investments .................................................................
Total cash and cash equivalents .......................................
Investment securities:
Available for sale, at fair value ..............................................
Held to maturity, at amortized cost ........................................
Total investment securities ...............................................
Loans held for sale, at lower of cost or fair value ........................
Loans:
Residential mortgage .............................................................
Commercial mortgage ............................................................
Home equity ...........................................................................
Commercial ............................................................................
Consumer ...............................................................................
Total loans ........................................................................
Allowance for loan losses ......................................................
Net loans ..........................................................................
502,318
71,133
573,451
1,684
347,908
276,428
50,574
47,570
19,769
742,249
(10,948)
731,301
Federal Home Loan Bank of Boston stock, at cost ......................
Bank owned life insurance ...........................................................
Banking premises and equipment, net .........................................
Accrued interest receivable ..........................................................
Other assets ..................................................................................
Total assets .................................................................
5,010
22,903
6,214
3,877
13,623
$ 1,417,986
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Demand ..................................................................................
Interest bearing checking .......................................................
Money market ........................................................................
Savings ...................................................................................
Certificates of deposit ............................................................
Total deposits ...................................................................
Short-term borrowings .................................................................
Long-term borrowings .................................................................
Other liabilities .............................................................................
Total liabilities..................................................................
Stockholders’ equity:
Common stock, par value $1.00; Authorized
5,000,000 shares; Outstanding: 3,854,951 and
3,805,748 shares, respectively .............................................
Additional paid-in capital ......................................................
Retained earnings ...................................................................
Accumulated other comprehensive income ...........................
Total stockholders’ equity ..........................................
Total liabilities and stockholders’ equity ...................
$ 329,211
363,575
60,850
393,541
134,156
1,281,333
—
20,000
11,762
1,313,095
3,855
24,421
75,787
828
104,891
$ 1,417,986
The accompanying notes are an integral part of these
consolidated financial statements.
12
470,232
74,256
544,488
—
330,933
231,595
61,307
38,260
11,170
673,265
(10,159)
663,106
4,806
17,331
6,216
4,423
12,978
$ 1,275,860
$ 285,724
316,454
58,532
328,771
136,173
1,125,654
2,500
30,000
21,073
1,179,227
3,806
23,001
68,232
1,594
96,633
$ 1,275,860
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
2011
2012
(In thousands, except
per share data)
Interest income:
Interest on loans ..................................................................
Interest on taxable investment securities ............................
Interest on tax exempt investment securities ......................
Dividends on FHLB of Boston stock ..................................
Interest on overnight investments .......................................
Total interest income .....................................................
$
Interest expense:
Interest on deposits .............................................................
Interest on borrowed funds .................................................
Total interest expense ....................................................
Net interest income .......................................................
Provision for loan losses ...........................................................
Net interest income after provision for loan losses .............
Noninterest income:
Wealth management income ...............................................
Deposit account fees ...........................................................
ATM/Debit card income .....................................................
Bank owned life insurance income .....................................
Gain on disposition of investment securities ......................
Gain on loans held for sale ..................................................
Other income .......................................................................
Total noninterest income ...............................................
Noninterest expense:
Salaries and employee benefits ...........................................
Occupancy and equipment ..................................................
Data processing ...................................................................
Professional services ...........................................................
Marketing ............................................................................
FDIC Insurance ...................................................................
Other expenses ....................................................................
Total noninterest expense ..............................................
Income before income taxes .........................................
Income tax expense ...................................................................
Net income ....................................................................
Per share data:
Basic earnings per common share .......................................
Diluted earnings per common share ...................................
Average shares outstanding - basic .....................................
Average shares outstanding - diluted ..................................
$
$
$
33,984
13,003
2,029
25
25
49,066
2,219
972
3,191
45,875
800
45,075
14,110
2,398
1,043
713
882
592
751
20,489
27,835
7,660
3,560
1,585
1,842
704
2,661
45,847
19,717
6,314
13,403
3.49
3.45
3,839,681
3,879,607
The accompanying notes are an integral part of these
consolidated financial statements.
13
$
$
$
$
32,401
13,219
1,987
14
42
47,663
2,745
1,186
3,931
43,732
1,000
42,732
13,152
2,179
981
519
552
—
764
18,147
25,116
7,323
3,594
1,588
1,703
752
2,609
42,685
18,194
5,717
12,477
3.29
3.25
3,791,167
3,834,569
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year Ended December 31,
2011
2012
(In thousands)
Net income ...................................................................................
$
13,403
$
12,477
Other comprehensive income/(loss), net of tax:
Defined benefit retirement plans:
Change in unfunded retirement liability ..........................
104
(2,941)
Unrealized gains/(losses) on Available for Sale securities:
Unrealized holding gains/(losses) arising
during the period ............................................................
Less: reclassification adjustment for gains
recognized in net income ...............................................
Other comprehensive income/(loss) ............................................
(302)
(568)
(766)
2,259
(351)
(1,033)
Comprehensive income ....................................................
$
12,637
$
11,444
The accompanying notes are an integral part of these
consolidated financial statements.
14
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B
CAMBRIDGE BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows provided by operating activities:
Net income .............................................................................
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses ..................................................
Amortization of deferred charges/(income), net ..............
Depreciation and amortization .........................................
Bank owned life insurance income ..................................
Gain on disposition of investment securities ...................
Compensation expense from stock option
and restricted stock grants ..............................................
Change in loans held for sale ...........................................
Change in accrued interest receivable, deferred
taxes, other assets and other liabilities ...........................
Other, net ..........................................................................
Net cash provided by operating activities ..................
Year Ended December 31,
2012
2011
(In thousands)
$
13,403
$
12,477
800
1,360
1,430
(713)
(882)
551
(1,684)
(8,655)
291
5,901
1,000
561
1,441
(519)
(552)
401
—
359
481
15,649
Cash flows used by investing activities:
Origination of loans ...............................................................
(205,096)
(211,667)
Purchase of:
Investment securities - AFS .............................................
Investment securities - HTM ...........................................
(201,506)
(824)
Maturities, calls and principal payments of:
Loans ................................................................................
Investment securities - AFS .............................................
Investment securities - HTM ...........................................
Proceeds from sale of investment securities - AFS ................
Purchase of bank owned life insurance ..................................
Change in FHLB of Boston stock ..........................................
Purchase of banking premises and equipment .......................
Net cash used by investing activities .........................
Cash flows provided by financing activities:
Net increase in deposits .........................................................
Net increase/(decrease) in short-term borrowings .................
Repayment of long-term borrowings .....................................
Proceeds from issuance of common stock .............................
Repurchase of common stock ................................................
Cash dividends paid on common stock ..................................
Net cash provided by financing activities ..................
Net increase/(decrease) in cash and cash equivalents ..................
Cash and cash equivalents at beginning of year ..........................
Cash and cash equivalents at end of year .....................................
Supplemental disclosure of cash flow information:
Cash paid for interest .............................................................
Cash paid for income taxes ....................................................
Non-cash transactions:
135,435
130,165
3,933
37,786
(5,000)
(204)
(1,428)
(106,739)
155,679
(2,500)
(10,000)
937
(103)
(5,764)
138,249
37,411
22,512
59,923
3,205
6,350
$
$
(235,502)
(2,531)
106,443
164,920
9,526
38,540
(5,001)
—
(1,614)
(136,886)
131,846
598
—
1,224
(287)
(5,388)
127,993
6,756
15,756
22,512
3,946
6,475
$
$
Change in AOCI, net of taxes ..........................................
(766)
(1,033)
The accompanying notes are an integral part of these
consolidated financial statements.
16
CAMBRIDGE BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2012
1. THE BUSINESS
The accompanying consolidated financial statements include the accounts of Cambridge
Bancorp (the “Corporation”) 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, CTC Security Corporation II and CTC Security Corporation
III. References to the Corporation 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 Corporation is a state chartered, federally registered bank holding company
headquartered in Cambridge, Massachusetts, that was incorporated in 1983. The
Corporation is closely held and has less than five hundred shareholders of record and,
accordingly, is not required to file quarterly, annual or other public reports with the
Securities and Exchange Commission (“SEC”). The Corporation is the sole stockholder of
the Bank, a Massachusetts trust company chartered in 1890 which is a community-oriented
commercial bank. The community banking business, the Corporation’s only reportable
operating segment, consists of commercial banking, consumer banking, and trust and
investment management services and is managed as a single strategic unit.
The Bank offers a full range of commercial and consumer banking services through
its network of 12 full-service banking offices in Massachusetts. 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 three wholly-
owned Massachusetts Security Corporations, CTC Security Corporation, CTC Security
Corporation II 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 full-service
branches in Massachusetts and through two wealth management offices located in New
Hampshire. The Bank also utilizes its non-depository trust company, Cambridge Trust
Company of New Hampshire, Inc., in providing wealth management services in New
Hampshire. The assets held for wealth management customers are not assets of the Bank
and, accordingly, are not reflected in the accompanying consolidated balance sheets. Total
assets managed on behalf of wealth management clients were approximately $1,795,000,000
and $1,468,000,000 at December 31, 2012 and 2011, respectively.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements have been prepared in conformity with U.S. generally accepted
accounting principles (“GAAP”) and general practices within the banking industry.
17
Use of Estimates
In preparing the consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual results could
differ from these estimates. Material estimates that are particularly susceptible to change
relate to the determination of the allowance for loan losses and review of goodwill for
impairment.
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’s (“FASB”) Accounting
Standards Codification (“ASC”) 320, “Investments – Debt and Equity Securities.”
Debt securities that management has the positive intent and ability to hold to maturity
are classified as held to maturity and are carried at cost, adjusted for the amortization
of premiums and the accretion of discounts, using the effective-yield method. U.S.
Government Sponsored Enterprise (“GSE”) obligations represent debt securities issued
by the Federal Farm Credit Bank (“FFCB”), the Federal Home Loan Banks (“FHLB”), the
Government National Mortgage Association (“GNMA”), the Federal National Mortgage
Association (“FNMA”) or the Federal Home Loan Mortgage Corporation (“FHLMC”).
Mortgage-backed securities represent Pass-Through Certificates and Collateralized
Mortgage Obligations (“CMOs”) either issued by, or collateralized by securities issued by,
GNMA, FNMA or FHLMC. Mortgage-backed securities are adjusted for amortization of
premiums and accretion of discounts, using the effective-yield method over the estimated
average lives of the investments.
Debt and equity securities not classified as held to maturity are classified as available for
sale and carried at fair value with unrealized after-tax gains and losses reported net as a
separate component of stockholders’ equity. Stockholders’ equity included net unrealized
gains of $7,174,000 and $8,044,000 at December 31, 2012 and 2011, respectively. These
amounts are net of deferred taxes payable of $4,109,000 and $4,619,000, in each of the
respective years. The Corporation classifies its securities based on its intention at the time
of purchase.
Declines in the fair value of investment securities below their amortized cost that are
deemed to be other-than-temporary are reflected in earnings as realized losses to the extent
the impairment is related to credit losses. The amount of the impairment related to other
factors is recognized in other comprehensive income. In estimating other-than-temporary
impairment losses, management considers (1) the length of time and the extent to which
the fair value has been less than cost; (2) the financial condition and near-term prospects of
the issuer; and (3) the Corporation’s intent to sell the security or whether it is more likely
than not that the Corporation will be required to sell the debt security before its anticipated
recovery.
18
Loans and the Allowance for Loan Losses
Loans are reported at the amount of their outstanding principal, including deferred loan
origination fees and costs, reduced by unearned discounts and the allowance for loan losses.
Loan origination fees, net of related direct incremental loan origination costs, are deferred
and recognized as income over the contractual lives of the related loans as an adjustment
to the loan yield, using a method which approximates the interest method. Unearned
discount is recognized as an adjustment to the loan yield, using the interest method over
the contractual life of the related loan. When a loan is paid off, the unamortized portion of
net fees or unearned discount is recognized as interest income.
Loans are considered delinquent when a payment of principal and/or interest becomes past
due 30 days following its scheduled payment due date.
Loans on which the accrual of interest has been discontinued are designated non-accrual
loans. Accrual of interest income is discontinued when concern exists as to the collectability
of principal or interest, or typically when a loan becomes over 90 days delinquent.
Additionally, when a loan is placed on non-accrual status, all interest previously accrued
but not collected is reversed against current period income. Loans are removed from non-
accrual when they become less than 90 days past due and when concern no longer exists
as to the collectability of principal or interest. Interest collected on non-accruing loans is
either applied against principal or reported as income according to management’s judgment
as to the collectability of principal.
A loan is considered impaired when, based on current information and events, it is probable
that the Corporation will be unable to collect the scheduled payments of principal or
interest when due according to the contractual terms of the loan agreement. Under certain
circumstances, the Corporation may restructure the terms of a loan as a concession to
a borrower. These restructured loans are generally also considered impaired loans.
Impairment is measured on a loan-by-loan basis for commercial mortgage and commercial
loans by either the present value of expected future cash flows discounted at the loan’s
effective interest rate, the loan’s obtainable market price, or the fair value of the collateral
if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are
collectively evaluated for impairment. Accordingly, the Corporation does not separately
identify individual residential mortgage, home equity or consumer loans for impairment
disclosures unless they have been modified in a troubled debt restructuring.
The provision for loan losses and the level of the allowance for loan losses reflects
management’s estimate of probable loan losses inherent in the loan portfolio at the balance
sheet date. Management uses a systematic process and methodology to establish the
allowance for loan losses each quarter. To determine the total allowance for loan losses,
an estimate is made by management of the allowance needed for each of the following
segments of the loan portfolio: (a) residential mortgage loans, (b) commercial mortgage
loans, (c) home equity loans, (d) commercial & industrial loans, and (e) consumer loans.
Portfolio segments are further disaggregated into classes of loans. The establishment
of the allowance for each portfolio segment is based on a process consistently applied
that evaluates the risk characteristics relevant to each portfolio segment and takes into
consideration multiple internal and external factors. Internal factors include (a) historic
levels and trends in charge-offs, delinquencies, risk ratings, and foreclosures, (b) level
and changes in industry, geographic and credit concentrations, (c) underwriting policies
and adherence to such policies, and (d) the experience of, and any changes in, lending and
19
credit personnel. External factors include (a) conditions and trends in the local and national
economy and (b) levels and trends in national delinquent and non-performing loans. An
additional unallocated component is maintained based on a judgmental process whereby
management considers qualitative and quantitative assessments of other environmental
factors not included above.
The Bank evaluates certain loans within the commercial & industrial, commercial mortgage
and commercial construction loan portfolios individually for specific impairment. A loan
is considered impaired when, based on current information and events, it is probable that
the Bank will be unable to collect the scheduled payments of principal or interest when due
according to the contractual terms of the loan agreement. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired. Loans are
selected for evaluation based upon internal risk rating, delinquency status, or non-accrual
status. A specific allowance amount is allocated to an individual loan when such loan has
been deemed impaired and when the amount of the probable loss is able to be estimated.
Estimates of loss may be determined by the present value of anticipated future cash flows,
the loan’s observable fair market value, or the fair value of the collateral, if the loan is
collateral dependent.
Risk characteristics relevant to each portfolio segment are as follows:
Residential mortgage and home equity loans – The Bank generally does not originate loans
in these segments with a loan-to-value ratio greater than 80 percent and does not grant
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 – The Bank generally does not originate loans in this segment
with a loan-to-value ratio greater than 75 percent. Loans in this segment are secured by
owner-occupied and nonowner-occupied commercial real estate and repayment is primarily
dependent on the cash flows of the property (if nonowner-occupied) or of the business (if
owner-occupied).
Commercial loans – Loans in this segment are made to businesses and are generally secured
by equipment, accounts receivable or inventory, as well as the personal guarantees of the
principal owners of the business and repayment is primarily dependent on the cash flows
generated by the business.
Consumer loans – Loans in this segment are made to individuals and can be secured
or unsecured. Repayment is primarily dependent on the credit quality of the individual
borrower.
The majority of the Bank’s loans are concentrated in Eastern Massachusetts and therefore
the overall health of the local economy, including unemployment rates, vacancy rates, and
consumer spending levels, can have a material effect on the credit quality of all of these
portfolio segments.
The process to determine the allowance for loan losses requires management to exercise
considerable judgment regarding the risk characteristics of the loan portfolio segments and
the effect of relevant internal and external factors.
20
The provision for loan losses charged to operations is based on management’s judgment of
the amount necessary to maintain the allowance at a level adequate to provide for probable
loan losses. 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
loan losses. Recoveries on loans that have been previously charged off are credited to the
allowance for loan losses as received. The allowance is an estimate, and ultimate losses
may vary from current estimates. As adjustments become necessary, they are reported in
the results of operations through the provision for loan losses in the period in which they
become known.
Residential mortgage loans originated and intended for sale in the secondary market are
classified as held for sale at the time of their origination and are carried at the lower of cost
or fair value. Changes in fair value relating to loans held for sale below the loans cost basis
are charged against earnings. Gains and losses on the actual sale of the residential loans are
recorded in earnings as net gains (losses) on loans held for sale.
Rights to service mortgage loans for others are recognized as an asset. The total cost of
originated loans that are sold with servicing rights retained is allocated between the loan
servicing rights and the loans without servicing rights based on their relative fair values.
Capitalized loan servicing rights are included in other assets and are amortized as an offset
to other income over the period of estimated net servicing income. They are evaluated for
impairment at each reporting date based on their fair value. Impairment is measured on an
aggregated basis according to interest rate band and period of origination. The fair value
is estimated based on the present value of expected cash flows, incorporating assumptions
for discount rate, prepayment speed and servicing cost. Any impairment is recognized as
a charge to earnings.
Bank Owned Life Insurance
Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain
employees who have provided positive consent allowing the Bank to be the beneficiary of
such policies. Since the Bank is the primary beneficiary of the insurance policies, increases
in the cash value of the policies, as well as insurance proceeds received, are recorded
in other noninterest income, and are not subject to income taxes. The cash value of the
policies is included in other assets. The Bank reviews the financial strength of the insurance
carriers prior to the purchase of BOLI and at least annually thereafter.
Banking Premises and Equipment
Land is stated at cost. Buildings, leasehold improvements and equipment are stated at cost,
less accumulated depreciation and amortization, which is computed using the straight-line
method over the estimated useful lives of the assets or the terms of the leases, if shorter.
The cost of ordinary maintenance and repairs is charged to expense when incurred.
Other Real Estate Owned
Other real estate owned (“OREO”) consists of properties formerly pledged as collateral
to loans, which have been acquired by the Bank through foreclosure proceedings or
acceptance of a deed in lieu of foreclosure. Upon transfer of a loan to foreclosure status, an
appraisal is obtained and any excess of the loan balance over the fair value, less estimated
costs to sell, is charged against the allowance for loan losses. Expenses and subsequent
adjustments to the fair value are treated as other operating expense.
21
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets
acquired in a business combination. Goodwill and intangible assets that are not amortized
are tested for impairment, based on their fair values, at least annually. Identifiable intangible
assets that are subject to amortization are also reviewed for impairment based on their fair
value. Any impairment is recognized as a charge to earnings and the adjusted carrying
amount of the intangible asset becomes its new accounting basis. The remaining useful
life of an intangible asset that is being amortized is also evaluated each reporting period
to determine whether events and circumstances warrant a revision to the remaining period
of amortization.
Income Taxes
The Corporation and its subsidiaries file income tax returns in the U.S. federal jurisdiction,
and in the state of Massachusetts and other states as required.
The Corporation uses the asset and liability method of accounting for income taxes. Deferred
tax assets and liabilities are reflected at currently enacted income tax rates applicable to the
period in which the deferred tax assets or liabilities are expected to be realized or settled.
As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. Deferred tax assets are reviewed quarterly and
reduced by a valuation allowance if, based upon the information available, it is more likely
than not that some or all of the deferred tax assets will not be realized.
Interest and penalties related to unrecognized tax benefits, if incurred, are recognized as a
component of income tax expense.
Wealth Management Income
Income from investment management and fiduciary activities is recognized on the accrual
basis of accounting.
Pension and Retirement Plans
The Corporation sponsors a defined benefit pension plan and a postretirement health care
plan covering substantially all employees hired before May 2, 2011. Benefits for the pension
plan are based primarily on years of service and the employee’s average monthly pay
during the five highest consecutive plan years of the employee’s final ten years. Benefits
for the postretirement health care plan are based on years of service. Expense for both of
these plans is recognized over the employee’s service life utilizing the projected unit credit
actuarial cost method. Contributions are periodically made to the pension plan so as to
comply with the Employee Retirement Income Security Act (“ERISA”) funding standards
and the Internal Revenue Code of 1986, as amended.
The Corporation also has a non-qualified retirement plan to provide supplemental retirement
benefits to certain executives. Expense for this plan is recognized over the executive’s
service life utilizing the projected unit credit actuarial cost method.
Stock-Based Compensation
The cost of stock-based awards (stock options, restricted stock and/or restricted stock
units of the Corporation) is determined at the grant date as measured by the fair value of
the award. Stock-based awards requiring future service are recognized as compensation
expense over the relevant service period. Stock-based awards that do not require future
22
service are expensed immediately. The Corporation estimates expected forfeitures in
determining compensation expense.
Fair Value Measurements
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 Share
Basic earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding for each period presented. Diluted earnings per
share are computed by dividing net income by the weighted average number of common
shares outstanding plus the dilutive effect of stock options outstanding.
Subsequent Events
Management has reviewed events occurring through March 1, 2013, the date the
consolidated financial statements were issued and determined that no subsequent events
occurred requiring accrual or disclosure.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In December 2011, the FASB issued Accounting Standards Update No. 2011-11, “Balance
Sheet (Topic 210), Disclosures about Offsetting Assets and Liabilities” (“ASU 2011-
11”). ASU 2011-11 requires an entity to disclose information about offsetting and related
arrangements to enable users of financial statements to understand the effect of those
arrangements on its financial position, and to allow investors to better compare financial
23
statements prepared under U.S. GAAP with financial statements prepared under IFRS.
The new standards are effective for annual periods beginning January 1, 2013, and interim
periods within those annual periods. Retrospective application is required. As ASU 2011-11
provides only guidance on the disclosure about offsetting and related arrangements, its
adoption on January 1, 2013 should have no impact on the Corporation’s consolidated
financial statements.
In July 2012, the FASB issued Accounting Standards Update No. 2012-02, “Testing
Indefinite-Lived Assets for Impairment” (“ASU 2012-02”). The objective of ASU 2012-02
is to reduce the cost and complexity of performing an impairment test for indefinite-lived
asset categories by simplifying how an entity performs the testing of those assets. Similar
to the amendments to goodwill impairment testing issued in September 2011, an entity has
the option first to assess qualitative factors to determine whether the existence of events and
circumstances indicates that it is more likely than not that the indefinite-lived intangible
asset is impaired. If an entity concludes that it is not more likely than not that the indefinite-
lived intangible asset is impaired, then the entity is not required to take further action. If an
entity concludes otherwise, then it is required to determine the fair value of the indefinite-
lived intangible asset and perform the quantitative impairment test. The provisions of ASU
2012-02 are effective for annual and interim goodwill impairment tests performed for fiscal
years beginning after September 15, 2012, with early adoption permitted. The adoption of
ASU 2012-02 is not expected to have a material impact on the Corporation’s consolidated
financial position, results of operations or cash flows.
4. CASH AND DUE FROM BANKS
At December 31, 2012 and 2011, cash and due from banks totaled $59,923,000 and
$22,512,000, respectively. Of this amount, $8,849,000 and $6,586,000, respectively, were
maintained to satisfy the reserve requirements of the Federal Reserve Bank of Boston
(“FRB Boston”). Additionally, at December 31, 2012, $1,000,000 was pledged to the New
Hampshire Banking Department relating to Cambridge Trust Company of New Hampshire,
Inc.’s operations in that State.
24
5. 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:
Amortized
Cost
December 31, 2012
Unrealized
Gains
Losses
(In thousands)
Fair
Value
Securities available for sale:
U.S. GSE obligations ............................ $ 100,074
371,288
Mortgage-backed securities ..................
19,001
Corporate debt securities .......................
Mutual funds .........................................
672
491,035
Total securities available for sale ....
Securities held to maturity:
12,499
U.S. GSE obligations ............................
5,322
Mortgage-backed securities ..................
53,312
Municipal securities ..............................
71,133
Total securities held to maturity ......
Total investment securities .............. $ 562,168
$
773
9,808
811
$
—
11,392
220
387
4,574
5,181
16,573
$
$
(23) $ 100,824
381,036
(60)
19,812
—
646
(26)
502,318
(109)
—
—
(6)
(6)
12,719
5,709
57,880
76,308
(115) $ 578,626
Amortized
Cost
December 31, 2011
Unrealized
Gains
Losses
(In thousands)
Fair
Value
Securities available for sale:
U.S. GSE obligations ............................ $
Mortgage-backed securities ..................
Corporate debt securities .......................
Mutual funds .........................................
Total securities available for sale ....
92,067
341,833
22,997
672
457,569
Securities held to maturity:
12,495
U.S. GSE obligations ............................
8,672
Mortgage-backed securities ..................
53,089
Municipal securities ..............................
Total securities held to maturity ......
74,256
Total investment securities .............. $ 531,825
$
—
$
1,675
11,073
306
13,054
729
597
4,902
6,228
19,282
$
—
(76)
(293)
(22)
(391)
$
93,742
352,830
23,010
650
470,232
—
—
13,224
9,269
57,991
80,484
(391) $ 550,716
—
—
$
All of the Corporation’s mortgage-backed securities have been issued by, or are collateralized
by securities issued by, either GNMA, FNMA or FHLMC.
25
The amortized cost and fair value of debt investments, aggregated by contractual maturity,
are shown below. Maturities of mortgage-backed securities do not take into consideration
scheduled amortization or prepayments. Actual maturities will differ from contractual
maturities because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
Within One Year
After One, But
Within Five Years
After Five, But
Within Ten Years
After Ten Years
Amortized
Cost
Fair
Value Cost
Amortized
Fair
Value
Amortized Fair
Value
Cost
Amortized
Cost
Fair
Value
(In thousands)
At December 31, 2012:
Debt securities
available for sale:
U.S. GSE
obligations .............. $ 40,000 $ 40,356 $ 25,103 $ 25,410 $ 34,971 $ 35,058 $
— $
—
Mortgage-backed
securities .................
350
366
5,676
5,895
6,417
6,939
358,845
367,836
Corporate debt
securities .................
Total debt
securities
available
for sale ................
Debt securities held
to maturity:
U.S. GSE
—
—
19,001
19,812
—
—
—
—
40,350
40,722
49,780
51,117
41,388
41,997
358,845
367,836
obligations ..............
12,499
12,719
—
—
—
—
Mortgage-backed
securities .................
25
26
919
984
4,238
4,533
—
140
—
166
Municipal
securities .................
Total debt
securities held
to maturity ...........
Total debt
461
469
8,974
9,637
32,168
35,071
11,709
12,703
12,985
13,214
9,893
10,621
36,406
39,604
11,849
12,869
securities ............. $ 53,335 $ 53,936 $ 59,673 $ 61,738 $ 77,794 $ 81,601 $ 370,694 $ 380,705
The following table shows the Corporation’s securities with gross unrealized losses,
aggregated by investment category and length of time that individual securities have been
in a continuous loss position:
Less than One Year
Fair
Value
Unrealized
Losses
One Year or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
(In thousands)
$ 9,972
27,806
—
566
38,344
—
$
—
$
—
(23)
(60)
—
(6)
(89)
—
—
—
—
646
$
—
—
—
—
—
(26)
$ 9,972
27,806
—
566
38,344
646
$
(23)
(60)
—
(6)
(89)
(26)
At December 31, 2012:
U.S. GSE obligations .............
Mortgage-backed securities ...
Corporate debt securities .......
Municipal securities ...............
Subtotal, debt securities .....
Mutual funds ..........................
Total temporarily
impaired securities ...........
$ 38,344
$
(89)
$
646
$
(26)
$ 38,990
$
(115)
26
Less than One Year
Fair
Value
Unrealized
Losses
One Year or Longer
Fair
Value
Unrealized
Losses
Total
Fair
Value
Unrealized
Losses
(In thousands)
$
—
6,930
8,801
—
15,731
—
—
(6)
(261)
(267)
$
—
—
$
—
8,950
2,463
—
11,413
650
$
—
—
(70)
(32)
(102)
(22)
$
—
15,880
11,264
—
27,144
650
$
—
—
(76)
(293)
(369)
(22)
At December 31, 2011:
U.S. GSE obligations .............
Mortgage-backed securities ...
Corporate debt securities .......
Municipal securities ...............
Subtotal, debt securities .....
Mutual funds ..........................
Total temporarily
impaired securities ...........
$ 15,731
$
(267)
$ 12,063
$
(124)
$ 27,794
$
(391)
Securities are evaluated by management for other than temporary impairment on at least
a quarterly basis, and more frequently when economic or market conditions warrant such
evaluation. Consideration is given to (1) the length of time and the extent to which the
fair value has been less than cost; (2) the financial condition and near-term prospects of
the issuer; and (3) the intent and ability of the Corporation to retain its investment in the
issuer for a period of time sufficient to allow for any anticipated recovery in fair value. As
of December 31, 2012, thirteen debt securities and one equity security had gross unrealized
losses, with an aggregate depreciation of 0.29% from the Corporation’s amortized cost
basis. The largest loss percentage of any single security was 3.93% of its amortized cost.
The Corporation believes that the nature and duration of impairment on its debt security
positions are primarily a function of interest rate movements and changes in investment
spreads, and does not consider full repayment of principal on the reported debt obligations
to be at risk. Since nearly all of these securities are rated “investment grade” and a) the
Corporation does not intend to sell these securities before recovery, and b) that it is more
likely than not that the Corporation will not be required to sell these securities before
recovery, the Corporation does not consider these securities to be other-than-temporarily
impaired as of December 31, 2012.
The following table sets forth information regarding sales of investment securities and the
resulting gains or losses from such sales.
Year Ended December 31,
2011
2012
(In thousands)
Amortized cost of securities sold ...........................................
Gain realized on securities sold .............................................
Proceeds from securities sold ...........................................
$
$
36,904
882
37,786
$
$
37,988
552
38,540
6. LOANS AND ALLOWANCE FOR LOAN LOSSES
The Bank originates loans to businesses and individuals on both a collateralized and an
uncollateralized basis. The Bank’s customer base is concentrated in Eastern Massachusetts.
The Bank has diversified the risk in its commercial loan portfolio by lending to businesses
in a wide range of industries while maintaining no significant individual industry
concentration. The majority of loans to individuals are collateralized by residential real
estate, marketable securities or other assets.
27
Loans outstanding are detailed by category as follows:
December 31,
2012
2011
(In thousands)
Residential real estate:
Mortgages - fixed rate (30 year) .............................................
Mortgages - fixed rate (15 year) .............................................
Mortgages - fixed rate (10 year) .............................................
Mortgages - adjustable rate ....................................................
Deferred costs net of unearned fees .......................................
Total residential real estate ...............................................
$
Commercial real estate:
Mortgages - nonowner occupied ............................................
Mortgages - owner occupied ..................................................
Construction ...........................................................................
Deferred costs net of unearned fees .......................................
Total commercial real estate ............................................
Home equity:
Home equity - lines of credit .................................................
Home equity - term loans .......................................................
Deferred costs net of unearned fees .......................................
Total home equity.............................................................
Commercial:
Commercial and industrial .....................................................
Deferred costs net of unearned fees .......................................
Total commercial..............................................................
Consumer:
Secured ...................................................................................
Unsecured ..............................................................................
Deferred costs net of unearned fees .......................................
Total consumer .................................................................
135,466
106,250
44,327
61,736
129
347,908
216,643
51,665
7,886
234
276,428
47,359
3,090
125
50,574
47,265
305
47,570
16,879
2,870
20
19,769
$
176,843
71,595
27,103
55,063
329
330,933
176,634
45,340
9,426
195
231,595
57,177
4,010
120
61,307
37,984
276
38,260
9,249
1,902
19
11,170
Total loans ........................................................................
$
742,249
$
673,265
Certain directors and officers of the Corporation are customers of the Bank. Loans to these
parties are made in the ordinary course of business at the Bank’s normal credit terms,
including interest rate and collateral requirements, and do not represent more than a normal
risk of collection. At December 31, 2012 and 2011, total loans outstanding to these related
parties were $752,000 and $786,000, respectively. During 2012, $916,000 of additions and
$950,000 of repayments were made to these loans, compared to no additions and $146,000
of repayments made during 2011.
28
The following table sets forth information regarding non-performing loans.
December 31,
2012
2011
(In thousands)
Non-accrual loans ..................................................................
Loans past due >90 days, but still accruing ...........................
Troubled debt restructurings ..................................................
Total non-performing loans ..............................................
$
—
$
1,570
—
1,570
$
—
$
1,204
—
1,204
A breakdown of non-accrual loans receivable is as follows:
Non-accrual loans:
Residential mortgage loans .............................................
Commercial mortgage loans ...........................................
Home equity loans ..........................................................
Commercial loans ...........................................................
Consumer loans ...............................................................
Total ..........................................................................
December 31,
2012
2011
(In thousands)
$
3
$
$
708
—
322
537
1,570
$
802
—
340
51
11
1,204
The following table contains period-end balances of loans receivable disaggregated by
credit quality indicator:
December 31, 2012
(In thousands)
Residential
Mortgages
Home
Equity
Consumer
Credit risk profile based on payment activity:
Performing .....................................................
Non-performing .............................................
Total .........................................................
$
$
347,200
708
347,908
$
$
50,252
322
50,574
$
3
$
19,766
19,769
Commercial
Mortgages Commercial
Credit risk profile by internally assigned grade:
Pass ..............................................................................................
Special mention ............................................................................
Substandard ..................................................................................
Doubtful .......................................................................................
Total .......................................................................................
$
—
$
274,108
—
2,320
276,428
$
—
$
43,168
3,158
1,244
47,570
With respect to residential real estate, home equity and consumer loans, the Bank utilizes
the following categories as indicators of credit quality:
•
•
Performing – These loans are accruing and are considered having low to moderate
risk.
Non-performing – These loans either have been placed on non-accrual, or are past
due more than ninety days but are still accruing, and may contain greater than
average risk.
29
With respect to commercial real estate and commercial loans, the Bank utilizes a ten 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 average
risk.
Loans rated 7 (Special Mention) – These loans have potential weaknesses warranting
close attention which if left uncorrected may result in deterioration of the credit at
some future date.
Loans rated 8 (Substandard) – These loans have well-defined weaknesses that
jeopardize the orderly liquidation of the debt under the original loan terms. Loss
potential exists but is not identifiable in any one customer.
Loans rated 9 (Doubtful) – These loans have pronounced weaknesses that make full
collection highly questionable and improbable.
Loans rated 10 (Loss) – These loans are considered uncollectible and continuance as
a bankable asset is not warranted.
The following table contains period-end balances of loans receivable disaggregated by
past due status:
December 31, 2012
Current
30 - 59
Days
60 - 89
Days
90 Days
or Greater
Total
Past Due
Total
Loans
(In thousands)
Greater
Than 90
Days But
Accruing
Loans receivable:
Residential
mortgage loans .........
Commercial mortgage
loans .........................
Home equity loans .....
Commercial loans ......
Consumer loans ..........
Total .....................
$ 347,309 $ 366
$ 103 $
130 $ 599 $ 347,908 $ —
375
275,612
39
50,535
91
47,337
19,265
504
$ 740,058 $ 1,375
—
—
142
—
—
$ 245 $
441
—
—
816
39
233
504
276,428
50,574
47,570
19,769
—
—
—
—
571 $ 2,191 $ 742,249 $ —
The following table contains period-end balances of the allowance for loan losses
and related loans receivable disaggregated by impairment method:
Residential
Mortgages
Commercial Home
Mortgages
Equity
Commercial
Consumer Unallocated
Total
December 31, 2012
(In thousands)
Allowance for loan losses:
Individually evaluated
for impairment ..............
$
— $
— $ — $
— $ — $
— $
—
Collectively evaluated
for impairment ..............
Total.............................
$
3,792
3,792 $
4,850
4,850 $
551
551 $
824
824 $
273
273 $
658
10,948
658 $ 10,948
Loans receivable:
Individually evaluated
for impairment ..............
$
— $
— $ — $
489 $ —
$
489
Collectively evaluated
for impairment ..............
Total.............................
276,428
347,908
$ 347,908 $ 276,428 $ 50,574 $
50,574
19,769
47,081
47,570 $ 19,769
741,760
$ 742,249
30
Residential
Mortgages
Commercial Home
Mortgages
Equity
Commercial
Consumer Unallocated
Total
December 31, 2011
(In thousands)
Allowance for loan losses:
Individually evaluated
for impairment ..............
$
— $
— $ — $
— $ — $
— $
—
Collectively evaluated
for impairment ..............
Total.............................
$
3,905
3,905 $
4,385
4,385 $
711
711 $
742
742 $
163
163 $
10,159
253
253 $ 10,159
Loans receivable:
Individually evaluated
for impairment ..............
$
— $
— $ — $
— $ —
$
—
Collectively evaluated
for impairment ..............
Total.............................
330,933
231,595
$ 330,933 $ 231,595 $ 61,307 $
61,307
38,260
11,170
38,260 $ 11,170
673,265
$ 673,265
As discussed in Note 2, Summary of Significant Accounting Policies, the provision for loan
losses is evaluated on a regular basis by management in order to determine the adequacy
of the allowance for loan losses.
Changes in the allowance for loan losses were as follows:
Residential
Mortgages
Commercial Home
Mortgages
Equity
Commercial
Consumer Unallocated
Total
December 31, 2012
(In thousands)
Balance at beginning of year $
Provision for loan losses .
Loans charged off ...........
Recoveries ......................
Balance at end of year ........
$
3,905 $
(286)
—
173
3
3,792 $
4,385 $
462
—
711 $
(160)
—
—
4,850 $
551 $
742 $
280
(282)
84
824 $
163 $
99
(20)
31
273 $
253 $ 10,159
800
405
(302)
—
—
291
658 $ 10,948
An analysis of mortgage servicing rights follows:
Mortgage
Servicing
Rights
Valuation
Allowance
(In thousands)
Balance at December 31, 2011 .............................
Mortgage servicing rights capitalized .............
Amortization charged against servicing
income ...........................................................
Change in impairment reserve ........................
Balance at December 31, 2012 .............................
$
—
225
$
(9)
—
$
216
$
—
—
—
(1)
(1)
7. FEDERAL HOME LOAN BANK OF BOSTON STOCK
Total
$
$
—
225
(9)
(1)
215
As a voluntary member of the FHLB of Boston (“FHLB Boston”), the Bank is required
to invest in stock of the FHLB Boston (which is considered a restricted equity security) in
an amount based upon its outstanding advances from the FHLB Boston. At December 31,
2012, the Bank’s investment in FHLB Boston stock exceeded its required investment by
$2,020,000. No market exists for shares of this stock. The Bank’s cost for FHLB Boston
stock is equal to its par value. Upon redemption of the stock, which is at the discretion of
31
the FHLB Boston, the Bank would receive an amount equal to the par value of the stock.
At its discretion, the FHLB Boston may also declare dividends on its stock.
The Bank’s investment in FHLB 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,
2012, no impairment has been recognized.
8. 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,
2012
2011
Estimated
Useful Lives
(In thousands)
Land ......................................................................
Building and leasehold improvements ..................
Equipment, including vaults .................................
Subtotal ...........................................................
Accumulated depreciation and amortization ........
Total ................................................................
$ 1,116
11,702
14,588
27,406
(21,192)
$ 6,214
$ 1,116
11,121
13,742
25,979
(19,763)
$ 6,216
1-30 years
3-20 years
Total depreciation expense for the years ended December 31, 2012 and 2011 amounted to
approximately $1,430,000 and $1,441,000, respectively, and is included in occupancy and
equipment expenses in the accompanying consolidated statements of income.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying value of goodwill and other intangible assets, which are included
in other assets in the accompanying consolidated balance sheets, were as follows:
Goodwill
Customer
Intangibles
(In thousands)
Balance at December 31, 2010 .............................
Amortization expense .....................................
Balance at December 31, 2011 .............................
Amortization expense .....................................
Balance at December 31, 2012 .............................
$
—
—
$
412
$
412
412
$
160
(148)
12
(12)
—
The components of intangible assets were as follows:
Total
Intangibles
$
$
572
(148)
424
(12)
412
Customer intangibles .............................................................
Accumulated amortization .....................................................
Net customer intangibles ..................................................
$
$
3,777
(3,777)
—
$
$
3,777
(3,765)
12
December 31,
2012
2011
(In thousands)
32
Goodwill and intangible assets that are not amortized are tested for impairment, based
on their fair values, at least annually. As of December 31, 2012, no impairment has been
recognized.
10. DEPOSITS
Deposits are summarized as follows:
Demand deposits (non-interest bearing) ................................
Interest bearing checking .......................................................
Money market ........................................................................
Savings ...................................................................................
Certificates of deposit under $100,000 ..................................
Certificates of deposit $100,000 or greater ............................
Total deposits ...................................................................
December 31,
2012
2011
(In thousands)
$
329,211
363,575
60,850
393,541
55,729
78,427
$ 1,281,333
$ 285,724
316,454
58,532
328,771
57,475
78,698
$ 1,125,654
Certificates of deposit had the following schedule of maturities:
December 31,
2012
2011
(In thousands)
Less than 3 months remaining ...............................................
3 to 5 months remaining ........................................................
6 to 11 months remaining .......................................................
12 to 23 months remaining ....................................................
24 to 47 months remaining ....................................................
48 months or more remaining ................................................
Total certificates of deposit ..............................................
$
$
46,001
27,058
22,860
20,884
14,433
2,920
134,156
$
54,452
25,998
20,214
15,336
18,843
1,330
$ 136,173
Interest expense on certificates of deposit $100,000 or greater was $642,000 and $653,000
for the years ended December 31, 2012 and 2011, respectively.
11. SHORT-TERM BORROWINGS
Information relating to activity and rates paid on short-term borrowings is presented
below:
Year Ended December 31,
2011
2012
(Dollars in thousands)
Short-term borrowings:
Average daily balance ......................................................
Average interest rate.........................................................
Highest month-end balance ..............................................
$
17,270
0.27 %
$
59,000
$
3,978
0.26 %
$ 14,724
33
12. LONG-TERM BORROWINGS
Long-term borrowings consisted of the following:
December 31, 2012
Amount
Rate
December 31, 2011
Rate
Amount
(Dollars in thousands)
Wholesale Repurchase Agreements:
Due 07/05/2012; callable quarterly
beginning 07/05/2009 ............................ $
—
—
$
10,000
5.10%
Due 03/03/2013; callable quarterly
beginning 03/03/2011 ............................
Total ................................................... $
20,000
20,000
3.25%
3.25%
20,000
30,000
$
3.25%
3.87%
All short- and long-term borrowings with the FHLB Boston are secured by the Bank’s
stock in the FHLB Boston and a blanket lien on “qualified collateral” defined principally
as 90% of the market value of certain U.S. Government and GSE obligations and 75% of
the carrying value of certain residential mortgage loans. Based upon collateral pledged,
the Bank’s unused borrowing capacity with the FHLB Boston at December 31, 2012 was
approximately $303,684,000.
The Bank also has a line of credit with the FRB Boston. At December 31, 2012, the Bank
had pledged commercial real estate and commercial & industrial loans with aggregate
principal balances of approximately $272,386,000 as collateral for this line of credit. Based
upon the collateral pledged, the Bank’s unused borrowing capacity with the FRB Boston at
December 31, 2012 was approximately $174,117,000.
The Bank’s wholesale repurchase agreements are with another financial institution. For
financial statement purposes, sales of repurchase agreements are treated as financings. The
obligations to repurchase the identical securities that were sold are reflected as liabilities
and the securities remain in the asset accounts. The agreements are collateralized by U.S.
GSE securities owned by the Bank, which as of December 31, 2012, had a carrying value
of approximately $25,159,000.
13. INCOME TAXES
The components of income tax expense were as follows:
Current:
Federal ..............................................................................
State ..................................................................................
Total current expense .................................................
Deferred:
Federal ..............................................................................
State ..................................................................................
Total deferred expense (benefit) .................................
Total income tax expense ...........................................
34
Year Ended December 31,
2011
2012
(In thousands)
$
$
2,971
202
3,173
2,449
692
3,141
6,314
$
$
5,467
694
6,161
(346)
(98)
(444)
5,717
The following is a reconciliation of the total income tax provision, calculated at statutory
federal income tax rates, to the income tax provision in the consolidated statements of
income:
Provision at statutory rates .....................................................
Increase/(decrease) resulting from:
State tax, net of federal tax benefit ...................................
Tax-exempt income ..........................................................
ESOP dividends ...............................................................
Bank owned life insurance ...............................................
Other ................................................................................
Total income tax expense ...........................................
Year Ended December 31,
2011
2012
(In thousands)
$
6,901
$
6,368
581
(710)
(163)
(249)
(46)
6,314
387
(695)
(152)
(182)
(9)
5,717
$
$
As of December 31, 2012 and 2011, the Corporation had no unrecognized tax assets or
liabilities.
The Corporation’s net deferred tax asset consisted of the following components:
Gross deferred tax assets:
Allowance for loan losses ................................................
Accrued retirement benefits .............................................
Depreciation of premises and equipment .........................
Goodwill ..........................................................................
Rent ..................................................................................
ESOP dividends ...............................................................
Equity based compensation ..............................................
Other ................................................................................
Total gross deferred tax assets ...................................
Gross deferred tax liabilities:
Deferred loan origination costs ........................................
Mortgage servicing rights ................................................
Unrealized gains on AFS securities .................................
Total gross deferred tax liabilities ..............................
Net deferred tax asset .................................................
December 31,
2012
2011
(In thousands)
$
$
4,472
2,901
753
255
210
190
271
132
9,184
(340)
(88)
(4,108)
(4,536)
4,648
$
$
4,150
6,328
819
376
202
177
200
96
12,348
(379)
—
(4,619)
(4,998)
7,350
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. In addition, the Corporation’s net deferred tax asset is supported
by recoverable income taxes. Therefore, no valuation allowance was required at either
December 31, 2012 or 2011 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.
35
At December 31, 2012 and 2011, the Corporation had no unrecognized tax benefits or any
uncertain tax positions. The Corporation does not expect the total amount of unrecognized
tax benefits to significantly increase with the next twelve months.
The Corporation’s federal income tax returns are open and subject to examination from
the 2009 tax return year and forward. The Corporation’s state income tax returns are
generally open from the 2009 and later tax return years based on individual state statute
of limitations.
14. PENSION AND RETIREMENT PLANS
The Corporation has a noncontributory, defined benefit pension plan (“Pension Plan”)
covering substantially all employees hired before May 2, 2011. Employees in positions
requiring at least 1,000 hours of service per year were eligible to participate upon the
attainment of age 21 and the completion of one year of service. Benefits are based primarily
on years of service and the employee’s average monthly pay during the five highest
consecutive plan years of the employee’s final ten years. The Corporation also provides
supplemental retirement benefits to certain executive officers of the Corporation under
the terms of Supplemental Executive Retirement Agreements (“Supplemental Retirement
Plan”). The Supplemental Retirement Plan became effective on October 1, 1989. Benefits to
be paid under the plan are contractually agreed upon and detailed in individual agreements
with the executives. The Corporation uses a December 31 measurement date each year to
determine the benefit obligations for these plans.
Projected benefit obligations and funded status were as follows:
Pension
Plan
2012
2011
Supplemental
Retirement Plan
2011
2012
(In thousands)
Change in projected benefit obligation:
Obligation at beginning of year ............ $ 28,444
1,542
1,212
2,097
(715)
32,580
Service cost ...........................................
Interest cost ...........................................
Actuarial (gain)/loss ..............................
Benefits paid ..........................................
Obligation at end of year .................
$
$ 22,355
1,200
1,174
4,313
(598)
28,444
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 ..................
19,445
3,426
11,000
(715)
33,156
17,655
388
2,000
(598)
19,445
5,586
544
237
592
(122)
6,837
—
—
122
(122)
$
4,821
533
253
101
(122)
5,586
—
—
122
(122)
—
—
Overfunded (underfunded) status
at end of year ............................................. $
576
$
(8,999)
$
(6,837)
$
(5,586)
36
Amounts recognized in the consolidated balance sheets consisted of:
Pension
Plan
2012
2011
Supplemental
Retirement Plan
2011
2012
(In thousands)
Other assets (liabilities) ............................... $
576
$
(8,999)
$
(6,837)
$
(5,586)
Amounts recognized in accumulated other comprehensive income consisted of:
Pension
Plan
2012
2011
Supplemental
Retirement Plan
2011
2012
(In thousands)
Net actuarial (gain)/loss .............................. $
Prior service cost/(benefit) ..........................
$
9,656
(38)
9,618
$ 10,280
(31)
$ 10,249
$
$
1,164
26
1,190
$
$
573
104
677
Information for pension plans with an accumulated benefit obligation in excess of plan
assets:
Pension
Plan
2012
2011
Supplemental
Retirement Plan
2011
2012
(In thousands)
Projected benefit obligation ........................ $ 32,580
27,088
Accumulated benefit obligation ..................
33,156
Fair value of plan assets ..............................
$ 28,444
23,915
19,445
$
6,837
6,837
—
$
5,586
5,586
—
During 2012, the Corporation contributed $11,000,000 to the Pension Plan which resulted
in a funded status in excess of the accumulated benefit obligation as of December 31,
2012.
37
The components of net periodic benefit cost and amounts recognized in other comprehensive
income were as follows:
Pension
Plan
2012
2011
Supplemental
Retirement Plan
2011
2012
(In thousands)
Net periodic benefit cost:
Service cost ........................................... $
Interest cost ...........................................
Expected return on assets ......................
1,542
1,212
(1,508)
$
1,200
1,174
(1,367)
Amortization of prior service
cost/(benefit) .......................................
6
14
Amortization of net actuarial
(gain)/loss ............................................
Net periodic benefit cost .................
804
2,056
353
1,374
$
1
544
237
—
79
533
253
—
79
$
—
861
865
Amounts recognized in other
comprehensive income:
Net actuarial (gain)/loss ........................
Amortization of prior service
(625)
4,939
cost/(benefit) .......................................
(6)
(14)
Total recognized in other
comprehensive income ..................
(631)
4,925
592
(79)
513
101
(79)
22
Total recognized in net periodic
benefit cost and other
comprehensive income .................. $
1,425
$
6,299
$
1,374
$
887
Weighted-average assumptions used to determine projected benefit obligations are as
follows:
Pension
Plan
2012
2011
Supplemental
Retirement Plan
2011
2012
Discount rate ...............................................
Rate of compensation increase ....................
4.00%
4.00%
4.25%
4.00%
4.00%
NA
4.25%
NA
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
Pension
Plan
2012
2011
Supplemental
Retirement Plan
2011
2012
Discount rate ...............................................
Expected long-term return on plan assets ...
Rate of compensation increase ....................
4.25%
7.50%
4.00%
5.25%
7.50%
4.00%
4.25%
NA
NA
5.25%
NA
NA
The expected long-term rate of return has been established based on the ongoing investment
of pension plan assets in a diversified portfolio of equities and fixed income securities. The
components of the expected long-term rate of return include annual expectations for a
risk-free rate of return of approximately 3.00% per year, plus long-term annual inflation at
approximately 3.00% per year, plus a risk premium rate of return of approximately 1.50%
per year.
38
The Corporation maintains an Investment Policy for its defined benefit pension plan. The
objective of this policy is to seek a balance between capital appreciation, current income,
and preservation of capital, with a longer term tilt towards equities because of the extended
time horizon of the pension plan. The Investment Policy guidelines suggest that the target
asset allocation percentages are from 50% to 70% in equities, and from 30% to 50% in
fixed income debt securities and cash. The Corporation expects to contribute $1,000,000 to
its defined benefit pension plan in 2013.
The Corporation’s defined pension plan weighted-average asset allocations by asset
category were as follows:
Equity securities ..........................................................................
Debt securities .............................................................................
Cash and other .............................................................................
Total ......................................................................................
December 31,
2012
50%
22
28
100%
2011
60%
37
100%
3
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 Corporation’s market assumptions.
The following table summarizes the various categories of the pension plan’s assets:
Fair Value as of December 31, 2012
Level 1
Level 2
Level 3
Total
(In thousands)
$ 9,405
$
—
$
—
$ 9,405
Asset category:
Cash and cash equivalents .................
Equity securities:
Common stocks:
Large cap core ........................
Mid cap core ..........................
International ...........................
8,968
2,865
1,987
Mutual funds:
Fixed income ..........................
International ...........................
Mid cap blend ........................
Total .................................
7,162
1,988
781
$ 33,156
—
$
—
—
—
—
—
—
—
—
—
—
—
—
8,968
2,865
1,987
7,162
1,988
781
$ 33,156
—
$
The Corporation 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
39
of active service. The Corporation uses a December 31 measurement date each year to
determine the benefit obligation for this plan.
Projected benefit obligations and funded status were as follows:
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 ..............................................
Overfunded (underfunded) status at end of year .....................
Postretirement
Healthcare Plan
2012
2011
(In thousands)
$
—
$
695
15
25
(67)
(40)
628
—
—
40
(40)
(628)
$
—
$
655
11
32
54
(57)
695
—
—
57
(57)
(695)
Amounts recognized in the consolidated balance sheets consisted of:
Postretirement
Healthcare Plan
2012
2011
(In thousands)
Other assets (liabilities) ...........................................................
$
(628)
$
(695)
Amounts recognized in accumulated other comprehensive income consisted of:
Net actuarial (gain)/loss ..........................................................
Prior service cost/(benefit) ......................................................
Postretirement
Healthcare Plan
2012
2011
(In thousands)
(52)
(28)
(80)
$
$
13
(36)
(23)
$
$
40
Information for pension plans with an accumulated benefit obligation in excess of plan
assets:
Postretirement
Healthcare Plan
2012
2011
(In thousands)
Projected benefit obligation ....................................................
Accumulated benefit obligation ..............................................
Fair value of plan assets ..........................................................
$
628
628
—
$
695
695
—
The components of net periodic benefit cost and amounts recognized in other comprehensive
income were as follows:
Postretirement
Healthcare Plan
2012
2011
(In thousands)
Net periodic benefit cost:
Service cost .......................................................................
Interest cost .......................................................................
Expected return on assets ..................................................
Amortization of prior service cost/(benefit) ......................
Amortization of net actuarial (gain)/loss ..........................
Net periodic benefit cost .............................................
Amounts recognized in other comprehensive income:
Net actuarial (gain)/loss ....................................................
Amortization of prior service cost/(benefit) ......................
Amortization of net actuarial (gain)/loss ..........................
Total recognized in other comprehensive income.......
$
1
$
—
—
15
25
—
(8)
(1)
31
(67)
8
(58)
Total recognized in net periodic benefit cost
and other comprehensive income ..............................
$
(27)
$
11
32
—
(9)
34
54
9
63
97
Weighted-average assumptions used to determine projected benefit obligations are as
follows:
Discount rate ...........................................................................
Rate of compensation increase ................................................
4.00%
NA
4.25%
NA
Postretirement
Healthcare Plan
2012
2011
(In thousands)
41
Weighted-average assumptions used to determine net periodic benefit cost are as follows:
Discount rate ...........................................................................
Expected long-term return on plan assets ...............................
Rate of compensation increase ................................................
Assumed health care cost trend rates are as follows:
Postretirement
Healthcare Plan
2012
2011
(In thousands)
4.25%
NA
NA
5.25%
NA
NA
December 31,
2012
2011
Health care cost trend rate assumed for next year ...............
Rate to which the cost trend rate is assumed
to decline (the ultimate trend rate) .....................................
Year that the rate reaches the ultimate trend rate .................
6.00%
5.00%
2014
7.00%
5.00%
2014
Assumed health care trend rates have a significant effect on the amounts reported for the
health care plans. A one-percentage-point change in assumed health care cost trend rates
would have the following effects:
One Percentage Point
Increase
Decrease
Effect on total service and interest cost ...............................
Effect on postretirement benefit obligation ..........................
$
Benefits expected to be paid in the next ten years are as follows:
(In thousands)
—
15
$
—
(14)
Year ended
December 31,
Pension
Plan
2013
2014
2015
2016
2017
2018-2022 inclusive
Ten year total
$
965
980
1,072
1,138
1,247
8,121
$ 13,523
Supplemental
Retirement
Plan
Post-
retirement
Healthcare
Plan
(In thousands)
$
$
366
485
483
481
484
3,195
5,494
$
$
44
43
43
41
42
197
410
Total
$
$
1,375
1,508
1,598
1,660
1,773
11,513
19,427
42
The estimated amounts that will be amortized from accumulated other comprehensive
income into net periodic benefit cost during 2013 are as follows:
Pension
Plan
Supplemental
Retirement
Plan
Post-
retirement
Healthcare
Plan
Total
Prior service cost ....................
Net (gain)/loss ........................
Total .................................
$
$
4
(650)
(646)
(In thousands)
$
$
(79)
(53)
(132)
$
—
$
(8)
(8)
$
$
(83)
(703)
(786)
The Corporation 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 Corporation matches employee contributions up to 100% of the first 3% of each
participant’s salary. Each year, the Corporation may also make a discretionary contribution
to the PSP. Employees are eligible to participate in the 401(k) feature of the PSP on the
first business day of the quarter following their initial date of service and attainment of age
21. Employees are eligible to participate in discretionary contribution feature of the PSP
on January 1 and July 1 of each year provided they have attained the age of 21 and the
completion of twelve months of service consisting of at least 1,000 hours.
The Corporation 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. It is anticipated that
the ESOP will purchase from the Corporation shares presently authorized but unissued at a
price determined by an independent appraiser and certified by a committee of the trustees
of the ESOP. Purchases of the Corporation’s stock by the ESOP will be funded solely by
employer contributions. At December 31, 2012 and 2011, the ESOP owned 308,968 shares
and 303,298 shares, respectively, of the Corporation’s common stock.
Total expenses related to the Profit Sharing and ESOP Plans for the years ended December
31, 2012 and 2011, amounted to approximately $900,000 and $950,000, respectively.
15. STOCK OPTION AND DIRECTOR STOCK PLANS
In 1993, the Corporation adopted a Stock Option Plan for key employees as an incentive
for them to assist the Corporation in achieving long-range performance goals. During 2005,
the Corporation’s shareholders amended the plan to permit the issuance of restricted stock,
restricted stock units (“RSUs”) and stock appreciation rights (“SARs”).
43
Stock options time-vest over a five-year period. All options expire 10 years from the date
granted and have been issued at fair value at the date of grant which, in some instances,
may be less than publicly traded values. A summary of stock options outstanding as
of December 31, 2012 and 2011, and changes during the years ended on those dates is
presented below:
2012
2011
Weighted
Average
Exercise
Price
Number
of Options
Weighted
Average
Exercise
Price
Number
of Options
Stock options:
Outstanding at beginning of year ....
Granted ......................................
Forfeited ....................................
Expired ......................................
Exercised ...................................
Outstanding at end of year ..............
$
350,535
—
—
(22,264)
(15,355)
312,916
30.12
—
—
29.15
28.76
30.25
$
384,185
—
(4,000)
(966)
(28,684)
350,535
29.71
—
28.39
25.67
25.09
30.12
Exercisable at end of year ...............
257,666
$
30.48
235,635
$
30.08
The following table summarizes information about stock options outstanding at
December 31, 2012:
Range of
Exercise Price
$25.00 - $29.99
$30.00 - $34.99
Options Outstanding
Number
Outstanding
at 12/31/12 Contractual Life
Weighted
Average
Remaining
197,845
115,071
312,916
3.6 years
1.7 years
2.9 years
Weighted
Average
Exercise
Price
$ 28.83
$ 32.70
$ 30.25
Options Exercisable
Weighted
Average
Exercisable Exercise
Price
at 12/31/12
Number
142,595
115,071
257,666
$
$
$
28.68
32.70
30.48
Restricted stock awards time-vest over a five-year period and have been fair valued as of
the date of grant. The holders of restricted stock awards participate fully in the rewards of
stock ownership of the Corporation, including voting and dividend rights. A summary of
non-vested restricted shares outstanding as of December 31, 2012 and 2011, and changes
during the years ended on those dates is presented below:
2012
2011
Weighted
Average
Grant
Value
Number
of Shares
Weighted
Average
Grant
Value
Number
of Shares
Restricted stock:
Non-vested at beginning of year .....
Granted ......................................
Vested ........................................
Forfeited ....................................
Non-vested at end of year ...............
$
33,978
23,210
(10,422)
(1,062)
45,704
31.99
34.46
31.73
30.54
33.34
$
32,549
11,770
(9,041)
(1,300)
33,978
30.57
34.40
30.06
31.81
31.99
44
Restricted stock unit awards vest based upon the Corporation’s performance over a
three-year period and have been fair valued as of the date of grant. The holders of
performance-based RSU awards do not participate in the rewards of stock ownership of the
Corporation until vested. A summary of non-vested restricted stock units outstanding as of
December 31, 2012 and 2011, and changes during the years ended on those dates is
presented below:
2012
2011
Weighted
Average
Grant
Value
Number
of Shares
Weighted
Average
Grant
Value
Number
of Shares
Restricted stock units:
Non-vested at beginning of year .....
Granted ......................................
Vested (Performance achieved) .
Forfeited ....................................
Expired (Performance
not achieved) ...........................
Non-vested at end of year ...............
$
18,150
9,010
—
(955)
32.56
34.39
—
31.62
9,380
8,770
—
—
$
30.80
34.40
—
—
—
—
—
—
26,205
33.22
18,150
32.56
Total expense related to the Stock Option Plan for the years ended December 31, 2012 and
2011, amounted to approximately $546,000 and $401,000, respectively.
In 1993, the Corporation initiated a Director Stock Plan (“DSP”). The DSP provides that
Directors of the Corporation receive their annual retainer fee in the form of stock in the
Corporation. Total shares issued under the DSP in the years ending December 31, 2012 and
2011 were 4,185 and 4,537, respectively.
16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
To meet the financing needs of its customers, the Bank is a party to financial instruments
with off-balance-sheet risk in the normal course of business. These financial instruments
include commitments to extend credit 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 Bank’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 Bank uses the same credit policies
in making commitments and conditional obligations as it does for on-balance-sheet
instruments.
45
Off-balance-sheet financial instruments with contractual amounts that present credit risk
included the following:
Standby letters of credit ........................................................
Commitments to extend credit:
Unused portion of existing lines of credit .......................
Origination of new loans .................................................
Commitments to sell loans ....................................................
Liabilities associated with letters of credit ............................
December 31,
2012
2011
(In thousands)
$
6,093
$
7,858
160,394
32,864
6,250
33
142,933
28,524
—
40
Standby letters of credit are conditional commitments issued by the Bank to guarantee
performance of a customer 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 customers. The collateral supporting those commitments varies
and may include real property, accounts receivable or inventory. Commitments to extend
credit are agreements to lend to a customer as long as there is no violation of any condition
established in the contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of the commitments
may expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer’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 customer. Collateral held varies, but may
include primary residences, accounts receivable, inventory, property, plant and equipment,
and income-producing commercial real estate.
17. COMMITMENTS AND CONTINGENCIES
The Corporation is obligated under various lease agreements covering its main office,
branch offices and other locations. These agreements are accounted for as operating leases
and their terms expire between 2013 and 2022 and, in some instances, contain options to
renew for periods up to twenty years. The total minimum rentals due in future periods
under these agreements in effect at December 31, 2012 were as follows:
Year Ended
December 31,
2013
2014
2015
2016
2017
Thereafter
Total minimum lease payments
$
Future Minimum
Lease Payments
(In thousands)
3,785
3,907
4,484
3,674
1,302
2,592
19,744
$
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
46
amounted to approximately $3,777,000 and $3,549,000 for the years ended December 31,
2012 and 2011, respectively.
Under the terms of a sublease agreement, the Corporation will receive minimum annual
rental payments of approximately $29,000 through July 31, 2019. Total rental income
amounted to approximately $35,000 and $31,000 for the years ended December 31, 2012
and 2011, respectively.
The Bank is involved in various legal actions arising in the normal course of business.
Although the ultimate outcome of these actions cannot be ascertained at this time, it is
the opinion of management, after consultation with counsel, that the resolution of such
actions will not have a material adverse effect on the consolidated financial condition of
the Corporation.
The Corporation has entered into agreements with its President and with certain other senior
officers, whereby, following the occurrence of a change in control of the Corporation, 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.
18. STOCKHOLDERS’ EQUITY
Capital guidelines issued by the Federal Reserve Board (“FRB”) and by the FDIC require
that the Corporation 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 Corporation’s
financial statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, there are specific capital guidelines that involve quantitative
measures of assets, liabilities and certain off-balance-sheet items as calculated under
regulatory accounting practices. The risk-based capital rules are designed to make
regulatory capital more sensitive to differences in risk profiles among bank and bank
holding companies, to account for off-balance-sheet exposure and to minimize disincentives
for holding liquid assets. Management believes that as of December 31, 2012 and 2011,
the Corporation and the Bank met all applicable minimum capital requirements and were
considered “well-capitalized” by both the FRB and the FDIC. There have been no events
or conditions since the end of the year that management believes would have changed the
Corporation’s or the Bank’s category.
47
The Corporation’s and the Bank’s actual and required capital measures were as follows:
Actual
Amount
Ratio
Minimum To Be
Well-Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Minimum For Capital
Adequacy Purposes
Ratio
Amount
(Dollars in thousands)
At December 31, 2012:
Cambridge Bancorp:
Total capital
(to risk-weighted assets) ..... $ 112,915
15.2%
$ 59,480
8.0%
$ 74,350
10.0%
Tier I capital
(to risk-weighted assets) .....
103,601
13.9%
29,740
4.0%
44,610
Tier I capital
(to average assets) ..............
103,601
7.5%
55,069
4.0%
68,836
6.0%
5.0%
Cambridge Trust Company:
Total capital
(to risk-weighted assets) ..... $ 112,025
15.1%
$ 59,480
8.0%
$ 74,350
10.0%
Tier I capital
(to risk-weighted assets) .....
102,711
13.8%
29,740
4.0%
44,610
Tier I capital
(to average assets) ..............
102,711
7.5%
55,013
4.0%
68,766
6.0%
5.0%
At December 31, 2011:
Cambridge Bancorp:
Total capital
(to risk-weighted assets) ..... $ 103,040
15.3%
$ 53,929
8.0%
$ 67,411
10.0%
Tier I capital
(to risk-weighted assets) .....
94,592
14.0%
26,964
4.0%
40,446
Tier I capital
(to average assets) ..............
94,592
7.6%
49,979
4.0%
62,474
6.0%
5.0%
Cambridge Trust Company:
Total capital
(to risk-weighted assets) ..... $ 99,404
13.8%
$ 57,680
8.0%
$ 72,100
10.0%
Tier I capital
(to risk-weighted assets) .....
90,377
12.5%
28,840
4.0%
43,260
Tier I capital
(to average assets) ..............
90,377
7.3%
49,790
4.0%
62,237
6.0%
5.0%
19. OTHER INCOME
The components of other income were as follows:
Year Ended December 31,
2011
2012
(In thousands)
Safe deposit box income ........................................................
Loan fee income .....................................................................
Miscellaneous income ............................................................
Total other income ...........................................................
$
$
343
171
237
751
$
$
346
175
243
764
48
20. OTHER OPERATING EXPENSES
The components of other operating expenses were as follows:
Year Ended December 31,
2011
2012
(In thousands)
Contributions / Public relations .............................................
Director fees ...........................................................................
Printing and supplies ..............................................................
Postage ...................................................................................
Travel and entertainment .......................................................
Dues and memberships ..........................................................
Security ..................................................................................
Amortization of intangible assets ...........................................
Other losses ............................................................................
Miscellaneous expense ...........................................................
Total other operating expenses .........................................
$
$
507
418
408
313
282
245
166
12
91
219
2,661
$
$
454
415
362
293
274
227
141
148
95
200
2,609
21. OTHER COMPREHENSIVE INCOME
Comprehensive income is defined as all changes to equity except investments by and
distributions to stockholders. Net income is a component of comprehensive income,
with all other components referred to in the aggregate as ‘other comprehensive income’.
The Corporation’s other comprehensive income consists of unrealized gains or losses
on securities held at year-end classified as available-for-sale and the component of the
unfunded retirement liability computed in accordance with the requirements of ASC 715,
“Compensation – Retirement Benefits”. The before-tax and after-tax amount of each of
these categories, as well as the tax (expense)/benefit of each, is summarized as follows:
Year Ended December 31, 2012
Tax
(Expense)
or Benefit
(In thousands)
Net-of-tax
Amount
Before Tax
Amount
Defined benefit retirement plans:
Change in unfunded retirement liability .....
Unrealized gains/(losses) on AFS securities:
Unrealized holding gains/(losses) arising
$
176
$
(72)
$
104
during the period .......................................
(499)
Reclassification adjustment for gains
recognized in net income ............................
$
(882)
(1,205)
$
197
314
439
(302)
(568)
(766)
$
49
Before Tax
Amount
Year Ended December 31, 2011
Tax
(Expense)
or Benefit
(In thousands)
Net-of-tax
Amount
Defined benefit retirement plans:
Change in unfunded retirement liability .....
Unrealized gains/(losses) on AFS securities:
Unrealized holding gains/(losses) arising
$
(5,010)
$
2,069
$
(2,941)
during the period .......................................
3,561
(1,302)
2,259
Reclassification adjustment for gains
recognized in net income ..........................
$
(552)
(2,001)
$
201
968
(351)
(1,033)
$
22. EARNINGS PER SHARE
The following represents a reconciliation between basic and diluted earnings per share:
Year Ended December 31, 2012
Diluted
Basic
EPS
EPS
Numerator:
Net income .......................................................................
$ 13,403,000
$ 13,403,000
Denominator:
Weighted average common shares outstanding ...............
Dilutive effect of stock options ........................................
Total shares ................................................................
3,839,681
—
3,839,681
3,839,681
39,926
3,879,607
Earnings per share ..................................................................
$
3.49
$
3.45
Year Ended December 31, 2011
Diluted
Basic
EPS
EPS
Numerator:
Net income .......................................................................
$ 12,477,000
$ 12,477,000
Denominator:
Weighted average common shares outstanding ...............
Dilutive effect of stock options ........................................
Total shares ................................................................
3,791,167
—
3,791,167
3,791,167
43,402
3,834,569
Earnings per share ..................................................................
$
3.29
$
3.25
50
23. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following is a summary of the carrying values and estimated fair values of the
Corporation’s significant financial instruments as of the dates indicated.
Financial assets:
Cash and cash equivalents .................
Securities - available for sale .............
Securities - held to maturity ...............
Loans held for sale .............................
Loans, net ...........................................
FHLB Boston stock............................
Accrued interest receivable ................
Mortgage servicing rights ..................
Financial liabilities:
Deposits..............................................
Short-term borrowings .......................
Long-term borrowings .......................
December 31, 2012
Carrying Estimated
Fair Value
Value
December 31, 2011
Carrying Estimated
Fair Value
Value
(In thousands)
$
59,923
502,318
71,133
1,684
731,301
5,010
3,877
215
$
59,923
502,318
76,308
1,687
753,285
5,010
3,877
254
$
22,512
470,232
74,256
—
663,106
4,806
4,423
—
$
22,512
470,232
80,484
—
685,994
4,806
4,423
—
1,281,333
—
20,000
1,280,932
—
20,121
1,125,654
2,500
30,000
1,126,618
2,500
30,930
The Corporation follows ASC 820, “Fair Value Measurements and Disclosures” for
financial assets and liabilities. ASC 820 defines fair value, establishes a framework for
measuring fair value and expands disclosure requirements about fair value measurements.
ASC 820, among other things, emphasizes that fair value is a market-based measurement,
not an entity-specific measurement, and states that a fair value measurement should be
determined based on the assumptions the market participants would use in pricing the
asset or liability. In addition, ASC 820 specifies a hierarchy of valuations 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 Corporation’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 Corporation’s market assumptions.
Under ASC 820, fair values are based on the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When available, the Corporation 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-
51
based inputs are not available, the Corporation 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 Corporation uses fair value measurements to record fair value adjustments to certain
assets and to determine fair value disclosures. Securities available for sale are recorded
at fair value on a recurring basis. Additionally, from time to time, the Corporation may
be required to record at fair value other assets on a nonrecurring basis, such as collateral
dependent impaired loans.
The following table summarizes certain assets reported at fair value:
Measured on a recurring basis:
Securities available for sale:
U.S. GSE obligations ...................
Mortgage-backed securities .........
Corporate debt securities ..............
Mutual funds ................................
Measured on a recurring basis:
Securities available for sale:
U.S. GSE obligations ...................
Mortgage-backed securities .........
Corporate debt securities ..............
Mutual funds ................................
Fair Value as of December 31, 2012
Level 1
Level 2
Level 3
Total
(In thousands)
$
$
—
—
—
646
$ 100,824
381,036
19,812
—
—
—
—
—
$ 100,824
381,036
19,812
646
Fair Value as of December 31, 2011
Level 1
Level 2
Level 3
Total
(In thousands)
$
$
—
—
—
650
$
93,742
352,830
23,010
—
—
—
—
—
$
93,742
352,830
23,010
650
52
The following is a description of the principal valuation methodologies used by the
Corporation 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 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 that are deemed to be impaired in
accordance with ASC 310, “Receivables”, are valued based upon the lower of cost or fair
value of the underlying collateral.
FHLB Boston Stock
The fair value of FHLB Boston stock equals its carrying value since such stock is only
redeemable at its par value.
Mortgage Servicing Rights
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.
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 Bank’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.
Long-term Borrowings
For long-term borrowings, fair values are estimated using future cash flows, discounted
at rates based upon current costs for debt securities with similar terms and remaining
maturities.
Other Financial Assets and Liabilities
Cash and cash equivalents, accrued interest receivable and short-term borrowings have fair
values which approximate their respective carrying values because these instruments are
payable on demand or have short-term maturities and present relatively low credit risk and
interest rate risk.
53
Off-Balance-Sheet Financial Instruments
In the course of originating loans and extending credit, the Bank will charge fees in
exchange for its commitment. While these commitment fees have value, the Bank has not
estimated their value due to the short-term nature of the underlying commitments and their
immateriality.
Values Not Determined
In accordance with ASC 820, the Corporation has not estimated fair values for non-
financial assets such as banking premises and equipment, goodwill, the intangible value
of the Bank’s portfolio of loans serviced for itself and the intangible value inherent in the
Bank’s deposit relationships (i.e., core deposits), among others. Accordingly, the aggregate
fair value amounts presented do not represent the underlying value of the Corporation.
54
CAMBRIDGE TRUST COMPANY–OFFICERS
Joseph V. Roller II ......................................................................... President & Chief Executive Officer
Lynne M. Burrow .............................................. Executive Vice President & Chief Information Officer
Michael A. Duca .......................................................... Executive Vice President, Wealth Management
Albert R. Rietheimer ..................................Senior Vice President, Chief Financial Officer & Treasurer
Robert C. Davis ...............................................Senior Vice President, Chief Credit Officer & Secretary
Martin B. Millane, Jr. ................................................... Senior Vice President & Chief Lending Officer
James F. Spencer ......................................................Senior Vice President & Chief Investment Officer
Noreen A. Briand ................................................. Senior Vice President & Human Resources Director
Thomas A. Johnson ............ Senior Vice President, Consumer Banking Director & Assistant Secretary
Robert N. Siegrist ..............................................................Senior Vice President & Marketing Director
David G. Strachan, Jr. ................................................................. Senior Vice President & Trust Officer
David E. Walker .................................................................Senior Vice President & Investment Officer
Julie A. Alix ............................................................................................Vice President & Trust Officer
Elaine M. Arseneault ........................................................................................................ Vice President
Susan K. Barry ................................................................................................................. Vice President
Carol J. Bartalussi ............................................................................................................ Vice President
Jo-Ann E. Bussiere ........................................................................................................... Vice President
Stephen A. Caputo ........................................................................................................... Vice President
Kathleen E. Carlson ................................................... Vice President & Business Development Officer
Susan I. Chiappisi ...................................................................................Vice President & Trust Officer
Jeffrey B. Churchill .......................................................................................................... Vice President
Jason R. DeMello ....................................................... Vice President & Business Development Officer
Michael F. Falvey .................................................................... Vice President, Commercial Real Estate
Edward F. Fitzgerald, Jr. ....................................................... Vice President, Business Banking Officer
Ana Maria Foster ......................................... Vice President, Compliance & Risk Management Officer
Peter J. Halberstadt .......................................................................................................... Vice President
John A. Haley ............................................ Vice President & Director of Wealth Management Services
Ryan M. Hanna ............................................................................. Vice President & Investment Officer
Eric C. Jussaume ........................................................................... Vice President & Investment Officer
Brian A. Kelley ................................................................................................................ Vice President
Matthew S. Lieber ...................................................................................Vice President & Trust Officer
M. Lynne Linnehan .......................................................................................................... Vice President
Robert J. MacAllister ................................................. Vice President & Business Development Officer
Andrew J. Mahoney, Jr. .................................................................................................... Vice President
Robert P. Maloof .......................................Vice President & Manager, Commercial Credit Department
Jane E. Mason .............................................................................Vice President, Relationship Manager
Roma A. Mayur ................................................................................................................ Vice President
CAMBRIDGE TRUST COMPANY–OFFICERS (continued)
Michael T. McGovern .............................................. Vice President, Information Technology Manager
Laura C. McGregor .................................................................................Vice President & Trust Officer
Stuart J. McGuirk ........................................... Vice President, Business Analyst & Compliance Officer
Steven J. Mead ........................................................................ Vice President, Commercial Real Estate
Patricia J. Mullin .............................................................................................................. Vice President
Frank Pasciuto .................................................................................................................. Vice President
Robert C. Pasciuto, Esq. .........................................................................Vice President & Trust Officer
Donna R. Petro ................................................................................................................. Vice President
Steven G. Pisan ................................................................................................................ Vice President
Salvatore M. Sagarese ...................................................................................................... Vice President
Joseph P. Sapienza ......................................................................................Vice President & Controller
Dina M. Scianna ......................................................... Vice President, Business Development Manager
Stacy Sheehan .................................................................................................................. Vice President
Brian J. Sokolowski ...................................................................... Vice President & Investment Officer
W. Todd Spoor ................................................................................................................. Vice President
David S. Tait ........................................................................... Vice President, Commercial Real Estate
Ann K. Tucker .................................................................................................................. Vice President
Helen F. Van Nostrand ..................................................................................................... Vice President
Eric G. Warasta ............................................................................. Vice President & Investment Officer
John M. Winslow ............................................................... Vice President & Director of Internal Audit
William M. Yates ....................................................... Vice President & Business Development Officer
Jennifer A. Casey ........................................................ Assistant Vice President & Director of Training
Julia M. Cawley .............................................................Assistant Vice President & Operations Officer
John H. Chambers .............................................................................................Assistant Vice President
Christopher E. Durning .....................................................................................Assistant Vice President
Aimee B. Forsythe .........................................................Assistant Vice President & Investment Officer
Stephen W. Hall .............................................Assistant Vice President & Information Security Officer
Patricia E. Hartnett ............................................................................................Assistant Vice President
Kathryn L. Hersey ..........................................................Assistant Vice President & Investment Officer
Eugene K. Kalaw ........................................Assistant Vice President & Business Development Officer
Patrick J. McCue ..........................................................Assistant Vice President & Assistant Controller
Ana M. Mojica-Boyd ........................................................................................Assistant Vice President
Maria Montgomery ...........................................................................................Assistant Vice President
Richard A. Moquin .................................................................... Assistant Vice President & Tax Officer
Mary Colt Navins ..............................................................................................Assistant Vice President
Susan A. O’Keefe ........................................Assistant Vice President & Business Development Officer
Barbara E. Piacentino .....................................................Assistant Vice President & Operations Officer
CAMBRIDGE TRUST COMPANY–OFFICERS (continued)
Stephen I. Sall ............................................................Assistant Vice President & Loan Review Officer
Charles E. Samour ............................................................. Assistant Vice President & Security Officer
Angela L. Vitagliano ......................................................Assistant Vice President & Operations Officer
Clinton D. Williams ..................................................................................................Assistant Treasurer
Ping H. Wong ............................................................................................................Assistant Treasurer
Pooja Bhandary .......................................................................................... Assistant Operations Officer
JoAnn M. Cavallaro ............................................................................................ Administrative Officer
Erin J. Cooper ........................................................................................ Business Development Officer
Renée L. Daniell ........................................................................................ Assistant Operations Officer
Mark J. Earnest .............................................................................. Banking Officer, Portfolio Manager
Alice J. Flanagan .................................................................................................................Trust Officer
Gabriele Fabrizio .......................................................................................................Operations Officer
Medard H. Kadima .....................................................................................Information Security Officer
Ann C. Kuske .............................................................................................................Operations Officer
Karina Q. Pinella .......................................................................................Senior Credit Analyst Officer
Maya C. Silvis ...........................................................................................Senior Credit Analyst Officer
Leah Siporin ................................................................................................... Digital Marketing Officer
Peter C. Stoneman ..............................................................................................Consumer Loan Officer
James R. Weishaupt ...................................................................................................Operations Officer
James J. Zurn .....................................................................................................Consumer Loan Officer
CAMBRIDGE TRUST COMPANY OF NEW HAMPSHIRE – OFFICERS
Susan Martore-Baker ................................................................................................................President
Judith V. Goodnow ...................................................................... Senior Vice President & Trust Officer
Maureen Kelliher ...............................................................Senior Vice President & Investment Officer
Brian J. Krol .................................................................................. Vice President & Investment Officer
Michael P. Panebianco ............................................................................Vice President & Trust Officer
CAMBRIDGE TRUST COMPANY–EMPLOYEES
Ambrose, Aliya
Bailey, Adrienne
Basnyat, Nivedita
Bennett, Michael
Bober, Jeffrey
Burke, Sandra
Carnazzo, Gail
Catanzano, Joseph
Chowdhury, Farzana
Cole, Jeffrey
Collopy, Alan
Connolly III, Peter
Cope, Andrea
Corey, Aurora
Costello, Laura
Cronburg, Wendy
Curtin, Stephen
Dalomba, Christian
Dean, Shellie
DeAngelis, Maryellen
DeDominicis, Catherine
Dillon, Janice
Diloyan, Anahit
Djatsa, Viviane
Dodge, Jeanne
Dumas, Donald
Dutt, Anita
Fin, Bernadette
Flanagan, Ryan
Flores, Cynthia
Frederique, Jude
Frost, David
Gielczyk, Michael
Gilkes, Yvette
Gilpin, Kaitlyn
Greco, Randi
Greene, Mary
Gunn, Charles
Hamblen, Sally
Hanna, Amy
Howard, Margaret
Hutchinson, Beverly
Islam, Khondaker
Jacobs, Catherine
Jorge, Adelaide
Kantor, Jasmine
Kaufman, Theresa
Keenan, Robert
Kingsford, Alessandra
Kirwin, Marie
Kumari, Anita
Kuzmich, Katherine
LaMorticelli, René
Lazzari, Linda
Leonard, Ketline
Leonard, Sean
Lettieri, Robyn
Levine, Patricia
Lim, Raymond
Liu, Rose
Lombardi, Joseph
Lombardo, Joseph
Long, John
Lucas, Nicole
Manessis, Demetrios
Marcantonio, Paul
McCarty, William
McGilvray, Elizabeth
McWilliams, Katherine
Mei, Yi Lan
Membrino, Patricia
Mesina, Rosita
Mesquita, Heidy
Miranda, Ana Paula
Mui, Donna
Mulcahy, Deborah
Murphy, Barbara
Nardella, Justine
Nichols, Pamela
O’Leary, Brendan
O’Rourke, Alan
Palacios, Maria Del Mar
Perry Durkee, Christina
Phuyal, Puja
Prager, Robert
Quigley, Maria
Reed, Michael
Ricker, Kelly
Rock, Gloria
Rodriguez, Aileen
Rudden, Thomas
Sands, Janet
Serio, Linda
Shahi, Bala
Shay, Debbie
Sheikh, Basharat
Small, Jasmine
Sottile, Charlotte
Soul, Jr., Harwood
Sprague, Cynthia
Stephano, Susan
Stone, Jason
Sullivan, Mary
Tamasi, Joanne
Thain, Lina
Toronto, Melissa
Trebicka, Daniela
Truesdale, Stacey
Truong, Andrew
Usova, Victoria
Vallejo, Ivan
Vaudo Tobin, Rita
Vitale, Louis
Vo, Lana
White, Kristen
Wu, Qihui
Yearwood, Carol
Zaring, Victoria
Zelman, Carol Jean
CAMBRIDGE TRUST COMPANY OF NEW HAMPSHIRE – EMPLOYEES
Bozek, Cheryl Lee
Schwechheimer, Brenda
Talbot, Michele
Travers, Janelle
Main Office
Harvard Square • 1336 Massachusetts Avenue • Cambridge, MA 02138
617-876-5500
Huron Village • 353 Huron Avenue • Cambridge, MA 02138
617-661-1317
Kendall Square • 326 Main Street • Cambridge, MA 02142
617-441-0951
Porter Square • 1720 Massachusetts Avenue • Cambridge, MA 02138
617-661-0398
University Park at MIT • 350 Massachusetts Avenue • Cambridge, MA 02139
617-225-0792
Beacon Hill • 65 Beacon Street • Boston, MA 02108
617-523-3551
South End • 565 Tremont Street • Boston, MA 02118
617-236-2247
361 Trapelo Road • Belmont, MA 02478
617-484-0892
75 Main Street • Concord, MA 01742
978-369-9909
1690 Massachusetts Avenue • Lexington, MA 02420
781-863-0976
152 Lincoln Road • Lincoln, MA 01773
781-259-4890
494 Boston Post Road • Weston, MA 02493
781-893-5500
Cambridge Innovation Center • One Broadway • Cambridge, MA 02142
617-225-4385
116 North Main Street • Concord, NH 03301
603-226-1212
One Harbour Place • Portsmouth, NH 03801
603-373-6010