CAMBRIDGE BANCORP - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

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

For the transition period from _________________ to __________________

Commission File Number: 001-38184

CAMBRIDGE BANCORP

(Exact Name of Registrant as Specified in its Charter)


Massachusetts	04-2777442
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1336 Massachusetts Avenue Cambridge, MA	02138
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:


Common Stock	CATC	NASDAQ
(Title of each class)	(Trading symbol)	(Name of each exchange on which registered)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐	Small reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 29, 2021, the registrant had 6,964,691 shares of common stock, $1.00 par value per share, outstanding.

Table of Contents

CAMBRIDGE BANCORP AND SUBSIDIARIES


		Page
PART I.	FINANCIAL INFORMATION	1
Item 1.	Financial Statements (Unaudited)	1
	Unaudited Consolidated Balance Sheets	1
	Unaudited Consolidated Statements of Income	2
	Unaudited Consolidated Statements of Comprehensive Income	3
	Unaudited Consolidated Statements of Changes in Shareholders’ Equity	4
	Unaudited Consolidated Statements of Cash Flows	5
	Notes to Unaudited Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	59
PART II.	OTHER INFORMATION	60
Item 1.	Legal Proceedings	60
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	Mine Safety Disclosures	60
Item 5.	Other Information	60
Item 6.	Exhibits	61
Signatures		62

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS


	September 30, 2021			December 31, 2020
	(dollars in thousands, except par value)
Assets
Cash and cash equivalents	$	93,477		$	75,785
Investment securities
Available for sale, at fair value (amortized cost $211,900 and $234,252, respectively)		210,993			237,030
Held to maturity, at amortized cost (fair value $668,640 and $260,139, respectively)		666,322			247,672
Total investment securities		877,315			484,702
Loans held for sale, at lower of cost or fair value		—			6,909
Loans
Residential mortgage		1,381,413			1,298,868
Commercial mortgage		1,474,694			1,358,962
Home equity		90,697			106,194
Commercial and industrial		315,904			347,855
Consumer		38,210			41,769
Total loans		3,300,918			3,153,648
Less: allowance for credit losses on loans		(35,231	)		(36,016	)
Net loans		3,265,687			3,117,632
Federal Home Loan Bank of Boston Stock, at cost		4,816			5,734
Bank owned life insurance		46,773			46,169
Banking premises and equipment, net		17,266			18,158
Right-of-use asset operating leases		31,639			34,927
Deferred income taxes, net		10,834			11,639
Accrued interest receivable		8,895			9,514
Goodwill		51,912			51,912
Merger-related intangibles, net		2,707			2,977
Other assets		72,246			83,239
Total assets	$	4,483,567		$	3,949,297
Liabilities
Deposits
Demand	$	1,281,881		$	1,006,132
Interest-bearing checking		682,675			625,650
Money market		841,641			532,218
Savings		937,565			984,262
Certificates of deposit		191,084			254,821
Total deposits		3,934,846			3,403,083
Borrowings		16,878			32,992
Operating lease liabilities		34,341			37,448
Other liabilities		69,925			74,042
Total liabilities		4,055,990			3,547,565
Shareholders’ Equity
Common stock, par value $1.00; Authorized: 10,000,000 shares; Outstanding: 6,965,871 shares and 6,926,728 shares, respectively		6,966			6,927
Additional paid-in capital		228,694			226,967
Retained earnings		193,861			165,404
Accumulated other comprehensive income (loss)		(1,944	)		2,434
Total shareholders’ equity		427,577			401,732
Total liabilities and shareholders’ equity	$	4,483,567		$	3,949,297

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

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021			September 30, 2020
	(dollars in thousands, except share data)
Interest and dividend income
Interest on taxable loans	$	30,093	$	34,468	$	90,975		$	85,936
Interest on tax-exempt loans		353		243		850			652
Interest on taxable investment securities		2,502		1,404		6,110			4,648
Interest on tax-exempt investment securities		671		631		1,962			1,827
Dividends on FHLB of Boston stock		7		127		19			280
Interest on overnight investments		28		8		87			163
Total interest and dividend income		33,654		36,881		100,003			93,506
Interest expense
Interest on deposits		1,086		1,354		3,367			5,879
Interest on borrowed funds		147		376		428			1,223
Interest on subordinated debt		—		189		—			253
Total interest expense		1,233		1,919		3,795			7,355
Net interest and dividend income		32,421		34,962		96,208			86,151
Provision for (release of) credit losses		86		2,000		(1,021	)		18,430
Net interest and dividend income after provision for (release of) credit losses		32,335		32,962		97,229			67,721
Noninterest income
Wealth management revenue		9,238		8,025		26,012			21,686
Deposit account fees		462		603		1,420			2,089
ATM/Debit card income		406		349		1,144			946
Bank owned life insurance income		199		201		604			526
Gain on disposition of investment securities		—		—		—			69
Gain on loans sold		45		873		779			1,185
Loan related derivative income		390		292		1,628			1,137
Other income		375		590		1,283			1,085
Total noninterest income		11,115		10,933		32,870			28,723
Noninterest expense
Salaries and employee benefits		16,404		15,744		48,912			42,302
Occupancy and equipment		3,303		3,676		10,382			9,421
Data processing		2,052		2,084		6,265			5,601
Professional services		1,468		1,151		4,037			3,108
Marketing		608		420		2,024			1,162
FDIC insurance		305		313		902			810
Non-operating expenses		787		1,168		787			5,787
Other expenses		597		889		1,707			2,767
Total noninterest expense		25,524		25,445		75,016			70,958
Income before income taxes		17,926		18,450		55,083			25,486
Income tax expense		4,607		5,021		14,321			6,542
Net income	$	13,319	$	13,429	$	40,762		$	18,944
Share data:
Weighted average shares outstanding, basic		6,932,882		6,918,692		6,924,168			6,078,586
Weighted average shares outstanding, diluted		6,999,773		6,954,324		6,991,175			6,113,828
Basic earnings per share	$	1.91	$	1.94	$	5.86		$	3.11
Diluted earnings per share	$	1.89	$	1.93	$	5.80		$	3.09

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

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	For the Three Months Ended						For the Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
	(dollars in thousands)
Net income	$	13,319		$	13,429		$	40,762		$	18,944
Other comprehensive income (loss), net of tax:
Available for sale securities
Unrealized holding gains (losses)		(873	)		10			(2,725	)		3,320
Less: reclassification adjustment for gains realized in net income		—			—			—			(57	)
Total unrealized gains (losses) on available for sale securities		(873	)		10			(2,725	)		3,263
Interest rate swaps designated as cash flow hedges
Unrealized holding gains (losses)		74			(120	)		(245	)		4,840
Less: reclassification adjustment for gains realized in net income		(511	)		(452	)		(1,431	)		(896	)
Total unrealized gains (losses) on interest rate swaps		(437	)		(572	)		(1,676	)		3,944
Defined benefit retirement plans
Change in retirement liabilities		8			(3	)		23			(4	)
Other comprehensive income (loss)		(1,302	)		(565	)		(4,378	)		7,203
Comprehensive income	$	12,017		$	12,864		$	36,384		$	26,147

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

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY


	For the Three Months Ended
	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	(dollars in thousands, except per share data)
Balance at June 30, 2020	$	6,928	$	224,540	$	146,305		$	5,287		$	383,060
Net income		—		—		13,429			—			13,429
Other comprehensive loss		—		—		—			(565	)		(565	)
Share based compensation and other share-based activity		—		821		—			—			821
Dividends declared ($0.53 per share)		—		—		(3,672	)		—			(3,672	)
Balance at September 30, 2020	$	6,928	$	225,361	$	156,062		$	4,722		$	393,073

Balance at June 30, 2021	$	6,966	$	228,387	$	184,790		$	(642	)	$	419,501
Net income		—		—		13,319			—			13,319
Other comprehensive loss		—		—		—			(1,302	)		(1,302	)
Share based compensation and other share-based activity		—		307		—			—			307
Dividends declared ($0.61 per share)		—		—		(4,248	)		—			(4,248	)
Balance at September 30, 2021	$	6,966	$	228,694	$	193,861		$	(1,944	)	$	427,577


	For the Nine Months Ended
	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	(dollars in thousands, except per share data)

Balance at December 31, 2019	$	5,401	$	136,766	$	146,875		$	(2,481	)	$	286,561
Cumulative effect of accounting changes		—		—		(347	)					(347	)
Net income		—		—		18,944			—			18,944
Other comprehensive income		—		—		—			7,203			7,203
Share based compensation and other share-based activity		24		2,935		—			—			2,959
Dividends declared ($1.59 per share)		—		—		(9,410	)		—			(9,410	)
Common stock issued for merger		1,503		85,660		—			—			87,163
Balance at September 30, 2020	$	6,928	$	225,361	$	156,062		$	4,722		$	393,073

Balance at December 31, 2020	$	6,927	$	226,967	$	165,404		$	2,434		$	401,732
Net income		—		—		40,762			—			40,762
Other comprehensive loss		—		—		—			(4,378	)		(4,378	)
Share based compensation and other share-based activity		39		1,727		—			—			1,766
Dividends declared ($1.77 per share)		—		—		(12,305	)		—			(12,305	)
Balance at September 30, 2021	$	6,966	$	228,694	$	193,861		$	(1,944	)	$	427,577

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

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Nine Months Ended
	September 30, 2021			September 30, 2020
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	40,762		$	18,944
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for (release of ) credit losses		(1,021	)		18,430
Amortization (accretion) of deferred charges and fees, net		(1,351	)		260
(Accretion), depreciation, and amortization, net		(1,905	)		(5,823	)
Bank owned life insurance income		(604	)		(526	)
Gain on disposition of investment securities		—			(69	)
Share-based compensation and other share-based activity		1,766			2,959
Change in accrued interest receivable		619			392
Deferred income tax (benefit)/expense		2,404			(1,355	)
Change in other assets, net		9,251			(30,190	)
Change in other liabilities, net		(4,531	)		24,308
Change in loans held for sale		6,909			(5,833	)
Net cash provided by operating activities		52,299			21,497
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of loans		(1,042,956	)		(808,446	)
Proceeds from principal payments of loans		903,068			626,140
Proceeds from calls/maturities of securities available for sale		31,709			38,002
Purchase of securities available for sale		(9,927	)		(45,702	)
Proceeds from sales of securities available for sale		—			10,821
Proceeds from calls/maturities of securities held to maturity		45,806			43,007
Purchase of securities held to maturity		(465,490	)		(12,955	)
Redemption of FHLB of Boston stock		918			7,747
Purchase of banking premises and equipment		(1,324	)		(1,331	)
Net cash acquired in business combinations		—			43,063
Net cash used in investing activities		(538,196	)		(99,654	)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in demand, interest bearing, money market and savings accounts		595,500			288,146
Change in certificates of deposit		(63,564	)		(75,123	)
Change in borrowings		(16,042	)		(122,271	)
Cash dividends paid on common stock		(12,305	)		(9,410	)
Net cash provided by financing activities		503,589			81,342
Net change in cash and cash equivalents		17,692			3,185
Cash and cash equivalents at beginning of period		75,785			61,335
Cash and cash equivalents at end of period	$	93,477		$	64,520
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	3,920		$	7,142
Income taxes		7,442			11,920
Significant non-cash transactions
Transfer of other real estate owned		—			2,293
Common Stock issued to shareholders due to merger		—			87,163
Fair value of assets acquired, net of cash acquired		—			961,668
Fair value of liabilities assumed		—			917,569

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

CAMBRIDGE BANCORP AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF PRESENTATION

The unaudited consolidated financial statements include the accounts of Cambridge Bancorp (the “Company”) and its wholly owned subsidiary, Cambridge Trust Company (the “Bank”), and the Bank’s wholly owned subsidiaries, Cambridge Trust Company of New Hampshire Inc., CTC Security Corporation, and CTC Security Corporation III. References to the Company herein relate to the consolidated group of companies. All significant intercompany accounts and transactions have been eliminated in preparation of the consolidated financial statements.

The Company is a state-chartered, federally registered bank holding company headquartered in Cambridge, Massachusetts and was incorporated in 1983. The Company is the sole shareholder of the Bank, a Massachusetts trust company chartered in 1890, which is a commercial bank. The Company operates as 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.

The unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) and disclosures necessary to present fairly the Company’s financial position, as of September 30, 2021 and December 31, 2020, and the results of operations and cash flows for the interim periods presented in accordance with generally accepted accounting principles in the United States (“GAAP”). Interim results are not necessarily reflective of the results of the entire year.

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission (the “SEC”) on March 15, 2021.

2. Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements. Actual results could differ from those estimates. The allowance for credit losses, the fair values of financial instruments, and the valuation of deferred tax assets are particularly subject to change.

3. Subsequent Events

Management has reviewed events occurring through November 4, 2021, the date the unaudited consolidated financial statements were available to be issued and determined that no subsequent events occurred requiring adjustment to or disclosure in these unaudited consolidated financial statements.

4. Recently Issued Accounting Guidance

Accounting Pronouncements Yet to be Adopted

Accounting Standards Update (“ASU”) 2020-04 - Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). On March 12, 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04 to ease the potential burden in accounting for reference rate reform. The amendments in ASU 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference the London-Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The new guidance provides the following optional expedients:



Simplify accounting analyses for contract modifications.



Allow hedging relationships to continue without de-designation if there are qualifying changes in the critical terms of an existing hedging relationship due to reference rate reform. Allow a change in the systematic and rational method used to recognize in earnings the components excluded from the assessment of hedge effectiveness.



Allow a change in the designated benchmark interest rate to a different eligible benchmark interest rate in a fair value hedging relationship.



Allow the shortcut method for a fair value hedging relationship to continue for the remainder of the hedging relationship.



Simplify the assessment of hedge effectiveness and provide temporary optional expedients for cash flow hedging

relationships affected by reference rate reform.



Allow a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and are classified as held to maturity before January 1, 2020.

The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. The Company is currently assessing the impact the adoption of this guidance will have on its consolidated balance sheets, statements of income, and cash flows.

5. Cash and cash equivalents

At September 30, 2021 and December 31, 2020, cash and cash equivalents totaled $93.5 million and $75.8 million, respectively. There were no amounts required to be maintained at the Federal Reserve Bank of Boston at September 30, 2021 and December 31, 2020. At September 30, 2021 and December 31, 2020, the Company pledged $500,000 to the New Hampshire Banking Department relating to Cambridge Trust Company of New Hampshire, Inc.’s operations in that state. The Company also pledged cash collateral to derivative counterparties totaling $15.4 million and $29.9 million at September 30, 2021 and December 31, 2020, respectively. See Note 16- 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 unaudited consolidated balance sheets according to management’s intent. The carrying amounts of securities and their approximate fair values were as follows:


	September 30, 2021									December 31, 2020
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
Available for sale securities
U.S. Government Sponsored Enterprise obligations	$	22,996	$	373	$	(96	)	$	23,273	$	22,995	$	641	$	(19	)	$	23,617
Mortgage-backed securities		187,162		1,519		(2,733	)		185,948		208,515		2,502		(387	)		210,630
Corporate debt securities		1,742		32		(2	)		1,772		2,742		41		—			2,783
Total available for sale securities	$	211,900	$	1,924	$	(2,831	)	$	210,993	$	234,252	$	3,184	$	(406	)	$	237,030

Held to maturity securities
Mortgage-backed securities	$	554,583	$	4,871	$	(5,858	)	$	553,596	$	137,435	$	6,784	$	(97	)	$	144,122
Corporate debt securities		6,995		71		—			7,066		6,989		197		—			7,186
Municipal securities		104,744		3,922		(688	)		107,978		103,248		5,643		(60	)		108,831
Total held to maturity securities	$	666,322	$	8,864	$	(6,546	)	$	668,640	$	247,672	$	12,624	$	(157	)	$	260,139
Total	$	878,222	$	10,788	$	(9,377	)	$	879,633	$	481,924	$	15,808	$	(563	)	$	497,169

All of the Company’s mortgage-backed securities (“MBS”) have been issued by, or are collateralized by securities issued by, either Government National Mortgage Association (“Ginnie Mae” or “GNMA”), Federal National Mortgage Association (“Fannie Mae” or “FNMA”), or Federal Home Loan Mortgage Corporation (“Freddie Mac”).

The following tables show the Company’s securities with gross unrealized losses for which an allowance for credit losses has not been recorded at September 30, 2021 or at December 31, 2020, aggregated by investment category and length of time that individual securities have been in a continuous loss position:


	September 30, 2021
	Less than 12 months					12 months or longer						Total
	Fair Value		Unrealized Losses			Fair Value			Unrealized Losses			Fair Value		Unrealized Losses
	(dollars in thousands)
Available for sale securities
U.S. Government Sponsored Enterprise obligations	$	4,967	$	(29	)	$	4,933		$	(67	)	$	9,900	$	(96	)
Mortgage-backed securities		103,703		(2,715	)		3,508			(18	)		107,211		(2,733	)
Corporate debt securities		765		(2	)		—	—		—			765		(2	)
Total available for sale securities	$	109,435	$	(2,746	)	$	8,441		$	(85	)	$	117,876	$	(2,831	)

Held to maturity securities
Mortgage-backed securities	$	406,336	$	(5,858	)	$	—		$	—		$	406,336	$	(5,858	)
Municipal securities		18,660		(456	)		3,458			(232	)		22,118		(688	)
Total held to maturity securities	$	424,996	$	(6,314	)	$	3,458		$	(232	)	$	428,454	$	(6,546	)
Total	$	534,431	$	(9,060	)	$	11,899		$	(317	)	$	546,330	$	(9,377	)


	December 31, 2020
	Less than 12 months					12 months or longer					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(dollars in thousands)
Available for sale securities
U.S. Government Sponsored Enterprise obligations	$	4,981	$	(19	)	$	—	$	—		$	4,981	$	(19	)
Mortgage-backed securities		91,094		(384	)		944		(3	)		92,038		(387	)
Total available for sale securities	$	96,075	$	(403	)	$	944	$	(3	)	$	97,019	$	(406	)

Held to maturity securities
Mortgage-backed securities	$	16,340	$	(97	)	$	—	$	—		$	16,340	$	(97	)
Municipal securities		6,221		(60	)		—		—			6,221		(60	)
Total held to maturity securities	$	22,561	$	(157	)	$	—	$	—		$	22,561	$	(157	)
Total	$	118,636	$	(560	)	$	944	$	(3	)	$	119,580	$	(563	)

The Company adopted ASU 2016-13 - Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on January 1, 2020. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary based upon the composition of the portfolio at period end.

As of September 30, 2021, 122 debt securities had gross unrealized losses, with an aggregate depreciation of 1.69% from the Company’s amortized cost basis. The largest unrealized dollar loss of any single security was $264,000, or 5.2% of its amortized cost. The largest unrealized loss percentage of any single security was 7.9% of its amortized cost, or $211,000.

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 September 30, 2021.

The amortized cost and fair value of debt securities, aggregated by the earlier of call date or contractual maturity, are shown below. 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				After One, But Within Five Years				After Five, But Within Ten Years				After Ten Years				Total
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
At September 30, 2021	(dollars in thousands)
Available for sale securities
U.S. Government Sponsored Enterprise obligations	$	—	$	—	$	9,996	$	9,900	$	5,000	$	5,089	$	8,000	$	8,284	$	22,996	$	23,273
Mortgage-backed securities		5		5		2,935		2,997		55,736		55,591		128,486		127,355		187,162		185,948
Corporate debt securities		—		—		1,742		1,772		—		—		—		—		1,742		1,772
Total available for sale securities	$	5	$	5	$	14,673	$	14,669	$	60,736	$	60,680	$	136,486	$	135,639	$	211,900	$	210,993

Held to maturity securities
Mortgage-backed securities	$	—	$	—	$	1	$	1	$	57,764	$	60,277	$	496,818	$	493,318	$	554,583	$	553,596
Corporate debt securities		6,995		7,066		—		—		—		—		—		—		6,995		7,066
Municipal securities		4,362		4,428		18,993		19,691		38,574		40,617		42,815		43,242		104,744		107,978
Total held to maturity securities	$	11,357	$	11,494	$	18,994	$	19,692	$	96,338	$	100,894	$	539,633	$	536,560	$	666,322	$	668,640
Total	$	11,362	$	11,499	$	33,667	$	34,361	$	157,074	$	161,574	$	676,119	$	672,199	$	878,222	$	879,633

The following table sets forth information regarding sales of investment securities and the resulting gains from such sales:


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(dollars in thousands)
Amortized cost of securities sold	$	—	$	—	$	—	$	10,752
Gross gains realized on securities sold		—		—		—		69
Gross losses realized on securities sold		—		—		—		—
Net proceeds from securities sold	$	—	$	—	$	—	$	10,821

The Company monitors the credit quality of certain debt securities through the use of credit ratings among other factors on a quarterly basis. The following tables summarize the credit rating of the Company’s debt securities portfolio at September 30, 2021 and December 31, 2020.


	September 30, 2021
	Mortgage-backed Securities		Corporate Debt Securities		Municipal Securities		U.S. GSE obligations		Total
	(dollars in thousands)
Available for sale securities, at fair value
AAA/AA/A (1)	$	185,948	$	764	$	—	$	23,273	$	209,985
BBB/BB/B		—		1,008		—		—		1,008
Total available for sale securities	$	185,948	$	1,772	$	—	$	23,273	$	210,993
Held to maturity securities, at amortized cost
AAA/AA/A	$	554,583	$	6,995	$	104,744	$	—	$	666,322
Total held to maturity securities	$	554,583	$	6,995	$	104,744	$	—	$	666,322


	December 31, 2020
	Mortgage-backed Securities		Corporate Debt Securities		Municipal Securities		U.S. GSE obligations		Total
	(dollars in thousands)
Available for sale securities, at fair value
AAA/AA/A (1)	$	210,630	$	1,779	$	—	$	23,617	$	236,026
BBB/BB/B		—		1,004		—		—		1,004
Total available for sale securities	$	210,630	$	2,783	$	—	$	23,617	$	237,030
Held to maturity securities, at amortized cost
AAA/AA/A	$	137,435	$	6,989	$	102,973	$	—	$	247,397
BBB/BB/B		—		—		275		—		275
Total held to maturity securities	$	137,435	$	6,989	$	103,248	$	—	$	247,672

(1)

Includes agency MBS pass-through securities and collateralized mortgage obligations (“CMOs”) issued by U.S. Government Sponsored Enterprises (“GSEs”) such as Fannie Mae, Freddie Mac, and Ginnie Mae that are not rated by Moody’s or Standard & Poor’s (“S&P”). Each security contains a guarantee by the issuing GSE or agency and carries an implicit guarantee of the U.S. government. These have been categorized as AAA/AA/A.

7. LOANS AND THE ALLOWANCE FOR CREDIT LOSSES

The Company’s lending activities are conducted primarily in Eastern Massachusetts and Southern New Hampshire. The Company grants single- and multi-family residential, commercial and industrial (“C&I”), commercial real estate (“CRE”), construction, and a variety of consumer loans. Most of the loans granted by the Company are secured by real estate collateral. Repayment of the Company’s residential loans is generally dependent on the health of the employment market in the borrowers’ geographic areas and that of the general economy with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default. The repayment of C&I loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower. As borrower cash flow may be difficult to predict, liquidation of the underlying collateral securing these loans is typically viewed as the primary source of repayment in the event of borrower default. However, collateral typically consists of equipment, inventory, accounts receivable, or other business assets that may fluctuate in value, so the liquidation of collateral in the event of default is often an insufficient source of repayment. 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.

Loans outstanding are detailed by category as follows:


	September 30, 2021			December 31, 2020
	(dollars in thousands)
Residential mortgage
Mortgages - fixed rate	$	656,993		$	535,804
Mortgages - adjustable rate		690,684			734,593
Construction		28,315			25,495
Deferred costs, net of unearned fees		5,421			2,976
Total residential mortgages		1,381,413			1,298,868

Commercial mortgage
Mortgages - non-owner occupied		1,225,372			1,064,317
Mortgages - owner occupied		157,393			153,474
Construction		89,681			139,075
Deferred costs, net of unearned fees		2,248			2,096
Total commercial mortgages		1,474,694			1,358,962

Home equity
Home equity - lines of credit		88,373			102,460
Home equity - term loans		2,026			3,503
Deferred costs, net of unearned fees		298			231
Total home equity		90,697			106,194

Commercial and industrial
Commercial and industrial		256,943			223,415
PPP loans		60,518			126,227
Unearned fees, net of deferred costs		(1,557	)		(1,787	)
Total commercial and industrial		315,904			347,855

Consumer
Secured		37,302			41,409
Unsecured		900			341
Deferred costs, net of unearned fees		8			19
Total consumer		38,210			41,769
Total loans	$	3,300,918		$	3,153,648

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.

In the first round of the PPP, which ended in August of 2020, an eligible business could apply for a PPP loan up to the lesser of: (1) 2.5 times its average monthly “payroll costs”, or (2) $10.0 million. 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.

In the second round of the PPP, which ended on May 31, 2021, PPP loans were available both to first-time borrowers and to borrowers that previously received funding in the first round. The maximum PPP loan size remained the same for the second round for first-time borrowers, but for borrowers that received a PPP loan in the first round, the maximum size of a PPP loan was the lesser of: (1) 2.5 times its average monthly “payroll costs” or (2) $2.0 million. Eligibility requirements during the second round of PPP were also more restrictive for borrowers that received a PPP loan in the first round, therefore not all previous recipients of PPP loans in the first round qualified for a second PPP loan. The SBA guarantee and loan forgiveness features of the PPP remained similar in most material respects in the second round. The Company did not record an allowance for credit losses for PPP loans due to the SBA guarantee.

Directors and officers of the Company and their associates are customers of, and have other transactions with, the Company in the normal course of business. All loans and commitments included in such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and do not involve more than normal risk of collection or present other unfavorable features.

Asset Quality

The Company’s philosophy toward managing its loan portfolios is predicated upon careful monitoring, which stresses early detection and response to delinquent and default situations. The Company seeks to make arrangements to resolve any delinquent or default situation over the shortest possible time frame. As a general rule, loans more than 90 days past due with respect to principal or interest are classified as nonaccrual 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:


	September 30, 2021
	Residential Mortgage		Commercial Mortgage		Home Equity		Commercial and Industrial		Total
	(dollars in thousands)
Non-performing loans:
Nonaccrual loans	$	3,838	$	531	$	598	$	117	$	5,084
Troubled debt restructurings		655		—		—		112		767
Total	$	4,493	$	531	$	598	$	229	$	5,851


	December 31, 2020
	Residential Mortgage		Commercial Mortgage		Home Equity		Commercial and Industrial		Total
	(dollars in thousands)
Non-performing loans:
Nonaccrual loans	$	3,695	$	3,917	$	—	$	132	$	7,744
Loans past due >90 days, but still accruing		—		—		—		407		407
Troubled debt restructurings		689		—		—		122		811
Total	$	4,384	$	3,917	$	—	$	661	$	8,962

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. The 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 nonaccrual status at the time of the restructuring generally remain on nonaccrual 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. TDRs are individually evaluated for credit losses.

There were no new TDRs during the three and nine months ended September 30, 2021. At both September 30, 2021 and December 31, 2020, four loans were determined to be TDRs with a total carrying value of $767,000 and $811,000, respectively. There were no TDR defaults during the three and nine months ended September 30, 2021.

The allowance for credit losses includes a reserve for TDRs of approximately $91,000 and $90,000 as of September 30, 2021 and December 31, 2020, respectively.

As of September 30, 2021 and December 31, 2020, there were no significant commitments to lend additional funds to borrowers whose loans were restructured.

Pursuant to Section 4013 of the CARES Act, financial institutions could suspend the requirements under U.S. GAAP related to TDRs for modifications made before December 31, 2020 to loans that were current as of December 31, 2019. On January 3, 2021, the President signed into law the Consolidated Appropriations Act, 2021 (the “Appropriations Act”). As a result of the Appropriations Act, the suspension of TDR accounting has been 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 terminates. The requirement that a loan be not more than 30 days past due as of December 31, 2019 is still applicable. In response to the COVID-19 pandemic and its economic impact to customers, a short-term modification program that complies with the CARES Act had been 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 recently issued guidance, provided these loans were current as of either December 31, 2019, or the date of the modification, these loans are not considered TDRs and will not be reported as past due during the deferral period. The Company had four loans totaling $4.3 million on deferral, or 0.13% of total loans outstanding at September 30, 2021.

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 September 30, 2021
	2021		2020		2019		2018		2017		Prior		Revolving loans amortized cost basis		Total
	(dollars in thousands)
Residential Mortgage:
Current	$	422,326	$	357,635	$	147,418	$	111,606	$	87,327	$	250,608	$	—	$	1,376,920
Non-performing		—		—		—		255		55		4,183		—		4,493
Total	$	422,326	$	357,635	$	147,418	$	111,861	$	87,382	$	254,791	$	—	$	1,381,413

Home equity:
Current	$	—	$	873	$	3,937	$	4,729	$	6,014	$	5,165	$	69,381	$	90,099
Non-performing		—		—		—		—		—		598		—		598
Total	$	—	$	873	$	3,937	$	4,729	$	6,014	$	5,763	$	69,381	$	90,697

Consumer:
Current	$	15,456	$	8,640	$	1,553	$	3,187	$	2,241	$	6,604	$	529	$	38,210
Non-performing		—		—		—		—		—		—		—		—
Total	$	15,456	$	8,640	$	1,553	$	3,187	$	2,241	$	6,604	$	529	$	38,210


	Credit Quality Indicator - by Origination Year as of September 30, 2021
	2021		2020		2019		2018		2017		Prior		Revolving loans amortized cost basis		Total
	(dollars in thousands)
Commercial Mortgage:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	234,025	$	267,650	$	326,287	$	169,424	$	98,092	$	311,510	$	—	$	1,406,988
7 (Special Mention)		2,921		1,103		39,904		17,376		1,227		4,434		—		66,965
8 (Substandard)		—		—		—		—		—		741		—		741
9 (Doubtful)		—		—		—		—		—		—		—		—
10 (Loss)		—		—		—		—		—		—		—		—
Total	$	236,946	$	268,753	$	366,191	$	186,800	$	99,319	$	316,685	$	—	$	1,474,694
Commercial and Industrial:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	109,674	$	84,433	$	39,799	$	40,929	$	19,696	$	7,242	$	381	$	302,154
7 (Special Mention)		344		314		5,796		405		236		951		10		8,056
8 (Substandard)		—		838		2,425		526		—		1,905		—		5,694
9 (Doubtful)		—		—		—		—		—		—		—		—
10 (Loss)		—		—		—		—		—		—		—		—
Total	$	110,018	$	85,585	$	48,020	$	41,860	$	19,932	$	10,098	$	391	$	315,904


	Credit Quality Indicator - by Origination Year as of December 31, 2020
	2020		2019		2018		2017		2016		Prior		Revolving loans amortized cost basis		Total
	(dollars in thousands)
Residential Mortgage:
Current	$	398,267	$	221,019	$	158,962	$	144,256	$	106,360	$	265,620	$	—	$	1,294,484
Non-performing		—		—		782		58		1,454		2,090		—		4,384
Total	$	398,267	$	221,019	$	159,744	$	144,314	$	107,814	$	267,710	$	—	$	1,298,868

Home equity:
Current	$	2,131	$	6,024	$	7,997	$	6,976	$	2,119	$	5,191	$	75,756	$	106,194
Non-performing		—		—		—		—		—		—		—		—
Total	$	2,131	$	6,024	$	7,997	$	6,976	$	2,119	$	5,191	$	75,756	$	106,194

Consumer:
Current	$	16,192	$	5,819	$	3,652	$	2,643	$	4,879	$	8,032	$	552	$	41,769
Non-performing		—		—		—		—		—		—		—		—
Total	$	16,192	$	5,819	$	3,652	$	2,643	$	4,879	$	8,032	$	552	$	41,769


	Credit Quality Indicator - by Origination Year as of December 31, 2020
	2020		2019		2018		2017		2016		Prior		Revolving loans amortized cost basis		Total
	(dollars in thousands)
Commercial Mortgage:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	282,870	$	396,026	$	197,473	$	106,489	$	126,537	$	221,257	$	—	$	1,330,652
7 (Special Mention)		—		872		13,445		1,270		85		8,304		—		23,976
8 (Substandard)		—		145		—		—		215		3,300		—		3,660
9 (Doubtful)		—		—		—		—		—		674		—		674
10 (Loss)		—		—		—		—		—		—		—		—
Total	$	282,870	$	397,043	$	210,918	$	107,759	$	126,837	$	233,535	$	—	$	1,358,962
Commercial and Industrial:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	210,356	$	51,424	$	37,286	$	23,700	$	2,920	$	7,373	$	416	$	333,475
7 (Special Mention)		534		3,407		3,725		420		180		1,001		10		9,277
8 (Substandard)		1,333		1,116		544		—		1,907		203		—		5,103
9 (Doubtful)		—		—		—		—		—		—		—		—
10 (Loss)		—		—		—		—		—		—		—		—
Total	$	212,223	$	55,947	$	41,555	$	24,120	$	5,007	$	8,577	$	426	$	347,855

With respect to residential 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 nonaccrual, are more than 90 days past due but are still accruing, or are restructured. These loans may contain greater than average risk.

With respect to CRE mortgages and C&I loans, the Company utilizes a 10-grade internal loan rating system as an indicator of credit quality. The grades are as follows:



Loans rated 1-6 (Pass) – These loans are considered “pass” rated with low to moderate risk.



Loans rated 7 (Special Mention) – These loans have potential weaknesses warranting close attention, which, if left uncorrected, may result in deterioration of the credit at some future date.



Loans rated 8 (Substandard) – These loans have well-defined weaknesses that jeopardize the orderly liquidation of the debt under the original loan terms. Loss potential exists but is not identifiable in any one customer.



Loans rated 9 (Doubtful) – These loans have pronounced weaknesses that make full collection highly questionable and improbable.



Loans rated 10 (Loss) – These loans are considered uncollectible and continuance as a bankable asset is not warranted.

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:


	September 30, 2021
	30-59 Days		60-89 Days		90 Days or greater		Total Past Due		Current Loans		Total		Amortized Cost 90+ Days Past Due and Accruing
	(dollars in thousands)
Residential mortgages	$	14,717	$	825	$	1,907	$	17,449	$	1,363,964	$	1,381,413	$	—
Commercial mortgages		1,046		270		—		1,316		1,473,378		1,474,694		—
Home equity		354		—		598		952		89,745		90,697		—
Commercial and Industrial		557		3		—		560		315,344		315,904		—
Consumer loans		64		—		—		64		38,146		38,210		—
Total	$	16,738	$	1,098	$	2,505	$	20,341	$	3,280,577	$	3,300,918	$	—


	December 31, 2020
	30-59 Days		60-89 Days		90 Days or Greater		Total Past Due		Current Loans		Total		Amortized Cost 90+ Days Past Due and Accruing
	(dollars in thousands)
Residential mortgages	$	12,647	$	2,450	$	2,335	$	17,432	$	1,281,436	$	1,298,868	$	—
Commercial mortgages		1,080		—		674		1,754		1,357,208		1,358,962		—
Home equity		843		353		—		1,196		104,998		106,194		—
Commercial and Industrial		276		1,917		409		2,602		345,253		347,855		407
Consumer loans		3,120		—		—		3,120		38,649		41,769		—
Total	$	17,966	$	4,720	$	3,418	$	26,104	$	3,127,544	$	3,153,648	$	407

There were no significant commitments to lend additional funds to borrowers whose loans were on nonaccrual status at September 30, 2021 and December 31, 2020.

Allowance for Credit Losses

The following table presents changes in the allowance for credit losses disaggregated by loan category:


	For the Three Months Ended September 30, 2021
	Residential Mortgage			Commercial Mortgage			Home Equity			Commercial and Industrial			Consumer			Unfunded Commitments			Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at June 30, 2021	$	13,556		$	17,301		$	473		$	3,209		$	490		$	—		$	35,029
Charge-offs		(4	)		—			—			—			(2	)		—			(6	)
Recoveries		—			—			—			58			24			—			82
Provision for (Release of) credit losses - loan portfolio		360			(26	)		(22	)		(109	)		(77	)		—			126
Allowance for credit losses - loan portfolio	$	13,912		$	17,275		$	451		$	3,158		$	435		$	—		$	35,231
Allowance for credit losses - unfunded commitments:
Balance at June 30, 2021	$	—		$	—		$	—		$	—		$	—		$	950		$	950
Provision for (Release of) credit losses - unfunded commitments		—			—			—			—			—			(40	)		(40	)
Allowance for credit losses- unfunded commitments	$	—		$	—		$	—		$	—		$	—		$	910		$	910
Total allowance for credit loss	$	13,912		$	17,275		$	451		$	3,158		$	435		$	910		$	36,141


	For the Nine Months Ended September 30, 2021
	Residential Mortgage			Commercial Mortgage			Home Equity			Commercial and Industrial			Consumer			Unfunded Commitments			Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at December 31, 2020	$	13,067		$	18,564		$	552		$	3,309		$	524		$	—		$	36,016
Charge-offs		(4	)		—			—			—			(5	)		—			(9	)
Recoveries		—			30			—			92			29			—			151
Provision for (Release of) credit losses - loan portfolio		849			(1,319	)		(101	)		(243	)		(113	)		—			(927	)
Allowance for credit losses - loan portfolio	$	13,912		$	17,275		$	451		$	3,158		$	435		$	—		$	35,231
Allowance for credit losses - unfunded commitments:
Balance at December 31, 2020	$	—		$	—		$	—		$	—		$	—		$	1,004		$	1,004
Provision for (Release of) credit losses - unfunded commitments		—			—			—			—			—			(94	)		(94	)
Allowance for credit losses- unfunded commitments	$	—		$	—		$	—		$	—		$	—		$	910		$	910
Total allowance for credit loss	$	13,912		$	17,275		$	451		$	3,158		$	435		$	910		$	36,141


	For the Three Months Ended September 30, 2020
	Residential Mortgages		Commercial Mortgages		Home Equity			Commercial and Industrial			Consumer			Unfunded Commitments			Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at June30, 2020	$	11,880	$	18,067	$	652		$	2,939		$	476		$	—		$	34,014
Charge-offs		—		—		—			(233	)		(3	)		—			(236	)
Recoveries		—		—		—			23			—			—			23
Provision for (Release of) credit losses - loan portfolio		1,145		118		(42	)		769			129			—			2,119
Allowance for credit losses - loan portfolio	$	13,025	$	18,185	$	610		$	3,498		$	602		$	—		$	35,920
Allowance for credit losses - unfunded commitments:
Balance at June 30, 2020	$	—	$	—	$	—		$	—		$	—		$	1,164		$	1,164
Provision for (Release of) credit losses - unfunded commitments		—		—		—			—			—			(119	)		(119	)
Allowance for credit losses- unfunded commitments	$	—	$	—	$	—		$	—		$	—		$	1,045		$	1,045
Total allowance for credit loss	$	13,025	$	18,185	$	610		$	3,498		$	602		$	1,045		$	36,965


	For the Nine Months Ended September 30, 2020
	Residential Mortgages		Commercial Mortgages			Home Equity			Commercial and Industrial			Consumer			Unfunded Commitments		Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at December 31, 2019	$	5,141	$	10,905		$	461		$	1,475		$	198		$	—	$	18,180
Adoption of ASC 326		2,061		(1,447	)		(205	)		(492	)		288			—		205
Provision for acquired loans		2,880		3,625			188			1,577			12			—		8,282
Initial allowance for PCD		35		382			—			20			—			—		437
Charge-offs		—		(264	)		—			(387	)		(33	)		—		(684	)
Recoveries		—		—			—			57			14			—		71
Provision for (Release of ) credit losses - loan portfolio		2,908		4,984			166			1,248			123			—		9,429
Allowance for credit losses - loan portfolio	$	13,025	$	18,185		$	610		$	3,498		$	602		$	—	$	35,920
Allowance for credit losses - unfunded commitments:
Balance at December 31, 2019	$	—	$	—		$	—		$	—		$	—		$	50	$	50
Adoption of ASC 326		—		—			—			—			—			276		276
Provision for acquired unfunded loan commitments		—		—			—			—			—			356		356
Provision for (Release of) credit losses - unfunded commitments		—		—			—			—			—			363		363
Allowance for credit losses- unfunded commitments	$	—	$	—		$	—		$	—		$	—		$	1,045	$	1,045
Total allowance for credit loss	$	13,025	$	18,185		$	610		$	3,498		$	602		$	1,045	$	36,965

The Company adopted ASU 2016-13 - Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), and its related amendments, on January 1, 2020 using a modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Upon adoption, the Company recorded a $481,000 increase in the allowance for credit losses, which is shown in the table above, and a cumulative effect adjustment, which decreased retained earnings by $347,000, net of taxes, and is reflected in the Company’s statement of changes in shareholders’ equity for the nine months ended September 30, 2020.

8. Income Taxes

The Company’s effective tax rate was 25.7% and 26.0% for the three and nine months ended September 30, 2021, as compared to 27.2% and 25.7% for the three and nine months ended September 30, 2020.

Net deferred tax assets totaled $10.8 million and $11.6 million at September 30, 2021 and December 31, 2020, respectively. The Company did not record a valuation allowance for deferred tax assets at September 30, 2021 or December 31, 2020.

The components of income tax expense were as follows:


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(dollars in thousands)
Current income tax expense
Federal	$	3,078	$	3,013	$	8,225	$	5,133
State		1,403		1,304		3,692		2,764
Total current income tax expense		4,481		4,317		11,917		7,897

Deferred income tax expense (benefit)
Federal	$	82	$	478	$	1,634	$	(878	)
State		44		226		770		(477	)
Total deferred income tax expense (benefit)		126		704		2,404		(1,355	)
Total income tax expense	$	4,607	$	5,021	$	14,321	$	6,542

One of the business tax provisions of the CARES Act included allowing net operating losses (“NOLs”) 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%. This allowed the Company to recognize lower tax expense associated with NOLs, and combined with adjustments to state NOL rates, resulted in a benefit of $372,000 during 2020.

9. Pension and Retirement Plans

The components of net periodic benefit cost (credit) were as follows:


	Three Months Ended
	Pension Plan						Supplemental Retirement Plan				Retirement Healthcare Plan
	September 30, 2021			September 30, 2020			September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(dollars in thousands)
Net periodic benefit cost (credit)
Service cost	$	—		$	—		$	88	$	90	$	6	$	6
Interest cost		301			361			54		70		5		5
Expected return on assets		(892	)		(800	)		—		—		—		—
Amortization of prior service credit		(1	)		(1	)		—		—		—		—
Amortization of net actuarial loss		—			—			12		2		—		—
Net periodic benefit cost (credit)	$	(592	)	$	(440	)	$	154	$	162	$	11	$	11


	Nine Months Ended
	Pension Plan						Supplemental Retirement Plan				Retirement Healthcare Plan
	September 30, 2021			September 30, 2020			September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(dollars in thousands)
Net periodic benefit cost (credit)
Service cost	$	—		$	—		$	300	$	267	$	23	$	23
Interest cost		907			1,077			167		213		14		16
Expected return on assets		(2,675	)		(2,401	)		—		—		—		—
Amortization of prior service credit		(2	)		(3	)		—		—		—		—
Amortization of net actuarial loss		—			—			34		6		—		—
Net periodic benefit cost (credit)	$	(1,770	)	$	(1,327	)	$	501	$	486	$	37	$	39

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 three and nine months ended September 30, 2021, nor does it expect to make any contributions to the qualified defined benefit plan during the remainder of 2021.

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. Each year, the Company may also make a discretionary contribution to the PSP and employees are eligible to participate in the discretionary contribution portion of the PSP on the first day of their initial date of service. Additionally, employees 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.

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 common stock by the ESOP will be funded by employer contributions or reinvestment of cash dividends.

Total expenses related to the PSP and ESOP for the three months ended September 30, 2021 and September 30, 2020 amounted to $887,000 and $985,000, respectively. Total expenses related to the PSP and ESOP for the nine months ended September 30, 2021 and September 30, 2020 amounted to $3.2 million and $2.8 million, respectively.

Defined Contribution Supplemental Executive Retirement Plan (“DC SERP”)

For executives participating in the DC SERP, the Company may make a discretionary contribution of up to 10% of each executive’s base salary and bonus to his or her account under the Company’s DC SERP, the Executive Deferred Compensation Plan. Total expenses related to the DC SERP for the three months ended September 30, 2021 and September 30, 2020 amounted to $51,000 and $57,000, respectively. Total expenses related to the DC SERP for the nine months ended September 30, 2021 and September 30, 2020 amounted to $150,000 and $152,000, respectively.

10. STOCK BASED COMPENSATION

Time Vested Restricted Stock Awards (“RSAs”) and Time Vested Restricted Stock Units (“RSUs”)

During the three and nine months ended September 30, 2021, the Company issued the following RSAs and RSUs from the 2017 Equity and Cash Incentive Plan (the “2017 Plan”). RSAs time-vest either over a three-year or five-year period. RSUs vest over a three-year-period. The fair value of RSAs and RSUs are based upon the closing price of the Company's common stock on the date of the applicable grant. The holders of RSAs participate fully in the rewards of stock ownership of the Company, including voting and dividend rights. The holders of restricted stock units do not participate in the rewards of stock ownership of the Company until vested.


For the Three Months Ended September 30, 2021
		Weighted-Average
Shares Granted		Fair Value at Grant Date		Type of Award
	550	$	85.95	RSAs


For the Nine Months Ended September 30, 2021
		Weighted-Average
Shares Granted		Fair Value at Grant Date		Type of Award
	14,169	$	78.74	RSAs
	7,464	$	77.01	RSUs

Performance-Based Restricted Stock Units (“PRSUs”)

There were no PRSUs granted during the three months ended September 30, 2021. During the nine months ended September 30, 2021, the Company granted the following PRSUs from the 2017 Plan. PRSUs are subject to a three year performance period and are earned based on two factors: i) operating return on assets ii) operating diluted earnings per share growth as compared to the Company’s

established peer indices as defined in the Company’s 2021 Proxy Statement filed with the Securities and Exchange Commission on March 17, 2021.


For the Nine Months Ended September 30, 2021
		Weighted-Average
Shares Granted		Fair Value at Grant Date		Type of Award
	23,639	$	77.00	PRSUs

The following table presents the pre-tax expense associated with all outstanding non-vested RSAs, RSUs, and PRSUs, and the related tax benefits recognized:


	Three Months Ended				Nine Months Ended
	September 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
	(dollars in thousands)
Share based compensation expense	$	396	$	1,086	$	2,909	$	3,398
Related tax benefits	$	111	$	303	$	812	$	645

Share-based activity in the statement of changes in stockholders’ equity includes RSA, RSU, PRSU expense, as well as expense related to the Company’s share based compensation for directors and shares repurchased by the Company for shares tendered by employees to cover income tax liability as grants vest.

11. Financial Instruments with Off-Balance-Sheet Risk

To meet the financing needs of its customers, 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 mortgage loans, and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amount of those instruments assuming that the amounts are fully advanced, and that collateral or other security is of no value. The Company generally uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Off-balance-sheet financial instruments with contractual amounts that present credit risk include the following:


	September 30, 2021		December 31, 2020
	(dollars in thousands)
Financial instruments whose contractual amount represents credit risk:
Commitments to extend credit:
Unused portion of existing lines of credit	$	743,278	$	584,520
Origination of new loans		57,075		94,399
Standby letters of credit		11,543		9,430
Financial instruments whose notional amount exceeds the amount of credit risk:
Commitments to sell residential mortgage loans		—		17,644

12. LEASES

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 2023 and 2032 and, in some instances, contain options to renew for periods up to 30 years.

The components of operating lease cost and other related information are as follows:


	Three Months Ended
	September 30, 2021			September 30, 2020
	(dollars in thousands)
Operating lease cost	$	1,709		$	1,848
Variable lease cost (Cost excluded from lease payments)		3			1
Sublease income		(13	)		(16	)
Total Operating Lease Cost	$	1,699		$	1,833
Other Information
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows for operating leases	$	1,812		$	1,805
Operating Lease - Operating cash flows (Liability reduction)		1,564			1,524
Weighted average lease term - operating leases	6.34 Years			7.08 Years
Weighted average discount rate - operating leases		2.93	%		2.96	%


	Nine Months Ended
	September 30, 2021			September 30, 2020
	(dollars in thousands)
Operating lease cost	$	5,232		$	4,843
Variable lease cost (Cost excluded from lease payments)		10			2
Sublease income		(46	)		(49	)
Total operating lease cost	$	5,196		$	4,796
Other Information
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows for operating leases	$	5,468		$	4,728
Operating Lease - Operating cash flows (Liability reduction)		4,703			3,884
Weighted average lease term - operating leases	6.34 Years			7.08 Years
Weighted average discount rate - operating leases		2.93	%		2.96	%

The total minimum lease payments due in future periods for lease agreements in effect at September 30, 2021 were as follows:


	Future Minimum
September 30, 2021	Lease Payments
	(dollars in thousands)
Remainder of 2021	$	1,794
2022		7,014
2023		6,629
2024		5,893
2025		4,946
Thereafter		11,695
Total minimum lease payments	$	37,971
Less: interest		(3,630	)
Total lease liability	$	34,341

Several of the Company’s 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 $1.8 million and $2.0 million for the three months ended September 30, 2021 and 2020, respectively. Total rental expense was $5.5 million and $5.0 million for the nine months ended September 30, 2021 and September 30, 2020, respectively.

13. Shareholders’ Equity

As of September 30, 2021 and December 31, 2020, the Company and the Bank met all applicable minimum capital requirements and were considered “well-capitalized” by both the Federal Reserve Bank (“FRB”) and the Federal Deposit Insurance Corporation (“FDIC”).


	Actual					Minimum Capital Required For Capital Adequacy Plus Capital Conservation Buffer					Minimum To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
At September 30, 2021
Cambridge Bancorp:
Total capital (to risk-weighted assets)	$	411,042		13.7	%	$	314,261		10.5	%	N/A		N/A
Tier I capital (to risk-weighted assets)		374,902		12.5	%		254,402		8.5	%	N/A		N/A
Common equity tier I capital (to risk-weighted assets)		374,902		12.5	%		209,507		7.0	%	N/A		N/A
Tier I capital (to average assets)		374,902		8.6	%		173,676		4.0	%	N/A		N/A
Cambridge Trust Company:
Total capital (to risk-weighted assets)	$	405,420		13.6	%	$	314,231		10.5	%	$	299,268		10.0	%
Tier I capital (to risk-weighted assets)		369,280		12.3	%		254,377		8.5	%		239,414		8.0	%
Common equity tier I capital (to risk-weighted assets)		369,280		12.3	%		209,487		7.0	%		194,524		6.5	%
Tier I capital (to average assets)		369,280		8.5	%		173,665		4.0	%		217,081		5.0	%


	Actual					Minimum Capital Required For Capital Adequacy Plus Capital Conservation Buffer					Minimum To Be Well-Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
At December 31, 2020
Cambridge Bancorp:
Total capital (to risk-weighted assets)	$	378,393		13.9	%	$	285,145		10.5	%	N/A		N/A
Tier I capital (to risk-weighted assets)		344,409		12.7	%		230,832		8.5	%	N/A		N/A
Common equity tier I capital (to risk-weighted assets)		344,409		12.7	%		190,097		7.0	%	N/A		N/A
Tier I capital (to average assets)		344,409		8.9	%		155,009		4.0	%	N/A		N/A
Cambridge Trust Company:
Total capital (to risk-weighted assets)	$	376,209		13.9	%	$	285,117		10.5	%	$	271,540		10.0	%
Tier I capital (to risk-weighted assets)		342,229		12.6	%		230,809		8.5	%		217,232		8.0	%
Common equity tier I capital (to risk-weighted assets)		342,229		12.6	%		190,078		7.0	%		176,501		6.5	%
Tier I capital (to average assets)		342,229		8.8	%		154,999		4.0	%		193,748		5.0	%

14. Other Comprehensive Income (LOSS)

The following table presents the changes in accumulated other comprehensive income (“AOCI”) during the period, by component, net of tax:


	Three Months Ended September 30, 2021									Three Months Ended September 30, 2020
	Before Tax Amount			Tax (Expense) or Benefit			Net-of-tax Amount			Before Tax Amount			Tax (Expense) or Benefit			Net-of-tax Amount
	(dollars in thousands)
Available for sale securities
Unrealized holding (losses) gains	$	(1,183	)	$	310		$	(873	)	$	4		$	6		$	10
Interest rate swaps designated as cash flow hedges
Unrealized holding gains (losses)		103			(29	)		74			(166	)		46			(120	)
Reclassification adjustment for (losses) gains recognized in net income		(709	)		198			(511	)		(627	)		175			(452	)
Defined benefit retirement plans
Net change in retirement liability		11			(3	)		8			(1	)		(2	)		(3	)
Total other comprehensive (loss) income	$	(1,778	)	$	476		$	(1,302	)	$	(790	)	$	225		$	(565	)


	Nine Months Ended September 30, 2021									Nine Months Ended September 30, 2020
	Before Tax Amount			Tax (Expense) or Benefit			Net-of-tax Amount			Before Tax Amount			Tax (Expense) or Benefit			Net-of-tax Amount
	(dollars in thousands)
Available for sale securities
Unrealized holding (losses) gains	$	(3,685	)	$	960		$	(2,725	)	$	4,322		$	(1,002	)	$	3,320
Reclassification adjustment for (losses) gains realized in net income		—			—			—			(73	)		16			(57	)
Interest rate swaps designated as cash flow hedges
Unrealized holding (losses) gains		(340	)		95			(245	)		6,709			(1,869	)		4,840
Reclassification adjustment for (losses) gains recognized in net income		(1,985	)		554			(1,431	)		(1,242	)		346			(896	)
Defined benefit retirement plans
Net change in retirement liability		32			(9	)		23			(3	)		(1	)		(4	)
Total other comprehensive income (loss)	$	(5,978	)	$	1,600		$	(4,378	)	$	9,713		$	(2,510	)	$	7,203

Reclassifications out of AOCI that have an impact on net income are presented below:


Three Months Ended
Details about Accumulated Other Comprehensive Income Components	September 30, 2021			September 30, 2020			Affected Line Item in the Statement where Net Income (Loss) is Presented
	(dollars in thousands)
Unrealized gains on derivatives	$	709		$	627		Interest on taxable loans
Tax expense		(198	)		(175	)	Income tax expense
Net of tax	$	511		$	452		Net income


Nine Months Ended
Details about Accumulated Other Comprehensive Income Components	September 30, 2021			September 30, 2020			Affected Line Item in the Statement where Net Income is Presented
	(dollars in thousands)
Unrealized gains on available for sale securities	$	—		$	73		Gain on disposition of investment securities
Unrealized gains on derivatives		1,985			1,242		Interest on taxable loans
Tax expense		(554	)		(362	)	Income tax expense
Net of tax	$	1,431		$	953		Net income

15. Earnings per Share

The following represents a reconciliation between basic and diluted earnings per share:


	Three Months Ended						Nine Months Ended
	September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
	(dollars in thousands, except per share data)
Earnings per common share - basic:
Numerator:
Net income	$	13,319		$	13,429		$	40,762		$	18,944
Less dividends and undistributed earnings allocated to participating securities		(62	)		(5	)		(184	)		(14	)
Net income applicable to common shareholders	$	13,257		$	13,424		$	40,578		$	18,930
Denominator:
Weighted average common shares outstanding		6,933			6,919			6,924			6,079
Earnings per common share - basic	$	1.91		$	1.94		$	5.86		$	3.11
Earnings per common share - diluted:
Numerator:
Net income	$	13,319		$	13,429		$	40,762		$	18,944
Less dividends and undistributed earnings allocated to participating securities		(62	)		(19	)		(184	)		(28	)
Net income applicable to common shareholders	$	13,257		$	13,410		$	40,578		$	18,916
Denominator:
Weighted average common shares outstanding		6,933			6,919			6,924			6,079
Dilutive effect of common stock equivalents		67			35			67			35
Weighted average diluted common shares outstanding		7,000			6,954			6,991			6,114
Earnings per common share - diluted	$	1.89		$	1.93		$	5.80		$	3.09

16. Derivative 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 customers. 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.

Cash Flow Hedges of Interest Rate Risk

The Company uses interest rate 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.

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.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. For the Company’s customers, these are interest rate swaps and risk participation agreements.

Interest Rate Swaps. The Company enters into interest rate swap contracts to help commercial loan borrowers manage their interest rate risk. The interest rate swap contracts with commercial loan borrowers allow them to convert floating-rate loan payments to fixed rate loan payments. When the Company enters into an interest rate swap contract with a commercial loan borrower, it simultaneously enters into a “mirror” swap contract with a third party. The third party exchanges the borrower’s fixed-rate loan payments for floating-rate loan payments. These derivatives are not designated as hedges and therefore, changes in fair value are recognized in earnings. Because these derivatives have mirror-image contractual terms, the changes in fair value substantially offset each other through earnings. Fees earned in connection with the execution of derivatives related to this program are recognized in earnings through loan-related derivative income.

The credit risk associated with swap transactions is the risk of default by the counterparty. To minimize this risk, the Company enters into interest rate agreements only with highly rated counterparties that management believes to be creditworthy and maintains collateral pledging agreements with its counterparties. 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:


	September 30, 2021
	Derivative Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
	(dollars in thousands)					(dollars in thousands)
Derivatives designated as hedging instruments
Interest rate contracts	$	150,000	Other Assets	$	5,148	$	—	Other Liabilities	$	—
Total derivatives designated as hedging instruments				$	5,148				$	—
Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate swaps with customers	$	504,871	Other Assets	$	25,771		—	Other Liabilities	$	—
Mirror swaps with counterparties		—	Other Assets		—		504,871	Other Liabilities		25,771
Risk participation agreements-out to counterparties		44,794	Other Assets		75		—	Other Liabilities		—
Risk participation agreements-in with counterparties		—	Other Assets		—		103,826	Other Liabilities		288
Total derivatives not designated as hedging instruments				$	25,846				$	26,059


	December 31, 2020
	Derivative Assets					Derivative Liabilities
	Notional Amount		Balance Sheet Location	Fair Value		Notional Amount		Balance Sheet Location	Fair Value
	(dollars in thousands)					(dollars in thousands)
Derivatives designated as hedging instruments
Interest rate contracts	$	150,000	Other Assets	$	7,618	$	—	Other Liabilities	$	—
Total derivatives designated as hedging instruments				$	7,618				$	—
Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate swaps with customers	$	409,493	Other Assets	$	38,415	$	—	Other Liabilities	$	—
Mirror swaps with counterparties		—	Other Assets		—		409,493	Other Liabilities		38,415
Risk participation agreements-out to counterparties		26,580	Other Assets		51		—	Other Liabilities		—
Risk participation agreements-in with counterparties		—	Other Assets		—		104,956	Other Liabilities		496
Total derivatives not designated as hedging instruments				$	38,466				$	38,911

The following tables present the changes to AOCI as a result of cash flow hedge accounting as of the periods presented:


	For the Three Months Ended September 30, 2021
	Amount of Gain or (Loss) Recognized in OCI			Amount of Gain or (Loss) Recognized in OCI - Included Component			Amount of Gain or (Loss) Recognized in OCI - Excluded Component			Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
	(dollars in thousands)										(dollars in thousands)
Interest rate contracts	$	(606	)	$	(579	)	$	(27	)	Interest Income	$	709	$	758	$	(49	)


	For the Nine Months Ended September 30, 2021
	Amount of Gain or (Loss) Recognized in OCI			Amount of Gain or (Loss) Recognized in OCI Included Component			Amount of Gain or (Loss) Recognized in OCI Excluded Component		Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
	(dollars in thousands)									(dollars in thousands)
Interest rate contracts	$	(2,325	)	$	(2,364	)	$	39	Interest Income	$	1,985	$	2,131	$	(146	)


	For the Three Months Ended September 30, 2020
	Amount of Gain or (Loss) Recognized in OCI			Amount of Gain or (Loss) Recognized in OCI Included Component			Amount of Gain or (Loss) Recognized in OCI Excluded Component			Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
	(dollars in thousands)										(dollars in thousands)
Interest rate contracts	$	(793	)	$	(657	)	$	(136	)	Interest Income	$	627	$	763	$	(136	)


	For the Nine Months Ended September 30, 2020
	Amount of Gain or (Loss) Recognized in OCI		Amount of Gain or (Loss) Recognized in OCI - Included Component		Amount of Gain or (Loss) Recognized in OCI - Excluded Component			Location of Gain or (Loss)	Amount of Gain or (Loss) Reclassified from AOCI into Income		Amount of Gain or (Loss) Reclassified from AOCI into Income Included Component		Amount of Gain or (Loss) Reclassified from AOCI into Income Excluded Component
	(dollars in thousands)								(dollars in thousands)
Interest rate contracts	$	5,467	$	6,390	$	(923	)	Interest Income	$	1,242	$	1,466	$	(224	)

The Company estimates that an additional $2.5 million will be reclassified out of AOCI into earnings, as an increase to interest income over the next twelve months.

The following table presents the effect of the Company’s derivative financial instruments on the consolidated statements of net income (loss) for the periods presented:


	Three Months Ended September 30, 2021			Nine Months Ended September 30, 2021
	Interest Income			Interest Income
	(dollars in thousands)			(dollars in thousands)
Total amount of income presented in the statements of income in which the effects of cash flow hedges are recorded	$	655		$	1,931
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest rate contracts:
Amount of gain reclassed from AOCI into income	$	655		$	1,931
Amount of gain reclassed from AOCI into income - Included Component	$	704		$	2,077
Amount of loss reclassed from AOCI into income - Excluded Component	$	(49	)	$	(97	)


	Three Months Ended September 30, 2020			Nine Months Ended September 30, 2020
	Interest Income			Interest Income
	(dollars in thousands)			(dollars in thousands)
Total amount of income presented in the statements of income in which the effects of cash flow hedges are recorded	$	627		$	1,242
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest rate contracts:
Amount of gain reclassed from AOCI into income	$	627		$	1,242
Amount of gain reclassed from AOCI into income - Included Component	$	763		$	1,466
Amount of loss reclassed from AOCI into income - Excluded Component	$	(136	)	$	(224	)

The following table presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income as of the periods presented:


		Amount of Gain or (Loss) Recognized in Income on Derivatives
		Three Months Ended
		September 30, 2021			September 30, 2020
	Location of Gain or (Loss)	(dollars in thousands)
Other contracts	Loan related derivative income	$	(136	)	$	152


		Amount of Gain or (Loss) Recognized in Income on Derivatives
		Nine Months Ended
		September 30, 2021		September 30, 2020
	Location of Gain or (Loss)	(dollars in thousands)
Other contracts	Loan related derivative income	$	17	$	291

Credit-risk-related Contingent Features

By entering into derivative transactions, the Company is exposed to credit risk to the extent that counterparties to the derivative contracts do not perform as required. Should a counterparty fail to perform under the terms of a derivative contract, the Company’s credit exposure on interest rate swaps is limited to the net positive fair value and accrued interest of all swaps with each counterparty. The Company seeks to minimize counterparty credit risk through credit approvals, limits, monitoring procedures, and obtaining collateral, where appropriate. Institutional counterparties must have an investment grade credit rating and be approved by the Company’s board of directors. As such, management believes the risk of incurring credit losses on derivative contracts with institutional counterparties is remote.

The Company has agreements with its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations. In addition, the Company also has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the counterparty could terminate the derivative position(s) and the Company would be required to settle its obligations under the agreements.

Balance Sheet Offsetting

Certain financial instruments may be eligible for offset in the consolidated balance sheet and/or subject to master netting arrangements or similar agreements. The Company’s derivative transactions with institutional counterparties are generally executed under International Swaps and Derivative Association (“ISDA”) master agreements which include “right of set-off” provisions. In such cases there is generally a legally enforceable right to offset recognized amounts and there may be an intention to settle such amounts on a net basis. Generally, the Company does not offset such financial instruments for financial reporting purposes.

The following tables present the information about financial instruments that are eligible for offset in the consolidated balance sheets as September 30, 2021 and December 31, 2020:


								Gross Amounts Not Offset
		Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Recognized		Financial Instruments		Collateral Pledged (Received)		Net Amount
		September 30, 2021
	(dollars in thousands)
Offsetting of Derivative Assets
Derivative Assets		$	30,994	$	—	$	30,994	$	7,341	$	—	$	23,653

Offsetting of Derivative Liabilities
Derivative Liabilities		$	26,059	$	—	$	26,059	$	7,341	$	15,985	$	2,733


								Gross Amounts Not Offset
		Gross Amounts Recognized		Gross Amounts Offset		Net Amounts Recognized		Financial Instruments		Collateral Pledged (Received)		Net Amount
		December 31, 2020
	(dollars in thousands)
Offsetting of Derivative Assets
Derivative Assets		$	46,084	$	—	$	46,084	$	7,649	$	—	$	38,435

Offsetting of Derivative Liabilities
Derivative Liabilities		$	38,911	$	—	$	38,911	$	7,649	$	30,724	$	538

As of September 30, 2021 and December 31, 2020, 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 $16.1 million and $30.7 million, respectively. As of September 30, 2021and December 31, 2020, the Company had minimum collateral posting thresholds with certain of its derivative counterparties and posted cash collateral of $16.0 million and $29.9 million, respectively. If the Company had breached any of these provisions at September 30, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of $16.1 million and $30.7 million, respectively.

17. 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:


	September 30, 2021				December 31, 2020
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(dollars in thousands)
Financial assets
Cash and cash equivalents	$	93,477	$	93,477	$	75,785	$	75,785
Securities available for sale		210,993		210,993		237,030		237,030
Securities held to maturity		666,322		668,640		247,672		260,139
Loans, net		3,265,687		3,231,348		3,117,632		3,092,021
Loans held for sale		—		—		6,909		7,101
FHLB Boston stock		4,816		4,816		5,734		5,734
Accrued interest receivable		8,895		8,895		9,514		9,514
Mortgage servicing rights		1,161		1,518		1,219		1,219
Interest rate contracts		5,148		5,148		7,618		7,618
Loan level interest rate swaps		25,771		25,771		38,415		38,415
Risk participation agreements out to counterparties		75		75		51		51

Financial liabilities
Deposits		3,934,846		3,935,165		3,403,083		3,403,832
Borrowings		16,878		16,900		32,992		34,284
Loan level interest rate swaps		25,771		25,771		38,415		38,415
Risk participation agreements in with counterparties		288		288		496		496

The Company follows ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”) for financial assets and liabilities. ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosure requirements about fair value measurements. ASC 820, among other things, emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions the market participants would use in pricing the asset or liability. In addition, ASC 820 specifies a hierarchy of 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 820, fair values are based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When available, the Company uses quoted market prices to determine fair value. If quoted prices are not available, fair value is based upon valuation techniques, such as matrix pricing or other models that use, where possible, current market-based or independently sourced market parameters, such as interest rates. If observable market-based inputs are not available, the Company uses unobservable inputs to determine appropriate valuation adjustments using methodologies applied consistently over time.

Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters, such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks.

Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time, they are susceptible to material near-term changes. The fair values disclosed do not reflect any premium or discount that could result from offering significant holdings of financial instruments at bulk sale, nor do they reflect the possible tax ramifications or estimated transaction costs. Changes in economic conditions may also dramatically affect the estimated fair values.

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available for sale, derivative instruments, and hedges are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as individually evaluated collateral dependent loans. The Company uses an exit price notion for its fair value disclosures.

The following tables summarize certain assets and liabilities reported at fair value on a recurring basis:


	Fair Value as of September 30, 2021
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Measured on a recurring basis
Securities available for sale
U.S. GSE obligations	$	—	$	23,273	$	—	$	23,273
Mortgage-backed securities		—		185,948		—		185,948
Corporate debt securities		—		1,772		—		1,772
Other assets
Interest rate swaps with customers		—		25,771		—		25,771
Risk participation agreements out to counterparties		—		75		—		75
Interest rate contracts		—		5,148		—		5,148
Other liabilities
Mirror swaps with counterparties		—		25,771		—		25,771
Risk participation agreements in with counterparties		—		288		—		288


	Fair Value as of December 31, 2020
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Measured on a recurring basis
Securities available for sale
U.S. GSE obligations	$	—	$	23,617	$	—	$	23,617
Mortgage-backed securities		—		210,630		—		210,630
Corporate debt securities		—		2,783		—		2,783
Other assets
Interest rate swaps with customers		—		38,415		—		38,415
Risk participation agreements out to counterparties		—		51		—		51
Interest rate contracts		—		7,618		—		7,618
Other liabilities
Mirror swaps with counterparties		—		38,415		—		38,415
Risk participation agreements in with counterparties		—		496		—		496

The following tables present the carrying value of assets held at September 30, 2021 and December 31, 2020, which were measured at fair value on a non-recurring basis:


	September 30, 2021
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Items recorded at fair value on a non-recurring basis
Assets
Individually evaluated collateral dependent loans		—		—		138		138
Total	$	—	$	—	$	138	$	138


	December 31, 2020
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Items recorded at fair value on a non-recurring basis
Assets
Mortgage servicing rights	$	—	$	—	$	1,219	$	1,219
Loans held for sale		6,909		—		—		6,909
Individually evaluated collateral dependent loans		—		—		672		672
Other real estate owned		—		—		1,820		1,820
Total	$	6,909	$	—	$	3,711	$	10,620

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 repayment speeds, discount rates, servicing costs, and other economic factors.

There were no transfers between levels for the three and nine months ended September 30, 2021 or 2020.

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 310, Receivables, are valued based upon the lower of cost or fair value of the underlying collateral.

Federal Home Loan Bank of Boston (“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 Bank’s long-term relationships with core depositors. The fair value of fixed-maturity certificates of deposit is estimated using a replacement cost of funds approach and is based upon rates currently offered for deposits of similar remaining maturities.

Borrowings

For long-term borrowings, fair values are estimated using future cash flows, discounted at rates based upon current costs for debt securities with similar terms and remaining maturities.

Other Financial Assets and Liabilities

Cash and cash equivalents, accrued interest receivable, and short-term borrowings have fair values which approximate their respective carrying values because these instruments are payable on demand or have short-term maturities and present relatively low credit risk and interest rate risk.

Derivative Instruments and Hedges

The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The Company incorporates credit valuation adjustments to appropriately reflect nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings.

Off-Balance-Sheet Financial Instruments

In the course of originating loans and extending credit, the Company will charge fees in exchange for its commitment. While these commitment fees have value, the Company has not estimated their value due to the short-term nature of the underlying commitments and their immateriality.

Values Not Determined

In accordance with ASC 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.

18. Mergers

Merger with Wellesley Bancorp, Inc. (“Wellesley”)

On June 1, 2020, the Company completed its merger with Wellesley (“the Wellesley Merger”), adding 6 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 Wellesley 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 the Business Combinations Topic of the FASB’s Accounting Standards Codification. Accordingly, the Company recorded merger expenses during the three months and nine months ended September 30, 2020 of approximately $1.2 million and $5.8 million, respectively.

The Company recorded total assets of $985.6 million, assumed total liabilities of $917.6 million, and recorded an additional $20.7 million in goodwill. Additionally, the Company recorded $8.6 million in provision for credit losses to reflect the impact of CECL merger accounting on June 1, 2020.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following analysis discusses the changes in financial condition and results of operation of Cambridge Bancorp (together with its bank subsidiary, unless the context otherwise requires, the “Company”) and should be read in conjunction with the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission on March 15, 2021 (the “2020 Form 10-K”).

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 the COVID-19 pandemic and its impact on levels of consumer confidence;



actions that 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 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 Act, which may adversely affect the Company’s 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;



costs and effects of litigation, regulatory investigations, or similar matters;



the inability to realize expected cost savings or implement integration plans and other adverse consequences associated with the merger with Wellesley Bancorp, Inc. (“Wellesley”);



a failure by the Company to effectively manage the risks the Company faces, including credit, operational and cyber security risks;



increased pressures from competitors (both banks and non-banks) and/or an inability 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 customers or operations;



a loss of customer 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 customers;



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.

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 bank subsidiary: Cambridge Trust Company (the “Bank”), formed in 1890. As of September 30, 2021, the Company had total assets of approximately $4.5 billion. The Bank operates 19 full-service banking offices in Eastern Massachusetts and New Hampshire. As a private bank, we focus on four core services that center around client needs. Our core services include Wealth Management, Commercial Banking, Consumer Lending, and Personal Banking. The Bank’s customers consist primarily of consumers and small- and medium-sized businesses in the 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 September 30, 2021, the Company had Assets under Management and Administration of approximately $4.5 billion. The Wealth Management Group offers comprehensive investment management, as well as trust administration, estate settlement, and financial planning services. Our 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 its investment portfolios to help clients meet their long-term financial goals. Through development of an appropriate asset allocation and disciplined security and fund selection, the Bank’s in-house investment team targets long-term capital growth while seeking to minimize downside risk. Our internally developed, research-driven process is managed by our skilled team of portfolio managers and analysts. We build portfolios consisting of our best investment 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.

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, deposits, as well as 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 personal banking. Within the commercial loan portfolio, the Company has traditionally been a CRE lender. However, in recent years the Company has diversified commercial operations within the areas of C&I lending to include Renewable Energy, Innovation Banking, which works with primarily New England-based entrepreneurs, and asset-based lending that helps companies throughout New England and New York grow by borrowing against existing assets. Through its renewable energy lending efforts, the Company provides financing for the developers and operators of commercial renewable energy projects.

Critical Accounting Policies

Accounting policies involving significant judgments and assumptions by management, which have, or could have, a material impact on the carrying value of certain assets and impact income are considered critical accounting policies. The Company considers the allowance for credit losses and income taxes to be its critical accounting policies.

See “Management’s Discussion and Analysis—Critical Accounting Policies” in our 2020 Form 10-K, for a detailed discussion of the Company’s other critical accounting estimates and policies.

Recent Accounting Developments

See NOTE 4 to the Unaudited Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Company’s consolidated financial statements.

COVID-19

In December 2019, a novel strain of coronavirus (“COVID-19”) was reported in Wuhan, China. The World Health Organization has declared the outbreak to constitute a “Public Health Emergency of International Concern.” 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 customers has not fully manifested in 2020 or 2021. 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 our business and results of operations in future periods remains uncertain. The extent of the continued impact of COVID-19 on our 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 the Delta variant, a potential resurgence following a decline in the outbreak, and impact on our customers, 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.

Results of Operations

Results of Operations for the three months ended September 30, 2021 and September 30, 2020

General. Net income decreased by $110,000, or 0.8%, to $13.3 million for the quarter ended September 30, 2021, as compared to net income of $13.4 million for the quarter ended September 30, 2020, primarily due to a $2.5 million decrease in net interest and dividend income before the provision for (release of) credit losses, which was partially offset by a $1.9 million decrease in the provision for (release of) credit losses. Diluted earnings per share were $1.89 for the quarter ended September 30, 2021, as compared to a diluted earnings per share of $1.93 the quarter ended September 30, 2020.

Net Interest and Dividend Income. Net interest and dividend income before the provision for (release of) credit losses for the quarter ended September 30, 2021, decreased by $2.5 million, or 7.3%, to $32.4 million, as compared to $35.0 million for the quarter ended September 30, 2020, primarily due to lower loan accretion associated with merger accounting and lower asset yields, partially offset by growth in both the loan and investment portfolios, lower cost of funds, and Paycheck Protection Program (“PPP”) loan income recognized on PPP loans forgiven by the Small Business Administration (“SBA”) during the quarter end September 30, 2021.



Interest on loans decreased by $4.3 million, or 12.3%, primarily due to lower loan accretion associated with merger accounting and lower loan yields, partially offset by loan growth and PPP loan related income.



Interest on investment securities increased by $1.1 million, or 55.9%, primarily due to growth in the investment portfolio as the Company invested excess cash.



Interest on deposits decreased by $268,000, or 19.8%, primarily due to lower cost of deposits, partially offset by deposit growth.

Total average interest-earning assets increased by $437.6 million, or 11.7%, to $4.18 billion during the quarter ended September 30, 2021, from $3.74 billion for the quarter ended September 30, 2020, primarily due to growth in both the loan and investment securities portfolios. The Company’s net interest margin, on a fully taxable equivalent basis, decreased 63 basis points to 3.10% for the quarter ended September 30, 2021, as compared to 3.73% for the quarter ended September 30, 2020, primarily due to lower fair value accretion and lower yields on interest-earning assets, partially offset by PPP income on loan forgiveness.

Interest and Dividend Income. Total interest and dividend income decreased by $3.2 million, or 8.7%, to $33.7 million for the quarter ended September 30, 2021, as compared to $36.9 million for the quarter ended September 30, 2020, primarily due to lower loan accretion associated with merger accounting and lower yields on interest-earning assets, partially offset by growth in both the loan and investment securities portfolios and PPP loan related income.

Interest Expense. Interest expense decreased by $686,000, or 35.7%, to $1.2 million for the quarter ended September 30, 2021, as compared to $1.9 million for the quarter ended September 30, 2020, primarily driven by a decrease in interest expense on borrowings, a decrease in interest expense for subordinated debt, and a lower cost of deposits, partially offset by deposit growth.

Average interest-bearing liabilities increased by $151.6 million to $2.65 billion during the quarter ended September 30, 2021, from $2.50 billion for the quarter ended September 30, 2020, primarily due to strong core deposit growth, partially offset by lower borrowings. The increase in interest-bearing liabilities was primarily driven by an increase in average money market accounts of $358.7 million and an increase in average checking account balances of $108.4 million, partially offset by a decrease in average other borrowed funds of $160.4 million and a decrease in average certificates of deposit balances of $131.4 million. The average cost of funds decreased to 0.12% for the quarter ended September 30, 2021 from 0.20% during the quarter ended September 30, 2020.

Provision for (Release of) Credit Losses. The Company recorded a provision for credit losses of $86,000 for the quarter ended September 30, 2021, as a result of the Company’s loan growth during the quarter, partially offset by improving forward-looking economic assumptions and the resulting decrease in loss expectations in the Company’s allowance for credit losses modeling. The Company recorded a provision for credit losses of $2.0 million for the quarter ended September 30, 2020 as a result of the anticipated effect of the COVID-19 pandemic.

The Company recorded net loan recoveries of $76,000 for the quarter ended September 30, 2021, as compared to net charge-offs of $213,000 for the quarter ended September 30, 2020.

Noninterest Income. Total noninterest income increased by $182,000, or 1.7%, to $11.1 million for the quarter ended September 30, 2021, as compared to $10.9 million for the quarter ended September 30, 2020, primarily as a result of increases in Wealth Management revenue partially offset by a decrease in gain on loans sold. Noninterest income was 25.5% of total revenues for the quarter ended September 30, 2021.



Wealth Management revenue increased by $1.2 million, or 15.1%, to $9.2 million for the quarter ended September 30, 2021, as compared to $8.0 million for the quarter ended September 30, 2020. Wealth Management Assets under Management and Administration were $4.51 billion as of September 30, 2021, an increase of $557.7 million, or 14.1%, from $3.95 billion as of September 30, 2020, primarily due to appreciation within the equity markets.



Gain on loans sold decreased by $828,000, or 94.8% due to decreased sales of residential mortgages.

The categories of Wealth Management revenues are shown in the following table:


	Three Months Ended
	September 30, 2021		September 30, 2020
	(dollars in thousands)
Wealth Management revenues:
Trust and investment advisory fees	$	8,719	$	7,479
Financial planning fees and other service fees		519		546
Total wealth management revenues	$	9,238	$	8,025

The following table presents the changes in Wealth Management assets under management:


	Three Months Ended
	September 30, 2021			September 30, 2020
	(dollars in thousands)
Wealth Management Assets under Management
Balance at the beginning of the period	$	4,282,204		$	3,572,286
Gross client asset inflows		117,204			90,606
Gross client asset outflows		(88,670	)		(95,243	)
Net market impact		13,662			223,415
Balance at the end of the period	$	4,324,400		$	3,791,064
Weighted average management fee		0.79	%		0.79	%

There were no significant changes to the average fee rates and fee structure for the three months ended September 30, 2021 and September 30, 2020.

Noninterest Expense. Total noninterest expense increased by $79,000, or 0.3%, to $25.5 million for the quarter ended September 30, 2021, as compared to $25.4 million for the quarter ended September 30, 2020, primarily driven by an increase in salaries and employee benefits expense, professional services expense, and marketing expense, partially offset by a decrease in non-operating expense and occupancy and equipment expense.



Salaries and employee benefits expense increased by $660,000, or 4.2%, driven by staff additions to support business initiatives, merit increases, and higher employee benefit costs.



Professional services increased by $317,000, or 27.5%, primarily due to increased consulting fees associated with the wealth management system conversion anticipated in the fourth quarter of 2021 and higher employment agency costs.



Marketing expense increased by $188,000, or 44.8%, primarily driven by increased marketing efforts during 2021.



Non-operating expense decreased by $381,000, or 32.6%. During the third quarter of 2021, the Company closed its Wellesley Square, Massachusetts and Pease Tradeport, New Hampshire branch locations and relocated its Concord, New Hampshire wealth management location. The Company recorded $787,000 of expenses associated with the branch closures and relocation within non-operating expenses during the third quarter of 2021. For the quarter ended September 30, 2020, the Company recorded non-operating expenses of $1.2 million associated with the merger with Wellesley Bancorp Inc.



Occupancy and equipment expense decreased by $373,000, or 10.1%, due to the previously announced branch and support office location closures.

Income Tax Expense. The Company recorded a provision for income taxes of $4.6 million for the quarter ended September 30, 2021, as compared to $5.0 million for the same quarter in 2020. The Company’s effective tax rate was 25.7% for the quarter ended September 30, 2021, as compared to 27.2% for the quarter ended September 30, 2020.

Results of Operations for the nine months ended September 30, 2021 and September 30, 2020

General. Net income increased by $21.8 million, or 115.2%, to $40.8 million for the nine months ended September 30, 2021, as compared to net income of $18.9 million for the nine months ended September 30, 2020, primarily due to a $19.5 million decrease in the provision for (release of) credit losses, a $10.1 million increase in net interest and dividend income before the provision for (release of) credit losses, and a $4.1 million increase in noninterest income, which were partially offset by a $4.1 million increase in noninterest expenses and higher income tax expense of $7.8 million. Diluted earnings per share were $5.80 for the first nine months of 2021, representing a 87.7% increase over diluted earnings per share of $3.09 for the nine months ended September 30, 2020. Net income for the nine months ended September 30, 2020 was impacted by various items resulting from the Company’s merger with Wellesley effective June 1, 2020 and the effect of the COVID-19 pandemic on the Company’s allowance for credit losses.

Net Interest and Dividend Income. Net interest and dividend income before the provision for (release of) credit losses, increased by $10.1 million, or 11.7%, to $96.2 million, as compared to $86.2 million for the nine months ended September 30, 2020, primarily due to growth in both the loan and investment portfolios, higher deferred PPP loan income recognized on PPP loans forgiven by the SBA during the period, and 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 loans increased by $5.2 million, or 6.0%, 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 investment securities increased by $1.6 million, or 24.7%, primarily due to growth in the investment portfolio as the Company reinvested excess cash.



Interest on deposits decreased by $2.5 million, or 42.7%, primarily due to a decrease in the cost of deposits, partially offset by deposit growth.



Interest on borrowings decreased by $795,000, or 65.0%, primarily due to lower volume.



Interest on subordinated debt decreased by $253,000 or 100% as the Company redeemed $10.0 million in subordinated debt during the fourth quarter of 2020.

Average interest earning assets increased by $843.0 million, or 26.6%, to $4.01 billion during the nine months ended September 30, 2021, from $3.17 billion during the nine months ended September 30, 2020, primarily due to the merger with Wellesley coupled with organic growth within the loan and investment portfolios. The Company’s net interest margin, on a fully taxable equivalent basis, decreased 42 basis points to 3.23% for the nine months ended September 30, 2021, as compared to 3.65% for the nine months ended September 30, 2020.

Interest and Dividend Income. Total interest and dividend income increased by $6.5 million, or 6.9%, to $100.0 million for the nine months ended September 30, 2021, as compared to $93.5 million for the nine months ended September 30, 2020, primarily due to loan growth (both organic and as a result of the merger with Wellesley), investment portfolio 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 48.4%, to $3.8 million during the nine months ended September 30, 2021, as compared to $7.4 million during the nine months ended September 30, 2020, primarily driven by a decrease in the cost of deposits and lower borrowing expense, partially offset by deposit growth.

Average interest-bearing liabilities increased by $409.1 million, or 19.0%, to $2.56 billion during the nine months ended September 30, 2021, from $2.15 billion for the nine months ended September 30, 2020, primarily related to the merger with Wellesley coupled with organic core deposit growth. The increase in interest-bearing liabilities was primarily driven by an increase in average money market accounts of $395.9 million, an increase in average checking account balances of $138.0 million, and an increase in average savings account balances of $39.2 million, partially offset by a decrease in borrowed funds of $128.6 million, a decrease in average certificate of deposit balances of $30.9 million., and a decrease in subordinated debt of $4.4 million. The average cost of funds decreased to 0.13% for the nine months ended September 30, 2021, from 0.31% for the nine months ended September 30, 2020.

Provision for (Release of) Credit Losses. The Company recorded a release of credit losses of $1.0 million for the nine months ended September 30, 2021, as compared to a provision for credit losses of $18.4 million for the nine months ended September 30, 2020, resulting from improving forward-looking economic assumptions and the resulting decrease in loss expectations in the Company’s allowance for credit losses modeling. The Company's provision for credit losses for the nine months ended September 30, 2020 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.

The Company recorded net recoveries of $142,000 for the nine months ended September 30, 2021, as compared to net charge-offs of $613,000 for the nine months ended September 30, 2020.

Noninterest Income. Total noninterest income increased by $4.1 million, or 14.4%, to $32.9 million for the nine months ended September 30, 2021, as compared to $28.7 million for the nine months ended September 30, 2020, primarily as a result of increases in wealth management revenue and loan related derivative income, partially offset by decreases in deposit account fees and gain on loans sold. Noninterest income was 25.5% of total revenue for the nine months ended September 30, 2021.



Wealth management revenue increased by $4.3 million, or 19.9%, to $26.0 million for the nine months ended September 30, 2021, as compared to $21.7 million for the nine months ended September 30, 2020, primarily due to appreciation within the equity markets.



Loan related derivative income increased by $491,000, or 43.2%, to $1.6 million for the nine months ended September 30, 2021, as compared to $1.1 million for the nine months ended September 30, 2020.



Deposit account fees decreased by $669,000, or 32.0%, to $1.4 million for the nine months ended September 30, 2021, as compared to $2.1 million for the nine months ended September 30, 2020, primarily due to a decrease in fee revenue from commercial deposit sweep products as a result of lower interest rates.



Gain on loans sold decreased by $406,000, or 34.3%, to $779,000 for the nine months ended September 30, 2021, as compared to $1.2 million for the nine months ended September 30, 2020, due to decreased sales of residential mortgages.

The categories of Wealth Management revenues are shown in the following table:


	Nine Months Ended
	September 30, 2021		September 30, 2020
	(dollars in thousands)
Wealth Management revenues:
Trust and investment advisory fees	$	25,170	$	20,693
Financial planning fees and other service fees		842		993
Total wealth management revenues	$	26,012	$	21,686

The following table presents the changes in Wealth Management Assets under Management:


	Nine Months Ended
	September 30, 2021			September 30, 2020
	(dollars in thousands)
Wealth Management Assets under Management
Balance at the beginning of the period	$	3,994,152		$	3,287,371
Acquired wealth management assets		—			338,676
Gross client asset inflows		355,297			245,670
Gross client asset outflows		(322,761	)		(262,731	)
Net market impact		297,712			182,078
Balance at the end of the period	$	4,324,400		$	3,791,064
Weighted average management fee		0.80	%		0.81	%

There were no significant changes to the average fee rates and fee structure for the nine months ended September 30, 2021 and September 30, 2020.

Noninterest Expense. Total noninterest expense increased by $4.1 million, or 5.7%, to $75.0 million for the nine months ended September 30, 2021, as compared to $71.0 million for the nine months ended September 30, 2020, primarily driven by increases in salaries and employee benefits expense, occupancy and equipment expense, and professional fees, partially offset by a decrease in non-operating expenses.



Salaries and employee benefits expense increased by $6.6 million, or 15.6%, primarily related to the merger with Wellesley in the second quarter of 2020, additions to support business initiatives, normal merit increases, and increases in employee benefit costs.



Occupancy and equipment expense increased by $1.0 million, or 10.2%, primarily as a result of additional branches and office space arising from the merger with Wellesley.



Professional services increased by $929,000, or 29.9%, primarily due to increased consulting fees associated with the wealth management system conversion anticipated in the fourth quarter of 2021 and employment agency costs.



Non-operating expenses decreased by $5.0 million, or 86.4% primarily due to one-time non-operating costs associated with the Wellesley merger that were incurred in 2020.

Income Tax Expense. The Company recorded a provision for income taxes of $14.3 million for the nine months ended September 30, 2021, as compared to $6.5 million for the nine months ended September 30, 2020. The effective tax rate was 26.0% for the nine months ended September 30, 2021, as compared to 25.7% for the nine months ended September 30, 2020.

Changes in Financial Condition

Total Assets. Total assets increased by $534.3 million, or 13.5%, from $3.95 billion at December 31, 2020 to $4.48 billion at September 30, 2021.

Cash and Cash Equivalents. Cash and cash equivalents increased by $17.7 million, or 23.3%, from $75.8 million at December 31, 2020 to $93.5 million at September 30, 2021.

Investment Securities. The Company’s total investment securities portfolio increased by $392.6 million, or 81.0%, from $484.7 million at December 31, 2020 to $877.3 million at September 30, 2021 as the Company invested excess cash.

Loans. Total loans increased by $147.3 million, or 4.7%, from $3.15 billion at December 31, 2020 to $3.30 billion as of September 30, 2021. Excluding PPP loans and their associated deferred PPP loan processing fees, total loans increased by $212.7 million, or 7.0%, from December 31, 2020.



Residential real estate loans increased by $82.5 million, from $1.30 billion at December 31, 2020 to $1.38 billion at September 30, 2021.



CRE loans increased by $115.7 million, from $1.36 billion at December 31, 2020 to $1.47 billion at September 30, 2021.



C&I loans, excluding PPP loans and their associated deferred PPP loan processing fees, increased by $33.5 million, from $223.7 million at December 31, 2020 to $257.1 million at September 30, 2021.



PPP loans, net of associated deferred PPP loan processing fees, were $58.8 million at September 30, 2021, as compared to $124.2 million at December 31, 2020, and are included in commercial and industrial loans on the consolidated balance sheets. As of September 30 2021, approximately 98.6% of first round and 43.8% of second round PPP loans have been or are in the process of being forgiven.

Bank-Owned Life Insurance. The Company invests in bank-owned life insurance to help offset the costs of our employee benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. At September 30, 2021, our investment in bank-owned life insurance was $46.8 million, representing an increase of $604,000 from $46.2 million at December 31, 2020, due to increases in the cash surrender value of the policies during 2021.

Other Assets. Other assets decreased by $11.0 million, or 13.2%, to $72.2 million at September 30, 2021, from $83.2 million at December 31, 2020, primarily due to reductions in the fair value of loan level derivative assets.

Deposits. Total deposits grew by $531.8 million, or 15.6%, to $3.93 billion at September 30, 2021 from $3.40 billion at December 31, 2020.



Core deposits, which the Company defines as all deposits other than certificates of deposit, increased by $595.5 million, or 18.9%, to $3.74 billion at September 30, 2021, as a result of growth from new and existing client relationships.



The cost of total deposits for the nine months ended September 30, 2021 was 0.12%, as compared to 0.28% for the nine months ended September 30, 2020, a reduction of 16 basis points. At September 30, 2021, the spot cost of deposits was 0.13%.



Certificates of deposit totaled $191.1 million at September 30, 2021, a decrease of $63.7 million from $254.8 million at December 31, 2020, primarily due to lower brokered deposit balances. Total brokered certificates of deposit, which are included within certificates of deposit, were $3.0 million and $30.8 million at September 30, 2021 and December 31, 2020, respectively.

Borrowings. At September 30, 2021 and December 31, 2020, borrowings consisted solely of advances from the Federal Home Loan Bank of Boston (“FHLB of Boston”). Total borrowings decreased to $16.9 million at September 30, 2021, from $33.0 million at December 31, 2020 as the Company utilized excess cash to reduce wholesale funding.

Shareholders’ Equity. Total shareholders’ equity increased $25.8 million, or 6.4%, to $427.6 million at September 30, 2021, from $401.7 million at December 31, 2020, primarily due to net income of $40.8 million, partially offset by dividend payments of $12.3 million and a decrease in unrealized gains on the available for sale investment portfolio of $3.7 million (before tax effects).

The Company’s ratio of tangible common equity to tangible assets decreased 49 basis points to 8.42% at September 30, 2021, from 8.91% at December 31, 2020, primarily due to strong asset growth during the nine months ended September 30, 2021. Tangible book value per share grew by $3.47, or 6.9%, to $53.54 at September 30, 2021, as compared to $50.07 at December 31, 2020.

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.


	Three Months Ended									Nine Months Ended
Operating Net Income / Operating Diluted Earnings Per Share	September 30, 2021			June 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
	(dollars in thousands, except share data)
Net Income (a GAAP measure)	$	13,319		$	13,944		$	13,429		$	40,762		$	18,944
Add: Merger expenses		—			—			1,168			—			5,787
Add: Gain on disposition of investment securities		—			—			—			—			(69	)
Add: Provision established for acquired Wellesley loans		—			—			—			—			8,638
Add: Branch and office closure expenses		787			—			—			787			—
Tax effect of non-operating adjustments (1)		(219	)		—			(280	)		(219	)		(3,772	)
Operating Net Income (a non-GAAP measure)	$	13,887		$	13,944		$	14,317		$	41,330		$	29,528
Less: Dividends and Undistributed Earnings Allocated to Participating Securities (GAAP)		(65	)		(67	)		(19	)		(186	)		(22	)
Operating Income Applicable to Common Shareholders (a non-GAAP measure)	$	13,822		$	13,877		$	14,298		$	41,144		$	29,506
Weighted Average Diluted Shares		6,999,773			6,998,936			6,954,324			6,991,175			6,113,828
Operating Diluted Earnings Per Share (a non-GAAP measure)	$	1.97		$	1.98		$	2.06		$	5.89		$	4.83

(1)

The net tax benefit associated with non-operating items is determined by assessing whether each non-operating item is included or excluded from net taxable income and applying the Company’s combined marginal tax rate to only those items included in net taxable income. The tax effect for the three and nine months ended September 30, 2020 has been updated to reflect the final tax deductibility for the year.

The following tables summarize the calculation of the Company’s tangible common equity ratio and tangible book value per share for the periods indicated:


	September 30, 2021			June 30, 2021			December 31, 2020			September 30, 2020
	(dollars in thousands)
Tangible Common Equity:
Shareholders' equity (GAAP)	$	427,577		$	419,501		$	401,732		$	393,073
Less: Goodwill and acquisition related intangibles (GAAP)		(54,619	)		(54,709	)		(54,889	)		(54,980	)
Tangible Common Equity (a non-GAAP measure)	$	372,958		$	364,792		$	346,843		$	338,093
Total assets (GAAP)	$	4,483,567		$	4,303,287		$	3,949,297		$	3,987,109
Less: Goodwill and acquisition related intangibles (GAAP)		(54,619	)		(54,709	)		(54,889	)		(54,980	)
Tangible assets (a non-GAAP measure)	$	4,428,948		$	4,248,578		$	3,894,408		$	3,932,129
Tangible Common Equity Ratio (a non-GAAP measure)		8.42	%		8.59	%		8.91	%		8.60	%

Tangible Common Equity (excluding PPP loans):
Tangible Common Equity (a non-GAAP measure)	$	372,958		$	364,792		$	346,843		$	338,093
Tangible assets (a non-GAAP measure)	$	4,428,948		$	4,248,578		$	3,894,408		$	3,932,129
Less: PPP loans		(58,767	)		(107,638	)		(124,201	)		(189,916	)
Tangible assets (excluding PPP Loans) (a non-GAAP measure)	$	4,370,181		$	4,140,940		$	3,770,207		$	3,742,213
Tangible Common Equity Ratio (excluding PPP Loans) (a non-GAAP measure)		8.53	%		8.81	%		9.20	%		9.03	%

Tangible Book Value Per Share:
Tangible Common Equity (a non-GAAP measure)	$	372,958		$	364,792		$	346,843		$	338,093
Common shares outstanding		6,965,871			6,965,557			6,926,728			6,928,288
Tangible Book Value Per Share (a non-GAAP measure)	$	53.54		$	52.37		$	50.07		$	48.80

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”), U.S. GSE mortgage-backed securities and corporate debt securities. These securities are carried at fair value, with unrealized gains and losses, net of applicable income taxes, recognized as a separate component of shareholders’ equity.

The fair value of securities available for sale totaled $211.0 million and included gross unrealized gains of $1.9 million and gross unrealized losses of $2.8 million at September 30, 2021. At December 31, 2020, the fair value of securities available for sale totaled $237.0 million and included gross unrealized gains of $3.2 million and gross unrealized losses of $406,000.

Securities classified as held to maturity consist of U.S. GSE mortgage-backed securities, corporate debt securities, and state, county, and municipal securities. Securities held to maturity as of September 30, 2021 are carried at their amortized cost of $666.3 million. At December 31, 2020, securities held to maturity totaled $247.7 million.

The following table sets forth the fair value of available for sale investment securities, the amortized costs of held to maturity investment securities, and the percentage distribution at the dates indicated:


	September 30,					December 31,
	2021					2020
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Available for sale securities
U.S. GSE obligations	$	23,273		11	%	$	23,617		10	%
Mortgage-backed securities		185,948		88	%		210,630		89	%
Corporate debt securities		1,772		1	%		2,783		1	%
Total securities available for sale	$	210,993		100	%	$	237,030		100	%
Held to maturity securities
Mortgage-backed securities	$	554,583		83	%	$	137,435		55	%
Corporate debt securities		6,995		1	%		6,989		3	%
Municipal securities		104,744		16	%		103,248		42	%
Total securities held to maturity	$	666,322		100	%	$	247,672		100	%
Total	$	877,315				$	484,702

The following tables set forth the composition and maturities of debt 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					After One, But Within Five Years					After Five, But Within Ten Years					After Ten Years					Total
	Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)
At September 30, 2021	(dollars in thousands)
Available for sale securities
U.S. GSE obligations	$	—		—		$	9,996		0.5	%	$	5,000		2.3	%	$	8,000		2.6	%	$	22,996		1.6	%
Mortgage-backed securities		5		0.0	%		2,935		1.4	%		55,736		1.5	%		128,486		1.0	%		187,162		1.1	%
Corporate debt securities		—		—			1,742		1.8	%		—		—			—		—			1,742		1.8	%
Total available for sale securities	$	5		0.0	%	$	14,673		0.8	%	$	60,736		1.6	%	$	136,486		1.1	%	$	211,900		1.2	%

Held to maturity securities
Mortgage-backed securities	$	—		—		$	1		5.8	%	$	57,764		2.5	%	$	496,818		1.4	%	$	554,583		1.5	%
Corporate debt securities		6,995		2.6	%		—		0.0	%		—		—			—		—			6,995		2.6	%
Municipal securities		4,362		4.7	%		18,993		3.5	%		38,574		3.4	%		42,815		2.7	%		104,744		3.2	%
Total held to maturity securities	$	11,357		3.4	%	$	18,994		3.5	%	$	96,338		2.8	%	$	539,633		1.5	%	$	666,322		1.8	%
Total	$	11,362		3.4	%	$	33,667		2.3	%	$	157,074		2.3	%	$	676,119		1.4	%	$	878,222		1.7	%


	Within One Year					After One, But Within Five Years					After Five, But Within Ten Years					After Ten Years					Total
	Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)			Amortized Cost		Weighted Average Yield (1)
At December 31, 2020	(dollars in thousands)
Available for sale securities
U.S. GSE obligations	$	—		—		$	9,995		0.5	%	$	5,000		2.3	%	$	8,000		2.6	%	$	22,995		1.6	%
Mortgage-backed securities		1		5.2	%		4,226		1.4	%		54,849		1.5	%		149,439		1.2	%		208,515		1.3	%
Corporate debt securities		1,001		1.1	%		1,741		1.8	%		—		—			—		—			2,742		1.6	%
Total available for sale securities	$	1,002		1.1	%	$	15,962		0.9	%	$	59,849		1.6	%	$	157,439		1.2	%	$	234,252		1.3	%

Held to maturity securities
Mortgage-backed securities	$	—		—		$	2		5.6	%	$	60,933		2.4	%	$	76,500		2.1	%	$	137,435		2.3	%
Corporate debt securities		—		—			6,989		2.6	%		—		—			—		—			6,989		2.6	%
Municipal securities		2,541		4.5	%		19,343		3.7	%		40,934		3.4	%		40,430		2.8	%		103,248		3.3	%
Total held to maturity securities	$	2,541		4.5	%	$	26,334		3.4	%	$	101,867		2.8	%	$	116,930		2.3	%	$	247,672		2.7	%
Total	$	3,543		3.5	%	$	42,296		2.4	%	$	161,716		2.4	%	$	274,369		1.7	%	$	481,924		2.0	%

(1) Weighted Average Yield is shown on a fully taxable equivalent basis using a federal tax rate of 21% at September 30, 2021 and December 31, 2020.

The Company did not record an allowance for credit losses on its investments securities as of September 30, 2021 or December 31, 2020. The Company regularly reviews debt securities for expected credit loss using both qualitative and quantitative criteria, as necessary based on the composition of the portfolio at period end.

Loans

The Company’s lending activities are conducted principally in Eastern Massachusetts and Southern New Hampshire. The Company grants single- and multi-family residential loans, C&I loans, CRE loans, construction loans, and a variety of consumer loans. Most of the loans granted by the Company are secured by real estate collateral. Repayment of the Company’s residential loans is generally dependent on the health of the employment market in the borrowers’ geographic areas and that of the general economy, with liquidation of the underlying real estate collateral being typically viewed as the primary source of repayment in the event of borrower default. The repayment of C&I loans depends primarily on the cash flow and credit worthiness of the borrower and secondarily on the underlying collateral provided by the borrower. As borrower cash flow may be difficult to predict, liquidation of the underlying collateral securing these loans is typically viewed as the primary source of repayment in the event of borrower default. However, collateral typically consists of equipment, inventory, accounts receivable, or other business assets that may fluctuate in value, so the liquidation of collateral in the event of default is often an insufficient source of repayment. For renewable energy loans, cash flow is generally from multiple revenue sources and dependent on energy output. 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 table shows the composition of the loan portfolio at the dates indicated:


	September 30, 2021						December 31, 2020
	Amount			% of Total			Amount			% of Total
	(dollars in thousands)
Residential mortgage
Mortgages - fixed rate	$	656,993			20	%	$	535,804			17	%
Mortgages - adjustable rate		690,684			21	%		734,593			23	%
Construction		28,315			1	%		25,495			1	%
Deferred costs, net of unearned fees		5,421			0	%		2,976			0	%
Total residential mortgages		1,381,413			42	%		1,298,868			41	%
Commercial mortgage
Mortgages - non-owner occupied		1,225,372			37	%		1,064,317			35	%
Mortgages - owner occupied		157,393			5	%		153,474			5	%
Construction		89,681			3	%		139,075			4	%
Deferred costs, net of unearned fees		2,248			0	%		2,096			0	%
Total commercial mortgages		1,474,694			45	%		1,358,962			44	%
Home equity
Home equity - lines of credit		88,373			2	%		102,460			3	%
Home equity - term loans		2,026			0	%		3,503			0	%
Deferred costs, net of unearned fees		298			0	%		231			0	%
Total home equity		90,697			2	%		106,194			3	%
Commercial and industrial
Commercial and industrial		256,943			8	%		223,415			7	%
PPP loans		60,518			2	%		126,227			4	%
Unearned fees, net of deferred costs		(1,557	)		0	%		(1,787	)		0	%
Total commercial and industrial		315,904			10	%		347,855			11	%
Consumer
Secured		37,302			1	%		41,409			1	%
Unsecured		900			0	%		341			0	%
Deferred costs, net of unearned fees		8			0	%		19			0	%
Total consumer		38,210			1	%		41,769			1	%
Total loans	$	3,300,918			100	%	$	3,153,648			100	%

Residential Mortgage. Residential real estate loans held in portfolio amounted to $1.38 billion at September 30, 2021, an increase of $82.5 million, or 6.4%, from $1.30 billion at December 31, 2020, and consisted of one-to-four family residential mortgage loans. The residential mortgage portfolio represented 42% and 41% of total loans at September 30, 2021 and December 31, 2020, respectively.

The average loan balance outstanding in the residential portfolio was $494,000 and the largest individual residential mortgage loan outstanding was $5.9 million as of September 30, 2021. At September 30, 2021, this loan was performing in accordance with its original terms.

The Bank offers fixed and adjustable-rate residential mortgage and construction loans with maturities up to 30 years. One-to-four family residential mortgage loans are generally underwritten according to Federal National Mortgage Association (“Fannie Mae”) or Federal Home Loan Mortgage Corporation (“Freddie Mac”) guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” The Bank generally originates and purchases both fixed and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which increased to $548,250 in 2021 from $510,400 in 2020, 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 Community Reinvestment Act (“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. We do 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 customer 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 three and nine months ended September 30, 2021.

The Company is servicing mortgage loans sold to others without recourse of approximately $180.4 million at September 30, 2021 and $188.2 million at December 31, 2020.

The table below presents residential real estate loan origination activity for the periods indicated:


	For the Nine Months Ended September 30,
	2021		2020
	(dollars in thousands)
Originations for retention in portfolio	$	436,316	$	401,808
Originations for sale to the secondary market		33,627		58,878
Total	$	469,943	$	460,686

Loans are sold with servicing retained or released. The table below presents residential real estate loan sale activity for the periods indicated:


	For the Nine Months Ended
	September 30, 2021		September 30, 2020
	(dollars in thousands)
Loans sold with servicing rights retained	$	23,204	$	35,802
Loans sold with servicing rights released		2,466		18,024
Total	$	25,670	$	53,826

Loans sold with the retention of servicing typically result in the capitalization of servicing rights. Loan servicing rights are included in other assets and are subsequently amortized as an offset to other income over the estimated period of servicing. The net balance of capitalized mortgage servicing rights amounted to $1.2 million as of both September 30, 2021 and December 31, 2020.

Commercial Mortgage (CRE). CRE loans were $1.47 billion as of September 30, 2021, an increase of $115.7 million, or 8.5%, from $1.36 billion at December 31, 2020. The CRE loan portfolio represented 45.0% and 44% of total loans at September 30, 2021 and December 31, 2020, respectively. The average loan balance outstanding in this portfolio was $1.8 million, and the largest individual CRE loan outstanding was $30.0 million as of September 30, 2021. At September 30, 2021, 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 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 $90.7 million and $106.2 million at September 30, 2021 and December 31, 2020, respectively. The home equity portfolio represented 2% and 3% of total loans at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, the largest home equity line of credit was $3.5 million and had an outstanding balance of $3.0 million. At September 30, 2021, 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 $315.9 million and $347.9 million at September 30, 2021 and December 31, 2020, respectively. The C&I portfolio represented 10% and 11% of total loans at September 30, 2021 and December 31, 2020, respectively. The average loan balance outstanding in this portfolio, excluding PPP loans and the associated deferred PPP processing fees, was $334,000, and the largest individual C&I loan outstanding was $8.6 million as of September 30, 2021. At September 30, 2021, this loan was performing in accordance with its original terms. Loans under the SBA’s PPP program, net of associated deferred PPP processing fees, totaled $58.8 million at September 30, 2021 and $124.2 million at December 31, 2020, respectively, and are included in the C&I portfolio. Renewable energy loans are reported within the C&I portfolio. At September 30, 2021, commercial renewable energy loans totaled $111.2 million and the average loan balance outstanding in this portfolio was $2.6 million. The largest individual loan outstanding was $8.3 million, and this loan was performing in accordance with its original terms.

The Company’s C&I loan customers represent various small- and middle-market established businesses involved in professional 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.

Consumer Loans. The consumer loan portfolio totaled $38.2 million at September 30, 2021 and $41.8 million at December 31, 2020. Consumer loans represented 1% of the total loan portfolio at both September 30, 2021 and December 31, 2020. The average loan balance outstanding in this portfolio was $13,000 and the largest individual consumer loan outstanding was $3.8 million as of September 30, 2021. At September 30, 2021, this loan was performing in accordance with its original terms.

Consumer loans include secured and unsecured loans, lines of credit, and personal installment loans. Unsecured consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets. The secured consumer loans and lines portfolio are generally fully secured by pledged assets, such as bank accounts or investments.

Loan Portfolio Maturities. The following table summarizes the dollar amount of loans maturing in the portfolio based on their loan type and contractual terms to maturity at September 30, 2021. 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.


	September 30, 2021
	One Year or Less		One to Five Years		Over Five Years		Total
	(dollars in thousands)
Residential mortgage	$	6,505	$	10,631	$	1,364,277	$	1,381,413
Commercial mortgage		99,494		341,722		1,033,478		1,474,694
Home equity		611		5,016		85,070		90,697
Commercial and industrial		58,741		118,922		138,241		315,904
Consumer		38,094		43		73		38,210
Total	$	203,445	$	476,334	$	2,621,139	$	3,300,918

Loan Portfolio by Interest Rate Type. The following table summarizes the dollar amount of loans in our portfolio based on whether the loan has a fixed, adjustable, or floating rate of interest at September 30, 2021. Floating rate loans are tied to a market index while adjustable-rate loans are adjusted based on the contractual terms of the loan.


	September 30, 2021
	Fixed		Adjustable		Floating		Total
	(dollars in thousands)
Residential mortgage	$	671,997	$	699,825	$	9,591	$	1,381,413
Commercial mortgage		516,880		422,113		535,701		1,474,694
Home equity		2,225		—		88,472		90,697
Commercial and industrial		106,913		42,105		166,886		315,904
Consumer		248		464		37,498		38,210
Total	$	1,298,263	$	1,164,507	$	838,148	$	3,300,918

Nonperforming Loans and TROUBLED DEBT RESTRUCTURINGS (“TDRs”)

The composition of nonperforming assets is as follows:


	September 30,			December 31,
	2021			2020
	(dollars in thousands)
Nonaccruals	$	5,084		$	7,744
Loans past due > 90 days, but still accruing		—			407
Troubled debt restructurings		767			811
Total nonperforming loans	$	5,851		$	8,962
Accruing troubled debt restructured loans	$	—		$	—
Nonperforming loans as a percentage of total loans		0.18	%		0.28	%
Nonperforming loans as a percentage of total assets		0.13	%		0.23	%

Total non-performing loans decreased by $3.1 million at September 30, 2021, as compared to December 31, 2020, primarily due to a reduction of CRE 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 September 30, 2021 and December 31, 2020, although such values may fluctuate with changes in the economy and the real estate market. In addition to the monitoring and review of loan performance internally, the Company has contracted with an independent organization to review the Company’s C&I and CRE loan portfolios. This independent review was performed in each of the past five years.

Nonaccrual Loans. Loans are typically placed on nonaccrual 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.

Allowance for Credit Losses

The following table summarizes the changes in the Company’s allowance for credit losses on loans for the periods indicated:


	Nine Months Ended			Year Ended
	September 30,			December 31,
	2021			2020
	(dollars in thousands)
Period-end loans outstanding (net of unearned discount and deferred loan fees)	$	3,300,918		$	3,153,648
Average loans outstanding (net of unearned discount and deferred loan fees)	$	3,228,575		$	2,856,631
Balance of allowance for credit losses at the beginning of year – loans	$	36,016		$	18,180
Loans charged-off:
Commercial and industrial		—			(400	)
Commercial mortgage		—			(264	)
Residential mortgage		(4	)		—
Consumer		(5	)		(40	)
Total loans charged-off		(9	)		(704	)
Recovery of loans previously charged-off:
Commercial and industrial		92			250
Commercial mortgage		30			—
Consumer		29			15
Total recoveries of loans previously charged-off:		151			265
Net loan (charge-offs) recoveries		142			(439	)
Adoption of CECL accounting standard – loans		—			205
Provision for credit losses - acquired loans		—			8,282
Initial allowance for PCD		—			437
Provision for (release of) credit losses – loans		(927	)		9,351
Balance of allowance for credit losses at end of period – loans	$	35,231		$	36,016
Ratio of net (charge-offs) recoveries to average loans outstanding		0.00	%		(0.02	)%
Ratio of allowance for credit losses on loans to loans outstanding		1.07	%		1.14	%

The allowance for credit losses on loans to loans outstanding, excluding PPP loans was 1.09% and 1.19% at September 30, 2021 and December 31, 2020, respectively.

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.

Sources of Funds

General. Deposits traditionally have been the Company’s primary source of funds for its investment and lending activities. The Company also borrows from the FHLB of Boston and the Federal Reserve Bank of Boston (“FRB of Boston”) and utilizes 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 customers in the communities in which its branches and offices are located, as well as from small- and medium-sized businesses and other customers throughout its lending area. We rely on our 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.

The following table sets forth the Company’s deposits for the periods indicated:


	September 30,					December 31,
	2021					2020
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Demand deposits (non-interest bearing)	$	1,281,881		32.6	%	$	1,006,132		29.7	%
Interest bearing checking		682,675		17.3	%		625,650		18.4	%
Money market		841,641		21.4	%		532,218		15.6	%
Savings		937,565		23.8	%		984,262		28.9	%
Retail certificates of deposit under $100,000		55,297		1.4	%		62,646		1.8	%
Retail certificates of deposit of $100,000 or greater		132,836		3.4	%		161,387		4.7	%
Wholesale certificates of deposit		2,951		0.1	%		30,788		0.9	%
Total	$	3,934,846		100.0	%	$	3,403,083		100.0	%

At September 30, 2021, the Company had a total of $188.1 million in certificates of deposit, excluding brokered deposits, of which $154.9 million had remaining maturities of one year or less. As of September 30, 2021 and December 31, 2020, the Company had a total of $3.0 million and $30.8 million of brokered deposits, respectively.

Borrowings. Total borrowings were $16.9 million at September 30, 2021, a decrease of $16.1 million, as compared to $33.0 million at December 31, 2020. The Company’s borrowings consisted of advances from the FHLB of Boston. 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 Bank’s remaining borrowing capacity at the FHLB of Boston at September 30, 2021 was approximately $748.1 million. In addition, the Bank has a $10.0 million line of credit with the FHLB of Boston. The Company had no borrowings outstanding with the FRB of Boston at September 30, 2021. The Bank’s borrowing capacity at the FRB of Boston at September 30, 2021 was approximately $504.3 million.

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 average assets, liabilities and shareholders’ equity, and average rates earned or paid on a fully taxable equivalent basis for each of the periods indicated:


	Three Months Ended
	September 30, 2021									June 30, 2021									September 30, 2020
	Average Balance			Interest Income/ Expenses (1)			Rate Earned/ Paid (1)			Average Balance			Interest Income/ Expenses (1)			Rate Earned/ Paid (1)			Average Balance			Interest Income/ Expenses (1)			Rate Earned/ Paid (1)
	(dollars in thousands)
ASSETS
Interest-earning assets
Loans (2)
Taxable	$	3,242,476		$	30,093			3.68	%	$	3,195,077		$	30,557			3.84	%	$	3,288,304		$	34,468			4.17	%
Tax-exempt		45,228			448			3.93			33,039			348			4.22			18,940			307			6.45
Securities available for sale (3)
Taxable		213,542			660			1.23			218,230			651			1.20			129,957			524			1.60
Securities held to maturity
Taxable		459,940			1,842			1.59			343,380			1,372			1.60			147,771			880			2.37
Tax-exempt		105,672			850			3.19			102,650			801			3.13			90,698			799			3.50
Cash and cash equivalents		113,511			28			0.10			132,964			28			0.08			67,056			8			0.05
Total interest-earning assets (4)		4,180,369			33,921			3.22	%		4,025,340			33,757			3.36	%		3,742,726			36,986			3.93	%
Non-interest-earning assets		252,201									251,641									281,910
Allowance for credit losses		(35,302	)								(36,183	)								(33,872	)
Total assets	$	4,397,268								$	4,240,798								$	3,990,764
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Checking accounts	$	685,731		$	63			0.04	%	$	671,424		$	51			0.03	%	$	577,294		$	164			0.11	%
Savings accounts		949,487			198			0.08			959,606			174			0.07			963,253			565			0.23
Money market accounts		794,081			613			0.31			706,100			467			0.27			435,417			245			0.22
Certificates of deposit		201,944			212			0.42			218,738			314			0.58			333,366			380			0.45
Total interest-bearing deposits		2,631,243			1,086			0.16			2,555,868			1,006			0.16			2,309,330			1,354			0.23
Subordinated debt		—			—			—			—			—			—			9,936			189			7.57
Other borrowed funds		17,005			147			3.43			18,288			141			3.09			177,423			376			0.84
Total interest-bearing liabilities		2,648,248			1,233			0.18	%		2,574,156			1,147			0.18	%		2,496,689			1,919			0.31	%
Non-interest-bearing liabilities
Demand deposits		1,219,288									1,156,854									986,590
Other liabilities		105,846									97,515									119,762
Total liabilities		3,973,382									3,828,525									3,603,041
Shareholders’ equity		423,886									412,273									387,723
Total liabilities & shareholders’ equity	$	4,397,268								$	4,240,798								$	3,990,764
Net interest income on a fully taxable equivalent basis					32,688									32,610									35,067
Less taxable equivalent adjustment					(274	)								(241	)								(232	)
Net interest income				$	32,414								$	32,369								$	34,835
Net interest spread (5)								3.03	%								3.18	%								3.63	%
Net interest margin (6)								3.10	%								3.25	%								3.73	%

(1)

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21%.

(2)

Nonaccrual loans are included in average amounts outstanding.

(3)

Average balances of securities available for sale calculated utilizing amortized cost.

(4)

FHLB of Boston stock balance is excluded from interest-earning assets and dividend income is excluded from interest income.

(5)

Net interest rate spread represents the difference between the weighted average yield on interest-earning assets, inclusive of PPP loans originated during 2020 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 2020 and 2021.


	Nine Months Ended
	September 30, 2021									September 30, 2020
	Average Balance			Interest Income/ Expenses (1)			Rate Earned/ Paid (1)			Average Balance			Interest Income/ Expenses (1)			Rate Earned/ Paid (1)
	(dollars in thousands)
ASSETS
Interest-earning assets
Loans (2)
Taxable	$	3,193,657		$	90,975			3.81	%	$	2,719,965		$	85,936			4.22	%
Tax-exempt		34,918			1,077			4.12			21,175			825			5.20
Securities available for sale (3)
Taxable		220,429			2,004			1.22			126,433			1,742			1.84
Securities held to maturity
Taxable		330,011			4,106			1.66			158,506			2,906			2.45
Tax-exempt		103,569			2,484			3.21			86,275			2,313			3.58
Cash and cash equivalents		130,221			87			0.09			57,472			163			0.38
Total interest-earning assets (4)		4,012,805			100,733			3.36	%		3,169,826			93,885			3.96	%
Non-interest-earning assets		254,351									236,346
Allowance for credit losses		(35,822	)								(25,221	)
Total assets	$	4,231,334								$	3,380,951
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Checking accounts	$	663,497		$	198			0.04	%	$	525,511		$	532			0.14	%
Savings accounts		962,067			644			0.09			922,835			2,797			0.40
Money market accounts		696,203			1,617			0.31			300,300			834			0.37
Certificates of deposit		219,876			908			0.55			250,796			1,716			0.91
Total interest-bearing deposits		2,541,643			3,367			0.18	%		1,999,442			5,879			0.39	%
Subordinated debt		—			—			—			4,421			253			7.64
Other borrowed funds		19,082			428			3.00			147,730			1,223			1.11
Total interest-bearing liabilities		2,560,725			3,795			0.20	%		2,151,593			7,355			0.46	%
Non-interest-bearing liabilities
Demand deposits		1,154,222									793,934
Other liabilities		102,705									99,168
Total liabilities		3,817,652									3,044,695
Shareholders’ equity		413,682									336,256
Total liabilities & shareholders’ equity	$	4,231,334								$	3,380,951
Net interest income on a fully taxable equivalent basis					96,938									86,530
Less taxable equivalent adjustment					(749	)								(659	)
Net interest income				$	96,189								$	85,871
Net interest spread (5)								3.16	%								3.50	%
Net interest margin (6)								3.23	%								3.65	%

(1)

Annualized on a fully taxable equivalent basis calculated using a federal tax rate of 21%.

(2)

Nonaccrual loans are included in average amounts outstanding.

(3)

Average balances of securities available for sale calculated utilizing amortized cost.

(4)

FHLB of Boston stock balance is excluded from interest-earning assets and dividend income is excluded from interest income.

(5)

(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 2020 and 2021.

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) and (ii) changes attributable to changes in rate (change in average interest rate multiplied by prior year average balance), while (iii) changes attributable to the combined impact of volumes and rates have been allocated proportionately to separate volume and rate categories.


	Three Months Ended September 30, 2021									Nine Months Ended September 30, 2021
	Compared with									Compared with
	Three Months Ended September 30, 2020									Nine Months Ended September 30, 2020
	Increase/(Decrease) Due to Change in									Increase/(Decrease) Due to Change in
	Volume			Rate			Total			Volume			Rate			Total
	(dollars in thousands)
Interest income
Loans
Taxable	$	(466	)	$	(3,909	)	$	(4,375	)	$	13,967		$	(8,928	)	$	5,039
Tax-exempt		298			(157	)		141			450			(198	)		252
Securities available for sale
Taxable		281			(145	)		136			991			(729	)		262
Securities held to maturity
Taxable		1,335			(373	)		962			2,362			(1,162	)		1,200
Tax-exempt		126			(75	)		51			430			(259	)		171
Cash and cash equivalents		8			12			20			108			(184	)		(76	)
Total interest income	$	1,582		$	(4,647	)	$	(3,065	)	$	18,308		$	(11,460	)	$	6,848
Interest expense
Deposits
Checking accounts	$	26		$	(127	)	$	(101	)	$	113		$	(447	)	$	(334	)
Savings accounts		(8	)		(359	)		(367	)		114			(2,267	)		(2,153	)
Money market accounts		254			114			368			939			(156	)		783
Certificates of deposit		(139	)		(29	)		(168	)		(192	)		(616	)		(808	)
Total interest-bearing deposits		133			(401	)		(268	)		974			(3,486	)		(2,512	)
Subordinated debt		(189	)		—			(189	)		(253	)		—			(253	)
Other borrowed funds		(579	)		350			(229	)		(1,679	)		884			(795	)
Total interest expense	$	(635	)	$	(51	)	$	(686	)	$	(958	)	$	(2,602	)	$	(3,560	)
Change in net interest income	$	2,217		$	(4,596	)	$	(2,379	)	$	19,266		$	(8,858	)	$	10,408

Excluding the impact of merger-related loan accretion and the impact of PPP loans, the adjusted net interest margin for the quarter ended September 30, 2021 was 2.92%, presenting a 49 basis points decrease over the quarter ended September 30, 2020’s adjusted net interest margin of 3.41%.


	Three Months Ended
	September 30, 2021
	Average Balance			Interest Income/ Expenses			Rate Earned/ Paid
	(dollars in thousands)
Total interest-earning assets (GAAP)	$	4,180,369
Net interest income on a fully taxable equivalent basis (GAAP)				$	32,688
Net interest margin on a fully taxable equivalent basis (GAAP)								3.10	%
Less: Paycheck Protection Program loan impact		(81,880	)		(1,558	)		-0.09	%
Less: Accretion of loan fair value adjustments					(1,014	)		-0.09	%
Adjusted net interest margin on a fully taxable equivalent basis	$	4,098,489		$	30,116			2.92	%
Less: Excess cash impact (1)		(60,884	)		(23	)		0.04	%
Normalized adjusted net interest margin on a fully taxable equivalent basis	$	4,037,605		$	30,093			2.96	%

(1)

Excess cash represents the estimated amount of average cash on the balance sheet that is above normal levels.

Excluding the impact of merger-related loan accretion and the impact of PPP loans, the adjusted net interest margin for the nine months ended September 30, 2021 was 3.02%, representing a 37 basis points decrease over the nine months ended September 30, 2020’s adjusted net interest margin of 3.39%.


	Nine Months Ended
	September 30, 2021
	Average Balance			Interest Income/ Expenses			Rate Earned/ Paid
	(dollars in thousands)
Total interest-earning assets (GAAP)	$	4,012,805
Net interest income on a fully taxable equivalent basis (GAAP)				$	96,938
Net interest margin on a fully taxable equivalent basis (GAAP)								3.23	%
Less: Paycheck Protection Program loan impact		(125,006	)		(4,876	)		-0.06	%
Less: Accretion of loan fair value adjustments					(4,142	)		-0.15	%
Adjusted net interest margin on a fully taxable equivalent basis	$	3,887,799		$	87,920			3.02	%
Less: Excess cash impact (1)		(77,594	)		(87	)		0.06	%
Normalized adjusted net interest margin on a fully taxable equivalent basis	$	3,810,205		$	87,833			3.08	%

(1)

Excess cash represents the estimated amount of average cash on the balance sheet that is above normal levels.

Market Risk and Asset Liability Management

Market risk is the risk of loss from adverse changes in market prices and rates. The Company’s market risk arises primarily from interest rate risk inherent in its investment, borrowing, lending and deposit gathering activities. 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 (excluding purchase accounting adjustments and PPP fee income) 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 months.

As of September 30, 2021:


		Year 1
Change in Interest Rates (in Basis Points)		Percentage Change in Net Interest Income
Parallel rate shocks
+300		(0.9)
+200		(1.3)
+100		(0.5)
–100		(5.7)

The following table demonstrates the annualized result of an interest rate simulation (excluding purchase accounting adjustments and PPP fee income) 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 months.

As of September 30, 2021:


		Year 1
Change in Interest Rates (in Basis Points)		Percentage Change in Net Interest Income
Gradual rate shifts
+200		3.2
–100		(0.7)

These simulations assume that there is no growth in interest-earning assets or interest-bearing liabilities over the next 12 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, 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 September 30, 2021, estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 8.5% increase in the economic value of equity for the next 12 months, resulting in an economic value of equity ratio of 10.8%. 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 6.2% increase in the economic value of equity, resulting in an economic value of equity ratio of 10.3%. 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 September 30, 2021. 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 customer 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, 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

Impact of Inflation and Changing Prices. Our Consolidated Financial Statements and related notes have been prepared in accordance with GAAP. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, generally speaking, changes in market interest rates have a greater impact on performance than the effects of inflation.

Liquidity. Liquidity is defined as the Company’s ability to generate adequate cash to meet its needs for day-to-day operations and material long- and short-term commitments. Liquidity risk is the risk of potential loss if the Company were unable to meet its funding requirements at a reasonable cost. The Company manages its liquidity based on demand and specific events and uncertainties to meet current and future financial 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, and purchasing wholesale certificates of deposit as its secondary sources. At September 30, 2021, the Company had access to funds totaling $1.72 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 Company’s board of directors.

Capital Adequacy. Total shareholders’ equity was $427.6 million at September 30, 2021, as compared to $401.7 million at December 31, 2020. The Company’s equity increased primarily due to net income of $40.8 million, partially offset by regular dividend payments of $12.3 million and decreases in unrealized gains on the available for sale investment portfolio (before tax effects) of $3.7 million. Book value per share at September 30, 2021 and December 31, 2020 amounted to $61.38 and $58.00, respectively.

The Company and the Bank are subject to various regulatory capital requirements. As of September 30, 2021, the Company and the Bank exceeded the regulatory minimum levels to be considered “well-capitalized.” See Note 13 to the Unaudited Consolidated Financial Statements for additional discussion of regulatory capital requirements.

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 customers. These financial instruments primarily include commitments to originate and sell loans, standby letters of credit, unused lines of credit, and unadvanced portions of construction loans. The instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Company has in these particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments, standby letters of credit and unadvanced portions of construction loans is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

Off-Balance-Sheet Arrangements. Our significant off-balance-sheet arrangements consist of the following:



commitments to originate and sell loans,



standby and commercial letters of credit,



unused lines of credit,



unadvanced portions of construction loans,



unadvanced portions of other loans,



loan related derivatives, and



risk participation agreements.

Off-balance-sheet arrangements are more fully discussed within Note 11 – Financial Instruments with Off-Balance-Sheet Risk.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

The information required by this item is included in Item 2 of this report under “Market Risk and Asset Liability Management.”

Item 4. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. As of September 30, 2021, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including its Chief Executive Officer and its Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) of the Securities Exchange Act of 1934). Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2021 for recording, processing, summarizing, and reporting the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in SEC rules and forms.

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions and the risk that the degree of compliance with policies or procedures may deteriorate over time. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud or in making all material information known in a timely manner to the appropriate levels of management.

Changes in Internal Controls over Financial Reporting. During the quarter ended September 30, 2021, there were no changes in the Company’s internal controls over financial reporting that have materially affected or are reasonably likely to affect the Company’s internal controls over financial reporting.

PART II—OTHER INFORMATION

Item 1. 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 1A. Risk Factors.

For a discussion of the potential risks and uncertainties, please refer to the "Risk Factors" sections in the Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”) and in the Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 (the “March 31, 2021 Quarterly Report”), which are accessible on the SEC’s website at www.sec.gov. Except as supplemented by the risk factors in the March 31, 2021 Quarterly Report, there have been no material changes to the risk factors previously disclosed in the 2020 Annual Report.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth the information regarding the Company’s repurchases of its common stock during the three months ended September 30, 2021:


	Total Number of Shares Repurchased (1)		Weighted Average Price Paid Per Share
Period
July 1 to July 31, 2021		—	$	—
August 1 to August 31, 2021		236	$	85.85
September 1 to September 30, 2021		—	$	—
Total		236	$	85.85

(1)

Shares repurchased by the Company relate to shares tendered by employees to pay their income tax liability on current period RSA, RSU, or PRSU vestings.

On March 15, 2021, the Company’s board of directors authorized a share repurchase program (the “Repurchase Program”) to acquire from time to time up to 5.0% shares of the Company’s common stock through March 15, 2022, provided that the aggregate purchase price does not exceed $26.0 million. The timing and amount of any shares of the Company’s common stock repurchased will be determined by the Company’s management based on its evaluation of market conditions and other factors. The Repurchase Program may be suspended or discontinued at any time. The Company did not repurchase any shares under its Repurchase Program during the three and nine months ended September 30, 2021.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Furnish the exhibits required by Item 601 of Regulation S-K (§ 229.601 of this chapter).


Exhibit Number		Description

31.1*		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.

31.2*		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.

32.1*		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.

32.2*		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 its XBRL tags are embedded within the Inline XBRL document.

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		The cover page for the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, has been formatted in Inline XBRL and contained in Exhibit 101.

* Filed herewith.

SIGNATURES

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.


	CAMBRIDGE BANCORP

November 4, 2021	By:	/s/ Denis K. Sheahan
		Denis K. Sheahan
		Chairman, President & Chief Executive Officer (Principal Executive Officer)

November 4, 2021
	By:	/s/ Michael F. Carotenuto
		Michael F. Carotenuto
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)