ENTERPRISE BANCORP INC /MA/ - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
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)
Massachusetts | 04-3308902 | ||||||||||
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | ||||||||||
incorporation or organization) | |||||||||||
222 Merrimack Street, | 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 o No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yes o No
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.
Large accelerated filer ☐ Accelerated filer x
Non-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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes x No
As of October 29, 2021, there were 12,027,185 shares of the issuer's common stock outstanding, par value $0.01 per share.
ENTERPRISE BANCORP, INC.
INDEX
Page Number | ||||||||
Financial Statements (unaudited) | ||||||||
2
PART I-FINANCIAL INFORMATION
Item 1 -Financial Statements
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share data) | September 30, 2021 | December 31, 2020 | ||||||||||||
Assets | ||||||||||||||
Cash and cash equivalents: | ||||||||||||||
Cash and due from banks | $ | 38,056 | $ | 40,636 | ||||||||||
Interest-earning deposits with banks | 606,321 | 213,146 | ||||||||||||
Total cash and cash equivalents | 644,377 | 253,782 | ||||||||||||
Investments: | ||||||||||||||
Debt securities at fair value (amortized cost of $800,250 and $551,191, respectively) | 817,781 | 582,303 | ||||||||||||
Equity securities at fair value | 1,441 | 746 | ||||||||||||
Total investment securities at fair value | 819,222 | 583,049 | ||||||||||||
Federal Home Loan Bank ("FHLB") stock | 2,164 | 1,905 | ||||||||||||
Loans held for sale | 413 | 371 | ||||||||||||
Loans: | ||||||||||||||
Total loans | 2,848,110 | 3,073,860 | ||||||||||||
Allowance for credit losses | (47,262) | (44,565) | ||||||||||||
Net loans | 2,800,848 | 3,029,295 | ||||||||||||
Premises and equipment, net | 44,630 | 46,708 | ||||||||||||
Lease right-of-use asset | 24,477 | 18,439 | ||||||||||||
Accrued interest receivable | 13,785 | 16,079 | ||||||||||||
Deferred income taxes, net | 15,720 | 11,290 | ||||||||||||
Bank-owned life insurance | 61,881 | 31,363 | ||||||||||||
Prepaid income taxes | 3,542 | 2,449 | ||||||||||||
Prepaid expenses and other assets | 14,717 | 13,938 | ||||||||||||
Goodwill | 5,656 | 5,656 | ||||||||||||
Total assets | $ | 4,451,432 | $ | 4,014,324 | ||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||
Liabilities | ||||||||||||||
Deposits: | ||||||||||||||
Customer deposits | $ | 3,970,936 | $ | 3,476,268 | ||||||||||
Brokered deposits | — | 74,995 | ||||||||||||
Total deposits | 3,970,936 | 3,551,263 | ||||||||||||
Borrowed funds | 8,600 | 4,774 | ||||||||||||
Subordinated debt | 58,949 | 73,744 | ||||||||||||
Lease liability | 23,748 | 17,539 | ||||||||||||
Accrued expenses and other liabilities | 41,902 | 30,638 | ||||||||||||
Accrued interest payable | 757 | 1,940 | ||||||||||||
Total liabilities | 4,104,892 | 3,679,898 | ||||||||||||
Commitments and Contingencies | ||||||||||||||
Stockholders' Equity | ||||||||||||||
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; 12,029,601 and 11,937,795 shares issued and outstanding, respectively | 120 | 119 | ||||||||||||
Additional paid-in capital | 99,619 | 97,137 | ||||||||||||
Retained earnings | 233,137 | 214,977 | ||||||||||||
Accumulated other comprehensive income | 13,664 | 22,193 | ||||||||||||
Total stockholders' equity | 346,540 | 334,426 | ||||||||||||
Total liabilities and stockholders' equity | $ | 4,451,432 | $ | 4,014,324 |
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, | |||||||||||||||||||||||||
(Dollars in thousands, except per share data) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
Interest and dividend income: | ||||||||||||||||||||||||||
Loans and loans held for sale | $ | 33,420 | $ | 33,481 | $ | 100,730 | $ | 97,472 | ||||||||||||||||||
Investment securities | 3,893 | 3,225 | 10,715 | 10,093 | ||||||||||||||||||||||
Other interest-earning assets | 262 | 71 | 471 | 315 | ||||||||||||||||||||||
Total interest and dividend income | 37,575 | 36,777 | 111,916 | 107,880 | ||||||||||||||||||||||
Interest expense: | ||||||||||||||||||||||||||
Deposits | 862 | 2,231 | 3,295 | 9,856 | ||||||||||||||||||||||
Borrowed funds | 17 | 8 | 43 | 603 | ||||||||||||||||||||||
Subordinated debt | 817 | 1,007 | 2,677 | 1,468 | ||||||||||||||||||||||
Total interest expense | 1,696 | 3,246 | 6,015 | 11,927 | ||||||||||||||||||||||
Net interest income | 35,879 | 33,531 | 105,901 | 95,953 | ||||||||||||||||||||||
Provision for credit losses | 28 | 1,575 | 747 | 10,397 | ||||||||||||||||||||||
Net interest income after provision for credit losses | 35,851 | 31,956 | 105,154 | 85,556 | ||||||||||||||||||||||
Non-interest income: | ||||||||||||||||||||||||||
Wealth management fees | 1,768 | 1,469 | 5,018 | 4,255 | ||||||||||||||||||||||
Deposit and interchange fees | 1,813 | 1,607 | 5,070 | 4,804 | ||||||||||||||||||||||
Income on bank-owned life insurance, net | 250 | 143 | 518 | 446 | ||||||||||||||||||||||
Net gains on sales of debt securities | — | 127 | 128 | 227 | ||||||||||||||||||||||
Net gains on sales of loans | 177 | 329 | 795 | 814 | ||||||||||||||||||||||
Loss on termination of swaps | (1,847) | — | (1,847) | — | ||||||||||||||||||||||
Other income | 918 | 649 | 2,448 | 1,986 | ||||||||||||||||||||||
Total non-interest income | 3,079 | 4,324 | 12,130 | 12,532 | ||||||||||||||||||||||
Non-interest expense: | ||||||||||||||||||||||||||
Salaries and employee benefits | 17,224 | 15,031 | 49,377 | 46,267 | ||||||||||||||||||||||
Occupancy and equipment expenses | 2,471 | 2,099 | 7,268 | 6,357 | ||||||||||||||||||||||
Technology and telecommunications expenses | 2,583 | 2,316 | 7,877 | 6,815 | ||||||||||||||||||||||
Advertising and public relations expenses | 435 | 372 | 1,602 | 1,506 | ||||||||||||||||||||||
Audit, legal and other professional fees | 558 | 498 | 1,702 | 1,715 | ||||||||||||||||||||||
Deposit insurance premiums | 593 | 749 | 1,327 | 1,690 | ||||||||||||||||||||||
Supplies and postage expenses | 200 | 202 | 605 | 675 | ||||||||||||||||||||||
Loss on extinguishment of subordinated debt | — | — | 713 | — | ||||||||||||||||||||||
Other operating expenses | 1,705 | 1,502 | 5,138 | 4,752 | ||||||||||||||||||||||
Total non-interest expense | 25,769 | 22,769 | 75,609 | 69,777 | ||||||||||||||||||||||
Income before income taxes | 13,161 | 13,511 | 41,675 | 28,311 | ||||||||||||||||||||||
Provision for income taxes | 3,329 | 3,185 | 10,352 | 6,712 | ||||||||||||||||||||||
Net income | $ | 9,832 | $ | 10,326 | $ | 31,323 | $ | 21,599 | ||||||||||||||||||
Basic earnings per share | $ | 0.82 | $ | 0.87 | $ | 2.61 | $ | 1.82 | ||||||||||||||||||
Diluted earnings per share | $ | 0.81 | $ | 0.87 | $ | 2.60 | $ | 1.81 | ||||||||||||||||||
Basic weighted average common shares outstanding | 12,022,610 | 11,916,486 | 11,997,199 | 11,886,811 | ||||||||||||||||||||||
Diluted weighted average common shares outstanding | 12,065,100 | 11,927,043 | 12,038,561 | 11,908,716 |
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) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
Net income | $ | 9,832 | $ | 10,326 | $ | 31,323 | $ | 21,599 | ||||||||||||||||||
Other comprehensive (loss) income, net of tax | ||||||||||||||||||||||||||
Net change in fair value of debt securities | (2,629) | (50) | (10,552) | 13,740 | ||||||||||||||||||||||
Net change in fair value of cash flow hedges | 1,333 | 167 | 2,023 | (2,197) | ||||||||||||||||||||||
Total other comprehensive (loss) income, net of tax | (1,296) | 117 | (8,529) | 11,543 | ||||||||||||||||||||||
Total comprehensive income, net | $ | 8,536 | $ | 10,443 | $ | 22,794 | $ | 33,142 | ||||||||||||||||||
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, 2021 | 12,014,933 | $ | 120 | $ | 98,708 | $ | 225,529 | $ | 14,960 | $ | 339,317 | |||||||||||||||||||||||||||
Net income | 9,832 | 9,832 | ||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net | (1,296) | (1,296) | ||||||||||||||||||||||||||||||||||||
Common stock dividend declared ($0.185 per share) | (2,224) | (2,224) | ||||||||||||||||||||||||||||||||||||
Common stock issued under dividend reinvestment plan | 9,192 | — | 310 | 310 | ||||||||||||||||||||||||||||||||||
Common stock issued, other | 461 | — | 15 | 15 | ||||||||||||||||||||||||||||||||||
Stock-based compensation, net | (56) | — | 503 | 503 | ||||||||||||||||||||||||||||||||||
Net settlement for employee taxes on restricted stock and options | — | — | (8) | (8) | ||||||||||||||||||||||||||||||||||
Stock options exercised, net | 5,071 | — | 91 | 91 | ||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 12,029,601 | $ | 120 | $ | 99,619 | $ | 233,137 | $ | 13,664 | $ | 346,540 | |||||||||||||||||||||||||||
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 | — | 306 | 306 | ||||||||||||||||||||||||||||||||||
Common stock issued, other | 889 | — | 20 | 20 | ||||||||||||||||||||||||||||||||||
Stock-based compensation, net | (110) | — | 420 | 420 | ||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 11,926,198 | $ | 119 | $ | 96,402 | $ | 207,206 | $ | 22,053 | $ | 325,780 |
See the accompanying notes to the unaudited consolidated interim financial statements.
6
ENTERPRISE BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity (continued)
(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 December 31, 2020 | 11,937,795 | $ | 119 | $ | 97,137 | $ | 214,977 | $ | 22,193 | $ | 334,426 | |||||||||||||||||||||||||||
Net income | 31,323 | 31,323 | ||||||||||||||||||||||||||||||||||||
(6,510) | (6,510) | |||||||||||||||||||||||||||||||||||||
Other comprehensive loss, net | (8,529) | (8,529) | ||||||||||||||||||||||||||||||||||||
Common stock dividend declared ($0.555 per share) | (6,653) | (6,653) | ||||||||||||||||||||||||||||||||||||
Common stock issued under dividend reinvestment plan | 28,499 | — | 938 | 938 | ||||||||||||||||||||||||||||||||||
Common stock issued, other | 1,322 | — | 42 | 42 | ||||||||||||||||||||||||||||||||||
Stock-based compensation, net | 63,684 | 1 | 1,656 | 1,657 | ||||||||||||||||||||||||||||||||||
Net settlement for employee taxes on restricted stock and options | (7,803) | — | (260) | (260) | ||||||||||||||||||||||||||||||||||
Stock options exercised, net | 6,104 | — | 106 | 106 | ||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 12,029,601 | $ | 120 | $ | 99,619 | $ | 233,137 | $ | 13,664 | $ | 346,540 | |||||||||||||||||||||||||||
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 | — | 914 | 914 | ||||||||||||||||||||||||||||||||||
Common stock issued, other | 3,115 | — | 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) | — | (224) | (224) | ||||||||||||||||||||||||||||||||||
Stock options exercised, net | 1,040 | — | 21 | 21 | ||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | 11,926,198 | $ | 119 | $ | 96,402 | $ | 207,206 | $ | 22,053 | $ | 325,780 |
See the accompanying notes to the unaudited consolidated interim financial statements.
7
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended September 30, | ||||||||||||||
(Dollars in thousands) | 2021 | 2020 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||
Net income | $ | 31,323 | $ | 21,599 | ||||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Provision for credit losses | 747 | 10,397 | ||||||||||||
Depreciation and amortization | 5,894 | 4,946 | ||||||||||||
Stock-based compensation expense | 1,550 | 1,409 | ||||||||||||
Income on bank-owned life insurance, net | (518) | (446) | ||||||||||||
Net gains on sales of debt securities | (128) | (227) | ||||||||||||
Mortgage loans originated for sale | (28,084) | (40,837) | ||||||||||||
Proceeds from mortgage loans sold | 28,837 | 36,941 | ||||||||||||
Net gains on sales of loans | (795) | (814) | ||||||||||||
Net (gains) losses on equity securities | (154) | 135 | ||||||||||||
Loss on termination of swaps | 1,847 | — | ||||||||||||
Changes in: | ||||||||||||||
Net decrease (increase) in other assets | 1,864 | (9,892) | ||||||||||||
Net (decrease) increase in other liabilities | (7,563) | 3,533 | ||||||||||||
Net cash provided by operating activities | 34,820 | 26,744 | ||||||||||||
Cash flows from investing activities: | ||||||||||||||
Proceeds from sales of debt securities | 3,059 | 5,907 | ||||||||||||
Purchase of debt securities | (300,660) | (34,487) | ||||||||||||
Proceeds from maturities, calls and pay-downs of debt securities | 64,779 | 51,969 | ||||||||||||
Net purchases of equity securities | (541) | (319) | ||||||||||||
Net (purchases) sales of FHLB capital stock | (259) | 2,579 | ||||||||||||
Net decrease (increase) in loans | 219,277 | (585,532) | ||||||||||||
Additions to premises and equipment, net | (2,665) | (5,676) | ||||||||||||
Purchase of bank-owned life insurance | (30,000) | — | ||||||||||||
Net cash used in investing activities | (47,010) | (565,559) | ||||||||||||
Cash flows from financing activities: | ||||||||||||||
Net increase in deposits | 419,673 | 823,330 | ||||||||||||
Net increase (decrease) in borrowed funds | 3,826 | (94,494) | ||||||||||||
Repayment of subordinated debt | (15,600) | — | ||||||||||||
Loss on extinguishment of subordinated debt | 713 | — | ||||||||||||
Proceeds from issuance of subordinated debt | — | 60,000 | ||||||||||||
Cash dividends paid, net of dividend reinvestment plan | (5,715) | (5,323) | ||||||||||||
Proceeds from issuance of common stock | 42 | 75 | ||||||||||||
Net settlement for employee taxes on restricted stock and options | (260) | (224) | ||||||||||||
Net proceeds from stock option exercises | 106 | 21 | ||||||||||||
Net cash provided by financing activities | 402,785 | 783,385 | ||||||||||||
Net increase in cash and cash equivalents | 390,595 | 244,570 | ||||||||||||
Cash and cash equivalents at beginning of period | 253,782 | 63,794 | ||||||||||||
Cash and cash equivalents at end of period | $ | 644,377 | $ | 308,364 | ||||||||||
See the accompanying notes to the unaudited consolidated interim financial statements.
8
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
(1)Summary of Significant Accounting Policies
(a) Organization of the Company and Basis of Presentation
The accompanying unaudited consolidated interim financial statements and these notes should be read in conjunction with the December 31, 2020 audited consolidated financial statements and notes thereto contained in the 2020 Annual Report on Form 10-K of Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our") as filed with the Securities and Exchange Commission (the "SEC") on March 10, 2021 (the "2020 Annual Report on Form 10-K").
The Company has not materially changed its significant accounting policies from those disclosed in its 2020 Annual Report on Form 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), "Recent Accounting Pronouncements," below in this Note 1.
The accompanying 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 Wealth Services, LLC, both organized under the laws of the State of Delaware, to engage in insurance sales activities and offer 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 investment activities that the Bank itself would be allowed to conduct under applicable laws. In April 2021, the Bank formed a Massachusetts limited liability company, with the Bank as sole member, in order to hold a commercial property taken by deed-in-lieu of foreclosure.
The accompanying unaudited consolidated interim financial statements, and notes thereto, in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 (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. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all necessary adjustments, consisting of normal recurring accruals and elimination of intercompany balances, for a fair presentation. 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.
(b) Uses 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 dates 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 circumstances. Changes in those estimates resulting from continuing changes 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 2020 Annual Report on Form 10-K and updated in this Form 10-Q for the adoption of the current expected credit loss ("CECL") methodology, the most significant areas in which management applies critical assumptions and estimates are: the estimates of the allowance for credit losses for loans, unfunded commitments, and available-for-sale securities, and the impairment review of goodwill. See Item (c), “Recent Accounting Pronouncements,” below in this Note 1.
9
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
(c) Recent Accounting Pronouncements
In August 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU 2021-06"), Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946)... This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The rules reduce the required reporting periods to align them with the relevant financial statement periods required by SEC rules and requires certain statistical disclosures for annual periods, and interim disclosures if a material change in the information, or trend, has occurred. The amendments in this update are effective upon addition to the FASB Codification and apply to fiscal years ending on or after December 15, 2021. However, voluntary early compliance is permitted upon the effective date, provided that the rules are applied in their entirety. The amended disclosures will not have a material impact on the consolidated financial statements.
Effective January 1, 2021, the Company adopted the FASB ASU") No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU No. 2016-13"), including the CECL methodology for estimating allowances for credit losses ("ACL"). The CECL methodology requires early recognition of credit losses using a lifetime credit loss measurement approach that also requires the consideration of reasonable and supportable forecasts in the estimate. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. It applies to the loan portfolio, off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, which are not unconditionally cancellable. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses be presented as an allowance rather than as a write-down. See the following footnotes for more information on the Company's adoption of CECL: Note 2, "Investment Securities," Note 3, "Loans," and Note 4, "Allowance for Credit Losses for Loans."
In February 2019, the federal bank regulatory agencies issued a final rule (the "2019 CECL Rule") that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). Upon the adoption of CECL on January 1, 2021, the Company has not elected to delay the impact of CECL on regulatory capital.
(d) Subsequent Events
The Company has evaluated subsequent events and transactions from September 30, 2021 through the date this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP and determined there were no material subsequent events requiring recognition or disclosure.
(2) Investment Securities
Debt Securities
All of the Company's debt securities were classified as available-for-sale and carried at fair value as of the dates specified in the tables below. The amortized cost and fair values of debt securities at the dates specified are summarized as follows:
September 30, 2021 | ||||||||||||||||||||||||||
(Dollars in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||
Federal agency obligations(1) | $ | 33,914 | $ | — | $ | 237 | $ | 33,677 | ||||||||||||||||||
Residential federal agency MBS(1) | 362,929 | 3,646 | 4,867 | 361,708 | ||||||||||||||||||||||
Commercial federal agency MBS(1) | 101,744 | 5,314 | — | 107,058 | ||||||||||||||||||||||
Taxable municipal securities | 199,781 | 6,998 | 418 | 206,361 | ||||||||||||||||||||||
Tax-exempt municipal securities | 87,328 | 6,350 | — | 93,678 | ||||||||||||||||||||||
Corporate bonds | 8,554 | 575 | — | 9,129 | ||||||||||||||||||||||
Subordinated corporate bonds | 6,000 | 170 | — | 6,170 | ||||||||||||||||||||||
Total debt securities, at fair value | $ | 800,250 | $ | 23,053 | $ | 5,522 | $ | 817,781 |
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ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
December 31, 2020 | ||||||||||||||||||||||||||
(Dollars in thousands) | Amortized Cost | Unrealized Gains | Unrealized Losses | Fair Value | ||||||||||||||||||||||
Residential federal agency MBS(1) | $ | 209,923 | $ | 6,339 | $ | 287 | $ | 215,975 | ||||||||||||||||||
Commercial federal agency MBS(1) | 102,468 | 7,726 | — | 110,194 | ||||||||||||||||||||||
Taxable municipal securities | 135,117 | 9,293 | 3 | 144,407 | ||||||||||||||||||||||
Tax-exempt municipal securities | 88,235 | 7,216 | — | 95,451 | ||||||||||||||||||||||
Corporate bonds | 10,448 | 828 | — | 11,276 | ||||||||||||||||||||||
Subordinated corporate bonds | 5,000 | — | — | 5,000 | ||||||||||||||||||||||
Total debt securities, at fair value | $ | 551,191 | $ | 31,402 | $ | 290 | $ | 582,303 |
__________________________________________
(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.
As of the dates reflected in the tables above, the majority of investments in the residential and commercial federal agency mortgage back securities ("MBS") categories were collateralized mortgage obligations ("CMOs") issued by U.S. government agencies. The remaining MBS investments totaled $24.1 million and $18.7 million at September 30, 2021 and December 31, 2020, respectively.
Net unrealized appreciation and depreciation on debt 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 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.
ACL for Available-for-Sale Securities
The Company measures expected credit losses on available-for-sale securities based upon the unrealized gain or loss position of the security. For available-for-sale debt securities in an unrealized loss position, the Company evaluates qualitative criteria to determine any expected loss unless the Company intends to sell, or it is more likely than not that the Company will be required to sell before recovery of the amortized cost. In the latter two circumstances, the Company recognizes the entire difference between the security’s amortized cost basis and its fair value as a write-down of the investment balance with a charge to earnings. Otherwise, management’s analysis considers various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, and (4) structure of the security. If the Company does not expect to recover the entire amortized cost basis of the security, an allowance for credit losses for available-for-sale securities would be recorded, with a related charge to earnings, limited by the amount of the fair value of the security less its amortized cost.
At September 30, 2021, management performed its quarterly analysis of all securities with unrealized losses and determined that all were attributable to increases in market yields. Management concluded that no ACL for available-for-sale securities was considered necessary as of September 30, 2021.
Accrued interest receivable on available-for-sale debt securities, included in the "Accrued Interest Receivable” line item on the Company’s Consolidated Balance Sheets, amounted to $3.2 million and $2.3 million at September 30, 2021 and December 31, 2020, respectively. There was no allowance carried on the accrued interest receivable at either period.
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ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
The following tables summarize the duration of unrealized losses for debt securities at September 30, 2021 and December 31, 2020:
September 30, 2021 | ||||||||||||||||||||||||||||||||||||||||||||
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 | $ | 26,692 | $ | 237 | $ | — | $ | — | $ | 26,692 | $ | 237 | 5 | |||||||||||||||||||||||||||||||
Residential federal agency MBS | 202,960 | 4,543 | 13,451 | 324 | 216,411 | 4,867 | 30 | |||||||||||||||||||||||||||||||||||||
Tax-exempt municipal securities | 36,185 | 418 | — | — | 36,185 | 418 | 39 | |||||||||||||||||||||||||||||||||||||
Total temporarily impaired debt securities | $ | 265,837 | $ | 5,198 | $ | 13,451 | $ | 324 | $ | 279,288 | $ | 5,522 | 74 |
December 31, 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 | |||||||||||||||||||||||||||||||||||||
Residential federal agency MBS | $ | 51,396 | $ | 284 | $ | 2,107 | $ | 3 | $ | 53,503 | $ | 287 | 10 | |||||||||||||||||||||||||||||||
Taxable municipal securities | 1,997 | 3 | — | — | 1,997 | 3 | 4 | |||||||||||||||||||||||||||||||||||||
Total temporarily impaired debt securities | $ | 53,393 | $ | 287 | $ | 2,107 | $ | 3 | $ | 55,500 | $ | 290 | 14 |
The contractual maturity distribution at September 30, 2021 of debt securities was as follows:
(Dollars in thousands) | Amortized Cost | Fair Value | ||||||||||||
Due in one year or less | $ | 13,084 | $ | 13,246 | ||||||||||
Due after one, but within five years | 141,731 | 148,754 | ||||||||||||
Due after five, but within ten years | 232,279 | 242,212 | ||||||||||||
Due after ten years | 413,156 | 413,569 | ||||||||||||
Total debt securities | $ | 800,250 | $ | 817,781 |
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 table above are callable securities, comprised of municipal securities and corporate bonds, with a fair value of $155.5 million, which can be redeemed by the issuers prior to the maturity presented above. Management considers these factors when evaluating the interest-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 ("FRB"). The fair value of debt securities pledged as collateral for these purposes was $794.4 million and $577.3 million at September 30, 2021 and December 31, 2020, respectively.
Sales of debt securities for the three and nine months ended September 30, 2021 and September 30, 2020 are summarized as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
Amortized cost of debt securities sold (1) | $ | — | $ | 3,153 | $ | 2,931 | $ | 5,680 | ||||||||||||||||||
Gross realized gains on sales | — | 127 | 128 | 227 | ||||||||||||||||||||||
Gross realized losses on sales | — | — | — | — | ||||||||||||||||||||||
Total proceeds from sales of debt securities | $ | — | $ | 3,280 | $ | 3,059 | $ | 5,907 |
_________________________________________
(1)Amortized cost of investments sold is determined on a specific identification basis and includes pending trades based on trade date, if applicable.
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ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
Equity Securities
The Company held equity securities with a fair value of $1.4 million at September 30, 2021 and $746 thousand at December 31, 2020. At September 30, 2021, 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, 2021 and September 30, 2020 are summarized as follows:
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||||
Net gains (losses) recognized during the period on equity securities | $ | 6 | $ | (3) | $ | 154 | $ | (135) | ||||||||||||||||||
Less: Net gains (losses) recognized on equity securities sold during the period | — | — | 6 | (11) | ||||||||||||||||||||||
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the end of the period (included in other income) | $ | 6 | $ | (3) | $ | 148 | $ | (124) |
(3)Loans
Loan Portfolio Classifications
Major classifications of loans at the dates indicated were as follows(1):
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
Commercial real estate | $ | 1,556,240 | $ | 1,476,236 | ||||||||||
Commercial and industrial | 401,718 | 435,548 | ||||||||||||
Commercial construction | 412,332 | 371,856 | ||||||||||||
SBA paycheck protection program ("PPP") | 148,240 | 443,070 | ||||||||||||
Total commercial loans | 2,518,530 | 2,726,710 | ||||||||||||
Residential mortgages | 239,960 | 252,995 | ||||||||||||
Home equity loans and lines | 81,217 | 85,178 | ||||||||||||
Consumer | 8,403 | 8,977 | ||||||||||||
Total retail loans | 329,580 | 347,150 | ||||||||||||
Total loans | 2,848,110 | 3,073,860 | ||||||||||||
Allowance for credit losses | (47,262) | (44,565) | ||||||||||||
Net loans | $ | 2,800,848 | $ | 3,029,295 |
__________________________________________
(1) Upon the adoption of CECL, the Company includes deferred fees as part of the portfolio segment balance at amortized cost. The prior period balances have been adjusted to conform to this presentation.
Net deferred loan origination fees amounted to $9.5 million, including $5.3 million of deferred PPP fees, at September 30, 2021 and $13.4 million, including $10.0 million of deferred PPP fees, at December 31, 2020.
Upon the adoption of CECL, effective as of January 1, 2021, the Company elected to continue to present the accrued interest receivable balance on loans separate from amortized costs, exclude accrued interest from the measurement of the allowance for credit losses for loans and to continue to write-off uncollectible accrued interest receivable by reversing interest income. Accrued interest receivable on loans amounted to $10.6 million and $13.8 million at September 30, 2021 and December 31, 2020, respectively, and was included in the "Accrued interest receivable” line item on the Company’s Consolidated Balance Sheets.
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 $68.6 million at September 30, 2021 and $77.1 million at December 31, 2020. 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
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ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
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 also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.
Paycheck Protection Program
The PPP was created by the CARES Act and instituted by the Small Business Administration (“SBA”), with SBA funding of PPP loans beginning in April 2020. Until the funding for the PPP expired on May 31, 2021, the PPP allowed entities to apply for a 1.00% interest-rate loan with payments generally deferred until the date the lender receives the applicable forgiveness amount from the SBA. PPP loans may be partially or fully forgiven by the SBA if the entity meets certain conditions. In addition, PPP loans carry a put-back provision in the event that a PPP loan is fraudulently originated and the Bank is at fault. The maturity term for any principal portion left unforgiven is either 2 or 5 years from the funding date, depending on when the loan was originated. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding.
Management believes the PPP loan portfolio, which has an average loan size of approximately $182 thousand as of September 30, 2021 and was limited to existing bank customers, to be of minimal credit risk. Management expects the majority of outstanding PPP loans will be forgiven by the SBA, with any remaining balance fully guaranteed by the SBA. Management has segmented the PPP loan portfolio as a group of loans with similar risk characteristics in its assessment for credit losses and, as of September 30, 2021, has not recorded an ACL on these loans, but will continue to monitor the PPP loan portfolio.
Loans serviced for others
At September 30, 2021 and December 31, 2020, the Company was servicing residential mortgage loans owned by investors amounting to $12.0 million and $13.7 million, respectively. Additionally, the Company was servicing commercial loans originated by the Company and participated out to various other institutions amounting to $64.9 million and $65.3 million at September 30, 2021 and December 31, 2020, respectively.
Loans serving as collateral
Loans designated as qualified collateral and pledged to the FHLB for borrowing capacity as of the dates indicated are summarized below:
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
Commercial real estate | $ | 156,382 | $ | 195,936 | ||||||||||
Residential mortgages | 212,412 | 233,050 | ||||||||||||
Home equity | 5,236 | 5,971 | ||||||||||||
Total loans pledged to FHLB | $ | 374,030 | $ | 434,957 |
(4)ACL for Loans
On January 1, 2021, the Company adopted CECL under the modified retrospective approach. Upon adoption, the Company recorded a reduction to retained earnings of $6.5 million, net of $2.5 million in deferred income taxes. The ACL for loans increased by $6.6 million and the ACL for unfunded commitments (included in other liabilities) increased by $2.4 million. Prior to January 1, 2021, the Company measured the allowance under the incurred loss method. The ACL for loans to total loans ratio was 1.66% at September 30, 2021 and January 1, 2021.
There have been no material changes to the Company's underwriting practices or credit risk management system used to estimate loan loss exposure. See Note 4, "Allowance for Loan Losses," to the Company's audited consolidated financial statements contained in the 2020 Annual Report on Form 10-K.
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ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
ACL for Loans Methodology
The CECL methodology requires early recognition of credit losses using an estimated lifetime credit loss measurement that takes into consideration reasonable and supportable forecasts. The ACL for loans is established through a provision for credit losses, a direct charge to earnings. The ACL for loans is a valuation account that is deducted from the amortized cost to present the net amount of the loan portfolio expected to be collected. Loan losses are charged against the ACL when management believes that the collectability of the amortized cost of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the ACL, generally at the time cash is received on a charged-off account.
Arriving at an appropriate level of ACL for loans involves a high degree of management judgement. The underlying assumptions, estimates and assessments used to estimate the ACL for loans reflects the Company’s best estimate of model assumptions and forecasted conditions at that time. Changes in such estimates can significantly affect the ACL and the provision for credit losses. It is possible and likely that the Company will experience credit losses that are different from the current estimates.
On a quarterly basis, the Company makes an assessment to estimate the ACL necessary to cover expected credit losses for the loan portfolio as of the specified balance sheet dates. The adequacy of the ACL for loans is reviewed and evaluated on a regular basis by an internal management committee, a sub-committee of the Company's Board of Directors (the "Board") and the full Board.
While management uses available information to recognize losses on loans, future additions to the ACL for loans may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ACL for loans. Such agencies may require the Company to recognize additions to the ACL for loans based on judgments different from those of management.
In making its assessment on the adequacy of the ACL, management considers several quantitative and qualitative factors from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts, including: the expected duration of the loans, the trends in risk classification of individual loans; individual review of larger and higher risk problem assets; the level of delinquent loans and non-performing loans; impaired and restructured loans; the level of foreclosure activity; net charge-offs; commercial concentrations by industry, property type and real estate location; the growth and composition of the loan portfolio; as well as trends in the general levels of these indicators. In addition, management monitors expansion in the Company's geographic market area, the experience level of lenders and any changes in underwriting criteria, the strength of the local and national economy, including general conditions in the multi-family, commercial real estate and development and construction markets in the Company's local region as well as for changes in current and forecasted economic conditions, such as changes in gross domestic product, the unemployment rate, real estate values, commercial vacancy rates and other relevant factors. Management also performs a qualitative assessment beyond model estimates and applies qualitative adjustments as management deems necessary.
The Company uses a systematic methodology to measure the amount of estimated loan losses. The methodology uses a two-tiered approach that applies specific reserves for loans individually evaluated and general reserves for larger groups of non-adversely classified homogeneous loans, segmented by loan type and for adversely classified loans not individually evaluated, segmented by internal risk rating.
Loans collectively evaluated
Loans that share risk characteristics are evaluated on a pool basis. Management has segmented the loan portfolio for groups of loans with similar risk characteristics by loan type for non-adversely classified loans (loans risk rated "pass") and by internal risk rating for adversely classified loans not individually evaluated. The general loss allocation factors consider the quantitative historic loss experience, qualitative or environmental factors such as those identified above, forecasts over the estimated life of the loan pools, as well as regulatory guidance and industry data.
The Company uses a two-year reasonable and supportable forecast, and for periods beyond the forecast period, the Company reverts immediately to historical loss rates.
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ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
Loans individually evaluated
Loans individually evaluated consist primarily of loans which management considers it probable that not all amounts due (principals and interest) will be collected in accordance with the original contractual terms, loans designated as troubled debt restructurings ("TDRs") and to a lesser extent, if applicable, loans that management deems as individually significant or with unique risk characteristics or for some other reason based on management’s judgement. Management considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management estimates the credit loss by comparing the loan's carrying value against either (i) the present value of the expected future cash flows discounted at the loan's effective interest-rate; (ii) the loan's observable market price; or (iii) the expected realizable fair value of the collateral, in the case of collateral dependent loans. A specific allowance is assigned to the loan for the amount of estimated credit loss. Individually evaluated loans are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.
ACL for unfunded commitments
ASU 2016-13 also applies to off-balance sheet credit exposure for unfunded commitments (commitments to originate loans, additional funding commitments on existing loans, standby letters of credit, financial guarantees and other similar investments) that are not unconditionally cancellable. The ACL for unfunded commitments is classified with "Accrued expenses and other liabilities" on the Company’s Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates.
Based on the foregoing, management believes that the Company's ACL for loans and for unfunded commitments is adequate as of September 30, 2021.
Credit Risk Management
As noted above, the credit risk management function focuses on a wide variety of factors and early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors these factors, among others, through ongoing credit reviews by the Company's Credit Department, an external loan review service, reviews by members of senior management as well as reviews by the Board's Loan Committee and the Board. This review includes the assessment of internal credit quality indicators such as, among others, the risk classification of loans, past due and non-accrual loans, individually evaluated and troubled-debt restructured loans, and the level of foreclosure activity. These credit quality indicators are discussed below.
Credit quality indicators
Risk ratings and adversely classified loans
The Company's loan risk rating system classifies loans depending on risk of loss characteristics. The classifications for "pass" risk rated loans 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 "border-line pass." Adversely classified ratings for loans determined to be of weaker credit range from "special mention," for loans that may need additional monitoring, to 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, with risk ratings adjusted as warranted by management.
Loans classified as special mention include loans currently protected by the sound net worth and paying capacity of the guarantor but are potentially weakened due to adverse business circumstances or unfavorable economic conditions. Supporting financial information for the business may be too stale or insufficient to accurately assess borrower ability to support the loan. Borrower cash flow may be impacted by adverse operating trends or an unbalanced financial condition which has not yet jeopardized loan payments, or the trend of payment delinquencies or deposit account overdraft activity may be increasing.
Loans classified as substandard include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. These loans are inadequately protected by the sound net worth and paying capacity of the borrower; repayment has become increasingly reliant on collateral liquidation or reliance on guaranties; credit weaknesses
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ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
are well-defined; borrower cash flow is insufficient to meet the required debt service specified in the loan terms and to meet other obligations, such as trade debt and tax payments.
Loans classified as doubtful have all the weaknesses inherent in a substandard rated loan with the added characteristic that the weaknesses make collection or full payment from liquidation, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The probability of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until more exact status may be determined.
Loans classified as loss are generally considered uncollectible at present, although long term recovery of part or all of loan proceeds may be possible. These "loss" loans would require a specific loss reserve or charge-off.
Adversely classified loans may be accruing or on non-accrual status and may be individually evaluated or restructured, or some combination thereof.
Management does not set any minimum delay of payments as a factor in its review but considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. An adverse classification will be considered for upgrade based on the borrower's sustained performance over time and their improving financial condition. Consistent with the criteria for returning non-accrual loans to accrual status, the borrower must demonstrate the ability to continue to service the loan in accordance with the original or modified terms and, in the judgment of management, the collectability of the remaining balances, both principal and interest, are reasonably assured. In the case of TDR loans having had a modified interest-rate, that rate must be at, or greater than, a market rate for a similar credit at the time of modification for an upgrade to be considered.
Current year information is presented below in accordance with CECL; prior year disclosures are reported under legacy GAAP and are included below in this Note 4 under the heading “Prior Period Disclosures under the Incurred Loss Methodology.”
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ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
The following tables presents the amortized cost basis of the Company's loan portfolio risk ratings within portfolio classifications, by origination date, or revolving status as of September 30, 2021:
Term Loans By Origination Year | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 2021 | 2020 | 2019 | 2018 | 2017 | Prior | Revolving Loans | Revolving Loans Converted to Term | Total | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | $ | 225,255 | $ | 228,203 | $ | 263,809 | $ | 116,038 | $ | 182,495 | $ | 496,840 | $ | 470 | $ | — | $ | 1,513,110 | ||||||||||||||||||||||||||||||||||||||
Special mention | — | — | 903 | 808 | 381 | 7,934 | — | — | 10,026 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | 2,204 | 3,168 | 13,119 | 14,431 | — | — | 32,922 | |||||||||||||||||||||||||||||||||||||||||||||||
Doubtful | — | — | — | 182 | — | — | — | — | 182 | |||||||||||||||||||||||||||||||||||||||||||||||
Total commercial real estate | 225,255 | 228,203 | 266,916 | 120,196 | 195,995 | 519,205 | 470 | — | 1,556,240 | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial and industrial | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 36,941 | 43,086 | 39,278 | 22,260 | 16,711 | 52,844 | 172,721 | 1,231 | 385,072 | |||||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | 664 | 2,216 | 1,024 | 12 | 1,522 | 3,990 | — | 9,428 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | 16 | 116 | 83 | 4,144 | 2,804 | 55 | 7,218 | |||||||||||||||||||||||||||||||||||||||||||||||
Total commercial and industrial | 36,941 | 43,750 | 41,510 | 23,400 | 16,806 | 58,510 | 179,515 | 1,286 | 401,718 | |||||||||||||||||||||||||||||||||||||||||||||||
Commercial construction | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 109,091 | 126,637 | 81,137 | 34,872 | 5,395 | 27,615 | 26,327 | — | 411,074 | |||||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | — | — | 150 | — | 1,068 | 1,218 | |||||||||||||||||||||||||||||||||||||||||||||||
Loss | — | — | — | — | — | — | 40 | — | 40 | |||||||||||||||||||||||||||||||||||||||||||||||
Total commercial construction | 109,091 | 126,637 | 81,137 | 34,872 | 5,395 | 27,765 | 26,367 | 1,068 | 412,332 | |||||||||||||||||||||||||||||||||||||||||||||||
SBA PPP(1) | 135,967 | 12,273 | — | — | — | — | — | — | 148,240 | |||||||||||||||||||||||||||||||||||||||||||||||
Residential mortgages | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 44,424 | 60,657 | 29,671 | 26,586 | 15,023 | 61,401 | — | — | 237,762 | |||||||||||||||||||||||||||||||||||||||||||||||
Special mention | — | — | — | — | — | 595 | — | — | 595 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | — | — | 1,603 | — | — | 1,603 | |||||||||||||||||||||||||||||||||||||||||||||||
Total residential mortgages | 44,424 | 60,657 | 29,671 | 26,586 | 15,023 | 63,599 | — | — | 239,960 | |||||||||||||||||||||||||||||||||||||||||||||||
Home equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 665 | 481 | 368 | — | — | 2,045 | 77,074 | 242 | 80,875 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | — | — | 255 | 87 | — | 342 | |||||||||||||||||||||||||||||||||||||||||||||||
Total home equity | 665 | 481 | 368 | — | — | 2,300 | 77,161 | 242 | 81,217 | |||||||||||||||||||||||||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Pass | 2,518 | 1,622 | 1,788 | 1,123 | 707 | 506 | — | 126 | 8,390 | |||||||||||||||||||||||||||||||||||||||||||||||
Substandard | — | — | — | — | — | 13 | — | — | 13 | |||||||||||||||||||||||||||||||||||||||||||||||
Total consumer | 2,518 | 1,622 | 1,788 | 1,123 | 707 | 519 | — | 126 | 8,403 | |||||||||||||||||||||||||||||||||||||||||||||||
Total loans | $ | 554,861 | $ | 473,623 | $ | 421,390 | $ | 206,177 | $ | 233,926 | $ | 671,898 | $ | 283,513 | $ | 2,722 | $ | 2,848,110 |
__________________________________________
(1)All SBA PPP loans were "pass" rated at September 30, 2021, as these loans are 100% guaranteed by the SBA.
The total amortized cost basis of adversely classified loans amounted to $63.6 million, or 2.23% of total loans, at September 30, 2021.
18
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
Past due and non-accrual loans
Loans on which the accrual of interest has been discontinued are designated as non-accrual and the classified portions are credit downgraded to one of the adversely classified categories noted above. Accrual of interest on loans is generally discontinued when a loan becomes contractually past due, with respect to interest or principal, by 90 days, or when reasonable doubt exists as to the full and timely collection of interest or principal. Interest payments received on loans in a non-accrual status are generally applied to principal on the books of the Company. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when payments are brought current and have remained current for a period of 180 days and when, in the judgment of management, the collectability of both principal and interest is reasonably assured.
The following table presents an age analysis of past due loans by portfolio classification as of the date indicated:
Balance at September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | 30-59 Days Past Due | 60-89 Days Past Due | Past Due 90 days or More | Total Past Due Loans(1) | Current Loans(1) | Total Loans | ||||||||||||||||||||||||||||||||
Commercial real estate | $ | 373 | $ | 424 | $ | 1,296 | $ | 2,093 | $ | 1,554,147 | $ | 1,556,240 | ||||||||||||||||||||||||||
Commercial and industrial | 1,598 | 166 | 305 | 2,069 | 399,649 | 401,718 | ||||||||||||||||||||||||||||||||
Commercial construction | 2,417 | — | 190 | 2,607 | 409,725 | 412,332 | ||||||||||||||||||||||||||||||||
SBA PPP | 925 | — | — | 925 | 147,315 | 148,240 | ||||||||||||||||||||||||||||||||
Residential mortgages | 492 | 272 | 284 | 1,048 | 238,912 | 239,960 | ||||||||||||||||||||||||||||||||
Home equity | 125 | — | 87 | 212 | 81,005 | 81,217 | ||||||||||||||||||||||||||||||||
Consumer | 2 | — | — | 2 | 8,401 | 8,403 | ||||||||||||||||||||||||||||||||
Total loans | $ | 5,932 | $ | 862 | $ | 2,162 | $ | 8,956 | $ | 2,839,154 | $ | 2,848,110 |
_______________________________________
(1)The loan balances in the table above include loans designated as non-accrual despite their payment due status.
The following table presents the amortized cost of non-accrual loans by portfolio classification as of the date indicated:
Balance at September 30, 2021 | ||||||||||||||||||||||||||
(Dollars in thousands) | Total Non-accrual Loans | Non-accrual Loans without a Specific Reserve | Non-accrual Loans with a Specific Reserve | Related Specific Reserve | ||||||||||||||||||||||
Commercial real estate | $ | 23,529 | $ | 7,452 | $ | 16,077 | $ | 1,167 | ||||||||||||||||||
Commercial and industrial | 2,044 | 1,302 | 742 | 429 | ||||||||||||||||||||||
Commercial construction | 1,258 | 1,218 | 40 | 14 | ||||||||||||||||||||||
SBA PPP | — | — | — | — | ||||||||||||||||||||||
Residential mortgages | 662 | 662 | — | — | ||||||||||||||||||||||
Home equity | 342 | 342 | — | — | ||||||||||||||||||||||
Consumer | — | — | — | — | ||||||||||||||||||||||
Total loans | $ | 27,835 | $ | 10,976 | $ | 16,859 | $ | 1,610 |
At September 30, 2021, 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.
Non-accrual loans that were not adversely classified amounted to $144 thousand at September 30, 2021. These balances primarily represented the guaranteed portions of non-performing SBA loans.
The ratio of non-accrual loans to total loans amounted to 0.98% at September 30, 2021.
At September 30, 2021, additional funding commitments for non-accrual loans were not material.
19
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
Collateral-dependent loans
Loans that have been individually evaluated and repayment is expected substantially from the operations or ultimate sale of the underlying collateral are deemed to be collateral-dependent loans. Collateral-dependent loans are adversely classified loans that may also be TDRs. These loans may be accruing or on non-accrual status. Collateral-dependent loans are carried at the lower of the recorded investment in the loan or the estimated fair value. When the estimated fair value of the underlying collateral, less estimated costs to sell, is not sufficient to cover the outstanding carrying balance on the loan, a specific reserve is assigned for the amount of the estimated credit loss. These estimated credit losses are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.
Underlying collateral will vary by type of loan, as discussed below.
Commercial real estate loans include loans secured by both owner-use and non-owner occupied (investor) 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.
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.
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.
Residential mortgage loans and home equity loans and lines may be secured by one-to-four family residential properties serving as the borrower's primary residence, or as vacation homes or investment properties.
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.
The carrying value of collateral dependent loans amounted to $36.5 million at September 30, 2021. Total accruing collateral dependent loans amounted to $9.1 million while non-accrual collateral dependent loans amounted to $27.4 million as of September 30, 2021.
The following table presents the recorded investment in collateral dependent individually evaluated loans and the related specific allowance by portfolio allocation as of the date indicated:
Balance at September 30, 2021 | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | Unpaid Contractual Principal Balance | Total Recorded Investment in Collateral Dependent Loans | Recorded Investment without a Specific Reserve | Recorded Investment with a Specific Reserve | Related Specific Reserve | |||||||||||||||||||||||||||
Commercial real estate | $ | 30,516 | $ | 28,786 | $ | 12,709 | $ | 16,077 | $ | 1,167 | ||||||||||||||||||||||
Commercial and industrial | 9,168 | 5,013 | 4,217 | 796 | 270 | |||||||||||||||||||||||||||
Commercial construction | 2,366 | 1,258 | 1,068 | 190 | 14 | |||||||||||||||||||||||||||
SBA PPP | — | — | — | — | — | |||||||||||||||||||||||||||
Residential mortgages | 1,189 | 1,065 | 1,065 | — | — | |||||||||||||||||||||||||||
Home equity | 509 | 342 | 342 | — | — | |||||||||||||||||||||||||||
Consumer | — | — | — | — | — | |||||||||||||||||||||||||||
Total | $ | 43,748 | $ | 36,464 | $ | 19,401 | $ | 17,063 | $ | 1,451 |
At September 30, 2021, additional funding commitments for collateral dependent loans was not material.
20
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
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 Company 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; extension of additional credit based on receipt of adequate collateral; or a deferment or reduction of payments (principal or interest) which materially alters the Bank'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. TDR loans are individually reviewed and evaluated, and a specific reserve is assigned for the amount of the estimated credit loss.
At September 30, 2021, payment deferrals related to the COVID-19 pandemic were active on 4 "pass" rated loans amounting to $11.8 million, or 0.41% of total loans. Under the terms of the CARES Act and the Consolidated Appropriations Act, 2021 as discussed below, these loans remain on accrual status.
Total TDR loans as of September 30, 2021 amounted to $17.6 million. TDR loans on accrual status amounted to $9.2 million and TDR loans included in non-accrual loans amounted to $8.4 million at September 30, 2021.
The Company continues to work with customers and enter 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 following table presents the number and balance of loans modified as TDRs, by portfolio classification, during the three months indicated:
Three months ended | ||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||
(Dollars in thousands) | Number of restructurings | Pre-modification outstanding recorded investment | Post-modification outstanding recorded investment | |||||||||||||||||
Commercial real estate | 1 | $ | 2,690 | $ | 2,656 | |||||||||||||||
Commercial and industrial | 1 | 15 | 14 | |||||||||||||||||
Commercial construction | — | — | — | |||||||||||||||||
SBA PPP | — | — | — | |||||||||||||||||
Residential mortgages | — | — | — | |||||||||||||||||
Home equity loans and lines | — | — | — | |||||||||||||||||
Consumer | — | — | — | |||||||||||||||||
Total | 2 | $ | 2,705 | $ | 2,670 |
At September 30, 2021, additional funding commitments for TDR loans were not material.
21
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
The following table presents loans modified as TDRs within the preceding twelve months, which have defaulted on the modified terms during the three months ended September 30, 2021 as indicated:
Three months ended | ||||||||||||||
September 30, 2021 | ||||||||||||||
(Dollars in thousands) | Number of TDRs that Defaulted | Post- modification Outstanding Recorded Investment | ||||||||||||
Commercial real estate | — | $ | — | |||||||||||
Commercial and industrial | 1 | 14 | ||||||||||||
Commercial construction | — | — | ||||||||||||
SBA PPP | — | — | ||||||||||||
Residential mortgages | — | — | ||||||||||||
Home equity loans and lines | — | — | ||||||||||||
Consumer | — | — | ||||||||||||
Total | 1 | $ | 14 |
The following table presents the number and balance of loans modified as TDRs, by portfolio classification, during the nine months indicated:
Nine months ended | ||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||
(Dollars in thousands) | Number of Restructurings | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | |||||||||||||||||
Commercial real estate | 3 | $ | 3,591 | $ | 3,708 | |||||||||||||||
Commercial and industrial | 1 | 15 | 14 | |||||||||||||||||
Commercial construction | — | — | — | |||||||||||||||||
SBA PPP | — | — | — | |||||||||||||||||
Residential mortgages | 1 | 224 | 224 | |||||||||||||||||
Home equity | — | — | — | |||||||||||||||||
Consumer | — | — | — | |||||||||||||||||
Total | 5 | $ | 3,830 | $ | 3,946 |
There were no subsequent charge-offs associated with the new TDRs noted in the table above during the nine months ended September 30, 2021.
22
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
The following table presents loans modified as TDRs within the preceding twelve months, which have defaulted on the modified terms during the nine months ended September 30, 2021 as indicated:
September 30, 2021 | ||||||||||||||
(Dollars in thousands) | Number of TDRs that Defaulted | Post- modification Outstanding Recorded Investment | ||||||||||||
Commercial real estate | 1 | $ | 670 | |||||||||||
Commercial and industrial | 1 | 14 | ||||||||||||
Commercial construction | — | — | ||||||||||||
SBA PPP | — | — | ||||||||||||
Residential mortgages | — | — | ||||||||||||
Home equity | — | — | ||||||||||||
Consumer | — | — | ||||||||||||
Total | 2 | $ | 684 |
The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the nine-month period indicated:
Nine months ended | ||||||||||||||
September 30, 2021 | ||||||||||||||
(Dollars in thousands) | Number of Restructurings | Amount | ||||||||||||
Extended maturity date | 1 | $ | 382 | |||||||||||
Temporary payment reduction and payment re-amortization of remaining principal over extended term | 2 | 894 | ||||||||||||
Temporary interest only payment plan | 1 | 14 | ||||||||||||
Forbearance of post default rights | — | — | ||||||||||||
Other payment concessions | 1 | 2,656 | ||||||||||||
Total | 5 | $ | 3,946 | |||||||||||
Amount of allowance for credit losses for loans associated with TDRs listed above | $ | 14 |
ACL and provision for credit loss activity
For the three and nine months ended September 30, 2021, the total provision for credit losses amounted to $28 thousand and $747 thousand, respectively, and included provisions for credit losses on loans and unfunded commitments.
ACL for loans
The ACL for loans amounted to $47.3 million at September 30, 2021 and the ACL for loans to total loans ratio was 1.66% at September 30, 2021.
Changes in the ACL for loans by portfolio classification for the three months ended September 30, 2021 are presented below:
(Dollars in thousands) | Commercial Real Estate | Commercial and Industrial | Commercial Construction | Residential Mortgage | Home Equity | Consumer | Total | |||||||||||||||||||||||||||||||||||||
Beginning Balance at June 30, 2021 | $ | 34,008 | $ | 10,800 | $ | 3,777 | $ | 843 | $ | 295 | $ | 318 | $ | 50,041 | ||||||||||||||||||||||||||||||
Provision (benefit) for credit losses on loans | (1,660) | 694 | 397 | (4) | (32) | (48) | (653) | |||||||||||||||||||||||||||||||||||||
Recoveries | — | 19 | — | — | 57 | 2 | 78 | |||||||||||||||||||||||||||||||||||||
Less: Charge-offs | — | 2,194 | — | — | — | 10 | 2,204 | |||||||||||||||||||||||||||||||||||||
Ending Balance at September 30, 2021 | $ | 32,348 | $ | 9,319 | $ | 4,174 | $ | 839 | $ | 320 | $ | 262 | $ | 47,262 |
23
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
Changes in the ACL for loans by portfolio classification for the nine months ended September 30, 2021 are presented below:
(Dollars in thousands) | Commercial Real Estate | Commercial and Industrial | Commercial Construction | Residential Mortgage | Home Equity | Consumer | Total | |||||||||||||||||||||||||||||||||||||
Beginning Balance at December 31, 2020 | $ | 26,755 | $ | 9,516 | $ | 6,129 | $ | 1,530 | $ | 467 | $ | 168 | $ | 44,565 | ||||||||||||||||||||||||||||||
CECL adjustment upon adoption | 7,664 | 1,988 | (2,416) | (695) | (158) | 177 | 6,560 | |||||||||||||||||||||||||||||||||||||
Provision (benefit) for credit losses for loans | (285) | 156 | 461 | 4 | (56) | (71) | 209 | |||||||||||||||||||||||||||||||||||||
Recoveries | 39 | 102 | — | — | 67 | 5 | 213 | |||||||||||||||||||||||||||||||||||||
Less: Charge-offs | 1,825 | 2,443 | — | — | — | 17 | 4,285 | |||||||||||||||||||||||||||||||||||||
Ending Balance at September 30, 2021 | $ | 32,348 | $ | 9,319 | $ | 4,174 | $ | 839 | $ | 320 | $ | 262 | $ | 47,262 | ||||||||||||||||||||||||||||||
ACL for unfunded commitments
The Company’s ACL for unfunded commitments amounted to $3.0 million as of September 30, 2021 and $2.5 million at January 1, 2021. The provision for unfunded commitments amounted to $681 thousand and $538 thousand for the respective three and nine months ended September 30, 2021.
Other real estate owned ("OREO")
The Company had one OREO property at September 30, 2021 with a carrying value of $2.4 million that was added in April of 2021 and none at December 31, 2020. There were no sales and no subsequent write downs of OREO during the nine months ended September 30, 2021 or 2020. There were no OREO additions during the nine months ended September 30, 2020.
At September 30, 2021, the Company had one consumer mortgage loan secured by residential real estate property for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions with carrying amount of $87 thousand. The Company had no consumer mortgage loans in the process of foreclosure at December 31, 2020.
Prior Period Disclosures under the Incurred Loss Methodology
The prior year disclosures below were prepared under the incurred methodology, before the Company adopted the CECL methodology. See Note 4, "Allowance for Loan Losses," to the Company's audited consolidated financial statements contained in the 2020 Annual Report on Form 10-K for additional information about the incurred loss methodology.
The balances of loans as of December 31, 2020 by portfolio 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 | $ | 35,915 | $ | 1,442,320 | $ | 1,478,235 | ||||||||||||||
Commercial and industrial | 8,409 | 427,251 | 435,660 | |||||||||||||||||
Commercial construction | 2,999 | 370,310 | 373,309 | |||||||||||||||||
SBA PPP | — | 453,084 | 453,084 | |||||||||||||||||
Residential mortgages | 596 | 252,375 | 252,971 | |||||||||||||||||
Home equity | 381 | 84,625 | 85,006 | |||||||||||||||||
Consumer | 18 | 8,963 | 8,981 | |||||||||||||||||
Total gross loans | $ | 48,318 | $ | 3,038,928 | $ | 3,087,246 |
24
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
Adversely classified loans-Prior Period
The following table presents the Company's credit risk profile for each portfolio classification by internally assigned adverse risk rating category as of the period indicated:
December 31, 2020 | ||||||||||||||||||||||||||||||||
Adversely Classified(1) | Not Adversely | |||||||||||||||||||||||||||||||
(Dollars in thousands) | Substandard | Doubtful | Loss | Classified | Gross Loans | |||||||||||||||||||||||||||
Commercial real estate | $ | 40,088 | $ | 197 | $ | — | $ | 1,437,950 | $ | 1,478,235 | ||||||||||||||||||||||
Commercial and industrial | 7,901 | 2,293 | — | 425,466 | 435,660 | |||||||||||||||||||||||||||
Commercial construction | 3,501 | — | — | 369,808 | 373,309 | |||||||||||||||||||||||||||
SBA PPP | — | — | — | 453,084 | 453,084 | |||||||||||||||||||||||||||
Residential mortgages | 474 | — | — | 252,497 | 252,971 | |||||||||||||||||||||||||||
Home equity | 381 | — | — | 84,625 | 85,006 | |||||||||||||||||||||||||||
Consumer | 41 | — | — | 8,940 | 8,981 | |||||||||||||||||||||||||||
Total gross loans | $ | 52,386 | $ | 2,490 | $ | — | $ | 3,032,370 | $ | 3,087,246 |
__________________________________
(1) Prior to the adoption of CECL, the Company did not include special-mention risk rated loans as adversely classified.
Total adversely classified loans amounted to 1.79% of total loans at December 31, 2020.
Past due and non-accrual loans-Prior Period
The following tables present an age analysis of past due loans by portfolio classification as of the date indicated:
Balance at December 31, 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 | $ | 6,105 | $ | 499 | $ | 5,592 | $ | 12,196 | $ | 1,466,039 | $ | 1,478,235 | $ | 29,680 | ||||||||||||||||||||||||||||||
Commercial and industrial | 417 | 13 | 607 | 1,037 | 434,623 | 435,660 | 4,574 | |||||||||||||||||||||||||||||||||||||
Commercial construction | 13,466 | — | 1,351 | 14,817 | 358,492 | 373,309 | 2,999 | |||||||||||||||||||||||||||||||||||||
SBA PPP | — | — | — | — | 453,084 | 453,084 | — | |||||||||||||||||||||||||||||||||||||
Residential mortgages | 890 | — | 290 | 1,180 | 251,791 | 252,971 | 414 | |||||||||||||||||||||||||||||||||||||
Home equity | — | — | 255 | 255 | 84,751 | 85,006 | 381 | |||||||||||||||||||||||||||||||||||||
Consumer | 2 | 1 | — | 3 | 8,978 | 8,981 | 2 | |||||||||||||||||||||||||||||||||||||
Total gross loans | $ | 20,880 | $ | 513 | $ | 8,095 | $ | 29,488 | $ | 3,057,758 | $ | 3,087,246 | $ | 38,050 |
At December 31, 2020, 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 $137 thousand at December 31, 2020. 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 1.24% at December 31, 2020.
Impaired Loans-Prior Period
The carrying value of impaired loans amounted to $48.3 million at December 31, 2020. Total accruing impaired loans amounted to $10.3 million while non-accrual impaired loans amounted to $38.0 million as of December 31, 2020.
25
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
The following table sets forth the recorded investment in impaired loans and the related specific allowance allocated by portfolio classification as of the date indicated:
Balance at December 31, 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 | $ | 37,184 | $ | 35,915 | $ | 14,728 | $ | 21,187 | $ | 3,454 | ||||||||||||||||||||||
Commercial and industrial | 10,628 | 8,409 | 4,696 | 3,713 | 2,713 | |||||||||||||||||||||||||||
Commercial construction | 3,668 | 2,999 | 2,999 | — | — | |||||||||||||||||||||||||||
SBA PPP | — | — | — | — | — | |||||||||||||||||||||||||||
Residential mortgages | 699 | 596 | 596 | — | — | |||||||||||||||||||||||||||
Home equity | 539 | 381 | 381 | — | — | |||||||||||||||||||||||||||
Consumer | 18 | 18 | — | 18 | 18 | |||||||||||||||||||||||||||
Total | $ | 52,736 | $ | 48,318 | $ | 23,400 | $ | 24,918 | $ | 6,185 |
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 | ||||||||||||||
(Dollars in thousands) | Average Recorded Investment | Interest Income Recognized | ||||||||||||
Commercial real estate | $ | 16,002 | $ | 66 | ||||||||||
Commercial and industrial | 9,208 | 50 | ||||||||||||
Commercial construction | 7,180 | 17 | ||||||||||||
SBA PPP | — | — | ||||||||||||
Residential mortgages | 700 | 2 | ||||||||||||
Home equity | 434 | — | ||||||||||||
Consumer | 36 | — | ||||||||||||
Total | $ | 33,560 | $ | 135 |
The following table presents the average recorded investment in impaired loans by portfolio classification and the related interest recognized during the nine months indicated:
Nine months ended September 30, 2020 | ||||||||||||||
(Dollars in thousands) | Average Recorded Investment | Interest Income Recognized | ||||||||||||
Commercial real estate | $ | 15,188 | $ | 208 | ||||||||||
Commercial and industrial | 8,560 | 118 | ||||||||||||
Commercial construction | 6,537 | 22 | ||||||||||||
SBA PPP | — | — | ||||||||||||
Residential mortgages | 939 | 6 | ||||||||||||
Home equity | 418 | (1) | ||||||||||||
Consumer | 39 | 1 | ||||||||||||
Total | $ | 31,681 | $ | 354 |
26
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
TDRs-Prior Period
Total TDR loans, included in the impaired loan balances above, as of December 31, 2020, were $17.7 million. TDR loans on accrual status amounted to $10.3 million at December 31, 2020. TDR loans included in non-performing loans amounted to $7.5 million at December 31, 2020.
The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the nine-month periods indicated:
Nine months ended | ||||||||||||||
September 30, 2020 | ||||||||||||||
(Dollars in thousands) | Number of Restructurings | Amount | ||||||||||||
Extended maturity date | 2 | $ | 1,145 | |||||||||||
Temporary payment reduction and payment re-amortization of remaining principal over extended term | 6 | 1,599 | ||||||||||||
Forbearance of post default rights | 4 | 2,070 | ||||||||||||
Total | 12 | $ | 4,814 | |||||||||||
Amount of specific reserves included in the allowance for loan losses associated with TDRs listed above | $ | 1,240 |
Loans modified as troubled debt restructurings during the three-month period ended September 30, 2020 are detailed below:
Three months ended | ||||||||||||||||||||
September 30, 2020 | ||||||||||||||||||||
(Dollars in thousands) | Number of Restructurings | Pre-modification Outstanding Recorded Investment | Post-modification Outstanding Recorded Investment | |||||||||||||||||
Commercial real estate | 1 | $ | 217 | $ | 215 | |||||||||||||||
Commercial and industrial | 3 | 410 | 413 | |||||||||||||||||
Commercial construction | — | — | — | |||||||||||||||||
SBA PPP | — | — | — | |||||||||||||||||
Residential mortgages | — | — | — | |||||||||||||||||
Home equity loans and lines | — | — | — | |||||||||||||||||
Consumer | — | — | — | |||||||||||||||||
Total | 4 | $ | 627 | $ | 628 |
27
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
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 ended September 30, 2020:
Three months ended | ||||||||||||||
September 30, 2020 | ||||||||||||||
(Dollars in thousands) | Number of TDRs that Defaulted | Post- modification Outstanding Recorded Investment | ||||||||||||
Commercial real estate | — | $ | — | |||||||||||
Commercial and industrial | 2 | 327 | ||||||||||||
Commercial construction | 2 | 1,510 | ||||||||||||
SBA PPP | — | — | ||||||||||||
Residential mortgages | — | — | ||||||||||||
Home equity loans and lines | — | — | ||||||||||||
Consumer | — | — | ||||||||||||
Total | 4 | $ | 1,837 |
The following table presents number and balance of loans modified as TDRs, by portfolio classification, during the nine months indicated:
Nine months ended | ||||||||||||||||||||
September 30, 2020 | ||||||||||||||||||||
(Dollars in thousands) | Number of Restructurings | Pre-modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | |||||||||||||||||
Commercial real estate | 1 | $ | 217 | $ | 215 | |||||||||||||||
Commercial and industrial | 4 | 884 | 672 | |||||||||||||||||
Commercial construction | 6 | 4,754 | 3,927 | |||||||||||||||||
SBA PPP | — | — | — | |||||||||||||||||
Residential mortgages | — | — | — | |||||||||||||||||
Home equity | — | — | — | |||||||||||||||||
Consumer | 1 | 1 | — | |||||||||||||||||
Total | 12 | $ | 5,856 | $ | 4,814 |
There were no subsequent charge-offs associated with the new TDRs noted in the table above during the nine months ended September 30, 2020.
28
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
The following table presents loans modified as TDRs within the preceding twelve months, which have defaulted on the
modified terms during the during the nine months ended September 30, 2020:
Nine months ended | ||||||||||||||
September 30, 2020 | ||||||||||||||
(Dollars in thousands) | Number of TDRs that Defaulted | Post- modification Outstanding Recorded Investment | ||||||||||||
Commercial real estate | — | $ | — | |||||||||||
Commercial and industrial | 4 | 391 | ||||||||||||
Commercial construction | 4 | 2,655 | ||||||||||||
SBA PPP | — | — | ||||||||||||
Residential mortgages | — | — | ||||||||||||
Home equity | — | — | ||||||||||||
Consumer | 1 | — | ||||||||||||
Total | 9 | $ | 3,046 |
Allowance for loan loss activity-Prior Period
The allowance for loan losses amounted to $44.6 million at December 31, 2020 and $43.8 million at September 30, 2020. The allowance for loan losses to total loans ratio was 1.45% at December 31, 2020 and 1.39% at September 30, 2020.
Changes in the allowance for loan losses by portfolio classification for the three months ended September 30, 2020 are presented below:
(Dollars in thousands) | Commercial Real Estate | Commercial and Industrial | Commercial Construction | Residential 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 | — | 33 | — | — | 4 | 9 | 46 | |||||||||||||||||||||||||||||||||||||
Less: Charge-offs | — | 103 | — | — | — | 7 | 110 | |||||||||||||||||||||||||||||||||||||
Ending Balance at September 30, 2020 | $ | 23,636 | $ | 10,182 | $ | 7,571 | $ | 1,669 | $ | 550 | $ | 227 | $ | 43,835 |
Changes in the allowance for loan losses by portfolio classification for the nine months ended September 30, 2020 are presented below:
(Dollars in thousands) | Commercial Real Estate | Commercial and Industrial | Commercial Construction | Residential Mortgage | Home Equity | Consumer | Total | |||||||||||||||||||||||||||||||||||||
Beginning Balance at December 31, 2019 | $ | 18,338 | $ | 9,129 | $ | 4,149 | $ | 1,195 | $ | 536 | $ | 267 | $ | 33,614 | ||||||||||||||||||||||||||||||
Provision for credit losses for loans | 5,298 | 1,248 | 3,422 | 474 | 4 | (49) | 10,397 | |||||||||||||||||||||||||||||||||||||
Recoveries | — | 207 | — | — | 10 | 34 | 251 | |||||||||||||||||||||||||||||||||||||
Less: Charge-offs | — | 402 | — | — | — | 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 | $ | — | $ | — | $ | 31 | $ | 4,590 | ||||||||||||||||||||||||||||||
Allocated to loans collectively evaluated for impairment | $ | 23,618 | $ | 7,292 | $ | 5,920 | $ | 1,669 | $ | 550 | $ | 196 | $ | 39,245 |
29
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
(5)Leases
For the Company, material leases consist of operating leases on our facilities, mainly leased branch locations; leases 12 months or less and immaterial equipment leases have been excluded. As of September 30, 2021, the Company had 17 operating real estate leases, with one new branch lease commencing in the quarter.
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 expense for the three and nine months ended September 30, 2021 was $414 thousand and $1.1 million, respectively. Lease expense for the three and nine months ended September 30, 2020 was $326 thousand and $974 thousand, 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, 2021 and September 30, 2020 was 28.8 years and 26.8 years, respectively. The weighted average discount rate was 3.61% at September 30, 2021 and 3.80% at September 30, 2020.
At September 30, 2021, the remaining undiscounted cash flows by year of these lease liabilities were as follows:
(Dollars in thousands) | Operating Leases | |||||||
2021 (three remaining months) | $ | 340 | ||||||
2022 | 1,377 | |||||||
2023 | 1,403 | |||||||
2024 | 1,431 | |||||||
2025 | 1,437 | |||||||
Thereafter | 32,982 | |||||||
Total lease payments | 38,970 | |||||||
Less: Imputed interest | 15,222 | |||||||
Total lease liability | $ | 23,748 |
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 2020 Annual Report on Form 10-K, for further information regarding the accounting for the Company's leases.
(6)Deposits
Deposits are summarized as follows as of the periods indicated:
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
Non-interest checking | $ | 1,404,353 | $ | 1,164,908 | ||||||||||
Interest-bearing checking | 713,991 | 599,630 | ||||||||||||
Savings | 294,143 | 256,347 | ||||||||||||
Money market | 1,344,116 | 1,210,414 | ||||||||||||
CDs $250,000 or less | 160,810 | 176,895 | ||||||||||||
CDs greater than $250,000 | 53,523 | 68,074 | ||||||||||||
Total customer deposits | 3,970,936 | 3,476,268 | ||||||||||||
Brokered deposits | — | 74,995 | ||||||||||||
Total deposits | $ | 3,970,936 | $ | 3,551,263 |
30
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
Total customer deposits include reciprocal balances from checking, money market deposits and CDs received from participating banks in nationwide deposit networks due to our customers electing to participate in Company offered programs which allow for enhanced FDIC insurance. Essentially, the equivalent of the customers' original deposited funds comes back to the Company and are carried within the appropriate category under deposits. The Company's balances in these reciprocal products were $538.7 million and $508.4 million at September 30, 2021 and December 31, 2020, respectively.
The Company's brokered deposit balance at December 31, 2020 consisted of balances used in conjunction with interest-rate-swaps to hedge against adverse interest-rate movements.
See Note 8, "Derivatives and Hedging Activities," of this Form 10-Q, contained below, for additional information on the Company's interest-rate swaps.
(7)Borrowed Funds and Subordinated Debt
The Company's borrowed funds amounted to $8.6 million and $4.8 million at September 30, 2021 and December 31, 2020, respectively, in FHLB advances.
Borrowed funds at September 30, 2021 and December 31, 2020 are summarized, as follows:
September 30, 2021 | December 31, 2020 | |||||||||||||||||||||||||
(Dollars in thousands) | Balance | Rate | Balance | Rate | ||||||||||||||||||||||
Within 12 months | $ | 5,585 | 0.30 | % | $ | 4,316 | 0.33 | % | ||||||||||||||||||
Over 5 years | $ | 3,015 | 1.70 | % | $ | 458 | — | % |
The Company's borrowings at September 30, 2021 and December 31, 2020 were related to specific lending projects under the FHLB's community development programs.
The Company also had outstanding subordinated debt (net of deferred issuance costs) of $58.9 million and $73.7 million at September 30, 2021 and December 31, 2020, respectively.
On March 31, 2021, the Company redeemed the subordinated notes issued in January 2015 which were due in January 2030. The redemption of the January 2015 Notes was recorded as a loss on the extinguishment of subordinated debt in the amount of $713 thousand, consisting of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs.
(8) Derivatives and Hedging Activities
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 of which are determined by interest rates. In addition, the Company provides certain commercial customers back-to-back swaps, which 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 tables below present a summary of the Company's derivative financial instruments, notional amounts and fair values for the periods presented:
As of September 30, 2021 | ||||||||||||||||||||||||||
(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 | $ | 36,711 | $ | 825 | $ | — | $ | — | ||||||||||||||||||
Interest-rate contracts - pay fixed, receive floating | — | — | 36,711 | 825 | ||||||||||||||||||||||
Total back-to-back interest-rate swaps | $ | 36,711 | $ | 825 | $ | 36,711 | $ | 825 |
31
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
December 31, 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 | $ | — | $ | — | $ | 75,000 | $ | 2,814 | ||||||||||||||||||
Total cash flow hedge interest-rate swaps | $ | — | $ | — | $ | 75,000 | $ | 2,814 | ||||||||||||||||||
Derivatives not subject to hedge accounting | ||||||||||||||||||||||||||
Interest-rate contracts - pay floating, receive fixed | $ | 38,027 | $ | 2,286 | $ | — | $ | — | ||||||||||||||||||
Interest-rate contracts - pay fixed, receive floating | — | — | 38,027 | 2,286 | ||||||||||||||||||||||
Total back-to-back interest-rate swaps | $ | 38,027 | $ | 2,286 | $ | 38,027 | $ | 2,286 |
__________________________________________
(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, 2021 or December 31, 2020 and no cash flow hedges at September 30, 2021.
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.
In August 2021, three interest rate swaps with notional values totaling $75.0 million were terminated resulting in a $1.8 million loss on termination of swaps, which is reported as a component of non-interest income. The Company terminated these interest-rate swaps and accelerated the reclassification of the loss from other comprehensive income to earnings as a result of hedged forecasted transactions becoming probable not to occur.
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.
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 no net gains or losses recognized in income on Back-to-Back swaps during the nine months ended September 30, 2021 or September 30, 2020.
At September 30, 2021 and December 31, 2020, all the Back-to-Back swaps with the counterparty were in the same liability position, therefore there was no netting reflected in the Company’s Consolidated Balance Sheets.
Credit Risk
By using derivative financial instruments, the Company exposes itself to counterparty-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 creditworthy. Additionally, counterparty interest-rate swaps contain provisions for collateral to be posted if the derivative exposure exceeds a threshold amount.
The Company had one counterparty and it was rated A and A2 by Standard & Poor's and Moody's, respectively, at September 30, 2021. The Company had no credit risk exposure at either September 30, 2021 or December 31, 2020 relating to interest-rate swaps with counterparties. When the Company has credit risk exposure, collateral is received from the
32
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
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 Sheets. 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 Sheets. The Company posted cash collateral of $1.4 million and $5.3 million at September 30, 2021 and December 31, 2020, respectively.
Customer-related credit risk on Back-to-Back swaps is minimized by the cross collateralization of the loan and the interest-rate swap agreement to the customer's underlying collateral.
Credit-risk-related Contingent Features
The Company's interest-rate swaps with counterparties 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, 2021, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk, related to these agreements was $825 thousand. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral at September 30, 2021 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-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-loss exposure would be equal to a percentage of the originating bank's swap loss based on the ratio of the Company's loan participation to the underlying loan. At both September 30, 2021 and December 31, 2020, the Company had one participation loan where the originating bank utilizes a back-to-back interest-rate swap structure. At September 30, 2021, management considers the risk of material swap-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, 2021 and December 31, 2020, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.
(9) Regulatory Capital Requirements
Capital Raised and Capital Adequacy Requirements
As of September 30, 2021, and December 31, 2020, the Company met the definition of "well-capitalized" under the applicable regulations of the Board of Governors of the Federal Reserve System and the Bank qualified as "well-capitalized" under the prompt corrective action regulations of Basel III and the FDIC.
33
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
The Company's and the Bank's actual capital amounts and ratios are presented as of September 30, 2021 and December 31, 2020 in the tables below:
Actual | Minimum Capital for Capital Adequacy Purposes(1) | Minimum Capital To Be Well Capitalized(2) | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||
As of September 30, 2021 | ||||||||||||||||||||||||||||||||||||||
The Company | ||||||||||||||||||||||||||||||||||||||
Total Capital to risk-weighted assets ("RWA") | $ | 423,722 | 14.16 | % | $ | 239,322 | 8.00 | % | N/A | N/A | ||||||||||||||||||||||||||||
Tier 1 Capital to RWA | 327,220 | 10.94 | % | 179,492 | 6.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||
Tier 1 Capital to average assets ("AA") or Leverage Ratio | 327,220 | 7.42 | % | 176,474 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital to RWA | 327,220 | 10.94 | % | 134,619 | 4.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||
The Bank | ||||||||||||||||||||||||||||||||||||||
Total Capital to RWA | $ | 423,585 | 14.16 | % | $ | 239,323 | 8.00 | % | $ | 299,153 | 10.00 | % | ||||||||||||||||||||||||||
Tier 1 Capital to RWA | 386,032 | 12.90 | % | 179,492 | 6.00 | % | 239,323 | 8.00 | % | |||||||||||||||||||||||||||||
Tier 1 Capital to AA, Leverage Ratio | 386,032 | 8.75 | % | 176,474 | 4.00 | % | 220,592 | 5.00 | % | |||||||||||||||||||||||||||||
Common Equity Tier 1 Capital to RWA | 386,032 | 12.90 | % | 134,619 | 4.50 | % | 194,450 | 6.50 | % |
Actual | Minimum Capital for Capital Adequacy Purposes(1) | Minimum Capital To Be Well Capitalized(2) | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||||||||||
As of December 31, 2020 | ||||||||||||||||||||||||||||||||||||||
The Company | ||||||||||||||||||||||||||||||||||||||
Total Capital to RWA | $ | 415,999 | 14.62 | % | $ | 227,631 | 8.00 | % | N/A | N/A | ||||||||||||||||||||||||||||
Tier 1 Capital to RWA | 306,577 | 10.77 | % | 170,723 | 6.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||
Tier 1 Capital to AA, Leverage Ratio | 306,577 | 7.52 | % | 163,127 | 4.00 | % | N/A | N/A | ||||||||||||||||||||||||||||||
Common Equity Tier 1 Capital to RWA | 306,577 | 10.77 | % | 128,042 | 4.50 | % | N/A | N/A | ||||||||||||||||||||||||||||||
The Bank | ||||||||||||||||||||||||||||||||||||||
Total Capital to RWA | $ | 413,862 | 14.55 | % | $ | 227,631 | 8.00 | % | $ | 284,538 | 10.00 | % | ||||||||||||||||||||||||||
Tier 1 Capital to RWA | 378,184 | 13.29 | % | 170,723 | 6.00 | % | 227,631 | 8.00 | % | |||||||||||||||||||||||||||||
Tier 1 Capital to AA, Leverage Ratio | 378,184 | 9.27 | % | 163,127 | 4.00 | % | 203,909 | 5.00 | % | |||||||||||||||||||||||||||||
Common Equity Tier 1 Capital to RWA | 378,184 | 13.29 | % | 128,042 | 4.50 | % | 184,950 | 6.50 | % |
__________________________________________
(1)Before application of the capital conservation buffer of 2.50% as of September 30, 2021 and December 31, 2020. See discussion below.
(2)For the Bank to qualify as "well-capitalized," it must maintain at least the minimum ratios listed under the regulatory prompt corrective action framework. This framework does not apply to the Company.
The Company is subject to the Basel III capital ratio requirements which include a "capital conservation buffer" of 2.50% above the regulatory minimum risk-based capital adequacy requirements shown above. The capital conservation buffer requirement, which had a phase in implementation period, was fully implemented on January 1, 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, exceeded the Basel III risk-based capital requirement with the capital conservation buffer as of September 30, 2021.
34
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
The Basel III minimum capital ratio requirements as applicable to the Company and the Bank with the capital conversation buffer 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 RWA | 8.00 | % | 2.50 | % | 10.50 | % | ||||||||||||||
Tier 1 Capital to RWA | 6.00 | % | 2.50 | % | 8.50 | % | ||||||||||||||
Tier 1 Capital to AA, or Leverage Ratio | 4.00 | % | — | % | 4.00 | % | ||||||||||||||
Common equity tier 1 capital to RWA | 4.50 | % | 2.50 | % | 7.00 | % |
Failure to meet minimum capital requirements can initiate or result in certain mandatory and possibly additional discretionary supervisory actions by regulators that, if undertaken, could have a material adverse effect on the Company's consolidated financial statements. Under applicable capital adequacy requirements and the regulatory framework for prompt corrective action applicable to the Bank, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
(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. See below for the Company's other components of comprehensive income at the 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 losses or gains are realized.
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 benefit (expense) allocated to each component of other comprehensive income (loss):
Three months ended September 30, 2021 | Three months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Pre-Tax | Tax Benefit (Expense) | After Tax Amount | Pre-Tax | Tax (Expense) Benefit | After Tax Amount | ||||||||||||||||||||||||||||||||
Change in fair value of debt securities | $ | (3,401) | $ | 772 | $ | (2,629) | $ | 57 | $ | (9) | $ | 48 | ||||||||||||||||||||||||||
Less: net security gains reclassified into non-interest income | — | — | — | 127 | (29) | 98 | ||||||||||||||||||||||||||||||||
Net change in fair value of debt securities | (3,401) | 772 | (2,629) | (70) | 20 | (50) | ||||||||||||||||||||||||||||||||
Change in fair value of cash flow hedges | (1,061) | 299 | (762) | 14 | (4) | 10 | ||||||||||||||||||||||||||||||||
Less: net cash flow hedges losses reclassified into income | (2,915) | 820 | (2,095) | (218) | 61 | (157) | ||||||||||||||||||||||||||||||||
Net change in fair value of cash flow hedges | 1,854 | (521) | 1,333 | 232 | (65) | 167 | ||||||||||||||||||||||||||||||||
Total other comprehensive income (loss), net | $ | (1,547) | $ | 251 | $ | (1,296) | $ | 162 | $ | (45) | $ | 117 |
35
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Pre-Tax | Tax Benefit (Expense) | After Tax Amount | Pre-Tax | Tax (Expense) Benefit | After Tax Amount | ||||||||||||||||||||||||||||||||
Change in fair value of debt securities | $ | (13,453) | $ | 3,000 | $ | (10,453) | $ | 17,887 | $ | (3,971) | $ | 13,916 | ||||||||||||||||||||||||||
Less: net security gains reclassified into non-interest income | 128 | (29) | 99 | 227 | (51) | 176 | ||||||||||||||||||||||||||||||||
Net change in fair value of debt securities | (13,581) | 3,029 | (10,552) | 17,660 | (3,920) | 13,740 | ||||||||||||||||||||||||||||||||
Change in fair value of cash flow hedges | 378 | (106) | 272 | (3,334) | 937 | (2,397) | ||||||||||||||||||||||||||||||||
Less: net cash flow hedges losses reclassified into income | (2,436) | 685 | (1,751) | (278) | 78 | (200) | ||||||||||||||||||||||||||||||||
Net change in fair value of cash flow hedges | 2,814 | (791) | 2,023 | (3,056) | 859 | (2,197) | ||||||||||||||||||||||||||||||||
Total other comprehensive (loss) income, net | $ | (10,767) | $ | 2,238 | $ | (8,529) | $ | 14,604 | $ | (3,061) | $ | 11,543 |
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, 2021 | Three months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
(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 | $ | 16,293 | $ | (1,333) | $ | 14,960 | $ | 24,300 | $ | (2,364) | $ | 21,936 | ||||||||||||||||||||||||||
Total other comprehensive income, net | (2,629) | 1,333 | (1,296) | (50) | 167 | 117 | ||||||||||||||||||||||||||||||||
Accumulated other comprehensive income - ending balance | $ | 13,664 | $ | — | $ | 13,664 | $ | 24,250 | $ | (2,197) | $ | 22,053 |
Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
(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 | $ | 24,216 | $ | (2,023) | $ | 22,193 | $ | 10,510 | $ | — | $ | 10,510 | ||||||||||||||||||||||||||
Total other comprehensive (loss) income, net | (10,552) | 2,023 | (8,529) | 13,740 | (2,197) | 11,543 | ||||||||||||||||||||||||||||||||
Accumulated other comprehensive income - ending balance | $ | 13,664 | $ | — | $ | 13,664 | $ | 24,250 | $ | (2,197) | $ | 22,053 |
36
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 two of its current executive officers and one 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 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 SERP.
The SERP is a non-qualified plan and represents a direct liability of the Company, and as such, the Company has no specific assets set aside to settle the benefit obligation. The aggregate amount accrued, or the "accumulated benefit obligation," 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. Benefits paid under the SERP amounted to $69 thousand and $207 thousand for both the three and nine months ended September 30, 2021 and September 30, 2020, respectively.
Total expenses for the SERP were $14 thousand and $45 thousand for the three and nine months ended September 30, 2021, respectively, compared to $20 thousand and $60 thousand for the three and nine months ended September 30, 2020, respectively. The Company anticipates accruing an additional $15 thousand related to the SERP during the remainder of 2021.
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.
These arrangements provide a death benefit to the officer's designated beneficiaries that extend to post-retirement periods for some of the supplemental life insurance plans. The Company has recognized a liability for these future post-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 post-retirement benefit obligation," which is the present value of the post-retirement benefits associated with this arrangement.
Total net periodic post-retirement benefit cost for supplemental life insurance plans, which consisted mainly of interest costs, was $15 thousand and $47 thousand for the three and nine months ended September 30, 2021, respectively, compared to $23 thousand and $69 thousand for the three and nine months ended September 30, 2020, respectively.
(12)Stock-Based Compensation
The Company currently has one active stock incentive plan: The Enterprise Bancorp, Inc. 2016 Stock Incentive Plan, as amended (the "2016 plan"). At the Company's 2021 Annual Shareholders' Meeting on May 4, 2021, the shareholders voted to approve an amendment to the 2016 Plan increasing the number of shares of common stock available for awards made under the 2016 Plan by 400,000 shares of common stock. As of September 30, 2021, 506,403 shares of common stock remained available for future grants under the 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. Non-employee director fees are accrued and carried in "Accrued expenses and other liabilities" during the year and distributed to those directors in January of the following year. Total stock-based compensation expense was $559 thousand and $1.6 million for the three and nine months ended September 30, 2021, respectively, compared to $476 thousand and $1.4 million for the three and nine months ended September 30, 2020, respectively.
37
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
A tax benefit of $18 thousand and $57 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 September 30, 2021, respectively, compared with a tax expense of $6 thousand and $29 thousand for the three and nine months ended September 30, 2020, 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 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, | ||||||||||||||
2021 | 2020 | |||||||||||||
Options granted | 17,580 | 24,208 | ||||||||||||
Term in years | 10 | 10 | ||||||||||||
Weighted average assumptions used in the fair value model: | ||||||||||||||
Expected volatility | 44 | % | 37 | % | ||||||||||
Expected dividend yield | 3.01 | % | 3.43 | % | ||||||||||
Expected life in years | 6.5 | 6.5 | ||||||||||||
Risk-free interest-rate | 1.28 | % | 1.02 | % | ||||||||||
Weighted average market price on date of grants | $ | 32.73 | $ | 28.22 | ||||||||||
Per share weighted average fair value | $ | 11.95 | $ | 8.41 | ||||||||||
Fair value as a percentage of market value at grant date | 36 | % | 30 | % |
Options granted during the first nine months of 2021 and 2020 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 to determine the per share grant date fair value of stock option grants.
The Company recognized stock-based compensation expense related to stock option awards of $48 thousand and $140 thousand for the three and nine months ended September 30, 2021, respectively, compared to $46 thousand and $136 thousand for the three and nine months ended September 30, 2020, 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-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) | 2021 | 2020 | ||||||||||||
Two-year vesting | 8,109 | 8,295 | ||||||||||||
Four-year vesting | 24,307 | 26,015 | ||||||||||||
Performance-based vesting | 21,559 | 25,001 | ||||||||||||
Total restricted stock awards granted | 53,975 | 59,311 | ||||||||||||
Weighted average grant date fair value | $ | 32.73 | $ | 28.22 |
38
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
Stock-based compensation expense recognized in association with stock awards, mainly restricted stock awards, amounted to $455 thousand and $1.2 million for the three and nine months ended September 30, 2021, respectively, compared to $374 thousand and $1.1 million for the three and nine months ended September 30, 2020, respectively.
Stock in Lieu of Directors' Fees
In addition to restricted stock awards discussed above, the non-employee members of the Company's Board may opt to receive newly issued shares of the Company's common stock in lieu of cash compensation for attendance at Board and Board committee meetings. Stock-based compensation expense related to these directors' fees amounted to $56 thousand and $179 thousand for the three and nine months ended September 30, 2021, respectively, compared to $56 thousand and $214 thousand for the three and nine months ended September 30, 2020, respectively, and is included in other operating expenses and in "Accrued expenses and other liabilities." In January 2021, non-employee directors were issued 11,532 shares of the Company's common stock in lieu of 2020 annual cash fees of $286 thousand at a price of $24.77 per share, based on the Company's average quarterly close prices during 2020.
39
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 9, "Stockholders' Equity," under the caption "Shares Authorized and 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, | |||||||||||||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||||||||||||
Basic weighted average common shares outstanding | 12,022,610 | 11,916,486 | 11,997,199 | 11,886,811 | ||||||||||||||||||||||
Dilutive shares | 42,490 | 10,557 | 41,362 | 21,905 | ||||||||||||||||||||||
Diluted weighted average common shares outstanding | 12,065,100 | 11,927,043 | 12,038,561 | 11,908,716 |
There were 55,777 and 77,023 stock options outstanding for the three and nine months ended September 30, 2021, respectively, that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for those periods. There were 102,733 and 75,979 stock options outstanding for the three and nine months ended September 30, 2020, 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 those dates, may potentially dilute earnings per share in the future.
Unvested participating restricted awards amounted to 124,631 shares and 116,174 shares as of September 30, 2021 and December 31, 2020, respectively.
(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 best information available under the circumstances.
40
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, 2021 | ||||||||||||||||||||||||||
Fair Value Measurements Using: | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||
Assets measured on a recurring basis: | ||||||||||||||||||||||||||
Debt securities | $ | 817,781 | $ | — | $ | 817,781 | $ | — | ||||||||||||||||||
Equity securities | 1,441 | 1,441 | — | — | ||||||||||||||||||||||
FHLB stock | 2,164 | — | 2,164 | — | ||||||||||||||||||||||
Interest-rate swaps | 825 | — | 825 | — | ||||||||||||||||||||||
Assets measured on a non-recurring basis: | ||||||||||||||||||||||||||
Individually evaluated loans (collateral dependent) | 15,612 | — | — | 15,612 | ||||||||||||||||||||||
Other real estate owned | 2,400 | — | — | 2,400 | ||||||||||||||||||||||
Liabilities measured on a recurring basis: | ||||||||||||||||||||||||||
Interest-rate swaps | $ | 825 | $ | — | $ | 825 | $ | — |
December 31, 2020 | ||||||||||||||||||||||||||
Fair Value Measurements Using: | ||||||||||||||||||||||||||
(Dollars in thousands) | Fair Value | (Level 1) | (Level 2) | (Level 3) | ||||||||||||||||||||||
Assets measured on a recurring basis: | ||||||||||||||||||||||||||
Debt securities | $ | 582,303 | $ | — | $ | 582,303 | $ | — | ||||||||||||||||||
Equity securities | 746 | 746 | — | — | ||||||||||||||||||||||
FHLB stock | 1,905 | — | 1,905 | — | ||||||||||||||||||||||
Interest-rate swaps | 2,286 | — | 2,286 | — | ||||||||||||||||||||||
Assets measured on a non-recurring basis: | ||||||||||||||||||||||||||
Collateral dependent loans carried at fair value | 18,733 | — | — | 18,733 | ||||||||||||||||||||||
Liabilities measured on a recurring basis: | ||||||||||||||||||||||||||
Interest-rate swaps | $ | 5,100 | $ | — | $ | 5,100 | $ | — |
All the Company's debt securities 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 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. 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 FHLB par value which management believes approximates fair value; therefore, these securities are categorized as Level 2 measures.
41
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
For loans individually assessed and deemed to be collateral dependent management has estimated the value and the probable credit loss by comparing the loan's amortized cost 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 loans carried at realizable fair value are categorized as Level 3 within the fair value hierarchy. A specific reserve is assigned to the collateral dependent loan for the amount of management's estimated probable credit loss. The specific reserve assigned to individually evaluated loans that are collateral dependent amounted to $1.5 million at September 30, 2021 compared to $5.8 million at December 31, 2020.
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 the estimated fair value of the property acquired, less estimated costs to sell, establishing a new cost basis. The estimated fair value is based on market appraisals and the Company's internal analysis. Certain inputs used in appraisals or the Company's internal analysis, are not always observable, and therefore, OREO may be categorized as Level 3 within the fair value hierarchy.
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 risks 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 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 Consolidated Balance Sheets as a liability and 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 Consolidated Balance Sheets at September 30, 2021 and December 31, 2020 were deemed immaterial.
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. 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, 2021 and December 31, 2020, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.
The following table presents additional quantitative information about assets measured at fair value on a 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, 2021 and December 31, 2020:
Fair Value | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | Valuation Technique | Unobservable Input | Unobservable Input Value or Range | |||||||||||||||||||||||||||
Assets measured on a non-recurring basis: | ||||||||||||||||||||||||||||||||
Individually evaluated loans (collateral dependent) | $ | 15,612 | $ | 18,733 | Appraisal of collateral | Appraisal adjustments(1) | 15% - 50% | |||||||||||||||||||||||||
Other real estate owned | $ | 2,400 | $ | — | Appraisal of collateral | Appraisal adjustments(1) | 0% - 20% |
__________________________________________
(1)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
42
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
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 Sheets, 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 Consolidated Balance Sheets.
Financial instruments for which the fair value is disclosed but not recognized on the Consolidated Balance Sheets are summarized below. The table includes the carrying value, estimated fair value and its placement in the fair value hierarchy as follows:
September 30, 2021 | ||||||||||||||||||||||||||||||||
Fair Value Measurement | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | Carrying Value | Fair Value | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Loans held for sale | $ | 413 | $ | 403 | $ | — | $ | 403 | $ | — | ||||||||||||||||||||||
Loans, net | 2,800,848 | 2,845,236 | — | — | 2,845,236 | |||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
CDs | 214,333 | 214,860 | — | 214,860 | — | |||||||||||||||||||||||||||
Borrowed funds | 8,600 | 8,210 | — | 8,210 | — | |||||||||||||||||||||||||||
Subordinated debt | 58,949 | 58,938 | — | 58,938 | — |
December 31, 2020 | ||||||||||||||||||||||||||||||||
Fair Value Measurement | ||||||||||||||||||||||||||||||||
(Dollars in thousands) | Carrying Value | Fair Value | Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | |||||||||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||||||||||
Loans held for sale | $ | 371 | $ | 372 | $ | — | $ | 372 | $ | — | ||||||||||||||||||||||
Loans, net | 3,029,295 | 3,064,791 | — | — | 3,064,791 | |||||||||||||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||||||||||
CDs | 244,969 | 246,498 | — | 246,498 | — | |||||||||||||||||||||||||||
Brokered deposits | 74,995 | 76,652 | — | 76,652 | — | |||||||||||||||||||||||||||
Borrowed funds | 4,774 | 4,684 | — | 4,684 | — | |||||||||||||||||||||||||||
Subordinated debt | 73,744 | 76,769 | — | 76,769 | — |
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 classified within Level 1 in the fair value hierarchy.
Also excluded from these tables are the fair values of commitments for unused portions of lines of credit and commitments to originate loans that were short-term, at current market rates and estimated to have no significant change in fair value.
43
ENTERPRISE BANCORP, INC. Notes to the Unaudited Consolidated Interim Financial Statements |
(15)Supplemental Cash Flow Information
The supplemental cash flow information for the nine months ended September 30, 2021 and September 30, 2020 is as follows:
Nine months ended September 30, | ||||||||||||||
(Dollars in thousands) | 2021 | 2020 | ||||||||||||
Supplemental financial data: | ||||||||||||||
Cash paid for: interest | $ | 7,198 | $ | 11,502 | ||||||||||
Cash paid for: income taxes | 11,074 | 11,883 | ||||||||||||
Cash paid for: lease liability | 912 | 921 | ||||||||||||
Supplemental schedule of non-cash activity: | ||||||||||||||
Net purchases of investment securities not yet settled | 17,260 | — | ||||||||||||
Transfer from loans to other real estate owned | 2,400 | — | ||||||||||||
ROU lease assets: operating leases(1) | 7,932 | — |
_________________________________________
(1)Represents net new right of use ("ROU") lease assets added in the periods indicated.
44
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 unaudited consolidated interim financial statements and notes thereto contained in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2021 (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, 2020 (the "2020 Annual Report on Form 10-K") as filed with the Securities and Exchange Commission (the "SEC") on March 10, 2021.
Throughout this Management Discussion & Analysis we have noted certain balances, ratios or other measures of the Company’s performance which exclude the impact of Paycheck Protection Program (“PPP”) loans originated by the Company, which we expect to be short-term in nature. See "Non-GAAP Measures" below for additional information on the balances, ratios and other measures of the Company’s performance which exclude the impact of loans.
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements about the Company and its industry involve substantial risks and uncertainties. Statements other than statements of current or historical fact, including statements regarding the Company’s future financial condition, results of operations, business plans, liquidity, cash flows, projected costs, and the impact of any laws or regulations applicable to the Company, are forward-looking statements. 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 including, but not limited to statements related to management's views on:
(i)failure of risk management controls and procedures;
(ii)adequacy of the allowance for credit 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 credit losses;
(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 interest 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 operations 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 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;
(xi)our ability to retain and increase our aggregate assets under management;
(xii)our ability to enter new markets successfully and capitalize on growth opportunities, including the receipt of required regulatory approvals;
(xiii)damage to our reputation in the markets we serve;
(xiv)exposure to legal claims and litigation;
(xv)the inability to raise capital, on terms favorable to us, could cause us to fall below regulatory minimum capital adequacy levels and consequently restrict our business and operations;
(xvi)changes in laws and regulations that apply to the Company's business and operations, and any additional regulations, or repeals that may be forthcoming as a result thereof, could cause the Company to incur additional costs and adversely affect the Company's business environment, operations and financial results;
(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, the Financial Accounting Standards Board ("FASB"), or the Public Company Accounting Oversight Board could negatively impact the Company's financial results; and
(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," of the Company's 2020
45
Annual Report on Form 10-K, which could have a material adverse effect on the Company's business, financial condition and results of operations.
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 several 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:
•the banking environment and the 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;
•the interest-rate environment, credit risk and the level of future non-performing assets and charge-offs;
•potential asset and deposit growth, future non-interest expenditures and non-interest income growth;
•expansion strategy; and
•borrowing capacity.
46
Overview
Overall, the Company strategically operates with a long-term mindset that is focused on organic growth and supporting such growth by continually investing in our people, products, services, technology, digital evolution, and both new and existing branches. Our 26th branch located in North Andover, Massachusetts was opened on January 4, 2021 and our 27th branch located in Londonderry, New Hampshire is expected to open in the second quarter of 2022. Additionally, the relocation of our Lawrence, Massachusetts branch was completed on August 30, 2021.
COVID-19 Pandemic
The pandemic and its effects have impacted the Company’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.
Paycheck Protection Program
The PPP was established by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and implemented by the Small Business Administration ("SBA") in order to provide loans to help businesses keep their workforce employed during the pandemic. PPP loans may be partially or fully forgiven by the SBA if the borrower meets certain conditions. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding.
The SBA began funding PPP loans in April 2020, with the first forgiveness payments distributed from the SBA beginning in November 2020. The third round of the PPP ended in May, 2021. Over the course of the PPP, the Company originated 4,149 PPP loans amounting to $717.2 million with associated deferred SBA processing fees of $26.2 million. As of September 30, 2021, the Company had 846 PPP loans outstanding with a principal balance of $153.6 million and deferred SBA fees of $5.3 million, compared to 2,633 PPP loans with a principal balance of $453.1 million and deferred SBA fees of $10.0 million at December 31, 2020. The Company anticipates the majority of the deferred SBA fees will be recognized as the PPP loans are forgiven by the SBA or paid off over the next several quarters.
Accounting Implications
The Company suspended TDR accounting as permitted under the CARES Act beginning in the first quarter of 2020 for certain short-term loan modifications to borrowers impacted by the pandemic. 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 risk rated as “pass” as of December 31, 2019.
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 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.
See Part I, Item 1, "Business," under the "Risk Management Framework," section of the 2020 Annual Report on Form 10-K for additional information on the Company's key risk mitigation strategies.
In addition to the risks outlined in this Form 10-Q, numerous other factors that could adversely affect the Company's future results of operations and financial condition, and its reputation and business model, are addressed in Part I, Item 1A, "Risk Factors," of the 2020 Annual Report on Form 10-K.
Accounting Policies/Critical Accounting Estimates
As discussed in the 2020 Annual Report on Form 10-K and updated in this Form 10-Q for the adoption of CECL, the most significant areas in which management applies critical assumptions and estimates are: the estimates of the allowance for credit losses for loans, unfunded commitments, and available-for-sale securities, as well as the impairment review of goodwill.
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On January 1, 2021, the Company adopted ASU 2016-13, including the CECL methodology for estimating the ACL. The CECL methodology requires early recognition of credit losses using a lifetime credit loss measurement approach that also requires the consideration of reasonable and supportable forecasts in the estimate. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, which for the Company is primarily the loan portfolio. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, which are not unconditionally cancellable. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses be presented as an allowance rather than as a write-down. See the following footnotes for more information on the Company's adoption of CECL: Note 2, "Investment Securities," Note 3, "Loans," and Note 4, "ACL for Loans." Prior to the adoption of CECL, the company utilized the incurred loss methodology, under which an entity measured credit losses for loans using 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 Company has not materially changed its significant accounting and reporting policies from those disclosed in its 2020 Annual Report on Form 10-K for the impairment review of goodwill.
Recent Accounting Pronouncements
See Note 1, Item (c), "Recent Accounting Pronouncements," to the Company's unaudited consolidated interim financial statements in this Form 10-Q for information regarding recent accounting pronouncements.
Non-GAAP Measures
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with GAAP. However, certain balances, ratios or other measures of the Company’s performance exclude the impact of PPP loans, which we expect to be short-term in nature. We refer to any balance, ratio or measure that excludes PPP loans as “core.” In addition, we refer to any balance, ratio or measure that excludes PPP loans and interest-earning deposits with banks as “adjusted.” The core and adjusted balances, ratios and measures were derived in order to provide more meaningful comparisons to prior periods as: (i) PPP loans outstanding have been originated within the last 18 months and the majority are expected to pay off during the next several quarters; and (ii) growth in customer deposits and PPP loan pay-downs have resulted in a high balance in low-yielding interest-earning deposits with banks.
These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. In addition, the non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies.
The following table summarizes the reconciliation of GAAP items to non-GAAP items related to the impact of PPP loans on total loans and assets:
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | ||||||||||||
Total loans | $ | 2,848,110 | $ | 3,073,860 | ||||||||||
Adjustment: PPP loans | (153,552) | (453,084) | ||||||||||||
Adjustment: Deferred PPP fees | 5,312 | 10,014 | ||||||||||||
Total core loans (non-GAAP) | $ | 2,699,870 | $ | 2,630,790 | ||||||||||
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The following table summarizes the reconciliation of GAAP items to non-GAAP items related to the impact of PPP loans and interest-earning deposits with banks:
Three months ended | Three months ended | |||||||||||||
(Dollars in thousands) | September 30, 2021 | September 30, 2020 | ||||||||||||
ADJUSTED INTEREST-EARNING ASSETS | ||||||||||||||
Total average interest-earning assets | $ | 4,250,266 | $ | 3,898,091 | ||||||||||
Adjustment: Average PPP loans, net | (223,611) | (493,783) | ||||||||||||
Adjustment: Average interest-earning deposits with banks | (675,746) | (257,807) | ||||||||||||
Total adjusted average interest-earning assets (non-GAAP) | $ | 3,350,909 | $ | 3,146,501 | ||||||||||
ADJUSTED NET INTEREST INCOME | ||||||||||||||
Net interest income (tax equivalent) | $ | 36,231 | $ | 33,886 | ||||||||||
Adjustment: PPP income | (4,898) | (3,469) | ||||||||||||
Adjustment: Interest on interest-earning deposits with banks | (254) | (59) | ||||||||||||
Adjusted net interest income (tax equivalent) (non-GAAP) | $ | 31,079 | $ | 30,358 | ||||||||||
ADJUSTED NET INTEREST MARGIN | ||||||||||||||
Net interest margin (tax equivalent) | 3.39 | % | 3.46 | % | ||||||||||
Adjustment: PPP effect(1) | (0.30) | % | 0.10 | % | ||||||||||
Adjustment: Interest-earning deposits with banks effect(2) | 0.59 | % | 0.28 | % | ||||||||||
Adjusted net interest margin (tax equivalent) (non-GAAP) | 3.68 | % | 3.84 | % |
Nine months ended | Nine months ended | |||||||||||||
(Dollars in thousands) | September 30, 2021 | September 30, 2020 | ||||||||||||
ADJUSTED INTEREST-EARNING ASSETS | ||||||||||||||
Total average interest-earning assets | $ | 4,108,528 | $ | 3,570,224 | ||||||||||
Adjustment: Average PPP loans, net | (361,924) | (287,969) | ||||||||||||
Adjustment: Average interest-earning deposits with banks | (488,181) | (146,457) | ||||||||||||
Total adjusted average interest-earning assets (non-GAAP) | $ | 3,258,423 | $ | 3,135,798 | ||||||||||
ADJUSTED INTEREST INCOME | ||||||||||||||
Net interest income (tax equivalent)(3) | $ | 106,970 | $ | 97,026 | ||||||||||
Adjustment: PPP loan income | (16,495) | (5,990) | ||||||||||||
Adjustment: Interest on interest-earning deposits with banks | (458) | (191) | ||||||||||||
Adjusted net interest income (tax equivalent) (non-GAAP) | $ | 90,017 | $ | 90,845 | ||||||||||
ADJUSTED NET INTEREST MARGIN | ||||||||||||||
Net interest margin (tax equivalent) | 3.48 | % | 3.63 | % | ||||||||||
Adjustment: PPP loan effect(1) | (0.25) | % | 0.08 | % | ||||||||||
Adjustment: Interest-earning deposits with banks effect(2) | 0.46 | % | 0.16 | % | ||||||||||
Adjusted net interest margin (tax equivalent) (non-GAAP) | 3.69 | % | 3.87 | % |
_________________________________________
(1)PPP loan adjustments include an elimination of average PPP loans, net of deferred SBA fees, as well as interest income on PPP loans and related SBA fee accretion, included in interest income.
(2)Interest-earning deposit adjustments include an elimination of average interest-earning deposits with banks, as well as interest income on interest-earning deposits with banks, included in interest income.
(3)Nine-month results reflect tax equivalent adjustments as of September 30 of the respective periods.
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Results of Operations for the three months ended September 30, 2021 and September 30, 2020
Unless otherwise indicated, the reported results are for the three months ended September 30, 2021 with the "same period," the "prior year period," the "comparable period," and the "prior period" being the three months ended September 30, 2020. Average yields are presented on an annualized tax equivalent basis.
Net Income
The Company's net income for the three months ended September 30, 2021 amounted to $9.8 million, or $0.81 per diluted common share, compared to $10.3 million, or $0.87 per diluted common share, for the three months ended September 30, 2020. The decrease was primarily attributable to a decrease in non-interest income and an increase in non-interest expense, partially offset by an increase in net interest income and a decrease in the provision for credit losses. Non-interest income for the third quarter of 2021 included a $1.8 million loss from the termination of interest-rate swaps used in hedge transactions. Excluding this realized loss, non-interest income increased over the respective prior year period.
Net Interest Income and Margin
The Company's net interest income for the three months ended September 30, 2021 amounted to $35.9 million, an increase of $2.3 million, or 7%, compared to the prior year period. The increase in the current period was due largely to increases in PPP loan income of $1.4 million and investment security income of $668 thousand and lower deposit interest expense of $1.4 million, partially offset by lower non-PPP loan income of $1.5 million. For the three months ended September 30, 2021, net interest income included PPP interest and SBA fee income of $4.9 million, compared to $3.5 million in the prior year period.
Tax equivalent net interest margin (“net interest margin” or “margin”) was 3.39% and 3.46% for the three months ended September 30, 2021 and 2020, respectively. Current period margin has been negatively impacted by large balances in lower-yielding interest-earning deposits with banks, and to a lesser extent loan pay-downs and a lower interest rate environment, partially offset by accelerated SBA fee income on PPP loan forgiveness, which began in November 2020.
For the three months ended September 30, 2021 and September 30, 2020:
•The average interest-earning deposits with banks balances were $675.7 million and $257.8 million.
•The average PPP loan balances, net of deferred fees, were $223.6 million and $493.8 million.
•Adjusted net interest margin (non-GAAP) was 3.68% and 3.84%.
Interest and Dividend Income
Total interest and dividend income amounted to $37.6 million for the three months ended September 30, 2021, an increase of $798 thousand, or 2%, compared to the prior year period. The increase was attributed primarily to increases in PPP loan income of $1.4 million and investment security income of $668 thousand, partially offset by lower yields on interest-earning assets. The average tax equivalent yield on interest-earning assets has declined 25 basis points compared to the prior year period. See the "Net Interest Income and Margin" discussion above for further information on the decrease in yields.
Interest Expense
For the three months ended September 30, 2021, total interest expense amounted to $1.7 million, a decrease of $1.6 million, or 48%, compared to the same period in 2020, due primarily to decreases in interest expense related to customer deposits of $1.4 million and subordinated debt of $190 thousand. The average cost of funding for the three months ended September 30, 2021, including the impact of non-interest-bearing checking accounts balances, decreased 18 basis points compared to three months ended September 30, 2020. The average balance of checking, savings and money market accounts increased $301.7 million, or 15%, and the average balance of subordinated debt decreased $11.0 million over the same period.
Deposit growth since December 31, 2020 was due in large part to customers depositing funds received from round three PPP loan advances, government stimulus checks received during the period, and generally maintaining higher liquidity in response to the pandemic.
Non-interest-bearing checking accounts are an important component of the Company's core funding strategy. For the three months ended September 30, 2021, the average balance of non-interest-bearing checking accounts increased $120.5 million, or 10%, as compared to the same period in 2020, and represented 35% of total average deposit balances for the three months ended September 30, 2021 and September 30, 2020.
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Interest-rate risk is reviewed in detail in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.
The re-pricing frequency of the Company'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" and is reviewed in more detail in Part I, Item 3, "Quantitative and Qualitative Disclosures About Market Risk," of this Form 10-Q and in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of the Company's 2020 Annual Report on Form 10-K.
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, 2021, compared to the three months ended September 30, 2020. 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 rate have been allocated proportionately based on absolute value to the changes due to volume and 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) | $ | (69) | $ | (3,033) | $ | 2,964 | ||||||||||||||
Investment securities (tax-equivalent) | 673 | 1,347 | (674) | |||||||||||||||||
Other interest-earning assets(1) | 191 | 156 | 35 | |||||||||||||||||
Total interest-earning assets (tax-equivalent) | 795 | (1,530) | 2,325 | |||||||||||||||||
Interest expense | ||||||||||||||||||||
Interest checking, savings and money market | (601) | 130 | (731) | |||||||||||||||||
Certificates of deposit | (659) | (156) | (503) | |||||||||||||||||
Brokered CDs | (110) | (173) | 63 | |||||||||||||||||
Borrowed funds | 9 | 13 | (4) | |||||||||||||||||
Subordinated debt | (189) | (155) | (34) | |||||||||||||||||
Total interest-bearing funding | (1,550) | (341) | (1,209) | |||||||||||||||||
Change in net interest income (tax-equivalent) | $ | 2,345 | $ | (1,189) | $ | 3,534 |
__________________________________________
(1)Income on other interest-earning assets includes interest on deposits and fed funds sold, and dividends on FHLB stock.
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The following table presents the Company's average balance sheet, net interest income and average rates for the three months ended September 30, 2021 and 2020:
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Three months ended September 30, 2021 | Three months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Interest(1) | Average Yield(1) | Average Balance | Interest(1) | Average Yield(1) | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||
Loans and loans held for sale (2) (tax equivalent) | $ | 2,892,192 | $ | 33,540 | 4.60 | % | $ | 3,168,787 | $ | 33,609 | 4.22 | % | ||||||||||||||||||||||||||
Investments (3) (tax equivalent) | 680,164 | 4,125 | 2.43 | % | 469,552 | 3,452 | 2.94 | % | ||||||||||||||||||||||||||||||
Other interest-earning assets (4) | 677,910 | 262 | 0.15 | % | 259,752 | 71 | 0.11 | % | ||||||||||||||||||||||||||||||
Total interest-earning assets (tax equivalent) | 4,250,266 | 37,927 | 3.54 | % | 3,898,091 | 37,132 | 3.79 | % | ||||||||||||||||||||||||||||||
Other assets | 181,826 | 168,755 | ||||||||||||||||||||||||||||||||||||
Total assets | $ | 4,432,092 | $ | 4,066,846 | ||||||||||||||||||||||||||||||||||
Liabilities and stockholders' equity: | ||||||||||||||||||||||||||||||||||||||
Interest checking, savings and money market | $ | 2,327,826 | 351 | 0.06 | % | $ | 2,026,137 | 953 | 0.19 | % | ||||||||||||||||||||||||||||
Certificates of deposit | 219,375 | 359 | 0.65 | % | 266,576 | 1,017 | 1.52 | % | ||||||||||||||||||||||||||||||
Brokered CDs | 33,424 | 152 | 1.80 | % | 74,994 | 261 | 1.39 | % | ||||||||||||||||||||||||||||||
Borrowed funds | 8,606 | 17 | 0.80 | % | 2,809 | 8 | 1.22 | % | ||||||||||||||||||||||||||||||
Subordinated debt (5) | 58,931 | 817 | 5.55 | % | 69,941 | 1,007 | 5.73 | % | ||||||||||||||||||||||||||||||
Total interest-bearing funding | 2,648,162 | 1,696 | 0.26 | % | 2,440,457 | 3,246 | 0.53 | % | ||||||||||||||||||||||||||||||
Net interest-rate spread (tax equivalent) | 3.28 | % | 3.26 | % | ||||||||||||||||||||||||||||||||||
Non-interest checking | 1,381,939 | — | — | 1,261,451 | — | |||||||||||||||||||||||||||||||||
Total deposits, borrowed funds and subordinated debt | 4,030,101 | 1,696 | 0.17 | % | 3,701,908 | 3,246 | 0.35 | % | ||||||||||||||||||||||||||||||
Other liabilities | 56,746 | 43,115 | ||||||||||||||||||||||||||||||||||||
Total liabilities | 4,086,847 | 3,745,023 | ||||||||||||||||||||||||||||||||||||
Stockholders' equity | 345,245 | 321,823 | ||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 4,432,092 | $ | 4,066,846 | ||||||||||||||||||||||||||||||||||
Net interest income (tax equivalent) | 36,231 | 33,886 | ||||||||||||||||||||||||||||||||||||
Net interest margin (tax equivalent) | 3.39 | % | 3.46 | % | ||||||||||||||||||||||||||||||||||
Less tax equivalent adjustment | 352 | 355 | ||||||||||||||||||||||||||||||||||||
Net interest income | $ | 35,879 | $ | 33,531 | ||||||||||||||||||||||||||||||||||
Net interest margin | 3.35 | % | 3.43 | % |
________________________________________
(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 2021 and 2020, based on tax equivalent adjustments associated with tax exempt loans and investments interest income.
(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 with banks, fed funds sold and FHLB stock.
(5)The subordinated debt is net of average deferred debt issuance costs.
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Provision for Credit Losses
The provision for credit losses for the three months ended September 30, 2021 was determined under the CECL methodology and amounted to $28 thousand, a decrease of $1.5 million compared to the respective prior year period, which was under the incurred loss methodology. The provision for credit losses was impacted by the following:
•The current three-month provision resulted primarily from core loan growth (non-GAAP) and an increase in reserves for unfunded commitments, partially offset by a reduction from changes in general loan loss reserve factors and declines in reserves for individually evaluated loans.
•The provision in the prior year period reflects an increase in reserves related to the anticipated impact of the COVID-19 pandemic on the credit quality of the loan portfolio and an increase in reserves for individually evaluated loans.
The provision for credit losses is a significant factor in the Company's operating results. For further discussion regarding the provision for credit losses and management's assessment of the adequacy of the ACL see "Asset Quality," and "ACL for Loans" under "Financial Condition" in this Item 2, below.
Non-Interest Income
Non-interest income for the three months ended September 30, 2021, amounted to $3.1 million, a decrease of $1.2 million, or 29%, as compared to the same period in 2020. The primary components of the quarter over quarter decrease are as follows:
•Net gains on sales of loans decreased $152 thousand due primarily to lower volume of loans originated for sale;
•Net gains on sales of debt securities decreased $127 thousand as no debt securities were sold during the current period; and
•Loss on termination of interest-rate swaps increased $1.8 million due to the early termination of interest rate swaps used in hedge transactions;
•Partially offset by deposit interchange fees increase of $206 thousand due primarily to higher deposit account activity combined with higher balances in customer accounts and increased consumer spending resulting in higher interchange activity; and
•Wealth management fees increase of $299 thousand due primarily to asset growth from net new business and market appreciation.
Non-Interest Expense
Non-interest expense for the three months ended September 30, 2021 amounted to $25.8 million, an increase of $3.0 million, or 13%, compared to the prior year period. The primary components of the quarter over quarter increase are as follows:
•Salaries and employee benefits increased $2.2 million due primarily to an increase of $1.3 million in the Company's variable compensation incentive plan, which resulted from stronger performance in the current period relative to the prior year period.
•Excluding the increase in the Company's variable compensation incentive plan above, non-interest expense for the three months ended September 30, 2021 increased 8% compared to the respective prior year period.
•Occupancy and equipment increased $372 thousand due primarily to the higher costs related to branch openings and relocations.
•Technology and telecommunications increased $267 thousand 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.
Income Taxes
The effective tax rate for the three months ended September 30, 2021 was 25.3%, compared to 23.6% for the three months ended September 30, 2020.
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Results of Operations for the nine months ended September 30, 2021 and September 30, 2020
Unless otherwise indicated, the reported results are for the nine months ended September 30, 2021 with the "same period," the "prior year period," the "comparable period," "prior year," and "prior period" being the nine months ended September 30, 2020. Average yields are presented on an annualized tax equivalent basis.
Net Income
The Company's net income for the nine months ended September 30, 2021 amounted to $31.3 million, or $2.60 per diluted common share, compared to $21.6 million, or $1.81 per diluted common share, for the nine months ended September 30, 2020. The increase was primarily attributable to an increase in net interest income and a decrease in the provision for credit losses, partially offset by a decrease in non-interest income and an increase in non-interest expense. Non-interest income for the third quarter of 2021 included a $1.8 million loss from the termination of interest-rate swaps used in hedge transactions. Excluding this realized loss, non-interest income increased over the respective prior year period.
Net Interest Income and Margin
The Company's net interest income for the nine months ended September 30, 2021 amounted to $105.9 million, an increase of $9.9 million, or 10%, compared to the prior year period. The increase in the current period was due largely to PPP related SBA fee income and lower deposit interest expense, partially offset by lower non-PPP loan income and an increase in subordinated debt interest expense. For the nine months ended September 30, 2021, net interest income included PPP interest and fee income of $16.5 million, compared to $6.0 million in the prior year period.
Net interest margin was 3.48% and 3.63% for the nine months ended September 30, 2021 and September 30, 2020. Current period margin has been negatively impacted by large balances in lower-yielding interest-earning deposits with banks, and to a lesser extent loan pay-downs and a lower interest rate environment, partially offset by accelerated SBA fee income on PPP loan forgiveness, which began in November 2020.
For the nine months ended September 30, 2021 and 2020:
•The average interest-earning deposits with banks balances were $488.2 million and $146.5 million.
•The average PPP loan balances, net of deferred SBA fees, were $361.9 million and $288.0 million.
•Adjusted net interest margin (non-GAAP) was 3.69% and 3.87%.
Interest and Dividend Income
Total interest and dividend income amounted to $111.9 million for the nine months ended September 30, 2021, an increase of $4.0 million, or 4%, compared to the prior year period. The increase was attributed primarily to increases in PPP loan income of $10.5 million and investment security income of $622 thousand, partially offset by lower yields on interest-earning assets. Average tax equivalent yields on interest-earning asset have declined 40 basis points since the comparable period. 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, 2021, total interest expense amounted to $6.0 million, a decrease of $5.9 million, or 50%, over the same period in 2020, due primarily to decreases in interest expense on deposits of $6.6 million and FHLB borrowings of $560 thousand, partially offset by increased interest costs of $1.2 million from subordinated debt. The average cost of funding, including the impact of non-interest deposit accounts balances, decreased 26 basis points. For the nine months ended September 30, 2021, the average balance of checking, savings and money market accounts increased $334.5 million, or 18%, and the average balance of borrowed funds decreased $45.3 million compared to the respective prior year period.
Deposit growth since December 31, 2020 was due in large part to customers depositing funds received from round three PPP loan advances, government stimulus checks received during the period, and generally maintaining higher liquidity in response to the pandemic.
Non-interest deposit accounts are an important component of the Company's core funding strategy. For the nine months ended September 30, 2021, the average balance of non-interest checking accounts increased $229.8 million, or 21%, as compared to
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the same period in 2020. This non-interest-bearing funding source represented 34% and 33% of total average deposit balances for the nine months ended September 30, 2021 and September 30, 2020.
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, 2021, compared to the nine months ended September 30, 2020. 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 rate have been allocated proportionately based on absolute value to the changes due to volume and 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) | $ | 3,245 | $ | 2,244 | $ | 1,001 | ||||||||||||||
Investment securities (tax equivalent) | 631 | 2,771 | (2,140) | |||||||||||||||||
Other interest-earning assets(1) | 156 | 399 | (243) | |||||||||||||||||
Total interest-earning assets (tax equivalent) | 4,032 | 5,414 | (1,382) | |||||||||||||||||
Interest expense | ||||||||||||||||||||
Interest checking, savings and money market | $ | (4,400) | $ | 869 | $ | (5,269) | ||||||||||||||
CDs | (2,429) | (667) | (1,762) | |||||||||||||||||
Brokered deposits | 268 | 241 | 27 | |||||||||||||||||
Borrowed funds | (560) | (352) | (208) | |||||||||||||||||
Subordinated debt | 1,209 | 1,279 | (70) | |||||||||||||||||
Total interest-bearing funding | (5,912) | 1,370 | (7,282) | |||||||||||||||||
Change in net interest income (tax equivalent) | $ | 9,944 | $ | 4,044 | $ | 5,900 |
__________________________________________
(1)Income on other interest-earning assets includes interest on deposits with banks, fed funds sold, and dividends on FHLB stock.
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The following table presents the Company's average balance sheet, net interest income and average rates for the nine months ended September 30, 2021 and 2020:
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Average Balance | Interest(1) | Average Yield(1) | Average Balance | Interest(1) | Average Yield(1) | ||||||||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||||||||||||||
Loans and loans held for sale(2) (tax equivalent) | $ | 3,002,404 | $ | 101,102 | 4.50 | % | $ | 2,941,755 | $ | 97,858 | 4.44 | % | ||||||||||||||||||||||||||
Investment securities(3) (tax equivalent) | 615,858 | 11,412 | 2.47 | % | 478,365 | 10,781 | 3.00 | % | ||||||||||||||||||||||||||||||
Other interest-earning assets(4) | 490,266 | 471 | 0.13 | % | 150,104 | 315 | 0.28 | % | ||||||||||||||||||||||||||||||
Total interest-earnings assets (tax equivalent) | 4,108,528 | 112,985 | 3.68 | % | 3,570,224 | 108,954 | 4.08 | % | ||||||||||||||||||||||||||||||
Other assets | 165,991 | 159,287 | ||||||||||||||||||||||||||||||||||||
Total assets | $ | 4,274,519 | $ | 3,729,511 | ||||||||||||||||||||||||||||||||||
Liabilities and stockholders' equity: | ||||||||||||||||||||||||||||||||||||||
Interest checking, savings and money market | $ | 2,221,068 | 1,203 | 0.07 | % | $ | 1,886,542 | 5,603 | 0.40 | % | ||||||||||||||||||||||||||||
CDs | 229,793 | 1,428 | 0.83 | % | 288,374 | 3,857 | 1.79 | % | ||||||||||||||||||||||||||||||
Brokered deposits | 60,989 | 664 | 1.46 | % | 38,592 | 396 | 1.37 | % | ||||||||||||||||||||||||||||||
Borrowed funds | 7,742 | 43 | 0.75 | % | 53,078 | 603 | 1.52 | % | ||||||||||||||||||||||||||||||
Subordinated debt(5) | 63,754 | 2,677 | 5.60 | % | 33,364 | 1,468 | 5.88 | % | ||||||||||||||||||||||||||||||
Total interest-bearing funding | 2,583,346 | 6,015 | 0.31 | % | 2,299,950 | 11,927 | 0.69 | % | ||||||||||||||||||||||||||||||
Net interest-rate spread (tax equivalent) | 3.37 | % | 3.39 | % | ||||||||||||||||||||||||||||||||||
Non-interest checking | 1,306,485 | — | 1,076,711 | — | ||||||||||||||||||||||||||||||||||
Total deposits, borrowed funds and subordinated debt | 3,889,831 | 6,015 | 0.21 | % | 3,376,661 | 11,927 | 0.47 | % | ||||||||||||||||||||||||||||||
Other liabilities | 48,834 | 41,111 | ||||||||||||||||||||||||||||||||||||
Total liabilities | 3,938,665 | 3,417,772 | ||||||||||||||||||||||||||||||||||||
Stockholders' equity | 335,854 | 311,739 | ||||||||||||||||||||||||||||||||||||
Total liabilities and stockholders' equity | $ | 4,274,519 | $ | 3,729,511 | ||||||||||||||||||||||||||||||||||
Net interest income (tax equivalent) | 106,970 | 97,027 | ||||||||||||||||||||||||||||||||||||
Net interest margin (tax equivalent) | 3.48 | % | 3.63 | % | ||||||||||||||||||||||||||||||||||
Less tax equivalent adjustment | 1,069 | 1,074 | ||||||||||||||||||||||||||||||||||||
Net interest income | $ | 105,901 | $ | 95,953 | ||||||||||||||||||||||||||||||||||
Net interest margin | 3.44 | % | 3.59 | % |
_______________________________________
(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 2021 and 2020, based on tax equivalent adjustments associated with tax exempt loans and investments interest income.
(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 with banks, fed funds sold, and FHLB stock.
(5)The subordinated debt is net of average deferred debt issuance costs.
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Provision for Credit Losses
The provision for credit losses for the nine months ended September 30, 2021 was determined under the CECL methodology and amounted to $747 thousand, a decrease of $9.7 million, compared to the same period in 2020, which was under the incurred loss methodology. The provision for credit losses was impacted by the following:
•The current nine-month provision resulted primarily from core loan growth (non-GAAP) and an increase in reserves for unfunded commitments, partially offset by a reduction from changes in general loan loss reserve factors and declines in reserves for individually evaluated loans.
•The provision in the prior year period reflected increases in reserves related to the anticipated impact of the pandemic on the credit quality of the loan portfolio and an increase in reserves for individually evaluated loans.
The provision for credit losses is a significant factor in the Company's operating results. For further discussion regarding the provision for credit losses and management's assessment of the adequacy of the ACL see "Asset Quality," and "Allowance for Credit Losses" under "Financial Condition" in this Item 2, below.
Non-Interest Income
Non-interest income for the nine months ended September 30, 2021 amounted to $12.1 million, a decrease of $402 thousand, or 3%, compared to the nine months ended September 30, 2020. The primary components of the decrease are as follows:
•Loss on termination of interest-rate swaps increased $1.8 million due to the early termination of interest rate swaps used in hedge transactions;
•Partially offset by deposit interchange fees increase of $266 thousand due primarily to higher deposit account activity and increased consumer spending resulting in higher interchange activity;
•Wealth management fees increase of $763 thousand due primarily to asset growth from net new business and market appreciation; and
•Increases in equity securities market value gains of $290 thousand included in other income.
Non-Interest Expense
Non-interest expense for the nine months ended September 30, 2021 amounted to $75.6 million, an increase of $5.8 million, or 8%, compared to the same period in 2020. The primary components of the increase are as follows:
•Salaries and employee benefits increased $3.1 million due primarily to an increase of $1.8 million related to the Company's variable compensation incentive plan, which resulted from stronger performance in the current period relative to the prior year period. The prior year period salaries and employee benefits expense included additional pandemic-related expenditures, primarily in the second quarter.
•Occupancy and equipment increased $911 thousand due primarily to the higher costs related to branch openings and relocations.
•Technology and telecommunications increased $1.1 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.
•The Company also realized a loss on the extinguishment of subordinated debt of $713 thousand from the early redemption of the January 2015 Notes on March 31, 2021. The loss on the extinguishment of the January 2015 Notes consisted of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs.
Income Taxes
The effective tax rate was 24.8% and 23.7% for the nine months ended September 30, 2021 and September 30, 2020, respectively.
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Financial Condition
Total assets amounted to $4.45 billion at September 30, 2021, compared to $4.01 billion at December 31, 2020, an increase of $437.1 million, or 11%. Total core assets (non-GAAP) have increased $731.9 million, or 20%, since December 31, 2020. The increase in the Company’s total assets since December 31, 2020, is related primarily to the increase in interest-earning deposits with banks of $393.2 million. The balance sheet composition and changes since December 31, 2020 are discussed below.
Cash and cash equivalents
Cash and cash equivalents may be comprised of cash on hand and cash items due from banks, interest-earning deposits with banks (deposit accounts, excess reserve cash balances, money markets, and money market mutual funds accounts) and federal funds sold ("fed funds"). Cash and cash equivalents increased $390.6 million since December 31, 2020. At September 30, 2021, cash and cash equivalents amounted to 14% of total assets, compared to 6% of total assets at December 31, 2020. The increase in cash and cash equivalents over the prior period was due primarily to total interest-earning deposits with banks which amounted to $606.3 million at September 30, 2021 compared to $213.1 million at December 31, 2020. The increase related primarily to increases in customer deposits and funds received from PPP loan forgiveness.
While balances in cash and cash equivalents will fluctuate due primarily to the timing of net cash flows from deposits, borrowings, loans and investments, and the immediate liquidity needs of the Company, management believes customers are generally maintaining higher liquidity in response to the pandemic and lower interest rates, contributing to the increase in cash and cash equivalents since December 31, 2020.
Investments
At September 30, 2021, the fair value of the investment portfolio amounted to $819.2 million, an increase of $236.2 million, or 41%, since December 31, 2020. The investment portfolio at fair value represented 18% and 15% of total assets at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021 and December 31, 2020, the investment portfolio was comprised primarily of debt securities, classified as available-for-sale, with a small portion of the portfolio invested in equity securities. Excess liquidity was partially utilized to fund growth in the Company's investment security portfolio, which increased $185.2 million, or 29%, during the quarter ended September 30, 2021.
During the nine months ended September 30, 2021, the Company purchased $317.9 million in debt securities and had principal pay downs, calls and maturities totaling $64.8 million.
During the nine months ended September 30, 2021, management sold debt securities with an amortized cost of approximately $2.9 million realizing net gains on sales of $128 thousand.
Net unrealized gains on the debt securities portfolio amounted to $17.5 million at September 30, 2021, compared to $31.1 million at December 31, 2020 and $31.2 million at September 30, 2020. The Company attributes the decrease in net unrealized gains as compared to December 31, 2020 to an increase in market yields.
Loans
Total loans decreased $225.8 million, or 7%, compared to December 31, 2020, and decreased $302.7 million, or 10%, since September 30, 2020. The decline during the nine months ended September 30, 2021 was primarily due to PPP forgiveness of $507.3 million, partially offset by PPP originations of $207.8 million and net core loan growth (non-GAAP) of $69.1 million. The mix of loans within the portfolio remained relatively unchanged with commercial loans, excluding PPP loans, amounting to 88% of total core loans (non-GAAP) at September 30, 2021 and 87% at both December 31, 2020 and September 30, 2020. Since September 30, 2020 commercial real estate and commercial construction loans have increased, while commercial and industrial loans have declined.
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The following table sets forth the loan balances by loan portfolio segment at the dates indicated and the percentage of each segment to total loans(1):
September 30, 2021 | December 31, 2020 | September 30, 2020 | ||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||||||||||||||||||||
Commercial real estate | $ | 1,556,240 | 54.6 | % | $ | 1,476,236 | 48.0 | % | $ | 1,488,664 | 47.2 | % | ||||||||||||||||||||||||||
Commercial and industrial | 401,718 | 14.1 | % | 435,548 | 14.2 | % | 435,829 | 13.8 | % | |||||||||||||||||||||||||||||
Commercial construction | 412,332 | 14.5 | % | 371,856 | 12.1 | % | 382,767 | 12.1 | % | |||||||||||||||||||||||||||||
SBA PPP | 148,240 | 5.2 | % | 443,070 | 14.4 | % | 494,701 | 15.7 | % | |||||||||||||||||||||||||||||
Total commercial loans | 2,518,530 | 88.4 | % | 2,726,710 | 88.7 | % | 2,801,961 | 88.9 | % | |||||||||||||||||||||||||||||
Residential mortgages | 239,960 | 8.4 | % | 252,995 | 8.2 | % | 254,814 | 8.1 | % | |||||||||||||||||||||||||||||
Home equity | 81,217 | 2.9 | % | 85,178 | 2.8 | % | 84,974 | 2.7 | % | |||||||||||||||||||||||||||||
Consumer | 8,403 | 0.3 | % | 8,977 | 0.3 | % | 9,066 | 0.3 | % | |||||||||||||||||||||||||||||
Total retail loans | 329,580 | 11.6 | % | 347,150 | 11.3 | % | 348,854 | 11.1 | % | |||||||||||||||||||||||||||||
Total loans | 2,848,110 | 100.0 | % | 3,073,860 | 100.0 | % | 3,150,815 | 100.0 | % | |||||||||||||||||||||||||||||
Allowance for credit losses | (47,262) | (44,565) | (43,835) | |||||||||||||||||||||||||||||||||||
Net loans | $ | 2,800,848 | $ | 3,029,295 | $ | 3,106,980 |
__________________________________________
(1) Upon the adoption of CECL, the Company includes deferred fees as part of the portfolio segment balance. Prior periods have been adjusted in this table to align with the CECL presentation.
As of September 30, 2021, commercial real estate loans increased $80.0 million, or 5%, compared to December 31, 2020, and $67.6 million, or 5%, compared to September 30, 2020. 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.
As of September 30, 2021, commercial and industrial loan balances decreased by $33.8 million, or 8%, compared to December 31, 2020 and $34.1 million, or 8%, compared to September 30, 2020. The decreases reflect 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, and term loans. Also included in commercial and industrial loans are loans partially guaranteed by the SBA under various long-established programs (see below regarding the separate PPP loan portfolio). 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.
Commercial construction loans increased by $40.5 million, or 11%, since December 31, 2020, and $29.6 million, or 8%, compared to September 30, 2020. 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.
During the nine-month period ended September 30, 2021, PPP loan forgiveness amounted to $507.3 million, and round three PPP loan originations, which ended May 31, 2021, amounted to $207.8 million.
Total retail loan balances decreased by $17.6 million, or 5%, since December 31, 2020, and $19.3 million, or 5.5%, since September 30, 2020. Residential secured one-to-four family mortgage loans continue to make up the largest portion of the retail segment and the primary component of the decline since prior periods. The current active residential real estate market and low interest-rate environment have driven sale and refinance activity during the nine-month period ended September 30, 2021.
At September 30, 2021, commercial loan balances participated out to various banks amounted to $64.9 million, compared to $65.3 million at December 31, 2020, and $75.7 million at September 30, 2020. 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 $68.6 million, $77.1 million and $103.6 million at September 30, 2021, December 31, 2020, and September 30, 2020, respectively. See above,
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Note 3, above, "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.
Asset Quality
Certain prior period figures have been adjusted to include "special mention" rated loans in the adversely classified loan balance to be consistent with the CECL presentation used for periods after January 1, 2021.
The following table sets forth information regarding non-performing assets, 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, 2021 | December 31, 2020 | September 30, 2020 | |||||||||||||||||
Non-accrual loan summary: | ||||||||||||||||||||
Commercial real estate | $ | 23,529 | $ | 29,680 | $ | 9,719 | ||||||||||||||
Commercial and industrial | 2,044 | 4,574 | 4,981 | |||||||||||||||||
Commercial construction | 1,258 | 2,999 | 6,121 | |||||||||||||||||
SBA PPP | — | — | — | |||||||||||||||||
Residential mortgages | 662 | 414 | 409 | |||||||||||||||||
Home equity | 342 | 381 | 399 | |||||||||||||||||
Consumer | — | 2 | 12 | |||||||||||||||||
Total non-performing loans | 27,835 | 38,050 | 21,641 | |||||||||||||||||
OREO | 2,400 | — | — | |||||||||||||||||
Total non-performing assets | $ | 30,235 | $ | 38,050 | $ | 21,641 | ||||||||||||||
Total loans | $ | 2,848,110 | $ | 3,073,860 | $ | 3,150,815 | ||||||||||||||
Accruing TDR loans not included above | $ | 9,203 | $ | 10,268 | $ | 10,659 | ||||||||||||||
Delinquent loans 60-89 days past due and still accruing | $ | 233 | $ | 316 | $ | 312 | ||||||||||||||
Loans 60-89 days past due and still accruing to total loans | 0.01 | % | 0.01 | % | 0.01 | % | ||||||||||||||
Non-performing loans to total loans | 0.98 | % | 1.24 | % | 0.69 | % | ||||||||||||||
Non-performing assets to total assets | 0.68 | % | 0.95 | % | 0.53 | % | ||||||||||||||
Allowance for credit losses for loans | $ | 47,262 | $ | 44,565 | $ | 43,835 | ||||||||||||||
Allowance for credit losses for loans to non-performing loans | 169.79 | % | 117.12 | % | 202.56 | % | ||||||||||||||
Allowance for credit losses for loans to total loans | 1.66 | % | 1.45 | % | 1.39 | % | ||||||||||||||
As of September 30, 2021, the ratio of non-performing loans to total core loans (non-GAAP) was 1.03%. Additionally, the ACL for loans to total core loans ratio (non-GAAP) was 1.75% at September 30, 2021 compared to 1.94% at January 1, 2021. Total core loans (non-GAAP) exclude PPP loans, as all qualifying PPP loans are fully guaranteed by the SBA.
The majority of non-accrual loans were also carried as adversely classified during the periods presented. At September 30, 2021, December 31, 2020, and September 30, 2020, the Company had adversely classified loans (loans carrying "special mention," "substandard," "doubtful" or "loss" classifications) amounting to $63.6 million, $75.3 million, and $63.5 million, respectively. The decrease in non-performing loans at September 30, 2021, compared to December 31, 2020, was due to the partial charge-off of two commercial relationships, one of which was transferred to OREO, as well as principal pay-downs and credit upgrades based on improved performance, partially offset by additional downgrades. The increase in non-performing loans at December 31, 2020, compared to September 30, 2020, was due primarily to three commercial relationships, which were placed on non-accrual in late 2020 and are in industries that have been highly impacted by the pandemic.
Adversely classified loans that were performing but possessed potential weakness and, as a result, could ultimately become non-performing loans amounted to $36.0 million at September 30, 2021 and $37.4 million at December 31, 2020. The remaining balances of adversely classified loans were non-accrual loans, amounting to $27.6 million at September 30, 2021 and $37.9 million at December 31, 2020. Non-accrual loans that were not adversely classified amounted to $144 thousand and $137 thousand at September 30, 2021 and December 31, 2020, respectively, and primarily represented the guaranteed portions of non-performing SBA loans.
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Total individually evaluated collateral dependent loans amounted to $36.5 million and $48.3 million at September 30, 2021 and December 31, 2020, respectively. Total accruing collateral dependent loans amounted to $9.1 million and $10.3 million at September 30, 2021 and December 31, 2020, respectively, while non-accrual collateral dependent loans amounted to $27.4 million and $38.0 million as of September 30, 2021 and December 31, 2020, respectively.
In management's opinion, the majority of collateral dependent loan balances at September 30, 2021 and December 31, 2020 were supported by the net realizable value of the underlying collateral. Based on management's collateral assessment at September 30, 2021, collateral dependent loans totaling $19.4 million required no specific reserves while collateral dependent loans totaling $17.1 million required specific reserve reserves of $1.5 million. At December 31, 2020, collateral dependent loans totaling $23.4 million required no specific reserves while collateral dependent loans totaling $24.9 million required specific reserves of $6.2 million. The decrease in specific reserves since December 31, 2020 was due primarily to the partial charge-off of two commercial relationships noted above. Management closely monitors all individually evaluated relationships for their individual business circumstances, credit metrics, or underlying collateral value deterioration to determine if additional reserves are necessary.
Total TDR loans as of September 30, 2021 and December 31, 2020 were $17.6 million and $17.7 million, respectively. TDR loans on accrual status amounted to $9.2 million and $10.3 million at September 30, 2021 and December 31, 2020, respectively. TDR loans included in non-accrual loans amounted to $8.4 million at September 30, 2021 and $7.5 million at December 31, 2020. The Company continues to work with customers 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 prospects of the borrower.
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. Payment deferrals due to the pandemic remained active on 4 "pass" rated loans, amounting to $11.8 million, or 0.44% of total core loans (non-GAAP), at September 30, 2021, compared to 17 loans amounting to $36.0 million, or 1.36% of total core loans (non-GAAP), at June 30, 2021.
ACL for Loans
There have been no material changes to the Company's underwriting practices or credit risk management system used to estimate credit loss exposure. See Note 4, "Allowance for Loan Losses," to the Company's audited consolidated financial statements contained the 2020 Annual Report on Form 10-K.
On January 1, 2021, the Company adopted the CECL methodology under the modified retrospective approach. Upon adoption, the Company recorded a reduction to retained earnings of $6.5 million, net of $2.5 million in deferred income taxes. The ACL for loans increased by $6.6 million and the ACL for unfunded commitments (included in other liabilities) increased by $2.4 million. Prior to 2021, the Company measured the allowance under the incurred loss method.
ACL for Loans Methodology
The CECL methodology requires early recognition of credit losses using an estimated lifetime credit loss measurement that takes into consideration reasonable and supportable forecasts in the estimate. Arriving at an appropriate level of ACL for loans involves a high degree of management judgement. The ACL for loans is established through a provision for credit losses, a direct charge to earnings. Loan losses are charged against the ACL for loans when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance.
In making its assessment on the adequacy of the allowance, management considers several quantitative and qualitative
factors from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts, including: the risk classification of individual loans; individual review of larger and higher risk problem assets; the level of delinquent loans and non-performing loans; impaired and restructured loans; the level of foreclosure activity; net charge-offs; commercial concentrations by industry and property type and by real estate location; the growth and composition of the loan portfolio; as well as trends in the general levels of these indicators. In addition, management monitors expansion in geographic market area, the experience level of lenders and any changes in underwriting criteria, the strength of the local and national
economy, including general conditions in the multi-family, commercial real estate and development and construction
markets in the Company's local region as well as for changes in current and forecasted economic conditions, such as changes in gross domestic product, the unemployment rate, real estate values, commercial vacancy rates and other relevant factors. Management also performs a qualitative assessment beyond model estimates, and applies qualitative adjustments as management deems necessary.
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The Company uses a systematic methodology to measure the amount of estimated loan losses. The methodology uses a two-tiered approach that applies specific reserves for loans individually evaluated and general reserves for larger groups of non-adversely classified homogeneous loans, segmented by loan type and for adversely classified loans not individually evaluated, segmented by internal risk rating.
Loans collectively evaluated
Loans that share risk characteristics are evaluated on a pool basis. Management has segmented the loan portfolio for groups of loans with similar risk characteristics by loan type for non-adversely classified loans and by internal risk rating for adversely classified loans not individually evaluated. The general loss allocation factors consider the quantitative historic loss experience, qualitative or environmental factors such as those identified above, as well as regulatory guidance and industry data.
The Company uses a two-year reasonable and supportable forecast, and for periods beyond the forecast period, the Company reverts immediately to historical loss rates.
Loans individually evaluated
Loans individually evaluated consist primarily of loans which management considers it probable that not all amounts due (principals and interest) will be collected in accordance with the original contractual terms and loans designated as TDRs and to a lesser extent, if applicable, loans that management deems as individually significant or with unique risk characteristics or for some other reason based on management’s judgement. Management considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management estimates the credit loss by comparing the loan's carrying value against either (i) the present value of the expected future cash flows discounted at the loan's effective interest-rate; (ii) the loan's observable market price; or (iii) the expected realizable fair value of the collateral, in the case of collateral dependent loans. A specific allowance is assigned to the loan for the amount of estimated credit loss. Individually evaluated loans are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.
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While management uses available information and judgement to estimate credit losses on loans, future additions to the ACL may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ACL for loans. Such agencies may require the Company to recognize additions to the ACL based on judgments different from those of management.
ACL for loans activity
The following table summarizes the activity in the ACL for loans for the periods indicated:
Nine Months Ended September 30, | ||||||||||||||
(Dollars in thousands) | 2021 | 2020 | ||||||||||||
Balance at beginning of year | $ | 44,565 | $ | 33,614 | ||||||||||
Day one CECL adjustment | 6,560 | — | ||||||||||||
Provision for credit losses for loans | 209 | 10,397 | ||||||||||||
Recoveries on charged-off loans: | ||||||||||||||
Commercial real estate | 39 | — | ||||||||||||
Commercial and industrial | 102 | 207 | ||||||||||||
Commercial construction | — | — | ||||||||||||
SBA PPP | — | — | ||||||||||||
Residential mortgages | — | — | ||||||||||||
Home equity | 67 | 10 | ||||||||||||
Consumer | 5 | 34 | ||||||||||||
Total recovered | 213 | 251 | ||||||||||||
Charged-off loans | ||||||||||||||
Commercial real estate | 1,825 | — | ||||||||||||
Commercial and industrial | 2,443 | 402 | ||||||||||||
Commercial construction | — | — | ||||||||||||
SBA PPP | — | — | ||||||||||||
Residential mortgages | — | — | ||||||||||||
Home equity | — | — | ||||||||||||
Consumer | 17 | 25 | ||||||||||||
Total charged-off | 4,285 | 427 | ||||||||||||
Net loans charged-off (recovered) | 4,072 | 176 | ||||||||||||
Ending balance | $ | 47,262 | $ | 43,835 | ||||||||||
Annualized net loans charged-off to average loans outstanding | 0.18 | % | 0.01 | % |
Net charge-offs for the nine months ended September 30, 2021, related primarily to two individually evaluated commercial loans, which were fully reserved in late 2020.
See Note 4, "ACL for Loans," to the Company's unaudited consolidated interim financial statements, contained in Item 1 in this Form 10-Q, for further information regarding the ACL for loans and credit quality.
ACL for unfunded commitments
CECL also applies to off-balance sheet credit exposure for unfunded commitments (commitments to originate loans and additional funding commitments, standby letters of credit, financial guarantees and other similar investments) that are not unconditionally cancellable. The ACL for unfunded commitments is classified within "Accrued expenses and other liabilities" on the Company's Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates.
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The Company’s ACL for unfunded commitments amounted to $3.0 million as of September 30, 2021 and the associated provision was $538 thousand for the nine months ended September 30, 2021.
Based on the foregoing, management believes that the Company's ACL for loans and unfunded commitments is adequate as of September 30, 2021.
Other real estate owned
The Company had one OREO property at September 30, 2021 with a net book value of $2.4 million and none at December 31, 2020, or September 30, 2020. There was one OREO addition during the nine months ended September 30, 2021 and none during the nine months ended September 30, 2020. There were no sales or subsequent write downs of OREO during the nine months ended September 30, 2021 and September 30, 2020.
Deposits
As of September 30, 2021, customer deposits increased $494.7 million, or 14%, since December 31, 2020, and $435.9 million, or 12%, since September 30, 2020. Since December 31, 2020, the largest growth occurred in checking accounts and to a lesser extent money market accounts. Management believes the deposit growth since December 31, 2020 was due in large part to customers depositing funds received from PPP loan advances, stimulus checks, and generally maintaining higher liquidity in response to the pandemic and low interest rates.
The 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 the programs. Essentially, the equivalent of the original customers' deposited funds comes back to the Company and are carried within the appropriate category under total customer deposits. The Company's balances in these reciprocal products were $538.7 million, $508.4 million and $471.5 million at September 30, 2021, December 31, 2020 and September 30, 2020, respectively. Savings accounts are not eligible for this program.
Borrowed Funds
The Company had borrowed funds outstanding of $8.6 million, $4.8 million, and $1.7 million at September 30, 2021, December 31, 2020, and September 30, 2020, respectively, all of which were FHLB advances. FHLB borrowings outstanding at each of these dates were related to specific lending projects under the FHLB's community development and affordable housing programs.
Subordinated Debt
The Company had outstanding subordinated debt, net of deferred issuance costs, of $58.9 million at September 30, 2021 and $73.7 million at December 31, 2020 and September 30, 2020.
On March 31, 2021, the Company redeemed the Notes issued January 2015. The redemption of the January 2015 Notes was recorded as a loss on the extinguishment of subordinated debt in the amount of $713 thousand, consisting of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs. The January 2015 Notes were outstanding at September 30, 2020 and December 31, 2020.
In July 2020, the Company issued $60.0 million in notes callable in July 2025 and due in July 2030. The July 2020 notes were outstanding at September 30, 2021 and December 31, 2020.
See also Note 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 against adverse interest-rate movements with a combined notional value, maturing from 2023 through 2025, of $75.0 million. In August of 2021, the Company terminated the interest-rate swaps resulting in a loss of $1.8 million.
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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 decreased to $36.7 million at September 30, 2021 from $38.0 million at December 31, 2020. The fair value of assets and corresponding liabilities associated with these swaps and carried on the Company's Consolidated Balance Sheets was $825 thousand at September 30, 2021 compared to $2.3 million at December 31, 2020.
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 Board. The duties and responsibilities related to asset-liability management matters are also covered by the 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-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.
The Company's wholesale funding sources included primarily borrowing capacity at the FHLB and brokered deposits. In addition, the Company's secondary funding sources include uncommitted overnight fed fund purchase arrangements with correspondent banks, access to the FRB Discount Window and the PPPLF, which provides funding secured by PPP pledged loans. At September 30, 2021, the Bank had the capacity to borrow additional funds from the FHLB, FRB Discount Window, and under the Paycheck Protection Program Liquidity Facility (the "PPPLF") of up to approximately $720 million, $239 million and $148.2 million, respectively.
Management believes that the Company has adequate liquidity to meet its obligations. However, if 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 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. 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 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.
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 notes, which were classified as a liability on the Company's Consolidated Balance Sheets, qualify as Tier 2 regulatory capital for the Company and the Company's investment in the Bank qualifies as Tier 1 regulatory capital for the Bank.
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On January 1, 2021, the Company's adoption of CECL resulted in the Company recording a net cumulative-effect adjustment that decreased retained earnings by $6.5 million, net of $2.5 million in deferred income taxes.
On March 31, 2021, the Company redeemed the January 2015 Notes. The redemption of the January 2015 Notes was funded through a dividend from the Bank.
For the nine months ended September 30, 2021, the Company declared $6.7 million in cash dividends. Stockholders utilized the dividend reinvestment portion of the DRSPP to purchase an aggregate of 28,499 shares of the Company's common stock, totaling $938 thousand.
On October 19, 2021, the Company announced a quarterly dividend of $0.185 per share to be paid on December 1, 2021 to stockholders of record as of November 10, 2021.
For further information about the Company's capital, see Note 9 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 and to the Company's audited consolidated financial statements contained in the Company's 2020 Annual Report on Form 10-K, respectively.
Assets Under Management
Total assets under management include total assets and wealth assets under management. Wealth assets under management are not carried as assets on the Company's Consolidated Balance Sheets, and as such, total assets under management are not a financial measurement recognized under GAAP, however management believes its disclosure provides information useful on the Company's operations.
The Company provides a wide range of wealth management and wealth services, including brokerage, trust, and investment management. Excluded from wealth assets under management are additional assets under administration which include 401(k) plans and Trust and Custody accounts.
As of September 30, 2021, wealth assets under management, which are reflected at fair market value, decreased $10.3 million, or 1%, since December 31, 2020, and since September 30, 2020, balances have increased $72.6 million, or 8%. The decrease since December 31, 2020 resulted primarily from the departure of a large institutional relationship following the client's merger. Excluding the aforementioned client, assets under management increased 9% over the nine-month period from net new assets and increases in market values.
The following table sets forth the value of assets under management and its components at the dates indicated:
(Dollars in thousands) | September 30, 2021 | December 31, 2020 | September 30, 2020 | |||||||||||||||||
Total assets | $ | 4,451,432 | $ | 4,014,324 | $ | 4,060,547 | ||||||||||||||
Wealth assets under management | 966,180 | 976,502 | 893,538 | |||||||||||||||||
Total assets under management | $ | 5,417,612 | $ | 4,990,826 | $ | 4,954,085 |
Additionally, the Company had assets under administration of $235.0 million at September 30, 2021, $210.9 million at December 31, 2020, and $196.2 million, at September 30, 2020 respectively, consisting of mostly 401(k) plans and to a lesser extent Trust and Custodial accounts.
Item 3 -Quantitative and Qualitative Disclosures About Market Risk
The Company's primary interest-rate risk exposure continues to be margin compression that may result from changes in the economic environment, the shape of the yield curve 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 within assets, and higher cost versus lower cost deposits and overnight borrowings versus term borrowings and certificates of deposit within liabilities. The Company's margin generally performs 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.
As shown in the table below, the Company's net interest income sensitivity has increased materially at September 30, 2021 compared to December 31, 2020 resulting primarily from an increase in the Company’s net short-term liquidity, which is defined as interest-earning deposits in banks less short-term wholesale borrowings consisting of brokered deposits and FHLB
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borrowings. The net short-term liquidity balance over the periods shown below have increased largely from deposit growth and PPP loan forgiveness.
The net interest income simulation model assumes a static balance sheet over 24 months but we anticipate that the net liquidity balance will diminish over time. Excluding the buildup in the net short-term liquidity balance, the Company’s net interest income sensitivity position at September 30, 2021, is not considered materially different than at December 31, 2020 and 2019, respectively.
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, 2021, December 31, 2020 and December 31, 2019.
(Dollars in thousands, except for percentage data) | September 30, 2021 | December 31, 2020 | December 31, 2019 | |||||||||||||||||
Net short-term liquidity | $ | 597,721 | $ | 133,377 | $ | (72,306) | ||||||||||||||
Changes in interest rates | Percentage Change | Percentage Change | Percentage Change | |||||||||||||||||
Rates Rise 400 Basis Points | 14.35 | % | 6.40 | % | 0.77 | % | ||||||||||||||
Rates Rise 200 Basis Points | 7.66 | % | 3.57 | % | 0.83 | % | ||||||||||||||
Rates Unchanged | — | % | — | % | — | % | ||||||||||||||
Rates Decline 100 Basis Points | (5.16) | % | (4.16) | % | (1.24) | % |
The results in the table above are subject to various assumptions as reported in Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of the Company's 2020 Annual Report on Form 10-K. Refer to heading "Results of Operations" contained within Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q for further discussion of margin.
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, 2021.
Changes in Internal Control over Financial Reporting
There have been no significant changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (i.e., the three months ended September 30, 2021) that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
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
Except as provided in the risk factor below, management believes that there have been no material changes in the Company's risk factors as reported in the 2020 Annual Report on Form 10-K.
If the United States or the markets in which we operate encounter sustained economic stress or recession, or if long-term consequences or lagging effects of the pandemic are experienced by our customers and businesses, many of the risk factors identified in the Company's 2020 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.
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, 2021:
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).
Item 3 -Defaults upon Senior Securities
Not Applicable.
Item 4 -Mine Safety Disclosures
Not Applicable.
Item 5 -Other Information
Not Applicable.
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Item 6 -Exhibits
EXHIBIT INDEX
_____________
Exhibit No. Description
101* The following materials from Enterprise Bancorp, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021 were formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2021 and 2020; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2021 and 2020; (iv) Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2021 and 2020; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020; 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, 2021 has been formatted in Inline XBRL and contained in Exhibit 101.
____________________
*Filed herewith
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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.
ENTERPRISE BANCORP, INC. | |||||||||||
DATE: | November 8, 2021 | By: | /s/ Joseph R. Lussier | ||||||||
Joseph R. Lussier | |||||||||||
Executive Vice President, Treasurer | |||||||||||
and Chief Financial Officer | |||||||||||
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