CAMBRIDGE BANCORP - Quarter Report: 2021 March (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 March 31, 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 in 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 April 30, 2021, the registrant had 6,960,050 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	31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	52
PART II.	OTHER INFORMATION	53
Item 1.	Legal Proceedings	53
Item 1A.	Risk Factors	53
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 3.	Defaults Upon Senior Securities	54
Item 4.	Mine Safety Disclosures	54
Item 5.	Other Information	54
Item 6.	Exhibits	55
Signatures		56

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

	March 31, 2021			December 31, 2020
	(dollars in thousands, except par value)
Assets
Cash and cash equivalents	$	226,633		$	75,785
Investment securities
Available for sale, at fair value (amortized cost $223,597 and $234,252, respectively)		222,452			237,030
Held to maturity, at amortized cost (fair value $408,450 and $260,139, respectively)		402,358			247,672
Total investment securities		624,810			484,702
Loans held for sale, at lower of cost or fair value		3,353			6,909
Loans
Residential mortgage		1,294,366			1,298,868
Commercial mortgage		1,370,948			1,358,962
Home equity		98,740			106,194
Commercial & Industrial		380,938			347,855
Consumer		35,379			41,769
Total loans		3,180,371			3,153,648
Less: allowance for credit losses on loans		(35,646	)		(36,016	)
Net loans		3,144,725			3,117,632
Federal Home Loan Bank of Boston Stock, at cost		5,064			5,734
Bank owned life insurance		46,365			46,169
Banking premises and equipment, net		17,815			18,158
Right-of-use asset operating leases		33,386			34,927
Deferred income taxes, net		11,242			11,639
Accrued interest receivable		8,871			9,514
Goodwill		51,912			51,912
Merger related intangibles, net		2,887			2,977
Other assets		76,110			83,239
Total assets	$	4,253,173		$	3,949,297
Liabilities
Deposits
Demand	$	1,154,869		$	1,006,132
Interest bearing checking		675,578			625,650
Money market		687,578			532,218
Savings		983,173			984,262
Certificates of deposit		228,867			254,821
Total deposits		3,730,065			3,403,083
Borrowings		17,608			32,992
Operating lease liabilities		35,837			37,448
Other liabilities		61,990			74,042
Total liabilities		3,845,500			3,547,565
Shareholders’ Equity
Common stock, par value $1.00; Authorized: 10,000,000 shares; Outstanding: 6,960,194 shares and 6,926,728 shares, respectively		6,960			6,927
Additional paid-in capital		226,841			226,967
Retained earnings		175,093			165,404
Accumulated other comprehensive income (loss)		(1,221	)		2,434
Total shareholders’ equity		407,673			401,732
Total liabilities and shareholders’ equity	$	4,253,173		$	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
	March 31, 2021			March 31, 2020
	(dollars in thousands, except share data)
Interest and dividend income
Interest on taxable loans	$	30,325		$	23,338
Interest on tax-exempt loans		222			198
Interest on taxable investment securities		1,585			1,723
Interest on tax-exempt investment securities		658			595
Dividends on FHLB of Boston stock		—			101
Interest on overnight investments		31			140
Total interest and dividend income		32,821			26,095
Interest expense
Interest on deposits		1,275			3,129
Interest on borrowed funds		140			566
Total interest expense		1,415			3,695
Net interest and dividend income		31,406			22,400
Provision (release) for credit losses		(206	)		2,000
Net interest and dividend income after provision (release) for credit losses		31,612			20,400
Noninterest income
Wealth management revenue		8,151			6,627
Deposit account fees		474			791
ATM/Debit card income		333			307
Bank owned life insurance income		196			160
Gain on loans sold		569			119
Loan related derivative income		671			510
Other income		455			304
Total noninterest income		10,849			8,818
Noninterest expense
Salaries and employee benefits		16,045			13,016
Occupancy and equipment		3,576			2,807
Data processing		2,034			1,685
Professional services		1,272			859
Marketing		463			256
FDIC insurance		336			179
Nonoperating expenses		—			253
Other expenses		493			870
Total noninterest expense		24,219			19,925
Income before income taxes		18,242			9,293
Income tax expense		4,743			2,061
Net income	$	13,499		$	7,232
Share data:
Weighted average number of shares outstanding, basic		6,907,861			5,397,040
Weighted average number of shares outstanding, diluted		6,987,216			5,432,099
Basic earnings per share	$	1.95		$	1.34
Diluted earnings per share	$	1.92		$	1.33

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

CAMBRIDGE BANCORP AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended March 31,
	2021			2020
	(dollars in thousands)
Net income	$	13,499		$	7,232
Other comprehensive income (loss), net of tax:
Available for sale securities
Unrealized holding gains (losses)		(2,887	)		2,500
Interest rate swaps designated as cash flow hedges
Unrealized holding gains (losses)		(322	)		4,327
Less: reclassification adjustment for (gains) losses realized in net income		(454	)		(81	)
Defined benefit retirement plans
Change in retirement liabilities		8			(1	)
Other comprehensive (loss) income		(3,655	)		6,745
Comprehensive income	$	9,844		$	13,977

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

	Three Months Ended March 31,
	Common Stock		Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	(dollars in thousands, except per share data)
Balance at December 31, 2019	$	5,401	$	136,766		$	146,875		$	(2,481	)	$	286,561
Cumulative effect of accounting changes		—		—			(347	)		—			(347	)
Net income		—		—			7,232			—			7,232
Other comprehensive income		—		—			—			6,745			6,745
Share based compensation and other share-based activity		17		420			—			—			437
Dividends declared ($0.53 per share)		—		—			(2,869	)		—			(2,869	)
Balance at March 31, 2020	$	5,418	$	137,186		$	150,891		$	4,264		$	297,759

Balance at December 31, 2020	$	6,927	$	226,967		$	165,404		$	2,434		$	401,732
Net income		—		—			13,499			—			13,499
Other comprehensive loss		—		—			—			(3,655	)		(3,655	)
Share based compensation and other share-based activity		33		(126	)		—			—			(93	)
Dividends declared ($0.55 per share)		—		—			(3,810	)		—			(3,810	)
Balance at March 31, 2021	$	6,960	$	226,841		$	175,093		$	(1,221	)	$	407,673

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 Three Months Ended March 31,
	2021			2020
	(dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	13,499		$	7,232
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (release) for credit losses		(206	)		2,000
Amortization (accretion) of deferred charges and fees, net		(382	)		51
(Accretion), depreciation, and amortization, net		(763	)		78
Bank owned life insurance income		(196	)		(160	)
Share-based compensation and other share based activity		(93	)		437
Change in accrued interest receivable		643			180
Deferred income tax (benefit)/expense		1,730			2,265
Change in other assets, net		5,777			(23,741	)
Change in other liabilities, net		(12,037	)		19,613
Change in loans held for sale		3,556			(1,329	)
Net cash provided by operating activities		11,528			6,626
CASH FLOWS FROM INVESTING ACTIVITIES
Origination of loans		(353,256	)		(158,477	)
Proceeds from principal payments of loans		328,758			127,572
Proceeds from calls/maturities of securities available for sale		10,444			25,559
Proceeds from calls/maturities of securities held to maturity		12,099			11,139
Purchase of securities		(167,019	)		—
Redemption of FHLB of Boston stock		670			1,586
Purchase of banking premises and equipment		(310	)		(364	)
Net cash provided by (used in) in investing activities		(168,614	)		7,015
CASH FLOWS FROM FINANCING ACTIVITIES
Change in demand, interest bearing, money market and savings accounts		352,936			(5,600	)
Change in certificates of deposit		(25,846	)		37,026
Change in borrowings		(15,346	)		(60,544	)
Cash dividends paid on common stock		(3,810	)		(2,869	)
Net cash provided by (used in) financing activities		307,934			(31,987	)
Net change in cash and cash equivalents		150,848			(18,346	)
Cash and cash equivalents at beginning of period		75,785			61,335
Cash and cash equivalents at end of period	$	226,633		$	42,989
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest	$	1,527		$	3,696
Income taxes		1,590			—
Significant non-cash transactions
Transfer of other real estate owned		—			2,293

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 March 31, 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 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 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 May 6, 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 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 March 31, 2021 and December 31, 2020, cash and cash equivalents totaled $226.6 million and $75.8 million, respectively. There were no amounts required to be maintained at the Federal Reserve Bank of Boston at March 31, 2021 and December 31, 2020. Additionally, at March 31, 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 $11.7 million and $29.9 million at March 31, 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:

	March 31, 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	$	22,995	$	502	$	(218	)	$	23,279	$	22,995	$	641	$	(19	)	$	23,617
Mortgage-backed securities		197,861		1,632		(3,100	)		196,393		208,515		2,502		(387	)		210,630
Corporate debt securities		2,741		40		(1	)		2,780		2,742		41		—			2,783
Total available for sale securities	$	223,597	$	2,174	$	(3,319	)	$	222,452	$	234,252	$	3,184	$	(406	)	$	237,030

Held to maturity securities
Mortgage-backed securities	$	293,516	$	5,374	$	(3,036	)	$	295,854	$	137,435	$	6,784	$	(97	)	$	144,122
Corporate debt securities		6,991		147		—			7,138		6,989		197		—			7,186
Municipal securities		101,851		4,158		(551	)		105,458		103,248		5,643		(60	)		108,831
Total held to maturity securities	$	402,358	$	9,679	$	(3,587	)	$	408,450	$	247,672	$	12,624	$	(157	)	$	260,139
Total	$	625,955	$	11,853	$	(6,906	)	$	630,902	$	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” or “FHLMC”).

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

	March 31, 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	$	9,777	$	(218	)	$	—	$	—		$	9,777	$	(218	)
Mortgage-backed securities		107,624		(3,098	)		858		(2	)		108,482		(3,100	)
Corporate debt securities		772		(1	)		—		—			772		(1	)
Total available for sale securities	$	118,173	$	(3,317	)	$	858	$	(2	)	$	119,031	$	(3,319	)

Held to maturity securities
Mortgage-backed securities	$	115,877	$	(3,036	)	$	—	$	—		$	115,877	$	(3,036	)
Municipal securities		20,159		(551	)		—		—			20,159		(551	)
Total held to maturity securities	$	136,036	$	(3,587	)	$	—	$	—		$	136,036	$	(3,587	)
Total	$	254,209	$	(6,904	)	$	858	$	(2	)	$	255,067	$	(6,906	)

	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 March 31, 2021, 71 debt securities had gross unrealized losses, with an aggregate depreciation of 2.64% from the Company’s amortized cost basis. The largest unrealized dollar loss of any single security was $354,000, or 6.9% of its amortized cost. The largest unrealized loss percentage of any single security was 11.81%, or $316,000, of its amortized cost.

The Company believes that the nature and duration of impairment on its debt security positions are primarily a function of interest rate movements and changes in investment spreads and does not consider full repayment of principal on the reported debt obligations to be at risk. Since nearly all of these securities are rated “investment grade” and the Company (a) does not intend to sell these securities before recovery and (b) that is more likely than not that the Company will not be required to sell these securities before recovery, and the Company does not expect to suffer a credit loss as of March 31, 2021.

The amortized cost and fair value of debt securities, aggregated by the earlier of guaranteed 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 March 31, 2021	(dollars in thousands)
Available for sale securities
U.S. Government Sponsored Enterprise obligations	$	—	$	—	$	9,995	$	9,777	$	5,000	$	5,105	$	8,000	$	8,397	$	22,995	$	23,279
Mortgage-backed securities		20		20		3,675		3,747		57,903		57,283		136,263		135,343		197,861		196,393
Corporate debt securities		1,000		1,000		1,741		1,780		—		—		—		—		2,741		2,780
Total available for sale securities	$	1,020	$	1,020	$	15,411	$	15,304	$	62,903	$	62,388	$	144,263	$	143,740	$	223,597	$	222,452

Held to maturity securities
Mortgage-backed securities	$	—	$	—	$	2	$	2	$	58,604	$	61,050	$	234,910	$	234,802	$	293,516	$	295,854
Corporate debt securities		4,496		4,576		2,495		2,562		—		—		—		—		6,991		7,138
Municipal securities		2,241		2,259		20,339		21,184		39,830		42,041		39,441		39,974		101,851		105,458
Total held to maturity securities	$	6,737	$	6,835	$	22,836	$	23,748	$	98,434	$	103,091	$	274,351	$	274,776	$	402,358	$	408,450
Total	$	7,757	$	7,855	$	38,247	$	39,052	$	161,337	$	165,479	$	418,614	$	418,516	$	625,955	$	630,902

There were no sales of investment securities during the three months ended March 31, 2021 and 2020.

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 March 31, 2021 and December 31, 2020.

	March 31, 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⁾	$	196,393	$	1,772	$	—	$	23,279	$	221,444
BBB/BB/B		—		1,008		—		—		1,008
Total available for sale securities	$	196,393	$	2,780	$	—	$	23,279	$	222,452
Held to maturity securities, at amortized cost
AAA/AA/A	$	293,516	$	6,991	$	101,851	$	—	$	402,358

	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 S&P. Each security contains a guarantee by the issuing GSE or agency and therefore carries an implicit guarantee of the U.S. government. These have been categorized as AAA/AA/A.

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 loans, commercial & industrial (“C&I”), commercial real estate (“CRE”), 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. 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:

	March 31, 2021			December 31, 2020
	(dollars in thousands)
Residential mortgage
Mortgages - fixed rate	$	550,121		$	535,804
Mortgages - adjustable rate		712,662			734,593
Construction		27,964			25,495
Deferred costs, net of unearned fees		3,619			2,976
Total residential mortgages		1,294,366			1,298,868

Commercial mortgage
Mortgages - non-owner occupied		1,103,537			1,064,317
Mortgages - owner occupied		146,307			153,474
Construction		118,718			139,075
Deferred costs, net of unearned fees		2,386			2,096
Total commercial mortgages		1,370,948			1,358,962

Home equity
Home equity - lines of credit		95,465			102,460
Home equity - term loans		3,011			3,503
Deferred costs, net of unearned fees		264			231
Total home equity		98,740			106,194

Commercial & industrial
Commercial & industrial		214,962			223,415
PPP loans		169,858			126,227
Unearned fees, net of deferred costs		(3,882	)		(1,787	)
Total commercial & industrial		380,938			347,855

Consumer
Secured		33,816			41,409
Unsecured		1,549			341
Deferred costs, net of unearned fees		14			19
Total consumer		35,379			41,769
Total loans	$	3,180,371		$	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 Payroll Protection Program (“PPP”). As a qualified SBA lender, the Company was automatically authorized to originate PPP loans. In December 2020, many provisions of the CARES Act were extended through the end of 2021.

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.

The PPP program is currently in its second round, and PPP loans are available both to first-time borrowers and to second-time borrowers that previously received funding in the first round. The current deadline to apply for a PPP loan in this second round is May 31, 2021. The maximum PPP loan size remains the same for the second round of the PPP program for first-time borrowers, but for second-time borrowers that received a PPP loan previously in the first round, the maximum size of a PPP loan in the second round is the lesser of: (1) 2.5 times its average monthly “payroll costs” or (2) $2.0 million. Eligibility requirements for second-time borrowers are also more restrictive, so not all previous recipients of PPP loans will qualify for a second PPP loan. The SBA guarantee and loan forgiveness

features of the PPP program remain similar in most material respects in the second round. The Company does 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:

	March 31, 2021
.	Residential Mortgages		Commercial Mortgages		Home Equity		Commercial & Industrial		Total
	(dollars in thousands)
Non-performing loans:
Nonaccrual loans	$	3,694	$	559	$	374	$	114	$	4,741
Loans past due >90 days, but still accruing		—		—		—		1,826		1,826
Troubled debt restructurings		673		—		—		123		796
Total	$	4,367	$	559	$	374	$	2,063	$	7,363

	December 31, 2020
	Residential Mortgages		Commercial Mortgages		Home Equity		Commercial & 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. 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 months ended March 31, 2021. At March 31, 2021, four loans were determined to be TDRs with a total carrying value of $796,000. There were no TDR defaults during the three months ended March 31, 2021.

At December 31, 2020, four loans were determined to be TDRs with a total carrying value of $811,000. There were no TDR defaults during the year ended December 31, 2020.

The allowance for credit losses includes a specific reserve for TDRs of approximately $98,000 as of March 31, 2021 and $90,000 as of December 31, 2020.

As of March 31, 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 can 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 “Act”). As a result of the 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 was implemented to provide temporary payment relief to those borrowers directly impacted by COVID-19. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Under recently issued guidance, provided these loans were current as of either year end or the date of the modification, these loans are not considered TDR loans and will not be reported as past due during the deferral period. The Company had 45 loans totaling $37.5 million on deferral, or 1.2% of total loans outstanding, at March 31, 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 March 31, 2021
	2021		2020		2019		2018		2017		Prior		Revolving loans amortized cost basis		Total
	(dollars in thousands)
Residential:
Current	$	125,322	$	391,195	$	182,155	$	144,809	$	121,621	$	324,897	$	—	$	1,289,999
Non-performing		—		—		—		768		57		3,542		—		4,367
Total		125,322		391,195		182,155		145,577		121,678		328,439		—		1,294,366

Home equity:
Current	$	—	$	1,594	$	4,702	$	7,573	$	6,827	$	6,995	$	70,675	$	98,366
Non-performing		—		—		—		—		—		374		—		374
Total	$	—	$	1,594	$	4,702	$	7,573	$	6,827	$	7,369	$	70,675	$	98,740

Consumer:
Current	$	2,476	$	15,212	$	2,969	$	3,515	$	2,623	$	8,110	$	474	$	35,379
Non-performing		—		—		—		—		—		—		—		—
Total	$	2,476	$	15,212	$	2,969	$	3,515	$	2,623	$	8,110	$	474	$	35,379

	Credit Quality Indicator - by Origination Year as of March 31, 2021
	2021		2020		2019		2018		2017		Prior		Revolving loans amortized cost basis		Revolving loans converted to term		Total
	(dollars in thousands)
Commercial:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	50,827	$	277,751	$	354,237	$	196,373	$	104,751	$	337,648	$	—	$	—	$	1,321,587
7 (Special Mention)		2,960		1,047		24,858		13,221		1,253		5,049		—		—		48,388
8 (Substandard)		—		—		—		—		—		973		—		—		973
9 (Doubtful)		—		—		—		—		—		—		—		—		—
10 (Loss)		—		—		—		—		—		—		—		—		—
Total	$	53,787	$	278,798	$	379,095	$	209,594	$	106,004	$	343,670	$	—	$	—	$	1,370,948
Commercial & Industrial:
Credit risk profile by internally assigned grade:
1-6 (Pass)	$	95,343	$	155,966	$	43,097	$	39,086	$	23,263	$	9,166	$	403	$	—	$	366,324
7 (Special Mention)		—		484		7,131		402		397		1,242		10		—		9,666
8 (Substandard)		—		1,315		1,034		549		—		2,050		—		—		4,948
9 (Doubtful)		—		—		—		—		—		—		—		—		—
10 (Loss)		—		—		—		—		—		—		—		—		—
Total	$	95,343	$	157,765	$	51,262	$	40,037	$	23,660	$	12,458	$	413	$	—	$	380,938

	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:
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		Revolving loans converted to term		Total
	(dollars in thousands)
Commercial:
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 & 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 real estate mortgages, home equity, and consumer loans, the Company utilizes the following categories as indicators of credit quality:

•

Performing – These loans are accruing and are considered having low to moderate risk.

•

Non-performing – These loans are on nonaccrual or 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 commercial loans, the Company utilizes a 10 grade internal loan rating system as an indicator of credit quality. The grades are as follows:

•

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

•

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

•

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

	March 31, 2021
	30-59 Days		60-89 Days		90 Days or greater		Total Past Due		Current Loans		Total		Amortized Cost 90+ Days and Accruing
	(dollars in thousands)
Residential Mortgages	$	4,474	$	1,652	$	968	$	7,094	$	1,287,272	$	1,294,366	$	—
Commercial Mortgages		—		—		—		—		1,370,948		1,370,948		—
Home Equity		601		—		—		601		98,139		98,740		—
Commercial & Industrial		66		1		1,826		1,893		379,045		380,938		1,826
Consumer loans		1		—		—		1		35,378		35,379		—
Total	$	5,142	$	1,653	$	2,794	$	9,589	$	3,170,782	$	3,180,371	$	1,826

	December 31, 2020
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater		Total Past Due		Current Loans		Total		Amortized Cost 90+ Days 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 & 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 March 31, 2021 and December 31, 2020.

Other Real Estate Owned (“OREO”)

As of March 31, 2021, the Company held other real estate owned assets of $1.8 million. OREO consists of real estate properties, which have primarily served as collateral to secure loans that are controlled or owned by the Bank. These properties are recorded at fair value less estimated costs to sell at the date control is established, resulting in a new cost basis. The amount by which the recorded investments in the loan exceeds the fair value (net of estimated costs to sell) of the foreclosed assets is charged to the allowance for credit losses. Subsequent declines in the fair value of the foreclosed asset below the new cost basis are recorded through the use of a valuation allowance. Subsequent increases in the fair value are recorded as reductions in the valuation allowance, but not below zero. The Company’s OREO assets are currently under agreement to be sold.

Foreclosure Proceedings

As of March 31, 2021, one loan secured by one to four family residential property amounting to $107,000 was in process of foreclosure.

Allowance for Credit Losses

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

	For the Three Months Ended March 31,2021
	Residential Mortgages		Commercial Mortgages		Home Equity			Commercial & Industrial			Consumer			Unfunded Commitments		Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at December 31, 2020	$	13,067	$	18,564	$	552		$	3,309		$	524		$	—	$	36,016
Charge-offs		—		—		—			—			(3	)		—		(3	)
Recoveries		—		—		—			19			4			—		23
Provision (Release) for loan portfolio		77		129		(189	)		(350	)		(57	)		—		(390	)
Allowance for credit losses - loan portfolio	$	13,144	$	18,693	$	363		$	2,978		$	468		$	—	$	35,646
Allowance for credit losses - unfunded commitments:
Balance at December 31, 2020	$	—	$	—	$	—		$	—		$	—		$	1,004	$	1,004
Provision for - unfunded commitments		—		—		—			—			—			184		184
Allowance for credit losses-unfunded commitments		—		—		—			—			—			1,188		1,188
Total allowance for credit loss	$	13,144	$	18,693	$	363		$	2,978		$	468		$	1,188	$	36,834

	For the Three Months Ended March 31, 2020
	Residential Mortgages		Commercial Mortgages			Home Equity			Commercial & Industrial			Consumer			Unfunded Commitments			Total
	(dollars in thousands)
Allowance for credit loss:
Allowance for credit losses - loan portfolio:
Balance at December 31, 2019	$	5,141	$	10,905		$	461		$	1,475		$	198		$	—		$	18,180
Adoption of ASC 326		2,061		(1,447	)		(205	)		(492	)		288			—			205
Charge-offs		—		(187	)		—			(89	)		(14	)		—			(290	)
Recoveries		—		—			—			12			13			—			25
Provision for loan portfolio		275		1,610			54			40			64			—			2,043
Allowance for credit losses - loan portfolio	$	7,477	$	10,881		$	310		$	946		$	549		$	—		$	20,163
Allowance for credit losses - unfunded commitments:
Balance at December 31, 2019	$	—	$	—		$	—		$	—		$	—		$	50		$	50
Adoption of ASC 326		—		—			—			—			—			276			276
Provision for - unfunded commitments		—		—			—			—			—			(43	)		(43	)
Allowance for credit losses-unfunded commitments		—		—			—			—			—			283			283
Total allowance for credit loss	$	7,477	$	10,881		$	310		$	946		$	549		$	283		$	20,446

The Company adopted Topic 326, 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 three-months ended March 31, 2020.

8.	Income Taxes

The Company’s effective tax rate was 26.0% and 22.2% for the quarters ended March 31, 2021 and 2020, respectively.

Net deferred tax assets totaled $11.2 million and $11.6 million at March 31, 2021 and December 31, 2020. respectively. The Company did not record a valuation allowance for deferred tax assets at March 31, 2021 or December 31, 2020.

The components of income tax expense were as follows:

	Three Months Ended March 31,
	2021		2020
	(dollars in thousands)
Current income tax expense (benefit)
Federal	$	2,091	$	(478	)
State		922		274
Total current income tax expense (benefit)		3,013		(204	)

Deferred income tax expense
Federal		1,182		1,600
State		548		665
Total deferred income tax expense		1,730		2,265
Total income tax expense	$	4,743	$	2,061

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 the first quarter of 2020.

9.	Pension and Retirement Plans

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

	Three Months Ended March 31,
	Pension Plan						Supplemental Retirement Plan				Retirement Healthcare Plan
	2021			2020			2021		2020		2021		2020
	(dollars in thousands)
Net periodic benefit cost (credit)
Service cost	$	—		$	—		$	106	$	71	$	9	$	6
Interest cost		303			420			57		87		4		6
Expected return on assets		(892	)		(680	)		—		—		—		—
Amortization of prior service credit		(1	)		(1	)		—		—		—		—
Amortization of net actuarial (gain) loss		—			39			11		—		—		(1	)
Net periodic benefit cost (credit)	$	(590	)	$	(222	)	$	174	$	158	$	13	$	11

The Company did not make any contributions to the qualified defined benefit pension plan during the three months ended March 31, 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 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 March 31, 2021 and March 31, 2020 amounted to $1.1 million and $966,000, respectively.

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

For executives participating in the DC SERP, the Company may make a discretionary contribution of 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 March 31, 2021 and March 31, 2020 amounted to $50,000 and $43,000, respectively.

10.	STOCK BASED COMPENSATION

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

During the three months ended March 31, 2021, the Company issued the following RSAs and RSUs from the 2017 Equity and Cash Incentive 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 is based upon the Company’s common stock closing share price 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 performance-based restricted stock units do not participate in the rewards of stock ownership of the Company until vested.

		Weighted-
		Average
Shares Granted		Fair Value at Grant Date		Type of Award
	11,857	$	76.77	RSAs
	7,291	$	76.77	RSUs

Performance-Based Restricted Stock Units (“PRSUs”)

On February 15, 2021, the Company granted 23,108 PRSUs. These PRSUs were issued from the 2017 Equity and Cash Incentive Plan and had a grant date fair value per share of $76.77, as determined by the closing price on grant date. PRSUs are subject to a three year performance period and are earned based on operating return on assets and operating diluted earnings per share growth performance as compared to the Company’s peer group as defined in the Company’s 2021 Proxy Statement filed with the Securities and Exchange Commission on March 17, 2021.

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

	Three Months Ended March 31,
	2021		2020
	(dollars in thousands)
Stock based compensation expense	$	1,375	$	980
Related tax benefits	$	384	$	273

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 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:

	March 31, 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	$	605,217	$	584,520
Origination of new loans		141,731		94,399
Standby letters of credit		9,708		9,430

Financial instruments whose notional amount exceeds the amount of credit risk:
Commitments to sell residential mortgage loans		1,674		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 2021 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 March 31,
	2021			2020
	(dollars in thousands)
Operating lease cost	$	1,768		$	1,389
Variable lease cost (Cost excluded from lease payments)		—			—
Sublease income		(16	)		(16	)
Total Operating Lease Cost	$	1,752		$	1,373
Other Information
Cash paid for amounts included in the measurement of lease liabilities - operating cash flows for operating leases	$	1,854		$	1,327
Operating Lease - Operating cash flows (Liability reduction)		1,597			1,026
Weighted average lease term - operating leases	6.74 Years			8.36 years
Weighted average discount rate - operating leases		3.00	%		3.38	%

The total minimum lease payments due in future periods for lease agreements in effect at March 31, 2021 were as follows:

	Future Minimum
March 31, 2021	Lease Payments
	(dollars in thousands)
Remainder of 2021	$	7,110
2022		6,655
2023		6,233
2024		5,141
2025		4,371
Thereafter		10,317
Total minimum lease payments		39,827
Less: interest		(3,990	)
Total lease liability	$	35,837

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 $1.9 million and $1.5 million for the quarter ended March 31, 2021 and 2020, respectively.

13.	Shareholders’ Equity

As of March 31, 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 March 31, 2021
Cambridge Bancorp:
Total capital (to risk-weighted assets)	$	388,843		14.0	%	$	291,667		10.5	%	N/A		N/A
Tier I capital (to risk-weighted assets)		354,095		12.8	%		236,112		8.5	%	N/A		N/A
Common equity tier I capital (to risk-weighted assets)		354,095		12.8	%		194,445		7.0	%	N/A		N/A
Tier I capital (to average assets)		354,095		8.9	%		159,823		4.0	%	N/A		N/A
Cambridge Trust Company:
Total capital (to risk-weighted assets)	$	385,674		13.9	%	$	291,639		10.5	%	$	277,752		10.0	%
Tier I capital (to risk-weighted assets)		350,929		12.6	%		236,089		8.5	%		222,201		8.0	%
Common equity tier I capital (to risk-weighted assets)		350,929		12.6	%		194,426		7.0	%		180,539		6.5	%
Tier I capital (to average assets)		350,929		8.8	%		159,813		4.0	%		199,766		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

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

	Three Months Ended March 31, 2021									Three Months Ended March 31, 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	$	(3,923	)	$	1,036		$	(2,887	)	$	3,241		$	(741	)	$	2,500
Interest rate swaps designated as cash flow hedges
Unrealized holding gains (losses)		(447	)		125			(322	)		5,998			(1,671	)		4,327
Reclassification adjustment for gains recognized in net income		(630	)		176			(454	)		(112	)		31			(81	)
Defined benefit retirement plans
Net change in retirement liability		11			(3	)		8			(1	)		—			(1	)
Total Other Comprehensive Income (Loss)	$	(4,989	)	$	1,334		$	(3,655	)	$	9,126		$	(2,381	)	$	6,745

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

Three Months Ended March 31,
Details about Accumulated Other Comprehensive Income (Loss) Components	2021			2020			Affected Line Item in the Statement where Net Income is Presented
	(dollars in thousands)
Unrealized gains on derivatives	$	630		$	112		Interest on taxable loans
Tax expense		(176	)		(31	)	Income tax expense
Net of tax	$	454		$	81		Net income

15.	Earnings per Share

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

	Three Months Ended March 31,
	2021			2020
	(dollars in thousands, except per share data)
Earnings per common share - basic:
Numerator:
Net income	$	13,499		$	7,232
Less dividends and undistributed earnings allocated to participating securities		(57	)		(16	)
Net income applicable to common shareholders	$	13,442		$	7,216

Denominator:
Weighted average common shares outstanding		6,908			5,397
Earnings per common share – basic	$	1.95		$	1.34

Earnings per common share - diluted:
Numerator:
Net income	$	13,499		$	7,232
Less dividends and undistributed earnings allocated to participating securities		(57	)		(16	)
Net income applicable to common shareholders	$	13,442		$	7,216

Denominator:
Weighted average common shares outstanding		6,908			5,397
Dilutive effect of common stock equivalents		79			35
Weighted average diluted common shares outstanding		6,987			5,432
Earnings per common share – diluted	$	1.92		$	1.33

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 our 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. 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 with a corresponding offset within other assets or other liabilities.

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:

	March 31, 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	$	6,498	$	—	Other Liabilities	$	—
Total derivatives designated as hedging instruments				$	6,498				$	—

Derivatives not designated as hedging instruments
Loan related derivative contracts
Interest rate swaps with customers		433,862	Other Assets	$	27,221		—	Other Liabilities	$	—
Mirror swaps with counterparties		—	Other Assets		—		433,862	Other Liabilities		27,221
Risk participation agreements-out to counterparties		26,509	Other Assets		28		—	Other Liabilities		—
Risk participation agreements-in with counterparties		—	Other Assets		—		104,591	Other Liabilities		269
Total derivatives not designated as hedging instruments				$	27,249				$	27,490

	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 effect of cash flow hedge accounting on AOCI as of the periods presented:

	For the Three Months Ended March 31, 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) Recognized in OCI - Included Component		Amount of Gain or (Loss) Recognized in OCI - Excluded Component
	(dollars in thousands)										(dollars in thousands)
Interest rate contracts	$	(1,077	)	$	(1,156	)	$	79		Interest Income	$	630	$	678	$	(48	)

	For the Three Months Ended March 31, 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	$	5,998		$	6,634		$	(636	)	Interest Income	$	112	$	161	$	(49	)

The Company estimates that an additional $2.5 million will be reclassified out of AOCI into earnings, as a reduction of 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 for the periods presented:

	Three Months Ended March 31, 2021		Three Months Ended March 31, 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	$	630	$	112
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest rate contracts:
Amount of gain reclassed from AOCI into income		630		112
Amount of gain reclassed from AOCI into income - Included Component		678		161
Amount of loss reclassed from AOCI into income - Excluded Component		(48)		(49	)

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 Derivative
		Three Months Ended March 31,
		2021		2020
	Location of Gain or (Loss)	(dollars in thousands)
Other contracts	Loan related derivative income	$	206	$	178

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 March 31, 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
	March 31, 2021
	(dollars in thousands)
Offsetting of Derivative Assets
Derivative Assets		$	33,747	$	—	$	33,747	$	11,455	$	—	$	22,292

Offsetting of Derivative Liabilities
Derivative Liabilities		$	27,490	$	—	$	27,490	$	11,455	$	10,680	$	5,355

								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 March 31, 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 $10.7 million and $30.7 million, respectively. As of March 31, 2021, and December 31, 2020, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted cash collateral of $11.7 million and $29.9 million, respectively. If the Company had breached any of these provisions at March 31, 2021 or December 31, 2020, it could have been required to settle its obligations under the agreements at their termination value of $10.7 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:

	March 31, 2021				December 31, 2020
	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
	(dollars in thousands)
Financial assets
Cash and cash equivalents	$	226,633	$	226,633	$	75,785	$	75,785
Securities available for sale		222,452		222,452		237,030		237,030
Securities held to maturity		402,358		408,450		247,672		260,139
Loans, net		3,144,725		3,117,989		3,117,632		3,092,021
Loans held for sale		3,353		3,269		6,909		7,101
FHLB Boston stock		5,064		5,064		5,734		5,734
Accrued interest receivable		8,871		8,871		9,514		9,514
Mortgage servicing rights		1,363		1,712		1,219		1,219
Interest rate contracts		6,498		6,498		7,618		7,618
Loan level interest rate swaps		27,221		27,221		38,415		38,415
Risk participation agreements out to counterparties		28		28		51		51

Financial liabilities
Deposits		3,730,065		3,730,344		3,403,083		3,403,832
Borrowings		17,608		18,709		32,992		34,284
Loan level interest rate swaps		27,221		27,221		38,415		38,415
Risk participation agreements in with counterparties		269		269		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 collateral dependent impaired 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 March 31, 2021
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Measured on a recurring basis
Securities available for sale
U.S. GSE obligations	$	—	$	23,279	$	—	$	23,279
Mortgage-backed securities		—		196,393		—		196,393
Corporate debt securities		—		2,780		—		2,780
Other assets
Interest rate swaps with customers		—		27,221		—		27,221
Risk participation agreements out to counterparties		—		28		—		28
Interest rate contracts		—		6,498		—		6,498
Other liabilities
Mirror swaps with counterparties		—		27,221		—		27,221
Risk participation agreements in with counterparties		—		269		—		269

	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 March 31, 2021 and December 31, 2020, which were measured at fair value on a non-recurring basis:

	March 31, 2021
	Level 1		Level 2		Level 3		Total
	(dollars in thousands)
Items recorded at fair value on a non-recurring basis
Assets
Loans held for sale	$	3,353	$	—	$	—	$	3,353
Individually evaluated collateral dependent loans		—		—		276		276
Other real estate owned		—		—		1,820		1,820
Total	$	3,353	$	—	$	2,096	$	5,449

	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 months ended March 31, 2021 and March 31, 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 Stock (“FHLB of Boston”)

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.

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 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;

•

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 our business and/or competitive position, impose additional costs on the Company or cause us to change our business practices;

•

the Dodd-Frank Act’s consumer protection regulations which could adversely affect the Company’s business, financial condition, or results of operations;

•

disruptions in the Company’s ability to access capital markets which may adversely affect its capital resources and liquidity;

•

the Company’s heavy reliance on communications and information systems to conduct its business and reliance on third parties and affiliates to provide key components of its business infrastructure, any disruptions of which could interrupt the Company's operations or increase the costs of doing business;

•

that the Company’s financial reporting controls and procedures may not 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 mergers with Optima Bank & Trust Company (“Optima”) and 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 March 31, 2021, the Company had total assets of approximately $4.25 billion. The Bank operates 21 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 these communities and surrounding areas throughout Massachusetts and New Hampshire. The Company’s Wealth Management Group has five offices, two in Massachusetts in Boston and Wellesley, and three in New Hampshire in Concord, Manchester, and Portsmouth. As of March 31, 2021, the Company had Assets under Management and Administration of approximately $4.27 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 makes commercial loans, commercial real estate (“CRE”) loans, construction loans, consumer loans, and 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 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 commercial and industrial (“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 financial statements.

COVID-19

In December 2019, a novel strain of coronavirus 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, 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.

For a further discussion of the risks and uncertainties relating to COVID-19 on our results of operations and business condition, see Item 1A. Risk Factors.

Results of Operations

Results of Operations for the three months ended March 31, 2021 and March 31, 2020

General. Net income increased $6.3 million, or 86.7%, to $13.5 million for the quarter ended March 31, 2021, as compared to net income of $7.2 million for the quarter ended March 31, 2020, primarily due to a $11.2 million increase in net interest and dividend income after the provision (release) for credit losses, and a $2.0 million increase in noninterest income, which were partially offset by a $4.3 million increase in noninterest expenses, and higher income tax expense of $2.7 million. Diluted earnings per share were $1.92 for the first quarter of 2021, representing a 44.4% increase over diluted earnings per share of $1.33 for the same quarter last year.

Net Interest and Dividend Income. Net interest and dividend income before the provision (release) for credit losses increased by $9.0 million, or 40.2%, to $31.4 million, as compared to $22.4 million for the quarter ended March 31, 2020, primarily due to loan growth (both organic and as a result of the merger with Wellesley), lower cost of funds, interest income on PPP loans, and loan accretion associated with merger accounting.

•

Interest on loans increased by $7.0 million, or 29.8%, primarily due to loan growth, accretion associated with merger accounting and PPP related income.

•

Interest on deposits decreased by $1.9 million, or 59.3%, primarily due to lower cost of deposits, partially offset by deposit growth.

Total average interest-earning assets increased by $1.15 billion, or 43.2%, to $3.83 billion as of the quarter ended March 31, 2021, from $2.67 billion for the quarter ended March 31, 2020, primarily due to the merger with Wellesley in 2020 and organic loan growth. The Company’s net interest margin, on a fully taxable equivalent basis, decreased four basis points to 3.35% for the quarter ended March 31, 2021, as compared to 3.39% for the quarter ended March 31, 2020, and decreased 32 basis points as compared to 3.67% for the quarter ended December 31, 2020.

Interest and Dividend Income. Total interest and dividend income increased $6.7 million, or 25.8%, to $32.8 million for the quarter ended March 31, 2021, as compared to $26.1 million for the quarter ended March 31, 2020, primarily due to loan growth as a result of the merger with Wellesley in 2020, interest income on PPP loans, and loan accretion associated with merger accounting.

Interest Expense. Interest expense decreased $2.3 million, or 61.7%, to $1.4 million for the quarter ended March 31, 2021, as compared to $3.7 million for the quarter ended March 31, 2020, primarily driven by a decrease in cost of deposits, partially offset by deposit growth.

Average interest-bearing liabilities increased $603.8 million to $2.46 billion as of the quarter ended March 31, 2021, from $1.85 billion the quarter ended March 31, 2020, primarily related to the merger with Wellesley coupled with organic core deposit growth. The average cost of funds decreased to 0.15% for the quarter ended March 31, 2021 from 0.56% at the quarter ended March 31, 2020. The increase in interest-bearing liabilities was primarily driven by an increase in average money market accounts of $393.1 million, an increase in average checking account balances of $175.6 million, an increase in average savings balances of $88.4 million, and an increase in average certificates of deposit balances of $52.0 million, partially offset by a decrease in average other borrowed funds of $105.4 million.

Provision for Credit Losses. The Company recorded a $206,000 release of provision for credit losses for the quarter ended March 31, 2021, as compared to a provision for credit losses of $2.0 million for the quarter ended March 31, 2020, due to changes in our assumptions both quantitatively and qualitatively.

The Company recorded net loan recoveries of $20,000 for the quarter ended March 31, 2021, as compared to net charge-offs of $265,000 for the quarter ended March 31, 2020.

Noninterest Income. Total noninterest income increased by $2.0 million, or 23.0%, to $10.8 million for the quarter ended March 31, 2021, as compared to $8.8 million for the quarter ended March 31, 2020, primarily as a result of increases in Wealth Management revenue, loan related derivative income, and higher gains on loans sold. Noninterest income was 25.7% of total revenue for the quarter ended March 31, 2021.

•

Wealth Management revenue increased by $1.5 million, or 23.0%, to $8.2 million for the first quarter of 2021, as compared to $6.6 million for the first quarter of 2020. Wealth Management Assets under Management and Administration were $4.27 billion as of March 31, 2021, an increase of $1.20 billion, or 38.9%, from $3.07 billion as of March 31, 2020, primarily due to appreciation within the equity markets and the merger with Wellesley.

•

Loan related derivative income increased by $161,000, or 31.6%, to $671,000 for the first quarter of 2021, as compared to $510,000 for the first quarter of 2020, due to increased loan volume and fair value adjustments.

•

Gain on loans sold increased by $450,000, to $569,000 as compared to $119,000 for the first quarter of 2020, due to increased sales of residential mortgages.

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

	For the Three Months Ended March 31,
	2021		2020
	(dollars in thousands)
Wealth Management revenues:
Trust and investment advisory fees	$	8,006	$	6,430
Financial planning fees and other service fees		145		197
Total wealth management revenues	$	8,151	$	6,627

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

	For the Three Months Ended March 31,
	2021			2020
	(dollars in thousands)
Wealth Management Assets under Management
Balance at the beginning of the period	$	3,994,152		$	3,287,371
Gross client asset inflows		116,899			99,247
Gross client asset outflows		(100,759	)		(73,054	)
Net market impact		73,519			(381,171	)
Balance at the end of the period	$	4,083,811		$	2,932,393
Weighted average management fee		0.80	%		0.81	%

There were no significant changes to the average fee rates and fee structure for the three months ended March 31, 2021 and 2020.

Noninterest Expense. Total noninterest expense increased by $4.3 million, or 21.6%, to $24.2 million for the quarter ended March 31, 2021, as compared to $19.9 million for the quarter ended March 31, 2020, primarily driven by increases in salaries and benefits expense, occupancy and equipment expense, data processing expense, and professional services.

•

Salaries and employee benefits expense increased $3.0 million driven by increased staffing related to the merger with Wellesley, merit increases, additions to support business initiatives, and higher employee benefit costs.

•

Occupancy and equipment expense increased $769,000 due to the operation of additional branches and office space as a result of the merger with Wellesley that was not reflected within the first quarter of 2020.

•

Data processing expense increased $349,000, primarily as a result of increased client transaction activity associated with the impact of the merger with Wellesley.

•

Professional services increased $413,000, primarily due to higher consulting fees during the quarter.

Income Tax Expense. The Company recorded a provision for income taxes of $4.7 million for the quarter ended March 31, 2021, as compared to $2.1 million for the same quarter in 2020. The Company’s effective tax rate was 26.0% for the quarter ended March 31, 2021, as compared to 22.2% for the quarter ended March 31, 2020. The increase in tax expense of $2.6 million is due to higher levels of pre-tax income for the three months ended March 31, 2021 as compared to the same period in 2020. The increase in the effective tax rate for the three months ended March 31, 2021 as compared to March 31, 2020, reflects the recognition of benefits realized in 2020 related to net operating loss (“NOL”) carrybacks related to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

Changes in Financial Condition

Total Assets. Total assets increased $303.9 million, or 7.7%, from December 31, 2020 and were $4.25 billion as of March 31, 2021.

Cash and Cash Equivalents. Cash and cash equivalents increased by $150.8 million to $226.6 million at March 31, 2021 from $75.8 million at December 31, 2020.

Investment Securities. The Company’s total investment securities portfolio increased by $140.1 million, or 28.9%, from $484.7 million at December 31, 2020 to $624.8 million at March 31, 2021 as the Company partially invested excess cash.

Loans. Total loans increased by $26.7 million, or 0.8%, from December 31, 2020 and totaled $3.18 billion as of March 31, 2021.

•

Residential real estate loans decreased by $4.5 million, from $1.30 billion at December 31, 2020 to $1.29 billion at March 31, 2021 as a result of continued payoff activity.

•

CRE loans increased by $12.0 million, from $1.36 billion at December 31, 2020 to $1.37 billion at March 31, 2021.

•

C&I loans, excluding PPP loans, decreased by $8.4 million, from $223.7 million at December 31, 2020 to $ 215.3 million at March 31, 2021.

•

Loans under the Small Business Administration’s (“SBA”) Payroll Protection Program (“PPP”) amounted to $165.7 million at March 31, 2021, as compared to $126.2 million at December 31, 2020. PPP loans are included in C&I loans. Approximately

78% of the first round PPP loans have been or are in the process of being forgiven. Additionally, during the first quarter of 2021, the Company originated 557 second round PPP loans totaling $92.9 million.

Excluding PPP loans, total loans were lower by $14.8 million, or 0.5%, from December 31, 2020.

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 March 31, 2021, our investment in bank-owned life insurance was $46.4 million, representing an increase of $196,000 from $46.2 million at December 31, 2020, primarily due to increases in the cash surrender value of the policies during the first quarter of 2021.

Other assets. Other assets decreased $7.1 million to $76.1 million at March 31, 2021, from $83.2 million at December 31, 2020, primarily due to reductions in the value of loan level derivative assets.

Deposits. Total deposits grew by $327.0 million, or 9.6%, to $3.73 billion at March 31, 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 $352.9 million, or 11.2%, to $3.50 billion at March 31, 2021, reflective of growth from new and existing client relationships, as well as funds deposited with the Company as part of the second round of the SBA’s PPP program.

•

Of the $327.0 million in total deposit growth, an estimated $91.4 million was related to the PPP program.

•

The cost of total deposits for the quarter ended March 31, 2021 was 0.15%, as compared to 0.17% for the quarter ended December 31, 2020, a reduction of two basis points driven by reduced interest rates during 2021. At March 31, 2021, the spot cost of deposits was 0.13%.

•

Certificates of deposit totaled $228.9 million at March 31, 2021, a decrease of $26.0 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 $18.6 million and $30.8 million at March 31, 2021 and December 31, 2020, respectively.

Borrowings. At March 31, 2021, borrowings consisted of advances from the Federal Home Loan Bank of Boston (“FHLB of Boston”). Total borrowings decreased to $17.6 million at March 31, 2021, from $33.0 million at December 31, 2020 as the Company utilized excess cash flow to reduce wholesale funding.

Shareholders’ Equity. Total shareholders’ equity increased $5.9 million, or 1.5%, to $407.7 million at March 31, 2021, from $401.7 million at December 31, 2020, primarily due to net income of $13.5 million, partially offset by decreases in the value of the Company’s interest rate derivative positions of $776,000, decreases in unrealized gains on the available for sale investment portfolio of $2.9 million, and the regular quarterly dividend payments of $3.8 million.

The Company’s total shareholders’ equity to total assets ratio decreased by 58 basis points to 9.59% as of March 31, 2021, as compared to 10.17% as of December 31, 2020. Book value per share grew by $0.57, or 0.98%, to $58.57 as of March 31, 2021, as compared to $58.00 as of December 31, 2020.

The Company’s ratio of tangible common equity to tangible assets decreased 50 basis points to 8.41%, at March 31, 2021, from 8.91% at December 31, 2020, primarily due to balance sheet growth and fair value changes. Tangible book value per share grew by $0.63, or 1.3%, to $50.70 at March 31, 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
Operating Net Income / Operating Diluted Earnings Per Share	March 31, 2021			December 31, 2020			March 31, 2020
	(dollars in thousands, except share data)
Net Income (a GAAP measure)	$	13,499		$	13,014		$	7,232
Add: Merger expenses		—			581			253
Add: Branch and office closure expenses		—			1,244			—
Tax effect of nonoperating adjustments ⁽¹⁾		—			(486	)		(63	)
Operating Net Income (a non-GAAP measure)	$	13,499		$	14,353		$	7,422
Less: Dividends and Undistributed Earnings Allocated to Participating Securities (GAAP)		(57	)		(63	)		(16	)
Operating Income Applicable to Common Shareholders (a non-GAAP measure)	$	13,442		$	14,290		$	7,406
Weighted Average Diluted Shares		6,987,216			6,970,542			5,432,099
Operating Diluted Earnings Per Share (a non-GAAP measure)	$	1.92		$	2.05		$	1.36

(1)

The net tax benefit associated with nonoperating items is determined by assessing whether each nonoperating 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 months ended March 31, 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:

	March 31, 2021			December 31, 2020			March 31, 2020
	(dollars in thousands)
Tangible Common Equity:
Shareholders' equity (GAAP)	$	407,673		$	401,732		$	297,759
Less: Goodwill and acquisition related intangibles (GAAP)		(54,799	)		(54,889	)		(34,454	)
Tangible Common Equity (a non-GAAP measure)		352,874			346,843			263,305
Total assets (GAAP)		4,253,173			3,949,297			2,852,629
Less: Goodwill and acquisition related intangibles (GAAP)		(54,799	)		(54,889	)		(34,454	)
Tangible assets (a non-GAAP measure)	$	4,198,374		$	3,894,408		$	2,818,175
Tangible Common Equity Ratio (a non-GAAP measure)		8.41	%		8.91	%		9.34	%

Tangible Common Equity (excluding PPP loans):
Tangible Common Equity (a non-GAAP measure)		352,874			346,843			263,305
Tangible assets (a non-GAAP measure)		4,198,374			3,894,408			2,818,175
Less: PPP loans	$	(165,679	)	$	(124,201	)		—
Tangible assets (excluding PPP Loans) (a non-GAAP measure)	$	4,032,695		$	3,770,207		$	2,818,175
Tangible Common Equity Ratio (excluding PPP Loans) (a non-GAAP measure)		8.75	%		9.20	%		9.34	%

Tangible Book Value Per Share:
Tangible Common Equity (a non-GAAP measure)	$	352,874		$	346,843		$	263,305
Common shares outstanding		6,960,194			6,926,728			5,417,983
Tangible Book Value Per Share (a non-GAAP measure)	$	50.70		$	50.07		$	48.60

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”) and 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, are recognized as a separate component of shareholders’ equity.

The fair value of securities available for sale totaled $222.5 million and included gross unrealized gains of $2.2 million and gross unrealized losses of $3.3 million at March 31, 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 March 31, 2021 are carried at their amortized cost of $402.4 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:

	March 31,					December 31,
	2021					2020
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Available for sale securities
U.S. GSE obligations	$	23,279		11	%	$	23,617		10	%
Mortgage-backed securities		196,393		88	%		210,630		89	%
Corporate debt securities		2,780		1	%		2,783		1	%
Total securities available for sale	$	222,452		100	%	$	237,030		100	%
Held to maturity securities
Mortgage-backed securities	$	293,516		73	%	$	137,435		55	%
Corporate debt securities		6,991		2	%		6,989		3	%
Municipal securities		101,851		25	%		103,248		42	%
Total securities held to maturity	$	402,358		100	%	$	247,672		100	%
Total	$	624,810		100	%	$	484,702		100	%

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 March 31, 2021	(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		20		0.0	%		3,675		1.4	%		57,903		1.6	%		136,263		1.0	%		197,861		1.1	%
Corporate debt securities		1,000		1.1	%		1,741		1.8	%		—		—			—		—			2,741		1.5	%
Total available for sale securities	$	1,020		1.0	%	$	15,411		0.9	%	$	62,903		1.6	%	$	144,263		1.0	%	$	223,597		1.2	%

Held to maturity securities
Mortgage-backed securities	$	—		—		$	2		5.6	%	$	58,604		2.4	%	$	234,910		1.4	%	$	293,516		1.6	%
Corporate debt securities		4,496		2.6	%		2,495		2.5	%		—		—			—		—			6,991		2.6	%
Municipal securities		2,241		4.6	%		20,339		3.7	%		39,830		3.4	%		39,441		2.8	%		101,851		3.3	%
Total held to maturity securities	$	6,737		3.2	%	$	22,836		3.6	%	$	98,434		2.8	%	$	274,351		1.6	%	$	402,358		2.1	%
Total	$	7,757		3.0	%	$	38,247		2.5	%	$	161,337		2.3	%	$	418,614		1.4	%	$	625,955		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 March 31, 2021 and December 31, 2020.

The Company did not record an allowance for credit losses on its investments securities as of March 31, 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, CRE, 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 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:

	March 31, 2021						December 31, 2020
	Amount			% of Total			Amount			% of Total
	(dollars in thousands)
Residential mortgage
Mortgages - fixed rate	$	550,121			17	%	$	535,804			17	%
Mortgages - adjustable rate		712,662			22	%		734,593			23	%
Construction		27,964			1	%		25,495			1	%
Deferred costs, net of unearned fees		3,619			0	%		2,976			0	%
Total residential mortgages		1,294,366			40	%		1,298,868			41	%
Commercial mortgage
Mortgages - non-owner occupied		1,103,537			35	%		1,064,317			35	%
Mortgages - owner occupied		146,307			5	%		153,474			5	%
Construction		118,718			4	%		139,075			4	%
Deferred costs, net of unearned fees		2,386			0	%		2,096			0	%
Total commercial mortgages		1,370,948			44	%		1,358,962			44	%
Home equity
Home equity - lines of credit		95,465			3	%		102,460			3	%
Home equity - term loans		3,011			0	%		3,503			0	%
Deferred costs, net of unearned fees		264			0	%		231			0	%
Total home equity		98,740			3	%		106,194			3	%
Commercial & industrial
Commercial & industrial		214,962			7	%		223,415			7	%
PPP loans		169,858			5	%		126,227			4	%
Unearned fees, net of deferred costs		(3,882	)		0	%		(1,787	)		0	%
Total commercial & industrial		380,938			12	%		347,855			11	%
Consumer
Secured		33,816			1	%		41,409			1	%
Unsecured		1,549			0	%		341			0	%
Deferred costs, net of unearned fees		14			0	%		19			0	%
Total consumer		35,379			1	%		41,769			1	%
Total loans	$	3,180,371			100	%	$	3,153,648			100	%

Residential Mortgage. Residential real estate loans held in portfolio amounted to $1.29 billion at March 31, 2021, a decrease of $4.5 million, or 0.3%, from $1.30 billion at December 31, 2020, and consisted of one-to-four family residential mortgage loans. The residential mortgage portfolio represented 40% and 41% of total loans at March 31, 2021 and December 31, 2020, respectively.

The average loan balance outstanding in the residential portfolio was $465,000 and the largest individual residential mortgage loan outstanding was $5.9 million as of March 31, 2021. At March 31, 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 do we 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.

The Company is servicing mortgage loans sold to others without recourse of approximately $187.2 million at March 31, 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 Three Months Ended March 31,
	2021		2020
	(dollars in thousands)
Originations for retention in portfolio	$	142,217	$	76,944
Originations for sale to the secondary market		14,821		9,095
Total	$	157,038	$	86,039

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

	For the Three Months Ended March 31,
	2021		2020
	(dollars in thousands)
Loans sold with servicing rights retained	$	16,641	$	5,736
Loans sold with servicing rights released		1,734		6,597
Total	$	18,375	$	12,333

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 $1.3 million and $1.2 million as of March 31, 2021 and December 31, 2020, respectively.

Commercial Mortgage. CRE loans were $1.37 billion as of March 31, 2021, an increase of $12.0 million, or 0.9%, from $1.36 billion at December 31, 2020. The CRE loans portfolio represented 44% of total loans at both March 31, 2021 and December 31, 2020. The average loan balance outstanding in this portfolio was $1.6 million, and the largest individual CRE loan outstanding was $27.2 million as of March 31, 2021. At March 31, 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 ten 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 $98.7 million and $106.2 million at March 31, 2021 and December 31, 2020, respectively. The home equity portfolio represented 3% of total loans at both March 31, 2021 and December 31, 2020. At March 31, 2021, the largest home equity line of credit was $3.5 million and had an outstanding balance of $3.4 million. At March 31, 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 5 and 20 years.

Commercial & Industrial (C&I). The C&I portfolio totaled $380.9 million and $347.9 million at March 31, 2021 and December 31, 2020, respectively. The C&I portfolio represented 12% and 11% of total loans at March 31, 2021 and December 31, 2020, respectively. The average loan balance outstanding in this portfolio was $430,000, excluding PPP loans, and the largest individual C&I loan outstanding was $15.0 million as of March 31, 2021. At March 31, 2021, this loan was performing in accordance with its original terms. Loans under the SBA’s PPP program totaled $169.9 million at March 31, 2021 and $126.2 million at December 31, 2020 and are included in the C&I portfolio.

Components of C&I loans are described below:

•

At March 31, 2021, Innovation Banking loans totaled $16.6 million and the average loan balance outstanding in this portfolio was $692,000. The largest individual loan outstanding was $4.6 million, and this loan was performing in accordance with its original terms.

•

At March 31, 2021, asset-based loans totaled $21.6 million and the average loan balance outstanding in this portfolio was $1.5 million. The largest individual loan outstanding was $15.0 million, and this loan was performing in accordance with its original terms.

•

At March 31, 2021, commercial renewable energy loans totaled $90.3 million and the average loan balance outstanding in this portfolio was $2.6 million. The largest individual loan outstanding was $8.6 million, and this loan was performing in accordance with its original terms at March 31, 2021.

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 Bank 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 $35.4 million at March 31, 2021 and $41.8 million at December 31, 2020. Consumer loans represented 1% of the total loan portfolio at both March 31, 2021 and December 31, 2020. The average loan balance outstanding in this portfolio was $12,000 and the largest individual consumer loan outstanding was $2.2 million as of March 31, 2021. At March 31, 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 March 31, 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.

	March 31, 2021
	One Year or Less		One to Five Years		Over Five Years		Total
	(dollars in thousands)
Residential mortgage	$	4,091	$	13,363	$	1,276,912	$	1,294,366
Commercial mortgage		97,411		353,310		920,227		1,370,948
Home equity		874		5,727		92,139		98,740
Commercial & Industrial		36,061		229,649		115,228		380,938
Consumer		35,237		64		78		35,379
Total	$	173,674	$	602,113	$	2,404,584	$	3,180,371

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 March 31, 2021. Floating rate loans are tied to a market index while adjustable-rate loans are adjusted based on the contractual terms of the loan.

	March 31, 2021
	Fixed		Adjustable		Floating		Total
	(dollars in thousands)
Residential mortgage	$	563,118	$	719,226	$	12,022	$	1,294,366
Commercial mortgage		418,345		412,471		540,132		1,370,948
Home equity		3,607		—		95,133		98,740
Commercial & Industrial		217,486		50,400		113,052		380,938
Consumer		287		407		34,685		35,379
Total	$	1,202,843	$	1,182,504	$	795,024	$	3,180,371

Nonperforming Loans and TROUBLED DEBT RESTRUCTURINGS (TDRs)

The composition of nonperforming assets is as follows:

	March 31,			December 31,
	2021			2020
	(dollars in thousands)
Nonaccruals	$	4,741		$	7,744
Loans past due > 90 days, but still accruing		1,826			407
Troubled debt restructurings		796			811
Total nonperforming loans	$	7,363		$	8,962
Accruing troubled debt restructured loans	$	—		$	—
Nonperforming loans as a percentage of total loans		0.23	%		0.28	%
Nonperforming loans as a percentage of total assets		0.17	%		0.23	%

Total non-performing loans decreased $1.6 million at March 31, 2021 as compared to December 31, 2020, primarily due to a reduction of CRE loans on nonaccrual, partially offset by higher loans 90 days past due and still accruing.

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 March 31, 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:

	Three Months Ended			Year Ended
	March 31,			December 31,
	2021			2020
	(dollars in thousands)
Period-end loans outstanding (net of unearned discount and deferred loan fees)	$	3,180,371		$	3,153,648
Average loans outstanding (net of unearned discount and deferred loan fees)	$	3,168,598		$	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	)
Consumer		(3	)		(40	)
Total loans charged-off	$	(3	)	$	(704	)
Recovery of loans previously charged-off:
Commercial and industrial		19			250
Consumer		4			15
Total recoveries of loans previously charged-off:		23			265
Net loan (charge-offs) recoveries	$	20		$	(439	)
Adoption of CECL accounting standard – loans		—			205
Provision for credit losses - acquired loans		—			8,282
Initial allowance for PCD		—			437
Provision (release) for credit losses – loans		(390	)		9,351
Balance at end of period	$	35,646		$	36,016
Ratio of net (charge-offs) recoveries to average loans outstanding		0.00	%		(0.02	)%
Ratio of allowance for credit losses to loans outstanding		1.12	%		1.14	%

The allowance for credit losses to loans outstanding excluding PPP loans was 1.18% and 1.19% at March 31, 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 our 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. Our additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities and fee income and proceeds from the sales of loans and securities.

Deposits. The Company accepts deposits primarily from customers in the communities in which our branches and offices are located, as well as from small- and medium-sized businesses and other customers throughout our 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:

	March 31,					December 31,
	2021					2020
	Amount		Percent			Amount		Percent
	(dollars in thousands)
Demand deposits (non-interest bearing)	$	1,154,869		31.0	%	$	1,006,132		29.7	%
Interest bearing checking		675,578		18.1	%		625,650		18.4	%
Money market		687,578		18.4	%		532,218		15.6	%
Savings		983,173		26.4	%		984,262		28.9	%
Retail certificates of deposit under $100,000		59,464		1.6	%		62,646		1.8	%
Retail certificates of deposit of $100,000 or greater		150,779		4.0	%		161,387		4.7	%
Wholesale certificates of deposit		18,624		0.5	%		30,788		0.9	%
Total	$	3,730,065		100.0	%	$	3,403,083		100.0	%

At March 31, 2021, the Company had a total of $210.2 million in certificates of deposit, excluding brokered deposits, of which $193.1 million had remaining maturities of one year or less. Based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity. As of March 31, 2021, we had a total of $18.6 million of brokered deposits and $30.8 million of brokered deposits at December 31, 2020.

Borrowings. Total borrowings were $17.6 million at March 31, 2021, a decrease of $15.4 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 March 31, 2021 was approximately $685.2 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 March 31, 2021. The Bank’s borrowing capacity at the FRB Boston at March 31, 2021 was approximately $542.8 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
	March 31, 2021									December 31, 2020									March 31, 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	$	3,142,319		$	30,325			3.91	%	$	3,174,185		$	33,510			4.20	%	$	2,204,862		$	23,338			4.26	%
Tax-exempt		26,279			281			4.34			26,413			290			4.37			23,605			250			4.26
Securities available for sale ⁽³⁾
Taxable		229,693			694			1.23			167,583			596			1.41			133,402			660			1.99
Securities held to maturity
Taxable		183,678			891			1.97			135,764			803			2.35			169,433			1,063			2.52
Tax-exempt		102,348			832			3.30			100,464			833			3.30			83,193			754			3.65
Cash and cash equivalents		144,567			31			0.09			106,449			23			0.09			59,845			140			0.94
Total interest-earning assets ⁽⁴⁾		3,828,884			33,054			3.50	%		3,710,858			36,055			3.87	%		2,674,340			26,205			3.94	%
Non interest-earning assets		259,248									272,011									192,184
Allowance for credit losses		(35,988	)								(35,828	)								(18,423	)
Total assets	$	4,052,144								$	3,947,041								$	2,848,101
LIABILITIES AND SHAREHOLDERS’ EQUITY
Interest-bearing deposits
Checking accounts	$	632,754		$	83			0.05	%	$	638,847		$	150			0.09	%	$	457,189		$	159			0.14	%
Savings accounts		977,415			272			0.11			980,172			581			0.24			888,973			1,772			0.80
Money market accounts		586,142			537			0.37			498,483			443			0.35			193,048			449			0.94
Certificates of deposit		239,356			383			0.65			285,694			242			0.34			187,318			749			1.61
Total interest-bearing deposits		2,435,667			1,275			0.21			2,403,196			1,416			0.23			1,726,528			3,129			0.73
Subordinated debt		—			—			—			8,346			191			9.10			—			—			—
Other borrowed funds		22,009			140			2.58			52,106			182			1.39			127,389			566			1.79
Total interest-bearing liabilities		2,457,676			1,415			0.23	%		2,463,648			1,789			0.29	%		1,853,917			3,695			0.80	%
Non-interest-bearing liabilities
Demand deposits		1,085,048									971,837									622,892
Other liabilities		104,744									114,749									80,089
Total liabilities		3,647,468									3,550,234									2,556,898
Shareholders’ equity		404,676									396,807									291,203
Total liabilities & shareholders’ equity	$	4,052,144								$	3,947,041								$	2,848,101
Net interest income on a fully taxable equivalent basis					31,639									34,266									22,510
Less taxable equivalent adjustment					(233	)								(236	)								(211	)
Net interest income				$	31,406								$	34,030								$	22,299
Net interest spread ⁽⁵⁾								3.27	%								3.58	%								3.14	%
Net interest margin ⁽⁶⁾								3.35	%								3.67	%								3.39	%

(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.

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 March 31, 2021
	Compared with
	Three Months Ended March 31, 2020
	Increase/(Decrease) Due to Change in
	Volume			Rate			Total
	(dollars in thousands)
Interest income
Loans
Taxable	$	9,011		$	(2,024	)	$	6,987
Tax-exempt		27			4			31
Securities available for sale
Taxable		350			(316	)		34
Securities held to maturity
Taxable		81			(253	)		(172	)
Tax-exempt		156			(78	)		78
Cash and cash equivalents		87			(196	)		(109	)
Total interest income	$	9,712		$	(2,863	)	$	6,849
Interest expense
Deposits
Checking accounts	$	46		$	(122	)	$	(76	)
Savings accounts		158			(1,658	)		(1,500	)
Money market accounts		482			(394	)		88
Certificates of deposit		165			(531	)		(366	)
Total interest-bearing deposits		851			(2,705	)		(1,854	)
Other borrowed funds		(601	)		175			(426	)
Total interest expense	$	250		$	(2,530	)	$	(2,280	)
Change in net interest income	$	9,462		$	(333	)	$	9,129

Excluding the impact of merger-related loan accretion and the impact of PPP loans, the adjusted net interest margin for the quarter ended March 31, 2021 was 3.16%, representing an 11 basis points decrease over the quarter ended December 31, 2020’s adjusted net interest margin of 3.27%.

	Three Months Ended
	March 31, 2021
	Average Balance			Interest Income/ Expenses			Rate Earned/ Paid
	(dollars in thousands)
Total interest-earning assets (GAAP)	$	3,828,884
Net interest income on a fully taxable equivalent basis (GAAP)				$	31,639
Net interest margin (GAAP)								3.35	%
Less: Paycheck Protection Program loan impact		(145,066	)		(1,596	)		-0.04	%
Less: Accretion of loan fair value adjustments					(1,356	)		-0.15	%
Adjusted net interest margin on a fully taxable equivalent basis	$	3,683,818		$	28,687			3.16	%
Less: Excess cash impact (1)		(91,899	)		(23	)		0.08	%
Normalized adjusted net interest margin on a fully taxable equivalent basis	$	3,591,919		$	28,664			3.24	%

(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 our 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. The Company’s Asset Liability Committee (“ALCO”), using policies and procedures approved by the Company’s board of directors, is responsible for the management of the Company’s interest rate sensitivity position. 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 simulation models to measure interest rate risk and to evaluate strategies to improve profitability. A simplified static statement of condition is prepared on a quarterly basis as a starting point, using instrument level data of our actual loans, investments, borrowings, and deposits as inputs. If potential changes to net equity value and net interest income resulting from hypothetical interest rate changes are not within the limits established by the Company’s board of directors, management may adjust the asset and liability mix to bring the risk position within approved limits or take other actions.

The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a parallel interest rate shift, or “instantaneous shock,” in the yield curve and subjective adjustments in deposit pricing might have on the Company’s projected net interest income over the next 12 months.

As of March 31, 2021:

		Year 1
Change in Interest Rates (in Basis Points)		Percentage Change in Net Interest Income
Parallel rate shocks
+400		5.1
+300		3.2
+200		1.3
+100		0.5
–100		(4.7)

The following table demonstrates the annualized result of an interest rate simulation and the estimated effect that a gradual interest rate shift in the yield curve and subjective adjustments in deposit pricing might have on the Company’s projected net interest income over the next 12 months.

As of March 31, 2021:

		Year 1
Change in Interest Rates (in Basis Points)		Percentage Change in Net Interest Income

Gradual rate shifts
+200		(0.4)
–100		(0.5)

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.

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 March 31, 2021 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 14.0% increase in the economic value of equity for the next 12 months, resulting in an economic value of equity ratio of 11.8%.

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 10.0% increase in the economic value of equity, resulting in an economic value of equity ratio of 10.7%. The estimates within the economic value of equity calculation are significantly impacted by management’s assumption that the value of non-maturity deposits do not fall below their stated balance as of March 31, 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 March 31, 2021, the Company had access to funds totaling $1.81 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 ALCO 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 $407.7 million at March 31, 2021, as compared to $401.7 million at December 31, 2020. The Company’s equity increased primarily due to net income of $13.5 million, partially offset by decreases in the value of the Company’s interest rate derivative positions of $776,000, decreases in unrealized gains on the available for sale investment portfolio of $2.9 million, and regular quarterly dividend payments of $3.8 million. The ratio of total equity to total assets amounted to 9.59% at March 31, 2021 and 10.17% at December 31, 2020. Book value per share at March 31, 2021 and December 31, 2020 amounted to $58.57 and $58.00, respectively.

The Company and the Bank are subject to various regulatory capital requirements. As of March 31, 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 Liability Management.”

Item 4. Controls and Procedures.

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures. As of March 31, 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 March 31, 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 March 31, 2021, there were no changes in the Company’s internal control over reporting that have materially affected or are reasonably likely to affect the Company’s control 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.

The COVID-19 pandemic is adversely impacting us and our customers, counterparties, employees, and third-party service providers. Further, the COVID-19 pandemic could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which we operate and the adverse impacts on our business, financial position, results of operations and prospects could be significant.

The outbreak of COVID-19 has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, more than 70 million people have filed claims for unemployment, and stock markets have declined in value and in particular bank stocks have significantly declined in value. In response to the COVID-19 pandemic, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10-year and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). In addition, the federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of COVID-19 has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and may take further actions as may be required by government authorities or that we determine is in the best interests of our employees, customers, and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when COVID-19 can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•

demand for products and services may decline, making it difficult to grow assets and income;

•

if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•

collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

•

our allowance for credit losses may have to be increased if unemployment forecasts increase or borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

•

the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

•

as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

•

a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;

•

our wealth management revenues may decline with continuing market turmoil;

•

our cyber security risks are increased as the result of an increase in the number of employees working remotely; and

•

we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us.

These factors, among others, together or in combination with other events or occurrences not yet known or anticipated, could adversely affect our operations. In addition, many countries, including in Asia and South America, are currently experiencing a resurgence of the COVID-19 virus and if, the rate of infections continues to rise, these factors could be exacerbated.

Please read Item 1A. “Risk Factors” in the Company’s 2020 Form 10-K. There have been no other material changes since the 2020 Form 10-K was filed. These risks are not the only ones facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition, and operating results.

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 March 31, 2021:

	Total Number of Shares Repurchased ⁽¹⁾		Weighted Average Price Paid Per Share
Period
January 1 to January 31, 2021		5,580	$	76.29
February 1 to February 28, 2021		255	$	73.59
March 31 to March 31, 2021		10,814	$	85.98
Total		16,649

(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 stock 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 stocks under its stock Repurchase Program during the three months ended March 31, 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 March 31, 2021, has been formatted in Inline XBRL.

*	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

May 6, 2021	By:	/s/ Denis K. Sheahan
		Denis K. Sheahan
		Chairman, Chief Executive Officer (Principal Executive Officer)

May 6, 2021
	By:	/s/ Michael F. Carotenuto
		Michael F. Carotenuto
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)