Cambridge Bancorp
Annual Report 2013

Plain-text annual report

CAMBRIDGE BANCORP ANNUAL REPORT 2013 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 DONALD T. BRIGGS JEANETTE G. CLOUGH HAMBLETON LORD JEAN K. MIXER President Federal Realty Boston Senior Vice President – Development Federal Realty Investment Trust President and Chief Executive Officer Mount Auburn Hospital 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 ANNE M. THOMAS DAVID C. WARNER LINDA WHITLOCK Manager Kestrel Management, LLC 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 Group Wealth Advisors, LLC Monument Group Tax Advisors, LLC Woodman & Eaton, P.C. We shape our buildings, and afterwards our buildings shape us. —Winston Churchill In remarking as he did in 1943 that “our buildings shape us,” Churchill was not merely making the unexceptionable observation that we are influenced by our surroundings, much less proposing that we are primarily shaped by them. He was, in fact, thinking of a specific building, namely, the House of Commons, which had been damaged by German bombs during the Blitz of London. His suggestion was that the structure of the debating chamber, which was designed to facilitate open argument between parties seated directly opposite to one another, was worth maintaining in its essentials while being restored. The character of the institution could be preserved while the premises were made suitable for use by future generations. It was the need to renovate which prompted Churchill to reflect upon the principles that were essential for the building’s purpose. Renovations, of course, do not always follow from calamity; they may also represent welcome opportunities. During the past year, Cambridge Trust has been presented with just such an opportunity. Last year in this letter, I noted that: “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. When complete, the Bank will have banking premises that better suit current and future servicing needs of our customers.” What I did not explicitly note at the time was that our new premises, in being brought up to date, would continue to reflect the same principles of visibility, accessibility, and effectiveness that have consistently informed the arrangement of our 1 headquarters. I am happy to report, however, that this is very much the case. It is not just our new and improved premises that reflect our commitment to our customers, shareholders, and the future. 2013 was characterized by significant achievement—record loan and wealth management growth, the procurement of a long-term lease for the Harvard Square headquarters that potentially extends to mid-century, and a range of exciting new products and investments in technology. These investments and products address changing customer preferences and ultimately will enhance the customer experience. The Bank had an impressive year in 2013, building on the momentum generated in 2012 through a number of strategic initiatives. The year ending December 31, 2013 produced another earnings record with net income of $14,140,000 compared to earnings of $13,403,000 for the year ending December 31, 2012. The year-over-year increase in earnings of $737,000 was 5.5%. Diluted earnings per share (EPS) were $3.62 for the year ended December 31, 2013, compared to $3.45 in the prior year. Similar to prior years, the Bank’s performance was driven by a number of factors, the most noteworthy of which were loan growth and wealth management growth, with assets under management (AUM) breaking through $2 billion. Deposits increased $128 million in 2013 over 2012. This marks the fifth consecutive year that deposits grew by more than $100 million. With total loan growth in 2013 of $200 million, one might justifiably expect a robust increase in net interest income. This was not the case, as this Bank and the industry continued to encounter declining net interest margins. The Federal Reserve Bank’s accommodative monetary policy kept short-term rates near zero, with longer term rates declining through the first half of 2013. This decline occurred in response to the Fed’s monthly purchase of $85 billion in securities through a program known as quantitative easing. 2 For Cambridge Trust the effect of protracted low interest rates produced a net interest margin that declined from 3.58% in 2012 to 3.35% in 2013. Though one might assume that loan growth of $200 million would produce higher net interest income, it is important to note that a lower average margin affects all of the Bank’s earning assets (principally loans and investments), or $1.39 billion, and creates significant drag. In nominal terms, for the year ending December 31, 2013, net interest income was $45,466,000 compared to $45,875,000 in 2012. On a more positive note, these new loans position us well going forward. Moreover, we noted a bottoming out in rates around mid-year and a slight bias higher toward year-end. Year End 2009 2010 2011 2012 2013 4.27 % 4.15 % $ 993,808 $ 568,568 Deposits (in thousands) ....... $ 872,767 Total Loans (in thousands) .. $ 537,933 Net Interest Margin ............. Noninterest Income (in thousands)(A)................. $ 16,618 $ $ 19,877 $ $ 13,254 Net Income (in thousands) .. $ 10,277 $ 3.53 $ 2.75 Basic Earnings/Share .......... $ $ 1.40 $ Dividends Declared ............. $ 1.34 $ 23.73 $ 21.95 Book Value .......................... $ 1.25 % Return/Average Assets ........ 1.06 % 14.98 % 13.09 % Return/Average Equity ........ $ 1,125,654 $ 673,265 $ 1,281,333 $ 742,249 $ 1,409,047 $ 942,451 3.90 % 3.58 % 3.35 % $ 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 % 23,181 14,140 3.65 1.59 28.13 0.99 % 13.63 % (A) Includes $2.8 million pre-tax gain on disposition of merchant services portfolio in 2010 It is especially helpful during periods of protracted margin pressure to have a diversified revenue stream in the form of noninterest income. In 2013, we continued to see a significant upswing in this area. Noninterest income in 2013 was $23,181,000 compared to $20,489,000 in 2012, an increase of $2,692,000 (13.1%). Most of this increase came from the Bank’s highly successful Wealth Management business where year- over-year revenues rose $2,155,000 (15.3%). I will have more to say about Wealth Management later in this report. It would be fair to say that Massachusetts, like most densely populated parts of the country, is over-banked. Consumers and businesses have a wide variety of banks from which to choose. In such a competitive environment, it is critical that we clearly answer the question, “Why bank with Cambridge Trust?” and that we make the answers to that question widely known. To that end, as I reported last year, we have introduced a 3 new brand platform built around the theme of “Life’s Bank.” This platform was built on the premise that when the inevitable and often unexpected changes and disruptions of life occur it is good to know that you have a competent, accessible, and responsive partner to assist you. In 2012, I noted that we would build on this brand message in 2013. We have done so with the introduction of two television commercials. Our move into television represents a new media channel for Cambridge Trust and demonstrates an amplified level of sophistication for the brand. The Bank’s sustained earnings growth and returns on average equity and on average assets position it well in the industry. The return on average equity in 2013 of 13.63% and return on average assets of 0.99% place the Bank in a category of high-performing banks. We think it is important that shareholders benefit from the Bank’s earnings performance. In that regard, the quarterly dividend was increased by 7.7% to $0.42 per share. Consumer Banking Among the many updates from 2013 to share, one stands out. Building off momentum generated in 2012, together with an interest rate environment that drove customers to consider refinancing their mortgages, Cambridge Trust experienced its strongest year ever in terms of loan volume. For the year ending December 31, 2013, residential mortgage loans outstanding increased $110 million (31.7%) to $458 million, compared to year-end 2012. Not all mortgages are held on the Bank’s books. Commencing in 2012, Cambridge Trust sold its 30-year conforming mortgages in the secondary market but retained the loan servicing. Fees generated from such transactions are shown on the income statement as “Gain on loans held for sale.” Readers will note a modest decline in this revenue number to $519,000 in 2013 compared to $592,000 in 2012. Rising interest rates in the May/June time frame put the brakes on the “Refi” business for the remainder of 2013, although we did experience an upswing in purchase mortgage activity. 4 In the business of banking, the immense regulatory compliance requirements are constantly changing. Close oversight is necessary, which is one reason Brian Bacci, Lending Compliance Officer, joined the Bank. We also recognize the importance of maintaining service levels in high volume operations areas. In light of that recognition, we promoted Gabriele Fabrizio to Assistant Vice President. Technology investments made by the Bank have streamlined and improved services, providing a better experience for the customer. The introduction of an online mortgage application is one example. Today, most customers take advantage of this service, knowing that they may also call or visit one of our skilled mortgage professionals if they have questions. Similarly, an increasing number of Cambridge Trust depositors use a new mobile banking application to deposit checks using their smart phone or tablet. We plan to introduce mobile banking for business customers in 2014. A significant undertaking in 2013 affecting consumer and business customers was the outsourcing of items processing and statement print processing. As usage of internet and mobile banking has grown, check writing has declined. Through outsourcing, Cambridge Trust can lower its costs by utilizing the scale of an outside party, while maintaining its high quality standards. In addition, the vendor’s scale advantage and multiple site operations improve the Bank’s disaster readiness. Undoubtedly, one of the most important investments we made in 2013 was for the renovation of the Bank’s Harvard Square headquarters. We are committed to this location and have entered into a lease that provides options extending to 2046. We are also committed to providing a space that recognizes changes in demographics and habits of usage by customers, as well as the need for greater privacy and remote access to bank professionals located away from Harvard Square. To this last point, we have incorporated video conferencing capability throughout the site. I should also note that we wanted to preserve an attractive and comfortable work environment for our employees. We aimed to maintain a connection with and pay homage to our past, while considering current 5 and future circumstances. Two questions often asked are, “Is there a fireplace?” and “Will the president sit on the banking floor?” Yes and yes. Business Banking There is a certain symmetry to the Business and Consumer Banking stories in 2013. I noted earlier the robust growth in residential mortgage lending. Likewise, commercial lending had its strongest year on record. Commercial loans increased $90 million in 2013, growing to $414 million. The comparable commercial loan growth in 2012 was approximately $54 million. Most of the $90 million loan increase originated in the commercial real estate sector. This diversified portfolio includes multifamily, retail, office, and mixed-use properties. It is worth noting that loan growth from both new and existing customers produced the results; this growth will provide momentum going into 2014. In addition, Glenn Davis, Vice President, joined the lending team in 2013 and made an important contribution to the aforementioned development of this vital sector. Cambridge Trust also makes loans available to an array of agencies in the nonprofit sector. These agencies provide numerous services to residents in communities we serve. Additionally, in 2013 the Bank made a $1 million loan to Boston Community Capital (BCC). BCC invests in projects that provide affordable housing, good jobs, and new opportunities in low-income communities. Such projects help in the process of connecting these neighborhoods to the mainstream economy. As the Bank continues to build its commercial loan business, all members of the team are mindful of the need to maintain a strong credit culture. Close oversight and attention to asset quality have been hallmarks of Cambridge Trust. These practices have served the Bank well through various economic cycles. Net recoveries in 2013 were $260,000. Non-performing loans at the end of 2013 were $1,703,000, compared to $1,570,000 at the end of 2012. The Allowance for Loan Losses in December 31, 2013 was $12,708,000 or 1.35% of loans. The comparable numbers in 2012 were $10,948,000 and 1.47%, respectively. The Bank provided more to the Allowance in 2013 than in prior years to reflect the significant loan growth in 2013. We also added to the support team with 6 the hiring of Justin Drolsbaugh, Commercial Officer, Portfolio Manager, and Rachel Bandi, Senior Credit Analyst Officer. Joining the Business Development team was Leslie Hartwell, Assistant Vice President. Since its formation in 2011, the Innovation Banking Group has focused on the rapidly changing innovation sector. In this context, they have consistently raised awareness about the value Cambridge Trust brings to growing companies. By establishing its niche and articulating its capabilities, the Bank had a breakthrough year in 2013 with the acquisition of new loan, deposit, and cash management customers. We were especially pleased that Tiffany Ormon, Vice President, joined the group. Wealth Management By almost any measure, 2013 represented a landmark year for Cambridge Trust’s Wealth Management business. Highlights include record assets under management (AUM), record revenues, new growth in New Hampshire, expanded marketing initiatives, and new premises in Boston. For the first time AUM exceeded $2 billion, finishing the year ending December 31, 2013, at $2,140,000,000. This represents an increase of $345 million (19.2%) over the prior year-end. Wealth Management revenues also reached new heights, increasing $2,155,000 (15.3%) in 2013 to $16,265,000. Two factors drove this growth. The Bank has been consistently successful in attracting new relationship clients, and 2013 was an especially good year. In addition, growth in 2013 was enhanced by a significant upswing in equity markets. The Dow increased 26.5% and the S&P 29.6% in 2013. Year 2009 2010 2011 2012 2013 Wealth Management Gross Revenues (in thousands) Managed Assets (in millions) $ 11,353 $ 12,364 $ 13,152 $ 14,110 $ 16,265 7 $ 1,383 $ 1,507 $ 1,468 $ 1,795 $ 2,140 Over the long term, the leverage of rising equity prices on AUM is one of the benefits of assisting clients with the management of their investments and with other matters relating to their family’s needs. We think that there is considerable opportunity to continue our growth. The appointment of Brian Bickford, Senior Vice President and Investment Officer, to our New Hampshire team will help us to maximize that opportunity. I also want to acknowledge the promotion of Aimee Forsythe to Vice President. Aimee plays a key role in trading and compliance. When there is a good story to tell and valuable insights to share, it is important that the Bank project these messages in the market. In this instance, as part of Cambridge Trust’s expanded brand awareness campaign, we incorporated a Wealth Management theme into one of the Bank’s television advertisements. We also introduced a video series, accessible on the Bank’s website (www.cambridgetrust.com), featuring Jim Spencer, Chief Investment Officer. “Finding Opportunity in a Complex Market,” provides an inside look at how today’s headlines are tomorrow’s opportunities. This will be a regular video series that over time will grow to include other members of the Wealth Management team, including both Investment and Trust Officers. Clearly, the capstone for 2013 for Wealth Management – and Cambridge Trust – was the relocation of all Massachusetts Wealth Management staff to 75 State Street in Boston’s Financial District. The move makes a strong statement about the strategic importance of Wealth Management. It testifies to the Bank’s commitment to grow the business over the long term. Moreover, we created an office environment that is consistent with and conducive to the kind of sophisticated financial advice our clients expect. * * * * * * There are other employees of the Bank that I want to recognize in this report. Their contributions had a positive impact on the Bank’s performance, across many areas of the organization. Alan Collopy was promoted to Operations Officer; Joseph Lombardi to Assistant Controller; and Basharat Sheikh to Assistant Treasurer. We were also very fortunate to have Joseph Cardarelli, Vice President, Information Technology Manager 8 and Linda Sullivan, Human Resources Officer, join the Bank team during 2013. * * * * * * Board governance and oversight have been consistent strengths of Cambridge Trust. Our engaged, diverse, and experienced Board helps to ensure that management executes on its plans to achieve strategic goals. In 2013, Donald Briggs was appointed to the Board. Don is President – Federal Realty Boston and Senior Vice President – Development for Federal Realty Investment Trust, an equity real estate investment trust specializing in the ownership, management, and redevelopment of high- quality retail real estate in the country’s best markets. His extensive real estate development experience and familiarity with the greater Boston market have made Don a valuable contributor to the Board. * * * * * * Back in 2011, a year marked by considerable uncertainty in the global economy and financial markets, I observed that under such conditions, “challenges multiply at a rapid pace. In attempting to keep up with or even to exceed that pace, organizations and individuals may find themselves moving quickly in a number of directions all at once.” Such activity may yield the impression of productivity. But when efforts, no matter how strenuous, do not build upon a firm base of existing achievements and positions, it is that much harder to build momentum. Although the global financial crisis has abated, the pressure to maintain our focus on the positions that are the key sources of our momentum and to continue building remain. That pressure, however, is not wholly negative. To be sure, it entails dealing with challenges arising from external conditions. Yet it also entails the need continually to excel in view of our own standards and our commitment to betterment across the board. As I look out over the next three to five years, I am confident that we can continue to execute on our strategy as we have consistently done in the past. But keeping up with our past achievements and maintaining our current capabilities is not enough. The changing and more intensely 9 competitive environment during this period will challenge us in ways that we may not fully perceive at this time. Nimbleness, foresight, innovation, and a readiness to take action will be requirements, not merely attractive options. While we cannot know the future, we can know our own capabilities well enough to gain insight into how they can be improved. As Peter Drucker once noted, “Knowledge has to be improved, challenged, and increased constantly, or it vanishes.” The task of improving our knowledge of what we can do requires being willing to think in innovative ways about what we might do beyond our current capabilities. It involves knowing that we can always do better and insisting upon finding new approaches to problem-solving, as well as idea generation and development. Ideation (the process of generating new ideas) occurs most fruitfully under conditions of openness and collaboration. We are already taking steps to enhance our environment in this regard. 2013 has been a year in which the Bank made significant strides with respect to the task of building momentum for the future. It was a year in which we generated new sources of momentum, rather than merely drawing fuel from ones we had previously established. We look forward to reporting on the Bank’s progress across all fronts in 2014 through our forthcoming quarterly reports. In closing, I wish to express my appreciation to our shareholders for your confidence in Cambridge Trust Company and for your support. We will remain focused on performing at a high level, while operating with accountability and integrity. Respectfully submitted, Joseph V. Roller II President and CEO February 26, 2014 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, 2013 and 2012, and the related consolidated statements of income, comprehensive 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 REPORT OF INDEPENDENT AUDITORS 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. To the Board of Directors and Stockholders of Cambridge Bancorp: 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 statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for 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 financial statements based on our audits. 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 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 accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cambridge Bancorp and its subsidiaries as of December 31, 2013 and 2012, and the results of their operations and their cash flows for the years then ended in accordance 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 of their operations and their cash flows for the years then ended in conformity with U.S. generally accepted accounting principles. Report on Other Legal and Regulatory Requirements 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, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated March 2, 2012 expressed an unqualified opinion on the effectiveness of the Bank’s internal control over financial reporting. 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 as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 26, 2014 expressed an unqualified opinion on the effectiveness of Cambridge Trust Company’s internal control over financial reporting. Boston, Massachusetts Boston, Massachusetts February 26, 2014 March 2, 2012 11 CAMBRIDGE BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2013 2012 (In thousands) Cash and cash equivalents ........................................................... $ 88,107 $ 59,923 ASSETS 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 .......................................................................... 388,793 59,181 447,974 403 458,176 363,294 46,635 50,758 23,588 942,451 (12,708) 929,743 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 ................................................................. 6,231 23,555 9,951 3,626 24,120 $ 1,533,710 LIABILITIES AND STOCKHOLDERS’ EQUITY Deposits: Demand .................................................................................. Interest bearing checking ....................................................... Money market ........................................................................ Savings ................................................................................... Certificates of deposit ............................................................ Total deposits ................................................................... $ 382,255 335,010 78,410 489,160 124,212 1,409,047 Long-term borrowings ................................................................. Other liabilities ............................................................................ Total liabilities.................................................................. — 15,380 1,424,427 Stockholders’ equity: Common stock, par value $1.00; Authorized 10,000,000 shares; Outstanding: 3,884,851 and 3,854,951 shares, respectively ............................................. Additional paid-in capital ...................................................... Retained earnings ................................................................... Accumulated other comprehensive income ........................... Total stockholders’ equity .......................................... Total liabilities and stockholders’ equity ................... 3,885 26,027 83,479 (4,108) 109,283 $ 1,533,710 The accompanying notes are an integral part of these consolidated financial statements. 12 502,318 71,133 573,451 1,684 347,908 276,428 50,574 47,570 19,769 742,249 (10,948) 731,301 5,010 22,903 6,214 3,877 13,623 $ 1,417,986 $ 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 CAMBRIDGE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31, 2012 2013 (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 .................................. $ $ $ 35,669 9,905 2,028 20 39 47,661 1,970 224 2,194 45,467 1,500 43,967 16,265 2,567 1,182 652 1,121 519 875 23,181 26,995 8,163 4,012 1,548 1,822 739 2,832 46,111 21,037 6,897 14,140 3.65 3.62 3,839,146 3,907,201 The accompanying notes are an integral part of these consolidated financial statements. 13 $ $ $ $ 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 CAMBRIDGE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Year Ended December 31, 2012 2013 (In thousands) Net income ................................................................................... $ 14,140 $ 13,403 Other comprehensive income/(loss), net of tax: Defined benefit retirement plans: Change in unfunded retirement liability .......................... 5,671 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) ............................................ (9,887) (720) (4,936) 104 (302) (568) (766) Comprehensive income .................................................... $ 9,204 $ 12,637 The accompanying notes are an integral part of these consolidated financial statements. 14 l a t o T ’ s r e d l o h k c o t S y t i u q E d e t a l u m u c c A r e h t O e v i s n e h e r p m o C ) s s o L ( / e m o c n I d e n i a t e R s g n i n r a E l a n o i t i d d A n i - d i a P l a t i p a C n o m m o C k c o t S ) a t a d e r a h s r e p t p e c x e , s d n a s u o h t n I ( S E I R A I D I S B U S D N A P R O C N A B E G D I R B M A C Y T I U Q E ’ S R E D L O H K C O T S N I S E G N A H C F O S T N E M E T A T S D E T A D I L O S N O C 3 3 6 , 6 9 $ 4 9 5 , 1 $ 2 3 2 , 8 6 $ 1 0 0 , 3 2 $ 6 0 8 , 3 $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B 1 5 5 2 4 4 5 9 4 7 3 6 , 2 1 ) 3 0 1 ( ) 4 6 7 , 5 ( 1 9 8 , 4 0 1 9 3 4 0 6 6 5 9 5 4 0 2 , 9 ) 2 4 3 ( ) 4 6 1 , 6 ( ) 6 6 7 ( — — — — — 8 2 8 ) 6 3 9 , 4 ( — — — — — — — — 3 0 4 , 3 1 ) 4 8 ( ) 4 6 7 , 5 ( 7 8 7 , 5 7 0 4 1 , 4 1 — — — ) 4 8 2 ( ) 4 6 1 , 6 ( — 9 3 4 8 3 6 8 7 5 — ) 9 4 ( — — 2 2 7 1 — ) 9 ( . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e m o c n i e v i s n e h e r p m o C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n o i t a s n e p m o c d e s a b k c o t S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t p o k c o t s f o e s i c r e x E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P S D d n a P O S E o t d e u s s i k c o t S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) e r a h s r e p 9 5 . 1 $ ( d e r a l c e d s d n e d i v i D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d e s a h c r u p e r k c o t S — 9 2 5 7 2 4 0 8 4 — ) 6 1 ( — 2 2 5 1 5 1 — ) 3 ( . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e m o c n i e v i s n e h e r p m o C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . n o i t a s n e p m o c d e s a b k c o t S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . s n o i t p o k c o t s f o e s i c r e x E . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P S D d n a P O S E o t d e u s s i k c o t S . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ) e r a h s r e p 0 5 . 1 $ ( d e r a l c e d s d n e d i v i D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . d e s a h c r u p e r k c o t S 15 1 2 4 , 4 2 5 5 8 , 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B 3 8 2 , 9 0 1 $ ) 8 0 1 , 4 ( $ 9 7 4 , 3 8 $ 7 2 0 , 6 2 $ 5 8 8 , 3 $ . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 0 2 , 1 3 r e b m e c e D t a e c n a l a B e s e h t f o t r a p l a r g e t n i n a e r a s e t o n g n i y n a p m o c c a e h T . s t n e m e t a t s l a i c n a n fi d e t a d i l o s n o c 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 2013 (In thousands) $ 14,140 $ 13,403 1,500 720 1,569 (652) (1,121) 439 1,281 4,998 321 23,195 800 1,360 1,430 (713) (882) 551 (1,684) (8,655) 291 5,901 Cash flows used by investing activities: Origination of loans ............................................................... (333,266) (205,096) Purchase of: Investment securities - AFS ............................................. Investment securities - HTM ........................................... 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 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 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: (55,577) (4,427) 132,692 117,713 16,361 35,557 — (1,221) (5,306) (97,474) 127,714 — (20,000) 1,255 (342) (6,164) 102,463 28,184 59,923 88,107 2,196 3,610 $ $ Change in AOCI, net of taxes .......................................... (4,936) The accompanying notes are an integral part of these consolidated financial statements. 16 (201,506) (824) 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 (766) $ $ CAMBRIDGE BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2013 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 two thousand 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, a wealth management office located in Boston, and 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 $2,140,000,000 and $1,795,000,000 at December 31, 2013 and 2012, 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 losses of $3,432,000 at December 31, 2013 and net unrealized gains of $7,174,000 at December 31, 2012. These amounts are net of deferred taxes receivable of $1,847,000 and net taxes payable of $4,109,000, 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 February 26, 2014, the date the consolidated financial statements were issued and determined that no subsequent events occurred requiring accrual or disclosure. 3. RECENT ACCOUNTING PRONOUNCEMENTS 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 23 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 were 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 on January 1, 2013 did not have any impact on the Corporation’s consolidated financial statements. In February 2013, the FASB issued Accounting Standards Update No. 2013-02, “Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-02”). ASU 2013-02 requires an entity to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income or as a separate disclosure in the notes to the financial statements. The new standard was effective for annual periods beginning January 1, 2013. As ASU 2013-02 provides only guidance on the disclosure of amounts reclassified out of accumulated other comprehensive income, its adoption did not have any impact on the Corporation’s consolidated financial statements. 4. CASH AND DUE FROM BANKS At December 31, 2013 and 2012, cash and due from banks totaled $88,107,000 and $59,923,000, respectively. Of this amount, $8,977,000 and $8,849,000, respectively, were maintained to satisfy the reserve requirements of the Federal Reserve Bank of Boston (“FRB Boston”). Additionally, at both December 31, 2013 and 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, 2013 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 .... 75,056 296,336 22,008 672 394,072 Securities held to maturity: — U.S. GSE obligations ............................ 3,327 Mortgage-backed securities .................. 55,854 Municipal securities .............................. 59,181 Total securities held to maturity ...... Total investment securities .............. $ 453,253 $ $ 54 2,594 622 — 3,270 — 214 2,239 2,453 5,723 $ $ (1,866) $ (6,608) (16) (59) (8,549) 73,244 292,322 22,614 613 388,793 — — (179) (179) — 3,541 57,914 61,455 (8,728) $ 450,248 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 .............................. Total securities held to maturity ...... 71,133 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 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, 2013: Debt securities available for sale: U.S. GSE obligations .............. $ — $ — $ 50,077 $ 49,263 $ 24,979 $ 23,981 $ — $ — Mortgage-backed securities ................. Corporate debt securities ................. Total debt securities available for sale ................ Debt securities held to maturity: U.S. GSE obligations .............. Mortgage-backed securities ................. Municipal securities ................. Total debt securities held to maturity ........... Total debt — — — 3,092 3,301 1,819 1,979 291,425 287,042 — 21,008 21,619 1,000 995 — — — — 74,177 74,183 27,798 26,955 291,425 287,042 — 36 — — — — — 38 1,124 1,190 2,036 2,169 — 131 — 144 1,150 1,165 12,196 12,829 33,491 34,867 9,017 9,053 1,186 1,203 13,320 14,019 35,527 37,036 9,148 9,197 securities ............. $ 1,186 $ 1,203 $ 87,497 $ 88,202 $ 63,325 $ 63,991 $ 300,573 $ 296,239 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) $ 63,176 205,790 2,994 6,636 278,596 — $ (1,866) (5,726) (16) (121) (7,729) — $ — 21,182 — 514 21,696 613 $ — (882) — (58) (940) (59) $ 63,176 226,972 2,994 7,150 300,292 613 $ (1,866) (6,608) (16) (179) (8,669) (59) At December 31, 2013: U.S. GSE obligations ............ Mortgage-backed securities ... Corporate debt securities ....... Municipal securities ............... Subtotal, debt securities ..... Mutual funds .......................... Total temporarily impaired securities ........... $ 278,596 $ (7,729) $ 22,309 $ (999) $ 300,905 $ (8,728) 26  Less than One Year Fair Value Unrealized Losses One Year or Longer Fair Value Unrealized Losses Total Fair Value Unrealized Losses (In thousands) At December 31, 2012: U.S. GSE obligations ............. Mortgage-backed securities ... Corporate debt securities ....... Municipal securities ............... Subtotal, debt securities ..... Mutual funds .......................... $ 9,972 27,806 — 566 38,344 — Total temporarily $ $ $ (23) (60) — (6) (89) — — — — — — 646 — — — — — (26) $ 9,972 27,806 — 566 38,344 646 $ (23) (60) — (6) (89) (26) impaired securities ........... $ 38,344 $ (89) $ 646 $ (26) $ 38,990 $ (115) 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, 2013, ninety-five debt securities and one equity security had gross unrealized losses, with an aggregate depreciation of 2.82% from the Corporation’s amortized cost basis. The largest unrealized loss percentage of any single security was 10.42% (or $33,000) of its amortized cost. The largest unrealized dollar loss of any single security was $382,000 (or 7.70%) 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, 2013. The following table sets forth information regarding sales of investment securities and the resulting gains or losses from such sales. Year Ended December 31, 2012 2013 (In thousands) Amortized cost of securities sold ........................................... Gain realized on securities sold ............................................. Proceeds from securities sold ........................................... $ $ 34,436 1,121 35,557 $ $ 36,904 882 37,786 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, 2013 2012 (In thousands) Residential real estate: Mortgages - fixed rate (20 & 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 ................................................................. 134,498 123,627 56,426 143,159 466 458,176 304,509 44,999 13,584 202 363,294 43,521 2,985 129 46,635 50,513 245 50,758 20,931 2,643 14 23,588 $ 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 Total loans ........................................................................ $ 942,451 $ 742,249 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, 2013 and 2012, total loans outstanding to these related parties were $729,000 and $752,000, respectively. During 2013, $50,000 of additions and $73,000 of repayments were made to these loans, compared to $916,000 of additions and $950,000 of repayments made during 2012. 28 The following table sets forth information regarding non-performing loans. Non-accrual loans .................................................................. Loans past due >90 days, but still accruing ........................... Troubled debt restructurings .................................................. Total non-performing loans .............................................. 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, 2013 2012 (In thousands) 1,582 121 — 1,703 $ $ 1,570 — — 1,570 December 31, 2013 2012 (In thousands) 645 379 340 218 — 1,582 $ $ 708 — 322 537 3 1,570 $ $ $ $ The following table contains period-end balances of loans receivable disaggregated by credit quality indicator: December 31, 2013 (In thousands) Residential Mortgages Home Equity Consumer Credit risk profile based on payment activity: Performing ..................................................... Non-performing ............................................. Total ......................................................... $ $ 457,531 645 458,176 $ $ 46,174 461 46,635 $ $ 23,588 — 23,588 Commercial Mortgages Commercial Credit risk profile by internally assigned grade: Pass .............................................................................................. Special mention ............................................................................ Substandard .................................................................................. Doubtful ....................................................................................... Total ....................................................................................... $ $ 362,195 470 629 — 363,294 $ $ 47,366 1,080 2,312 — 50,758 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, 2013 Current 30 - 59 Days 60 - 89 Days 90 Days or Greater Total Past Due Total Loans (In thousands) Greater Than 90 Days But Accruing $ 457,673 $ 289 $ 201 $ 13 $ 503 $ 458,176 $ — 767 362,527 38 46,157 252 50,429 23,091 496 $ 939,877 $ 1,842 — — 77 1 $ 279 $ 767 478 329 497 — — 121 440 — — — — 453 $ 2,574 $ 942,451 $ 121 363,294 46,635 50,758 23,588 Loans receivable: Residential mortgage loans ......................... Commercial mortgage loans ......................... Home equity loans ..... Commercial loans ...... Consumer loans .......... Total ..................... 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, 2013 (In thousands) Allowance for loan losses: Individually evaluated for impairment .............. $ — $ — $ — $ — $ — $ — $ — Collectively evaluated for impairment .............. Total............................. $ 4,490 4,490 $ 5,954 5,954 $ 476 476 $ 845 845 $ 302 302 $ 641 12,708 641 $ 12,708 Loans receivable: Individually evaluated for impairment .............. $ — $ 379 $ — $ 131 $ — $ 510 Collectively evaluated for impairment .............. Total............................. 362,915 458,176 $ 458,176 $ 363,294 $ 46,635 $ 46,635 23,588 50,627 50,758 $ 23,588 941,941 $ 942,451 30  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 $ 10,948 658 658 $ 10,948 Loans receivable: Individually evaluated for impairment .............. $ — $ — $ — $ 489 $ — $ 489 Collectively evaluated for impairment .............. 347,908 Total............................. $ 347,908 $ 276,428 $ 50,574 $ 276,428 50,574 47,081 19,769 47,570 $ 19,769 741,760 $ 742,249 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, 2013 (In thousands) Balance at beginning of year .............................. Provision for loan losses . Loans charged off ........... Recoveries ...................... Balance at end of year ........ $ $ 3,792 $ 639 — 59 4,490 $ 4,850 $ 1,096 — 8 5,954 $ 551 $ (60) (15) — 476 $ 824 $ (191) (25) 237 845 $ 273 $ 33 (21) 17 302 $ 658 $ 10,948 (17) 1,500 (61) — 321 — 641 $ 12,708 An analysis of mortgage servicing rights follows: Balance at December 31, 2011 ............................. Mortgage servicing rights capitalized ............. Amortization charged against servicing income ........................................................... Change in impairment reserve ........................ Balance at December 31, 2012 ............................. Mortgage servicing rights capitalized ............. Amortization charged against servicing income ........................................................... Change in impairment reserve ........................ Balance at December 31, 2013 ............................. Mortgage Servicing Rights $ $ — 223 (7) — 216 263 (83) — 396 Valuation Allowance (In thousands) Total $ $ — — — (1) (1) — — (11) (12) $ $ — 223 (7) (1) 215 263 (83) (11) 384 31 7. FEDERAL HOME LOAN BANK OF BOSTON STOCK 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, 2013, the Bank’s investment in FHLB Boston stock exceeded its required investment by $3,001,000. 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 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, 2013, 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, 2013 2012 Estimated Useful Lives (In thousands) Land ...................................................................... Building and leasehold improvements .................. Equipment, including vaults ................................. Construction in process ......................................... Subtotal ........................................................... Accumulated depreciation and amortization ........ Total ................................................................ $ 1,116 12,577 16,399 2,620 32,712 (22,761) $ 9,951 $ 1,116 11,702 14,519 69 27,406 (21,192) $ 6,214 1-30 years 3-20 years Total depreciation expense for the years ended December 31, 2013 and 2012 amounted to approximately $1,569,000 and $1,430,000, 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: Balance at December 31, 2011 ............................. Amortization expense ..................................... Balance at December 31, 2012 ............................. Amortization expense ..................................... Balance at December 31, 2013 ............................. Goodwill $ $ 412 — 412 — 412 Customer Intangibles (In thousands) $ $ 12 (12) — — — Total Intangibles $ $ 424 (12) 412 — 412 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, 2013, 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, 2013 2012 (In thousands) $ 382,255 335,010 78,410 489,160 52,025 72,187 $ 1,409,047 $ 329,211 363,575 60,850 393,541 55,729 78,427 $ 1,281,333 Certificates of deposit had the following schedule of maturities: 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 .............................................. December 31, 2013 2012 (In thousands) $ $ 44,631 21,546 23,042 20,707 10,036 4,250 124,212 $ 46,001 27,058 22,860 20,884 14,433 2,920 $ 134,156 Interest expense on certificates of deposit $100,000 or greater was $533,000 and $642,000 for the years ended December 31, 2013 and 2012, respectively. 11. SHORT-TERM BORROWINGS Information relating to activity and rates paid on short-term borrowings is presented below: Year Ended December 31, 2012 2013 (Dollars in thousands) Short-term borrowings: Average daily balance ...................................................... Average interest rate......................................................... Highest month-end balance .............................................. $ 42,753 $ 17,270 0.26 % 0.27 % $ 72,000 $ 59,000 33 12. LONG-TERM BORROWINGS Long-term borrowings consisted of the following: December 31, 2013 Amount Rate December 31, 2012 Rate Amount (Dollars in thousands) Wholesale Repurchase Agreements: Due 03/03/2013; callable quarterly beginning 03/03/2011 ............................ $ — — $ 20,000 3.25% 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, 2013 was approximately $264,263,000. The Bank also has a line of credit with the FRB Boston. At December 31, 2013, the Bank had pledged commercial real estate and commercial & industrial loans with aggregate principal balances of approximately $260,704,000 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, 2013 was approximately $161,829,000. 13. INCOME TAXES The components of income tax expense were as follows: Current: Federal .............................................................................. State .................................................................................. Total current expense ................................................. Deferred: Federal .............................................................................. State .................................................................................. Total deferred (benefit)/expense................................. Total income tax expense ........................................... Year Ended December 31, 2012 2013 (In thousands) $ $ 6,324 1,009 7,333 (340) (96) (436) 6,897 $ $ 2,971 202 3,173 2,449 692 3,141 6,314 34 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, 2012 2013 (In thousands) $ 7,363 $ 6,901 593 (710) (176) (228) 55 6,897 581 (710) (163) (249) (46) $ 6,314 $ As of December 31, 2013 and 2012, 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 ............................................. Unrealized gains on AFS securities ................................. Depreciation of premises and equipment ......................... Goodwill .......................................................................... Rent .................................................................................. ESOP dividends ............................................................... Equity based compensation .............................................. Other ................................................................................ Total gross deferred tax assets ................................... Gross deferred tax liabilities: Unrealized gains on AFS securities ................................. Accrued retirement benefits ............................................. Deferred loan origination costs ........................................ Mortgage servicing rights ................................................ Total gross deferred tax liabilities .............................. Net deferred tax asset ................................................. December 31, 2013 2012 (In thousands) $ $ 5,191 — 1,847 338 129 228 206 231 171 8,341 — (616) (444) (157) (1,217) 7,124 $ $ 4,472 2,901 — 753 255 210 190 271 132 9,184 (4,108) — (340) (88) (4,536) 4,648 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, 2013 or 2012 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, 2013 and 2012, 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 in the next twelve months. The Corporation’s federal income tax returns are open and subject to examination from the 2010 tax return year and forward. The Corporation’s state income tax returns are generally open from the 2010 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 2013 2012 Supplemental Retirement Plan 2012 2013 (In thousands) Change in projected benefit obligation: Obligation at beginning of year ............ $ 32,580 1,539 1,300 (4,386) (824) 30,209 Service cost ........................................... Interest cost ........................................... Actuarial (gain)/loss .............................. Benefits paid .......................................... Obligation at end of year ................. $ $ 28,444 1,542 1,212 2,097 (715) 32,580 $ 6,837 630 273 (1,402) (122) 6,216 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 .................. 33,156 5,307 1,000 (824) 38,639 19,445 3,426 11,000 (715) 33,156 — — 122 (122) — 5,586 544 237 592 (122) 6,837 — — 122 (122) — Overfunded (underfunded) status at end of year ......................................... $ 8,430 $ 576 $ (6,216) $ (6,837) 36 Amounts recognized in the consolidated balance sheets consisted of: Pension Plan 2013 2012 Supplemental Retirement Plan 2012 2013 (In thousands) Other assets (liabilities) ............................... $ 8,430 $ 576 $ (6,216) $ (6,837) Amounts recognized in accumulated other comprehensive income consisted of: Pension Plan 2013 2012 Supplemental Retirement Plan 2012 2013 (In thousands) Net actuarial (gain)/loss .............................. $ Prior service cost/(benefit) .......................... $ 1,709 (34) 1,675 $ $ 9,656 (38) 9,618 $ $ (344) — (344) $ $ 1,164 26 1,190 Information for pension plans with an accumulated benefit obligation in excess of plan assets: Pension Plan 2013 2012 Supplemental Retirement Plan 2012 2013 (In thousands) Projected benefit obligation ........................ $ 30,209 25,513 Accumulated benefit obligation .................. 38,639 Fair value of plan assets .............................. $ 32,580 27,088 33,156 $ 6,216 6,216 — $ 6,837 6,837 — 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 and 2013. 37 The components of net periodic benefit cost and amounts recognized in other comprehensive income were as follows: Pension Plan 2013 2012 Supplemental Retirement Plan 2012 2013 (In thousands) Net periodic benefit cost: Service cost ........................................... $ Interest cost ........................................... Expected return on assets ...................... 1,539 1,300 (2,487) $ 1,542 1,212 (1,508) $ Amortization of prior service cost/(benefit) ....................................... (4) 6 Amortization of net actuarial (gain)/loss ............................................ Net periodic benefit cost ................. 741 1,089 804 2,056 $ 630 273 — 79 53 1,035 Amounts recognized in other comprehensive income: Net actuarial (gain)/loss ........................ Amortization of prior service (7,947) (625) (1,402) cost/(benefit) ....................................... 4 (6) (79) Total recognized in other comprehensive income .................. (7,943) (631) (1,481) 544 237 — 79 1 861 592 (79) 513 Total recognized in net periodic benefit cost and other comprehensive income .................. $ (6,854) $ 1,425 $ (446) $ 1,374 Weighted-average assumptions used to determine projected benefit obligations are as follows: Pension Plan 2013 2012 Supplemental Retirement Plan 2012 2013 Discount rate ............................................... Rate of compensation increase .................... 5.00% 4.00% 4.00% 4.00% 5.00% NA 4.00% NA Weighted-average assumptions used to determine net periodic benefit cost are as follows: Pension Plan 2013 2012 Supplemental Retirement Plan 2012 2013 Discount rate ............................................... Expected long-term return on plan assets ... Rate of compensation increase .................... 4.00% 7.50% 4.00% 4.25% 7.50% 4.00% 4.00% NA NA 4.25% 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 60% to 85% in equities, from 10% to 55% in fixed income debt securities and cash, and from 0% to 10% in real assets. The Corporation does not expect to make a contribution to its defined benefit pension plan in 2014. The Corporation’s defined pension plan weighted-average asset allocations by asset category were as follows: Equity securities .......................................................................... Debt securities ............................................................................. Cash and equivalents ................................................................... Total ...................................................................................... December 31, 2013 74% 23 3 100% 2012 50% 22 28 100% 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: Asset category: Cash and cash equivalents ................. Equity securities: Common stocks: Large cap core ........................ Mid cap core .......................... International ........................... Mutual funds: Fixed income .......................... Mid cap blend ........................ International ........................... Total ................................. Fair Value as of December 31, 2013 Level 1 Level 2 Level 3 Total (In thousands) $ 1,147 $ — $ — $ 1,147 14,381 3,394 2,630 8,993 1,731 6,363 $ 38,639 $ — — — — — — — — — — — — — — 14,381 3,394 2,630 8,993 1,731 6,363 $ 38,639 $ There were no transfers between fair value levels during the years ended December 31, 2013 and 2012. 39 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 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 .............................................. Postretirement Healthcare Plan 2013 2012 (In thousands) $ 628 14 22 (124) (32) 508 — — 32 (32) — 695 15 25 (67) (40) 628 — — 40 (40) — Overfunded (underfunded) status at end of year ..................... $ (508) $ (628) Amounts recognized in the consolidated balance sheets consisted of: Postretirement Healthcare Plan 2013 2012 (In thousands) Other assets (liabilities) ........................................................... $ (508) $ (628) Amounts recognized in accumulated other comprehensive income consisted of: Net actuarial (gain)/loss .......................................................... Prior service cost/(benefit) ...................................................... Postretirement Healthcare Plan 2013 2012 (In thousands) $ $ (170) (20) (190) $ $ (52) (28) (80) 40 Information for pension plans with an accumulated benefit obligation in excess of plan assets: Postretirement Healthcare Plan 2013 2012 (In thousands) Projected benefit obligation .................................................... Accumulated benefit obligation .............................................. Fair value of plan assets .......................................................... $ 508 508 — $ 628 628 — The components of net periodic benefit cost and amounts recognized in other comprehensive income were as follows: 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....... Postretirement Healthcare Plan 2013 2012 (In thousands) $ 14 22 — (8) (5) 23 (124) 8 5 (111) 15 25 — (8) (1) 31 (67) 8 1 (58) Total recognized in net periodic benefit cost and other comprehensive income .............................. $ (88) $ (27) Weighted-average assumptions used to determine projected benefit obligations are as follows: Discount rate ........................................................................... Rate of compensation increase ................................................ Postretirement Healthcare Plan 2013 5.00% NA 2012 4.00% NA 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: Health care cost trend rate assumed for next year ............... Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) ..................................... Year that the rate reaches the ultimate trend rate ................. Postretirement Healthcare Plan 2013 2012 4.00% NA NA 4.25% NA NA December 31, 2013 2012 5.00% 5.00% 2014 6.00% 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 (In thousands) Effect on total service and interest cost ............................... Effect on postretirement benefit obligation .......................... $ 396 9,422 $ (363) (8,670) Benefits expected to be paid in the next ten years are as follows: Year ended December 31, Pension Plan 2014 2015 2016 2017 2018 2019-2023 inclusive Ten year total $ 1,017 1,108 1,150 1,212 1,363 8,764 $ 14,614 Supplemental Retirement Plan Post- retirement Healthcare Plan (In thousands) $ $ 472 470 468 473 560 3,185 5,628 $ $ 35 36 35 34 33 173 346 Total $ $ 1,524 1,614 1,653 1,719 1,956 12,122 20,588 42 The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost during 2014 are as follows: Pension Plan Supplemental Retirement Plan Post- retirement Healthcare Plan (In thousands) Total Prior service cost .................... Net (gain)/loss ........................ Total ................................. $ $ 4 — 4 $ $ — — — $ $ (8) (12) (20) $ $ (4) (12) (16) 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, 2013 and 2012, the ESOP owned 314,773 shares and 308,968 shares, respectively, of the Corporation’s common stock. Total expenses related to the Profit Sharing and ESOP Plans for the years ended December 31, 2013 and 2012, amounted to approximately $516,000 and $900,000, 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, 2013 and 2012, and changes during the years ended on those dates is presented below: 2013 2012 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 .............. $ 312,916 — — (42,121) (22,018) 248,777 30.25 — — 34.11 28.95 29.71 $ 350,535 — — (22,264) (15,355) 312,916 30.12 — — 29.15 28.76 30.25 Exercisable at end of year ............... 248,777 $ 29.71 257,666 $ 30.48 The following table summarizes information about stock options outstanding at December 31, 2013: Range of Exercise Price $25.00 - $29.99 $30.00 - $34.99 Options Outstanding Number Outstanding at 12/31/13 Contractual Life Weighted Average Remaining 180,827 67,950 248,777 2.6 years 1.8 years 2.4 years Weighted Average Exercise Price $ 28.89 $ 31.92 $ 29.71 Options Exercisable Weighted Average Exercisable Exercise Price at 12/31/13 Number 180,827 67,950 248,777 $ $ $ 28.89 31.92 29.71 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, 2013 and 2012, and changes during the years ended on those dates is presented below: 2013 2012 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 ............... $ 45,704 1,200 (14,852) (300) 31,752 33.34 40.09 32.82 32.03 33.85 $ 33,978 23,210 (10,422) (1,062) 45,704 31.99 34.46 31.73 30.54 33.34 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, 2013 and 2012, and changes during the years ended on those dates is presented below: 2013 2012 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 ............... $ 26,205 9,880 — — (8,870) 27,215 33.22 40.70 — — 30.80 36.73 $ 18,150 9,010 — (955) — 26,205 32.56 34.39 — 31.62 — 33.22 Total expense related to the Stock Option Plan for the years ended December 31, 2013 and 2012, amounted to approximately $404,000 and $546,000, 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, 2013 and 2012 were 4,821 and 4,185, respectively. 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK To meet the financing needs of its customers, the Bank is a party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments are primarily comprised of commitments to extend credit 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, 2013 2012 (In thousands) $ 18,775 $ 6,093 170,354 22,894 800 145 160,394 32,864 6,250 33 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 2014 and 2022 and, in some instances, contain options to renew for periods up to twenty-five years. The total minimum rentals due in future periods under these agreements in effect at December 31, 2013 were as follows: Year Ended December 31, 2014 2015 2016 2017 2018 Thereafter Total minimum lease payments $ Future Minimum Lease Payments (In thousands) 3,461 4,023 3,658 2,673 2,463 4,674 20,952 $ 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 46 rental expense amounted to approximately $4,009,000 and $3,777,000 for the years ended December 31, 2013 and 2012, 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 $32,000 and $35,000 for the years ended December 31, 2013 and 2012, 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, 2013 and 2012, 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, 2013: Cambridge Bancorp: Total capital (to risk-weighted assets) .... $ 123,992 13.4% $ 74,117 8.0% $ 92,646 10.0% Tier I capital (to risk-weighted assets) ..... 112,881 12.2% 37,058 4.0% 55,588 Tier I capital (to average assets) .............. 112,881 7.6% 59,160 4.0% 73,950 6.0% 5.0% Cambridge Trust Company: Total capital (to risk-weighted assets) .... $ 121,869 13.2% $ 74,117 8.0% $ 92,646 10.0% Tier I capital (to risk-weighted assets) ..... 110,758 12.0% 37,058 4.0% 55,588 Tier I capital (to average assets) .............. 110,758 7.5% 59,048 4.0% 73,810 6.0% 5.0% 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% 19. OTHER INCOME The components of other income were as follows: Year Ended December 31, 2012 2013 (In thousands) Safe deposit box income ........................................................ Loan fee income ..................................................................... Miscellaneous income ............................................................ Total other income ........................................................... $ $ 345 282 248 875 $ $ 343 171 237 751 48 20. OTHER OPERATING EXPENSES The components of other operating expenses were as follows: Year Ended December 31, 2012 2013 (In thousands) Contributions / Public relations ............................................. Director fees ........................................................................... Printing and supplies .............................................................. Travel and entertainment ....................................................... Postage ................................................................................... Dues and memberships .......................................................... Security .................................................................................. Other losses ............................................................................ Amortization of intangible assets ........................................... Miscellaneous expense ........................................................... Total other operating expenses ......................................... $ $ 489 473 373 325 283 276 254 129 — 230 2,832 $ $ 507 418 408 282 313 245 166 91 12 219 2,661 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, 2013 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 $ 9,587 $ (3,916) $ 5,671 during the period ....................................... (15,441) Reclassification adjustment for gains recognized in net income .......................... (1,121) (6,975) $ $ 5,554 401 2,039 (9,887) (720) (4,936) $ 49  Before Tax Amount Year Ended December 31, 2012 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 during the period ....................................... Reclassification adjustment for gains recognized in net income .......................... $ 176 $ (72) $ 104 (499) (882) (1,205) $ $ 197 314 439 (302) (568) (766) $ Reclassifications out of Accumulated Other Comprehensive Income (“AOCI”) are presented below: Year Ended December 31, 2013 Details about AOCI Components Amount Reclassified from AOCI Affected Line Item on the Statement of Income (In thousands) Unrealized gains/(losses) on AFS securities: $ $ 1,121 (401) 720 Gain on disposition of investment securities Income tax expense Net income 22. EARNINGS PER SHARE The following represents a reconciliation between basic and diluted earnings per share: Year Ended December 31, 2013 Diluted Basic EPS EPS Numerator: Net income ....................................................................... $ 14,015,000 $ 14,140,000 Denominator: Weighted average common shares outstanding ............... Dilutive effect of stock options ........................................ Total shares ................................................................ 3,839,146 — 3,839,146 3,839,146 68,055 3,907,201 Earnings per share .................................................................. $ 3.65 $ 3.62 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 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.............................................. Long-term borrowings ....................... December 31, 2013 Carrying Estimated Fair Value Value December 31, 2012 Carrying Estimated Fair Value Value (In thousands) $ 88,107 388,793 59,181 403 929,743 6,231 3,626 384 $ 88,107 388,793 61,455 405 935,837 6,231 3,626 438 $ 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 1,409,047 — 1,407,948 — 1,281,333 20,000 1,280,932 20,121 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, 2013 Level 1 Level 2 Level 3 Total (In thousands) $ $ — — — 613 $ 73,244 292,322 22,614 — — — — — $ 73,244 292,322 22,614 613 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 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 Joseph D. Cardarelli . . . . . . . . . . . . . . . . . . . . . . . Vice President & Information Technology Manager Susan I. Chiappisi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Vice President & Trust Officer Jeffrey B. Churchill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Glenn P. Davis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President, Commercial Real Estate Jason R. DeMello . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Business Development Officer Edward F. Fitzgerald, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President, Business Banking Officer Aimee B. Forsythe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President & Investment 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 CAMBRIDGE TRUST COMPANY – OFFICERS (continued) Jane E. Mason . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Vice President, Relationship Manager Roma A. Mayur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President 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 Tiffany N. Ormon . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Frank Pasciuto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vice President Robert C. Pasciuto, Esq. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Vice President & Trust Officer 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 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 Gabriele Fabrizio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assistant Vice President & Operations Officer Stephen W. Hall . . . . . . . . . . . . . . . . . . . . . . Assistant Vice President & Information Security Officer Patricia E. Hartnett . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Assistant Vice President Leslie L. Hartwell . . . . . . . . . . . . . . . . . . . .Assistant Vice President & Business Development Officer Kathryn L. Hersey . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assistant Vice President & Investment Officer Eugene K. Kalaw . . . . . . . . . . . . . . . . . . . .Assistant Vice President & Business Development Officer 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 Banking Operations Manager 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 Basharat H. Sheikh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Assistant Treasurer Clinton D. Williams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Assistant Treasurer Ping H. Wong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Assistant Treasurer Brian T. Bacci . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lending Compliance Officer Rachel S. Bandi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Senior Credit Analyst Officer Pooja Bhandary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assistant Operations Officer JoAnn M. Cavallaro . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative Officer Alan M. Collopy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operations Officer Erin J. Cooper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Development Officer Renée L. Daniell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assistant Operations Officer Justin H. Drolsbaugh . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Officer, Portfolio Manager Mark J. Earnest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banking Officer, Portfolio Manager Alice J. Flanagan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Trust Officer Medard H. Kadima . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Information Security Officer Ann C. Kuske . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operations Officer Joseph D. Lombardi . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assistant Controller Karina Q. Pinella . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Senior Credit Analyst Officer Leah Siporin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Digital Marketing Officer Peter C. Stoneman . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer Loan Officer Linda G. Sullivan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Human Resources Officer James R. Weishaupt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operations Officer James J. Zurn . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer Loan Officer CAMBRIDGE TRUST COMPANY OF NEW HAMPSHIRE – OFFICERS Susan Martore-Baker . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .President Brian A. Bickford . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Senior Vice President & Investment Officer 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 Alvarez, Yolamary Bailey, Adrienne Basnyat, Nivedita Bennett, Michael Bober, Jeffrey Burke, Sandra Carnazzo, Gail Catanzano, Joseph Cedrone, Jeffrey Chowdhury, Farzana Cole, Jeffrey Cope, Andrea Costello, Laura Cronburg, Wendy Curtin, Stephen Dalomba, Christian Dean, Shellie DeAngelis, Maryellen DeDominicis, Catherine DePierro, Caityln Dillon, Janice Diloyan, Anahit Djatsa, Viviane Dodge, Jeanne Dutt, Anita Fin, Bernadette Flanagan, Ryan Flores, Cynthia Frederique, Jude Frost, David Gallant, Derek Gentle, Nerissa Gielczyk, Michael Gilkes, Yvette Gilpin, Kaitlyn Greco, Randi Greene, Mary 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 Kvitman, Marina LaMorticelli, René Layne, Tanisha Lazzari, Linda Leonard, Ketline Leonard, Sean Lettieri, Robyn Levine, Patricia Lim, Raymond Liu, Rose Lombardo, Joseph 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 Park, David Perry Durkee, Christina Phuyal, Puja Prager, Robert Quigley, Maria Reed, Michael Resende, Jonathan Ricker, Kelly Rudden, Thomas Sands, Janet Serio, Linda Shahi, Bala Shay, Debbie Small, Jasmine Smith, Zachary 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 Cannon, Susan Schwechheimer, Brenda Talbot, Michele Travers, Janelle Corporate Headquarters 1336 Massachusetts Avenue • Cambridge, MA 02138 617-876-5500 Branch Offices Harvard Square • 1336 Massachusetts Avenue • Cambridge, MA 02138 Huron Village • 353 Huron Avenue • Cambridge, MA 02138 Kendall Square • 326 Main Street • Cambridge, MA 02142 Porter Square • 1720 Massachusetts Avenue • Cambridge, MA 02138 University Park at MIT • 350 Massachusetts Avenue • Cambridge, MA 02139 Beacon Hill • 65 Beacon Street • Boston, MA 02108 South End • 565 Tremont Street • Boston, MA 02118 361 Trapelo Road • Belmont, MA 02478 75 Main Street • Concord, MA 01742 1690 Massachusetts Avenue • Lexington, MA 02420 152 Lincoln Road • Lincoln, MA 01773 494 Boston Post Road • Weston, MA 02493 Wealth Management Offices 75 State Street • Boston, MA 02109 116 North Main Street • Concord, NH 03301 One Harbour Place • Portsmouth, NH 03801 Innovation Banking Group Office Cambridge Innovation Center • One Broadway • Cambridge, MA 02142 Website www.cambridgetrust.com 

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