Cambridge Bancorp
Annual Report 2022

Plain-text annual report

2022 Annual Report PRIVATE BANKING WEALTH MANAGEMENT $ $ $ $ $ $ $ $ $ $ $ $ Financial Highlights (Dollars in thousands, except per share data) Selected Year-End Data Net Income Operating Net Income* Total Assets Total Loans Total Deposits Total Shareholder’s Equity Assets Under Management and Administration Per Common Share Diluted Earnings Per Share Operating Diluted Earnings Per Share* Dividend Declared Per Share Book Value Per Share Tangible Book Value Per Share* Financial Ratios Return on Average Assets Return on Average Equity Operating Return on Average Assets* Operating Return on Average Tangible Common Equity* Net Interest Margin, FTE Adjusted Net Interest Margin, FTE* Asset Quality Nonperforming Assets/Total Assets Year-to-date net recoveries (charge-offs)/Total Loans Allowance to Total Loans *GAAP to Non-GAAP Reconciliation on pages 13 & 14 2022 52,909 56,549 5,559,737 4,062,856 4,815,376 517,552 4,059,819 7.30 7.80 2.56 66.38 57.15 1.03% 11.56% 1.10% 14.18% 2.92% 2.87% 0.12% 0.00% 0.93% $ $ $ $ $ $ $ $ $ $ $ $ 2021 54,024 54,828 4,891,544 3,319,106 4,331,152 437,837 4,853,119 7.69 7.81 2.38 62.83 55.01 1.24% 12.93% 1.26% 15.10% 3.12% 2.93% 0.11% 0.00% 1.04% $ $ $ $ $ $ $ $ $ $ $ $ 2020 31,959 43,870 3,949,297 3,153,648 3,403,083 401,732 4,167,903 5.03 6.90 2.12 58.00 50.07 0.91% 9.09% 1.25% 14.38% 3.65% 3.36% 0.27% (0.01%) 1.14% $7.80 OPERATING DILUTED EARNINGS PER SHARE 1.10% OPERATING RETURN ON AVERAGE ASSETS 14.18% OPERATING RETURN ON AVERAGE TOTAL COMMON EQUITY “Cambridge Bancorp continued to grow, adding new markets of operation within the Merrimack Valley region of Massachusetts, as a result of our merger with Northmark Bank. The Company grew capital, added to reserves, and strengthened its resiliency for whatever lies ahead.” Page 2 2022 Annual Report2022 Letter to Shareholders We have always viewed trust as the core of our brand and reputation. It embodies integrity, ability and character. Trust has been the hallmark of our success for over 132 years. We do our best to earn our clients’ trust by providing exceptional personal attention tailored to each client’s individual banking and wealth management goals. In 2022, as in years past, we have relied on trust as a core value in service of our clients, our communities and our colleagues. The past year was marked by many positives accompanied by continued or new challenges. On the positive side, Cambridge Bancorp continued to grow, adding new markets of operation within the Merrimack Valley region of Massachusetts as a result of our merger with Northmark Bank. The Company grew capital, added to reserves, and strengthened its resiliency for whatever lies ahead. Unfortunately, the year was not without headwinds including rapidly rising interest rates, geopolitical insecurity, the ongoing pandemic, economic concerns of inflation, and reductions of value within the bond and equity markets. All of these factors continue to present obstacles that we must overcome. Despite these challenges, we worked closely with our clients and our community, assisting them to weather the uncertainty and achieve their long-term goals. Page 3 What served me the most pride is the work we performed on a daily basis to delight our clients by understanding their needs and giving them exceptional personal attention and custom financial solutions. In 2022, through our newly formed Premier Client Group, we focused on delivering an unparalleled experience as we onboard and service our clients. We began to see the benefits of our technology enhancements, including the new wealth management system that we implemented in late 2021 and the improvements made to commercial banking automation, both aimed at strengthening the client experience while increasing productivity and efficiency. Banking assets were $5.6 billion and client wealth management assets were $4.1 billion as of year-end 2022. Operating earnings per share were $7.80 in 2022, with an operating return on tangible common equity of 14.18%. Importantly, asset quality remained excellent with low levels of non-performing assets and the Company maintains strong liquidity with access to over $1.5 billion in secondary sources of funding. We continue to build a stronger, more resilient company, well positioned to create value for our shareholders and to attract new clients, nurture existing clients, create engaged employees, and contribute to the communities in which we serve. Setting us apart is our ability to consistently provide highly skilled capabilities and services, combined with an unwavering commitment to our clients during both good and challenging environments. Looking ahead this year and into 2024, we are evaluating an upgrade of our mobile banking platform for both personal and business clients with a much-improved offering that is designed to not only meet, but to anticipate their needs. institutions are vanishing, it is refreshing to work with a bank as a partner. Not just myself and my “ In a world where ‘relationships’ with financial family, but the clients we refer as well. ” — Richard Hilow, Straight Forward Financial Group, New Hampshire Page 4 2022 Annual Report“In 2022, we announced a $30 million loan commitment to New Hampshire Housing to construct new affordable housing.” Commitment to the Community The community remains a critical aspect of our core values and an area in which we look to build trust. We have expanded this commitment, not only to the communities where we reside but also where our children attend school and our employees volunteer to make a difference. We are proud of our support to increase affordable housing, both within Massachusetts and notably in New Hampshire that has ex- perienced 15 consecutive years of rising rents and extremely low vacancy rates. To assist in providing solutions to these problems, Cambridge Trust has committed $140 million to affordable housing projects in Massachusetts and New Hampshire over the past two years. In 2022, we announced a $30 million loan commitment to New Hampshire Housing to construct new affordable housing. Additionally, Cambridge Trust, through the Cambridge Trust Charitable Foundation, contributed to over 250 community organizations in 2022. We provided support for financial literacy, arts and culture, social justice, and youth and family services. We are committed not only to giving back to our communities but to sustaining our mutual pursuit of the common good. We also provide technical expertise, experience and guidance to many vital community organizations, and our employees donated over 2,500 volunteer hours in 2022. Once again, the Boston BusinessJournal recognized Cambridge Trust as one of the Top Charitable Contributors in Massachusetts last year. “ Cambridge Trust has been a valued resource, not just as a banking partner, but also to the families we serve through their financial literacy programs and philanthropic support. We are so grateful. ” — Valerie Paric, Executive Director, One Family, Inc. Page 5 Environmental, Social, & Governance (ESG) and Sustainability Cambridge Trust is also committed to acting as a responsible corporate citizen. We recognize and value the importance of establishing sustainable practices to make the world a better place. In 2022, we conducted our initial Greenhouse Gas Emissions (GHG) assessment in order to measure our estimated carbon footprint in alignment with global sustainability standards. The results were very positive and, as we expected, we have a low carbon impact. Additionally, we have found ways to reduce our impact on a per-employee basis over the time period measured, whether through reduced employee commuting, re-sizing our physical footprint, or simple solutions such as more sustainable light bulbs. We will continue evaluating strategies to reduce our carbon output as we grow into the future. Cambridge Trust places a high value on the talent of our people, and we foster an inclusive and diverse culture and work environment that helps build a stronger, more successful company. We embrace differences and welcome all voices and perspectives. In prior annual letters, we have highlighted our workplace diversity statistics, employee benefits and strong corporate governance practices. I encourage you to visit the Corporate Responsibility section of our website to see the enhancements we have been making during the past few years. “In 2022, we conducted our initial Greenhouse Gas (GHG) assessment to measure our estimated carbon footprint in alignment with global sustainability standards. The results were very positive and, as we expected, we have a low carbon impact.” Page 6 2022 Annual ReportFinancial Performance The Company’s results in 2022 were acceptable in a year of tremendous volatility which was evident not only in interest rates, led by the Federal Reserves’ significant actions to control inflation, but also in bond and equity markets and the outlook for a possible recession. Each of these factors have impacted the Company’s near-term performance. Cambridge Trust reported net income of $52.9 million for the year ended December 31, 2022, a decrease of $1.1 million, or 2.1%, as compared to net income of $54.0 million for the year ended December 31, 2021. The results for the year ended December 31, 2022, include the impact of the merger with Northmark Bank and the corresponding effects to the provision for credit losses, merger expenses, and other non-operating items. When excluding these items to provide a more comparable view of operations between the years, operating net income was $56.5 million for the year ended December 31, 2022, an increase of $1.7 million, or 3.1%, as compared to operating net income of $54.8 million for the year ended December 31, 2021. Operating diluted earnings per share were $7.80 for the year ended December 31, 2022, as compared to operating diluted earnings per share of $7.81 for the year ended December 31, 2021. Total Asset and Earnings Per Share Growth Dollars in millions $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- $4,892 $5,560 $3,949 $2,856 $2,101 $5.80 $6.20 $6.90 $7.81 $7.80 2018 2019 2020 2021 2022 Total Assets (Left Axis) Operating Diluted EPS (Right Axis) $18.0 $15.0 $12.0 $9.0 $6.0 $3.0 $0.0 Page 7 “In 2022, Cambridge Trust reported organic loan growth of $440.5 million, or 13.3%.” Capital levels grew nicely during the year with the tangible common equity ratio reaching 8.12% as of December 31, 2022, and the Company’s profitability ratios remained strong in 2022, with an operating return on average assets of 1.10% and operating return on average tangible common equity at 14.18%. The Company increased the dividends paid during the year to shareholders by 8% in 2022 from $2.38 per share to $2.56 per share and further increased the quarterly dividend by 5% in the first quarter of 2023 from $0.64 cents per share to $0.67 cents per share. As has been the company’s history for decades, Cambridge Trust maintained its focus on responsible lending and our asset quality ratios remained excellent with non-performing loans to total loans of 0.16% and non-performing assets to total assets of 0.12%. Dollars in millions Total Loans $5,000 $4,000 $3,000 $2,000 $1,000 $- $1,560 0.04% 2018 $2,227 0.25% 2019 $3,154 $3,319 $4,063 0.28% 0.16% 0.16% 2020 2021 2022 Commercial Loans (Left Axis) Consumer Loans (Left Axis) Non Performing Loans/Total Loans (Right Axis) 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Page 8 2022 Annual ReportTotal deposits, excluding brokered deposits but including the impact of the merger with Northmark Bank, increased by $106 million or 2.4% from 2021 to 2022. Cambridge Trust added three banking offices in 2022, bringing the total number of office locations to 22 in Massachusetts and New Hampshire. We deliver personalized service including a full suite of consumer and business deposit products. We support our clients on the way to wealth. Dollars in millions Total Deposits* $4,328 $4,434 $3,373 $1,783 $2,354 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- 2018 2019 2020 2021 2022 Interest Bearing Deposits Non-Interest Bearing Deposits *Total Deposits excludes Brokered Deposits “We create solutions that revolve around our clients: Our capabilities focus on growing, preserving and managing the personal wealth and business interests of our clients. We work as a team to develop a customized plan tailored to each client’s needs.” Page 9 “We manage complex wealth relationships: When life events add complexity to the significant wealth a client has built, we’re a trusted partner with the expertise to create an integrated strategy.” Dollars in millions Wealth Management Assets $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $- $4,853 $4,060 $35.0 $33.0 $4,168 $29.8 $2,877 $25.2 $3,453 $26.5 2018 2019 2020 2021 2022 Client Assets (Left Axis) Revenue (Right Axis) $50.0 $40.0 $30.0 $20.0 $10.0 Our wealth management team’s efforts on client outreach and proactive asset management continued in 2022. Clients took advantage of the ongoing quarterly webinars, the “Market Perspectives” series written by our Chief Investment Officer and other thought-leadership content, sharing our experts’ insights and points of view of the impact of rapidly changing markets on long-term investing, financial planning and tax loss harvesting, all as a way to plan for future generations. Bond and equity valuations came under pressure in 2022 and as shown in the chart above, client assets were reduced by approximately $793 million during 2022, driven largely by market movements. Additionally, once again, we were ranked on the Boston Business Journal’s list of the top 25 Largest Independent Investment Advisers in Massachusetts. Page 10 2022 Annual ReportLooking Forward Unpredictability surrounding inflation, interest rate movements and a possible recession in 2023 will likely create volatility throughout much of the year. Cambridge Trust has managed through periods of uncertainty before. We believe our conservatism in good times better prepares us to weather the storm in more challenging times. While we do not know exactly what the future holds, we remain resolute in our continued focus to provide clients with exceptional, innovative, personalized financial solutions for their financial success, and continued support of the communities where we do business. When we think about our strategic goals, we consider alternatives over the long term. We operate in dynamic and historically resilient markets with strong local economies, led by world renowned centers of education, innovation, and healthcare across both Massachusetts and New Hampshire. With this backdrop, we remain optimistic about the long-term future for Cambridge Bancorp, our communities and especially our clients despite the headwinds for growth in 2023. Our Board of Directors We continue to add to both the diversity and professional experience of our Board of Directors. In 2022, Directors Edward Jankowski and Thomas Fontaine stepped down, and I thank them for their insight, knowledge of the banking environment, and their dedicated service to Cambridge Trust. In their stead, we added two independent directors, Jane Walsh, the former Chief Executive Officer of Northmark Bank and Dr. Andargachew (Andy) Zelleke, a senior lecturer at the Harvard Business School and an expert in corporate governance and leadership development. We are excited about the professional experience, knowledge and leadership they bring to the board. We are also saddened by the passing of former Cambridge Trust directors M. Colyer Crum, beloved HBS Finance Professor, Sherwood “Joe” Bain who not only served on the board but was a leader in the business community, and Mr. Joseph V. Roller, former CEO and Director at Cambridge Trust, a mentor to his bank colleagues. I thank the Board of Directors for their commitment, engagement and leadership in support of the Company’s efforts. Page 11 “I thank our employees for their trusted client relationships and as I have said in the past, everything we accomplish is because of them.” Closing Thoughts I thank our employees for their trusted client relationships and, as I have said in the past, everything we accomplish is because of them. In particular, I thank Martin Millane, upon his retirement, for his contributions to the bank over the past two decades and his leadership of our commercial banking efforts. As part of our long-term succession plan, Steven Mead and Peter Halberstadt have been promoted to Chief Commercial Banking Officer and Chief Credit Officer, respectively. Finally, thanks to you, our shareholders, for your continued support of the Company. Denis K. Sheahan Chairman, President and Chief Executive Officer March 16, 2023 Page 12 2022 Annual ReportGAAP to Non-GAAP Reconciliation (Dollars in thousands except per share data) * Statement on Non-GAAP Measures: The Company believes the presentation of the following non-GAAP financial measures provides useful supplemental information that is essential to an investor’s proper understanding of the results of operations and financial condition of the Company. Management uses non-GAAP financial measures in its analysis of the Company’s performance. These non-GAAP measures should not be viewed as substitutes for the financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Please see the following tables for a reconciliation of such non-GAAP financial measures to the most directly comparable GAAP measure. For the Year-Ended December 31 2022 2021 2020 Operating Net Income / Operating Diluted Earnings Per Share Net Income (a GAAP measure) Add: Merger expenses Add: Provision for credit losses for acquired loans Add: Contractual termination expenses Add: (Gain) Loss on disposition of investment securities Less: Tax effect of non-operating expenses (1) Less: Death benefit on bank owned life insurance ("BOLI") and policy surrender Add: Tax effect of BOLI policy surrender Operating Net Income (a non-GAAP measure) Less: Dividends and Undistributed Earnings Allocated to Participating Securities (a non-GAAP measure) Operating Net Income Applicable to Common Shareholders (a non-GAAP measure) Weighted Average Diluted Shares Operating Diluted Earnings Per Share (a non-GAAP measure) Operating Return on Average Assets: (2) Operating Net Income (a non-GAAP measure) Average Assets $ 52,909 $ 54,024 $ 31,959 1,941 2,239 1,118 — (1,237) (1,157) 736 — — 1,118 — (314) — — 6,368 8,638 1,244 (69) (4,270) — — 56,549 $ 54,828 $ 43,870 (273) (252) (64) 56,276 $ 54,576 $ 43,806 7,213,913 6,990,603 6,344,409 7.80 $ 7.81 $ 6.90 56,549 5,150,336 $ $ 54,828 $ 43,870 4,343,873 $ 3,523,249 $ $ $ $ $ Operating Return on Average Assets (a non-GAAP measure) 1.10% 1.26% 1.25% (1) The net tax benefit associated with non-operating items is determined by assessing whether each non-operating item is included or excluded from net taxable income and applying the Company’s combined marginal tax rate to only those items included in net taxable income. (2) Operating return on average assets represents operating net income as a percentage of average assets. Page 13 GAAP to Non-GAAP Reconciliation (continued) (Dollars in thousands except share data) For the Year-Ended December 31 2022 2021 2020 Operating Return on Tangible Common Equity: (3) Operating Net Income (a non-GAAP measure) Average Common Equity Average Goodwill and merger related intangibles Average tangible common equity (a non-GAAP measure) Operating Return on Tangible Common Equity (a non-GAAP measure) $ $ $ $ $ $ 56,549 457,540 (58,859) 398,681 14.18% 54,828 417,768 (54,707) $ $ 43,870 351,477 (46,476) 363,061 $ 305,001 15.10% 14.38% Tangible Common Equity Shareholders' Equity (GAAP) Less: Goodwill and acquisition related intangibles (GAAP) Tangible Common Equity (a non-GAAP measure) Total Assets (GAAP) Less: Goodwill and acquisition related intangibles (GAAP) $ $517,552 $ 437,837 $ 401,732 (71,982) 445,570 5,559,737 (71,982) (54,529) 383,308 (54,889) 346,843 4,891,544 3,949,297 (54,529) (54,889) Tangible Assets (a non-GAAP measure) $ 5,487,755 $ 4,837,015 $ 3,894,408 Tangible Common Equity Ratio (a non-GAAP measure) 8.12% 7.92% 8.91% Tangible Book Value Per Share Tangible Common Equity (a non-GAAP measure) Common Shares Outstanding Tangible Book Value Per Share (a non-GAAP measure) Adjusted Net Interest Margin $ $ 445,570 7,796,440 57.15 $ $ 383,308 $ 346,843 6,968,192 6,926,728 55.01 $ 50.07 For the Year Ended December 31, 2022 Average Balance Interest Income/ Expenses Rate Earned/ Paid (dollars in thousands) Total interest-earning assets (GAAP) $ 4,938,595 Net interest income on a fully taxable equivalent basis (GAAP) $ 143,971 Net interest margin on a fully taxable equivalent basis (GAAP) Less: Accretion of loan fair value adjustments (2,259) Adjusted net interest margin on a fully taxable equivalent basis $ 4,938,595 $ 141,712 (3) Operating return on tangible common equity represents operating net income as a percentage of average tangible common equity. 2.92% -0.05% 2.87% Page 14 2022 Annual ReportUNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2022 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission File Number 001-38184 CAMBRIDGE BANCORP (Exact name of Registrant as specified in its Charter) Massachusetts (State or other jurisdiction of incorporation or organization) 1336 Massachusetts Avenue Cambridge, MA (Address of principal executive offices) 04-2777442 (I.R.S. Employer Identification No.) 02138 (Zip Code) Registrant’s telephone number, including area code: (617) 876-5500 Securities registered pursuant to Section 12(b) of the Act: Common Stock (Title of each class) CATC (Trading symbol) NASDAQ (Name of each exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ☐ NO ☒ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES ☐ NO ☒ Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐ Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit). YES ☒ NO ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Non-accelerated filer ☐ ☐ Accelerated filer Smaller reporting company Emerging growth company ☒ ☐ ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐ Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 726.2(b)) by the registered public accounting firm that prepared or issued its audit report. YES ☒ NO ☐ The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on June 30, 2022, was $528.7 million. The number of shares of Registrant’s Common Stock outstanding as of March 9, 2023 was 7,834,057. Portions of the Registrant’s Definitive Proxy Statement relating to the Annual Meeting of Shareholders, scheduled to be held on May 15, 2023, are incorporated by reference into Part III of this Report. DOCUMENTS INCORPORATED BY REFERENCE Page 1 2 13 23 23 23 23 24 25 26 51 52 103 103 104 104 105 105 105 105 105 106 108 109 PART I Table of Contents Business Item 1. Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Item 3. Item 4. Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Reserved Management’s Discussion and Analysis of Financial Condition and Results of Operations PART II Item 5. Item 6. Item 7. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Item 8. Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections PART III Item 10. Directors, Executive Officers and Corporate Governance Item 11. Item 12. Item 13. Item 14. Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accounting Fees and Services PART IV Item 15. Item 16. Signatures Exhibits, Financial Statement Schedules Form 10-K Summary i PART I Unless the context requires otherwise, all references to the “Company,” “we,” “us,” and “our,” refer to Cambridge Bancorp. Forward-Looking Statements This report contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward- looking statements about the Company and its industry involve substantial risks and uncertainties. Statements other than statements of current or historical fact, including statements regarding the Company’s future financial condition, results of operations, business plans, liquidity, cash flows, projected costs, and the impact of any laws or regulations applicable to the Company, are forward-looking statements. Words such as “anticipates,” “believes,” “estimates,” “expects,” “forecasts,” “intends,” “plans,” “projects,” “may,” “will,” “should,” and other similar expressions are intended to identify these forward-looking statements. Such statements are subject to factors that could cause actual results to differ materially from anticipated results. Such factors include, but are not limited to, the following: • • • • • • • • • • • • • • • • • • • • • • national, regional, and local economic conditions may be less favorable than expected, resulting in, among other things, increased charge-offs of loans, higher provisions for credit losses and/or reduced demand for the Company’s services; disruptions to the credit and financial markets, either nationally or globally; the duration and scope of COVID-19 pandemic and its impact on levels of consumer confidence; actions governments, businesses and individuals take in response to the COVID-19 pandemic; the impact of the COVID-19 pandemic and actions taken in response to the COVID-19 pandemic on global and regional economies and economic activity; a prolonged resurgence in the severity of the COVID-19 pandemic due to variants and mutations of the virus; the pace of recovery when the COVID-19 pandemic subsides; weakness in the real estate market, including the secondary residential mortgage market, which can affect, among other things, the value of collateral securing mortgage loans, mortgage loan originations and delinquencies, and profits on sales of mortgage loans; legislative, regulatory, or accounting changes, including changes resulting from the adoption and implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which may adversely affect our business and/or competitive position, impose additional costs on the Company or cause us to change our business practices; the Dodd-Frank Act’s consumer protection regulations which could adversely affect the Company’s business, financial condition or results of operations; disruptions in the Company’s ability to access capital markets which may adversely affect its capital resources and liquidity; the Company’s heavy reliance on communications and information systems to conduct its business and reliance on third parties and affiliates to provide key components of its business infrastructure, any disruptions of which could interrupt the Company’s operations or increase the costs of doing business; the failure of the Company’s financial reporting controls and procedures to prevent or detect all errors or fraud; the Company’s dependence on the accuracy and completeness of information about clients and counterparties; the fiscal and monetary policies of the federal government and its agencies; the failure to satisfy capital adequacy and liquidity guidelines applicable to the Company; downgrades in the Company’s credit rating; changes in interest rates which could affect interest rate spreads and net interest income; decrease in net interest margin due to increasing cost of funds in a rising interest rate environment; costs and effects of litigation, regulatory investigations or similar matters; inability to realize expected cost savings or to implement integration plans and other adverse consequences associated with the Company’s merger (the “Northmark Merger”) with Northmark Bank (“Northmark”). a failure by the Company to effectively manage the risks the Company faces, including credit, operational and cyber security risks; 1 • • • • • • • • • • increased pressures from competitors (both banks and non-banks) and/or an inability by of the Company to remain competitive in the financial services industry, particularly in the markets which the Company serves, and keep pace with technological changes; unpredictable natural or other disasters, which could adversely impact the Company’s clients or operations; a loss of client deposits, which could increase the Company’s funding costs; the disparate impact that can result from having loans concentrated by loan type, industry segment, borrower type or location of the borrower or collateral; changes in the creditworthiness of clients; increased credit losses or impairment of goodwill and other intangibles; negative public opinion which could damage the Company’s reputation and adversely impact business and revenues; the Company depends on the expertise of key personnel, and if these individuals leave or change their roles without effective replacements, operations may suffer; the Company may not be able to hire or retain additional qualified personnel, including those acquired in previous acquisitions, and recruiting and compensation costs may increase as a result of turnover, both of which may increase costs and reduce profitability and may adversely impact the Company’s ability to implement the Company’s business strategies; and changes in the Company’s accounting policies or in accounting standards which could materially affect how the Company reports financial results and condition. Except as required by law, the Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements. You are cautioned not to place undue reliance on these forward-looking statements. Item 1. Business. The Company Cambridge Bancorp (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state- chartered, federally registered bank holding company headquartered in Cambridge, Massachusetts. The Company is a Massachusetts corporation formed in 1983 and has one bank subsidiary, Cambridge Trust Company (the “Bank”), formed in 1890. On October 18, 2017, shares of the Company’s common stock commenced trading on the NASDAQ Stock Market under the symbol CATC. Prior to this date, the Company’s shares traded on the over-the-counter market. As of December 31, 2022, the Company had total assets of approximately $5.6 billion. Currently, the Bank operates 22 banking offices in Eastern Massachusetts and New Hampshire. As a private bank, we focus on three core services that center around client needs. The Company’s core services include Wealth Management, Commercial Banking, and Personal Banking. The Bank’s clients consist primarily of consumers and small- and medium-sized businesses in these communities and surrounding areas throughout Massachusetts and New Hampshire. The Company’s Wealth Management Group has five offices, two in Massachusetts in Boston and Wellesley, and three in New Hampshire in Concord, Manchester, and Portsmouth. As of December 31, 2022, the Company had Assets under Management and Administration of approximately $4.1 billion. The Wealth Management Group offers comprehensive investment management, as well as trust administration, estate settlement, and financial planning services. The Company’s wealth management clients value personal service and depend on the commitment and expertise of our experienced banking, investment, and fiduciary professionals. The Wealth Management Group customizes investment portfolios to help clients meet their long-term financial goals. Through development of an appropriate asset allocation and disciplined investment selection, the Company’s in-house research team targets long- term capital growth while seeking to minimize downside risk. The Company’s internally developed, research-driven process is managed by our skilled team of portfolio managers and analysts. The Company builds portfolios consisting of its best ideas, focusing on individual global equities, fixed income securities, exchange-traded funds, and mutual funds. The Company offers a wide range of services to commercial enterprises, non-profit organizations, and individuals. The Company emphasizes service to consumers and small-and medium-sized businesses in its market area. The Company originates commercial and industrial (“C&I”) loans, commercial real estate (“CRE”) loans, construction loans, consumer loans, and residential real estate loans (including one-to-four family and home equity lines of credit), and accepts savings, money market, time, and demand deposits. In addition, the Company offers a wide range of commercial and personal banking services which include cash management, online banking, mobile banking, and global payments. 2 The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings, and non-interest income largely from its wealth management services. The results of operations are affected by the level of income and fees from loans, the cost of deposits, operating expenses, the provision for (release of) credit losses, the impact of federal and state income taxes, the relative levels of interest rates, and local and national economic activity. Through the Bank, the Company focuses on wealth management, the commercial banking business and private banking for clients, including residential lending and relationship banking. Relationship banking focuses on providing exceptional service to clients and in deepening relationships. Within the commercial loan portfolio, the Company has traditionally been a commercial real estate lender. However, in recent years the Company has diversified commercial operations within the areas of commercial and industrial lending to including both Renewable Energy and innovation banking. Through its renewable energy lending efforts, the Company provides financing for developers and operators of commercial and utility scale solar energy projects. Target clients generally include experienced borrowers who have built or managed other renewable energy facilities, and financing is provided for the construction and permanent financing of new projects, the acquisition of completed projects, or the refinancing of existing operating projects. The Innovation Banking Group has a narrow client focus for lending and provides a local banking option for technology and entrepreneurial companies across a wide range of industries within our market area. Financing includes recurring revenue based lending to support working capital, as well as growth capital term debt with borrowers that have demonstrated continued performance to plan during their growth progression. Cambridge Trust Company The Bank offers a full range of commercial and consumer banking services through its network of 22 banking offices in Eastern Massachusetts and New Hampshire. The Bank is engaged principally in the business of attracting deposits from the public and investing those deposits. The Bank invests those funds in various types of loans, including residential, CRE, commercial and industrial, and consumer loans. The Bank also invests its deposits and borrowed funds in investment securities and has two wholly owned Massachusetts security corporations, CTC Security Corporation and CTC Security Corporation III, for this purpose. Deposits at the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) for the maximum amount permitted by FDIC regulations. Investment management and trust services are offered through our two wealth management offices located in Massachusetts and three wealth management offices located in New Hampshire. The Bank also utilizes its subsidiary and non-depository trust company, Cambridge Trust Company of New Hampshire, Inc., to provide specialized wealth management services in New Hampshire. The assets held for wealth management clients are not assets of the Bank and, accordingly, are not reflected in the Company’s consolidated balance sheets. The Bank is active in the communities we serve. The Bank makes contributions to various non-profits and local organizations, invests in community development lending, and invests in low-income housing. All, of which strive to improve the communities that our employees and clients call home. Market Area The Company operates in Eastern Massachusetts and Southern New Hampshire. Our primary lending market includes Middlesex, Essex, Norfolk, and Suffolk counties in Massachusetts and Rockingham and Hillsborough counties in New Hampshire. We benefit from the presence of numerous institutions of higher learning, medical care and research centers, a vibrant innovation economy in life sciences and technology, and the corporate headquarters of several significant financial service companies within the Boston area. Eastern Massachusetts also has many high-technology companies employing personnel with specialized skills. These factors affect the demand for wealth management services, residential homes, multi-family apartments, office buildings, shopping centers, industrial warehouses, and other commercial properties. Our lending area is primarily an urban market area with a substantial number of one-to-four-unit residential properties, some of which are non-owner occupied, as well as apartment buildings, condominiums, office buildings, and retail space. As a result, our loan portfolio contains a significantly greater number of multi-family and CRE loans compared to institutions that operate in non-urban markets. Our market area is located largely in the Boston-Cambridge-Quincy, Massachusetts/New Hampshire Metropolitan Statistical Area (“MSA”). As of February 2023, the Boston metropolitan area is estimated to be the 11th largest metropolitan area in the United States, based upon data from S & P Global Market Intelligence©. Located adjacent to major transportation corridors, the Boston metropolitan area provides a highly diversified economic base, with major employment sectors ranging from services, education, manufacturing, and wholesale/retail trade, to finance, technology, and medical care. According to the United States Department of Labor, in December 2022, the Boston-Cambridge-Newton, Massachusetts/New Hampshire MSA had an unemployment rate of 2.7% compared to the national unemployment rate of 3.5%. 3 Merger with Northmark Bank On October 1, 2022, the Company completed its merger (“Northmark Merger”) with Northmark Bank (“Northmark”) adding three banking offices in Massachusetts. Under the terms of the Agreement and Plan of Merger with Northmark, each outstanding share of Northmark common stock was converted into 0.9950 shares of the Company’s common stock. As a result of the Northmark Merger, former Northmark shareholders received an aggregate of 788,137 shares of the Company's common stock. The total consideration paid amounted to $62.8 million, based on the closing price of $79.74 of the Company's common stock and cash paid for fractional shares on October 1, 2022. The Company accounted for the Northmark Merger using the acquisition method pursuant to Financial Accounting Standards Board (“FASB”) Codification (“ASC”) Topic 805, “Business Combinations” (“ASC 805”) Accordingly, the Company recorded merger expenses of $1.9 million for the year ended December 31, 2022. In accordance with the Northmark Merger, the Company recorded total assets of $428.7 million, assumed total liabilities of $378.5 million, and recorded $12.6 million in goodwill. Additionally, the Company recorded $2.2 million in provision for credit losses to reflect the impact of merger related allowance for credit losses commensurate with ASC Topic 326, “Financial Instruments Credit Losses” (“ASC 326”) commonly referred to as current expected credit losses (“CECL”) on October 1, 2022. See NOTE 4 – MERGERS for additional details. Merger with Wellesley Bancorp, Inc. On June 1, 2020, the Company completed its merger (the “Wellesley Merger”) with Wellesley Bancorp, Inc. (“Wellesley”), adding six banking offices in Massachusetts. Under the terms of the Agreement and Plan of Merger with Wellesley, each outstanding share of Wellesley common stock was converted into 0.580 shares of the Company’s common stock. As a result of the merger, former Wellesley shareholders received an aggregate of 1,502,814 shares of the Company’s common stock. The total consideration paid amounted to $88.8 million, based on the closing price of $58.00 of the Company’s common stock, the value of Wellesley’s exercisable options, and cash paid for fractional shares on May 31, 2020. The Company accounted for the Wellesley Merger using the acquisition method pursuant to ASC 805. Accordingly, the Company recorded merger expenses of approximately $6.4 million for the year ended December 31, 2020. In connection with the Wellesley Merger, the Company recorded total assets of $985.6 million, assumed total liabilities of $917.6 million, and recorded $20.7 million in goodwill. Additionally, the Company recorded $8.6 million in provision for credit losses to reflect the impact of merger related allowance for CECL on June 1, 2020. Competition The financial services industry is highly competitive. The Company experiences substantial competition with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other non-bank financial service providers in attracting deposits, making loans, and attracting wealth management clients. The competing major commercial banks have greater resources that may provide them a competitive advantage by enabling them to maintain numerous branch offices, invest in technology, and mount extensive advertising campaigns. The increasingly competitive environment is the result of changes in regulation, changes in technology and product delivery systems, additional financial service providers, and the accelerating pace of consolidation among financial services providers. The financial services industry has become even more competitive as a result of legislative, regulatory, and technological changes and continued consolidation. Banks, securities firms, and insurance companies can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and underwriting), and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Some of the Company’s non-banking competitors have fewer regulatory constraints and may have lower cost structures. In addition, some of the Company’s competitors have assets, capital, and lending limits greater than that of the Company, greater access to capital markets, and offer a broader range of products and services than the Company. These institutions may have the ability to finance wide- ranging advertising campaigns and may also be able to offer lower rates on loans and higher rates on deposits than the Company can offer. Some of these institutions offer services, such as international banking, which the Company does not directly offer. Various in-state market competitors and out-of-state banks continue to enter or have announced plans to enter or expand their presence in the market areas in which the Company currently operates. With the addition of new banking presences within our market, the Company expects increased competition for loans, deposits, and other financial products and services. The Bank is a private bank and wealth management firm, stressing the holistic client relationship, and relies upon local promotional activities, the skill and personal relationships established by officers, directors, and employees with its clients, and specialized services 4 tailored to meet the needs of the communities served. While the Bank’s position varies by market, management believes that it can compete effectively as a result of local market knowledge, local decision making, and awareness of client needs. Supervision and Regulation General Banking is a complex, highly regulated industry. Consequently, the performance of the Company and the Bank can be affected not only by management decisions and general and local economic conditions, but also by the statutes enacted by the U.S. Congress and state legislatures, and the regulations and policies of, various governmental regulatory authorities. These authorities include, but are not limited to, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Massachusetts Division of Banks (the “MA DOB”), the State of New Hampshire Banking Department, and the FDIC. The primary goals of bank regulation are to maintain a safe and sound banking system, establish consumer protection standards, and to facilitate the conduct of sound monetary policy. In furtherance of these goals, the U.S. Congress and the Commonwealth of Massachusetts have created largely autonomous regulatory agencies that oversee and have enacted numerous laws that govern banks, bank holding companies, and the banking industry. The system of supervision and regulation applicable to the Company and the Bank establishes a comprehensive framework for the entities’ respective operations and is intended primarily for the protection of the Bank’s depositors and the public, rather than the shareholders and creditors. The following summarizes the significant laws, rules, and regulations governing banks and bank holding companies, including the Company and the Bank, but does not purport to be a complete summary of all applicable laws, rules, and regulations governing bank holding companies and banks or the Company or the Bank. The descriptions are qualified in their entirety by reference to the specific statutes, regulations, and policies discussed. Any change in applicable laws, regulations, or regulatory policies may have a material effect on our businesses, operations, and prospects. The Company is unable to predict the nature or extent of the effects that economic controls or new federal or state legislation may have on our business and earnings in the future. In addition to the summary below, as a result of the COVID-19 pandemic, the U.S. bank regulators issued several letters and other guidance to bank holding companies and banks regarding expectations for supporting the community and certain related temporary regulatory changes or accommodations, including, for example, temporary relief for banks that may exceed certain regulatory asset thresholds due in large part to their participation in government programs established in response to the COVID-19 pandemic. The Company continues to monitor guidance and developments related to COVID-19. Regulatory Agencies The Company is a legal entity separate and distinct from its first-tier bank subsidiary, the Bank, and its second-tier subsidiaries, Cambridge Trust Company of New Hampshire, Inc., a New Hampshire state-chartered non-depository trust company, and CTC Security Corporation and CTC Security Corporation III, which are used to invest the Bank’s deposits and borrowed funds in investment securities. As a bank holding company, the Company is regulated under the Bank Holding Company Act of 1956, as amended (“BHC Act”), Massachusetts laws applying to bank holding companies and Massachusetts corporations more generally. The Company is subject to inspection, examination, and supervision by the Federal Reserve and the MA DOB. As a Massachusetts state-chartered insured depository institution, the Bank is subject to supervision, periodic examination, and regulation by the MA DOB as its chartering authority, and by the FDIC as its primary federal regulator. The prior approval of the MA DOB and the FDIC is required, among other things, for the Bank to establish or relocate any additional branch offices, assume deposits, or engage in any merger, consolidation, purchase, or sale of all or substantially all of the assets of any insured depository institution. Cambridge Trust Company of New Hampshire, Inc. is subject to supervision, periodic examination, and regulation by The State of New Hampshire Banking Department. Bank Holding Company Regulations Applicable to the Company The BHC Act and other federal laws and regulations subject bank holding companies to particular restrictions on the types of activities in which they may engage and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. As a Massachusetts corporation and bank holding company, the Company is also subject to certain limitations and restrictions under applicable Massachusetts law. Mergers & Acquisitions The BHC Act, the Bank Merger Act, the laws of the Commonwealth of Massachusetts applicable to financial institutions, and other federal and state statutes regulate acquisitions of banks and their holding companies. The BHC Act generally limits acquisitions by bank holding companies to banks and companies engaged in activities that the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto. The BHC Act requires every bank holding company to obtain the prior approval of the Federal 5 Reserve before (i) acquiring more than 5% of the voting stock of any bank or other bank holding company, (ii) acquiring all or substantially all the assets of any bank or bank holding company, or (iii) merging or consolidating with any other bank holding company. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities generally consider, among other things, the competitive effect and public benefits of the transactions, the financial and managerial resources and future prospects of the combined organization (including the capital position of the combined organization), the applicant’s performance record under the Community Reinvestment Act (see —Community Reinvestment Act), fair housing laws, and the effectiveness of the subject organizations in combating money laundering activities. Non-bank Activities Generally, bank holding companies are prohibited, under the BHC Act, from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in, any activity other than (i) banking or managing or controlling banks or (ii) an activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking. The Federal Reserve has the authority to require a bank holding company to terminate an activity or terminate control of, or liquidate or divest, certain subsidiaries or affiliates when the Federal Reserve believes the activity, or the control of the subsidiary or affiliate constitutes a significant risk to the financial safety, soundness, or stability of any of its bank subsidiaries. A bank holding company that qualifies and elects to become a financial holding company is permitted to engage in additional activities that are financial in nature or incidental or complementary to financial activity. The Company currently has no plans to make a financial holding company election. Bank holding companies and their non-banking subsidiaries are prohibited from engaging in activities that represent unsafe and unsound banking practices. For example, under certain circumstances the Federal Reserve’s Regulation Y requires a holding company to give the Federal Reserve prior notice of any redemption or repurchase of its own equity securities if the consideration to be paid, together with the consideration paid for any other redemptions or repurchases in the preceding year, is equal to 10% or more of the bank holding company’s consolidated net worth. The Federal Reserve may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate a regulation. As another example, a bank holding company is prohibited from impairing its subsidiary bank’s soundness by causing the bank to make funds available to non-bank subsidiaries or their clients if the Federal Reserve believes it is not prudent to do so. The Federal Reserve has the power to assess civil money penalties for knowing or reckless violations if the activities leading to a violation caused a substantial loss to a depository institution. Potential penalties can reach as high as almost $2.0 million for each day such activity continues. Source of Strength In accordance with Federal Reserve policy, the Company is expected to act as a source of financial and managerial strength to the Bank. Section 616 of the Dodd-Frank Act codifies the requirement that bank holding companies serve as a source of financial strength to their subsidiary depository institutions. Under this policy, the holding company is expected to commit resources to support its bank subsidiary, including at times when the holding company may not be in a financial position to provide it. As discussed below, the Company could be required to guarantee the capital plan of the Bank if it becomes undercapitalized for purposes of banking regulations. Any capital loans by a bank holding company to its subsidiary bank are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. The BHC Act provides that, in the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to priority of payment. Regulatory agencies have promulgated regulations to increase the capital requirements for bank holding companies to a level that matches those of banking institutions. See — Capital Adequacy and Prompt Corrective Action and Safety and Soundness. Annual Reporting & Examinations The Company is required to file annual and periodic reports with the Federal Reserve and such additional information as the Federal Reserve may require. The Federal Reserve may examine a bank holding company and any of its subsidiaries and charge the Company for the cost of such an examination. Imposition of Liability for Undercapitalized Subsidiaries Pursuant to Section 38 of the Federal Deposit Insurance Act (the “FDIA”), federal banking agencies are required to take “prompt corrective action” (“PCA”) should an insured depository institution fail to meet certain capital adequacy standards. In the event an institution becomes “undercapitalized,” it must submit a capital restoration plan. The capital restoration plan will not be accepted by the regulators unless each company “having control of” the undercapitalized institution has “guaranteed” the subsidiary’s compliance with 6 the capital restoration plan until it has been “adequately capitalized” on average during each of four consecutive calendar quarters. For purposes of this statute, the Company has control of the Bank. Under the FDIA, the aggregate guarantee liability of all companies controlling a particular institution is limited to the lesser of 5% of the depository institution’s total assets at the time it became undercapitalized or the amount necessary to bring the institution into compliance with applicable capital standards. The FDIA grants greater powers to the federal banking agencies in situations where an institution becomes “significantly” or “critically” undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve approval of proposed distributions or might be required to consent to a merger or to divest the troubled institution or other affiliates. See — Capital Adequacy and Prompt Corrective Action and Safety and Soundness. Dividends Dividends from the Bank are the Company’s principal source of cash revenues. The Company’s earnings and activities are affected by legislation, regulations, and local legislative and administrative bodies and decisions of courts in the jurisdictions in which we conduct business. These include limitations on the ability of the Bank to pay dividends to the Company and our ability to pay dividends to our shareholders. It is the policy of the Federal Reserve that bank holding companies should pay cash dividends on common stock only out of income available over the past year and only if prospective earnings retention is consistent with the organization’s expected future needs and financial condition. This policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company’s ability to serve as a source of strength to its bank subsidiary. Consistent with such policy, a banking organization should have comprehensive policies on dividend payments that clearly articulate the organization’s objectives and approaches for maintaining a strong capital position and achieving the objectives of the policy statement. The Company has a comprehensive dividend policy in place. The FDIC has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. Under applicable Massachusetts law, the Bank’s Board of Directors may declare from net profits cash dividends annually, semi-annually, or quarterly, but not more frequently, and noncash dividends at any time, although no dividends may be declared, credited, or paid so long as there is any impairment of capital stock. The MA DOB Commissioner’s approval is required in order to authorize the payment of a dividend, if the total dividends declared in a calendar year exceed that year’s net profits combined with retained net profits for the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. Transactions with Affiliates Transactions between a bank and its affiliates are subject to certain restrictions under Sections 23A and 23B of the Federal Reserve Act (the “FRA”) and the Federal Reserve’s implementing Regulation W. The Company is considered an “affiliate” of the Bank under these sections. Generally, Sections 23A and 23B: (1) limit the extent to which an insured depository or its subsidiaries may engage in covered transactions (a) with an affiliate (as defined in such sections) to an amount equal to 10% of such institution’s capital and surplus and (b) with all affiliates, in the aggregate, to an amount equal to 20% of such capital and surplus; and (2) require all transactions with an affiliate, whether or not covered transactions, to be on terms substantially the same, or at least as favorable to the institution or subsidiary, as the terms provided or that would be provided to a non-affiliate. The term “covered transaction” includes the making of loans to an affiliate, purchase securities issued by an affiliate, purchase of assets from an affiliate, issuance of a guarantee on behalf of an affiliate, and other similar types of transactions. Capital Adequacy In July 2013, the Federal Reserve, the Office of the Comptroller of the Currency (the “OCC”), and the FDIC approved final rules (the “Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The Capital Rules generally implement the Basel Committee on Banking Supervision’s December 2010 final capital framework referred to as “Basel III” for strengthening international capital standards. The Capital Rules revise the definitions and the components of regulatory capital, as well as address other issues affecting the numerator in banking institutions’ regulatory capital ratios. The Capital Rules also address asset risk weights and other matters affecting the denominator in banking institutions’ regulatory capital ratios and replace the existing general risk-weighting approach with a more risk-sensitive approach. The Capital Rules: (i) include “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital Rules, for most banking organizations, including the Company, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common forms of Tier 2 capital are subordinated notes and a portion of the allocation for allowance for credit losses, in each case, subject to the Capital Rules’ specific requirements. 7 Pursuant to the Capital Rules, effective January 1, 2015, the minimum capital ratios are as follows: • • • • 4.5% CET1 to risk-weighted assets; 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (called “leverage ratio”). The Capital Rules also include a “capital conservation buffer,” composed entirely of CET1, in addition to these minimum risk-weighted asset ratios (which are each of the first three ratios described above, but not the leverage ratio). The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions that do not hold the requisite capital conservation buffer will face constraints on dividends, capital instrument repurchases, interest payments on capital instruments and discretionary bonus payments based on the amount of the shortfall. Thus, the capital standards applicable to the Company include an additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk-weighted assets of at least 8.5%, and (iii) total capital to risk-weighted assets of at least 10.5%. The Capital Rules provide for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing assets, deferred tax assets arising from temporary differences that could not be realized through net operating loss carrybacks, and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such items, in the aggregate, exceed 15% of CET1. In November 2017, the Federal Reserve finalized a rule pausing the phase-in of these deductions and adjustments for non-advanced approaches institutions. In July 2019, the OCC, the Federal Reserve Board and the FDIC adopted a final rule intended to simplify the Capital Rules described above for non- advanced approaches rule institutions. Institutions were required to implement the provisions of the simplification rule by April 1, 2020. The transition provisions to the Capital Rules issued by these agencies in November 2017 ceased to apply to an institution in the quarter in which it adopted the simplification rule. In addition, under the current general risk-based capital rules, the effects of accumulated other comprehensive income or loss items included in shareholders’ equity (for example, mark-to-market of securities held in the available for sale portfolio) under U.S. generally accepted accounting principles (“GAAP”) are reversed for the purposes of determining regulatory capital ratios. Pursuant to the Capital Rules, the effects of certain of the above items are not excluded. However, banking organizations, including the Company, that are not subject to the advanced approaches rule, could make a one-time permanent election to exclude these items. The Company made the one- time permanent election to exclude these items. The Capital Rules also preclude certain hybrid securities, such as trust preferred securities, from inclusion in bank holding companies’ Tier 1 capital, although bank holding companies that had total consolidated assets of less than $15 billion at December 31, 2009 may include trust preferred securities issued prior to May 19, 2010 as a component of Tier 1 capital. The risk-weighting categories in the Capital Rules are standardized and include a risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 1,250% for certain credit exposures, and resulting in higher risk weights for a variety of asset classes. In September 2019, the OCC, the Federal Reserve Board, and the FDIC adopted a final rule that is intended to further simplify the Capital Rules for depository institutions and their holding companies that have less than $10 billion in total consolidated assets, such as Cambridge Bancorp, if such institutions meet certain qualifying criteria. This final rule became effective on January 1, 2020. Under this final rule, if the Company met the qualifying criteria, including having a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of a certain size (greater than 8.5 percent through 2021 and 9 percent thereafter), the Company will be eligible to opt into the community bank leverage ratio framework. If the Company opts into this framework, the Company will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the Capital Rules (as modified pursuant to the simplification rule) and will be considered to have met the well-capitalized ratio requirements for PCA purposes. The Bank has not elected to adopt this framework. The Company and the Bank are in compliance with the currently applicable capital requirements. 8 Prompt Corrective Action and Safety and Soundness Pursuant to Section 38 of the FDIA, federal banking agencies are required to take Prompt Corrective Action (“PCA”) should a depository institution fail to meet certain capital adequacy standards. At each successive lower capital category, an insured depository institution is subject to more restrictions and prohibitions, including restrictions on growth, restrictions on interest rates paid on deposits, restrictions, or prohibitions on payment of dividends, and restrictions on the acceptance of brokered deposits. For example, “well-capitalized” institutions are permitted to accept brokered deposits, but banks that are not well-capitalized are generally restricted or prohibited from accepting such deposits. Furthermore, if an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency, and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well-capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. For purposes of PCA, to be: (i) well-capitalized, a bank must have a total risk-based capital ratio of at least 10%, a Tier 1 risk-based capital ratio of at least 8%, a CET1 risk-based capital ratio of at least 6.5%, and a Tier 1 leverage ratio of at least 5%; (ii) adequately capitalized, a bank must have a total risk-based capital ratio of at least 8%, a Tier 1 risk-based capital ratio of at least 6%, a CET1 risk- based capital ratio of at least 4.5%, and a Tier 1 leverage ratio of at least 4% (but not otherwise meet all of the criteria to be considered “well-capitalized”); (iii) undercapitalized, a bank would have a total risk-based capital ratio of less than 8%, a Tier 1 risk-based capital ratio of less than 6%, a CET1 risk-based capital ratio of less than 4.5%, or a Tier 1 leverage ratio of less than 4% (but not otherwise meet all of the criteria to be considered “significantly” or “critically” undercapitalized); (iv) significantly undercapitalized, a bank would have a total risk-based capital ratio of less than 6%, a Tier 1 risk-based capital ratio of less than 4%, a CET1 risk-based capital ratio of less than 3%, or a Tier 1 leverage ratio of less than 3% (but not otherwise meet the criterion to be considered “critically undercapitalized”); and (v) critically undercapitalized, a bank would have a ratio of tangible equity to total assets that is less than or equal to 2%. The Bank is currently well-capitalized, under the PCA standards. Bank holding companies and insured banks also may be subject to potential enforcement actions of varying levels of severity by the federal banking agencies for unsafe or unsound practices in conducting their business, or for violation of any law, rule, regulation, condition imposed in writing by the agency or term of a written agreement with the agency. In more serious cases, enforcement actions may include: issuances of directives to increase capital; issuances of formal and informal agreements; impositions of civil monetary penalties; issuances of a cease and desist order that can be judicially enforced; issuances of removal and prohibition orders against officers, directors, and other institution−affiliated parties; terminations of the bank’s deposit insurance; appointment of a conservator or receiver for the bank; and enforcements of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted. Deposit Insurance The Bank’s deposit accounts are fully insured by the Deposit Insurance Fund (the “DIF”) of the FDIC up to the deposit insurance limit of $250,000 per depositor, per insured institution, per ownership category, in accordance with applicable laws and regulations. The FDIC uses a risk-based assessment system that imposes insurance premiums based upon a risk matrix that accounts for a bank’s capital level and supervisory rating (“CAMELS”) rating. The risk matrix uses different risk categories distinguished by capital levels and supervisory ratings. The base for deposit insurance assessments is average consolidated total assets less average tangible equity. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed. The FDIC may increase or decrease the assessment rate schedule in order to manage the DIF to prescribed statutory target levels. An increase in the risk category for the Bank or in the assessment rates could have an adverse effect on the Bank’s, and consequently the Company’s earnings. The FDIC may terminate deposit insurance if it determines the institution involved has engaged in or is engaging in unsafe or unsound banking practices, is in an unsafe or unsound condition, or has violated applicable laws, regulations, or orders. The Bank is not aware of any practice, condition, or violation that might lead to the termination of its deposit insurance. The FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit unless the institution’s capital category is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” Depository institutions that have brokered deposits in excess of 10% of total assets are subject to increased FDIC deposit insurance premium assessments. However, for institutions that are well capitalized and have a CAMELS composite rating of 1 or 2, reciprocal deposits are deducted from brokered deposits. Section 202 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, which was enacted in 2018, amended the FDIA to exempt a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions. 9 Depositor Preference The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institution. Consumer Financial Protection The Company and the Bank are subject to a number of federal and state consumer protection laws that govern their relationship with clients. These laws include the Consumer Financial Protection Act of 2010, Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act, the Truth in Savings Act, the Electronic Fund Transfer Act, the Expedited Funds Availability Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the Right to Financial Privacy Act, the Servicemembers Civil Relief Act, and these laws’ respective state-law counterparts, as well as state usury laws and laws regarding unfair and deceptive acts and practices. These and other federal laws, among other things, require disclosures of the cost of credit and terms of deposit accounts, provide substantive consumer rights, prohibit discrimination in credit transactions, regulate the use of credit report information, provide financial privacy protections, prohibit unfair, deceptive, and abusive practices, restrict the Bank’s ability to raise interest rates, and subject the Bank to substantial regulatory oversight. Violations of applicable consumer protection laws can result in significant potential liability from litigation brought by clients, including actual damages, restitution, and attorneys’ fees. Further, the Consumer Financial Protection Bureau (“CFPB”) has broad rulemaking authority for a wide range of consumer financial laws that apply to all banks, including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. While there are no statutory definitions for those terms, the CFPB has found an act or practice to be “unfair” when: “(i) it causes or is likely to cause substantial injury to consumers; (ii) the injury is not reasonably avoidable by consumers; and (iii) the injury is not outweighed by countervailing benefits to consumers or to competition.” “Deceptive acts or practices” occur when “(i) the act or practice misleads or is likely to mislead the consumer; (ii) the consumer’s interpretation is reasonable under the circumstances; and (iii) the misleading act or practice is material.” Finally, an act or practice is “abusive” when it: “(i) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or (ii) takes unreasonable advantage of (a) a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service; (b) a consumer’s inability to protect his or her interests in selecting or using a consumer financial product or service; or (c) a consumer’s reasonable reliance on a covered person to act in his or her interests.” Neither the Dodd-Frank Act, nor the individual consumer financial protection laws, prevent states from adopting stricter consumer protection standards. Community Reinvestment Act The Community Reinvestment Act of 1977 (the “CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low- and moderate-income individuals and communities. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. The applicable federal banking agencies regularly conduct CRA examinations to assess the performance of financial institutions and assign one of four ratings to the institution’s records of meeting the credit needs of its community. The Bank received a “Satisfactory” rating during its last examination in July 2020. 10 Insider Credit Transactions Section 22(h) of the FRA and its implementing Regulation O restricts loans to directors, executive officers, and principal shareholders of a bank or its affiliates, and companies and political or campaign committees controlled by such persons (“insiders”). Under Section 22(h), a loan by a bank to any insider may not exceed, together with all other outstanding loans to such person and any company or political or campaign committee controlled by such person, the bank’s loan-to-one-borrower limit. Loans to insiders above specified amounts must receive the prior approval of the Company’s Board of Directors. Further, under Section 22(h) of the FRA, loans to insiders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank’s (or, if applicable, the bank affiliate’s) employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers. A violation of these restrictions may result in the assessment of substantial civil monetary penalties on the affected bank or any officer, director, employee, agent, or other person participating in the conduct of the affairs of that bank, the imposition of a cease and desist order, and other regulatory sanctions. Financial Privacy The Company is subject to federal laws, including the Gramm-Leach-Bliley Act (the “GLBA”), and certain state laws containing consumer privacy protection provisions. These provisions limit the ability of banks and other financial institutions to disclose nonpublic information about consumers to affiliated and non-affiliated third parties and limit the reuse of certain consumer information received from non-affiliated financial institutions. These provisions require notice of privacy policies to clients and, in some circumstances, allow consumers to prevent disclosure of certain nonpublic personal information to affiliates or non-affiliated third parties by means of “opt out” or “opt in” authorizations. Financial Data Security The GLBA requires that financial include administrative, technical, and physical safeguards to protect consumer information. Further, pursuant to interpretive guidance issued under the GLBA and certain state laws, financial institutions are required to notify clients and regulators of security breaches that result in unauthorized access to their non-public personal information (“NPPI”). institutions implement comprehensive written information security programs that Incentive Compensation The Dodd-Frank Act requires the federal banking agencies and the Securities and Exchange Commission (the “SEC”) to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including the Company and the Bank, with at least $1 billion in total consolidated assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits that could lead to material financial loss to the entity. The federal banking agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, they will restrict the manner in which executive compensation is structured. The Dodd-Frank Act also requires publicly traded companies to give shareholders a non-binding vote on executive compensation and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. Anti-Money Laundering Initiatives and the USA PATRIOT Act Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their clients, prevent money laundering, monitor client transactions, and report suspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from federal banking agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the GLBA and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or provide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The primary federal banking agencies and the Secretary of the U.S. Department of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act. The Company has a Bank Secrecy Act and USA PATRIOT Act compliance program commensurate with its risk profile. 11 The Fair Credit Reporting Act’s Red Flags Rule requires financial institutions with covered accounts (e.g., consumer bank accounts and loans) to develop, implement, and administer an identity theft prevention program. This program must include reasonable policies and procedures to detect suspicious patterns or practices that indicate the possibility of identity theft, such as inconsistencies in personal information or changes in account activity. Office of Foreign Assets Control Regulation The Office of Foreign Assets Control (“OFAC”) of the U.S. Department of the Treasury administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy, or economy of the United States. OFAC publishes lists of individuals and companies owned or controlled by, or acting for or on behalf of, targeted countries. It also lists individuals, groups, and entities, such as terrorists and narcotics traffickers, designated under programs that are not country specific. These are typically known as the OFAC rules based on their administration by the OFAC. The OFAC-administered sanctions targeting countries take many different forms. Generally, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences. Available Information The SEC maintains an Internet website at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our Internet website is https://www.cambridgetrust.com. You can obtain on our website, free of charge, a copy of our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we electronically file such reports or amendments with, or furnish them to, the SEC. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. Human Capital As of December 31, 2022, the Company had 440 full-time and seven part-time employees. At any given time, less than 1% of our employees are temporary. The Company’s employees are not represented by any collective bargaining unit. The Company is committed to recruiting, developing and promoting a diverse workforce to meet the current and future demands of our business. In 2019, we instituted a policy which requires that all searches for positions Vice President and above include at least one racially or ethnically diverse candidate and one female candidate. All of our positions are listed on multiple job boards specifically targeted towards women, minorities, veterans, and people with disabilities. In 2017, the Company formed a Diversity, Equity and Inclusion Steering Committee, which today comprises twenty (20) members from across the organization, including three members of executive management. This committee meets no less than quarterly and has established goals to further the Company’s Diversity, Equity and Inclusion efforts. As of December 31, 2022, our overall workforce was 51% female and 22% racially or ethnically diverse. Of those employees with position titles of Vice President and above, 41% were female and 11% were racially or ethnically diverse. To ensure we provide a rich experience for our employees, we measure organizational culture and engagement by periodically engaging independent third parties to conduct cultural assessments and employee engagement surveys. Our employee driven Engagement Committee focus on monitoring and making continuous improvements to our work environment and employee engagement. The Company encourages employees to contribute their personal best while respecting the balance between work and personal life. To empower employees to reach their potential, we provide training and development programs including traditional classroom training and coaching and experiential learning through Company-wide initiative beyond the scope of their everyday responsibilities. We also provide access to virtual and self-directed online courses in topics ranging from compliance to management skills through our online learning system. To identify and develop our next generation of leaders, we have a robust talent and succession planning process and 12 specialized programs to support the development of our talent pipeline at different levels. The Company believes that its employee relations are good. Item 1A. Risk Factors. Risks Related to our Business and Industry The COVID-19 pandemic is adversely impacting us and our clients, counterparties, employees, and third-party service providers. Further, the COVID-19 pandemic could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which we operate and the adverse impacts on our business, financial position, results of operations and prospects could be significant. The COVID-19 pandemic and related countermeasures have caused economic and financial disruptions in the areas in which we conduct our business operations. The spread of COVID-19 has caused us to modify our business practices, including employee travel, employee work locations, and reduction of physical participation in meetings, events, and conferences. In accordance with relevant public health guidance and local conditions, we conducted a phased return to our offices and facilities, implemented a hybrid remote/office working model, and resumed certain travel, but continue to closely monitor the COVID-19 pandemic to determine if additional actions or policy adjustments are required. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations: • • • • • • • • • demand for products and services may decline, making it difficult to grow assets and income; if the economy is unable to substantially recover, and high levels of unemployment exist for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; our allowance for credit losses may have to be increased if unemployment forecasts increase or borrowers experience financial difficulties, which will adversely affect our net income; the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend; our wealth management revenues may decline with market turmoil; our cyber security risks are increased as the result of an increase in the number of employees working remotely; and we rely on third-party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us. These factors, among others, together or in combination with other events or occurrences not yet known or anticipated, could adversely affect our operations. In addition, other countries as well as the United States have experienced resurgences of the COVID-19 virus, including in the form of the Delta and Omicron variants, and the BA.4 and BA.5 subvariants, and the length and severity of such resurgence in part depends on the speed and effectiveness of vaccine and treatment developments and their deployment, including public adoption rates of COVID-19 vaccines and booster shots, and their effectiveness against emerging variants of COVID-19. If the rate of infections rise, these factors will be exacerbated. Deterioration in local economic conditions may negatively impact our financial performance. The Company’s success depends primarily on the general economic conditions in Eastern Massachusetts and New Hampshire and the specific local markets in which the Company operates. Unlike larger national or other regional banks that are more geographically diversified, the Company provides banking and financial services to clients primarily in Massachusetts and New Hampshire. The local economic conditions in these areas have a significant impact on the demand for the Company’s products and services as well as the ability of the Company’s clients to repay loans, the value of the collateral securing loans, and the stability of the Company’s deposit funding sources. A downturn in our local economy may limit funds available for deposit and may negatively affect our borrowers’ ability to repay their loans on a timely basis, both of which could have an impact on our profitability. 13 Variations in interest rates may negatively affect our financial performance. The Company’s earnings and financial condition are largely dependent upon net interest income, which is the difference between interest earned from loans and investments and interest paid on deposits and borrowings. The narrowing of interest rate spreads could adversely affect the Company’s earnings and financial condition. The Company cannot predict with certainty, or control, changes in interest rates. Regional and local economic conditions and the policies of regulatory authorities, including monetary policies of the Federal Reserve, affect interest income and interest expense. Our net interest income and net interest margin may be negatively impacted during periods of rate tightening due to pressure on our funding costs, particularly if we are unable to realize higher rates on our assets at a pace that matches that of the funding. High interest rates could also affect the amount of loans that the Company can originate because higher rates could cause clients to apply for fewer mortgages or cause depositors to shift funds from accounts that have a comparatively lower cost to accounts with a higher cost. The Company may also experience client attrition due to competitor pricing. If the cost of interest- bearing deposits increases at a rate greater than the yields on interest-earning assets increase, then net interest income will be negatively affected. Changes in the asset and liability mix may also affect net interest income. Similarly, lower interest rates cause higher yielding assets to prepay and floating or adjustable-rate assets to reset to lower rates. If the Company is not able to reduce its funding costs sufficiently, due to either competitive factors or the maturity schedule of existing liabilities, then the Company’s net interest margin will decline. Although management believes it has implemented effective asset and liability management strategies to mitigate the potential adverse effects of changes in interest rates on the Company’s results of operations, any substantial or unexpected change in, or prolonged change in market interest rates could have a material adverse effect on the Company’s financial condition and results of operations. Changes in the economy or the financial markets could materially affect our financial performance. Downturns in the United States or global economies or financial markets could adversely affect the demand for and income received from the Company’s fee-based services. Revenues from the Wealth Management Group depend in large part on the level of assets under management and administration. Market volatility that leads clients to liquidate investments, as well as lower asset values, can reduce our level of assets under management and administration and thereby decrease our investment management and administration revenues. Our loan portfolio includes loans with a higher risk of loss. The Bank originates C&I loans, CRE loans, consumer loans, and residential mortgage loans primarily within our market area. Our lending strategy focuses on residential real estate lending, as well as servicing commercial clients, including increased emphasis on C&I lending, and commercial deposit relationships. C&I, CRE loans, and consumer loans may expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans may not be sold as easily as residential real estate. In addition, CRE and C&I loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have greater credit risk than residential real estate for the following reasons: • • • CRE Loans. Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service. C&I Loans. Repayment is generally dependent upon the successful operation of the borrower’s business. Consumer Loans. Consumer loans are collateralized, if at all, with assets that may fluctuate in value based on market conditions or changes in interest rates. Any downturn in the real estate market or local economy could adversely affect the value of the properties securing the loans or revenues from the borrowers’ businesses thereby increasing the risk of non-performing loans. We may experience losses and expenses if security interests granted for loans are not enforceable. When the Company makes loans it sometimes obtains liens, such as real estate mortgages or other asset pledges, to provide the Company with a security interest in collateral. If there is a loan default, the Company may seek to foreclose upon collateral and enforce the security interests to obtain repayment and eliminate or mitigate the Company’s loss. Drafting errors, recording errors, other defects or imperfections in the security interests granted to the Company and/or changes in law may render liens granted to the Company unenforceable. The Company may incur losses or expenses if security interests granted to the Company are not enforceable. If our allowance for credit losses is not sufficient to cover actual loan losses, then our earnings will decrease. The Bank’s loan clients may not repay their loans according to their terms and the collateral securing the payment of these loans may be insufficient to pay any remaining loan balance. The Bank therefore may experience significant credit losses, which could have a material adverse effect on our operating results. Material additions to our allowance for credit losses would materially decrease our net income, and the charge-off of loans may cause us to increase the allowance. The Bank makes various assumptions and judgments about 14 the collectability of the loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. We rely on our loan quality reviews, our experience, and our evaluation of economic conditions, among other factors, in determining the amount of the allowance for credit losses. If our assumptions prove to be incorrect, our allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance. Strong competition within our industry and market area could hurt our performance and slow our growth. The Company operates in a competitive market for both attracting deposits, which is our primary source of funds, and originating loans. Historically, our most direct competition for deposits has come from savings and commercial banks. Our competition for loans comes principally from commercial banks, savings institutions, mortgage banking firms, credit unions, finance companies, mutual funds, insurance companies, and investment banking firms. We also face additional competition from internet-based institutions and brokerage firms. Competition for loan originations and deposits may limit our future growth and earnings prospects. The Company’s ability to compete successfully depends on a number of factors, including, among other things: • • • • • • • the ability to develop, maintain, and build upon long-term client relationships based on service quality, high ethical standards and reputation; the ability to expand the Company’s market position; the scope, relevance, and pricing of products and services offered to meet client needs and demands; the rate at which the Company introduces new products, services, and technologies relative to its competitors; client satisfaction with the Company’s level of service; industry and general economic trends; and the ability to attract and retain talented employees. Failure to perform in any of these areas could significantly weaken the Company’s competitive position, which could adversely affect the Company’s growth and profitability, which, in turn, could have a material adverse effect on the Company’s financial condition and results of operations. The Company’s earnings may not grow if we are unable to successfully attract core deposits and lending opportunities and execute opportunities to generate fee-based income. The Company has experienced growth, and our future business strategy is to continue to expand. Historically, the growth of our loans and deposits has been the principal factor in our increase in net-interest income. In the event that we are unable to execute our business strategy of continued growth in loans and deposits, our earnings could be adversely impacted. The Company’s ability to continue to grow depends, in part, upon our ability to expand our market share, to successfully attract core deposits and identify loan and investment opportunities, as well as opportunities to generate fee-based income. Our ability to manage growth successfully will also depend on whether we can continue to efficiently fund asset growth and maintain asset quality and cost controls, as well as on factors beyond our control, such as economic conditions and interest-rate trends. 15 There are substantial risks and uncertainties associated with the introduction or expansion of lines of business or new products and services within existing lines of business. From time to time, the Company may implement new lines of business or offer new products and services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, the Company may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove attainable. External factors, such as compliance with regulations, competitive alternatives, and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on the Company’s business, results of operations, and financial condition. The Company is subject to liquidity risk, which could adversely affect net interest income and earnings. The purpose of the Company’s liquidity management practices is to meet the cash flow obligations of its clients for both deposits and loans. One liquidity measurement the Company utilizes is called basic surplus, which captures the adequacy of the Company’s access to reliable sources of cash relative to the stability of its funding mix of average liabilities. This approach recognizes the importance of balancing levels of cash flow liquidity from short- and long-term securities with the availability of dependable borrowing sources which can be accessed when necessary. However, competitive pressure on deposit pricing could result in a decrease in the Company’s deposit base or an increase in funding costs. In addition, liquidity will come under additional pressure if loan growth exceeds deposit growth. To manage this risk, the Company has the ability to borrow from the Federal Home Loan Bank (“FHLB ”) of Boston , purchase brokered deposit, borrow against established borrowing facilities with other banks (Federal funds), and enter into repurchase agreements with investment companies. Depending on the level of interest rates, the Company’s net interest income, and therefore earnings, could be adversely affected. Our ability to service our debt, pay dividends, and otherwise pay our obligations as they come due is substantially dependent on capital distributions from our subsidiary. The Company is a separate and distinct legal entity from its subsidiary, the Bank. It receives substantially all of its revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on the Company’s common stock. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to the Company. Also, the Company’s right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s depositors and certain other creditors. In the event the Bank is unable to pay dividends to the Company, the Company may not be able to service debt, pay obligations, or pay dividends on the Company’s common stock. The inability to receive dividends from the Bank could have a material adverse effect on the Company’s business, financial condition, and results of operations. The Company depends on its executive officers and key personnel to continue the implementation of our long-term business strategy and could be harmed by the loss of their services. The Company believes that its continued growth and future success will depend in large part upon the skills of our management team. The competition for qualified personnel in the financial services industry is intense, and the loss of our key personnel, or an inability to continue to attract or retain and motivate key personnel could adversely affect our business. We cannot provide any assurance that we will be able to retain our existing key personnel, attract additional qualified personnel, or effectively manage the succession of key personnel. Although we have change of control agreements with our actively employed named executive officers, the loss of the services of one or more of our executive officers or key personnel could impair our ability to continue to develop our business strategy. 16 The Company relies on third parties to provide key components of its business infrastructure. The Company relies on third parties to provide key components for its business operations, such as data processing and storage, recording and monitoring transactions, online banking interfaces and services, internet connections, and network access. While the Company selects these third-party vendors carefully, it does not control their actions. Any problems caused by these third parties, including those resulting from breakdowns or other disruptions in communication services provided by a vendor, failure of a vendor to handle current or higher volumes, cyber-attacks and security breaches at a vendor, failure of a vendor to provide services for any reason, or poor performance of services by a vendor, could adversely affect the Company’s ability to deliver products and services to its clients and otherwise conduct its business. Financial or operational difficulties of a third-party vendor could also hurt the Company’s operations if those difficulties interfere with the vendor’s ability to serve the Company. Replacing these third-party vendors could create significant delays and expense that adversely affect the Company’s business and performance. The possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets would likely have an adverse effect on our business, financial position, and results of operations. The economy in the United States and globally has experienced volatility in recent years and may continue to experience such volatility for the foreseeable future. There can be no assurance that economic conditions will not worsen. Unfavorable or uncertain economic conditions can be caused by declines in economic growth, business activity, or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impact of changing governmental policies, natural disasters, climate change, epidemics / pandemics, such as COVID-19, terrorist attacks, acts of war, or a combination of these or other factors. A worsening of business and economic conditions could have adverse effects on our business, including the following: • • • • • • • investors may have less confidence in the equity markets in general and in financial services industry stocks in particular, which could place downward pressure on the Company’s stock price and resulting market valuation; economic and market developments may further affect consumer and business confidence levels and may cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates; the Company’s ability to assess the creditworthiness of its clients may be impaired if the models and approaches the Company uses to select, manage, and underwrite its clients become less predictive of future behaviors; the Company could suffer decreases in demand for loans or other financial products and services or decreased deposits or other investments in accounts with the Company; clients of the Company’s Wealth Management Group may liquidate investments, which together with lower asset values, may reduce the level of assets under management and administration, and thereby decrease the Company’s investment management and administration revenues; competition in the financial services industry could intensify as a result of the increasing consolidation of financial services companies in connection with current market conditions or otherwise; and the value of loans and other assets or collateral securing loans may decrease. The Company may be adversely affected by the soundness of other financial institutions, including the FHLB of Boston. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, or other relationships. The Company has exposure to different industries and counterparties, and we routinely execute transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual and hedge funds, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated if the collateral held by us cannot be realized or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due us. These circumstances could lead to impairments or write-downs in a bank’s securities portfolio and periodic gains or losses on other investments under mark-to-market accounting treatment. We could incur additional losses to our securities portfolio in the future as a result of these issues. There is no assurance that any such losses would not materially and adversely affect our business, financial condition, or results of operations. The Company owns common stock of the FHLB of Boston in order to qualify for membership in the FHLB system, which enables it to borrow funds under the FHLB of Boston’s advance program. The carrying value and fair market value of our FHLB of Boston common stock was $6.3 million as of December 31, 2022. There are 11 branches of the FHLB, including Boston, which are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB branch cannot meet its obligations to pay its share of the system’s debt, other FHLB branches can be called upon to make the payment. Any adverse effects within the FHLB of Boston could 17 adversely affect the value of our investment in its common stock and our ability to rely on the FHLB as a funding source and this could negatively impact our results of operations. Risks Related to an Investment in the Company’s Securities The Company’s common stock price may fluctuate significantly. The market price of the Company’s common stock may fluctuate significantly in response to a number of factors including, but not limited to: • • • • • • • • • • • the political climate and whether the proposed policies of the current presidential administration in the U.S. that have affected market prices for financial institution stocks are successfully implemented; changes in securities analysts’ recommendations or expectations of financial performance; volatility of stock market prices and volumes; incorrect information or speculation; changes in industry valuations; announcements regarding proposed acquisitions; variations in operating results from general expectations; actions taken against the Company by various regulatory agencies; changes in authoritative accounting guidance; changes in general domestic economic conditions such as inflation rates, tax rates, unemployment rates, labor and healthcare cost trend rates, recessions, and changing government policies, laws, and regulations; and severe weather, natural disasters, climate change, epidemics / pandemics such as COVID-19, acts of war or terrorism, and other external events. Future issuance of our common stock may have a dilutive effect and may reduce the voting power and relative percentage interests of current common shareholders in our earnings and market value, and there may be future sales or other dilution of the Company’s equity, which may adversely affect the market price of the Company’s stock. Future issuances of shares of our common stock, including for acquisitions, may have a dilutive effect and may reduce the voting power and relative percentage interests of current common shareholders in our earnings and market value. Additionally, the Company is not restricted from issuing additional common stock, including any securities that are convertible into or exchangeable for, or that represent the right to receive, common stock. The Company also grants shares of common stock to employees and directors under the Company’s incentive plan each year. The issuance of any additional shares of the Company’s common stock or securities convertible into, exchangeable for or that represent the right to receive common stock, or the exercise of such securities could be substantially dilutive to shareholders of the Company’s common stock. Holders of the Company’s common stock have no preemptive rights that entitle such holders to purchase their pro rata share of any offering of shares or any class or series. Because the Company’s decision to issue securities in any future offering will depend on market conditions, its acquisition activity and other factors, the Company cannot predict or estimate the amount, timing, or nature of its future offerings. Thus, the Company’s shareholders bear the risk of the Company’s future offerings reducing the market price of the Company’s common stock and diluting their stock holdings in the Company. Risks Related to Legal, Governmental and Regulatory Changes The Company is subject to extensive government regulation and supervision, which may interfere with its ability to conduct its business and may negatively impact its financial results. The Company, primarily through the Bank, Cambridge Trust Company of New Hampshire, Inc., and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, the DIF and the safety and soundness of the banking system as a whole, not shareholders. These laws and regulations affect the Company’s lending practices, capital structure, investment practices, dividend policy, and growth, among other things. The U.S. Congress and federal and state banking agencies continually review banking laws, regulations, and policies for possible changes. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect the Company in substantial and unpredictable ways. Such changes could subject the Company to additional costs, limit the types of financial services and products the Company may offer, and/or limit the pricing the Company may charge on certain banking services, among other things. Compliance personnel and resources may increase our costs of operations and adversely impact our earnings. 18 Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on our business, financial condition, and results of operations. While the Company has policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. State and federal banking agencies periodically conduct examinations of our business, including for compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations may adversely affect our business. Federal and state regulatory agencies periodically conduct examinations of our business, including our compliance with laws and regulations. If, as a result of an examination, an agency were to determine that the financial, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of any of our operations had become unsatisfactory or violates any law or regulation, such agency may take certain remedial or enforcement actions it deems appropriate to correct any deficiency. Remedial or enforcement actions include the power to enjoin “unsafe or unsound” practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced against a bank, to direct an increase in the bank’s capital, to restrict the bank’s growth, to assess civil monetary penalties against a bank’s officers or directors, and to remove officers and directors. In the event that the FDIC concludes that, among other things, our financial condition cannot be corrected or that there is an imminent risk of loss to our depositors, it may terminate our deposit insurance. The CFPB also has authority to take enforcement actions, including cease-and desist orders or civil monetary penalties, if it finds that we offer consumer financial products and services in violation of federal consumer financial protection laws. If we are unable to comply with future regulatory directives, or with the terms of any future supervisory requirements to which we may become subject, then we could become subject to a variety of supervisory actions and orders, including cease and desist orders, PCA, memoranda of understanding, and other regulatory enforcement actions. Such supervisory actions could, among other things, impose greater restrictions on our business, as well as our ability to develop any new business. The Company could also be required to raise additional capital or dispose of certain assets and liabilities within a prescribed time period, or both. Failure to implement remedial measures as required by financial regulatory agencies could result in additional orders or penalties from federal and state regulators, which could trigger one or more of the remedial actions described above. The terms of any supervisory action and associated consequences with any failure to comply with any supervisory action could have a material negative effect on our business, operating flexibility, and overall financial condition. The Company may be subject to more stringent capital requirements. The Bank and the Company are each subject to capital adequacy guidelines and other regulatory requirements specifying minimum amounts and types of capital which each of the Bank and the Company must maintain. From time to time, the regulators implement changes to these regulatory capital adequacy guidelines. If we fail to meet these minimum capital guidelines and other regulatory requirements, then our financial condition would be materially and adversely affected. Any changes to regulatory capital requirements could adversely affect our ability to pay dividends or could require us to reduce business levels or to raise capital, including in ways that may adversely affect our financial condition or results of operations. Replacement of the LIBOR benchmark interest rate could adversely affect our business, financial condition, and results of operations. In 2017, the United Kingdom’s Financial Conduct Authority (“FCA”), which regulates the London Interbank Offered Rate (“LIBOR”), announced that the FCA intends to stop persuading or compelling banks to submit the rates required to calculate LIBOR after 2021. This announcement indicated that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. The U.S. bank regulators issued a Statement on LIBOR Transition on November 30, 2020 encouraging banks to transition away from U.S. Dollar (USD) LIBOR as soon as practicable and in any event by December 31, 2021 for new contracts. LIBOR is currently anticipated to be fully phased out by June 30, 2023. At this time, it is not possible to predict whether and to what extent banks will continue to provide submissions for the calculation of LIBOR. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable market benchmark, what rate or rates may become accepted alternatives to LIBOR or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. The Alternative Reference Rates Committee (“ARRC”) formed by the FRB has proposed a paced market transition plan to Secured Overnight Financing Rate (SOFR) from LIBOR and organizations are continuing to work on industry wide and company-specific transition plans as it relates to derivatives and cash markets exposed to LIBOR. The Company is monitoring this activity and evaluating the related risks. This includes identifying outstanding LIBOR-based loans without ARRC recommended fallback language, internal training and education, and working with our core provider to ensure proper integration once an alternative reference is implemented. Management is monitoring ARRC publications for best practices as the Company transitions legacy LIBOR loans by the June 30, 2023 deadline. We have financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR, or any changes or reforms to the determination or supervision of LIBOR, could have an adverse impact on the market for or value of any LIBOR-linked securities, loans, and other financial obligations or extensions of credit held by or due to us, could create considerable 19 costs and additional risk and could have an adverse impact on or overall financial condition or results of operations. Since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. In 2021, we adopted Accounting Standards Update (“ASU”) 2020-04 - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). See NOTE 3 – RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS for additional details. The transition from LIBOR will change our market risk profiles, requiring changes to risk and pricing models, valuation tools, product design and hedging strategies. Furthermore, failure to adequately manage this transition process with our clients could adversely impact our reputation. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition, and results of operations. Accounting standards periodically change and the application of our accounting policies and methods may require management to make estimates about matters that are uncertain. The regulatory bodies that establish accounting standards, including, among others, the FASB, and the SEC, periodically revise or issue new financial accounting and reporting standards that govern the preparation of our consolidated financial statements. The effect of such revised or new standards on our financial statements can be difficult to predict and can materially impact how we record and report our financial condition and results of operations. In addition, management must exercise judgment in appropriately applying many of our accounting policies and methods so they comply with generally accepted accounting principles. In some cases, management may have to select a particular accounting policy or method from two or more alternatives. In some cases, the accounting policy or method chosen might be reasonable under the circumstances and yet might result in our reporting materially different amounts than would have been reported if we had selected a different policy or method. Accounting policies are critical to fairly presenting our financial condition and results of operations and may require management to make difficult, subjective, or complex judgments about matters that are uncertain. Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business. Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to could have a material adverse effect on our business, results of operations and financial condition. Legal proceedings to which we are subject or may become subject may have a material adverse impact on our financial position and results of operations. Like many banks and other financial services organizations in our industry, we are from time to time involved in various legal proceedings and subject to claims and other actions related to our business activities brought by clients, employees, and others. All such legal proceedings are inherently unpredictable and, regardless of the merits of the claims, litigation is often expensive, time-consuming, disruptive to our operations and resources, and distracting to management. If resolved against us, such legal proceedings could result in excessive verdicts and judgments, injunctive relief, equitable relief, and other adverse consequences that may affect our financial condition and how we operate our business. Similarly, if we settle such legal proceedings, it may affect our financial condition and how we operate our business. Future court decisions, alternative dispute resolution awards, matters arising due to business expansion, or legislative activity may increase our exposure to litigation and regulatory investigations. In some cases, substantial non-economic remedies or punitive damages may be sought. Although we maintain liability insurance coverage, there can be no assurance that such coverage will cover any particular verdict, judgment, or settlement that may be entered against us, that such coverage will prove to be adequate, or that such coverage will continue to remain available on acceptable terms, if at all. Legal proceedings to which we are subject or may become subject may have a material adverse impact on our financial position and results of operations. The Company is exposed to risk of environmental liabilities with respect to properties to which we obtain title. A significant portion of our loan portfolio is secured by real estate. In the course of our business, we may foreclose and take title to real estate and could be subject to environmental liabilities with respect to these properties. The Company may be held liable to a government entity or to third parties for property damage, personal injury, investigation, and clean-up costs incurred by these parties in connection with environmental contamination or may be required to clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation and remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. These costs and claims could adversely affect our business, results of operations, and prospects. 20 Risks Related to Cybersecurity and Data Privacy A breach of information security, including cyber-attacks, could disrupt our business and impact our earnings. The Company depends upon data processing, communication, and information exchange on a variety of computing platforms and networks and over the internet. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. Despite existing safeguards, we cannot be certain that all of our systems are free from vulnerability to attack or other technological difficulties or failures. During the normal course of our business, we have experienced and we expect to continue to experience attempts to breach our systems, none of which has been material to the Company to date, and we may be unable to protect sensitive data and the integrity of our systems. If information security is breached or difficulties or failures occur, despite the controls we and our third-party vendors have instituted, information can be lost or misappropriated, resulting in financial loss or costs to us, reputational harm, or damages to others. Such costs or losses could exceed the amount of insurance coverage, if any, which would adversely affect our earnings. The Company may be adversely affected by fraud. The Company is inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, clients, and other third parties targeting the Company and/or the Company’s clients or data. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering, and other dishonest acts. During the normal course of our business, we have been subjected to and we expect to continue to be subject to theft and fraudulent activity, none of which has been material to the Company to date. The Company continually encounters technological change and the failure to understand and adapt to these changes could hurt its business. The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology- driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve clients and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its clients by using technology to provide products and services that will satisfy client demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its clients. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations. Risks Related to Acquisitions The risks presented by acquisitions, such as the recently completed Northmark and Wellesley Mergers, could adversely affect our financial condition and results of operations. The business strategy of the Company may include growth through acquisitions such as the recently completed Northmark Merger. Any such future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks may include, among other things: • • • • • our ability to realize anticipated cost savings; the difficulty of integrating operations and personnel, and the loss of key employees; the potential disruption of our or the acquired company’s ongoing business in such a way that could result in decreased revenues, the inability of our management to maximize our financial and strategic position; the inability to maintain uniform standards, controls, procedures, and policies; and the impairment of relationships with the acquired company’s employees and clients as a result of changes in ownership and management. The Company cannot provide any assurance that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome these risks could have an adverse effect on the achievement of our business strategy and results of operations. The integration of the Company and Northmark will present significant challenges that may result in the combined business not operating as effectively as expected or in the failure to achieve some or all of the anticipated benefits of the transaction. The benefits and synergies expected to result from the Northmark Merger will depend in part on whether the operations of Northmark can be integrated in a timely and efficient manner with those of the Company. The Company will face challenges in consolidating its functions with those of Northmark, and integrating the organizations, procedures, and operations of the two businesses. The integration 21 of the Company and Northmark will be complex and time-consuming, and the management teams of both companies will have to dedicate substantial time and resources to it. These efforts could divert management’s focus and resources from serving existing clients or other strategic opportunities and from day-to-day operational matters during the integration process. Failure to successfully integrate operations of the Company and Northmark could result in the failure to achieve some of the anticipated benefits from the transaction, including cost savings and other operating efficiencies, and the Company may not be able to capitalize on the existing relationships of Northmark to the extent anticipated, or it may take longer, or be more difficult or expensive than expected to achieve these goals. This could have an adverse effect on the business, results of operations, financial condition, or prospects of the Company and/or the Bank after the transaction. Unanticipated costs relating to the Northmark Merger could reduce the Company’s future earnings per share. The Company and the Bank believe that each has reasonably estimated the likely costs of integrating the operations of the Bank and Northmark, and the incremental costs of operating as a combined company. However, it is possible that unexpected transaction costs such as taxes, fees or professional expenses or unexpected future operating expenses such as increased personnel costs or increased taxes, as well as other types of unanticipated adverse developments, could have a material adverse effect on the results of operations and financial condition of the combined company. If unexpected costs are incurred, the Northmark Merger could have a dilutive effect on the Company’s earnings per share. In other words, after the completion of the Northmark Merger, the earnings per share of the Company’s common stock could be less than anticipated or even less than if the Northmark Merger had not been completed. Following the Northmark Merger, the Company may not continue to pay dividends at or above the rate currently paid by the Company. Following the Northmark Merger, the Company’s shareholders may not receive dividends at the same rate that they did prior to the merger for various reasons, including the following: • • • the Company may not have enough cash to pay such dividends due to changes in its cash requirements, capital spending plans, cash flow or financial position; decisions on whether, when and in what amounts to make any future dividends will remain at all times entirely at the discretion of the Board, which reserves the right to change the Company’s dividend practices at any time and for any reason; and the amount of dividends that the Company’s subsidiaries may distribute to the Company may be subject to restrictions imposed by state law and restrictions imposed by the terms of any current or future indebtedness that these subsidiaries may incur. The Company’s shareholders will have no contractual or other legal right to dividends that have not been declared by the Board. General Risks Natural disasters, climate change, acts of war or terrorism, the impact of health epidemics and other adverse external events could detrimentally affect our financial condition and results of operations. Natural disasters, climate change, acts of war or terrorism, and other adverse external events could have a significant negative impact on our ability to conduct business or upon third parties who perform operational services for us or our clients. Such events also could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in lost revenue or cause us to incur additional expenses. The COVID-19 outbreak could negatively impact the ability of our employees and clients to engage in banking and other financial transactions in the geographic areas in which the Company operates. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a COVID-19 outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective. In the event of a natural disaster, the spread of COVID-19 to our market areas or other adverse external events, our business, services, asset quality, financial condition and results of operations could be adversely affected. The effects of widespread public health emergencies may negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations. Widespread health emergencies, such as the COVID-19 outbreak, can disrupt our operations through their impact on our employees, clients and their businesses, and the communities in which we operate. Disruptions to our clients could result in increased risk of 22 delinquencies, defaults, foreclosures, and losses on our loans, negatively impact regional economic conditions, result in a decline in local loan demand, loan originations and deposit availability and negatively impact the implementation of our growth strategy. Any one or more of these developments could have a material adverse effect on our business, financial condition, and results of operations. Item 1B. Unresolved Staff Comments. None. Item 2. Properties. The Company conducts its business through 22 banking offices, including its main banking office and headquarters in Cambridge, Massachusetts. The Company also has operations centers in Burlington and Wellesley, Massachusetts, and Portsmouth, New Hampshire, and five wealth management offices. Item 3. Legal Proceedings. From time to time, the Company and its subsidiaries may be parties to various claims and lawsuits arising in the ordinary course of their normal business activities. Although the ultimate outcome of these suits, if any, cannot be ascertained at this time, it is the opinion of management that none of these matters, even if it resolved adversely to the Company, will have a material adverse effect on the Company’s consolidated financial position. The Company is not currently party to any material pending legal proceedings. Item 4. Mine Safety Disclosures. None. 23 PART II Item 5. Market for Registrant’s Common Equity Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information On October 18, 2017, shares of the Company’s common stock commenced trading on the NASDAQ Stock Market under the symbol “CATC”. Prior to this date, the Company’s shares traded on the over-the-counter market. As of March 9, 2023, there were 7,834,057 shares of the Company’s common stock outstanding held by 509 holders of record. The number of record-holders may not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms, and other nominees. The closing price of the Company’s common stock on December 31, 2022 was $83.06. The Company declared cash dividends of $2.56 and $2.38 per share in 2022 and 2021, respectively. The continued payment of dividends depends upon our profitability, debt and equity structure, earnings, financial condition, need for capital and other factors, including economic conditions, regulatory restrictions, and tax considerations. We cannot guarantee the payment of dividends or that, if paid, that dividends will not be reduced or eliminated in the future. The only funds available for the payment of dividends on our capital stock will be cash and cash equivalents held by us, dividends paid to us by the Bank, and borrowings. The Bank will be prohibited from paying cash dividends to us to the extent that any such payment would reduce the Bank’s capital below required capital levels. The Company’s primary source of funds for dividends paid to shareholders is the receipt of dividends from the Bank. A discussion of the restrictions on the advance of funds or payments of dividends by the Bank to the Company is included in “Supervision and Regulation – Dividends.” Stock Performance Graph The following compares the cumulative total shareholder return on the Company’s common stock against the cumulative total return of the KBW NASDAQ Bank Index and the S&P U.S. BMI Banks Index from December 31, 2017 to December 31, 2022. The results presented assume that the value of the Company’s common stock and each index was $100.00 on December 31, 2017. The total return assumes reinvestment of dividends. Source: Standard & Poor’s Global Market Intelligence © 2022 24 This performance graph shall not be deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or incorporated by reference into any filing by us under the Securities Act of 1933, as amended, or the Securities Exchange Act, except as shall be expressly set forth by specific reference in such filing. Issuer Purchase of Equity Securities The following table sets forth the information regarding the Company’s repurchases of its common stock during the three months ended December 31, 2022: Period October 1 to October 31, 2022 November 1 to November 30, 2022 December 1 to December 31, 2022 Total Total Number of Shares Repurchased (1) Weighted Average Price Paid Per Share — $ $ 331 194 $ 525 — 90.00 83.06 (1) Shares repurchased by the Company relate to shares tendered by employees to pay their income tax liability on current period equity award vesting. On March 14, 2022, the Company’s Board of Directors authorized a share repurchase program (the “2022 Repurchase Program”) to acquire from time to time up to 5.0% of the total number of outstanding shares of the Company’s common stock as of December 31, 2021, with such purchases occurring prior to March 14, 2023, provided that the aggregate purchase price does not exceed $32.0 million. The timing and amount of any shares of the Company’s common stock repurchased under the 2022 Repurchase Program will be determined by the Company’s management based on its evaluation of market conditions and other factors. The 2022 Repurchase Program may be suspended or discontinued at any time. The 2022 Repurchase Program replaced the 2021 Repurchase Program which expired on March 15, 2022. The Company did not repurchase any shares under the 2021 Repurchase Program during the year ended December 31, 2022. On March 13, 2023, the Company’s Board of Directors authorized a share repurchase program (the “2023 Repurchase Program”) to acquire from time to time up to 5.0% of the total number of outstanding shares of the Company’s common stock as of December 31, 2022, with such purchases occurring prior to March 13, 2024, provided that the aggregate purchase price does not exceed $32.4 million. The timing and amount of any shares of the Company’s common stock repurchased under the 2023 Repurchase Program will be determined by the Company’s management based on its evaluation of market conditions and other factors. The 2023 Repurchase Program may be suspended or discontinued at any time. The 2023 Repurchase Program replaces the 2022 Repurchase Program which expired on March 14, 2023. The Company did not repurchase any shares under the 2022 Repurchase Program during the year ended December 31, 2022. Recent Sales of Unregistered Securities There were no unregistered sales of equity securities during the year ended December 31, 2022. Item 6. Reserved 25 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW Cambridge Bancorp (together with its bank subsidiary, unless the context otherwise requires, the “Company”) is a Massachusetts state- chartered, federally registered bank holding company headquartered in Cambridge, Massachusetts. The Company is a Massachusetts corporation formed in 1983 and has one banking subsidiary, Cambridge Trust Company (the “Bank”), formed in 1890. At December 31, 2022, the Company had total assets of approximately $5.6 billion. Currently, the Bank operates 22 banking offices in Eastern Massachusetts and New Hampshire. The Company’s Wealth Management Group has five offices, one in Boston and Wellesley, Massachusetts and three in New Hampshire in Concord, Manchester, and Portsmouth. The Company’s Assets under Management and Administration as of December 31, 2022 were approximately $4.1 billion. The Bank’s clients consist primarily of small- and medium- sized businesses and retail clients in these communities and surrounding areas throughout Massachusetts and New Hampshire. The Company’s results of operations are largely dependent on net interest income, which is the difference between the interest earned on loans and securities and interest paid on deposits and borrowings. The results of operations are also affected by the level of income and fees earned from wealth management services and loans, operating expenses, the provision for (release of) credit losses, the impact of federal and state income taxes, and the relative levels of interest rates and economic activity. CRITICAL ACCOUNTING ESTIMATES Estimates and assumptions are necessary in the application of certain accounting policies and can be susceptible to significant change. Critical accounting policies are defined as those that involve a significant level of estimation uncertainty and have had, or could have a material impact on the Company's financial condition or results of operations. The Company considers the allowance for credit losses and income taxes to be its critical accounting estimates. Allowance for Credit Losses The Company evaluates the need for an allowance for credit losses on all financial assets measured at amortized cost, including loans receivable and held to maturity securities, in accordance with FASB ASC Topic 326, Financial Instruments – Credit Losses (“ASC Topic 326”), on a quarterly basis. ASC Topic 326 requires a methodology to estimate current expected credit losses (“CECL”) over the life of a loan, which incorporates applying a reasonable and supportable forecast period before reverting back to historical data. ASC Topic 326 also applies to off-balance sheet credit exposures not accounted for as insurance (i.e. loan commitments, standby letters of credit, financial guarantees, and other similar investments) and net investments in leases recognized by a lessor in accordance with ASU 2016-02 – Leases (Topic 842). Losses on loan receivables are estimated and recognized upon origination of the loan, based on expected credit losses for the life of the loan balance as of the period end date. The Company’s methodology for calculating the allowance for credit losses (“ACL”) on loans consists of quantitative and qualitative components. The quantitative component of the ACL on loans is model-based and utilizes a forward-looking macroeconomic forecast. The Company uses a discounted cash flow method, incorporating probability of default and loss given default forecasted based on statistically derived economic variable loss drivers, to estimate expected credit losses. This process includes estimates which involve modeling loss projections attributable to existing loan balances, and considering historical experience, current conditions, and future expectations for homogeneous pools of loans over a reasonable and supportable forecast period. The historical information either experienced by the Company or by a selection of peer banks, when appropriate, is derived from a combination of recessionary and non-recessionary performance periods for which data is available. The reasonable and supportable forecast period is primarily determined based upon the stability of current economic conditions at each measurement date. Management considers the accuracy level of historical loss forecast estimates, the specific loan level models and methodology utilized, and considers material changes in growth, credit strategy, and its business which may not be applicable within the current environment. For periods beyond the reasonable and supportable forecast period, we revert to historical information over a period for which comparable data is available. The qualitative component of the ACL considers (i) the uncertainty of forward-looking scenarios; (ii) certain portfolio characteristics, such as portfolio concentrations, real estate values, changes in the number and amount of non-accrual and past due loans; and (iii) model limitations; among other factors. Qualitative adjustments are considered when management believes expected credit losses are not representative of historical loss experience alone, and should be adjusted to reflect the current conditions and characteristics of the Company’s own portfolio. They are made at the segment level, considering any required adjustments for differences in underwriting standards, portfolio mix, and other relevant data shifts over time. 26 We regularly review our collection experience (including delinquencies and net charge-offs) in determining our allowance for credit losses. We also consider our historical loss experience to date based on actual defaulted loans and overall portfolio indicators including delinquent and non-accrual loans, trends in loan volume and lending terms, credit policies and other observable environmental factors, such as unemployment and interest rate changes. The underlying assumptions, estimates and assessments we use to estimate the allowance for credit losses reflect management’s best estimate of model assumptions and forecasted conditions at that time. Changes in such estimates can significantly affect the allowance and provision for credit losses. It is possible and likely that we will experience credit losses that are different from our current estimates. Charge-offs are deducted from the allowance for credit losses when we judge the principal to be uncollectible, and subsequent recoveries are added to the allowance, generally at the time cash is received on a charged-off account. Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to increases in the ACL on loans; conversely, improving conditions or assumptions could lead to further reductions in the ACL on loans. The expected credit losses for unfunded commitments are measured over the contractual period of the Company’s exposure to credit risk. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, for the risk of loss, and current conditions and expectations. Management periodically reviews and updates its assumptions for estimated funding rates based on historical rates, and factors such as portfolio growth, changes to organizational structure, economic conditions, borrowing habits, or any other factor which could impact the likelihood that funding will occur. The Company does not reserve for unfunded commitments which are unconditionally cancellable. Income Taxes The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, the Commonwealth of Massachusetts, the State of New Hampshire, the State of Maine, and other states as required. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expense. Deferred tax assets are reviewed quarterly and reduced by a valuation allowance if, based upon the information available, it is more likely than not that some or all of the deferred tax assets will not be realized. Interest and penalties related to unrecognized tax benefits, if incurred, are recognized as a component of income tax expense. Recent Accounting Developments See NOTE 3 – RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS for additional details on recently issued and adopted accounting pronouncements and their expected impact on the Company’s financial statements. COVID-19 The COVID-19 pandemic and countermeasures taken to contain its spread have caused economic and financial disruptions globally. The impact of the pandemic on the Company’s business, financial condition, results of operations, and its clients had not fully manifested in 2021 or 2022. The fiscal stimulus and relief programs appear to have delayed any materially adverse financial impact to the Company. Once these stimulus programs have been exhausted, loan credit metrics may worsen, and credit losses may ultimately materialize. The magnitude of future credit losses may be affected by the impact of COVID-19 on individuals and businesses in the long and short term. However, the COVID-19 situation remains dynamic, and the duration and severity of its impact on the Company's business and results of operations in future periods remains uncertain. The extent of the continued impact of COVID-19 on the operational and financial performance will depend on certain developments, including the duration and spread of the outbreak, actions taken in response to the pandemic, the speed and effectiveness of vaccine and treatment developments and their deployment, including public adoption rates of COVID-19 vaccines and booster shots, and their effectiveness against emerging variants of COVID-19, such as BA.4 and BA.5 subvariants, a potential resurgence following a decline in the outbreak, and impact on the Company's clients, employees, and vendors, all of which are uncertain and cannot be predicted. If the COVID-19 pandemic or its adverse effects become more severe or prevalent or are prolonged in the locations where we conduct business, or we experience more pronounced disruptions in our business or operations, or in economic activity and demand for our products and services generally, our business and results of operations in future periods could be materially adversely affected. Please see Item 1A. - Risk Factors above for more detail on risks related to COVID-19. 27 Selected Financial Highlights The selected consolidated financial highlights set forth below do not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information including the Consolidated Financial Statements and related Notes and within this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Operating Data Interest Income Interest Expense Net Interest and Dividend Income Provision for (Release of) Credit Losses Noninterest Income Noninterest Expense Income Before Taxes Income Taxes Net Income (a GAAP Measure) Operating Net Income (a non-GAAP measure)* Average shares outstanding, basic Average shares outstanding, diluted Total shares outstanding Basic Earnings Per Share Diluted Earnings Per Share Operating Diluted Earnings Per Share (a non-GAAP measure)* Dividends Declared Per Share Dividend payout ratio (1) Financial Condition Data Total Assets Total Deposits Total Loans Shareholders' Equity Book Value Per Share Tangible Book Value Per Share (a non-GAAP measure)* Performance Ratios Return on Average Assets Operating Return on Average Assets (a non-GAAP measure)* Return on Average Shareholders' equity Operating Return on Tangible Common Equity (a non-GAAP measure)* Total Shareholders’ Equity to Total Assets Interest rate spread (2) Net Interest Margin, taxable equivalent (3) Efficiency ratio * Operating Efficiency Ratio (a non-GAAP measure)* Wealth Management Assets Market Value of Assets Under Management & Administration Asset Quality Non-Performing Loans Non-Performing Loans/Total Loans Net Loan (Charge-Offs) Recoveries Allowance/Total Loans Capital Ratios (4): Total capital Tier 1 capital Common Equity Tier 1 Tier 1 leverage capital Other Data: Number of full-service offices Full time equivalent employees $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 2022 159,993 16,778 143,215 3,881 43,009 110,382 71,961 19,052 52,909 56,549 7,163,223 7,213,913 7,796,440 7.35 7.30 7.80 2.56 35% 5,559,737 4,815,376 4,062,856 517,552 66.38 57.15 1.03% 1.10% 11.56% 14.18% 9.31% 2.72% 2.92% 59.27% 57.99% 4,059,819 6,542 0.16% 53 0.93% 13.52% 12.45% 12.45% 8.51% 22 440 December 31, 2021 2019 2020 (dollars in thousands, except per share data) 2018 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 133,514 5,533 127,981 (1,294) 44,324 100,484 73,115 19,091 54,024 54,828 6,926,257 6,990,603 6,968,192 7.76 7.69 7.81 2.38 31% 4,891,544 4,331,152 3,319,106 437,837 62.83 55.01 1.24% 1.26% 12.93% 15.10% 8.95% 3.05% 3.12% 58.32% 57.67% 4,853,119 5,386 0.16% 154 1.04% 13.56% 12.40% 12.40% 8.31% 19 384 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 129,378 9,145 120,233 18,310 39,525 98,085 43,363 11,404 31,959 43,870 6,289,481 6,344,409 6,926,728 5.07 5.03 6.90 2.12 42% 3,949,297 3,403,083 3,153,648 401,732 58.00 50.07 0.91% 1.25% 9.09% 14.38% 10.17% 3.52% 3.65% 61.40% 56.66% 4,167,903 8,962 0.28% (439) 1.14% 13.93% 12.68% 12.68% 8.89% 21 372 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 96,339 17,643 78,696 3,004 36,401 78,175 33,918 8,661 25,257 29,156 4,629,255 4,661,720 5,400,868 5.41 5.37 6.20 2.04 38% 2,855,563 2,358,878 2,226,728 286,561 53.06 46.66 0.97% 1.12% 11.40% 14.80% 10.04% 2.93% 3.22% 67.92% 63.78% 3,452,852 5,651 0.25% (1,592) 0.82% 13.61% 12.70% 12.70% 8.98% 16 303 69,055 5,467 63,588 1,502 32,989 63,987 31,088 7,207 23,881 24,024 4,061,529 4,098,633 4,107,051 5.82 5.77 5.80 1.96 34% 2,101,384 1,811,410 1,559,772 167,026 40.67 40.57 1.21% 1.21% 15.35% 15.49% 7.95% 3.19% 3.33% 66.25% 66.05% 2,876,702 642 0.04% (54) 1.08% 13.25% 12.07% 12.07% 8.49% 10 252 * (1) (2) (3) (4) See “GAAP to Non-GAAP Reconciliations” section below Dividend payout ratio represents per share dividends declared divided by diluted earnings per share. The interest rate spread represents the difference between the fully taxable equivalent weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period. The net interest margin represents fully taxable equivalent net interest income as a percent of average interest-earning assets for the period. Capital ratios are for Cambridge Bancorp. 28 RESULTS OF OPERATIONS Results of Operations for the years ended December 31, 2022 and 2021 General. Net income decreased by $1.1 million, or 2.1%, to $52.9 million for the year ended December 31, 2022, from $54.0 million for the year ended December 31, 2021, primarily due to a $9.9 million increase in noninterest expenses including $1.9 million in merger expenses, and a $5.2 million increase in the provision for (release of) credit losses, partially offset by a $15.2 million increase in net interest and dividend income before the provision for (release of) credit losses. Diluted earnings per share were $7.30 for the year ended December 31, 2022, representing a 5.1% decrease over diluted earnings per share of $7.69 for the year ended December 31, 2021. Net Interest and Dividend Income. Net interest and dividend income before the provision for (release of) credit losses increased by $15.2 million, or 11.9%, to $143.2 million for the year ended December 31, 2022, as compared to $128.0 million for the year ended December 31, 2021. This increase was primarily due to an increase in average earning assets (both organic and as a result of the Northmark Merger) and higher asset yields, partially offset by a decrease in Paycheck Protection Program (“PPP”) loan income, lower loan accretion associated with merger accounting, and higher costs of funds. • • • • Interest on loans increased by $16.2 million, or 13.4%, as a result of loan growth, partially offset by lower PPP loan income and lower loan accretion associated with merger accounting. Interest on investment securities increased by $9.9 million, or 82.2%, primarily due to growth in the investment portfolio. Interest on deposits increased by $9.6 million, or 193.5%, primarily due to an increase in the cost of deposits. Interest on borrowings increased by $1.6 million, or 290.0%, primarily due to an increase in other borrowed funds during the year. Average interest earning assets increased by $810.7 million, or 19.6%, to $4.94 billion for the year ended December 31, 2022 from $4.13 billion in 2021, primarily due to the Northmark Merger combined with organic growth within the loan and investment securities portfolios. The Company’s net interest margin, on a fully tax equivalent basis, decreased 20 basis points to 2.92% for the year ended December 31, 2022, as compared to 3.12% in 2021. Average interest-bearing liabilities increased by $516.4 million, or 19.7%, to $3.14 billion for the year ended December 31, 2022 from $2.63 billion in 2021, primarily due to the Northmark Merger. The Company experienced an increase in average money market accounts of $400.8 million, an increase in average checking account balances of $77.2 million, an increase in average borrowed funds of $67.1 million, and an increase in retail certificates of deposit of $31.2 million, partially offset by a decrease in average savings deposit balances of $59.9 million. The average cost of funds increased to 0.34% for the year ended December 31, 2022, as compared to 0.13% for the year ended December 31, 2021. Interest and Dividend Income. Total interest and dividend income increased by $26.5 million, or 19.8%, to $160.0 million for the year ended December 31, 2022, as compared to $133.5 million in 2021, primarily due to growth within the loans and investment securities portfolios, partially offset by lower PPP loan related income and lower loan accretion associated with merger accounting. Interest Expense. Interest expense increased by $11.2 million, or 203.2% to $16.8 million for the year ended December 31, 2022, as compared to $5.5 million in 2021, primarily driven by an increase in the cost of deposits and higher borrowing expense. Provision for (Release of) Credit Losses. The Company recorded a provision for credit losses of $3.9 million for the year ended December 31, 2022, as compared to a release of credit losses of $1.3 million for the year ended December 31, 2021, which included $2.2 million for the recognition of the CECL merger accounting impact as a result of the Northmark merger, inclusive of unfunded commitments. The Company recorded net recoveries of $53,000 or 0.00% of total loans, for the year ended December 31, 2022, as compared to net recoveries of $154,000, or 0.00% of total loans for the year ended December 31, 2021. The allowance for credit losses for loans was $37.8 million, or 0.93% of total loans outstanding at December 31, 2022, as compared to $34.5 million, or 1.04% of total loans outstanding at December 31, 2021. 29 Noninterest Income. Inclusive of the Northmark Merger, total noninterest income decreased by $1.3 million, or 3.0%, to $43.0 million for the year ended December 31, 2022, as compared to $44.3 million the year ended December 31, 2021. This was primarily the result of lower wealth management revenue, lower loan related derivative income, and lower gains on loans sold. These items were partially offset by higher bank owned life insurance income, higher deposit account fees, and higher other income. Noninterest income was 23.1% and 25.7% of total revenue for the year ended December 31, 2022 and 2021, respectively. • • • • • • Wealth Management revenue decreased by $2.0 million, or 5.7%, to $33.0 million for the year ended December 31, 2022, as compared to $35.0 million for the year ended December 31, 2021, primarily due to decline in both the bond and equity markets. Wealth Management Assets Under Management and Administration were $4.1 billion at December 31, 2022, as compared to $4.9 billion at December 31, 2021. Loan related derivative income decreased by $1.5 million, or 70.6%, to $625,000 for the year ended December 31, 2022, as compared to $2.1 million for the year ended December 31, 2021, primarily as a result of lower floating rate loan volume. Gain on loans sold decreased by $734,000, or 88.2%, to $98,000 for the twelve months ended December 31, 2022, as compared to $832,000 for the twelve months ended December 31, 2021, primarily due to lower refinance activity and the corresponding lower sales of residential mortgages. Bank owned life insurance (“BOLI”) income increased by $1.0 million, or 125.7%, to $1.8 million for the twelve months ended December 31, 2022, as compared to $801,000 for the twelve months ended December 31, 2021, primarily a result of a $1.2 million gain related to a death benefit claim and policy surrender. Deposit account fees increased by $974,000, or 50.2%, to $2.9 million for the year ended December 31, 2022, as compared to $1.9 million for the year ended December 31, 2021, primarily due to increased fee revenue from commercial deposit sweep products resulting from higher interest rates. Other income increased by $844,000, or 41.7%, to $2.9 million for the twelve months ended December 31, 2022, as compared to $2.0 million for the twelve months ended December 31, 2021, primarily due to equity warrant revenue and success fees associated with Innovation Banking loans, in addition to gains recognized on a community development fund investment. The categories of Wealth Management revenues are shown in the following table: Wealth Management revenues: Trust and investment advisory fees Financial planning fees and other service fees Total wealth management revenues For the Year Ended December 31, 2022 2021 (dollars in thousands) $ $ 31,992 1,042 33,034 $ $ 34,092 945 35,037 The following table presents the changes in wealth management assets under management: Wealth management assets under management Balance at the beginning of the period Acquired wealth management assets Gross client asset inflows Gross client asset outflows Net market impact Balance at the end of the period Weighted average management fee For the Year Ended December 31, 2022 2021 (dollars in thousands) $ $ 4,656,183 — 699,466 (917,636) (562,266) 3,875,747 0.78% $ $ 3,994,152 — 532,507 (442,679) 572,203 4,656,183 0.79% There were no significant changes to the average fee rates and fee structure during the years ended December 31, 2022 or 2021. Noninterest Expense. Total noninterest expense, inclusive of the Northmark Merger, increased by $9.9 million, or 9.9%, to $110.4 million for the year ended December 31, 2022, as compared to $100.5 million for the year ended December 31, 2021, primarily driven by increases in salaries and employee benefits expense, data processing expense, nonoperating expenses, and FDIC expense, partially offset by decreases in professional services and marketing expense. • Salaries and employee benefits increased by $5.0 million, or 7.6%, to $70.1 million for the twelve months ended December 31, 2022, from $65.1 million for the twelve months ended December 31, 2021, primarily due to increased staffing related 30 to the Northmark Merger, normal merit increases, additions to support business initiatives, and increases in employee benefit costs. Data processing fees increased by $1.9 million, or 21.3%, to $10.7 million for the twelve months ended December 31, 2022, from $8.8 million for the twelve months ended December 31, 2021, primarily as a result of the full year impact of a new wealth management system and the partial year impact of higher data processing fees associated the Northmark merger. Non-operating expenses increased by $1.9 million, or 173.6%, to $3.1 million for the twelve months ended December 31, 2022, from $1.1 million for the twelve months ended December 31, 2021, primarily due to merger expenses and contractual termination costs. FDIC insurance increased by $527,000, or 40.0%, to $1.8 million for the twelve months ended December 31, 2022, from $1.3 million for the twelve months ended December 31, 2021, primarily due to balance sheet growth. Professional services decreased by $663,000, or 12.3%, to $4.7 million for the twelve months ended December 31, 2022, from $5.4 million for the twelve months ended December 31, 2021, primarily due to lower recruiting and temporary help expenses as well as lower consulting fees. Marketing expense decreased by $235,000, or 9.3%, to $2.3 million for the twelve months ended December 31, 2022, from $2.5 million for the twelve months ended December 31, 2021. • • • • • Income Tax Expense. The Company recorded a provision for income taxes of $19.1 million for both the years ended December 31, 2022, and December 31, 2021. The effective tax rate was 26.5%, for the year ended December 31, 2022, as compared to 26.1% for the year ended December 31, 2021. The increase was primarily due to the tax effects of a BOLI policy surrender and death benefit claim during the second fiscal quarter of 2022 and the impact of non-deductible merger related expenses. Results of Operations for the years ended December 31, 2021 and 2020 General. Net income increased by $22.1 million, or 69.0%, to $54.0 million for the year ended December 31, 2021, from $32.0 million for the year ended December 31, 2020, primarily due to a $19.6 million decrease in the provision for (release of) credit losses, a $7.7 million increase in net interest and dividend income before the provision for (release of) credit losses, and a $4.8 million increase in noninterest income, which were partially offset by a $2.4 million increase in noninterest expenses and a $7.7 million increase in income tax expense. Diluted earnings per share were $7.69 for 2021, representing a 52.9% increase over diluted earnings per share of $5.03 for the year ended December 31, 2020. Net Interest and Dividend Income. Net interest and dividend income before the provision for (release of) credit losses increased by $7.7 million, or 6.4%, to $128.0 million for the year ended December 31, 2021, as compared to $120.2 million for the year ended December 31, 2020. This increase was primarily due to higher interest on investment securities, higher PPP loan income recognized on PPP loans forgiven by the SBA during the year, and a lower cost of funds, partially offset by lower loan accretion associated with merger accounting and lower yields on interest-earning assets during the period. • • • • • Interest on investment securities increased by $3.6 million, or 41.7%, primarily due to growth in the investment portfolio as the Company reinvested excess cash. Interest on deposits decreased by $2.3 million, or 31.8%, primarily due to a decrease in the cost of deposits, partially offset by deposit growth. Interest on loans increased by $897,000, or 0.7%, as a result of loan growth combined with accelerated PPP loan related income, partially offset by lower loan accretion associated with merger accounting and lower loan yields. Interest on borrowings decreased by $847,000, or 60.2%, primarily due to a decrease in borrowings outstanding during the year. The Company did not incur any interest on subordinated debt during 2021, as the Company redeemed the $10.0 million in subordinated debt assumed in the Wellesley Merger during the fourth quarter of 2020. Average interest earning assets increased by $822.0 million, or 24.9%, to $4.13 billion for the year ended December 31, 2021 from $3.31 billion in 2020, primarily due to the Wellesley Merger coupled with organic growth within the loan and investment portfolios. The Company’s net interest margin, on a fully tax equivalent basis, decreased 53 basis points to 3.12% for the year ended December 31, 2021, as compared to 3.65% in 2020. Average interest-bearing liabilities increased by $395.6 million, or 17.7%, to $2.63 billion for the year ended December 31, 2021 from $2.23 billion in 2020, primarily related to the Wellesley Merger coupled with organic core deposit growth. The increase in interest- bearing liabilities was primarily driven by an increase in average money market accounts of $414.9 million, an increase in average checking account balances of $121.8 million, and an increase in average savings account balances of $19.8 million, partially offset by a decrease in average borrowed funds of $105.2 million, and a decrease in average certificate of deposit balances of $50.3 million. The average cost of funds decreased to 0.13% for the year ended December 31,2021 from 0.28% for the year ended December 31, 2020. 31 Interest and Dividend Income. Total interest and dividend income increased by $4.1 million, or 3.2%, to $133.5 million for the year ended December 31, 2021, as compared to $129.4 million in 2020, primarily due to investment portfolio growth, loan growth, and increased PPP loan related income, partially offset by lower loan accretion associated with merger accounting and lower asset yields. Interest Expense. Interest expense decreased by $3.6 million, or 39.5% to $5.5 million for the year ended December 31, 2021, as compared to $9.1 million in 2020, primarily driven by a decrease in the cost of deposits and lower borrowing expense, partially offset by deposit growth. Provision for (Release of) Credit Losses. The Company recorded a release of credit losses of $1.3 million for the year ended December 31, 2021, as compared to a provision of credit losses of $18.3 million for the year ended December 31, 2020, which included $9.3 million associated with the expected impact of the COVID-19 pandemic on future loan losses and $8.6 million for the recognition of the non-operating impact of merger related CECL accounting during the year ended December 31, 2020. The Company’s release of credit losses during 2021 was driven by improved economic assumptions and the resulting decrease in loss expectations in the Company’s allowance for credit losses modeling. The Company recorded net recoveries of $154,000 or 0.00% of total loans, for the year ended December 31, 2021, as compared to net charge-offs of $439,000, or 0.01% of total loans for the year ended December 31, 2020. The allowance for credit losses was $34.5 million, or 1.05% of total loans outstanding (excluding PPP loans) at December 31, 2021, as compared to $36.0 million, or 1.19% of total loans outstanding (excluding PPP loans) at December 31, 2020. Noninterest Income. Total noninterest income increased by $4.8 million, or 12.1%, to $44.3 million for the year ended December 31, 2021, as compared to $39.5 million the year ended December 31, 2020. This change was primarily a result of increases in wealth management revenue and loan related derivative income, partially offset by decreases in gain on loans sold, net and deposit account fees. Noninterest income was 25.7% and 24.7% of total revenue for the year ended December 31, 2021 and 2020, respectively. • • • • Wealth Management revenue increased by $5.3 million, or 17.8%, to $35.0 million for the year ended December 31, 2021, as compared to $29.8 million for the year ended December 31, 2020, primarily due to appreciation within the equity markets and positive net client asset flows. Wealth Management Assets Under Management and Administration were $4.9 billion at December 31, 2021, as compared to $4.2 billion at December 31, 2020. Loan related derivative income increased by $645,000, or 43.6%, to $2.1 million for the year ended December 31, 2021, as compared to $1.5 million for the year ended December 31, 2020, due to increased loan volume combined with fair value adjustments. Gain on loans sold, net decreased by $1.0 million, or 55.0%, to $832,000 at December 31, 2021, as compared to $1.9 million for the year ended December 31, 2020 primarily due to decreased sales of residential mortgages. Deposit account fees decreased by $656,000, or 25.3%, to $1.9 million for the year ended December 31, 2021, as compared to $2.6 million for the year ended December 31, 2020, primarily due to a decrease in fee revenue from commercial deposit sweep products as a result of lower interest rates. 32 The categories of Wealth Management revenues are shown in the following table: Wealth Management revenues: Trust and investment advisory fees Financial planning fees and other service fees Total wealth management revenues For the Year Ended December 31, 2021 2020 (dollars in thousands) $ $ 34,092 945 35,037 $ $ 28,599 1,152 29,751 The following table presents the changes in wealth management assets under management: Wealth management assets under management Balance at the beginning of the period Acquired wealth management assets Gross client asset inflows Gross client asset outflows Net market impact Balance at the end of the period Weighted average management fee For the Year Ended December 31, 2021 2020 (dollars in thousands) $ $ 3,994,152 — 532,507 (442,679) 572,203 4,656,183 0.79% $ $ 3,287,371 338,676 314,032 (383,059) 437,132 3,994,152 0.81% There were no significant changes to the average fee rates and fee structure during the years ended December 31, 2021 or 2020. Noninterest Expense. Total noninterest expense increased by $2.4 million, or 2.4%, to $100.5 million for the year ended December 31, 2021, as compared to $98.1 million for the year ended December 31, 2020, primarily driven by increases in salaries and employee benefits expense, professional services fees, data processing fees, and occupancy and equipment expenses, partially offset by a decrease in non-operating expenses. • • • • • Salaries and employee benefits increased by $6.2 million, or 10.4%, primarily related to the full year impact of the Wellesley Merger in the second quarter of 2020, additions to support business initiatives, normal merit increases, and increases in employee benefit costs. Professional services fees increased by $1.2 million, or 28.7%, primarily due to increased consulting fees associated with the wealth management system conversion completed in the fourth quarter of 2021 and employment agency costs. Data processing fees increased by $1.2 million, or 15.2%, primarily due to the full year impact of new client usage of our banking systems as a result of Wellesley Merger and higher data processing fees associated with the wealth management system conversion completed during the fourth quarter of 2021. Occupancy and equipment expense increased by $894,000, or 6.9%, primarily as a result of the full year impact of additional branches and office space acquired from the Wellesley Merger. Non-operating expenses decreased by $6.5 million, or 85.3%, primarily due to one-time non-operating costs associated with the Wellesley merger that were incurred in 2020, partially offset by previously communicated branch closures and the wealth management system conversion expenses. Income Tax Expense. The Company recorded a provision for income taxes of $19.1 million for the year ended December 31, 2021, as compared to $11.4 million for the same period in 2020. The effective tax rate was 26.1%, for the year ended December 31, 2021, as compared to 26.3% for the year ended December 31, 2020. 33 CHANGES IN FINANCIAL CONDITION Total Assets. Total assets, inclusive of the Northmark Merger, increased by $668.2 million, or 13.7%, from $4.89 billion at December 31, 2021, and were $5.56 billion as of December 31, 2022. Loans. Total loans increased by $743.8 million, or 22.4%, to $4.06 billion at December 31, 2022, from $3.32 billion at December 31, 2021, inclusive of the Northmark Merger. • • • Residential real estate loans increased by $233.8 million to $1.65 billion at December 31, 2022, from $1.42 billion at December 31, 2021. Commercial real estate loans increased by $403.4 million to $1.91 billion at December 31, 2022, from $1.51 billion at December 31, 2021. Commercial and industrial loans increased by $81.2 million to $350.7 million at December 31, 2022, from $269.4 million at December 31, 2021. Excluding the net loans acquired as a result of the Northmark Merger, total loans grew by $440.5 million, or 13.3% from December 31, 2021. Please see the Organic Loan and Deposit table for more details. Bank-Owned Life Insurance. The Company invests in BOLI to help offset the costs of our employee benefit plan obligations. BOLI also generally provides noninterest income that is nontaxable. At December 31, 2022, our investment in BOLI decreased by $12.5 million, or 26.6%, to $34.5 million, from $47.0 million at December 31, 2021, primarily due to the surrender of a policy and a death benefit claim during the second quarter of 2022. Goodwill and Merger Related intangibles. The Company recorded goodwill of $12.6 million associated with the Northmark Merger. The Company recorded core deposit intangible assets of $5.3 million associated with the Northmark merger during the year ended December 31, 2022. Goodwill and merger related intangible assets totaled $72.0 million at December 31, 2022 and $54.5 million at December 31, 2021. Other Assets. Other assets increased by $28.9 million, or 37.9% to $105.3 million at December 31, 2022, from $76.4 million at December 31, 2021, primarily due to the change in fair value of loan level derivative assets. Deposits. Total deposits, inclusive of the Northmark Merger, increased by $484.2 million, or 11.2%, to $4.82 billion at December 31, 2022, from $4.33 billion at December 31, 2021. • • • • • Core deposits, which the Company defines as all deposits other than certificates of deposit, increased by $59.7 million, or 1.4%, to $4.23 billion at December 31, 2022, from $4.17 billion at December 31, 2021, primarily due to the Northmark Merger. Excluding the impact of the Northmark Merger, organic core deposits decreased $216.8 million, or 5.2%, as the rapidly increasing interest rate environment saw clients use funds for investment opportunities, spend down historically high balances, and seek additional return. Certificates of deposit totaled $586.6 million at December 31, 2022, an increase of $424.6 million, or 262.0%, from $162.1 million at December 31, 2021, primarily due to increases in brokered certificates of deposit. Total brokered certificates of deposit, which are included within certificates of deposit, were $381.6 million at December 31, 2022 and $2.7 million at December 31, 2021. Inclusive of the Northmark Merger, the cost of total deposits for the year ended December 31, 2022 was 0.32%, as compared to 0.13% for the year ended December 31, 2021, an increase of 19 basis points. The cost of total deposits excluding brokered deposits was 0.26% for the year ended December 31, 2022, as compared to 0.13% for the year ended December 31, 2021, an increase of 13 basis points. At December 31, 2022, the spot cost of non-brokered deposits was 0.80%, an increase of 62 basis points as compared to 0.18% at December 31, 2021. Borrowings. At December 31, 2022 and December 31, 2021, borrowings consisted primarily of advances from the FHLB of Boston. Total borrowings increased by $88.7 million, or 537.3%, to $105.2 million at December 31, 2022, from $16.5 million at December 31, 2021, primarily due to fluctuations in liquidity. Shareholders’ Equity. Total shareholders’ equity increased $79.7 million, or 18.2%, to $517.6 million at December 31, 2022, from $437.8 million at December 31, 2021, primarily due to $62.8 million of equity issued as a result of the Northmark Merger and net income of $52.9 million, partially offset by an increase in unrealized losses on the available for sale investment portfolio of $18.7 million and dividend payments of $18.4 million. 34 The Company's book value per share increased $3.55 to $66.38 at December 31, 2022, as compared to $62.83 at December 31, 2021. The Company’s ratio of tangible common equity to tangible assets increased 20 basis points to 8.12% at December 31, 2022, as compared to 7.92% at December 31, 2021. Tangible book value per share grew by $2.14, or 3.9%, to $57.15 as of December 31, 2022, as compared to $55.01 as of December 31, 2021. Organic Loan and Deposit Growth/(Decline) (dollars in thousands) Loans Residential mortgage Commercial mortgage Home equity Commercial & Industrial Consumer Total loans Deposits Demand Interest bearing checking Money market Savings Core deposits Certificates of deposit Brokered Certificates of Deposits Total Certificate of Deposits Total deposits December 31, 2022 December 31, 2021 Northmark Balance Acquired December 2022 vs December 2021 Organic Growth/(Decline) % Organic Growth/(Decline) $ (dollars in thousands) $ $ $ $ 1,648,838 1,914,423 111,351 350,650 37,594 4,062,856 1,366,395 908,961 1,162,773 790,628 4,228,757 205,060 381,559 586,619 4,815,376 $ $ $ $ 1,415,079 1,511,002 87,960 269,446 35,619 3,319,106 1,393,935 763,188 1,104,238 907,722 4,169,083 159,367 2,702 162,069 4,331,152 $ $ $ $ 114,775 155,848 15,466 16,122 1,004 303,215 137,651 17,831 67,942 53,002 276,426 96,703 — 96,703 373,129 $ $ $ $ 118,984 247,573 7,925 65,082 971 440,535 (165,191) 127,942 (9,407) (170,096) (216,752) (51,010) 378,857 327,847 111,095 8.4% 16.4% 9.0% 24.2% 2.7% 13.3% (11.9%) 16.8% (0.9%) (18.7%) (5.2%) (32.0%) 14,023.6% 202.3% 2.6% GAAP to Non-GAAP Reconciliations (dollars in thousands except per share data) Statement on Non-GAAP Measures: The Company believes the presentation of the following non-GAAP financial measures provides useful supplemental information that is essential to an investor’s proper understanding of the results of operations and financial condition of the Company. Management uses non-GAAP financial measures in its analysis of the Company’s performance. These non-GAAP measures should not be viewed as substitutes for the financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. The following table summarizes the calculation of the Company’s operating net income and operating diluted earnings per share: Operating Net Income / Operating Diluted Earnings Per Share For the Year Ended December 31, 2022 2021 2020 (dollars in thousands, except share data) 2019 2018 Net Income (a GAAP measure) Add: Merger expenses Add: Provision for credit losses for acquired loans Add: Contractual termination expenses Add: (Gain) loss disposition of investment securities Less: Tax effect of non-operating expenses (1) Less: Death benefit on bank owned life insurance (“BOLI”) and policy surrender Add: Tax effect of BOLI policy surrender Operating Net Income (a non-GAAP measure) Less: Dividends and Undistributed Earnings Allocated to Participating Securities (a non-GAAP measure) Operating Net Income Applicable to Common Shareholders (a non-GAAP measure) Weighted Average Diluted Shares Operating Diluted Earnings Per Share (a non-GAAP measure) ` $ $ $ $ 52,909 1,941 2,239 1,118 — (1,237) (1,157) 736 56,549 (273) 56,276 7,213,913 7.80 $ $ $ $ 54,024 — — 1,118 — (314) — — 54,828 (252) 54,576 6,990,603 7.81 $ $ $ $ 31,959 6,368 8,638 1,244 (69) (4,270) — — 43,870 (64) 43,806 6,344,409 6.90 $ $ $ $ 25,257 4,721 — — 79 (901) — — 29,156 (243) 28,913 4,661,720 6.20 $ $ $ $ 23,881 201 — — (2) (56) — — 24,024 (239) 23,785 4,098,633 5.80 (1) The net tax benefit associated with non-operating items is determined by assessing whether each non-operating item is included or excluded from net taxable income and applying the Company’s combined marginal tax rate to only those items included in net taxable income. 35 The following tables summarize the calculation of the Company’s tangible common equity ratio and tangible book value per share for the periods indicated: December 31, 2022 December 31, 2021 December 31, 2020 (in thousands, except share data) December 31, 2019 December 31, 2018 Tangible Common Equity: Shareholders' equity (GAAP) Less: Goodwill and acquisition related intangibles (GAAP) Tangible Common Equity (a non-GAAP measure) Total assets (GAAP) Less: Goodwill and acquisition related intangibles (GAAP) Tangible assets (a non-GAAP measure) Tangible Common Equity Ratio (a non-GAAP measure) Tangible Book Value Per Share: Tangible Common Equity (a non-GAAP measure) Common shares outstanding Tangible Book Value Per Share (a non-GAAP measure) $ $ $ $ $ $ 517,552 (71,982) 445,570 5,559,737 (71,982) 5,487,755 8.12% 445,570 7,796,440 57.15 $ $ $ $ $ $ 437,837 (54,529) 383,308 4,891,544 (54,529) 4,837,015 7.92% 383,308 6,968,192 55.01 $ $ $ $ $ $ 401,732 (54,889) 346,843 3,949,297 (54,889) 3,894,408 8.91% 346,843 6,926,728 50.07 $ $ $ $ $ $ 286,561 (34,544) 252,017 2,855,563 (34,544) 2,821,019 8.93% 252,017 5,400,868 46.66 $ $ $ $ $ $ 167,026 (412) 166,614 2,101,384 (412) 2,100,972 7.93% 166,614 4,107,051 40.57 The following tables summarize the calculation of the Company’s efficiency and operating ratios for the periods indicated: Efficiency Ratio: (1) Noninterest expense Net interest and dividend income Total noninterest income Total revenue Efficiency Ratio Operating Efficiency Ratio: (2) Noninterest expense Merger expenses (Pretax) Contractual termination expenses (Pretax) Operating expense (a non-GAAP measure) Total revenue Add:(gain) loss on disposition of investment securities Death benefit on bank owned life insurance (“BOLI”) and policy surrender (Pretax) Operating revenue (a non-GAAP measure) Operating Efficiency Ratio (a non-GAAP measure) For the Year Ended December 31, 2022 2021 2020 (dollars in thousands) 2019 2018 $ $ $ $ $ $ $ $ $ $ $ $ $ 110,382 143,215 43,009 186,224 59.27% 110,382 (1,941) (1,118) 107,323 186,224 (1,157) 100,484 127,981 44,324 172,305 58.32% 100,484 — (1,118) 99,366 $ $ $ $ $ 172,305 $ — $ — 98,085 120,233 39,525 159,758 61.40% 98,085 (6,368) (1,244) 90,473 159,758 (69) — 185,067 $ 57.99% 172,305 $ 159,689 57.67% 56.66% $ $ $ $ $ $ $ $ 78,175 78,696 36,401 115,097 67.92% 78,175 (4,721) — 73,454 115,097 79 — 115,176 63.78% $ $ $ $ $ $ $ $ 63,987 63,588 32,989 96,577 66.25% 63,987 (201) — 63,786 96,577 (2) — 96,575 66.05% 36 For the Year Ended December 31, 2022 2021 2020 2019 2018 Operating Return on Tangible Common Equity: (3) Operating Net Income (a non-GAAP measure) Average common equity Average goodwill and merger related intangibles Average tangible common equity (a non-GAAP measure) Operating Return on Tangible Common Equity (a non-GAAP measure) Operating Return on Average Assets: (4) Operating Net Income (a non-GAAP measure) Average assets Operating Return on Average Assets (a non-GAAP measure) $ $ $ $ $ 56,549 457,540 (58,859) 398,681 14.18% 56,549 5,150,336 $ $ $ $ $ 54,828 417,768 (54,707) 363,061 15.10% 54,828 4,343,873 $ $ $ $ $ 43,870 351,477 (46,476) 305,001 14.38% 43,870 3,523,249 $ $ $ $ $ 29,156 221,617 (24,577) 197,040 14.80% 29,156 2,600,316 $ $ $ $ $ 24,024 155,546 (412) 155,134 15.49% 24,024 1,980,580 1.10% 1.26% 1.25% 1.12% 1.21% (1) The efficiency ratio represents noninterest expense as a percentage of the sum of net interest and dividend income and noninterest income. (2) Operating efficiency ratio represents operating expense as a percentage of operating revenue. (3) Operating return on tangible common equity represents operating net income as a percentage of average tangible common equity. (4) Operating return on average assets represents operating net income as a percentage of average assets. INVESTMENT SECURITIES The Company’s securities portfolio consists of securities available for sale (“AFS”) and securities held to maturity (“HTM”). The largest component of the securities portfolio is mortgage-backed securities, all of which are issued by U.S. government agencies or U.S. government-sponsored enterprises. Securities available for sale consist of certain U.S. Government Sponsored Enterprises (“GSE”) obligations, U.S. GSE mortgage-backed securities, and corporate debt securities. These securities are carried at fair value, and unrealized gains and losses net of applicable income taxes are recognized as a separate component of shareholders’ equity. The fair value of securities available for sale totaled $153.4 million and included gross unrealized gains of $7,000 and gross unrealized losses of $28.6 million at December 31, 2022. At December 31, 2021, the fair value of securities available for sale totaled $197.8 million and included gross unrealized gains of $1.2 million and gross unrealized losses of $4.7 million. Securities classified as held to maturity consist of certain U.S. GSE mortgage-backed securities, corporate debt securities, U.S. Treasury Notes, and state, county, and municipal securities. Securities held to maturity as of December 31, 2022 are carried at their amortized cost of $1.05 billion. At December 31, 2021, the amortized cost of securities held to maturity totaled $977.1 million. The following table sets forth the fair value of available for sale investment securities, the amortized costs of held to maturity, and the percentage distribution at the dates indicated. 37 Available for sale securities U.S. GSE obligations Mortgage-backed securities Corporate debt securities Total securities available for sale Held to maturity securities U.S. Treasury Notes Mortgage-backed securities Corporate debt securities Municipal securities Total securities held to maturity Total December 31, 2022 2021 Amount Percent Amount Percent (dollars in thousands) $ $ 19,733 132,683 1,000 153,416 $ 3,970 951,372 250 96,405 $ 1,051,997 $ 1,205,413 13% $ 86% 1% 100% $ 23,011 173,028 1,764 197,803 —% $ 91% —% 9% 100% $ — 864,983 6,997 105,081 977,061 $ 1,174,864 12% 87% 1% 100% —% 88% 1% 11% 100% The following table sets forth the composition and maturities of investment securities. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Within One Year Amortized Cost Weighted Average Yield (1) After One, But Within Five Years Amortized Cost Weighted Average Yield (1) December 31, 2022 After Five, But Within Ten Years Weighted Average Amortized Yield (1) Cost (dollars in thousands) After Ten Years Total Amortized Cost Weighted Average Yield (1) Amortized Cost Weighted Average Yield (1) $ $ $ — — 996 996 987 — — — $ 9,997 0.5% $ 5,000 2.3% $ 8,000 2.6% $ 22,997 — 10,680 2.0% 41,622 1.5% 105,732 1.5% 158,034 5.1% — — — — — — 996 5.1% $ 20,677 1.3% $ 46,622 1.6% $ 113,732 1.5% $ 182,027 4.3% $ 2,983 4.2% $ — 0.0% $ — 0.0% $ 3,970 — — 19,572 250 2.3% 48,731 1.9% 883,069 1.8% 951,372 2.0% — — — — 250 6,987 3.9% 18,657 3.5% 26,441 3.3% 44,320 2.7% 96,405 $ $ 7,974 8,970 3.9% $ 4.1% $ 41,462 62,139 75,172 3.0% $ 2.4% $ 121,794 927,389 2.4% $ 2.1% $ 1,041,121 1.9% $ 1,051,997 1.8% $ 1,234,024 1.6% 1.5% 5.1% 1.5% 4.2% 1.8% 2.0% 3.1% 2.0% 1.9% Available for sale securities U.S. GSE obligations Mortgage-backed securities Corporate debt securities Total available for sale securities Held to maturity securities U.S. treasury Notes Mortgage-backed securities Corporate debt securities Municipal securities Total held to maturity securities Total (1) Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21% for 2022. The Company did not record an allowance for credit losses on its investment securities as of December 31, 2022 or 2021. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary based on the composition of the portfolio at period end. LOANS The Company’s lending activities are conducted principally in Eastern Massachusetts and Southern New Hampshire. The Company grants single- and multi-family residential loans, C&I loans, CRE loans, construction loans, and a variety of consumer loans. Most of the loans granted by the Company are secured by real estate collateral. Repayment of the Company’s residential loans is generally dependent on the health of the employment market in the borrowers’ geographic areas and that of the general economy, with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default. The repayment of C&I loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower. As borrower cash flow may be difficult to predict, liquidation of the underlying collateral securing 38 these loans is typically viewed as the primary source of repayment in the event of borrower default. However, collateral typically consists of equipment, inventory, accounts receivable, or other business assets that may fluctuate in value, so the liquidation of collateral in the event of default is often an insufficient source of repayment. For renewable energy loans, cash flow is dependent on energy output and is generated from the contracted sale of energy credits or wholesale energy sales as well as state mandated incentive programs. For PPP loans, the SBA generally guarantees 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount subject to program requirements. The Company’s CRE loans are primarily made based on the cash flow from the collateral property and secondarily on the underlying collateral provided by the borrower, with liquidation of the underlying real estate collateral typically being viewed as the primary source of repayment in the event of borrower default. The Company’s construction loans are primarily made based on the borrower’s expected ability to execute and the future completed value of the collateral property, with sale of the underlying real estate collateral typically being viewed as the primary source of repayment. The following summary shows the composition of the loan portfolio at the dates indicated: Residential mortgage Mortgages - fixed rate Mortgages - adjustable rate Construction Deferred costs, net of unearned fees Total residential mortgages Commercial mortgage Mortgages - non-owner occupied Mortgages - owner occupied Construction Deferred costs, net of unearned fees Total commercial mortgages Home equity Home equity - lines of credit Home equity - term loans Deferred costs, net of unearned fees Total home equity Commercial and industrial Commercial and industrial PPP loans Unearned fees, net of deferred costs Total commercial and industrial Consumer Secured Unsecured Deferred costs, net of unearned fees Total consumer Total loans $ 2022 902,968 703,958 35,299 6,613 1,648,838 1,592,732 183,591 135,782 2,318 1,914,423 108,961 2,098 292 111,351 349,026 1,384 240 350,650 35,679 1,897 18 37,594 $ 4,062,856 December 31, % of Total 2021 (dollars in thousands) % of Total 22% $ 17% 1% 0% 40% 716,456 679,675 13,012 5,936 1,415,079 39% 5% 3% 0% 47% 3% 0% 0% 3% 9% 0% 0% 9% 1,272,135 150,632 86,246 1,989 1,511,002 85,639 2,017 304 87,960 247,024 22,856 (434) 269,446 1% 0% 0% 1% 34,308 1,303 8 35,619 100% $ 3,319,106 22% 21% 0% 0% 43% 38% 4% 3% 0% 45% 3% 0% 0% 3% 7% 1% 0% 8% 1% 0% 0% 1% 100% Residential Mortgage. Residential real estate loans held in portfolio were to $1.65 billion at December 31, 2022, an increase of $233.8 million, or 16.5%, from $1.42 billion at December 31, 2021 and consisted of one-to-four family residential mortgage loans, or for the construction thereof. The residential mortgage portfolio represented 40% and 43% of total loans at December 31, 2022 and December 31, 2021, respectively. The average loan balance outstanding in the residential portfolio was $517,000 and the largest individual residential mortgage loan outstanding was $5.5 million as of December 31, 2022. At December 31, 2022, this loan was performing in accordance with its original terms. The Bank offers fixed and adjustable-rate residential mortgage and construction loans with maturities up to 30 years. One-to-four family residential mortgage loans are generally underwritten according to Federal National Mortgage Association (“Fannie Mae”) or Federal 39 Home Loan Mortgage Corporation (“Freddie Mac”) guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” The Bank generally originates and purchases both fixed and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which increased to $647,200 in 2022 from $548,250 in 2021, for one-unit properties. In addition, the Bank also offers loans above conforming lending limits typically referred to as “jumbo” loans and interest only loans. These loans are typically underwritten to jumbo conforming guidelines; however, the Bank may choose to hold a jumbo loan within its portfolio with underwriting criteria that does not exactly match conforming guidelines. The Bank may also, from time to time, purchase residential loans that are either jumbo, conforming, or meet our CRA requirements. Purchases have historically been made to satisfy CRA requirements for lending to low- and moderate-income borrowers within the Bank’s CRA Assessment Area. Generally, our residential construction loans are based on complete value per plans and specifications, with loan proceeds used to construct the house for single family primary residence. Loans are provided for terms up to 12 months during the construction phase, with loan-to-values that generally do not exceed 80% on as complete basis. The loans then convert to permanent financing at terms up to 360 months. The Company does not offer reverse mortgages, nor does it offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. The Company does not offer “subprime loans” (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation). Residential real estate loans are originated both for sale to the secondary market, as well as for retention in the Bank’s loan portfolio. The decision to sell a loan to the secondary market or retain within the portfolio is determined based on a variety of factors, including, but not limited to, the Bank’s asset/liability position, the current interest rate environment, and client preference. Indemnification. In general, the Company does not sell loans with recourse, except to the extent that it arises from standard loan-sale contract provisions. These provisions cover violations of representations and warranties and, under certain circumstances, first payment default by borrowers. These indemnifications may include the repurchase of loans by the Company and are considered customary provisions in the secondary market for conforming mortgage loan sales. Repurchases and losses have been rare, and no provision is made for losses at the time of sale. There were no such repurchases for the year ended December 31, 2022. The Company was servicing mortgage loans sold to others without recourse of approximately $191.9 million at December 31, 2022 and $170.8 million at December 31, 2021. The table below presents residential real estate loan origination activity for the periods indicated: Originations for retention in portfolio Originations for sale to the secondary market Total $ $ 2022 For the Year Ended December 31, 2021 (dollars in thousands) 556,715 22,583 579,298 $ $ $ $ 432,008 4,515 436,523 2020 378,247 82,620 460,867 Loans are sold with servicing retained or released. The table below presents residential real estate loan sale activity for the periods indicated: For the Year Ended December 31, 2022 2021 2020 Loans sold with servicing rights retained Loans sold with servicing rights released Total $ $ 5,834 — 5,834 $ (dollars in thousands) 25,361 2,465 27,826 $ $ $ 60,453 18,024 78,477 Loans sold with the retention of servicing typically result in the capitalization of servicing rights. Loan servicing rights are included in other assets and subsequently amortized as an offset to other income over the estimated period of servicing. The net balance of capitalized servicing rights totaled $1.7 million and $1.1 million at December 31, 2022 and 2021, respectively. Commercial Mortgage. CRE loans were $1.91 billion as of December 31, 2022, an increase of $403.4 million, or 26.7%, from $1.51 billion at December 31, 2021. The CRE loan portfolio represented 47% and 45% of total loans at December 31, 2022 and December 31, 2021, respectively. The average loan balance outstanding in this portfolio was $1.7 million and the largest individual CRE loan 40 outstanding was $29.0 million as of December 31, 2022. At December 31, 2022, this commercial mortgage was performing in accordance with its original terms. CRE loans are secured by a variety of property types inclusive of multi-family dwellings, retail facilities, office buildings, commercial mixed use, lodging, industrial and warehouse properties, and other specialized properties. Generally, our CRE loans are for terms of up to 10 years, with loan-to-values that generally do not exceed 75%. Amortization schedules are long-term, and thus, a balloon payment is generally due at maturity. Under most circumstances, the Bank will offer to rewrite or otherwise extend the loan at prevailing interest rates. Generally, our commercial construction loans are speculative in nature, with loan proceeds used to acquire and develop real estate property for sale or rental. Loans are typically provided for terms up to 36 months during the construction phase, with loan-to-values that generally do not exceed 75% on both an “as is” and “as complete and stabilized” basis. Construction projects are primarily for the development of residential property types, inclusive of one-to-four family and multifamily properties. Home Equity. The home equity portfolio totaled $111.4 million and $88.0 million at December 31, 2022 and 2021, respectively. The home equity portfolio represented 3% of total loans at both December 31, 2022 and 2021. At December 31, 2022, the largest home equity line of credit was a $3.0 million line of credit and had an outstanding balance of $3.0 million at December 31, 2022. At December 31, 2022, this line of credit was performing in accordance with its original terms. Home equity lines of credit are extended as both first and second mortgages on owner-occupied residential properties in the Bank’s market area. Home equity lines of credit are generally underwritten with the same criteria that we use to underwrite one-to-four family residential mortgage loans. Our home equity lines of credit are revolving lines of credit, which generally have a term between 15 and 20 years, with draws available for the first 10 years. Our 15-year lines of credit are interest only during the first 10 years and amortize on a five-year basis thereafter. Our 20-year lines of credit are interest only during the first 10 years and amortize on a 10-year basis thereafter. We generally originate home equity lines of credit with loan-to-value ratios of up to 80% when combined with the principal balance of the existing first mortgage loan, although loan-to-value ratios may occasionally exceed 80% on a case-by-case basis. Maximum combined loan-to-values are determined based on an applicant’s loan/line amount and the estimated property value. Lines of credit above $1.0 million generally will not exceed combined loan-to-value of 75%. Rates are adjusted monthly based on changes in a designated market index. We also offer home equity term loans, which are extended as second mortgages on owner-occupied residential properties in our market area. Our home equity term loans are fixed rate second mortgage loans, which generally have a term between five and 20 years. Commercial and Industrial (“C&I”). The C&I portfolio totaled $350.7 million at December 31, 2022, an increase of $81.2 million, or 30.1%, from $269.4 million at December 31, 2021. C&I loans represented 9% and 8% of total loans at December 31, 2022 and 2021, respectively. The average loan balance outstanding in this portfolio was $577,000, and the largest individual commercial and industrial loan outstanding was $18.9 million as of December 31, 2022. At December 31, 2022, this loan was performing in accordance with its original terms. The Company’s C&I loan clients represent various small- and middle-market established businesses involved in professional and financial services, accommodation and food services, utilities, health care, wholesale trade, manufacturing, distribution, retailing, and non-profits. Most clients are privately owned businesses with markets that range from local to national in scope. Many of the loans to this segment are secured by liens on corporate assets and the personal guarantees of the principals. The Company also makes loans to entrepreneurial and technology businesses, where regional economic strength or weakness impacts the relative risks in this loan category, in addition to renewable energy lending which is more specialized in nature. The Company has expanded its exposure within renewable energy lending but otherwise there are no significant concentrations in any one business sector, and loan risks are generally diversified among many borrowers. Loans under the SBA’s PPP program, net of associated deferred PPP processing fees, totaled $1.3 million at December 31, 2022 and $22.2 million at December 31, 2021, respectively, and are included in the C&I portfolio. At December 31, 2022, commercial solar loans totaled $113.0 million and the average loan balance outstanding in this portfolio was $2.2 million. The largest individual loan outstanding was $7.5 million, and this loan was performing in accordance with its original terms at December 31, 2022. Consumer Loans. The consumer loan portfolio totaled $37.6 million at December 31, 2022, an increase of $2.0 million, or 5.5%, from $35.6 million at December 31, 2021. Consumer loans represented 1% of the total loan portfolio at both December 31, 2022 and December 31, 2021. The average loan balance outstanding in this portfolio was $12,000 and the largest individual consumer loan outstanding was $2.5 million as of December 31, 2022. At December 31, 2022, this loan was performing in accordance with its original terms. 41 Consumer loans include secured and unsecured loans, lines of credit, and personal installment loans. Unsecured consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets. The secured consumer loans and lines portfolio are generally fully secured by pledged assets, such as bank accounts or investments. Loan Portfolio Maturities. The following table summarizes the dollar amount of loans maturing in our portfolio based on their loan type and contractual terms to maturity at December 31, 2022. The table does not include any estimate of prepayments, which can significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Residential mortgage Commercial mortgage Home equity Commercial and industrial Consumer Total One Year or Less One to Five Years December 31, 2022 After Five Years through Fifteen Years (dollars in thousands) After Fifteen Years Total $ $ 7,031 3,318 442 16,363 36,812 63,966 $ $ 8,971 470,996 7,921 100,176 329 588,393 $ 133,771 1,340,429 82,033 197,932 453 $ 1,754,618 $ 1,499,065 99,680 20,955 36,179 — $ 1,655,879 $ 1,648,838 1,914,423 111,351 350,650 37,594 $ 4,062,856 Loan Portfolio by Interest Rate Type. The following table summarizes the dollar amount of loans maturing over one year in our portfolio based on whether the loan has a fixed, adjustable, or floating rate of interest at December 31, 2022. Floating rate loans are tied to a market index while adjustable-rate loans are adjusted based on the contractual terms of the loan. December 31, 2022 Fixed Adjustable Floating Total Residential mortgage Commercial mortgage Home equity Commercial and industrial Consumer Total $ 855,202 856,842 2,626 53,576 971 $ 1,769,217 $ $ (dollars in thousands) 793,636 454,969 — 32,329 — $ 1,280,934 602,612 108,725 264,745 36,623 $ 1,012,705 — $ 1,648,838 1,914,423 111,351 350,650 37,594 $ 4,062,856 NONPERFORMING LOANS AND TROUBLED DEBT RESTRUCTURINGS (“TDRs”) The composition of nonperforming loans is as follows: Non-accrual loans Loans past due > 90 days, but still accruing Troubled debt restructurings Total non-performing loans Nonperforming loans as a percentage of gross loans Nonperforming loans as a percentage of total assets 2022 2021 December 31, 2020 (dollars in thousands) 2019 2018 $ $ $ $ 5,839 — 703 6,542 0.16% 0.12% $ $ 4,628 — 758 5,386 0.16% 0.11% $ $ 7,744 407 811 8,962 0.28% 0.23% $ $ 4,160 1,264 227 5,651 0.25% 0.20% 525 — 117 642 0.04% 0.03% Total non-performing loans increased by $1.2 million at December 31, 2022 as compared to December 31, 2021, primarily due to higher residential and home equity loans on nonaccrual offset by a decrease in commercial real estate loans on nonaccrual. The Company continues to closely monitor the portfolio of non-performing loans for which management has concerns regarding the ability of the borrowers to perform. The majority of the loans are secured by real estate and are considered to have adequate collateral value to cover the loan balances at December 31, 2022 and December 31, 2021, although such values may fluctuate with changes in the economy and the real estate market. In addition to the monitoring and review of loan performance internally, the Company has contracted 42 with an independent organization to review the Company’s commercial and CRE loan portfolios. This independent review was performed in each of the past five years. Non-accrual Loans. Loans are typically placed on non-accrual status when any payment of principal and/or interest is 90 days or more past due unless the collateral is sufficient to cover both principal and interest and the loan is in the process of collection. The Company monitors closely the performance of its loan portfolio. The status of delinquent loans, as well as situations identified as potential problems, is reviewed on a regular basis by management. Troubled Debt Restructurings. Loans are considered restructured in a troubled debt restructuring when the Company has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection. Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on non-accrual status at the time of the restructuring generally remain on non-accrual status for approximately six months or longer before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term. Troubled debt restructurings are individually evaluated for credit losses. Pursuant to Section 4013 of the CARES Act, financial institutions were allowed to suspend the requirements under U.S. GAAP related to TDRs for modifications made before December 31, 2020 to loans that were current as of December 31, 2019. On January 3, 2021, the President signed into law the Consolidated Appropriations Act, 2021 (the “CAA”). As a result of the CAA, the suspension of TDR accounting was extended to the earlier of January 1, 2022, or the date that is 60 days after the date on which the national emergency concerning the COVID-19 pandemic declared by the President of the United States of America terminates. As of December 31, 2022, the Company had no loans in deferral. ALLOWANCE FOR CREDIT LOSSES The following table summarizes the ratios related to the Company’s allowance for credit losses and certain asset quality indicators for the years indicated: Period-end loans outstanding (net of unearned fees and deferred costs) Average loans outstanding (net of unearned fees and deferred costs) Loans on non-accrual Allowance for credit losses balance at end of period $ $ $ $ 2022 For the Year Ended December 31, 2021 (dollars in thousands) 3,319,106 $ 3,240,876 $ 4,628 $ 34,496 $ $ $ $ $ 4,062,856 3,600,815 5,839 37,774 Net (charge-offs) recoveries to average loans outstanding- Total Non-accrual loans to loans outstanding at year end Allowance for credit losses to total loans (ex. PPP) Ratio of allowance for credit losses on loans to loans on non-accrual Ratio of allowance for credit losses to loans outstanding 0.00% 0.14% 0.93% 646.93% 0.93% 0.00% 0.14% 1.05% 745.38% 1.04% 2020 3,153,648 2,856,631 7,744 36,016 (0.02)% 0.25% 1.19% 465.08% 1.14% The level of charge-offs depends on many factors, including the national and regional economy. Cyclical lagging factors may result in charge-offs being higher than historical levels. Although the allowance is allocated between categories, the entire allowance is available to absorb losses attributable to all loan categories. Management believes that the allowance for credit losses is adequate. 43 The following table presents the ratio of net charge-offs to average loans outstanding within each loan category: For the Year Ended December 31, 2022 Net (Charge- offs) Recoveries Net (Charge- offs) Recoveries to Total Average Loans Average Balance 2021 Net (Charge- offs) Recoveries Net (Charge- offs) Recoveries to Total Average Loans 2020 Net (Charge- offs) Recoveries Net (Charge- offs) Recoveries to Total Average Loans Average Balance Average Balance Residential mortgages Commercial mortgages Home equity Commercial and industrial Consumer Total $ 1,508,546 1,661,235 95,441 292,872 42,721 $ 3,600,815 4 — — 66 (17) 53 (dollars in thousands) 0.00 %$ 1,343,112 0.00 0.00 1,424,126 94,949 338,494 0.00 0.00 40,195 0.00 %$ 3,240,876 (4) 30 — 140 (12) 154 0.00 %$ 1,160,998 0.00 0.00 1,253,401 97,574 304,194 0.00 0.00 40,465 0.00 %$ 2,856,632 — (264) — (150) (25) (439) 0.00 % (0.01) 0.00 (0.01) 0.00 (0.02) % The following table presents the allocation of the allowance for credit losses for loans by loan category: Allowance Amount 2022 % of Allowance % of Total Loans Allowance Amount 2021 % of Allowance % of Total Loans December 31, Residential mortgages Commercial mortgages Home equity Commercial and industrial Consumer Total Allowance $ $ 13,321 19,086 573 4,153 641 37,774 35% 50 2 11 2 100 % (dollars in thousands) 40 % $ 47 3 9 1 100 % $ 13,383 17,133 406 2,989 585 34,496 39 % 49 1 9 2 100 % 43 % 46 2 8 1 100 % See additional discussion regarding the allowance for credit losses, in Item 7 under the caption “Critical Accounting Estimates” and in Note 7 to the Audited Consolidated Financial Statements. SOURCES OF FUNDS General. Deposits traditionally have been our primary source of funds for our investment and lending activities. The Company also borrows from the FHLB of Boston or the Federal Reserve Bank of Boston (“FRB of Boston”), and utilizes repurchase agreements and brokered deposits to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes, and to manage our cost of funds. The Company's additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities, fee income, and proceeds from the sales of loans and securities. Deposits. The Company accepts deposits primarily from clients in the communities in which its branches and offices are located, as well as from small- and medium-sized businesses and other clients throughout its lending area. We rely on competitive pricing and products, convenient locations, and client service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of relationship checking for consumers and businesses, statement savings accounts, certificates of deposit, money market accounts, interest on lawyer trust accounts, commercial and regular checking accounts, and individual retirement accounts. Deposit rates and terms are based primarily on current business strategies, market interest rates, liquidity requirements, and our deposit growth goals. The Bank may also access the brokered deposit market for funding. 44 The following table sets forth the Company’s deposits for the periods indicated: Demand deposits (non-interest bearing) Interest-bearing checking Money market Savings Retail certificates of deposit under $250,000 Retail certificates of deposit of $250,000 or greater Brokered certificates of deposit Total December 31, 2022 December 31, 2021 Amount Percent Amount Percent $ $ 1,366,395 908,961 1,162,773 790,628 117,532 87,528 381,559 4,815,376 (dollars in thousands) 28.4% $ 18.9% 24.1% 16.4% 2.5% 1.8% 7.9% 100.0% $ 1,393,935 763,188 1,104,238 907,722 99,196 60,171 2,702 4,331,152 32.1% 17.6% 25.5% 21.0% 2.3% 1.4% 0.1% 100.0% At December 31, 2022, the Company had a total of $205.1 million in certificates of deposit, excluding brokered deposits, of which $151.7 million had remaining maturities of one year or less. The Company had total brokered deposits of $381.6 million and $2.7 million at December 31, 2022 and 2021, respectively. The amount of deposits above the FDIC’s limit of $250,000 was $2.50 billion and $2.19 billion as of December 31, 2022 and 2021, respectively. Retail certificates of deposit of $250,000 or greater by maturity are as follows: December 31, 2022 December 31, 2021 Within three months Over 3 months, within six months Over six months, within twelve months Over twelve months. Total $ $ $ (dollars in thousands) 32,560 16,162 18,152 20,654 87,528 $ 30,889 5,243 11,142 12,897 60,171 Interest expense on retail certificates of deposit of $250,000 or greater was $385,000, $551,000, and $832,000 for the years ended December 31, 2022, 2021, and 2020, respectively. The following table sets forth certificates of deposit, excluding brokered deposits, classified by interest rate as of the dates indicated: Interest Rate: 0.00% to 0.50% 0.51% to 1.00% 1.00% to 1.99% 2.00% to 2.99% 3.00% to 3.99% 4.00% to 4.99% Total December 31, 2022 December 31, 2021 (dollars in thousands) $ $ 101,559 26,606 28,736 11,009 19,493 17,657 205,060 $ $ 107,025 37,265 5,152 9,925 — — 159,367 Borrowings. Total borrowings were $105.2 million, an increase of $88.7 million as compared to $16.5 million at December 31, 2021. The Company’s borrowings consisted of advances from the FHLB of Boston and repurchase agreements. FHLB of Boston advances are collateralized by a blanket pledge agreement on the Company’s FHLB of Boston stock and residential mortgages held in the Bank’s portfolios. The Company pledged investment securities as collateral for its repurchase agreements. The Company’s remaining borrowing capacity at the FHLB of Boston at December 31, 2022 was approximately $639.0 million. In addition, the Company has a $10.0 million line of credit with the FHLB of Boston and a $10.0 million line of credit with a correspondent bank. The Company had no borrowings outstanding with the FRB of Boston at both December 31, 2022 and 2021. The Company’s remaining borrowing capacity at the FRB of Boston at December 31, 2022 was approximately $680.4 million. See NOTE 12 - BORROWINGS, for a schedule, including related interest rates and other information. 45 NET INTEREST MARGIN Net interest income represents the difference between interest earned, primarily on loans and investments, and interest paid on funding sources, primarily deposits and borrowings. Interest rate spread is the difference between the average rate earned on total interest-earning assets and the average rate paid on total interest-bearing liabilities. Net interest margin is the amount of net interest income, on a fully taxable-equivalent basis, expressed as a percentage of average interest-earning assets. The average rate earned on earning assets is the amount of annualized taxable equivalent interest income expressed as a percentage of average earning assets. The average rate paid on interest-bearing liabilities is equal to annualized interest expense as a percentage of average interest-bearing liabilities. The following table sets forth the distribution of the Company’s daily average assets, liabilities and shareholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the periods indicated: Average Balance December 31, 2022 Interest Income/ Expenses(1) Rate Earned/ Paid (1) Average Balance Year Ended December 31, 2021 Interest Income/ Expenses (1) (dollars in thousands) Rate Earned/ Paid (1) December 31, 2020 Interest Income/ Expenses (1) Rate Earned/ Paid (1) Average Balance $ 3,552,934 47,881 $ 135,965 1,832 3.83% $ 3,203,126 37,750 3.83 $ 120,019 1,525 3.75% $ 2,832,796 23,835 4.04 $ 119,447 1,115 194,612 2,680 1.38 217,096 2,617 1.21 136,776 2,337 ASSETS Interest-earning assets Loans (2) Taxable Tax-exempt Securities available for sale (3) Taxable Securities held to maturity Taxable Tax-exempt Cash and cash equivalents Total interest-earning assets (4) Non-interest-earning assets Allowance for credit losses Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Interest-bearing deposits Checking accounts Savings accounts Money market accounts Certificates of deposit Total interest-bearing deposits Subordinated debt Other borrowed funds Total interest-bearing liabilities Non-interest-bearing liabilities Demand deposits Other liabilities Total liabilities Shareholders’ equity 16,875 3,135 262 160,749 1,285 1,554 7,999 3,760 14,598 — 2,180 16,778 978,321 100,057 64,790 4,938,595 246,813 (35,072) $ 5,150,336 $ $ 753,001 897,146 1,165,793 240,468 3,056,408 — 85,580 3,141,988 1,446,745 104,063 4,692,796 457,540 Total liabilities & shareholders’ equity $ 5,150,336 Net interest income on a fully taxable equivalent basis 4.22% 4.68 1.71 2.43 3.50 0.27 3.93% 0.12% 0.36 0.36 0.75 0.35% 8.21 1.14 0.41% 1.72 3.13 0.40 3.25% 424,499 104,114 141,278 4,127,863 251,652 (35,642) $ 4,343,873 6,847 3,329 150 134,487 1.61 3.20 0.11 3.26% 152,789 89,841 69,783 3,305,820 245,316 (27,887) $ 3,523,249 3,711 3,145 187 129,942 $ 0.17% $ 0.17 0.69 1.56 675,753 957,039 765,021 209,311 0.48% — 2.55 2,607,124 — 18,466 0.53% 2,625,590 265 861 2,769 1,079 4,974 — 559 5,533 $ 0.04% $ 0.09 0.36 0.52 554,000 937,247 350,117 259,568 0.19% — 3.03 2,100,932 5,408 123,693 0.21% 2,230,033 682 3,378 1,277 1,958 7,295 444 1,406 9,145 1,197,056 103,459 3,926,105 417,768 $ 4,343,873 838,653 103,086 3,171,772 351,477 $ 3,523,249 120,797 (895) 119,902 143,971 (1,043) 142,928 128,954 (1,019) 127,935 $ Less taxable equivalent adjustment Net interest income Net interest spread (5) Net interest margin (6) (1) Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21% for 2022, 2021, and 2020. (2) Non-accrual loans are included in average amounts outstanding. (3) Average balances of securities available for sale calculated utilizing amortized cost. (4) (5) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets, inclusive of PPP loans originated FHLB stock balance is excluded from interest-earning assets and dividend income is excluded from interest income. 3.05% 3.12% 2.72% 2.92% 3.52% 3.65% $ $ during 2022 and 2021, and the weighted average cost of interest-bearing liabilities. (6) Net interest margin represents net interest income on a fully tax equivalent basis as a percentage of average interest-earning assets, inclusive of PPP loans originated during 2022 and 2021. 46 Rate/Volume Analysis The following table describes the extent to which changes in interest rates and changes in the volume of interest-earning assets and interest-bearing liabilities have affected the Company’s interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volumes (changes in average balance multiplied by prior year average rate), (ii) changes attributable to changes in rate (change in average interest rate multiplied by prior year average balance), and (iii) changes attributable to the combined impact of volumes and rates have been allocated proportionately to separate volume and rate categories. Year Ended December 31, 2022 Compared with Year Ended December 31, 2021 Increase/(Decrease) Due to Change in Rate (dollars in thousands) Year Ended December 31, 2021 Compared with Year Ended December 31, 2020 Increase/(Decrease) Due to Change in Rate (dollars in thousands) Volume Total Volume Total Interest income Loans Taxable Tax-exempt Securities available for sale Taxable Securities held to maturity Taxable Tax-exempt Cash and cash equivalents Total interest income Interest expense Deposits Checking accounts Savings accounts Money market accounts Certificates of deposit Total interest-bearing deposits Subordinated debt Other borrowed funds Total interest expense Change in net interest income $ $ $ $ 13,341 391 $ $ 2,605 (84) 15,946 307 $ 14,676 579 $ (14,104) $ (169) (287) 350 63 1,103 (823) 9,522 (128) (118) 22,721 $ 506 (66) 230 3,541 $ 10,028 (194) 112 26,262 $ 4,735 472 119 21,684 $ (1,599) (288) (156) (17,139) $ 34 (57) 1,930 183 2,090 — 1,723 3,813 18,908 $ $ 986 750 3,300 2,498 7,534 — (102) 7,432 $ (3,891) $ 1,020 693 5,230 2,681 9,624 — 1,621 11,245 15,017 125 70 1,502 (334) 1,363 (444) (1,869) $ $ (950) $ $ 22,634 (542) (2,587) (10) (545) (3,684) — 1,022 (2,662) $ (14,477) $ 572 410 280 3,136 184 (37) 4,545 (417) (2,517) 1,492 (879) (2,321) (444) (847) (3,612) 8,157 Excluding the impact of merger-related loan accretion, the adjusted net interest margin for the year ended December 31, 2022, was 2.87%, representing a six basis points decrease over the adjusted net interest margin for the year ended December 31, 2021 of 2.93%. Total interest-earning assets (GAAP) Net interest income on a fully taxable equivalent basis (GAAP) Net interest margin on a fully taxable equivalent basis (GAAP) Less: Accretion of loan fair value adjustments (GAAP) Adjusted net interest margin on a fully taxable equivalent basis (non-GAAP) $ $ Average Balance 4,938,595 Year Ended December 31, 2022 Interest Income/ Expenses (dollars in thousands) $ 143,971 4,938,595 $ (2,259) 141,712 Rate Earned/ Paid 2.92% -0.05% 2.87% 47 Excluding the impact of merger-related loan accretion and the impact of PPP loans, the adjusted net interest margin for the year ended December 31, 2021 was 2.93%, representing a 43 basis points decrease over the adjusted net interest margin for the year ended December 31, 2020 of 3.36%. Total interest-earning assets (GAAP) Net interest income on a fully taxable equivalent basis (GAAP) Net interest margin on a fully taxable equivalent basis (GAAP) Less: Paycheck Protection Program loan impact (GAAP) Less: Accretion of loan fair value adjustments (GAAP) Adjusted net interest margin on a fully taxable equivalent basis (non-GAAP) MARKET RISK AND ASSET LIABILITY MANAGEMENT Average Balance $ 4,127,863 Year Ended December 31, 2021 Interest Income/ Expenses (dollars in thousands) $ 128,954 (102,979) $ 4,024,884 $ (6,089) (4,771) 118,094 Rate Earned/ Paid 3.12% -0.07% -0.12% 2.93% Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its investment, borrowing, lending and deposit gathering activities. To that end, management actively monitors and manages its interest rate risk exposure. The Company’s profitability is affected by fluctuations in interest rates. A sudden and substantial change in interest rates may adversely impact the Company’s earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, to the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. The Company’s primary objective in managing interest rate risk is to minimize the adverse impact of changes in interest rates on the Company’s net interest income and capital, while structuring the Company’s asset-liability structure to obtain the maximum yield-cost spread on that structure. The Company relies primarily on its asset-liability structure to control interest rate risk. Interest Rate Sensitivity. The Company actively manages its interest rate sensitivity position. The objectives of interest rate risk management are to control exposure of net interest income to risks associated with interest rate movements and to achieve sustainable growth in net interest income. Responsibility for the management of the Company’s interest rate sensitivity position falls under the authority of the Board of Directors (the “Board”) which, in turn, has assigned authority for its formulation, revision and administration to the Risk Committee of the Board of Directors who reviews, approves and reports on information provided by the Investment and Asset/Liability Committee (the “ALCO” or the “Committee”). The Company manages interest rate sensitivity by changing the mix, pricing, and re-pricing characteristics of its assets and liabilities, through the management of its investment portfolio, its offerings of loan and selected deposit terms, and through wholesale funding. Wholesale funding consists of, but is not limited to, multiple sources, including borrowings with the FHLB of Boston, the FRB of Boston’s discount window, and certificates of deposit from institutional brokers. The Company uses several tools to manage its interest rate risk including interest rate sensitivity analysis, or gap analysis, market value of portfolio equity analysis, interest rate simulations under various rate scenarios, and net interest margin reports. The results of these reports are compared to limits established by the Company’s ALCO policies and appropriate adjustments may be made if the results are outside the established limits. The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “instantaneous shock,” in the yield curve and subjective adjustments in deposit pricing might have on the Company’s projected net interest income over the next 12 and 24 months. As of December 31, 2022: 48 Change in Interest Rates (in Basis Points) Parallel rate shocks +300 +200 +100 –100 –200 Year 1 Percentage Change in Net Interest Income (1.8) (1.3) (0.5) 1.6 0.8 Year 2 Percentage Change in Net Interest Income 16.6 13.8 11.7 6.6 1.3 The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a gradual interest rate shift in the yield curve and subjective adjustments in deposit pricing might have on the Company’s projected net interest income over the next 12 and 24 months. As of December 31, 2022: Change in Interest Rates (in Basis Points) Gradual rate shifts +200 –100 –200 Year 1 Percentage Change in Net Interest Income 0.4 1.3 1.5 Year 2 Percentage Change in Net Interest Income 12.8 7.9 4.3 These simulations assume that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 and 24 months. The changes to net interest income shown above are in compliance with the Company’s policy guidelines. These estimates of changes in the Company’s net interest income require us to make certain assumptions including loan- and mortgage- related investment prepayment speeds, reinvestment rates, deposit cost, deposit repricing, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on net interest income. Although our analysis provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates and will differ from actual results. Economic Value of Equity Analysis. The Company also analyzes the sensitivity of the Bank’s financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between estimated changes in the present value of the Bank’s assets and estimated changes in the present value of the Bank’s liabilities assuming various changes in current interest rates. The Bank’s economic value of equity analysis as of December 31, 2022, estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 5.6% decrease in the economic value of equity for the next 12 months, resulting in an economic value of equity ratio of 11.9%. At the same date, our analysis estimated that, in the event of an instantaneous 100 basis point decrease in interest rates, the Bank would experience a 1.3% increase in the economic value of equity, resulting in an economic value of equity ratio of 11.7%. The estimates within the economic value of equity calculation are significantly impacted by management’s assumption that the value of non-maturity deposits do not fall below their stated balance as of December 31, 2022. This assumption has the impact of increasing the Bank’s economic value of equity in the falling rate scenario as lower market rates increase the value of the loan and investment portfolios while the value of the non-maturity deposit base remains static. The Company believes retaining client relationships is the most desirable strategy over the long term. The estimates of changes in the economic value of our equity require us to make certain assumptions including loan- and mortgage- related investment prepayment speeds, reinvestment rates, deposit costs, deposit repricing, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity. Although our economic value of equity analysis provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of our equity and will differ from actual results. LIQUIDITY AND CAPITAL RESOURCES Liquidity. Liquidity is defined as the Company’s ability to generate adequate cash to meet its needs for day-to-day operations and material long- and short-term commitments. Liquidity risk is the risk of potential loss if the Company were unable to meet its funding 49 requirements at a reasonable cost. The Company manages its liquidity based on demand and specific events and uncertainties to meet current and future financial and contractual obligations of a short-term nature. The Company’s objective in managing liquidity is to respond to the needs of depositors and borrowers, as well as increase to earnings enhancement opportunities in a changing marketplace. The Company’s liquidity position is managed on a daily basis as part of the daily settlement function and continuously as part of the formal asset liability management process. The Bank’s liquidity is maintained by managing its core deposits as the primary source, selling investment securities, selling loans in the secondary market, borrowing from the FHLB of Boston and FRB of Boston, entering into repurchase agreements, and purchasing wholesale certificates of deposit as its secondary sources. At December 31, 2022, the Company had access to funds totaling $1.5 billion. The sources of funds for dividends paid by the Company are dividends received from the Bank and liquid funds held by the Company. The Company and the Bank are regulated enterprises and their abilities to pay dividends are subject to regulatory review and restriction. Certain regulatory and statutory restrictions exist regarding dividends, loans, and advances from the Bank to the Company. Generally, the Bank has the ability to pay dividends to the Company subject to minimum regulatory capital requirements. Quarterly, the Risk Committee reviews the Company’s liquidity needs and reports any findings (if required) to the Board of Directors. Capital Adequacy. Total shareholders’ equity was $517.6 million at December 31, 2022, as compared to $437.8 million at December 31, 2021. The Company’s equity increased primarily due to $62.9 million of equity issued as a result of the Northmark Merger and net income of $52.9 million, partially offset by an increase in unrealized losses on the available for sale investment portfolio of $18.7 million and dividend payments of $18.4 million. Based on past performance and current expectations, the Company believes that cash from operations, cash, cash equivalents, investments, and other sources of liquidity will satisfy its currently anticipated working capital needs, capital expenditures, and other liquidity requirements associated with its operations through the next 12 months and the reasonably foreseeable future. The Company and the Bank are subject to various regulatory capital requirements. As of December 31, 2022, the Company and the Bank exceeded the regulatory minimum levels to be considered “well capitalized.” See NOTE 18 – SHAREHOLDERS’ EQUITY to the Consolidated Financial Statements for additional discussion of regulatory capital requirements. Contractual Obligations, Commitments, and Contingencies As of December 31, 2022 and December 31, 2021, the Company had outstanding commitments to extend credit of $1.07 billion and $809.4 million, respectively, and commitments associated with outstanding letters of credit of $24.2 million and $18.9 million, respectively. Since commitments associated with commitments to extend credit and outstanding letters of credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. As of December 31, 2022, the Company had cash and cash equivalents of $30.7 million, as compared with $180.2 million at December 31, 2021, a decrease of $149.4 million, or 82.9%. In the ordinary course of business, the Company has entered into numerous contractual obligations and commitments. The following table summarizes the Company’s contractual cash obligations by maturity at December 31, 2022: CONTRACTUAL OBLIGATIONS Total FHLBB advances Retirement benefit obligations Lease obligations Certificates of deposit Total contractual cash obligations $ $ Less Than One Year Payments Due — By Period as of December 31, 2022 Three to One to Five Three Years Years (dollars in thousands) $ — $ $ 105,212 31,220 30,132 586,619 105,212 2,759 7,085 533,513 — $ 5,721 11,203 45,130 6,006 5,961 7,976 After Five Years — 16,734 5,883 — 753,183 $ 648,569 $ 62,054 $ 19,943 $ 22,617 Further discussion regarding commitments and contingencies can be found in NOTE 16 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK and NOTE 17 – COMMITMENTS AND CONTINGENCIES to the Consolidated Financial Statements. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Company is party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its clients. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused 50 lines of credit, and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance- sheet instruments. Off-Balance-Sheet Arrangements. Our significant off-balance-sheet arrangements consist of the following: • • • • • • • commitments to originate and sell loans, standby and commercial letters of credit, unused lines of credit, unadvanced portions of construction loans, unadvanced portions of other loans, loan related derivatives, and risk participation agreements. Off-balance-sheet arrangements are more fully discussed in NOTE 16 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK to the Consolidated Financial Statements. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. The information required by this item is included in Item 7 of this report under “Market Risk and Asset Liability Management.” 51 Item 8. Financial Statements and Supplementary Data. CAMBRIDGE BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Cash and cash equivalents Investment securities Assets Available for sale, at fair value (amortized cost $182,027 and $201,270, respectively) Held to maturity, at amortized cost (fair value $885,586 and $971,092, respectively) Total investment securities Loans held for sale, at lower of cost or fair value Loans Residential mortgage Commercial mortgage Home equity Commercial and industrial Consumer Total loans Less: allowance for credit losses on loans Net loans Federal Home Loan Bank of Boston Stock, at cost Bank owned life insurance Banking premises and equipment, net Right-of-use asset operating leases Deferred income taxes, net Accrued interest receivable Goodwill Merger-related intangibles, net Other assets Total assets Liabilities Deposits Demand Interest-bearing checking Money market Savings Certificates of deposit Total deposits Borrowings Operating lease liabilities Other liabilities Total liabilities Shareholders’ Equity Common stock, par value $1.00; Authorized: 10,000,000 shares; Outstanding: 7,796,440 shares and 6,968,192 shares, respectively Additional paid-in capital Retained earnings Accumulated other comprehensive loss December 31, 2022 December 31, 2021 (dollars in thousands, except share information) $ 30,719 $ 180,153 153,416 1,051,997 1,205,413 — 1,648,838 1,914,423 111,351 350,650 37,594 4,062,856 (37,774) 4,025,082 6,264 34,484 23,297 25,098 17,990 14,118 64,539 7,443 105,290 5,559,737 1,366,395 908,961 1,162,773 790,628 586,619 4,815,376 105,212 27,413 94,184 5,042,185 $ $ $ $ 7,796 293,186 237,369 (20,799) 517,552 5,559,737 197,803 977,061 1,174,864 1,490 1,415,079 1,511,002 87,960 269,446 35,619 3,319,106 (34,496) 3,284,610 4,816 46,970 17,326 31,273 9,985 9,162 51,912 2,617 76,366 4,891,544 1,393,935 763,188 1,104,238 907,722 162,069 4,331,152 16,510 33,871 72,174 4,453,707 6,968 229,205 202,874 (1,210) 437,837 4,891,544 Total shareholders’ equity Total liabilities and shareholders’ equity Auditor $ The accompanying notes are an integral part of these consolidated financial statements. $ 52 CAMBRIDGE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME For the Year Ended December 31, 2021 (dollars in thousands, except per share information) 2020 2022 Interest and dividend income Interest on taxable loans Interest on tax-exempt loans Interest on taxable investment securities Interest on tax-exempt investment securities Dividends on FHLB of Boston stock Interest on overnight investments Total interest and dividend income Interest expense Interest on deposits Interest on subordinated debt Interest on borrowed funds Total interest expense Net interest and dividend income Provision for (Release of) credit losses Net interest and dividend income after provision for (release of) credit losses Noninterest income Wealth management revenue Deposit account fees ATM/Debit card income Bank owned life insurance income Gain on loans sold, net Loan related derivative income Other income Total noninterest income Noninterest expense Salaries and employee benefits Occupancy and equipment Data processing Professional services Marketing FDIC insurance Non-operating expenses Other expenses Total noninterest expense Income before income taxes Income tax expense Net income Share data: Weighted average shares outstanding, basic Weighted average shares outstanding, diluted Basic earnings per share Diluted earnings per share $ $ $ $ $ 135,965 1,447 19,555 2,477 287 262 159,993 14,598 — 2,180 16,778 143,215 3,881 $ 120,019 1,205 9,464 2,630 46 150 133,514 4,974 — 559 5,533 127,981 (1,294) 119,447 880 6,048 2,485 331 187 129,378 7,295 444 1,406 9,145 120,233 18,310 139,334 129,275 101,923 33,034 2,913 1,663 1,808 98 625 2,868 43,009 70,109 14,364 10,706 4,728 2,301 1,845 3,059 3,270 110,382 71,961 19,052 52,909 7,163,223 7,213,913 7.35 7.30 $ $ $ 35,037 1,939 1,567 801 832 2,124 2,024 44,324 65,127 13,898 8,829 5,391 2,536 1,318 1,118 2,267 100,484 73,115 19,091 54,024 6,926,257 6,990,603 7.76 7.69 $ $ $ 29,751 2,595 1,308 747 1,850 1,479 1,726 39,525 58,975 13,004 7,662 4,190 1,818 992 7,612 3,832 98,085 43,363 11,404 31,959 6,289,481 6,344,409 5.07 5.03 The accompanying notes are an integral part of these consolidated financial statements. 53 CAMBRIDGE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Net income Other comprehensive income (loss), net of tax: Available for sale securities Unrealized holding gains (losses) Less: reclassification adjustment for losses realized in net income Total unrealized losses on available for sale securities Interest rate swaps designated as cash flow hedges Unrealized holding gains (losses) Less: reclassification adjustment for gains (losses) realized in net income Total unrealized losses on interest rate swaps Defined benefit retirement plans Change in retirement liabilities Other comprehensive income (loss) Comprehensive income 2022 For the Year Ended December 31, 2021 (dollars in thousands) 2020 $ 52,909 $ 54,024 $ 31,959 (18,736) (4,622) — (18,736) (1,563) (600) (2,163) — (4,622) (959) (1,864) (2,823) 1,310 (19,589) 33,320 $ 3,801 (3,644) 50,380 $ $ 2,800 (57) 2,743 4,758 (1,354) 3,404 (1,232) 4,915 36,874 The accompanying notes are an integral part of these consolidated financial statements. 54 CAMBRIDGE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY For the Year Ended December 31, Balance at December 31, 2019 Cumulative effect of accounting changes Net income Other comprehensive income Share based compensation and other share-based activity Dividends declared ($2.12 per share) Common stock issued for Wellesley merger Balance at December 31, 2020 Balance at December 31, 2020 Net income Other comprehensive loss Share based compensation and other share-based activity Dividends declared ($2.38 per share) Balance at December 31, 2021 Balance at December 31, 2021 Net income Other comprehensive loss Share based compensation and other share-based activity Dividends declared ($2.56 per share) Common stock issued for Northmark merger Balance at December 31, 2022 Common Stock 5,401 — — — 23 — 1,503 6,927 6,927 — — 41 — 6,968 6,968 — — 39 — 789 7,796 $ $ $ $ $ $ $ $ $ $ $ $ Accumulated Other Comprehensive Additional Income Retained Paid-In (Loss) Capital Earnings (dollars in thousands, except per share data) 136,766 — — — 146,875 (347) 31,959 — (2,481) $ — — 4,915 $ $ Total Shareholders’ Equity 286,561 (347) 31,959 4,915 4,564 (13,083) 87,163 401,732 401,732 54,024 (3,644) 2,279 (16,554) 437,837 — — — 2,434 2,434 — (3,644) $ $ — — (1,210) $ (1,210) $ — (19,589) 437,837 52,909 (19,589) — — — (20,799) $ 1,959 (18,414) 62,850 517,552 4,541 — 85,660 226,967 226,967 — — 2,238 — 229,205 229,205 — — 1,920 — 62,061 293,186 $ $ $ $ $ — (13,083) — 165,404 165,404 54,024 — — (16,554) 202,874 202,874 52,909 — — (18,414) — 237,369 $ $ $ $ $ The accompanying notes are an integral part of these consolidated financial statements. 55 CAMBRIDGE BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for (Release of) credit losses Amortization (accretion) of deferred charges and fees, net Depreciation (accretion), and amortization, net Bank owned life insurance income (Gain) loss on disposition of investment securities Share-based compensation and other share-based activity Change in accrued interest receivable Deferred income tax expense Change in loans held for sale Change in other assets, net Change in other liabilities, net Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Origination of loans Proceeds from principal payments of loans Purchase of loans Proceeds from calls/maturities of securities available for sale Purchase of securities available for sale Proceeds from sales of securities Proceeds from calls/maturities of securities held to maturity Purchase of securities held to maturity Death benefit on bank-owned life insurance Redemption on bank-owned life insurance (Purchase) redemption of FHLB of Boston stock Purchase of banking premises and equipment Net cash acquired in business combinations Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Change in demand, interest-bearing, money market and savings accounts Change in certificates of deposit Change in short term borrowings Redemption of subordinated debt Cash dividends paid on common stock Net cash provided by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for: Interest Income taxes Significant non-cash transactions Transfer of other real estate owned Common Stock issued to shareholders due to merger Fair value of assets acquired, net of cash acquired Fair value of liabilities assumed $ $ 2022 For the Year Ended December 31, 2021 (dollars in thousands) 2020 $ 52,909 $ 54,024 $ 31,959 3,881 2,282 726 (1,808) — 1,959 (4,280) 587 1,490 (32,056) 26,260 51,950 (1,265,305) 850,886 (23,655) 29,040 (10,170) 19,018 132,173 (205,137) 4,025 10,759 (1,215) (1,776) 82,174 (379,183) (216,751) 327,938 85,026 — (18,414) 177,799 (149,434) 180,153 30,719 15,805 21,822 — 62,850 346,501 378,453 $ $ (1,294) (1,434) (1,838) (801) — 2,279 352 2,899 5,419 5,473 429 65,508 (1,327,044) 1,170,430 — 42,169 (9,927) — 70,800 (801,775) — — 918 (2,033) — (856,462) 1,020,821 (92,552) (16,393) — (16,554) 895,322 104,368 75,785 180,153 5,656 9,054 — — — — $ $ 18,310 (780) (8,134) (747) (69) 4,564 253 (665) (5,363) (22,863) 20,332 36,797 (1,070,321) 1,022,516 — 47,087 (140,570) 10,821 56,007 (33,818) — — 8,505 (2,218) 43,063 (58,928) 422,866 (138,213) (224,989) (10,000) (13,083) 36,581 14,450 61,335 75,785 9,172 14,628 2,293 87,163 961,668 917,569 The accompanying notes are an integral part of these consolidated financial statements. 56 CAMBRIDGE BANCORP AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2022 1. THE BUSINESS The accompanying consolidated financial statements include the accounts of Cambridge Bancorp (the “Company”) and its wholly owned subsidiary, Cambridge Trust Company (the “Bank”), and the Bank’s subsidiaries, Cambridge Trust Company of New Hampshire, Inc., CTC Security Corporation, and CTC Security Corporation III. References to the Company herein relate to the consolidated group of companies. All significant intercompany accounts and transactions have been eliminated in preparation of the consolidated financial statements. The Company is a state-chartered, federally registered bank holding company headquartered in Cambridge, Massachusetts, incorporated in 1983. The Company is the sole shareholder of the Bank, a Massachusetts trust company chartered in 1890 which is a commercial bank. The Company is a private bank offering a full range of private banking and wealth management services to its clients. The private banking business, the Company’s only reportable operating segment, is managed as a single strategic unit. As a private bank, the Company focuses on four core services that center around client needs. The core services include Wealth Management, Commercial Banking, Residential Lending, and Personal Banking. The Bank offers a full range of commercial and consumer banking services through its network of 22 banking offices in Massachusetts and New Hampshire. The Bank is engaged principally in the business of attracting deposits from the public and investing those deposits. The Bank invests those funds in various types of loans, including residential and commercial real estate, and a variety of commercial and consumer loans. The Bank also invests its deposits and borrowed funds in investment securities and has two wholly owned Massachusetts security corporations, CTC Security Corporation and CTC Security Corporation III, for this purpose. Deposits at the Bank are insured by the Federal Deposit Insurance Corporation (“FDIC”) for the maximum amount permitted by FDIC Regulations. Trust and investment management services are offered through the Bank’s private banking offices in Massachusetts and New Hampshire, and its wealth management offices located in Boston and Wellesley, Massachusetts and Concord, Manchester, and Portsmouth, New Hampshire. The Bank also has a non-depository trust company, Cambridge Trust Company of New Hampshire, Inc., which allows non- New Hampshire residents the opportunity to take advantage of the state’s favorable trust laws. The assets held for wealth management clients are not assets of the Bank and, accordingly, are not reflected in the accompanying consolidated balance sheets. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”). Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from those estimates. The allowance for credit losses, the valuation of deferred tax assets, and the valuation of assets acquired and liabilities assumed in business combinations are particularly subject to change. Reclassifications Certain amounts in the prior year’s financial statements may have been reclassified to conform with the current year’s presentation. Cash and Cash Equivalents Cash and cash equivalents consist of cash on hand, amounts due from banks, and overnight investments. Investment Securities Investment securities are classified as either “held to maturity” or “available for sale” in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, Investments – Debt Securities. Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity and recorded at amortized cost. 57 Debt securities not classified as held to maturity are classified as available for sale and carried at fair value with unrealized after-tax gains and losses reported net as a separate component of shareholders’ equity. The Company classifies its securities based on its intention at the time of purchase. Purchase premiums and discounts are recognized in interest income using the effective yield or straight-line method over the term of the securities, except for callable debt securities for which the purchase premiums are recognized through the earliest call date. Gains and losses on the sale of debt securities are recorded on the trade date and determined using the specific identification method. Allowance for Credit Losses - Held to Maturity Securities The Company measures expected credit losses on held to maturity debt securities on a collective basis by security type and risk rating where available. The reserve for each pool is calculated based on a Probability of Default/Loss Given Default (“PD/LGD”) basis taking into consideration the expected life of each security. Held to maturity securities which are issued by the United States of America (“U.S.”) or are guaranteed by U.S. federal agencies do not currently have an allowance for credit loss as the Company determined these securities are either backed by the full faith and credit of the U.S. government and/or there is an unconditional commitment to make interest payments and to return the principal investment in full to investors when a debt security reaches maturity. The Company will evaluate this position no less than annually, however, certain items which may cause the Company to change this methodology include legislative changes that remove a government-sponsored enterprise’s (“GSE”) ability to draw funds from the U.S. government, or legislative changes to housing policy that reduce or eliminate the U.S. government’s implicit guarantee on such securities. For securities which are not U.S. treasury or agency backed, risk ratings are generally sourced from Moody’s or Standard & Poor’s. The Company updates loss given default, probability of default, and recovery rates for each security as that information becomes available but no less than annually. The expected remaining life to maturity of each applicable security is updated quarterly. Any expected credit losses on held to maturity securities would be presented as an allowance rather than as a direct write-down through the consolidated statements of income if the Company does not intend to sell or believes that it is more likely than not that the Company will be required to sell the security. Allowance for Credit Losses - Available for Sale Securities The Company measures expected credit losses on available for sale securities based upon the gain or loss position of the security. For available for sale debt securities in an unrealized loss position, which the Company does not intend to sell, or it is not more likely than not that the Company will be required to sell the security before recovery of the Company’s amortized cost, the Company evaluates qualitative criteria to determine any expected loss. This includes among other items the financial health of, and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. The Company also evaluates quantitative criteria including determining whether there has been an adverse change in expected future cash flows of the security. If the Company does not expect to recover the entire amortized cost basis of the security, an allowance for credit losses would be recorded, with a related charge to earnings, limited by the amount of the fair value of the security less its amortized cost. If the Company intends to sell the security or it is more likely than not that the Company will be required to sell the debt security before recovery of its amortized cost basis, the Company recognizes the entire difference between the security’s amortized cost basis and its fair value in earnings. Loans Loans are reported at the amount of their outstanding principal, including deferred loan origination fees and costs, reduced by unearned discounts, and the allowance for credit losses. Loans are considered delinquent when a payment of principal and/or interest becomes past due 30 days following its scheduled payment due date. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Loans 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. Allowance for Credit Losses - Loans Losses on loan receivables are estimated and recognized upon origination of the loan, based on expected credit losses for the life of the loan balance as of the period end date. The Company’s methodology for calculating the allowance for credit losses (“ACL”) on loans consists of quantitative and qualitative components. The Company uses a discounted cash flow method incorporating probability of default and loss given default forecasted based on statistically derived economic variable loss drivers combined with qualitative factors, to estimate expected credit losses. This process includes estimates which involve modeling loss projections attributable to existing loan balances, considering historical experience, current conditions, and future expectations for homogeneous pools of loans over the reasonable and supportable forecast period. The reasonable and supportable forecast period is determined based upon the accuracy level of historical loss forecast estimates, the specific loan level models and methodology utilized, and considers material changes in growth and credit strategy, and business changes. For periods beyond a reasonable and supportable forecast interval, the Company reverts to historical information over a period for which comparable data is available. The historical information either experienced by the Company, or by a selection of peer banks when appropriate, is derived from a combination of recessionary and non-recessionary performance periods for which data is available. Similar to the reasonable and supportable forecast period, the Company reassesses the 58 reversion period at the segment level, considering any required adjustments for differences in underwriting standards, portfolio mix, and other relevant data shifts over time. The Company generally segments its loan receivable population into homogeneous pools of loans. Consistent with the Company’s other assumptions, the Company regularly reviews segmentation to determine whether the homogeneous pools remain relevant as risk characteristics change. When a loan no longer meets the criteria of its initial pooling as a result of credit deterioration or other changes, the Company may evaluate the credit for estimated losses on an individual basis if the Company determines that the credit no longer retains the same risk characteristics. To the extent that there are a multitude of these loans with new similar risk characteristics, the Company would anticipate a change to the pooling methodology. Loans that do not share risk characteristics are evaluated on an individual basis and are not included in the collective evaluation. For loans with real estate collateral, when management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate. The qualitative component of the ACL considers (i) the uncertainty of forward-looking scenarios; (ii) certain portfolio characteristics, such as portfolio concentrations, real estate values, changes in the number and amount of non-accrual and past due loans; and (iii) model limitations; among other factors. Qualitative adjustments are considered when management believes expected credit losses are not representative of historical loss experience alone, and should be adjusted to reflect the current conditions and characteristics of the Company’s own portfolio. They are made at the segment level, considering any required adjustments for differences in underwriting standards, portfolio mix, and other relevant data shifts over time. The Company evaluates the allowance for credit losses on loans quarterly. The Company regularly reviews its collection experience (including delinquencies and net charge-offs) in determining its allowance for credit losses. The Company also considers its historical loss experience to date based on actual defaulted loans and overall portfolio indicators including delinquent and non-accrual loans, trends in loan volume and lending terms, credit policies and other observable environmental factors such as unemployment and interest rate changes. The underlying assumption estimates and assessments the Company uses to estimate the allowance for credit losses reflects the Company’s best estimate of model assumptions and forecasted conditions at that time. Changes in such estimates can significantly affect the allowance and provision for (release of) credit losses. It is possible and likely that the Company will experience credit losses that are different from the current estimates. The provision for (release of) credit losses charged to income is based on management’s judgment of the amount necessary to maintain the allowance at a level to provide for expected credit losses for the life of the loan balances as of the evaluation date. When management believes that the collectability of a loan’s principal balance, or portions thereof, is unlikely, the principal amount is charged against the allowance for credit losses. Recoveries on loans that have been previously charged off are credited to the allowance for credit losses, generally at the time cash is received on a charged-off account. The allowance is an estimate, and ultimate losses may vary from current estimates. As adjustments become necessary, they are reported in the results of operations through the provision for (release of) credit losses in the period in which they become known. Risk characteristics relevant to each portfolio segment are as follows: Residential mortgage and home equity loans – The Company generally does not originate loans in these segments with a loan-to-value ratio greater than 80%, unless covered by private mortgage insurance, and in all cases not greater than a loan-to-value ratio of 97%. The Company does not originate subprime loans. Loans in these segments are secured by one-to-four family residential real estate, and repayment is primarily dependent on the credit quality of the individual borrower. Commercial mortgage loans – This includes multi-family properties and construction. The Company generally does not originate loans in this segment with a loan-to-value ratio greater than 75%. Loans in this segment are secured by owner-occupied and nonowner- occupied commercial real estate (“CRE”), and repayment is primarily dependent on the cash flows of the property (if nonowner- occupied) or of the business (if owner-occupied). Commercial and industrial loans (“C&I”) – Loans in this segment are made to businesses and are generally secured by equipment, accounts receivable, or inventory, as well as the personal guarantees of the principal owners of the business, and repayment is primarily dependent on the cash flows generated by the business. In addition, this segment includes certain loans issued under the U. S. Small Business Administration’s (“SBA”) Paycheck Protection Program (“PPP”). These loans are guaranteed and are not evaluated for an allowance for credit losses because the Company expects the guarantees will be effective, if necessary. 59 Consumer loans – Loans in this segment are made to individuals and can be secured or unsecured. Repayment is primarily dependent on the credit quality of the individual borrower. The majority of the Company’s loans are concentrated in Eastern Massachusetts and Southern New Hampshire and therefore the overall health of the local economy, including unemployment rates, vacancy rates, and consumer spending levels, can have a material effect on the credit quality of all of these portfolio segments. The process to determine the allowance for credit losses requires management to exercise considerable judgment regarding the risk characteristics of the loan portfolio segments and the effect of relevant internal and external factors. Allowance for Credit Losses - Unfunded Commitments The expected credit losses for unfunded commitments are measured over the contractual period of the Company’s exposure to credit risk. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, for the risk of loss, and current conditions and expectations. Management periodically reviews and updates its assumptions for estimated funding rates based on historical rates, and factors such as portfolio growth, changes to organizational structure, economic conditions, borrowing habits, or any other factor which could impact the likelihood that funding will occur. The Company does not reserve for unfunded commitments which are unconditionally cancellable. Acquired Loans Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors, including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective as they may be susceptible to significant change. Effective January 1, 2020, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. The Company evaluates acquired loans for deterioration in credit quality based on, but not limited to, the following: (1) non-accrual status; (2) troubled debt restructured designation; (3) risk ratings of special mention, substandard or doubtful; (4) watchlist credits; and (5) delinquency status, including loans that are current on acquisition date, but had been previously delinquent. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. For acquired loans not deemed PCD at acquisition, the differences between the initial fair value and the unpaid principal balance are recognized as interest income on a level-yield basis over the lives of the related loans. At the acquisition date, an initial allowance for expected credit losses is estimated and recorded as provision for credit losses. The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans. Allowance for Loan Losses Prior to the adoption of ASC Topic 326 – Financial Instruments – Credit Losses (“CECL”) on January 1, 2020, the Company calculated its provision for loan losses and the level of the allowance for loan losses to reflect management’s estimate of probable loan losses inherent in the loan portfolio at the balance sheet date. Management used a systematic process and methodology to establish the allowance for loan losses each quarter. To determine the total allowance for loan losses, an estimate was 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) C&I loans, and (e) consumer loans. Portfolio segments were further disaggregated into classes of loans. The establishment of the allowance for each portfolio segment was based on a process that evaluated the risk characteristics relevant to each portfolio segment and took into consideration multiple internal and external factors. Internal factors included, but were not limited to, (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, (d) the growth and vintage of the portfolios, and (e) the experience of, and any changes in, lending and credit personnel. External factors included, but were not limited to, (a) conditions and trends in the local and national economy and (b) levels and trends in national delinquent and non-performing loans. 60 The Company evaluated certain loans individually for specific impairment. A loan was considered impaired when, based on current information and events, it was probable that the Company would be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Loans were selected for evaluation based upon internal risk rating, delinquency status, or non-accrual status. A specific allowance amount was allocated to an individual loan when such loan had been deemed impaired and when the amount of the probable loss was able to be estimated. Estimates of loss were 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 was collateral dependent. Loans Held for Sale Residential mortgage loans originated and intended for sale in the secondary market are classified as held for sale at the time of their origination and are carried at the lower of cost or fair value on an individual loan basis. Changes in fair value relating to loans held for sale below the loans cost basis are charged against gain on loans sold. Gains and losses on the actual sale of the residential loans are recorded in earnings as gains on loans sold, net on the consolidated statements of income. Bank Owned Life Insurance Bank owned life insurance (“BOLI”) represents life insurance on the lives of certain active and former employees who have provided positive consent allowing the Company to be the beneficiary of such policies. Since the Company is the primary beneficiary of the insurance policies, increases in the cash value of the policies, as well as insurance proceeds received in excess of cash surrender value, are recorded in noninterest income, and are not subject to income taxes. Applicable regulations generally limit the Company’s investment in BOLI to 25% of its Tier 1 capital plus its allowance for credit losses. The Company reviews the financial strength of the insurance carriers prior to the purchase of BOLI and at least annually thereafter. Banking Premises and Equipment Land is stated at cost. Buildings, leasehold improvements, and equipment are stated at cost, less accumulated depreciation, and amortization, which is computed using the straight-line method over the estimated useful lives of the assets or the terms of the leases, if shorter. The cost of ordinary maintenance and repairs is charged to expense when incurred. Leases The Company leases office space and certain branch locations under noncancelable operating leases, several of which have renewal options to extend lease terms. Upon commencement of a new lease, the Company will recognize a right-of-use (“ROU”) asset and corresponding lease liability. The Company makes the decision on whether to renew an option to extend a lease by considering various factors. The Company will recognize an adjustment to its ROU asset and lease liability when lease agreements are amended and executed. The discount rate used in determining the present value of lease payments is based on the Company’s incremental borrowing rate for borrowings with terms similar to each lease at commencement date. The Company has lease agreements with lease and non- lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance, are not included in the measurement of the lease liability since they are generally able to be segregated. Marketing Expense Advertising costs are expensed as incurred. Other Real Estate Owned Other real estate owned consists of properties formerly pledged as collateral to loans, which have been acquired by the Company through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Upon transfer of a loan to foreclosure status, an appraisal is obtained and any excess of the loan balance over the fair value, less estimated costs to sell, is charged against the allowance for credit losses. Expenses and subsequent adjustments to the fair value are treated as noninterest expense through other expenses. Goodwill, Core Deposit Intangibles, and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of net assets acquired in a business combination. Core deposit intangible (“CDI”) represents a premium paid to acquire the core deposits of an institution and is recorded as an intangible asset. Goodwill and intangible assets that are not amortized are tested for impairment, based on their fair values, at least annually. There was no goodwill impairment recognized during 2022, 2021, or 2020. 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 61 amount of the intangible asset becomes its new accounting basis. The remaining useful life of an intangible asset that is being amortized is also evaluated each reporting period to determine whether events and circumstances warrant a revision to the remaining period of amortization. The Company is amortizing the CDI on a straight-line basis over a ten-year period. Mortgage servicing rights (“MSR”) are recognized as separate assets when rights are acquired through purchase or through sale of financial assets with servicing rights retained. The fair value of the servicing rights is determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs, and other economic factors. For purposes of measuring impairment, the underlying loans are generally stratified into relatively homogeneous pools based on predominant risk characteristics. Because of the small size of this asset class, and its relative homogeneity, only one stratum is used. If the aggregate carrying value of the capitalized mortgage servicing rights for this stratum exceeds its fair value, MSR impairment is recognized in earnings through a valuation allowance for the difference. As the loans are repaid and net servicing revenue is earned, the MSR asset is amortized as an offset to loan servicing income. Servicing revenues are expected to exceed this amortization expense. However, if actual prepayment experience or defaults exceed what was originally anticipated, net servicing revenues may be less than expected and mortgage servicing income may be negative. Income Taxes The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, the Commonwealth of Massachusetts, the state of New Hampshire, the state of Maine, and other states as required. For the tax year ended December 31, 2022, the Company expects to file taxes in Massachusetts, New Hampshire, and Maine. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through income tax expenses in the period of enactment. Deferred tax assets are reviewed quarterly and reduced by a valuation allowance if, based upon the information available, it is more likely than not that some or all of the deferred tax assets will not be realized. Interest and penalties related to unrecognized tax benefits, if incurred, are recognized as a component of income tax expense. Wealth Management Fee Revenue The Company earns wealth management fees for providing investment management, trust administration, and financial planning services to clients. The Company’s performance obligation under these contracts is satisfied over time as the wealth management services are provided. Fees are recognized monthly based on the monthly value of the assets under management and the applicable fee rate, or at a fixed annual rate, depending on the terms of the contract. No performance-based incentives are earned on wealth management contracts. The Company also earns trust fees for servicing as trustee for certain clients. As trustee, the Company serves as a fiduciary, administers the client’s trust, and in some cases, manages the assets of the trust. The Company’s performance obligation under these agreements is satisfied over time as the administrative and management services are provided. Fees are recognized monthly based on a percentage of the market value of the account or at a fixed annual rate as outlined in the agreement. The Company also earns fees for trust related activities. The Company’s performance obligation under these agreements is satisfied at a point in time and recognized when these services have been performed. Other Banking Fee Income The Company charges a variety of fees to its clients for services provided on the deposit and deposit management related accounts. Each fee is either transaction-based or assessed monthly. The types of fees include service charges on accounts, wire transfer fees, maintenance fees, ATM fee charges, and other miscellaneous charges related to the accounts. These fees are not governed by individual contracts with clients. They are charged to clients based on disclosures presented to these clients upon opening these accounts, along with updated disclosures when changes are made to the fee structures. The transaction-based fees are recognized in revenue when charged to the client based on specific activity on the client’s account. Monthly service and maintenance charges are recognized in the month they are earned and are charged directly to the client’s account. Pension and Retirement Plans The Company sponsors a defined benefit pension plan (the “Pension Plan”) and a postretirement health care plan covering substantially all employees hired before May 2, 2011. Effective December 31, 2017, the accrual of benefits for all participants in the Pension Plan was frozen. Benefits for the postretirement health care plan are based on years of service. Expenses for the postretirement health care plan are recognized over the employee’s service life utilizing the projected unit credit actuarial cost method. Effective November 7, 2019, the postretirement health care plan was frozen for employees hired after that date. 62 The Company also sponsors non-qualified retirement programs that provide supplemental retirement benefits to certain current and former executives. Prior to 2016, the Company provided individual non-qualified defined benefit supplemental executive retirement plans (“DB SERPs”) to certain executives. The DB SERPs generally provide for an annual benefit payable in equal monthly installments following the executive’s retirement and continuing for at least the remainder of his or her lifetime, with such annual benefit generally based on the executive’s years of service and his or her highest three consecutive years of base salary and bonus. In 2016, the Company’s Board of Directors discontinued the use of DB SERPs for new entrants to the Company’s non-qualified retirement programs. Instead, new entrants are provided with individual non-qualified defined contribution supplemental executive retirement plans (“DC SERPs”). Under the DC SERPs, the Company may contribute an amount equal to 10% of the executive’s base salary and bonus to his or her account under the Company’s non-qualified deferred compensation plan, the Executive Deferred Compensation Plan. Expense for the DB SERPs is recognized over the executive’s service life utilizing the projected unit credit actuarial cost method. Expense for the DC SERPs is recognized as incurred. The Company maintains a Profit-Sharing Plan (“PSP”) that provides for deferral of federal and state income taxes on employee contributions allowed under Section 401(k) of federal law. The Company matches employee contributions up to 100% of the first 4% of each participant’s salary, eligible bonus, and eligible incentive. Each year, the Company may also make a discretionary contribution to the PSP based on eligible salary, bonus, and incentive. Employees are eligible to participate in the PSP on the first day of their initial date of service. Employees are also eligible to participate in the discretionary contribution portion of the PSP on the first date of their initial date of service. The employee must be employed on the last day of the calendar year or retire at the normal retirement age of 65 during the calendar year to receive the discretionary contribution. Share-Based Compensation Share-based compensation plans provide for stock option awards, restricted stock awards, time-based restricted stock units (“RSUs”), and performance-based restricted stock units (“PRSUs”). Compensation expense for restricted stock awards is recognized over the vesting period based on the fair value at the date of grant. RSUs and PRSUs are valued at the fair market value of the Company’s common stock as of the award date. PRSUs’ compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change. If the goals are not met, vesting does not occur, no compensation cost will be recognized and any recognized compensation costs will be reversed. Stock-based awards that do not require future service are expensed in the year of grant. Derivative Instruments and Hedging Activities Derivatives are recognized as either assets or liabilities on the consolidated balance sheets and are measured at fair value. The accounting for changes in the fair value of such derivatives depends on the intended use of the derivative and resulting designation. For derivatives not designated as hedges, changes in fair value of the derivative instruments are recognized in earnings in noninterest income. For derivatives designated as fair value hedges, changes in the fair value of such derivatives are recognized in earnings together with the changes in the fair value of the related hedged item. The net amount, if any, represents hedge ineffectiveness and is reflected in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded in other comprehensive income (loss) and recognized in earnings when the hedged transaction affects earnings. The ineffective portion of changes in the fair value of cash flow hedges is recognized directly in earnings. Fair Value Measurements Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company measures the fair values of its financial instruments in accordance with accounting guidance that requires an entity to base fair value on exit price and maximize the use of observable inputs and minimize the use of unobservable inputs to determine the exit price. ASC 820, “Fair Value Measurements and Disclosures” establishes a fair value hierarchy that gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data and requires fair value measurements to be disclosed by level within the hierarchy. The three broad levels defined by the fair value hierarchy are as follows: Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported date. The type of financial instruments included in Level 1 are highly liquid cash instruments with quoted prices such as government or agency securities, listed equities, and money market securities, as well as listed derivative instruments. 63 Level 2 – Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments includes cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value has been derived using a model where inputs to the model are directly observable in the market or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Instruments which are generally included in this category are corporate bonds and loans, mortgage whole loans, municipal bonds, and over-the-counter derivatives. Level 3 – Instruments that have little to no pricing observability as of the reported date. These financial instruments do not have two-way markets and are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment to estimation. Instruments that are included in this category generally include certain commercial mortgage loans, certain private equity investments, distressed debt, non- investment grade residual interests in securitizations, as well as certain highly structured over-the-counter derivative contracts. Earnings per Common Share Earnings per common share is computed using the more dilutive two-class method prescribed under ASC Topic 260, “Earnings Per Share.” ASC Topic 260 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company has determined that its outstanding non-vested stock awards are participating securities. Under the two-class method, basic earnings per common share is computed by dividing net earnings allocated to common stock by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of common stock equivalents. A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted average common shares used in calculating diluted earnings per common share for the reported periods is provided in NOTE 20 - EARNINGS PER SHARE. Subsequent Events Management has reviewed events occurring through March 16, 2023, the date the consolidated financial statements were issued and determined that no subsequent events occurred requiring adjustment to or disclosure in these consolidated financial statements. 3. RECENTLY ISSUED AND ADOPTED ACCOUNTING STANDARDS Accounting Pronouncements Adopted in 2022 In December 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. The amendments in this ASU defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The ASU is effective upon issuance. The FASB had previously issued 2020-04 - Facilitation of the Effects of Reference Rate Reform on Financial Reporting and related amendments in 2020 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 were elective and applied to all entities that have contracts, hedging relationships, and other transactions that reference the London Inter-bank Offer Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The adoption of the new ASU did not have an impact on the Company's consolidated financial statements. Accounting Pronouncements Yet to be Adopted In March 2022, the FASB issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The amendments in this ASU eliminate the accounting guidance for troubled debt restructurings (“TDRs”) by creditors in Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. For public business entities, the amendments in this ASU require an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption was permitted. The Company plans to adopt this guidance in January of 2023. The adoption of the new ASU is not expected to have an impact on the Company's consolidated financial statements. In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. The amendments in this ASU allow multiple hedged layers to be designated for a single closed portfolio of financial assets or one or more beneficial interests secured by a portfolio of financial instruments. The amendments in this ASU also clarify the accounting for and promote consistency in the reporting of hedge basis adjustments applicable to both a single hedged layer and multiple hedged layers. These amendments are effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The 64 adoption of the new ASU is not expected to have an impact on the Company's consolidated financial statements. As of December 31, 2022, the Company has no hedge relationships designated as fair value hedges. 4. MERGERS Northmark Bank On October 1, 2022, the Company completed its merger (the “Northmark Merger”) with Northmark Bank. (“Northmark”), adding three banking offices in Massachusetts. Under the terms of the Agreement and Plan of Merger, each outstanding share of Northmark common stock was converted into 0.9950 shares of the Company’s common stock. As a result of the merger, former Northmark stockholders received an aggregate of 788,137 shares of the Company's common stock. The total consideration paid amounted to $62.8 million, based on the closing price of $79.74 of the Company's common stock and cash paid for fractional shares on October 1, 2022. The Company recorded total assets of $428.7 million, assumed total liabilities of $378.5 million, and recorded $12.6 million in goodwill. The Company accounted for the merger using the acquisition method pursuant to ASC Topic 805, “Business Combinations.” Accordingly, the Company recorded merger expenses of $1.9 million during the year ended at December 31, 2022. Additionally, on October 1, 2022, the Company recorded $2.2 million in provision for credit losses to reflect the impact of CECL on the acquired loans. The acquisition method requires the acquirer to recognize the assets acquired and the liabilities assumed at their fair values as of the acquisition date. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed as of the date of the acquisition: Total Purchase Price Assets Cash and cash equivalents Investments Gross loans Allowance for loan loss Premises and equipment Core deposit intangible Other assets Total assets acquired Liabilities Deposits Repurchase agreements Other liabilities Total liabilities assumed Net assets acquired Goodwill At October 1, 2022 Net Assets Acquired at Fair Value (dollars in thousands) 62,850 82,174 22,929 303,215 — 6,856 5,320 8,181 428,675 373,129 3,745 1,579 378,453 50,222 12,628 $ $ $ $ Fair value adjustments to assets acquired and liabilities assumed are generally amortized using either an effective yield or straight-line basis over periods consistent with the average life, useful life, and/or contractual term of the related assets and liabilities. Fair values of the major categories of assets acquired and liabilities assumed were determined as follows: Cash and Cash Equivalents The fair values of cash and cash equivalents approximate the respective carrying amounts because the instruments are payable on demand or have short-term maturities. Investments The fair values of securities were based on quoted market prices for identical securities received from an independent, nationally recognized, third-party pricing service. Prices provided by the independent pricing service were based on recent trading activity and 65 other observable information including, but not limited to, market interest rate curves, referenced credit spreads, and estimated prepayment rates where applicable. Loans Fair value was determined using market participant assumptions in estimating the amount and timing of both principal and interest cash flows expected to be collected, as adjusted for an estimate of default rate and prepayments, and then applying a market-based discount rate to those cash flows. Premises and Equipment The fair value of premises was determined based upon appraisals by licensed real estate appraisers. The appraisal was based upon the best and highest use of the property with the final value determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for the property appraised. Core Deposit Intangible The fair value of the core deposit intangible is derived by comparing the interest rate and servicing costs that the financial institution pays on the core deposit liability versus the current market rate for alternative sources of financing, while factoring in estimates over the remaining life and attrition rate of the deposit accounts. The intangible asset represents the stable and relatively low cost source of funds that the deposits and accompanying relationships provide the Company, when compared to alternative funding sources. Deposits The fair value of acquired savings and transaction deposit accounts was assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. The fair value of time deposits was determined based on the present value of the contractual cash flows over the remaining period to maturity using a market interest rate. Selected Pro Forma Results The following summarizes the pro forma results of operations as if the Company merged with Northmark on January 1, 2022 (2021 amounts represent combined results for the Company and Northmark). The selected pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the financial results of the combined companies had the acquisition actually been completed at the beginning of the periods presented, nor does it indicate future results for any other interim or full-year period. Net interest and dividend income after provision for loan losses Net Income For the Year Ended December 31, 2022 2021 (dollars in thousands) 169,606 69,839 $ 111,753 29,182 $ Excluded from the pro forma results of operations for the year ended December 31, 2022 are merger-related costs of approximately $1.9 million recognized by the Company. There were no merger related expenses for the year ended December 31, 2021. These costs primarily consisted of contract terminations arising due to the merger, the acceleration of certain compensation and benefit costs, and other merger expenses. The provision for credit losses recorded on acquired loans of $2.2 million was also excluded as a non-recurring adjustment. Wellesley Bancorp, Inc. The Company completed its merger (the “Wellesley Merger”) with Wellesley Bancorp, Inc. (“Wellesley”) on June 1, 2020. Under the terms of the Agreement and Plan of Merger, each outstanding share of Wellesley common stock was converted into 0.580 shares of the Company’s common stock. As a result of the merger, former Wellesley stockholders received an aggregate of 1,502,814 shares of the Company’s common stock. The total consideration paid amounted to $88.8 million, based on the closing price of $58.00 of the Company's common stock, the value of Wellesley's exercisable options, and cash paid for fractional shares. The Company accounted for the merger using the acquisition method and recorded total assets of $985.6 million, including $20.7 million in goodwill, and assumed total liabilities of $917.6 million. 5. CASH AND CASH EQUIVALENTS At December 31, 2022 and December 31, 2021, cash and due from banks totaled $30.7 million and $180.2 million, respectively. There were no amounts required to be maintained at the Federal Reserve Bank of Boston (“FRB of Boston”) at December 31, 2022 and December 31, 2021. At December 31, 2022 and December 31, 2021, the Company pledged $500,000 to the New Hampshire Banking 66 Department relating to Cambridge Trust Company of New Hampshire, Inc.’s operations in that state. The Company did not have any cash pledged as collateral to derivative counterparties at December 31, 2022, as compared to $13.3 million at December 31, 2021. See NOTE 21 - DERIVATIVES AND HEDGING ACTIVITIES for a discussion of the Company’s derivative and hedging activities. 6. 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, 2022 Gross Unrealized Gains Gross Unrealized Losses Fair Value Amortized Cost (dollars in thousands) December 31, 2021 Gross Unrealized Losses Gross Unrealized Gains Fair Value $ $ $ $ $ 22,997 158,034 996 182,027 3,970 951,372 250 96,405 1,051,997 1,234,024 $ $ $ $ $ — $ 3 4 (3,264) (25,354) — $ 19,733 132,683 1,000 7 $ (28,618) $ 153,416 $ — $ 4 — 88 (18) (157,208) (6) (9,271) 3,952 794,168 244 87,222 92 99 $ (166,503) $ (195,121) $ $ 885,586 1,039,002 $ $ $ $ $ $ 22,996 176,531 1,743 $ 246 959 24 $ (231) (4,462) (3) 23,011 173,028 1,764 201,270 $ 1,229 $ (4,696) $ 197,803 — $ — $ — $ 864,983 6,997 105,081 3,981 26 3,798 (13,258) — (516) — 855,706 7,023 108,363 977,061 1,178,331 $ $ 7,805 9,034 $ $ (13,774) (18,470) $ $ 971,092 1,168,895 Available for sale securities U.S. Government Sponsored Enterprise obligations Mortgage-backed securities Corporate debt securities Total available for sale securities Held to maturity securities U.S. Treasury Notes Mortgage-backed securities Corporate debt securities Municipal securities Total held to maturity securities Total All of the Company’s mortgage-backed securities have been issued by, or are collateralized by securities issued by, either the Government National Mortgage Association (“Ginnie Mae” or “GNMA”), the Federal National Mortgage Association (“Fannie Mae” or “FNMA”), or the Federal Home Loan Mortgage Corporation (“Freddie Mac” or “FHLMC”). 67 The amortized cost and fair value of investment securities, aggregated by the contractual maturity, are shown below. Municipal securities are aggregated by the earliest of call date or contractual maturity. Maturities of mortgage-backed securities do not take into consideration scheduled amortization or prepayments. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Within One Year Fair Value Amortized Cost After One, But Within Five Years Fair Value Amortized Cost December 31, 2022 After Five, But Within Ten Years Fair Value Amortized Cost (dollars in thousands) After Ten Years Fair Value Amortized Cost Total Amortized Cost Fair Value Available for sale securities U.S. Government Sponsored Enterprise obligations Mortgage-backed securities Corporate debt securities Total available for sale securities Held to maturity securities U.S. Treasury Notes Mortgage-backed securities Corporate debt securities Municipal securities Total held to maturity securities Total $ — $ — $ 9,997 $ 9,012 $ 5,000 $ 4,346 $ 8,000 $ 6,375 $ 22,997 $ 19,733 — 996 — 10,680 9,966 41,622 34,934 105,732 87,783 158,034 132,683 1,000 — — — — — — 996 1,000 $ $ 996 $ 1,000 $ 20,677 $ 18,978 $ 46,622 $ 39,280 $ 113,732 $ 94,158 $ 182,027 $ 153,416 987 $ 983 $ 2,983 $ 2,969 $ — $ — $ — $ — $ 3,970 $ 3,952 — — — — 19,572 18,355 48,731 42,866 883,069 732,947 951,372 794,168 250 244 — — — — 250 244 6,987 6,997 18,657 18,602 26,441 26,028 44,320 35,595 96,405 87,222 $ $ 7,974 8,970 $ $ 7,980 8,980 $ $ 41,462 62,139 $ $ 40,170 59,148 $ 75,172 $ 121,794 $ 68,894 $ 108,174 $ 927,389 $ 1,041,121 $ 768,542 $ 862,700 $ 1,051,997 $ 1,234,024 $ 885,586 $ 1,039,002 The following tables show the Company’s investment securities with gross unrealized losses, for which an allowance for credit losses has not been recorded at December 31, 2022 or at December 31, 2021, aggregated by investment category and length of time that individual investment securities have been in a continuous loss position: Less than 12 months Fair Value Unrealized Losses December 31, 2022 12 months or longer Unrealized Fair Value Losses (dollars in thousands) Total Fair Value Unrealized Losses Available for sale securities U.S. Government Sponsored Enterprise obligations Mortgage-backed securities Total available for sale securities Held to maturity securities U.S. Treasury Notes Mortgage-backed securities Corporate debt securities Municipal securities Total held to maturity securities Total $ $ 10,722 41,832 52,554 $ 3,952 230,708 243 51,969 $ 286,872 $ 339,426 $ $ $ $ $ (2,278) $ (3,097) (5,375) $ 9,012 90,545 99,557 $ $ (986) $ 19,734 (22,257) 132,377 (23,243) $ 152,111 $ $ (3,264) (25,354) (28,618) — $ (134,846) — (4,883) 3,952 793,543 243 65,683 $ (139,729) $ 863,421 $ (162,972) $ 1,015,532 $ (18) (157,208) (6) (9,271) $ (166,503) $ (195,121) (18) $ — $ 562,835 (22,362) — (6) 13,714 (4,388) (26,774) $ 576,549 (32,149) $ 676,106 68 Less than 12 months Fair Value Unrealized Losses December 31, 2021 12 months or longer Unrealized Fair Value Losses (dollars in thousands) Total Fair Value Unrealized Losses Available for sale securities U.S. Government Sponsored Enterprise obligations Mortgage-backed securities Corporate debt securities Total available for sale securities Held to maturity securities Mortgage-backed securities Municipal securities Total held to maturity securities Total $ $ 4,881 74,724 760 80,365 $ 740,966 12,607 $ 753,573 $ 833,938 $ $ $ $ $ (115) $ (2,253) (3) (2,371) $ 4,884 47,871 — 52,755 (12,509) $ (194) (12,703) $ (15,074) $ 15,345 5,716 21,061 73,816 $ $ $ $ $ (116) $ (2,209) — 9,765 122,595 760 (2,325) $ 133,120 (749) $ 756,311 18,323 (322) (1,071) $ 774,634 (3,396) $ 907,754 $ $ $ $ $ (231) (4,462) (3) (4,696) (13,258) (516) (13,774) (18,470) As of December 31, 2022, 432 debt securities had gross unrealized losses, with an aggregate depreciation of 16.1% from the Company’s amortized cost basis. The largest unrealized dollar loss of any single security was $2.0 million, or 21.5% of its amortized cost. The largest unrealized loss percentage of any single security was 35.0% of its amortized cost, or $823,000. The Company believes that the nature and duration of unrealized losses on its debt security positions are primarily a function of interest rate movements and changes in investment spreads and does not consider full repayment of principal on the reported debt obligations to be at risk. Since nearly all of these securities are rated “investment grade” and (a) the Company does not intend to sell these securities before recovery and (b) it is more likely than not that the Company will not be required to sell these securities before recovery, the Company does not expect to suffer a credit loss as of December 31, 2022. U.S. Government obligations with an amortized cost of $9.1 million and a fair value of $8.0 million were pledged as collateral for repurchase agreements at December 31, 2022. There were no investment securities pledged as collateral for repurchase agreements at December 31, 2021. The following table sets forth information regarding sales of investment securities and the resulting gains or losses from such sales: Amortized cost of securities sold Gross gains realized on securities sold Gross losses realized on securities sold Net proceeds from securities sold 2022 For the Year Ended December 31, 2021 (dollars in thousands) 2020 $ $ 19,018 — — 19,018 $ $ — $ — — — $ 10,752 111 (42) 10,821 The Company monitors the credit quality of certain debt securities through the use of credit rating among other factors on a quarterly basis. Credit ratings are opinions about the credit quality of a security and are utilized by the Company to make informed decisions. Investment grade securities are rated BBB-/Baa3 or higher and are generally considered to be of low risk. At December 31, 2022 and 2021 respectively, the Company’s debt securities portfolio did not contain any securities below investment grade, as reported by major credit rating agencies. At December 31, 2022 and 2021, respectively, none of the Company's investment securities were delinquent or in non-accrual status. The following tables summarize the credit rating of the Company’s debt securities portfolio at December 31, 2022 and December 31, 2021. 69 Mortgage- backed Securities (1) Corporate Debt Securities December 31, 2022 Municipal Securities U.S. GSE Obligations (dollars in thousands) U.S. Treasury Notes Total Available for sale securities, at fair value AAA/AA/A BBB/BB/B Total available for sale securities Held to maturity securities, at amortized cost AAA/AA/A Total held to maturity securities $ $ $ $ 132,683 — 132,683 951,372 951,372 $ $ $ $ — $ 1,000 1,000 250 250 $ $ $ — $ — — $ 19,733 — 19,733 $ $ — $ — — $ 152,416 1,000 153,416 96,405 96,405 $ $ — $ — $ 3,970 3,970 $ 1,051,997 $ 1,051,997 Available for sale securities, at fair value AAA/AA/A BBB/BB/B Total available for sale securities Held to maturity securities, at amortized cost AAA/AA/A Total held to maturity securities December 31, 2021 Mortgage- backed Securities (1) Corporate Debt Securities Municipal Securities (dollars in thousands) U.S. GSE Obligations Total $ $ $ $ 173,028 — 173,028 864,983 864,983 $ $ $ $ 759 1,005 1,764 6,997 6,997 $ $ $ $ — $ — — $ 23,011 — 23,011 $ $ 196,798 1,005 197,803 105,081 105,081 $ $ — $ — $ 977,061 977,061 1. Includes Agency mortgage-backed pass-through securities and collateralized mortgage obligations issued by U.S. Government Sponsored enterprises ("GSEs") and U.S. government agencies, such as FNMA, FHLMC, and GNMA that are not rated by Moody’s or Standard & Poor's. Each security contains a guarantee by the issuing GSE or agency and therefore carries an implicit guarantee of the U.S. government. These have been categorized as AAA/AA/A. 70 7. LOANS AND ALLOWANCE FOR CREDIT LOSSES Loans outstanding are detailed by category as follows: Residential mortgage Mortgages - fixed rate Mortgages - adjustable rate Construction Deferred costs, net of unearned fees Total residential mortgages Commercial mortgage Mortgages - non-owner occupied Mortgages - owner occupied Construction Deferred costs, net of unearned fees Total commercial mortgages Home equity Home equity - lines of credit Home equity - term loans Deferred costs, net of unearned fees Total home equity Commercial and industrial Commercial and industrial PPP loans Unearned fees, net of deferred costs Total commercial and industrial Consumer Secured Unsecured Deferred costs, net of unearned fees Total consumer Total loans December 31, 2022 December 31, 2021 (dollars in thousands) $ $ $ 902,968 703,958 35,299 6,613 1,648,838 1,592,732 183,591 135,782 2,318 1,914,423 108,961 2,098 292 111,351 349,026 1,384 240 350,650 716,456 679,675 13,012 5,936 1,415,079 1,272,135 150,632 86,246 1,989 1,511,002 85,639 2,017 304 87,960 247,024 22,856 (434) 269,446 35,679 1,897 18 37,594 4,062,856 $ 34,308 1,303 8 35,619 3,319,106 The Coronavirus Aid, Relief, and Economic Security Act, (the “CARES Act”), was signed into law on March 27, 2020, and provided emergency economic relief to individuals and businesses impacted by the COVID-19 pandemic. Among other things, the CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new 7(a) loan program called the Paycheck Protection Program (“PPP”). As a qualified SBA lender, the Company was authorized to originate PPP loans. PPP loans have: (a) an interest rate of 1.0%, (b) a two year or five-year loan term to maturity; and (c) principal and interest payments deferred until the SBA remits the forgiven amount to the Company or 10 months from the end of the covered period, as defined. The SBA will guarantee 100% of the PPP loans made to eligible borrowers. The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP so long as employee and compensation levels of the business are maintained and 60% of the loan proceeds are used for payroll expense, with the remaining 40% of the loan proceeds used for other qualifying expenses. The Company did not record a provision for credit losses for PPP loans in 2022, 2021 or 2020 due to the SBA guarantee. Directors and officers of the Company and their associates are clients of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features. 71 Asset Quality The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. The Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as non-accrual loans. The Company may use discretion regarding other loans over 90 days past due if the loan is well secured and/or in process of collection. The following tables set forth information regarding non-performing loans disaggregated by loan category: Non-performing loans: Non-accrual loans Troubled debt restructurings Total Non-performing loans: Non-accrual loans Troubled debt restructurings Total Residential Mortgage Commercial Mortgage December 31, 2022 Home Equity (dollars in thousands) Commercial and Industrial Total $ $ 4,733 622 5,355 $ $ 311 — 311 $ $ 722 — 722 $ $ 73 81 154 $ $ 5,839 703 6,542 Residential Mortgage Commercial Mortgage December 31, 2021 Home Equity (dollars in thousands) Commercial and Industrial Total $ $ 3,777 652 4,429 $ $ 517 — 517 $ $ 223 — 223 $ $ 111 106 217 $ $ 4,628 758 5,386 It is the Company’s policy to reverse any accrued interest when a loan is put on non-accrual status; as such, the Company did not record any interest income on non-accrual loans during the years ended December 31, 2022 and December 31, 2021. There were no significant commitments to lend additional funds to borrowers whose loans were on non-accrual status at December 31, 2022 and December 31, 2021. Troubled Debt Restructurings (“TDRs”) Loans are considered restructured in a troubled debt restructuring when the Company has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions may include modifications of the terms of the debt such as deferral of payments, extension of maturity, reduction of principal balance, reduction of the stated interest rate other than normal market rate adjustments, or a combination of these concessions. Debt may be bifurcated with separate terms for each tranche of the restructured debt. Restructuring a loan in lieu of aggressively enforcing the collection of the loan may benefit the Company by increasing the ultimate probability of collection. Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on non-accrual status at the time of the restructuring generally remain on non-accrual status for approximately six months or longer before management considers such loans for return to accruing status. Accruing restructured loans are placed into non- accrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term. TDRs are individually evaluated for credit losses. There were no new TDRs during the years ended December 31, 2022 or December 31, 2021. At December 31, 2022, four loans were TDRs with a total carrying value of $704,000. There were no TDR defaults during the year ended December 31, 2022. As of December 31, 2021, four loans were TDRs with a total carrying value of $758,000. There were no TDR defaults during the year ended December 31, 2021. The allowance for credit losses includes a specific reserve for TDRs of approximately $60,000 and $85,000 as of December 31, 2022 and December 31, 2021, respectively. As of December 31, 2022 and December 31, 2021, there were no significant commitments to lend additional funds to borrowers whose loans were restructured. 72 Pursuant to Section 4013 of the CARES Act, financial institutions could suspend the requirements under U.S. GAAP related to TDRs for modifications made before December 31, 2020 to loans that were current as of December 31, 2019. As a result of the enactment of the Consolidated Appropriations Act, 2021, in January 2021, the suspension of TDR accounting was extended to, and expired on January 1, 2022. The requirement that a loan be not more than 30 days past due as of December 31, 2019 was still applicable. In response to the COVID-19 pandemic and its economic impact to clients, a short-term modification program that complied with the CARES Act was implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Under issued guidance, provided that these loans were current as of either year end or the date of the modification, these loans were not considered TDR loans at December 31, 2022 and will not be reported as past due during the deferral period. The Company had no loans in deferral as of December 31, 2022. Loans by Credit Quality Indicator. The following tables contain period-end balances of loans receivable disaggregated by credit quality indicator: Credit Quality Indicator - by Origination Year as of December 31, 2022 2022 2021 2020 2019 2018 Prior (dollars in thousands) Revolving loans amortized cost basis Total Residential Mortgage: Current Non-performing Total Home equity: Current Non-performing Total Consumer: Current Non-performing Total $ 314,599 — $ 314,599 $ 511,217 — $ 511,217 $ 276,698 206 $ 276,904 $ 113,251 315 $ 113,566 $ $ $ $ 3,611 — 3,611 13,214 — 13,214 $ $ $ $ — $ — — $ — $ — — $ 8,482 — 8,482 $ $ 5,353 — 5,353 $ $ 58 — 58 444 — 444 $ $ $ $ $ $ 77,620 684 78,304 $ 350,098 4,150 $ 354,248 360 — 360 2,078 — 2,078 $ $ $ $ 481 — 481 7,424 — 7,424 $ $ $ $ $ $ — $ 1,643,483 — 5,355 — $ 1,648,838 106,119 722 106,841 599 — 599 $ $ $ $ 110,629 722 111,351 37,594 — 37,594 Credit Quality Indicator - by Origination Year as of December 31, 2022 Revolving loans amortized cost basis Prior 2020 2021 2019 (dollars in thousands) 2018 2022 Total Commercial Mortgage: Credit risk profile by internally assigned grade: 1-6 (Pass) 7 (Special Mention) 8 (Substandard) 9 (Doubtful) 10 (Loss) Total Commercial and Industrial: Credit risk profile by internally assigned grade: 1-6 (Pass) 7 (Special Mention) 8 (Substandard) 9 (Doubtful) 10 (Loss) Total $ 411,927 — — — — $ 411,927 $ 330,593 — — — — $ 330,593 $ 222,073 4,562 — — — $ 226,635 $ 260,588 41,578 — — — $ 302,166 $ 125,398 21,697 — — — $ 147,095 $ 489,564 6,132 311 — — $ 496,007 $ 128,301 — — — — $ 128,301 $ 67,727 4,211 — — — $ 71,938 $ 62,025 130 628 — — $ 62,783 $ 28,557 161 2,102 — — $ 30,820 $ 18,794 407 81 — — $ 19,282 $ 36,836 121 84 — — $ 37,041 $ $ $ $ — $ — — — — — $ 1,840,143 73,969 311 — — 1,914,423 475 10 — — — 485 $ $ 342,715 5,040 2,895 — — 350,650 73 Credit Quality Indicator - by Origination Year as of December 31, 2021 2021 2020 2019 2018 2017 Prior (dollars in thousands) Revolving loans amortized cost basis Total Residential Mortgage: Current Non-performing Total Home equity: Current Non-performing Total Consumer: Current Non-performing Total $ 535,071 — $ 535,071 $ 329,501 151 $ 329,652 $ 135,139 — $ 135,139 $ 101,108 330 $ 101,438 $ $ $ $ — $ — — $ 719 — 719 14,427 — 14,427 $ $ 8,758 — 8,758 $ $ $ $ 3,088 223 3,311 1,544 — 1,544 $ $ $ $ 4,469 — 4,469 3,168 — 3,168 $ $ $ $ $ $ 77,702 54 77,756 $ 232,129 3,894 $ 236,023 5,060 — 5,060 1,838 — 1,838 $ $ $ $ 5,475 — 5,475 5,357 — 5,357 $ $ $ $ $ $ — $ 1,410,650 — 4,429 — $ 1,415,079 68,926 — 68,926 527 — 527 $ $ $ $ 87,737 223 87,960 35,619 — 35,619 Credit Quality Indicator - by Origination Year as of December 31, 2021 Commercial Mortgage: Credit risk profile by internally assigned grade: 1-6 (Pass) 7 (Special Mention) 8 (Substandard) 9 (Doubtful) 10 (Loss) Total Commercial and Industrial: Credit risk profile by internally assigned grade: 1-6 (Pass) 7 (Special Mention) 8 (Substandard) 9 (Doubtful) 10 (Loss) Total 2021 2020 2019 2018 2017 Prior (dollars in thousands) $ 319,633 — — — — $ 319,633 $ 248,691 1,096 — — — $ 249,787 $ 320,189 40,879 — — — $ 361,068 $ 158,462 22,471 — — — $ 180,933 $ 93,016 2,913 — — — $ 95,929 $ 298,791 4,131 730 — — $ 303,652 $ 83,614 318 — — — $ 83,932 $ 77,073 350 792 — — $ 78,215 $ 38,299 5,523 2,331 — — $ 46,153 $ 34,360 406 504 — — $ 35,270 $ 19,727 161 — — — $ 19,888 $ $ 4,622 859 144 — — 5,625 Revolving loans amortized cost basis Total $ $ $ $ — $ — — — — — $ 1,438,782 71,490 730 — — 1,511,002 353 10 — — — 363 $ $ 258,048 7,627 3,771 — — 269,446 With respect to residential real estate mortgages, home equity, and consumer loans, the Company utilizes the following categories as indicators of credit quality: • • Performing – These loans are accruing and are considered having low to moderate risk. Non-performing – These loans are on non-accrual or are past due more than 90 days but are still accruing or are restructured. These loans may contain greater than average risk. With respect to commercial mortgages and commercial loans, the Company utilizes a 10-grade internal loan rating system as an indicator of credit quality. The grades are as follows: • • Loans rated 1-6 (Pass) – These loans are considered “pass” rated with low to moderate risk. Loans rated 7 (Special Mention) – These loans have potential weaknesses warranting close attention, which, if left uncorrected, may result in deterioration of the credit at some future date. 74 • • • Loans rated 8 (Substandard) – These loans have well-defined weaknesses that jeopardize the orderly liquidation of the debt under the original loan terms. Loss potential exists but is not identifiable in any one client. Loans rated 9 (Doubtful) – These loans have pronounced weaknesses that make full collection highly questionable and improbable. Loans rated 10 (Loss) – These loans are considered uncollectible and continuance as a bankable asset is not warranted. Delinquencies The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more. Loan delinquencies can be attributed to many factors, such as but not limited to, a continuing weakness in, or deteriorating, economic conditions in the region in which the collateral is located, the loss of a tenant or lower lease rates for commercial borrowers, or the loss of income for consumers and the resulting liquidity impacts on the borrowers. The following tables contain period-end balances of loans receivable disaggregated by past due status: Residential mortgage Commercial mortgage Home equity Commercial and industrial Consumer Total Residential mortgage Commercial mortgage Home equity Commercial and industrial Consumer Total 30-59 Days 60-89 Days 90 Days or greater Total Past Due Current Loans Total December 31, 2022 $ $ $ $ 11,359 — 962 65 81 12,467 $ $ 1,454 — 393 269 — 2,116 30-59 Days 60-89 Days 8,470 476 314 5 — 9,265 $ $ 415 — 643 437 — 1,495 (dollars in thousands) 1,809 — 214 — — 2,023 $ $ 14,622 — 1,569 334 81 16,606 December 31, 2021 90 Days or Greater Total Past Due (dollars in thousands) 1,488 — — — — 1,488 $ $ 10,373 476 957 442 — 12,248 $ $ $ $ $ $ $ $ 1,634,216 1,914,423 109,782 350,316 37,513 4,046,250 Current Loans 1,404,706 1,510,526 87,003 269,004 35,619 3,306,858 $ $ $ $ 1,648,838 1,914,423 111,351 350,650 37,594 4,062,856 Total 1,415,079 1,511,002 87,960 269,446 35,619 3,319,106 There were no loans 90 days or more past due and still accruing at December 31, 2022 or December 31, 2021. 75 Allowance for Credit Losses The following tables contain changes in the allowance for credit losses disaggregated by loan category: Residential Mortgage Commercial Mortgage Home Equity Commercial & Industrial Consumer Unfunded Commitments Total For the Year Ended December 31, 2022 (dollars in thousands) Allowance for credit loss: Allowance for credit losses - loan portfolio: Balance at December 31, 2021 Provision for acquired loans Initial allowance for PCD Charge-offs Recoveries Provision for (release of) credit losses - loan portfolio Allowance for credit losses - loan portfolio Allowance for credit losses - unfunded commitments: Balance at December 31, 2021 Acquired loan commitments Provision for (release of) credit losses - unfunded commitments Allowance for credit losses- unfunded commitments Total allowance for credit loss $ $ $ $ $ $ 13,383 527 19 — 4 $ 17,133 1,337 37 — — (612) 579 $ 406 117 — — — 50 $ 2,989 113 — (23) 89 985 $ 585 8 — (29) 12 65 — $ — — — — 34,496 2,102 56 (52) 105 — 1,067 13,321 $ 19,086 $ 573 $ 4,153 $ 641 $ — $ 37,774 — $ — — — $ — — — $ — — — $ — — — $ $ 13,321 — $ $ 19,086 — $ $ 573 — $ $ 4,153 — $ — — — $ $ 641 1,384 137 575 2,096 2,096 $ $ $ 1,384 137 575 2,096 39,870 Residential Mortgages Commercial Mortgages Home Equity Commercial & Industrial Consumer Unfunded Commitments Total For the Year Ended December 31, 2021 (dollars in thousands) Allowance for credit loss: Allowance for credit losses - loan portfolio: Balance at December 31, 2020 Charge-offs Recoveries Provision for (release of) credit losses - loan portfolio Allowance for credit losses - loan portfolio Allowance for credit losses - unfunded commitments: Balance at December 31, 2020 Provision for credit losses - unfunded commitments Allowance for credit losses-unfunded commitments Total allowance for credit loss $ $ $ $ $ 13,067 (4) — $ 18,564 — 30 $ 552 — — 320 (1,461) (146) $ 3,309 (41) 181 (460) $ 524 (42) 30 73 — $ — — 36,016 (87) 241 — (1,674) 13,383 $ 17,133 $ 406 $ 2,989 $ 585 $ — $ 34,496 — $ — — — 13,383 $ — 17,133 $ — $ — $ — $ — $ 1,004 $ 1,004 — — 406 — — 2,989 $ $ — — 585 $ 380 380 1,384 1,384 $ 1,384 35,880 8. FEDERAL HOME LOAN BANK (“FHLB”) OF BOSTON STOCK As a voluntary member of the FHLB of Boston, the Company is required to invest in stock of the FHLB of Boston (which is considered a restricted equity security) in an amount based upon its outstanding advances from the FHLB of Boston. At December 31, 2022 and 2021, the Company’s investment in FHLB of Boston stock totaled $6.3 million and $4.8 million, respectively. No market exists for shares of this stock. The Company’s cost for FHLB of Boston stock is equal to its par value. Upon redemption of the stock, which is at the discretion of the FHLB of Boston, the Bank would receive an amount equal to the par value of the stock. At its discretion, the FHLB of Boston may also declare dividends on its stock. The Company’s investment in FHLB of Boston stock is reviewed for impairment at each reporting date based on the ultimate recoverability of the cost basis of the stock. As of December 31, 2022 and December 31, 2021, no impairment has been recognized. 76 9. BANKING PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation and amortization of property, leasehold improvements, and equipment is presented below: Land Building and leasehold improvements Equipment, including vaults Work in process Subtotal Accumulated depreciation and amortization Total December 31, 2022 2021 (dollars in thousands) $ $ 3,396 25,588 20,165 22 49,171 (25,874) 23,297 $ $ 1,516 20,254 18,592 19 40,381 (23,055) 17,326 Estimated Useful Lives 3-30 years 3-20 years Total depreciation expense for the years ended December 31, 2022, 2021, and 2020 amounted to $2.7 million, $2.6 million, and $2.5 million, and is included in occupancy and equipment expenses in the accompanying consolidated statements of income. 10. INTANGIBLE ASSETS Core deposit intangible (“CDI”). At December 31, 2022 and December 31, 2021, the carrying value of CDI assets totaled $7.4 million and $2.6 million, respectively. The Company recorded CDI assets of $5.3 million associated with the Northmark merger during the year ended December 31, 2022. The Company recorded amortization expense of CDI assets totaling $494,000, $361,000, and $361,000 for the years ended December 31, 2022, December 31, 2021, and December 31, 2020, respectively. The weighted-average remaining amortization period for CDI was 8.7 years and 7.3 years at December 31, 2022 and December 31, 2021, respectively. Mortgage servicing rights. Periodically, the Company sells certain residential mortgage loans to the secondary market. Generally, these loans are sold without recourse or other credit enhancements. The Company sells loans and either releases or retains the servicing rights. For loans sold with servicing rights retained, the Company provides the servicing for the loans on a per-loan fee basis. Mortgage loans sold with servicing rights retained during the years ended December 31, 2022, December 31, 2021, and December 31, 2020 were $5.8 million, $25.3 million, and $60.5 million, respectively. The following table provides an analysis of mortgage servicing rights, which are included in other assets: Balance at December 31, 2019 Mortgage servicing rights acquired as a result of the Wellesley merger Mortgage servicing rights capitalized Amortization charged against servicing income Change in impairment reserve Balance at December 31, 2020 Balance at December 31, 2020 Mortgage servicing rights capitalized Amortization charged against servicing income Change in impairment reserve Balance at December 31, 2021 Balance at December 31, 2021 Mortgage servicing rights acquired as a result of the Northmark merger Mortgage servicing rights capitalized Amortization charged against servicing income Change in impairment reserve Balance at December 31, 2022 77 Mortgage Servicing Rights Valuation Allowance (dollars in thousands) Total $ $ $ $ $ $ 1,347 50 536 (572) — 1,361 1,361 281 (559) — 1,083 1,083 785 71 (274) — 1,665 $ $ $ $ $ $ (26) $ — — — (116) (142) $ (142) $ — — 142 — $ — $ — — — — $ 1,321 50 536 (572) (116) 1,219 1,219 281 (559) 142 1,083 1,083 785 71 (274) — 1,665 The fair value of the Company’s mortgage servicing rights portfolio was $2.3 million and $1.5 million as of December 31, 2022 and 2021, respectively. The fair value of mortgage servicing rights is estimated based on the present value of expected cash flows, incorporating assumptions for discount rate, prepayment speed, and servicing cost. The weighted-average amortization period for mortgage servicing rights portfolio was 7.1 years and 5.7 years at December 31, 2022 and 2021, respectively. The estimated aggregate future amortization expense for mortgage servicing rights for each of the next five years and thereafter is as follows: 2023 2024 2025 2026 2027 Thereafter Total $ $ Future Amortization Expense (dollars in thousands) 217 192 170 150 132 804 1,665 11. DEPOSITS Deposits are summarized as follows: Demand deposits (non-interest bearing) Interest bearing checking Money market Savings Retail certificates of deposit under $250,000 Retail certificates of deposit $250,000 or greater Brokered certificates of deposit Total deposits Certificates of deposit had the following schedule of maturities: 2022 2023 2024 2025 2026 2027 and after Total certificates of deposit Related Party Deposits December 31, 2022 December 31, 2021 (dollars in thousands) 1,366,395 908,961 1,162,773 790,628 117,532 87,528 381,559 4,815,376 $ $ 1,393,935 763,188 1,104,238 907,722 99,196 60,171 2,702 4,331,152 December 31, 2022 December 31, 2021 (dollars in thousands) — $ 533,513 39,753 5,377 6,021 1,955 586,619 $ 132,212 19,062 4,443 2,182 4,170 — 162,069 $ $ $ $ Deposit accounts of directors, executive officers, and their respective affiliates totaled $2.7 million and $7.5 million as of December 31, 2022 and 2021, respectively. 12. BORROWINGS Federal Home Loan Bank Advances At December 31, 2022 the Company had $100.0 million of short-term advances from the FHLB of Boston, with a weighted average rate of 4.38%. At December 31, 2021, the Company did not have any short-term advances outstanding from the FHLB of Boston. 78 Information relating to long-term borrowings from the FHLB of Boston is presented below: Stated Maturity 2022 2023* December 31, 2022 Amount Rate December 31, 2021 Amount Rate $ $ — 176 176 (dollars in thousands) — $ 2.36 2.36% $ 221 16,221 16,442 1.84% 3.69 3.67% * December 31, 2021 totals includes a $15 million advance with an interest rate of 3.80%, that was callable by the FHLB of Boston on January 27, 2022. Securities Sold Under Agreements to Repurchase The Company periodically enters into repurchase agreements with its larger deposit and commercial clients as part of its cash management services which are typically overnight borrowings. Repurchase agreements with clients totaled $5.0 million as of December 31, 2022. The daily average balance of securities sold under agreements to repurchase during the year ended December 31, 2022 was $1.2 million. There were no repurchase agreements with clients outstanding as of December 31, 2021. The Company retains control of the securities underlying these agreements. Federal Reserve Bank PPP Loan Facility (“PPPLF”) Advances During the years ended December 31, 2022 and December 31, 2021, the Company did not borrow funds from the Federal Reserve Bank’s PPPLF. During the year ended December 31, 2020, in order to fund a portion of the Company’s PPP loan originations, the Company borrowed $85.4 million from the Federal Reserve Bank’s PPPLF, which carried a rate of 0.35% fixed for the term of the corresponding PPP loan. The Company pledged eligible PPP loans as collateral for the borrowings. As of December 31, 2020, all of the Company’s borrowings under the PPPLF were repaid. Subordinated Debt In the fourth quarter of 2020, the Company redeemed $10.0 million in subordinated debt, bearing a 6.0% coupon, which was assumed as part of the Wellesley Merger. Unused Borrowing Capacity with the FHLB of Boston and FRB of Boston All short- and long-term borrowings with the FHLB of Boston are secured by the Company’s stock in the FHLB of Boston and a blanket lien on “qualified collateral” defined principally as 60% - 70% of the carrying value of certain residential mortgage loans. Based upon collateral pledged, the Bank’s unused borrowing capacity with the FHLB of Boston at December 31, 2022 was approximately $639.0 million. The Company also has a line of credit with the FRB of Boston. The Banks did not have any outstanding FRB borrowings as of December 31, 2022 and 2021. At December 31, 2022 and 2021, the Company had pledged investment securities, CRE, and C&I loans with aggregate principal balances of approximately $970.1 million and $652.3 million, respectively, as collateral for this line of credit. Based upon the collateral pledged, the Company’s unused borrowing capacity with the FRB of Boston at December 31, 2022 and 2021 was approximately $680.4 million and $419.6 million, respectively. 79 13. INCOME TAXES The components of income tax expense were as follows: Current tax expense Federal State Deferred tax expense (benefit) Federal State Total income tax expense 2022 For the Year Ended December 31, 2021 (dollars in thousands) 2020 $ $ 12,906 5,559 18,465 455 132 587 19,052 $ $ 11,330 4,862 16,192 1,840 1,059 2,899 19,091 $ $ 7,877 4,192 12,069 (250) (415) (665) 11,404 The following is a reconciliation of the total income tax expense, calculated at statutory federal income tax rates, to the income tax provision in the consolidated statements of income: Income tax expense at statutory rate of 21.0% Increase/(decrease) resulting from: State tax, net of federal tax benefit Tax-exempt income ESOP dividends Bank owned life insurance Compensation limited under 162(m) Benefit from stock compensation Non-deductible acquisition costs Non-deductible expenses Impact of CARES Act BOLI surrender, death benefit Other Total income tax expense For the Year Ended December 31, 2022 2021 2020 $ $ 15,112 4,496 (814) (150) (133) 193 (81) 182 44 — 310 (107) 19,052 (dollars in thousands) 15,354 $ $ 4,678 (795) (145) (165) 226 (46) — 55 — — (71) 19,091 $ $ 9,106 2,984 (694) (125) (157) 511 — 186 — (539) — 132 11,404 The CARES Act was signed into law on March 27, 2020, to help stimulate the United States economy. One of the business tax provisions of the CARES Act included allowing net operating losses (“NOL”) generated by the Company in tax years 2018 and 2019 to be carried back up to five years at the tax rates in effect during those periods, rather than carried forward at current federal tax rates of 21%. The effect of the Act allowed the Company to recognize lower tax expense associated with NOL carryforwards from 2018 and 2019 (as a result of the Optima Bank and Trust merger) and resulted in a benefit of $539,000 during the year ended December 31, 2020. 80 The Company’s 2022 and 2021 net deferred tax assets were measured using a 27.95% and 27.92% tax rate, respectively, and consisted of the following components: Gross deferred tax assets Allowance for credit losses Unrealized losses on available for sale securities Incentive compensation Equity based compensation Lease liabilities ESOP dividends Intangibles and fair value marks (merger related) Other Total gross deferred tax assets Gross deferred tax liabilities Deferred loan origination costs Retirement benefits Depreciation of premises and equipment Right-of-use asset Mortgage servicing rights Goodwill Derivative transactions Total gross deferred tax liabilities Net deferred tax asset December 31, 2022 December 31, 2021 (dollars in thousands) $ $ 11,142 7,390 1,819 1,298 7,661 200 2,322 931 32,763 (2,886) (1,745) (2,551) (7,014) (465) (115) 3 (14,773) 17,990 $ $ 10,019 982 1,905 1,347 9,458 193 658 265 24,827 (2,324) (535) (1,997) (8,733) (303) (115) (835) (14,842) 9,985 It is management’s belief that it is more likely than not that the reversal of deferred tax liabilities and results of future operations will generate sufficient taxable income to realize the deferred tax assets. Therefore, no valuation allowance was required at either December 31, 2022 and December 31, 2021 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. At December 31, 2022 and December 31, 2021, the Company had no unrecognized tax benefits or any uncertain tax positions. The Company does not expect the total amount of unrecognized tax benefits to significantly increase in the next 12 months. The Company’s federal income tax returns are open and subject to examination from the 2019 through 2022 tax return years. The Company’s state income tax returns are open from the 2019 through 2022 tax return years based on individual states’ statute of limitations. 14. PENSION AND RETIREMENT PLANS The Company has a noncontributory, defined benefit pension plan (“Pension Plan”) covering substantially all employees hired before May 2, 2011. The Company also provides supplemental retirement benefits to certain current and former executive officers of the Company under the terms of Supplemental Executive Retirement Agreements (“Supplemental Retirement Plan”). The Company also offers postretirement health care benefits for current and future retirees of the Bank. Certain employees receive a fixed monthly benefit at age 65 toward the purchase of postretirement medical coverage. The benefit received is based on the employee’s years of active service. Effective November 7, 2019, the postretirement health care plan was frozen for employees hired after that date. The Company froze the accrual of benefits on the qualified defined benefit pension plan in 2017. The Company did not make any contributions to the qualified defined benefit pension plan during the year ended December 31, 2022. The Company uses a December 31st measurement date each year to determine the benefit obligations for these plans. 81 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 Funded status at end of year Pension Plan 2022 Supplemental Retirement Plan 2021 2022 (dollars in thousands) 2021 $ $ 47,875 — 1,309 (11,754) (1,832) 35,598 60,638 (8,457) — (1,832) 50,349 14,751 $ $ 50,117 — 1,211 (1,838) (1,615) 47,875 55,802 6,451 — (1,615) 60,638 12,763 $ $ $ 10,075 399 260 (2,057) (617) 8,060 — — 617 (617) — (8,060) $ 10,505 400 223 (451) (602) 10,075 — — 602 (602) — (10,075) The funded status of the Company’s Pension Plan is included within other assets and the funded status of the Company’s Supplemental Retirement Plan is included within other liabilities on the Company’s consolidated balance sheets at December 31, 2022 and 2021. Accumulated benefit obligation Pension Plan 2022 $ 35,598 $ Amounts recognized in accumulated other comprehensive income (loss) consisted of: Supplemental Retirement Plan 2021 2022 (dollars in thousands) 47,875 $ 7,627 2021 $ 9,472 Net actuarial (gain) loss Prior service credit Total Pension Plan Supplemental Retirement Plan 2022 2021 2022 2021 (dollars in thousands) $ $ 373 — 373 $ $ (206) $ — (206) $ (617) $ — (617) $ 1,468 — 1,468 The components of net periodic benefit cost and amounts recognized in other comprehensive income (loss) were as follows: Net periodic benefit cost Service cost Interest cost Expected return on assets Amortization of prior service credit Amortization of net actuarial loss Net periodic expense (benefit) Amounts recognized in other comprehensive income (loss) Net actuarial loss/(gain) Amortization of prior service credit Amortization of net actuarial loss Total recognized in other comprehensive income (loss) Total recognized in net periodic expense (benefit) and other Pension Plan 2022 Supplemental Retirement Plan 2021 2022 (dollars in thousands) 2021 $ — $ — $ 1,309 (3,876) — — (2,567) 579 — — 579 1,211 (3,566) (3) — (2,358) (4,723) 3 — (4,720) $ 399 260 — — 28 687 (2,057) — (28) (2,085) 400 223 — — 40 663 (451) — (40) (491) comprehensive income (loss) $ (1,988) $ (7,078) $ (1,398) $ 172 82 Weighted-average assumptions used to determine projected benefit obligations are as follows: Discount rate Rate of compensation increase Pension Plan Supplemental Retirement Plan 2022 2021 2022 2021 5.22% N/A 2.79% N/A 5.15% 4.00% 2.63% 4.00% Weighted-average assumptions used to determine the net periodic benefit cost in each year were as follows: Discount rate Expected long-term return on plan assets Rate of compensation increase Pension Plan Supplemental Retirement Plan 2022 2021 2022 2021 2.79% 6.50% N/A 2.45% 6.50% N/A 2.63% N/A 4.00% 2.21% N/A 4.00% To develop the expected long-term rate of return on assets assumption for the Pension Plan, the Company considered the historical returns and the future expectations for returns for each asset class, as well as target asset allocations of the pension portfolio. The Company maintains an Investment Policy for its Pension Plan. The objective of this policy is to seek a balance between capital appreciation, current income, and preservation of capital, with a longer-term weighting 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 30% to 60% in domestic large cap equities, from 5% to 20% in domestic small/mid cap equities, from 0% to 20% in international and emerging equities, and from 20% to 60% in cash and fixed income. The Company’s Pension Plan weighted-average asset allocations by asset category were as follows: Equity securities Debt securities Other Cash and equivalents Total December 31, 2022 2021 60% 33 — 7 100% 68% 29 — 3 100% 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 Company’s market assumptions. The following table summarizes the various categories of the Pension Plan’s assets: Asset category Cash and cash equivalents Fixed income Equity securities Mutual funds Domestic equity International Domestic fixed income Total Level 1 Fair Value as of December 31, 2022 Level 2 Level 3 (dollars in thousands) Total $ 3,676 — — $ 12,347 — $ — 3,676 12,347 24,201 3,942 6,183 38,002 $ — — — 12,347 $ — — — — $ 24,201 3,942 6,183 50,349 $ $ 83 Asset category Cash and cash equivalents Fixed income Equity securities Common stock Large cap core Small cap core Mutual funds Domestic equity International Domestic fixed income Total Fair Value as of December 31, 2021 Level 1 Level 2 Level 3 Total (dollars in thousands) $ 1,689 — — $ 13,338 — $ — 1,689 13,338 16,940 2,359 10,413 6,579 9,320 47,300 — — — — — 13,338 $ $ — — — — — — $ 16,940 2,359 10,413 6,579 9,320 60,638 $ $ There were no transfers between fair value levels during the years ended December 31, 2022 and December 31, 2021. The Company offers postretirement health care benefits for current and future retirees of the Bank. Employees receive a fixed monthly benefit at age 65 toward the purchase of postretirement medical coverage. The benefit received is based on the employee’s years of active service. The Company uses a December 31 measurement date each year to determine the benefit obligation for this plan. On November 7, 2019, the Company announced its decision to freeze the accrual of benefits to new hires within the plan. The plan is unfunded and plan obligations were $424,000 and $729,000 at December 31, 2022 and December 31, 2021, respectively. Benefits expected to be paid in the next ten years are as follows: Year-ended December 31, 2023 2024 2025 2026 2027 2028-2032 Total Pension Plan Supplemental Retirement Plan Postretirement Healthcare Plan Total (dollars in thousands) $ $ 2,124 2,197 2,270 2,394 2,378 12,695 24,058 $ $ 611 606 602 597 592 3,916 6,924 $ $ 24 23 23 23 22 123 238 $ $ 2,759 2,826 2,895 3,014 2,992 16,734 31,220 Employee Profit Sharing and 401(k) Plan The Company maintains a Profit-Sharing Plan (“PSP”) that provides for deferral of federal and state income taxes on employee contributions allowed under Section 401(k) of federal law. The Company matches employee contributions up to 100% of the first 4% of each participant’s salary, eligible bonus, and eligible incentive. Employees are eligible to participate in the PSP on the first day of their initial date of service. The Company may also make discretionary contributions to the PSP. Employee Stock Ownership Plan The Company has an Employee Stock Ownership Plan (“ESOP”) for its eligible employees. Employees are eligible to participate upon the attainment of age 21 and the completion of 12 months of service consisting of at least 1,000 hours. Purchases of the Company’s stock by the ESOP will be funded by employer contributions or reinvestment of cash dividends. Total expenses related to the Profit Sharing and ESOP Plans for the years ended December 31, 2022, 2021, and 2020 amounted to $4.5 million, $4.0 million, and $3.6 million, respectively. 84 Defined Contribution SERP Plan For executives participating in the Defined Contribution SERP Plan (“DC SERP”) plan, the Company made a contribution of 10% of each executive’s base salary and bonus to his or her account under the Company’s DC SERP. Total expenses related to the Company’s DC SERP for the years ended December 31, 2022, 2021, and 2020 amounted to $271,000, $201,000, and $209,000, respectively. 15. SHARE-BASED COMPENSATION In 2017, the Company adopted the 2017 Equity and Cash Incentive Plan (the “2017 Plan”) and all future awards from date of adoption are anticipated to be made under the 2017 Plan. The 2017 Plan permits the issuance of restricted stock, restricted stock units (both time and performance-based), stock options, and stock appreciation rights. Restricted stock awards time-vest either over a three-year or five-year period and are fair valued as of the date of grant. The holders of restricted stock awards participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. A summary of restricted stock outstanding as of December 31, 2022 and 2021, and changes during the years ended on those dates, is presented below: Restricted stock Non-vested at beginning of year Granted Vested Forfeited Non-vested at end of year December 31, 2022 December 31, 2021 Number of Shares Weighted Average Grant Value Number of Shares Weighted Average Grant Value 34,622 14,380 (11,450) (2,980) 34,572 $ $ 78.20 87.10 76.50 81.43 82.19 31,649 18,781 (11,691) (4,117) 34,622 $ $ 73.07 82.06 71.27 75.97 78.20 Performance-based restricted stock units vest based upon the Company’s performance over a three-year period and are fair valued as of the date of grant. The holders of performance-based restricted stock units do not participate in the rewards of stock ownership of the Company until vested. A summary of non-vested performance-based restricted stock units outstanding as of December 31, 2022 and 2021, and changes during the years ended on those dates, is presented below: Performance-based restricted stock units Non-vested at beginning of year Granted Vested (Performance achieved) Forfeited Non-vested at end of year December 31, 2022 December 31, 2021 Number of Units Weighted Average Grant Value Number of Units Weighted Average Grant Value 74,699 37,263 (34,248) (5,580) 72,134 $ $ 73.59 88.18 70.36 79.92 80.83 75,246 32,697 (30,059) (3,185) 74,699 $ $ 73.41 77.00 76.56 75.06 73.59 Time-based restricted stock units vest over a three-year-period and have been fair valued as of the date of the grant. The holders of time- based restricted stock units do not participate in the rewards of stock ownership of the Company until vested. A summary of non-vested time-based restricted stock units outstanding as of December 31, 2022 and 2021, and changes during the years ended on those dates, is presented below: Time-based restricted stock units Non-vested at beginning of year Granted Vested Forfeited Non-vested at end of year December 31, 2022 December 31, 2021 Number of Shares Weighted Average Grant Value Number of Shares Weighted Average Grant Value 13,836 8,796 (7,417) (1,664) 13,551 $ $ 75.91 88.18 75.94 84.40 82.81 14,968 7,464 (7,899) (697) 13,836 $ $ 74.84 77.00 74.95 75.64 75.91 85 The following table presents the amounts recognized in the consolidated statements of income for restricted stock, time-based restricted stock units, and performance-based restricted stock units: Share-based compensation expense Related income tax benefit 2022 $ $ For the Year Ended December 31, 2021 (dollars in thousands) $ $ 3,476 970 $ $ 2,875 804 2020 4,923 1,375 The 2017 Plan allows Directors of the Company to receive their annual retainer fee in the form of stock in the Company. Total shares issued under the 2017 Plan in the years ended December 31, 2022 and 2021 were 7,386 and 5,941, respectively. 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK To meet the financing needs of its clients, the Company is a party to financial instruments with off-balance-sheet risk in the normal course of business. These financial instruments are primarily comprised of commitments to extend credit, commitments to sell residential real estate mortgage loans and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments assuming that the amounts are fully advanced and that collateral or other security is of no value. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. Off-balance-sheet financial instruments with contractual amounts that present credit risk included the following: Financial instruments whose contractual amount represents credit risk: Commitments to extend credit: Unused portion of existing lines of credit Origination of new loans Standby letters of credit Financial instruments whose notional amount exceeds the amount of credit risk: Commitments to sell residential mortgage loans December 31, 2022 December 31, 2021 (dollars in thousands) $ $ 1,073,567 25,411 24,234 250 809,383 70,633 18,880 3,920 Standby letters of credit are conditional commitments issued by the Company to guarantee performance of a client to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. Most guarantees extend for one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. The collateral supporting those commitments varies and may include real property, accounts receivable, or inventory. Commitments to extend credit are agreements to lend to a client as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since some of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each client’s creditworthiness on a case-by-case basis. The amount of collateral obtained upon extension of the credit is based on management’s credit evaluation of the client. Collateral held varies, but may include primary residences, accounts receivable, inventory, property, plant and equipment, and income-producing CRE. See NOTE 21 - DERIVATIVES AND HEDGING ACTIVITIES for a discussion of the Company’s derivatives and hedging activities. 17. COMMITMENTS AND CONTINGENCIES Lease Commitments. The Company is obligated under various lease agreements covering its main office, branch offices, and other locations. These agreements are accounted for as operating leases and their terms expire between 2022 and 2032 and, in some instances, contain options to renew for periods up to 25 years. The Company recognizes its operating leases on its consolidated balance sheet by recording a lease liability, representing the Company’s legal obligation to make lease payments, and a ROU asset, representing the Company’s legal right to use the leased office space and 86 banking centers. The Company, by policy, does not include renewal options for leases as part of its ROU assets and lease liabilities unless they are deemed reasonably certain to exercise. The Company does not have any material sub-lease agreements. Operating lease expenses are comprised of operating lease costs and variable lease costs, net of sublease income, and are recognized over the lease term. Variable lease payments that are not dependent on an index or a rate or changes in variable payments based on an index or rate after the commencement date are excluded from the measurement of the lease liability, recognized in the period incurred and included within variable lease costs below. The Company determines whether a contract contains a lease based on whether a contract, or a part of a contract, conveys the right to control the use of an identified asset for a period of time in exchange for consideration. The discount rate is determined as either the rate implicit in the lease or, when a rate cannot be readily determined, the Company’s incremental borrowing rate. The incremental borrowing rate is the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term. The components of operating lease cost and other related information are as follows: For the Year Ended December 31, 2022 2021 2020 Operating lease cost Variable lease cost (cost excluded from lease payments) Sublease income Total operating lease cost Other Information Cash paid for amounts included in the measurement of lease liabilities - operating cash flows for operating leases Operating Lease - operating cash flows (liability reduction) Weighted average lease term - operating leases Weighted average discount rate - operating leases $ $ $ 6,965 38 (316) 6,687 7,263 6,401 5.45 Years $ $ (dollars in thousands) $ 6,976 13 (65) 6,924 7,259 6,252 6.13 Years $ $ $ 6,691 2 (65) 6,628 6,547 5,430 6.90 Years 3.01% 2.94% 2.98% The total minimum lease payments due in future periods under these agreements in effect at December 31, 2022 and December 31, 2021 were as follows: December 31, 2022 2023 2024 2025 2026 2027 Thereafter Total minimum lease payments Less: interest Total lease liability $ $ $ Future Minimum Lease Payments (dollars in thousands) 7,085 6,085 5,118 3,882 2,079 5,883 30,132 (2,719) 27,413 Several lease agreements contain clauses calling for escalation of minimum lease payments contingent on increases in real estate taxes, gross income adjustments, percentage increases in the consumer price index, and certain ancillary maintenance costs. Total rental expense was $7.6 million, $7.3 million, and $7.0 million for the years ended December 31, 2022, 2021, and 2020, respectively. 87 Change in Control Agreements. The Company has entered into agreements with its Chief Executive Officer and with certain other senior officers, whereby, following the occurrence of a change in control of the Company, if employment is terminated (except because of death, retirement, disability, or for “cause” as defined in the agreements) or is voluntarily terminated for “good reason,” as defined in the agreements, said officers will be entitled to receive additional compensation, as defined in the agreements. 18. SHAREHOLDERS’ EQUITY Capital guidelines issued by the Federal Reserve Bank and by the FDIC require that the Company and the Bank maintain minimum capital levels for capital adequacy purposes. These regulations also require banks and their holding companies to maintain higher capital levels to be considered “well-capitalized.” Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, there are specific capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Capital Rules: (i) include “Common Equity Tier 1” (“CET1”) and related regulatory capital ratio of CET1 to risk-weighted assets; (ii) specify that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting certain revised requirements; (iii) mandate that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital; and (iv) expand the scope of the deductions from and adjustments to capital as compared to existing regulations. Under the Capital Rules, for most banking organizations, including the Company, the most common form of Additional Tier 1 capital is non-cumulative perpetual preferred stock, and the most common forms of Tier 2 capital are subordinated notes and a portion of the allowance for credit losses, in each case, subject to the Capital Rules’ specific requirements. Pursuant to the Capital Rules, effective January 1, 2015, the minimum capital ratios are as follows: • • • • 4.5% CET1 to risk-weighted assets; 6.0% Tier 1 capital (that is, CET1 plus Additional Tier 1 capital) to risk-weighted assets; 8.0% Total capital (that is, Tier 1 capital plus Tier 2 capital) to risk-weighted assets; and 4.0% Tier 1 capital to average consolidated assets as reported on consolidated financial statements (called “leverage ratio”). Additionally, the Company is required to maintain additional capital conservation buffer of 2.5% of CET1, effectively resulting in minimum ratios inclusive of the capital conservation buffer of (i) CET1 to risk-weighted assets of at least 7%, (ii) Tier 1 capital to risk- weighted assets of at least 8.5%, and (iii) total capital to risk-weighted assets of at least 10.5%. Management believes that as of December 31, 2022 and 2021, the Company and the Bank met all applicable minimum capital requirements and were considered “well-capitalized” by both the Federal Reserve Board and the FDIC. The Company adopted ASU 2016-13 on January 1, 2020. The joint federal bank regulatory agencies issued an interim final rule that allows banking organizations to phase-in the effects of the CECL accounting standard in their regulatory capital, over a three-year period from January 1, 2022 through December 31, 2024. The Company did not elect to delay the adoption of CECL and did not adopt the transition period for regulatory capital. 88 The Company’s and the Bank’s actual and required capital measures were as follows: Actual Amount Ratio Minimum Capital Required For Capital Adequacy Plus Capital Conservation Buffer Amount Ratio (dollars in thousands) Minimum To Be Well-Capitalized Under Prompt Corrective Action Provisions Amount Ratio At December 31, 2022 Cambridge Bancorp: Total capital (to risk-weighted assets) Tier 1 capital (to risk-weighted assets) Common equity tier I capital (to risk- weighted assets) Tier 1 capital (to average assets) Cambridge Trust Company: Total capital (to risk-weighted assets) Tier 1 capital (to risk-weighted assets) Common equity tier I capital (to risk- weighted assets) Tier 1 capital (to average assets) $ 506,239 466,369 466,369 466,369 $ 490,175 450,305 450,305 450,305 13.5% $ 393,285 318,373 12.5% 12.5% 8.5% 262,190 219,309 10.5% 8.5% 7.0% 4.0% N/A N/A N/A N/A 13.1% $ 393,246 318,342 12.0% 10.5% $ 374,520 299,616 8.5% 12.0% 8.2% 262,164 219,296 7.0% 4.0% 243,438 274,120 N/A N/A N/A N/A 10.0% 8.0% 6.5% 5.0% Actual Amount Ratio Minimum Capital Required For Capital Adequacy Plus Capital Conservation Buffer Amount Ratio (dollars in thousands) Minimum To Be Well-Capitalized Under Prompt Corrective Action Provisions Amount Ratio At December 31, 2021 Cambridge Bancorp: Total capital (to risk-weighted assets) Tier 1 capital (to risk-weighted assets) Common equity tier I capital (to risk- weighted assets) Tier 1 capital (to average assets) Cambridge Trust Company: Total capital (to risk-weighted assets) Tier 1 capital (to risk-weighted assets) Common equity tier I capital (to risk- weighted assets) Tier 1 capital (to average assets) $ 420,398 384,518 384,518 384,518 $ 409,806 373,926 373,926 373,926 13.6% $ 325,617 263,595 12.4% 12.4% 8.3% 217,078 185,015 10.5% 8.5% 7.0% 4.0% N/A N/A N/A N/A 13.2% $ 325,587 263,570 12.1% 10.5% $ 310,082 248,066 8.5% 12.1% 8.1% 217,058 185,003 7.0% 4.0% 201,554 231,254 N/A N/A N/A N/A 10.0% 8.0% 6.5% 5.0% 89 19. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) is defined as all changes to shareholders’ equity except investments by and distributions to shareholders. Net income is a component of comprehensive income (loss), with all other components referred to in the aggregate as “other comprehensive income (loss).” The Company’s other comprehensive income (loss) consists of unrealized gains or losses on securities held at year-end classified as available for sale and, cash flow hedges, and the component of the unfunded retirement liability computed in accordance with the requirements of ASC Topic 715, “Compensation – Retirement Benefits.” The before-tax and after-tax amount of each of these categories, as well as the tax (expense)/benefit of each, is summarized as follows: For the Year Ended December 31, 2022 Tax (Expense) or Benefit Before Tax Amount Net-of- tax Amount For the Year Ended December 31, 2021 Tax (Expense) or Benefit Before Tax Amount Net-of- tax Amount For the Year Ended December 31, 2020 Tax (Expense) or Benefit Before Tax Amount Net-of- tax Amount Available for sale securities Unrealized holding gains (losses) Reclassification adjustment for (gains) losses realized in net income (1) Interest rate swaps designated as cash flow hedges Unrealized holding gains (losses) Reclassification adjustment for (gains) losses recognized in net income (2) Defined benefit retirement plans Net change in retirement liability Total other comprehensive income (loss) $ (25,144) $ 6,408 $ (18,736) $ (6,245) $ 1,623 $ (4,622) $ 3,630 $ (830) $ 2,800 — (2,170) (832) — 607 232 — — (1,563) (1,329) (600) (2,587) — 370 723 — (73) 16 (57) (959) 6,602 (1,844) 4,758 (1,864) (1,879) 525 (1,354) 1,818 $ (26,328) $ (508) 6,739 1,310 $ (19,589) 5,273 $ (4,888) (1,472) 1,244 3,801 $ (3,644) $ (1,695) 6,585 463 $ (1,670) $ (1,232) 4,915 $ (dollars in thousands) (1) Reported in gain (loss) on disposition of investment securities line item in the Consolidated Statements of Income. (2) Reported in interest on payable loans line item in the Consolidated Statements of Income. The components of accumulated other comprehensive income are as follows: Before Tax Amount December 31, 2022 Deferred (tax) benefit Net-of-tax Amount Before Tax Amount December 31, 2021 Deferred (tax) benefit Net-of-tax Amount $ (dollars in thousands) (21,221) (10) 432 (20,799) $ (3,467) $ 2,988 (1,218) (1,697) $ 982 $ (836) 341 487 $ (2,485) 2,152 (877) (1,210) Available for sale securities Interest Rate swaps designated as cash flow hedges Defined benefit retirement plans Total accumulated other comprehensive income $ $ (28,611) $ (14) 600 (28,025) $ 7,390 $ 4 (168) 7,226 $ 90 20. EARNINGS PER SHARE The following represents a reconciliation between basic and diluted earnings per share: Earnings per common share - basic: Numerator: Net income Less dividends and undistributed earnings allocated to participating securities Net income applicable to common shareholders Denominator: Weighted average common shares outstanding Earnings per common share - basic Earnings per common share - diluted: Numerator: Net income Less dividends and undistributed earnings allocated to participating securities Net income applicable to common shareholders Denominator: Weighted average common shares outstanding Dilutive effect of common stock equivalents Weighted average diluted common shares outstanding Earnings per common share - diluted 2022 For the Year Ended December 31, 2021 (dollars in thousands, except per share data) 2020 $ $ $ $ $ $ 52,909 (257) 52,652 7,163 7.35 52,909 (257) 52,652 7,163 51 7,214 7.30 $ $ $ $ $ $ 54,024 (250) 53,774 6,926 7.76 54,024 (250) 53,774 6,926 65 6,991 7.69 $ $ $ $ $ $ 31,959 (47) 31,912 6,289 5.07 31,959 (47) 31,912 6,289 55 6,344 5.03 21. DERIVATIVES AND HEDGING ACTIVITIES The Company utilizes interest rate swaps and floors to mitigate exposure to interest rate risk and to facilitate the needs of its clients. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts principally related to the Company’s assets. The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s existing credit derivatives result from participations loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities Cash Flow Hedges of Interest Rate Risk The Company uses interest floors to manage its exposure to interest rate movements. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-front premium. The Company’s objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate floors as part of its interest rate risk management strategy. Interest rate floors designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty if interest rates fall below the strike rate on the contract in exchange for an up-front premium. During 2022, such derivatives were used to hedge the variable cash flows associated with variable-rate assets. 91 For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest income in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis. The earnings recognition of excluded components is presented in interest income. Amounts reported in AOCI related to derivatives will be reclassified to interest income as interest payments are received on the Company’s variable-rate assets. During fiscal year 2023, the Company estimates that $539,000 will be reclassified out of AOCI into earnings, as a decrease to interest income. Non-designated Hedges Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain clients. For the Company’s clients, these are interest rate swaps and risk participation agreements. Interest Rate Swaps. The Company enters into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating-rate loan payments to fixed rate loan payments. When the Company enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party. The third party exchanges the client’s fixed-rate loan payments for floating-rate loan payments. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Because these derivatives have mirror-image contractual terms, the changes in fair value substantially offset each other through earnings. Fees earned in connection with the execution of derivatives related to this program are recognized in earnings through loan related derivative income. The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Company enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy. The notional amounts of these agreements do not represent amounts exchanged by the parties and, thus, are not a measure of the potential loss exposure. Risk Participation Agreements. The Company enters into risk participation agreements (“RPAs”) with other banks participating in commercial loan arrangements. Participating banks guarantee the performance on borrower-related interest rate swap contracts. RPAs are derivative financial instruments and are recorded at fair value. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Under a risk participation-out agreement, a derivative asset, the Company participates out a portion of the credit risk associated with the interest rate swap position executed with the commercial borrower, for a fee paid to the participating bank. Under a risk participation-in agreement, a derivative liability, the Company assumes, or participates in, a portion of the credit risk associated with the interest rate swap position with the commercial borrower for a fee received from the other bank. The following tables present the notional amount, the location, and fair values of derivative instruments in the Company’s consolidated balance sheets: Notional Amount Derivative Assets Balance Sheet Location (dollars in thousands) December 31, 2022 Fair Value Notional Amount $ 250,000 Other Assets $ $ $ 1,966 1,966 Derivative Liabilities Balance Sheet Location (dollars in thousands) Other Liabilities — Derivatives designated as hedging instruments Interest rate contracts Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments Loan related derivative contracts Interest rate contracts $ 499,619 Other Assets $ 50,784 $ 499,619 Risk participation agreements-out to counterparties Risk participation agreements-in with counterparties 46,604 Other Assets — Other Assets 23 — — 71,046 Other Liabilities Other Liabilities Other Liabilities Fair Value $ $ — — $ 50,784 — 43 Total derivatives not designated as hedging instruments $ 50,807 $ 50,827 92 Notional Amount Derivative Assets Balance Sheet Location (dollars in thousands) December 31, 2021 Fair Value Notional Amount $ 150,000 Other Assets $ $ $ 3,513 3,513 Derivative Liabilities Balance Sheet Location (dollars in thousands) Other Liabilities — Derivatives designated as hedging instruments Interest rate contracts Total derivatives designated as hedging instruments Derivatives not designated as hedging instruments Loan related derivative contracts Interest rate contracts $ 522,581 Other Assets $ 23,431 $ 522,581 Risk participation agreements-out to counterparties Risk participation agreements-in with counterparties 47,988 Other Assets — Other Assets 107 — — 109,510 Total derivatives not designated as hedging instruments $ 23,538 Other Liabilities Other Liabilities Other Liabilities The following tables present the effect of cash flow hedge accounting on AOCI as of the periods presented: Fair Value $ $ — — $ 23,431 — 293 $ 23,724 Twelve Months Ended December 31, 2022 Amount of Gain or (Loss) Recognized in OCI Amount of Gain or (Loss) Recognized in OCI Included Component (dollars in thousands) Amount of Gain or (Loss) Recognized in OCI Excluded Component Location of Gain or (Loss) Amount of Gain or (Loss) Reclassified from AOCL into Income Amount of Gain or (Loss) Reclassified from AOCL into Income Included Component (dollars in thousands) Amount of Gain or (Loss) Reclassified from AOCL into Income Excluded Component Interest rate contracts $ (2,170) $ 607 $ (1,563) Interest Income $ 832 $ 1,026 $ (194) Twelve Months Ended December 31, 2021 Amount of Gain or (Loss) Recognized in OCI Amount of Gain or (Loss) Recognized in OCI - Included Component (dollars in thousands) Amount of Gain or (Loss) Recognized in OCI - Excluded Component Location of Gain or (Loss) Amount of Gain or (Loss) Reclassified from AOCI into Income Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component (dollars in thousands) Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component Interest rate contracts $ (1,329) $ 370 $ (959) Interest Income $ 2,587 $ 2,782 $ (195) The following table presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income as of the periods presented: Other contracts Location of Gain or (Loss) Loan-related derivative income $ Credit-risk-related Contingent Features Amount of Gain or (Loss) Recognized in Income For the Year Ended December 31, 2022 2021 (dollars in thousands) 2020 (166) $ (124) $ 155 By entering into derivative transactions, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s Board of Directors. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote. 93 The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well- capitalized institution, then the counterparty could terminate the derivative position(s) and the Company would be required to settle its obligations under the agreements. Balance Sheet Offsetting Certain financial instruments may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. The Company’s derivative transactions with institutional counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Generally, the Company does not offset such financial instruments for financial reporting purposes. The following tables present the information about financial instruments that are eligible for offset in the consolidated balance sheets as of December 31, 2022 and 2021: Offsetting of Derivative Assets Derivative Assets Offsetting of Derivative Liabilities Derivative Liabilities Offsetting of Derivative Assets Derivative Assets Offsetting of Derivative Liabilities Derivative Liabilities Gross Amounts Recognized Gross Amounts Offset Net Amounts Recognized Gross Amounts Not Offset Collateral Pledged (Received) Financial Instruments Net Amount December 31, 2022 (dollars in thousands) 52,773 $ — $ 52,773 $ 48 $ (52,130) $ 595 50,827 $ — $ 50,827 $ 48 $ — $ 50,875 Gross Amounts Recognized Gross Amounts Offset Net Amounts Recognized Gross Amounts Not Offset Collateral Pledged (Received) Financial Instruments Net Amount December 31, 2021 (dollars in thousands) 27,051 $ — $ 27,051 $ 6,365 $ — $ 20,686 23,724 $ — $ 23,724 $ 6,365 $ 14,011 $ 3,348 $ $ $ $ 94 At December 31, 2022, there were no derivatives in a net liability position related to these financial instruments. At December 31, 2021, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $14.0 million. At December 31, 2021, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $13.3 million against these agreements. If the Company had breached any of these provisions at December 31, 2021, it could have been required to settle its obligations under the agreements at their termination value of $14.0 million. 22. FAIR VALUE MEASUREMENTS The following is a summary of the carrying values and estimated fair values of the Company’s significant financial instruments as of the dates indicated: Financial assets Cash and cash equivalents Securities available for sale Securities held to maturity Loans, net Loans held for sale FHLB of Boston stock Accrued interest receivable Mortgage servicing rights Interest rate contracts Loan level interest rate swaps Risk participation agreements out to counterparties Financial liabilities Deposits Borrowings Loan level interest rate swaps Risk participation agreements in with counterparties December 31, 2022 December 31, 2021 Carrying Value Estimated Fair Value Carrying Value (dollars in thousands) Estimated Fair Value $ 30,719 153,416 1,051,997 4,025,082 — 6,264 14,118 1,665 1,966 50,784 23 4,815,376 105,212 50,784 43 $ 30,719 153,416 885,586 3,783,051 — 6,264 14,118 2,336 1,966 50,784 23 4,810,695 105,202 50,784 43 $ 180,153 197,803 977,061 3,284,610 1,490 4,816 9,162 1,083 3,513 23,431 107 4,331,152 16,510 23,431 293 $ 180,153 197,803 971,092 3,230,339 1,528 4,816 9,162 1,518 3,513 23,431 107 4,330,991 16,523 23,431 293 The Company follows ASC Topic 820, Fair Value Measurements and Disclosures, for financial assets and liabilities. ASC Topic 820 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements. ASC Topic 820, among other things, emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, ASC Topic 820 specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy: • • • Level 1 – Quoted prices for identical assets or liabilities in active markets. Level 2 – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. Level 3 – Valuations derived from techniques in which one or more significant inputs or significant value drivers are unobservable in the markets and which reflect the Company’s market assumptions. Under ASC Topic 820, fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Company uses quoted market prices to determine fair value. If quoted prices are not available, fair value is based upon valuation techniques, such as matrix pricing or other models that use, where possible, current market-based or independently sourced market parameters, such as interest rates. If observable market- based inputs are not available, the Company uses unobservable inputs to determine appropriate valuation adjustments using methodologies applied consistently over time. Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. 95 Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time, they are susceptible to material near-term changes. The fair values disclosed do not reflect any premium or discount that could result from offering significant holdings of financial instruments at bulk sale, nor do they reflect the possible tax ramifications or estimated transaction costs. Changes in economic conditions may also dramatically affect the estimated fair values. The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, derivative instruments, and hedges are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, mortgage servicing rights, other real estate owned, and collateral dependent impaired loans. The Company uses an exit price notion for its fair value disclosures. The following tables summarize certain assets reported at fair value on a recurring basis: Measured on a recurring basis Securities available for sale U.S. GSE obligations Mortgage-backed securities Corporate debt securities Other assets Interest rate swaps with clients Risk participation agreements-out to counterparties Interest rate contracts Other liabilities Interest rate swaps with counterparties Risk participation agreements-in with counterparties Measured on a recurring basis Securities available for sale U.S. GSE obligations Mortgage-backed securities Corporate debt securities Other assets Interest rate swaps with clients Risk participation agreements-out to counterparties Interest rate contracts Other liabilities Interest rate swaps with counterparties Risk participation agreements-in with counterparties $ $ Fair Value as of December 31, 2022 Level 1 Level 2 Level 3 Total (dollars in thousands) — $ — — $ 19,733 132,683 1,000 — $ — — 19,733 132,683 1,000 — — — — — 50,784 23 1,966 50,784 43 — — — — — 50,784 23 1,966 18,161 43 Level 1 Fair Value as of December 31, 2021 Level 2 Level 3 (dollars in thousands) Total — $ — — $ 23,011 173,028 1,764 — $ — — 23,011 173,028 1,764 — — — — — 23,431 107 3,513 23,431 293 — — — — — 23,431 107 3,513 23,431 293 The following table presents the carrying value of assets held at December 31, 2022 and 2021, which were measured at fair value on a non-recurring basis: Items recorded at fair value on a non-recurring basis Assets Individually evaluated collateral dependent loans Total Level 1 December 31, 2022 Level 2 Level 3 (dollars in thousands) Total $ $ — $ — $ — $ — $ 103 103 $ $ 103 103 96 Items recorded at fair value on a non-recurring basis Assets Loans held for sale Individually evaluated collateral dependent loans Total Level 1 December 31, 2021 Level 2 Level 3 (dollars in thousands) Total $ $ 1,490 — 1,490 $ $ — $ — — $ — $ 130 130 $ 1,490 130 1,620 Individually evaluated collateral dependent loans. Collateral dependent loans are carried at the lower of cost or fair value of the collateral less estimated costs to sell which approximates fair value. The Company uses the appraisal value of the collateral and applies certain adjustments depending on the nature, quality, and type of collateral securing the loan. Loans held for sale. Loans held for sale are carried at the lower of fair value or carrying value (unpaid principal and unamortized loans fees). Other Real Estate Owned. These properties are carried at fair value less estimated costs to sell. Mortgage servicing rights. These assets are carried at the fair value determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs, and other economic factors. There were no transfers between fair value levels for the years ended December 31, 2022 and 2021. The following is a description of the principal valuation methodologies used by the Company to estimate the fair values of its financial instruments. Investment Securities For investment securities, fair values are primarily based upon valuations obtained from a national pricing service which uses matrix pricing with inputs that are observable in the market or can be derived from, or corroborated by, observable market data. When available, quoted prices in active markets for identical securities are utilized. Loans Held for Sale For loans held for sale, fair values are estimated using projected future cash flows, discounted at rates based upon either trades of similar loans or mortgage-backed securities, or at current rates at which similar loans would be made to borrowers with similar credit ratings and for similar remaining maturities. Loans For most categories of loans, fair values are estimated using projected future cash flows, discounted at rates based upon current rates at which similar loans would be made to borrowers with similar credit ratings, and for similar remaining maturities. Projected estimated cash flows are adjusted for prepayment assumptions, liquidity premium assumptions, and credit loss assumptions. Loans that are deemed to be impaired in accordance with ASC Topic 310, Receivables, are valued based upon the lower of cost or fair value of the underlying collateral. FHLB of Boston Stock The fair value of FHLB of Boston stock equals its carrying value since such stock is only redeemable at its par value. Deposits The fair value of non-maturity deposit accounts is the amount payable on demand at the reporting date. This amount does not take into account the value of the Company’s long-term relationships with core depositors. The fair value of fixed-maturity certificates of deposit is estimated using a replacement cost of funds approach and is based upon rates currently offered for deposits of similar remaining maturities. 97 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 Cash and cash equivalents and accrued interest receivable have fair values which approximate their respective carrying values because these instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk. Derivative Instruments and Hedges The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings. Off-Balance-Sheet Financial Instruments In the course of originating loans and extending credit, the Company will charge fees in exchange for its commitment. While these commitment fees have value, the Company has not estimated their value due to the short-term nature of the underlying commitments and their immateriality. Values Not Determined In accordance with ASC Topic 820, the Company has not estimated fair values for non-financial assets such as banking premises and equipment, goodwill, the intangible value of the Company’s portfolio of loans serviced for itself, and the intangible value inherent in the Company’s deposit relationships (i.e., core deposits), among others. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. 23. CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY The condensed balance sheets of Cambridge Bancorp, the Parent Company, as of December 31, 2022 and December 31, 2021 and the condensed statements of income and cash flows for each of the years in the three-year period ended December 31, 2022 are presented below. The statements of changes in shareholders’ equity are identical to the consolidated statements of changes in shareholders’ equity and are therefore not presented here. CONDENSED BALANCE SHEET ASSETS Cash and cash equivalents Goodwill Other assets Investment in subsidiary Total assets SHAREHOLDERS’ EQUITY Shareholders’ equity Total shareholders’ equity December 31, 2022 2021 (dollars in thousands) $ $ $ $ 15,747 33 318 501,454 517,552 517,552 517,552 $ $ $ $ 10,303 33 289 427,212 437,837 437,837 437,837 98 CONDENSED STATEMENTS OF INCOME Income Dividends from subsidiary Total income Expenses Interest expense Other expenses Total expenses Income before income taxes and equity in undistributed income of subsidiary Income tax benefit Income of parent company Equity in undistributed income of subsidiary Net income 2022 For the Year Ended December 31, 2021 (dollars in thousands) 2020 $ $ 24,734 24,734 $ 25,995 25,995 $ — 148 148 24,586 (40) 24,626 28,283 52,909 $ — 150 150 25,845 (42) 25,887 28,137 54,024 $ 21,639 21,639 444 110 554 21,085 (153) 21,238 10,721 31,959 CONDENSED STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities Deferred income tax benefit Change in other assets, net Change in other liabilities, net Undistributed income of subsidiary Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Cash paid in business combinations Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from the issuance of common stock Repurchase of common stock Redemption of subordinate debt Cash dividends paid on common stock Net cash provided by/(used in) financing activities Net increase (decrease) in cash Cash at beginning of year Cash at end of year SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Significant non-cash transactions Common Stock issued to shareholders due to merger 2022 For the Year Ended December 31, 2021 (dollars in thousands) 2020 $ 52,909 $ 54,024 $ 31,959 (40) 12 — (28,283) 24,598 — — 580 (1,320) — (18,414) (19,154) 5,444 10,303 15,747 $ (42) — 13 (28,137) 25,858 — — 519 (1,440) — (16,554) (17,475) 8,383 1,920 10,303 $ (153) 3,032 444 (10,721) 24,561 (534) (534) 452 (556) (10,600) (13,083) (23,787) 240 1,680 1,920 62,850 $ — $ 87,163 $ $ 99 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Cambridge Bancorp: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Cambridge Bancorp and subsidiaries (the Company) as of December 31, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2022, and the related notes (collectively, “the financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013, and our report dated March 16, 2023 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the Company’s Audit Committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses – Qualitative Factors Critical Audit Matter Description As described in Notes 2 and 7 to the financial statements, the Company has recorded an allowance for credit losses for its loan portfolio in the amount of $37.8 million as of December 31, 2022, representing management’s estimate of credit losses over the remaining expected life of the Company’s loan portfolio as of that date. Management determined this amount, and corresponding provision for credit loss expense, pursuant to the application of Accounting Standards Codification Topic 326, Financial Instruments – Credit Losses. The Company’s methodology to determine its allowance for credit losses incorporates qualitative assessments of its current loan portfolio and economic conditions, and the application of forecasted economic conditions. We determined that performing procedures relating to these components of the Company’s methodology is a critical audit matter. The principal considerations for our determination are (i) the application of significant judgment and estimation on the part of management, which in turn led to a high degree of auditor judgment and subjectivity in performing procedures and evaluating audit evidence obtained, and (ii) significant audit effort was necessary in evaluating management’s methodology, significant assumptions and calculations. How the Critical Audit Matter was Addressed in the Audit 100 Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included testing the effectiveness of controls relating to the Company’s determination of qualitative factors and forecasted economic conditions. These procedures also included, among others, testing management’s process for determining the qualitative reserve component, evaluating the appropriateness of management’s methodology relating to the qualitative reserve component and testing the completeness and accuracy of data utilized by management. /s/ Wolf & Company, P.C. Boston, Massachusetts March 16,2023 We have served as the Company’s auditor since 2020. 101 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Cambridge Bancorp: Opinion on the Internal Control Over Financial Reporting We have audited Cambridge Bancorp and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2022, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the December 31, 2022 consolidated financial statements of the Company and our report dated March 16, 2023 expressed an unqualified opinion. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Wolf & Company, P.C. Boston, Massachusetts March 16, 2023 102 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. None Item 9A. Controls and Procedures. Disclosure Controls and Procedures As required by Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, the Company has evaluated, with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, as of the end of the period covered by this report, the effectiveness of the design and operation of its disclosure controls and procedures. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that such disclosure controls and procedures were effective as of December 31, 2022 in ensuring that material information required to be disclosed by the Company, including its consolidated subsidiaries: a) b) was made known to the certifying officers by others within the Company and its consolidated subsidiaries in the reports that it files or submits under the Exchange Act; and is recorded, processed, summarized, and reported within the time periods specified in the Securities Exchange Commission rules and forms. On a quarterly basis, the Company evaluates the disclosure controls and procedures and may, from time to time, make changes aimed at enhancing their effectiveness and to ensure that the Company’s systems evolve with its business. Changes in Internal Controls over Financial Reporting The Company completed the Northmark Merger during the fourth quarter of 2022 and implemented certain controls and procedures in connection with the merger including financial reviews, policies and procedures, disclosure controls and procedures, and organization integration. We believe these controls and procedures mitigate the risk of weaknesses in internal control over financial reporting. There were no other changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting in 2022. Management’s Report on Internal Control Over Financial Reporting The management of the Company is responsible for establishing and maintaining adequate internal control (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended) over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to the Company’s Chief Executive Officer and Chief Financial Officer regarding the reliability of financial reporting and preparation of the Company’s financial statements in accordance with accounting principles generally accepted in the U.S. In designing and evaluating the Company’s disclosure controls and procedures, the Company and its management recognize that any controls and procedures, no matter how well designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating and implementing possible controls and procedures. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate. The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022. In making this assessment, management used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in 2013. Based on management’s assessment, the Company believes that, as of December 31, 2022, the Company’s internal control over financial reporting is effective based on the criteria established by Internal Control—Integrated Framework issued by COSO in 2013. 103 Wolf & Company, P.C, an independent registered public accounting firm, has audited the Company’s consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued its report, included herein on page 102, on the effectiveness of the Company’s internal control over financial reporting. Item 9B. Other Information. None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. Not applicable. 104 Item 10. Directors, Executive Officers and Corporate Governance. PART III The information required by this Item is incorporated herein by reference to the captions “Proposal 1: Election of Directors,” “Committees of the Board of Directors – Audit Committee,” “Information about the Company’s Executive Officers Who are not Directors,” and “Code of Ethics” in the Company’s definitive proxy statement for the 2023 Annual Meeting of Shareholders (the “Proxy Statement”), which will be filed with the SEC no later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K. Item 11. Executive Compensation. The information required by this Item is incorporated herein by reference to the captions “Compensation Discussion and Analysis,” “Director Compensation,” “Executive Compensation Tables,” “Compensation Committee Interlocks and Insider Participation,” and “Compensation Committee Report” in the Proxy Statement, which are incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. The information required by this Item is incorporated herein by reference to the caption “Security Ownership of Certain Beneficial Owners and Management” and “Securities Authorized for Issuance Under Equity Compensation Plans” in the Proxy Statement. Item 13. Certain Relationships and Related Transactions, and Director Independence. The information required by this Item is incorporated herein by reference to the captions “Transactions with Related Persons” and “Board of Directors Independence” in the Proxy Statement. Item 14. Principal Accounting Fees and Services. Our independent registered public accounting firm is Wolf & Company, P.C., Boston, Massachusetts, (PCAOB ID No.: 392). The information required by this Item is incorporated herein by reference to the caption “Independent Registered Public Accounting Firm Fees and Services” in the Proxy Statement. 105 PART IV Item 15. Exhibits, Financial Statement Schedules. (a) Documents filed as a Part of this Annual Report on Form 10-K: (1) Financial Statements—Included in Item 8 of this Annual Report on Form 10-K. Audited Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2022 and 2021 Consolidated Statements of Income for the Years Ended December 31, 2022, 2021, and 2020 Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2022, 2021, and 2020 Consolidated Statements of Shareholders’ Equity for the Years Ended December 31, 2022, 2021, and 2020 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022, 2021, and 2020 Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm 52 53 54 55 56 57 100 (2) Financial Statement Schedules 1. 2. 3. Financial Statements. The financial statements of the Company required in response to this item are listed in response to Part II, Item 8 of this Annual Report on Form 10-K. Financial Statement Schedules. There are no financial statement schedules that are required to be filed as part of this form since they are not applicable, or the information is included in the consolidated financial statements. Exhibits. The following exhibits are included as part of this Form 10-K. (3) Index to Exhibits. Exhibit Number Description 2.1 2.2 2.3 3.1 3.2 4.1 4.2 10.1** 10.2** 10.4** Agreement and Plan of Merger, dated December 5, 2018, by and between Cambridge Bancorp, Cambridge Trust Company and Optima Bank & Trust Company (incorporated by reference to Exhibit 2.1 of the Form 8-K filed with the SEC on December 6, 2018) Agreement and Plan of Merger, dated December 5, 2019, by and between Cambridge Bancorp, Cambridge Trust Company, Wellesley Bancorp, Inc., and Wellesley Bank (incorporated by reference to Exhibit 2.1 of the Form 8-K filed with the SEC on December 5, 2019) Agreement and Plan of Merger, dated May 23, 2022, by and among Cambridge Bancorp, Cambridge Trust Company and Northmark Bank (incorporated by reference to Exhibit 2.1 of the Form 8-K filed with the SEC on May 23, 2022) Articles of Organization (incorporated by reference to Exhibit 3.1 of the Form 8-K filed with the SEC on June 19, 2018) Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 of Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017) Specimen stock certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017) Description of Cambridge Bancorp Securities Registered under Section 12 of the Securities Exchange Act of 1934 (incorporated by reference to Exhibit 4.2 of the Form 10-K filed with the SEC on March 14, 2022) Cambridge Bancorp 2017 Equity and Cash Incentive Plan (incorporated by reference to Exhibit 10.2 of Amendment No. 2 to the Registration Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017) Cambridge Bancorp Director Stock Plan, amended as of April 25, 2011 (incorporated by reference to Exhibit 10.3 of Amendment No. 2 of the Registration Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017) The Executive Nonqualified Excess Plan of Cambridge Trust Company (incorporated by reference to Exhibit 10.5 of Amendment No. 2 to the Registration Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017) 106 10.5** 10.6** 10.7** 10.8** 10.9** 10.10** 10.11** 10.12** 10.13# 10.14# 10.15# 10.16# 21# 23.1# 31.1# 31.2# 32.1# 32.2# Cambridge Trust Company Amended and Restated Supplemental Executive Retirement Agreement for Denis K. Sheahan, dated July 7, 2017 (incorporated by reference to Exhibit 10.6 of Amendment No. 2 to the Registration Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017) Cambridge Trust Company Supplemental Executive Retirement Agreement for Martin B. Millane, Jr., dated January 1, 2016 (incorporated by reference to Exhibit 10.11 of Amendment No. 2 to the Registration Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017) Change in Control Agreement with Denis K. Sheahan, dated December 21, 2015 (incorporated by reference to Exhibit 10.12 of Amendment No. 2 to the Registration Statement File No. 1-38184 on Form 10 filed with the SEC on October 4, 2017) Change in Control Agreement with Mr. Michael Carotenuto, dated April 26, 2019 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed with the SEC on April 29, 2019) Change in Control Agreement with Mr. Martin Millane, dated April 26, 2019 (incorporated by reference to Exhibit 10.2 of the Form 8-K filed with the SEC on April 29, 2019) Change in Control Agreement with Ms. Jennifer Pline, dated April 26, 2019 (incorporated by reference to Exhibit 10.3 of the Form 8-K filed with the SEC on April 29, 2019) Cambridge Trust Company Supplemental Executive Retirement Agreement for Jennifer A. Pline, dated January 30, 2017 (incorporated by reference to Exhibit 10.22 of the Form 10-K filed with the SEC on March 18, 2019) Cambridge Trust Company Supplemental Executive Retirement Agreement for Michael F. Carotenuto, dated February 7, 2022 (incorporated by reference to Exhibit 10.1 of the Form 8-K filed on February 9, 2022) Transition Agreement and General Release with Thomas J. Fontaine, dated December 9, 2022 Transition Agreement and General Release with Jennifer A. Pline, dated December 30, 2022 Nonqualified Deferred Compensation Plan Adoption Agreement Nonqualified Deferred Compensation Plan Basic Plan Document Subsidiaries of the Registrant Consent of Wolf & Company P.C. dated March 16, 2023 Certification of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 101.INS Inline XBRL Instance Document - the instance document does not appear in the Interactive data File because XBRL tags are embedded within the Inline XBRL 101.SCH Inline XBRL Taxonomy Extension Schema Document 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document 104 Cover page interactive data file (formatted as Inline XBRL and contained in Exhibit 101) 107 Filed herewith. # ** Management Compensatory plans or arrangements. Item 16. Form 10-K Summary. None. 108 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SIGNATURES March 16, 2023 March 16, 2023 CAMBRIDGE BANCORP By: /s/ Denis K. Sheahan Denis K. Sheahan Chairman, President & Chief Executive Officer By: /s/ Michael F. Carotenuto Michael F. Carotenuto Executive Vice President, Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated. Name /s/ Denis K. Sheahan Denis K. Sheahan /s/ Michael F. Carotenuto Michael F. Carotenuto /s/ Jeanette G. Clough Jeanette G. Clough /s/ Christine Fuchs Christine Fuchs /s/ Simon R. Gerlin Simon R. Gerlin /s/ Pamela A. Hamlin Pamela A. Hamlin /s/ Kathryn M. Hinderhofer Kathryn M. Hinderhofer /s/ Hambleton Lord Hambleton Lord /s/ Thalia M. Meehan Thalia M. Meehan /s/ Daniel R. Morrison Daniel R. Morrison /s/ Leon A. Palandjian Leon A. Palandjian /s/ Laila S. Partridge Laila S. Partridge /s/ Jody A. Rose Jody A. Rose /s/ Cathleen A. Schmidt Cathleen A. Schmidt /s/ R. Gregg Stone R. Gregg Stone /s/ Jane C. Walsh Jane C. Walsh /s/ Andargachew S. Zelleke Andargachew S. Zelleke Title Date March 16, 2023 Chairman, President & Chief Executive Officer (Principal Executive Officer) Executive Vice President, Chief Financial Officer March 16, 2023 (Principal Financial Officer and Principal Accounting Officer) Director March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 March 16, 2023 Director Director Director Director Director Director Director Director Director Director Director Director Director Director 109 Cambridge Trust Directors and Officers Directors Jeanette G. Clough Retired President and Chief Executive Officer Mount Auburn Hospital Cathleen A. Schmidt Retired Executive Director and Chief Executive Officer McLane Middleton Professional Association Christine Fuchs Early–Stage Investor, and Former Equity Analyst and Sector Fund Managerr Wellington Management Simon R. Gerlin Chief Financial Officer and Executive Vice President of Finance MassDevelopment Pamela A. Hamlin President York Creative Collective Kathryn M. Hinderhofer Retired Executive Vice President of Operations and Technology National Bank Holdings Corp Hambleton D. Lord Chairman Launchpad Venture Group Chairman & Co-Founder Seraf Thalia M. Meehan Independent Director Safety Insurance Group Daniel R. Morrison Retired Chief Executive Officer Cambridge Trust New Hampshire Leon A. Palandjian Chief Risk Officer Intercontinental Real Estate Corporation Laila S. Partridge Chief Executive Officer The HardTech Project Jody A. Rose Former President Hack.Diversity Denis K. Sheahan Chairman, President and Chief Executive Officer Cambridge Bancorp and Cambridge Trust Company R. Gregg Stone Manager Kestrel Management, LLC Jane C. Walsh Former President and Chief Executive Officer Northmark Bank Andargachew Zelleke Senior Lecturer Harvard Business School Officers Michael F. Carotenuto Executive Vice President and Chief Financial Officer Peter Halberstadt Senior Vice President and Chief Credit Officer Steven J. Mead Senior Vice President and Chief Commercial Banking Officer Kerri A. Mooney Senior Vice President and Chief Deposit Officer Puneet Nevatia Senior Vice President and Chief Information Officer Jennifer A. Pline, CFA Executive Vice President and Head of Wealth Management Pilar Pueyo Senior Vice President and Director of Human Resources Danielle Remis Hackel Senior Vice President and Chief Marketing Officer John J. Sullivan Senior Vice President and Director of Consumer Lending 2022 Annual ReportWealth Management Offices Massachusetts Boston 75 State Street, 18th Floor Boston, MA 02109 617-520-5559 Wellesley 100 Worcester Street, Suite 300 Wellesley, MA 02481 617-520-5559 New Hampshire Concord 11 South Main Street, Suite 502 Concord, NH 03301 603-226-1212 Manchester 1000 Elm Street, Suite 201 Manchester, NH 03101 603-369-5101 Portsmouth Two Harbour Place, First Floor Portsmouth, NH 03801 603-373-6010 Corporate Headquarters Harvard Square 1336 Massachusetts Avenue Cambridge, MA 02138 617-876-2790 Private Banking Offices Massachusetts Andover 69 Park Street Andover, MA 01810 978-475-5000 Belmont 361 Trapelo Road Belmont, MA 02478 617-484-0892 Boston - Beacon Hill 65 Beacon Street Boston, MA 02108 617-523-3551 Boston - Financial District One Federal Street Boston, MA 02110 617-778-5860 Cambridge - Harvard Square 1336 Massachusetts Avenue Cambridge, MA 02138 617-876-2790 Cambridge - Huron Village 353 Huron Avenue Cambridge, MA 02138 617-661-1317 Cambridge - Kendall Square 415 Main Street Cambridge, MA 02142 617-441-0951 Cambridge - Porter Square 1720 Massachusetts Avenue Cambridge, MA 02138 617-661-0398 Concord 75 Main Street Concord, MA 01742 978-369-9909 Lexington 1690 Massachusetts Avenue Lexington, MA 02420 781-863-0976 Needham 865 Central Ave., H-302 Needham, MA 02492 781-489-7040 Newton Centre 776-1 Beacon Street Newton Centre, MA 02459 617-778-5888 North Andover 89 Turnpike Street North Andover, MA 01845 978-686-9100 Wellesley - Lower Falls 29 Washington Street Wellesley, MA 02481 781-489-4500 Wellesley - Linden Square 197 Linden Street Wellesley, MA 02482 781-489-7630 Weston 494 Boston Post Road Weston, MA 02493 781-893-5500 Winchester 26 Mt. Vernon Street Winchester, MA 01890 781-721-9100 New Hampshire Bedford 99 South River Road Bedford, NH 03110 603-488-6040 Dover 920 Central Avenue Dover, NH 03820 603-516-1175 North Hampton 26 Lafayette Road North Hampton, NH 03862 603-433-9633 Portsmouth 143 Daniel Street Portsmouth, NH 03801 603-433-9611 Stratham 17 Portsmouth Avenue Stratham, NH 03885 603-773-5222 Parent of Cambridge Trust Company NASDAQ: CATC cambridgetrust.com 

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