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ENTERPRISE BANCORP INC /MA/ - Quarter Report: 2022 September (Form 10-Q)

Table of Contents
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, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number:  001-33912
 Enterprise Bancorp, Inc.
(Exact name of registrant as specified in its charter)
 
Massachusetts04-3308902
(State or other jurisdiction of(I.R.S. Employer Identification No.)
incorporation or organization) 
  
222 Merrimack Street,Lowell,Massachusetts01852
(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 classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareEBTCNASDAQ 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 31, 2022, there were 12,124,086 shares of the issuer's common stock outstanding, par value $0.01 per share.

Table of Contents
ENTERPRISE BANCORP, INC.
INDEX
  Page Number
 
   
 
 
 
 
 
 
   
   
 


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Table of Contents
PART I-FINANCIAL INFORMATION
Item 1 -Financial Statements
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
(Unaudited)
(Dollars in thousands, except per share data)September 30, 2022December 31, 2021
Assets  
Cash and cash equivalents:  
Cash and due from banks$45,345 $33,572 
Interest-earning deposits with banks368,343 403,004 
Total cash and cash equivalents413,688 436,576 
Investments:
Debt securities at fair value (amortized cost of $950,881 and $950,523, respectively)
827,215 956,430 
Equity securities at fair value3,815 1,785 
Total investment securities at fair value831,030 958,215 
Federal Home Loan Bank ("FHLB") stock2,343 2,164 
Loans:
Total loans3,109,369 2,920,684 
Allowance for credit losses (51,211)(47,704)
Net loans3,058,158 2,872,980 
Premises and equipment, net44,141 44,689 
Lease right-of-use asset24,559 24,295 
Accrued interest receivable15,746 13,354 
Deferred income taxes, net51,692 19,644 
Bank-owned life insurance63,847 62,954 
Prepaid income taxes1,205 279 
Prepaid expenses and other assets17,755 7,013 
Goodwill5,656 5,656 
Total assets$4,529,820 $4,447,819 
Liabilities and shareholders' Equity  
Liabilities  
Deposits$4,138,038 $3,980,239 
Borrowed funds2,934 5,479 
Subordinated debt59,102 58,979 
Lease liability24,020 23,627 
Accrued expenses and other liabilities32,700 31,063 
Accrued interest payable833 1,537 
Total liabilities4,257,627 4,100,924 
Commitments and Contingencies
Shareholders' 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; 12,127,453 and 12,038,382 shares issued and outstanding, respectively
121 120 
Additional paid-in capital103,007 100,352 
Retained earnings264,738 241,761 
Accumulated other comprehensive (loss) income (95,673)4,662 
Total shareholders' equity272,193 346,895 
Total liabilities and shareholders' equity$4,529,820 $4,447,819 
See the accompanying notes to the unaudited consolidated interim financial statements.
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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)2022202120222021
Interest and dividend income:  
Loans and loans held for sale$35,306 $33,420 $98,149$100,730
Investment securities4,728 3,893 14,09710,715
Other interest-earning assets2,068 262 2,642471
Total interest and dividend income42,102 37,575 114,888111,916
Interest expense:  
Deposits1,460 862 2,7313,295
Borrowed funds13 17 3943
Subordinated debt850 817 2,4852,677
Total interest expense2,323 1,696 5,255 6,015 
Net interest income39,779 35,879 109,633 105,901 
Provision for credit losses1,000 28 3,939 747 
Net interest income after provision for credit losses38,779 35,851 105,694 105,154 
Non-interest income:  
Wealth management fees1,626 1,768 4,9655,018
Deposit and interchange fees2,045 1,813 5,8475,070
Income on bank-owned life insurance, net303 250 893518
Net gains on sales of debt securities— — 1,062128
Net gains on sales of loans8 177 30795
Loss on termination of swaps— (1,847)— (1,847)
(Loss) gain on equity securities(193)6 (688)154
Other income736 912 2,1432,294
Total non-interest income4,525 3,079 14,252 12,130 
Non-interest expense:  
Salaries and employee benefits18,915 17,224 53,45049,377
Occupancy and equipment expenses2,203 2,471 6,9827,268
Technology and telecommunications expenses2,599 2,583 8,1547,877
Advertising and public relations expenses510 435 1,7371,602
Audit, legal and other professional fees693 558 2,0781,702
Deposit insurance premiums391 593 1,3131,327
Supplies and postage expenses219 200 663605
Loss on extinguishment of subordinated debt———713
Other operating expenses2,007 1,705 5,7705,138
Total non-interest expense27,537 25,769 80,147 75,609 
Income before income taxes15,767 13,161 39,799 41,675 
Provision for income taxes3,805 3,329 9,389 10,352 
Net income$11,962 $9,832 $30,410 $31,323 
Basic earnings per share$0.99 $0.82 $2.51 $2.61 
Diluted earnings per share$0.98 $0.81 $2.50 $2.60 
Basic weighted average common shares outstanding12,119,348 12,022,610 12,094,613 11,997,199 
Diluted weighted average common shares outstanding12,156,695 12,065,100 12,143,468 12,038,561 
See the accompanying notes to the unaudited consolidated interim financial statements.

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ENTERPRISE BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three months ended September 30,Nine months ended September 30,
(Dollars in thousands)2022202120222021
Net income$11,962 $9,832 $30,410 $31,323 
Other comprehensive (loss) income, net of tax
Net change in fair value of debt securities(23,295)(2,629)(100,335)(10,552)
Net change in fair value of cash flow hedges— 1,333 — 2,023 
Total other comprehensive loss, net of tax (23,295)(1,296)(100,335)(8,529)
Total comprehensive (loss) income, net$(11,333)$8,536 $(69,925)$22,794 


See the accompanying notes to the unaudited consolidated interim financial statements.

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ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity
(Unaudited)
Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive (Loss)/Income		Total
Shareholders'
Equity
(Dollars in thousands, except per share data)SharesAmount
Balance at June 30, 202212,115,924 $121 $102,108 $255,259 $(72,378)$285,110 
Net income11,962 11,962 
Other comprehensive loss, net(23,295)(23,295)
Common stock dividend declared ($0.205 per share)
(2,483)(2,483)
Common stock issued under dividend reinvestment plan11,297 — 354 354 
Common stock issued, other344 — 11 11 
Stock-based compensation, net61 553 553 
Net settlement for employee taxes on restricted stock and options(1,408)— (46)(46)
Stock options exercised, net1,235 — 27 27 
Balance at September 30, 202212,127,453 $121 $103,007 $264,738 $(95,673)$272,193 
Balance at June 30, 202112,014,933 $120 $98,708 $225,529 $14,960 $339,317 
Net income9,832 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 plan9,192 — 310 310 
Common stock issued, other461 — 15 15 
Stock-based compensation, net(56)— 503 503 
Net settlement for employee taxes on restricted stock and options— — (8)(8)
Stock options exercised, net5,071 — 91 91 
Balance at September 30, 202112,029,601 $120 $99,619 $233,137 $13,664 $346,540 










See the accompanying notes to the unaudited consolidated interim financial statements.

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ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity (continued)
(Unaudited)
Common StockAdditional
Paid-in
Capital		Retained
Earnings		Accumulated
Other
Comprehensive Income/(Loss)		Total
Stockholders'
Equity
(Dollars in thousands, except per share data)SharesAmount
Balance at December 31, 202112,038,382 $120 $100,352 $241,761 $4,662 $346,895 
Net income30,410 30,410 
Other comprehensive loss, net(100,335)(100,335)
Common stock dividend declared ($0.615 per share)
(7,433)(7,433)
Common stock issued under dividend reinvestment plan30,821 — 1,053 1,053 
Common stock issued, other1,195 — 41 41 
Stock-based compensation, net60,345 1 1,785 1,786 
Net settlement for employee taxes on restricted stock and options(9,136)— (332)(332)
Stock options exercised, net5,846 — 108 108 
Balance at September 30, 202212,127,453 $121 $103,007 $264,738 $(95,673)$272,193 
Balance at December 31, 202011,937,795 $119 $97,137 $214,977 $22,193 $334,426 
Net income31,323 31,323 
Cumulative effect adjustment for CECL adoption(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 plan28,499 — 938 938 
Common stock issued, other1,322 — 42 42 
Stock-based compensation, net63,684 1 1,656 1,657 
Net settlement for employee taxes on restricted stock and options(7,803)— (260)(260)
Stock options exercised, net6,104 — 106 106 
Balance at September 30, 202112,029,601 $120 $99,619 $233,137 $13,664 $346,540 
See the accompanying notes to the unaudited consolidated interim financial statements.

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ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
 Nine months ended September 30,
(Dollars in thousands)20222021
Cash flows from operating activities:
Net income$30,410 $31,323 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses3,939 747 
Depreciation and amortization5,292 5,894 
Stock-based compensation expense1,724 1,550 
Income on bank-owned life insurance, net(893)(518)
Net gains on sales of debt securities(1,062)(128)
Mortgage loans originated for sale(1,263)(28,084)
Proceeds from mortgage loans sold1,293 28,837 
Net gains on sales of loans(30)(795)
Net losses (gains) on equity securities688 (154)
Loss on termination of swaps— 1,847 
Changes in:
  Net (increase) decrease in other assets(16,433)1,864 
  Net decrease in other liabilities(3,249)(7,563)
Net cash provided by operating activities20,416 34,820 
Cash flows from investing activities:
Proceeds from sales of debt securities32,715 3,059 
Purchase of debt securities(97,789)(300,660)
Proceeds from maturities, calls and pay-downs of debt securities68,149 64,779 
Net purchases of equity securities(2,718)(541)
Net purchases of FHLB capital stock(179)(259)
Net (increase) decrease in loans(188,758)219,277 
Additions to premises and equipment, net(3,415)(2,665)
Purchase of bank-owned life insurance— (30,000)
Net cash (used in) provided by investing activities(191,995)(47,010)
Cash flows from financing activities:
Net increase in deposits157,799 419,673 
Net (decrease) increase in borrowed funds(2,545)3,826 
Repayment of subordinated debt— (15,600)
Loss on extinguishment of subordinated debt— 713 
Cash dividends paid, net of dividend reinvestment plan(6,380)(5,715)
Proceeds from issuance of common stock41 42 
Net settlement for employee taxes on restricted stock and options(332)(260)
Net proceeds from stock option exercises108 106 
Net cash provided by financing activities148,691 402,785 
Net (decrease) increase in cash and cash equivalents(22,888)390,595 
Cash and cash equivalents at beginning of period436,576 253,782 
Cash and cash equivalents at end of period$413,688 $644,377 
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, 2021 audited consolidated financial statements and notes thereto contained in the 2021 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, 2022 (the "2021 Annual Report on Form 10-K"). The Company has not materially changed its significant accounting policies from those disclosed in its 2021 Annual Report on Form 10-K. See Item (c), "Recent Accounting Pronouncements," below in this Note 1.

The accompanying unaudited consolidated interim financial statements of the Company 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. The services offered through the Bank and its subsidiaries are managed as one strategic unit and represent the Company's only reportable operating segment.

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, 2022 (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 2021 Annual Report on Form 10-K, the most significant areas in which management applies critical assumptions and estimates are: the estimates of the allowance for credit losses ("ACL") for loans and available for sale securities, the reserve for unfunded commitments, and the impairment review of goodwill. Refer to Note 1, "Summary of Significant Accounting Policies," to the Company's audited consolidated financial statements included in the Company's 2021 Annual Report on Form 10-K for accounting policies related to these significant estimates.

(c) Recent Accounting Pronouncements

Accounting pronouncements not yet adopted by the Company
In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. This ASU clarifies the guidance on fair value hedge accounting of interest rate risk for portfolios of financial assets. The ASU amends the guidance in ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, that, among other things, established the "last-of-layer" method for making the fair value hedge accounting for these portfolios more accessible. ASU

9
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
2022-01 renames that method the "portfolio layer" method and addresses feedback from stakeholders regarding its application. For the Company, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently assessing the impact of this ASU and expects that this ASU will not have a material impact to the consolidated financial statements.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the current expected credit loss ("CECL") methodology for estimating allowances for credit losses and enhances the disclosure requirements for loan restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross charge-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. For the Company, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently assessing the impact of this ASU and expects that implementation will not have a material impact to the consolidated financial statements.

Accounting pronouncements adopted by the Company
In August 2021, the FASB issued 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 did not have a material impact on the consolidated financial statements.

(d) Subsequent Events

The Company has evaluated subsequent events and transactions from September 30, 2022, 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, 2022
(Dollars in thousands)Amortized
Cost		Unrealized
Gains		Unrealized
Losses		Fair Value
Federal agency obligations$5,016 $— $6 $5,010 
U.S. treasury securities85,865 — 6,205 79,660 
Federal agency collateralized mortgage obligations ("CMO")446,530 — 66,453 380,077 
Federal agency mortgage-baked securities ("MBS")23,305 — 3,326 19,979 
Taxable municipal securities 286,449 — 44,196 242,253 
Tax-exempt municipal securities85,293 15 1,840 83,468 
Corporate bonds 6,475 — 195 6,280 
Subordinated corporate bonds11,948 — 1,460 10,488 
Total debt securities, at fair value$950,881 $15 $123,681 $827,215 


10
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 December 31, 2021
(Dollars in thousands)Amortized
Cost		Unrealized
Gains		Unrealized
Losses		Fair Value
U.S. treasury securities$62,850 $— $684 $62,166 
Federal agency CMO489,789 5,672 8,748 486,713 
Federal agency MBS22,794 517 417 22,894 
Taxable municipal securities 272,507 5,607 2,264 275,850 
Tax-exempt municipal securities87,024 5,648 — 92,672 
Corporate bonds 8,559 441 — 9,000 
Subordinated corporate bonds7,000 135 — 7,135 
Total debt securities, at fair value$950,523 $18,020 $12,113 $956,430 
At September 30, 2022, management performed its quarterly analysis of all securities with unrealized losses and determined that the losses were primarily attributable to significant increases in market interest rates experienced during the first nine months of 2022. Management concluded that no ACL for available-for-sale securities was necessary as of September 30, 2022 and anticipates they will mature or be called at par value.

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 $4.4 million and $3.2 million at September 30, 2022 and December 31, 2021, respectively.

The following tables summarize the duration of unrealized losses for debt securities at September 30, 2022 and December 31, 2021:
 September 30, 2022
 Less than 12 months12 months or longerTotal
(Dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		# of Holdings
Federal agency obligations$5,011 $6 $— $— $5,011 $6 1 
U.S. treasury securities49,643 2,290 30,017 3,915 79,660 6,205 12 
Federal agency CMO193,638 21,696 186,439 44,757 380,077 66,453 101 
Federal agency MBS10,741 911 9,237 2,415 19,978 3,326 11 
Taxable municipal securities 160,929 25,059 77,625 19,137 238,554 44,196 269 
Tax-exempt municipal securities78,249 1,840 — — 78,249 1,840 128 
Corporate bonds6,279 195 — — 6,279 195 31 
Subordinated corporate bonds6,875 1,073 3,613 387 10,488 1,460 6 
Total$511,365 $53,070 $306,931 $70,611 $818,296 $123,681 559 
 December 31, 2021
 Less than 12 months12 months or longerTotal
(Dollars in thousands)Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		Fair
Value		Unrealized
Losses		# of Holdings
U.S. treasury securities$62,166 $684 $— $— $62,166 $684 9
Federal agency CMO266,313 6,627 51,281 2,121 317,594 8,748 43
Federal agency MBS11,447 417 — — 11,447 417 2 
Taxable municipal securities 117,388 2,023 6,727 241 124,115 2,264 118
Total$457,314 $9,751 $58,008 $2,362 $515,322 $12,113 172 

11
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
The contractual maturity distribution at September 30, 2022 of debt securities was as follows:    
(Dollars in thousands)Amortized CostFair Value
Due in one year or less$13,464 $13,407 
Due after one, but within five years198,843 189,724 
Due after five, but within ten years290,032 248,284 
Due after ten years448,542 375,800 
 Total debt securities
$950,881 $827,215 

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 $159.0 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 $813.0 million and $949.3 million at September 30, 2022 and December 31, 2021, respectively.

The Company had no sales of debt securities during the three months ended September 30, 2022 or September 30, 2021. Sales of debt securities for the nine months ended September 30, 2022 and September 30, 2021 are summarized as follows:     
Nine months ended September 30,
(Dollars in thousands)20222021
Amortized cost of debt securities sold (1)
$31,653 $2,931 
Gross realized gains on sales1,062 128 
Gross realized losses on sales— — 
Total proceeds from sales of debt securities$32,715 $3,059 
_________________________________________
(1)Amortized cost of investments sold is determined on a specific identification basis and includes pending trades based on trade date, if applicable.

Equity Securities

The Company held equity securities with a fair value of $3.8 million at September 30, 2022 and $1.8 million at December 31, 2021. At September 30, 2022, the equity portfolio consisted of investments in broad-based equity index funds and common stock of entities in the financial services industry. The equity portfolio also included 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, 2022 and September 30, 2021 are summarized as follows:
Three months ended September 30,Nine months ended September 30,
(Dollars in thousands)2022202120222021
Net (losses) gains recognized during the period on equity securities $(193)$6 $(688)$154 
Less: Net gains recognized on equity securities sold during the period— — — 6 
Unrealized (losses) gains recognized during the reporting period on equity securities still held at the end of the period (included in other income)$(193)$6 $(688)$148 


12
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
(3)Loans

Loan Portfolio Classifications

Major classifications of loans and their amortized cost as of the dates indicated were as follows:
(Dollars in thousands)September 30,
2022		December 31,
2021
Commercial real estate$1,886,365 $1,680,792 
Commercial and industrial413,347 412,070 
Commercial construction396,027 410,443 
SBA Paycheck Protection Program ("PPP")2,725 71,502 
Total commercial loans2,698,464 2,574,807 
Residential mortgages321,663 256,940 
Home equity loans and lines 80,882 80,467 
Consumer8,360 8,470 
Total retail loans410,905 345,877 
Total loans3,109,369 2,920,684 
ACL for loans(51,211)(47,704)
Net loans$3,058,158 $2,872,980 

Net deferred loan origination fees, included in the amortized costs of loans reflected in the table above, amounted to $5.2 million at September 30, 2022 and $7.5 million at December 31, 2021. Accrued interest receivable on loans amounted to $11.3 million and $10.2 million at September 30, 2022 and December 31, 2021, 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 $90.8 million at September 30, 2022 and $62.6 million at December 31, 2021. See also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.

The Company expects that the remaining principal balance of PPP loans originated by the Company will be forgiven by the Small Business Administration ("SBA") or otherwise repaid as agreed. 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, 2022, has not recorded an ACL on these loans, but will continue to monitor the PPP loan portfolio.

Loans serviced for others

At September 30, 2022 and December 31, 2021, the Company was servicing residential mortgage loans owned by investors amounting to $9.3 million and $10.4 million, respectively. Additionally, the Company was servicing commercial loans originated by the Company and participated out to various other institutions amounting to $59.0 million and $66.7 million at September 30, 2022 and December 31, 2021, 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,
2022		December 31,
2021
Commercial real estate$117,832 $143,056 
Residential mortgages303,189 235,744 
Home equity41,686 5,055 
Total loans pledged to FHLB$462,707 $383,855 


13
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
(4)ACL for Loans

There have been no material changes to the Company's ACL methodology, underwriting practices, or credit risk management system used to estimate credit loss exposure since December 31, 2021. See Note 4, "ACL for Loans," to the Company's audited consolidated financial statements contained in the 2021 Annual Report on Form 10-K. 
Risk ratings and adversely classified loans

The Company's loan risk rating system classifies loans depending on risk of loss characteristics. 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.

The following tables present the amortized cost basis of the Company's loan portfolio risk ratings within portfolio classifications, by origination date, or revolving status as of the dates indicated:
Balance at September 30, 2022
Term Loans by Origination Year
(Dollars in thousands)20222021202020192018PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial real estate
Pass $300,077 $390,986 $197,656 $220,986 $128,316 $612,567 $1,403 $— $1,851,991 
Special mention— 289 — 510 2,828 17,823 — — 21,450 
Substandard— — — 1,440 632 10,852 — — 12,924 
Total commercial real estate300,077 391,275 197,656 222,936 131,776 641,242 1,403 — 1,886,365 
Commercial and industrial
Pass34,275 54,762 33,631 31,057 14,587 47,119 189,114 1,537 406,082 
Special mention— 20 — 12 661 315 2,044 — 3,052 
Substandard— — — 10 134 357 3,674 20 4,195 
Loss— — — — — 18 — — 18 
Total commercial and industrial34,275 54,782 33,631 31,079 15,382 47,809 194,832 1,557 413,347 
Commercial construction
Pass104,498 161,351 55,471 33,510 8,420 3,504 24,521 989 392,264 
Special mention— — — 3,763 — — — — 3,763 
Total commercial construction104,498 161,351 55,471 37,273 8,420 3,504 24,521 989 396,027 
SBA PPP(1)
— 1,132 1,593 — — — — — 2,725 
Residential mortgages
Pass97,484 74,523 50,753 20,965 19,101 56,027 — — 318,853 
Special mention— — — — — 328 — — 328 
Substandard— — — 1,076 — 1,406 — — 2,482 
Total residential mortgages97,484 74,523 50,753 22,041 19,101 57,761 — — 321,663 
Home equity
Pass582 605 469 352 — 1,475 76,032 873 80,388 
Substandard— 274 — — — 220 — — 494 
Total home equity582 879 469 352 — 1,695 76,032 873 80,882 
Consumer
Pass2,819 1,993 1,160 1,179 689 520 — — 8,360 
Total consumer2,819 1,993 1,160 1,179 689 520 — — 8,360 
Total loans $539,735 $685,935 $340,733 $314,860 $175,368 $752,531 $296,788 $3,419 $3,109,369 


14
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
Balance at December 31, 2021
Term Loans by Origination Year
(Dollars in thousands)20212020201920182017PriorRevolving LoansRevolving Loans Converted to TermTotal
Commercial real estate
Pass $402,838 $220,942 $239,248 $120,286 $173,652 $479,298 $3,019 $— $1,639,283 
Special mention— — 989 802 — 7,626 — — 9,417 
Substandard— — 2,628 3,111 12,842 13,336 — — 31,917 
Doubtful— — — 175 — — — — 175 
Total commercial real estate402,838 220,942 242,865 124,374 186,494 500,260 3,019 — 1,680,792 
Commercial and industrial
Pass64,555 40,333 36,177 19,754 14,983 44,835 174,320 1,243 396,200 
Special mention— 644 2,173 958 59 1,431 4,053 18 9,336 
Substandard— — 15 100 25 3,845 2,440 109 6,534 
Total commercial and industrial64,555 40,977 38,365 20,812 15,067 50,111 180,813 1,370 412,070 
Commercial construction
Pass175,069 106,165 54,907 24,343 4,561 19,489 24,864 — 409,398 
Substandard— — — — — — — 1,045 1,045 
Total commercial construction175,069 106,165 54,907 24,343 4,561 19,489 24,864 1,045 410,443 
SBA PPP(1)
66,232 5,270 — — — — — — 71,502 
Residential mortgages
Pass79,130 56,948 27,343 22,743 12,886 55,571 — — 254,621 
Special mention— — — — — 590 — — 590 
Substandard— — — — — 1,729 — — 1,729 
Total residential mortgages79,130 56,948 27,343 22,743 12,886 57,890 — — 256,940 
Home equity
Pass486 478 498 — — 1,727 76,619 414 80,222 
Substandard— — — — — 245 — — 245 
Total home equity486 478 498 — — 1,972 76,619 414 80,467 
Consumer
Pass2,843 1,498 1,619 1,005 617 390 — 473 8,445 
Doubtful25 — — — — — — — 25 
Total consumer2,868 1,498 1,619 1,005 617 390 — 473 8,470 
Total loans $791,178 $432,278 $365,597 $193,277 $219,625 $630,112 $285,315 $3,302 $2,920,684 
__________________________________________
(1)All PPP loans were pass-rated at September 30, 2022 and December 31, 2021, as these loans are 100% guaranteed by the SBA.

The total amortized cost basis of adversely classified loans amounted to $48.7 million, or 1.57% of total loans, at September 30, 2022, and $61.0 million, or 2.09% of total loans, at December 31, 2021.













15
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
Past due and non-accrual loans

The following tables present an age analysis of past due loans by portfolio classification as of the dates indicated:
Balance at September 30, 2022
(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$1,555 $— $1,615 $3,170 $1,883,195 $1,886,365 
Commercial and industrial808 72 201 1,081 412,266 413,347 
Commercial construction294 — — 294 395,733 396,027 
SBA PPP— — — — 2,725 2,725 
Residential mortgages1,122 — 253 1,375 320,288 321,663 
Home equity36 — 73 109 80,773 80,882 
Consumer13 — — 13 8,347 8,360 
Total loans$3,828 $72 $2,142 $6,042 $3,103,327 $3,109,369 
Balance at December 31, 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$1,917 $— $1,719 $3,636 $1,677,156 $1,680,792 
Commercial and industrial564 678 194 1,436 410,634 412,070 
Commercial construction— — — — 410,443 410,443 
SBA PPP162 19 — 181 71,321 71,502 
Residential mortgages182 — 432 614 256,326 256,940 
Home equity45 — — 45 80,422 80,467 
Consumer7 27 — 34 8,436 8,470 
Total loans$2,877 $724 $2,345 $5,946 $2,914,738 $2,920,684 
_______________________________________
(1)The loan balances in the tables above include loans designated as non-accrual according to their payment due status.
At September 30, 2022 and December 31, 2021, all loans past due 90 days or more were carried as non-accrual. In addition, loans that were less than 90 days past due where reasonable doubt existed as to the full and timely collection of interest or principal, have also been designated as non-accrual, despite their payment due status.

The following tables present the amortized cost of non-accrual loans by portfolio classification as of the dates indicated:

Balance at September 30, 2022
(Dollars in thousands)Total Non-accrual LoansNon-accrual Loans without a Specific ReserveNon-accrual Loans with a Specific ReserveRelated Specific
Reserve
Commercial real estate$3,255 $1,949 $1,306 $271 
Commercial and industrial675 403 272 272 
Commercial construction— — — — 
SBA PPP— — — — 
Residential mortgages1,567 1,567 — — 
Home equity 220 220 — — 
Consumer— — — — 
Total loans$5,717 $4,139 $1,578 $543 


16
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
Balance at December 31, 2021
(Dollars in thousands)Total Non-accrual LoansNon-accrual Loans without a Specific ReserveNon-accrual Loans with a Specific ReserveRelated Specific
Reserve
Commercial real estate$22,870 $7,144 $15,726 $896 
Commercial and industrial1,542 1,337 205 185 
Commercial construction1,045 1,045 — — 
SBA PPP— — — — 
Residential mortgages794 633 161 161 
Home equity 246 246 — — 
Consumer25 — 25 25 
Total loans$26,522 $10,405 $16,117 $1,267 

The ratio of non-accrual loans to total loans amounted to 0.18% and 0.91% at September 30, 2022 and December 31, 2021, respectively. The decline in non-accrual loans at September 30, 2022 compared to December 31, 2021 was due primarily to two commercial relationships that were returned to accrual status due to improved financial strength and consistent payment history.

Non-accrual loans that were not adversely classified amounted to $3 thousand at both September 30, 2022 and December 31, 2021. These balances primarily represented the guaranteed portions of non-performing SBA loans.

At September 30, 2022 and December 31, 2021, additional funding commitments for non-accrual loans were not material.

Collateral dependent loans

The carrying value of collateral dependent loans amounted to $26.4 million at September 30, 2022 compared to $34.6 million at December 31, 2021. Total accruing collateral dependent loans amounted to $21.0 million while non-accrual collateral dependent loans amounted to $5.4 million as of September 30, 2022. Total accruing collateral dependent loans amounted to $8.4 million while non-accrual collateral dependent loans amounted to $26.2 million as of December 31, 2021.

The following tables present the recorded investment in collateral dependent individually evaluated loans and the related specific allowance by portfolio allocation as of the dates indicated:

Balance at September 30, 2022
(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$26,411 $23,552 $22,246 $1,306 $271 
Commercial and industrial3,039 678 616 62 4 
Commercial construction— — — — — 
SBA PPP— — — — — 
Residential mortgages2,117 1,953 1,953 — — 
Home equity393 220 220 — — 
Consumer— — — — — 
Total$31,960 $26,403 $25,035 $1,368 $275 

17
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
Balance at December 31, 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$29,562 $27,617 $11,891 $15,726 $896 
Commercial and industrial8,880 4,699 4,191 508 128 
Commercial construction1,181 1,045 1,045 — — 
SBA PPP— — — — — 
Residential mortgages1,165 1,033 1,033 — — 
Home equity347 246 246 — — 
Consumer— — — — — 
Total$41,135 $34,640 $18,406 $16,234 $1,024 
 
At September 30, 2022 and December 31, 2021, additional funding commitments for collateral dependent loans were not material.

Troubled debt restructurings ("TDRs")

Total TDR loans as of September 30, 2022 amounted to $8.6 million compared to $16.4 million as of December 31, 2021. At September 30, 2022 and December 31, 2021, TDR loans on accrual status amounted to $5.8 million and $8.6 million, respectively, and TDR loans included in non-accrual loans amounted to $2.8 million and $7.8 million, respectively.

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.

At September 30, 2022 and September 30, 2021, additional funding commitments for TDR loans were not material.

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, 2022September 30, 2021
(Dollars in thousands)Number of
Restructurings		Pre-modification
Outstanding Recorded
Investment		Post-modification
Outstanding Recorded
Investment		Number of
Restructurings		Pre-modification
Outstanding Recorded
Investment		Post-modification
Outstanding Recorded
Investment
Commercial real estate1 $131 $131 1 $2,690 $2,656 
Commercial and industrial— — — 1 15 14 
Total1 $131 $131 2 $2,705 $2,670 

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, 2022September 30, 2021
(Dollars in thousands)Number of
Restructurings		Pre-modification
Outstanding Recorded
Investment		Post-modification
Outstanding Recorded
Investment		Number of
restructurings		Pre-modification
outstanding recorded
investment		Post-modification
outstanding recorded
investment
Commercial real estate5 $3,319 $2,841 3 $3,591 $3,708 
Commercial and industrial— — — 1 15 14 
Residential mortgages— — — 1 224 224 
Total5 $3,319 $2,841 5 $3,830 $3,946 


18
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
There were no subsequent charge-offs associated with the new TDRs noted in the table above during the nine months ended September 30, 2022 and September 30, 2021.

Payment defaults by portfolio classification, during the three months indicated, on loans modified as TDRs within the preceding twelve months are detailed below:
Three months ended
September 30, 2022September 30, 2021
(Dollars in thousands)Number of TDRs that DefaultedPost-
modification Outstanding
Recorded Investment		Number of TDRs that DefaultedPost-
modification Outstanding
Recorded Investment
Commercial and industrial— — 1 14 
Total— $— 1 $14 

Payment defaults by portfolio classification, during the nine months indicated, on loans modified as TDRs within the preceding twelve months are detailed below:
Nine months ended
September 30, 2022September 30, 2021
(Dollars in thousands)Number of TDRs that DefaultedPost-
modification Outstanding
Recorded Investment		Number of TDRs that defaultedPost-
modification outstanding
recorded investment
Commercial real estate3 $1,325 1 $670 
Commercial and industrial1 45 1 14 
Total4 $1,370 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 periods indicated:
Nine months ended
September 30, 2022September 30, 2021
(Dollars in thousands)Number of
Restructurings		AmountNumber 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 plan3 151 1 14 
Deferral of interest1 1,306 — — 
Other payment concessions1 1,384 1 2,656 
  Total5 $2,841 5 $3,946 
Amount of ACL for loans associated with TDRs listed above$271 $14 

ACL and provision for credit loss activity

The following table presents changes in the provision for credit losses on loans and unfunded commitments during the three and nine-month periods indicated:
Three months endedNine months ended
(Dollars in thousands)September 30,
2022		September 30,
2021		September 30,
2022		September 30,
2021
Provision for credit losses on loans$560 $(653)$3,580 $209 
Provision for unfunded commitments440 681 359 538 
Total provision for credit losses$1,000 $28 $3,939 $747 



19
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
ACL for loans

The ACL for loans amounted to $51.2 million and $47.7 million at September 30, 2022 and December 31, 2021, respectively. The ACL for loans to total loans ratio was 1.65% and 1.63% at September 30, 2022 and December 31, 2021, respectively.

The following tables present changes in the ACL for loans by portfolio classification, during the three months indicated:
(Dollars in thousands)Commercial Real
Estate		Commercial and
Industrial		Commercial ConstructionResidential
Mortgage		Home
Equity		ConsumerTotal
Beginning Balance at June 30, 2022$35,379 $8,938 $3,667 $1,902 $554 $263 $50,703 
Provision for credit losses on loans404 (44)95 74 11 20 560 
Recoveries— 29 — — 2 4 35 
Less: Charge-offs— 82 — — — 5 87 
Ending Balance at September 30, 2022$35,783 $8,841 $3,762 $1,976 $567 $282 $51,211 

(Dollars in thousands)Commercial Real
Estate		Commercial and
Industrial		Commercial ConstructionResidential
Mortgage		Home
Equity		ConsumerTotal
Beginning Balance at June 30, 2021$34,008 $10,800 $3,777 $843 $295 $318 $50,041 
Provision 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 

The following table presents changes in the ACL for loans by portfolio classification, during the nine months indicated:
(Dollars in thousands)Commercial Real
Estate		Commercial and
Industrial		Commercial ConstructionResidential
Mortgage		Home
Equity		ConsumerTotal
Beginning Balance at December 31, 2021$31,847 $9,574 $4,090 $1,405 $465 $323 $47,704 
Provision for credit losses for loans3,936 (680)(328)571 93 (12)3,580 
Recoveries— 139 — — 9 14 162 
Less: Charge-offs— 192 — — — 43 235 
Ending Balance at September 30, 2022$35,783 $8,841 $3,762 $1,976 $567 $282 $51,211 

(Dollars in thousands)Commercial Real
Estate		Commercial and
Industrial		Commercial ConstructionResidential
Mortgage		Home
Equity		ConsumerTotal
Beginning Balance at December 31, 2020$26,755 $9,516 $6,129 $1,530 $467 $168 $44,565 
CECL adjustment upon adoption7,664 1,988 (2,416)(695)(158)177 6,560 
Provision for credit losses for loans(285)156 461 4 (56)(71)209 
Recoveries39 102 — — 67 5 213 
Less: Charge-offs1,825 2,443 — — — 17 4,285 
Ending Balance at September 30, 2021$32,348 $9,319 $4,174 $839 $320 $262 $47,262 

Reserve for unfunded commitments

The Company's reserve for unfunded commitments amounted to $4.1 million at September 30, 2022 and $3.7 million at December 31, 2021. Management believes that the Company's ACL for loans and reserve for unfunded commitments were adequate as of September 30, 2022.

Other real estate owned ("OREO")

The Company carried no OREO at September 30, 2022 and December 31, 2021.


20
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
At September 30, 2022 and December 31, 2021, the Company had no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions.

(5)Leases

As of September 30, 2022, the Company had 16 facilities 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.

Lease expense for the three and nine months ended September 30, 2022 amounted to $397 thousand and $1.2 million, respectively. Lease expense for the three and nine months ended September 30, 2021 amounted to $414 thousand and $1.1 million, respectively. Variable lease costs and short-term lease expenses included in lease expense during these periods were immaterial.

The weighted average remaining lease term for operating leases at September 30, 2022 and September 30, 2021 was 29.7 years and 28.8 years, respectively. The weighted average discount rate was 3.44% at September 30, 2022 and 3.61% at September 30, 2021.

At September 30, 2022, the remaining undiscounted cash flows by year of these lease liabilities were as follows:
(Dollars in thousands)Operating Leases
2022 (three remaining months)$359 
20231,406 
20241,435 
20251,441 
20261,452 
Thereafter32,848 
Total lease payments38,941 
Less: Imputed interest14,921 
Total lease liability$24,020 

(6)Deposits
 
Deposits are summarized as follows as of the periods indicated:
(Dollars in thousands)September 30, 2022December 31, 2021
Non-interest checking$1,441,104 $1,364,258 
Interest-bearing checking719,474 743,587 
Savings351,665 310,244 
Money market1,395,756 1,355,701 
CDs $250,000 or less 163,520 154,403 
CDs greater than $250,00066,519 52,046 
Deposits$4,138,038 $3,980,239 

All of the Company's deposits outstanding at both September 30, 2022 and December 31, 2021 were customer deposits. 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 Federal Deposit Insurance Corporation ("FDIC") deposit 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 $580.6 million and $546.7 million at September 30, 2022 and December 31, 2021, respectively.

21
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
(7)Borrowed Funds and Subordinated Debt

The Company's borrowed funds amounted to $2.9 million and $5.5 million at September 30, 2022 and December 31, 2021, respectively, and were comprised of FHLB advances related to specific lending projects under the FHLB's community development programs.

Borrowed funds at September 30, 2022 and December 31, 2021 are summarized, as follows:
September 30, 2022December 31, 2021
(Dollars in thousands)BalanceRateBalanceRate
Within 12 months$— — %$2,485 0.29 %
Over 5 years2,934 1.71 %2,994 1.70 %
Total borrowed funds$2,934 1.71 %$5,479 1.06 %

The Company also had outstanding subordinated debt (net of deferred issuance costs) of $59.1 million at September 30, 2022 and $59.0 million at December 31, 2021. The outstanding subordinated notes are due on July 15, 2030 and callable at the Company's option on or after July 15, 2025.

(8)    Derivatives and Hedging Activities

See Note 9, "Derivatives and Hedging," to the Company's audited consolidated financial statements contained in the 2021 Annual Report on Form 10-K. 

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, 2022
(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$— $— $7,838 $836 
Interest-rate contracts - pay fixed, receive floating7,838 836 — — 
Total back-to-back interest-rate swaps$7,838 $836 $7,838 $836 

December 31, 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$36,263 $528 $— $— 
Interest-rate contracts - pay fixed, receive floating— — 36,263 528 
Total back-to-back interest-rate swaps$36,263 $528 $36,263 $528 
__________________________________________
(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 or cash flow hedges at either September 30, 2022 or December 31, 2021.

Each back-to-back interest-rate swap consists of two interest-rate swaps (a customer swap and offsetting counterparty swap) and amounted to a total number of 4 interest-rate swaps outstanding at September 30, 2022 and 10 at December 31, 2021. 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, 2022 or September 30, 2021.





22
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
Interest-rate swaps with counterparties are subject to master netting agreements, while interest-rate swaps with customers are not. At September 30, 2022, all the back-to-back swaps with the counterparty were in asset positions and at December 31, 2021, all the back-to-back swaps with the counterparty were in liability positions, therefore there was no netting reflected in the Company's Consolidated Balance Sheets as of the respective dates.
Credit Risk

The Company had one interest-rate swap counterparty that was rated A and A2 by Standard & Poor's and Moody's, respectively, at September 30, 2022. When the Company has credit risk exposure, collateral is posted by the counterparty. Collateral posted by counterparties 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 restricted cash is carried on the Company's Consolidated Balance Sheets. The Company had credit risk exposure relating to interest-rate swaps with counterparties of $836 thousand and counterparties posted cash collateral of $712 thousand at September 30, 2022. At December 31, 2021 the Company had no credit risk exposure relating to interest-rate swaps with counterparties and posted restricted cash collateral of $840 thousand.

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

There have been no material changes to the credit-risk-related contingent provisions contained within the Company's interest-rate swaps with counterparties since December 31, 2021.

As of September 30, 2022, the fair value of derivatives related to these agreements was at a net asset position of $836 thousand, which excludes any adjustment for nonperformance risk. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and as of September 30, 2022, has not posted collateral related to these agreements.

Other Derivative Related Activity

At both September 30, 2022 and December 31, 2021, the Company had one participation loan where the originating bank utilizes a back-to-back interest-rate swap structure. At September 30, 2022, 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.

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. At September 30, 2022 and December 31, 2021, 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, 2022 and December 31, 2021, 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.

23
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, 2022 and December 31, 2021 in the tables below:
 Actual
Minimum Capital
for Capital
Adequacy
Purposes(1)
Minimum Capital
to be
Well
Capitalized(2)
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
As of September 30, 2022      
The Company      
Total Capital to risk-weighted assets ("RWA")$464,515 13.49 %$275,536 8.00 %N/AN/A
Tier 1 Capital to RWA362,210 10.52 %206,652 6.00 %N/AN/A
Tier 1 Capital to average assets ("AA") or Leverage Ratio362,210 7.89 %183,517 4.00 %N/AN/A
Common Equity Tier 1 Capital to RWA362,210 10.52 %154,989 4.50 %N/AN/A
The Bank      
Total Capital to RWA$464,330 13.48 %$275,535 8.00 %$344,419 10.00 %
Tier 1 Capital to RWA421,127 12.23 %206,652 6.00 %275,535 8.00 %
Tier 1 Capital to AA, Leverage Ratio421,127 9.18 %183,517 4.00 %229,396 5.00 %
Common Equity Tier 1 Capital to RWA421,127 12.23 %154,989 4.50 %223,873 6.50 %
 Actual
Minimum Capital
for Capital
Adequacy
Purposes(1)
Minimum Capital
to be
Well
Capitalized(2)
(Dollars in thousands)AmountRatioAmountRatioAmountRatio
As of December 31, 2021      
The Company      
Total Capital to RWA$435,328 13.73 %$253,610 8.00 %N/AN/A
Tier 1 Capital to RWA336,577 10.62 %190,208 6.00 %N/AN/A
Tier 1 Capital to AA, Leverage Ratio336,577 7.56 %177,978 4.00 %N/AN/A
Common Equity Tier 1 Capital to RWA336,577 10.62 %142,656 4.50 %N/AN/A
The Bank      
Total Capital to RWA$434,430 13.70 %$253,610 8.00 %$317,013 10.00 %
Tier 1 Capital to RWA394,658 12.45 %190,208 6.00 %253,610 8.00 %
Tier 1 Capital to AA, Leverage Ratio394,658 8.87 %177,978 4.00 %222,473 5.00 %
Common Equity Tier 1 Capital to RWA394,658 12.45 %142,656 4.50 %206,058 6.50 %
__________________________________________
(1)Before application of the capital conservation buffer of 2.50% as of September 30, 2022, and December 31, 2021. 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. 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, 2022.








24
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
(10)Comprehensive Income (Loss)

The following table presents a reconciliation of the changes in the components of other comprehensive income (loss) for the dates indicated, including the amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss):
Three months ended September 30, 2022Three months ended September 30, 2021
(Dollars in thousands)Pre-TaxTax BenefitAfter Tax AmountPre-TaxTax (Expense)After Tax Amount
Change in fair value of debt securities$(30,133)$6,838 $(23,295)$(3,401)$772 $(2,629)
Less: net security gains reclassified into non-interest income— — — — — — 
Net change in fair value of debt securities(30,133)6,838 (23,295)(3,401)772 (2,629)
Change in fair value of cash flow hedges— — — (1,061)299 (762)
Less: net cash flow hedges losses reclassified into income— — — (2,915)820 (2,095)
Net change in fair value of cash flow hedges— — — 1,854 (521)1,333 
Total other comprehensive (loss) income, net$(30,133)$6,838 $(23,295)$(1,547)$251 $(1,296)

Nine months ended September 30, 2022Nine months ended September 30, 2021
(Dollars in thousands)Pre-TaxTax Benefit (Expense)After Tax AmountPre-TaxTax Benefit (Expense)After Tax Amount
Change in fair value of debt securities$(128,511)$29,004 $(99,507)$(13,453)$3,000 $(10,453)
Less: net security gains reclassified into non-interest income1,062 (234)828 128 (29)99 
Net change in fair value of debt securities(129,573)29,238 (100,335)(13,581)3,029 (10,552)
Change in fair value of cash flow hedges— — — 378 (106)272 
Less: net cash flow hedges losses reclassified into income— — — (2,436)685 (1,751)
Net change in fair value of cash flow hedges— — — 2,814 (791)2,023 
Total other comprehensive income (loss), net$(129,573)$29,238 $(100,335)$(10,767)$2,238 $(8,529)

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, 2022Three months ended September 30, 2021
(Dollars in thousands)Unrealized Gains (Losses) on Debt SecuritiesUnrealized Gains (Losses) on Cash Flow HedgesTotalUnrealized Gains (Losses) on Debt SecuritiesUnrealized Gains (Losses) on Cash Flow HedgesTotal
Accumulated other comprehensive (loss) income - beginning balance$(72,378)$— $(72,378)$16,293 $(1,333)$14,960 
Total other comprehensive loss, net(23,295)— (23,295)(2,629)1,333 (1,296)
Accumulated other comprehensive (loss) income - ending balance$(95,673)$— $(95,673)$13,664 $— $13,664 

25
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
Nine months ended September 30, 2022Nine months ended September 30, 2021
(Dollars in thousands)Unrealized Gains (Losses) on Debt SecuritiesUnrealized Gains (Losses) on Cash Flow HedgesTotalUnrealized Gains (Losses) on Debt SecuritiesUnrealized Gains (Losses) on Cash Flow HedgesTotal
Accumulated other comprehensive (loss) income - beginning balance$4,662 $— $4,662 $24,216 $(2,023)$22,193 
Total other comprehensive loss, net(100,335)— (100,335)(10,552)2,023 (8,529)
Accumulated other comprehensive (loss) income - ending balance$(95,673)$— $(95,673)$13,664 $— $13,664 

(11)Stock-Based Compensation
 
There have been no material changes to the Company's Stock-Based Compensation Plan since December 31, 2021. As of September 30, 2022, 437,012 shares of Company common stock remained available for future grants under the 2016 plan.

Total stock-based compensation expense was $609 thousand and $1.7 million for the three and nine months ended September 30, 2022, respectively, compared to $559 thousand and $1.6 million for the three and nine months ended September 30, 2021, respectively.

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,
 20222021
Options granted17,06017,580
Term in years1010
Weighted average assumptions used in the fair value model:
Expected volatility44 %44 %
Expected dividend yield3.05 %3.01 %
Expected life in years6.56.5
Risk-free interest-rate2.20 %1.28 %
Weighted average market price on date of grants$38.57$32.73
Per share weighted average fair value$14.40$11.95
Fair value as a percentage of market value at grant date37 %36 %
Options granted during the first nine months of 2022 and 2021 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 $53 thousand and $153 thousand for the three and nine months ended September 30, 2022, respectively, compared to $48 thousand and $140 thousand for the three and nine months ended September 30, 2021, 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.

26
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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)20222021
Two-year vesting8,823 8,109 
Four-year vesting 22,116 24,307 
Performance-based vesting 22,254 21,559 
Total restricted stock awards granted53,193 53,975 
Weighted average grant date fair value$38.57 $32.73 

Stock-based compensation expense recognized in association with stock awards, mainly restricted stock awards, amounted to $500 thousand and $1.4 million for the three and nine months ended September 30, 2022, respectively, compared to $455 thousand and $1.2 million for the three and nine months ended September 30, 2021, respectively.

Stock in Lieu of Directors' Fees

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 meetings of the Board and committees of the Board. Stock-based compensation expense related to these directors' fees amounted to $56 thousand and $190 thousand for the three and nine months ended September 30, 2022, respectively, compared to $56 thousand and $179 thousand for the three and nine months ended September 30, 2021, respectively.

(12)Earnings per Share
 
The table below presents basic earnings per share and 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,
 2022202120222021
Basic weighted average common shares outstanding12,119,348 12,022,610 12,094,613 11,997,199 
Dilutive shares37,347 42,490 48,855 41,362 
Diluted weighted average common shares outstanding12,156,695 12,065,100 12,143,468 12,038,561 

There were 49,321 and 34,473 stock options outstanding for the three and nine months ended September 30, 2022, respectively, that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for those periods. 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 the respective periods. These stock options, which were not dilutive, may potentially dilute earnings per share in the future.

Unvested participating restricted awards amounted to 120,728 shares and 113,871 shares as of September 30, 2022 and December 31, 2021, respectively.

(13)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.





27
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, 2022
 Fair Value Measurements Using:
(Dollars in thousands)Fair Value(Level 1)(Level 2)(Level 3)
Assets measured on a recurring basis:    
Debt securities$827,215 $— $827,215 $— 
Equity securities3,815 3,815 — — 
FHLB stock2,343 — 2,343 — 
Interest-rate swaps836 — 836 — 
Assets measured on a non-recurring basis:    
Individually evaluated loans (collateral dependent)1,093 — — 1,093 
Liabilities measured on a recurring basis:
Interest-rate swaps$836 $— $836 $— 
 
December 31, 2021
 Fair Value Measurements Using:
(Dollars in thousands)Fair Value(Level 1)(Level 2)(Level 3)
Assets measured on a recurring basis:    
Debt securities$956,430 $— $956,430 $— 
Equity securities1,785 1,785 — — 
FHLB stock2,164 — 2,164 — 
Interest-rate swaps528 — 528 — 
Assets measured on a non-recurring basis:    
Individually evaluated loans (collateral dependent)15,210 — — 15,210 
Liabilities measured on a recurring basis:
Interest-rate swaps$528$— $528 $— 
 
The Company utilizes third-party pricing vendors to provide valuations on its debt securities.

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. 

The fair values for the interest-rate swap assets and liabilities, which is comprised of back-to-back swaps, represent a FASB Level 2 measurement and are based on settlement values adjusted for credit risks and observable market interest-rate curves. 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.

28
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 $275 thousand at September 30, 2022, compared to $1.0 million at December 31, 2021.

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, 2022 and December 31, 2021:
Fair Value
(Dollars in thousands)September 30, 2022December 31, 2021Valuation TechniqueUnobservable InputUnobservable Input Value or Range
Assets measured on a non-recurring basis:
Individually evaluated loans (collateral dependent)$1,093 $15,210 Appraisal of collateral
Appraisal adjustments(1)
15% - 50%
__________________________________________
(1)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

Estimated Fair Values of Assets and Liabilities

In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the Consolidated Balance 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, 2022
Fair Value Measurement
(Dollars in thousands)Carrying
Value		Fair ValueLevel 1 InputsLevel 2 InputsLevel 3 Inputs
Financial assets:  
Loans, net$3,058,158 $2,903,850 $— $— $2,903,850 
Financial liabilities:  
CDs230,039 225,366 — 225,366 — 
Borrowed funds2,934 1,916 — 1,916 — 
Subordinated debt59,102 56,809 — 56,809 — 

December 31, 2021
 Fair Value Measurement
(Dollars in thousands)Carrying
Value		Fair ValueLevel 1 InputsLevel 2 InputsLevel 3 Inputs
Financial assets:  
Loans, net$2,872,980 $2,922,947 $— $— $2,922,947 
Financial liabilities:
CDs206,449 206,450 — 206,450 — 
Borrowed funds5,479 5,121 — 5,121 — 
Subordinated debt58,979 58,460 — 58,460 — 


29
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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.

(14)Supplemental Cash Flow Information

The supplemental cash flow information for the nine months ended September 30, 2022 and September 30, 2021 is as follows:
Nine months ended September 30,
(Dollars in thousands)20222021
Supplemental financial data:
Cash paid for: interest$5,960 $7,198 
Cash paid for: income taxes13,101 11,074 
Cash paid for: lease liability1,021 912 
Supplemental schedule of non-cash activity:
Net purchases of investment securities not yet settled3,700 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..

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Table of Contents
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, 2022 (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, 2021 (the "2021 Annual Report on Form 10-K") as filed with the Securities and Exchange Commission (the "SEC") on March 10, 2022.

Throughout this Management Discussion & Analysis, certain measures have been adjusted to provide what management believes are more meaningful comparisons between periods. The items principally impacted and reported as non-GAAP were loans (PPP loans), liquidity (interest-earning deposits with banks), shareholders' equity (accumulated other comprehensive income ("AOCI")), and any related measures presented. See "Non-GAAP Measures" below for additional information on the non-GAAP measures of the Company's performance.

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. We caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:

•the impact, duration and severity of the ongoing COVID-19 pandemic ("pandemic"), and any current or future variants thereof, and the Company's participation in and execution of government programs related to the pandemic;
•failure of risk management controls and procedures;
•the adequacy of the allowance for credit losses;
•risk specific to commercial loans and borrowers;
•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;
•the uncertain inflationary outlook in the United States and our market areas, and its impact on market interest rates, the economy and credit quality;
•deterioration of capital markets, which 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;
•changes in market interest rates could negatively impact net interest income;
•increases in market interest rates could negatively impact bond market values and result in a lower net book value;
•our ability to successfully manage the current rising market interest-rate environment, our credit risk and the level of future non-performing assets and charge-offs;
•potential decreases or growth of assets, deposits, future non-interest expenditures and non-interest income;
•our ability to maintain adequate liquidity and to raise necessary capital to fund our operations or to meet minimum regulatory capital levels;
•material decreases in the amount of deposits we hold, or a failure to grow our deposit base as necessary to help fund our growth and operations;
•changes in market interest rates that affect the pricing of our loans and deposits and our net interest income, as well as the potential discontinuance of London Interbank Offer Rate ("LIBOR") and the uncertainty around its replacement;

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Table of Contents
•our ability to keep pace with technological change or difficulties when implementing new technologies;
•technology-related risk, including technological changes and technology service interruptions or failure could adversely impact the Company's operations and increase technology-related expenditures;
•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;
•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;
•our ability to retain and increase our aggregate assets under management;
•our ability to enter new markets successfully and capitalize on growth opportunities, including the receipt of required regulatory approvals;
•damage to our reputation in the markets we serve;
•risks associated with fraudulent, negligent, or other acts by our customers, employees or vendors;
•exposure to legal claims and litigation;
•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;
•our ability to maintain an effective system of disclosure controls and procedures and internal control over financial reporting;
•our ability to attract, hire and retain qualified management personnel;
•recent and future 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, which could cause the Company to incur additional costs and adversely affect the Company's business environment, operations and financial results;
•future regulatory compliance costs, including any increase caused by new regulations imposed by the government;
•changes in tariffs and trade barriers;
•our ability to navigate the uncertain impacts of current and future governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve");
•our ability to comply with supervisory actions by federal and state banking agencies;
•changes in the scope and cost of Federal Deposit Insurance Corporation (the "FDIC") insurance and other coverage;
•changes in accounting and/or auditing standards, policies and practices, as may be adopted or established by the regulatory agencies, FASB, or the Public Company Accounting Oversight Board could negatively impact the Company's financial results; and
•systemic risks associated with the soundness of other financial institutions.

The Company cautions readers that the forward-looking statements in this Form 10-Q reflect numerous assumptions that management believes to be reasonable, but which are inherently uncertain and beyond the Company's control. Forward-looking statements involve a number of risks and uncertainties that could cause the Company's actual results to differ materially from those expressed in, or implied by, the forward-looking statement. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and readers should not place undue reliance on such forward-looking information and statements. 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.



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Overview

Executive Summary

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, including digital evolution, and both new and existing branches.

Our financial condition at September 30, 2022, as well as the three and nine month results for the periods ended September 30, 2022, have been impacted by significant increases in interest rates resulting from the high inflationary environment and the related 300 basis point increase in the federal funds rate by the Federal Reserve Bank. The impact is addressed as applicable throughout this Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Net income for the three months ended September 30, 2022, amounted to $12.0 million, or $0.98 per diluted common share, compared to $9.8 million, or $0.81 per diluted common share, for the three months ended September 30, 2021. The increase was attributable primarily to increases in net interest income of $3.9 million and non-interest income of $1.4 million, partially offset by increases in the provision for credit losses of $972 thousand and non-interest expense of $1.8 million. Net income for the three months ended September 30, 2021, was impacted by a loss of $1.8 million on the termination of swaps used in hedging activities.

Net income for the nine months ended September 30, 2022, amounted to $30.4 million, or $2.50 per diluted common share, compared to $31.3 million, or $2.60 per diluted common share, for the nine months ended September 30, 2021. The decrease was attributable primarily to increases in the provision for credit losses of $3.2 million and non-interest expense of $4.5 million, partially offset by increases in net interest income of $3.7 million and non-interest income of $2.1 million. Significant items impacting net income for the nine months ended September 30, 2022, compared to the nine months ended September 30, 2021, include, a decrease in PPP income, of $14.0 million, and an increase in gains on sales of debt securities, of $934 thousand. The results for the nine months ended September 30, 2021, were impacted by a loss on the extinguishment of subordinated debt and the termination of swaps of $713 thousand and $1.8 million, respectively, both of which were included in non-interest expense, are considered infrequent in nature and did not occur during the nine months ended September 30, 2022.

Total assets amounted to $4.53 billion at September 30, 2022, compared to $4.45 billion at December 31, 2021. Investment securities at fair value declined $127.2 million during the nine months ended September 30, 2022, primarily from a decline in the fair value of debt securities due to the significant increase in market interest rates during the period. Total loans increased $188.7 million consisting of an increase in core loans (non-GAAP) of $257.5 million and a decrease in PPP loans of $68.8 million. Total core loans (non-GAAP) increased 15% versus a year ago, resulting from high customer demand and strong business development efforts.

The non-performing loan to total core loan ratio (non-GAAP) decreased to 0.18% at September 30, 2022 from 0.21% at June 30, 2022 and 1.03% at September 30, 2021. The improvement in the second quarter of 2022 resulted primarily from two commercial relationships that were returned to accrual status due to improved financial strength and consistent payment history.

During the nine months ended September 30, 2022, customer deposits increased $157.8 million, and shareholders’ equity decreased $74.7 million, the latter of which was due primarily to the decrease in the fair value of debt securities held in the Company's securities portfolio due to the significant increase in market interest rates during the period, net of tax.












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Selected Financial Data and Ratios

The following table sets forth selected financial data and ratios for the Company at or for the three month periods indicated :

At or for the three months ended
(Dollars in thousands, except per share data)September 30,
2022		June 30, 2022March 31, 2022December 31,
2021		September 30,
2021
Balance Sheet Data
Total cash and cash equivalents$413,688$306,460$429,687$436,576$644,377
Total investment securities at fair value831,030866,580910,013958,215819,222
Total loans3,109,3693,084,9152,962,7212,920,6842,848,110
Allowance for credit losses(51,211)(50,703)(48,424)(47,704)(47,262)
Total assets4,529,8204,417,4474,454,4744,447,8194,451,432
Total deposits4,138,0384,016,8144,034,5003,980,2393,970,936
Subordinated debt59,10259,03959,00958,97958,949
Total shareholders' equity272,193285,110310,539346,895346,540
Total liabilities and shareholders' equity4,529,8204,417,4474,454,4744,447,8194,451,432
Wealth Management
Wealth assets under management$835,661$849,536$961,491$1,041,409$966,180
Wealth assets under administration$185,977$205,646$243,247$257,867$235,002
Shareholders' Equity Ratios
Book value per common share$22.44$23.53$25.66$28.82$28.81
Dividends paid per common share$0.205$0.205$0.205$0.185$0.185
Regulatory Capital Ratios
Total capital to risk weighted assets13.49 %13.38 %13.72 %13.73 %14.16 %
Tier 1 capital to risk weighted assets(1)
10.52 %10.38 %10.65 %10.62 %10.94 %
Tier 1 capital to average assets7.89 %8.03 %7.83 %7.56 %7.42 %
Credit Quality Data
Non-performing loans$5,717$6,321$25,173$26,522$27,835
Other real estate owned————2,400
Non-performing assets$5,717$6,321$25,173$26,522$30,235
Non-performing loans to total loans0.18 %0.20 %0.85 %0.91 %0.98 %
Non-performing assets to total assets0.13 %0.14 %0.57 %0.60 %0.68 %
ACL for loans to total loans1.65 %1.64 %1.63 %1.63 %1.66 %
ACL for loans to total core loans (non-GAAP)(2)
1.65 %1.65 %1.65 %1.67 %1.75 %
Income Statement Data
Net interest income$39,779$35,821$34,033$35,655$35,879
Provision for credit losses1,0002,4095301,02328
Total non-interest income4,5254,1325,5955,9773,079
Total non-interest expense27,53726,85325,75726,52625,769
Income before income taxes15,76710,69113,34114,08313,161
Provision for income taxes3,8052,5303,0543,2353,329
Net income$11,962$8,161$10,287$10,848$9,832
Income Statement Ratios
Diluted earnings per common share$0.98$0.67$0.85$0.90$0.81
Return on average total assets1.05 %0.76 %0.95 %0.97 %0.88 %
Return on average shareholders' equity16.47 %11.24 %12.56 %12.56 %11.30 %
Net interest margin (tax-equivalent)(3)
3.61 %3.45 %3.28 %3.34 %3.39 %
_______________________________________________________
(1)Ratio also represents common equity tier 1 capital to risk weighted assets as of the periods presented.
(2)See non-GAAP measures table below for PPP-adjusted balances referred to as core.
(3)Tax-equivalent net interest margin is net interest income adjusted for the tax-equivalent effect associated with tax-exempt loan and investment income, expressed as a percentage of average interest-earning assets.

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Non-GAAP Measures

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with GAAP. However, certain financial measures we present are supplemental measures that are not required by or are not presented in accordance with GAAP, which we refer to as "non-GAAP" measures. We refer to any measure that excludes PPP loans as "core" and any measure that excludes PPP loans and interest-earning deposits with banks as "adjusted." The activities which resulted in the Company's use of non-GAAP measures consist of: (1) the Company's origination of over $717 million in short-term PPP loans between April 2020 and May 2021; (2) forgiveness of PPP loans by the SBA which began in November 2020 and continued through September 30, 2022; (3) liquidity, carried as lower-yielding interest-earning deposits with banks, had increased significantly following the trends in customer deposits and PPP loan forgiveness by the SBA over the past two years; and (4) the significant increase in market interest rates during the first nine months of 2022 has resulted in unrealized losses in the Company's available-for-sale debt securities portfolio at September 30, 2022 of $123.7 million and an accumulated other comprehensive loss, included in shareholder's equity, of $95.7 million at September 30, 2022.

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; therefore, these measures may not be comparable to other similarly titled measures as presented by other companies.

The following tables summarize the reconciliation of GAAP to non-GAAP measures related to the impact of PPP loans on total loans and loan interest income:
(Dollars in thousands)September 30,
2022		December 31,
2021		September 30,
2021
Total Core Loans
Total loans $3,109,369 $2,920,684 $2,848,110 
Adjustment: PPP loans(2,725)(71,502)(148,240)
Total core loans (non-GAAP)$3,106,644 $2,849,182 $2,699,870 
Three months endedNine months ended
September 30,September 30,
(Dollars in thousands)2022202120222021
Loan Income Excluding PPP Income
Loan income$35,306 $33,420 $98,149 $100,730 
Adjustment: PPP income(437)(4,898)(2,537)(16,495)
Loan income excluding PPP income (non-GAAP)$34,869 $28,522 $95,612 $84,235 
Net Interest Income Excluding PPP Income
Net interest income$39,779 $35,879 $109,633 $105,901 
Adjustment: PPP income(437)(4,898)(2,537)(16,495)
Net interest income excluding PPP income (non-GAAP)$39,342 $30,981 $107,096 $89,406 









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The following tables summarize the reconciliation of GAAP to non-GAAP measures related to the impact of PPP loans and interest-earning deposits with banks on net interest margin:
Three months endedNine months ended
(Dollars in thousands)September 30,
2022		September 30,
2021		September 30,
2022		September 30,
2021
Adjusted Average Interest-Earning Assets   
Total average interest-earning assets$4,415,494$4,250,266$4,287,616$4,108,528
Adjustment: Average PPP loans, net(7,161)(223,611)(26,543)(361,924)
Adjustment: Average interest-earning deposits with banks(372,871)(675,746)(322,045)(488,181)
Total adjusted average interest-earning assets (non-GAAP)$4,035,462$3,350,909$3,939,028$3,258,423
Adjusted Net Interest Income
Net interest income (tax equivalent)$40,126$36,231$110,665$106,970
Adjustment: PPP income(437)(4,898)(2,537)(16,495)
Adjustment: Interest on interest-earning deposits with banks(2,037)(254)(2,588)(458)
Adjusted net interest income (tax equivalent) (non-GAAP)$37,652$31,079$105,540$90,017
Adjusted Net Interest Margin
Net interest margin (tax equivalent)3.61 %3.39 %3.45 %3.48 %
Adjustment: PPP effect(1)
(0.03)%(0.30)%(0.06)%(0.25)%
Adjustment: Interest-earning deposits with banks effect(2)
0.13 %0.59 %0.19 %0.46 %
Adjusted net interest margin (tax equivalent) (non-GAAP)3.71 %3.68 %3.58 %3.69 %
____________________________________________________
(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 net 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 net interest income.
The following tables summarize the reconciliation of GAAP to non-GAAP measures related to the impact of AOCI on the Company's reported book value per common share and return on average shareholders' equity:
At or for the three months ended
(Dollars in thousands, except per share data)September 30,
2022		December 31,
2021
Shareholders' Equity
Total shareholders' equity (as reported)$272,193$346,895
Less: accumulated other comprehensive (loss) income(95,673)4,662
Shareholders' equity excluding AOCI (non-GAAP)$367,866$342,233
Book Value Per Common Share
Book value per common share (as reported)$22.44$28.82
Book value per common share excluding AOCI (non-GAAP)$30.33$28.43
Average Shareholders' Equity
Total average shareholders' equity (as reported)$288,122$342,635
Less: average accumulated other comprehensive (loss) income(78,257)3,585
Average shareholders' equity excluding AOCI (non-GAAP)$366,379$339,050
Return on Average Shareholders' Equity
Return on average shareholders' equity (as reported)16.47 %12.56 %
Return on average shareholders' equity excluding AOCI (non-GAAP)12.95 %12.69 %


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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 2021 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 2021 Annual Report on Form 10-K.

Accounting Policies/Critical Accounting Estimates

As discussed in the Company's 2021 Annual Report on Form 10-K and in this Form 10-Q, the most significant areas in which management applies critical assumptions and estimates are: the estimates of the ACL for loans and available-for-sale securities, the reserve for unfunded commitments and the impairment review of goodwill.

The Company has not materially changed its significant accounting and reporting policies from those disclosed in its 2021 Annual Report on Form 10-K.

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.

Results of Operations for the three months ended September 30, 2022 and September 30, 2021
 
Unless otherwise indicated, the reported results are for the three months ended September 30, 2022 with the "prior year period" being the three months ended September 30, 2021. Average yields are presented on an annualized tax equivalent basis.

Net Income
Net income for the three months ended September 30, 2022, amounted to $12.0 million, an increase of $2.1 million, or 22%, compared to the prior year period.
•The increase in net income was due primarily to increases in net interest income of $3.9 million and non-interest income of $1.4 million, partially offset by increases in the provision for credit losses of $972 thousand and non-interest expense of $1.8 million.
•Non-interest income for the prior year quarter was impacted by a loss of $1.8 million on the termination of swaps used in hedging activities. Excluding this charge, non-interest income decreased $402 thousand compared to the prior year quarter.

Net Interest Income
Net interest income for the three months ended September 30, 2022, amounted to $39.8 million, an increase of $3.9 million, or 11%, compared to the three months ended September 30, 2021.
•The increase in net interest income was due largely to increases in loan income excluding PPP income (non-GAAP), of $6.3 million, investment securities income of $835 thousand, and other interest-earning asset income of $1.8 million, partially offset by a decrease in PPP income of $4.5 million and an increase in deposit interest expense of $598 thousand.
•PPP income amounted to $437 thousand for the three months ended September 30, 2022, compared to $4.9 million for the three months ended September 30, 2021. PPP loans outstanding amounted to $2.7 million at September 30, 2022, compared to $148.2 million at September 30, 2021. The decline in balance outstanding was due to the continued forgiveness of PPP loans by the SBA during the period.

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Table of Contents
Net Interest Margin
Tax-equivalent net interest margin ("net interest margin") was 3.61% for the three months ended September 30, 2022, compared to 3.45% and 3.39% for the three months ended June 30, 2022 and September 30, 2021, respectively.
Key items impacting net interest margin for the three months ended September 30, 2022, compared to the prior year period, included:
•Average interest-earning deposits with banks decreased $302.9 million, or 45%, while the yield increased 202 basis points. The decrease in average balance resulted primarily from the funding of growth in the Company's investment and core loan portfolios, partially offset by funds received from the forgiveness of PPP loans by the SBA. The increase in yield reflected the 300 basis point increase in the federal funds rate during the first nine months 2022.
•Average investment securities at fair value increased $274.2 million, or 40%, while the tax-equivalent yield decreased 35 basis points. The changes in average balance and yield resulted primarily from investment security purchases in the second half of 2021 when market interest rates were lower than the portfolio yield at that time.
•Average loans increased $193.7 million, or 7%, while the tax-equivalent yield decreased 4 basis points.
◦Average PPP loans outstanding decreased $216.5 million, or 97%, due to the continued forgiveness of PPP loans by the SBA during the period.
◦Average core loans (non-GAAP) increased $410.2 million, or 15%, and the yield increased 25 basis points. The increase in average balance resulted primarily from growth in the commercial and residential real estate portfolios. Core loan yields in the current quarter have benefited primarily from the 300 basis point increase in the prime lending rate during the first nine months of 2022 and to a lesser extent higher market interest rates over the respective prior year period.

•Average total deposits increased $153.9 million, or 4%, and the yield increased 5 basis points. The increase in yield reflected higher market rates in 2022.

Adjusted net interest margin (non-GAAP), which excludes PPP loans and interest-earning deposits with banks, was 3.71% for the three months ended September 30, 2022, compared to 3.55% and 3.68% for the three months ended June 30, 2022 and September 30, 2021, respectively.
•The 16 basis point increase from the three months ended June 30, 2022 to the three months ended September 30, 2022 reflected primarily an increase in loan yields from increases in the prime lending and to a lesser extent higher market interest rates on fixed rate loan originations which collectively exceeded increases in deposit costs.
•The 13 basis point decrease from September 30, 2021 to June 30, 2022 reflected primarily significant growth in investment securities and fixed rate loans at market interest rates which were below portfolio yields, partially offset by a decrease in the cost of deposits.

Refer to the June 30, 2022 10-Q for further disclosure on the calculation of adjusted margin for the respective period.
Interest-rate risk is reviewed in detail in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.















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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, 2022, compared to the three months ended September 30, 2021. 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		VolumeRate
Interest income   
Loans and loans held for sale (tax-equivalent)$1,882 $1,990 $(108)
Investment securities (tax-equivalent)834 1,489 (655)
Other interest-earning assets(1)
1,806 (164)1,970 
Total interest-earning assets (tax-equivalent)4,522 3,315 1,207 
Interest expense   
Interest checking, savings and money market694 19 675 
Certificates of deposit56 4 52 
Brokered CDs(152)(76)(76)
Borrowed funds(4)(16)12 
Subordinated debt33 2 31 
Total interest-bearing funding627 (67)694 
Change in net interest income (tax-equivalent)$3,895 $3,382 $513 
__________________________________________
(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, 2022 and 2021:

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

 Three months ended September 30, 2022Three months ended September 30, 2021
(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)
$3,085,896 $35,422 4.56 %$2,892,192 $33,540 4.60 %
Investment securities(3) (tax equivalent)
954,385 4,959 2.08 %680,164 4,125 2.43 %
Other interest-earning assets(4)
375,213 2,068 2.19 %677,910 262 0.15 %
Total interest-earnings assets (tax equivalent)4,415,494 42,449 3.82 %4,250,266 37,927 3.54 %
Other assets101,095 181,826   
Total assets$4,516,589   $4,432,092   
Liabilities and stockholders' equity:      
Interest checking, savings and money market$2,444,705 1,045 0.17 %$2,327,826 351 0.06 %
CDs221,827 415 0.74 %219,375 359 0.65 %
Brokered deposits— — — %33,424 152 1.80 %
Borrowed funds2,940 13 1.77 %8,606 17 0.80 %
Subordinated debt(5)
59,052 850 5.76 %58,931 817 5.55 %
Total interest-bearing funding2,728,524 2,323 0.34 %2,648,162 1,696 0.26 %
Non-interest checking1,449,909 — — %1,381,939 — — %
Total deposits, borrowed funds and subordinated debt4,178,433 2,323 0.22 %4,030,101 1,696 0.17 %
Other liabilities50,034 56,746  
Total liabilities4,228,467  4,086,847  
Stockholders' equity288,122 345,245  
Total liabilities and stockholders' equity$4,516,589  $4,432,092  
Net interest-rate spread (tax equivalent)  3.48 %  3.28 %
Net interest income (tax equivalent) 40,126  36,231 
Net interest margin (tax equivalent)  3.61 %  3.39 %
Less tax equivalent adjustment347 352 
Net interest income$39,779 $35,879 
Net interest margin3.58 %3.35 %
________________________________________
(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 2022 and 2021, 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, federal 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, 2022, amounted to $1.0 million, compared to $28 thousand for the three months ended September 30, 2021.
•The provision for the three months ended September 30, 2022, consisted of $560 thousand for loans outstanding and $440 thousand for reserves on unfunded commitments (included in other liabilities).
•The majority of the provision for credit losses during the third quarter of 2022 related to growth in the Company's loan portfolio and in off-balance sheet commitments related primarily to commercial construction lending.

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, 2022, amounted to $4.5 million, an increase of $1.4 million, or 47%, compared to the three months ended September 30, 2021.
•Non-interest income in the prior year period included a loss on the termination of swaps used in hedging activities of $1.8 million. Excluding this item, non-interest income decreased $402 thousand, or 8%, resulting primarily from decreases in wealth management fees of $142 thousand, gains on sales of loans of $169 thousand, losses on equity securities of $199 thousand, and other income of $176 thousand, partially offset by an increase in deposit and interchange fees of $232 thousand.

Non-Interest Expense
Non-interest expense for the three months ended September 30, 2022, amounted to $27.5 million, an increase of $1.8 million, or 7%, compared to the three months ended September 30, 2021.
•The increase in non-interest expense over the respective periods resulted primarily from increases in salaries and employee benefits of $1.7 million and other operating expenses of $275 thousand, partially offset by a decrease in occupancy and equipment expenses of $268 thousand.

Income Taxes
The effective tax rate for the three months ended September 30, 2022, was 24.1%, compared to 25.3% for the three months ended September 30, 2021. Tax expense for the three months ended September 30, 2022, benefited from a lower effective tax rate compared to the prior year period due to increases in tax-exempt income and lower-taxed income at the Bank's security corporation subsidiaries.

Results of Operations for the nine months ended September 30, 2022 and September 30, 2021
 
Unless otherwise indicated, the reported results are for the nine months ended September 30, 2022 with the "prior year period," being the nine months ended September 30, 2021. Average yields are presented on an annualized tax equivalent basis.

Net Income
Net income for the nine months ended September 30, 2022, amounted to $30.4 million, a decrease of $913 thousand, or 3%, compared to the prior year period.
•The decrease in net income was attributable primarily to increases in the provision for credit losses of $3.2 million and non-interest expense of $4.5 million, partially offset by increases in net interest income of $3.7 million and non-interest income of $2.1 million.
Net Interest Income
Net interest income for the nine months ended September 30, 2022, amounted to $109.6 million, an increase of $3.7 million, or 4%, compared to the nine months ended September 30, 2021.
•The increase in net interest income was due largely to an increases in loan income, excluding PPP (non-GAAP), of $11.4 million, investment security income of $3.4 million, other interest-earning asset income of $1.8 million, and a decrease in interest expense of $760 thousand, partially offset by a decrease PPP income of $14.0 million.
•PPP income amounted to $2.5 million for the nine months ended September 30, 2022, compared to $16.5 million for the nine months ended September 30, 2021. PPP loans outstanding amounted to $2.7 million at September 30, 2022,

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compared to $148.2 million at September 30, 2021, due to the continued forgiveness of PPP loans by the SBA during the period.

Net Interest Margin
Net interest margin was 3.45% and 3.48% for the nine-month periods ended September 30, 2022 and September 30, 2021, respectively.
Key items impacting margin for the nine months ended September 30, 2022, compared to the prior year period included:
•Average interest-earning deposits with banks decreased $166.1 million, or 34%, while the yield increased 94 basis points. The decrease in average balance resulted primarily from the funding of growth in the Company's investment and core loan portfolios, partially offset by funds received from the forgiveness of PPP loans by the SBA. The increase in yield reflected the 300 basis point increase in the federal funds rate during the nine months ended September 30, 2022.
•Average investment securities at fair value increased $341.1 million, or 55%, while the tax-equivalent yield decreased 41 basis points. The changes in average balance and yield resulted primarily from investment security purchases in the second half of 2021 when market interest rates were lower than the portfolio yield at that time.

•Average loans increased $4.0 million, while the tax-equivalent yield decreased 12 basis points.
◦Average PPP loans outstanding decreased $335.4 million, or 93%, due to the continued forgiveness of PPP loans by the SBA during the period.
◦Average core loans (non-GAAP) increased $339.4 million, or 13%, and the tax-equivalent yield increased 2 basis points. The increase in average balance resulted primarily from growth in the commercial and residential real estate portfolios. Core loan yields in 2022 have been positively impacted by increases in the prime lending rate of 300 basis points, mostly offset by significant fixed-rate originations when market rates were lower.
•Average total deposits increased $176.6 million, or 5%, while the yield decreased 3 basis points.
◦Average non-interest checking balances increased $109.6 million, or 8%.
◦Average higher-costing brokered deposits decreased $61.0 million, or 100%.
•Adjusted net interest margin (non-GAAP), which excludes PPP loans and interest-earning deposits with banks, amounted to 3.58% and 3.69%, respectively. The decrease reflected primarily net growth in fixed rate investment securities and loans when market interest rates were lower, partially offset by recent yield increases on floating rate loans and from a decrease in the cost of funds.

Interest-rate risk is reviewed in detail in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.


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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, 2022, compared to the nine months ended September 30, 2021. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) volume (change in average portfolio balance multiplied by prior year average rate); and (ii) interest rate (change in average interest rate multiplied by prior year 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		VolumeRate
Interest income   
Loans and loans held for sale (tax equivalent)$(2,616)$(292)$(2,324)
Investment securities (tax equivalent)3,380 5,508 (2,128)
Other interest-earning assets(1)
2,171 (213)2,384 
Total interest-earning assets (tax equivalent)2,935 5,003 (2,068)
Interest expense   
Interest checking, savings and money market677 72 605 
CDs(577)(127)(450)
Brokered deposits(664)(332)(332)
Borrowed funds(4)(33)29 
Subordinated debt(192)(197)5 
Total interest-bearing funding(760)(617)(143)
Change in net interest income (tax equivalent)$3,695 $5,620 $(1,925)
__________________________________________
(1)Income on other interest-earning assets includes interest on deposits with banks, federal 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, 2022 and 2021: 
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
 
 Nine months ended September 30, 2022Nine months ended September 30, 2021
(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)
$3,006,403 $98,486 4.38 %$3,002,404 $101,102 4.50 %
Investment securities(3) (tax equivalent)
956,921 14,792 2.06 %615,858 11,412 2.47 %
Other interest-earning assets(4)
324,292 2,642 1.09 %490,266 471 0.13 %
Total interest-earnings assets (tax equivalent)4,287,616 115,920 3.61 %4,108,528 112,985 3.68 %
Other assets123,364 165,991   
Total assets$4,410,980   $4,274,519   
Liabilities and stockholders' equity:      
Interest checking, savings and money market$2,371,033 1,880 0.11 %$2,221,068 1,203 0.07 %
CDs207,835 851 0.55 %229,793 1,428 0.83 %
Brokered deposits— — — %60,989 664 1.46 %
Borrowed funds3,383 39 1.55 %7,742 43 0.75 %
Subordinated debt(5)
59,022 2,485 5.61 %63,754 2,677 5.60 %
Total interest-bearing funding2,641,273 5,255 0.27 %2,583,346 6,015 0.31 %
Non-interest checking1,416,050 — — %1,306,485 — — %
Total deposits, borrowed funds and subordinated debt4,057,323 5,255 0.17 %3,889,831 6,015 0.21 %
Other liabilities50,045 48,834   
Total liabilities4,107,368   3,938,665   
Stockholders' equity303,612 335,854  
Total liabilities and stockholders' equity$4,410,980   $4,274,519   
Net interest-rate spread (tax equivalent)  3.34 %3.37 %
Net interest income (tax equivalent) 110,665   106,970  
Net interest margin (tax equivalent) 3.45 %3.48 %
Less tax equivalent adjustment 1,032 1,069 
Net interest income$109,633 $105,901 
Net interest margin 3.42 %3.44 %
_______________________________________
(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 2022 and 2021, 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, federal 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, 2022, amounted to $3.9 million, an increase of $3.2 million, compared to the nine months ended September 30, 2021.
•The provision for the nine months ended September 30, 2022, consisted of $3.6 million for growth of loans outstanding, partially offset by a reduction of $359 thousand in reserves on unfunded commitments (included in other liabilities).
•Most of the provision for the nine months ended September 30, 2022, related to the Company's strong loan growth during the nine months ended September 30, 2022, and to a lesser extent, a deterioration in the economic forecast due to the rising interest rate environment and persistent high inflation levels, partially offset by improved credit quality.

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 nine months ended September 30, 2022, amounted to $14.3 million, an increase of $2.1 million, or 17%, compared to the nine months ended September 30, 2021.
•Non-interest income in the prior year period included a loss on the termination of swaps used in hedging activities of $1.8 million. Excluding this item, non-interest income increased $274 thousand, or 2%, resulting primarily from increases in net gains on sales of debt securities of $934 thousand and deposit and interchange fees of $777 thousand, partially offset by a decrease in gains on sales of loans of $765 thousand and an increase in losses on equity securities of $842 thousand.

Non-Interest Expense
Non-interest expense for the nine months ended September 30, 2022, amounted to $80.1 million, an increase of $4.5 million, or 6%, compared to the nine months ended September 30, 2021.
•The increase in non-interest expense over the respective periods resulted primarily from an increase in salaries and employee benefits of $4.1 million, or 8%. The increase in salaries and employee benefit expense during the nine months ended September 30, 2022, included an increase of $1.2 million in performance-based incentive accruals. Excluding this cost, the increase in salaries and benefits expense amounted to $2.9 million, or 7%, compared to the prior year period.
•Non-interest expense in the prior year period included a loss on extinguishment of subordinated debt of $713 thousand.

Income Taxes
The effective tax rate for the nine months ended September 30, 2022, was 23.6%, compared to 24.8% for the nine months ended September 30, 2021. Tax expense for the nine months ended September 30, 2022, benefited from a lower effective tax rate compared to the prior year period due to increases in tax-exempt income, lower-taxed income at Bank's security corporation subsidiaries and discrete tax benefits related to stock-based compensation transactions.

Financial Condition
 
Total assets amounted to $4.53 billion at September 30, 2022, compared to $4.45 billion at December 31, 2021, an increase of $82.0 million, or 2%. The increase was driven by an increase in core loans (non-GAAP) of $257.5 million, partially offset by decreases in interest-earning deposits with banks of $34.7 million, investments securities at fair value of $127.2 million, and PPP loans outstanding of $68.8 million. The balance sheet composition and changes since December 31, 2021 are discussed below.

Cash and cash equivalents

Cash and cash equivalents at September 30, 2022 decreased $22.9 million since December 31, 2021. At September 30, 2022 and December 31, 2021, cash and cash equivalents amounted to 9% and 10% of total assets, respectively. The decrease in cash and cash equivalents since December 31, 2021 was related primarily to funding core loan growth (non-GAAP), partially offset by funds received from the SBA for forgiveness of PPP loans during the nine months ended September 30, 2022.


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Investments

At September 30, 2022, the fair value of the investment portfolio amounted to $831.0 million, a decrease of $127.2 million, or 13%, since December 31, 2021. The investment portfolio at fair value represented 18% and 22% of total assets at September 30, 2022 and December 31, 2021, respectively. The change resulted primarily from a decrease in the fair value of the Company's investment portfolio of $129.6 million, during the nine months ended September 30, 2022, caused primarily by significant increases in market interest rates over the respective periods. As of September 30, 2022 and December 31, 2021, the Company's investment portfolio was comprised primarily of debt securities, classified as available-for-sale, with a small portion of the portfolio invested in equity securities.

During the nine months ended September 30, 2022, the Company purchased $101.5 million in debt securities, had principal pay downs, calls and maturities totaling $68.1 million, and sold debt securities with an amortized cost of approximately $31.7 million realizing net gains on sales of $1.1 million.

Net unrealized losses on the debt securities portfolio amounted to $123.7 million at September 30, 2022, compared to net unrealized gains of $5.9 million at December 31, 2021 and $17.5 million at September 30, 2021. The Company attributes the change in net unrealized gains (losses) compared to December 31, 2021 to the significant increases in market interest rates during the respective periods.

The mix of investment securities remained relatively unchanged at September 30, 2022 compared to December 31, 2021. The effective duration of the debt securities portfolio at September 30, 2022 was approximately 5.1 years compared to 4.9 years at December 31, 2021.

Loans

As of September 30, 2022, total loans increased $188.7 million, or 6%, compared to December 31, 2021. The increase in total loans as of September 30, 2022 compared to December 31, 2021 was due primarily to net core loan growth (non-GAAP) of $257.5 million, partially offset by a decrease in PPP loans outstanding of $68.8 million due to forgiveness from the SBA. The mix of loans within the Company's loan portfolio remained relatively unchanged with commercial loans amounting to 87% of total loans at September 30, 2022, compared to 88% at December 31, 2021.

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:
 September 30, 2022December 31, 2021September 30, 2021
(Dollars in thousands)AmountPercentAmountPercentAmountPercent
Commercial real estate$1,886,365 61 %$1,680,792 58 %$1,556,240 55 %
Commercial and industrial413,347 13 %412,070 14 %401,718 14 %
Commercial construction396,027 13 %410,443 14 %412,332 14 %
SBA PPP2,725 — %71,502 2 %148,240 5 %
Total commercial loans2,698,464 87 %2,574,807 88 %2,518,530 88 %
Residential mortgages321,663 10 %256,940 9 %239,960 8 %
Home equity 80,882 3 %80,467 3 %81,217 3 %
Consumer8,360 — %8,470 — %8,403 — %
Total retail loans410,905 13 %345,877 12 %329,580 12 %
Total loans3,109,369 100 %2,920,684 100 %2,848,110 100 %
Allowance for credit losses(51,211) (47,704) (47,262) 
Net loans$3,058,158  $2,872,980  $2,800,848  

As of, or for the nine months ended September 30, 2022,

•Growth in the commercial real estate portfolio has been strong over the last twelve months resulting in a slight increase in commercial real estate loans as a percentage of total loans, relative to the commercial and industrial and commercial construction portfolios.

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•Commercial real estate loans increased $205.6 million, or 12%, compared to December 31, 2021. The increase resulted from strong customer demand.
•Commercial and industrial loans increased by $1.3 million, or 0%, compared to December 31, 2021.
•Commercial construction loans decreased by $14.4 million, or 4%, since December 31, 2021. The decrease was driven by relatively high payoff volume during the period.
•PPP loan forgiveness by the SBA amounted to $71.1 million.
•Total retail loans increased by $65.0 million, or 19%, since December 31, 2021. The increase resulted from the Company retaining more residential mortgages on its balance sheet.

At September 30, 2022, commercial loan balances participated out to various banks amounted to $59.0 million, compared to $66.7 million at December 31, 2021. 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 $90.8 million and $62.6 million at September 30, 2022 and December 31, 2021, respectively. See Note 3, "Loans," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form 10-Q above for information on loans serviced for others and loans pledged as collateral.

Asset Quality

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,
2022		December 31, 2021September 30,
2021
Non-accrual loan summary:
Commercial real estate$3,255$22,870$23,529
Commercial and industrial6751,5422,044
Commercial construction—1,0451,258
SBA PPP———
Residential mortgages1,567794662
Home equity220246342
Consumer—25—
Total non-performing loans5,71726,52227,835
OREO——2,400
Total non-performing assets$5,717$26,522$30,235
Total loans$3,109,369$2,920,684$2,848,110
Accruing TDR loans not included above$5,814$8,556$9,203
Delinquent loans 60-89 days past due and still accruing$72$38$233
Loans 60-89 days past due and still accruing to total loans— %— %0.01 %
Non-performing loans to total loans0.18 %0.91 %0.98 %
Non-performing assets to total assets0.13 %0.60 %0.68 %
Allowance for credit losses for loans $51,211$47,704$47,262
Allowance for credit losses for loans to non-performing loans895.77 %179.87 %169.79 %
Allowance for credit losses for loans to total loans1.65 %1.63 %1.66 %

The decrease in non-performing loans at September 30, 2022, compared to December 31, 2021, was due primarily to two commercial relationships, amounting to $17.9 million, which were upgraded and restored to accrual status during the second quarter of 2022 due to improved financial strength and consistent payment history, as well as pay-downs and payoffs on several commercial relationships.

As of September 30, 2022, the ACL for loans to total loans ratio was 1.65% at September 30, 2022, compared to 1.63% at December 31, 2021.

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The majority of non-accrual loans were also carried as adversely classified during the periods presented. At September 30, 2022 and December 31, 2021, the Company had adversely classified loans (loans carrying "special mention," "substandard," "doubtful" or "loss" classifications) amounting to $48.7 million and $61.0 million, respectively. Adversely classified loans that were performing but possessed potential weakness and, as a result, could ultimately become non-performing loans amounted to $43.0 million at September 30, 2022 and $34.5 million at December 31, 2021. The remaining balances of adversely classified loans which were non-accrual loans, amounted to $5.7 million at September 30, 2022 and $26.5 million at December 31, 2021.

Total individually evaluated collateral dependent loans amounted to $26.4 million and $34.6 million at September 30, 2022 and December 31, 2021, respectively. Total accruing collateral dependent loans amounted to $21.0 million and $8.4 million at September 30, 2022 and December 31, 2021, respectively, while non-accrual collateral dependent loans amounted to $5.4 million and $26.2 million as of September 30, 2022 and December 31, 2021, respectively.

In management's opinion, the majority of collateral dependent loan balances at September 30, 2022 and December 31, 2021 were supported by the net realizable value of the underlying collateral. Based on management's collateral assessment at September 30, 2022, collateral dependent loans totaling $25.0 million required no specific reserves while collateral dependent loans totaling $1.4 million required specific reserves of $275 thousand. At December 31, 2021, collateral dependent loans totaling $18.4 million required no specific reserves while collateral dependent loans totaling $16.2 million required specific reserves of $1.0 million.

Total TDR loans as of September 30, 2022 and December 31, 2021, were $8.6 million and $16.4 million, respectively. TDR loans on accrual status amounted to $5.8 million and $8.6 million at September 30, 2022 and December 31, 2021, respectively. TDR loans included in non-accrual loans amounted to $2.8 million at September 30, 2022 and $7.8 million at December 31, 2021. 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.

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 as described in the 2021 Annual Report on Form 10-K. See Note 4, "ACL for Loans," to the Company's audited consolidated financial statements contained the 2021 Annual Report on Form 10-K. 

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 credit quality and the allowance for credit losses and the Company's methodology under CECL.

While management uses available information and judgment 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.

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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)20222021
Balance at beginning of year$47,704$44,565
Day one CECL adjustment —6,560
Provision for credit losses for loans3,580209
  Recoveries on charged-off loans:  
Commercial real estate
—39
Commercial and industrial
139102
Commercial construction
——
SBA PPP——
Residential mortgages
——
Home equity
967
Consumer
145
Total recovered
162213
  Charged-off loans
Commercial real estate
—1,825
Commercial and industrial
1922,443
Commercial construction
——
SBA PPP——
Residential mortgages
——
Home equity
——
Consumer
4317
Total charged-off
2354,285
Net loans charged-off (recovered)734,072
Ending balance$51,211$47,262
Annualized net loans charged-off to average loans outstanding— %0.18 %

The charge-offs for the prior year period related primarily to two individually evaluated commercial relationships, which were fully reserved for prior to 2021.

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.

Reserve for unfunded commitments

The reserve for unfunded commitments is classified within "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.

The Company's reserve for unfunded commitments amounted to $4.1 million as of September 30, 2022 and $3.7 million at December 31, 2021. The provision for unfunded commitments amounted to $440 thousand compared to $681 thousand for the three months ended September 30, 2022 and September 30, 2021, respectively. The provision for unfunded commitments amounted to $359 thousand compared to $538 thousand for the nine months ended September 30, 2022 and September 30, 2021, respectively.


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Management believes that the Company's ACL for loans and the reserve for unfunded commitments were adequate as of September 30, 2022.

Deposits
 
As of September 30, 2022, customer deposits increased $157.8 million, or 4%, since December 31, 2021 with the largest growth occurring in non-interest checking accounts of $76.8 million, or 6%.

The following table sets forth the deposit balances by certain categories at the dates indicated and the percentage of each category to total deposits:
 September 30, 2022December 31, 2021September 30, 2021
(Dollars in thousands)AmountPercentAmountPercentAmountPercent
Checking$2,160,578 52 %$2,107,845 53 %$2,118,344 53 %
Money markets and savings1,747,421 42 %1,665,945 42 %1,638,259 41 %
Certificates of deposit ("CDs")230,039 6 %206,449 5 %214,333 6 %
Deposits$4,138,038 100 %$3,980,239 100 %$3,970,936 100 %

Borrowed Funds
 
The Company had borrowed funds outstanding of $2.9 million and $5.5 million at September 30, 2022 and December 31, 2021, respectively, all of which were FHLB advances 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 $59.1 million at September 30, 2022 compared to $59.0 million at December 31, 2021.

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.

Shareholders' Equity

Total shareholders' equity amounted to $272.2 million at September 30, 2022, compared to $346.9 million at December 31, 2021, a decrease of $74.7 million, or 22%. The change was attributable primarily to a decrease in AOCI of $100.3 million since December 31, 2021, partially offset by an increase in retained earnings of $23.0 million over the same period. The change in AOCI resulted from a decrease in the fair value of debt securities, which is attributed to the significant increase in market interest rates during the period. The Company classifies all debt securities as available-for-sale and at September 30, 2022 anticipates they will mature or be called at par value.

The Company's reported book value per common share and return on average shareholders' equity ratios were impacted by the change in AOCI as follows:
•Book value per common share was $22.44 at September 30, 2022, compared to $28.82 at December 31, 2021, a decrease of 22%. Excluding AOCI (non-GAAP), book value per common share was $30.33 at September 30, 2022 and $28.43 at December 31, 2021, an increase of 7%.
•Return on average shareholders' equity was 16.47% and 12.56% for the quarters ended September 30, 2022, and December 31, 2021, respectively. Return on average shareholders' equity, excluding AOCI (non-GAAP), was 12.95% and 12.69% for the quarters ended September 30, 2022, and December 31, 2021, respectively.

For the nine months ended September 30, 2022 and September 30, 2021, the Company declared cash dividends of $7.4 million and $6.7 million, respectively, and shareholders utilized the dividend reinvestment portion of the Company's dividend reinvestment and direct stock purchase plan to purchase aggregate shares of the Company's common stock amounting to 30,821 shares and 28,499 shares, totaling $1.1 million and $938 thousand, respectively.

On October 18, 2022, the Company announced a quarterly dividend of $0.205 per share to be paid on December 1, 2022 to shareholders of record as of November 10, 2022.

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Derivatives and Hedging

The Company had no derivative fair value or cash flow hedges at either September 30, 2022 or December 31, 2021.

The notional value of interest-rate swaps with customers decreased to $7.8 million at September 30, 2022 from $36.3 million at December 31, 2021 due to customer pay-offs. The fair value of assets and corresponding liabilities associated with these swaps and carried on the Company's Consolidated Balance Sheets was $836 thousand at September 30, 2022 compared to $528 thousand at December 31, 2021.

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 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 federal fund purchase arrangements with correspondent banks, access to the FRB Discount Window. At September 30, 2022, the Bank had the capacity to borrow additional funds from the FHLB and FRB Discount Window of up to approximately $765.0 million and $360.0 million, respectively.

Management believes that the Company has adequate liquidity to meet its obligations. However, if general economic conditions, the pandemic, changes in market interest rates, the persistence of the inflationary environment in the United States and our market areas, 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.

Capital Resources

The principal cash requirement of the Company is the payment of interest on subordinated debt and the payment of dividends on our common stock. The Company's Board of Directors approves cash dividends on a quarterly basis after careful analysis and consideration of various factors, including our capital position, economic conditions, growth rates, earnings performance and projections as well as strategic initiatives and related capital requirements.

The Company's primary source of cash is dividends paid by the Bank, which are limited to the Bank’s net income for the current year plus its retained net income for the prior two years.

The Company's total capital and tier 1 capital to risk weighted assets amounted to 13.49% and 10.52%, respectively, at September 30, 2022, compared to 13.73% and 10.62%, respectively, at December 31, 2021. The decrease in each ratio was due primarily to strong core loan growth (non-GAAP) over the respective periods, which required higher capital reserves than interest-earning deposits with banks.

Tier 1 capital to average assets amounted to 7.89% at September 30, 2022, compared to 7.56% at December 31, 2021. The increase was driven primarily by the increase in retained earnings noted above, partially offset by an increase in average assets.

For further information about the Company's capital, see Note 9 "Regulatory Capital Requirements," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form 10-Q.

Wealth Management

Wealth assets under management and wealth assets under administration are not carried as assets on the Company's consolidated balance sheets. The Company provides a wide range of wealth management and wealth services, including investment management, brokerage, annuities, trust, and 401(k) administration.
 

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Wealth assets under management and wealth assets under administration amounted to $835.7 million and $186.0 million, respectively, at September 30, 2022, representing decreases of $205.7 million, or 20%, and $71.9 million, or 28%, respectively, compared to December 31, 2021. The decreases in wealth assets under management and administration were attributable primarily to declines in market values during the nine months ended September 30, 2022.

Item 3 -Quantitative and Qualitative Disclosures About Market Risk

Interest Margin Sensitivity Analysis

Refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of the Company's 2021 Annual Report on Form 10-K for further information on the Company's net interest income and net interest margin sensitivity under different interest rate and yield curve scenarios as well as different asset and liability mix scenarios.

The net interest income simulation model assumes a static balance sheet over 24 months. In the 200 and 400 basis point rising rate scenarios below, net interest income is projected to increase in the first 24 months primarily due to the elevated balance of net short-term liquidity that reprices immediately. In the 200 basis point declining interest rate scenario, net interest income is projected to decrease as funding costs are at low levels and do not decline as significantly as asset yields.

At September 30, 2022, the Company's net interest income sensitivity decreased compared to December 31, 2021, resulting primarily from a decrease in net liquidity and growth in the Company’s fixed rate commercial real estate and to a lesser extent, growth in residential mortgage portfolios. The increase in residential mortgages was from the Company retaining more production on the balance sheet instead of selling into the secondary market.

In the declining interest rate scenario, the percent change in net interest income was relatively consistent to results at December 31, 2021 primarily due to the aforementioned decrease in interest rate sensitivity from the decline in liquidity and the increase in fixed rate loans, mostly offset by an increase in interest rate sensitivity caused by higher yields on short term investments.

Net short-term liquidity, which is included in the table below is defined as interest-earning deposits in banks less short-term wholesale borrowings consisting of brokered deposits and FHLB borrowings. The balance is generally considered to be high at September 30, 2022 and December 31, 2021 and resulted in large part to funds received from the forgiveness of PPP loans offset by core loan growth.

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, 2022 and December 31, 2021.

(Dollars in thousands, except for percentage data)September 30,
2022		December 31,
2021
Net liquidity$365,409$397,525
Changes in interest ratesPercentage ChangePercentage Change
Rates Rise 400 Basis Points 3.98 %9.73 %
Rates Rise 200 Basis Points1.94 %5.37 %
Rates Unchanged— %— %
Rates Decline 100 Basis Points (8.60)%(4.95)%

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 2021 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.

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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, 2022.
 
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, 2022) 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 2021 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 2021 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, 2022:
 
Total number of shares repurchased(1)
Average Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or Programs AnnouncedMaximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
July1,408$32.63 ——
August—$— ——
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

3.1.1    Amended and Restated Articles of Organization of the Company, as amended as of June 4, 2013 incorporated by reference to the Company's Current Report on Form 8-K filed June 10, 2013 (File No. 001-33912).

3.1.2    Articles of Amendment to the Restated Articles of Organization of the Company, as amended as of May 16, 2017 incorporated by reference to the Company's Current Report on Form 8-K filed May 18, 2017 (File No. 001-33912).

3.1.3    Articles of Amendment to the Amended and Restated Articles of Organization of the Company, as amended as of January 5, 2018, incorporated by reference to the Company's Current Report on Form 8-K filed January 11, 2018 (File No. 001-33912).

3.2    Second Amended and Restated Bylaws of the Company, as amended as of January 19, 2021, incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on January 22, 2021 (File No. 001-33912).

31.1*    Certification of Principal Executive Officer under Securities Exchange Act Rule 13a-14(a).

31.2*    Certification of Principal Financial Officer under Securities Exchange Act Rule 13a-14(a).

32*    Certification of Principal Executive Officer and Principal Financial Officer under 18 U.S.C. § 1350 Furnished Pursuant to Securities Exchange Act Rule 13a-14(b).

101*    The following materials from Enterprise Bancorp, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022 were formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021; (iii) Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021; (iv) Consolidated Statements of Changes in Equity for the three and nine months ended September 30, 2022 and 2021; (v) Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021; 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, 2022 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 4, 2022By:/s/ Joseph R. Lussier
  Joseph R. Lussier
  Executive Vice President, Treasurer
  and Chief Financial Officer
  

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