UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 20172020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-33912
Enterprise Bancorp, Inc.
(Exact name of registrant as specified in its charter)
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| | | | | | | | | | |
Massachusetts | 04-3308902 |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) |
incorporation or organization) | |
| | | |
222 Merrimack Street, Lowell, Massachusetts | Lowell, | Massachusetts | 01852 |
(Address of principal executive offices) | (Zip code) |
(978) 459-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, $0.01 par value per share | | EBTC | | NASDAQ Stock Market |
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. x Yes oNo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). xYes oNo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition for "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):Act.
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Large accelerated filer o
| Accelerated filer x
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Non-accelerated filer o
| Smaller reporting company o
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| Emerging growth company o
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Large accelerated filer ☐Accelerated filer xNon-accelerated filer ☐Smaller reporting company ☐Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).¨
☐Yes xNo
As of November 1, 20172, 2020, there were 11,597,68311,926,614 shares of the issuer's common stock outstanding- Par Valueoutstanding, par value $0.01 per share.
ENTERPRISE BANCORP, INC.
INDEX
PART I-FINANCIAL INFORMATION
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Item 1 - | Financial Statements |
Item 1 -Financial Statements ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)
| | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | | September 30, 2020 | | December 31, 2019 |
Assets | | | | |
Cash and cash equivalents: | | | | |
Cash and due from banks | | $ | 43,660 | | | $ | 39,927 | |
Interest-earning deposits | | 264,704 | | | 23,867 | |
| | | | |
Total cash and cash equivalents | | 308,364 | | | 63,794 | |
Investments: | | | | |
Debt securities at fair value | | 497,480 | | | 504,788 | |
Equity securities at fair value | | 651 | | | 467 | |
Total investment securities at fair value | | 498,131 | | | 505,255 | |
Federal Home Loan Bank ("FHLB") stock | | 1,905 | | | 4,484 | |
Loans held for sale | | 5,311 | | | 601 | |
Loans: | | | | |
Total loans | | 3,150,815 | | | 2,565,459 | |
Allowance for loan losses | | (43,835) | | | (33,614) | |
Net loans | | 3,106,980 | | | 2,531,845 | |
Premises and equipment, net | | 47,145 | | | 45,419 | |
Lease right-of-use asset | | 18,580 | | | 19,048 | |
Accrued interest receivable | | 16,466 | | | 12,295 | |
Deferred income taxes, net | | 8,064 | | | 8,732 | |
Bank-owned life insurance | | 31,222 | | | 30,776 | |
Prepaid income taxes | | 3,388 | | | 572 | |
Prepaid expenses and other assets | | 9,335 | | | 6,572 | |
Goodwill | | 5,656 | | | 5,656 | |
Total assets | | $ | 4,060,547 | | | $ | 3,235,049 | |
Liabilities and Stockholders' Equity | | | | |
Liabilities | | | | |
Deposits: | | | | |
Customer deposits | | $ | 3,535,065 | | | $ | 2,786,730 | |
Brokered deposits | | 74,995 | | | 0 | |
Total deposits | | 3,610,060 | | | 2,786,730 | |
Borrowed funds | | 1,679 | | | 96,173 | |
Subordinated debt | | 73,725 | | | 14,872 | |
Lease liability | | 17,690 | | | 18,104 | |
Accrued expenses and other liabilities | | 30,342 | | | 21,683 | |
| | | | |
Accrued interest payable | | 1,271 | | | 846 | |
Total liabilities | | 3,734,767 | | | 2,938,408 | |
Commitments and Contingencies | | | | |
Stockholders' Equity | | | | |
Preferred stock, $0.01 par value per share; 1,000,000 shares authorized; 0 shares issued | | 0 | | | 0 | |
Common stock, $0.01 par value per share; 40,000,000 shares authorized; 11,926,198 shares issued and outstanding at September 30, 2020 and 11,825,331 shares issued and outstanding at December 31, 2019 | | 119 | | | 118 | |
Additional paid-in capital | | 96,402 | | | 94,170 | |
Retained earnings | | 207,206 | | | 191,843 | |
Accumulated other comprehensive income | | 22,053 | | | 10,510 | |
Total stockholders' equity | | 325,780 | | | 296,641 | |
Total liabilities and stockholders' equity | | $ | 4,060,547 | | | $ | 3,235,049 | |
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| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Assets | | |
| | |
|
Cash and cash equivalents: | | |
| | |
|
Cash and due from banks | | $ | 35,920 |
| | $ | 33,047 |
|
Interest-earning deposits | | 14,771 |
| | 17,428 |
|
Total cash and cash equivalents | | 50,691 |
| | 50,475 |
|
Investment securities at fair value | | 385,942 |
| | 374,790 |
|
Federal Home Loan Bank stock | | 7,225 |
| | 2,094 |
|
Loans held for sale | | 876 |
| | 1,569 |
|
Loans, less allowance for loan losses of $33,184 at September 30, 2017 and $31,342 at December 31, 2016 | | 2,169,189 |
| | 1,991,387 |
|
Premises and equipment, net | | 36,260 |
| | 33,540 |
|
Accrued interest receivable | | 10,088 |
| | 8,792 |
|
Deferred income taxes, net | | 15,889 |
| | 17,020 |
|
Bank-owned life insurance | | 29,292 |
| | 28,765 |
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Prepaid income taxes | | 906 |
| | 1,344 |
|
Prepaid expenses and other assets | | 13,458 |
| | 10,837 |
|
Goodwill | | 5,656 |
| | 5,656 |
|
Total assets | | $ | 2,725,472 |
| | $ | 2,526,269 |
|
Liabilities and Stockholders' Equity | | |
| | |
|
Liabilities | | |
| | |
|
Deposits | | $ | 2,302,673 |
| | $ | 2,268,921 |
|
Borrowed funds | | 149,255 |
| | 10,671 |
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Subordinated debt | | 14,844 |
| | 14,834 |
|
Accrued expenses and other liabilities | | 26,540 |
| | 16,794 |
|
Accrued interest payable | | 273 |
| | 263 |
|
Total liabilities | | 2,493,585 |
| | 2,311,483 |
|
Commitments and Contingencies | |
|
| |
|
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Stockholders' Equity | | |
| | |
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Preferred stock, $0.01 par value per share; 1,000,000 shares authorized; no shares issued | | — |
| | — |
|
Common stock $0.01 par value per share; 40,000,000 shares authorized; 11,599,266 shares issued and outstanding at September 30, 2017 and 11,475,742 shares issued and outstanding at December 31, 2016 | | 116 |
| | 115 |
|
Additional paid-in-capital | | 87,492 |
| | 85,421 |
|
Retained earnings | | 141,992 |
| | 130,008 |
|
Accumulated other comprehensive income (loss) | | 2,287 |
| | (758 | ) |
Total stockholders' equity | | 231,887 |
| | 214,786 |
|
Total liabilities and stockholders' equity | | $ | 2,725,472 |
| | $ | 2,526,269 |
|
See the accompanying notes to the unaudited consolidated interim financial statements.
3
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
| | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands, except per share data) | | 2017 | | 2016 | | 2017 | | 2016 | (Dollars in thousands, except per share data) | | 2020 | | 2019 | | 2020 | | 2019 |
Interest and dividend income: | | |
| | |
| | | | | Interest and dividend income: | | | | | | | | |
Loans and loans held for sale | | $ | 24,892 |
| | $ | 21,466 |
| | $ | 70,544 |
| | $ | 63,379 |
| Loans and loans held for sale | | $ | 33,481 | | | $ | 30,938 | | | $ | 97,472 | | $ | 90,973 |
Investment securities | | 2,017 |
| | 1,629 |
| | 5,901 |
| | 4,720 |
| Investment securities | | 3,225 | | | 3,278 | | | 10,093 | | 9,785 |
Other interest-earning assets | | 136 |
| | 96 |
| | 302 |
| | 189 |
| Other interest-earning assets | | 71 | | | 632 | | | 315 | | 1,688 |
Total interest and dividend income | | 27,045 |
| | 23,191 |
| | 76,747 |
| | 68,288 |
| Total interest and dividend income | | 36,777 | | | 34,848 | | | 107,880 | | 102,446 |
Interest expense: | | |
| | |
| | | | | Interest expense: | | | | | | | | |
Deposits | | 1,509 |
| | 1,138 |
| | 4,117 |
| | 3,325 |
| Deposits | | 2,231 | | | 5,158 | | | 9,856 | | 15,156 |
Borrowed funds | | 169 |
| | 2 |
| | 422 |
| | 79 |
| Borrowed funds | | 8 | | | 36 | | | 603 | | 315 |
Subordinated debt | | 233 |
| | 234 |
| | 692 |
| | 695 |
| Subordinated debt | | 1,007 | | | 233 | | | 1,468 | | 692 |
Total interest expense | | 1,911 |
| | 1,374 |
| | 5,231 |
| | 4,099 |
| Total interest expense | | 3,246 | | | 5,427 | | | 11,927 | | | 16,163 | |
Net interest income | | 25,134 |
| | 21,817 |
| | 71,516 |
| | 64,189 |
| Net interest income | | 33,531 | | | 29,421 | | | 95,953 | | | 86,283 | |
Provision for loan losses | | 1,225 |
| | 1,386 |
| | 1,630 |
| | 2,503 |
| Provision for loan losses | | 1,575 | | | 1,025 | | | 10,397 | | | 1,580 | |
Net interest income after provision for loan losses | | 23,909 |
| | 20,431 |
| | 69,886 |
| | 61,686 |
| Net interest income after provision for loan losses | | 31,956 | | | 28,396 | | | 85,556 | | | 84,703 | |
Non-interest income: | | |
| | |
| | | | | Non-interest income: | | | | | | | | |
Investment advisory fees | | 1,311 |
| | 1,162 |
| | 3,803 |
| | 3,593 |
| |
Wealth management fees | | Wealth management fees | | 1,469 | | | 1,407 | | | 4,255 | | 4,077 |
Deposit and interchange fees | | 1,527 |
| | 1,272 |
| | 4,389 |
| | 3,790 |
| Deposit and interchange fees | | 1,607 | | | 1,790 | | | 4,804 | | 5,041 |
Income on bank-owned life insurance, net | | 174 |
| | 182 |
| | 527 |
| | 564 |
| Income on bank-owned life insurance, net | | 143 | | | 158 | | | 446 | | 482 |
Net gains (losses) on sales of investment securities | | (284 | ) | | 546 |
| | 485 |
| | 611 |
| |
| Net gains on sales of debt securities | | Net gains on sales of debt securities | | 127 | | | 0 | | | 227 | | 146 |
Net gains on sales of loans | | 88 |
| | 198 |
| | 359 |
| | 392 |
| Net gains on sales of loans | | 329 | | | 139 | | | 814 | | 244 |
Other income | | 628 |
| | 588 |
| | 1,954 |
| | 1,786 |
| Other income | | 649 | | | 655 | | | 1,986 | | 2,035 |
Total non-interest income | | 3,444 |
| | 3,948 |
| | 11,517 |
| | 10,736 |
| Total non-interest income | | 4,324 | | | 4,149 | | | 12,532 | | | 12,025 | |
Non-interest expense: | | |
| | |
| | | | | Non-interest expense: | | | | | | | | |
Salaries and employee benefits | | 12,177 |
| | 10,948 |
| | 36,661 |
| | 32,458 |
| Salaries and employee benefits | | 15,031 | | | 14,382 | | | 46,267 | | 41,982 |
Occupancy and equipment expenses | | 1,993 |
| | 1,859 |
| | 5,877 |
| | 5,453 |
| Occupancy and equipment expenses | | 2,099 | | | 2,034 | | | 6,357 | | 6,342 |
Technology and telecommunications expenses | | 1,601 |
| | 1,577 |
| | 4,789 |
| | 4,548 |
| Technology and telecommunications expenses | | 2,316 | | | 1,863 | | | 6,815 | | 5,290 |
Advertising and public relations expenses | | 597 |
| | 591 |
| | 2,013 |
| | 2,087 |
| Advertising and public relations expenses | | 372 | | | 430 | | | 1,506 | | 1,927 |
Audit, legal and other professional fees | | 381 |
| | 409 |
| | 1,058 |
| | 1,241 |
| Audit, legal and other professional fees | | 498 | | | 528 | | | 1,715 | | 1,389 |
Deposit insurance premiums | | 371 |
| | 347 |
| | 1,130 |
| | 997 |
| Deposit insurance premiums | | 749 | | | 16 | | | 1,690 | | 733 |
Supplies and postage expenses | | 248 |
| | 241 |
| | 726 |
| | 728 |
| Supplies and postage expenses | | 202 | | | 232 | | | 675 | | 718 |
| Other operating expenses | | 1,465 |
| | 1,442 |
| | 4,753 |
| | 4,313 |
| Other operating expenses | | 1,502 | | | 1,613 | | | 4,752 | | 5,320 |
Total non-interest expense | | 18,833 |
| | 17,414 |
| | 57,007 |
| | 51,825 |
| Total non-interest expense | | 22,769 | | | 21,098 | | | 69,777 | | | 63,701 | |
Income before income taxes | | 8,520 |
| | 6,965 |
| | 24,396 |
| | 20,597 |
| Income before income taxes | | 13,511 | | | 11,447 | | | 28,311 | | | 33,027 | |
Provision for income taxes | | 3,014 |
| | 2,251 |
| | 7,723 |
| | 6,799 |
| Provision for income taxes | | 3,185 | | | 2,445 | | | 6,712 | | | 7,566 | |
Net income | | $ | 5,506 |
| | $ | 4,714 |
| | $ | 16,673 |
| | $ | 13,798 |
| Net income | | $ | 10,326 | | | $ | 9,002 | | | $ | 21,599 | | | $ | 25,461 | |
| | | | | | | | | | | | | | | | |
Basic earnings per share | | $ | 0.48 |
| | $ | 0.41 |
| | $ | 1.44 |
| | $ | 1.28 |
| Basic earnings per share | | $ | 0.87 | | | $ | 0.76 | | | $ | 1.82 | | | $ | 2.16 | |
Diluted earnings per share | | $ | 0.47 |
| | $ | 0.41 |
| | $ | 1.43 |
| | $ | 1.27 |
| Diluted earnings per share | | $ | 0.87 | | | $ | 0.76 | | | $ | 1.81 | | | $ | 2.15 | |
| | | | | | | | | |
Basic weighted average common shares outstanding | | 11,589,039 |
| | 11,430,134 |
| | 11,557,054 |
| | 10,801,278 |
| Basic weighted average common shares outstanding | | 11,916,486 | | | 11,808,603 | | | 11,886,811 | | | 11,779,629 | |
Diluted weighted average common shares outstanding | | 11,669,159 |
| | 11,498,990 |
| | 11,640,373 |
| | 10,869,405 |
| Diluted weighted average common shares outstanding | | 11,927,043 | | | 11,843,497 | | | 11,908,716 | | | 11,820,388 | |
See the accompanying notes to the unaudited consolidated interim financial statements.
4
ENTERPRISE BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net income | | $ | 10,326 | | | $ | 9,002 | | | $ | 21,599 | | | $ | 25,461 | |
Other comprehensive income, net of tax | | | | | | | | |
Net change in fair value of debt securities | | (50) | | | 2,249 | | | 13,740 | | | 13,395 | |
Net change in fair value of cash flow hedges | | 167 | | | 0 | | | (2,197) | | | 0 | |
Total other comprehensive income, net of tax | | 117 | | | 2,249 | | | 11,543 | | | 13,395 | |
Total comprehensive income, net | | $ | 10,443 | | | $ | 11,251 | | | $ | 33,142 | | | $ | 38,856 | |
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| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Net income | | $ | 5,506 |
| | $ | 4,714 |
| | $ | 16,673 |
| | $ | 13,798 |
|
Other comprehensive income (loss), net of taxes: | | | | | | | | |
Gross unrealized holding gains (losses) on investments arising during the period | | (1,180 | ) | | (558 | ) | | 5,251 |
| | 6,522 |
|
Income tax (expense) benefit | | 431 |
| | 213 |
| | (1,885 | ) | | (2,416 | ) |
Net unrealized holding gains (losses), net of tax | | (749 | ) | | (345 | ) | | 3,366 |
| | 4,106 |
|
Less: Reclassification adjustment for net gains (losses) included in net income | | | | | | | | |
Net realized gains (losses) on sales of securities during the period | | (284 | ) | | 546 |
| | 485 |
| | 611 |
|
Income tax (expense) benefit | | 112 |
| | (196 | ) | | (164 | ) | | (220 | ) |
Reclassification adjustment for gains (losses) realized, net of tax | | (172 | ) | | 350 |
| | 321 |
| | 391 |
|
| | | | | | | | |
Total other comprehensive income (loss), net | | (577 | ) | | (695 | ) | | 3,045 |
| | 3,715 |
|
Comprehensive income | | $ | 4,929 |
| | $ | 4,019 |
| | $ | 19,718 |
| | $ | 17,513 |
|
See the accompanying notes to the unaudited consolidated interim financial statements.
5
ENTERPRISE BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Total Stockholders' Equity |
(Dollars in thousands, except per share data) | | Shares | | Amount | | | | |
Balance at June 30, 2020 | | 11,911,488 | | | $ | 119 | | | $ | 95,656 | | | $ | 198,965 | | | $ | 21,936 | | | $ | 316,676 | |
Net income | | | | | | | | 10,326 | | | | | 10,326 | |
Other comprehensive income, net | | | | | | | | | | 117 | | | 117 | |
Common stock dividend declared ($0.175 per share) | | | | | | | | (2,085) | | | | | (2,085) | |
Common stock issued under dividend reinvestment plan | | 13,931 | | | 0 | | | 306 | | | | | | | 306 | |
Common stock issued, other | | 889 | | | 0 | | | 20 | | | | | | | 20 | |
Stock-based compensation, net | | (110) | | | 0 | | | 420 | | | | | | | 420 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Balance at September 30, 2020 | | 11,926,198 | | | $ | 119 | | | $ | 96,402 | | | $ | 207,206 | | | $ | 22,053 | | | $ | 325,780 | |
| | | | | | | | | | | | |
Balance at June 30, 2019 | | 11,806,008 | | | $ | 118 | | | $ | 92,767 | | | $ | 177,880 | | | $ | 9,862 | | | $ | 280,627 | |
Net income | | | | | | | | 9,002 | | | | | 9,002 | |
Other comprehensive income, net | | | | | | | | | | 2,249 | | | 2,249 | |
Common stock dividend declared ($0.16 per share) | | | | | | | | (1,888) | | | | | (1,888) | |
Common stock issued under dividend reinvestment plan | | 10,345 | | | 0 | | | 293 | | | | | | | 293 | |
Common stock issued, other | | 634 | | | 0 | | | 19 | | | | | | | 19 | |
Stock-based compensation, net | | (139) | | | 0 | | | 411 | | | | | | | 411 | |
Net settlement for employee taxes on restricted stock and options | | (1,654) | | | 0 | | | (49) | | | | | | | (49) | |
Stock options exercised, net | | 877 | | | 0 | | | 18 | | | | | | | 18 | |
Balance at September 30, 2019 | | 11,816,071 | | | $ | 118 | | | $ | 93,459 | | | $ | 184,994 | | | $ | 12,111 | | | $ | 290,682 | |
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(Dollars in thousands) | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss)/Income | | Total Stockholders' Equity |
Balance at December 31, 2016 | | $ | 115 |
| | $ | 85,421 |
| | $ | 130,008 |
| | $ | (758 | ) | | $ | 214,786 |
|
Net income | | | | | | 16,673 |
| | | | 16,673 |
|
Cumulative effect adjustment for adoption of new accounting pronouncement | | | | 13 |
| | (13 | ) | | | | — |
|
Other comprehensive income, net | | | | | | | | 3,045 |
| | 3,045 |
|
Common stock dividend paid ($0.405 per share) | | | | | | (4,676 | ) | | | | (4,676 | ) |
Common stock issued under dividend reinvestment plan | | — |
| | 1,118 |
| | | | | | 1,118 |
|
Common stock issued other | | — |
| | 61 |
| | | | | | 61 |
|
Stock-based compensation, net | | 1 |
| | 1,366 |
| | | | | | 1,367 |
|
Repurchases for tax withholdings on options and restricted stock awards, net of proceeds from exercise of stock options | | — |
| | (487 | ) | | | | | | (487 | ) |
Balance at September 30, 2017 | | $ | 116 |
| | $ | 87,492 |
| | $ | 141,992 |
| | $ | 2,287 |
| | $ | 231,887 |
|
See the accompanying notes to the unaudited consolidated interim financial statements.
6
ENTERPRISE BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity (Continued)
(Unaudited)
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| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Total Stockholders' Equity |
(Dollars in thousands, except per share data) | | Shares | | Amount | | | | |
Balance at December 31, 2019 | | 11,825,331 | | | $ | 118 | | | $ | 94,170 | | | $ | 191,843 | | | $ | 10,510 | | | $ | 296,641 | |
Net income | | | | | | | | 21,599 | | | | | 21,599 | |
Other comprehensive income, net | | | | | | | | | | 11,543 | | | 11,543 | |
Common stock dividend declared ($0.525 per share) | | | | | | | | (6,236) | | | | | (6,236) | |
Common stock issued under dividend reinvestment plan | | 38,762 | | | 0 | | | 914 | | | | | | | 914 | |
Common stock issued, other | | 3,115 | | | 0 | | | 75 | | | | | | | 75 | |
Stock-based compensation, net | | 65,912 | | | 1 | | | 1,446 | | | | | | | 1,447 | |
Net settlement for employee taxes on restricted stock and options | | (7,962) | | | 0 | | | (224) | | | | | | | (224) | |
Stock options exercised, net | | 1,040 | | | 0 | | | 21 | | | | | | | 21 | |
Balance at September 30, 2020 | | 11,926,198 | | | $ | 119 | | | $ | 96,402 | | | $ | 207,206 | | | $ | 22,053 | | | $ | 325,780 | |
| | | | | | | | | | | | |
Balance at December 31, 2018 | | 11,708,218 | | | $ | 117 | | | $ | 91,281 | | | $ | 165,183 | | | $ | (1,284) | | | $ | 255,297 | |
Net income | | | | | | | | 25,461 | | | | | 25,461 | |
Other comprehensive income, net | | | | | | | | | | 13,395 | | | 13,395 | |
Common stock dividend declared ($0.48 per share) | | | | | | | | (5,650) | | | | | (5,650) | |
Common stock issued under dividend reinvestment plan | | 30,189 | | | 0 | | | 885 | | | | | | | 885 | |
Common stock issued, other | | 1,844 | | | 0 | | | 55 | | | | | | | 55 | |
Stock-based compensation, net | | 62,037 | | | 1 | | | 1,466 | | | | | | | 1,467 | |
Net settlement for employee taxes on restricted stock and options | | (8,223) | | | 0 | | | (402) | | | | | | | (402) | |
Stock options exercised, net | | 22,006 | | | 0 | | | 174 | | | | | | | 174 | |
Balance at September 30, 2019 | | 11,816,071 | | | $ | 118 | | | $ | 93,459 | | | $ | 184,994 | | | $ | 12,111 | | | $ | 290,682 | |
See the accompanying notes to the unaudited consolidated interim financial statements.
7
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
| | | | Nine months ended September 30, | | | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | (Dollars in thousands) | | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | Cash flows from operating activities: | | | | | |
Net income | | $ | 16,673 |
| | $ | 13,798 |
| Net income | | | $ | 21,599 | | | $ | 25,461 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | | |
Provision for loan losses | | 1,630 |
| | 2,503 |
| Provision for loan losses | | | 10,397 | | | 1,580 | |
Depreciation and amortization | | 5,250 |
| | 4,387 |
| Depreciation and amortization | | | 4,946 | | | 4,553 | |
Stock-based compensation expense | | 1,287 |
| | 1,349 |
| Stock-based compensation expense | | | 1,409 | | | 1,405 | |
Income on bank-owned life insurance, net | | Income on bank-owned life insurance, net | | | (446) | | | (482) | |
Net gains on sales of debt securities | | Net gains on sales of debt securities | | | (227) | | | (146) | |
Mortgage loans originated for sale | | (16,033 | ) | | (19,943 | ) | Mortgage loans originated for sale | | | (40,837) | | | (16,049) | |
Proceeds from mortgage loans sold | | 17,085 |
| | 19,873 |
| Proceeds from mortgage loans sold | | | 36,941 | | | 13,697 | |
Net gains on sales of loans | | (359 | ) | | (392 | ) | Net gains on sales of loans | | | (814) | | | (244) | |
Net gains (losses) on sales of investments | | (485 | ) | | (611 | ) | |
Income on bank-owned life insurance, net | | (527 | ) | | (564 | ) | |
Net losses (gains) on equity securities | | Net losses (gains) on equity securities | | | 135 | | | (275) | |
Net gains on sales of other real estate owned ("OREO") | | Net gains on sales of other real estate owned ("OREO") | | | 0 | | | (34) | |
| Changes in: | | | | | Changes in: | | |
Decrease (increase) in other assets | | 1,342 |
| | (1,810 | ) | |
Increase in other liabilities | | 2,458 |
| | 497 |
| |
Increase in other assets | | Increase in other assets | | | (9,892) | | | (2,202) | |
Increase (decrease) in other liabilities | | Increase (decrease) in other liabilities | | | 3,533 | | | (694) | |
Net cash provided by operating activities | | 28,321 |
| | 19,087 |
| Net cash provided by operating activities | | | 26,744 | | | 26,570 | |
Cash flows from investing activities: | | | | | Cash flows from investing activities: | | | | | |
Proceeds from sales of investment securities | | 65,114 |
| | 4,729 |
| |
Net (purchases) proceeds from FHLB capital stock | | (5,131 | ) | | 1,166 |
| |
Proceeds from maturities, calls and pay-downs of investment securities | | 21,135 |
| | 16,708 |
| |
Purchase of investment securities | | (91,890 | ) | | (65,846 | ) | |
Proceeds from sales of debt securities | | Proceeds from sales of debt securities | | | 5,907 | | | 13,623 | |
Purchase of debt securities | | Purchase of debt securities | | | (34,487) | | | (83,583) | |
Proceeds from maturities, calls and pay-downs of debt securities | | Proceeds from maturities, calls and pay-downs of debt securities | | | 51,969 | | | 36,150 | |
Net purchases of equity securities | | Net purchases of equity securities | | | (319) | | | 290 | |
Net proceeds from the sales of FHLB capital stock | | Net proceeds from the sales of FHLB capital stock | | | 2,579 | | | 3,333 | |
Net increase in loans | | (179,432 | ) | | (125,814 | ) | Net increase in loans | | | (585,532) | | | (86,373) | |
Additions to premises and equipment, net | | (6,253 | ) | | (7,033 | ) | Additions to premises and equipment, net | | | (5,676) | | | (9,368) | |
Proceeds from bank-owned life insurance | | — |
| | 405 |
| |
Proceeds from OREO sales | | Proceeds from OREO sales | | | 0 | | | 289 | |
| Net cash used in investing activities | | (196,457 | ) | | (175,685 | ) | Net cash used in investing activities | | | (565,559) | | | (125,639) | |
Cash flows from financing activities: | | | | | Cash flows from financing activities: | | | | | |
Net increase in deposits | | 33,752 |
| | 203,461 |
| Net increase in deposits | | | 823,330 | | | 219,611 | |
Net increase (decrease) in borrowed funds | | 138,584 |
| | (53,000 | ) | |
Cash dividends paid | | (4,676 | ) | | (4,196 | ) | |
Net decrease in borrowed funds | | Net decrease in borrowed funds | | | (94,494) | | | (96,315) | |
| Proceeds from issuance of subordinated debt | | Proceeds from issuance of subordinated debt | | | 60,000 | | | 0 | |
Cash dividends paid, net of dividend reinvestment plan | | Cash dividends paid, net of dividend reinvestment plan | | | (5,323) | | | (4,765) | |
Proceeds from issuance of common stock | | 1,179 |
| | 20,816 |
| Proceeds from issuance of common stock | | | 75 | | | 55 | |
Repurchases for tax withholdings on options and restricted stock awards, net of proceeds from exercise of stock options | | (487 | ) | | (47 | ) | |
Tax benefit from stock-based compensation | | — |
| | 229 |
| |
Net settlement for employee taxes on restricted stock and options | | Net settlement for employee taxes on restricted stock and options | | | (224) | | | (402) | |
Net proceeds from stock option exercises | | Net proceeds from stock option exercises | | | 21 | | | 174 | |
Net cash provided by financing activities | | 168,352 |
| | 167,263 |
| Net cash provided by financing activities | | | 783,385 | | | 118,358 | |
| | | | | | | | | | |
Net increase in cash and cash equivalents | | 216 |
| | 10,665 |
| Net increase in cash and cash equivalents | | | 244,570 | | | 19,289 | |
Cash and cash equivalents at beginning of period | | 50,475 |
| | 51,495 |
| Cash and cash equivalents at beginning of period | | | 63,794 | | | 63,120 | |
Cash and cash equivalents at end of period | | $ | 50,691 |
| | $ | 62,160 |
| Cash and cash equivalents at end of period | | | $ | 308,364 | | | $ | 82,409 | |
| | | | | |
Supplemental financial data: | | | | | |
Cash Paid For: Interest | | $ | 5,221 |
| | $ | 4,098 |
| |
Cash Paid For: Income Taxes | | $ | 7,825 |
| | $ | 8,021 |
| |
| | | | | |
Supplemental schedule of non-cash investing activity: | | | | | |
Net purchases of investment securities not yet settled | | $ | 1,631 |
| | $ | 1,215 |
| |
|
See the accompanying notes to the unaudited consolidated interim financial statements.
78
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
(1) | Summary of Significant Accounting Policies |
(1)Summary of Significant Accounting Policies
(a) Organization of Holdingthe Company and Basis of Presentation
The accompanying unaudited consolidated interim financial statements and these notes should be read in conjunction with the December 31, 20162019 audited consolidated financial statements and notes thereto contained in the 20162019 Annual Report on Form 10-K of Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our"), a Massachusetts corporation, as filed with the Securities and Exchange Commission (the "SEC") on March 14, 201710, 2020 (the "2016"2019 Annual Report on Form 10-K"). The Company has not materially changed its significant accounting policies from those disclosed in its 20162019 Annual Report on Form 10-K.10-K, other than to elect options for the temporary deferral of certain accounting guidance as allowed under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act as discussed under Item (c), "Accounting Policies," below in this Note 1. See also Item (e), "Recent Accounting Pronouncements," under the subheading "Accounting pronouncements adopted by the Company," below in this Note 1.
The Company'saccompanying unaudited consolidated interim financial statements of Enterprise Bancorp, Inc., a Massachusetts corporation, include the accounts of the Company and its wholly owned subsidiary, Enterprise Bank and Trust Company, commonly referred to as Enterprise Bank (the "Bank"). The Bank is a Massachusetts trust company and state chartered commercial bank organized in 1989. Substantially all of the Company's operations are conducted through the Bank and its subsidiaries.
The Bank's subsidiaries include Enterprise Insurance Services, LLC and Enterprise InvestmentWealth Services, LLC, both organized under the laws of the State of Delaware, for the purposes of engagingto engage in insurance sales activities and offeringoffer non-deposit investment products and services, respectively. In addition, the Bank has the following subsidiaries that are incorporated in the Commonwealth of Massachusetts and classified as security corporations in accordance with applicable Massachusetts General Laws: Enterprise Security Corporation; Enterprise Security Corporation II; and Enterprise Security Corporation III. The security corporations, which hold various types of qualifying securities, are limited to conducting securities investment activities that the Bank itself would be allowed to conduct under applicable laws.
The Company's headquarters and the Bank's main office are located at 222 Merrimack Street in Lowell, Massachusetts. At September 30, 2017,2020, the Company had 24 full service branches25 full-service branch banking offices serving the Greater Merrimack Valley, Nashoba Valley and North Central regions of Massachusetts and Southern New Hampshire (Southern Hillsborough and Rockingham counties). The Company is also scheduled to open a branch in North Andover, Massachusetts early 2021. Through the Bank and its subsidiaries, the Company offers a range of commercial, residential and consumer loan products, deposit products and cash management services, as well as investment advisoryelectronic and digital banking options, and commercial insurance services. The Company also provides a range of wealth management, wealth services and trust services delivered via two channels, Enterprise Wealth Management and insurance services.Enterprise Wealth Services. The services offered through the Bank and its subsidiaries are managed as one1 strategic unit and represent the Company's only reportable operating segment.
The Federal Deposit Insurance Corporation (the "FDIC") and the Massachusetts Division of Banks (the "Division") have regulatory authority over the Bank. The Bank is also subject to certain regulatory requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and, with respect to its New Hampshire branch operations, the New Hampshire Banking Department. The business and operations of the Company are subject to the regulatory oversight of the Federal Reserve Board. The Division also retains supervisory jurisdiction over the Company.
The accompanying unaudited consolidated interim financial statements and notes thereto, on this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (this "Form 10-Q"), have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the SEC instructions for Quarterly Reports on Form 10-Q through the rules and interpretive releases of the SEC under federal securities law. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all necessary adjustments consisting of normal recurring accruals for a fair presentation. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated interim financial statements. Certain previous years' amounts in the unaudited consolidated financial statements, and notes thereto, have been reclassified to conform to the current year's presentation. Interim results are not necessarily indicative of results to be expected for the entire year, or any future period.
The Company has evaluated subsequent events and transactions from September 30, 2017 through the date this Quarterly Report on Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP and determined that there were no material subsequent events requiring recognition or disclosure.
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
(b) Critical AccountingUses of Estimates
In preparing the unaudited consolidated interim financial statements in conformity with GAAP, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. These assumptions and estimates affect the reported values of assets and liabilities as of the balance sheet datedates and income and expenses for the period then ended. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates should the assumptions and estimates used be incorrect or change over time due to changes in
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| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
circumstances. Changes in those estimates resulting from continuing changechanges in the economic environment and other factors will be reflected in the consolidated financial statements and results of operations in future periods.
As discussed in the Company's 20162019 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates areare: the estimates of the allowance for loan losses, impairment review of investment securities, and the impairment review of goodwill. Refer to Note 1, "Summary of Significant Accounting Policies," to the Company's audited consolidated financial statements included in the Company's 20162019 Annual Report on Form 10-K for accounting policies related to these significant estimates. The Company has not changed its significant accounting policies from those disclosed in its 2016 Annual Report on Form 10-K.
(c) Accounting Policies
Restricted InstrumentsCash and Investments
Certain of the Company's derivative agreements contain provisions that require the Company to post collateral if the derivative exposure exceeds a threshold amount. When the Company has pledged cash as collateral for this purpose,in relation to certain derivatives, the cash is carried as restricted cash within cash"Interest-earning deposits" on the Company's Consolidated Balance Sheet. See Note 8, "Derivatives and cash equivalents.Hedging Activities," to the Company's unaudited consolidated interim financial statements below in this Form 10-Q for more information about the Company's collateral related to its derivatives.
As a member of the Federal Home Loan Bank of Boston ("FHLB"),FHLB, the Company is required to purchase certain levels of FHLB capital stock at par value in association with outstanding advances from the FHLB. From time-to-time, the FHLB may initiate the repurchase, at par value, of "excess" levels of its capital stock held by member banks. This stock is classified as a restricted investment and carried at cost, which management believes approximates fair value. FHLB stock represents the only restricted investment held by the Company.
Management regularly reviews its holdings of FHLB stock for other-than-temporary-impairment ("OTTI").Company and is carried at cost, which management believes approximates fair value. Based on management's periodic review for other-than-temporary impairment ("OTTI"), the Company has not recorded any OTTI charges on this investment to date. If it was determined that a write-down
Other Accounting Policies
The CARES Act allows certain financial institutions the option to delay the adoption of FHLB stock was required, impairment would be recognized through a chargethe Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-13 (Measurement of Credit Losses on Financial Instruments), including the current expected credit loss ("CECL") methodology for estimating allowances for credit losses, during the period beginning on March 27, 2020 until the earlier of (1) the date on which the national emergency concerning the COVID-19 pandemic ("pandemic") declared under the National Emergencies Act terminates; or (2) December 31, 2020. In the first quarter of 2020, the Company elected to earnings.
delay the adoption of CECL. See Item (e) "Recent Accounting Pronouncements," under the subheading "Accounting pronouncements not yet adopted by the Company," below in this Note 2, "Investment Securities,"1 for additional information on management's OTTI review.CECL.
(d) Income Taxes
The Company usesIn addition, Section 4013 of the asset and liability method ofCARES Act provides the option for financial institutions to suspend troubled debt restructuring ("TDR") accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax expense or benefit attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable tounder GAAP in certain circumstances, during the period inbeginning March 1, 2020 and ending on the earlier of (1) December 31, 2020; or (2) the date that is 60 days after the date on which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities will be adjusted accordingly throughnational emergency concerning the provision for income taxes inpandemic declared under the period that includes the enactment date.
The Company's policy is to classify interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company's judgment changes regarding an uncertain tax position.
The income tax provisions will differ from the expense that would result from applying the federal statutory rate to income before taxes, due primarily to the impact of tax-exempt interest from certain investment securities, loans and bank-owned life insurance.
The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at September 30, 2017.National Emergencies Act terminates. The Company is subjectsuspending TDR accounting, which primarily impacts financial statement disclosure, for loans that have had a short-term payment deferral related to U.S. federalthe pandemic since March 1, 2020, as long as those loans were current and state income tax examinations by taxing authorities for the 2013 through 2016 tax years.risk rated as “pass” as of December 31, 2019.
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
(d) Subsequent Events
The Company has evaluated subsequent events and transactions from September 30, 2020 through the date this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP and determined that other than the item noted below, there were no material subsequent events requiring recognition or disclosure.
In late October 2020, management determined that it was prudent to downgrade the credit rating on a large commercial real estate relationship from pass credit risk rated to substandard and to classify as TDR non-accrual. This financing is in a previously identified industry considered to be most at-risk from the impact of the pandemic and had previous short-term modifications. The relationship was not able to resume contractual payments upon expiration and subsequently requested, and was granted, an additional principal and interest deferral in late October 2020. Interest income of approximately $313 thousand, related to this $15.2 million relationship will be reversed in the fourth quarter.
(e) Recent Accounting Pronouncements
AccountingThe tables below summarize recent accounting pronouncements issued by the FASB that were either recently adopted by the Company
In March 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU" or "Update") No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting." The new standard was effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
The Company adopted ASU No. 2016-09 in the first quarter of 2017. Several aspects of the accounting are simplified including, generally: a) income tax consequences; b) classification of awards as either equity or liabilities; c) accounting for forfeitures; and d) classification on the statement of cash flows. Upon adoption, the most significant impact of this amendment resulted from the prospective application of current excess tax benefits and deficiencies being recognized in income tax expense, which would previously have not yet been recognized in additional paid-in capital, in the reporting period in which they occur.adopted. For the nine months ended September 30, 2017, this reduced the Company's provision for income taxes, increasing earnings by approximately $832 thousand. For the year ended December 31, 2016, the Company recognized $789 thousand in additional paid-in-capital in this regard, which, if under the new ASU, would have been recognized as income tax benefit in the income statement. This amount, treated as discrete items in the period in which they occur, will vary from year to year as a function of the volume of share-based payments vested or exercised and the then current market price of the Company's stock in comparison to the compensation cost recognized in the consolidated financial statements.
Additionally upon adoption, the Company made a policy election to record forfeitures as they occur rather than make use of an estimate. Using a modified retrospective approach, the Company recorded an immaterial cumulative effect adjustment from retained earnings to additional paid-in-capital. The other provisions did not have a material impact on the Company's consolidated financial statements upon adoption.
Accounting pronouncements not yet adopted, by the Company (in order of effective date of implementation)
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)." This ASU is intended to create a single source of revenue guidance which is more principles based than current revenue guidance. The guidance affects any entity that either enters into contracts with customers to transfer goods or services, or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" to amend the effective date of ASU 2014-09. The amendmentslisted below is in ASU 2014-09 are effectiveline with the required adoption date for annual and interim periods within fiscal years beginning after December 15, 2017. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The FASB has since issued additional related ASUs amendments intended to clarify certain aspects and improve understanding of the implementation guidance of Topic 606 but do not change the core principles of the guidance in Topic 606. The effective date and transition requirements for the amendments are the samepublic business entities, such as the effective date and transition requirements of Topic 606.
The Company, is currently evaluatingthough certain accounting pronouncements may permit early adoption. For more detailed information regarding these pronouncements, refer to the potential impact of the ASU and its amendments on the Company's consolidated financial statements, results of operations, and disclosures and does not currently plan to early adopt. Based on the Company's initial review, and because the largest portion of the Company's revenue, interest income and various loan fees, are specifically excluded from the scope of this ASU, and because the Company currently recognizes the majority of the remaining revenue sources in a manner that management believes is consistent with the new ASU, management believes that this new standard will not materially impact the Company's consolidated financial statements, results of operations or disclosures. The foregoing observations are subject to change as management completes their evaluation.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments.
Among other things, the new guidance:
Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
FASB's ASUs.
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company is currently evaluating the effects of this ASU on the Company's consolidated financial statements, results of operations and disclosures. Based on the Company's evaluation to date, management believes the more significant implications upon adoption of this ASU will be the potential recognition of changes in fair value of the Company's equity portfolio in net income. Under current GAAP, net unrealized appreciation or depreciation on the equity portfolio, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income. The net unrealized gain or loss on equity securities will fluctuate based on changes in the market value of the mutual funds and individual securities held in the portfolio. For the nine months ended September 30, 2017, other comprehensive losses, net of taxes, generated from the equity portfolio amounted to $670 thousand, compared to a gain of $178 thousand generated for the nine months ended September 30, 2016. Any potential future changes in fair value of the equity portfolio recognized in net income will depend on the amount of dollars invested in the portfolio and the potential magnitude of changes in equity market values. The foregoing observations are subject to change as management completes their evaluation.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments." The amendments are intended to reduce diversity in practice related to the presentation of eight specific cash flow issues. For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Because this amendment primarily impacts the presentation and classification of information, the Company does not expect this ASU to have an impact on the Company's consolidated financial statements and results of operations.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash flows-Restricted Cash (Topic 230)." The amendments in this Update clarify the inclusion of restricted cash in the cash and cash equivalents beginning-of-period and end-of period reconciliation on the statement of cash flows. For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Because this amendment primarily impacts the presentation and classification of information, the Company does not expect this ASU to have an impact on the Company's consolidated financial statements and results of operations.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." The amendments in this Update outline the presentation, classification and disclosure requirements for service cost and other components of net benefit costs. For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Because this amendment primarily impacts the presentation and classification of information, the Company does not expect this ASU to have an impact on the Company's consolidated financial statements and results of operations.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting." The amendments in this Update apply to entities that change the terms of an outstanding share-based payment award. The amendments are intended to reduce diversity in practice as well as cost and complexity when applying guidance in Topic 718 to the modification of the terms and conditions of a share-based payment award. This ASU provides guidance on the three modifications to share-based payment awards and conditions that must be met in order to exempt an entity from modification accounting under topic 718. The amendments in this Update apply prospectively to award modifications on or after the adoption date, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company currently does not expect that adoption of the ASU will have a material impact on its consolidated financial statements, results of operations or disclosures.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," which supersedes previous leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with
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Accounting pronouncements adopted by the Company |
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Standard/Adoption Date | Description | | Effect on Financial Statements or Other Significant Matters |
ASU No. 2018-13, Fair Value Measurement (ASU Topic 820)-Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement
January 1, 2020
| The amendments in this ASU modify the disclosure requirements related primarily to level 3 fair value measurements of the fair value hierarchy.
| | The adoption of ASU No. 2018-13 in January 2020 did not have a material impact on the Company's consolidated financial statements and results of operations because this ASU relates primarily to disclosure requirements and the dollar amounts of related assets held by the Company are immaterial.
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ASU No.2018-15, Intangibles-Goodwill and Other- Internal-Use Software (ASU Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract
January 1, 2020
| The major provision in the amendments in this ASU requires an entity to capitalize certain implementation costs incurred in a hosting arrangement that is a service contract in accordance with current GAAP for internal-use software and expense these costs over the term of the hosting arrangement. Additionally, these capitalized implementation costs are required to be reviewed for impairment in accordance with current GAAP for internal-use software. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.
| | The adoption of ASU No. 2018-15 in January 2020 did not have a material impact on the Company's consolidated financial statements and results of operations.
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ASU No. 2020-04. Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting
Upon Issuance | The amendments in the provision are effective for a limited period and mainly address accounting and reporting challenges due to the transition from LIBOR on existing contracts. The optional expedients may be applied to loans, borrowings, leases and derivatives. The standard 1) simplifies the accounting analyses for contract modifications and 2) simplifies the hedge effectiveness assessment and allows hedging relationships impacted by the LIBOR transition to continue. | | This ASU was effective upon issuance and is applicable until December 31, 2022. The Company adopted this ASU prospectively and made certain optional elections related to its cashflow hedge relationships which did not materially impact our consolidated financial statements. The Company continues to assess the other implications and expedients under this standard, which allows for elections to be made at different time intervals, but does not expect that the ASU will have a material impact on the Company's consolidated financial statements, or results of operations.
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
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Accounting pronouncements not yet adopted by the Company |
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Standard/Anticipated Adoption Date | Description | | Effect on Financial Statements or Other Significant Matters |
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
The earlier of (1) the date on which the national emergency concerning the pandemic declared by the National Emergencies Act terminates; or (2) December 31, 2020. | The amendments in this ASU require a financial asset (or a group of financial assets) measured on an amortized cost basis to be presented at the net amount expected to be collected. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss and generally recognition of the full amount of credit losses was delayed until the loss was probable of occurring. The amendments in this ASU eliminate the probable initial recognition threshold in current GAAP and, instead, reflect an entity's current estimate of CECL. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the report amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The Statement of Income reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.
Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments in this ASU require that credit losses be presented as an allowance rather than as a write-down. Unlike current GAAP, the ASU provides for reversals of credit losses in future period net income in situations where the estimate of loss declines.
Based on current regulatory guidance, as of the adoption date an entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of January 1, 2020 (that is, a modified-retrospective approach).
| | In accordance with the CARES Act, the Company elected to defer the adoption of this standard. The Company continues to monitor regulatory guidance related to this deferment.
As of September 30, 2020, the Company estimates adoption of CECL would have increased the total allowance for loan losses (credit losses under CECL), including the reserves for unfunded commitments by $8.0 million to $11.0 million and increased the total allowance for credit losses to total loans ratio from 1.65% to a range of 1.95% to 2.06%, excluding Paycheck Protection Program ("PPP") loans that are SBA guaranteed and are estimated to have nominal credit risk.
CECL will be adopted with an effective retrospective implementation date of January 1, 2020.Included in the estimated total increase in the allowance for credit losses is approximately pre-tax $3.0 million that will be recorded through equity, net of taxes, as the CECL day one implementation adjustment and pre-tax $5.0 million to $8.0 million that will be recorded through earnings and applied retrospectively to the applicable March 31, June 30, and September 30 quarterly results.
In March 2020, the regulatory banking agencies issued an interim final rule that allows banking institutions that implement CECL during 2020 to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period. The Company is currently assessing its options at this time and will make its election when it adopts CECL.The foregoing observations are subject to change as management completes its analysis and adopts the standard later this year. |
ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (ASU Subtopic 715-20) - Disclosure Framework- Changes to the Disclosure Requirements for Defined Benefit Plans
January 1, 2021
| The amendments in this ASU modify the disclosure requirements on defined benefit plans including requiring disclosures about significant gains and losses related to changes in the benefit obligation. | | The adoption of ASU No. 2018-14 will not have a material impact on the Company's consolidated financial statements and results of operations because this ASU relates primarily to disclosure requirements and the balances of the benefit plans impacted by this ASU are immaterial to the Company.
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classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements, with certain practical expedients available.
The Company is currently evaluating the effects of this ASU on the Company's consolidated financial statements, results of operations and disclosures. Based on the Company's evaluation to date, management believes the more significant implication of this ASU on the Company relates to operating leases of our facilities, mainly branch leases. As of September 30, 2017, the Company had leases on 17 of its locations, including branches and part of its main campus, and expects that upon adoption of this ASU the balance sheet will reflect both lease liabilities, equal to the present value of lease payments, and right-of-use assets, equal to the lease liability plus payments made to lessors adjusted for prepaid or accrued rent and any initial direct cost incurred. In addition, the Company will recognize lease expense in the income statement on a straight-line basis similar to current operating leases. The straight-line expense will reflect the interest expense on the lease liability (effective interest method) and amortization of the right-of-use asset. Lease expense will be presented as a single line item in the operating expense section of the income statement. Management believes that lease expense under the new standard will generally approximate lease expense under current GAAP. The foregoing observations are subject to change as management completes their evaluation.
In March 2017, the FASB issued ASU No. 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities." The amendments shorten the amortization period to the earliest call date for certain callable debt securities held at a premium. The accretion for securities held at a discount is not affected by this statement and remains unchanged. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective basis is required upon adoption. Early adoption is permitted. The Company has assessed the impact of this ASU and does not expect that it will have a material impact on the Company's consolidated financial statements, results of operations and disclosures upon adoption.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss and generally recognition of the full amount of credit losses was delayed until the loss was probable of occurring. The amendments in this ASU eliminate the probable initial recognition threshold in current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses.
The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.
Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments in this Update require that credit losses be presented as an allowance rather than as a write-down. Unlike current GAAP, the ASU provides for reversals of credit losses in future period net income in situations where the estimate of loss declines.
An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption for fiscal years beginning after December 15, 2018 is permitted.
The Company has established an implementation committee and an enterprise-wide implementation plan for this ASU, which will consider the impact to operations, financial results, disclosures and controls. At present, the impact of the adoption of ASU No. 2016-13 on the Company's operations, financial results, disclosures, and controls is unknown.
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
(2)Investment Securities
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment." The main provision in this ASU eliminated Step 2
As of the goodwill impairment test and instead requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount. An impairment charge would be recognized for the amount the carrying value exceeds the reporting unit's fair value as long as the amount recognized doesn't exceed the amount of goodwill allocated to the reporting unit. For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for impairment tests performed on testing dates after January 1, 2017. Goodwill carried on the Company’s consolidated financial statements was $5.7 million at both September 30, 20172020, and December 31, 2016. This asset is related to the Company’s acquisition of two branch offices in July 2000. The Company does not expect the adoption of ASU No. 2017-01 to have a material impact on2019, the Company's consolidated financial statementsinvestment portfolio was comprised primarily of debt securities, with a small portion of the portfolio invested in equity securities.
See also the section "Restricted Cash and resultsInvestments," under Item (c), "Accounting Policies," contained in Note 1, "Summary of operations.Significant Accounting Policies," above in this Form 10-Q, for further information regarding the Company's investment in FHLB stock. See Note 14, "Fair Value Measurements," of this Form 10-Q, contained below, for further information regarding the Company's fair value measurements for investment securities.
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(2) | InvestmentDebt Securities |
All of the Company's debt securities were classified as available-for-sale and carried at fair value. The amortized cost and carryingfair values of investmentdebt securities at the dates specified are summarized as follows:
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| | September 30, 2020 |
(Dollars in thousands) | | Amortized cost | | Unrealized gains | | Unrealized losses | | Fair Value |
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Residential federal agency MBS(1) | | $ | 178,022 | | | $ | 6,717 | | | $ | 143 | | | $ | 184,596 | |
Commercial federal agency MBS(1) | | 107,142 | | | 8,103 | | | 0 | | | 115,245 | |
Taxable municipal securities | | 79,868 | | | 8,622 | | | 0 | | | 88,490 | |
Tax-exempt municipal securities | | 90,239 | | | 7,013 | | | 0 | | | 97,252 | |
Corporate bonds | | 11,051 | | | 846 | | | 0 | | | 11,897 | |
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Total debt securities, at fair value | | $ | 466,322 | | | $ | 31,301 | | | $ | 143 | | | $ | 497,480 | |
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| | September 30, 2017 |
(Dollars in thousands) | | Amortized cost | | Unrealized gains | | Unrealized losses | | Fair Value |
Federal agency obligations (1) | | $ | 74,763 |
| | $ | 355 |
| | $ | 46 |
| | $ | 75,072 |
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Residential federal agency MBS (1) | | 101,241 |
| | 260 |
| | 543 |
| | 100,958 |
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Commercial federal agency MBS(1) | | 65,009 |
| | 105 |
| | 318 |
| | 64,796 |
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Municipal securities | | 127,275 |
| | 2,654 |
| | 167 |
| | 129,762 |
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Corporate bonds | | 11,278 |
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| 111 |
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| 33 |
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| 11,356 |
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Certificates of deposits (2) | | 950 |
| | 2 |
| | — |
| | 952 |
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Total debt securities | | 380,516 |
| | 3,487 |
| | 1,107 |
| | 382,896 |
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Equity investments | | 1,861 |
| | 1,187 |
| | 2 |
| | 3,046 |
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Total investment securities, at fair value | | $ | 382,377 |
| | $ | 4,674 |
| | $ | 1,109 |
| | $ | 385,942 |
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| | | | December 31, 2016 | | | December 31, 2019 |
(Dollars in thousands) | | Amortized cost | | Unrealized gains | | Unrealized losses | | Fair Value | (Dollars in thousands) | | Amortized cost | | Unrealized gains | | Unrealized losses | | Fair Value |
Federal agency obligations(1) | | $ | 74,682 |
| | $ | 432 |
| | $ | 45 |
| | $ | 75,069 |
| Federal agency obligations(1) | | $ | 999 | | | $ | 5 | | | $ | 0 | | | $ | 1,004 | |
Residential federal agency MBS(1) | | 94,818 |
| | 96 |
| | 1,561 |
| | 93,353 |
| Residential federal agency MBS(1) | | 190,392 | | | 2,599 | | | 333 | | | 192,658 | |
Commercial federal agency MBS(1) | | 71,993 |
| | 15 |
| | 1,730 |
| | 70,278 |
| Commercial federal agency MBS(1) | | 111,182 | | | 3,453 | | | 0 | | | 114,635 | |
Municipal securities | | 112,401 |
| | 922 |
| | 1,520 |
| | 111,803 |
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Taxable municipal securities | | Taxable municipal securities | | 79,095 | | | 2,726 | | | 134 | | | 81,687 | |
Tax-exempt municipal securities | | Tax-exempt municipal securities | | 95,342 | | | 4,696 | | | 0 | | | 100,038 | |
Corporate bonds | | 10,734 |
| | 51 |
| | 90 |
| | 10,695 |
| Corporate bonds | | 13,826 | | | 485 | | | 0 | | | 14,311 | |
Certificates of deposits (2) | | 950 |
| | — |
| | 1 |
| | 949 |
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Total debt securities | | 365,578 |
| | 1,516 |
| | 4,947 |
| | 362,147 |
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Equity investments | | 10,413 |
| | 2,532 |
| | 302 |
| | 12,643 |
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Total investment securities, at fair value | | $ | 375,991 |
| | $ | 4,048 |
| | $ | 5,249 |
| | $ | 374,790 |
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CDs(2) | | CDs(2) | | 454 | | | 1 | | | 0 | | | 455 | |
Total debt securities, at fair value | | Total debt securities, at fair value | | $ | 491,290 | | | $ | 13,965 | | | $ | 467 | | | $ | 504,788 | |
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(1)
| (1)These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as investments guaranteed by Ginnie Mae ("GNMA"), a wholly-owned government entity. (2)CDs represent term deposits issued by banks that are subject to FDIC insurance and purchased on the open market.
As of the dates reflected in the tables above, the majority of investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as, investments guaranteed by Ginnie Mae ("GNMA"), a wholly-owned government entity. |
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(2)
| Certificates of deposits ("CDs") represent term deposits issued by banks that are subject to FDIC insurance and purchased on the open market. |
Included in the residential and commercial federal agency MBSmortgage back securities ("MBS") categories were collateralized mortgage obligations ("CMOs") issued by U.S. agencies with fair values totaling $110.2government agencies. The remaining MBS investments totaled $20.6 million and $107.0$23.5 million at September 30, 20172020 and December 31, 2016,2019, respectively.
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| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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At September 30, 2017, the equity portfolio was comprised of investments in individual common stock of financial services entities.
As of the dates reflected in the tables above, all of the Company’s investment securities were classified as available-for-sale and carried at fair value. Net unrealized appreciation and depreciation on investmentsdebt securities available-for-sale, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income (loss).
The net unrealized gain or loss in the Company's debt security portfolio fluctuates as market interest rates rise and fall. Due to the predominantly fixed rate nature of this portfolio, as market rates fall, the value of the portfolio rises, and as market rates rise, the value of the portfolio declines. The unrealized gains or losses on debt securities will also decline as the securities approach maturity. Unrealized gainslosses on debt securities that are deemed OTTI are generally charged to earnings, as described further in Note 1, "Summary of Significant Accounting Policies," under Item (e), "Investments," to the Company's audited consolidated financial statements contained in the Company's 2019 Annual Report on Form 10-K. Gains or losses will be recognized in the income statementConsolidated Statement of Income if the debt securities are sold. However, if an unrealized loss on a debt security portfolio is deemed to be other than temporary, the credit loss portion is charged to earnings and the noncredit portion is recognized in accumulated other comprehensive income (loss).
The net unrealized gain or loss on equity securities will fluctuate based on changes in the market value of the mutual funds and individual securities held in the portfolio. Unrealized gains or losses will be recognized in the statements of income if the securities are sold. However, if an unrealized loss on an equity security is deemed to be other than temporary prior to a sale, the loss is charged to earnings.
The following tables summarize investments (debt and equity) having temporary impairment, due to the fair market values having declined below the amortized costs of the individual investments, and the period that the investments have been temporarily impaired at September 30, 2017 and December 31, 2016.
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| | September 30, 2017 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of holdings |
Federal agency obligations | | $ | 22,980 |
| | $ | 46 |
| | $ | — |
| | $ | — |
| | $ | 22,980 |
| | $ | 46 |
| | 6 |
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Residential federal agency MBS | | 57,917 |
| | 401 |
| | 7,454 |
| | 142 |
| | 65,371 |
| | 543 |
| | 23 |
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Commercial federal agency MBS | | 41,007 |
| | 318 |
| | — |
| | — |
| | 41,007 |
| | 318 |
| | 9 |
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Municipal securities | | 5,627 |
| | 57 |
| | 6,084 |
| | 110 |
| | 11,711 |
| | 167 |
| | 21 |
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Corporate bonds | | 2,281 |
| | 23 |
| | 1,095 |
| | 10 |
| | 3,376 |
| | 33 |
| | 19 |
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Equity investments | | 74 |
| | 2 |
| | — |
| | — |
| | 74 |
| | 2 |
| | 1 |
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Total temporarily impaired investment securities(1) | | $ | 129,886 |
| | $ | 847 |
| | $ | 14,633 |
| | $ | 262 |
| | $ | 144,519 |
| | $ | 1,109 |
| | 79 |
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| | December 31, 2016 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of holdings |
Federal agency obligations | | $ | 13,956 |
| | $ | 45 |
| | $ | — |
| | $ | — |
| | $ | 13,956 |
| | $ | 45 |
| | 3 |
Residential federal agency MBS | | 68,138 |
| | 1,236 |
| | 8,008 |
| | 325 |
| | 76,146 |
| | 1,561 |
| | 31 |
Commercial federal agency MBS | | 60,060 |
| | 1,730 |
| | — |
| | — |
| | 60,060 |
| | 1,730 |
| | 18 |
Municipal securities | | 60,436 |
| | 1,520 |
| | — |
| | — |
| | 60,436 |
| | 1,520 |
| | 107 |
Corporate bonds | | 5,729 |
| | 90 |
| | — |
| | — |
| | 5,729 |
| | 90 |
| | 37 |
Certificates of deposit | | 949 |
| | 1 |
| | — |
| | — |
| | 949 |
| | 1 |
| | 4 |
Equity investments | | 1,185 |
| | 20 |
| | 2,743 |
| | 282 |
| | 3,928 |
| | 302 |
| | 3 |
Total temporarily impaired investment securities | | $ | 210,453 |
| | $ | 4,642 |
| | $ | 10,751 |
| | $ | 607 |
| | $ | 221,204 |
| | $ | 5,249 |
| | 203 |
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(1)
| The Company did not hold any Certificates of deposit that had unrealized losses as of September 30, 2017. |
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
DuringThe following tables summarize debt securities with unrealized losses, due to the nine months endedfair values having declined below the amortized costs of the individual investments, by the duration of their continuous unrealized loss positions at September 30, 20172020 and 2016, the Company did not record any fair value impairment charges on its investments. December 31, 2019:
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| | September 30, 2020 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of holdings |
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Residential federal agency MBS | | $ | 15,433 | | | $ | 143 | | | $ | 0 | | | $ | 0 | | | $ | 15,433 | | | $ | 143 | | | 5 | |
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Total temporarily impaired debt securities | | $ | 15,433 | | | $ | 143 | | | $ | 0 | | | $ | 0 | | | $ | 15,433 | | | $ | 143 | | | 5 | |
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| | December 31, 2019 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of holdings |
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Residential federal agency MBS | | $ | 36,464 | | | $ | 263 | | | $ | 5,060 | | | $ | 70 | | | $ | 41,524 | | | $ | 333 | | | 11 |
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Taxable municipal securities | | 16,826 | | | 134 | | | 0 | | | 0 | | | 16,826 | | | 134 | | | 15 |
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Total temporarily impaired debt securities | | $ | 53,290 | | | $ | 397 | | | $ | 5,060 | | | $ | 70 | | | $ | 58,350 | | | $ | 467 | | | 26 | |
Management regularly reviews the portfolio for debt securities with unrealized losses that are other-than-temporarily impaired. AtDuring the nine months ended September 30, 2017, management attributes the unrealized losses in the portfolio to increases in current market yields compared to the yields at the time the investments were purchased by2020 and 2019, the Company fordid not record any OTTI on its investments in debt securities and the impact of market value fluctuations on the equity portion of our portfolio. As ofat September 30, 2017,2020, management did not consider itsany debt securities to be other-than-temporarily impaired because (1) the decline in market value is not attributablehave OTTI. There have been no material changes to a fundamental deterioration in quality of the securities or the issuers, and (2) the Company did not intend to sell, and it is more likely than not that it will not be required to, sell those investments prior to a market price recovery or maturity with recovery of the amortized cost. The unrealized losses in equity investments as of September 30, 2017 were not material.
In assessing the Company's process for assessing investments for OTTI as reported in federal agency mortgage-backed securities and federal agency obligations, the contractual cash flows of these investments are guaranteed by the respective government sponsored enterprise (FHLMC, FNMA, FFCB, or FHLB) or wholly-owned government corporation (GNMA). Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company's investments. Management's assessment of other debt securities within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investments' materiality, and duration of the investments' unrealized loss position. In addition, the Company utilizes an outside registered investment adviser to manage the corporate and municipal bond portfolios, within prescribed guidelines set by management, and to provide assistance in assessing the credit risk of those portfolios. At September 30, 2017,2019 Annual Report on Form 10-K. For more information about the Company's corporate and municipal bond portfolios did not contain any securities below investment grade, as reported by major credit rating agencies. For equities and funds, management's assessment includesfor OTTI, see Note 2, "Investment Securities," to the severity of the declines, whether it is unlikely that the security or fund will completely recover its unrealized loss within a reasonable time period and if the equity security or fund exhibits fundamental deterioration.
See "Financial Condition," in Item 2, "Management's Discussion and Analysis," under the heading "Investments" in this Form 10-Q for additional information about changesCompany's audited consolidated financial statements contained in the net unrealized gains (losses)Company's 2019 Annual Report on investments.Form 10-K.
The contractual maturity distribution at September 30, 20172020 of total debt securities was as follows:
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(Dollars in thousands) | | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 8,202 | | | $ | 8,250 | |
Due after one, but within five years | | 96,187 | | | 103,196 | |
Due after five, but within ten years | | 147,763 | | | 162,303 | |
Due after ten years | | 214,170 | | | 223,731 | |
Total debt securities | | $ | 466,322 | | | $ | 497,480 | |
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(Dollars in thousands) | | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 16,217 |
| | $ | 16,262 |
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Due after one, but within five years | | 112,615 |
| | 113,439 |
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Due after five, but within ten years | | 117,552 |
| | 118,680 |
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Due after ten years | | 134,132 |
| | 134,515 |
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Total debt securities | | $ | 380,516 |
| | $ | 382,896 |
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Scheduled contractual maturities shown above may not reflect the actual maturities of the investments. The actual MBS/CMO cash flows likely will be faster than presented above due to prepayments and amortization. Similarly, included in the fair value of debt securitiestable above are callable securities, comprised of municipal securities and corporate bonds, totaling $68.1with a fair value of $87.1 million, which can be redeemed by the issuerissuers prior to the maturity presented above. Management considers these factors when evaluating the interest rateinterest-rate risk in the Company's asset-liability management program.
From time to time, the Company may pledge debt securities as collateral for deposit account balances of municipal customers, and for borrowing capacity with the FHLB and the Federal Reserve Bank of Boston (the "FRB"("FRB"). The fair value of debt securities pledged as collateral for these purposes was $374.4$497.5 million at September 30, 2017.2020.
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
Sales of investments, including pending trades based on trade date, if applicable,debt securities for the three and nine months ended September 30, 20172020 and September 30, 20162019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Amortized cost of debt securities sold (1) | | $ | 3,153 | | | $ | 0 | | | $ | 5,680 | | | $ | 11,621 | |
Gross realized gains on sales | | 127 | | | 0 | | | 227 | | | 149 | |
Gross realized losses on sales | | 0 | | | 0 | | | 0 | | | (3) | |
Total proceeds from sales of debt securities | | $ | 3,280 | | | $ | 0 | | | $ | 5,907 | | | $ | 11,767 | |
(1)Amortized cost of investments sold is determined on a specific identification basis and includes pending trades based on trade date, if applicable.
Equity Securities
Equity securities are accounted for under ASC Topic 321, "Investments-Equity Securities," and are recorded on the Company's consolidated balance sheet at fair value with changes in fair value recognized in the Company's Consolidated Statement of Income as a component of "Other Income." The amount related to equity securities fair value adjustments recognized in "Other income" is dependent primarily on the amount of dollars invested in equities and the magnitude of changes in equity market values.
The Company held equity securities with a fair value of $651 thousand at September 30, 2020 and $467 thousand at December 31, 2019. At September 30, 2020, the equity portfolio consisted primarily of investments in common stock of individual entities in the financial services industry and mutual funds held in conjunction with the Company's supplemental executive retirement and deferred compensation plan.
Gains and losses on equity securities for the three and nine months ended September 30, 2020 and September 30, 2019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2020 | | 2019 | | 2020 | | 2019 |
Net gains (losses) recognized during the period on equity securities | | $ | (3) | | | $ | 12 | | | $ | (135) | | | $ | 275 | |
Less: Net losses recognized on equity securities sold during the period | | 0 | | | 36 | | | (11) | | | 36 | |
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the end of the period | | $ | (3) | | | $ | (24) | | | $ | (124) | | | $ | 239 | |
(3)Loans
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Amortized cost of investments sold (1) | | $ | 60,834 |
| | $ | 2,354 |
| | $ | 70,202 |
| | $ | 4,118 |
|
Gross realized gains on sales | | 1,350 |
| | 546 |
| | 2,225 |
| | 611 |
|
Gross realized losses on sales | | (1,634 | ) | | — |
| | (1,740 | ) | | — |
|
Total proceeds from sales of investments | | $ | 60,550 |
| | $ | 2,900 |
| | $ | 70,687 |
| | $ | 4,729 |
|
| |
(1)
| Amortized cost of investments sold is determined on a specific identification basis. |
The losses realized in the third quarter of 2017 were predominately from a debt security portfolio restructuring, largely offset by gains on equity sales.
See Note 12, "Fair Value Measurements," below for further information regarding the Company's fair value measurements for available-for-sale securities.
The Company specializes in lending to business entities, non-profit organizations, professionals and individuals. The Company's primary lending focus is on the development of high quality commercial relationships achieved through active business development efforts, long-term relationships with established commercial developers, strong community involvement and focused marketing strategies. Loans made to businesses include commercial mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and letters of credit. The Company also originates equipment lease financing for businesses. Loans made to individuals include conventional residential mortgage loans, home equity loans and lines, residential construction loans on primary and secondary residences, and secured and unsecured personal loans and lines of credit. The Company manages its loan portfolio to avoid concentration by industry, and relationship size and source of repayment to lessen its credit risk exposure.
See Note 4, "Allowance for Loan Losses," for For additional information on the Company's credit risk management, non-accrual, impaired and troubled debt restructured loans andlending products, see the allowance for loan losses.heading "Lending Products" under Item 1, "Business," contained in the Company's 2019 Annual Report on Form 10-K.
Major classifications of loans at the periods indicated were as follows:
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Commercial real estate | | $ | 1,153,108 |
| | $ | 1,038,082 |
|
Commercial and industrial | | 512,736 |
| | 490,799 |
|
Commercial construction | | 245,453 |
| | 213,447 |
|
Total commercial loans | | 1,911,297 |
| | 1,742,328 |
|
Residential mortgages | | 194,375 |
| | 180,560 |
|
Home equity loans and lines | | 89,044 |
| | 91,065 |
|
Consumer | | 10,085 |
| | 10,845 |
|
Total retail loans | | 293,504 |
| | 282,470 |
|
| | | | |
Gross loans | | 2,204,801 |
| | 2,024,798 |
|
Deferred loan origination fees, net | | (2,428 | ) | | (2,069 | ) |
Total loans | | 2,202,373 |
| | 2,022,729 |
|
Allowance for loan losses | | (33,184 | ) | | (31,342 | ) |
Net loans | | $ | 2,169,189 |
| | $ | 1,991,387 |
|
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
Loan Portfolio Classifications
Loan Categories
Major classifications of loans at the dates indicated were as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
Commercial real estate | | $ | 1,490,649 | | | $ | 1,394,179 | |
Commercial and industrial | | 435,856 | | | 501,227 | |
Commercial construction | | 384,121 | | | 317,477 | |
SBA Paycheck Protection Program | | 508,196 | | | 0 | |
Total commercial loans | | 2,818,822 | | | 2,212,883 | |
| | | | |
Residential mortgages | | 254,784 | | | 247,373 | |
Home equity | | 84,778 | | | 98,252 | |
Consumer | | 9,070 | | | 10,054 | |
Total retail loans | | 348,632 | | | 355,679 | |
| | | | |
Gross loans | | 3,167,454 | | | 2,568,562 | |
Deferred loan origination fees, net | | (3,144) | | | (3,103) | |
Deferred PPP fees | | (13,495) | | | 0 | |
Total loans | | 3,150,815 | | | 2,565,459 | |
| | | | |
Allowance for loan losses | | (43,835) | | | (33,614) | |
Net loans | | $ | 3,106,980 | | | $ | 2,531,845 | |
- Commercial loans:
Commercial real estate loans include loans secured by both owner-use and non-owner occupied real estate. These loans are typically secured by a variety of commercial and industrial property types, including one-to-four and multi-family apartment buildings, office, industrial or mixed-use facilities, strip shopping centers, or other commercial properties, and are generally guaranteed by the principals of the borrower. Commercial real estate loans generally have repayment periods of approximately fifteen to twenty-five years. Variable interest rate loans have a variety of adjustment terms and underlying interest rate indices, and are generally fixed for an initial period before periodic rate adjustments begin.
Commercial and industrial loans include seasonal revolving lines of credit, working capital loans, equipment financing (including equipment leases), and term loans. Also included in commercial and industrial loans are loans partially guaranteed by the U.S. Small Business Administration ("SBA"), and loans under various programs and agencies. Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the borrower. Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally having fixed initial periods. Commercial and industrial loans have average repayment periods of one to seven years.
Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by underlying real estate collateral and are generally guaranteed by the principals of the borrowers. Construction lenders work to cultivate long-term relationships with established developers. The Company limits the amount of financing provided to any single developer for the construction of properties built on a speculative basis. Funds for construction projects are disbursed as pre-specified stages of construction are completed. Regular site inspections are performed, prior to advancing additional funds, at each construction phase, either by experienced construction lenders on staff or by independent outside inspection companies. Commercial construction loans generally are variable rate loans and lines with interest rates that are periodically adjusted and generally have terms of one to three years.
From time to time, the Company participates with other banks in the financing of certain commercial projects. Participating loans with other institutions provide banks the opportunity to retain customer relationships and reduce credit risk exposure among each participating bank, while providing customers with larger credit vehicles than the individual bank might be willing or able to offer independently. In some cases, the Company may act as the lead lender, originating and servicing the loans, but participating out a portion of the funding to other banks. In other cases, the Company may participate in loans originated by other institutions. In each case, the participating bank funds a percentage of the loan commitment and takes on the related pro-rata risk. In each case in which the Company participates in a loan, the rights and obligations of each participating bank are divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks. When the participation qualifies as a sale under GAAP, the balances participated out to other institutions are not carried as assets on the Company's financial statements. The Company performs an independent credit analysis of each commitment and a review of the participating institution prior to participation in the loan, and an annual review thereafter of each participating institution. Loans originated by other banks in which the Company is a participating institution are carried in the loan portfolio at the Company's pro ratapro-rata share of ownership. Loans originated by other banks in which the Company is a participating institutionownership and amounted to $89.4$103.6 million at September 30, 20172020 and $85.2$104.3 million at December 31, 2016.2019. See also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.
Paycheck Protection Program
The PPP was established by the CARES Act and implemented by the Small Business Administration (“SBA”) with support from the Department of the Treasury. The PPP began in early April 2020 and the deadline for submission of PPP loan applications was August 8, 2020. The PPP is a federally guaranteed, low-interest rate loan program designed to provide a direct incentive for small businesses to keep workers on the payroll. Businesses may use PPP loan funds to pay payroll costs as well as to cover other eligible business expenses. PPP loans may be partially or fully forgiven by the SBA if the funds are used for eligible expenses during the relevant 8 or 24 week "covered forgiveness period" and the borrower meets the employee retention criteria. The PPP loans carry an interest rate of 1% to be paid by either the SBA, in the event of forgiveness, or by the borrower for the term of the loan, which may be 2 years or 5 years. The PPP loans that the SBA approved on or after June 5, 2020 will have a maturity date of 5 years. Payments for PPP loans are deferred until the SBA issues a forgiveness decision or ten months after the end of the covered forgiveness period if the borrower fails to apply for forgiveness during that period. Borrowers may submit a loan forgiveness application any time before the maturity date of the loan. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding. As of September 30, 2020, the Company had 2,758 PPP loans outstanding totaling $508.2 million. As of September 30, 2020, the SBA had not issued any forgiveness determinations to the Bank's PPP borrowers.
In addition to generating interest income, the SBA pays lender’s fees for processing PPP loans. As of September 30, 2020, the Company has recorded $17.2 million in PPP related SBA fees and is accreting these fees into interest income over the life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining unearned fee is recognized into income at that time. Year-to-date through September 30, 2020, the Company has recognized $3.7 million in PPP related SBA fees through accretion.
Letters of credit are conditional commitments issued byLoans serviced for others
At September 30, 2020 and December 31, 2019, the Company to guarantee the financial obligation or performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. If the letter of credit is drawn upon, a loan is created for the customer, generally a commercial loan, with the same criteria associated with similar commercial loans.
- Residential loans:
Enterprise originates conventionalwas servicing residential mortgage loans on one-to-four family residential properties. These properties may serve asowned by investors amounting to $14.8 million and $15.7 million, respectively. Additionally, the borrower's primary residence, or as vacation homes or investment properties. Loan-to-value limits vary, generally from 75% for multi-family, owner-occupied properties, up to 97% for single family, owner-occupied properties, with mortgage
Company was servicing commercial loans
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
insurance coverage required for loan-to-value ratios greater than 80% based on program parameters. In addition, financing is provided for the construction of owner-occupied primary and secondary residences. Residential mortgage loans may have terms of up to 30 years at either fixed or adjustable rates of interest. Fixed and adjustable rate residential mortgage loans are generally originated using secondary market underwriting and documentation standards.
Depending on the current interest rate environment, management projections of future interest rates and the overall asset-liability management program ofby the Company management may elect to sell those fixed and adjustable rate residential mortgage loans which are eligible for sale in the secondary market, or hold some or all of this residential loan production for the Company's portfolio. Mortgage loans are generally not pooled for sale, but instead sold on an individual basis. The Company may retain or sell the servicing when selling the loans. Loans sold are subject to standard secondary market underwriting and eligibility representations and warranties over the life of the loan and are subject to an early payment default period covering the first four payments for certain loan sales. Loans classified as held for sale are carried as a separate line item on the balance sheet.
- Home equity loans and lines of credit:
Home equity term loans have in the past been originated for one-to-four family residential properties with maximum original loan-to-value ratios generally up to 80% of the automated valuation or appraised value of the property securing the loan. Home equity loan payments consist of monthly principal and interest based on amortization ranging from three to fifteen years. The rates may be variable or fixed.
The Company originates home equity revolving lines of credit for one-to-four family residential properties with maximum original loan-to-value ratios generally up to 80% of the automated valuation or appraised value of the property securing the loan. Home equity lines generally have interest rates that adjust monthly based on changes in the Wall Street Journal Prime Rate, although minimum rates may be applicable. Some home equity line rates may be fixed for a period of time and then adjusted monthly thereafter. The payment schedule for home equity lines requires interest only payments for the first ten years of the lines. Generally at the end of ten years, the line may be frozen to future advances, and principal plus interest payments are collected over a fifteen-year amortization schedule or, for eligible borrowers meeting certain requirements, the line availability may be extended for an additional interest only period.
- Consumer loans:
Consumer loans consist primarily of secured or unsecured personal loans, loans under energy efficiency financing programs in conjunction with Massachusetts public utilities, and overdraft protection lines on checking accounts extended to individual customers. The aggregate amount of overdrawn deposit accounts are reclassified as loan balances.
Loans serviced for others
At September 30, 2017 and December 31, 2016, the Company was servicing residential mortgage loans owned by investors amounting to $19.1 million and $18.7 million, respectively. Additionally, the Company was servicing commercial loans participated out to various other institutions amounting to $67.7$75.7 million and $62.3$80.2 million at September 30, 20172020 and December 31, 2016,2019, respectively. See the discussion above under the heading "Commercial loans" for further information regarding commercial participations.
Loans serving as collateral
Loans designated as qualified collateral and pledged to the FHLB for borrowing capacity foras of the periodsdates indicated are summarized below:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
Commercial real estate | | $ | 208,970 | | | $ | 246,865 | |
Residential mortgages | | 237,096 | | | 231,028 | |
Home equity | | 6,748 | | | 7,676 | |
Total loans pledged to FHLB | | $ | 452,814 | | | $ | 485,569 | |
|
| | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 |
Commercial real estate | | $ | 228,710 |
| | $ | 247,664 |
|
Residential mortgages | | 181,309 |
| | 170,247 |
|
Home equity | | 10,454 |
| | 12,340 |
|
Total loans pledged to FHLB | | $ | 420,473 |
| | $ | 430,251 |
|
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| | |
| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
See also Note 12,4, "Allowance for Loan Losses," of this Form 10-Q, contained below, for information on the Company's credit risk management, non-accrual, impaired and troubled debt restructured loans and the allowance for loan losses. See Note 8, "Derivatives and Hedging Activities," of this Form 10-Q, contained below, for information regarding interest-rate swap agreements related to certain commercial loans, and see Note 14, "Fair Value Measurements," of this Form 10-Q, contained below, for further information regarding the Company's fair value measurements for loans, and Note 7, "Derivatives and Hedging Activities," belowloans.
(4)Allowance for information regarding interest-rate swap agreements related to certain commercial loans.Loan Losses
| |
(4) | Allowance for Loan Losses |
Allowance for probable loan losses methodology
On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company uses a systematic methodology to measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology makes use of specific reserves for loans individually evaluated and deemed impaired, and general reserves for larger groupspools of homogeneous loans, which are collectively evaluated relying on a combination of qualitative and quantitative factors that may affect credit quality of the pool.
There have been no material changes to the Company's underwriting practices, credit risk management system, or to the allowance assessment methodology used to estimate loan loss exposure as reported inhowever, due to the 2016 Annual Report on Form 10-K. Refer toeconomic uncertainty from the pandemic, management has strengthened risk management over new originations and existing credits. See Note 4, "Allowance for Loan Losses," to the Company's audited consolidated financial statements contained in the 20162019 Annual Report on Form 10-K for further discussion10-K.
The Company has elected to delay the adoption of management's methodology usedCECL in accordance with the CARES Act, which allows Companies to estimate a sufficient allowance for loan losses,delay adoption until the credit risk management function and adversely classified loan rating system.earlier of: (1) the date on which the national emergency concerning the pandemic declared under the National Emergencies Act terminates; or (2) December 31, 2020. The information that follows is presented under the incurred loss model.
The balances of loans as of September 30, 20172020 by segmentportfolio classification and evaluation method are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Loans individually evaluated for impairment | | Loans collectively evaluated for impairment | | Gross Loans |
Commercial real estate | | $ | 16,190 | | | $ | 1,474,459 | | | $ | 1,490,649 | |
Commercial and industrial | | 8,964 | | | 426,892 | | | 435,856 | |
Commercial construction | | 6,121 | | | 378,000 | | | 384,121 | |
SBA PPP loans | | 0 | | | 508,196 | | | 508,196 | |
Residential mortgages | | 604 | | | 254,180 | | | 254,784 | |
Home equity | | 399 | | | 84,379 | | | 84,778 | |
Consumer | | 31 | | | 9,039 | | | 9,070 | |
Total gross loans | | $ | 32,309 | | | $ | 3,135,145 | | | $ | 3,167,454 | |
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Loans individually evaluated for impairment | | Loans collectively evaluated for impairment | | Gross Loans |
Commercial real estate | | $ | 15,133 |
| | $ | 1,137,975 |
| | $ | 1,153,108 |
|
Commercial and industrial | | 12,098 |
| | 500,638 |
| | 512,736 |
|
Commercial construction | | 1,615 |
| | 243,838 |
| | 245,453 |
|
Residential mortgages | | 403 |
| | 193,972 |
| | 194,375 |
|
Home equity loans and lines | | 378 |
| | 88,666 |
| | 89,044 |
|
Consumer | | 36 |
| | 10,049 |
| | 10,085 |
|
Total gross loans | | $ | 29,663 |
| | $ | 2,175,138 |
| | $ | 2,204,801 |
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
The balances of loans as of December 31, 20162019 by segmentportfolio classification and evaluation method are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Loans individually evaluated for impairment | | Loans collectively evaluated for impairment | | Gross Loans |
Commercial real estate | | $ | 17,515 | | | $ | 1,376,664 | | | $ | 1,394,179 | |
Commercial and industrial | | 9,332 | | | 491,895 | | | 501,227 | |
Commercial construction | | 3,347 | | | 314,130 | | | 317,477 | |
Residential mortgages | | 1,229 | | | 246,144 | | | 247,373 | |
Home equity | | 411 | | | 97,841 | | | 98,252 | |
Consumer | | 44 | | | 10,010 | | | 10,054 | |
Total gross loans | | $ | 31,878 | | | $ | 2,536,684 | | | $ | 2,568,562 | |
|
| | | | | | | | | | | | |
(Dollars in thousands) | | Loans individually evaluated for impairment | | Loans collectively evaluated for impairment | | Gross Loans |
Commercial real estate | | $ | 14,261 |
| | $ | 1,023,821 |
| | $ | 1,038,082 |
|
Commercial and industrial | | 13,372 |
| | 477,427 |
| | 490,799 |
|
Commercial construction | | 3,364 |
| | 210,083 |
| | 213,447 |
|
Residential mortgages | | 289 |
| | 180,271 |
| | 180,560 |
|
Home equity loans and lines | | 509 |
| | 90,556 |
| | 91,065 |
|
Consumer | | 1 |
| | 10,844 |
| | 10,845 |
|
Total gross loans | | $ | 31,796 |
| | $ | 1,993,002 |
| | $ | 2,024,798 |
|
Credit quality indicators
Early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors internal credit quality indicators such as, among others, the risk classification of individualadversely classified loans, individual review of problem assets, past due and non-accrual loans, impaired and restructured loans, and the level of foreclosure activity, as well as trends in the general levels of these indicators.activity. These credit quality indicators are discussed below.
See also Note 1, "Subsequent Events," of this Form 10-Q, for additional information regarding non-accrual, impaired and troubled debt restructured loans.
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| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
Adversely classified loans
The Company's loan risk rating system classifies loans depending on risk of loss characteristics. Loans which are evaluated to be of weaker credit quality are placed on the "watch credit list" and reviewed on a more frequent basis by management. The classifications range from "substantially risk free" for the highest quality loans and loans that are secured by cash collateral, through a satisfactory range of "minimal," "moderate," "better than average," and "average" risk, to the regulatory problem-asset classifications of "criticized," for loans that may need additional monitoring, and the more severe adverse classifications of "substandard," "doubtful," and "loss" based on criteria established under banking regulations. Loans which are evaluated to be of weaker credit quality are placed on the "watch credit list" and reviewed on a more frequent basis by management.
Adversely classified loans may be accruing or in non-accrual status and may be additionally designated as impaired or restructured, or some combination thereof.
The following tables present the Company's credit risk profile for each class of loan in its portfolio by internally assigned adverse risk rating category as of the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 |
| | Adversely Classified | | Not Adversely | | |
(Dollars in thousands) | | Substandard | | Doubtful | | Loss | | Classified | | Gross Loans |
Commercial real estate | | $ | 14,270 |
| | $ | — |
| | $ | — |
| | $ | 1,138,838 |
| | $ | 1,153,108 |
|
Commercial and industrial | | 11,287 |
| | 51 |
| | 1 |
| | 501,397 |
| | 512,736 |
|
Commercial construction | | 1,615 |
| | — |
| | — |
| | 243,838 |
| | 245,453 |
|
Residential mortgages | | 1,366 |
| | — |
| | — |
| | 193,009 |
| | 194,375 |
|
Home equity loans and lines | | 527 |
| | — |
| | — |
| | 88,517 |
| | 89,044 |
|
Consumer | | 53 |
| | 11 |
| | — |
| | 10,021 |
| | 10,085 |
|
Total gross loans | | $ | 29,118 |
| | $ | 62 |
| | $ | 1 |
| | $ | 2,175,620 |
| | $ | 2,204,801 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Adversely Classified | | Not Adversely | | |
(Dollars in thousands) | | Substandard | | Doubtful | | Loss | | Classified | | Gross Loans |
Commercial real estate | | $ | 16,003 |
| | $ | — |
| | $ | — |
| | $ | 1,022,079 |
| | $ | 1,038,082 |
|
Commercial and industrial | | 12,770 |
| | 99 |
| | 2 |
| | 477,928 |
| | 490,799 |
|
Commercial construction | | 3,364 |
| | — |
| | — |
| | 210,083 |
| | 213,447 |
|
Residential mortgages | | 1,414 |
| | — |
| | — |
| | 179,146 |
| | 180,560 |
|
Home equity loans and lines | | 666 |
| | — |
| | — |
| | 90,399 |
| | 91,065 |
|
Consumer | | 30 |
| | — |
| | — |
| | 10,815 |
| | 10,845 |
|
Total gross loans | | $ | 34,247 |
| | $ | 99 |
| | $ | 2 |
| | $ | 1,990,450 |
| | $ | 2,024,798 |
|
Total adversely classified loans amounted to 1.32% of total loans at September 30, 2017, as compared to 1.70% at December 31, 2016.
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
The following tables present the Company's credit risk profile for each portfolio classification by internally assigned adverse risk rating category as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | Adversely Classified | | Not Adversely | | |
(Dollars in thousands) | | Substandard | | Doubtful | | Loss | | Classified | | Gross Loans |
Commercial real estate | | $ | 20,086 | | | $ | 0 | | | $ | 0 | | | $ | 1,470,563 | | | $ | 1,490,649 | |
Commercial and industrial | | 9,215 | | | 2,303 | | | 0 | | | 424,338 | | | 435,856 | |
Commercial construction | | 6,625 | | | 0 | | | 0 | | | 377,496 | | | 384,121 | |
SBA PPP loans | | 0 | | | 0 | | | 0 | | | 508,196 | | | 508,196 | |
Residential mortgages | | 481 | | | 0 | | | 0 | | | 254,303 | | | 254,784 | |
Home equity | | 481 | | | 0 | | | 0 | | | 84,297 | | | 84,778 | |
Consumer | | 54 | | | 0 | | | 0 | | | 9,016 | | | 9,070 | |
Total gross loans | | $ | 36,942 | | | $ | 2,303 | | | $ | 0 | | | $ | 3,128,209 | | | $ | 3,167,454 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | Adversely Classified | | Not Adversely | | |
(Dollars in thousands) | | Substandard | | Doubtful | | Loss | | Classified | | Gross Loans |
Commercial real estate | | $ | 16,664 | | | $ | 0 | | | $ | 0 | | | $ | 1,377,515 | | | $ | 1,394,179 | |
Commercial and industrial | | 10,900 | | | 2,370 | | | 0 | | | 487,957 | | | 501,227 | |
Commercial construction | | 4,836 | | | 0 | | | 0 | | | 312,641 | | | 317,477 | |
Residential mortgages | | 1,825 | | | 0 | | | 0 | | | 245,548 | | | 247,373 | |
Home equity | | 455 | | | 0 | | | 0 | | | 97,797 | | | 98,252 | |
Consumer | | 69 | | | 3 | | | 0 | | | 9,982 | | | 10,054 | |
Total gross loans | | $ | 34,749 | | | $ | 2,373 | | | $ | 0 | | | $ | 2,531,440 | | | $ | 2,568,562 | |
Total adversely classified loans amounted to 1.25% of total loans at September 30, 2020, compared to 1.45% at December 31, 2019.
Past due and non-accrual loans
The following tables present an age analysis of past due loans by portfolio classification as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at September 30, 2020 |
(Dollars in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | Past Due 90 days or more | | Total Past Due Loans | | Current Loans | | Gross Loans | | Non-accrual Loans |
Commercial real estate | | $ | 1,439 | | | $ | 375 | | | $ | 5,954 | | | $ | 7,768 | | | $ | 1,482,881 | | | $ | 1,490,649 | | | $ | 9,719 | |
Commercial and industrial | | 285 | | | 227 | | | 753 | | | 1,265 | | | 434,591 | | | 435,856 | | | 4,981 | |
Commercial construction | | 14,929 | | | 0 | | | 4,116 | | | 19,045 | | | 365,076 | | | 384,121 | | | 6,121 | |
SBA PPP loans | | 0 | | | 0 | | | 0 | | | 0 | | | 508,196 | | | 508,196 | | | 0 | |
Residential mortgages | | 325 | | | 297 | | | 0 | | | 622 | | | 254,162 | | | 254,784 | | | 409 | |
Home equity | | 49 | | | 0 | | | 269 | | | 318 | | | 84,460 | | | 84,778 | | | 399 | |
Consumer | | 3 | | | 0 | | | 0 | | | 3 | | | 9,067 | | | 9,070 | | | 12 | |
Total gross loans | | $ | 17,030 | | | $ | 899 | | | $ | 11,092 | | | $ | 29,021 | | | $ | 3,138,433 | | | $ | 3,167,454 | | | $ | 21,641 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at September 30, 2017 |
(Dollars in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | Past Due 90 days or more | | Total Past Due Loans | | Current Loans | | Gross Loans | | Non-accrual Loans |
Commercial real estate | | $ | 2,005 |
| | $ | 638 |
| | $ | 3,641 |
| | $ | 6,284 |
| | $ | 1,146,824 |
| | $ | 1,153,108 |
| | $ | 8,058 |
|
Commercial and industrial | | 529 |
| | 81 |
| | 1,095 |
| | 1,705 |
| | 511,031 |
| | 512,736 |
| | 3,428 |
|
Commercial construction | | 3,133 |
| | — |
| | — |
| | 3,133 |
| | 242,320 |
| | 245,453 |
| | 197 |
|
Residential mortgages | | 1,630 |
| | 95 |
| | 89 |
| | 1,814 |
| | 192,561 |
| | 194,375 |
| | 267 |
|
Home equity loans and lines | | 39 |
| | — |
| | 194 |
| | 233 |
| | 88,811 |
| | 89,044 |
| | 477 |
|
Consumer | | 57 |
| | 27 |
| | 31 |
| | 115 |
| | 9,970 |
| | 10,085 |
| | 62 |
|
Total gross loans | | $ | 7,393 |
| | $ | 841 |
| | $ | 5,050 |
| | $ | 13,284 |
| | $ | 2,191,517 |
| | $ | 2,204,801 |
| | $ | 12,489 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2016 |
(Dollars in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | Past Due 90 days or more | | Total Past Due Loans | | Current Loans | | Gross Loans | | Non-accrual Loans |
Commercial real estate | | $ | 5,993 |
| | $ | 923 |
| | $ | 1,399 |
| | $ | 8,315 |
| | $ | 1,029,767 |
| | $ | 1,038,082 |
| | $ | 4,876 |
|
Commercial and industrial | | 267 |
| | 4 |
| | 1,544 |
| | 1,815 |
| | 488,984 |
| | 490,799 |
| | 3,174 |
|
Commercial construction | | — |
| | — |
| | — |
| | — |
| | 213,447 |
| | 213,447 |
| | 519 |
|
Residential mortgages | | 648 |
| | — |
| | 99 |
| | 747 |
| | 179,813 |
| | 180,560 |
| | 289 |
|
Home equity loans and lines | | 270 |
| | — |
| | 269 |
| | 539 |
| | 90,526 |
| | 91,065 |
| | 616 |
|
Consumer | | 94 |
| | 13 |
| | 11 |
| | 118 |
| | 10,727 |
| | 10,845 |
| | 11 |
|
Total gross loans | | $ | 7,272 |
| | $ | 940 |
| | $ | 3,322 |
| | $ | 11,534 |
| | $ | 2,013,264 |
| | $ | 2,024,798 |
| | $ | 9,485 |
|
| | | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2019 |
(Dollars in thousands) | | 30-59 Days Past Due | | 60-89 Days Past Due | | Past Due 90 days or more | | Total Past Due Loans | | Current Loans | | Gross Loans | | Non-accrual Loans |
Commercial real estate | | $ | 1,469 | | | $ | 3,914 | | | $ | 4,158 | | | $ | 9,541 | | | $ | 1,384,638 | | | $ | 1,394,179 | | | $ | 8,280 | |
Commercial and industrial | | 576 | | | 1,034 | | | 265 | | | 1,875 | | | 499,352 | | | 501,227 | | | 3,285 | |
Commercial construction | | 576 | | | 3,325 | | | 1,735 | | | 5,636 | | | 311,841 | | | 317,477 | | | 1,735 | |
Residential mortgages | | 700 | | | 283 | | | 623 | | | 1,606 | | | 245,767 | | | 247,373 | | | 411 | |
Home equity | | 645 | | | 0 | | | 169 | | | 814 | | | 97,438 | | | 98,252 | | | 1,040 | |
Consumer | | 12 | | | 0 | | | 6 | | | 18 | | | 10,036 | | | 10,054 | | | 20 | |
Total gross loans | | $ | 3,978 | | | $ | 8,556 | | | $ | 6,956 | | | $ | 19,490 | | | $ | 2,549,072 | | | $ | 2,568,562 | | | $ | 14,771 | |
At September 30, 20172020 and December 31, 2016,2019, all loans past due 90 days or more were carried as non-accrual, in addition to those loans that were less than 90 days past due where reasonable doubt existed as to the full and timely collection of interest or principal that have also been designated as non-accrual, despite their payment due status shown in the tables above.
Non-accrual loans that were not adversely classified amounted to $6$184 thousand at September 30, 20172020 and $220$84 thousand at December 31, 2016.2019. These balances primarily represented the guaranteed portions of non-performing SBA loans. The majority of the non-accrual loan balances were also carried as impaired loans during the periods noted and are discussed further below.
The ratio of non-accrual loans to total loans amounted to 0.57%0.69% at September 30, 2017,2020 and 0.47%0.58% and at December 31, 2016.2019.
At September 30, 2017,2020, additional funding commitments for non-accrual loans was not material.were $1.2 million.
At September 30, 2020, short term payment deferrals related to the COVID-19 pandemic were active on 178 loans amounting to $104.1 million, or 3% of the Company's loan portfolio; these loans remain on accrual status.
Impaired loans
Impaired loans are individually significant loans for which management considers it probable that not all amounts due (principal and interest) will be collected in accordance with the original contractual terms will be collected. Impaired loans are individually evaluated for credit loss and a specific allowance reserve is assigned for the amount of the estimated probable credit loss. The majority of impaired loans are included within the non-accrual balances; however, not every loan on non-accrual status has been designated as impaired.terms. Impaired loans include loans that have been modified in a troubled debt restructuring ("TDR"),TDR, see "Trouble debt restructurings""Troubled Debt Restructurings" below. Impaired loans are individually evaluated and exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR.
The carrying value of impaired loans amounted to $32.3 million and $31.9 million at September 30, 2020 and December 31, 2019, respectively. Total accruing impaired loans amounted to $10.7 million and $17.1 million at September 30, 2020 and December 31, 2019, respectively, while non-accrual impaired loans amounted to $21.6 million and $14.8 million as of September 30, 2020 and December 31, 2019, respectively.
|
| | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
The carrying value of impaired loans amounted to $29.7 million and $31.8 million at September 30, 2017 and December 31, 2016, respectively. Total accruing impaired loans amounted to $17.3 million and $22.4 million at September 30, 2017 and December 31, 2016, respectively, while non-accrual impaired loans amounted to $12.4 million and $9.4 million as of September 30, 2017 and December 31, 2016, respectively.
The following tables set forth the recorded investment in impaired loans and the related specific allowance allocated by portfolio classification as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at September 30, 2020 |
(Dollars in thousands) | | Unpaid contractual principal balance | | Total recorded investment in impaired loans | | Recorded investment with no allowance | | Recorded investment with allowance | | Related specific allowance |
Commercial real estate | | $ | 17,348 | | | $ | 16,190 | | | $ | 15,908 | | | $ | 282 | | | $ | 18 | |
Commercial and industrial | | 11,055 | | | 8,964 | | | 5,054 | | | 3,910 | | | 2,890 | |
Commercial construction | | 6,249 | | | 6,121 | | | 3,510 | | | 2,611 | | | 1,651 | |
SBA PPP loans | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Residential mortgages | | 704 | | | 604 | | | 604 | | | 0 | | | 0 | |
Home equity | | 560 | | | 399 | | | 399 | | | 0 | | | 0 | |
Consumer | | 32 | | | 31 | | | 0 | | | 31 | | | 31 | |
Total | | $ | 35,948 | | | $ | 32,309 | | | $ | 25,475 | | | $ | 6,834 | | | $ | 4,590 | |
| | | | Balance at September 30, 2017 | | Balance at December 31, 2019 |
(Dollars in thousands) | | Unpaid contractual principal balance | | Total recorded investment in impaired loans | | Recorded investment with no allowance | | Recorded investment with allowance | | Related specific allowance | (Dollars in thousands) | | Unpaid contractual principal balance | | Total recorded investment in impaired loans | | Recorded investment with no allowance | | Recorded investment with allowance | | Related specific allowance |
Commercial real estate | | $ | 16,739 |
| | $ | 15,133 |
| | $ | 12,876 |
| | $ | 2,257 |
| | $ | 386 |
| Commercial real estate | | $ | 18,537 | | | $ | 17,515 | | | $ | 17,129 | | | $ | 386 | | | $ | 31 | |
Commercial and industrial | | 12,591 |
| | 12,098 |
| | 8,406 |
| | 3,692 |
| | 1,778 |
| Commercial and industrial | | 11,455 | | | 9,332 | | | 7,405 | | | 1,927 | | | 974 | |
Commercial construction | | 1,665 |
| | 1,615 |
| | 1,615 |
| | — |
| | — |
| Commercial construction | | 3,359 | | | 3,347 | | | 3,347 | | | 0 | | | 0 | |
Residential mortgages | | 515 |
| | 403 |
| | 403 |
| | — |
| | — |
| Residential mortgages | | 1,331 | | | 1,229 | | | 1,229 | | | 0 | | | 0 | |
Home equity loans and lines | | 545 |
| | 378 |
| | 352 |
| | 26 |
| | 26 |
| |
Home equity | | Home equity | | 607 | | | 411 | | | 411 | | | 0 | | | 0 | |
Consumer | | 37 |
| | 36 |
| | — |
| | 36 |
| | 36 |
| Consumer | | 44 | | | 44 | | | 0 | | | 44 | | | 44 | |
Total | | $ | 32,092 |
| | $ | 29,663 |
| | $ | 23,652 |
| | $ | 6,011 |
| | $ | 2,226 |
| Total | | $ | 35,333 | | | $ | 31,878 | | | $ | 29,521 | | | $ | 2,357 | | | $ | 1,049 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2016 |
(Dollars in thousands) | | Unpaid contractual principal balance | | Total recorded investment in impaired loans | | Recorded investment with no allowance | | Recorded investment with allowance | | Related specific allowance |
Commercial real estate | | $ | 16,010 |
| | $ | 14,261 |
| | $ | 12,444 |
| | $ | 1,817 |
| | $ | 370 |
|
Commercial and industrial | | 14,291 |
| | 13,372 |
| | 9,366 |
| | 4,006 |
| | 2,222 |
|
Commercial construction | | 3,408 |
| | 3,364 |
| | 3,051 |
| | 313 |
| | 28 |
|
Residential mortgages | | 388 |
| | 289 |
| | 289 |
| | — |
| | — |
|
Home equity loans and lines | | 665 |
| | 509 |
| | 509 |
| | — |
| | — |
|
Consumer | | 2 |
| | 1 |
| | — |
| | 1 |
| | 1 |
|
Total | | $ | 34,764 |
| | $ | 31,796 |
| | $ | 25,659 |
| | $ | 6,137 |
| | $ | 2,621 |
|
The following table presents the average recorded investment in impaired loans by portfolio classification and the related interest recognized during the three months indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | | Three months ended September 30, 2019 |
(Dollars in thousands) | | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized |
Commercial real estate | | $ | 16,002 | | | $ | 66 | | | $ | 17,828 | | | $ | 140 | |
Commercial and industrial | | 9,208 | | | 50 | | | 10,886 | | | 85 | |
Commercial construction | | 7,180 | | | 17 | | | 1,732 | | | 26 | |
SBA PPP loans | | 0 | | | 0 | | | 0 | | | 0 | |
Residential mortgages | | 700 | | | 2 | | | 1,034 | | | (2) | |
Home equity | | 434 | | | 0 | | | 427 | | | 0 | |
Consumer | | 36 | | | 0 | | | 29 | | | 1 | |
Total | | $ | 33,560 | | | $ | 135 | | | $ | 31,936 | | | $ | 250 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 |
(Dollars in thousands) | | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income (loss) recognized |
Commercial real estate | | $ | 15,401 |
| | $ | 92 |
| | $ | 14,828 |
| | $ | 107 |
|
Commercial and industrial | | 12,264 |
| | 94 |
| | 9,889 |
| | 69 |
|
Commercial construction | | 1,617 |
| | 21 |
| | 3,113 |
| | 39 |
|
Residential mortgages | | 315 |
| | — |
| | 300 |
| | — |
|
Home equity loans and lines | | 451 |
| | 1 |
| | 368 |
| | (2 | ) |
Consumer | | 27 |
| | — |
| | 13 |
| | 1 |
|
Total | | $ | 30,075 |
| | $ | 208 |
| | $ | 28,511 |
| | $ | 214 |
|
|
| | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
The following table presents the average recorded investment in impaired loans by portfolio classification and the related interest recognized during the periodsnine months indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | | Nine months ended September 30, 2019 |
(Dollars in thousands) | | Average recorded investment | | Interest income recognized | | Average recorded investment | | Interest income recognized |
Commercial real estate | | $ | 15,188 | | | $ | 208 | | | $ | 16,685 | | | $ | 382 | |
Commercial and industrial | | 8,560 | | | 118 | | | 11,426 | | | 294 | |
Commercial construction | | 6,537 | | | 22 | | | 1,735 | | | 78 | |
SBA PPP loans | | 0 | | | 0 | | | 0 | | | 0 | |
Residential mortgages | | 939 | | | 6 | | | 954 | | | 16 | |
Home equity | | 418 | | | (1) | | | 457 | | | 0 | |
Consumer | | 39 | | | 1 | | | 24 | | | 0 | |
Total | | $ | 31,681 | | | $ | 354 | | | $ | 31,281 | | | $ | 770 | |
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended September 30, 2017 | | Nine Months Ended September 30, 2016 |
(Dollars in thousands) | | Average recorded investment | | Interest income (loss) recognized | | Average recorded investment | | Interest income (loss) recognized |
Commercial real estate | | $ | 14,394 |
| | $ | 271 |
| | $ | 12,399 |
| | $ | 214 |
|
Commercial and industrial | | 12,503 |
| | 275 |
| | 8,801 |
| | 134 |
|
Commercial construction | | 1,884 |
| | 70 |
| | 3,059 |
| | 113 |
|
Residential mortgages | | 293 |
| | — |
| | 304 |
| | — |
|
Home equity loans and lines | | 518 |
| | (1 | ) | | 307 |
| | (4 | ) |
Consumer | | 18 |
| | — |
| | 18 |
| | 1 |
|
Total | | $ | 29,610 |
| | $ | 615 |
| | $ | 24,888 |
| | $ | 458 |
|
At September 30, 2017,2020, additional funding commitments for impaired loans totaled $414 thousand. The Company's obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion.were $1.2 million.
Troubled debt restructurings
Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the BankCompany grants the borrower a concession on the terms that would not otherwise be considered. Typically, such concessions may consist of one or a combination of the following: a reduction in interest rate to a below market rate, taking into account the credit quality of the note,note; extension of additional credit based on receipt of adequate collateral,collateral; or a deferment or reduction of payments (principal or interest) which materially alters the Bank'sCompany's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan's origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. All TDR loans are included in the impaired loan category and, as such, these loans are individually reviewed and evaluated, and a specific reserve is assigned for the amount of the estimated probable credit loss.
Total TDR loans, included in the impaired loan balances above, as of September 30, 20172020 and December 31, 2016,2019, were $23.6$18.0 million and $27.0$21.1 million,, respectively. TDR loans on accrual status amounted to $17.3$10.7 million and $22.4$17.1 million at September 30, 20172020 and December 31, 2016,2019, respectively. TDR loans included in non-performing loans amounted to $6.3$7.3 million and $4.6 million at September 30, 20172020 and $4.0 million at December 31, 2016, respectively. 2019.
The Company continues to work with customers particularly commercial relationships, and enters into loan modifications (which may or may not be TDRs) to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the individual financial circumstances and future prospects of the borrower.
At September 30, 2017, additional funding commitments for TDR loans totaled $390 thousand. The Company's obligation to fulfill the additional funding commitments on TDR loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion.
|
| | |
| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the periods indicated.
|
| | | | | | | | | | | | | | |
| | Nine months ended |
| | September 30, 2017 | | September 30, 2016 |
(Dollars in thousands) | | Number of restructurings | | Amount | | Number of restructurings | | Amount |
Loan advances with adequate collateral | | 1 |
| | $ | 357 |
| | 5 |
| | $ | 7,760 |
|
Extended maturity date | | 1 |
| | 984 |
| | — |
| | — |
|
Temporary payment reduction and payment re-amortization of remaining principal over extended term | | 7 |
| | 831 |
| | 3 |
| | 343 |
|
Temporary interest only payment plan | | 3 |
| | 179 |
| | 7 |
| | 1,150 |
|
Total | | 12 |
| | $ | 2,351 |
| | 15 |
| | $ | 9,253 |
|
Amount of specific reserves included in the allowance for loan losses associated with TDRs listed above | | | | $ | 83 |
| | | | $ | 204 |
|
Loans modified as TDRs during the threenine month periods ended September 30, 2017 and September 30, 2016 are detailed below. indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended |
| | September 30, 2020 | | September 30, 2019 |
(Dollars in thousands) | | Number of restructurings | | Amount | | Number of restructurings | | Amount |
| | | | | | | | |
Extended maturity date | | 2 | | | $ | 1,145 | | | 0 | | | $ | 0 | |
Temporary payment reduction and payment re-amortization of remaining principal over extended term | | 6 | | | 1,599 | | | 8 | | | 49 | |
Temporary interest only payment plan | | 0 | | | 0 | | | 3 | | | 386 | |
Forbearance of post default rights | | 4 | | | 2,070 | | | 0 | | | 0 | |
Other payment concessions | | 0 | | | 0 | | | 4 | | | 1,773 | |
Total | | 12 | | | $ | 4,814 | | | 15 | | | $ | 2,208 | |
Amount of specific reserves included in the allowance for loan losses associated with TDRs listed above | | | | $ | 1,240 | | | | | $ | 72 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended |
| | September 30, 2017 | | September 30, 2016 |
(Dollars in thousands) | | Number of restructurings | | Pre-modification outstanding recorded investment | | Post-modification outstanding recorded investment | | Number of restructurings | | Pre-modification outstanding recorded investment | | Post-modification outstanding recorded investment |
Commercial real estate | | 2 |
| | $ | 577 |
| | $ | 571 |
| | 3 |
| | $ | 532 |
| | $ | 2,026 |
|
Commercial and industrial | | — |
| | — |
| | — |
| | 2 |
| | 224 |
| | 200 |
|
Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential mortgages | | 1 |
| | 136 |
| | 136 |
| | — |
| | — |
| | — |
|
Home equity loans and lines | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer | | 1 |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
|
Total | | 4 |
| | $ | 714 |
| | $ | 708 |
| | 5 |
| | $ | 756 |
| | $ | 2,226 |
|
23
Payment defaults, during the three month periods ended September 30, 2017 and September 30, 2016 on loans modified as TDRs within the preceding twelve months are detailed below.
|
| | | | | | | | | | | | | | |
| | Three months ended |
| | September 30, 2017 | | September 30, 2016 |
(Dollars in thousands) | | Number of TDRs that defaulted | | Post- modification outstanding recorded investment | | Number of TDRs that defaulted | | Post- modification outstanding recorded investment |
Commercial real estate | | — |
| | $ | — |
| | 1 |
| | $ | 148 |
|
Commercial and industrial | | — |
| | — |
| | — |
| | — |
|
Commercial construction | | — |
| | — |
| | 1 |
| | 1,188 |
|
Residential mortgages | | — |
| | — |
| | — |
| | — |
|
Home equity loans and lines | | — |
| | — |
| | — |
| | — |
|
Consumer | | — |
| | — |
| | — |
| | — |
|
Total | | — |
| | $ | — |
| | 2 |
| | $ | 1,336 |
|
|
| | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
LoansThe following table presents number and balance of loans modified as TDRs, by portfolio classification, during the three months indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended |
| | September 30, 2020 | | September 30, 2019 |
(Dollars in thousands) | | Number of restructurings | | Pre-modification outstanding recorded investment | | Post-modification outstanding recorded investment | | Number of restructurings | | Pre-modification outstanding recorded investment | | Post-modification outstanding recorded investment |
Commercial real estate | | 1 | | | $ | 217 | | | $ | 215 | | | 0 | | | $ | 0 | | | $ | 0 | |
Commercial and industrial | | 3 | | | 410 | | | 413 | | | 2 | | | 22 | | | 22 | |
Commercial construction | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
SBA PPP loans | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Residential mortgages | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Home equity loans and lines | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Consumer | | 0 | | | 0 | | | 0 | | | 1 | | | 7 | | | 7 | |
Total | | 4 | | | $ | 627 | | | $ | 628 | | | 3 | | | $ | 29 | | | $ | 29 | |
At September 30, 2020, additional funding commitments for TDR loans were not material.
The following table presents loans modified as TDRs within the preceding twelve months, which have defaulted on the modified terms during the during the three months indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended |
| | | September 30, 2020 | | September 30, 2019 |
(Dollars in thousands) | | | Number of TDRs that defaulted | | Post- modification outstanding recorded investment | | Number of TDRs that defaulted | | Post- modification outstanding recorded investment |
Commercial real estate | | | 0 | | | $ | 0 | | | 1 | | | $ | 1,400 | |
Commercial and industrial | | | 2 | | | 327 | | | 2 | | | 62 | |
Commercial construction | | | 2 | | | 1,510 | | | 0 | | | 0 | |
SBA PPP loans | | | 0 | | | 0 | | | 0 | | | 0 | |
Residential mortgages | | | 0 | | | 0 | | | 1 | | | 311 | |
Home equity loans and lines | | | 0 | | | 0 | | | 0 | | | 0 | |
Consumer | | | 0 | | | 0 | | | 1 | | | 5 | |
Total | | | 4 | | | $ | 1,837 | | | 5 | | | $ | 1,778 | |
| | | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
The following table presents number and balance of loans modified as TDRs, by portfolio classification, during the nine month periods ended September 30, 2017 and September 30, 2016 are detailed below.months indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended |
| | September 30, 2020 | | September 30, 2019 |
(Dollars in thousands) | | Number of restructurings | | Pre-modification outstanding recorded investment | | Post-modification outstanding recorded investment | | Number of restructurings | | Pre-modification outstanding recorded investment | | Post-modification outstanding recorded investment |
Commercial real estate | | 1 | | | $ | 217 | | | $ | 215 | | | 3 | | | $ | 2,047 | | | $ | 1,623 | |
Commercial and industrial | | 4 | | | 884 | | | 672 | | | 9 | | | 428 | | | 261 | |
Commercial construction | | 6 | | | 4,754 | | | 3,927 | | | 0 | | | 0 | | | 0 | |
SBA PPP loans | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Residential mortgages | | 0 | | | 0 | | | 0 | | | 1 | | | 315 | | | 311 | |
Home equity | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Consumer | | 1 | | | 1 | | | 0 | | | 2 | | | 13 | | | 13 | |
Total | | 12 | | | $ | 5,856 | | | $ | 4,814 | | | 15 | | | $ | 2,803 | | | $ | 2,208 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended |
| | September 30, 2017 | | September 30, 2016 |
(Dollars in thousands) | | Number of restructurings | | Pre-modification outstanding recorded investment | | Post-modification outstanding recorded investment | | Number of restructurings | | Pre-modification outstanding recorded investment | | Post-modification outstanding recorded investment |
Commercial real estate | | 3 |
| | $ | 696 |
| | $ | 689 |
| | 7 |
| | $ | 5,624 |
| | $ | 7,016 |
|
Commercial and industrial | | 7 |
| | 1,446 |
| | 1,525 |
| | 8 |
| | 2,282 |
| | 2,237 |
|
Commercial construction | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Residential mortgages | | 1 |
| | 136 |
| | 136 |
| | — |
| | — |
| | — |
|
Home equity loans and lines | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Consumer | | 1 |
| | 1 |
| | 1 |
| | — |
| | — |
| | — |
|
Total | | 12 |
| | $ | 2,279 |
| | $ | 2,351 |
| | 15 |
| | $ | 7,906 |
| | $ | 9,253 |
|
There were no0 subsequent charge-offs associated with the new TDRs noted in the table above during the nine months ended September 30, 2017,2020 or 2016.
Payment defaults, during the nine month periods ended September 30, 2017 and September 30, 2016 on2019.
The following table presents loans modified as TDRs within the preceding twelve months, are detailed below.
|
| | | | | | | | | | | | | | |
| | Nine months ended |
| | September 30, 2017 | | September 30, 2016 |
(Dollars in thousands) | | Number of TDRs that defaulted | | Post- modification outstanding recorded investment | | Number of TDRs that defaulted | | Post- modification outstanding recorded investment |
Commercial real estate | | 1 |
| | $ | 585 |
| | 1 |
| | $ | 148 |
|
Commercial and industrial | | 3 |
| | 267 |
| | 2 |
| | 389 |
|
Commercial construction | | — |
| | — |
| | 1 |
| | 1,188 |
|
Residential mortgages | | — |
| | — |
| | — |
| | — |
|
Home equity loans and lines | | — |
| | — |
| | — |
| | — |
|
Consumer | | — |
| | — |
| | — |
| | — |
|
Total | | 4 |
| | $ | 852 |
| | 4 |
| | $ | 1,725 |
|
Other real estate owned ("OREO")
The Company carried no OREO at September 30, 2017, December 31, 2016 or September 30, 2016. There were no additions, sales or write downswhich have defaulted on OREOthe modified terms during the nine months ended September 30, 2017 or 2016.indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended |
| | September 30, 2020 | | September 30, 2019 |
(Dollars in thousands) | | Number of TDRs that defaulted | | Post- modification outstanding recorded investment | | Number of TDRs that defaulted | | Post- modification outstanding recorded investment |
Commercial real estate | | 0 | | | $ | 0 | | | 1 | | | $ | 1,400 | |
Commercial and industrial | | 4 | | | 391 | | | 4 | | | 233 | |
Commercial construction | | 4 | | | 2,655 | | | 0 | | | 0 | |
SBA PPP loans | | 0 | | | 0 | | | 0 | | | 0 | |
Residential mortgages | | 0 | | | 0 | | | 1 | | | 311 | |
Home equity | | 0 | | | 0 | | | 0 | | | 0 | |
Consumer | | 1 | | | 0 | | | 1 | | | 5 | |
Total | | 9 | | | $ | 3,046 | | | 7 | | | $ | 1,949 | |
At September 30, 2017,
See "Financial Condition" in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the Company had consumer mortgage loans secured by residential real estate propertiesheadings "Credit Risk" and "Allowance for which formal foreclosure proceedings wereLoan Losses" in process according to local requirements ofthis Form 10-Q for additional information about changes in the applicable jurisdictions with carrying amounts totaling $101 thousand compared with $200 thousand atCompany's credit quality indicators since December 31, 2016.2019.
Allowance for loan loss activity
The allowance for loan losses is an estimate of probable credit losses inherent in the loan portfolio as of the specified balance sheet dates. On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated probable losses from specifically known and other credit risks associated with the portfolio. The allowance for loan losses is established through a provision for loan losses, a direct charge to earnings. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance.
|
| | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
The allowance for loan losses amounted to $33.2$43.8 million at September 30, 2017,2020, compared to $31.3$33.6 million at December 31, 2016,2019, and $31.6$33.9 million at September 30, 2016. For the nine months ended September 30, 2017 and September 30, 2016, the provision for loan losses amounted to $1.6 million and $2.5 million, respectively. The decrease in the provision for the nine months ended September 30, 2017 was due primarily to generally improving credit quality metrics and underlying collateral values, partially offset by the higher level of loan growth during the 2017 period, as compared to the 2016 period.
2019. The allowance for loan losses to total loans ratio was 1.51%1.39% at September 30, 2017, 1.55%2020, 1.31% at December 31, 20162019, and 1.59%1.37% at September 30, 2016.2019. Based on management's judgment as to the existing credit risks inherent in the loan portfolio, as discussed above under the heading "Credit Quality Indicators," management believes that the Company's allowance for loan losses is adequate to absorb probable losses from specifically known and other probable credit risks associated with the portfolio as of September 30, 2017.2020.
For the nine months ended September 30, 2020, the provision for loan losses amounted to $10.4 million, compared to $1.6 million for the nine months ended September 30, 2019. The provision for the nine months ended September 30, 2020 consisted of $6.3 million in general reserve factor increases related primarily to economic weakness caused by the pandemic and its impact on credit quality in the loan portfolio, $3.1 million related to classified and impaired loans and $1.0 million related to loan growth and other factors.
Changes in the allowance for loan losses by portfolio segmentclassification for the three months ended September 30, 20172020 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Cmml Real Estate | | Cmml and Industrial | | Cmml Constr | | Resid. Mortgage | | Home Equity | | Consumer | | Total |
Beginning Balance at June 30, 2020 | | $ | 22,477 | | | $ | 9,763 | | | $ | 7,498 | | | $ | 1,728 | | | $ | 613 | | | $ | 245 | | | $ | 42,324 | |
Provision | | 1,159 | | | 489 | | | 73 | | | (59) | | | (67) | | | (20) | | | 1,575 | |
Recoveries | | 0 | | | 33 | | | 0 | | | 0 | | | 4 | | | 9 | | | 46 | |
Less: Charge offs | | 0 | | | 103 | | | 0 | | | 0 | | | 0 | | | 7 | | | 110 | |
Ending Balance at September 30, 2020 | | $ | 23,636 | | | $ | 10,182 | | | $ | 7,571 | | | $ | 1,669 | | | $ | 550 | | | $ | 227 | | | $ | 43,835 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Cmml Real Estate | | Cmml and Industrial | | Cmml Constr | | Resid. Mortgage | | Home Equity | | Consumer | | Total |
Beginning Balance at June 30, 2017 | | $ | 15,645 |
| | $ | 10,987 |
| | $ | 3,484 |
| | $ | 989 |
| | $ | 622 |
| | $ | 231 |
| | $ | 31,958 |
|
Provision | | 475 |
| | 216 |
| | 432 |
| | 32 |
| | 42 |
| | 28 |
| | 1,225 |
|
Recoveries | | 61 |
| | 48 |
| | — |
| | — |
| | 1 |
| | 1 |
| | 111 |
|
Less: Charge offs | | — |
| | 104 |
| | — |
| | — |
| | — |
| | 6 |
| | 110 |
|
Ending Balance at September 30, 2017 | | $ | 16,181 |
| | $ | 11,147 |
| | $ | 3,916 |
| | $ | 1,021 |
| | $ | 665 |
| | $ | 254 |
| | $ | 33,184 |
|
Changes in the allowance for loan losses by portfolio segment for the nine months ended September 30, 2017 are presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Cmml Real Estate | | Cmml and Industrial | | Cmml Constr | | Resid. Mortgage | | Home Equity | | Consumer | | Total |
Beginning Balance at December 31, 2016 | | $ | 14,902 |
| | $ | 11,204 |
| | $ | 3,406 |
| | $ | 960 |
| | $ | 634 |
| | $ | 236 |
| | $ | 31,342 |
|
Provision | | 1,086 |
| | (127 | ) | | 510 |
| | 61 |
| | 28 |
| | 72 |
| | 1,630 |
|
Recoveries | | 193 |
| | 391 |
| | — |
| | — |
| | 3 |
| | 6 |
| | 593 |
|
Less: Charge offs | | — |
| | 321 |
| | — |
| | — |
| | — |
| | 60 |
| | 381 |
|
Ending Balance at September 30, 2017 | | $ | 16,181 |
| | $ | 11,147 |
| | $ | 3,916 |
| | $ | 1,021 |
| | $ | 665 |
| | $ | 254 |
| | $ | 33,184 |
|
Ending allowance balance: | | | | | | | | | | | | | | |
Allocated to loans individually evaluated for impairment | | $ | 386 |
| | $ | 1,778 |
| | $ | — |
| | $ | — |
| | $ | 26 |
| | $ | 36 |
| | $ | 2,226 |
|
Allocated to loans collectively evaluated for impairment | | $ | 15,795 |
| | $ | 9,369 |
| | $ | 3,916 |
| | $ | 1,021 |
| | $ | 639 |
| | $ | 218 |
| | $ | 30,958 |
|
Changes in the allowance for loan losses by portfolio segmentclassification for the nine months ended September 30, 2020 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Cmml Real Estate | | Cmml and Industrial | | Cmml Constr | | Resid. Mortgage | | Home Equity | | Consumer | | Total |
Beginning Balance at December 31, 2019 | | $ | 18,338 | | | $ | 9,129 | | | $ | 4,149 | | | $ | 1,195 | | | $ | 536 | | | $ | 267 | | | $ | 33,614 | |
Provision | | 5,298 | | | 1,248 | | | 3,422 | | | 474 | | | 4 | | | (49) | | | 10,397 | |
Recoveries | | 0 | | | 207 | | | 0 | | | 0 | | | 10 | | | 34 | | | 251 | |
Less: Charge offs | | 0 | | | 402 | | | 0 | | | 0 | | | 0 | | | 25 | | | 427 | |
Ending Balance at September 30, 2020 | | $ | 23,636 | | | $ | 10,182 | | | $ | 7,571 | | | $ | 1,669 | | | $ | 550 | | | $ | 227 | | | $ | 43,835 | |
Ending allowance balance: | | | | | | | | | | | | | | |
Allocated to loans individually evaluated for impairment | | $ | 18 | | | $ | 2,890 | | | $ | 1,651 | | | $ | 0 | | | $ | 0 | | | $ | 31 | | | $ | 4,590 | |
Allocated to loans collectively evaluated for impairment | | $ | 23,618 | | | $ | 7,292 | | | $ | 5,920 | | | $ | 1,669 | | | $ | 550 | | | $ | 196 | | | $ | 39,245 | |
Changes in the allowance for loan losses by portfolio classification for the three months ended September 30, 20162019 are presented below:
| | (Dollars in thousands) | | Cmml Real Estate | | Cmml and Industrial | | Cmml Constr | | Resid. Mortgage | | Home Equity | | Consumer | | Total | (Dollars in thousands) | | Cmml Real Estate | | Cmml and Industrial | | Cmml Constr | | Resid. Mortgage | | Home Equity | | Consumer | | Total |
Beginning Balance at June 30, 2016 | | $ | 14,514 |
| | $ | 9,913 |
| | $ | 4,056 |
| | $ | 1,085 |
| | $ | 552 |
| | $ | 225 |
| | $ | 30,345 |
| |
Beginning Balance at June 30, 2019 | | Beginning Balance at June 30, 2019 | | $ | 17,828 | | | $ | 10,731 | | | $ | 3,717 | | | $ | 1,187 | | | $ | 629 | | | $ | 259 | | | $ | 34,351 | |
Provision | | 581 |
| | 761 |
| | 22 |
| | 17 |
| | 4 |
| | 1 |
| | 1,386 |
| Provision | | 174 | | | 357 | | | 491 | | | (6) | | | (3) | | | 12 | | | 1,025 | |
Recoveries | | — |
| | 28 |
| | — |
| | — |
| | — |
| | 1 |
| | 29 |
| Recoveries | | 0 | | | 114 | | | 0 | | | 0 | | | 2 | | | 12 | | | 128 | |
Less: Charge offs | | — |
| | 151 |
| | — |
| | — |
| | — |
| | 20 |
| | 171 |
| Less: Charge offs | | 0 | | | 1,533 | | | 0 | | | 0 | | | 0 | | | 36 | | | 1,569 | |
Ending Balance at September 30, 2016 | | $ | 15,095 |
| | $ | 10,551 |
| | $ | 4,078 |
| | $ | 1,102 |
| | $ | 556 |
| | $ | 207 |
| | $ | 31,589 |
| |
Ending Balance at September 30, 2019 | | Ending Balance at September 30, 2019 | | $ | 18,002 | | | $ | 9,669 | | | $ | 4,208 | | | $ | 1,181 | | | $ | 628 | | | $ | 247 | | | $ | 33,935 | |
|
| | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
Changes in the allowance for loan losses by portfolio segmentclassification for the nine months ended September 30, 20162019 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Cmml Real Estate | | Cmml and Industrial | | Cmml Constr | | Resid. Mortgage | | Home Equity | | Consumer | | Total |
Beginning Balance at December 31, 2018 | | $ | 18,014 | | | $ | 10,493 | | | $ | 3,307 | | | $ | 1,160 | | | $ | 629 | | | $ | 246 | | | $ | 33,849 | |
Provision | | (12) | | | 598 | | | 901 | | | 21 | | | (8) | | | 80 | | | 1,580 | |
Recoveries | | 0 | | | 570 | | | 0 | | | 0 | | | 7 | | | 25 | | | 602 | |
Less: Charge offs | | 0 | | | 1,992 | | | 0 | | | 0 | | | 0 | | | 104 | | | 2,096 | |
Ending Balance at September 30, 2019 | | $ | 18,002 | | | $ | 9,669 | | | $ | 4,208 | | | $ | 1,181 | | | $ | 628 | | | $ | 247 | | | $ | 33,935 | |
Ending allowance balance: | | | | | | | | | | | | | | |
Allocated to loans individually evaluated for impairment | | $ | 4 | | | $ | 1,088 | | | $ | 0 | | | $ | 2 | | | $ | 0 | | | $ | 25 | | | $ | 1,119 | |
Allocated to loans collectively evaluated for impairment | | $ | 17,998 | | | $ | 8,581 | | | $ | 4,208 | | | $ | 1,179 | | | $ | 628 | | | $ | 222 | | | $ | 32,816 | |
Other real estate owned
Real estate acquired by the Company through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as OREO. When property is acquired, it is recorded at estimated fair value of the property acquired, less estimated costs to sell, establishing a new cost basis and carried on the Consolidated Balance Sheet in the line item "Prepaid expenses and other assets." The estimated fair value is based on market appraisals and the Company's internal analysis. Any loan balance in excess of the estimated realizable fair value on the date of transfer is charged to the allowance for loan losses on that date. All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value are charged to non-interest expense.
The Company had 0 OREO at September 30, 2020, December 31, 2019, or September 30, 2019. There were 0 OREO additions during the nine months ended September 30, 2020 and 1 addition during the nine months ended September 30, 2019. There were 0 sales, or subsequent write downs of OREO during the nine months ended September 30, 2020 compared to 1 sale and 0 subsequent write downs of OREO during the nine months ended September 30, 2019.
At both September 30, 2020 and December 31, 2019, the Company had 0 consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions.
(5)Leases
For the Company, material leases consist of operating leases on our facilities, mainly branch leases; leases 12 months or less and immaterial equipment leases have been excluded. As of September 30, 2020, the Company had 15 operating real estate leases. The Company's leased facilities are contracted under various non-cancelable operating leases, most of which provide options to the Company to extend the lease periods and include periodic rent adjustments. While the Company typically exercises its option to extend lease terms, the lease contains provisions that allow the Company, upon notification, to terminate the lease at the end of the lease term, or any option period. Several real estate leases also provide the Company the right of first refusal should the property be offered for sale.
Lease expenses for the three and nine months ended September 30, 2020 were $326 thousand and $974 thousand, respectively. Lease expense for the three and nine months ended September 30, 2019 were $322 thousand and $1.0 million, respectively. Variable lease costs and short-term lease expenses included in lease expense during these periods were immaterial.
The weighted average remaining lease term for operating leases at September 30, 2020 and September 30, 2019 was 26.8 years and 27.5 years, respectively. The weighted average discount rate was 3.8% at September 30, 2020 and September 30, 2019.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Cmml Real Estate | | Cmml and Industrial | | Cmml Constr | | Resid. Mortgage | | Home Equity | | Consumer | | Total |
Beginning Balance at December 31, 2015 | | $ | 13,514 |
| | $ | 9,758 |
| | $ | 3,905 |
| | $ | 1,061 |
| | $ | 540 |
| | $ | 230 |
| | $ | 29,008 |
|
Provision | | 1,740 |
| | 510 |
| | 178 |
| | 41 |
| | 19 |
| | 15 |
| | 2,503 |
|
Recoveries | | 20 |
| | 637 |
| | — |
| | — |
| | 2 |
| | 4 |
| | 663 |
|
Less: Charge offs | | 179 |
| | 354 |
| | 5 |
| | — |
| | 5 |
| | 42 |
| | 585 |
|
Ending Balance at September 30, 2016 | | $ | 15,095 |
| | $ | 10,551 |
| | $ | 4,078 |
| | $ | 1,102 |
| | $ | 556 |
| | $ | 207 |
| | $ | 31,589 |
|
Ending allowance balance: | | | | | | | | | | | | | | |
Allocated to loans individually evaluated for impairment | | $ | 518 |
| | $ | 975 |
| | $ | 473 |
| | $ | — |
| | $ | — |
| | $ | 2 |
| | $ | 1,968 |
|
Allocated to loans collectively evaluated for impairment | | $ | 14,577 |
| | $ | 9,576 |
| | $ | 3,605 |
| | $ | 1,102 |
| | $ | 556 |
| | $ | 205 |
| | $ | 29,621 |
|
| | | | | | | | |
(5) | DepositsENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
At September 30, 2020, the remaining undiscounted cash flows by year of these lease liabilities were as follows:
| | | | | | | | |
(Dollars in thousands) | | Operating Leases |
2020 (three remaining months) | | $ | 330 | |
2021 | | 1,242 | |
2022 | | 1,244 | |
2023 | | 1,251 | |
2024 | | 1,256 | |
Thereafter | | 23,344 | |
Total lease payments | | 28,667 | |
Less: Imputed interest | | 10,977 | |
Total lease liability | | $ | 17,690 | |
In addition, the Company currently collects rent through non-cancellable leases for a small portion of the overall square-footage within its Lowell, Massachusetts campus headquarters and at one of its branch locations. These leases are deemed immaterial.
See also Item (k), "Leases," contained in Note 1, "Summary of Significant Accounting Policies," to the Company's consolidated financial statements contained in the Company's 2019 Annual Report on Form 10-K, for further information regarding the accounting for the Company's leases.
(6)Deposits
Deposits are summarized as follows:
| | (Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 |
Non-interest bearing demand deposits | | $ | 717,879 |
| | $ | 646,115 |
| |
Interest bearing checking | | 359,308 |
| | 372,696 |
| |
Non-interest checking | | Non-interest checking | | $ | 1,274,210 | | | $ | 794,583 | |
Interest-bearing checking | | Interest-bearing checking | | 539,610 | | | 467,988 | |
Savings | | 198,595 |
| | 178,637 |
| Savings | | 255,417 | | | 203,236 | |
Money market | | 770,006 |
| | 844,216 |
| Money market | | 1,205,350 | | | 1,009,972 | |
Certificates of deposit $250,000 or less | | 132,041 |
| | 125,580 |
| |
Certificates of deposit more than $250,000 | | 42,352 |
| | 42,315 |
| |
CDs $250,000 or less | | CDs $250,000 or less | | 185,867 | | | 220,751 | |
CDs greater than $250,000 | | CDs greater than $250,000 | | 74,611 | | | 90,200 | |
Total customer deposits | | 2,220,181 |
| | 2,209,559 |
| Total customer deposits | | 3,535,065 | | | 2,786,730 | |
Brokered deposits (1) | | 82,492 |
| | 59,362 |
| Brokered deposits (1) | | 74,995 | | | 0 | |
Total deposits | | $ | 2,302,673 |
| | $ | 2,268,921 |
| Total deposits | | $ | 3,610,060 | | | $ | 2,786,730 | |
| |
(1)
| Brokered CDs $250,000 and under |
(1) Brokered CDs which are $250,000 and under.
Total customer deposits (deposits excluding brokered deposits) include reciprocal balances from checking, money market deposits and CDs received from participating banks in nationwide deposit networks as a result of our customers electing to participate in Company offered programs which allow for fullenhanced FDIC insurance. Essentially, the equivalent of the customers' original deposited funds comes back to the Company as customer depositsand are carried within the appropriate category under total deposits on the consolidated balance sheet.deposits. The Company's balances in these reciprocal products were $222.7$471.5 million and $281.6$419.7 million at September 30, 20172020 and December 31, 2016,2019, respectively.
The Company's brokered deposit balance at September 30, 2020 consists of short-term brokered CDs hedged for adverse interest rate movements through interest-rate swaps.
See Note 12,8, "Derivatives and Hedging Activities," of this Form 10-Q, contained below, for additional information on the Company's interest-rate swaps. See Note 14, "Fair Value Measurements," of this Form 10-Q, contained below, for further information regarding the Company's fair value measurements for deposits.
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(6) | Borrowed Funds and Subordinated Debt |
Borrowed funds, consisting of FHLB borrowings, amounted to $149.3 million at September 30, 2017, compared to $10.7 million at December 31, 2016.
The Company also carried subordinated debt of $14.8 million (net of deferred issuance costs) at both September 30, 2017 and December 31, 2016, which consisted of $15.0 million in aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Notes"), issued in January 2015, with a 15 year term. The Notes are intended to qualify as Tier 2 capital for
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
(7)Borrowed Funds and Subordinated Debt
The Company's borrowed funds amounted to $1.7 million and $96.2 million at September 30, 2020 and December 31, 2019, respectively, in FHLB advances.
Borrowed funds at September 30, 2020 and December 31, 2019 are summarized, as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Balance | | Rate | | Balance | | Rate |
Overnight | | $ | 0 | | | 0 | % | | $ | 92,000 | | | 1.85 | % |
Within 12 months | | 1,216 | | | 0.42 | % | | 3,697 | | | 2.22 | % |
Over 5 years | | 463 | | | 0 | % | | 476 | | | 0 | % |
The Company's borrowings at September 30, 2020 are related to specific lending projects under the FHLB's community development program. At December 31, 2019, borrowed funds, excluding overnight advances, also related to the specific lending projects noted above.
The Company also had outstanding subordinated debt (net of deferred issuance costs) of $73.7 million and $14.9 million at September 30, 2020 and December 31, 2019, respectively.
In January 2015 the Company issued $15.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes, with a 15-year term and currently callable by the Company at a premium. Original debt issuance costs were $190 thousand and have been netted against the subordinated debt on the consolidated balance sheet in accordance with accounting guidance. These costs are being amortized to interest expense over the life of the notes. The notes are intended to qualify as Tier 2 capital for regulatory purposes and pay interest at a fixed rate of 6.00% per annum through January 30, 2025, after which floating rates apply.
On July 7, 2020, the Company issued $60.0 million in fixed-to-floating rate subordinated notes, with a 10-year term and callable at the Company's option on or after July 15, 2025. Original debt issuance costs were $1.2 million and have been netted against the subordinated debt on the consolidated balance sheet in accordance with accounting guidance. These costs are being amortized to interest expense over the life of the notes. The notes are intended to qualify as Tier 2 capital for regulatory purposes and pay interest at a fixed rate of 5.25% per annum through October 15, 2025, after which floating rates apply.
Refer to Note 7,8, "Borrowed Funds and Subordinated Debt," to the Company's audited consolidated financial statements contained in the 2016Company's 2019 Annual Report on Form 10-K for additional information about the Company's subordinated debt.
See Note 12, "Fair Value Measurements,2, "Investment Securities," belowand Note 3, "Loans," of this Form 10-Q, contained above, for further information regarding securities and loans pledged for borrowed funds. Refer to the "Liquidity" and "Borrowed Funds" sections in the "Financial Condition" section in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operation," of this Form 10-Q for additional information about other sources of funding available to the Company and the Company's fairborrowing capacity.
(8) Derivatives and Hedging Activities
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and may also, at times, use derivative financial instruments. Specifically, the Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and unknown cash amounts, the value measurements for borrowed funds and subordinated debt.of which are determined by interest rates.
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(7) | Derivatives and Hedging ActivitiesENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
Interest rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. The Company generally does not pool mortgage loansaccounting for sale, but instead, sells the loans on an individual basis. To reduce the net interest rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest rate lock commitment is quoted on the origination of the loan. The Company estimateschanges in the fair value of these derivatives baseddepends on current secondary mortgage market prices. At September 30, 2017the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and December 31, 2016,apply hedge accounting and whether the estimatedhedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair valuesvalue of thesethe hedged asset or liability that are attributable to the earnings effect of the hedged forecasted transactions in a cash flow hedge. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative instruments were consideredis recorded in Accumulated Other Comprehensive Income (“AOCI”), net of tax and subsequently reclassified into interest income or interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to cash flow hedge derivatives will be immaterial.reclassified to interest expense as interest is incurred on the Company’s hedge liability or to interest income as interest is earned on the Company's hedge asset. See Note 10, “Other Comprehensive Income (Loss),” of this Form 10-Q for additional information related to the cash flow hedges impact on the Company’s AOCI and Consolidated Statements of Income.
The Company may use interest-rate contract swaps as partenter into derivative contracts that are intended to economically hedge certain of its interest-rate risk, management strategy. Interest-rate swap agreements are entered into as hedges against future interest-rate fluctuations on specifically identified assetseven though hedge accounting does not apply, or liabilities. Thethe Company didelects not have derivative fair value hedges or derivative cash flow hedges at either September 30, 2017 or December 31, 2016.
The Company has a “Back-to-Back Swap” program whereby the Bank enters into an interest rate swap with a qualified commercial banking customer and simultaneously enters into an equal and opposite interest rate swap with a counterparty. The customer interest rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to fixed-rate payment.
The transaction structure effectively minimizes the Bank’s net risk exposure resulting from such transactions. Customer-related credit risk is minimized by the cross collateralization of the loan and the interest rate swap agreement.
apply hedge accounting. Back-to-Back Swapsswaps are not speculative butspeculative; rather, the transactions result from a service the Company provides to certain commercial customers. Back-to-Back Swapsswaps do not meet hedge accounting requirements and therefore changes in the fair value of both the customer swaps and the counterparty swaps, which have an offsetting relationship, are recognized directly in earnings.
The Company records all derivatives on the balance sheet at fair value. Asset derivatives are included in the line item "Prepaid expenses and other assets," and liability derivatives are included in the "Accrued expenses and other liabilities" line item on the Consolidated Balance Sheets, respectively. In accordance with GAAP, the Company elects to measure the credit risk of its derivative financial instruments that are subject to master netting agreements by derivative type on a net basis by counterparty portfolio.
The tables below present a summary of the Company's derivative financial instruments, notional amounts and fair values for the periods presented:
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| | As of September 30, 2020 |
(Dollars in thousands) | | Asset Notional Amount | | Asset Derivatives(1) | | Liability Notional Amount | | Liability Derivatives(1) |
Derivatives designated as hedging instruments | | | | | | | | |
Interest-rate contracts - pay fixed, receive floating | | $ | 0 | | | $ | 0 | | | $ | 75,000 | | | $ | 3,057 | |
Total cash flow hedge interest-rate swaps | | $ | 0 | | | $ | 0 | | | $ | 75,000 | | | $ | 3,057 | |
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Derivatives not subject to hedge accounting | | | | | | | | |
Interest-rate contracts - pay floating, receive fixed | | $ | 38,458 | | | $ | 2,821 | | | $ | 0 | | | $ | 0 | |
Interest-rate contracts - pay fixed, receive floating | | 0 | | | 0 | | | 38,458 | | | 2,821 | |
Total back-to-back interest-rate swaps | | $ | 38,458 | | | $ | 2,821 | | | $ | 38,458 | | | $ | 2,821 | |
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| | December 31, 2019 |
(Dollars in thousands) | | Asset Notional Amount | | Asset Derivatives(1) | | Liability Notional Amount | | Liability Derivatives(1) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Derivatives not subject to hedge accounting | | | | | | | | |
Interest-rate contracts - pay floating, receive fixed | | $ | 10,502 | | | $ | 625 | | | $ | 12,273 | | | $ | 187 | |
Interest-rate contracts - pay fixed, receive floating | | 0 | | | 0 | | | 22,775 | | | 438 | |
Total back-to-back interest-rate swaps | | $ | 10,502 | | | $ | 625 | | | $ | 35,048 | | | $ | 625 | |
(1) Accrued interest balances related to the Company’s interest rate swaps are not included in the fair values above and are immaterial.
The Company had no derivative fair value hedges at either September 30, 2020 or December 31, 2019.
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
Cash flow hedges
Interest-rate swap agreements may be entered into as hedges against adverse interest-rate fluctuations on specifically identified assets or liabilities. The Company’s cash flow hedges are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s wholesale funding.
The Company’s objectives in using these interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. During the first quarter of 2020, the Company entered into 3 pay fixed, receive float interest rate swaps to hedge the variable cash flows associated with short-term wholesale funding, which may be comprised of brokered deposits and FHLB advances. Each swap has a notional value of $25.0 million with respective maturities of three years, four years and five years. At September 30, 2020, these interest rate swaps are designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
In relation to the Company's cash flow hedges, the Company estimates that an additional $947 thousand (pre-tax) will be reclassified out of AOCI as an increase to interest expense during the next twelve months.
Back-to-Back swaps
The Company has a "Back-to-Back Swap" program whereby the Bank enters into an interest-rate swap with qualified commercial banking customers and simultaneously enters into equal and opposite interest-rate swap with a swap counterparty. The customer interest-rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to a fixed-rate payment.
Each Back-to-Back swap consists of two interest-rate swaps (a customer swap and offsetting counterparty swap) and amounted to a total number of 10 interest-rate swaps outstanding at both September 30, 2020 and December 31, 2019. The transaction structure effectively minimizes the Bank's interest rate risk exposure resulting from such transactions. Customer-related credit risk is minimized by the cross collateralization of the loan and the interest-rate swap agreement to the customer's underlying collateral.
Interest-rate swaps with the counterparty are subject to master netting agreements, while interest-rate swaps with customers are not. As a result of this offsetting relationship, there were no0 net gains or losses recognized in income on Back-to-Back Swapsswaps during the nine months ended September 30, 20172020 or September 30, 2016.2019.
The Company had six interest-rate swaps atAt September 30, 2017 with an aggregate notional amount2020, all of $29.6 million compared to four interest-ratethe Back-to-Back swaps with an aggregate notional amount of $26.7 million at December 31, 2016.
Asset derivatives andthe counterparty were in the same liability derivatives are includedposition, therefore there was no netting reflected in prepaid expenses and other assets and accrued expenses and other liabilities on the consolidated balance sheets, respectively.
Company’s Consolidated Balance Sheet. The table below presents at December 31, 2019, the fair valueCompany's liability derivative positions and classificationthe potential effect of those netting arrangements on its financial position. As noted above, interest-rate swaps with customers are not subject to master netting agreements and therefore are not included in the Company’s derivative financial instruments for the periods presented:table below.
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| | As of December 31, 2019 |
(Dollars in thousands) | | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet |
Liabilities Derivatives | | | | | | |
Interest-rate contracts - pay fixed, receive floating | | $ | 625 | | | $ | 187 | | | $ | 438 | |
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| | As of September 30, 2017 | | As of December 31, 2016 |
(Dollars in thousands) | | Asset Derivatives | | Liability Derivatives | | Asset Derivatives | | Liability Derivatives |
Interest rate contracts - pay floating, received fixed | | $ | 65 |
| | $ | 493 |
| | $ | — |
| | $ | 610 |
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Interest rate contracts - pay fixed, receive floating | | 428 |
| | — |
| | 610 |
| | — |
|
Total interest rate swaps | | $ | 493 |
| | $ | 493 |
| | $ | 610 |
| | $ | 610 |
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Credit Risk
By using derivative financial instruments, the Company exposes itself to counterparty creditcounterparty-credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative
instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthy. As the swaps are subject to master netting agreements, the Company had reduced exposure relating to interest rate swaps with institutional counterparties at September 30, 2017. The Company had unsecured counterparty credit risk exposure of $428 thousand and $610 thousand on interest rate swaps at September 30, 2017 and December 31, 2016, respectively. The counterparty was rated A / A2 by S&P and Moody’s, respectively, at September 30, 2017.
The table below also presents the Company's asset derivative positions and the potential effect of netting arrangements on its financial position, as of the periods presented. Interest rate swaps with customers are not subject to master netting agreements and therefore are not included in the table below.
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| | September 30, 2017 |
(Dollars in thousands) | | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets Presented in the Statement of Financial Position |
Asset Derivatives | | | | | | |
Interest rate contracts - pay fixed, receive floating | | $ | 493 |
| | $ | 65 |
| | $ | 428 |
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| | December 31, 2016 |
(Dollars in thousands) | | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Statement of Financial Position | | Net Amounts of Assets Presented in the Statement of Financial Position |
Asset Derivatives | | | | | | |
Interest rate contracts - pay fixed, receive floating | | $ | 610 |
| | $ | — |
| | $ | 610 |
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CertainAdditionally, counterparty interest rate swaps contain provisions that require the Companyfor collateral to post collateralbe posted if the derivative exposure exceeds a threshold amount. As of September 30, 2017 and December 31, 2016, the Company has not posted or received any collateral.
The Company has interest rate1 counterparty and it was rated A and A2 by Standard & Poor's and Moody's, respectively, at September 30, 2020. The Company had 0 credit risk exposure at either September 30, 2020 or December 31, 2019 relating to interest-rate swaps with counterparties. When the Company has credit risk exposure, collateral is received from the counterparty and held by the Company. Collateral held by the Company is restricted and not considered an asset of the Company. Therefore, it is not carried on the Company's Consolidated Balance Sheet. If the Company posts collateral, the cash is restricted, is considered an asset of the Company and is carried on the Company's Consolidated Balance Sheet. The Company posted cash collateral of $6.1 million and $850 thousand at September 30, 2020 and December 31, 2019, respectively.
Credit-risk-related Contingent Features
The Company's interest-rate swaps with counterparties that contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness.
As of September 30, 2020, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk, related to these agreements was $5.9 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral at September 30, 2020 as noted above.
Other Derivative Related Activity
The Company also participates in loans originated by third party banks, where the originating bank utilizes a back-to-back interest rateinterest-rate swap structure; however, the Company is not a party to the swap agreements. Under the terms of the loan participations, the Company has accepted contingent liabilities that would only be realized if the swaps were terminated early and there were outstanding losses not covered by the underlying borrowers and the borrowers' pledged collateral. If applicable, the Company’s swap lossCompany's swap-loss exposure would be equal to thea percentage of the Company’s participation in the underlying loan applied to the originating bank's swap loss.loss based on the ratio of the Company's loan participation to the underlying loan. At both September 30, 2020 and December 31, 2019, the Company had 1 participation loan where the originating bank utilizes a back-to-back interest-rate swap structure. At September 30, 2017 and December 31, 2016, the Company had two such participation loans and2020, management considers the risk of material swap lossswap-loss exposure related to this participation loan to be unlikely based on the borrower's financial and collateral strength. Management continues to closely monitor for credit changes resulting from the pandemic.
Interest-rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. The Company generally does not pool mortgage loans for sale, but instead sells the loans on an individual basis. To reduce the net interest-rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest-rate lock commitment is quoted on the origination of the loan. The Company estimates the fair value of these derivatives based on current secondary mortgage market prices. At September 30, 2020 and December 31, 2019, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.
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| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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Shares authorizedAuthorized and share issuanceShare Issuance
The Company’sCompany's authorized capital is divided into common stock and preferred stock. At the Company's annual meeting of shareholders held on May 2, 2017, shareholders voted to amend the Company’s Restated Articles of Organization to increase the number of shares of common stock that theThe Company is authorized to issue from 20,000,00040,000,000 shares of common stock, with a par value of $0.01 per share, and as of September 30, 2020 had 11,926,198 shares issued and outstanding. Holders of common stock are entitled to 40,000,000 shares.1 vote per share and are entitled to receive dividends if, as, and when declared by the Company's Board of Directors (the "Board"). Dividend and liquidation rights of the common stock may be subject to the rights of any outstanding preferred stock. The Company is also authorized to issue 1,000,000 shares of preferred stock.stock, with a par value of $0.01 per share. NaN preferred stock has been issued as of the date of this Form 10-Q.
The Company has a shareholdersstockholders' rights plan. Under the plan, each share of common stock includes a right to purchase under certain circumstances one one-hundredth of a share of the Company’sCompany's Series A Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of $52.00$122.50 per one one-hundredth of a preferred share, subject to adjustment, or, in certain circumstances, to receive cash, property, shares of common stock or other securities of the Company. The rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events that would ordinarily be associated with an unsolicited acquisition or attempted acquisition of 10% or more of the Company’s Company's
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| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
outstanding shares of common stock. The rights have no voting or dividend privileges, and unless and until they become exercisable, have no dilutive effect on the earnings of the Company. The rights will expire, unless earlier redeemed, exchanged, or otherwise rescinded by the Company, on January 13, 2018. The Company is currently evaluating the renewal of the plan in anticipation of this expiration date.2028.
The Company's stock incentive plans permit the Board of Directors to grant, under various terms, stock options (for the purchase of newly issued shares of common stock), common stock, restricted stock awards, restricted stock units and stock appreciation rights to officers and other employees, non-employee directors and consultants. These plans also allow for newly issued shares of common stock to be issued without restrictions to officers and other employees, directors and consultants.
The Company issues stock options and restricted stock awards to officers and other employees and restricted stock awards and stock compensation in lieu of cash fees to non-employee directors. The restricted stock awards allow for the non-forfeitable receipt of dividends, and the voting of all shares, whether or not vested, throughout the vesting periods at the same proportional level as common shares outstanding. The unvested restricted stock awards are the Company's only participating securities and are included in shares outstanding. Unvested participating restricted awards amounted to 125,134118,440 shares and 141,580102,056 shares as of September 30, 20172020 and December 31, 2016,2019, respectively. See Note 13, "Earnings per Share," of this Form 10-Q, contained below, for further information regarding unvested participating restricted awards and the Company's earnings per share calculation.
Upon vesting, restricted stock awards may be net share-settledsettled to cover payment for employee tax obligations, resulting in shares of common stock being reacquired by the Company. Chapter 156DCompany and returned to the pool of shares reserved for issuance under the incentive plans. In accordance with Massachusetts General Laws, a statute known as the Massachusetts Business Corporation Act, which applies to Massachusetts corporations such aslaw, shares reacquired by the Company eliminates the concept of “treasury stock” and provides that shares a Massachusetts company reacquires will be treated as authorized but unissued shares.
The Company's stock incentive plans also allow for newly issued shares of common stock to be issued without restrictions to officers and other employees, non-employee directors and consultants. From time to time, the Company issues shares to community members for consulting on regional advisory councils and grants shares of fully vested stock as employee anniversary awards. These shares vest immediately and the cost, which is based on the market price on the date of grant and deemed to be immaterial, is expensed in the period in which the services are rendered. See Note 10,12, "Stock-Based Compensation," to the Company's unaudited consolidated interim financial statements of this Form 10-Q, contained below, for additional information regarding the Company's stock incentive plans.
In addition, to shares issued to employees, directors and consultants and shares issued through equity offerings (see below), the Company maintains a dividend reinvestment and direct stock purchase plan (“DRSPP”("DRSPP") forwhich enables stockholders, and new investorsat their discretion, to elect to reinvest or purchasecash dividends paid on their shares of the Company's common stock by purchasing additional shares of common stock directly from the Company.
Capital Raised
InCompany at a purchase price equal to fair market value. Under the second quarter of 2016,DRSPP, stockholders and new investors also have the Company completed a combined shareholder subscription rights offering and supplemental community offering (the "Offering"), at an offering price of $21.50 per share, under its $40 million shelf registration statement (Reg No. 333-190017). The Company issued 930,232opportunity to purchase shares of the Company's common stock without brokerage fees, subject to monthly minimums and received gross proceedsmaximums.
See "Capital Resources" in Item 2, "Management's Discussion and Analysis," of $20.0 million ($19.7 million, netthis Form 10-Q for the Company's capital ratios and capital adequacy assessment as of offering costs)September 30, 2020. See Note 10 "Comprehensive Income (Loss)," of this Form 10-Q for changes to stockholders' equity from comprehensive income (loss) as of September 30, 2020. Refer to Note 11, "Stockholders' Equity," to the Company's audited consolidated financial statements included in the Offering. The Company contributedCompany's 2019 Annual Report on Form 10-K for additional information relating to capital adequacy requirements, dividends and the net proceeds to the Bank to support future asset growth and for general corporate purposes.DRSPP.
See Note 11, "Earnings per Share," below for addition information regarding the impact of common stock and options issued.
(10)Comprehensive Income (Loss)
Comprehensive income is defined as all changes to stockholders' equity except investments by and distributions to stockholders. Net income is one component of comprehensive income, with other components referred to in the aggregate as other comprehensive income. TheSee below for the Company's only other components of comprehensive income component isat the net unrealized holding gains
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| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
or losses on investments available-for-sale, net of deferred income taxes.respective dates. Pursuant to GAAP, the Company initially excludes these unrealized holding gains and losses from net income; however, they are later reported as reclassifications out of accumulated other comprehensive income into net income when the securitieslosses or gains are sold. When securities are sold, the reclassification of realized gains and losses on available-for-sale securities are included on the Consolidated Statements of Income under the "non-interest income" subheading on the line item "net gains (losses) on sales of investment securities" and the related income tax expense is included in the line item "provision for income taxes," both of which are also detailed on the Consolidated Statements of Comprehensive Income under the subheading "reclassification adjustment for net gains (losses) included in net income."realized.
Refer to Note 10, "Stockholders' Equity," to the Company's consolidated financial statements included in the Company's 2016 Annual Report on Form 10-K for additional information relating to capital adequacy requirements, dividends and the DRSPP.33
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(9) | Supplemental Retirement Plan and Other Post-retirement Benefit ObligationsENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
The following table presents a reconciliation of the changes in the components of other comprehensive income (loss) for the dates indicated, including the amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | | Three months ended September 30, 2019 |
(Dollars in thousands) | | Pre Tax | | Tax (Expense) Benefit | | After Tax Amount | | Pre Tax | | Tax (Expense) Benefit | | After Tax Amount |
Change in fair value of debt securities | | $ | 57 | | | $ | (9) | | | $ | 48 | | | $ | 2,891 | | | $ | (642) | | | $ | 2,249 | |
Less: net security gains reclassified into non-interest income | | 127 | | | (29) | | | 98 | | | 0 | | | 0 | | | 0 | |
Net change in fair value of debt securities | | (70) | | | 20 | | | (50) | | | 2,891 | | | (642) | | | 2,249 | |
| | | | | | | | | | | | |
Change in fair value of cash flow hedges | | 14 | | | (4) | | | 10 | | | 0 | | | 0 | | | 0 | |
Less: net cash flow hedges losses reclassified into interest expense | | (218) | | | 61 | | | (157) | | | 0 | | | 0 | | | 0 | |
Net change in fair value of cash flow hedges | | 232 | | | (65) | | | 167 | | | 0 | | | 0 | | | 0 | |
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Total other comprehensive income (loss), net | | $ | 162 | | | $ | (45) | | | $ | 117 | | | $ | 2,891 | | | $ | (642) | | | $ | 2,249 | |
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| | Nine months ended September 30, 2020 | | Nine months ended September 30, 2019 |
(Dollars in thousands) | | Pre Tax | | Tax (Expense) Benefit | | After Tax Amount | | Pre Tax | | Tax (Expense) Benefit | | After Tax Amount |
Change in fair value of debt securities | | $ | 17,887 | | | $ | (3,971) | | | $ | 13,916 | | | $ | 17,385 | | | $ | (3,876) | | | $ | 13,509 | |
Less: net security gains reclassified into non-interest income | | 227 | | | (51) | | | 176 | | | 146 | | | (32) | | | 114 | |
Net change in fair value of debt securities | | 17,660 | | | (3,920) | | | 13,740 | | | 17,239 | | | (3,844) | | | 13,395 | |
| | | | | | | | | | | | |
Change in fair value of cash flow hedges | | (3,334) | | | 937 | | | (2,397) | | | 0 | | | 0 | | | 0 | |
Less: net cash flow hedges losses reclassified into interest expense | | (278) | | | 78 | | | (200) | | | 0 | | | 0 | | | 0 | |
Net change in fair value of cash flow hedges | | (3,056) | | | 859 | | | (2,197) | | | 0 | | | 0 | | | 0 | |
| | | | | | | | | | | | |
Total other comprehensive income (loss), net | | $ | 14,604 | | | $ | (3,061) | | | $ | 11,543 | | | $ | 17,239 | | | $ | (3,844) | | | $ | 13,395 | |
Information on the Company's accumulated other comprehensive income (loss), net of tax, is comprised of the following components as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2020 | | Three months ended September 30, 2019 |
(Dollars in thousands) | | Unrealized gains on debt securities | | Unrealized losses on cash flow hedges | | Total | | Unrealized gains on debt securities | | Unrealized losses on cash flow hedges | | Total |
Accumulated other comprehensive income - beginning balance | | $ | 24,300 | | | $ | (2,364) | | | $ | 21,936 | | | $ | 9,862 | | | $ | 0 | | | $ | 9,862 | |
Total other comprehensive income (loss), net | | (50) | | | 167 | | | 117 | | | 2,249 | | | 0 | | | 2,249 | |
Accumulated other comprehensive income - ending balance | | $ | 24,250 | | | $ | (2,197) | | | $ | 22,053 | | | $ | 12,111 | | | $ | 0 | | | $ | 12,111 | |
| | | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 | | Nine months ended September 30, 2019 |
(Dollars in thousands) | | Unrealized gains on debt securities | | Unrealized losses on cash flow hedges | | Total | | Unrealized gains (losses) on debt securities | | Unrealized gains (losses) on cash flow hedges | | Total |
Accumulated other comprehensive income - beginning balance | | $ | 10,510 | | | $ | 0 | | | $ | 10,510 | | | $ | (1,284) | | | $ | 0 | | | $ | (1,284) | |
Total other comprehensive income (loss), net | | 13,740 | | | (2,197) | | | 11,543 | | | 13,395 | | | 0 | | | 13,395 | |
Accumulated other comprehensive income - ending balance | | $ | 24,250 | | | $ | (2,197) | | | $ | 22,053 | | | $ | 12,111 | | | $ | 0 | | | $ | 12,111 | |
| | | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
(11)Supplemental Retirement Plans and Other Post-Retirement Benefit Obligations
Supplemental Employee Retirement Plan ("SERP")
The Company has salary continuation agreements with two2 of its current executive officers and one1 former executive officer. These salary continuation agreements provide for predetermined fixed-cash supplemental retirement benefits to be provided for a period of 20 years after each individual reaches a defined "benefit age." The individuals covered under the SERP have reached the defined benefit age and are receiving payments under the plan.SERP. Additionally, the Company has not recognized service costs in the current or prior year as each officer had previously attained their individually defined benefit age and was fully vested under the plan.SERP.
This non-qualified plan represents a direct liability of the Company, and as such, the Company has no specific assets set aside to settle the benefit obligation. The funded status is the aggregate amount accrued, or the "accumulated benefit obligation," which is equal to the present value of the benefits to be provided to the employee or any beneficiary. Because the Company's benefit obligations provide for predetermined fixed-cash payments, the Company does not have any unrecognized costs to be included as a component of accumulated other comprehensive income.
Total net periodic benefit costs, comprised of interest costs only, were $29 thousand and $87 thousand for Benefits paid under the three and nine months ended September 30, 2017, respectively, compared to $31 thousand and $93 thousand for the three and nine months ended September 30, 2016, respectively.
Benefits paidSERP amounted to $69 thousand and $207 thousand for both the three and nine months ended September 30, 20172020 and September 30, 2016,2019, respectively.
Total expenses for the SERP were $20 thousand and $60 thousand for the three and nine months ended September 30, 2020, respectively, compared to $25 thousand and $75 thousand for the three and nine months ended September 30, 2019, respectively. The Company anticipates accruing an additional $29$20 thousand related to the SERP during the remainder of 2017.2020.
Supplemental Life Insurance
The Company has provided supplemental life insurance through split-dollar life insurance arrangements for certain executive and senior officers on whom the Bank owns bank-owned life insurance ("BOLI").insurance.
These arrangements provide a death benefit to the officer's designated beneficiaries that extend to postretirementpost-retirement periods for some of the supplemental life insurance plans. The Company has recognized a liability for these future postretirementpost-retirement benefits.
These non-qualified plans represent a direct liability of the Company and, as such, the Company has no specific assets set aside to settle the benefit obligation. The funded status is the aggregate amount accrued, or the "accumulated postretirementpost-retirement benefit obligation," which is the present value of the post-retirement benefits associated with this arrangement.
|
| | |
| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
The following table illustrates theTotal net periodic post-retirement benefit cost for the supplemental life insurance plans, which consisted mainly of interest costs, were $23 thousand and $69 thousand for the periods indicated:three and nine months ended September 30, 2020, respectively, compared to $50 thousand and $149 thousand for the three and nine months ended September 30, 2019, respectively.
See also Note 12, "Stock-Based Compensation," of this Form 10-Q, contained below, for further information regarding employee benefits offered in the form of stock options and stock awards.
|
| | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Service Cost | | $ | (3 | ) | | $ | (2 | ) | | $ | (9 | ) | | $ | (7 | ) |
Interest Cost | | 22 |
| | 22 |
| | 68 |
| | 64 |
|
Net periodic post-retirement benefit cost | | $ | 19 |
| | $ | 20 |
| | $ | 59 |
| | $ | 57 |
|
(12)Stock-Based Compensation | |
(10) | Stock-Based Compensation |
The Company currently has two individual1 active stock incentive plans: the 2009 plan,plan: The Enterprise Bancorp, Inc. 2016 Stock Incentive Plan, as amended in 2015, and the 2016 plan.(the "2016 plan"). As of September 30, 2017, an aggregate2020, 191,790 shares of 446,860 shares remainCompany common stock remained available for future grants under the plans.2016 plan.
Awards previously granted under an earlier, now expired, plan remain outstanding and may be exercised through 2028.
The Company's stock-based compensation expense related to these plans includes stock options and stock awards to officers and other employees included in salary and benefits expense, and stock awards and stock compensation in lieu of cash fees to non-employee directors, both included in other operating expenses. Total stock-based compensation expense was $467$476 thousand and $1.3$1.4 million for the three and nine months ended September 30, 2017,2020, respectively, compared to $444$461 thousand and $1.3$1.4 million for the three and nine months ended September 30, 2016,2019, respectively.
Stock Option Awards
The Company recognized stock-based compensation expense related to stock option awardsA tax benefit of $49$6 thousand and $152a tax expense of $29 thousand associated with employee exercises and vesting of stock compensation was recorded as an adjustment to the Company's income tax expense for the three and nine months ended
| | | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
September 30, 2017,2020, respectively, compared to $63with a tax benefit of $3 thousand and $205$131 thousand for the three and nine months ended September 30, 2016,2019, respectively. These amounts, treated as discrete tax items in the period in which they occur, will vary from year to year as a function of the volume of share-based payments vested or exercised and the then-current market price of the Company's stock in comparison to the compensation cost recognized in the Company's unaudited consolidated interim financial statements.
Stock Option Awards
The table below provides a summary of the options granted, including the weighted average fair value, the fair value as a percentage of the market value of the stock at the date of grant and the average assumptions used in the model for the periods indicated:
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
Options granted | 24,208 | | | 23,218 | |
Term in years | 10 | | 10 |
Weighted average assumptions used in the fair value model: | | | |
Expected volatility | 37 | % | | 33 | % |
Expected dividend yield | 3.43 | % | | 2.75 | % |
Expected life in years | 6.5 | | 6.5 |
Risk-free interest rate | 1.02 | % | | 2.58 | % |
Weighted average market price on date of grants | $ | 28.22 | | | $ | 29.84 | |
Per share weighted average fair value | $ | 8.41 | | | $ | 8.70 | |
Fair value as a percentage of market value at grant date | 30 | % | | 29 | % |
Options granted during the first nine months of 2020 and 2019 generally vest 50% in year two and 50% in year four, on or about the anniversary date of the awards.
The Company utilizes the Black-Scholes option valuation model in order to determine the per share grant date fair value of stock option grants.
The table below provides a summary of the options granted during the periods indicated:
|
| | | | | | | |
| Nine Months Ended September 30, |
| 2017 | | 2016 |
Options granted | 15,009 |
| | 31,047 |
|
Term in years | 10 |
| | 10 |
|
Weighted average assumptions used in the fair value model: | | | |
Expected volatility | 40 | % | | 42 | % |
Expected dividend yield | 2.09 | % | | 3.02 | % |
Expected life in years | 7 |
| | 7 |
|
Risk-free interest rate | 2.35 | % | | 1.91 | % |
Weighted average market price on date of grants | $ | 30.46 |
| | $ | 21.91 |
|
Per share weighted average fair value | $ | 11.34 |
| | $ | 7.91 |
|
Fair value as a percentage of market value at grant date | 37 | % | | 36 | % |
Options granted during the first nine months of 2017 and 2016 generally vest 50% in year two and 50% in year four, on the anniversary date of the awards. Vested options are only exercisable while the employee remains employed with the Bank and for a limited time thereafter. For all awards, if a grantee’s employment or other service relationship, such as service as a director, is terminated for any reason, then any stock options granted that have not vested as of the time of such termination generally must be forfeited, unless the Compensation Committee or the Board of Directors, as the case may be, waives such forfeiture requirement.
|
| | |
| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
Refer to Note 12 "Stock-Based Compensation Plans," in the Company's 2016 Annual Report on Form 10-K for a further description of the assumptions used in the valuation model.
Stock Awards
Stock-basedCompany recognized stock-based compensation expense recognized in association withrelated to stock option awards amounted to $358of $46 thousand and $929$136 thousand for the three and nine months ended September 30, 2017,2020, respectively, compared to $322$48 thousand and $939$144 thousand for the three and nine months ended September 30, 2016,2019, respectively.
Restricted Stock Awards
Restricted stock awards are granted at the market price of the Company's common stock on the date of the grant. Employee restricted stock awards generally vest over four years in equal portions beginning on or about the first anniversary date of the restricted stock award or are performance basedperformance-based restricted stock awards that vest upon the Company achieving certain predefined performance objectives. Non-employee director restricted stock awards generally vest over two years in equal portions beginning on or about the first anniversary date of the restricted stock award.
The table below provides a summary of restricted stock awards granted during the periods indicated:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
Restricted Stock Awards (number of underlying shares) | | 2020 | | 2019 |
Two-year vesting | | 8,295 | | | 8,368 | |
Four-year vesting | | 26,015 | | | 22,403 | |
Performance-based vesting | | 25,001 | | | 24,427 | |
Total restricted stock awards granted | | 59,311 | | | 55,198 | |
Weighted average grant date fair value | | $ | 28.22 | | | $ | 29.84 | |
|
| | | | | | | | |
| | Nine Months Ended September 30, |
Restricted Stock Awards (no. of underlying shares) | | 2017 | | 2016 |
Two Year Vesting | | 6,944 |
| | 9,060 |
|
Four Year Vesting | | 16,253 |
| | 18,298 |
|
Performance-Based Vesting | | 25,623 |
| | 35,071 |
|
Total Restricted Stock Awards | | 48,820 |
| | 62,429 |
|
| | | | |
Weighted average grant date fair value | | $ | 30.46 |
| | $ | 21.90 |
|
| | | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
If a grantee's employment or other service relationship, such as service as a director, is terminated for any reason, then any shares of restrictedStock-based compensation expense recognized in association with stock granted that have not vested as of the time of such termination generally must be forfeited, unless the Compensation Committee or the Board of Directors, as the case may be, waives such forfeiture requirement.
Theawards, mainly restricted stock awards, allowamounted to $374 thousand and $1.1 million for the receipt of dividends,three and nine months ended September 30, 2020, respectively, compared to $363 thousand and $1.1 million for the voting of all shares, whether or not vested, throughout the vesting periods at the same proportional level as common shares outstanding.three and nine months ended September 30, 2019, respectively.
Upon vesting, restricted stock awards may be net share-settled to cover payment for employee tax obligations, resulting in shares of common stock being reacquired by the Company.
Any shares that are returned to the Company prior to vesting or as payment for employee tax obligations upon vesting shall remain available for issuance under such plan, while the plan is still open.
Stock in Lieu of Directors' Fees
In addition to restricted stock awards discussed above, the non-employee members of the Company's Board of Directors may opt to receive newly issued shares of the Company's common stock in lieu of cash compensation for attendance at Board and Board Committeecommittee meetings. Stock-based compensation expense related to these directors' fees amounted to $60$56 thousand and $206$214 thousand for the three and nine months ended September 30, 2017,2020, respectively, compared to $59$50 thousand and $205$188 thousand for the three and nine months ended September 30, 2016,2019, respectively, and is included in other operating expenses. In January 2017,2020, non-employee directors were issued 12,9928,346 shares of the Company's common stock in lieu of 20162019 annual cash fees of $286$253 thousand at a market value price of $22.04$30.35 per share, the market value of the common stockbased on the opt-in measurement date of January 4, 2016.Company's average quarterly close price in 2019.
In the first quarter of 2017, the Company adopted ASU 2016-09. For further information regarding the implementation of this update and the financial statement impact, refer to Note 1, "Summary of Significant Accounting Policies," Item (e), "Recent Accounting Pronouncements" above.
For further information regarding the Company's stock awards, see Note 8,9, "Stockholders' Equity," of this Form 10-Q, contained above, under the caption "Shares authorizedAuthorized and share issuance.Share Issuance." There have been no material changes to the terms of the Company's stock incentive plans or the terms for vesting, forfeiture and settlement for options and restricted stock awards granted and outstanding under such plans as reported in the 2019 Annual Report on Form 10-K. Refer to Note 13, "Stock-Based Compensation Plans," to the Company's audited consolidated financial statements in the Company's 2019 Annual Report on Form 10-K for further information on the Company's stock incentive plans, stock options and restricted awards including descriptions of the assumptions used in the valuation model for stock options.
|
| | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
(13)Earnings per Share
Basic earnings per share are calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding (including participating securities) during the year. The Company's only participating securities are unvested restricted stock awards that contain non-forfeitable rights to dividends. See Note 8,9, "Stockholders' Equity," under the caption "Shares authorizedAuthorized and share issuance,Share Issuance," of this Form 10-Q above for further information regarding the Company's participating securities. Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.
The table below presents the increase in average shares outstanding, using the treasury stock method, for the diluted earnings per share calculation for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Basic weighted average common shares outstanding | 11,916,486 | | | 11,808,603 | | | 11,886,811 | | | 11,779,629 | |
Dilutive shares | 10,557 | | | 34,894 | | | 21,905 | | | 40,759 | |
Diluted weighted average common shares outstanding | 11,927,043 | | | 11,843,497 | | | 11,908,716 | | | 11,820,388 | |
|
| | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Basic weighted average common shares outstanding | 11,589,039 |
| | 11,430,134 |
| | 11,557,054 |
| | 10,801,278 |
|
Dilutive shares | 80,120 |
| | 68,856 |
| | 83,319 |
| | 68,127 |
|
Diluted weighted average common shares outstanding | 11,669,159 |
| | 11,498,990 |
| | 11,640,373 |
| | 10,869,405 |
|
BasicThere were 102,733 and diluted weighted average common shares75,979 stock options outstanding for the three and nine months ended September 30, 2017 include the full impact of the 930,232 shares of common stock issued in the Offering, while the respective weighted averages for the 2016 periods were only affected by the Offering from the issue date of June 23, 2016 through period end.
There were 14,758 options outstanding2020, respectively, that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for those periods. There were 52,571 stock options outstanding for the three and nine months ended September 30, 2017.2019, respectively, that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for those periods. These stock options, which were not dilutive at that date,those dates, may potentially dilute earnings per share in the future.
| |
(12) | Fair Value Measurements |
(14)Fair Value Measurements
The FASB defines the fair value of an asset or liability to be the price which a seller would receive in an orderly transaction between market participants (an exit price) and also establishes a fair value hierarchy segregating fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; and (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed based on the basis of the best information available under the circumstances.
|
| | |
| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
The following tables summarize significant assets and liabilities carried at fair value and placement in the fair value hierarchy at the dates specified:
| | | | | | | | | | | | September 30, 2020 |
| | September 30, 2017 | | Fair Value Measurements using: | | | | Fair Value Measurements using: |
(Dollars in thousands) | | Fair Value | | (level 1) | | (level 2) | | (level 3) | (Dollars in thousands) | | Fair Value | | (Level 1) | | (Level 2) | | (Level 3) |
Assets measured on a recurring basis: | | |
| | |
| | |
| | |
| Assets measured on a recurring basis: | | | | | | | | |
Debt securities | | $ | 382,896 |
| | $ | — |
| | $ | 382,896 |
| | $ | — |
| Debt securities | | $ | 497,480 | | | $ | 0 | | | $ | 497,480 | | | $ | 0 | |
Equity securities | | 3,046 |
| | 3,046 |
| | — |
| | — |
| Equity securities | | 651 | | | 651 | | | 0 | | | 0 | |
FHLB stock | | 7,225 |
| | — |
| | — |
| | 7,225 |
| FHLB stock | | 1,905 | | | 0 | | | 1,905 | | | 0 | |
Interest-rate swaps | | 493 |
| | — |
| | 493 |
| | — |
| Interest-rate swaps | | 2,821 | | | 0 | | | 2,821 | | | 0 | |
Assets measured on a non-recurring basis: | | |
| | |
| | |
| | |
| Assets measured on a non-recurring basis: | | | | | | | | |
Impaired loans (collateral dependent) | | 3,745 |
| | — |
| | — |
| | 3,745 |
| Impaired loans (collateral dependent) | | 1,992 | | | 0 | | | 0 | | | 1,992 | |
| | | | | | | | | |
Liabilities measured on a recurring basis: | | | | | | | | | Liabilities measured on a recurring basis: | |
Interest-rate swaps | | 493 |
| | — |
| | 493 |
| | — |
| Interest-rate swaps | | $ | 5,878 | | | $ | 0 | | | $ | 5,878 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2016 | | Fair Value Measurements using: |
(Dollars in thousands) | | Fair Value | | (level 1) | | (level 2) | | (level 3) |
Assets measured on a recurring basis: | | |
| | |
| | |
| | |
|
Debt securities | | $ | 362,147 |
| | $ | — |
| | $ | 362,147 |
| | $ | — |
|
Equity investments | | 12,643 |
| | 12,643 |
| | — |
| | — |
|
FHLB stock | | 2,094 |
| | — |
| | — |
| | 2,094 |
|
Interest-rate swaps | | 610 |
| | — |
| | 610 |
| | — |
|
Assets measured on a non-recurring basis: | | |
| | |
| | |
| | |
|
Impaired loans (collateral dependent) | | 3,481 |
| | — |
| | — |
| | 3,481 |
|
| | | | | | | | |
Liabilities measured on a recurring basis: | | | | | | | | |
Interest-rate swaps | | 610 |
| | — |
| | 610 |
| | — |
|
| | | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | | | Fair Value Measurements using: |
(Dollars in thousands) | | Fair Value | | (Level 1) | | (Level 2) | | (Level 3) |
Assets measured on a recurring basis: | | | | | | | | |
Debt securities | | $ | 504,788 | | | $ | 0 | | | $ | 504,788 | | | $ | 0 | |
Equity securities | | 467 | | | 467 | | | 0 | | | 0 | |
FHLB stock | | 4,484 | | | 0 | | | 4,484 | | | 0 | |
Interest-rate swaps | | 625 | | | 0 | | | 625 | | | 0 | |
Assets measured on a non-recurring basis: | | | | | | | | |
Impaired loans (collateral dependent) | | 1,268 | | | 0 | | | 0 | | | 1,268 | |
| | | | | | | | |
| | | | | | | | |
Liabilities measured on a recurring basis: | | | | | | | | |
Interest-rate swaps | | $ | 625 | | $ | 0 | | | $ | 625 | | | $ | 0 | |
The Company did not transfer any assets between the fair value measurement levels during the nine months ended September 30, 2017 or the year ended December 31, 2016.
All of the Company's debt and equity securities that are considered "available-for-sale" and are carried at fair value. The debt security category above includes federal agency obligations, commercial and residential federal agency MBS, municipal securities, corporate bonds, and certificates of deposits,CDs, as held at those dates. The Company utilizes third-party pricing vendors to provide valuations on its debt securities. Fair values provided by the vendors were generally determined based upon pricing matrices utilizing observable market data inputs for similar or benchmark securities in active markets and/or based on a matrix pricing methodology which employs The Bond Market Association's standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Therefore, management regards the inputs and methods used by third-party pricing vendors to be "Level 2 inputs and methods" as defined in the "fair value hierarchy." The Company periodically obtains a second price from an impartial third party on debt securities to assess the reasonableness of prices provided by the primary independent pricing vendor.
The Company's equity portfolio fair value is measured based on quoted market prices for the shares; therefore, these securities are categorized as Level 1 within the fair value hierarchy.
The Bank is required to purchase FHLB stock at par value in association with advances from the FHLB; thisFHLB. The stock is issued, redeemed, repurchased and transferred by the FHLB only at their fixed par value. This stock is classified as a restricted investment and carried at costFHLB par value which management believes approximates fair value; therefore, these securities are categorized as Level 32 measures. See Note 1, "Summary of Significant Accounting Policies," Item (c) "Restricted Instruments" for further information regarding the Company's fair value assessment of FHLB capital stock.
|
| | |
| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
Impaired loan balances in the table above represent those collateral dependent impaired commercial loans where management has estimated the probable credit loss by comparing the loan's carrying value against the expected realizable fair value of the collateral (appraised value, or internal analysis, less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in these assessments, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans are categorized as Level 3 within the fair value hierarchy. A specific allowance is assigned to the collateral dependent impaired loan for the amount of management's estimated probable credit loss. The specific allowances assigned to the collateral dependent impaired loans amounted to $1.6$4.0 million at September 30, 20172020 compared to $1.9 million$564 thousand at December 31, 2016.2019.
The fair values for the interest-rate swap assets and liabilities, which is comprised of back-to-back swaps and cash flow hedges, represent a FASB Level 2 measurement and are based on settlement values adjusted for credit riskrisks and observable market interest rate curves. The settlement values are based on discounted cash flow analysis, a widely accepted valuation technique, reflecting the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. Credit risk adjustments consider factors such as the likelihood of default by the Company and its counterparties, its net exposures and remaining contractual life. The change in value of interest-rate swap assets and liabilities attributable to credit risk was not significant during the reported periods. Refer also to Note 7,8, "Derivatives and Hedging Activities," this Form 10-Q, contained above, for additional information on the Company's interest-rate swaps.
Letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance of a customer to a third party. The fair value of these commitments was estimated to be the fees charged to enter into similar agreements, and accordingly these fair value measures are deemed to be FASB Level 2 measurements. In accordance with the FASB, the estimated fair values of these commitments are carried on the balance sheetConsolidated Balance Sheet as a liability and
| | | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
amortized to income over the life of the letters of credit, which are typically one year. The estimated fair value of these commitments carried on the balance sheetConsolidated Balance Sheets at September 30, 20172020 and December 31, 20162019 were deemed immaterial.
Interest rateInterest-rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. The Company generally does not pool mortgage loans for sale, but instead sells the loans on an individual basis. To reduce the net interest rateinterest-rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest rateinterest-rate lock commitment is quoted on the origination of the loan. The Company estimates the fair value of these derivatives based on current secondary mortgage market prices. These commitments are accounted for in accordance with FASB guidance. The fair values of the Company's derivative instruments are deemed to be FASB Level 2 measurements. At September 30, 20172020 and December 31, 2016,2019, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgagesmortgage loans were deemed immaterial.
The following table presents additional quantitative information about assets measured at fair value on a recurring and non-recurring basis for which the Company utilized Level 3 inputs (significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability) to determine fair value as of September 30, 2017:2020 and December 31, 2019:
| | | | | | | | | | | Fair Value | |
(Dollars in thousands) | | Fair Value | | Valuation Technique | | Unobservable Input | | Unobservable Input Value or Range | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | | Valuation Technique | | Unobservable Input | | Unobservable Input Value or Range |
Assets measured on a recurring basis: | | | | |
FHLB stock | | $ | 7,225 |
| | FHLB Stated Par Value | | N/A | | N/A | |
Assets measured on a non-recurring basis: | | | | Assets measured on a non-recurring basis: | | | | | | | | |
Impaired loans (collateral dependent) | | $ | 3,745 |
| | Appraisal of collateral | | Appraisal adjustments (1) | | 5% - 50% | Impaired loans (collateral dependent) | | $ | 1,992 | | | $ | 1,268 | | | Appraisal of collateral | | Appraisal adjustments (1) | | 5% - 50% |
(1) Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
Estimated Fair Values of Assets and Liabilities
In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the consolidated balance sheet,Consolidated Balance Sheet, the Company is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the balance sheet.Consolidated Balance Sheet.
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| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
The carrying values, estimated fair values and placement in the fair value hierarchy of the Company's consolidated financial instruments for which fair value is only disclosed but not recognized on the balance sheetConsolidated Balance Sheets at the dates indicated are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 |
| | | | | | Fair value measurement |
(Dollars in thousands) | | Carrying Amount | | Fair Value | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs |
Financial assets: | | | | | | | | | | |
Loans held for sale | | $ | 5,311 | | | $ | 5,337 | | | $ | 0 | | | $ | 5,337 | | | $ | 0 | |
Loans, net | | 3,106,980 | | | 3,146,344 | | | 0 | | | 0 | | | 3,146,344 | |
Financial liabilities: | | | | | | | | | | |
CDs (including brokered) | | 335,473 | | | 339,330 | | | 0 | | | 339,330 | | | 0 | |
Borrowed funds | | 1,679 | | | 1,593 | | | 0 | | | 1,593 | | | 0 | |
Subordinated debt | | 73,725 | | | 77,902 | | | 0 | | | 0 | | | 77,902 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | Fair value measurement |
(Dollars in thousands) | | Carrying Amount | | Fair Value | | Level 1 inputs | | Level 2 Inputs | | Level 3 Inputs |
Financial assets: | | |
| | |
| | | | | | |
Loans held for sale | | $ | 876 |
| | $ | 876 |
| | $ | — |
| | $ | 876 |
| | $ | — |
|
Loans, net | | 2,169,189 |
| | 2,178,545 |
| | — |
| | — |
| | 2,178,545 |
|
Financial liabilities: | | |
| | |
| | | | | | |
Certificates of deposit (including brokered) | | 256,885 |
| | 256,220 |
| | — |
| | 256,220 |
| | — |
|
Borrowed funds | | 149,255 |
| | 149,251 |
| | — |
| | 149,251 |
| | — |
|
Subordinated debt | | 14,844 |
| | 14,216 |
| | — |
| | — |
| | 14,216 |
|
41
|
| | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 | | Fair value measurement |
(Dollars in thousands) | | Carrying Amount | | Fair Value | | Level 1 inputs | | Level 2 Inputs | | Level 3 Inputs |
Financial assets: | | |
| | |
| | | | | | |
Loans held for sale | | $ | 1,569 |
| | $ | 1,569 |
| | $ | — |
| | $ | 1,569 |
| | $ | — |
|
Loans, net | | 1,991,387 |
| | 1,997,887 |
| | — |
| | — |
| | 1,997,887 |
|
Financial liabilities: | | |
| | |
| | | | | | |
Certificates of deposit (including brokered) | | 227,257 |
| | 226,536 |
| | — |
| | 226,536 |
| | — |
|
Borrowed funds | | 10,671 |
| | 10,670 |
| | — |
| | 10,670 |
| | — |
|
Subordinated debt | | 14,834 |
| | 14,011 |
| | — |
| | — |
| | 14,011 |
|
| | | | | | | | |
| ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | | | Fair value measurement |
(Dollars in thousands) | | Carrying Amount | | Fair Value | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs |
Financial assets: | | | | | | | | | | |
Loans held for sale | | $ | 601 | | | $ | 609 | | | $ | 0 | | | $ | 609 | | | $ | 0 | |
Loans, net | | 2,531,845 | | | 2,542,577 | | | 0 | | | 0 | | | 2,542,577 | |
Financial liabilities: | | | | | | | | | | |
CDs | | 310,951 | | | 311,975 | | | 0 | | | 311,975 | | | 0 | |
Borrowed funds | | 96,173 | | | 96,045 | | | 0 | | | 96,045 | | | 0 | |
Subordinated debt | | 14,872 | | | 14,957 | | | 0 | | | 0 | | | 14,957 | |
Excluded from the tables above are certain financial instruments with carrying values that approximated their fair value at the dates indicated, as they were short-term in nature or payable on demand. These include cash and cash equivalents, accrued interest and non-term deposit accounts. The respective carrying values of these instruments would all be considered to be classified within Level 1 of their fair value hierarchy.
Also excluded from these tables are the fair values of commitments for the unused portionportions of lines of credit and letters of credit, which were estimated to be the fees currently charged to enter into similar agreements and are deemed to be immaterial, as well as commitments to originate loans whichthat were short-term, at current market rates and estimated to have no significant change in fair value.
When determining fair values noted
(15)Supplemental Cash Flow Information
The supplemental cash flow information for the nine months ended September 30, 2020 and September 30, 2019 is as follows:
| | | | | | | | | | | | | | |
| | Nine Months Ended September 30, |
(Dollars in thousands) | | 2020 | | 2019 |
Supplemental financial data: | | | | |
Cash paid for: interest | | $ | 11,502 | | | $ | 16,222 | |
Cash paid for: income taxes | | 11,883 | | | 8,760 | |
Cash paid for: lease liability | | 921 | | | 875 | |
Supplemental schedule of non-cash activity: | | | | |
Net purchases of investment securities not yet settled | | 0 | | | 6,348 | |
Transfer from loans to other real estate owned | | 0 | | | 255 | |
| | | | |
| | | | |
ROU lease assets: operating leases(1) | | 0 | | | 19,635 | |
(1)This represents the right of use ("ROU") lease asset that was recorded upon adoption of ASC 842 in 2019 and new leases added in the tables above, in cases where quoted fair values are not available, fair values are based upon estimates using various valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:
Loans held for sale: Loans held for sale are recordedat the lower of aggregate amortized cost or market value. The fair value is based on comparable market prices for loans with similar rates and terms.
Loans: The fair value of loans was determined using discounted cash flow analysis, using interest rates currently being offered by the Company. The incremental credit risk for adversely classified loans was considered in the determination of the fair value of the loans.
Financial liabilities: The fair values of certificates of deposit and borrowings were estimated using discounted cash flow analysis using rates offered by the Bank or advance rates offered by the FHLB on September 30, 2017 and December 31, 2016 for similar instruments. The fair value of subordinated debt was estimated using discounted cash flow analysis using a market rate of interest at September 30, 2017 and December 31, 2016.
periods indicated.
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| ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
| |
Limitations: The estimates of fair value of financial instruments were based on information available at September 30, 2017 and December 31, 2016 and are not indicative of the fair market value of those instruments as of the date of this Quarterly Report on Form 10-Q. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. The fair value of the Company's time deposit liabilities do not take into consideration the value of the Company's long-term relationships with depositors, which may have significant value.
Because no active market exists for a portion of the Company's financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates were based on existing on and off-balance sheet financial instruments without an attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including premises and equipment and foreclosed real estate, if any.
In addition, the tax ramifications related to the realization of the unrealized appreciation and depreciation can have a significant effect on fair value estimates and have not been considered in any of the estimates. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
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Item 2 - | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Item 2 -Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis should be read in conjunction with the Company's (also referred to herein as "Enterprise," "us," "we," or "our") unaudited consolidated interim financial statements and notes thereto contained in this reportQuarterly Report on Form 10-Q for the quarterly period ended September 30, 2020 (this "Form 10-Q"), and the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 20162019 (the "2016"2019 Annual Report on Form 10-K").
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Form 10-Q") contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, includingforward-looking statements concerning plans, objectives, future events or performance and assumptions and other statements. These statements that are other thannot statements of historical fact. Forward-looking statements may be identified by reference to a future period or periods or by use of forward-looking terminology such as "will," "should," "could," "anticipates," "believes," "expects," "intends," "may," "plans," "pursue," "views" and similar terms or expressions.
Various statements contained in Item 2 - "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 3 - "Quantitative and Qualitative Disclosures About Market Risk" of this Form 10-Q are forward-looking statements, including, but not limited to statements related to management's views on on:
•the banking environment and the economy, economy;
•the impact of the COVID-19 pandemic ("pandemic") and the Company’s participation in and execution of government programs related to the pandemic;
•competition and market expansion opportunities, opportunities;
•the interest rateinterest-rate environment, credit risk and the level of future non-performing assets and charge-offs, charge-offs;
•potential asset and deposit growth, future non-interest expenditures and non-interest income growth,growth;
•expansion strategy; and
•borrowing capacity are forward-looking statements. capacity.
The Company cautions readers that such forward-looking statements reflect numerous assumptions that management believes to be reasonable, but which are inherently uncertain and beyond the Company's control. Forward-looking statements involve a number of risks and uncertainties that could cause the Company's actual results to differ materially from those expressed in, or implied by, the forward-looking statement. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance. Any forward-looking statements in this Form 10-Q are based on information available to the Company as of the date of this Form 10-Q, and the Company undertakes no obligation to publicly update or otherwise revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law. Therefore, the Company cautions readers not to place undue reliance on any such forward-looking information and statements. The following important factors, among others, could cause the Company's results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein:
(i) changes in interest rates could negatively impact net interest income; failure of risk management controls and procedures;
(ii)adequacy of the allowance for loan losses;
(iii)risk specific to commercial loans and borrowers;
(iv)changes in the business cycle and downturns in the local, regional or national economies, including changes in consumer spending and deterioration in the local real estate market, could negatively impact credit and/or asset quality and result in credit losses and increases in the Company's allowance for loan losses; (iii)
(v)deterioration of securities markets could adversely affect the value or credit quality of the Company's assets and the availability of funding sources necessary to meet the Company's liquidity needs;
(vi)changes in consumer spendinginterest rates could negatively impact net interest income;
(vii)liquidity risks;
(viii)technology-related risk, including technological changes and technology service interruptions or failure could adversely impact the Company's credit qualityoperations and increase technology-related expenditures;
(ix)cybersecurity risk including security breaches and identity theft could impact the Company's reputation, increase regulatory oversight and impact the financial results; (iv) results of the Company;
(x)increasing competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services could adversely affect the Company's competitive position within its market area and reduce demand for the Company's products and services; (v) deterioration of securities markets could adversely affect the value or credit quality of the Company's assets and the availability of funding sources necessary
(xi)our ability to meet the Company's liquidity needs; (vi) technology related risk, including technological changes and technology service interruptions or failure could adversely impact the Company's operationsretain and increase technology-related expenditures; (vii) cyber-security riskour aggregate assets under management;
(xii)our ability to enter new markets successfully and capitalize on growth opportunities, including security breachesthe receipt of required regulatory approvals;
(xiii)damage to our reputation in the markets we serve;
(xiv)exposure to legal claims and identity theftlitigation;
(xv)the inability to raise capital, on terms favorable to us, could impact the Company's reputation, increasecause us to fall below regulatory oversightminimum capital adequacy levels and impact the financial results of the Company; (viii) increases in employee compensationconsequently restrict our business and benefit expenses could adversely affect the Company's financial results; (ix) operations;
(xvi)changes in laws and regulations that apply to the Company's business and operations, including without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), and theany additional regulations, or repeals that may be forthcoming as a result thereof, and potential changes in tax laws, could cause the Company to incur additional costs and adversely affect the Company's business environment, operations and financial results; (x)
(xvii)future regulatory compliance costs, including any increase caused by new regulations imposed by the government's current administration;
(xviii)changes in accounting and/or auditing standards, policies and practices, as may be adopted or established by the regulatory agencies, FASB, or the Public Company Accounting Oversight Board could negatively impact the Company's financial results; (xi) our ability to enter new markets successfully and capitalize on growth opportunities, including the receipt of required regulatory approvals; (xii) future regulatory compliance costs, including any increase caused by new regulations imposed by the government's current administration; and (xiii)
(xix)the risks and uncertainties described in the documents that the Company files or furnishes to the SEC, including those discussed under Part II, Item1A, "Risk Factors," of this Form 10-Q and Item 1A, "Risk Factors"Factors," of the Company's 20162019 Annual Report on Form 10-K, which could have a material adverse effect on the Company's business, financial condition and results of operations. Therefore, the Company cautions readers not to place undue reliance on any such forward-looking information and statements.
Overview
Executive Summary
Net income for the three months ended September 30, 20172020 amounted to $5.5$10.3 million, an increase of $792 thousand, or 17%,$0.87 per diluted share, compared to the same three-month period in 2016. Diluted earnings$9.0 million, or $0.76 per diluted share, were $0.47 for the three months ended September 30, 2017, an increase of 15%, compared to the same three-month period in 2016.2019. Net income for the nine months ended September 30, 20172020 amounted to $16.7 million, an increase of $2.9$21.6 million, or 21%,$1.81 per diluted share, compared to the nine months ended September 30, 2016. Diluted earnings$25.5 million, or $2.15 per share were $1.43 for the nine months ended September 30, 2017, an increase of 13%, compared to the nine months ended September 30, 2016. Diluted earnings perdiluted share, for the nine months ended September 30, 2017 include2019.
The net income results for the full dilutivethree and nine months ended September 30, 2020 compared to the prior year periods were positively impacted by growth in net interest income, offset by increases in the provision for loan losses and operating expenses. The increases in net interest income resulted mainly from loan growth, PPP income and lower funding costs. The provision for loan losses increased over the prior year periods as the Company added to general reserves to address the impact of COVID-19 on the Company's loan portfolio and from an increase in impaired loan reserves. Operating expenses increased primarily from the Company’s equity offering on June 23, 2016. strategic growth initiatives.
Total assets, total loans, and customer deposits as of September 30, 2020 have increased 10%by 29%, 11%27%, and 3%27%, respectively, as compared to September 30, 2016.2019. The strong growth figures this year have been significantly impacted by both the outstanding PPP loans and the pandemic in general. Loan growth was particularly stronghas been positively and substantially impacted by outstanding PPP loans. Deposit growth has also been positively and substantially impacted by the PPP, as loans grew $88.0 million, or 4%, during the quarter. Customer deposits, whosePPP loan monies were distributed into deposit accounts. Additionally, deposit growth trends and month end balances vary depending on market conditions, grew by 3% from a year ago and 20% from two years ago. The increase in our 2017 earnings compared to 2016 has been positively impacted by this growth.stimulus checks and by customers proactively building liquidity in response to the economic uncertainty caused by the pandemic. We anticipate that as the majority of PPP loans are forgiven or paid off, which we believe will occur principally over the next several quarters, and as customers spend down their PPP funds, we will experience a reduction in both loans and deposits.
Strategically, our focus remainsOverall, the Company strategically operates with a long-term mindset that is focused on organic growth and supporting such growth by continually planning for and investing in our future. We recentlypeople, products, services, technology, digital evolution, and both new and existing branches. Our 25th branch located in Lexington, Massachusetts opened in the first quarter of 2020 and our 24th26th branch located in Windham, NHNorth Andover, Massachusetts is expected to open in early 2021.
COVID-19 Pandemic
The pandemic and completedits effects have impacted the relocationCompany’s financial condition and results of operations, as discussed in this Management Discussion & Analysis. Management underscores that the pandemic may continue to impact the Company's financial condition and results of operations in the coming quarters, particularly due to the economic uncertainty and its potential impact on interest rates, organic growth opportunities and the quality of the loan portfolio. However, the long-term impact of the pandemic on the Company cannot be reasonably estimated at this time.
The Company activated its pandemic response team in January in response to the emergence of the pandemic and has continued to adjust its operations as the pandemic has evolved. For updated information on business and operating changes impacting customers, please visit our website at www.Enterprisebanking.com.
Paycheck Protection Program
The PPP was established by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and instituted by the Small Business Administration ("SBA"). The PPP began in early April 2020 and the deadline for submission of PPP loan applications was August 8, 2020. The PPP allowed entities to apply for a 1% interest rate loan with payments generally deferred until the date the lender receives the forgiveness amount from the SBA. The PPP loans may be partially or fully forgiven by the SBA if the borrower meets certain conditions. For most PPP loans, the maturity term for any principal portion left unforgiven is 2 years from the funding date. For PPP loans that the SBA approved on or after June 5, 2020, the loan must have a maturity of at least 5 years. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding. As of September 30, 2020, the Company had 2,758 PPP loans outstanding totaling $508.2 million. As of September 30, 2020, the SBA has not issued any forgiveness determinations to the Bank's PPP borrowers.
In addition to generating interest income, the SBA pays lender’s fees for processing PPP loans. As of September 30, 2020, the Company has recorded $17.2 million in PPP related SBA fees and is accreting these fees into interest income over the life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining unearned fee is recognized into income at that time. Year-to-date through September 30, 2020, the Company has recognized $3.7 million in PPP related SBA fees through accretion. The majority of the remaining $13.5 million in fees are expected to be recognized as the PPP loans are forgiven or paid off over the next several quarters.
Throughout this Management Discussion & Analysis we have noted certain ratios or other measures of the Company’s performance as having been adjusted to remove the impact of PPP loans, which is considered a non-GAAP measure. The Company normalized for this PPP activity in order to provide a more meaningful comparison to prior periods as we expect the PPP loans to be short-term in nature and fully guaranteed by the SBA. See the table below under the heading "Non-GAAP Measurers" which provides a reconciliation of the non-GAAP measures to the information presented under U.S. generally accepted accounting principles (“GAAP”)."
Credit Quality
The Company determined its allowance for loan loss reserves using the incurred loss methodology. The allowance for loan losses to total loan ratio was 1.39% at September 30, 2020, compared to 1.31% at December 31, 2019 and 1.37% at September 30, 2019. Excluding PPP loans, which are fully guaranteed by the SBA, the allowance for loan losses to total loan ratio was 1.65% at September 30, 2020.
While the Company has not yet adopted CECL, it estimates that under CECL, as of September 30, 2020, the combined allowance for credit losses and the reserve for unfunded commitments, would have been between $52.0 million and $55.0 million, or 1.95% to 2.06% of total loans, excluding PPP loans. The Company will adopt CECL in the fourth quarter. See additional information below under the heading "Accounting Implications."
Non-performing assets to total assets amounted to 0.53% at September 30, 2020, compared to 0.46% at December 31, 2019 and 0.39% at September 30, 2019. Excluding PPP loans, the non-performing assets to total assets ratio was 0.61% at September 30, 2020.
Management has been proactive with customers since the onset of the pandemic and granted short term payment deferrals to those requesting financial assistance. As of June 30, 2020, short-term payment deferrals due to the COVID-19 pandemic were granted on 1,130 loans amounting to $594.8 million, or 22% of the loan portfolio, excluding PPP loans. As of September 30, 2020, short term payment deferral due to the COVID-19 pandemic were active on 178 loans amounting to $104.1 million, or 4% of the portfolio, excluding PPP loans. The majority of the active deferrals as of September 30, 2020 are loans that were granted subsequent short-term deferral periods after the initial three-month deferral period ended. These active short-term COVID-19 related deferrals remain on accrual status.
As a result of the economic uncertainty created by the pandemic, the long-term impact on the credit quality of our branchloan portfolio cannot be reasonably estimated at this time. We will continue to closely monitor the effect on credit quality across all industry sectors in Salem, NHour diversified loan portfolio as the results unfold in future quarters.
Financial Strength & Stability
The Bank is designated as “well capitalized” by the Federal Deposit Insurance Corporation ("FDIC") and has collateralized lines of credit at both the Federal Home Loan Bank ("FHLB") and the Federal Reserve Bank of Boston ("FRB"). We also have access to its new location.the PPP Liquidity Facility ("PPPLF") established by the FRB. The Company had no PPPLF borrowings outstanding or loans pledged to the PPPLF at September 30, 2020. Any PPP loans pledged as collateral for the PPPLF would be excluded from average assets used in the leverage ratio calculation. The $508.2 million in PPP loans are fully guaranteed by the SBA and have no impact on our risk-based capital ratios.
Total capital to risk weighted assets ratio for Enterprise Bancorp, Inc. on a consolidated basis was 14.31% at September 30, 2020 compared to 11.88% and 12.04% at December 31, 2019 and September 30, 2019. The increase resulted primarily from the Company’s July 7, 2020 issuance of $60.0 million in fixed-to-floating rate subordinated notes (the “notes”) due 2030, redeemable on or after July 15, 2025. The notes are classified as Tier 2 regulatory capital for the Company.
Total and Tier 1 capital to risk weighted assets ratios for Enterprise Bank were 14.17% and 12.92%, respectively, at September 30, 2020 compared to 11.87% and 10.65% at December 31, 2019, respectively, and to 12.03% and 10.78% at September 30, 2019, respectively. The increase to the Bank's capital ratios was due primarily to the Company investing $53.0 million into the Bank from the Company’s issuance of the notes.
Accounting Implications
In the first quarter of 2020, the Company elected under the CARES Act to delay the adoption of CECL. The Company will be required to adopt CECL by December 31, 2020. We expectanticipate the relocationadoption of our Leominster branchCECL will result in a reduction to retained earnings and will increase the provision for loan losses in the period of adoption. See Note 1, Item (e), "Recent Accounting Pronouncements" to the Company's unaudited consolidated interim financial statements in this Form 10-Q for information regarding CECL.
In the fourth quarter of 2020 the Company will be completedadopting the CECL. If adopted as of September 30, 2020, the Company estimates CECL would have increased the total allowance for credit loan losses, including the reserve for unfunded commitments, by $8.0 million to $11.0 million and increased the total allowance for credit losses to total loans ratio from 1.65% to a range of 1.95% to 2.06%, excluding PPP loans. CECL will be adopted with an effective retrospective implementation date of January 1, 2020. Included in early 2018. the estimated total increase in the allowance for credit losses is approximately pre-tax $3.0 million that will be recorded through equity, net of taxes, as the CECL day one implementation adjustment and pre-tax $5.0 million to $8.0 million that that will be recorded through earnings and applied retrospectively to the applicable March 31, June 30, and September 30 quarterly results.
The relocationCompany also suspended TDR accounting under the CARES Act beginning in the first quarter of our branches in Salem, NH2020 for certain short-term loan modifications. This election primarily impacts financial statement disclosure, for loans that have had a short-term payment deferral since March 1, 2020 as long as those loans were current and Leominster, MA will provide improved and state-of-the-art branches in those communities to better serve our customers.risk rated as “pass” as of December 31, 2019.
Composition of Earnings
The Company's earnings are largely dependent on its net interest income, which is primarily the difference between interest earned on loans and investments and the cost of funding (primarily deposits and borrowings). Net interest income expressed as a percentage of average interest earning assets is referred to as net interest margin. The Company reports net interest margin ("margin"). Margin presented on a tax equivalent basis by factoring in adjustments associated with interest income on tax exempt loans and investments is referred to as tax equivalent net interest margin ("T/E margin").
Net interest income for the three months ended September 30, 20172020 amounted to $25.1$33.5 million, an increase of $3.3$4.1 million, or 15%14%, compared to the same period in 2016.three months ended September 30, 2019. Net interest income for the nine months ended September 30, 20172020 amounted to $71.5$96.0 million, an increase of $7.3$9.7 million, or 11%, compared to the nine months ended September 30, 2016.2019. The increase in net interest income was due largely to interest-earning asset growth, primarily to loan growth. in loans, partially offset by a decline in T/E margin. Quarter-to-date interest income included $1.3 million in PPP interest income plus $2.1 million in PPP related SBA fee accretion. Year-to-date net interest income included $2.2 million in PPP interest income plus $3.7 million in PPP related SBA fee accretion.
Average loan balances (including loans held for sale) increased $204.2$724.0 million, and $201.6 million for the quarter and nine months ended September 30, 2017, respectively, compared to the 2016 respective period averages. Margin was 4.03%or 30%, for the three months ended September 30, 20172020 and 3.90%$537.3 million, or 22%, for the nine months ended September 30, 2020, compared to the same respective 2019 period averages. Excluding PPP loans, average loan balances increased $230.2 million, or 9%, and $249.3 million, or 10%, for the three and nine months ended JuneSeptember 30, 2017, while net interest2020, respectively, compared to the same respective 2019 period averages.
T/E margin was 3.86%3.46%, 3.59%, and 3.93% for the three months ended September 30, 2016. Margin was 3.95% for the nine months ended2020, June 30, 2020, and September 30, 2017, compared to2019, respectively. T/E margin was 3.63% and 3.96% for the nine months ended September 30, 2016. See2020 and September 30, 2019, respectively. Excluding PPP loans, T/E margin for the discussion underthree and nine months ended September 30, 2020 was 3.56% and 3.70%, respectively. The lower margin results primarily reflect the heading "Resultssignificant decline in interest rates since the comparable periods resulting in interest-earning asset yields declining faster than the cost of Operations" below,funding. Interest-earning asset yields have been impacted by a 175 basis point decrease in this Item 2,the Federal Funds rate since September 30, 2019, with 150 basis points of that total decline occurring in March 2020. Term interest rates have also fallen significantly over the respective periods and collectively these interest rate decreases have reduced yields on loans repricing, short-term and overnight investments and interest-earning asset growth. The Company funds these interest-earning assets principally through non-term customer deposits, which were less impacted by interest rate declines. T/E margin for further information regarding changesthe September 2020 quarter was also impacted by a significantly higher quarter-to-date average balance in margin.lower-yielding short-term and overnight investments of $259.8 million compared to $106.3 million in the prior year period.
The re-pricing frequency of the Company’sCompany's assets and liabilities are not identical and therefore subject the Company to the risk of adverse changes in interest rates. This is often referred to as “interest rate risk”"interest-rate risk" and is reviewed in more detail in Part I, Item 3, “Quantitative"Quantitative and Qualitative Disclosures About Market Risk,”" of this Form 10-Q and in Item 7A, “Quantitative"Quantitative and Qualitative Disclosures About Market Risk,”" of the Company's 20162019 Annual Report on Form 10-K.
For the three months ended September 30, 2017 and September 30, 2016, the provision for loan losses amounted to $1.2 million and $1.4 million, respectively. For the nine months ended September 30, 2017 and September 30, 2016,2020, the provision for loan losses amounted to $1.6 million, compared to $1.0 million for the three months ended September 30, 2019. The provision for the quarter ended September 30, 2020 consisted of $1.0 million in general reserve factor increases related primarily to economic weakness caused by the COVID-19 pandemic and $2.5 million, respectively. The decreaseits impact on credit quality in the loan portfolio, $845 thousand related to classified and impaired loans and a net reduction of $278 thousand related to changes in loan mix, among other factors.
For the nine months ended September 30, 2020, the provision for loan losses amounted to $10.4 million, compared to $1.6 million for the nine months ended September 30, 2019. The provision for the nine months ended September 30, 2017, was due2020 consisted of $6.3 million in general reserve factor increases primarily related to generally improvedeconomic weakness caused by the COVID-19 pandemic and its impact on credit quality metricsin the loan portfolio, $3.1 million related to classified and underlying collateral values, partially offset by increasedimpaired loans and $1.0 million related to loan growth compared to the prior year period.
Contributing to the provision forand changes in loan losses were:
Total non-performing loans as a percentage of total loans (a measure of credit risk) amounted to 0.57% at September 30, 2017, compared to 0.50% at September 30, 2016. Impacting the non-performing loans ratio in the current period,mix, among other changes, were new impaired/non-accrual status classifications of two larger commercial relationships totaling approximately $4.5 million, which, based on a review of their individual business circumstances, management determined that no reserves were necessary as of September 30, 2017.
The balance of the allowance for loan losses allocated to impaired and adversely classified loans decreased by $761 thousand during the nine months ended September 30, 2017, compared to an increase of $863 thousand during the nine months ended September 30, 2016.
The Company recorded net recoveries of $212 thousand for the nine months ended September 30, 2017, compared to net recoveries of $78 thousand for the nine months ended September 30, 2016.
Loan growth for the nine months ended September 30, 2017 was $179.6 million, compared to $125.9 million during the nine months ended September 30, 2016.
The allowance for loan losses to total loans ratio was 1.51% at September 30, 2017, 1.55% at December 31, 2016 and 1.59% at September 30, 2016.
For further information regarding loan quality statistics and the allowance for loan losses, see the sections below under the heading "Financial Condition" titled "Asset Quality" and "Allowance for Loan Losses."
factors.
Non-interest income for the three months ended September 30, 20172020 amounted to $3.4$4.3 million, a decreasean increase of $504$175 thousand, or 13%4%, compared to the same quarter last year.three months ended September 30, 2019. Quarter-to-date non-interest income increased in 2020 due primarily to increases to net gains on sales of securities and net gains on sales of loans, partially off-set by decreases in deposit and interchange fees. Non-interest income for the nine months ended September 30, 20172020 amounted to $11.5$12.5 million, an increase of $781$507 thousand, or 7%4%, compared to the nine months ended September 30, 2016. The decrease2019. Year-to-date non-interest income increased in the quarter was2020 due primarily due to net losses of $284 thousand on sales of securities compared toincreases in net gains on sales of securities of $546 thousand in the comparable prior year quarter. Additionally, loan sale income decreased while depositloans and interchange fees and investment advisory fees increased in the current quarter compared to the same period in 2016. Year-to-date increases in non-interest income over the prior year-to-date period were due primarily to increases in deposit and interchange fees and investment advisorywealth management fees, partially offset by a decrease in net gains on the sales ofdeposit and interchange fees. Year-to-date other miscellaneous income decreased mainly due to decreases in equity investment securities.
fair values, partially offset by derivative fee income.
Non-interest expense for the quarterthree months ended September 30, 20172020 amounted to $18.8$22.8 million, an increase of $1.4$1.7 million, or 8%, compared to the same quarter in the prior year. For the ninethree months ended September 30, 2017, non-interest2019. Non-interest expense amounted to $57.0 million, an increase of $5.2 million, or 10%, over the nine months ended September 30, 2016. Increases in non-interest expenses over the same periods in the prior year primarily related to the Company’s strategic growth and market expansion initiatives, mainly increases in salaries and benefits expenses.
In the first quarter of 2017, the Company adopted a new accounting standard, ASU No. 2016-09 "Compensation-Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting," which among other aspects relates to the tax treatment of equity compensation. Since the adoption of this standard, the provision for income taxes has decreased, increasing earnings by approximately $832 thousand for the nine months ended September 30, 2017.2020 amounted to $69.8 million, an increase of $6.1 million, or 10%, compared to the nine months ended September 30, 2019. Increases in non-interest expense in 2020 related primarily to the Company's strategic growth initiatives, particularly salaries and employee benefits, and to a lesser extent technology and telecommunications expenses. Additionally, FDIC deposit insurance premiums increased due primarily to higher insurance charges caused by a decline in our Tier 1 leverage ratio resulting from PPP loans outstanding and also from the 2019 expense being positively impacted by a $376 thousand credit from the FDIC Deposit Insurance Fund.
Sources and Uses of Funds
The Company's primary sources of funds are customer and brokered deposits, Federal Home Loan Bank ("FHLB")FHLB borrowings, current earnings and proceeds from the sales, maturities and pay-downs on loans and investment securities. The Company may also, from time to time, utilize brokered deposits, overnight borrowings from correspondent banks.banks and borrowings from the FRB. Additionally, funding for the Company may be generated through equity transactions, including the dividend reinvestment and direct stock purchase plan or exercise of stock options, and occasionally the issuance of debt securities or the sale of newcommon stock. The Company's sources of funds are intended to be used to originateconduct operations and to support growth, by funding loans purchase investmentand investing in securities, conduct operations,to expand the branch network, and to pay dividends to stockholders.
The investment portfolio is used primarily used to provide liquidity, manage the Company's asset-liability position and to invest excess funds providing additional sources of revenue. Total investments oneat fair value, a component of the key components of interest earninginterest-earning assets, amounted to $385.9$498.1 million at September 30, 2017, an increase of $11.2 million, or 3%, since2020, consistent with December 31, 2016,2019 balances, and comprised 14%12% and 16%, of total assets at September 30, 20172020 and 15% of total assets at December 31, 2016.2019, respectively.
Enterprise's main asset strategy is to grow loans, the largest component of interest earninginterest-earning assets, with a focus on high quality commercial lending relationships. Total loans, increased $179.6 million, or 9%, since December 31, 2016, and amounted to $2.20 billion at September 30, 2017, comprising 81%78% of total assets at September 30, 20172020 and 80% of total assets79% at December 31, 2016.2019, amounted to $3.15 billion at September 30, 2020, compared to $2.57 billion at December 31, 2019, an increase of $585.4 million, or 23%, due largely to PPP loan growth. Excluding PPP loans, total loans have increased $90.7 million, or 4%, since December 31, 2019. Total commercial loans amounted to $1.91$2.82 billion,, or 87%89% of gross loans, at September 30, 2017, which was relatively consistent with the composition2020, compared to 86% at December 31, 20162019. Excluding PPP loans, total commercial loans amounted to $2.31 billion, or 87% of 86%.gross loans, at September 30, 2020.
Management's preferred strategy for funding asset growth is to grow relationship-based customer deposit balances, preferably transactional deposits (comprisedcomprised of demand depositnon-interest checking accounts, interest-bearing checking accounts and traditional savings accounts).accounts. Asset growth in excess of transactional deposits is typically funded through non-transactional deposits (comprised of money market accounts, commercial tiered rate or "investment savings" accounts and term certificates of deposit)CDs) and wholesale funding (brokered deposits and borrowed funds).
At September 30, 2017,2020, customer deposits (total deposits excluding brokered deposits) amounted to $2.22$3.54 billion,, an increase of $10.6 million, from December 31, 2016 balances. During the period, the increase was primarily due to increases in non-interest bearing checking accounts, largely offset by decreases in money market account balances.
Wholesale funding amounted to $231.7 million at September 30, 2017, comprising 9% or 87% of total assets, compared to $70.0 million at December 31, 2016,$2.79 billion, or 3%86% of total assets, an increaseat December 31, 2019. Since December 31, 2019, customer deposits increased $748.3 million, or 27%, primarily in checking accounts, and to a lesser extent money markets. Management believes the deposit growth since December 31, 2019 was due in large part to customers depositing funds received from PPP loan advances and stimulus checks, and generally maintaining higher liquidity in response to the pandemic. See "Deposits" under "Financial Condition" contained in this Item 2 of $161.7 million. this Form 10-Q for a further breakdown of deposit growth.
Wholesale funding, includedwhich may be comprised of brokered deposits and FHLB advances, of $149.3 million and $10.7amounted to $76.7 million at September 30, 2017 and December 31, 2016, respectively, and brokered deposits of $82.5 million at September 30, 20172020, compared to $59.4$96.2 million at December 31, 2016. The Company's level2019, a decrease of $19.5 million, or 20%. At September 30, 2020, wholesale funding has increasedwas comprised primarily of brokered deposits, while at December 31, 2019, it was principally overnight FHLB advances. See "Borrowed Funds," "Wholesale Funding," and "Derivatives and Hedging Activities" under "Financial Condition" contained in 2017 as loan growth exceeded deposit growth.this Item 2 of this Form 10-Q for additional information on the Company's borrowings and wholesale funding strategies at September 30, 2020.
OpportunitiesOn July 7, 2020, the Company issued $60.0 million of fixed-to-floating rate subordinated notes. These notes, with an initial fixed rate of 5.25%, are due in 2030 and Risksredeemable at the option of the Company beginning on or after July 15, 2025. Subordinated debt (net of deferred issuance costs) amounted to $73.7 million at September 30, 2020, compared to $14.9 million at December 31, 2019.
This OpportunitiesNon-GAAP Measures
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with GAAP. Non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and Risks discussionfinancial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with Item 1A "Risk Factors," and the section titled "Opportunities and Risks" containedCompany’s GAAP financial information.
Certain non-GAAP measures provided in Item 7 "Management'sthis Management Discussion and Analysis exclude the outstanding balance of Financial ConditionsPPP loans that the Company began originating in April 2020 and Resultswhich are expected to be short-term in nature. The Company normalized for this activity in order to provide a more meaningful comparison to prior periods.
The following tables summarize the reconciliation of Operations"GAAP items to non-GAAP items (1):
| | | | | |
(Dollars in thousands) | September 30, 2020 |
Total loans (GAAP) | $ | 3,150,815 | |
Adjustment: PPP loans | (508,196) | |
Adjustment: Deferred PPP fees | 13,495 | |
Total loans (non-GAAP) | $ | 2,656,114 | |
| |
Total assets (GAAP) | $ | 4,060,547 | |
Adjustment: PPP loans | (508,196) | |
Adjustment: Deferred PPP fees | 13,495 | |
Total assets (non-GAAP) | $ | 3,565,846 | |
| | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
(Dollars in thousands) | | September 30, 2020 | | September 30, 2020 |
| | | | |
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Total average loans (GAAP) (2) | | $ | 3,168,787 | | | $ | 2,941,755 | |
Adjustment: Average PPP loans | | (508,311) | | | (295,791) | |
Adjustment: Average deferred PPP fees | | 14,528 | | | 7,823 | |
Total average loans (non-GAAP) (2) | | $ | 2,675,004 | | | $ | 2,653,787 | |
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Net interest margin (tax equivalent) (GAAP) | | 3.46 | % | | 3.63 | % |
Adjustment: PPP effect (1) | | 0.10 | % | | 0.07 | % |
Net interest margin (tax equivalent) (non-GAAP) | | 3.56 | % | | 3.70 | % |
(1)PPP loan adjustments include an elimination of PPP loans, net of unearned SBA fees, as well as interest income on PPP loans and related SBA fee accretion, included in interest income. Period end and average balances were adjusted as applicable.
(2)Total average loans include loans held for sale.
Culture and Organic Growth Strategy
Management's present priorities continue to be the Company's 2016 Annual Reportsafety and wellness of our team members and customers and on Form 10-K, which addresses other factorsmanaging through the pandemic and details that could adversely affectits economic impact. Looking beyond the Company's business, reputation, its future results of operations and financial condition.
Enterprise faces robust competition to attract and retain customers within existing and neighboring geographic markets. The Company's ability to achieve itspandemic, management is focused on long-term strategic growth initiatives, including investments in employee hiring and market share objectives will dependtraining and development, fostering diversity and inclusion, cultivating strong community relationships in part upon management's continued success in differentiating the Company in the market placeall markets that we serve, loan growth funded by customer deposits, technology and its abilitydigital transformation, and branch evolution and expansion.
The Company's business model is to strengthen its competitive position.provide a full range of diversified financial products and services through a highly trained team of knowledgeable banking professionals, who have an in-depth understanding of our markets and a commitment to open and honest communication with clients. Management believes the Company has differentiated itself from the competition by building a solidstrong reputation within the local market as a dependable commercial-focusedcustomer-centric, and commercially focused, community rooted bank, delivering consistentoffering robust product and exceptional customer service lines, including commercial lending, cash management, wealth management and trust services and commercial insurance, delivered by a knowledgeable and dedicated team of community bankers through traditional in-person service and multiple digital delivery channels offering competitive products24/7 remote banking capabilities.
The Company's banking professionals are dedicated to upholding the Company's core values, including significant and taking an active roleinvolvement in supportmany charitable and civic organizations, and community development programs throughout our service area. This long-held commitment to community not only contributes to the welfare of the communities we serve. serve, it also helps to fuel the local economy, creating new businesses and jobs, and has led to a strong referral network with local businesses, non-profit organizations and community leaders.
As we face the current period of economic uncertainty, management is committed to utilizing its disciplined and reliable credit management approach, which has served to provide consistent quality asset growth over varying economic cycles during the Company's history. The Company's loan growth initiatives are executed through strong business development and referral efforts, by a seasoned lending team possessing a broad breadth of business acumen and lending experience, supported by a highly qualified and experienced commercial credit review function.
The Company actively seekshas an ongoing commitment to increase market shareuse scalable technology and strengthen its competitive position through continuous reviewsdigitization to continually improve the customer experience and internal efficiencies and productivity. As part of deposit product offerings, cash management and ancillarythe Company's multi-year digital evolution strategy, new technology-driven products, services, and state-of-the-art delivery channels, targetedand process automation are continually introduced. These investments have proved invaluable in keeping our business operating efficiently and effectively for our customers during the pandemic.
Branch evolution includes enhancing our highly personalized customer interactions, updating technology and delivery methods, and ongoing facility improvements and renovations. New and renovated branches exhibit a modern, open-concept lobby with advanced technology. These branches are supported by our "Universal Bankers," who are cross trained to businesses, non-profits, professional practice groups, municipalitiesfully serve customer needs and consumers' needs. In addition, Enterprise carefully plans market expansion throughhave on-site commercial lenders.
The Company also continually looks to develop new branch development, identifying branches strategically locatedlocations within, and to complement, our existing locations while expanding the Company's geographic market footprint. In July 2016, the Company's 23rd branchMarch 2020, Enterprise opened on Route 101A in Nashua, NH, and in July 2017,its new Lexington, Massachusetts location. Additionally, the Company opened its 24this also in the process of establishing a branch office in Windham, NH. Branch expansion is aimed at achieving not only deposit market share growth, but also is intended to contribute to loan originationsNorth Andover, Massachusetts and generate referrals for investment advisory and wealth management, trust and insurance services, residential mortgages and cash management products.
Management continues to undertake significant strategic initiatives, including investments in employee hiring, training and development; marketing and public relations; technology and electronic delivery methods; ongoing improvements, renovations or strategic relocation of existing facilities; and the continued development of recently added branches. The relocation of our branches in Salem, NH and Leominster, MAanticipates that this location will provide improved and state-of-the-art branches in prime locations in those communities to better serve our customers. In the third quarter of 2017, we relocated our Salem, NH branch, and we expect the relocation of our Leominster, MA branch to be completedopen in early 2018. 2021.
While management recognizes that such investments increase expenses in the short term, Enterprise believes that such initiatives are a necessarycritical investment in the long-term growth and earnings potential of the Company and will help the Company to capitalize on current opportunities in the current marketplace for community banks such as Enterprise. However, lower than expected returns on these investments, such as slower than anticipated loan and deposit growth in new branches, a delay in the time line for such initiatives due to the current pandemic, or other reasons, and/or lower than expected feeadoption rates or other income generated from new technology or initiatives, could decrease anticipated revenues and net income on such investments in the future.
Changes in government regulation or oversight could affect the Company in substantial and unpredictable ways. The President has signed many executive orders calling for the administration to review various U.S. financial laws and regulations. The full scope of the current administration's legislative agenda is not yet fully known, but it may include certain deregulatory measures for the banking industry, including the structure and powers of the Consumer Finance Protection Bureau and other areas under the Dodd-Frank Act in addition to extensive corporate tax reform proposals. Accordingly, it is difficult to anticipate the continued impact that this expansive legislation, if or when fully enacted, will have on the Company, its customers and the financial industry generally. The Company maintains a Compliance Management Program (the "CMP") designed to meet regulatory and legislative requirements. The CMP provides a framework for tracking and implementing regulatory changes,
monitoring the effectiveness of policies and procedures, conducting compliance risk assessments, and educating employees in matters relating to regulatory compliance.
Operational risk includes the threat of loss from inadequate or failed internal processes, people, systems or external events, due to, among other things: fraud or error; the inability to deliver products or services; failure to maintain a competitive position; lack of, or insufficient information security, cyber-security or physical security; inadequate procedures or controls followed by third-party service providers; or violations of ethical standards. In addition to intensive and ongoing employee training, employee and customer awareness campaigns, controls to manage operational risk include, but are not limited to, technology administration, information security, third-party management, and disaster recovery and business continuity planning. Any system of controls or contingency plan, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the controls and procedures will be met. Any breakdown in the integrity of these information systems, infrastructure, or cyber-security measures, or the Company's inability to identify, respond and correct such breakdown, could result in a loss of customer business, expose customers' personal information to unauthorized parties, damage the Company's reputation, subject the Company to increase costs and additional regulatory scrutiny, and expose the Company to civil litigation and possible financial liability, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.
Accounting Policies/Critical Accounting Estimates
As discussed in the Company's 2016 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, impairment review of investment securities and the impairment review of goodwill. The Company has not changed its significant accounting and reporting policies from those disclosed in its 2016 Annual Report on Form 10-K.
Financial Condition
Total assets increased $199.2$825.5 million,, or 8%26%, since December 31, 2016,2019 to $2.73$4.06 billion at September 30, 2017.2020. Excluding PPP loans, total assets have increased $330.8 million, or 10%, since December 31, 2019. The balance sheet composition and changes since December 31, 20162019 are discussed below.
Cash and cash equivalents
Cash and cash equivalents ismay be comprised of cash on hand and cash items due from banks, interest-earning deposits (deposit accounts, excess reserve cash balances, money markets, and money market mutual funds accounts) and federal funds sold ("fed funds") sold.. Cash and cash equivalents increased $244.6 million since December 31, 2019. At September 30, 2020, cash and cash equivalents amounted to 8% of total assets, compared to 2% of total assets at both September 30, 2017 and December 31, 2016. Balances2019. While balances in cash and cash equivalents will fluctuate due primarily to the timing of net depositcash flows borrowingfrom deposits, borrowings, loans and loan inflows and outflows, investment purchases and maturities, calls and sales proceeds,investments, and the immediate liquidity needs of the Company.Company, management believes customers are generally maintaining higher liquidity in response to the pandemic and have increased cash balances since December 31, 2019.
Investments
At September 30, 2017,2020, the carryingfair value of the investment portfolio amounted to $385.9$498.1 million,, an increase a decrease of $11.2$7.1 million, or 3%,1% since December 31, 2016.
2019 balance. The following table summarizes theinvestment portfolio at fair value represented 12% and 16% of investments at the dates indicated:
|
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| | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Federal agency obligations(1) | | $ | 75,072 |
| | 19.5 | % | | $ | 75,069 |
| | 20.0 | % | | $ | 80,145 |
| | 23.0 | % |
Residential federal agency MBS(1) | | 100,958 |
| | 26.2 | % | | 93,353 |
| | 24.9 | % | | 88,706 |
| | 25.4 | % |
Commercial federal agency MBS(1) | | 64,796 |
| | 16.8 | % | | 70,278 |
| | 18.7 | % | | 44,679 |
| | 12.8 | % |
Municipal securities | | 129,762 |
| | 33.6 | % | | 111,803 |
| | 29.8 | % | | 111,556 |
| | 31.9 | % |
Corporate bonds | | 11,356 |
| | 2.9 | % | | 10,695 |
| | 2.9 | % | | 11,131 |
| | 3.2 | % |
Certificates of deposits(2) | | 952 |
| | 0.2 | % | | 949 |
| | 0.3 | % | | 970 |
| | 0.3 | % |
Total debt securities | | 382,896 |
| | 99.2 | % | | 362,147 |
| | 96.6 | % | | 337,187 |
| | 96.6 | % |
Equity investments | | 3,046 |
| | 0.8 | % | | 12,643 |
| | 3.4 | % | | 11,877 |
| | 3.4 | % |
Total investment securities at fair value | | $ | 385,942 |
| | 100.0 | % | | $ | 374,790 |
| | 100.0 | % | | $ | 349,064 |
| | 100.0 | % |
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(1)
| These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as, investments guaranteed by Ginnie Mae ("GNMA"), a wholly-owned government entity. |
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(2)
| Certificates of deposits ("CDs") represent term deposits issued by banks that are subject to FDIC insurance and purchased on the open market. |
Included in the residential and commercial federal agency MBS categories were collateralized mortgage obligations (“CMOs”) issued by U.S. agencies totaling $110.2 million, $107.0 million, and $78.6 milliontotal assets at September 30, 2017,2020 and December 31, 2016 and2019, respectively. As of September 30, 2016, respectively.
During the nine months ended September 30, 2017, the Company purchased $99.4 million in securities. The Company had principal pay downs, calls2020 and maturities totaling $21.1 million during the nine months ended September 30, 2017. In addition, management sold securities with an amortized cost of approximately $70.2 million realizing net gains on sales of $485 thousand during the nine months ended September 30, 2017, predominately from gains on equity sales, largely offset by losses realized from a debt security portfolio restructuring in the third quarter of 2017.
Net unrealized gains onDecember 31, 2019, the investment portfolio amounted to $3.6 million at September 30, 2017 compared to net unrealized losseswas comprised primarily of$1.2 million at December 31, 2016 and unrealized gains of $9.4 million at September 30, 2016. The Company attributes the increase in net unrealized gains from December 31, 2016 primarily to the debt portfolio restructuring noted above, which mainly replaced lower yielding debt securities, classified as Available for Sale, with higher yielding ones, and to a lesser extent lower long term interest rates. Unrealized gains or losses will only be recognized in the statements of income if the investments are sold. However, should an investment be deemed "other than temporarily impaired" ("OTTI"), the Company is required to write-down the fair valuesmall portion of the investment. See “Impairment Review of Securities” under the heading “Critical Accounting Estimates”portfolio invested in Item 7 of the Company's 2016 Annual Report on Form 10-K for additional information regarding the accounting for OTTI.equity securities.
See also Note 2, "Investment Securities," and Note 12,14, "Fair Value Measurements," to the Company's unaudited consolidated interim financial statements contained in Item 1 in this Form 10-Q above for further information regarding the Company's unrealized gains and losses on debt and equity securities, including information about investments in an unrealized loss position for which an other-than-temporary impairment has or has not been recognized, and investments pledged as collateral, as well as the Company's fair value measurements for available-for-saleinvestments.
Debt Securities
The following table summarizes the fair value of debt securities at the dates indicated:
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| | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Federal agency obligations(1) | | $ | — | | | — | % | | $ | 1,004 | | | 0.2 | % | | $ | 1,004 | | | 0.2 | % |
Residential federal agency MBS(1) | | 184,596 | | | 37.1 | % | | 192,658 | | | 38.2 | % | | 181,152 | | | 37.6 | % |
Commercial federal agency MBS(1) | | 115,245 | | | 23.2 | % | | 114,635 | | | 22.7 | % | | 116,053 | | | 24.1 | % |
Municipal securities taxable | | 88,490 | | | 17.8 | % | | 81,687 | | | 16.2 | % | | 168,978 | | | 35.0 | % |
Municipal securities tax exempt | | 97,252 | | | 19.5 | % | | 100,038 | | | 19.8 | % | | — | | | — | % |
Corporate bonds | | 11,897 | | | 2.4 | % | | 14,311 | | | 2.8 | % | | 14,463 | | | 3.0 | % |
CDs(2) | | — | | | — | % | | 455 | | | 0.1 | % | | 456 | | | 0.1 | % |
Total debt securities | | $ | 497,480 | | | 100.0 | % | | $ | 504,788 | | | 100.0 | % | | $ | 482,106 | | | 100.0 | % |
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(1)These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as, investments guaranteed by Ginnie Mae ("GNMA"), a wholly-owned government entity.
(2)CDs represent term deposits issued by banks that are subject to FDIC insurance and purchased on the open market.
As of the dates reflected in the tables above, the majority of investments in the residential and commercial federal agency MBS categories were collateralized mortgage obligations ("CMOs") issued by U.S. government agencies. The remaining MBS investments totaled $20.6 million, $23.5 million, and $24.6 million at September 30, 2020 December 31, 2019 and September 30, 2019, respectively.
During the nine months ended September 30, 2020, the Company purchased $33.7 million in debt securities. The Company had principal pay downs, calls and maturities totaling $52.0 million during the nine months ended September 30, 2020.
During the nine months ended September 30, 2020, management sold debt securities with an amortized cost of approximately $5.7 million realizing net gains on sales of $227 thousand.
Net unrealized gains on the debt securities portfolio amounted to $31.2 million at September 30, 2020, compared to net unrealized gains of $13.5 million at December 31, 2019 and net unrealized gains of $15.6 million at September 30, 2019. The Company attributes the large increase in net unrealized gains as compared to December 31, 2019 to significant decreases in market yields.
Unrealized gains or losses on debt securities are carried on the Consolidated Balance Sheet and will be recognized in the Consolidated Statements of Income if the investments are sold. Should an investment be deemed OTTI, the Company is required to write-down the fair value of the investment. See Note 1, "Summary of Significant Accounting Policies," under Item (e), "Investments," to the Company's audited consolidated financial statements contained in the Company's 2019 Annual Report on Form 10-K for additional information on accounting for OTTI. For more information about the Company's assessment for OTTI, see Note 2, "Investment Securities," to the Company's audited consolidated financial statements contained in the Company's 2019 Annual Report on Form 10-K.
Equity Securities
The Company held equity securities with a fair value of $651 thousand at September 30, 2020, $467 thousand at December 31, 2019, and $1.4 million at September 30, 2019. During the nine months ended September 30, 2020, the Company recorded net losses on equity securities in the Consolidated Statements of Income of $135 thousand, compared to net gains of $275 thousand for the nine months ended September 30, 2019, due in both periods primarily to fair market value adjustments stemming from fluctuations in market prices of securities held. The amount recognized related to equity securities in "Other income" is dependent primarily on the amount of dollars invested in equities and the magnitude of changes in equity market values.
Federal Home Loan Bank Stock
The Bank is required to purchase stock of the FHLB at par value in association with advances from the FHLB; this stock is classified as a restricted investment and carried at cost, which management believes approximates fair value. The carrying amount ofCompany's investment in FHLB stock was $7.2 million for the period ended September 30, 2017, $2.1 million at December 31, 2016 and $1.9 million at September 30, 2016.2020, $4.5 million at December 31, 2019 and $2.0 million at September 30, 2019.
See Note 1, "Summary of Significant Accounting Policies," under the section "Restricted Cash and Investments," in Item (c), "Restricted Instruments,"Accounting Policies," to the Company's unaudited consolidated interim financial statements contained in Item 1 above for further information regarding the Company's investment in FHLB stock.
Loans
Total loans represented 81%78% of total assets at September 30, 20172020 and 80%79% of total assets at December 31, 2016.2019. Total loans increased $179.6$585.4 million,, or 9%23%, compared to December 31, 2016,2019, and $216.5increased $678.7 million,, or 11%27%, since September 30, 2016.2019. PPP loan production, which began in April 2020, accounted for $508.2 million in growth through September 30, 2020. The mix of loans within the portfolio remained relatively unchanged with commercial loans amounting to approximately 87% of grosstotal loans, excluding PPP loans at September 30, 2017, reflecting2020, compared to 86% at December 31, 2019.
Since December 31, 2019, and excluding PPP loans, there has been a continued focus onslight shift within the commercial loan growth.mix as commercial and industrial loans have decreased from 20% of total loans to 16%, while commercial real estate increased from 54% to 56% and commercial construction increased from 12% to 14% of total loans.
The following table sets forth the loan balances by certain loan categories at the dates indicated and the percentage of each category to gross loans.loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Commercial real estate | | $ | 1,490,649 | | | 47.1 | % | | $ | 1,394,179 | | | 54.3 | % | | $ | 1,317,999 | | | 53.3 | % |
Commercial and industrial | | 435,856 | | | 13.8 | % | | 501,227 | | | 19.5 | % | | 511,695 | | | 20.7 | % |
Commercial construction | | 384,121 | | | 12.2 | % | | 317,477 | | | 12.4 | % | | 295,448 | | | 11.9 | % |
SBA PPP loans | | 508,196 | | | 16.0 | % | | — | | | — | % | | — | | | — | % |
Total commercial loans | | 2,818,822 | | | 89.1 | % | | 2,212,883 | | | 86.2 | % | | 2,125,142 | | | 85.9 | % |
Residential mortgages | | 254,784 | | | 8.0 | % | | 247,373 | | | 9.6 | % | | 241,157 | | | 9.7 | % |
Home equity | | 84,778 | | | 2.6 | % | | 98,252 | | | 3.8 | % | | 98,763 | | | 4.0 | % |
Consumer | | 9,070 | | | 0.3 | % | | 10,054 | | | 0.4 | % | | 10,037 | | | 0.4 | % |
Total retail loans | | 348,632 | | | 10.9 | % | | 355,679 | | | 13.8 | % | | 349,957 | | | 14.1 | % |
| | | | | | | | | | | | |
Gross loans | | 3,167,454 | | | 100.0 | % | | 2,568,562 | | | 100.0 | % | | 2,475,099 | | | 100.0 | % |
Deferred fees, net | | (3,144) | | | | | (3,103) | | | | | (2,969) | | | |
Deferred PPP fees | | (13,495) | | | | | — | | | | | — | | | |
Total loans | | 3,150,815 | | | | | 2,565,459 | | | | | 2,472,130 | | | |
Allowance for loan losses | | (43,835) | | | | | (33,614) | | | | | (33,935) | | | |
Net loans | | $ | 3,106,980 | | | | | $ | 2,531,845 | | | | | $ | 2,438,195 | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Commercial real estate | | $ | 1,153,108 |
| | 52.3 | % | | $ | 1,038,082 |
| | 51.3 | % | | $ | 1,008,362 |
| | 50.7 | % |
Commercial and industrial | | 512,736 |
| | 23.3 | % | | 490,799 |
| | 24.2 | % | | 490,590 |
| | 24.7 | % |
Commercial construction | | 245,453 |
| | 11.1 | % | | 213,447 |
| | 10.5 | % | | 215,432 |
| | 10.9 | % |
Total commercial loans | | 1,911,297 |
| | 86.7 | % | | 1,742,328 |
| | 86.0 | % | | 1,714,384 |
| | 86.3 | % |
Residential mortgages | | 194,375 |
| | 8.8 | % | | 180,560 |
| | 8.9 | % | | 172,556 |
| | 8.7 | % |
Home equity loans and lines | | 89,044 |
| | 4.0 | % | | 91,065 |
| | 4.5 | % | | 90,116 |
| | 4.5 | % |
Consumer | | 10,085 |
| | 0.5 | % | | 10,845 |
| | 0.6 | % | | 10,634 |
| | 0.5 | % |
Total retail loans | | 293,504 |
| | 13.3 | % | | 282,470 |
| | 14.0 | % | | 273,306 |
| | 13.7 | % |
| | | | | | | | | | | | |
Gross loans | | 2,204,801 |
| | 100.0 | % | | 2,024,798 |
| | 100.0 | % | | 1,987,690 |
| | 100.0 | % |
Deferred fees, net | | (2,428 | ) | | |
| | (2,069 | ) | | |
| | (1,836 | ) | | |
|
Total loans | | 2,202,373 |
| | |
| | 2,022,729 |
| | |
| | 1,985,854 |
| | |
|
Allowance for loan losses | | (33,184 | ) | | |
| | (31,342 | ) | | |
| | (31,589 | ) | | |
|
Net loans | | $ | 2,169,189 |
| | |
| | $ | 1,991,387 |
| | |
| | $ | 1,954,265 |
| | |
|
As of September 30, 2017,2020, commercial real estate loans increased $115.0$96.5 million, or 11%7%, compared to December 31, 2016,2019, and increased 14%$172.7 million, or 13%, compared to September 30, 2016.2019. Commercial real estate loans are typically secured by a variety of owner-use and non-owner occupied (investor) commercial and industrial property types including one-to-four and multi-family apartment buildings, office, industrial or mixed-use facilities, strip shopping centers or other commercial properties and are generally guaranteed by the principals of the borrower.
CommercialAs of September 30, 2020, commercial and industrial loans increased $21.9loan balances decreased by $65.4 million, or 4%13%, compared to December 31, 2016,2019 and increased 5% asdecreased $75.8 million, or 15%, compared to September 30, 2016. 2019. The decrease reflects a decline in line utilization on revolving lines as business customers made use of alternative government sponsored funding sources and declines in business activity as a result of the pandemic, as well as general pay downs, maturities and reduction in originations.
These loans include seasonal and formula-based revolving lines of credit, working capital loans, equipment financing, (including equipment leases), and term loans. Also included in commercial and industrial loans are loans partially guaranteed by the U.S. Small Business Administration ("SBA"), and loansSBA under various long-established programs (see below regarding the SBA PPP loan portfolio). Commercial and agencies.industrial credits may be unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the borrower.
Commercial construction loans increased by $32.0$66.6 million,, or 15%21%, since December 31, 2016,2019, and increased 14% as$88.7 million, or 30%, compared to September 30, 2016.2019. Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by underlying real estate collateral and are generally guaranteed by the principals of the borrowers. In many cases, these loans move into the permanent commercial real estate portfolio when the construction phase is completed. The increases since December 31, 2019 and September 30, 2019 were due primarily to active local construction markets fueled by strong demand for residential and multi-family housing and increased commercial development activity.
RetailAs previously noted in the "Overview" section of this "Management's Discussion and Analysis of Financial Condition and Results of Operations," the PPP was established by the CARES Act and implemented by the SBA. The PPP began in early April 2020 and the deadline for submission of PPP loan applications was August 8, 2020. PPP loans may be partially or fully forgiven by the SBA if certain criteria are met. The PPP loans carry an interest rate of 1% to be paid by either the SBA, in the event of forgiveness, or by the borrower for the term of the loan, which may be either 2 or 5 years. Payments for PPP loans are deferred until the SBA issues a forgiveness decision or ten months after the end of the forgiveness covered period if the borrower fails to apply for forgiveness during that period.
Total retail loan balances increaseddecreased by $11.0$7.0 million, or 4%2%, since December 31, 20162019, and decreased $1.3 million, or 0.4%, and have increased by 7%since September 30, 2016. The increase over2019. Residential secured one-to-four family mortgage loans continue to make up the same period inlargest portion of the prior year was primarily with loans secured by residential property.retail segment.
At September 30, 2017,2020, commercial loan balances participated out to various banks amounted to $67.7$75.7 million,, compared to $62.3$80.2 million at December 31, 2016,2019, and $62.4$77.3 million at September 30, 2016.2019. These balances participated out to other institutions are not carried as assets on the Company's financial statements. Commercial loans originated by other banks in which the Company is a participating institution are carried at the pro-rata share of ownership and amounted to $89.4$103.6 million,, $85.2 $104.3 million and $86.8$68.0 million at September 30, 2017, 2020, December 31, 2016,2019, and September 30, 2016,2019, respectively. In each case, the participating bank funds a percentage of the loan commitment and takes on the related pro-rata risk. The rights and
obligations of each participating bank are divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks. Each participation is governed by individual participation agreements executed by the lead bank and the participant at loan origination. Participating loans with other institutions provide banks the opportunity to retain customer relationships and reduce credit risk exposure among each participating bank, while providing customers with larger credit vehicles than the individual bank might be willing or able to offer independently.
See Note 3, "Loans," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form
10-Q for information on loans serviced for others and loans pledged as collateral.
Credit Risk
Inherent in the lending process is the risk of loss due to customer non-payment, or "credit risk." The Company's commercial lending focus may entail significant additional credit risks compared to long-term financing on existing, owner-occupied residential real estate. The Company seeks to lessen its credit risk exposure by managing its loan portfolio to avoid concentration by industry, and relationship size, and source of repayment, and through sound underwriting practices and the credit risk management function; however, management recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio and economic conditions.
Non-performing assets are comprised of non-accrual loans deposit account overdrafts that are more than 90 days past due and OREO. The designation of a loan or other asset as non-performing does not necessarily indicate that loan principal and interest will ultimately be uncollectible. However, management recognizes the greater risk characteristics of these assets and therefore considers the potential risk of loss on assets included in this category in evaluating the adequacy of the allowance for loan losses. The level of delinquent and non-performing assets is largely a function of economic conditions and the overall banking environment and the individual business circumstances of borrowers. Despite prudent loan underwriting, adverse changes within the Company's market area, or deterioration in local, regional or national economic conditions, could negatively impact the Company's level of non-performing assets in the future.
Section 4013 of the CARES Act provides financial institutions the option to suspend TDR accounting under GAAP in certain circumstances, during the period beginning March 1, 2020 and ending on the earlier of (i) December 31, 2020, or (ii) the date that is 60 days after the date on which the national emergency concerning the pandemic declared under the National Emergencies Act terminates. The Company has elected to suspend TDR accounting in accordance with the CARES Act, which impacts primarily financial statement disclosure, for loans that have had a short-term payment deferral related to the pandemic, as long as those loans were current and risk rated as “pass” as of December 31, 2019.
Management has been proactive with customers since the onset of the pandemic and granted short term payment deferrals to those requesting financial assistance due to the impact of the pandemic. As of June 30, 2020, short-term payment deferrals due to the COVID-19 pandemic were granted on 1,130 loans amounting to $594.8 million, or 22% of the portfolio, excluding PPP loans. As of September 30, 2020, approximately 82% of the deferred balances have returned to scheduled principal and interest payments, with deferred interest expected to be collected over the remaining life of the loan. Through September 30, 2020, a total of 207 loans amounting to $136.9 million were granted additional subsequent short-term deferral periods.
As of September 30, 2020, short term payment deferrals were active on 178 loans amounting to $104.1 million, or 4% of the Company's loan portfolio, excluding PPP loans. The majority of the active deferrals are loans that were granted subsequent deferrals after the initial three-month deferral period ended. These loans continue to accrue interest in accordance with their initial terms and are not reported as TDR notes.
The following table provides information on loans with short-term payment deferrals as of September 30, 2020, by loan segment.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Gross loan balance | | Segment % of gross loans | | Deferred balance | | Average deferred balance | | Deferred balance to gross loans(1) |
Commercial real estate | | $ | 1,490,649 | | | 47.1 | % | | $ | 72,986 | | | $ | 924 | | | 2.7 | % |
Commercial and industrial | | 435,856 | | | 13.8 | % | | 13,758 | | 229 | | | 0.5 | % |
Commercial construction | | 384,121 | | | 12.2 | % | | 497 | | | 248 | | | — | % |
SBA PPP loans | | 508,196 | | | 16.0 | % | | — | | | — | | | — | % |
Residential mortgages | | 254,784 | | | 8.0 | % | | 15,901 | | 530 | | | 0.6 | % |
Home equity | | 84,778 | | | 2.6 | % | | 944 | | 189 | | | — | % |
Consumer | | 9,070 | | | 0.3 | % | | 18 | | 9 | | | — | % |
Total | | $ | 3,167,454 | | | 100.0 | % | | $ | 104,104 | | | $ | 585 | | | 3.8 | % |
(1) Gross loans excluding PPP loans
Approximately 84% of the loan balances with short-term payment deferrals, included in commercial real estate, commercial construction, residential mortgages and home equity loans in the table above, are secured primarily by real estate. Commercial and industrial loans with short-term payment deferrals are not secured primarily by real estate but consist generally of smaller balances. At September 30, 2020, the average loan size for commercial and industrial loans with a short-term payment deferral was $229 thousand.
Based on management's review of the loan portfolio and underlying credits, the industries that management considers generally to be most at-risk from the impact of the pandemic, and the active deferred balances at September 30, 2020 are: retail trade ($7.5 million), non-owner occupied - retail property ($12.6 million), restaurants and hotels ($15.1 million), and fitness centers ($16.9 million). Collectively, active loan deferrals to these industries amounted to 2% of total gross loans (excluding PPP loans) at September 30, 2020, and comprised 50% of the total active deferred balances. These industries are highly impacted by COVID-19 sector specific safety measures and the phased re-opening approaches mandated within our market areas. In addition, loans secured by 1-4 family residential homes or to lessors of residential dwellings had active deferrals of $24.7 million and comprised 24% of active deferrals at September 30, 2020. These loans may be more impacted by unemployment levels and vacancy rates within the Company’s market areas.
In late October 2020, management determined that it was prudent to downgrade the credit rating on a large commercial real estate relationship from pass credit risk rated to substandard and to classify as TDR non-accrual. This financing is in a previously identified industry considered to be most at-risk from the impact of the pandemic and had previous short-term modifications. The relationship was not able to resume contractual payments upon expiration and subsequently requested, and was granted, an additional principal and interest deferral in late October 2020. Interest income of approximately $313 thousand, related to this $15.2 million relationship will be reversed in the fourth quarter.
Management is closely monitoring all deferrals and loans that have recently completed their deferral period and returned to regular payments and highlights that the loans are generally secured by real estate, usually have personal guarantees and typically are managed by experienced operators. The Company will continue to maintain frequent contact with our commercial customers and to closely evaluate the effect on credit quality across all industry sectors in our diversified loan portfolio as the results of the pandemic unfold in future quarters. The credit quality of our loans could be further impacted, and additional provisions may be necessary.
Asset Quality
The following table sets forth information regarding non-performing assets, trouble debt restructuring ("TDR")TDR loans and delinquent loans 60-89 days past due as to interest or principal, held by the Company at the dates indicated:
| | (Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 | (Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
Non-accrual loan summary: | | | | | | | Non-accrual loan summary: | | | | | | |
Commercial real estate | | $ | 8,058 |
| | $ | 4,876 |
| | $ | 5,639 |
| Commercial real estate | | $ | 9,719 | | | $ | 8,280 | | | $ | 7,507 | |
Commercial and industrial | | 3,428 |
| | 3,174 |
| | 3,128 |
| Commercial and industrial | | 4,981 | | | 3,285 | | | 3,064 | |
Commercial construction | | 197 |
| | 519 |
| | 209 |
| Commercial construction | | 6,121 | | | 1,735 | | | 119 | |
SBA PPP loans | | SBA PPP loans | | — | | | — | | |
Residential | | 267 |
| | 289 |
| | 297 |
| Residential | | 409 | | | 411 | | | 1,050 | |
Home equity | | 477 |
| | 616 |
| | 607 |
| Home equity | | 399 | | | 1,040 | | | 423 | |
Consumer | | 35 |
| | — |
| | — |
| Consumer | | 12 | | | 20 | | | 20 | |
Total non-accrual loans | | 12,462 |
| | 9,474 |
| | 9,880 |
| Total non-accrual loans | | 21,641 | | | 14,771 | | | 12,183 | |
Overdrafts > 90 days past due | | 27 |
| | 11 |
| | 8 |
| |
Total non-performing loans | | 12,489 |
| | 9,485 |
| | 9,888 |
| |
| OREO | | — |
| | — |
| | — |
| OREO | | — | | | — | | | — | |
Total non-performing assets | | $ | 12,489 |
| | $ | 9,485 |
| | $ | 9,888 |
| Total non-performing assets | | $ | 21,641 | | | $ | 14,771 | | | $ | 12,183 | |
Total Loans | | $ | 2,202,373 |
| | $ | 2,022,729 |
| | $ | 1,985,854 |
| |
Total loans | | Total loans | | $ | 3,150,815 | | | $ | 2,565,459 | | | $ | 2,472,130 | |
Accruing TDR loans not included above | | $ | 17,301 |
| | $ | 22,418 |
| | $ | 18,917 |
| Accruing TDR loans not included above | | $ | 10,659 | | | $ | 17,103 | | | $ | 18,990 | |
Delinquent loans 60-89 days past due and still accruing | | $ | 746 |
| | $ | 940 |
| | $ | 572 |
| Delinquent loans 60-89 days past due and still accruing | | $ | 312 | | | $ | 7,776 | | | $ | 3,126 | |
Loans 60-89 days past due and still accruing to total loans | | 0.03 | % | | 0.05 | % | | 0.03 | % | Loans 60-89 days past due and still accruing to total loans | | 0.01 | % | | 0.30 | % | | 0.13 | % |
Adversely classified loans to total loans | | 1.32 | % | | 1.70 | % | | 1.66 | % | Adversely classified loans to total loans | | 1.25 | % | | 1.45 | % | | 1.43 | % |
Non-performing loans to total loans | | 0.57 | % | | 0.47 | % | | 0.50 | % | Non-performing loans to total loans | | 0.69 | % | | 0.58 | % | | 0.49 | % |
Non-performing assets to total assets | | 0.46 | % | | 0.38 | % | | 0.40 | % | Non-performing assets to total assets | | 0.53 | % | | 0.46 | % | | 0.39 | % |
Allowance for loan losses | | $ | 33,184 |
| | $ | 31,342 |
| | $ | 31,589 |
| Allowance for loan losses | | $ | 43,835 | | | $ | 33,614 | | | $ | 33,935 | |
Allowance for loan losses to non-performing loans | | 265.71 | % | | 330.44 | % | | 319.47 | % | Allowance for loan losses to non-performing loans | | 202.56 | % | | 227.57 | % | | 278.54 | % |
Allowance for loan losses to total loans | | 1.51 | % | | 1.55 | % | | 1.59 | % | Allowance for loan losses to total loans | | 1.39 | % | | 1.31 | % | | 1.37 | % |
The net increaseprovision for loan losses for the nine months ended September 30, 2020 included an allocation of $6.3 million in non-accrual loans sincegeneral reserve factor increases primarily related to economic weakness caused by the prior periods was due primarily to the migration of two large commercial relationshipsCOVID-19 pandemic and its impact on credit quality in the second quarterloan portfolio. The provision for the three and nine months ended September 30, 2020 are discussed further under the heading "Results of 2017, totaling approximately $4.5 million that were also carried as adversely rated/impaired credits onOperations."
Excluding PPP loans, which are fully guaranteed by the Company's "watched" creditSBA, the allowance for loan listing for closer monitoringlosses to total loan ratio was 1.65% at September 30, 2017. These additions, among others, were partially offset by principal paydowns and credit rating upgrades during the period. 2020.
The majority of non-accrual loans were also carried as impaired loansadversely classified during the periods and the changes since December 31, 2016 are discussed further below.
periods. At September 30, 20172020 and December 31, 2016,2019, the Company had adversely classified loans (loans carrying "substandard," "doubtful" or "loss" classifications) amounting to $29.2$39.2 million and $34.3$37.1 million, respectively. Total adversely classified loans amounted to 1.32%1.25% of total loans at September 30, 2017 as2020, compared to 1.70%1.45% at December 31, 2016. 2019.
Adversely classified loans that were performing but possessed potential weaknesses and, as a result, could ultimately become non-performing loans amounted to $16.7$17.8 million at September 30, 20172020 and $25.1$22.4 million at December 31, 2016.2019. The remaining balances of adversely classified loans were non-accrual loans, amounting to $12.5$21.5 million at September 30, 20172020 and $9.3$14.7 million at December 31, 2016.2019. Non-accrual loans that were not adversely classified amounted to $6$184 thousand and $220$84 thousand at September 30, 20172020 and December 31, 2016,2019, respectively, and primarily represented the guaranteed portions of non-performing SBA loans.
The declineincrease in adversely classifiedsclassified, non-performing loans at September 30, 2020 was due primarily to payoffs, net principal paydowns,an increase in non-accruing commercial construction loans, which consisted of four unrelated construction relationships amounting to $5.3 million in the aggregate and netrepresenting a variety of construction project types. These relationships were carried with the adverse credit risk rating upgrades duringof substandard and also included in impaired loans at September 30, 2020. Management continues to closely monitor these relationships and the year, particularly of several commercial relationships basedunderlying business fundamentals on ongoing construction projects and is in regular communication with the related entity's management teams. These efforts will allow us to quantify our exposure and apply the results to determine a review of their individual business circumstances.reasonable provision for loan losses.
Total impaired loans amounted to $29.7$32.3 million and $31.8$31.9 million at September 30, 20172020 and December 31, 2016,2019, respectively. Total accruing impaired loans amounted to $17.3$10.7 million and $22.4$17.1 million at September 30, 20172020 and December 31, 2016,2019, respectively, while non-accrual impaired loans amounted to $12.4$21.6 million and $9.4$14.8 million as of September 30, 20172020 and December 31, 2016,2019, respectively. The increase in non-accrual impaired loans was primarily due to the two larger commercial relationships noted above, which, based on a review of their individual business circumstances, management determined that no reserves were necessary on these relationships as of September 30, 2017.
In management's opinion, the majority of impaired loan balances at September 30, 20172020 and December 31, 20162019 were supported by expected future cash flows or, for those collateral dependent loans, the net realizable value of the underlying collateral. Based on management's assessment at September 30, 2017,2020, impaired loans totaling $23.7$25.5 million required no specific reserves and impaired loans totaling $6.0$6.8 million required specific reserve allocations of $2.2 million.$4.6 million. At December 31, 2016,2019, impaired loans totaling $25.7$29.5 million required no specific reserves and impaired loans totaling $6.1$2.4 million required specific reserve allocations of $2.6 million.$1.0 million. The increase in specific reserves since December 31, 2019 was due primarily to the credit downgrade of two commercial relationships, for which management determined that the additional provisions were necessary based on a review of underlying collateral values, individual business circumstances, and credit metrics. Management closely monitors theseall impaired relationships for the individual business circumstances, and underlying collateral or credit deterioration.deterioration to determine if additional reserves are necessary.
Total TDR loans included in the impaired loan amounts above as of September 30, 20172020 and December 31, 20162019 were $23.6$18.0 million and $27.0$21.1 million, respectively. TDR loans on accrual status amounted to $17.3$10.7 million and $22.4$17.1 million at September 30, 20172020 and December 31, 2016,2019, respectively. TDR loans included in non-performing loans amounted to $6.3 million and $4.6$7.3 million at September 30, 20172020 and $4.0 million at December 31, 2016, respectively.2019. The Company continues to work with customers particularly commercial relationships, and enters into loan modifications (which may or may not be TDRs) to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the individual financial circumstances and future prospects of the borrower.
The Company carried no OREO at September 30, 2017, December 31, 2016 and September 30, 2016. There were no additions, sales or writedowns on OREO during the nine months ended September 30, 2017 or 2016.
Allowance for Loan Losses
As noted above, the Company has elected to delay the implementation of CECL, as allowed under the CARES Act, which allows entities to delay adoption until the earlier of: (1) the date on which the national emergency concerning the pandemic declared under the National Emergencies Act terminates; or (2) December 31, 2020. Accordingly, the information that follows is under the incurred loss model.
The allowance for loan losses is an estimate of probable credit riskloss inherent in the loan portfolio as of the specified balance sheet dates. On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated probable losses from specifically known and other probable credit risks associated with the portfolio. Management closely monitors theThe Company maintains a robust credit quality of individual delinquentrisk management culture and non-performing relationships, industry concentrations, the localmay adjust policies, procedures and regional real estate market and current economic conditions. practices as circumstances warrant.
There have been no material changes to the Company's underwriting practices, credit risk management system, or to the allowance assessment methodology used to estimate loan loss exposure as reported inbut due to the 2016 Annual Report on Form 10-K. Please refer toeconomic uncertainty from the pandemic,
management has strengthened risk management over new originations and existing credits. See Note 4, "Allowance for Loan Losses," to the Company's audited consolidated financial statements contained in the 20162019 Annual Report on Form 10-K for further discussion of management's methodology used10-K.
Management continues to estimate a sufficientclosely monitor the necessary allowance for loan losses, the credit risk management function and adversely classified loan rating system.
levels, including specific reserves. The allowance for loan losses to total loans ratio was 1.51%1.39% at September 30, 2017, 1.55%2020, 1.31% at December 31, 2016,2019, and 1.59%1.37% at September 30, 2016. 2019. Excluding PPP loans, which are fully guaranteed by the SBA, the allowance for loan losses to total loan ratio was 1.65% at September 30, 2020. This increase at September 30, 2020 compared to prior periods resulted from increases in general reserve factors, related primarily to economic weakness caused by the pandemic and its impact on credit quality in the loan portfolio, and to additional reserves related to classified and impaired loans, and to loan growth and other factors.
The Company estimates that as of September 30, 2020, under its CECL model, the combined allowance for credit losses and the reserve for unfunded commitments, would have been between $52.0 million and $55.0 million, or a range of 1.95% to 2.06%, excluding PPP loans.
Based on the foregoing, as well as management's judgment as to the existing credit risks inherent in the loan portfolio, as discussed above under the headings "Credit Risk" and "Asset Quality," management believes that the Company's allowance for loan losses is adequate to absorb probable losses from specifically known and other probable credit risks associated with the portfolio as of September 30, 2017.
2020.
The following table summarizes the activity in the allowance for loan losses for the periods indicated:
| | | | Nine Months Ended September 30, | | | Nine Months Ended September 30, |
(Dollars in thousands) | | 2017 | | 2016 | (Dollars in thousands) | | 2020 | | 2019 |
Balance at beginning of year | | $ | 31,342 |
| | $ | 29,008 |
| Balance at beginning of year | | $ | 33,614 | | | $ | 33,849 | |
| | | | | |
Provision charged to operations | | 1,630 |
| | 2,503 |
| |
Provision for loan losses | | Provision for loan losses | | 10,397 | | | 1,580 | |
Recoveries on charged-off loans: | | |
| | |
| Recoveries on charged-off loans: | | | | |
Commercial real estate | | 193 |
| | 20 |
| Commercial real estate | | — | | | — | |
Commercial and industrial | | 391 |
| | 637 |
| Commercial and industrial | | 207 | | | 570 | |
Commercial construction | | — |
| | — |
| Commercial construction | | — | | | — | |
Residential | | — |
| | — |
| |
SBA PPP loans | | SBA PPP loans | | — | | | — | |
Residential mortgages | | Residential mortgages | | — | | | — | |
Home equity | | 3 |
| | 2 |
| Home equity | | 10 | | | 7 | |
Consumer | | 6 |
| | 4 |
| Consumer | | 34 | | | 25 | |
Total recoveries | | 593 |
| | 663 |
| |
Total recovered | | Total recovered | | 251 | | | 602 | |
Charged-off loans | | | | | Charged-off loans | |
Commercial real estate | | — |
| | 179 |
| Commercial real estate | | — | | | — | |
Commercial and industrial | | 321 |
| | 354 |
| Commercial and industrial | | 402 | | | 1,992 | |
Commercial construction | | — |
| | 5 |
| Commercial construction | | — | | | — | |
Residential | | — |
| | — |
| |
SBA PPP loans | | SBA PPP loans | | — | | |
Residential mortgages | | Residential mortgages | | — | | | — | |
Home equity | | — |
| | 5 |
| Home equity | | — | | | — | |
Consumer | | 60 |
| | 42 |
| Consumer | | 25 | | | 104 | |
Total Charged off | | 381 |
| | 585 |
| |
Total charged-off | | Total charged-off | | 427 | | | 2,096 | |
| | | | | |
Net loans recovered | | (212 | ) | | (78 | ) | |
Ending Balance | | $ | 33,184 |
| | $ | 31,589 |
| |
Annualized net loans recovered: Average loans outstanding | | (0.01 | )% | | (0.01 | )% | |
Net loans charged-off | | Net loans charged-off | | 176 | | | 1,494 | |
Ending balance | | Ending balance | | $ | 43,835 | | | $ | 33,935 | |
Annualized net loans charged-off to average loans outstanding | | Annualized net loans charged-off to average loans outstanding | | 0.01 | % | | 0.08 | % |
See Note 4, “Allowance"Allowance for Loan Losses”Losses," to the Company's unaudited consolidated interim financial statements, contained in Item 1 in this Form 10-Q, for further information regarding credit quality and the allowance for loan losses.losses and credit quality.
Other real estate owned
The Company had no OREO at September 30, 2020, December 31, 2019, or September 30, 2019. There were no OREO additions during the nine months ended September 30, 2020 and one addition during the nine months ended September 30, 2019. There were no sales, or subsequent write downs of OREO during the nine months ended September 30, 2020 compared to one sale and no subsequent write downs of OREO during the nine months ended September 30, 2019.
Deposits
Total deposits as a percentage of total assets were 89% at September 30, 2020 and 86% at December 31, 2019.
The following table sets forth the deposit balances by certain categories at the dates indicated and the percentage of each category to total deposits.deposits:
| | | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 | | | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | (Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Non-interest bearing demand deposits | | $ | 717,879 |
| | 31.2 | % | | $ | 646,115 |
| | 28.5 | % | | $ | 645,907 |
| | 29.1 | % | |
Interest bearing checking | | 359,308 |
| | 15.6 | % | | 372,696 |
| | 16.4 | % | | 346,957 |
| | 15.6 | % | |
Non-interest checking | | Non-interest checking | | $ | 1,274,210 | | | 35.3 | % | | $ | 794,583 | | | 28.5 | % | | $ | 804,051 | | | 28.9 | % |
Interest-bearing checking | | Interest-bearing checking | | 539,610 | | | 14.9 | % | | 467,988 | | | 16.8 | % | | 447,421 | | | 16.1 | % |
Total checking | | 1,077,187 |
| | 46.8 | % | | 1,018,811 |
| | 44.9 | % | | 992,864 |
| | 44.7 | % | Total checking | | 1,813,820 | | | 50.2 | % | | 1,262,571 | | | 45.3 | % | | 1,251,472 | | | 45.0 | % |
| | | | | | | | | | | | | |
Savings | | 198,595 |
| | 8.6 | % | | 178,637 |
| | 7.9 | % | | 181,653 |
| | 8.2 | % | Savings | | 255,417 | | | 7.1 | % | | 203,236 | | | 7.3 | % | | 201,504 | | | 7.2 | % |
Money markets | | 770,006 |
| | 33.4 | % | | 844,216 |
| | 37.2 | % | | 815,861 |
| | 36.7 | % | Money markets | | 1,205,350 | | | 33.4 | % | | 1,009,972 | | | 36.2 | % | | 1,022,344 | | | 36.7 | % |
Total savings/money markets | | 968,601 |
| | 42.0 | % | | 1,022,853 |
| | 45.1 | % | | 997,514 |
| | 44.9 | % | Total savings/money markets | | 1,460,767 | | | 40.5 | % | | 1,213,208 | | | 43.5 | % | | 1,223,848 | | | 43.9 | % |
| | | | | | | | | | | | | |
Certificates of deposit (CD's) | | 174,393 |
| | 7.6 | % | | 167,895 |
| | 7.4 | % | | 171,891 |
| | 7.7 | % | |
CDs | | CDs | | 260,478 | | | 7.2 | % | | 310,951 | | | 11.2 | % | | 309,073 | | | 11.1 | % |
Total customer deposits | | 2,220,181 |
| | 96.4 | % | | 2,209,559 |
| | 97.4 | % | | 2,162,269 |
| | 97.3 | % | Total customer deposits | | 3,535,065 | | | 97.9 | % | | 2,786,730 | | | 100.0 | % | | 2,784,393 | | | 100.0 | % |
| | | | | | | | | | | | | |
Brokered deposits (1) | | 82,492 |
| | 3.6 | % | | 59,362 |
| | 2.6 | % | | 59,340 |
| | 2.7 | % | Brokered deposits (1) | | 74,995 | | | 2.1 | % | | — | | | — | % | | — | | | — | % |
Total deposits | | $ | 2,302,673 |
| | 100.0 | % | | $ | 2,268,921 |
| | 100.0 | % | | $ | 2,221,609 |
| | 100.0 | % | Total deposits | | $ | 3,610,060 | | | 100.0 | % | | $ | 2,786,730 | | | 100.0 | % | | $ | 2,784,393 | | | 100.0 | % |
| |
(1)
| (1) Brokered CDs $250,000 and under. |
As of September 30, 2017,2020, customer deposits (deposits, excluding brokered deposits) increased $10.6$748.3 million, or 27%, since December 31, 2016,2019, and $57.9$750.7 million, or 3%27%, since September 30, 2016. The increase since2019. Since December 31, 2016 was primarily2019, the largest growth occurred in non-interest bearing checking account balances, largely offsetaccounts and to a lesser extent money markets. Deposit growth has been positively and significantly impacted by declinesthe PPP, stimulus checks and the ongoing pandemic as management believes the PPP loan monies were distributed into deposit accounts and many customers are proactively building liquidity in money market account balances.response to the economic uncertainty caused by the pandemic. We anticipate that as customers spend down their PPP loan funds, this will result in a reduction in deposits.
Customer deposits include reciprocal money market deposits and CDs received from participating banks in nationwide deposit networks as a result of ourThe Company offers its customers the ability to enhance FDIC insurance coverage by electing to participate a portion of their deposit balance into nationwide deposit networks. The Company’s total customer deposits reflect the equal and reciprocal deposits received from other banks' customers participating in Company offered programs which allow for full FDIC insurance.the programs. Essentially, the equivalent of the original customers' deposited funds comes back to the Company as customer depositsand are carried within the appropriate category under total deposits on the balance sheet.customer deposits. The Company's balances in these reciprocal products were $222.7$471.5 million, $281.6$419.7 million and $278.4$404.4 million at September 30, 2017,2020, December 31, 20162019 and September 30, 2016,2019, respectively. Savings account are not eligible for this program.
Wholesale funding, which includes brokered deposits and borrowed funds, amounted to $231.7 million at September 30, 2017, compared to $70.0 million at December 31, 2016, an increase of $161.7 million. Wholesale funding has increased as loan growth has exceeded deposit growth.
From time to time, management utilizesManagement may, from time-to-time, utilize brokered deposits as cost effective wholesale funding sources to support continued loan growth and as part of the Company's asset-liability management strategy to protect against rising rates.growth. Brokered deposits may be comprised of non-reciprocal insured overnight money market deposits andor selected term CDsfunding gathered from nationwide bank networks or term deposits from large money center banks; however, atbanks. At September 30, 2017, December 31, 2016, and September 30, 20162020 the Company's $75.0 million in brokered deposits were comprised only of short-term brokered CDs. Brokered CDs increased $23.1 million, or 39%, at September 30, 2017 compared to December 31, 2016. Brokered CDs outstanding at September 30, 2017 had a weighted average remaining lifehedged for adverse interest rate movements through interest-rate swaps. See also "Wholesale Funding" below.
Borrowed Funds and Subordinated Debt
BorrowedThe Company had borrowed funds comprisedoutstanding, all of which are FHLB borrowings, amounted to $149.3advances, of $1.7 million, $96.2 million, and $4.2 million at September 30, 2017, compared to $10.7 million at2020, December 31, 20162019, and $671 thousandSeptember 30, 2019, respectively. FHLB borrowings at September 30, 2016. Borrowed fund balances have increased $138.6 million since year end as loan growth has outpaced deposit growth.2020 are related to specific lending projects under the FHLB's community development and affordable housing programs. At December 31, 2019, borrowed funds, consisted primarily of overnight advances, with the remaining balance related to the specific lending projects noted above.
At September 30, 2017,2020, the Bank had the capacity to borrow additional funds from the FHLB of up to approximately $340.0$485.0 million and the capacity to borrow from the FRB Discount Window of up to approximately $120.0$160.0 million.
In April 2020, the Company established access to the PPPLF, which provides funding secured by PPP pledged loans. Advances issued under the PPPLF are non-recourse. The amount and term of an advance matches the amount and remaining term of the PPP loans pledged. Due to deposit growth in large part from customers depositing funds received from PPP loan advances and generally maintaining higher liquidity in response to the pandemic, the Company did not have any borrowings outstanding under the PPPLF at September 30, 2020. The Bank had the capacity to borrow up to approximately $508.2 million under the PPPLF at September 30, 2020, in addition to the Discount Window capacity noted above.
Wholesale Funding
50Wholesale funding includes brokered deposits and borrowed funds as discussed above. Since December 31, 2019, wholesale funding has decreased $19.5 million, or 20%.
wholesale funding by composition at the dates indicated and the percentage of each category to total wholesale funding: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Brokered deposits | | $ | 74,995 | | | 97.8 | % | | $ | — | | | — | % | | $ | — | | | — | % |
Borrowed funds | | 1,679 | | | 2.2 | % | | 96,173 | | | 100.0 | % | | 4,177 | | | 100.0 | % |
Wholesale funding | | $ | 76,674 | | | 100.0 | % | | $ | 96,173 | | | 100.0 | % | | $ | 4,177 | | | 100.0 | % |
The Company has the flexibility to use either brokered deposits or FHLB borrowings in conjunction with interest-rate swaps, entered into in early 2020, to hedge adverse interest rate movements, and in the third quarter of 2020 the Company used brokered CDs.
See "Liquidity," below, for additional information.
Subordinated Debt
The Company had $14.8 million (netoutstanding subordinated debt, net of deferred issuance costs)costs, of outstanding subordinated debt$73.7 million at September 30, 2017,2020 and $14.9 million at December 31, 20162019 and September 30, 2016, which consisted of2019.
The Company has two subordinated note issuances outstanding, $15.0 million in aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Notes")fixed-to-floating rate subordinated notes issued in January 2015 and $60.0 million of fixed-to-floating rate subordinated notes issued on July 7, 2020.
The notes issued in a private placement toJuly 2020 carry an accredited investor. initial fixed rate of 5.25%, are due in 2030 and are redeemable at the option of the Company beginning on or after July 15, 2025.
See also Note 6,7, "Borrowed Funds and Subordinated Debt," to the Company's unaudited consolidated interim financial statements contained in Item 1 above in this Form 10-Q, for further information regarding the Company's subordinated debt.
Derivatives and Hedging
During the first quarter of 2020, the Company entered into three pay fixed, receive float interest rate swaps to hedge the variable cash flows associated with the Company's short-term wholesale funding to add stability to interest expense and to manage its exposure to interest rate movements. The combined notional value of these swaps, maturing in three to five years,
was $75.0 million at September 30, 2020 and the fair value carried as a liability on the Company's Consolidated Balance Sheet was $3.1 million.
The Company also has a "Back-to-Back Swap" program whereby the Bank enters into an interest-rate swap with qualified commercial banking customers and simultaneously enters into an equal and opposite interest-rate swap with a swap counterparty. The customer interest-rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to a fixed-rate payment. The notional value of interest-rate swaps with customers increased to $38.5 million at September 30, 2020 from $22.8 million at December 31, 2019. The fair value of assets and corresponding liabilities associated with these swaps and carried on the Company's Consolidated Balance Sheets was $2.8 million at September 30, 2020 compared to $625 thousand at December 31, 2019.
For further information on the Company's derivatives and hedging activities see Note 8, "Derivatives and Hedging Activities," to the Company's unaudited consolidated interim financial statements contained in Item 1 above in this Form 10-Q.
Liquidity
Liquidity is the ability to meet cash needs arising from, among other things, fluctuations in loans, investments, deposits and borrowings. Liquidity management is the coordination of activities so that cash needs are anticipated and met readily and efficiently. The Company's liquidity policies are set and monitored by the Company's Board of Directors.Directors ("the Board"). The duties and responsibilities related to asset-liability management matters are also covered by the Board of Directors.Board. The Company's asset-liability objectives are to engage in sound balance sheet management strategies, maintain liquidity, provide and enhance access to a diverse and stable source of funds, provide competitively priced and attractive products to customers and conduct funding at a low costlow-cost relative to current market conditions. Funds gathered are used to support current commitments, to fund earning asset growth, and to take advantage of selected leverage opportunities.
The Company's liquidity is maintained by projecting cash needs, balancing maturing assets with maturing liabilities, monitoring various liquidity ratios, monitoring deposit flows, maintaining cash flow within the investment portfolio, and maintaining wholesale funding resources.
At September 30, 2017,2020, the Company's wholesale funding sources included primarily borrowing capacity at the FHLB and brokered deposits. In addition, the Company maintains uncommitted overnight fed fund purchase arrangements with correspondent banks, andhas access to the FRB Discount Window.Window and has access to the PPPLF, which provides funding secured by PPP pledged loans.
Management believes that the Company has adequate liquidity to meet its obligations. However, if as a result of general economic conditions, the pandemic, or other events, cause these sources of external funding to become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company's operations and growth.
The Company has in the past also increased capital and liquidity by offering for sale shares of the Company's common stock for sale to its existing stockholders and new investors and through the issuance of subordinated debt. On July 7, 2020, the Company issued $60.0 million of fixed-to-floating rate subordinated notes. See "Capital Resources," below for information on the Company's capital planning.
Capital Resources
Capital Raised and Capital Adequacy Requirements
Capital planning by the Company and the Bank considers current needs and anticipated future growth. Historically, the primary sources of capital for the Company and the Bank have been common stock issuances and proceeds from the issuance of subordinated debt. Ongoing sources of capital include the retention of earnings, less dividends paid, proceeds from the exercise of employee stock options and proceeds from purchases of shares pursuant to the Company’s Company's dividend reinvestment plan and direct stock purchase plan (together, the "DRSPP"). Additional sources of capital for the Company and the Bank have been proceeds from the issuance of the Company's common stock and subordinated debt. The Company believes its current capital is adequate to support ongoing operations.
Since January 1, 2015, theThe Company has beenis subject to increasingthe regulatory capital ratios, with a phase in period that extends to January 2019, as a result of regulation adopted by the federal bank regulatory agenciesframework known as the “Basel"Basel III Rules.”
Management believes, as" As of September 30, 2017, that2020, the Company and the Bank meetmet all capital adequacy requirements to which they were subject.subject under Basel III. As of September 30, 2017,2020, the Company met the definition of "well capitalized""well-capitalized" under the applicable Federal Reserve Board regulations and the Bank qualified as "well capitalized" under the prompt corrective action regulations of Basel III and the FDIC.
The Company's and the Bank's actual capital amounts and ratios are presented as of September 30, 20172020 are presented in the tables below.below: | | | | Actual | | Minimum Capital for Capital Adequacy Purposes (1) | | Minimum Capital To Be Well Capitalized (2) | | | | Actual | | Minimum Capital for Capital Adequacy Purposes(1) | | Minimum Capital To Be Well Capitalized(2) | |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | (Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | |
The Company | | | | | | | | | | | | | | The Company | | | | | | | | | | | | | |
Total Capital (to risk weighted assets) | | $ | 268,379 |
|
| 11.57 | % |
| $ | 185,640 |
|
| 8.00 | % |
| N/A | | N/A | | Total Capital (to risk weighted assets) | | $ | 407,485 | | | 14.31 | % | | $ | 227,772 | | | 8.00 | % | | N/A | | N/A | |
Tier 1 Capital (to risk weighted assets) | | $ | 223,944 |
|
| 9.65 | % |
| $ | 139,230 |
|
| 6.00 | % |
| N/A | | N/A | | Tier 1 Capital (to risk weighted assets) | | $ | 298,069 | | | 10.47 | % | | $ | 170,829 | | | 6.00 | % | | N/A | | N/A | |
Tier 1 Capital (to average assets) or Leverage ratio | | $ | 223,944 |
|
| 8.40 | % |
| $ | 106,611 |
|
| 4.00 | % |
| N/A | | N/A | | Tier 1 Capital (to average assets) or Leverage ratio | | $ | 298,069 | | | 7.39 | % | | $ | 161,319 | | | 4.00 | % | | N/A | | N/A | |
Common equity tier 1 capital (to risk weighted assets) | | $ | 223,944 |
| | 9.65 | % | | $ | 104,422 |
| | 4.50 | % | | N/A | | N/A | | Common equity tier 1 capital (to risk weighted assets) | | $ | 298,069 | | | 10.47 | % | | $ | 128,122 | | | 4.50 | % | | N/A | | N/A | |
| | | | | | | | | | | | | | |
The Bank | | | | | | | | | | | | | | The Bank | |
Total Capital (to risk weighted assets) | | $ | 267,860 |
| | 11.54 | % | | $ | 185,635 |
| | 8.00 | % | | $ | 232,043 |
| | 10.00 | % | | Total Capital (to risk weighted assets) | | $ | 403,560 | | | 14.17 | % | | $ | 227,772 | | | 8.00 | % | | $ | 284,715 | | | 10.00 | % | |
Tier 1 Capital (to risk weighted assets) | | $ | 238,270 |
| | 10.27 | % | | $ | 139,226 |
| | 6.00 | % | | $ | 185,635 |
| | 8.00 | % | | Tier 1 Capital (to risk weighted assets) | | $ | 367,869 | | | 12.92 | % | | $ | 170,829 | | | 6.00 | % | | $ | 227,772 | | | 8.00 | % | |
Tier 1 Capital (to average assets) or Leverage ratio | | $ | 238,270 |
| | 8.94 | % | | $ | 106,608 |
| | 4.00 | % | | $ | 133,261 |
| | 5.00 | % | | Tier 1 Capital (to average assets) or Leverage ratio | | $ | 367,869 | | | 9.12 | % | | $ | 161,319 | | | 4.00 | % | | $ | 201,649 | | | 5.00 | % | |
Common equity tier 1 capital (to risk weighted assets) | | $ | 238,270 |
| | 10.27 | % | | $ | 104,419 |
| | 4.50 | % | | $ | 150,828 |
| | 6.50 | % | | Common equity tier 1 capital (to risk weighted assets) | | $ | 367,869 | | | 12.92 | % | | $ | 128,122 | | | 4.50 | % | | $ | 185,065 | | | 6.50 | % | |
(1)Before application of the capital conservation buffer of 1.25% as of September 30, 2017,2.50%, see discussion below.
(2)For the Bank to qualify as “well capitalized,"well-capitalized," it must maintain at least the minimum ratios listed. Thislisted under the regulatory prompt corrective action framework. This framework does not apply to the Company.
Under theThe Basel III rules, capital ratio requirements for all banking organizations increased and include a "capital conservation buffer,"buffer" of 2.50% above the regulatory minimum risk-based capital adequacy requirements shown above. The capital conservation buffer requirement began to be phased in beginning in January 2016 at 0.625% of risk-weighted assets and will increase by that amount each year until fully implemented in January 2019. If a banking organization dips into its capital conservation buffer it may be restricted in its activities, including its ability to pay dividends and discretionary bonus payments to its executive officers. Both the Company's and the Bank's actual ratios, as outlined in the table above, would exceedexceeded the Basel III risk-based capital requirement with fullthe capital conservation buffer as of September 30, 2017.2020.
The Basel III minimum capital ratio requirements as applicable to the Company and the Bank in 2019 after the full phase-in periodat September 30, 2020 are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | Basel III Minimum for Capital Adequacy Purposes | | Basel III Additional Capital Conservation Buffer | | Basel III "Adequate" Ratio with Capital Conservation Buffer |
| | | |
Total Capital (to risk weighted assets) | | 8.00% | | 2.50% | | 10.50% |
Tier 1 Capital (to risk weighted assets) | | 6.00% | | 2.50% | | 8.50% |
Tier 1 Capital (to average assets) or Leverage ratio | | 4.00% | | —% | | 4.00% |
Common equity tier 1 capital (to risk weighted assets) | | 4.50% | | 2.50% | | 7.00% |
In response to the pandemic, in April 2020, the Company participated in both the PPP loan program and the PPPLF borrowing program. PPP loans are fully guaranteed by the SBA and have no impact on our risk-based capital ratios. PPP loans pledged as collateral for the PPPLF are excluded from the average assets used in the leverage ratio calculation. There were no PPPLF advances outstanding, nor PPP loans pledged as collateral for the PPPLF as of September 30, 2020.
In March 2020, the federal regulatory banking agencies issued an interagency interim final rule that allowed banking institutions that implement CECL during 2020 to delay for two years the estimated impact of CECL on regulatory capital, followed by a three-year transition period. The Company is currently assessing its options at this time and will make its election when it adopts CECL. The Company estimates that upon the adoption of CECL, there will be a reduction in retained earnings of approximately pre-tax $3.0 million, with an effective date of January 1, 2020.
On July 7, 2020, the Company issued $60.0 million in fixed-to-floating rate subordinated notes due 2030 and redeemable at the option of the Company on or after July 15, 2025. In September 2020, the Company invested $53.0 million of the net proceeds from the issuance into the Bank. The Bank's capital ratios at September 30, 2020 were:
|
| | | | | | |
| | Basel III Minimum for Capital Adequacy Purposes | | Basel III Additional Capital Conservation Buffer | | Basel III "Adequate" Ratio with Capital Conservation Buffer |
(Dollars in thousands) | | | |
Total Capital (to risk weighted assets) | | 8.00% | | 2.50% | | 10.50% |
Tier 1 Capital (to risk weighted assets) | | 6.00% | | 2.50% | | 8.50% |
Tier 1 Capital (to average assets) or Leverage ratio | | 4.00% | | —% | | 4.00% |
Common equity tier 1 capital (to risk weighted assets) | | 4.50% | | 2.50% | | 7.00% |
| | | | | | | | | | | | | | |
| | Actual | | Actual |
Enterprise Bank | | September 30, 2020 | | June 30, 2020 |
Total capital to risk weighted assets | | 14.17 | % | | 11.79 | % |
Tier 1 capital to risk weighted assets | | 12.92 | % | | 10.53 | % |
Tier 1 capital to average assets | | 9.12 | % | | 7.95 | % |
Common equity tier 1 capital to risk weighted assets | | 12.92 | % | | 10.53 | % |
DRSPP and Dividends
The Company maintains aCompany's DRSPP which enables stockholders, at their discretion, to elect to reinvest cash dividends paid on their shares of the Company's common stock by purchasing additional shares of common stock from the Company at a purchase price equal to fair market value. Under the DRSPP, stockholders and new investors also have the opportunity tocan purchase shares of the Company's common stock without brokerage fees, subject to monthly minimums and maximums.
For the nine months ended September 30, 2017,2020, the Company paid $4.7declared $6.2 million in cash dividends. Stockholders utilized the dividend reinvestment portion of the DRSPP to purchase an aggregate of 34,65738,762 shares of the Company's common stock, totaling $1.1 million.$914 thousand. The direct purchase component of the DRSPP was used by stockholders to purchase 1,3861,818 shares of the Company's common stock, totaling $47$43 thousand, during the nine months ended September 30, 2017.2020.
On October 17, 2017,20, 2020, the Company announced a quarterly dividend of $0.135$0.175 per share to be paid on December 1, 20172020 to stockholders of record as of November 10, 2017. The 2017 dividend rate represents a 3.8% increase over the 2016 dividend rate.2020.
For further information about the Company's capital, see Note 8, "Stockholder's9 and Note 11, both titled "Stockholders' Equity," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form 10-Q.10-Q and to the Company's audited consolidated financial statements contained in the Company's 2019 Annual Report on Form 10-K, respectively.
Assets Under Management
Total assets under management includesinclude total assets, loans serviced for others and investment assets under management. Loans serviced for others and investment assets under management are not carried as assets on the Company's consolidated balance sheet,Consolidated Balance Sheet, and as such, total assets under management is not a financial measurement recognized under GAAP.GAAP, however management believes its disclosure provides information useful in understanding the trends in total assets under management.
The Company provides a wide range of investment advisorywealth management and wealth management services, including brokerage, trust, and investment management (together, "investment advisory services").management. Also included in the investment assets under management total are customers' commercial sweep arrangements that are invested in third-party money market mutual funds.
InvestmentAs of September 30, 2020, investment assets under management, which are reflected at fair market value, increased $75.2$8.8 million, or 10%1%, since December 31, 20162019, and increased $90.7 million, or 13%, since September 30, 2016. 2019, balances have increased $50.3 million, or 6%. Since June 30, 2020, investment assets under management have increased $45.2 million, or 5%, due primarily to asset growth from market appreciation.
TotalAs of September 30, 2020, total assets under management increased $280.1$828.8 million, or 20% since December 31, 2019 and $969.0 million, or 24% since September 30, 2019. Excluding PPP loans, total assets under management have increased $334.1 million, or 8%, since December 31, 20162019 and $351.2$60.6 million, or 11%1%, since SeptemberJune 30, 2016.2020.
The following table sets forth the value of assets under management and its components at the dates indicated:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2020 | | December 31, 2019 | | September 30, 2019 |
Total assets | | $ | 4,060,547 | | | $ | 3,235,049 | | | $ | 3,138,724 | |
Loans serviced for others | | 90,499 | | | 95,905 | | | 93,672 | |
Investment assets under management | | 925,379 | | | 916,623 | | | 875,049 | |
Total assets under management | | $ | 5,076,425 | | | $ | 4,247,577 | | | $ | 4,107,445 | |
|
| | | | | | | | | | | | |
(Dollars in thousands) | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
Total assets | | $ | 2,725,472 |
| | $ | 2,526,269 |
| | $ | 2,470,849 |
|
Loans serviced for others | | 86,738 |
| | 80,996 |
| | 80,836 |
|
Investment assets under management | | 800,499 |
| | 725,338 |
| | 709,781 |
|
Total assets under management | | $ | 3,612,709 |
| | $ | 3,332,603 |
| | $ | 3,261,466 |
|
Results of Operations
Three Months Ended September 30, 20172020 vs. Three Months Ended September 30, 20162019
Unless otherwise indicated, the reported results are for the three months ended September 30, 20172020 with the "same period," the "prior year period," the "comparable period," and "prior period" being the three months ended September 30, 2016.2019. Average yields are presented on aan annualized tax equivalent basis.
The Company's net income for the third quarter of 20172020 amounted to $5.5$10.3 million, compared to $4.7$9.0 million for the same period in 2016, an increase of $792 thousand, or 17%.2019. Diluted earnings per share were $0.47$0.87 and $0.41$0.76 for the three months ended September 30, 20172020 and September 30, 2016, respectively,2019, respectively.
The net income results for the three nine months ended September 30, 2020 compared to the prior year period was positively impacted by growth in net interest income, offset by increases in the provision for loan losses and operating expenses. The increase in net interest income resulted mainly from loan growth, PPP income and lower funding costs. The provision for loan losses increased over the prior year period as the Company added to general reserves to address the impact of COVID-19 on the Company's loan portfolio and from an increase of 15%.in impaired loan reserves. Operating expenses increased primarily from the Company’s strategic growth initiatives.
Net Interest Income and Margin
The Company's net interest income for the quarter ended September 30, 20172020 amounted to $25.1$33.5 million, compared to $21.8$29.4 million for the quarter ended September 30, 2016,2019, an increase of $3.3$4.1 million, or 15%14%. The increase in net interest income over the comparable period was due primarily to revenue generated from loan growth and to a lesser extent an increase in rate.
Net Interest Margin
The Company's margin was 4.03%3.43% for three months ended September 30, 2020, compared to 3.88% for the quarter ended September 30, 2019. Margin was 3.55% for the quarter ended June 30, 2020.
Tax equivalent net interest income for the three months ended September 30, 20172020 was $33.9 million compared to 3.86%$29.8 million for the quarterthree months ended September 30, 2016. Margin2019, an increase of $4.1 million, or 14%. T/E margin was 3.90%3.46%, 3.59%, and 3.93% for the quarterthree months ended September 30, 2020, June 30, 2017. Margin has increased2020, and September 30, 2019, respectively. Excluding PPP loans, T/E margin for the three months ended September 30, 2020 was 3.56%.
The increase in net interest income was due largely to interest-earning asset growth, primarily in PPP loans, partially offset by a decline in T/E net interest margin. Quarter-to-date net interest income included $1.3 million in PPP interest income plus $2.1 million in PPP related SBA fee accretion.
The lower margin results in 2020 are reflective primarily of the significant decline in interest rates since the comparable periods resulting in interest-earning asset yields declining faster than the cost of funding. Net interest margin for the September 2020 quarter was also impacted by a significantly higher quarter-to-date average balance in lower-yielding short-term and overnight investments of $259.8 million compared to $106.3 million in the prior year period. Interest-earning asset yields have been impacted by a 175 basis-point decrease in the Federal Funds rate since September 30, 2019, with 150 basis-points of that total decline occurring in March 2020. Term interest rates have also fallen significantly over the respective periods and collectively these interest rate decreases have reduced yields on loan repricing, short-term and overnight investments and interest-earning asset growth. The Company funds these interest-earning assets principally through non-term customer deposits, which were less impacted by the interest rate declines.
Interest and Dividend Income
For the third quarter of 2020, total interest and dividend income amounted to $36.8 million, an increase of $1.9 million, or 6%, compared to the prior year period. The increase resulted primarily from an increase of $724.0 million, or 30%, in average balances of loans and loans held for sale, partially offset by lower yields on interest-earning assets. Average T/E loan yields have declined 83 basis points and other interest-earning asset yields have decreased 225 basis points compared to the prior period. See the "Net Interest Income and Margin" discussion above for further information on the decrease in interest rates.
Interest Expense
For the three months ended September 30, 2020, total interest expense amounted to $3.2 million, a decrease of $2.2 million, or 40%, compared to the same period in the prior year2019, due primarily to loandecreases in the deposit rates, mainly checking, saving and investment yields increasing at a faster rate thanmoney markets. The average cost of funds.
checking, saving and money markets decreased 65 basis points and the average cost of CDs decreased 53 basis points.
Non-interest-bearing checking accounts are an important component of the Company's core funding strategy. For the three months ended September 30, 2020, the average balance of non-interest-bearing checking accounts increased $449.5 million, or 55%, as compared to the same period in 2019, and represented 35% and 29% of total average deposit balances for the three months ended September 30, 2020 and September 30, 2019, respectively.
Interest rate risk is reviewed in detail under the heading Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.
Rate / Volume Analysis
The following table sets forth, on a tax-equivalent basis, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the three months ended September 30, 20172020 compared to the three months ended September 30, 2016.2019. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) volume (change in average portfolio balance multiplied by prior period average rate); and (2) interest rate (change in average interest rate multiplied by prior period average balance);. Changes attributable to the combined impact of volume and (3) rate have been allocated proportionately based on absolute value to the changes due to volume and volume (the remaining difference).the changes due to rate.
| | | | | | | | | | | | | | | | | | | | |
| | | | Increase (decrease) due to |
(Dollars in thousands) | | Net Change | | Volume | | Rate |
Interest Income | | | | | | |
Loans and loans held for sale (tax-equivalent) | | $ | 2,534 | | | $ | 8,389 | | | $ | (5,855) | |
Investment securities (tax-equivalent) | | (72) | | | 38 | | | (110) | |
Other interest-earning assets (1) | | (561) | | | 386 | | | (947) | |
Total interest-earning assets (tax-equivalent) | | 1,901 | | | 8,813 | | | (6,912) | |
Interest Expense | | | | | | |
Interest checking, savings and money market | | (2,637) | | | 580 | | | (3,217) | |
Certificates of deposit | | (551) | | | (174) | | | (377) | |
Brokered CDs | | 261 | | | 131 | | | 130 | |
Borrowed funds | | (28) | | | (16) | | | (12) | |
Subordinated debt | | 774 | | | 793 | | | (19) | |
Total interest-bearing funding | | (2,181) | | | 1,314 | | | (3,495) | |
Change in net interest income (tax-equivalent) | | $ | 4,082 | | | $ | 7,499 | | | $ | (3,417) | |
(1)Income on other interest-earning assets includes interest on deposits and fed funds sold, and dividends on FHLB stock.
|
| | | | | | | | | | | | | | | | |
| | | | Increase (decrease) due to |
(Dollars in thousands) | | Net Change | | Volume | | Rate | | Rate/ Volume |
Interest Income | | |
| | |
| | |
| | |
|
Loans and loans held for sale | | $ | 3,426 |
| | $ | 2,326 |
| | $ | 940 |
| | $ | 160 |
|
Investment securities | | 388 |
| | 367 |
| | 64 |
| | (43 | ) |
Other interest earning assets (1) | | 40 |
| | (44 | ) | | 154 |
| | (70 | ) |
Total interest earnings assets | | 3,854 |
| | 2,649 |
| | 1,158 |
| | 47 |
|
Interest Expense | | |
| | |
| | |
| | |
|
Interest checking, savings and money market | | 230 |
| | 48 |
| | 164 |
| | 18 |
|
Certificates of deposit | | 75 |
| | (1 | ) | | 78 |
| | (2 | ) |
Brokered CDs | | 66 |
| | 54 |
| | 8 |
| | 4 |
|
Borrowed funds | | 167 |
| | 101 |
| | 2 |
| | 64 |
|
Subordinated debt | | (1 | ) | | — |
| | (1 | ) | | — |
|
Total interest-bearing funding | | 537 |
| | 202 |
| | 251 |
| | 84 |
|
Change in net interest income | | $ | 3,317 |
| | $ | 2,447 |
| | $ | 907 |
| | $ | (37 | ) |
65 | |
(1)
| Income on other interest-earning assets includes interest on deposits and fed funds sold, and dividends on FHLB stock. |
The following table presents the Company's average balance sheet, net interest income and average rates for the three months ended September 30, 20172020 and 2016.2019:
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
| | | | Three Months Ended September 30, 2017 | | Three Months Ended September 30, 2016 | | | Three months ended September 30, 2020 | | Three months ended September 30, 2019 |
(Dollars in thousands) | | Average Balance | | Interest | | Average Yield(1) | | Average Balance | | Interest | | Average Yield(1) | (Dollars in thousands) | | Average Balance | | Interest(1) | | Average Yield(1) | | Average Balance | | Interest(1) | | Average Yield(1) |
Assets: | | |
| | |
| | |
| | |
| | |
| | |
| Assets: | | | | | | | | | | | | |
Loans and loans held for sale (2) | | $ | 2,149,365 |
| | $ | 24,892 |
| | 4.65 | % | | $ | 1,945,196 |
| | $ | 21,466 |
| | 4.45 | % | |
Investments (3) | | 375,236 |
| | 2,017 |
| | 2.73 | % | | 319,844 |
| | 1,629 |
| | 2.65 | % | |
Other interest earning assets (4) | | 36,271 |
| | 136 |
| | 1.48 | % | | 67,111 |
| | 96 |
| | 0.57 | % | |
Total interest earnings assets | | 2,560,872 |
| | 27,045 |
| | 4.33 | % | | 2,332,151 |
| | 23,191 |
| | 4.09 | % | |
Loans and loans held for sale (2) (tax equivalent) | | Loans and loans held for sale (2) (tax equivalent) | | $ | 3,168,787 | | | $ | 33,609 | | | 4.22 | % | | $ | 2,444,806 | | | $ | 31,075 | | | 5.05 | % |
Investments (3) (tax equivalent) | | Investments (3) (tax equivalent) | | 469,552 | | | 3,452 | | | 2.94 | % | | 465,411 | | | 3,524 | | | 3.03 | % |
Other interest-earning assets (4) | | Other interest-earning assets (4) | | 259,752 | | | 71 | | | 0.11 | % | | 106,296 | | | 632 | | | 2.36 | % |
Total interest-earning assets (tax equivalent) | | Total interest-earning assets (tax equivalent) | | 3,898,091 | | | 37,132 | | | 3.79 | % | | 3,016,513 | | | 35,231 | | | 4.64 | % |
Other assets | | 110,750 |
| | |
| | |
| | 108,485 |
| | |
| | |
| Other assets | | 168,755 | | | | | | | 144,453 | | | | | |
Total assets | | $ | 2,671,622 |
| | |
| | |
| | $ | 2,440,636 |
| | |
| | |
| Total assets | | $ | 4,066,846 | | | | | | | $ | 3,160,966 | | | | | |
| | | | | | | | | | | | | | | | | |
Liabilities and stockholders' equity: | | |
| | |
| | |
| | |
| | |
| | |
| Liabilities and stockholders' equity: | | | | | | | | | | | | |
Int chkg, savings and money market | | $ | 1,396,589 |
| | 883 |
| | 0.25 | % | | $ | 1,300,326 |
| | 653 |
| | 0.20 | % | |
Interest checking, savings and money market | | Interest checking, savings and money market | | $ | 2,026,137 | | | 953 | | | 0.19 | % | | $ | 1,699,714 | | | 3,590 | | | 0.84 | % |
Certificates of deposit | | 170,500 |
| | 372 |
| | 0.87 | % | | 171,105 |
| | 297 |
| | 0.69 | % | Certificates of deposit | | 266,576 | | | 1,017 | | | 1.52 | % | | 302,776 | | | 1,568 | | | 2.05 | % |
Brokered CDs | | 84,649 |
| | 254 |
| | 1.19 | % | | 65,688 |
| | 188 |
| | 1.14 | % | Brokered CDs | | 74,994 | | | 261 | | | 1.39 | % | | — | | | — | | | — | % |
Borrowed funds | | 53,181 |
| | 169 |
| | 1.26 | % | | 1,095 |
| | 2 |
| | 0.77 | % | Borrowed funds | | 2,809 | | | 8 | | | 1.22 | % | | 6,683 | | | 36 | | | 2.10 | % |
Subordinated debt (5) | | 14,842 |
| | 233 |
| | 6.23 | % | | 14,829 |
| | 234 |
| | 6.26 | % | Subordinated debt (5) | | 69,941 | | | 1,007 | | | 5.73 | % | | 14,867 | | | 233 | | | 6.22 | % |
Total interest-bearing funding | | 1,719,761 |
| | 1,911 |
| | 0.44 | % | | 1,553,043 |
| | 1,374 |
| | 0.35 | % | Total interest-bearing funding | | 2,440,457 | | | 3,246 | | | 0.53 | % | | 2,024,040 | | | 5,427 | | | 1.06 | % |
| | | | | | | | | | | | | | | | | |
Net interest rate spread | | |
| | |
| | 3.89 | % | | |
| | |
| | 3.74 | % | |
Net interest-rate spread (tax equivalent) | | Net interest-rate spread (tax equivalent) | | | | | | 3.26 | % | | | | | | 3.58 | % |
| | | | | | | | | | | | | |
Demand deposits | | 704,177 |
| | — |
| |
|
| | 656,158 |
| | — |
| |
|
| |
Non-interest checking | | Non-interest checking | | 1,261,451 | | | — | | | 811,942 | | | — | | |
Total deposits, borrowed funds and subordinated debt | | 2,423,938 |
| | 1,911 |
| | 0.31 | % | | 2,209,201 |
| | 1,374 |
| | 0.25 | % | Total deposits, borrowed funds and subordinated debt | | 3,701,908 | | | 3,246 | | | 0.35 | % | | 2,835,982 | | | 5,427 | | | 0.76 | % |
Other liabilities | | 17,714 |
| | |
| | |
| | 17,224 |
| | |
| | |
| Other liabilities | | 43,115 | | | | | | | 38,740 | | | | | |
Total liabilities | | 2,441,652 |
| | |
| | |
| | 2,226,425 |
| | |
| | |
| Total liabilities | | 3,745,023 | | | | | | | 2,874,722 | | | | | |
| | | | | | | | | | | | | |
Stockholders' equity | | 229,970 |
| | |
| | |
| | 214,211 |
| | |
| | |
| Stockholders' equity | | 321,823 | | | | | | | 286,244 | | | | | |
Total liabilities and stockholders' equity | | $ | 2,671,622 |
| | |
| | |
| | $ | 2,440,636 |
| | |
| | |
| Total liabilities and stockholders' equity | | $ | 4,066,846 | | | | | | | $ | 3,160,966 | | | | | |
| | | | | | | | | | | | | | | | | |
Net interest income (tax equivalent) | | Net interest income (tax equivalent) | | | | 33,886 | | | | | | | 29,804 | | | |
Net interest margin (tax equivalent) | | Net interest margin (tax equivalent) | | | | | | 3.46 | % | | | | | | 3.93 | % |
Less tax equivalent adjustment | | Less tax equivalent adjustment | | 355 | | | 383 | | |
Net interest income | | |
| | $ | 25,134 |
| | |
| | |
| | $ | 21,817 |
| | |
| Net interest income | | $ | 33,531 | | | $ | 29,421 | | |
Net interest margin (tax equivalent) | | |
| | |
| | 4.03 | % | | |
| | |
| | 3.86 | % | |
Net interest margin | | Net interest margin | | | | 3.43 | % | | | | 3.88 | % |
| |
(1)
| Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, which was not included in the interest amount above, was $845 thousand and $778 thousand for the quarters ended September 30, 2017 and September 30, 2016, respectively. |
| |
(2)
| Average loans and loans held for sale include non-accrual loans and are net of average deferred loan fees. |
| |
(3)
| Average investments are presented at average amortized cost. |
| |
(4)
| Average other interest earning assets include interest earning deposits, fed funds sold and FHLB stock. |
| |
(5)
| The subordinated debt issued in January 2015 is net of average deferred debt issuance costs. |
Interest21% in both 2020 and Dividend Income
For the third quarter of 2017, total interest and dividend income amounted to $27.0 million, an increase of $3.9 million, or 17%, compared to the prior period. The increase resulted primarily from an increase of $228.7 million, or 10%, in the average balance of interest earning assets, mainly2019, based on tax equivalent adjustments associated with tax exempt loans and to a lesser extent a 24 basis point increase in the average yield.investments interest income.
Interest income on(2)Average loans and loans held for sale which accounts for the majority of interest income, amounted to $24.9 million for the three months ended September 30, 2017, an increase of $3.4 million, or 16%, over the comparable period, due primarily to loan growth, and to a lesser extent an increase in averageinclude non-accrual loans and loans held for sale yields. Theare net of average balances of loans and loans held for sale increased $204.2 million, or 10%, for the three months ended September 30, 2017 compared to the same period in 2016, anddeferred loan fees.
(3)Average investments are presented at average yields increased 20 basis points.amortized cost.
Income on investment securities amounted to $2.0 million, an increase of $388 thousand, or 24%, compared to the same period in 2016. This increase primarily resulted from an increase of $55.4 million, or 17%, in the average balance of investment securities. (4)Average investment yields also increased 8 basis points due primarily to the debt security portfolio restructuring in the third quarter of 2017.
Income on other interest-earning assets amounted to $136 thousand, an increaseinclude interest-earning deposits, fed funds sold and FHLB stock.
(5)The subordinated debt is net of $40 thousand, or 42%, compared to the same quarter in the prior year. This increase was primarily due to an increaseaverage deferred debt issuance costs.
Interest Expense
For the three months ended September 30, 2017, total interest expense amounted to $1.9 million, an increase of $537 thousand, or 39%, compared to the prior period. The increase in total interest expense was due to increases in both average rates and average balances. The increase in average rates resulted from higher cost of funds in the current year, primarily interest-bearing funding which increased 9 basis points over the same period in the prior year. At the same time, the average balance of interest-bearing funding increased $166.7 million, or 11% over the same period.
Interest expense on interest checking, savings and money market accounts amounted to $883 thousand, an increase of $230 thousand, or 35%, compared to the same prior year period due primarily to an increase in average rates of 5 basis points and to a lesser extent an increase in average balances of $96.3 million, or 7%.
Interest expense on CDs amounted to $372 thousand, an increase of $75 thousand, or 25%, compared to the same period in the prior year due primarily to an increase of 18 basis points in average rates.
Interest expense on brokered CDs amounted to $254 thousand, an increase of $66 thousand, or 35%, compared to the 2016 period, due primarily to an increase in average balances. Average balances increased $19.0 million, or 29%.
Interest expense on borrowed funds amounted to $169 thousand, an increase of $167 thousand due to increases in both average balances and average rates. Average balances increased $52.1 million, and average rates increased 49 basis points compared to prior period. Average rates increased due mainly to increases in the Fed Funds rate since the prior period.
The average balance of non-interest bearing demand deposits increased $48.0 million, or 7%, as compared to the same period in 2016. Non-interest bearing demand deposits are an important component of the Company's core funding strategy. This non-interest bearing funding source represented 30% of total average deposit balances for both the three months ended September 30, 2017 and September 30, 2016.
Provision for Loan Loss
The provision for loan losses was determined under the incurred loss model and amounted to $1.2$1.6 million for the three months ended September 30, 2017, a decrease2020, an increase of $161$550 thousand, compared to the same period last year. prior period. The provision for the quarter ended September 30, 2020 consisted of $1.0 million in general reserve factor increases primarily related to economic weakness caused by the COVID-19 pandemic and its impact on credit quality in the loan portfolio, $845 thousand related to classified and impaired loans and a net reduction of $278 thousand related to changes in loan mix, among other factors.
The provision for loan losses is a significant factor in the Company's operating results. For further discussion regarding the provision for loan losses and management's assessment of the adequacy of the allowance for loan losses see "Credit Risk," "Asset Quality," and "Allowance for Loan Losses" under "Financial Condition" in this Item 2 above, and "Credit Risk," "Asset Quality," and "Allowance for Loan Losses" in the Financial Condition section of Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's 20162019 Annual Report on Form 10-K.
There have been no material changes to the Company's underwriting practices or to the allowance for loan loss methodology used to estimate loan loss exposure as reported in the Company's 2016 Annual Report on Form 10-K.
Non-Interest Income
Non-interest income for the three months ended September 30, 20172020 amounted to $3.4$4.3 million, a decreasean increase of $504$175 thousand, or 13%4%, as compared to the same period.period in 2019. The significant changesprimary components of the quarter over quarter change are discussed below:as follows:
Investment advisory fees increased by $149 thousand, or 13%, primarily driven by asset growth due to changes in market values.
Deposit and interchange fees increased by $255 thousand, or 20%, primarily due to increases in business checking fees and to a lesser extent ATM interchange fees and overdraft fees.
•Net gains (losses) on sales of investmentdebt securities decreased by $830of $127 thousand compared to no sales in the third quarter of 2017, predominately from losses of $1.6 million realized from a debt security portfolio restructuring, largely offset by2019.
•Net gains on equity sales in the current quarter of $1.3 million.
Net gain on loan sales increased by $190 thousand due primarily to higher volume of loans originated for sale.
•Deposit and interchange fees decreased $110by $183 thousand or 56%, primarily due to lower volumedeposit account activity combined with higher balances in the third quarter of 2017 compared to the same periodcustomer accounts and less consumer spending resulting in 2016.lower interchange activity.
Non-Interest Expense
Non-interest expense for the three months ended September 30, 20172020 amounted to $18.8$22.8 million, an increase of $1.4$1.7 million, or 8%, compared to the prior period in 2016.period. The significant changesprimary components of the quarter over quarter change are discussed below:as follows:
•Salaries and employee benefits increased by $1.2 million, or 11%,$649 thousand due primarily to support the Company's strategic growth initiatives.
•Technology and market expansion initiatives sincetelecommunications increased $453 thousand due primarily to higher infrastructure costs and expenses associated with the prior period.Company's multi–year digital evolution strategy to enhance operating efficiency and customer experience.
Occupancy and equipment expense •Deposit insurance premiums increased $733 thousand due primarily to higher insurance charges caused by $134 thousand, or 7%, mainly due to investmentsa decline in our facilities, including new branches,Tier 1 leverage ratio resulting from PPP origination volume and also from the overall branch network, and operations buildings.
2019 expense being positively impacted by a $376 thousand credit from the FDIC Deposit Insurance Fund.
Income Taxes
The effective tax rate for the three months ended September 30, 2017,2020 was 35.4%23.6%, compared to 32.3%21.4% for the three months ended September 30, 2016. The increase in rate was primarily due to higher levels of projected taxable income.2019.
Results of Operations
Nine Months Ended September 30, 20172020 vs. Nine Months Ended September 30, 20162019
Unless otherwise indicated, the reported results are for the nine months ended September 30, 20172020 with the "same period," the "prior year period," the "comparable period," "prior year," and "prior period" being the nine months ended September 30, 2016.2019. Average yields are presented on aan annualized tax equivalent basis.
Net Income
The Company's net income for the nine months ended September 30, 20172020 amounted to $16.7$21.6 million, compared to $13.8$25.5 million for the same period in 2016, an increase of $2.9 million, or 21%.2019. Diluted earnings per share were $1.43 and $1.27$1.81 for the nine months ended September 30, 2017 and September 30, 2016, respectively, an increase of 13%. Diluted weighted average common shares outstanding2020, compared to $2.15 for the nine months ended September 30, 2017 include2019.
Net income results for the fullnine months ended September 30, 2020 compared to the prior year period was positively impacted by growth in net interest income, offset by increases in the provision for loan losses and operating expenses. Net interest income increased mainly from loan growth and PPP income partially offset by lower net interest margin principally due to lower market interest rates. The provision for loan losses increased over the prior year periods as the Company added to general reserves to address the impact of COVID-19 on the 930,232 shares of common stock issuedCompany's loan portfolio and from an increase in impaired loan reserves. Operating expenses increased for the nine months ended September 30, 2020 compared to the prior year, due primarily to the Company’s strategic growth initiatives, and also from higher salary and benefit costs related to the pandemic, including our team members’ PPP loan origination effort in the Company’s 2016 equity offering, while the respective weighted average for the 2016 period was only affected from the issue datesecond quarter of June 23, 2016 through period end.2020.
Net Interest Income and Margin
The Company's net interest income for the nine months ended September 30, 2017 was $71.52020 amounted to $96.0 million, compared to $64.2$86.3 million for the nine months ended September 30, 2016, an increase of $7.3 million, or 11%. The increase in net interest income over the comparable period was due primarily to revenue generated from loan growth.
Net Interest Margin
The Company's margin was 3.95% for the nine months ended September 30, 2017,2019, an increase of $9.7 million, or 11%. The Company's margin was 3.59% for the nine months ended September 30, 2020 and was relatively flat3.90% for the nine months ended September 30, 2019.
Tax equivalent net interest income for the nine months ended September 30, 2020 was $97.0 million compared to $87.5 million for the nine months ended September 30, 2019, an increase of $9.5 million, or 11%. T/E margin was 3.63% and 3.96% for the nine months ended September 30, 2020 and 2019, respectively. Excluding PPP loans, T/E margin for the nine months ended September 30, 2016.2020 was 3.70%.
The increase in net interest income was due largely to interest-earning asset growth, primarily in loans, partially offset by a decline in tax equivalent net interest margin. Year-to-date net interest income included $2.2 million in PPP interest income plus $3.7 million in PPP related SBA fee accretion.
As with the third quarter, the lower year-to-date margin results primarily reflect the significant decline in interest rates since the comparable period resulting in interest-earning asset yields declining faster than the cost of funding. Interest-earning asset yields have been impacted by a 175 basis point decrease in the fed funds rate since September 30, 2019, with 150 basis points of that total decline occurring in March 2020. Term interest rates have also fallen significantly over the respective period and collectively these interest rate decreases have reduced yields on loans repricing, short-term and overnight investments and interest-earning asset growth. The Company funds these interest-earning assets principally through non-term customer deposits, which were less impacted by interest rate declines.
Interest and Dividend Income
Total interest and dividend income amounted to $107.9 million for the nine months ended September 30, 2020, an increase of $5.4 million, or 5%, compared to the prior period. The increase was attributed primarily to a $537.3 million, or 22%, increase in the average balances of loans and loans held for sale, partially offset by lower yields on interest-earning assets. Average tax equivalent loan yields have declined 64 basis points and the yield on other interest earning assets has decreased 216 basis points. See the "Net Interest Income and Margin" discussion above for further information on the decrease in yields.
Interest Expense
For the nine months ended September 30, 2020, total interest expense amounted to $11.9 million, a decrease of $4.2 million, or 26%, over the same period in 2019 due primarily to decreases in the cost of funding, partially offset by increases in average balances of checking, saving and money market accounts. The average cost of funding, including the impact of non-interest deposit accounts balances, decreased 31 basis points. The average balance of checking, savings and money market accounts increased $236.8 million, or 14%, and the average balance of borrowed funds increased $36.7 million.
Deposit growth for the nine months ended September 30, 2020, primarily in the third quarter, has been positively and significantly impacted by the PPP loan funds, stimulus checks and the ongoing pandemic as the PPP loan monies were distributed into deposit accounts and many customers are proactively building liquidity in response to the economic uncertainty caused by the pandemic.
Non-interest deposit accounts are an important component of the Company's core funding strategy. For the nine months ended September 30, 2020, the average balance of non-interest checking accounts increased $296.1 million, or 38%, as compared to the same period in 2019. This non-interest-bearing funding source represented 33% and 28% of total average deposit balances for the nine months ended September 30, 2020 and September 30, 2019, respectively.
Interest-rate risk is reviewed in detail in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.
Rate / Volume Analysis
The following table sets forth, on a tax-equivalent basis, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the nine months ended September 30, 20172020, compared to the nine months ended September 30, 2016.2019. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) volume (change in average portfolio balance multiplied by prior period average rate); and (2) interest rate (change in average interest rate multiplied by prior period average balance);. Changes attributable to the combined impact of volume and (3) rate have been allocated proportionately based on absolute value to the changes due to volume and volume (the remaining difference).the changes due to rate.
| | | | | | | | | | | | | | | | | | | | | |
| | | | Increase (decrease) due to | |
(Dollars in thousands) | | Net Change | | Volume | | Rate | |
Interest Income | | | | | | | |
Loans and loans held for sale (tax equivalent) | | $ | 6,469 | | | $ | 19,370 | | | $ | (12,901) | | |
Investment securities (tax equivalent) | | 217 | | | 461 | | | (244) | | |
Other interest-earning assets (1) | | (1,373) | | | 669 | | | (2,042) | | |
Total interest-earning assets (tax equivalent) | | 5,313 | | | 20,500 | | | (15,187) | | |
| | | | | | | |
Interest Expense | | | | | | | |
Interest checking, savings and money market | | (4,865) | | | 1,333 | | | (6,198) | | |
CDs | | (540) | | | (132) | | | (408) | | |
Brokered CDs | | 105 | | | 200 | | | (95) | | |
Borrowed funds | | 288 | | | 460 | | | (172) | | |
Subordinated debt | | 776 | | | 816 | | | (40) | | |
Total interest-bearing funding | | (4,236) | | | 2,677 | | | (6,913) | | |
Change in net interest income (tax equivalent) | | $ | 9,549 | | | $ | 17,823 | | | $ | (8,274) | | |
(1)Income on other interest-earning assets includes interest on deposits and fed funds sold, and dividends on FHLB stock.
|
| | | | | | | | | | | | | | | | |
| | | | Increase (decrease) due to |
(Dollars in thousands) | | Net Change | | Volume | | Rate | | Rate/ Volume |
Interest Income | | |
| | |
| | |
| | |
|
Loans and loans held for sale | | $ | 7,165 |
| | $ | 6,911 |
| | $ | 237 |
| | $ | 17 |
|
Investment securities | | 1,181 |
| | 1,403 |
| | (46 | ) | | (176 | ) |
Other interest earning assets (1) | | 113 |
| | (30 | ) | | 170 |
| | (27 | ) |
Total interest earnings assets | | 8,459 |
| | 8,284 |
| | 361 |
| | (186 | ) |
| | | | | | | | |
Interest Expense | | |
| | |
| | |
| | |
|
Interest checking, savings and money market | | 601 |
| | 231 |
| | 368 |
| | 2 |
|
Certificates of deposit | | 144 |
| | (12 | ) | | 152 |
| | 4 |
|
Brokered CDs | | 47 |
| | (47 | ) | | 103 |
| | (9 | ) |
Borrowed funds | | 343 |
| | 127 |
| | 83 |
| | 133 |
|
Subordinated debt | | (3 | ) | | — |
| | (3 | ) | | — |
|
Total interest-bearing funding | | 1,132 |
| | 299 |
| | 703 |
| | 130 |
|
Change in net interest income | | $ | 7,327 |
| | $ | 7,985 |
| | $ | (342 | ) | | $ | (316 | ) |
69 | |
(1)
| Income on other interest-earning assets includes interest on deposits and fed funds sold, and dividends on FHLB stock. |
The following table presents the Company's average balance sheet, net interest income and average rates for the nine months ended September 30, 20172020 and 2016.
2019:
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
| | | | Nine months ended September 30, 2017 | | Nine months ended September 30, 2016 | | | Nine months ended September 30, 2020 | | Nine months ended September 30, 2019 |
(Dollars in thousands) | | Average Balance | | Interest | | Average Yield(1) | | Average Balance | | Interest | | Average Yield(1) | (Dollars in thousands) | | Average Balance | | Interest(1) | | Average Yield(1) | | Average Balance | | Interest(1) | | Average Yield(1) |
Assets: | | |
| | |
| | |
| | |
| | |
| | |
| Assets: | | | | | | | | | | | | |
Loans and loans held for sale (2) | | $ | 2,098,992 |
| | $ | 70,544 |
| | 4.55 | % | | $ | 1,897,372 |
| | $ | 63,379 |
| | 4.52 | % | |
Investments (3) | | 377,273 |
| | 5,901 |
| | 2.65 | % | | 307,203 |
| | 4,720 |
| | 2.67 | % | |
Other interest earning assets (4) | | 29,748 |
| | 302 |
| | 1.35 | % | | 35,544 |
| | 189 |
| | 0.71 | % | |
Total interest earnings assets | | 2,506,013 |
| | 76,747 |
| | 4.23 | % | | 2,240,119 |
| | 68,288 |
| | 4.21 | % | |
Loans and loans held for sale(2) (tax equivalent) | | Loans and loans held for sale(2) (tax equivalent) | | $ | 2,941,755 | | | $ | 97,858 | | | 4.44 | % | | $ | 2,404,443 | | | $ | 91,389 | | | 5.08 | % |
Investment securities(3) (tax equivalent) | | Investment securities(3) (tax equivalent) | | 478,365 | | | 10,781 | | | 3.00 | % | | 458,433 | | | 10,564 | | | 3.07 | % |
Other interest-earning assets(4) | | Other interest-earning assets(4) | | 150,104 | | | 315 | | | 0.28 | % | | 92,593 | | | 1,688 | | | 2.44 | % |
Total interest-earnings assets (tax equivalent) | | Total interest-earnings assets (tax equivalent) | | 3,570,224 | | | 108,954 | | | 4.08 | % | | 2,955,469 | | | 103,641 | | | 4.69 | % |
Other assets | | 107,542 |
| | |
| | |
| | 104,158 |
| | |
| | |
| Other assets | | 159,287 | | | | | | | 134,401 | | | | | |
Total assets | | $ | 2,613,555 |
| | |
| | |
| | $ | 2,344,277 |
| | |
| | |
| Total assets | | $ | 3,729,511 | | | | | | | $ | 3,089,870 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Liabilities and stockholders' equity: | | |
| | |
| | |
| | |
| | |
| | |
| Liabilities and stockholders' equity: | | | | | | | | | | | | |
Int chkg, savings and money market | | $ | 1,386,227 |
| | 2,467 |
| | 0.24 | % | | $ | 1,231,888 |
| | 1,866 |
| | 0.20 | % | |
Certificates of deposit | | 166,546 |
| | 986 |
| | 0.79 | % | | 168,911 |
| | 842 |
| | 0.67 | % | |
Interest checking, savings and money market | | Interest checking, savings and money market | | $ | 1,886,542 | | | 5,603 | | | 0.40 | % | | $ | 1,649,758 | | | 10,468 | | | 0.85 | % |
CDs | | CDs | | 288,374 | | | 3,857 | | | 1.79 | % | | 297,580 | | | 4,397 | | | 1.98 | % |
Brokered CDs | | 74,584 |
| | 664 |
| | 1.19 | % | | 80,782 |
| | 617 |
| | 1.02 | % | Brokered CDs | | 38,592 | | | 396 | | | 1.37 | % | | 20,678 | | | 291 | | | 1.88 | % |
Borrowed funds | | 50,179 |
| | 422 |
| | 1.12 | % | | 19,281 |
| | 79 |
| | 0.55 | % | Borrowed funds | | 53,078 | | | 603 | | | 1.52 | % | | 16,415 | | | 315 | | | 2.56 | % |
Subordinated debt (5) | | 14,839 |
| | 692 |
| | 6.23 | % | | 14,826 |
| | 695 |
| | 6.26 | % | Subordinated debt(5) | | 33,364 | | | 1,468 | | | 5.88 | % | | 14,864 | | | 692 | | | 6.22 | % |
Total interest-bearing funding | | 1,692,375 |
| | 5,231 |
| | 0.41 | % | | 1,515,688 |
| | 4,099 |
| | 0.36 | % | Total interest-bearing funding | | 2,299,950 | | | 11,927 | | | 0.69 | % | | 1,999,295 | | | 16,163 | | | 1.08 | % |
| | | | | | | | | | | | | | | | | | | | | |
Net interest rate spread | | |
| | |
| | 3.82 | % | | |
| | |
| | 3.85 | % | |
Net interest-rate spread (tax equivalent) | | Net interest-rate spread (tax equivalent) | | | | | | 3.39 | % | | | | | | 3.61 | % |
| | | | | | | | | | | | | | | | | | | | | |
Demand deposits | | 680,817 |
| | — |
| | | | 616,686 |
| | — |
| | | |
Non-interest checking | | Non-interest checking | | 1,076,711 | | | — | | | | 780,632 | | | — | | | |
Total deposits, borrowed funds and subordinated debt | | 2,373,192 |
| | 5,231 |
| | 0.29 | % | | 2,132,374 |
| | 4,099 |
| | 0.26 | % | Total deposits, borrowed funds and subordinated debt | | 3,376,661 | | | 11,927 | | | 0.47 | % | | 2,779,927 | | | 16,163 | | | 0.78 | % |
Other liabilities | | 16,732 |
| | |
| | |
| | 15,572 |
| | |
| | |
| Other liabilities | | 41,111 | | | | | | | 37,369 | | | | | |
Total liabilities | | 2,389,924 |
| | |
| | |
| | 2,147,946 |
| | |
| | |
| Total liabilities | | 3,417,772 | | | | | | | 2,817,296 | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Stockholders' equity | | 223,631 |
| | |
| | |
| | 196,331 |
| | |
| | |
| Stockholders' equity | | 311,739 | | | | | | | 272,574 | | | | | |
Total liabilities and stockholders' equity | | $ | 2,613,555 |
| | |
| | |
| | $ | 2,344,277 |
| | |
| | |
| Total liabilities and stockholders' equity | | $ | 3,729,511 | | | | | | | $ | 3,089,870 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Net interest income (tax equivalent) | | Net interest income (tax equivalent) | | | | 97,027 | | | | | | | 87,478 | | | |
Net interest margin (tax equivalent) | | Net interest margin (tax equivalent) | | | | | | 3.63 | % | | | | | | 3.96 | % |
Less tax equivalent adjustment | | Less tax equivalent adjustment | | | 1,074 | | | | | 1,195 | | | |
Net interest income | | |
| | $ | 71,516 |
| | |
| | |
| | $ | 64,189 |
| | |
| Net interest income | | | $ | 95,953 | | | | | $ | 86,283 | | | |
Net interest margin (tax equivalent) | | |
| | |
| | 3.95 | % | | |
| | |
| | 3.96 | % | |
Net interest margin | | Net interest margin | | | | | 3.59 | % | | | | | 3.90 | % |
| |
(1)
| Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, which was not included in the interest amount above, was $2.5 million for the nine months ended September 30, 2017 and $2.3 million for the comparable period in 2016. |
| |
(2)
| Average loans and loans held for sale include non-accrual loans and are net of average deferred loan fees. |
| |
(3)
| Average investment balances are presented at average amortized cost. |
| |
(4)
| Average other interest earning assets includes interest-earning deposits, fed funds sold, and FHLB stock. |
| |
(5)
| The subordinated debt is net of average deferred debt issuance costs. |
(1)Average yields and interest income are presented on a tax equivalent basis, calculated using a U.S. federal income tax rate of 21% in both 2020 and 2019, based on tax equivalent adjustments associated with tax exempt loans and investments interest income.
Interest and Dividend Income
Total interest and dividend income amounted to $76.7 million for the nine months ended September 30, 2017, an increase of $8.5 million, or 12%, compared to the prior period. The increase resulted primarily from an increase of $265.9 million, or 12%, in the average balance of interest earning assets, mainly loans.
Interest income on(2)Average loans and loans held for sale which accounts for the majority of interest income, amounted to $70.5 million, an increase of $7.2 million, or 11%, over the comparable period, due primarily to an increaseinclude non-accrual loans and are net of average loansdeferred loan fees.
(3)Average investment balances are presented at average amortized cost.
(4)Average other interest-earning assets includes interest-earning deposits, fed funds sold, and loans heldFHLB stock.
(5)The subordinated debt is net of average deferred debt issuance costs.
Provision for sale balances by $201.6 million, or 11%, compared toLoan Loss
The provision for loan losses was determined under the prior period. The average yield on loans and loans held for sale also increased 3 basis points since the same period in 2016incurred loss model and amounted to 4.55% for the nine months ended September 30, 2017.
Income on investment securities amounted to $5.9$10.4 million, an increase of $1.2 million, or 25%, compared to the same period in 2016. This increase primarily resulted from an increase in the average balance of investment securities by $70.1 million, or 23%, partially offset by a 2 basis points decline in the average yield on investment securities.
Other interest earning assets income amounted to $302 thousand for the nine months ended September 30, 2017,2020, an increase of $113 thousand, or 60%, compared to the prior period. The increase resulted from a 64 basis point increase in the average yield, mainly due to an increase in the Fed Funds rates since the prior period, partially offset by a decrease of $5.8$8.8 million, or 16%, in the average balance of other interest earning assets compared to the prior period.
Interest Expense
For the nine months ended September 30, 2017, total interest expense amounted to $5.2 million, an increase of $1.1 million, or 28%, over the same period in 2016 due primarily to an increase in the cost of funds, mainly interest-bearing funding, and to a lesser extent an increase in average balances. The average rate on interest-bearing funding increased by 5 basis points and the average balances increased $176.7 million, or 12%.
Interest expense on interest checking, savings and money market accounts amounted to $2.5 million, an increase of $601 thousand, or 32%, compared to the prior period due to both an increase in rates by 4 basis points and average balances of $154.3 million, or 13%, over the comparable period.
Interest expense on CDs amounted to $986 thousand, an increase of $144 thousand, or 17%, over the same period in 2016 due primarily to an increase in the average rate of 12 basis points.
Interest expense on brokered CDs amounted to $664 thousand, an increase of $47 thousand, or 8%, due primarily to an increase in the average rate, partially offset by a decrease in the average balance. The average rate increased 17 basis points, while the average balance decreased $6.2 million, or 8%.
Interest expense on borrowed funds amounted to $422 thousand, an increase of $343 thousand, due to increases in both average balances and average rates of borrowed funds since the prior year. Average balances increased $30.9 million and average rates increased 57 basis points since the prior period, mainly due to increases in the Fed Funds rate.
For the nine months ended September 30, 2017, the average balance of non-interest bearing demand deposits increased $64.1 million, or 10%, as compared to the same period in 2016. Non-interest bearing demand deposits are an important component of the Company's core funding strategy. This non-interest bearing funding represented 29% of total average deposit balances for both the nine months ended September 30, 2017 and 2016.
Provision for Loan Loss
2019. The provision for loan losses amounted to $1.6 million for the nine months ended September 30, 2017, a decrease of $873 thousand compared to the same period last year. The decrease in the provision for the nine months ended September 30, 2017 was due2020 consisted of $6.3 million in general reserve factor increases primarily related to generally improvedeconomic weakness caused by the COVID-19 pandemic and its impact on credit quality metricsin the loan portfolio, $3.1 million related to classified and underlying collateral values, partially offset by increasedimpaired loans and $1.0 million related to loan growth compared to the prior year.and changes in loan mix, among other factors.
The provision for loan losses is a significant factor in the Company's operating results. For further discussion regarding the provision for loan losses and management's assessment of the adequacy of the allowance for loan losses see "Credit Risk," "Asset Quality," and "Allowance for Loan Losses" under "Financial Condition" in this Item 2, above, and "Credit Risk," "Asset Quality," and "Allowance for Loan Losses" in the Financial Condition"Financial Condition" section of Management's"Management's Discussion and Analysis of Financial Condition and Results of OperationsOperations" in the Company's 20162019 Annual Report on Form 10-K.
There have been no material changes to the Company's underwriting practices or to the allowance for loan loss methodology used to estimate loan loss exposure as reported in the Company's 2016 Annual Report on Form 10-K.
Non-Interest Income
Non-interest income for the nine months ended September 30, 20172020 amounted to $11.5$12.5 million,, an increase of $781$507 thousand,, or 7%4%, as compared to the nine months ended September 30, 2016.2019. The significant changesprimary components of the increase are discussed below:as follows:
Investment advisory•Net gains on loan sales increased $570 thousand due primarily to a higher volume of loans originated for sale.
•Wealth management fees increased by $210$178 thousand or 6%,due primarily due to increases in investments under managementasset growth from both new business and increases in market values.appreciation.
•Deposit and interchange fees increaseddecreased by $599$237 thousand or 16%, primarily due to increaseslower deposit account activity combined with higher balances in business checking feescustomer accounts and to a lesser extent ATMless consumer spending resulting in lower interchange fees.activity.
Net gains (losses) on security sales decreased $126 thousand, or 21%. Net gains on securities sales were lower in the current year predominately due to gains on equity sales, largely offset by losses realized from a debt security portfolio restructuring.
Non-Interest Expense
Non-interest expense for the nine months ended September 30, 20172020 amounted to $57.0$69.8 million,, an increase of $5.2$6.1 million,, or 10%, compared to the same period in 2016.2019. The significant changes in non-interest expense are discussed below:as follows:
•Salaries and employee benefits increased by $4.2 $4.3 million, or 13%, since the prior period, due primarily to support the Company's strategic growth and market expansion initiatives.
There were also several pandemic associated expense items including discretionary awards to recognize team contributions including the successful PPP loan effort, among others.
Occupancy and equipment expenses increased $424 thousand, or 8%, mainly due to investments in our facilities, including new branches, the overall branch network, and operations buildings.
•Technology and telecommunications expense increased $241$1.5 million due primarily to higher infrastructure costs and expenses associated with the Company's multi–year digital evolution strategy to enhance operating efficiency and customer experience.
•Deposit insurance premiums increased $957 thousand or 5%, primarily asto higher insurance charges caused by a result of investmentsdecline in our network infrastructureTier 1 leverage ratio resulting from PPP origination volume and security,from the 2019 expense being positively impacted by a $376 thousand credit from the FDIC Deposit Insurance Fund.
•Advertising and public relations costs decreased $421 thousand as the Company's business development costs were less due to improve our service capabilitiesthe pandemic and to enhance business continuity.the focus on PPP loan originations.
•Audit, legal and other professional fees increased $326 thousand primarily in other professional fees, which includes, among other things, consulting and professional expenses associated with the Company's digital evolution strategy.
•Other operating expenses decreased by $183$568 thousand or 15%, primarily due to a reduction of $101 thousand in audit and related fees compared to the same period in 2016.
Deposit insurance premiums increased by $133 thousand, or 13%, due primarily to changesthe pandemic resulting in the FDIC's assessment methodology in late 2016, which applied to all banks,lower employee-related expenses such as training, dues and the Company's growth.
entertainment, and travel.
Income Taxes
The effective tax rate was 23.7% and 22.9% for the nine months ended September 30, 2017 was 31.7%, compared2020 and September 30, 2019, respectively.
Risk Management Framework
Management utilizes a comprehensive enterprise risk management framework that enables a coordinated and structured approach for identifying, assessing and managing risks across the Company and provides reasonable assurance that management has the tools, programs, people, and processes in place to 33.0%support informed decision making, anticipate risks before they materialize and maintain the Company's risk profile consistent with its strategic planning, and applicable laws and regulations.
These risks, and the decisions related thereto, include, but are not limited to: credit risk, market and interest rate risk, legal and regulatory compliance risk, reputational risk, strategic risk, capital risk, compensation risk, liquidity management, information technology and cybersecurity risk, internal controls over financial reporting, physical security, loss and fraud prevention, policy reviews, vendor management (direct and indirect vendors) and contract management, business continuity and succession planning, short and long-term capital projects and facility planning, and corporate governance. See Part I, Item 1, "Business," under the "Risk Management Framework," section of the Company's 2019 Annual Report on Form 10-K for additional information on the Company's key risk mitigation strategies.
This Form 10-Q discusses certain key risks facing the Company and the Bank, including the following:
•Credit risk management is reviewed in detail in this Item 2 under the heading "Credit Risk," above.
•Liquidity management is the coordination of activities so that cash needs are anticipated and met, readily and efficiently. Liquidity management is reviewed in this Item 2 under the heading "Liquidity, " above.
•Capital adequacy risk and regulatory requirements are reviewed in this Item 2, under the heading "Capital Resources" above.
•Interest-rate risk is reviewed under Part I, Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.
In addition, certain heightened risks associated with the ongoing pandemic are outlined in Part II, Item 1A, "Risk Factors," in this Form 10-Q, below.
In January 2020, management activated our pandemic response team in light of the ongoing pandemic and have utilized established business continuity protocols since that time to provide uninterrupted service to our customers and communities. The pandemic response team quickly coordinated resources and responses across the Bank in order to (i) provide for the nine months ended September 30, 2016. The decreasesafety of our team members, customers, and business partners, (ii) maintain sound business operations, and (iii) minimize the risks identified above. Team leaders are in rate was due primarilyconstant communication and continually strategize and implement coordinated efforts to mitigate the risk identified above, among others. We have modified our protocols and procedures as circumstances have evolved and we will continue to monitor the impact of the pandemic on many fronts as the pandemic continues longer than originally expected, and as activities shift towards reopening of local economies and business activity.
In addition to the implementationrisks outlined in this Form 10-Q, numerous other factors that could adversely affect the Company's future results of a new accounting pronouncement (ASU No. 2016-09) related to stock-based compensation accountingoperations and financial condition, and its reputation and business model, are addressed in Part I, Item 1A, "Risk Factors," of the Company's 2019 Annual Report on Form 10-K.
Accounting Policies/Critical Accounting Estimates
As discussed in the first quarterCompany's 2019 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of 2017, which reduced tax expensethe allowance for loan losses, impairment review of investment securities and increased net income by approximately $832 thousand for the nine months ended September 30, 2017.impairment review of goodwill. The Company has not materially changed its significant accounting and reporting policies from those disclosed in its 2019 Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 1, Item (e), “Recent"Recent Accounting Pronouncements”Pronouncements," to the Company's unaudited consolidated interim financial statements in this Form 10-Q for information regarding recent accounting pronouncements.
Item 3 -Quantitative and Qualitative Disclosures About Market Risk
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Item 3 - | Quantitative and Qualitative Disclosures About Market Risk |
The Company's primary market risk is interest rate risk. Oversight of interest rate risk management isCompany can be subject to margin compression depending on the responsibilityeconomic environment and the shape of the Company's Board of Directors (the "Board"). Annually, the Board reviews and approves the Company's asset-liability management policy, which provides management with guidelines for controlling interest rate risk, as measured through net interest income sensitivity to changes in interest rates, within certain tolerance levels.yield curve. The Board also establishes and monitors guidelines for the Company's liquidity, capital ratios and asset-liability management.
The Company's asset-liability management strategies and guidelines are reviewed on a periodic basis by management and presented and discussed with the Board. These strategies and guidelines are revised based on changes in interest rate levels, general economic conditions, competition in the marketplace, the current interest rate risk position of the Company, anticipated growth and other factors.
One of the principal factors in maintaining planned levels of net interest income is the ability to design effective strategies to manage the impact of interest rate changes on future net interest income. Quarterly, management completes a net interest income sensitivity analysis, which is regularly presented to the Board. This analysis includes a simulation of the Company's net interest income under various interest rate scenarios. Variations in the interest rate environment affect numerous factors, including prepayment speeds, reinvestment rates, maturities of investments (due to call provisions), and interest rates on various asset and liability accounts.
Under the Company's current balance sheet position, the Company's margin generally performs slightly better over time in a rising rate environment, while it generally decreases in a declining rate environment and when the yield curve is flattening or inverted. The Company can be subject to margin compression depending on the economic environment and the shape
In a flattening yield curve scenario, margin compression occurs as the spread between the cost of funding and the yield on interest earning assets narrows. Under this scenario the degree of margin compression is highly dependent on the Company's ability to fund asset growth through lower cost deposits. However, if the curve is flattening, while short-term rates are rising, the adverse impact on margin may be somewhat delayed, as increases in the Prime Rate will initially result in the Company's asset yields re-pricing more quickly than funding costs. After a protracted period of flat rates, the Federal Open Market Committee had begun to increase the fed funds target rate, with three 25 basis point increases since their December 2016 meeting.
In an inverted yield curve situation, shorter-term rates exceed longer-term rates, and the impact on margin is similar but more adverse than the flat curve scenario. Again, however, the extent of the impact on margin is highly dependent on the Company's balance sheet mix.
In a declining rate environment, margin compression will eventually occur as the yield on interest earning assets decreases more rapidly than decreases in funding costs. The primary causes would be the impact of interest rate decreases (including decreases in the Prime Rate) on adjustable rate loans and the fact that decreases in deposit rates may be limited or lag decreases in the Prime Rate.
There have been no material changes in the results of the Company's net interest income sensitivity analysis as reported in the Company's 2016 Annual Report on Form 10-K. At September 30, 2017, management continues to consider2020, the Company's primary interest rateinterest-rate risk exposure continues to be margin compression that may result from changes in interest rates and/or changes in the mix of the Company's balance sheet components. This would include the mix of fixed versus variable rate loans and investments on the asset side,within assets, and higher cost versus lower cost deposits and overnight borrowings versus term borrowings and certificates of deposit within liabilities.
The Company’s net interest income sensitivity results at September 30, 2020 compared to December 31, 2019 were impacted primarily by both an increase in the Company’s on balance sheet liquidity and from a decrease in customer deposit rates. Under the liability side.Company’s static balance sheet model, relative to the December 31, 2019 results, the Company’s model results improved when interest rates increase primarily due to the increase in on balance sheet liquidity. When interest rates decrease, the Company’s results are worse than December 31, 2019 due primarily to customer deposit rates, which are at very low levels at September 30, 2020 and have limited capacity for further meaningful decline. The increased liquidity at September 30, 2020 has less impact when interest rates decrease because short-term investment rates are near zero.
The net interest income sensitivity model assumed a static balance sheet and did not forecast an increase in liquidity from potential PPP loan forgiveness, which absent any other significant balance sheet changes, would increase the Company’s on balance sheet liquidity and therefore increase the Company’s asset sensitivity as described above. Refer to heading “Results"Results of Operations”Operations" contained within Management’sItem 2, "Management's Discussion and Analysis of Financial Condition and Results of OperationsOperations" of this Form 10-Q for further discussion of margin.
The following table summarizes the results from the Company’s net interest income simulation model and compares the percent change in net interest income to the rates unchanged scenario, for a 24-month period at September 30, 2020 and December 31, 2019. These results are subject to various assumptions as reported in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the Company's 2019 Annual Report on Form 10-K.
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| | September 30, 2020 | | December 31, 2019 | |
(Dollars in thousands) | | Percentage Change(1) | | Percentage Change | | |
Changes in interest rates | | | | | | |
Rates Rise 400 Basis Points | | 7.37 | % | | 0.77 | % | | |
Rates Rise 200 Basis Points | | 4.05 | % | | 0.83 | % | | |
Rates Unchanged | | — | % | | — | % | | |
Rates Decline 100 Basis Points | | (4.07) | % | | (1.24) | % | | |
(1)The September 30, 2020 results reflect PPP loan forgiveness at a volume and timeline determined by Management.
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Item 4 - | Controls and Procedures |
Item 4 -Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures and internal controls designed to ensure that the information required to be disclosed in reports that it files or furnishes to the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
The Company carried out an evaluation as of the end of the period covered by this Form 10-Q under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective as of September 30, 2017.2020.
Changes in Internal Control over Financial Reporting
There hashave been no changesignificant changes in the Company's internal control over financial reporting that has occurred during the Company's most recent fiscal quarter (i.e., the three months ended September 30, 2017)2020) that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
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Item 1 - | Legal Proceedings |
Item 1 -Legal Proceedings
There are no material pending legal proceedings to which the Company or its subsidiaries are a party or to which any of its property is subject, other than ordinary routine litigation incidental to the business of the Company. Management does not believe resolution of any present litigation will have a material adverse effect on the business, consolidated financial condition or results of operations of the Company.
Item 1A -Risk Factors
ManagementExcept as provided in the risk factors below, management believes that there have been no material changes in the Company's risk factors as reported in the Company's 20162019 Annual Report on Form 10-K. If the effect of the COVID-19 pandemic ("pandemic") continues for a prolonged period, or results in sustained economic stress or recession, many of the risk factors identified in the Company's 2019 Annual Report on Form 10-K could become heightened and such effects could have a material adverse impact on the Company in a number of ways related to credit, collateral, customer demand, funding, operations and interest rate risk, as described in more detail below.
General
The pandemic has caused continued extensive disruption to the economy, impacted interest rates, increased economic and financial market uncertainty, disrupted global trade and supply chains and brought about historic unemployment levels. In addition, many state and local governments responded to the pandemic with the temporary closure of brick-and-mortar "non-essential" businesses, schools, and limitations on social gatherings, stay-at-home advisories and mandates, and travel bans and restrictions. Although many of these restrictions have eased or been lifted, these restrictions have resulted in significant adverse effects on our customers and business partners, particularly those in the retail, hospitality and food and beverage industries, among many others, including a significant number of layoffs and furloughs of employees nationwide, and in the regions and communities in which we operate. Nationwide attempts to gradually reopen commerce have, in some areas, been met with a resurgence in reported COVID-19 cases, and the decision to scale back on or delay the re-opening of the economy. The phased-in approach to reopen certain parts of the Massachusetts and New Hampshire economies may leave certain types of businesses closed until a there is a treatment or vaccine for COVID-19. The long-term consequences experienced by our customers and businesses may, in turn, have a material adverse impact on our business, financial condition and results of operations, as more specifically discussed below.
Lending & Credit Risk
The majority of our loan portfolio consists of commercial real estate, commercial and industrial, and commercial construction loans. Concern over the pandemic has caused and may continue to cause business shutdowns, limitations on commercial activity and financial transactions, labor shortages, supply chain interruptions, increased unemployment, increased commercial property vacancy rates, and the reduced ability for property tenants to make lease payments, all of which may cause our customers to be unable to make scheduled loan payments.
If the effects of the pandemic result in widespread and sustained repayment shortfalls on loans in our portfolio, we will incur significant loan delinquencies and non-accrual of interest, which may result in foreclosures and credit losses, particularly if the available collateral is insufficient to cover our exposure. The future effects of the pandemic on economic activity could negatively affect the collateral values associated with our existing loans, the ability to liquidate the real estate collateral securing our commercial real estate and residential loans, our ability to maintain loan origination volume and our ability to obtain additional collateralized funding. Further, in the event of delinquencies, changes in regulations and policies designed to protect borrowers may slow or prevent us from making our business decisions or may result in a delay in our taking certain remedial actions, such as foreclosures. In addition, we have unfunded commitments to extend credit to customers. During a challenging economic environment, our customers may be more dependent on our credit commitments, and any increased borrowings by the Company to fund these commitments could adversely impact our liquidity.
Furthermore, in an effort to support our communities during the pandemic, we are participating in the Paycheck Protection Program ("PPP"). If the borrower under a PPP loan fails to qualify for loan forgiveness, we are at the heightened risk of (i) holding these loans at unfavorable interest rates, with no collateral and no guarantors, as compared to the credits that we would have otherwise originated; and more so, (ii) if during the remaining loan term of any unforgiven portion of these loans, the borrower defaults and the SBA finds fault and does not honor their loan guarantee, we are at risk for additional credit losses. In addition, a customer perception that their PPP loan forgiveness application was not processed promptly by the Company, or a
change or delay in the guidance from the SBA, resulting in the SBA not approving forgiveness, could result in legal action against the Company, negative publicity or public complaints, whether real or perceived, disseminated by word of mouth, by the general media, by electronic or social networking means, or by other methods, which could result in additional expenses, and damage our reputation and adversely affect the market perception of our products and services, among other factors.
As allowed by the CARES Act, the Company has suspended TDR accounting for certain loans that have had a short-term payment deferral since March 1, 2020, as long as those loans were current and risk rated as “pass” at December 31, 2019 Although we currently expect that payments will resume after the deferral period has ended, we cannot at this time predict if a borrower’s individual business circumstances, or any prolonged economic weakness after the deferral period has expired, will allow them to support regularly scheduled payments. Consequently, the Company may experience an increase in non-performing assets and the related costs to manage those relationships, and a decline in interest income.
The long-term impact of the pandemic on the credit quality of our loan portfolio cannot be reasonably estimated at this time. It will likely be influenced by a variety of factors including the depth and duration of the economic contraction and the extent of financial support and fiscal stimulus by the U.S. government. We will continue to closely monitor the effect of the pandemic on credit quality across all industry sectors in our diversified loan portfolio as the results unfold in future quarters. The credit quality of our loans could be further impacted, and additional provisions may be necessary.
Economic & Financial Markets
At this time, it is unclear how long and to what extent the impact of the pandemic will be felt on the local and regional economy. The majority of businesses in the communities in which we operate, including the Company and its customers, business partners and vendors, have been impacted by these events in a variety of ways and to unprecedented degrees. Depending on the on-going and future developments with respect to the pandemic, which are highly uncertain and cannot be predicted, including the magnitude of the pandemic, effect of actions taken by governmental authorities, and any further weakening in general economic conditions in our market area, the demand for our financial products and services may be reduced and our business operations, financial results, and stock price could be adversely impacted.
Due to concerns about the impacts of the pandemic, citing layoffs, plummeting consumer spending and widespread closures, the Federal Reserve took action to lower the federal funds target rate range to near-zero, which has and may continue to negatively affect the Company’s net interest income and, therefore, earnings, financial condition and results of operation. A prolonged period of extremely volatile and unstable financial market conditions could increase our funding costs and negatively affect our asset-liability management strategies. Higher volatility in interest rates and spreads to benchmark indices could cause decreases in the fair market values of our investment portfolio, and assets the Company manages for others through our wealth management and trust channels, which would lower fee income, and may impair our ability to attract and retain funds from current and prospective customers. Fluctuations in interest rates will impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, any of which in turn could have a material adverse effect on our liquidity and ability to fund future growth, our operating results, and financial condition.
Liquidity
If, as a result of governmental or financial market responses to the pandemic, pledged collateral values decline, or sources of external funding become restricted or eliminated, the Company may not be able to raise adequate funds, or may incur substantially higher funding costs in order to raise the necessary funds to support the Company's operations and growth, or may be required to restrict operations or the payment of dividends.
The Company’s balance lower-yielding short-term and overnight investments has increased by loan paydowns and deposit growth which has been positively impacted by proceeds from PPP loans and stimulus checks and by customers proactively building liquidity in response to the economic uncertainty caused by the pandemic. As PPP loans are forgiven by the SBA, the Company could see further increases in liquidity.
The increase in liquidity has occurred when interest rates are at historically low levels. The immediate impact of carrying high liquidity as short term and overnight investments is a lowering of net interest margin. Investing these funds in the current low rate environment could expose the Company to increased interest rate risk.
Capital Adequacy
The Company is a separate and distinct legal entity from the Bank. It receives substantially all its revenue from dividends paid
by the Bank. If capital erosion occurs at the Bank, caused by a number of possible negative outcomes from the pandemic, such as an increase in the provisions for loan losses or other credit impairment charges, impairment of goodwill, or a significant decline in earnings, then the Bank may be unable to pay dividends to the Company. The Company in turn will be unable to service its debt, pay obligations or pay dividends on the Company’s common stock. If the Company is unable to raise additional capital to offset that decline, then regulatory capital ratios for both the Bank and the Company may fall below regulatory minimum adequacy levels, which could restrict the Company's ability to grow, among other operating restrictions, and require the Bank to submit a capital restoration plan under the prompt corrective action regulations.
Technology & Information Systems, and Operations
The spread of the pandemic has also caused the Company, like many other businesses, to modify our business practices, including employee work location and cancellation of physical participation in meetings, both internally and with business partners, vendors, and customers and prospects, turning instead to working remotely with a dependence on technology and internet connectivity for many communications. Technology and cyber security in customers’ and employees’ homes may not be as robust as in our offices and could cause the available networks, information systems, applications, and other tools to become more limited or less reliable than doing business in our offices. These modifications in business practices, for the Company, customers and vendors, and changes in technology may increase risk, including the circumvention of internal controls and heightened cybersecurity and information systems risk, and may be detrimental to our business operations. Such cyber risks include: greater phishing, malware, ransomware and other cybersecurity attacks; vulnerability to disruptions of our information technology infrastructure and telecommunications systems for remote operations; increased risk of unauthorized dissemination of confidential customer information; limited ability to restore the systems in the event of a systems failure, take-over, or interruption; greater risk of a security breach resulting in potential impairment of our ability to perform critical functions; all of which could expose the Company to risks of data or financial loss, litigation and liability and could seriously disrupt our operations and the operations of any impacted business partners and customers, and damage our reputation.
Additionally, we rely on many third parties for our business operations, including appraisers of real estate collateral, vendors that supply essential third-party services, information security assessments and technology support services, systems and analytical tools, advisory services, and providers of electronic funds delivery networks and clearing houses, and local and federal government offices, and courthouses used for the recording of mortgages and title work related to loan closings. In light of the evolving measures in response to the pandemic, many of these entities may limit the availability of and access to their services. If third-party service providers continue to have limited capacities for a prolonged period or if additional limitations or potential disruptions in these services materialize, it may negatively affect our business operations and financial results.
Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended September 30, 2020:
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Item 2 - | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
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| | Total number of shares repurchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Announced | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs |
July | | — | | $— | | — | | — |
August | | — | | — | | — | | — |
September | | — | | — | | — | | — |
(1)Amounts include shares repurchased that were not part of a publicly announced repurchase plan or program. These shares were owned and tendered by employees as payment for taxes upon vesting of restricted stock (net settlement of shares).
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Item 3 - | Defaults upon Senior Securities |
Item 3 -Defaults upon Senior Securities
Not Applicable.
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Item 4 - | Mine Safety Disclosures |
Item 4 -Mine Safety Disclosures
Not Applicable.
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Item 5 - | Other Information |
Item 5 -Other Information
Not Applicable.
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Item 6 -Exhibits
EXHIBIT INDEX
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Exhibit No.Description
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101* | The following materials from Enterprise Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016; (iv) Consolidated Statements of Changes in Equity for the nine months ended September 30, 2017; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016; and (vi) Notes to Unaudited Consolidated Interim Financial Statements. |
101* The following materials from Enterprise Bancorp, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 were formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2020 and 2019; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019; (iv) Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2020 and 2019; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019; and (vi) Notes to Unaudited Consolidated Interim Financial Statements.
104* The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 has been formatted in Inline XBRL and contained in Exhibit 101.
____________________
*Filed herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | ENTERPRISE BANCORP, INC. |
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DATE: | November 7, 20176, 2020 | By: | /s/ James A. MarcotteJoseph R. Lussier |
| | | James A. MarcotteJoseph R. Lussier |
| | | Executive Vice President, Treasurer |
| | | and Chief Financial Officer and Treasurer |
| | | (Principal Financial Officer) |