Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis should be read in conjunction with the Company's (also referred to herein as "Enterprise," "us," "we," or "our") consolidated financial statements and notes thereto, contained in Item 8, "Financial Statements and Supplementary Data," and the other financial and statistical information contained in this Annual Report on Form 10-K for the year ended December 31, 2021 (this “Form 10-K”).
Throughout this management discussion and analysis we have noted certain balances, ratios or other measures of the Company’s performance which exclude the impact of PPP loans, which we expect to be short-term in nature. We refer to any balance, ratio or measure that excludes PPP loans as "core" (non-GAAP). In addition, we refer to any balance, ratio or measure that excludes PPP loans and interest-earning deposits with banks as "adjusted" (non-GAAP). The core and adjusted balances, ratios and measures are supplemental measures that are not required by or are not presented in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). These non-GAAP measures were derived in order to provide more meaningful comparisons to prior periods as: (1) PPP loans outstanding have been originated within the last 21 months and the majority outstanding are expected to be forgiven by the Small Business Administration (the “SBA”) or repaid during the next several quarters; and (2) growth in customer deposits and PPP loan forgiveness have led to temporarily high liquidity, carried as lower-yielding interest-earning deposits with banks, compared to prior periods. For further discussion regarding the use of these non-GAAP measures, and a reconciliation of GAAP to non-GAAP measures, see the section entitled “Non-GAAP Measures” contained in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K.
Special Note Regarding Forward-Looking Statements
This Form 10-K 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 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 interest rates could negatively impact net interest income;
•increases in interest rates could negatively impact bond market values and result in a lower net book value;
•our ability to successfully manage the 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;
•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;
•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 foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-K, including those discussed in Item 1A, “Risk Factors,” of this Form 10-K. The Company cautions readers that the forward-looking statements in this Form 10-K 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-K are based on information available to the Company as of the date of this Form 10-K, 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.
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 26th branch located in North Andover, Massachusetts was opened on January 4, 2021, and our 27th branch located in Londonderry, New Hampshire is expected to open in the third quarter of 2022. Additionally, the relocations of our Lawrence and Lexington, Massachusetts branches were completed in August 2021 and March 2022, respectively.
Net income for the year ended December 31, 2021, amounted to $42.2 million, or $3.50 per diluted common share, compared to $31.5 million, or $2.64 per diluted common share, for the year ended December 31, 2020. The 34% increase in net income was substantially impacted by an increase in PPP income of $9.0 million from increases in SBA loan forgiveness, a decrease in the provision for credit losses of $10.7 million from improved credit and economic conditions and a decrease in deposit interest expense of $7.7 million from lower interest rates, partially offset by an increase in non-interest expense of $8.9 million to support the Company's growth and strategic initiatives. Net income results for the year ended December 31, 2021 were also impacted by lower tax-equivalent net interest margin ("net interest margin" or "margin") of 3.44%, compared to 3.59% for the year ended December 31, 2020. The lower net interest margin results were significantly impacted by low market rates and higher liquidity balances.
The Company’s financial results for 2021 were also impacted by non-recurring items including a net gain on the sale of OREO of $1.1 million and a loss on termination of interest rate swaps of $1.8 million reported in non-interest income and a loss on the extinguishment of subordinated debt of $713 thousand reported in non-interest expense.
Total assets amounted to $4.45 billion at December 31, 2021, compared to $4.01 billion at December 31, 2020, an increase of $433.5 million, or 11%. The increase related primarily to increases in interest-earning deposits with banks of $189.9 million, or 89%, investments of $375.2 million, or 64% and core loans (non-GAAP) of $218.4 million, or 8%, partially offset by a decrease in PPP loans of $371.6 million, or 84%.
The increased liquidity at December 31, 2021, compared to December 31, 2020, was due primarily to significant customer deposit growth of $504.0 million, or 14%, and funds received for PPP loan forgiveness of $587.0 million. The excess liquidity was partially utilized to fund growth in the Company's investment security portfolio and core loan (non-GAAP) growth as discussed above.
COVID-19 Pandemic
The ongoing pandemic and its effects have impacted the Company’s financial condition and results of operations, as discussed in this Management Discussion & Analysis. Management underscores that the pandemic and any related economic effects may continue to impact the Company's financial condition and results of operations in the coming quarters, particularly from its potential impact on interest rates, the economy, organic growth opportunities and the quality of the loan portfolio.
See also Item 1A. "Risk Factors" for further discussion on the impact on risk a result of the COVID-19 pandemic.
Paycheck Protection Program
The PPP was established by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and implemented by the SBA in order to provide loans to help businesses keep their workforce employed during the pandemic. PPP loans may be partially or fully forgiven by the SBA if the borrower meets certain conditions. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding.
The SBA began funding PPP loans in April 2020, with the first forgiveness payments distributed from the SBA beginning in November 2020. The third round of the PPP ended in May 2021. Over the course of the PPP, the Company originated 4,149 PPP loans amounting to $717.2 million with associated deferred SBA processing fees of $26.2 million. As of December 31, 2021, the Company had 396 PPP loans outstanding with a principal balance of $73.9 million and deferred SBA fees of $2.4 million, compared to 2,633 PPP loans with a principal balance of $453.1 million and deferred SBA fees of $10.0 million at December 31, 2020. The Company anticipates the majority of the deferred SBA fees will be recognized as the PPP loans are forgiven by the SBA or paid off over the next several quarters.
Culture and Organic Growth Strategy
The Company's business model is to provide a full range of diversified financial products and services through a highly trained team of knowledgeable banking professionals, who have an in-depth understanding of our markets and a commitment to servicing the financial needs of customers. The Company’s approach is people-centric (customers, shareholders, communities and team members), commercially focused and community rooted, offering robust product and service lines, including commercial and residential lending, cash management, wealth management and trust services and commercial insurance, delivered by a knowledgeable and dedicated team of community bankers through traditional in-person service and multiple digital delivery channels offering 24/7 online and remote banking capabilities. The Company is committed to fostering a culture of diversity, equity and inclusion and to investing in employee training and development.
Management utilizes a disciplined credit management approach, which has served to provide consistent quality asset growth over varying economic cycles. Loan growth initiatives are executed through strong business development and referral efforts, by a seasoned lending team, supported by an experienced commercial credit review function.
The Company has an ongoing commitment to use technology and digitization to continually improve customer experience as well as internal operating efficiency and productivity.
The Company generally looks to develop new branch locations within, and to complement, our existing footprint. New and renovated branches exhibit a modern, open-concept lobby with advanced technology. These branches are supported by our "Relationship Bankers," who are cross trained to fully serve customer needs, and each branch is supported by commercial lenders dedicated to that region.
Non-GAAP Measures
The accompanying consolidated financial statements have been prepared in accordance with GAAP. However, certain financial measures and ratios presented are supplemental measures that are not required by or are not presented in accordance with GAAP. These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. In addition, the non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies.
The following tables summarize the reconciliation of GAAP to non-GAAP measures related to the impact of PPP loans on total loans and loan interest income:
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(Dollars in thousands) | | December 31, 2021 | | December 31, 2020 | | |
TOTAL CORE LOANS (non-GAAP) | | | | | | |
Total loans | | $ | 2,920,684 | | | $ | 3,073,860 | | | |
Adjustment: PPP loans | | (73,885) | | | (453,084) | | | |
Adjustment: Deferred PPP fees | | 2,383 | | | 10,014 | | | |
Total core loans (non-GAAP) | | $ | 2,849,182 | | | $ | 2,630,790 | | | |
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| | Year ended | | |
| | December 31, | | |
(Dollars in thousands) | | 2021 | | 2020 | | |
CORE LOAN INCOME (non-GAAP) | | | | | | |
Loan income | | $ | 133,208 | | | $ | 131,091 | | | |
Adjustment: PPP income | | (19,691) | | | (10,675) | | | |
Core loan income (non-GAAP) | | $ | 113,517 | | | $ | 120,416 | | | |
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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:
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| | Year ended | | Year ended |
(Dollars in thousands) | | December 31, 2021 | | December 31, 2020 |
ADJUSTED AVERAGE INTEREST-EARNING ASSETS | | | | |
Total average interest-earning assets | | $ | 4,151,239 | | $ | 3,663,344 |
Adjustment: Average PPP loans, net | | (296,985) | | (336,493) |
Adjustment: Average interest-earning deposits with banks | | (499,097) | | (185,994) |
Total adjusted average interest-earning assets (non-GAAP) | | $ | 3,355,157 | | $ | 3,140,857 |
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ADJUSTED INTEREST INCOME | | | | |
Net interest income (tax-equivalent)(1) | | $ | 142,973 | | $ | 131,561 |
Adjustment: PPP income | | (19,691) | | (10,675) |
Adjustment: Interest on interest-earning deposits with banks | | (655) | | (262) |
Adjusted net interest income (tax-equivalent) (non-GAAP) | | $ | 122,627 | | $ | 120,624 |
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ADJUSTED NET INTEREST MARGIN | | | | |
Net interest margin (tax-equivalent) | | 3.44 | % | | 3.59 | % |
Adjustment: PPP effect(2) | | (0.25) | % | | 0.04 | % |
Adjustment: Interest-earning deposits with banks effect(3) | | 0.46 | % | | 0.21 | % |
Adjusted net interest margin (tax-equivalent) (non-GAAP) | | 3.65 | % | | 3.84 | % |
_________________________________________(1)Year-to-date results reflect tax-equivalent adjustments as of December 31 of the years presented.
(2)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.
(3)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.
Results of Operations
COMPARISON OF YEARS ENDED DECEMBER 31, 2021 AND 2020
Unless otherwise indicated, the reported results are for the year ended December 31, 2021, with the "same period," the "comparable year" and "prior year" being the year ended December 31, 2020. Average yields are presented on a tax-equivalent basis.
Net Income
Net income for the year ended December 31, 2021, amounted to $42.2 million, an increase of $10.7 million, or 34%, compared to the year ended December 31, 2020. Diluted earnings per share were $3.50 for the year ended December 31, 2021, as compared to $2.64 for the year ended December 31, 2020.
•The increase in net income was attributable largely to an increase in net interest income of $11.4 million, and a decrease in the provision for credit losses of $10.7 million, partially offset by an increase in non-interest expense of $8.9 million.
•Year-to-date non-interest income results, which are reviewed below, increased $860 thousand, or 5% over the prior year period and were impacted by non-recurring items related to a gain on sale of other real estate owned ("OREO") and the early termination of interest rate swaps.
Net Interest Income
Net interest income for the year ended December 31, 2021, amounted to $141.6 million, an increase of $11.4 million, or 9%, compared to the year ended December 31, 2020.
•The increase in net interest income was due largely to an increase in PPP income of $9.0 million and a decrease in deposit interest expense of $7.7 million, partially offset by a decrease in core loan income (non-GAAP) of $6.9 million.
•Net interest income included PPP income of $19.7 million for the year ended December 31, 2021, compared to $10.7 million for the year ended December 31, 2020.
Net Interest Margin
Tax-equivalent net interest margin was 3.44% and 3.59% for the years ended December 31, 2021, and 2020, respectively.
Margin has been negatively impacted by large balances in lower-yielding interest-earning deposits with banks, and to a lesser extent, loan pay-downs, new loan originations, investment purchases and lower interest yields, partially offset by PPP income.
For the years ended December 31, 2021, and 2020:
•Average interest-earning deposits with banks amounted to $499.1 million and $186.0 million.
•Average PPP loan balances, net of deferred SBA fees, amounted to $297.0 million and $336.5 million.
•Adjusted net interest margin (non-GAAP) was 3.65% and 3.84%.
Interest and Dividend Income
For the year ended December 31, 2021, total interest and dividend income amounted to $149.0 million, an increase of $4.2 million, or 3%, compared to the prior year.
•The increase was due largely to average interest-earning asset growth of $487.9 million, or 13%, primarily in investments and core loans (non-GAAP), partially offset by a decline in average yields on interest-earning assets of 37 basis points.
•The decrease in interest-earning asset yields since the prior period was due primarily to a shift in asset mix related to large increases in other interest earning assets and investments securities, which resulted from the significant increase in customer deposits, and are lower yielding than loans and loans held for sale, and to a lesser extent, loan pay-downs, new loan originations, and lower interest yields, partially offset by higher yielding PPP income.
Interest Expense
For the year ended December 31, 2021, total interest expense amounted to $7.5 million, a decrease of $7.2 million, or 49%, compared to the prior year.
•The decrease in interest expense was due primarily to decreases in deposit market rates during the year ended December 31, 2021. The average cost of funding, including the impact of non-interest deposit accounts, decreased 23 basis points. The average cost of interest-bearing checking, saving and money market accounts decreased 26 basis points and the average cost of CDs decreased 90 basis points.
•Partially offsetting the decrease in interest expense was an increase of $247.6 million in the average balances of interest-bearing deposits.
•Non-interest deposit accounts are an important component of the Company's core funding strategy. During the year ended December 31, 2021, the average balance of non-interest checking deposits increased $220.7 million, or 20%, as compared to the prior year. This non-interest-bearing funding source represented 35% of total average deposit balances for the year ended December 31, 2021, compared to 33% for the year ended December 31, 2020.
Interest rate risk is reviewed in detail under the heading Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of this Form 10-K below.
Rate/Volume Analysis
The following table sets forth, on a tax-equivalent basis, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense for the period indicated. 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.
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| | 2021 vs 2020 | |
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(Dollars in thousands) | | Net Change | | Volume | | Rate | | | | | | | | | |
Interest income | | | | | | | | | | | | | | | |
Loans and loans held for sale (tax-equivalent) | | $ | 2,091 | | | $ | (509) | | | $ | 2,600 | | | | | | | | | | |
Investment securities (tax-equivalent) | | 1,811 | | | 4,889 | | | (3,078) | | | | | | | | | | |
Other interest-earning assets(1) | | 280 | | | 453 | | | (173) | | | | | | | | | | |
Total interest-earning assets (tax-equivalent) | | 4,182 | | | 4,833 | | | (651) | | | | | | | | | | |
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Interest expense | | | | | | | | | | | | | | | |
Interest checking, savings, and money market | | (4,750) | | | 916 | | | (5,666) | | | | | | | | | | |
CDs | | (2,929) | | | (779) | | | (2,150) | | | | | | | | | | |
Brokered deposits | | 2 | | | (31) | | | 33 | | | | | | | | | | |
Borrowed funds | | (546) | | | (345) | | | (201) | | | | | | | | | | |
Subordinated debt | | 994 | | | 1,065 | | | (71) | | | | | | | | | | |
Total interest-bearing funding | | (7,229) | | | 826 | | | (8,055) | | | | | | | | | | |
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Change in net interest income (tax-equivalent) | | $ | 11,411 | | | $ | 4,007 | | | $ | 7,404 | | | | | | | | | | |
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(1) Income on other interest-earning assets includes interest on deposits, and fed funds sold, and dividends on FHLB stock.
The table on the following page presents the Company's average balance sheet, net interest income and average rates for the years ended December 31, 2021, 2020 and 2019:
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| | Average Balances, Interest and Average Yields |
| | Year ended December 31, 2021 | | Year ended December 31, 2020 | | Year ended December 31, 2019 |
(Dollars in thousands) | | Average Balance | | Interest(1) | | Average Yield(1) | | Average Balance | | Interest(1) | | Average Yield (1) | | Average Balance | | Interest(1) | | Average Yield(1) |
Assets: | | | | | | | | | | | | | | | | | | |
Loans and loans held for sale(2) (tax-equivalent) | | $ | 2,969,777 | | | $ | 133,696 | | | 4.50 | % | | $ | 2,986,001 | | | $ | 131,604 | | | 4.41 | % | | $ | 2,432,195 | | | $ | 122,635 | | | 5.04 | % |
Investment securities(3) (tax-equivalent) | | 680,261 | | | 16,072 | | | 2.36 | % | | 488,139 | | | 14,261 | | | 2.92 | % | | 462,017 | | | 14,160 | | | 3.06 | % |
Other interest-earning assets(4) | | 501,201 | | | 682 | | | 0.14 | % | | 189,204 | | | 402 | | | 0.21 | % | | 80,740 | | | 1,891 | | | 2.34 | % |
Total interest-earning assets (tax-equivalent) | | 4,151,239 | | | 150,450 | | | 3.62 | % | | 3,663,344 | | | 146,267 | | | 3.99 | % | | 2,974,952 | | | 138,686 | | | 4.66 | % |
Other assets | | 169,315 | | | | | | | 158,928 | | | | | | | 138,205 | | | | | |
Total assets | | $ | 4,320,554 | | | | | | | $ | 3,822,272 | | | | | | | $ | 3,113,157 | | | | | |
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Liabilities and shareholders' equity: | | | | | | | | | | | | | | | | | | |
Interest checking, savings and money market | | $ | 2,249,023 | | | 1,558 | | | 0.07 | % | | $ | 1,930,628 | | | 6,308 | | | 0.33 | % | | $ | 1,659,414 | | | 13,650 | | | 0.82 | % |
CDs | | 224,627 | | | 1,700 | | | 0.76 | % | | 279,467 | | | 4,629 | | | 1.66 | % | | 300,810 | | | 6,000 | | | 1.99 | % |
Brokered deposits | | 45,617 | | | 664 | | | 1.46 | % | | 47,743 | | | 662 | | | 1.39 | % | | 15,466 | | | 291 | | | 1.88 | % |
Borrowed funds | | 7,632 | | | 60 | | | 0.79 | % | | 40,479 | | | 606 | | | 1.50 | % | | 15,940 | | | 385 | | | 2.42 | % |
Subordinated debt(5) | | 62,546 | | | 3,495 | | | 5.59 | % | | 43,510 | | | 2,501 | | | 5.75 | % | | 14,866 | | | 925 | | | 6.22 | % |
Total interest-bearing funding | | 2,589,445 | | | 7,477 | | | 0.29 | % | | 2,341,827 | | | 14,706 | | | 0.63 | % | | 2,006,496 | | | 21,251 | | | 1.06 | % |
Non-interest checking | | 1,341,633 | | | — | | | | | 1,120,916 | | | — | | | | | 790,915 | | | — | | | |
Total deposits, borrowed funds and subordinated debt | | 3,931,079 | | | 7,477 | | | 0.19 | % | | 3,462,743 | | | 14,706 | | | 0.42 | % | | 2,797,411 | | | 21,251 | | | 0.76 | % |
Other liabilities | | 51,912 | | | | | | | 43,383 | | | | | | | 37,913 | | | | | |
Total liabilities | | 3,982,991 | | | | | | | 3,506,126 | | | | | | | 2,835,324 | | | | | |
Shareholders' equity | | 337,563 | | | | | | | 316,146 | | | | | | | 277,833 | | | | | |
Total liabilities and shareholders' equity | | $ | 4,320,554 | | | | | | | $ | 3,822,272 | | | | | | | $ | 3,113,157 | | | | | |
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Net interest-rate spread (tax-equivalent) | | | | | | 3.33 | % | | | | | | 3.36 | % | | | | | | 3.60 | % |
Net interest income (tax-equivalent) | | | | 142,973 | | | | | | | 131,561 | | | | | | | 117,435 | | | |
Net interest margin (tax-equivalent) | | | | | | 3.44 | % | | | | | | 3.59 | % | | | | | | 3.95 | % |
Less tax-equivalent adjustment | | | | 1,417 | | | | | | | 1,427 | | | | | | | 1,578 | | | |
Net interest income | | | | $ | 141,556 | | | | | | | $ | 130,134 | | | | | | | $ | 115,857 | | | |
Net interest margin | | | | | | 3.41 | % | | | | | | 3.55 | % | | | | | | 3.89 | % |
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(1)Average yields and interest income are presented on a tax-equivalent basis, calculated using a U.S. federal corporate income tax rate of 21% in the years ended 2021, 2020 and 2019, based on tax-equivalent adjustments associated with tax exempt loans and investments interest income.
(2)Average loans and loans held for sale include non-accrual loans and are net of average deferred loan fees.
(3)Average investment balances are presented at average amortized cost.
(4)Average other interest-earning assets includes interest-earning deposits with banks, fed funds sold, and FHLB stock.
(5)The subordinated debt is net of average deferred debt issuance costs.
Provision for Credit Losses
The provision for credit losses for the year ended December 31, 2021, amounted to $1.8 million, a decrease of $10.7 million, compared to the year ended December 31, 2020.
•The provision for the year ended December 31, 2021, resulted primarily from core loan growth (non-GAAP) and an increase in reserves for unfunded commitments (included in other liabilities), partially offset by a reduction in credit loss reserve factors and declines in reserves for individually evaluated loans.
•The provision for the year ended December 31, 2020, reflected increases in reserves related primarily to the estimated impact of the COVID-19 pandemic on the credit quality of the loan portfolio and increases in reserves for individually evaluated loans.
The provision for credit losses is a significant factor in the Company's operating results. For further discussion regarding the provision for credit losses and management's assessment of the adequacy of the ACL for loans see "Credit Risk," and "ACL for Loans" included in the section titled "Financial Condition," contained in this Item 7 of this Form 10-K above, for further information regarding the provision for credit losses.
Non-Interest Income
Non-interest income for the year ended December 31, 2021, amounted to $18.1 million, an increase of $860 thousand, or 5%, compared to the respective prior year periods.
The following table sets forth the components of non-interest income and the related changes for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Dollars in thousands) | | 2021 | | 2020 | | Change | | % Change |
Wealth management fees | | $ | 6,787 | | | $ | 5,815 | | | $ | 972 | | | 17 | % |
Deposit and interchange fees | | 6,971 | | | 6,426 | | | 545 | | | 8 | % |
Income on bank-owned life insurance, net | | 821 | | | 587 | | | 234 | | | 40 | % |
Net gains on sales of debt securities | | 128 | | | 227 | | | (99) | | | (44) | % |
Net gains on sales of loans | | 833 | | | 1,409 | | | (576) | | | (41) | % |
Net gain on sale of OREO | | 1,126 | | | — | | | 1,126 | | | 100 | % |
Loss on termination of swaps | | (1,847) | | | — | | | (1,847) | | | 100 | % |
Other income | | 3,288 | | | 2,783 | | | 505 | | | 18 | % |
Total non-interest income | | $ | 18,107 | | | $ | 17,247 | | | $ | 860 | | | 5 | % |
The primary components of the increase of non-interest income during the year ended December 31, 2021, are as follows:
•Wealth management fees increased $972 thousand due primarily to asset growth from net new business and market value appreciation.
•Deposit and interchange fees increased $545 thousand due primarily to higher deposit account activity and increased consumer debit card spending resulting in higher interchange activity.
•The Company recognized a gain on sale of OREO of $1.1 million from the sale of an OREO property in October 2021.
•Equity securities market value gains increased $290 thousand and are included in other income.
•The increase of non-interest income during the period was partially offset by a $1.8 million loss on the early termination of $75.0 million in interest-rate swaps, realized in the third quarter of 2021; and
•Decreases in net gains on sales of loans of $576 thousand, resulting largely from lower origination volume and the Company holding more residential loan production in the loan portfolio.
Non-Interest Expense
Non-interest expense for the year ended December 31, 2021, amounted to $102.1 million, an increase of $8.9 million, or 10%, compared to the prior year.
The following table sets forth the components of non-interest expense and the related changes for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Dollars in thousands) | | 2021 | | 2020 | | Change | | % Change |
Salaries and employee benefits | | $ | 66,633 | | | $ | 61,580 | | | $ | 5,053 | | | 8 | % |
Occupancy and equipment expenses | | 9,650 | | | 8,546 | | | 1,104 | | | 13 | % |
Technology and telecommunications expenses | | 10,574 | | | 9,197 | | | 1,377 | | | 15 | % |
Advertising and public relations expenses | | 2,373 | | | 2,151 | | | 222 | | | 10 | % |
Audit, legal and other professional fees | | 2,347 | | | 2,273 | | | 74 | | | 3 | % |
Deposit insurance premiums | | 1,910 | | | 2,124 | | | (214) | | | (10) | % |
Supplies and postage expenses | | 819 | | | 898 | | | (79) | | | (9) | % |
Loss on extinguishment of subordinated debt | | 713 | | | — | | | 713 | | | 100 | % |
Other operating expenses | | 7,116 | | | 6,485 | | | 631 | | | 10 | % |
Total non-interest expense | | $ | 102,135 | | | $ | 93,254 | | | $ | 8,881 | | | 10 | % |
The primary components of the increase of non-interest expense during the year ended December 31, 2021, are as follows:
•Salaries and employee benefits increased $5.1 million due primarily to an increase of $3.2 million related to performance-based accruals. Excluding this increase, non-interest expense for the year increased 6% over prior year.
•Occupancy and equipment increased $1.1 million due primarily to the higher costs from two branch relocations and one branch opening.
•Technology and telecommunications increased $1.4 million due primarily to higher infrastructure costs and expenses associated with the Company's multi–year digital evolution strategy to enhance operating efficiency and customer experience.
•The Company also realized a loss on the extinguishment of subordinated debt of $713 thousand from the early redemption of the Company’s $15.0 million in subordinated notes issued in January 2015 (the “January 2015 Notes”) on March 31, 2021. The loss on the extinguishment of the January 2015 Notes consisted of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs.
Income Tax Expense
The effective tax rate was 24.4% for the years ended December 31, 2021, and 2020. Refer to Note 15, "Income Taxes," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K, for additional information about the Company's tax positions.
Results of Operations Comparison of Years Ended December 31, 2020 and 2019
Financial Condition
Total assets increased $433.5 million, or 11%, since December 31, 2020, to $4.45 billion at December 31, 2021. The balance sheet composition and changes since December 31, 2020, are discussed below.
Cash and cash equivalents
Cash and cash equivalents may be comprised of cash on hand and cash items due from banks, interest-earning deposits with banks (deposit accounts, excess reserve cash balances, money markets, and money market mutual funds accounts) and federal funds sold ("fed funds"). Cash and cash equivalents increased $182.8 million, or 72%, since December 31, 2020. As of December 31, 2021, cash and cash equivalents amounted to 10% of total assets compared to 6% of total assets at December 31, 2020.
While balances in cash and cash equivalents will fluctuate due primarily to the timing of net cash flows from deposits, borrowings, loans and investments, and the immediate liquidity needs of the Company, management believes customers are generally maintaining higher liquidity in response to the pandemic and lower interest rates, contributing to the increase in cash and cash equivalents since December 31, 2020.
Investments
At December 31, 2021, the fair value of the investment portfolio amounted to $958.2 million, an increase of $375.2 million, or 64%, since December 31, 2020. The increase resulted primarily from debt security purchases of $211.4 million and $173.3 million during the third and fourth quarters of 2021, respectively. As of December 31, 2021, the investment portfolio represented 22% of total assets as compared to 15% of total assets at December 31, 2020 and was primarily comprised of debt securities, with a small portion of the investment portfolio invested in equity securities. At both December 31, 2021, and 2020, all investments were carried at fair value and debt securities were classified as available-for-sale.
Debt Securities
The following table summarizes the fair value of debt securities at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Federal agency obligations(1) | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 1,004 | | | 0.2 | % |
U.S. treasury securities | | 62,166 | | | 6.5 | % | | — | | | — | % | | — | | | — | % |
Residential federal agency MBS(1) | | 406,195 | | | 42.5 | % | | 215,975 | | | 37.1 | % | | 192,658 | | | 38.2 | % |
Commercial federal agency MBS(1) | | 103,412 | | | 10.8 | % | | 110,194 | | | 18.9 | % | | 114,635 | | | 22.7 | % |
Taxable municipal securities | | 275,850 | | | 28.8 | % | | 144,407 | | | 24.8 | % | | 81,687 | | | 16.2 | % |
Tax-exempt municipal securities | | 92,672 | | | 9.7 | % | | 95,451 | | | 16.4 | % | | 100,038 | | | 19.8 | % |
Corporate bonds | | 9,000 | | | 0.9 | % | | 11,276 | | | 1.9 | % | | 14,311 | | | 2.8 | % |
Subordinated corporate bonds | | 7,135 | | | 0.8 | % | | 5,000 | | | 0.9 | % | | — | | | — | % |
CDs | | — | | | — | % | | — | | | — | % | | 455 | | | 0.1 | % |
Total debt securities | | $ | 956,430 | | | 100.0 | % | | $ | 582,303 | | | 100.0 | % | | $ | 504,788 | | | 100.0 | % |
_____________________________________________
(1) These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as investments guaranteed by Ginnie Mae ("GNMA"), a wholly owned government entity.
During the years ended December 31, 2021, and 2020, the Company purchased debt securities totaling $491.2 million and $144.5 million, respectively. The Company also had principal pay downs, calls and maturities totaling $87.3 million during the year ended December 31, 2021, compared to $77.5 million during the year ended December 31, 2020.
We continuously monitor and evaluate our debt securities portfolio to identify and assess risks within our portfolio, including, but not limited to, the impact of the current rate environment, prepayment risk, and credit quality. The overall mix of debt securities at December 31, 2021 compared to December 31, 2020 remains relatively unchanged and the portfolio was well positioned to provide a stable source of cash flow. At December 31, 2021, the portfolio consisted primarily of 60% in U.S. Government or U.S. Federal Agency bonds and 39% in taxable and tax-exempt municipal bonds. The effective duration of our debt securities portfolio at December 31, 2021 was approximately 4.9 years compared to 4.4 and 3.8 years at December 31, 2020 and 2019.
Net unrealized gains on the debt securities portfolio amounted to $5.9 million at December 31, 2021, compared to net unrealized gains of $31.1 million at December 31, 2020.
During the year ended December 31, 2021, the Company realized net gains of $128 thousand on sales of debt securities with an amortized cost of approximately $2.9 million. For the year ended December 31, 2020, the Company realized net gains of $227 thousand on sales of debt securities with an amortized cost of approximately $5.7 million.
The contractual maturity distribution as of December 31, 2021, of the debt securities portfolio with the weighted average tax-equivalent yield for each category is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Under 1 Year | | >1 – 5 Years | | >5 – 10 Years | | Over 10 Years |
(Dollars in thousands) | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield | | Amount | | Yield |
At amortized cost: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
U.S. treasury securities | | $ | — | | | — | % | | $ | 55,853 | | | 0.68 | % | | $ | 6,997 | | | 1.01 | % | | $ | — | | | — | % |
Residential federal agency MBS | | — | | | — | % | | — | | | — | % | | 3,094 | | | 2.83 | % | | 409,808 | | | 1.52 | % |
Commercial federal agency MBS | | 9,981 | | | 1.86 | % | | 76,456 | | | 2.97 | % | | 13,244 | | | 2.50 | % | | — | | | — | % |
Taxable municipal securities | | — | | | — | % | | 24,547 | | | 3.16 | % | | 199,340 | | | 2.23 | % | | 48,620 | | | 2.23 | % |
Tax-exempt municipal securities | | 1,316 | | | 4.64 | % | | 27,740 | | | 3.09 | % | | 40,251 | | | 3.26 | % | | 17,717 | | | 3.23 | % |
Corporate bonds | | 2,101 | | | 2.60 | % | | 5,030 | | | 3.42 | % | | 1,428 | | | 3.61 | % | | — | | | — | % |
Subordinated corporate bonds | | — | | | — | % | | — | | | — | % | | 7,000 | | | 3.77 | % | | — | | | — | % |
| | | | | | | | | | | | | | | | |
Total debt securities | | $ | 13,398 | | | 2.25 | % | | $ | 189,626 | | | 2.35 | % | | $ | 271,354 | | | 2.42 | % | | $ | 476,145 | | | 1.66 | % |
| | | | | | | | | | | | | | | | |
Total debt securities at fair value | | $ | 13,478 | | | | | $ | 195,778 | | | | | $ | 276,528 | | | | | $ | 470,646 | | | |
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 $181.1 million, which can be redeemed by the issuer prior to the maturity presented above. Management considers these factors when evaluating the interest-rate risk in the Company's asset-liability management program.
Loans
This discussion should be read in conjunction with the material presented in Item 1, "Business," under the heading "Lending Products" of this Form 10-K.
Total loans represented 66% of total assets at December 31, 2021, and 77% of total assets at December 31, 2020. Total loans decreased $153.2 million, or 5%, for the year ended December 31, 2021, compared to December 31, 2020, due primarily to PPP loan forgiveness payments received from the SBA during the period. Total core loans (non-GAAP) increased $218.4 million, or 8% since December 31, 2020. The mix of loans within the portfolio remained relatively unchanged with the commercial loan portfolio comprising approximately 88% of total loans at December 31, 2021, compared to 89% at December 31, 2020.
At December 31, 2021, within the commercial loan portfolio there has been a slight shift as commercial and industrial loans declined 5% while commercial real estate increased 14%, and commercial construction increased 10%, compared to the respective December 31, 2020 balances.
The following table sets forth the loan balances by certain loan categories at the dates indicated and the percentage of each category to total loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
| | 2021 | | 2020 | | 2019 | | | | |
(Dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | | | | | | | |
Commercial real estate | | $ | 1,680,792 | | | 57.5 | % | | $ | 1,476,236 | | | 48.0 | % | | $ | 1,392,298 | | | 54.3 | % | | | | | | | | |
Commercial and industrial | | 412,070 | | | 14.1 | % | | 435,548 | | | 14.2 | % | | 501,247 | | | 19.5 | % | | | | | | | | |
Commercial construction | | 410,443 | | | 14.1 | % | | 371,856 | | | 12.1 | % | | 315,996 | | | 12.3 | % | | | | | | | | |
SBA PPP | | 71,502 | | | 2.4 | % | | 443,070 | | | 14.4 | % | | — | | | — | % | | | | | | | | |
Total commercial loans | | 2,574,807 | | | 88.1 | % | | 2,726,710 | | | 88.7 | % | | 2,209,541 | | | 86.1 | % | | | | | | | | |
Residential mortgages | | 256,940 | | | 8.8 | % | | 252,995 | | | 8.2 | % | | 247,386 | | | 9.7 | % | | | | | | | | |
Home equity | | 80,467 | | | 2.8 | % | | 85,178 | | | 2.8 | % | | 98,484 | | | 3.8 | % | | | | | | | | |
Consumer | | 8,470 | | | 0.3 | % | | 8,977 | | | 0.3 | % | | 10,048 | | | 0.4 | % | | | | | | | | |
Total retail loans | | 345,877 | | | 11.9 | % | | 347,150 | | | 11.3 | % | | 355,918 | | | 13.9 | % | | | | | | | | |
Total loans | | 2,920,684 | | | 100.0 | % | | 3,073,860 | | | 100.0 | % | | 2,565,459 | | | 100.0 | % | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
Allowance for credit losses | | (47,704) | | | | | (44,565) | | | | | (33,614) | | | | | | | | | | | |
Net loans | | $ | 2,872,980 | | | | | $ | 3,029,295 | | | | | $ | 2,531,845 | | | | | | | | | | | |
As of December 31, 2021, commercial real estate loans increased $204.6 million, or 14%, compared to December 31, 2020. The majority of the commercial real estate portfolio growth during 2021 was concentrated in the 4th quarter of the year which resulted from strong business development efforts and an improving business environment during the second half of 2021.
Commercial and industrial loan balances, decreased $23.5 million, or 5%, as of December 31, 2021, compared to December 31, 2020. The decrease reflects a decline in line utilization on revolving lines as business customers made use of alternative government sponsored funding sources and declines in business activity as a result of the pandemic, as well as general pay downs, maturities and reduction in originations.
Commercial construction loans increased by $38.6 million, or 10%, as of December 31, 2021, compared to December 31, 2020. In many cases, these loans move into the permanent commercial real estate portfolio when the construction phase is completed.
During the year ended December 31, 2021, the Company received $587.0 million of forgiveness payments on PPP loans from the SBA, compared to $46.6 million during the year ended December 31, 2020.
Total retail loan balances remained relatively unchanged as of December 31, 2021, compared to December 31, 2020. Residential secured one-to-four family mortgage loans continue to make up the largest portion of the retail segment.
For the year ended December 31, 2021, the Company originated $29.1 million of residential mortgage loans for sale in the secondary market, receiving gains on loan sales of $833 thousand, compared to originations of $59.6 million and gains of $1.4 million for the year ended December 31, 2020. Residential loans originated and retained within the portfolio amounted to $84.6 million and $73.2 million for the years ended December 31, 2021, and December 31, 2020, respectively.
At December 31, 2021, commercial loan balances participated out to various banks amounted to $66.7 million, compared to $65.3 million at December 31, 2020. These balances participated out to other institutions are not carried as assets on the Company's financial statements. Commercial loans originated by other banks in which the Company is a participating institution are carried at the pro-rata share of ownership and amounted to $62.6 million and $77.1 million at December 31, 2021, and 2020, respectively.
See also Note 3, "Loans," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below, for information on related party loans, loans serviced for others and loans pledged as collateral.
The following table sets forth the scheduled maturities of commercial real estate, commercial and industrial and commercial construction loans in the Company's portfolio at December 31, 2021. The table also sets forth the dollar amount of loans which are scheduled to mature after one year which have fixed or adjustable rates.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial Real Estate | | Commercial & Industrial | | Commercial Construction | | SBA PPP (3) |
Amounts due(1): | | | | | | | | |
One year or less, and demand notes | | $ | 111,738 | | | $ | 188,717 | | | $ | 115,680 | | | $ | 4,594 | |
After one year through five years | | 270,648 | | | 110,388 | | | 133,864 | | | 66,908 | |
Beyond five years | | 1,298,406 | | | 112,965 | | | 160,899 | | | — | |
| | $ | 1,680,792 | | | $ | 412,070 | | | $ | 410,443 | | | $ | 71,502 | |
| | | | | | | | |
Interest rate terms on amounts due after one year: | | | | | | | | |
Fixed | | $ | 107,673 | | | $ | 108,065 | | | $ | 14,091 | | | $ | 66,908 | |
Adjustable(2) | | $ | 1,461,381 | | | $ | 115,288 | | | $ | 280,672 | | | $ | — | |
_________________________________________
(1) Scheduled contractual maturities may not reflect the actual maturities of loans. The average maturity of loans may be shorter than their contractual terms principally due to prepayments and demand features.
(2) Adjustable-rate loans may have fixed initial periods before periodic rate adjustments begin.
(3) PPP loan maturities are two or five years; however, the majority of SBA forgiveness is expected within one year.
Credit Risk
Non-performing assets are comprised of non-accrual loans (loans contractually past due, with respect to interest or principal, by 90 days, or where reasonable doubt exists as to the full and timely collection of interest or principal), and OREO. The designation of a loan or other asset as non-performing does not necessarily indicate that loan principal and interest will ultimately be uncollectible. However, management recognizes the greater risk characteristics of these assets and therefore considers the potential risk of loss on assets included in this category in evaluating the adequacy of the allowance for credit losses. The level of delinquent and non-performing assets is largely a function of economic conditions and the overall banking environment and the individual business circumstances of borrowers. Despite prudent loan underwriting, adverse changes within the Company's market area, or deterioration in local, regional, or national economic conditions, could negatively impact the Company's level of non-performing assets in the future.
Management has been proactive with customers since the onset of the pandemic and granted short term payment deferrals to those requesting financial assistance due to the impact of the pandemic. The Company has accounted for these deferrals in accordance with Section 4013 of the CARES Act which provided financial institutions the option to suspend TDR accounting under GAAP in certain circumstances. As of December 31, 2020, short-term payment deferrals due to the COVID-19 pandemic were outstanding on 47 loans amounting to $46.7 million, or 1.5% of total loans. As of December 31, 2021, these payment deferrals were outstanding on 3 loans amounting to $5.5 million, or 0.2% of total loans. As of December 31, 2021, the majority of the deferral notes had returned to their original payment terms, continue to accrue interest in accordance with those terms and were not reported as TDRs.
See item (g) "Loans" contained in Note 1, "Summary of Significant Accounting Policies" of this Form 10-K, for additional information on the Company's loan accounting policies and Credit Risk monitoring.
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:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 | | | | |
Non-accrual loan summary: | | | | | | | | | | |
Commercial real estate | | $ | 22,870 | | $ | 29,680 | | $ | 8,280 | | | | |
Commercial and industrial | | 1,542 | | 4,574 | | 3,285 | | | | |
Commercial construction | | 1,045 | | 2,999 | | 1,735 | | | | |
SBA paycheck protection program | | — | | — | | — | | | | |
Residential mortgages | | 794 | | 414 | | 411 | | | | |
Home equity | | 246 | | 381 | | 1,040 | | | | |
Consumer | | 25 | | 2 | | 20 | | | | |
Total non-accrual loans | | 26,522 | | 38,050 | | 14,771 | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
OREO | | — | | — | | — | | | | |
Total non-performing assets | | $ | 26,522 | | $ | 38,050 | | $ | 14,771 | | | | |
| | | | | | | | | | |
Total Loans | | $ | 2,920,684 | | $ | 3,073,860 | | $ | 2,565,459 | | | | |
Accruing TDR loans not included above | | $ | 8,556 | | $ | 10,268 | | $ | 17,103 | | | | |
Delinquent loans 60-89 days past due and still accruing | | $ | 38 | | $ | 316 | | $ | 7,776 | | | | |
Loans 60-89 days past due and still accruing to total loans | | — | % | | 0.01 | % | | 0.30 | % | | | | |
| | | | | | | | | | |
Adversely classified loans to total loans | | 2.09 | % | | 1.79 | % | | 1.45 | % | | | | |
Non-performing loans to total loans | | 0.91 | % | | 1.24 | % | | 0.58 | % | | | | |
Non-performing assets to total assets | | 0.60 | % | | 0.95 | % | | 0.46 | % | | | | |
Allowance for credit losses for loans | | $ | 47,704 | | $ | 44,565 | | $ | 33,614 | | | | |
Allowance for credit losses for loans to non-performing loans | | 179.87 | % | | 117.12 | % | | 227.57 | % | | | | |
Allowance for credit losses for loans to total loans | | 1.63 | % | | 1.45 | % | | 1.31 | % | | | | |
The decrease in non-performing assets was due to principal pay-downs and credit upgrades, as well as the partial charge-off of two commercial relationships, partially offset by additional credit downgrades and loan advances. One of the charge-offs related to a commercial office building that was reclassified to OREO in April 2021 and subsequently sold in October 2021. The property sold was the Company’s only OREO asset during the years ended December 31, 2021, and 2020.
At December 31, 2021, and December 31, 2020, the Company had adversely classified loans (loans carrying "special mention," "substandard," "doubtful" or "loss" classifications) amounting to $61.0 million and $75.3 million, respectively. Adversely classified loans above that were performing but possessed potential weaknesses and, as a result, could ultimately become non-performing loans, amounted to $34.5 million at December 31, 2021, and $37.4 million at December 31, 2020. The remaining balance of adversely classified loans were also on non-accrual and amounted to $26.5 million and $37.9 million at December 31, 2021, and December 31, 2020, respectively. The decrease in adversely classified, non-performing loans at December 31, 2021, was due primarily to the decrease in non-accruing commercial relationships discussed above.
Total individually evaluated collateral dependent loans amounted to $34.6 million and $48.3 million at December 31, 2021, and December 31, 2020, respectively. Total accruing collateral dependent loans amounted to $8.4 million and $10.3 million at December 31, 2021, and December 31, 2020, respectively, while non-accrual collateral dependent loans amounted to $26.2 million and $38.0 million as of December 31, 2021, and December 31, 2020, respectively.
In management's opinion, the majority of collateral dependent loan balances at December 31, 2021, and 2020 were supported by the net realizable value of the underlying collateral. Based on management's collateral assessment 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 reserve reserves of $1.0 million. At December 31, 2020, collateral dependent loans totaling $23.4 million required no specific reserves while collateral dependent loans totaling $24.9 million required specific reserve reserves of $6.2 million. The decrease in specific reserves since December 31, 2020, was due primarily to the partial charge-off of two
commercial relationships noted above. Management closely monitors all individually evaluated relationships for their individual business circumstances, credit metrics, or underlying collateral value deterioration to determine if additional reserves are necessary.
Total TDR loans as of December 31, 2021 and December 31, 2020 were $16.4 million and $17.7 million, respectively. TDR loans on accrual status amounted to $8.6 million and $10.3 million at December 31, 2021 and December 31, 2020, respectively. TDR loans included in non-accrual loans amounted to $7.8 million and $7.5 million at December 31, 2021 and December 31, 2020, respectively. 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
In the first quarter of 2021, the Company adopted the Financial Accounting Standards Board's guidance related to measuring credit losses, including the current expected credit losses ("CECL") methodology for estimating the allowance for credit losses ("ACL"). The CECL methodology requires earlier recognition of credit losses using a lifetime credit loss measurement approach that also requires the consideration of reasonable and supportable forecasts in the estimate.
The adoption of CECL resulted in the Company recording a net cumulative-effect adjustment, effective January 1, 2021, that decreased retained earnings by $6.5 million, net of $2.5 million in deferred income taxes. The ACL for loans increased by $6.6 million and the reserve for unfunded commitments (included in other liabilities) increased by $2.4 million.
See also Note 4, "ACL for Loans," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K, 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 judgement to estimate credit losses on loans, future additions to the ACL for loans may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ACL for loans. Such agencies may require the Company to recognize additions to the ACL for loans based on judgments different from those of management.
The following table sets forth the allocation of the Company's allowance for credit losses among the categories of loans, the percentage of allowance allocated by category of loans to the total allowance for credit losses, and the percentage of loans in each category to total loans for the periods ending on the respective dates indicated:
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| | December 31, |
| | 2021 | | 2020 | | 2019 | | | | |
(Dollars in thousands) | | ACL Allocation | | % of ACL Allocation | | % of Total Loans | | ACL Allocation | | % of ACL Allocation | | % of Total Loans | | ACL Allocation | | % of ACL Allocation | | % of Total Loans | | | | | | | | |
Commercial real estate | | $ | 31,847 | | | 66.7 | % | | 57.5 | % | | $ | 26,755 | | | 60.0 | % | | 48.0 | % | | $ | 18,338 | | | 54.5 | % | | 54.3 | % | | | | | | | | |
Commercial and industrial | | 9,574 | | | 20.1 | % | | 14.1 | % | | 9,516 | | | 21.4 | % | | 14.2 | % | | 9,129 | | | 27.2 | % | | 19.5 | % | | | | | | | | |
Commercial construction | | 4,090 | | | 8.6 | % | | 14.1 | % | | 6,129 | | | 13.8 | % | | 12.1 | % | | 4,149 | | | 12.3 | % | | 12.3 | % | | | | | | | | |
SBA PPP | | — | | | — | % | | 2.4 | % | | — | | | — | % | | 14.4 | % | | — | | | — | % | | — | % | | | | | | | | |
Residential mortgages | | 1,405 | | | 2.9 | % | | 8.8 | % | | 1,530 | | | 3.4 | % | | 8.2 | % | | 1,195 | | | 3.6 | % | | 9.7 | % | | | | | | | | |
Home equity | | 465 | | | 1.0 | % | | 2.8 | % | | 467 | | | 1.0 | % | | 2.8 | % | | 536 | | | 1.6 | % | | 3.8 | % | | | | | | | | |
Consumer | | 323 | | | 0.7 | % | | 0.3 | % | | 168 | | | 0.4 | % | | 0.3 | % | | 267 | | | 0.8 | % | | 0.4 | % | | | | | | | | |
Total | | $ | 47,704 | | | 100.0 | % | | 100.0 | % | | $ | 44,565 | | | 100.0 | % | | 100.0 | % | | $ | 33,614 | | | 100.0 | % | | 100.0 | % | | | | | | | | |
Management believes the PPP portfolio to be of minimal credit risk, the average loan size was approximately $187 thousand, and Management expects that, based on its due diligence at origination and in the forgiveness application process, the majority of balances will be forgiven, with any remaining balance fully guaranteed by the SBA.
The following table summarizes the activity in the allowance for credit losses for the periods indicated:
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| | Years Ended December 31, |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
Beginning balance | | $ | 44,565 | | $ | 33,614 | | $ | 33,849 | | $ | 32,915 | | $ | 31,342 |
| | | | | | | | | | |
Day one CECL adjustment | | 6,560 | | — | | — | | — | | — |
Provision charged to operations | | 543 | | 12,499 | | 1,180 | | 2,250 | | 1,430 |
Recoveries on charged-off loans: | | | | | | | | | | |
Commercial real estate | | 39 | | — | | — | | 51 | | 193 |
Commercial and industrial | | 139 | | 265 | | 734 | | 278 | | 550 |
Commercial construction | | 105 | | — | | — | | — | | — |
Residential mortgages | | — | | — | | — | | — | | — |
Home equity | | 71 | | 45 | | 9 | | 55 | | 4 |
Consumer | | 9 | | 36 | | 35 | | 47 | | 8 |
Total recovered | | $ | 363 | | $ | 346 | | $ | 778 | | $ | 431 | | $ | 755 |
Charged-off loans: | | | | | | | | | | |
Commercial real estate | | 1,825 | | — | | — | | — | | 178 |
Commercial and industrial | | 2,477 | | 561 | | 2,069 | | 1,593 | | 348 |
Commercial construction | | — | | 1,300 | | — | | — | | — |
Residential mortgages | | — | | — | | — | | — | | — |
Home equity | | — | | — | | — | | — | | — |
Consumer | | 25 | | 33 | | 124 | | 154 | | 86 |
Total charged-off | | $ | 4,327 | | $ | 1,894 | | $ | 2,193 | | $ | 1,747 | | $ | 612 |
| | | | | | | | | | |
Net loans charged-off (recovered) | | $ | 3,964 | | $ | 1,548 | | $ | 1,415 | | $ | 1,316 | | $ | (143) |
| | | | | | | | | | |
Ending balance | | $ | 47,704 | | $ | 44,565 | | $ | 33,614 | | $ | 33,849 | | $ | 32,915 |
| | | | | | | | | | |
Average loans outstanding | | $ | 2,969,371 | | $ | 2,984,100 | | $ | 2,430,912 | | $ | 2,303,708 | | $ | 2,130,048 |
Net charge-offs (recoveries) to average loans | | 0.13 | % | | 0.05 | % | | 0.06 | % | | 0.06 | % | | (0.01) | % |
| | | | | | | | | | |
Recoveries to charge-offs | | 8.39 | % | | 18.27 | % | | 35.48 | % | | 24.67 | % | | 123.37 | % |
Net loans charged-off (recovered) to allowance | | 8.31 | % | | 3.47 | % | | 4.21 | % | | 3.89 | % | | (0.43) | % |
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 $3.7 million as of December 31, 2021 and $2.5 million at January 1, 2021. The provision for unfunded commitments amounted to $1.2 million for the year ended December 31, 2021. The increase at December 31, 2021, compared to January 1, 2021, resulted from growth, primarily in unadvanced construction loan balances, partially offset by lower reserve factors.
Based on the foregoing, management believes that the Company's ACL for loans and reserve for unfunded commitments is adequate as of December 31, 2021.
Deposits
Total deposits amounted to $3.98 billion as of December 31, 2021, an increase of $429.0 million, or 12%, compared to December 31, 2020. Total deposits as a percentage of total assets were 89% at December 31, 2021, and 88% at December 31, 2020.
The following table sets forth the deposit balances by certain categories as of the dates indicated and the percentage of each category to total deposits:
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| | December 31, 2021 | | December 31, 2020 | | December 31, 2019 |
(Dollars in thousands) | | Amount | | % of Total | | Amount | | % of Total | | Amount | | % of Total |
Non-interest checking | | $ | 1,364,258 | | | 34.3 | % | | $ | 1,164,908 | | | 32.8 | % | | $ | 794,583 | | | 28.5 | % |
Interest-bearing checking | | 743,587 | | | 18.7 | % | | 599,630 | | | 16.9 | % | | 467,988 | | | 16.8 | % |
Total checking | | 2,107,845 | | | 53.0 | % | | 1,764,538 | | | 49.7 | % | | 1,262,571 | | | 45.3 | % |
Savings | | 310,244 | | | 7.8 | % | | 256,347 | | | 7.2 | % | | 203,236 | | | 7.3 | % |
Money markets | | 1,355,701 | | | 34.0 | % | | 1,210,414 | | | 34.1 | % | | 1,009,972 | | | 36.2 | % |
Total savings/money markets | | 1,665,945 | | | 41.8 | % | | 1,466,761 | | | 41.3 | % | | 1,213,208 | | | 43.5 | % |
CDs | | 206,449 | | | 5.2 | % | | 244,969 | | | 6.9 | % | | 310,951 | | | 11.2 | % |
Total customer deposits | | 3,980,239 | | | 100.0 | % | | 3,476,268 | | | 97.9 | % | | 2,786,730 | | | 100.0 | % |
| | | | | | | | | | | | |
Brokered deposits(1) | | — | | | — | % | | 74,995 | | | 2.1 | % | | — | | | — | % |
Total deposits | | $ | 3,980,239 | | | 100.0 | % | | $ | 3,551,263 | | | 100.0 | % | | $ | 2,786,730 | | | 100.0 | % |
__________________________________
(1) Brokered deposits which are individually $250,000 and under.
As of December 31, 2021, customer deposits amounted to $3.98 billion, an increase of $504.0 million, or 14%, since December 31, 2020, and $1.2 billion, or 43%, since December 31, 2019. Since December 31, 2020, the largest growth occurred in checking accounts and to a lesser extent money market accounts. Management believes the deposit growth since December 31, 2020, was due in large part to customers depositing funds received from PPP loan advances, stimulus checks, and generally maintaining higher liquidity in response to the pandemic and low interest rates.
The Company offers its customers the ability to enhance FDIC insurance coverage by electing to participate a portion of their deposit balance into nationwide deposit networks, with an equal and reciprocal balance deposited to the Company through the network. The Company’s total customer deposit balances reflect the reciprocal deposits received from other banks' customers participating in the programs. Essentially, the equivalent of the original customers' deposited funds comes back to the Company and are carried within the appropriate category under total customer deposits. The Company's balances in these reciprocal products were $546.7 million, $508.4 million, and $419.7 million at December 31, 2021, December 31, 2020, and December 31, 2019, respectively. Savings accounts are not eligible for this program.
Management may, from time to time, utilize brokered deposits as a cost-effective wholesale funding source to support continued loan growth. Brokered deposits may be comprised of non-reciprocal insured overnight deposits and term funding gathered from nationwide bank networks or term deposits from large money center banks. At December 31, 2021, and December 31, 2019, the Company had no brokered deposits outstanding, compared to $75.0 million at December 31, 2020.
The following table shows the scheduled maturities of CDs greater than $250,000:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2021 | | December 31, 2020 |
Due in three months or less | | $ | 15,943 | | | $ | 19,482 | |
Due in greater than three months through six months | | 11,137 | | | 14,959 | |
Due in greater than six months through twelve months | | 12,476 | | | 20,118 | |
Due in greater than twelve months | | 12,490 | | | 13,515 | |
Total CDs | | $ | 52,046 | | | $ | 68,074 | |
The table below sets forth a comparison of the Company's average deposits, and average rates paid for the periods indicated, as well as the percentage of each deposit category to total average deposits. The annualized average rate on total deposits reflects both interest-bearing and non-interest-bearing deposits.
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| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
(Dollars in thousands) | | Average Balance | | Average Rate | | % of Total | | Average Balance | | Average Rate | | % of Total | | Average Balance | | Average Rate | | % of Total |
Non-interest checking | | $ | 1,341,633 | | | — | % | | 34.7 | % | | $ | 1,120,916 | | | — | % | | 33.2 | % | | $ | 790,915 | | | — | % | | 28.6 | % |
| | | | | | | | | | | | | | | | | | |
Interest checking | | 651,985 | | | 0.03 | % | | 16.9 | % | | 520,836 | | | 0.14 | % | | 15.4 | % | | 434,074 | | | 0.38 | % | | 15.7 | % |
Savings | | 293,868 | | | 0.04 | % | | 7.6 | % | | 236,549 | | | 0.08 | % | | 7.0 | % | | 204,977 | | | 0.18 | % | | 7.4 | % |
Money market | | 1,303,170 | | | 0.09 | % | | 33.8 | % | | 1,173,243 | | | 0.46 | % | | 34.7 | % | | 1,020,363 | | | 1.14 | % | | 36.9 | % |
Total interest-bearing non-term deposits | | 2,249,023 | | | 0.07 | % | | 58.3 | % | | 1,930,628 | | | 0.33 | % | | 57.1 | % | | 1,659,414 | | | 0.82 | % | | 60.0 | % |
CDs | | 224,627 | | | 0.76 | % | | 5.8 | % | | 279,467 | | | 1.66 | % | | 8.3 | % | | 300,810 | | | 1.99 | % | | 10.8 | % |
Total non-brokered deposits | | 3,815,283 | | | 0.09 | % | | 98.8 | % | | 3,331,011 | | | 0.33 | % | | 98.6 | % | | 2,751,139 | | | 0.71 | % | | 99.4 | % |
| | | | | | | | | | | | | | | | | | |
Brokered deposits | | 45,617 | | | 1.46 | % | | 1.2 | % | | 47,743 | | | 1.39 | % | | 1.4 | % | | 15,466 | | | 1.88 | % | | 0.6 | % |
Total | | $ | 3,860,900 | | | 0.10 | % | | 100.0 | % | | $ | 3,378,754 | | | 0.34 | % | | 100.0 | % | | $ | 2,766,605 | | | 0.72 | % | | 100.0 | % |
Borrowed Funds
Borrowed funds, comprised of FHLB borrowings and other borrowings, amounted to $5.5 million at December 31, 2021, compared to $4.8 million at December 31, 2020. The Company's primary borrowing source is the FHLB, but the Company may choose to borrow from other established business partners. Outstanding borrowings from the FHLB typically have been comprised of overnight or short-term borrowings and term advances linked to outstanding commercial loans under various community reinvestment programs of the FHLB, which represents the majority of the balance at December 31, 2021. At December 31, 2021, and 2020, borrowed funds consisted of FHLB borrowings only. The majority of the FHLB advances outstanding at December 31, 2020, were overnight advances, which the Company paid-down during the year ended December 31, 2021 as the Bank's liquidity increased.
The Company may also from time-to-time use interest-rate swaps to hedge against adverse interest rate movements of short-term FHLB advances.
At December 31, 2021, the Bank had the capacity to borrow additional funds from the FHLB of up to approximately $790.0 million and the capacity to borrow from the FRB discount window of approximately $350.0 million.
In April 2020, the Company established access to the FRB's PPPLF, which provided funding secured by the pledge of PPP loans and expired on July 2021. Advances issued under the PPPLF were non-recourse. The amount and term of an advance matched the amount and remaining term of the PPP loans pledged. The FRB's PPPLF program expired on July 31, 2021.
The table below shows the comparison of the Company's average borrowed funds and average rates paid for the periods indicated:
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| | Year ended December 31, |
| | 2021 | 2020 | | 2019 |
(Dollars in thousands) | | Average Balance | | Average Cost | | Average Balance | | Average Cost | | Average Balance | | Average Cost |
FHLB advances | | $ | 7,632 | | | 0.79 | % | | $ | 35,762 | | | 1.65 | % | | $ | 15,885 | | | 2.42 | % |
FRB PPPLF advances | | — | | | — | % | | 4,703 | | | 0.35 | % | | — | | | — | % |
Other borrowed funds | | — | | | — | % | | 14 | | | 1.07 | % | | 55 | | | 2.64 | % |
Total borrowed funds | | $ | 7,632 | | | 0.79 | % | | $ | 40,479 | | | 1.50 | % | | $ | 15,940 | | | 2.42 | % |
The category "Other borrowed funds" represents overnight advances from the FRB discount window, or borrowings from correspondent banks, advanced as part of our annual test of these external funding facilities.
For additional information on the composition of borrowed funds, including weighted average rates and maturities, and maximum borrowing outstanding at any month end, see Note 8, "Borrowed Funds and Subordinated Debt," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K.
Subordinated Debt
The Company had outstanding subordinated debt, net of deferred issuance costs, of $59.0 million at December 31, 2021, and $73.7 million at December 31, 2020.
On March 31, 2021, the Company redeemed $15.0 million in subordinated notes issued January 2015. The redemption of the January 2015 Notes was recorded as a loss on the extinguishment of subordinated debt in the amount of $713 thousand, consisting of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs.
In July 2020, the Company issued $60.0 million in subordinated callable in July 2025 and due in July 2030.
Derivatives and Hedging
During the first quarter of 2020, the Company entered into three pay fixed, receive float interest-rate swaps to hedge against adverse interest-rate movements with a combined notional value, maturing from 2023 through 2025 of $75.0 million. In August of 2021, the Company terminated the interest-rate swaps resulting in a loss of $1.8 million and eliminated the related borrowing costs from 2022-2025.
The Company also has a "Back-to-Back Swap" program whereby the Bank enters into an interest-rate swap with qualified commercial banking customers and simultaneously enters into an equal and opposite interest-rate swap with a swap counterparty. The customer interest-rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to a fixed-rate payment. The notional value of interest-rate swaps with customers increased to $36.3 million at December 31, 2021, from $38.0 million at December 31, 2020. The fair value of assets and corresponding liabilities associated with these swaps and carried on the Company's Consolidated Balance Sheets was $528 thousand at December 31, 2021, compared to $2.3 million at December 31, 2020.
Liquidity
Liquidity is the ability to meet cash needs arising from, among other things, fluctuations in loans, investments, deposits, and borrowings. Liquidity management is the coordination of activities so that cash needs are anticipated and met readily and efficiently. The Company's liquidity policies are set and monitored by the Company's Board. The duties and responsibilities related to asset-liability management matters are also covered by the Board. The Company's asset-liability objectives are to engage in sound balance sheet management strategies, maintain liquidity, provide and enhance access to a diverse and stable source of funds, provide competitively priced and attractive products to customers and conduct funding at a low-cost relative to current market conditions. Funds gathered are used to support current commitments, to fund earning asset growth, and to take advantage of selected leverage opportunities.
The Company's liquidity is maintained by projecting cash needs, balancing maturing assets with maturing liabilities, monitoring various liquidity ratios, monitoring deposit flows, maintaining cash flow within the investment portfolio, and maintaining wholesale funding resources.
The Company's wholesale funding sources included primarily borrowing capacity at the FHLB and brokered deposits. In addition, the Company's secondary funding sources include uncommitted overnight fed fund purchase arrangements with correspondent banks and access to the FRB discount window. At December 31, 2021, the Bank had the capacity to borrow additional funds from the FHLB and FRB discount window of up to approximately $790.0 million and $350.0 million, respectively.
Management believes that the Company has adequate liquidity to meet its obligations. However, if general economic conditions, the pandemic, or other events, cause these sources of external funding to become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company's operations and growth.
The Company has in the past also increased capital and liquidity by offering for sale shares of the Company's common stock and through the issuance of subordinated debt. On July 7, 2020, the Company issued $60.0 million of fixed-to-floating rate
subordinated notes. For additional information on the Company's capital planning, see the section entitled "Capital Resources" contained in Item 1, "Business," of this Form 10-K.
Capital Resources
The Company is subject to various regulatory capital requirements administered by the federal banking agencies. The Company's capital policies and capital levels are monitored internally on a quarterly basis and capital planning is reviewed at least annually by the Board.
Failure to meet minimum capital requirements can initiate or result in certain mandatory and possible additional discretionary supervisory actions by regulators, which if undertaken, could have a material adverse effect on the Company's consolidated financial condition. At December 31, 2021, the capital levels of both the Company and the Bank complied with all applicable minimum capital requirements of the Federal Reserve Board and the FDIC, respectively. Additionally, the Company met the definition of "well-capitalized" under the applicable Federal Reserve Board regulations and the Bank qualified as "well-capitalized" under the prompt corrective action regulations of Basel III and the FDIC.
On January 1, 2021, the Company's adopted of CECL and recorded a net cumulative-effect adjustment that decreased retained earnings by $6.5 million, net of $2.5 million in deferred income taxes.
On March 31, 2021, the Company redeemed the January 2015 Notes. The redemption of the January 2015 Notes was funded through a dividend from the Bank. This redemption and dividend decreased retained earnings at the Company and Bank, respectively.
For the year ended December 31, 2021, the Company declared $8.9 million in cash dividends. Shareholders utilized the dividend reinvestment portion of the DRSPP to purchase an aggregate of 36,651 shares of the Company's common stock, totaling $1.3 million.
On January 18, 2022, the Company announced a quarterly dividend of $0.205 per share to be paid on March 1, 2022, to shareholders of record as of February 8, 2022.
See also Note 12, "Shareholders' Equity," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below, for additional information regarding the capital requirements applicable to the Company and the Bank and their respective capital levels at December 31, 2021.
Contractual Obligations and Commitments
The Company is required to make future cash payments under various contractual obligations. The following table summarizes the contractual cash obligations at December 31, 2021:
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| | Payments Due by Period |
(Dollars in thousands) | | Total | | With-in 1 Year | | >1 – 3 Years | | >3 – 5 Years | | After 5 Years |
Contractual Cash Obligations: | | | | | | | | | | |
CDs | | $ | 206,449 | | | $ | 154,465 | | | $ | 50,184 | | | $ | 1,569 | | | $ | 231 | |
FHLB borrowings | | 5,479 | | | 2,485 | | | — | | | — | | | 2,994 | |
| | | | | | | | | | |
Subordinated debt | | 60,000 | | | — | | | — | | | — | | | 60,000 | |
Supplemental retirement plans | | 1,939 | | | 276 | | | 552 | | | 551 | | | 560 | |
Operating lease obligations | | 38,630 | | | 1,376 | | | 2,834 | | | 2,887 | | | 31,533 | |
Vendor contracts | | 17,765 | | | 9,304 | | | 6,571 | | | 1,648 | | | 242 | |
Total contractual obligations | | $ | 330,262 | | | $ | 167,906 | | | $ | 60,141 | | | $ | 6,655 | | | $ | 95,560 | |
The Company is also party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in the particular classes of financial instruments.
The following table summarizes the contractual commitments at December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Commitment Expiration — By Period |
(Dollars in thousands) | | Total | | With-in 1 Year | | >1 – 3 Years | | >3 – 5 Years | | After 5 Years |
Other Commitments: | | | | | | | | | | |
Unadvanced loans and lines | | $ | 1,044,218 | | | $ | 628,320 | | | $ | 196,083 | | | $ | 62,163 | | | $ | 157,652 | |
Commitments to originate loans | | 38,653 | | | 38,653 | | | — | | | — | | | — | |
Letters of credit | | 23,164 | | | 21,715 | | | 240 | | | 40 | | | 1,169 | |
Commitments to originate loans for sale | | — | | | — | | | — | | | — | | | — | |
Commitments to sell loans | | — | | | — | | | — | | | — | | | — | |
Customer related interest-rate swaps notional amount(1) | | 36,263 | | | 1,440 | | | — | | | 7,394 | | | 27,429 | |
Total commitments | | $ | 1,142,298 | | | $ | 690,128 | | | $ | 196,323 | | | $ | 69,597 | | | $ | 186,250 | |
_______________________________________________
(1) Offsetting positions to these interest-rate swaps offered to commercial loan customers are entered into with a counterparty. Notional principal amounts are not actually exchanged.
See also Note 10, "Commitments, Contingencies and Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below, for further information regarding unadvanced loans and lines, commitments to originate loans, letters of credit and commitments to originate loans for sale or to sell loans. See Note 9, "Derivatives and Hedging Activities," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below, for further information regarding customer related interest-rate swaps.
Wealth Assets Under Management & Administration
Wealth assets under management and 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.
As of December 31, 2021, wealth assets under management, at fair market value amounted to $1.04 billion, an increase of $64.9 million, or 7%, compared to the year ended December 31, 2020. The increase since December 31, 2020, was due primarily to asset growth from market appreciation along with new customer growth.
Additionally, the Company had assets under administration at fair value amounted to $257.9 million at December 31, 2021, and $210.9 million at December 31, 2020, consisting of primarily 401(k) plans and to a lesser extent trust and custodial accounts.
Impact of Inflation and Changing Prices
The Company's asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of the Company are monetary in nature. Management believes the impact of inflation on financial results depends upon the Company's ability to react to changes in interest rates and by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or at the same magnitude, as the prices of other goods and services. As discussed previously, management seeks to manage the relationship between interest rate-sensitive assets and liabilities in order to protect against wide net interest income fluctuations, including those resulting from inflation.
Various information shown elsewhere in this annual report will assist in the understanding of how well the Company is positioned to react to changing interest rates and inflationary trends. In particular, additional information related to the margin sensitivity analysis is contained in Item 7A of this Form 10-K below and other maturity and repricing information of the Company's interest rate-sensitive assets and liabilities is contained in this Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-K under the heading "Financial Condition" in this report.
Accounting Policies/Critical Accounting Estimates
The Company's significant accounting policies are described in Note 1, "Summary of Significant Accounting Policies," to the consolidated financial statements contained in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K. In applying these accounting policies, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain of the critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company's reported financial performance should the assumptions and estimates used be incorrect or change over time due to changes in circumstances. The most significant areas in which management applies critical assumptions and estimates are: the estimates of the allowance for credit losses for loans, and available-for-sale securities, the reserve for unfunded commitments and the impairment review of goodwill.
ACL for Loans
On January 1, 2021, the Company adopted ASU 2016-13, including the CECL methodology for estimating the ACL for loans. The CECL methodology requires early recognition of credit losses using an estimated lifetime credit loss measurement that takes into consideration reasonable and supportable forecasts. The ACL for loans is established through a provision for credit losses, a direct charge to earnings. The ACL for loans is a valuation account that is deducted from the amortized cost to present the net amount of the loan portfolio expected to be collected. Credit losses are charged against the ACL for loans when management believes that the collectability of the amortized cost of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the ACL for loans, generally at the time cash is received on a charged-off account.
Arriving at an appropriate level of ACL for loans involves a high degree of management judgement. The underlying assumptions, estimates and assessments used to estimate the ACL for loans reflects the Company’s best estimate of model assumptions and forecasted conditions at that time. Changes in such estimates can significantly affect the ACL for loans and the provision for credit losses. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ACL for loans. Such agencies may require the Company to recognize additions to the ACL for loans based on judgments different from those of management. It is possible and likely that the Company will experience credit losses that are different from the current estimates.
The Company uses a systematic methodology to measure the amount of estimated credit losses. The methodology uses a two-tiered approach that applies general reserves for larger groups of homogeneous loans, segmented by loan type or by internal risk rating, and specific reserves for loans individually evaluated.
In making its assessment on the adequacy of the general reserves of ACL for loans, management considers several quantitative and qualitative factors from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts, including: the expected duration of the loans segments, the trends in risk classification of individual loans; individual review of larger and higher risk problem assets; the level of delinquent loans and non-performing loans; impaired and restructured loans; the level of foreclosure activity; net charge-offs; commercial concentrations by industry, property type and real estate location; the growth and composition of the loan portfolio; as well as trends in the general levels of these indicators. In addition, management monitors expansion in the Company's geographic market area, the experience level of lenders and any changes in underwriting criteria, the strength of the local and national economy, including general conditions in the multi-family, commercial real estate and development and construction markets in the Company's local region. As well as changes in current and forecasted economic conditions, such as changes in gross domestic product, the unemployment rate and new jobs created, real estate values, commercial vacancy rates, recession risk estimates and other relevant economic factors. Management also performs a qualitative assessment beyond model estimates and applies qualitative adjustments as management deems necessary, acknowledging that it can take time for economic results to work through the loan portfolio with charge-offs often occurring years after the economic downturn.
For loans individually evaluated, the Company generally requires an internal evaluation or independent appraisal of the collateral supporting the loan. However, these assessment methods are only an estimate of the value of the collateral at the time the assessment is made and involve estimates and assumptions. An error in fact, estimate or judgment could adversely affect the reliability of the valuation. Furthermore, changes in those estimates due to the economic environment and events occurring after the initial assessment, may cause the value of the collateral to differ significantly from the initial valuations.
Reserve for unfunded commitments
ASU 2016-13 also applies to off-balance sheet credit exposure for unfunded commitments (commitments to originate loans, additional funding commitments on existing loans, standby letters of credit, financial guarantees, and other similar investments) that are not unconditionally cancellable. The reserve for unfunded commitments is classified with "Accrued expenses and other liabilities" on the Company’s Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates.
ACL for Available-for-Sale Securities
There are inherent risks associated with the Company's investment activities that could adversely impact the fair value and the ultimate collectability of the Company's investments. The Company primarily invests in debt securities. At December 31, 2021, the Company also held immaterial amounts of equity securities and FHLB stock.
The Company measures expected credit losses on available-for-sale securities based upon the unrealized gain or loss position of the security. For available-for-sale debt securities in an unrealized loss position, the Company evaluates qualitative criteria to determine any expected loss unless the Company intends to sell, or it is more likely than not that the Company will be required to sell before recovery of the amortized cost. In the latter two circumstances, the Company recognizes the entire difference between the security’s amortized cost basis and its fair value as a write-down of the investment balance with a charge to earnings. Otherwise, management’s analysis considers various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, and (4) structure of the security. If the Company does not expect to recover the entire amortized cost basis of the security, an allowance for credit losses for available-for-sale securities would be recorded, with a related charge to earnings, limited by the amount of the fair value of the security less its amortized cost.
Impairment Review of Goodwill
In accordance with GAAP, the Company does not amortize goodwill and instead, at least annually, evaluates whether the carrying value of goodwill has become impaired. A determination that goodwill has become impaired results in an immediate write-down of goodwill to its determined value with a resulting charge to the Company's Consolidated Statement of Income. Goodwill is evaluated at the reporting unit level. In the case of the Company, the services offered through the Bank and subsidiaries are managed as one strategic unit and represent the Company's only reportable operating segment.
The Company has the option to perform either (i) a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its book value, or (ii) a quantitative assessment.
1.Management's qualitative assessment would take into consideration, among other items, macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price. Based on the qualitative assessment, if the Company were to conclude: (a) it is "more likely than not" that the fair value of a reporting unit exceeds its book value, goodwill is deemed not impaired, or (b) it is "more likely than not" that the fair value of a reporting unit is less than its book value, a quantitative goodwill analysis must be performed.
2.The Company may elect to forgo the qualitative assessment and perform the quantitative analysis even if management does not believe that is "more likely than not" that goodwill is impaired. The quantitative goodwill analysis compares the fair value of the reporting unit with its book value, including goodwill. If the fair value of the reporting unit equals or exceeds its book value, goodwill is deemed not impaired. If the book value of the reporting unit exceeds its fair value, a goodwill impairment loss is recognized for the difference between these amounts, not exceeding the goodwill carrying amount.
At December 31, 2021, based on the Company's qualitative analysis, goodwill was deemed not to be impaired.
Recent Accounting Pronouncements
See Note 1, "Summary of Significant Accounting Policies," Item (w) "Recent Accounting Pronouncements," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below, for information regarding recent accounting pronouncements.
Item 8.Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
As of December 31,
| | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | | 2021 | | 2020 |
Assets | | | | |
Cash and cash equivalents: | | | | |
Cash and due from banks | | $ | 33,572 | | | $ | 40,636 | |
Interest-earning deposits with banks | | 403,004 | | | 213,146 | |
| | | | |
Total cash and cash equivalents | | 436,576 | | | 253,782 | |
Investments: | | | | |
Debt securities at fair value (amortized cost of $950,523 and $551,191, respectively) | | 956,430 | | | 582,303 | |
Equity securities at fair value | | 1,785 | | | 746 | |
Total investment securities at fair value | | 958,215 | | | 583,049 | |
Federal Home Loan Bank ("FHLB") stock | | 2,164 | | | 1,905 | |
Loans held for sale | | — | | | 371 | |
Loans: | | | | |
Total loans | | 2,920,684 | | | 3,073,860 | |
Allowance for credit losses | | (47,704) | | | (44,565) | |
Net loans | | 2,872,980 | | | 3,029,295 | |
Premises and equipment, net | | 44,689 | | | 46,708 | |
Lease right-of-use asset | | 24,295 | | | 18,439 | |
Accrued interest receivable | | 13,354 | | | 16,079 | |
Deferred income taxes, net | | 19,644 | | | 11,290 | |
Bank-owned life insurance | | 62,954 | | | 31,363 | |
Prepaid income taxes | | 279 | | | 2,449 | |
Prepaid expenses and other assets | | 7,013 | | | 13,938 | |
Goodwill | | 5,656 | | | 5,656 | |
Total assets | | $ | 4,447,819 | | | $ | 4,014,324 | |
Liabilities and Shareholders' Equity | | | | |
Liabilities | | | | |
Deposits: | | | | |
Customer deposits | | $ | 3,980,239 | | | $ | 3,476,268 | |
Brokered deposits | | — | | | 74,995 | |
Total deposits | | 3,980,239 | | | 3,551,263 | |
Borrowed funds | | 5,479 | | | 4,774 | |
Subordinated debt | | 58,979 | | | 73,744 | |
Lease liability | | 23,627 | | | 17,539 | |
Accrued expenses and other liabilities | | 31,063 | | | 30,638 | |
Accrued interest payable | | 1,537 | | | 1,940 | |
Total liabilities | | 4,100,924 | | | 3,679,898 | |
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; 12,038,382 and 11,937,795 shares issued and outstanding, respectively | | 120 | | | 119 | |
Additional paid-in capital | | 100,352 | | | 97,137 | |
Retained earnings | | 241,761 | | | 214,977 | |
Accumulated other comprehensive income | | 4,662 | | | 22,193 | |
Total shareholders' equity | | 346,895 | | | 334,426 | |
Total liabilities and shareholders' equity | | $ | 4,447,819 | | | $ | 4,014,324 | |
See accompanying notes to consolidated financial statements.
71
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31,
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | | 2021 | | 2020 | | 2019 |
Interest and dividend income: | | | | | | |
Loans and loans held for sale | | $ | 133,208 | | | $ | 131,091 | | | $ | 122,082 | |
Investment securities | | 15,143 | | | 13,347 | | | 13,135 | |
Other interest-earning assets | | 682 | | | 402 | | | 1,891 | |
Total interest and dividend income | | 149,033 | | | 144,840 | | | 137,108 | |
Interest expense: | | | | | | |
Deposits | | 3,922 | | | 11,599 | | | 19,941 | |
Borrowed funds | | 60 | | | 606 | | | 385 | |
Subordinated debt | | 3,495 | | | 2,501 | | | 925 | |
Total interest expense | | 7,477 | | | 14,706 | | | 21,251 | |
Net interest income | | 141,556 | | | 130,134 | | | 115,857 | |
Provision for credit losses | | 1,770 | | | 12,499 | | | 1,180 | |
Net interest income after provision for credit losses | | 139,786 | | | 117,635 | | | 114,677 | |
Non-interest income: | | | | | | |
Wealth management fees | | 6,787 | | | 5,815 | | | 5,494 | |
Deposit and interchange fees | | 6,971 | | | 6,426 | | | 6,870 | |
Income on bank-owned life insurance, net | | 821 | | | 587 | | | 638 | |
Net gains on sales of debt securities | | 128 | | | 227 | | | 146 | |
| | | | | | |
Net gains on sales of loans | | 833 | | | 1,409 | | | 469 | |
Net gain on sale of OREO | | 1,126 | | | — | | | 34 | |
Loss on termination of swaps | | (1,847) | | | — | | | — | |
Other income | | 3,288 | | | 2,783 | | | 2,668 | |
Total non-interest income | | 18,107 | | | 17,247 | | | 16,319 | |
Non-interest expense: | | | | | | |
Salaries and employee benefits | | 66,633 | | | 61,580 | | | 56,059 | |
Occupancy and equipment expenses | | 9,650 | | | 8,546 | | | 8,417 | |
Technology and telecommunications expenses | | 10,574 | | | 9,197 | | | 7,590 | |
Advertising and public relations expenses | | 2,373 | | | 2,151 | | | 2,962 | |
Audit, legal and other professional fees | | 2,347 | | | 2,273 | | | 2,039 | |
Deposit insurance premiums | | 1,910 | | | 2,124 | | | 876 | |
Supplies and postage expenses | | 819 | | | 898 | | | 971 | |
| | | | | | |
Loss on extinguishment of subordinated debt | | 713 | | | — | | | — | |
Other operating expenses | | 7,116 | | | 6,485 | | | 7,501 | |
Total non-interest expense | | 102,135 | | | 93,254 | | | 86,415 | |
Income before income taxes | | 55,758 | | | 41,628 | | | 44,581 | |
Provision for income taxes | | 13,587 | | | 10,172 | | | 10,381 | |
Net income | | $ | 42,171 | | | $ | 31,456 | | | $ | 34,200 | |
| | | | | | |
Basic earnings per share | | $ | 3.51 | | | $ | 2.64 | | | $ | 2.90 | |
Diluted earnings per share | | $ | 3.50 | | | $ | 2.64 | | | $ | 2.89 | |
| | | | | | |
Basic weighted average common shares outstanding | | 12,005,838 | | | 11,897,813 | | | 11,789,570 | |
Diluted weighted average common shares outstanding | | 12,051,293 | | | 11,919,508 | | | 11,829,818 | |
See accompanying notes to consolidated financial statements.
72
ENTERPRISE BANCORP, INC.
Consolidated Statements of Comprehensive Income
Years Ended December 31,
| | | | | | | | | | | | | | | | | | | | |
| | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Net income | | $ | 42,171 | | | $ | 31,456 | | | $ | 34,200 | |
Other comprehensive (loss) income, net of taxes: | | | | | | |
Net change in fair value of debt securities | | (19,554) | | | 13,706 | | | 11,794 | |
Net change in fair value of cash flow hedges | | 2,023 | | | (2,023) | | | — | |
Total other comprehensive (loss) income, net | | (17,531) | | | 11,683 | | | 11,794 | |
Total comprehensive income, net | | $ | 24,640 | | | $ | 43,139 | | | $ | 45,994 | |
See accompanying notes to consolidated financial statements.
73
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 2021, 2020 and 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income/(Loss) | | Total Shareholders’ Equity |
(Dollars in thousands, except share data) | | Shares | | Amount |
Balance at December 31, 2018 | | 11,708,218 | | | $ | 117 | | | $ | 91,281 | | | $ | 165,183 | | | $ | (1,284) | | | $ | 255,297 | |
Net income | | | | | | | | 34,200 | | | | | 34,200 | |
Other comprehensive income, net | | | | | | | | | | 11,794 | | | 11,794 | |
| | | | | | | | | | | | |
Common stock dividend declared ($0.64 per share) | | | | | | | | (7,540) | | | | | (7,540) | |
Common stock issued under dividend reinvestment plan | | 39,176 | | | — | | | 1,169 | | | | | | | 1,169 | |
Common stock issued, other | | 2,305 | | | — | | | 69 | | | | | | | 69 | |
Stock-based compensation, net | | 61,318 | | | 1 | | | 1,868 | | | | | | | 1,869 | |
Net settlement for employee taxes on restricted stock and options | | (8,223) | | | — | | | (402) | | | | | | | (402) | |
Stock option exercised, net | | 22,537 | | | — | | | 185 | | | | | | | 185 | |
Balance at December 31, 2019 | | 11,825,331 | | | $ | 118 | | | $ | 94,170 | | | $ | 191,843 | | | $ | 10,510 | | | $ | 296,641 | |
Net income | | | | | | | | 31,456 | | | | | 31,456 | |
Other comprehensive income, net | | | | | | | | | | 11,683 | | | 11,683 | |
| | | | | | | | | | | | |
Common stock dividend declared ($0.70 per share) | | | | | | | | (8,322) | | | | | (8,322) | |
Common stock issued under dividend reinvestment plan | | 50,506 | | | — | | | 1,217 | | | | | | | 1,217 | |
Common stock issued, other | | 3,816 | | | — | | | 91 | | | | | | | 91 | |
Stock-based compensation, net | | 65,417 | | | 1 | | | 1,871 | | | | | | | 1,872 | |
Net settlement for employee taxes on restricted stock and options | | (8,315) | | | — | | | (233) | | | | | | | (233) | |
Stock options exercised, net | | 1,040 | | | — | | | 21 | | | | | | | 21 | |
Balance at December 31, 2020 | | 11,937,795 | | | $ | 119 | | | $ | 97,137 | | | $ | 214,977 | | | $ | 22,193 | | | $ | 334,426 | |
Net income | | | | | | | | 42,171 | | | | | 42,171 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cumulative effect adjustment for (CECL) adoption, net of tax | | | | | | | | (6,510) | | | | | (6,510) | |
Other comprehensive loss, net | | | | | | | | | | (17,531) | | | (17,531) | |
Common stock dividend declared ($0.74 per share) | | | | | | | | (8,877) | | | | | (8,877) | |
Common stock issued under dividend reinvestment plan | | 36,651 | | | — | | | 1,250 | | | | | | | 1,250 | |
Common stock issued, other | | 1,766 | | | — | | | 59 | | | | | | | 59 | |
Stock-based compensation, net | | 63,329 | | | 1 | | | 2,093 | | | | | | | 2,094 | |
Net settlement for employee taxes on restricted stock and options | | (10,029) | | | — | | | (346) | | | | | | | (346) | |
Stock options exercised, net | | 8,870 | | | — | | | 159 | | | | | | | 159 | |
Balance at December 31, 2021 | | 12,038,382 | | | $ | 120 | | | $ | 100,352 | | | $ | 241,761 | | | $ | 4,662 | | | $ | 346,895 | |
See accompanying notes to consolidated financial statements.
74
ENTERPRISE BANCORP, INC
Consolidated Statements of Cash Flows
Years Ended December 31,
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 42,171 | | | $ | 31,456 | | | $ | 34,200 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Provision for credit losses | | 1,770 | | | 12,499 | | | 1,180 | |
Depreciation and amortization | | 7,809 | | | 6,784 | | | 6,142 | |
Stock-based compensation expense | | 2,060 | | | 1,905 | | | 1,872 | |
Income on bank-owned life insurance, net | | (821) | | | (587) | | | (638) | |
| | | | | | |
Net gains on sales of debt securities | | (128) | | | (227) | | | (146) | |
Net (gains) losses on equity securities | | (246) | | | 49 | | | (367) | |
| | | | | | |
Mortgage loans originated for sale | | (29,123) | | | (59,570) | | | (25,562) | |
Proceeds from mortgage loans sold | | 30,327 | | | 61,209 | | | 26,131 | |
Net gains on sales of loans | | (833) | | | (1,409) | | | (469) | |
Net gains on sales of OREO | | (1,126) | | | — | | | (34) | |
Loss on termination of swaps | | 1,847 | | | — | | | — | |
Changes in: | | | | | | |
Net decrease (increase) in other assets | | 9,324 | | | (16,997) | | | 136 | |
Net (decrease) increase in other liabilities | | (798) | | | 5,223 | | | 1,174 | |
Net cash provided by operating activities | | 62,233 | | | 40,335 | | | 43,619 | |
Cash flows from investing activities: | | | | | | |
Proceeds from sales of debt securities | | 3,059 | | | 5,907 | | | 13,623 | |
Purchase of debt securities | | (491,213) | | | (145,319) | | | (126,872) | |
Proceeds from maturities, calls and pay-downs of debt securities | | 87,347 | | | 77,534 | | | 48,805 | |
Net (purchases) sales of equity securities | | (793) | | | (328) | | | 1,348 | |
Net (purchases) sales of FHLB capital stock | | (259) | | | 2,579 | | | 873 | |
Net increase (decrease) in loans | | 146,812 | | | (509,949) | | | (179,623) | |
Additions to premises and equipment, net | | (4,187) | | | (6,679) | | | (12,498) | |
Proceeds from OREO sales | | 3,526 | | | — | | | 289 | |
| | | | | | |
| | | | | | |
Purchase of bank-owned life insurance | | (30,770) | | | — | | | — | |
Net cash used in investing activities | | (286,478) | | | (576,255) | | | (254,055) | |
Cash flows from financing activities: | | | | | | |
Net increase in deposits | | 428,976 | | | 764,533 | | | 221,948 | |
Net increase (decrease) in borrowed funds | | 705 | | | (91,399) | | | (4,319) | |
Repayment of subordinated debt | | (15,600) | | | — | | | — | |
Loss on extinguishment of subordinated debt | | 713 | | | — | | | — | |
Proceeds from the issuance of subordinated debt | | — | | | 60,000 | | | — | |
Cash dividends paid, net of dividend reinvestment plan | | (7,627) | | | (7,105) | | | (6,371) | |
Proceeds from issuance of common stock | | 59 | | | 91 | | | 69 | |
Net settlement for employee taxes on restricted stock and options | | (346) | | | (233) | | | (402) | |
Net proceeds from stock option exercises | | 159 | | | 21 | | | 185 | |
| | | | | | |
Net cash provided by financing activities | | 407,039 | | | 725,908 | | | 211,110 | |
| | | | | | |
Net increase in cash and cash equivalents | | 182,794 | | | 189,988 | | | 674 | |
Cash and cash equivalents at beginning of year | | 253,782 | | | 63,794 | | | 63,120 | |
Cash and cash equivalents at end of year | | $ | 436,576 | | | $ | 253,782 | | | $ | 63,794 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
See accompanying notes to consolidated financial statements.
75
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(1)Summary of Significant Accounting Policies
(a) Organization of the Company and Basis of Presentation
The accompanying consolidated financial statements of Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our"), a Massachusetts corporation, include the accounts of the Company and its wholly owned subsidiary, Enterprise Bank and Trust Company, commonly referred to as Enterprise Bank (the "Bank"). The Bank is a Massachusetts trust company and state chartered commercial bank organized in 1989. Substantially all 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, and 239 Littleton Road, LLC, organized in 2021 in the State of Massachusetts for the purpose of maintaining and disposing of real estate acquired through the Bank's lending functions. 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 Company's headquarters and the Bank's main office are located at 222 Merrimack Street in Lowell, Massachusetts. At December 31, 2021, the Company had 26 full-service branch banking offices serving the Northern Middlesex, Northern Essex and Northern Worcester counties of Massachusetts and Southern Hillsborough and Southern Rockingham counties in New Hampshire. A 27th branch to be located in Londonderry, New Hampshire is expected to open in the third quarter of 2022.
Through the Bank and its subsidiaries, the Company offers a range of commercial, residential and consumer loan products, deposit products and cash management services, electronic and digital banking options, and commercial insurance services. The Company also provides a range of wealth management, wealth services and trust services delivered via two channels, Enterprise Wealth Management and Enterprise Wealth Services. 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 Federal Deposit Insurance Corporation (the "FDIC") and the Massachusetts Division of Banks (the "Division") have regulatory authority over the Bank. The Bank is also subject to certain regulatory requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and, with respect to its New Hampshire branch operations, the New Hampshire Banking Department. The business and operations of the Company are subject to the regulatory oversight of the Federal Reserve Board. The Division also retains supervisory jurisdiction over the Company.
The accompanying audited consolidated financial statements and notes thereto have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") and the instructions for SEC Form 10-K through the rules and interpretive releases of the SEC under federal securities law. In the opinion of management, the accompanying audited consolidated financial statements reflect all necessary adjustments consisting of normal recurring accruals for a fair presentation. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. Certain previous years' amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to the current year's presentation.
The Company has evaluated subsequent events and transactions from December 31, 2021, through the filing date of this Annual Report on Form 10-K with the SEC for potential recognition or disclosure as required by GAAP and determined that there were no material subsequent events requiring recognition or disclosure.
(b) Uses of Estimates
In preparing the consolidated 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 years 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
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
financial statements and results of operations in future periods. The three most significant areas in which management applies critical assumptions and estimates are the estimates of the allowance for credit losses for loans and available for sale securities, and the impairment review of goodwill, which are each discussed below.
(c) Cash and Cash Equivalents
Cash equivalents are defined as highly liquid investments with original maturities of three months or less, that are readily convertible to known amounts of cash and present insignificant risk of changes in value due to changes in interest rates. The Company's cash and cash equivalents may be comprised of cash on hand and cash items due from banks, interest-earning deposits with banks (deposit accounts, excess reserve cash balances, money markets, and money market mutual fund accounts) and overnight and term federal funds ("fed funds") sold to money center banks. Balances in cash and cash equivalents will fluctuate due primarily to the timing of net cash flows from deposits, borrowings, loans and investments, and the immediate liquidity needs of the Company.
(d) Restricted Cash and Investments
Certain of the Company's derivative agreements contain provisions for collateral to be posted if the derivative exposure exceeds a threshold amount. When the Company has pledged cash as collateral in relation to certain derivatives, the cash is carried as restricted cash within "Interest-earning deposits with banks." See Note 9, "Derivatives and Hedging Activities," to the Company's consolidated financial statements of this Form 10-K below for more information about the Company's collateral related to its derivatives.
As a member of the FHLB, the Company is required to purchase certain levels of FHLB capital stock at par value in association with outstanding advances from the FHLB. From time-to-time, the FHLB may initiate the repurchase, at par value, of "excess" levels of its capital stock held by member banks. This stock is classified as a restricted investment and is carried at cost, which management believes approximates fair value. FHLB stock represents the only restricted investment held by the Company.
Management regularly reviews its holdings of FHLB stock for impairment, and as of December 31, 2021, the Company has determined that no allowance for credit losses on FHLB stock was necessary.
See Note 2, "Investment Securities," to the Company's consolidated financial statements of this Form 10-K, contained below, for additional information on management's assessment of expected credit losses for available for sale securities.
(e) Investment Securities
Investments in debt securities that are intended to be held for indefinite periods of time, but which may not be held to maturity or on a long-term basis are considered to be "available-for-sale" and are carried at fair value.
Included as available-for-sale are debt securities that are purchased in connection with the Company's asset-liability risk management strategy and that may be sold in response to changes in interest rates, prepayment risk and other related factors. In instances where the Company has the positive intent to hold debt securities to maturity, these securities will be classified as held-to-maturity and carried at amortized cost. As of the balance sheet dates, all the Company's debt securities were classified as available-for-sale and carried at fair value.
Net unrealized appreciation and depreciation on debt securities available-for-sale, net of applicable income taxes, are recorded in the Company's Consolidated Statement of Comprehensive Income as a component of "Accumulated other comprehensive (loss) income". The net unrealized gain or loss in the Company's debt security portfolio fluctuates as market interest rates rise and fall. Due to the fixed rate nature of this portfolio, as market rates fall, the value of the portfolio rises, and as market rates rise, the value of the portfolio declines. The unrealized gains or losses on debt securities will also decline as the securities approach maturity.
The Company's equity securities are carried at fair value with changes in fair value recognized in the Company's Consolidated Income Statement as a component of "Other income." The net gains and losses on equity securities that will be recognized as a component of "Other income" in the future will depend on the amount of dollars invested in equities, the magnitude of changes in equity markets and the amount of gains or losses realized through equity sales.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Investment securities' discounts are accreted and premiums are amortized over the period of estimated principal repayment using methods that approximate the interest method. Gains or losses on the sale of investment securities are recognized on the trade date on a specific identification basis.
ACL for Available-for-Sale Securities
The Company measures expected credit losses on available-for-sale securities based upon the unrealized gain or loss position of the security. For available-for-sale debt securities in an unrealized loss position, the Company evaluates qualitative criteria to determine any expected loss unless the Company intends to sell, or it is more likely than not that the Company will be required to sell before recovery of the amortized cost. In the latter two circumstances, the Company recognizes the entire difference between the security’s amortized cost basis and its fair value as a write-down of the investment balance with a charge to earnings. Otherwise, management’s analysis considers various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, and (4) structure of the security. If the Company does not expect to recover the entire amortized cost basis of the security, an allowance for credit losses for available-for-sale securities would be recorded, with a related charge to earnings, limited by the difference of the amortized cost of the security to its fair value. The Company has elected to exclude accrued interest from the measurement of the allowance for credit losses for available-for-sale debt securities and to continue to write-off uncollectible accrued interest receivable by reversing interest income.
At December 31, 2021, management performed its quarterly analysis of all securities with unrealized losses and determined that all were attributable to increases in market yields. Management concluded that no ACL for available-for-sale securities was considered necessary as of December 31, 2021.
(f) Loans Held for Sale
Depending on the current interest-rate environment, management projections of future interest rates and the overall asset-liability management program of the Company, management may elect to sell those fixed and adjustable rate residential mortgage loans which are eligible for sale in the secondary market or hold some or all of this residential loan production for the Company's portfolio. Mortgage loans are generally not pooled for sale, but instead sold on an individual basis. Enterprise may retain or sell the servicing when selling the loans. Loans sold are subject to standard secondary market underwriting and eligibility representations and warranties over the life of the loan and are subject to an early payment default period covering the first four payments for certain loan sales. Loans held for sale are carried at the lower of aggregate amortized cost or fair value on a separate line on the balance sheet. Fair value is based on comparable market prices for loans with similar rates and terms. When loans are sold, a gain or loss is recognized to the extent that the sales proceeds plus unamortized fees and costs exceed, or are less than, the carrying value of the loans. Gains and losses are determined using the specific identification method.
(g) Loans
Loans made by the Company to businesses, non-profits and professional practices include commercial real estate mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and letters of credit. Loans made to individuals include conventional residential mortgage loans, home equity loans and lines, residential construction loans on owner-occupied primary and secondary residences, and secured and unsecured personal loans and lines of credit. Most loans granted by the Company are collateralized by real estate, equipment, or receivables and/or are guaranteed by the principals of the borrower. The ability and willingness of borrowers to honor their repayment commitments is generally dependent on the health of the real estate sector in the borrowers' geographic areas and the general economy, among other factors.
Loans are reported at the principal amount outstanding, net of deferred origination fees and costs. The aggregate amounts of overdrawn deposit accounts are reclassified as loan balances. Loan origination fees received, offset by direct loan origination costs, are deferred and amortized using the straight-line method over three years to five years for lines of credit and demand notes or over the life of the related loans using the level-yield method for all other types of loans. When loans are paid off, the unamortized fees and costs are recognized as an adjustment to interest income.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
From time to time, the Company participates with other banks in the financing of certain commercial projects. In each case in which the Company participates in a loan, the rights and obligations of each participating bank are divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks. Each participation is governed by individual participation agreements executed by the lead bank and the participants at loan origination. When the participation qualifies as a sale under GAAP, the balances participated out to other institutions are not carried as assets on the Company's consolidated financial statements. The Company performs an independent credit analysis of each commitment and a review of the participating institution prior to participation in the loan, and an annual review thereafter of each participating institution. Loans originated by other banks in which the Company is the participating institution are carried in the loan portfolio at the Company's pro rata share of ownership. Participating loans with other institutions provide banks the opportunity to retain customer relationships and reduce credit risk exposure among each participating bank, while providing customers with larger credit vehicles than the individual bank might be willing or able to offer independently.
The Company seeks to lessen its credit risk exposure by managing its loan portfolio to avoid concentration by industry, relationship size and source of repayment, and through sound underwriting practices and the credit risk management function; however, management recognizes that credit losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio and economic conditions.
The Company's loan risk rating system classifies loans depending on risk of loss characteristics. The classifications range from "substantially risk free" for the highest quality loans and loans that are secured by cash collateral, through a satisfactory range of "minimal," "moderate," "better than average," and "average" risk, all of which are considered "pass" rated credits. The adverse classifications range from "special mention," for loans that may need additional monitoring, to the more severe classifications of "substandard," "doubtful," and "loss" based on criteria established under banking regulations. Loans which are evaluated to be of weaker credit quality are classified as adverse and placed on the "watch asset list" and reviewed on a more frequent basis by management. Loans classified as "substandard" include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as "doubtful" have all the weaknesses inherent in a substandard rated loan with the added characteristic that the weaknesses make collection or full payment from liquidation, based on existing facts, conditions, and values, highly questionable and improbable. Loans classified as "loss" are generally considered uncollectible at present, although long term recovery of part or all of loan proceeds may be possible. These "loss" loans would require a specific loss reserve or charge-off. Adversely classified loans may be accruing or in non-accrual status and may be additionally designated as impaired or restructured, or some combination thereof.
Loans on which the accrual of interest has been discontinued are designated as non-accrual loans and the classified portions are credit downgraded to one of the adversely classified categories noted above. Accrual of interest on loans is generally discontinued when a loan becomes contractually past due, with respect to interest or principal, by 90 days, or when reasonable doubt exists as to the full and timely collection of interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when payments are brought current and have remained current for a period of 180 days or when, in the judgment of management, the collectability of both principal and interest is reasonably assured. Interest payments received on loans in a non-accrual status are generally applied to principal on the books of the Company.
Loans individually evaluated consist primarily of loans for which management considers it probable that not all amounts due (principals and interest) will be collected in accordance with the original contractual terms and loans designated as TDRs and to a lesser extent, if applicable, loans that management deems as individually significant or with unique risk characteristics or for some other reason based on management’s judgement. Management considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management estimates the credit loss by comparing the loan's carrying value against either (i) the present value of the expected future cash flows discounted at the loan's effective interest-rate; (ii) the loan's observable market price; or (iii) the expected realizable fair value of the collateral, in the case of collateral dependent loans. A specific allowance is assigned to the loan for the amount of estimated credit loss. Individually evaluated loans are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.
Management does not set any minimum delay of payments as a factor in reviewing for individual evaluation. Management considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms.
Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Bank grants the borrower a concession on the terms that would not otherwise be
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
considered. Typically, such concessions may consist of one or a combination of the following: a reduction in interest rate to a below market rate, taking into account the credit quality of the note, extension of additional credit based on receipt of adequate collateral, or a deferment or reduction of payments (principal or interest), which materially alters the Bank's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. TDR loans are included in the individually evaluated loan category and as such, these loans are individually reviewed and evaluated for specific reserves.
Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act 2021, provides financial institutions the option to suspend the application of GAAP to any loan modification related to COVID-19 from treatment as a TDR for the period between March 1, 2020 and the earlier of (i) 60 days after the end of the national emergency proclamation or (ii) January 1, 2022. A financial institution may elect to suspend GAAP only for a loan that was not more than 30 days past due as of December 31, 2019. In addition, the temporary suspension of GAAP does not apply to any adverse impact on the credit of a borrower that is not related to the COVID-19 pandemic. The suspension of GAAP is applicable for the entire term of the modification, including an interest-rate modification, a forbearance agreement, a repayment plan, or other agreement that defers or delays the payment of principal and/or interest. Accordingly, a financial institution that elects to suspend GAAP pursuant to the CARES Act is not required to increase its reported TDRs at the end of the period of relief, unless the loans require further modification after the expiration of that period.
In accordance with the provision of the CARES Act and subsequent extension by the Consolidated Appropriations Act, 2021, management chose to suspend TDR accounting under GAAP in certain circumstances through December 31, 2021.
Individually evaluated adversely classified loans and TDR loans will be considered for upgrade based on the borrower's sustained performance over time and their improving financial condition. Consistent with the criteria for returning non-accrual loans to accrual status, the borrower must demonstrate the ability to continue to service the loan in accordance with the original or modified terms and, in the judgment of management, the collectability of the remaining balances, both principal and interest, are reasonably assured. In the case of TDR loans having had a modified interest rate, that rate must be at, or greater than, a market rate for a similar credit at the time of modification for an upgrade to be considered.
(h) ACL for Loans
On January 1, 2021, the Company adopted ASU 2016-13, including the CECL methodology for estimating the ACL for loans. The CECL methodology requires early recognition of credit losses using a lifetime credit loss measurement approach that also requires the consideration of reasonable and supportable forecasts in the estimate. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, which for the Company is primarily the loan portfolio. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, which are not unconditionally cancellable. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses be presented as an allowance rather than as a write-down. Additionally, the Company has elected to continue to present the accrued interest receivable balance on loans separate from amortized costs, exclude accrued interest from the measurement of the allowance for credit losses for loans and to continue to write-off uncollectible accrued interest receivable by reversing interest income.
Arriving at an appropriate level of ACL for loans involves a high degree of management judgement. The ACL for loans is established through a provision for credit losses, a direct charge to earnings. Credit losses are charged against the ACL for loans when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance.
See also Note 4, "ACL for Loans," to the Company's consolidated financial statements of this Form 10-K, for the methodology used to estimate the allowance for credit losses.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(i) Other Real Estate Owned
Real estate acquired by the Company through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as other real estate owned ("OREO"). When property is acquired, it is recorded at the estimated fair value of the property acquired, less estimated costs to sell, establishing a new cost basis and carried on the Consolidated Balance Sheet in the line item "Prepaid expenses and other assets." The estimated fair value is based on market appraisals and the Company's internal analysis. Any loan balance more than the estimated realizable fair value on the date of transfer is charged to the allowance for credit losses on that date. All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value are charged to non-interest expense.
(j) Premises and Equipment
Land is carried at cost. All other premises and equipment costs are stated at cost less accumulated depreciation and amortization. Depreciation or amortization is computed on a straight-line basis over the lesser of the estimated useful lives of the asset or the respective lease term (including renewal options reasonably certain to be exercised) for leasehold improvements generally as follows:
| | | | | | | | |
Bank premises, land improvements, and leasehold improvements | | 10 to 39 years |
Computer software and equipment | | 3 to 5 years |
Furniture, fixtures, and equipment | | 3 to 10 years |
(k) Leases
Lessees are recognized as right-of-use ("ROU") lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The lease liability represents the present value of the future lease payments. The ROU asset includes the lease liability, lease prepayments and initial direct costs, less fixed payment lease liabilities. For the Company, leases consist mainly of operating leases on our facilities, mainly branch leases.
The Company excludes leases with a term of 12 months or less from the recorded lease liability and ROU asset and accounts for lease and non-lease components (such as common area maintenance) separately. To calculate the lease liability, the Company uses its incremental borrowing rate as the discount rate to determine the net present value of the lease liability. In determining the term of a lease, the Company included option renewal periods that it considered reasonably certain to be exercised.
The Company recognizes lease expense on a straight-line basis in the "Occupancy and equipment expenses" line item within the non-interest expense section of the Consolidated Statement of Income.
(l) Bank Owned Life Insurance
The Company has purchased bank-owned life insurance ("BOLI") as an investment vehicle, on certain current and former senior and executive officers, utilizing the earnings on BOLI to offset the cost of the Company's benefit plans. There are no associated surrender charges under the outstanding policies.
Information on the Company's benefit plans is contained in Note 13, "Employee Benefit Plans," to the Company's consolidated financial statements of this Form 10-K, contained below.
(m) Impairment of Long-Lived Assets Other than Goodwill
The Company reviews long-lived assets, including premises, equipment, and lease right of use assets for impairment on an ongoing basis or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. If impairment is determined to exist, any related impairment loss is recognized through a charge to earnings. Impairment losses on assets disposed of, if any, are based on the estimated proceeds to be received, less cost of disposal.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(n) Goodwill
Goodwill is carried on the Company's consolidated financial statements and is related to the Company's acquisition of two branch offices in July 2000.
In accordance with GAAP, the Company does not amortize goodwill and instead, at least annually, evaluates whether the carrying value of goodwill has become impaired. A determination that goodwill has become impaired results in an immediate write-down of goodwill to its determined value with a resulting charge to the Company's Consolidated Statement of Income. Goodwill is evaluated at the reporting unit level. In the case of the Company, the services offered through the Bank and subsidiaries are managed as one strategic unit and represent the Company’s only reportable operating segment.
The Company has the option to perform either (i) a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its book value, or (ii) a quantitative assessment.
1.Management's qualitative assessment would take into consideration, among other items, macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price. Based on the qualitative assessment, if the Company were to conclude: a) it is "more likely than not" that the fair value of a reporting unit exceeds its book value, goodwill is deemed not impaired, or b) it is "more likely than not" that the fair value of a reporting unit is less than its book value, a quantitative goodwill analysis must be performed.
2.The Company may elect to forgo the qualitative assessment and perform the quantitative analysis even if management believes that is "more likely than not" that goodwill is not impaired. The quantitative goodwill analysis compares the fair value of the reporting unit with its book value, including goodwill. If the fair value of the reporting unit equals or exceeds its book value, goodwill is deemed not impaired. If the book value of the reporting unit exceeds its fair value, a goodwill impairment loss is recognized for the difference between these amounts, not exceeding the goodwill carrying amount.
At December 31, 2021, based on the Company's quantitative analysis, goodwill was deemed not impaired.
(o) Wealth Assets Under Management and Administration
Wealth assets under management consist of assets managed through Enterprise Wealth Management and Enterprise Wealth Services. Wealth assets under administration consist of 401(k) plans, trust, and custodial accounts. Wealth assets under management and administration are not included in the Consolidated Balance Sheets because they are not assets of the Company.
(p) Derivatives and Hedging
The Company may enter into derivative financial instruments to add stability to interest expense and to manage its exposure to interest rate movements. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
For derivatives designated and that qualify as cash flow hedges, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income ("AOCI"), net of tax and subsequently reclassified into interest income or interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to cash flow hedge derivatives will be reclassified to interest expense as interest is incurred on the Company’s hedge liability or to interest income as interest is earned on the Company's hedge asset. See Note 11, "Comprehensive Income (Loss)," of this Form 10-K for additional information related to the cash flow hedges impact on the Company’s AOCI and Consolidated Statements of Income.
The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting. Back-to-Back swaps are not speculative; rather, the transactions result from a service the Company provides to certain commercial customers. As a result, the Company has designated its back-to-back swaps as economic hedges which are not subject to hedge accounting. Any changes in the fair value of both the customer swaps and the counterparty swaps, which have an offsetting relationship, are recognized directly in earnings.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The Company records all derivatives on the balance sheet at fair value. Asset derivatives are included in the line item "Prepaid expenses and other assets," and liability derivatives are included in the "Accrued expenses and other liabilities" line item on the Consolidated Balance Sheets. In accordance with GAAP, the Company elects to measure the credit risk of its derivative financial instruments that are subject to master netting agreements by derivative type on a net basis by counterparty portfolio.
See Note 9, "Derivatives and Hedging Activities," to the Company's consolidated financial statements of this Form 10-K, contained below, for more information about the Company's back-back swaps and cash flow hedges.
Interest-rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. The Company generally does not pool mortgage loans for sale, but instead, sells the loans on an individual basis. To reduce the net interest rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest-rate lock commitment is quoted on the origination of the loan. The Company estimates the fair value of these derivatives based on current secondary mortgage market prices.
The Company’s objectives in using these interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. These interest rate swaps are designated as cash flow hedges and involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
(q) Revenue Recognition
While the majority of the Company's revenue is generated from contracts with customers, our primary sources of revenue, interest and dividend income (primarily loan interest income), are outside of the scope of ASC 606, "Revenue from Contracts with Customers," and are accounted for under other ASC topics. The core principles of this standard require an entity to recognize revenue to depict the transfer of goods and services to customers as performance obligations are satisfied.
The primary areas of income within the scope of ASC 606, wealth management fees and deposit and interchange fees, are components of non-interest income on the Company's Consolidated Statements of Income and are discussed below.
Wealth management fees consist of income generated through Enterprise Wealth Management and Enterprise Wealth Services. Enterprise Wealth Management income is primarily generated by managing customers' financial assets. Revenue is recognized as our performance obligation is completed each month. Enterprise Wealth Services revenue is generated through a third-party arrangement to refer, manage and service customers. For new sales and referrals along with transactional type charges, the performance obligation is based on a point in time and the payment is received and revenue is recognized in the same month as the revenue generating activity. For managing and servicing customers, revenue is recognized when our performance obligation is completed each month.
Deposit and interchange fees are comprised of deposit account related charges and income generated from electronic payment interchanges. Deposit account charges consist of certain transactional analysis fees net of earning balance credits, monthly account service fees, and transactional fees such as overdraft fees. Analysis and monthly account services fees are recognized over the period the service is performed. For transactional fees, the performance obligation and the revenue are recognized at a point of time and payment is typically received as the service is rendered. Interchange income is generated primarily from retail debit card transactions processed through the card payment network. The performance obligation and the revenue are recognized when the service is performed.
The following non-interest income components are not subject to ASC 606: income on BOLI, net gains/losses on investment securities, and net gains on sales of loans, and are covered under other ASC topics. The remaining revenue items in non-interest income are not material.
See Item (e), "Investments," Item (f), "Loans Held for Sale," and Item (g), "Loans," above in this Note 1, of this Form 10-K for additional accounting policies on revenue recognition related to income generated on investments, gains and losses on securities, net gains on loans held for sale, and loans.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(r) Stock-Based Compensation
The Company's consolidated financial statements include stock-based compensation expense for the portion of stock option awards and stock awards for which the requisite service has been rendered during the period or the estimate of achieving certain predefined performance objectives. The compensation expense has been recorded based on the estimated grant-date fair value of the stock option awards with no adjustment for estimated forfeitures, or in the case of stock awards, the market value of the common stock on the date of grant. Expense adjustments are made for actual forfeitures as they occur.
The Company will recognize the remaining estimated compensation expense for the portion of outstanding awards and compensation expense for any future awards, net of actual forfeitures, as the requisite service is rendered (i.e., on a straight-line basis over the remaining vesting period of each award) or as performance objectives are met. Stock awards that do not require future service ("vested awards") will be expensed immediately. Stock-based compensation also includes director stock compensation for stock awards and stock in lieu of cash fees, both included in other operating expenses.
See Note 14, "Stock-Based Compensation," to the Company's consolidated financial statements of this Form 10-K, contained below, for further information on the Company's stock-based compensation.
(s) Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states, within the directives of the respective enacted tax legislation. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax expense or benefit attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities will be adjusted accordingly through the provision for income taxes in the period that includes the enactment date.
The Company's policy is to classify interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company's judgment changes regarding an uncertain tax position.
The income tax provisions will differ from the expense that would result from applying the federal statutory rate to income before taxes, due primarily to the impact of state tax expense, tax-exempt interest from certain investment securities, loans and BOLI and the tax impact from equity compensation activity.
The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at December 31, 2021 or December 31, 2020. The Company is subject to examinations by taxing authorities for the 2018 through 2021 tax years. In addition, the Company's income tax returns for the 2015 and 2016 tax years, as amended in 2019, are also subject to examination by taxing authorities.
See also Note 15, "Income Taxes," to the Company's consolidated financial statements of this Form 10-K, contained below, for further information about the Company's income taxes and deferred tax assets.
(t) Earnings per Share
Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding (including participating securities) during the year. The Company's only participating securities are unvested restricted stock awards that contain non-forfeitable rights to dividends. Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.
(u) Reporting Comprehensive Income
Comprehensive income is defined as all changes to shareholders' equity except investments by and distributions to shareholders. Net income is one component of comprehensive income, with other components referred to in the aggregate as other comprehensive income. The Company's other comprehensive income components are the changes in fair value of debt
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
securities, net of deferred income taxes, and for derivatives designated and that qualify as cash flow hedges of interest rate risk, the changes in fair value of cash flow hedges, net of income taxes. Pursuant to GAAP, the Company initially excludes the unrealized holding gains and losses from net income; however, they are later reported as reclassifications out of accumulated other comprehensive income into net income when circumstances warrant.
When debt securities are sold, the reclassification of realized gains and losses on available-for-sale securities are included on the Consolidated Statements of Income under the "Non-interest income" subheading on the line item "Net gains (losses) on sales of available-for-sale debt securities" and the related income tax expense is included in the line item "Provision for income taxes," both of which are also detailed in Note 11, "Comprehensive Income (Loss)," of this Form 10-K.
For cash flow hedges of interest rate risk, the change in fair value will be reclassified in the same period during which the hedged transaction affects earnings, to either interest expense as interest is incurred on the Company's hedge liability, or to interest income as interest is earned on the Company's hedge asset. The reclassification of gain or loss on the derivatives are included on the Consolidated Statements of Income under "Interest income" or "Interest expense" line item and the related income tax expense is included in the line item "Provision for income taxes," both of which are also detailed in Note 11, "Comprehensive Income (Loss)," of this Form 10-K.
See Note 11, "Comprehensive Income (Loss)," of this Form 10-K for additional information related to the reconciliation of changes in the components of other comprehensive income / loss and accumulated other comprehensive income / loss.
(v) Other Accounting Policies
The CARES Act allows certain financial institutions the option to delay the adoption CECL during the period beginning on March 27, 2020 until the earlier of (i) the date on which the national emergency concerning the COVID-19 pandemic ("pandemic") declared under the National Emergencies Act terminates; or (i) December 31, 2020. The Consolidated Appropriations Act, which was signed into law on December 27, 2020, extended the period during which companies may delay the implementation of CECL until the earlier of (i) the first day of the fiscal year that begins after the national emergency termination date or (ii) January 1, 2022. In the first quarter of 2020, the Company elected to delay the adoption of CECL. See Item (w) "Recent Accounting Pronouncements," under the subheading "Accounting pronouncements not yet adopted by the Company," below in this Note 1 for additional information on the Company’s adoption of CECL.
In addition, Section 4013 of the CARES Act provides the option for financial institutions to suspend troubled debt restructuring ("TDR") accounting under GAAP in certain circumstances, during the period beginning March 1, 2020 and ending on the earlier of (i) January 1, 2022 (as amended by the Consolidated Appropriations Act of 2021); or (ii) the date that is 60 days after the date on which the national emergency concerning the pandemic declared under the National Emergencies Act terminates. The Company suspended TDR accounting, which primarily impacted financial statement disclosure, for loans that had a short-term payment deferral related to the pandemic from March 1, 2020 through December 31, 2021.
(w) Recent Accounting Pronouncements
In August 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU 2021-06"), Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946). This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The rules reduce the required reporting periods to align them with the relevant financial statement periods required by SEC rules and requires certain statistical disclosures for annual periods, and interim disclosures if a material change in the information, or trend, has occurred. The amendments in this update are effective upon addition to the FASB Codification and apply to fiscal years ending on or after December 15, 2021. However, voluntary early compliance is permitted upon the effective date, provided that the rules are applied in their entirety. The amended disclosures did not have a material impact on the consolidated financial statements.
Effective January 1, 2021, the Company adopted the FASB ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU No. 2016-13"), including the CECL methodology for estimating allowances for credit losses ("ACL"). The CECL methodology requires early recognition of credit losses using a lifetime credit loss measurement approach that also requires the consideration of reasonable and supportable forecasts in the estimate. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
amortized cost. It applies to the loan portfolio, off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, which are not unconditionally cancellable. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses be presented as an allowance rather than as a write-down. See the following footnotes for more information on the Company's adoption of CECL: Note 2, "Investment Securities," Note 3, "Loans," and Note 4, "Allowance for Credit Losses for Loans."
In February 2019, the federal bank regulatory agencies issued a final rule (the "2019 CECL Rule") that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). Upon the adoption of CECL on January 1, 2021, the Company has not elected to delay the impact of CECL on regulatory capital.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(2)Investment Securities
As of December 31, 2021, and 2020, the investment portfolio was comprised primarily of debt securities, with a small portion of the investment portfolio invested in equity 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:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
(Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | |
U.S. treasury securities | | $ | 62,850 | | | $ | — | | | $ | 684 | | | $ | 62,166 | |
Residential federal agency MBS(1) | | 412,902 | | | 2,406 | | | 9,113 | | | 406,195 | |
Commercial federal agency MBS(1) | | 99,681 | | | 3,783 | | | 52 | | | 103,412 | |
Taxable municipal securities | | 272,507 | | | 5,607 | | | 2,264 | | | 275,850 | |
Tax-exempt municipal securities | | 87,024 | | | 5,648 | | | — | | | 92,672 | |
Corporate bonds | | 8,559 | | | 441 | | | — | | | 9,000 | |
Subordinated corporate bonds | | 7,000 | | | 135 | | | — | | | 7,135 | |
| | | | | | | | |
Total debt securities, at fair value | | $ | 950,523 | | | $ | 18,020 | | | $ | 12,113 | | | $ | 956,430 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
(Dollars in thousands) | | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value |
| | | | | | | | |
Residential federal agency MBS(1) | | $ | 209,923 | | | $ | 6,339 | | | $ | 287 | | | $ | 215,975 | |
Commercial federal agency MBS(1) | | 102,468 | | | 7,726 | | | — | | | 110,194 | |
Taxable municipal securities | | 135,117 | | | 9,293 | | | 3 | | | 144,407 | |
Tax-exempt municipal securities | | 88,235 | | | 7,216 | | | — | | | 95,451 | |
Corporate bonds | | 10,448 | | | 828 | | | — | | | 11,276 | |
Subordinated corporate bonds | | 5,000 | | | — | | | — | | | 5,000 | |
| | | | | | | | |
Total debt securities, at fair value | | $ | 551,191 | | | $ | 31,402 | | | $ | 290 | | | $ | 582,303 | |
__________________________________________
(1)These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as, investments guaranteed by Ginnie Mae ("GNMA"), a wholly-owned government entity.
As of the dates reflected in the tables above, the majority of investments in the residential and commercial federal agency mortgage back securities ("MBS") categories were collateralized mortgage obligations ("CMOs") issued by U.S. government agencies. The remaining MBS investments totaled $22.9 million, and $18.7 million at December 31, 2021 and 2020, respectively.
Accrued interest receivable on available-for-sale debt securities, included in the "Accrued Interest Receivable" line item on the Company’s Consolidated Balance Sheets, amounted to $3.2 million and $2.3 million at December 31, 2021 and December 31, 2020, respectively.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The following tables summarize the duration of unrealized losses for debt securities at December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of Holdings |
| | | | | | | | | | | | | | |
U.S. treasury securities | | $ | 62,166 | | | $ | 684 | | | $ | — | | | $ | — | | | $ | 62,166 | | | $ | 684 | | | 9 | |
Residential federal agency MBS | | 272,863 | | | 6,992 | | | 51,281 | | | 2,121 | | | 324,144 | | | 9,113 | | | 44 | |
Commercial federal agency MBS | | 4,897 | | | 52 | | | — | | | — | | | 4,897 | | | 52 | | | 1 | |
Taxable municipal securities | | 117,388 | | | 2,023 | | | 6,727 | | | 241 | | | 124,115 | | | 2,264 | | | 118 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total temporarily impaired debt securities | | $ | 457,314 | | | $ | 9,751 | | | $ | 58,008 | | | $ | 2,362 | | | $ | 515,322 | | | $ | 12,113 | | | 172 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| | Less than 12 months | | 12 months or longer | | Total |
(Dollars in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | # of Holdings |
| | | | | | | | | | | | | | |
Residential federal agency MBS | | $ | 51,396 | | | $ | 284 | | | $ | 2,107 | | | $ | 3 | | | $ | 53,503 | | | $ | 287 | | | 10 | |
| | | | | | | | | | | | | | |
Taxable municipal securities | | 1,997 | | | 3 | | | — | | | — | | | 1,997 | | | 3 | | | 4 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Total temporarily impaired debt securities | | $ | 53,393 | | | $ | 287 | | | $ | 2,107 | | | $ | 3 | | | $ | 55,500 | | | $ | 290 | | | 14 | |
The contractual maturity distribution at December 31, 2021 of debt securities was as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | Amortized Cost | | Fair Value |
Due in one year or less | | $ | 13,398 | | | $ | 13,478 | |
Due after one, but within five years | | 189,626 | | | 195,778 | |
Due after five, but within ten years | | 271,354 | | | 276,528 | |
Due after ten years | | 476,145 | | | 470,646 | |
Total debt securities | | $ | 950,523 | | | $ | 956,430 | |
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 $181.1 million at December 31, 2021, 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 FRB. The fair value of debt securities pledged as collateral for these purposes was $949.3 million and $577.3 million at December 31, 2021 and 2020, respectively.
Sales of debt securities, for the years ended December 31, 2021, 2020, and 2019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Amortized cost of debt securities sold(1) | | $ | 2,931 | | | $ | 5,680 | | | $ | 11,621 | |
Gross realized gains on sales | | 128 | | | 227 | | | 149 | |
Gross realized losses on sales | | — | | | — | | | (3) | |
Total proceeds from sales of debt securities | | $ | 3,059 | | | $ | 5,907 | | | $ | 11,767 | |
__________________________________________
(1) Amortized cost of investments sold is determined on a specific identification basis and includes pending trades based on trade date, if applicable.
Tax-exempt interest earned on the municipal securities portfolio was $3.4 million for the year ended December 31, 2021, $3.5 million for the year ended December 31, 2020, and $3.8 million for the year ended December 31, 2019.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The average balance of tax-exempt investments was $87.8 million and $91.0 million for the years ended December 31, 2021 and December 31, 2020, respectively.
Equity Securities
As of December 31, 2021, the Company held equity securities with a fair value of $1.8 million, compared to $746 thousand at December 31, 2020. Included in the equity portfolio were investments with a fair value of $924 thousand and $476 thousand at December 31, 2021 and December 31, 2020, respectively, held in conjunction with the Company's supplemental executive retirement and deferred compensation plan.
Gains and losses on equity securities at December 31, 2021 and December 31, 2020 are summarized as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 |
Net (losses) gains recognized during the period on equity securities | | $ | 246 | | | $ | (49) | |
Less: Net (losses) gains realized on equity securities sold during the period | | 57 | | | (11) | |
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the end of the period (included in other income) | | $ | 189 | | | $ | (38) | |
(3) Loans
Loan Portfolio Classifications
Major classifications of loans at amortized cost at the periods indicated were as follows(1):
| | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2021 | | December 31, 2020 |
Commercial real estate | | $ | 1,680,792 | | | $ | 1,476,236 | |
Commercial and industrial | | 412,070 | | | 435,548 | |
Commercial construction | | 410,443 | | | 371,856 | |
SBA Paycheck Protection Program ("PPP") | | 71,502 | | | 443,070 | |
Total commercial loans | | 2,574,807 | | | 2,726,710 | |
| | | | |
Residential mortgages | | 256,940 | | | 252,995 | |
Home equity loans and lines | | 80,467 | | | 85,178 | |
Consumer | | 8,470 | | | 8,977 | |
Total retail loans | | 345,877 | | | 347,150 | |
| | | | |
| | | | |
| | | | |
Total loans | | 2,920,684 | | | 3,073,860 | |
| | | | |
Allowance for credit losses | | (47,704) | | | (44,565) | |
Net loans | | $ | 2,872,980 | | | $ | 3,029,295 | |
__________________________________________
(1) Upon the adoption of CECL, the Company includes deferred fees as part of the portfolio segment balance at amortized cost. The prior period balances have been adjusted to conform to this presentation.
Net deferred loan origination fees included in the portfolio segments in the table above amounted to $7.5 million, including $2.4 million of deferred PPP fees, at December 31, 2021 and $13.4 million, including $10.0 million of deferred PPP fees, at December 31, 2020.
Accrued interest receivable on loans amounted to $10.2 million and $13.8 million at December 31, 2021 and December 31, 2020, respectively, and was included in the "Accrued interest receivable" line item on the Company’s Consolidated Balance Sheets.
Commercial loans originated by other banks in which the Company is a participating institution are carried at the pro-rata share of ownership and amounted to $62.6 million at December 31, 2021 and $77.1 million at December 31, 2020. See also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Related Party Loans
Certain of the Company's directors, officers, principal shareholders, and their associates are credit customers of the Company in the ordinary course of business. In addition, certain directors are also directors, trustees, officers or shareholders of corporations and non-profit entities or members of partnerships that are customers of the Bank and that enter into loan and other transactions with the Bank in the ordinary course of business. All loans and commitments included in such transactions are on such terms, including interest rates, repayment terms and collateral, as those prevailing at the time for comparable transactions with persons who are not affiliated with the Bank and do not involve more than a normal risk of collectability or present other features unfavorable to the Bank.
As of December 31, 2021, and 2020, the outstanding loan balances to directors, officers, principal shareholders, and their associates were $37.7 million and $48.7 million, respectively. All loans to these related parties were current and accruing at those dates. Unadvanced portions of lines of credit available to these individuals were $14.5 million and $23.2 million, as of December 31, 2021 and 2020, respectively. During 2021, new loans and net increases in loan balances or lines of credit under existing commitments of $2.1 million were made and principal pay-downs of $21.8 million were received. During 2020, new loans and net increases in loan balances or lines of credit under existing commitments of $16.1 million were made and principal pay-downs of $11.4 million were received.
Paycheck Protection Program
The PPP was created by the CARES Act and instituted by the Small Business Administration (“SBA”), with SBA funding of PPP loans beginning in April 2020. Until the funding for the PPP expired on May 31, 2021, the PPP allowed entities to apply for a 1.00% interest-rate loan with payments generally deferred until the date the lender receives the applicable forgiveness amount from the SBA. PPP loans may be partially or fully forgiven by the SBA if the entity meets certain conditions. In addition, PPP loans carry a put-back provision in the event that a PPP loan is fraudulently originated and the Bank is at fault. The maturity term for any principal portion left unforgiven is either 2 or 5 years from the funding date, depending on when the loan was originated. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding.
In addition to generating interest income, the SBA pays lender’s fees for processing PPP loans. As of December 31, 2021, the Company had received $26.2 million in PPP related SBA fees and is accreting these fees into interest income over the life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining unearned fee is recognized into income at that time. For the years ended December 31, 2021, and 2020, the Company recognized $16.6 million and $7.2 million in PPP related SBA fees through accretion. The majority of the remaining $2.4 million in fees are expected to be recognized as the PPP loans are forgiven, which we expect to occur over the next several quarters.
Management believes the SBA PPP portfolio to be of minimal credit risk, as the average size of PPP loans outstanding at December 31, 2021 was approximately $187 thousand, and Management expects that, based on its due diligence at origination and in the forgiveness application process, the majority of balances will be forgiven, with any remaining balance guaranteed by the SBA. Management has segmented the PPP portfolio as a group of loans with similar risk characteristics in its assessment for credit losses.
Loans serviced for others
At December 31, 2021 and 2020, the Company was servicing residential mortgage loans owned by investors amounting to $10.4 million and $13.7 million, respectively. Additionally, the Company was servicing commercial loans originated by the Company and participated out to various other institutions amounting to $66.7 million and $65.3 million at December 31, 2021 and 2020, respectively.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Loans serving as collateral
Loans designated as qualified collateral and pledged to the FHLB for borrowing capacity for the periods indicated are summarized below:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | December 31, 2021 | | December 31, 2020 |
Commercial real estate | | $ | 143,056 | | | $ | 195,936 | |
Residential mortgages | | 235,744 | | | 233,050 | |
Home equity | | 5,055 | | | 5,971 | |
Total loans pledged to FHLB | | $ | 383,855 | | | $ | 434,957 | |
Tax-Exempt Interest
Tax-exempt interest earned on qualified commercial loans was $1.8 million for the year ended December 31, 2021, $2.0 million for the year ended December 31, 2020, and $2.1 million for the year ended and December 31, 2019. Average tax-exempt loan balances were $54.5 million and $58.0 million for the years ended December 31, 2021 and 2020, respectively.
(4) ACL for Loans
On January 1, 2021, the Company adopted CECL under the modified retrospective approach. Upon adoption, the Company recorded a reduction to retained earnings of $6.5 million, net of $2.5 million in deferred income taxes. The ACL for loans increased by $6.6 million and the reserve for unfunded commitments (included in other liabilities) increased by $2.4 million. Prior to January 1, 2021, the Company measured the allowance under the incurred loss method. The ACL for loans to total loans ratio was 1.63% at December 31, 2021 and January 1, 2021.
Inherent in the lending process is the risk of loss due to customer non-payment, or "credit risk." The Company's commercial lending focus may entail significant additional credit risks compared to long-term financing on existing, owner-occupied residential real estate. The Company seeks to lessen its credit risk exposure by managing its loan portfolio to avoid concentration by industry, relationship size and source of repayment, and through sound underwriting practices and the credit risk management function; however, management recognizes that credit losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio and economic conditions.
Credit Risk Management
The credit risk management function focuses on a wide variety of factors and early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors these factors, among others, through ongoing credit reviews by the Company's Credit Department, an external loan review service, reviews by members of senior management as well as reviews by the Board's Loan Committee and the Board. This review includes the assessment of internal credit quality indicators such as, among others, the risk classification of loans, past due and non-accrual loans, individually evaluated and troubled-debt restructured loans, and the level of foreclosure activity.
See item (g) "Loans" contained in Note 1, "Summary of Significant Accounting Policies" of this Form 10-K, for additional information on the Company Credit Risk monitoring and credit quality indicators.
ACL for Loans Methodology
The CECL methodology requires early recognition of credit losses using an estimated lifetime credit loss measurement that takes into consideration reasonable and supportable forecasts. The ACL for loans is established through a provision for credit losses, recorded as a direct charge to earnings. The ACL for loans is a valuation account that is deducted from the amortized cost to present the net amount of the loan portfolio expected to be collected. Credit losses are charged against the ACL for loans when management believes that the collectability of the amortized cost of a loan's principal balance is unlikely. Recoveries on loans previously charged-off are credited to the ACL for loans, generally at the time cash is received on a charged-off account.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Arriving at an appropriate level of ACL for loans involves a high degree of management judgement. The underlying assumptions, estimates and assessments used to estimate the ACL for loans reflects the Company’s best estimate of model assumptions and forecasted conditions at that time. Changes in such estimates can significantly affect the ACL for loans and the provision for credit losses. It is possible and likely that the Company will experience credit losses that are different from the current estimates and future additions to the ACL for loans may be necessary.
On a quarterly basis, the Company makes an assessment to estimate the ACL for loans necessary to cover expected credit losses from the loan portfolio as of the specified balance sheet dates. The adequacy of the ACL for loans is reviewed and evaluated on a regular basis by an internal management committee, a sub-committee of the Company's Board of Directors (the "Board") and the full Board.
In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ACL for loans. Such agencies may require the Company to recognize additions to the ACL for loans based on judgments different from those of management.
In making its assessment on the adequacy of the ACL for loans, management considers several quantitative and qualitative factors from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts,
The Company uses a systematic methodology to measure the amount of estimated loan losses. The methodology uses a two-tiered approach that applies general reserves for larger groups of pass-rated homogeneous loans, segmented by loan type and for adversely classified loans not individually evaluated, segmented by internal risk rating, and specific reserves for loans individually evaluated.
Loans collectively evaluated
The general loss allocation factors consider the quantitative historic loss experience, qualitative or environmental factors such as those identified above, forecasts over the estimated life of the loan pools, as well as regulatory guidance and industry data.
I.Pass-rated loans by loan type:
Management segments pass-rated loans using the Open Pool method by first calculating each segment's loss rate as net charge-offs over the expected average life of each segment, divided by the average loan balance over that same period. The historic loss factor is an average of the loss rate over each segment’s look-back period, which is defined as the average age of charged-off loans, specific to each segment. These historic loss factors are then adjusted up or down based on management's assessment of quantitative and qualitative factors. These key factors including quantitative facts about the loan portfolio such as: commercial concentrations by industry, property type and real estate location; the growth and composition of the loan portfolio; trends in risk classification of individual loans and higher risk problem assets; the level of delinquent loans and non-performing loans; individually evaluated and restructured loans; the level of foreclosure activity; net charge-offs; as well as trends in the general levels of these indicators. In addition, management monitors qualitative factors such as: expansion in the Company's geographic market area; the experience level of lenders and any changes in underwriting criteria; including general conditions in the multi-family, commercial real estate and construction and development markets in the Company's local region as well as changes in current and forecasted economic conditions, such as changes in gross domestic product, the unemployment rate and new jobs created, real estate values, commercial vacancy rates, recession risk estimates and other relevant economic factors. Management generally uses a two-year reasonable and supportable forecast, and for periods beyond the forecast period, reverts immediately to historical loss rates.
Management weighs the current effect of each of these areas on each particular pass-rated loan segment in determining the allowance allocation factors. Management must exercise significant judgment when evaluating the effect of these quantitative and qualitative factors on the amount of the ACL for loans because data may not be reasonably available or directly applicable to determine the precise impact of a factor on the collectability of the loan segment as of the evaluation date. The methodology contemplates a range of acceptable levels for these factors due to the subjective nature of the factors and the qualitative considerations related to the credit risk in the portfolio.
II.Adversely classified loan by credit rating:
For determining the reserve percentages for adversely classified loans, management has segmented the portfolio by risk rating: Special mention; Substandard; Doubtful; or Loss, after excluding loans that are individually evaluated for
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
impairment. The historic loss factor for adverse loan segments was determined by first tracking a sampling of these loans over a period of time, to determine their ultimate resolution. Those balances resulting in charge-offs were calculated as a percentage of the segment's loan balance and an average was calculated over that same period. This average period may be changed from time to time to be reflective of the most appropriate corresponding conditions (market, economic, etc.). These historic loss factors are then adjusted up or down based on management's assessment of qualitative factors that are likely to cause estimated credit losses as of the evaluation date to differ from the segment's historical loss experience. Management also utilizes regulatory guidance and industry data in relation to the Company's own portfolio statistics as a basis for assessing the reasonableness of the allocation factors for each class of problem-assets.
Management recognizes that additional issues may also impact the estimate of expected credit losses to some degree. From time to time management will re-evaluate the qualitative factors, regulatory guidance, and industry data in use in order to consider the impact of other issues which, based on changing circumstances, may become more significant in the future.
Loans individually evaluated
Loans individually evaluated consist primarily of loans which management considers it probable that not all amounts due (principals and interest) will be collected in accordance with the original contractual terms, loans designated as troubled debt restructurings ("TDRs") and to a lesser extent, if applicable, loans that management deems as individually significant or with unique risk characteristics or for some other reason based on management’s judgement. Management considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management estimates the credit loss by comparing the loan's carrying value against either (i) the present value of the expected future cash flows discounted at the loan's effective interest-rate; (ii) the loan's observable market price; or (iii) the expected realizable fair value of the collateral, in the case of collateral dependent loans. A specific allowance is assigned to the loan for the amount of estimated credit loss. Individually evaluated loans are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.
Reserve for unfunded commitments
ASU 2016-13 also applies to off-balance sheet credit exposure for unfunded commitments (commitments to originate loans, additional funding commitments on existing loans, standby letters of credit, financial guarantees and other similar investments) that are not unconditionally cancellable. The reserve for unfunded commitments is included in the line item "Accrued expenses and other liabilities" on the Company’s Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates.
Based on the foregoing, management believes that the Company's ACL for loans and reserve for unfunded commitments is adequate as of December 31, 2021.
Current year information is presented below in accordance with CECL; prior year disclosures are reported under legacy GAAP and are included below in this Note 4 under the heading “Prior Period Disclosures under the Incurred Loss Methodology.”
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The following tables presents the amortized cost basis of the Company's loan portfolio risk ratings within portfolio classifications, by origination date, or revolving status as of December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans By Origination Year | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | Prior | | Revolving Loans | | Revolving Loans Converted to Term | | Total |
Commercial real estate | | | | | | | | | | | | | | | | | | |
Pass | | $ | 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 estate | | 402,838 | | | 220,942 | | | 242,865 | | | 124,374 | | | 186,494 | | | 500,260 | | | 3,019 | | | — | | | 1,680,792 | |
| | | | | | | | | | | | | | | | | | |
Commercial and industrial | | | | | | | | | | | | | | | | | | |
Pass | | 64,555 | | | 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 industrial | | 64,555 | | | 40,977 | | | 38,365 | | | 20,812 | | | 15,067 | | | 50,111 | | | 180,813 | | | 1,370 | | | 412,070 | |
| | | | | | | | | | | | | | | | | | |
Commercial construction | | | | | | | | | | | | | | | | | | |
Pass | | 175,069 | | | 106,165 | | | 54,907 | | | 24,343 | | | 4,561 | | | 19,489 | | | 24,864 | | | — | | | 409,398 | |
| | | | | | | | | | | | | | | | | | |
Substandard | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 1,045 | | | 1,045 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total commercial construction | | 175,069 | | | 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 | | | | | | | | | | | | | | | | | | |
Pass | | 79,130 | | | 56,948 | | | 27,343 | | | 22,743 | | | 12,886 | | | 55,571 | | | — | | | — | | | 254,621 | |
Special mention | | — | | | — | | | — | | | — | | | — | | | 590 | | | — | | | — | | | 590 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 1,729 | | | — | | | — | | | 1,729 | |
| | | | | | | | | | | | | | | | | | |
Total residential mortgages | | 79,130 | | | 56,948 | | | 27,343 | | | 22,743 | | | 12,886 | | | 57,890 | | | — | | | — | | | 256,940 | |
| | | | | | | | | | | | | | | | | | |
Home equity | | | | | | | | | | | | | | | | | | |
Pass | | 486 | | | 478 | | | 498 | | | — | | | — | | | 1,727 | | | 76,619 | | | 414 | | | 80,222 | |
| | | | | | | | | | | | | | | | | | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 245 | | | — | | | — | | | 245 | |
| | | | | | | | | | | | | | | | | | |
Total home equity | | 486 | | | 478 | | | 498 | | | — | | | — | | | 1,972 | | | 76,619 | | | 414 | | | 80,467 | |
| | | | | | | | | | | | | | | | | | |
Consumer | | | | | | | | | | | | | | | | | | |
Pass | | 2,843 | | | 1,498 | | | 1,619 | | | 1,005 | | | 617 | | | 390 | | | — | | | 473 | | | 8,445 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Doubtful | | 25 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 25 | |
Total consumer | | 2,868 | | | 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 SBA PPP loans were pass-rated at December 31, 2021, as these loans are fully guaranteed by the SBA.
The total amortized cost basis of adversely classified loans amounted to $61.0 million, or 2.09% of total loans, at December 31, 2021.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Past due and non-accrual loans
The following table presents an age analysis of past due loans by portfolio classification as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 industrial | | 564 | | | 678 | | | 194 | | | 1,436 | | | 410,634 | | | 412,070 | | |
Commercial construction | | — | | | — | | | — | | | — | | | 410,443 | | | 410,443 | | |
SBA PPP | | 162 | | | 19 | | | — | | | 181 | | | 71,321 | | | 71,502 | | |
Residential mortgages | | 182 | | | — | | | 432 | | | 614 | | | 256,326 | | | 256,940 | | |
Home equity | | 45 | | | — | | | — | | | 45 | | | 80,422 | | | 80,467 | | |
Consumer | | 7 | | | 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 table above include loans designated as non-accrual despite their payment due status.
The following table presents the amortized cost of non-accrual loans by portfolio classification as of the date indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2021 |
(Dollars in thousands) | | Total Non-accrual Loans | | Non-accrual Loans without a Specific Reserve | | Non-accrual Loans with a Specific Reserve | | Related Specific Reserve |
Commercial real estate | | $ | 22,870 | | | $ | 7,144 | | | $ | 15,726 | | | $ | 896 | |
Commercial and industrial | | 1,542 | | | 1,337 | | | 205 | | | 185 | |
Commercial construction | | 1,045 | | | 1,045 | | | — | | | — | |
SBA PPP | | — | | | — | | | — | | | — | |
Residential mortgages | | 794 | | | 633 | | | 161 | | | 161 | |
Home equity | | 246 | | | 246 | | | — | | | — | |
Consumer | | 25 | | | — | | | 25 | | | 25 | |
Total loans | | $ | 26,522 | | | $ | 10,405 | | | $ | 16,117 | | | $ | 1,267 | |
At December 31, 2021, all loans past due 90 days or more were carried as non-accrual, in addition to those loans that were less than 90 days past due where reasonable doubt existed as to the full and timely collection of interest or principal that have also been designated as non-accrual, despite their payment due status.
Non-accrual loans that were not adversely classified amounted to $3 thousand at December 31, 2021. These balances primarily represented the guaranteed portions of non-performing SBA loans.
The ratio of non-accrual loans to total loans amounted to 0.91% at December 31, 2021.
At December 31, 2021, additional funding commitments for non-accrual loans were not material.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The reduction in interest income for the years ended December 31, associated with non-accruing loans is summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Income that would have been recognized if non-accrual loans had been current | | $ | 2,028 | | | $ | 1,946 | | | $ | 1,893 | |
Less income recognized | | 633 | | | 472 | | | 244 | |
Reduction in interest income | | $ | 1,395 | | | $ | 1,474 | | | $ | 1,649 | |
All payments received on individually evaluated loans in non-accrual status are applied to principal. Interest income that was not recognized on loans that were individually evaluated as of December 31, 2021, amounted to $1.4 million.
Collateral-dependent loans
Loans that have been individually evaluated and repayment is expected substantially from the operations or ultimate sale of the underlying collateral are deemed to be collateral-dependent loans. Collateral-dependent loans are adversely classified loans that may also be TDRs. These loans may be accruing or on non-accrual status. Collateral-dependent loans are carried at the lower of the recorded investment in the loan or the estimated fair value. When the estimated fair value of the underlying collateral, less estimated costs to sell, is not sufficient to cover the outstanding carrying balance on the loan, a specific reserve is assigned for the amount of the estimated credit loss. These estimated credit losses are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.
Underlying collateral will vary by type of loan, as discussed below.
Commercial real estate loans include loans secured by both owner and non-owner occupied (investor) real estate. These loans are typically secured by a variety of commercial, residential investment, and industrial property types, including one-to-four and multi-family apartment buildings, office, industrial, or mixed-use facilities, strip shopping centers, or other commercial properties.
Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables.
Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by underlying real estate collateral.
Residential mortgage loans and home equity loans and lines may be secured by one-to-four family residential properties serving as the borrower's primary residence, or as vacation homes or investment properties.
Consumer loans consist primarily of secured or unsecured personal loans, loans under energy efficiency financing programs in
conjunction with Massachusetts public utilities, and overdraft protection lines on checking accounts.
The carrying value of collateral dependent loans amounted to $34.6 million at December 31, 2021. 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 table presents the recorded investment in collateral dependent individually evaluated loans and the related specific allowance by portfolio allocation as of the date indicated:
ENTERPRISE BANCORP, INC
Notes to the Consolidated 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 industrial | | 8,880 | | | 4,699 | | | 4,191 | | | 508 | | | 128 | |
Commercial construction | | 1,181 | | | 1,045 | | | 1,045 | | | — | | | — | |
SBA PPP | | — | | | — | | | — | | | — | | | — | |
Residential mortgages | | 1,165 | | | 1,033 | | | 1,033 | | | — | | | — | |
Home equity | | 347 | | | 246 | | | 246 | | | — | | | — | |
Consumer | | — | | | — | | | — | | | — | | | — | |
Total | | $ | 41,135 | | | $ | 34,640 | | | $ | 18,406 | | | $ | 16,234 | | | $ | 1,024 | |
At December 31, 2021, additional funding commitments for collateral dependent loans was not material.
The Company's obligation to fulfill the additional funding commitments on individually evaluated loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion. At December 31, 2021, additional funding commitments for collateral dependent loans were not material.
Troubled debt restructurings
At December 31, 2021, payment deferrals related to the COVID-19 pandemic were active on 3 "pass" rated loans amounting to $5.5 million, or 0.2% of total loans. Under the terms of the CARES Act and the Consolidated Appropriations Act, 2021, as discussed below, these loans remain on accrual status.
Total TDR loans as of December 31, 2021 were $16.4 million. TDR loans on accrual status amounted to $8.6 million at December 31, 2021. TDR loans included in non-performing loans amounted to $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 future prospects of the borrower.
At December 31, 2021, additional funding commitments for TDR loans was not material. The Company's obligation to fulfill the additional funding commitments on TDR loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The following table presents the number and balance of loans modified as TDRs, by portfolio classification, during the year indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | |
(Dollars in thousands) | | Number of Restructurings | | Pre-modification Outstanding Recorded Investment | | Post-modification Outstanding Recorded Investment | | | | | | |
Commercial real estate | | 3 | | | $ | 3,591 | | | $ | 3,267 | | | | | | | |
Commercial and industrial | | 3 | | | 96 | | | 85 | | | | | | | |
Commercial construction | | — | | | — | | | — | | | | | | | |
SBA PPP | | — | | | — | | | — | | | | | | | |
Residential mortgages | | 1 | | | 224 | | | 222 | | | | | | | |
Home equity | | — | | | — | | | — | | | | | | | |
Consumer | | — | | | — | | | — | | | | | | | |
Total | | 7 | | | $ | 3,911 | | | $ | 3,574 | | | | | | | |
There were no subsequent charge-offs of new TDRs noted in the table above during 2021.
Interest payments received on non-accruing 2021 and 2020 TDR loans which were applied to principal and not recognized as interest income were not material.
Payment defaults by portfolio classification, during the year indicated, on loans modified as TDRs within the preceding twelve months are detailed below:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | |
(Dollars in thousands) | | Number of TDRs that Defaulted | | Post-modification Outstanding Recorded Investment | | | | |
Commercial real estate | | 1 | | | $ | 663 | | | | | |
Commercial and industrial | | 2 | | | 33 | | | | | |
Commercial construction | | — | | | — | | | | | |
SBA PPP | | — | | | — | | | | | |
Residential mortgages | | — | | | — | | | | | |
Home equity | | — | | | — | | | | | |
Consumer | | — | | | — | | | | | |
Total | | 3 | | | $ | 696 | | | | | |
The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the periods indicated:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2021 | | |
(Dollars in thousands) | | Number of Restructurings | | Amount | | | | |
| | | | | | | | |
Extended maturity date | | 3 | | | $ | 71 | | | | | |
Temporary payment reduction and payment re-amortization of remaining principal over extended term | | 2 | | | 885 | | | | | |
Temporary interest-only payment plan | | 1 | | | 14 | | | | | |
| | | | | | | | |
Other payment concessions | | 1 | | | 2,604 | | | | | |
Total | | 7 | | | $ | 3,574 | | | | | |
Allowance for credit losses associated with TDR loans listed above | | | | $ | 33 | | | | | |
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
ACL for loans and provision for credit loss activity
For the year ended December 31, 2021, the total provision for credit losses amounted to $1.8 million, and included provisions for credit losses on loans and unfunded commitments.
ACL for loans
The allowance for credit losses amounted to $47.7 million at December 31, 2021 and the ACL for loans to total loans ratio was 1.63% at December 31, 2021.
Changes in the allowance for credit losses for the years ended December 31, 2021, 2020 and 2019 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Balance at beginning of year | | $ | 44,565 | | | $ | 33,614 | | | $ | 33,849 | |
CECL adjustment upon adoption | | 6,560 | | | — | | | — | |
Provision | | 543 | | | 12,499 | | | 1,180 | |
Recoveries | | 363 | | | 346 | | | 778 | |
Less: Charge-offs | | 4,327 | | | 1,894 | | | 2,193 | |
Balance at end of year | | $ | 47,704 | | | $ | 44,565 | | | $ | 33,614 | |
Changes in the allowance for credit losses by portfolio classification for the year ended December 31, 2021 are presented below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial Real Estate | | Commercial and Industrial | | Commercial Construction | | Residential Mortgage | | Home Equity | | Consumer | | Total |
Beginning Balance | | $ | 26,755 | | | $ | 9,516 | | | $ | 6,129 | | | $ | 1,530 | | | $ | 467 | | | $ | 168 | | | $ | 44,565 | |
CECL adjustment upon adoption | | 7,664 | | | 1,988 | | | (2,416) | | | (695) | | | (158) | | | 177 | | | 6,560 | |
Provision | | (786) | | | 408 | | | 272 | | | 570 | | | 85 | | | (6) | | | 543 | |
Recoveries | | 39 | | | 139 | | | 105 | | | — | | | 71 | | | 9 | | | 363 | |
Less: Charge-offs | | 1,825 | | | 2,477 | | | — | | | — | | | — | | | 25 | | | 4,327 | |
Ending Balance | | $ | 31,847 | | | $ | 9,574 | | | $ | 4,090 | | | $ | 1,405 | | | $ | 465 | | | $ | 323 | | | $ | 47,704 | |
| | | | | | | | | | | | | | |
Ending allowance balance: | | | | | | | | | | | | | | |
Allocated to loans individually evaluated for impairment | | $ | 896 | | | $ | 402 | | | $ | — | | | $ | 161 | | | $ | — | | | $ | 25 | | | $ | 1,484 | |
Allocated to loans collectively evaluated for impairment | | $ | 30,951 | | | $ | 9,172 | | | $ | 4,090 | | | $ | 1,244 | | | $ | 465 | | | $ | 298 | | | $ | 46,220 | |
Reserve for unfunded commitments
The Company’s reserve for unfunded commitments amounted to $3.7 million as of December 31, 2021 and $2.5 million at January 1, 2021. The provision for unfunded commitments amounted $1.2 million for the year ended December 31, 2021.
Other real estate owned ("OREO")
The Company carried no OREO at December 31, 2021 or December 31, 2020. During the year ended December 31, 2021, there was one addition to OREO, which was subsequently sold during the year. During the year ended December 31, 2020, there were no additions to or sales of OREO. For the years ended December 31, 2021, 2020 and 2019, there were no write downs of OREO.
At both December 31, 2021 and December 31, 2020, 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.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
PRIOR PERIOD DISCLOSURES UNDER THE INCURRED LOSS METHODOLOGY
The prior year disclosures below were prepared under the incurred loss methodology, before the Company adopted the CECL methodology. See Note 4, "Allowance for Loans Losses," to the Company's audited consolidated financial statements contained in the 2020 Annual Report on Form 10-K for additional information about the incurred loss methodology.
The balances of loans as of December 31, 2020 by portfolio classification and evaluation method are summarized as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Loans Individually Evaluated for Impairment | | Loans Collectively Evaluated for Impairment | | Gross Loans |
Commercial real estate | | $ | 35,915 | | | $ | 1,442,320 | | | $ | 1,478,235 | |
Commercial and industrial | | 8,409 | | | 427,251 | | | 435,660 | |
Commercial construction | | 2,999 | | | 370,310 | | | 373,309 | |
SBA paycheck protection program | | — | | | 453,084 | | | 453,084 | |
Residential mortgages | | 596 | | | 252,375 | | | 252,971 | |
Home equity | | 381 | | | 84,625 | | | 85,006 | |
Consumer | | 18 | | | 8,963 | | | 8,981 | |
Total gross loans | | $ | 48,318 | | | $ | 3,038,928 | | | $ | 3,087,246 | |
Adversely classified loans-Prior Period
The following tables present the Company's credit risk profile for each portfolio classification by internally assigned adverse risk rating category as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
(Dollars in thousands) | | Adversely Classified (1) | | Not Adversely Classified | | Gross Loans |
Substandard | | Doubtful | | Loss |
Commercial real estate | | $ | 40,088 | | | $ | 197 | | | $ | — | | | $ | 1,437,950 | | | $ | 1,478,235 | |
Commercial and industrial | | 7,901 | | | 2,293 | | | — | | | 425,466 | | | 435,660 | |
Commercial construction | | 3,501 | | | — | | | — | | | 369,808 | | | 373,309 | |
SBA paycheck protection program | | — | | | — | | | — | | | 453,084 | | | 453,084 | |
Residential mortgages | | 474 | | | — | | | — | | | 252,497 | | | 252,971 | |
Home equity | | 381 | | | — | | | — | | | 84,625 | | | 85,006 | |
Consumer | | 41 | | | — | | | — | | | 8,940 | | | 8,981 | |
Total gross loans | | $ | 52,386 | | | $ | 2,490 | | | $ | — | | | $ | 3,032,370 | | | $ | 3,087,246 | |
__________________________________
(1) Prior to the adoption of CECL, the Company did not include special-mention risk rated loans as adversely classified.
Total adversely classified loans amounted to 1.79% at December 31, 2020.
Past due and non-accrual loans - Prior period
Loans on which the accrual of interest has been discontinued are designated as non-accrual and the classified portions are credit downgraded to one of the adversely classified categories noted above. Accrual of interest on loans is generally discontinued when a loan becomes contractually past due, with respect to interest or principal, by 90 days, or when reasonable doubt exists as to the full and timely collection of interest or principal. Interest payments received on loans in a non-accrual status are generally applied to principal on the books of the Company. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when payments are brought current and have remained current for a period of 180 days and when, in the judgment of management, the collectability of both principal and interest is reasonably assured.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The following tables present an age analysis of past due loans by portfolio classification as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2020 |
(Dollars in thousands) | | Past Due 30-59 Days | | Past Due 60-89 Days | | Past Due 90 Days or More | | Total Past Due Loans | | Current Loans | | Gross Loans | | Non-accrual Loans |
Commercial real estate | | $ | 6,105 | | | $ | 499 | | | $ | 5,592 | | | $ | 12,196 | | | $ | 1,466,039 | | | $ | 1,478,235 | | | $ | 29,680 | |
Commercial and industrial | | 417 | | | 13 | | | 607 | | | 1,037 | | | 434,623 | | | 435,660 | | | 4,574 | |
Commercial construction | | 13,466 | | | — | | | 1,351 | | | 14,817 | | | 358,492 | | | 373,309 | | | 2,999 | |
SBA paycheck protection program | | — | | | — | | | — | | | — | | | 453,084 | | | 453,084 | | | — | |
Residential mortgages | | 890 | | | — | | | 290 | | | 1,180 | | | 251,791 | | | 252,971 | | | 414 | |
Home equity | | — | | | — | | | 255 | | | 255 | | | 84,751 | | | 85,006 | | | 381 | |
Consumer | | 2 | | | 1 | | | — | | | 3 | | | 8,978 | | | 8,981 | | | 2 | |
Total gross loans | | $ | 20,880 | | | $ | 513 | | | $ | 8,095 | | | $ | 29,488 | | | $ | 3,057,758 | | | $ | 3,087,246 | | | $ | 38,050 | |
At December 31, 2020, all loans past due 90 days or more were carried as non-accrual, in addition to those loans that were less than 90 days past due where reasonable doubt existed as to the full and timely collection of interest or principal that have also been designated as non-accrual, despite their payment due status shown in the tables above.
Non-accrual loans that were not adversely classified amounted to $137 thousand at December 31, 2020. These balances primarily represented the guaranteed portions of non-performing SBA loans. The majority of the non-accrual loan balances were also carried as impaired loans during the periods noted and are discussed further below.
The ratio of non-accrual loans to total loans amounted to 1.24% at December 31, 2020.
Impaired loans - Prior period
The carrying value of impaired loans amounted to $48.3 million at December 31, 2020. Total accruing impaired loans amounted to $10.3 million while non-accrual impaired loans amounted to $38.0 million as of December 31, 2020.
The following tables set forth the recorded investment in impaired loans and the related specific allowance allocated by portfolio classification as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance at December 31, 2020 |
(Dollars in thousands) | | Unpaid Contractual Principal Balance | | Total Recorded Investment in Impaired Loans | | Recorded Investment with no Allowance | | Recorded Investment with Allowance | | Related Specific Allowance |
Commercial real estate | | $ | 37,184 | | | $ | 35,915 | | | $ | 14,728 | | | $ | 21,187 | | | $ | 3,454 | |
Commercial and industrial | | 10,628 | | | 8,409 | | | 4,696 | | | 3,713 | | | 2,713 | |
Commercial construction | | 3,668 | | | 2,999 | | | 2,999 | | | — | | | — | |
SBA paycheck protection program | | — | | | — | | | — | | | — | | | — | |
Residential mortgages | | 699 | | | 596 | | | 596 | | | — | | | — | |
Home equity | | 539 | | | 381 | | | 381 | | | — | | | — | |
Consumer | | 18 | | | 18 | | | — | | | 18 | | | 18 | |
Total | | $ | 52,736 | | | $ | 48,318 | | | $ | 23,400 | | | $ | 24,918 | | | $ | 6,185 | |
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The following table presents the average recorded investment in impaired loans by portfolio classification and the related interest recognized during the twelve months indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2020 | | Year ended December 31, 2019 |
(Dollars in thousands) | | Average Recorded Investment | | Interest Income Recognized | | Average Recorded Investment | | Interest Income Recognized |
Commercial real estate | | $ | 19,606 | | | $ | 138 | | | $ | 17,033 | | | $ | 509 | |
Commercial and industrial | | 8,639 | | | 168 | | | 11,135 | | | 385 | |
Commercial construction | | 5,991 | | | 22 | | | 2,158 | | | 81 | |
SBA PPP | | — | | | — | | | | | |
Residential mortgages | | 854 | | | 8 | | | 1,024 | | | 18 | |
Home equity | | 410 | | | (1) | | | 447 | | | — | |
Consumer | | 36 | | | 2 | | | 28 | | | — | |
Total | | $ | 35,536 | | | $ | 337 | | | $ | 31,825 | | | $ | 993 | |
All payments received on impaired loans in non-accrual status are applied to principal. Interest income that was not recognized on loans that were deemed impaired as of December 31, 2020, and 2019, amounted to $1.4 million, and $1.0 million, respectively.
TDRs-Prior Period
Total TDR loans, included in the impaired loan balances above, as of December 31, 2020, were $17.7 million. TDR loans on accrual status amounted to $10.3 million at December 31, 2020. TDR loans included in non-performing loans amounted to $7.5 million at December 31, 2020. The following table presents number and balance of loans modified as TDRs, by portfolio classification, during the twelve months indicated:
| | | | | | | | | | | | | | | | | | | | |
| | Year ended |
| | December 31, 2020 |
(Dollars in thousands) | | Number of Restructurings | | Pre-modification Outstanding Recorded Investment | | Post-modification Outstanding Recorded Investment |
Commercial real estate | | 3 | | | $ | 1,858 | | | $ | 1,838 | |
Commercial and industrial | | 5 | | | 976 | | | 344 | |
Commercial construction | | 6 | | | 4,754 | | | 2,765 | |
SBA PPP | | — | | | — | | | — | |
Residential mortgages | | — | | | — | | | — | |
Home equity | | 1 | | | 167 | | | 167 | |
Consumer | | 1 | | | 1 | | | — | |
Total | | 16 | | | $ | 7,756 | | | $ | 5,114 | |
There were $1.1 million subsequent charge-offs associated with the new TDRs noted in the table above during the year ended December 31, 2020.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The following table presents loans modified as TDRs within the preceding twelve months, which have defaulted on the
modified terms during the during the year ended December 31, 2020:
| | | | | | | | | | | | | | |
| | Year ended |
| | December 31, 2020 |
(Dollars in thousands) | | Number of TDRs that Defaulted | | Post- modification Outstanding Recorded Investment |
Commercial real estate | | 3 | | | $ | 1,838 | |
Commercial and industrial | | 2 | | | 172 | |
Commercial construction | | 4 | | | 1,798 | |
SBA PPP | | — | | | — | |
Residential mortgages | | — | | | — | |
Home equity | | 1 | | | 168 | |
Consumer | | — | | | — | |
Total | | 10 | | | $ | 3,976 | |
The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the twelve-month periods indicated:
| | | | | | | | | | | | | | |
| | Year ended |
| | December 31, 2020 |
(Dollars in thousands) | | Number of Restructurings | | Amount |
| | | | |
Extended maturity date | | 2 | | | $ | 150 | |
Temporary payment reduction and payment re-amortization of remaining principal over extended term | | 10 | | | 3,316 | |
| | | | |
Forbearance of post default rights | | 4 | | | 1,648 | |
| | | | |
Total | | 16 | | | $ | 5,114 | |
Amount of specific reserves included in the allowance for loan losses associated with TDRs listed above | | | | $ | 386 | |
Allowance for loan loss activity-Prior Period
The allowance for loan losses amounted to $44.6 million at December 31, 2020. The allowance for loan losses to total loans ratio was 1.45% at December 31, 2020.
Changes in the allowance for loan losses by portfolio classification for the year ended December 31, 2020 are presented below: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Commercial Real Estate | | Commercial and Industrial | | Commercial Construction | | Residential Mortgage | | Home Equity | | Consumer | | Total |
Beginning Balance | | $ | 18,338 | | | $ | 9,129 | | | $ | 4,149 | | | $ | 1,195 | | | $ | 536 | | | $ | 267 | | | $ | 33,614 | |
Provision for loan losses for loans | | 8,417 | | | 683 | | | 3,280 | | | 335 | | | (114) | | | (102) | | | 12,499 | |
Recoveries | | — | | | 265 | | | — | | | — | | | 45 | | | 36 | | | 346 | |
Less: Charge-offs | | — | | | 561 | | | 1,300 | | | — | | | — | | | 33 | | | 1,894 | |
Ending Balance | | $ | 26,755 | | | $ | 9,516 | | | $ | 6,129 | | | $ | 1,530 | | | $ | 467 | | | $ | 168 | | | $ | 44,565 | |
Ending allowance balance: | | | | | | | | | | | | | | |
Allocated to loans individually evaluated for impairment | | $ | 3,454 | | | $ | 2,713 | | | $ | — | | | $ | — | | | $ | — | | | $ | 18 | | | $ | 6,185 | |
Allocated to loans collectively evaluated for impairment | | $ | 23,301 | | | $ | 6,803 | | | $ | 6,129 | | | $ | 1,530 | | | $ | 467 | | | $ | 150 | | | $ | 38,380 | |
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(5) Premises and Equipment
Premises and equipment at December 31, 2021, and 2020, are summarized as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 |
Land and land improvements | | $ | 9,090 | | | $ | 9,090 | |
Bank premises and leasehold improvements | | 53,857 | | | 51,312 | |
Computer software and equipment | | 14,600 | | | 13,953 | |
Furniture, fixtures, and equipment | | 23,734 | | | 22,743 | |
Total premises and equipment, before accumulated depreciation | | 101,281 | | | 97,098 | |
| | | | |
Less accumulated depreciation | | (56,592) | | | (50,390) | |
Total premises and equipment, net of accumulated depreciation | | $ | 44,689 | | | $ | 46,708 | |
Total depreciation expense related to premises and equipment amounted to $6.2 million, $5.4 million, and $4.7 million for the years ended December 31, 2021, 2020, and 2019, respectively.
(6) Leases
For the Company, material leases consist of operating leases on our facilities, mainly branch leases; leases 12-months or less and immaterial equipment leases have been excluded. As of December 31, 2021, the Company had 17 active operating real estate leases. The Company's leased facilities are contracted under various non-cancelable operating leases, most of which provide options to the Company to extend the lease periods and include periodic rent adjustments. While the Company typically exercises its option to extend lease terms, the lease contains provisions that allow the Company, upon notification, to terminate the lease at the end of the lease term, or any option period. Several real estate leases also provide the Company the right of first refusal should the property be offered for sale.
Lease expenses for the years ended December 31, 2021, 2020 and 2019 amounted to $1.5 million, $1.3 million and $1.4 million, respectively. Variable lease costs and short-term lease expenses included in lease expense during this period were immaterial.
The weighted average remaining lease term for operating leases at December 31, 2021 and 2020 was 29.8 years and 26.6 years, respectively. The weighted average discount rate was 3.48% and 3.80% at December 31, 2021 and 2020, respectively.
At December 31, 2021, the remaining undiscounted cash flows by year of these lease liabilities were as follows:
| | | | | | | | |
(Dollars in thousands) | | Operating Leases |
2022 | | $ | 1,376 | |
2023 | | 1,403 | |
2024 | | 1,431 | |
2025 | | 1,438 | |
2026 | | 1,449 | |
Thereafter | | 31,533 | |
Total lease payments | | $ | 38,630 | |
Less: Imputed interest | | 15,003 | |
Total lease liability | | $ | 23,627 | |
In addition, the Company currently collects rent through non-cancellable leases for a small portion of the overall square-footage within its Lowell, Massachusetts campus headquarters and at one of its branch locations. These leases are deemed immaterial.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(7)Deposits
Deposits at December 31, are summarized as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 |
Non-interest checking | | $ | 1,364,258 | | | $ | 1,164,908 | |
Interest-bearing checking | | 743,587 | | | 599,630 | |
Savings | | 310,244 | | | 256,347 | |
Money market | | 1,355,701 | | | 1,210,414 | |
CDs $250,000 or less | | 154,403 | | | 176,895 | |
CDs greater than $250,000 | | 52,046 | | | 68,074 | |
Total customer deposits | | 3,980,239 | | | 3,476,268 | |
Brokered deposits(1) | | — | | | 74,995 | |
Total deposits | | $ | 3,980,239 | | | $ | 3,551,263 | |
__________________________________________
(1) Brokered deposits which are individually $250,000 and under.
Total customer deposits include reciprocal balances from checking, money market deposits and CDs received from participating banks in nationwide deposit networks as a result of our customers electing to participate in Company offered programs which allow for enhanced FDIC insurance. Essentially, the equivalent of the customers' original deposited funds comes back to the Company and are carried within the appropriate category under deposits. The Company's balances in these reciprocal products were $546.7 million and $508.4 million at December 31, 2021 and December 31, 2020, respectively.
The aggregate amounts of overdrawn deposits that have been reclassified as loan balances were $472 thousand and $330 thousand at December 31, 2021 and 2020, respectively.
The following table shows the scheduled maturities of CDs (December 31, 2020 includes brokered CDs with weighted average remaining lives of less than six months):
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 |
Due in less than twelve months | | $ | 154,465 | | | $ | 265,833 | |
Due in over one year through two years | | 43,302 | | | 37,908 | |
Due in over two years through three years | | 6,882 | | | 12,305 | |
Due in over three years through four years | | 1,078 | | | 3,365 | |
Due in over four years through five years | | 491 | | | 515 | |
Due in over five years | | 231 | | | 38 | |
Total CDs | | $ | 206,449 | | | $ | 319,964 | |
(8)Borrowed Funds and Subordinated Debt
Borrowed funds and subordinated debt outstanding at December 31, for the years indicated are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
(Dollars in thousands) | | Amount | | Average Rate | | Amount | | Average Rate | | Amount | | Average Rate |
Borrowed funds | | $ | 5,479 | | | 1.07 | % | | $ | 4,774 | | | 0.30 | % | | $ | 96,173 | | | 1.86 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Subordinated debt | | 58,979 | | | 5.54 | % | | 73,744 | | | 5.69 | % | | 14,872 | | | 6.22 | % |
Total borrowed funds and subordinated debt | | $ | 64,458 | | | 5.16 | % | | $ | 78,518 | | | 5.36 | % | | $ | 111,045 | | | 2.44 | % |
At December 31, 2021, 2020 and 2019, borrowed funds were comprised solely of FHLB borrowings.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The contractual maturity distribution as of December 31, 2021, of borrowed funds with the weighted average cost for each category is set forth below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
(Dollars in thousands) | | Balance | | Rate | | Balance | | Rate | | Balance | | Rate |
Overnight | | $ | — | | | — | % | | $ | — | | | — | % | | $ | 92,000 | | | 1.85 | % |
Within 12 months | | 2,485 | | | 0.29 | % | | 4,316 | | | 0.33 | % | | 3,697 | | | 2.22 | % |
Over 5 years | | 2,994 | | | 1.70 | % | | 458 | | | — | % | | 476 | | | — | % |
At December 31, 2021, 2020, and 2019, outstanding FHLB borrowings, excluding overnight advances, included specific lending projects under the FHLB's community development program.
Maximum FHLB and other borrowings outstanding at any month end during 2021 was $8.6 million and $96.2 million for both 2020 and 2019.
The following table summarizes the average balance and average cost of borrowed funds for the years indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 | | 2019 |
(Dollars in thousands) | | Average Balance | | Average Cost | | Average Balance | | Average Cost | | Average Balance | | Average Cost |
FHLB advances | | $ | 7,632 | | | 0.79 | % | | $ | 35,762 | | | 1.65 | % | | $ | 15,885 | | | 2.42 | % |
FRB PPPLF advances | | — | | | — | % | | 4,703 | | | 0.35 | % | | — | | | — | % |
Other borrowings | | — | | | — | % | | 14 | | | 1.07 | % | | 55 | | | 2.64 | % |
Total borrowed funds | | $ | 7,632 | | | 0.79 | % | | $ | 40,479 | | | 1.50 | % | | $ | 15,940 | | | 2.42 | % |
The Company's primary borrowing source is the FHLB, however the Company may choose to borrow from other established business partners. "Other borrowings" represents overnight advances from the FRB discount window or federal funds purchased from correspondent banks, advanced as part of our annual test of these external funding facilities.
As a member of the FHLB, the Bank has the potential capacity to borrow an amount up to the value of its discounted qualified collateral. Borrowings from the FHLB are secured by certain securities from the Company's investment portfolio not otherwise pledged and certain residential and commercial real estate loans. At December 31, 2021, based on qualifying collateral less outstanding advances, the Bank had the capacity to borrow additional funds from the FHLB of up to approximately $790.0 million. In addition, based on qualifying collateral, the Bank had the capacity to borrow funds from the FRB discount window up to approximately $350.0 million at December 31, 2021. The Bank also has pre-approved borrowing arrangements with large correspondent banks to provide overnight and short-term borrowing capacity. In April 2020, the Company established access to the FRB's PPPLF, which provided funding secured by the pledge of PPP loans. Advances issued under the PPPLF were non-recourse. The amount and term of an advance matched the amount and remaining term of the PPP loans pledged. The FRB's PPPLF program expired on July 31, 2021.
The Company had outstanding subordinated debt, net of deferred issuance costs, of $59.0 million, and $73.7 million at December 31, 2021, and December 31, 2020, respectively.
On July 7, 2020, the Company issued $60.0 million of fixed-to-floating rate, 10 year subordinated notes due 2030 (the "2020 Notes"), and callable at the Company's option on or after July 15, 2025. In January 2015, the Company issued $15.0 million of fixed-to-floating rate, 15 year subordinated notes due 2030 (the "2015 Notes") which were redeemed by the Company on March 31, 2021, as discussed below. The July 2020 Notes are intended to qualify as Tier 2 capital for regulatory purposes.
The July 2020 Notes pay interest at a fixed rate of 5.25% per annum through October 15, 2025, after which floating quarterly rates apply. Original debt issuance costs were $1.2 million and have been netted against the subordinated debt on the consolidated balance sheet in accordance with accounting guidance. These costs are being amortized to interest expense over the life of the July 2020 Notes.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
On March 31, 2021, the Company redeemed the 2015 Notes which were due in January 30, 2030. The redemption of the 2015 Notes was recorded as a loss on the extinguishment of subordinated debt in the amount of $713 thousand, consisting of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs.
(9)Derivatives and Hedging Activities
The tables below present a summary of the Company's derivative financial instruments, notional amounts and fair values for the periods presented:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
(Dollars in thousands) | | Asset Notional Amount | | Asset Derivatives(1)(2) | | Liability Notional Amount | | Liability Derivatives(1)(2) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2020 |
(Dollars in thousands) | | Asset Notional Amount | | Asset Derivatives(1)(2) | | Liability Notional Amount | | Liability Derivatives(1)(2) |
Derivatives designated as hedging instruments | | | | | | | | |
Interest-rate contracts - pay fixed, receive floating | | $ | — | | | $ | — | | | $ | 75,000 | | | $ | 2,814 | |
Total cash flow hedge interest-rate swaps | | $ | — | | | $ | — | | | $ | 75,000 | | | $ | 2,814 | |
| | | | | | | | |
Derivatives not subject to hedge accounting | | | | | | | | |
Interest-rate contracts - pay floating, receive fixed | | $ | 38,027 | | | $ | 2,286 | | | $ | — | | | $ | — | |
Interest-rate contracts - pay fixed, receive floating | | — | | | — | | | 38,027 | | | 2,286 | |
Total back-to-back interest-rate swaps | | $ | 38,027 | | | $ | 2,286 | | | $ | 38,027 | | | $ | 2,286 | |
__________________________________________
(1) Accrued interest balances related to the Company’s interest rate swaps are not included in the fair values above and are immaterial.
(2) The assets and liabilities related to the pay fixed, receive floating interest-rate contracts are subject to a master netting agreement and are presented net in the Consolidated Balance Sheet.
The Company had no derivative fair value hedges at either December 31, 2021 or December 31, 2020.
Cash flow hedges
Interest-rate swap agreements may be entered into as hedges against adverse interest-rate fluctuations on specifically identified assets or liabilities. The Company’s cash flow hedges are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s wholesale funding.
During the first quarter of 2020, the Company entered into three pay fixed, receive float interest rate swaps to hedge the variable cash flows associated with short-term wholesale funding. Each swap had a notional value of $25.0 million with respective maturities of three years, four years and five years. In August 2021, all three interest rate swaps with notional values totaling $75.0 million were terminated resulting in a $1.8 million loss on termination of swaps, which is reported as a component of non-interest income. The Company terminated these interest-rate swaps and accelerated the reclassification of the loss from other comprehensive income to earnings as a result of hedged forecasted transactions becoming probable not to occur.
Back-to-Back swaps
The Company has a "Back-to-Back Swap" program whereby the Bank enters into an interest-rate swap with qualified commercial banking customers and simultaneously enters into equal and opposite interest-rate swap with a swap counterparty.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The customer interest-rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to a fixed-rate payment.
Interest-rate swaps with the counterparty are subject to master netting agreements, while interest-rate swaps with customers are not. Each Back-to-Back swap consists of two interest-rate swaps (a customer swap and offsetting counterparty swap) and amounted to a total number of 10 interest-rate swaps outstanding at both December 31, 2021 and December 31, 2020. As a result of this offsetting relationship, there were no net gains or losses recognized in income on Back-to-Back swaps during the years ended December 31, 2021, December 31, 2020, or December 31, 2019.
At December 31, 2021 and December 31, 2020, all of the Back-to-Back swaps with the counterparty were in the same liability position, therefore there was no netting reflected in the Company’s Consolidated Balance Sheet.
Credit Risk
By using derivative financial instruments, the Company exposes itself to counterparty credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthy. Additionally, counterparty interest-rate swaps contain provisions for collateral to be posted if the derivative exposure exceeds a threshold amount.
The Company had one counterparty and it was rated A and A2 by Standard & Poor's and Moody's, respectively, at December 31, 2021. The Company had no credit risk exposure at either December 31, 2021 or December 31, 2020 relating to interest-rate swaps with counterparties. When the Company has credit risk exposure, collateral is received from the counterparty and held by the Company. Collateral held by the Company is restricted and not considered an asset of the Company. Therefore, it is not carried on the Company's Consolidated Balance Sheet. If the Company posts collateral, the cash is restricted, it is considered an asset of the Company and is carried on the Company's Consolidated Balance Sheet. The Company posted cash collateral of $840 thousand and $5.3 million at December 31, 2021 and December 31, 2020, respectively.
Credit-risk-related Contingent Features
The Company's interest-rate swaps with counterparties contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness.
As of December 31, 2021, the fair value of derivatives was in a net liability position, which excludes any adjustment for nonperformance risk related to these agreements was $528 thousand. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral at December 31, 2021 as noted above.
Other Derivative Related Activity
The Company also participates in loans originated by third party banks, where the originating bank utilizes a back-to-back interest-rate swap structure; however, the Company is not a party to the swap agreements. Under the terms of the loan participations, the Company has accepted contingent liabilities that would only be realized if the swaps were terminated early and there were outstanding losses not covered by the underlying borrowers and the borrowers' pledged collateral. If applicable, the Company's swap-loss exposure would be equal to a percentage of the originating bank's swap loss based on the ratio of the Company's loan participation to the underlying loan. At both December 31, 2021 and December 31, 2020, the Company had one participation loan where the originating bank utilizes a back-to-back interest-rate swap structure. At December 31, 2021, management considers the risk of material swap loss exposure related to this participation loan to be unlikely based the borrower's financial and collateral strength. Management continues to closely monitor for credit changes resulting from the pandemic.
At December 31, 2021 and December 31, 2020, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(10)Commitments, Contingencies and Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, letters of credit, and unadvanced portions of loans and lines of credit.
The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the Consolidated Balance Sheets. The contractual amounts of these instruments reflect the extent of involvement the Company has in the particular classes of financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and letters of credit is represented by the contractual amounts of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
Financial instruments with off-balance sheet credit risk at December 31, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 |
Commitments to originate loans | | $ | 38,653 | | | $ | 22,957 | |
Commitments to originate residential mortgages loans for sale | | — | | | 3,121 | |
Commitments to sell residential mortgage loans | | — | | | 3,493 | |
Letters of credit | | 23,164 | | | 28,038 | |
Unadvanced portions of commercial real estate loans | | 22,035 | | | 14,935 | |
Unadvanced portions of commercial loans and lines | | 565,921 | | | 530,525 | |
Unadvanced portions of construction loans (commercial & residential) | | 325,348 | | | 228,309 | |
Unadvanced portions of home equity lines | | 126,651 | | | 118,686 | |
Unadvanced portions of consumer loans | | 4,263 | | | 4,269 | |
Commitments to originate loans are agreements to lend to a customer provided there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee by the customer. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the borrower.
The Company originates residential mortgage loans intended for sale under agreements to sell such loans on an individual loan basis and may retain or sell the servicing when selling the loans. Loans sold are subject to standard secondary market underwriting and eligibility representations and warranties over the life of the loan and are subject to an early payment default period covering the first four payments for certain loan sales.
Letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. If the letter of credit is drawn upon, a loan is created for the customer, generally a commercial loan, with the same criteria associated with similar commercial loans.
Unadvanced portions of loans and lines of credit represent credit extended to customers but not yet drawn upon and are secured or guaranteed under preexisting loan agreements and credit evaluations having taken into consideration the full commitment amount.
See also Note 9, "Derivatives and Hedging Activities," and Note 1, "Summary of Significant Accounting Policies," under Item (p), "Derivatives," to the Company's consolidated financial statements of this Form 10-K, contained above, for information on the Company's interest-rate lock commitments, interest-rate swaps, and participation in loans originated by third-party banks with potential contingent liabilities.
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 and routine litigation incidental to the business of the Company. Management does not
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
believe resolution of any present litigation will have a material adverse effect on the consolidated financial condition or results of operations of the Company.
(11)Comprehensive (Loss) Income
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2021 | | Year ended December 31, 2020 |
(Dollars in thousands) | | Pre-Tax | | Tax (Expense) Benefit | | After Tax Amount | | Pre-Tax | | Tax (Expense) Benefit | | After Tax Amount |
Change in fair value of debt securities | | $ | (25,077) | | | $ | 5,622 | | | $ | (19,455) | | | $ | 17,841 | | | $ | (3,958) | | | $ | 13,883 | |
Less: net security gains reclassified into non-interest income | | 128 | | | (29) | | | 99 | | | 227 | | | (50) | | | 177 | |
Net change in fair value of debt securities | | (25,205) | | | 5,651 | | | (19,554) | | | 17,614 | | | (3,908) | | | 13,706 | |
| | | | | | | | | | | | |
Change in fair value of cash flow hedges | | 378 | | | (106) | | | 272 | | | (3,328) | | | 935 | | | (2,393) | |
Less: net cash flow hedges losses reclassified into interest expense | | (2,436) | | | 685 | | | (1,751) | | | (514) | | | 144 | | | (370) | |
Net change in fair value of cash flow hedges | | 2,814 | | | (791) | | | 2,023 | | | (2,814) | | | 791 | | | (2,023) | |
| | | | | | | | | | | | |
Total other comprehensive (loss) income, net | | $ | (22,391) | | | $ | 4,860 | | | $ | (17,531) | | | $ | 14,800 | | | $ | (3,117) | | | $ | 11,683 | |
Information on the Company's accumulated other comprehensive income (loss), net of tax, is comprised of the following components as of the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2021 | | Year ended December 31, 2020 |
(Dollars in thousands) | | Unrealized Gains on Debt Securities | | Unrealized Losses on Cash Flow Hedges | | Total | | Unrealized Gains (Losses) on Debt Securities | | Unrealized Gains (Losses) on Cash Flow Hedges | | Total |
Accumulated other comprehensive income - beginning balance | | $ | 24,216 | | | $ | (2,023) | | | $ | 22,193 | | | $ | 10,510 | | | $ | — | | | $ | 10,510 | |
Total other comprehensive (loss) income, net | | (19,554) | | | 2,023 | | | (17,531) | | | 13,706 | | | (2,023) | | | 11,683 | |
Accumulated other comprehensive income - ending balance | | $ | 4,662 | | | $ | — | | | $ | 4,662 | | | $ | 24,216 | | | $ | (2,023) | | | $ | 22,193 | |
(12)Shareholders' Equity
Shares Authorized and Share Issuance
The Company's authorized capital is divided into common stock and preferred stock. The Company is authorized to issue 40,000,000 shares of common stock, with a par value of $0.01 per share, and as of December 31, 2021 had 12,038,382 shares issued and outstanding. Holders of common stock are entitled to one vote per share and are entitled to receive dividends if, as and when declared by the Board. Dividend and liquidation rights of the common stock may be subject to the rights of any outstanding preferred stock. The Company is also authorized to issue 1,000,000 shares of preferred stock, with a par value of $0.01 per share. No preferred stock has been issued as of the date of this Form 10-K.
The Company has a shareholders' rights plan. Under the plan, each share of common stock includes a right to purchase under certain circumstances one one-hundredth of a share of the Company's Series A Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of $122.50 per one one-hundredth of a preferred share, subject to adjustment, or, in certain circumstances, to receive cash, property, shares of common stock or other securities of the Company. The rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events that would ordinarily be associated with an unsolicited acquisition or attempted acquisition of 10% or more of the Company's outstanding shares of common stock. The rights have no voting or dividend privileges, and unless and until they become
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
exercisable, have no dilutive effect on the earnings of the Company. The rights will expire, unless earlier redeemed, exchanged, or otherwise rescinded by the Company, on January 13, 2028.
The Company's stock incentive plans permit the Board to grant, under various terms, stock options (for the purchase of newly issued shares of common stock), common stock, restricted stock awards, restricted stock units and stock appreciation rights to officers and other employees, non-employee directors and consultants.
Upon vesting, restricted stock awards may be net settled to cover payment for employee tax obligations, resulting in shares of common stock being reacquired by the Company and returned to the pool of shares reserved for issuance under the incentive plans. In accordance with Massachusetts law, shares reacquired by the Company will be treated as authorized but unissued shares.
The Company's stock incentive plans also allow for newly issued shares of common stock to be issued without restrictions to officers and other employees, non-employee directors and consultants. From time to time, the Company issues shares to community members for consulting on regional advisory councils and grants shares of fully vested stock as employee anniversary awards. These shares vest immediately and the cost, which is based on the market price on the date of grant and deemed to be immaterial, is expensed in the period in which the services are rendered. See Note 14, "Stock-Based Compensation," to the Company's consolidated financial statements of this Form 10-K, contained below, for additional information regarding the Company's stock incentive plans.
In addition, the Company maintains a dividend reinvestment and direct stock purchase plan (together, the "DRSPP") which enables shareholders, at their discretion, to elect to reinvest cash dividends paid on their shares of the Company's common stock by purchasing additional shares of common stock from the Company at a purchase price equal to fair market value. Under the DRSPP, shareholders and new investors also have the opportunity to purchase shares of the Company's common stock without brokerage fees, subject to monthly minimums and maximums. During the years ended December 31, 2021, 2020, and 2019, the direct purchase component of the DRSPP was used by shareholders to purchase 407, 1,869 and 1,609 shares of the Company's common stock totaling $13 thousand, $44 thousand, and $48 thousand, respectively. See "Dividends" below for further information about the dividend reinvestment portion of the DRSPP.
Capital Raised and Capital Adequacy Requirements
Capital planning by the Company and the Bank considers current needs and anticipated future growth. Ongoing sources of capital include the retention of earnings, less dividends paid, proceeds from the exercise of employee stock options and proceeds from purchases of shares pursuant to the DRSPP. Additional sources of capital for the Company and the Bank have been proceeds from the issuance of common stock and proceeds from the issuance of subordinated debt. The Company believes its current capital is adequate to support ongoing operations.
Management believes, as of December 31, 2021, that the Company and the Bank met all capital adequacy requirements to which they were subject. As of December 31, 2021, and December 31, 2020, the Company met the definition of "well-capitalized" under the applicable Federal Reserve Board regulations and the Bank qualified as "well-capitalized" under the prompt corrective action regulations of Basel III and the FDIC.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The Company's and the Bank's actual capital amounts and ratios are presented as of December 31, 2021 and December 31, 2020 in the tables below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital for Capital Adequacy Purposes(1) | | Minimum Capital to be Well-Capitalized(2) |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of December 31, 2021 | | | | | | | | | | | | |
The Company | | | | | | | | | | | | |
Total Capital to risk-weighted assets ("RWA") | | $ | 435,328 | | | 13.73 | % | | $ | 253,610 | | | 8.00 | % | | N/A | | N/A |
Tier 1 Capital to RWA | | 336,577 | | | 10.62 | % | | 190,208 | | | 6.00 | % | | N/A | | N/A |
Tier 1 Capital to average assets ("AA") or Leverage Ratio | | 336,577 | | | 7.56 | % | | 177,978 | | | 4.00 | % | | N/A | | N/A |
Common Equity Tier 1 Capital to RWA | | 336,577 | | | 10.62 | % | | 142,656 | | | 4.50 | % | | N/A | | N/A |
| | | | | | | | | | | | |
The Bank | | | | | | | | | | | | |
Total Capital to RWA | | $ | 434,430 | | | 13.70 | % | | $ | 253,610 | | | 8.00 | % | | $ | 317,013 | | | 10.00 | % |
Tier 1 Capital to RWA | | 394,658 | | | 12.45 | % | | 190,208 | | | 6.00 | % | | 253,610 | | | 8.00 | % |
Tier 1 Capital to AA, Leverage Ratio | | 394,658 | | | 8.87 | % | | 177,978 | | | 4.00 | % | | 222,473 | | | 5.00 | % |
Common Equity Tier 1 Capital to RWA | | 394,658 | | | 12.45 | % | | 142,656 | | | 4.50 | % | | 206,058 | | | 6.50 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Capital for Capital Adequacy Purposes(1) | | Minimum Capital to be Well-Capitalized(2) |
(Dollars in thousands) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
As of December 31, 2020 | | | | | | | | | | | | |
The Company | | | | | | | | | | | | |
Total Capital to RWA | | $ | 415,999 | | | 14.62 | % | | $ | 227,631 | | | 8.00 | % | | N/A | | N/A |
Tier 1 Capital to RWA | | 306,577 | | | 10.77 | % | | 170,723 | | | 6.00 | % | | N/A | | N/A |
Tier 1 Capital to AA, Leverage Ratio | | 306,577 | | | 7.52 | % | | 163,127 | | | 4.00 | % | | N/A | | N/A |
Common Equity Tier 1 Capital to RWA | | 306,577 | | | 10.77 | % | | 128,042 | | | 4.50 | % | | N/A | | N/A |
| | | | | | | | | | | | |
The Bank | | | | | | | | | | | | |
Total Capital to RWA | | $ | 413,862 | | | 14.55 | % | | $ | 227,631 | | | 8.00 | % | | $ | 284,538 | | | 10.00 | % |
Tier 1 Capital to RWA | | 378,184 | | | 13.29 | % | | 170,723 | | | 6.00 | % | | 227,631 | | | 8.00 | % |
Tier 1 Capital to AA, Leverage Ratio | | 378,184 | | | 9.27 | % | | 163,127 | | | 4.00 | % | | 203,909 | | | 5.00 | % |
Common Equity Tier 1 Capital to RWA | | 378,184 | | | 13.29 | % | | 128,042 | | | 4.50 | % | | 184,950 | | | 6.50 | % |
__________________________________________
(1) Before application of the capital conservation buffer of 2.50% as of December 31, 2021 and December 31, 2020. See discussion below.
(2) For the Bank to qualify as "well-capitalized," it must maintain at least the minimum ratios listed under the regulatory prompt corrective action framework. This framework does not apply to the Company.
The Company is subject to the Basel III capital ratio requirements, which include a "capital conservation buffer" of 2.50% above the regulatory minimum risk-based capital adequacy requirements shown above. 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 December 31, 2021.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The Basel III minimum capital ratio requirements as applicable to the Company and the Bank with the capital conservation buffer are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | Basel III Minimum for Capital Adequacy Purposes | | Basel III Additional Capital Conservation Buffer | | Basel III "Adequate" Ratio with Capital Conservation Buffer |
Total Capital to RWA | | 8.00% | | 2.50% | | 10.50% |
Tier 1 Capital to RWA | | 6.00% | | 2.50% | | 8.50% |
Tier 1 Capital to AA, or Leverage Ratio | | 4.00% | | N/A | | 4.00% |
Common equity tier 1 capital to RWA | | 4.50% | | 2.50% | | 7.00% |
Failure to meet minimum capital requirements can initiate or result in certain mandatory and possibly additional discretionary supervisory actions by regulators that, if undertaken, could have a material adverse effect on the Company's consolidated financial statements. Under applicable capital adequacy requirements and the regulatory framework for prompt corrective action applicable to the Bank, the Company must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
See also "Supervision and Regulation," contained in Item 1, "Business," of this Form 10-K for further information on the Company's Basel III and capital requirements.
Dividends
Neither the Company nor the Bank may declare or pay dividends on its stock if the effect thereof would cause shareholders' equity to be reduced below applicable regulatory capital requirements or if such declaration and payment would otherwise violate regulatory requirements.
As the principal asset of the Company, the Bank currently provides the only source of cash for the payment of dividends by the Company. Under Massachusetts law, trust companies such as the Bank may pay dividends only out of "net profits" and only to the extent that such payments will not impair the Bank's capital stock. Any dividend payment that would exceed the total of the Bank's net profits for the current year plus its retained net profits of the preceding two years would require the Massachusetts Division of Banks' approval. Applicable provisions of the FDIC Improvement Act also prohibit a bank from paying any dividends on its capital stock if the bank is in default on the payment of any assessment to the FDIC or if the payment of dividends would otherwise cause the bank to become "undercapitalized." Any restrictions, regulatory or otherwise, on the ability of the Bank to pay dividends to the Company may restrict the ability of the Company to pay dividends to the holders of its common stock.
The statutory term "net profits" essentially equates with the accounting term "net income" and is defined under the Massachusetts banking statutes to mean the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting from such total all current operating expenses, actual losses, accrued dividends on any preferred stock and all federal and state taxes.
For the year ended December 31, 2021, the Company declared $8.9 million in cash dividends and shareholders utilized the dividend reinvestment portion of the DRSPP to purchase an aggregate of 36,651 shares of the Company's common stock totaling $1.3 million. During the year ended December 31, 2020, the Company declared $8.3 million in cash dividends and shareholders utilized the dividend reinvestment portion of the DRSPP to purchase 50,506 shares of the Company's common stock totaling $1.2 million. In 2019, the Company declared $7.5 million in cash dividends and shareholders utilized the dividend reinvestment portion of the DRSPP to purchase 39,176 shares of the Company's common stock totaling $1.2 million. See "Shares Authorized and Share Issuance" above in this Note 12 of this Form 10-K for more information on the DRSPP, including the direct stock purchase component of the plan.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(13)Employee Benefit Plans
Defined Contribution Plans
The Company has a 401(k) defined contribution employee benefit plan. The 401(k) plan allows eligible employees to contribute a percentage of their earnings to the plan. A portion of an employee's contribution, as determined by the Compensation and Human Resources Committee of the Board of Directors, is matched by the Company. During the years ended December 31, 2021, 2020, and 2019 the Company's percentage match was 70% up to the first 6% contributed by the employee.
All eligible employees, at least 18 years of age and completing 1 hour of service, may participate in the 401(k) plan. Vesting for the Company's 401(k) retirement plan matching contribution is based on years of service with participants becoming 25% vested on the anniversary of their hire date and each subsequent year until they are 100% vested following four years of service. Unvested amounts not distributed to an employee following termination of employment are used to offset plan expenses and the Company's matching contributions.
The Company's expense for the 401(k) plan match was $1.7 million, $1.6 million, and $1.5 million, respectively, for the years ended December 31, 2021, 2020, and 2019.
Additionally, on December 11, 2018, the Board approved and adopted the Enterprise Bank Supplemental Executive Retirement and Deferred Compensation Plan. The plan is unfunded and is maintained for the purpose of providing deferred compensation to a certain group of management employees. Total expenses for the deferred compensation plan were $611 thousand and $249 thousand for the years ended December 31, 2021 and 2020, respectively.
Supplemental Employee Retirement Plan ("SERP")
The Company has salary continuation agreements with two of its current executive officers and one former executive officer. These salary continuation agreements provide for predetermined fixed-cash supplemental retirement benefits to be provided for a period of 20 years after each individual reaches a defined "benefit age." The individuals covered under the SERP have reached the defined benefit age and are receiving payments under the SERP. Additionally, the Company has not recognized service costs in the current or prior year as each officer had previously attained their individually defined benefit age and was fully vested under the SERP.
This non-qualified plan represents a direct liability of the Company, and as such, the Company has no specific assets set aside to settle the benefit obligation. The aggregate amount accrued, or the "accumulated benefit obligation," is equal to the present value of the benefits to be provided to the employee or any beneficiary. Because the Company's benefit obligations provide for predetermined fixed-cash payments, the Company does not have any unrecognized costs to be included as a component of accumulated other comprehensive income.
The amounts charged to expense for the SERP are included in the table below. The Company anticipates accruing an additional $53 thousand to the SERP for the year ending December 31, 2022.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The following table provides a reconciliation of the changes in the supplemental retirement benefit obligation and the net periodic benefit cost for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Reconciliation of benefit obligation: | | | | | | |
Benefit obligation at beginning of year | | $ | 1,923 | | | $ | 2,064 | | | $ | 2,174 | |
Net periodic benefit cost: | | | | | | |
Interest cost | | 61 | | | 61 | | | 84 | |
Actuarial loss (gain) | | — | | | 74 | | | 82 | |
Net periodic benefit costs | | $ | 61 | | | $ | 135 | | | $ | 166 | |
| | | | | | |
Benefits paid | | (276) | | | (276) | | | (276) | |
Benefit obligation at end of year | | $ | 1,708 | | | $ | 1,923 | | | $ | 2,064 | |
| | | | | | |
Funded status: | | | | | | |
Accrued liability as of December 31 | | $ | (1,708) | | | $ | (1,923) | | | $ | (2,064) | |
| | | | | | |
Discount rate used for benefit obligation(1) | | 3.25 | % | | 3.25 | % | | 4.00 | % |
__________________________________________
(1)Management utilizes the Moody's 20 year AA corporate bond rates to establish the reasonableness of the discount rate used. The Company reviews and periodically updates the discount rate to reflect changes in bond market rates. The impact of the discount rate change is reflected as the actuarial gain or loss.
SERP benefits expected to be paid in each of the next five years and in the aggregate five years thereafter:
| | | | | | | | |
(Dollars in thousands) | | Payments |
2022 | | $ | 276 | |
2023 | | 276 | |
2024 | | 276 | |
2025 | | 276 | |
2026 | | 276 | |
2027-2031 | | 560 | |
Supplemental Life Insurance
The Company has provided supplemental life insurance through split-dollar life insurance arrangements for certain executive and senior officers on whom the Bank owns BOLI. See Item (l), "Bank Owned Life Insurance," in Note 1, "Summary of Significant Accounting Policies," to the Company's consolidated financial statements of this Form 10-K, contained above, for further information regarding BOLI.
These arrangements provide a death benefit to the officer's designated beneficiaries that extend to post-retirement periods for some of the supplemental life insurance plans. The Company has recognized a liability for these future post-retirement benefits.
These non-qualified plans represent a direct liability of the Company, and, as such, the Company has no specific assets set aside to settle the benefit obligation. The funded status is the aggregate amount accrued, or the "accumulated post-retirement benefit obligation," which is the present value of the post-retirement benefits associated with this arrangement.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The following table provides a reconciliation of the changes in the post-retirement supplemental life insurance plan obligation and the net periodic benefit cost for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Reconciliation of benefit obligation: | | | | | | |
Benefit obligation at beginning of year | | $ | 2,631 | | $ | 2,424 | | $ | 2,084 |
Net periodic benefit cost: | | | | | | |
Service cost | | (23) | | (21) | | (16) |
Interest cost | | 83 | | 87 | | 95 |
Actuarial loss (gain) | | (71) | | 141 | | 261 |
Total net period cost | | $ | (11) | | $ | 207 | | $ | 340 |
Benefit obligation at end of year | | $ | 2,620 | | $ | 2,631 | | $ | 2,424 |
| | | | | | |
Funded status: | | | | | | |
Accrued liability as of December 31 | | $ | (2,620) | | $ | (2,631) | | $ | (2,424) |
| | | | | | |
Discount rate used for benefit obligation(1) | | 3.25 | % | | 3.25 | % | | 4.00 | % |
__________________________________________
(1) Management utilizes the Moody's 20 year AA corporate bond rates to establish the reasonableness of the discount rate used. The Company reviews and periodically updates the discount rate to reflect changes in bond market rates. The impact of the discount rate change is reflected as the actuarial gain or loss.
The amounts charged to expense for supplemental life insurance are included in the table above. The Company anticipates accruing an additional $117 thousand to the plan for the year ending December 31, 2022.
(14)Stock-Based Compensation
The Company currently has one active stock incentive plan: The Enterprise Bancorp, Inc. 2016 Stock Incentive Plan, as amended. The 2016 plan permits the Board to grant, under various terms, common stock, both incentive and non-qualified stock options (for the purchase of newly issued shares of common stock), restricted stock, restricted stock units and stock appreciation rights to officers and other employees, directors, and consultants. Option exercises and restricted stock vesting may be net exercised or net settled to cover option costs and employee tax obligations under the terms of the respective plan. As of December 31, 2021, 507,699 common shares remained available for future grants under the 2016 plan.
Awards previously granted under an earlier, now expired plan remain outstanding and may be exercised through 2028.
The Company's stock-based compensation expense related to these plans includes stock options and stock awards to officers and other employees included in salary and benefits expense, and stock awards and stock compensation in lieu of cash fees to non-employee directors both included in other operating expenses. Total stock-based compensation expense was $2.1 million for the year ended December 31, 2021 and $1.9 million for the years ended December 31, 2020, and, 2019. The total tax benefit recognized related to the stock-based compensation expense was $579 thousand, $535 thousand, and $526 thousand for the years ended 2021, 2020 and 2019, respectively.
Tax benefits associated with employee exercises and vesting of stock compensation of approximately $85 thousand and $137 thousand were recorded as reductions of the Company's income tax expense for the years ended December 31, 2021 and December 31, 2019, respectively, compared with a tax expense of $25 thousand for the year ended December 31, 2020. These amounts, treated as discrete tax items in the period in which they occur, will vary from year to year as a function of the volume of share-based payments vested or exercised and the then current market price of the Company's stock in comparison to the compensation cost recognized in the Company's consolidated financial statements.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Stock Option Awards
Stock options granted generally vest 50% in year two and 50% in year four, on or about the anniversary date of the awards. Vested stock options are only exercisable while the employee remains employed with the Company and for a limited time thereafter. For all awards, if a grantee's employment or other service relationship, such as service as a director, is terminated for any reason, then any stock options granted that have not vested at the time of such termination generally must be forfeited, unless the Compensation and Human Resources Committee or the Board, as the case may be, waives such forfeiture requirement.
Under the terms of the plans, stock options may not be granted at less than 100% of the fair market value of the shares on the date of grant and may not have a term of more than 10 years. Any shares of common stock reserved for issuance pursuant to stock options granted under the plans that are returned to the Company unexercised shall remain available for issuance under such plan, while the plan is effective. For participants owning 10% or more of the Company's outstanding common stock (of which there are currently none), incentive stock options may not be granted at less than 110% of the fair market value of the shares on the date of grant and may not have an expiration term of more than five years.
The Company utilizes the Black-Scholes option valuation model in order to determine the per share grant date fair value of stock option grants.
The table below provides a summary of the stock options granted, including the weighted average fair value, the fair value as a percentage of the market value of the underlying stock at the date of grant and the average assumptions used in the model for the years indicated:
| | | | | | | | | | | | | | | | | | | | |
Stock Option Awards | | 2021 | | 2020 | | 2019 |
Stock options granted | | 17,580 | | 24,208 | | 23,218 |
Term in years | | 10 | | 10 | | 10 |
Weighted average assumptions used in the fair value model: | | | | | | |
Expected volatility | | 44 | % | | 37 | % | | 33 | % |
Expected dividend yield | | 3.01 | % | | 3.43 | % | | 2.75 | % |
Expected life in years | | 6.5 | | 6.5 | | 6.5 |
Risk-free interest rate | | 1.28 | % | | 1.02 | % | | 2.58 | % |
Weighted average market price on date of grants | | $ | 32.73 | | $ | 28.22 | | $ | 29.84 |
Per share weighted average fair value | | $ | 11.95 | | $ | 8.41 | | $ | 8.70 |
Fair value as a percentage of market value at grant date | | 36 | % | | 30 | % | | 29 | % |
The expected volatility is the anticipated variability in the Company's share price over the expected life of the stock option and is based on the Company's historical volatility.
The expected dividend yield is the Company's projected dividends based on historical annualized dividend yield to coincide with volatility divided by its share price at the date of grant.
The expected life represents the period of time that the stock option is expected to be outstanding. The Company utilized the simplified method, under which the expected term equals the vesting term plus the contractual term divided by 2.
The risk-free interest rate is based on the U.S. Department of the Treasury rate in effect at the time of grant for a period equivalent to the expected life of the stock option.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Stock option transactions during the year ended December 31, 2021 are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | | Options | | Weighted Average Exercise Price Per Share | | Weighted Average Remaining Life in Years | | Aggregate Intrinsic Value |
Outstanding December 31, 2020 | | 181,302 | | | $ | 24.07 | | | 5.3 | | $ | 627 | |
Granted | | 17,580 | | | 32.73 | | | | | |
Exercised | | 11,347 | | | 20.16 | | | | | |
Forfeited/Expired | | 643 | | | 30.24 | | | | | |
Outstanding December 31, 2021 | | 186,892 | | | $ | 25.10 | | | 4.9 | | $ | 3,704 | |
| | | | | | | | |
Vested and Exercisable at December 31, 2021 | | 128,203 | | | $ | 22.60 | | | 3.4 | | $ | 2,861 | |
The aggregate intrinsic value in the table above represents the difference between the closing price of the Company's common stock on December 31, 2021 and the exercise price, multiplied by the number of stock options outstanding. The intrinsic value will change based on the fair market value of the Company's common stock. If the closing price was less than the exercise price of the stock option, no intrinsic value was assigned to the grant. The intrinsic value of stock options vested and exercisable represents the total pretax intrinsic value that would have been received by the stock option holders had all in-the-money vested stock option holders exercised their options on December 31, 2021. At December 31, 2021, 128,203 of the vested and exercisable stock options were in-the money.
Cash received from stock option exercises amounted to $159 thousand, $21 thousand, and $185 thousand during the years ended December 31, 2021, 2020 and 2019, respectively. The total intrinsic value of stock options exercised amounted to $173 thousand, $8 thousand, and $659 thousand during the years ended December 31, 2021, 2020 and 2019, respectively. Cash paid by the Company for the net settlement of stock options to cover employee tax obligations amounted to $16 thousand and $157 thousand during the years ended December 31, 2021 and 2019, respectively. The Company paid no cash for the net settlement of stock options to cover employee tax obligations during the year ended December 31, 2020.
Stock option activity during the year ended December 31, 2021 for unvested options are summarized as follows:
| | | | | | | | | | | | | | |
Unvested Options | | Options | | Weighted Average Grant Date Fair Value |
Unvested December 31, 2020 | | 59,244 | | | $ | 9.27 | |
Granted | | 17,580 | | | 11.95 | |
Vested | | 17,528 | | | 9.73 | |
Forfeited | | 607 | | | 9.63 | |
Unvested December 31, 2021 | | 58,689 | | | $ | 9.93 | |
The total fair value of stock options vested (based on grant date fair value) during the years ended December 31, 2021, December 31, 2020 and December 31, 2019 was $171 thousand, $216 thousand, and $187 thousand, respectively.
Compensation expense recognized in association with the stock option awards amounted to $187 thousand for the year ended December 31, 2021 and $190 thousand for the years ended December 31, 2020, and 2019. The total tax benefit recognized related to the stock option expense was $52 thousand, $53 thousand, and $54 thousand for the years ended December 31, 2021, 2020, and 2019, respectively.
As of December 31, 2021, there was $342 thousand of unrecognized stock-based compensation expense related to non-vested stock options. That cost is expected to be recognized over the remaining weighted average vesting period of 2.5 years.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Restricted Stock Awards
Restricted stock awards are granted at the market price of the Company's common stock on the date of the grant. Employee restricted stock awards generally vest over four years in equal portions beginning on or about the first anniversary date of the restricted stock award or are performance based restricted stock awards that vest upon the Company achieving certain predefined performance objectives. Non-employee director restricted stock awards generally vest over two years in equal portions beginning on or about the first anniversary date of the restricted stock award.
The table below provides a summary of restricted stock awards granted during the years indicated:
| | | | | | | | | | | | | | | | | | | | |
Restricted Stock Awards (number of underlying shares) | | 2021 | | 2020 | | 2019 |
Two-year vesting | | 8,109 | | | 8,295 | | | 8,368 | |
Four-year vesting | | 24,307 | | | 26,015 | | | 22,403 | |
Performance-based vesting | | 21,559 | | | 25,001 | | | 24,427 | |
Total restricted stock awards | | 53,975 | | | 59,311 | | | 55,198 | |
| | | | | | |
Weighted average grant date fair value | | $ | 32.73 | | | $ | 28.22 | | | $ | 29.84 | |
If a grantee's employment or other service relationship, such as service as a director, is terminated for any reason, then any shares of restricted stock granted that have not vested as of the time of such termination generally must be forfeited, unless the Compensation and Human Resources Committee or the Board, as the case may be, waives such forfeiture requirement.
The restricted stock awards allow for the non-forfeitable receipt of dividends, and the voting of all shares, whether or not vested, throughout the vesting periods at the same proportional level as common shares outstanding.
Upon vesting, restricted stock awards may be net settled to cover payment for employee tax obligations, resulting in shares of common stock being reacquired by the Company. During the years ended December 31, 2021, 2020, and 2019 the Company paid $330 thousand, $233 thousand, and $245 thousand, respectively, to net settle the vesting of restricted stock awards to cover employee tax obligations.
Any shares that are returned to the Company prior to vesting or as payment for employee tax obligations upon vesting shall remain available for issuance under such plan, while the plan is still effective.
The following table sets forth a summary of the activity for the Company's restricted stock awards:
| | | | | | | | | | | | | | |
(Dollars in thousands, except per share data) | | Restricted Stock | | Weighted Average Grant Price Per Share |
Unvested December 31, 2020 | | 116,174 | | | $ | 29.70 | |
Granted | | 53,975 | | | 32.73 | |
Vested/released | | 53,960 | | | 30.78 | |
Forfeited | | 2,318 | | | 30.61 | |
Unvested December 31, 2021 | | 113,871 | | | $ | 30.61 | |
Stock-based compensation expense recognized in association with the restricted stock awards amounted to $1.6 million for the year ended December 31, 2021, and $1.4 million during each of the years ended 2020, and 2019. The total tax benefit recognized related to restricted stock award compensation expense was $456 thousand, $402 thousand, and $401 thousand for the years ended 2021, 2020, and 2019, respectively.
As of December 31, 2021, there remained $2.0 million of unrecognized compensation expense related to the restricted stock awards. That cost is expected to be recognized over the remaining weighted average vesting period of 2.2 years.
The total fair value of restricted stock awards vested (based on grant date fair value) during the years ended December 31, 2021, 2020 and 2019 was $1.7 million, $1.3 million, and $1.2 million, respectively.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Stock in Lieu of Directors' Fees
In addition to restricted stock awards discussed above, the non-employee members of the Company's Board may opt to receive newly issued shares of the Company's common stock in lieu of cash compensation for attendance at Board and Board Committee meetings. These shares are issued annually each January for Board meetings held in the previous year. Directors must make an irrevocable election to receive shares of common stock in lieu of cash fees prior to December 31st of the preceding year. Directors are granted shares of common stock in lieu of cash fees based on an average quarterly close price of the Company's common stock on the NASDAQ Global Market during the year.
The 2021 stock in lieu of directors' fees expense was $252 thousand, which represented 7,375 shares issued to Directors in January 2022, at a price of $34.14 per share, and was based on the Company's average quarterly close price in 2021. In 2020, the corresponding expense was $286 thousand, which represented 11,532 shares issued to Directors in January 2021, at a price of $24.77 per share, and was based on the Company's average quarterly close price in 2020. In 2019, the corresponding expense was $253 thousand, which represented 8,346 shares issued to Directors in January 2020, at a price of $30.35 per share, and was based on the Company's average quarterly close price in 2019. The total tax benefit recognized related to the stock in lieu of directors' fees for meeting attendance was $71 thousand, $80 thousand, and $71 thousand, for the years ended 2021, 2020 and 2019, respectively.
(15) Income Taxes
The components of income tax expense for the years ended December 31, were calculated using the asset and liability method as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Current expense: | | | | | | |
Federal | | $ | 10,786 | | | $ | 11,305 | | | $ | 7,728 | |
State | | 3,771 | | | 4,542 | | | 3,028 | |
Total current expense | | 14,557 | | | 15,847 | | | 10,756 | |
Deferred benefit: | | | | | | |
Federal | | (945) | | | (3,940) | | | (339) | |
State | | (25) | | | (1,735) | | | (36) | |
Total deferred benefit | | (970) | | | (5,675) | | | (375) | |
| | | | | | |
Total income tax expense | | $ | 13,587 | | | $ | 10,172 | | | $ | 10,381 | |
The provision for income taxes differs from the amount computed by applying the statutory U.S. federal income tax rate of 21% for 2021, 2020, and 2019 to income before taxes as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Computed income tax expense at statutory rate | | $ | 11,709 | | $ | 8,742 | | $ | 9,362 |
State income taxes, net of federal tax benefit | | 2,959 | | 2,218 | | 2,364 |
Tax-exempt income, net of disallowance | | (832) | | (865) | | (894) |
Bank-owned life insurance income, net | | (172) | | (123) | | (134) |
| | | | | | |
Tax expense (benefit) from stock compensation | | (85) | | 25 | | (137) |
Other | | 8 | | 175 | | (180) |
Total income tax expense | | $ | 13,587 | | $ | 10,172 | | $ | 10,381 |
| | | | | | |
Effective income tax rate | | 24.4 | % | | 24.4 | % | | 23.3 | % |
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
At December 31, the tax effects of each type of income and expense item that give rise to deferred taxes are as follows:
| | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 |
Deferred tax asset: | | | | |
Allowance for Credit Losses | | $ | 14,277 | | | $ | 12,415 | |
Depreciation | | 2,454 | | | 2,174 | |
| | | | |
| | | | |
| | | | |
Supplemental employee retirement plans | | 794 | | | 717 | |
Deferred compensation and benefits | | 2,799 | | | 291 | |
Non-accrual interest | | 699 | | | 610 | |
Stock-based compensation expense | | 667 | | | 662 | |
Lease liability | | 6,562 | | | 4,886 | |
Cashflow hedge swap | | — | | | 791 | |
Deferred fees on PPP loans | | 689 | | | 2,808 | |
Other | | 820 | | | 13 | |
Total | | 29,761 | | | 25,367 | |
| | | | |
Deferred tax liability: | | | | |
Goodwill | | 1,571 | | | 1,576 | |
Net unrealized gains on equity securities | | 80 | | | 31 | |
Net unrealized gains on debt securities | | 1,245 | | | 6,896 | |
Deferred origination costs | | 612 | | | 645 | |
Lease ROU asset | | 6,562 | | | 4,886 | |
Other | | 47 | | | 43 | |
Total | | 10,117 | | | 14,077 | |
| | | | |
Net deferred tax asset | | $ | 19,644 | | | $ | 11,290 | |
Deferred income taxes are recognized based on the expected future tax consequences of differences between the financial statement and tax basis of assets and liabilities, calculated using currently enacted tax rates. Management records net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making this determination, we consider all available positive and negative evidence, including recent financial operations and projected future taxable income. Management believes based upon positive historical and expected future earnings that it is more likely than not the Company will generate sufficient taxable income to realize the deferred tax asset existing at December 31, 2021. However, factors beyond management's control, such as the general state of the economy, can affect future levels of taxable income and there can be no assurances that sufficient taxable income will be generated to fully realize the deferred tax assets in the future.
The Company paid total income taxes during the years ended December 31, 2021, 2020, and 2019 of $12.3 million, $17.7 million, and $10.6 million, respectively.
The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at December 31, 2021 or December 31, 2020.
The Company invests in qualified affordable housing projects as a limited partner. during the years ended December 31, 2021, 2020 and 2019, the Company recognized $71 thousand of Federal Low Income Housing tax credits per year. The Company anticipates that it will receive additional tax credits related to the Federal Low Income Housing Tax Credit program in the amount of $36 thousand which is expected to be realized within one year.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(16)Earnings per Share
The table below presents the increase in average shares outstanding, using the treasury stock method, for the diluted earnings per share calculation for the years indicated:
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 | | 2019 |
Basic weighted average common shares outstanding | | 12,005,838 | | | 11,897,813 | | | 11,789,570 | |
Dilutive shares | | 45,455 | | | 21,695 | | | 40,248 | |
Diluted weighted average common shares outstanding | | 12,051,293 | | | 11,919,508 | | | 11,829,818 | |
There were 31,677, 75,870 and 52,219 stock options outstanding at December 31, 2021, December 31, 2020, and December 31, 2019, respectively, that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for the years ended December 31, 2021, 2020, and 2019. These stock options, which were not dilutive at that date, may potentially dilute earnings per share in the future.
The Company issues stock options and restricted stock awards to officers and other employees and restricted stock awards and stock compensation in lieu of cash fees to non-employee directors. The restricted stock awards allow for the non-forfeitable receipt of dividends, and the voting of all shares, whether or not vested, throughout the vesting periods at the same proportional level as common shares outstanding. The unvested restricted stock awards are the Company's only participating securities and are included in shares outstanding. Unvested participating restricted awards amounted to 113,871 shares and 116,174 shares as of December 31, 2021 and December 31, 2020, respectively.
(17) 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.
The following tables summarize significant assets and liabilities carried at fair value and placement in the fair value hierarchy at the dates specified:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 securities | | 1,785 | | | 1,785 | | | — | | | — | |
FHLB stock | | 2,164 | | | — | | | 2,164 | | | — | |
Interest-rate swaps | | 528 | | | — | | | 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 | | | $ | — | |
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | | | Fair Value Measurements Using: |
(Dollars in thousands) | | Fair Value | | (Level 1) | | (Level 2) | | (Level 3) |
Assets measured on a recurring basis: | | | | | | | | |
Debt securities | | $ | 582,303 | | | $ | — | | | $ | 582,303 | | | $ | — | |
Equity securities | | 746 | | | 746 | | | — | | | — | |
FHLB stock | | 1,905 | | | — | | | 1,905 | | | — | |
Interest-rate swaps | | 2,286 | | | — | | | 2,286 | | | — | |
Assets measured on a non-recurring basis: | | | | | | | | |
Impaired loans (collateral dependent) | | 18,733 | | | — | | | — | | | 18,733 | |
| | | | | | | | |
| | | | | | | | |
Liabilities measured on a recurring basis: | | | | | | | | |
Interest-rate swaps | | $ | 5,100 | | | $ | — | | | $ | 5,100 | | | $ | — | |
The Company did not transfer any assets between the fair value measurement levels during the years ended December 31, 2021 or December 31, 2020.
All of the Company's debt securities are considered "available-for-sale" and are carried at fair value. The debt security category above may include federal agency obligations, U.S. treasury securities, commercial and residential federal agency MBS, municipal securities, corporate bonds, and CDs, as held at those dates. The Company utilizes third-party pricing vendors to provide valuations on its debt securities. Fair values provided by the vendors were generally determined based upon pricing matrices utilizing observable market data inputs for similar or benchmark securities in active markets and/or based on a matrix pricing methodology which employs The Bond Market Association's standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Therefore, management regards the inputs and methods used by third-party pricing vendors to be "Level 2 inputs and methods" as defined in the "fair value hierarchy." The Company periodically obtains a second price from an impartial third-party on debt securities to assess the reasonableness of prices provided by the primary independent pricing vendor.
The Company's equity portfolio fair value is measured based on quoted market prices for the shares; therefore, these securities are categorized as Level 1 within the fair value hierarchy.
The Bank is required to purchase FHLB stock at par value in association with advances from the FHLB. The stock is issued, redeemed, repurchased, and transferred by the FHLB only at their fixed par value. This stock is classified as a restricted investment and carried at FHLB par value which management believes approximates fair value; therefore, these securities are categorized as Level 2 measures. See Note 1, "Summary of Significant Accounting Policies," Item (d), "Restricted Cash and Investments," to the Company's consolidated financial statements of this Form 10-K, contained above, for further information regarding the Company's fair value assessment of FHLB capital stock.
Individually evaluated loan balances in the table above represent those collateral dependent commercial loans where management has estimated the probable credit loss by comparing the loan's carrying value against the expected realizable fair value of the collateral (appraised value, or internal analysis, less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in these assessments, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent loans are categorized as Level 3 within the fair value hierarchy. A specific allowance is assigned to the collateral dependent loan for the amount of management's estimated probable credit loss. The specific allowances assigned to the collateral dependent individually evaluated loans amounted to $1.0 million at December 31, 2021 compared to $5.8 million at December 31, 2020.
The fair values for the interest-rate swap assets and liabilities, which is comprised of back-to-back swaps and cash flow hedges, represent a Level 2 measurement and are based on settlement values adjusted for credit risks and observable market interest-rate curves. The settlement values are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative, reflecting the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest-rate curves. Credit risk adjustments consider factors
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
such as the likelihood of default by the Company and its counterparties, its net exposures and remaining contractual life. The change in value of interest-rate swap assets and liabilities attributable to credit risk was not significant during the reported periods. Refer also to Note 9, "Derivatives and Hedging Activities," to the Company's consolidated financial statements of this Form 10-K, for additional information on the Company's interest-rate swaps.
Letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance of a customer to a third party. The fair value of these commitments was estimated to be the fees charged to enter into similar agreements, and accordingly these fair value measures are deemed to be FASB Level 2 measurements. In accordance with the FASB, the estimated fair values of these commitments are carried on the Consolidated Balance Sheet as a liability and amortized to income over the life of the letters of credit, which are typically one year. The estimated fair value of these commitments carried on the Consolidated Balance Sheets at December 31, 2021 and December 31, 2020 were deemed immaterial.
Interest-rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. The Company generally does not pool mortgage loans for sale, but instead sells the loans on an individual basis. To reduce the net interest rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest-rate lock commitment is quoted on the origination of the loan. The Company estimates the fair value of these derivatives based on current secondary mortgage market prices. These commitments are accounted for in accordance with FASB guidance. The fair values of the Company's derivative instruments are deemed to be FASB Level 2 measurements. At December 31, 2021 and December 31, 2020, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company utilized Level 3 inputs (significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability) to determine fair value as of December 31, 2021 and December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value | | | | | | |
(Dollars in thousands) | | December 31, 2021 | | December 31, 2020 | | Valuation Technique | | Unobservable Input | | Unobservable Input Value or Range |
Assets measured on a non-recurring basis: | | | | | | | | |
Individually evaluated loans (collateral dependent) | | $ | 15,210 | | | $ | 18,733 | | | 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 Sheet, the Company is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the Consolidated Balance Sheet.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
The carrying values, estimated fair values and placement in the fair value hierarchy of the Company's financial instruments for which fair value is only disclosed but not recognized on the Consolidated Balance Sheets at the dates indicated are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | | | Fair Value Measurement |
(Dollars in thousands) | | Carrying Amount | | Fair Value | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs |
Financial assets: | | | | | | | | | | |
| | | | | | | | | | |
Loans, net | | $ | 2,872,980 | | | $ | 2,922,947 | | | $ | — | | | $ | — | | | $ | 2,922,947 | |
Financial liabilities: | | | | | | | | | | |
CDs | | 206,449 | | | 206,450 | | | — | | | 206,450 | | | — | |
Borrowed funds | | 5,479 | | | 5,121 | | | — | | | 5,121 | | | — | |
Subordinated debt | | 58,979 | | | 58,460 | | | — | | | 58,460 | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | | | Fair Value Measurement |
(Dollars in thousands) | | Carrying Amount | | Fair Value | | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs |
Financial assets: | | | | | | | | | | |
Loans held for sale | | $ | 371 | | | $ | 372 | | | $ | — | | | $ | 372 | | | $ | — | |
Loans, net | | 3,029,295 | | | 3,064,791 | | | — | | | — | | | 3,064,791 | |
Financial liabilities: | | | | | | | | | | |
CDs | | 244,969 | | | 246,498 | | | — | | | 246,498 | | | — | |
Brokered deposits | | 74,995 | | | 76,652 | | | — | | | 76,652 | | | — | |
Borrowed funds | | 4,774 | | | 4,684 | | | — | | | 4,684 | | | — | |
Subordinated debt | | 73,744 | | | 76,769 | | | — | | | 76,769 | | | — | |
Excluded from the tables above are certain financial instruments with carrying values that approximated their fair value at the dates indicated, as they were short-term in nature or payable on demand. These include cash and cash equivalents, accrued interest and non-term deposit accounts. The respective carrying values of these instruments would all be classified within Level 1 of their 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.
(18)Supplemental Cash Flow Information
The supplemental cash flow information for the years indicated is as follows:
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Supplemental financial data: | | | | | | |
Cash paid for: interest | | $ | 7,880 | | | $ | 13,612 | | | $ | 21,384 | |
Cash paid for: income taxes | | 12,335 | | | 17,672 | | | 10,557 | |
Cash paid for: lease liability | | 1,251 | | | 1,242 | | | 1,205 | |
Supplemental schedule of non-cash activity: | | | | | | |
Net purchases of investment securities not yet settled | | — | | | — | | | 810 | |
Transfer from loans to other real estate owned | | 2,400 | | | — | | | 255 | |
| | | | | | |
| | | | | | |
ROU lease assets: operating leases(1) | | 6,608 | | | 27 | | | 19,635 | |
_________________________________________
(1)Represents net new right of use ("ROU") lease assets added in the periods indicated.
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
(19)Condensed Parent Company Only Financial Statements
Balance Sheets
| | | | | | | | | | | | | | |
| | December 31, |
(Dollars in thousands, except per share data) | | 2021 | | 2020 |
Assets | | | | |
Cash | | $ | 1,981 | | | $ | 3,302 | |
Investment in subsidiaries | | 404,975 | | | 406,032 | |
Other assets | | 365 | | | 430 | |
Total assets | | $ | 407,321 | | | $ | 409,764 | |
Liabilities and Shareholders' Equity | | | | |
Liabilities | | | | |
Subordinated debt | | $ | 58,979 | | | $ | 73,744 | |
Accrued interest payable | | 1,444 | | | 1,591 | |
Other liabilities | | 3 | | | 3 | |
Total liabilities | | 60,426 | | | 75,338 | |
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; 12,038,382 and 11,937,795 shares issued, respectively | | 120 | | | 119 | |
Additional paid-in capital | | 100,352 | | | 97,137 | |
Retained earnings | | 241,761 | | | 214,977 | |
Accumulated other comprehensive income | | 4,662 | | | 22,193 | |
Total shareholders' equity | | 346,895 | | | 334,426 | |
Total liabilities and shareholders' equity | | $ | 407,321 | | | $ | 409,764 | |
Statements of Income
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Equity in undistributed net income of subsidiaries | | $ | 22,985 | | | $ | 30,309 | | | $ | 29,329 | |
Dividends distributed by subsidiaries | | 22,350 | | | 3,100 | | | 5,700 | |
| | | | | | |
| | | | | | |
Total income | | 45,335 | | | 33,409 | | | 35,029 | |
Interest expense | | 3,495 | | | 2,502 | | | 925 | |
Other operating expenses | | 891 | | | 215 | | | 226 | |
Total operating expenses | | 4,386 | | | 2,717 | | | 1,151 | |
Income before income taxes | | 40,949 | | | 30,692 | | | 33,878 | |
Benefit from income taxes | | (1,222) | | | (764) | | | (322) | |
Net income | | $ | 42,171 | | | $ | 31,456 | | | $ | 34,200 | |
ENTERPRISE BANCORP, INC
Notes to the Consolidated Financial Statements
Parent Company Only Financial Statements
Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| | For the years ended December 31, |
(Dollars in thousands) | | 2021 | | 2020 | | 2019 |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 42,171 | | | $ | 31,456 | | | $ | 34,200 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Equity in undistributed net income of subsidiaries | | (22,985) | | | (30,309) | | | (29,329) | |
Payment from subsidiary bank for stock compensation expense | | 2,094 | | | 1,872 | | | 1,869 | |
Changes in: | | | | | | |
Net decrease (increase) in other assets | | 66 | | | (229) | | | (3) | |
Net (decrease) increase in other liabilities | | (25) | | | 385 | | | 12 | |
Net cash provided by operating activities | | 21,321 | | | 3,175 | | | 6,749 | |
Cash flows from investing activities: | | | | | | |
Investment in subsidiary | | — | | | (53,000) | | | — | |
Net cash provided by investing activities | | — | | | (53,000) | | | — | |
Cash flows from financing activities: | | | | | | |
Repayment of subordinated debt(2) | | (14,887) | | | — | | | — | |
Proceeds from the issuance of subordinated debt | | — | | | 60,000 | | | — | |
Cash dividends paid, net of dividend reinvestment plan | | (7,627) | | | (7,105) | | | (6,371) | |
Proceeds from issuance of common stock | | 59 | | | 91 | | | 69 | |
Net settlement for employee tax withholding on restricted stock and options | | (346) | | | (233) | | | (402) | |
Net proceeds from exercise of stock options | | 159 | | | 21 | | | 185 | |
| | | | | | |
Net cash (used in) provided by financing activities | | (22,642) | | | 52,774 | | | (6,519) | |
Net (decrease) increase in cash and cash equivalents | | (1,321) | | | 2,949 | | | 230 | |
Cash at beginning of year | | 3,302 | | | 353 | | | 123 | |
Cash at end of year | | $ | 1,981 | | | $ | 3,302 | | | $ | 353 | |
The Parent Company's Statements of Comprehensive Income and Statements of Changes in Shareholders' Equity are identical to the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Changes in Shareholders' Equity and therefore are not presented here.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Enterprise Bancorp, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Enterprise Bancorp, Inc. and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, and our report dated March 10, 2022 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
Adoption of New Accounting Standard
As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for credit losses on financial instruments in 2021 due to the adoption of Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses for Loans
As described in Notes 1 and 4 of the consolidated financial statements, the Company’s allowance for credit losses for loans totaled $47.7 million as of December 31, 2021. The allowance for credit losses for loans consists of two components: the specific reserve for loans individually evaluated of $1.5 million and the general reserve for larger groups of homogeneous loans collectively evaluated of $46.2 million. The general reserve for larger groups of homogeneous loans collectively evaluated is evaluated on a pool basis. The Company has segmented the loan portfolio for groups of loans with similar risk characteristics by 1) loan type for pass-rated loans and 2) by internal risk rating for adversely classified loans not individually evaluated. The general reserve comprised of a quantitative reserve based on the Company’s historical loss experience, a qualitative reserve based on management’s evaluation of several judgmental qualitative or environmental factors, and economic forecasts over the estimated life of the loan pools. The qualitative or environmental factors used by the Company include considerations such as commercial concentrations by industry, property type and real estate location; the growth and composition of the loan portfolio; the growth and composition of the loan portfolio; trends in risk classification of individual loans and higher risk problem assets;
the level of delinquent loans and non-performing loans; individually evaluated and restructured loans; the level of foreclosure activity; net charge-offs; and trends in the general levels of these indicators. In addition, the Company monitors expansion in the geographic market area; the experience level of lenders and any changes in underwriting criteria; and general conditions and development markets in the Company's local region as well as changes in the current and forecasted economic conditions, such as changes in gross domestic product, the unemployment rate and new jobs created, real estate values, commercial vacancy rates, recession risk estimates and other relevant economic factors. The Company generally uses a two-year reasonable and supportable forecast, and for periods beyond the forecast period, reverts to historical loss rates. The evaluation and measurement of the qualitative or environmental and economic forecasts requires management to apply a high degree of judgment and involves assumptions that are sensitive to change, for which future adjustments to the allowance may be necessary.
We identified the qualitative component of the general reserve for loans collectively evaluated in the allowance for credit losses for loans as a critical audit matter because auditing the underlying qualitative or environmental factors and economic forecasts used in establishing the general reserve involved a high degree of auditor judgment given the high degree of subjectivity exercised by management.
Our audit procedures related to management’s evaluation and establishment of the qualitative component of the general reserve for loans collectively evaluated in the allowance for credit losses for loans included the following, among others:
•We obtained an understanding of the relevant controls related to the qualitative or environmental factors and economic forecasts applied to the general reserve for loans collectively evaluated in the allowance for credit losses for loans and tested such controls for design and operating effectiveness, including controls over management’s establishment, review and approval of the qualitative or environmental factors and economic forecasts, including the data used in determining the qualitative or environmental factors and economic forecasts.
•We tested management’s process and significant judgments in the evaluation and establishment of the qualitative or environmental factors and economic forecasts used in the general reserve for loans collectively evaluated in the allowance for credit losses for loans, which included:
◦Validating the source of information used by management by comparing to the relevant internal or external information from which it was derived, as well as testing the completeness and accuracy of the source data used by management.
◦Evaluating the reasonableness of management’s judgments related to the qualitative or environmental factors and the correlation to potential losses by evaluating the adjustments in terms of magnitude and directional consistency based on the data utilized in the determination of the qualitative or environmental factors.
◦Evaluating the reasonableness of management’s indicators of current and forecasted economic factors, which include changes in gross domestic product, the unemployment rate and new jobs created, real estate values, commercial vacancy rates, recession risk estimates, among others, by comparing these forecasts to external and internal information sources.
/s/ RSM US LLP
We have served as the Company's auditor since 2015.
Boston, Massachusetts
March 10, 2022
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Enterprise Bancorp, Inc.
Opinion on the Internal Control Over Financial Reporting
We have audited Enterprise Bancorp, Inc. and its subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, changes in shareholder’s equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes to the consolidated financial statements (collectively the financial statements) of the Company and our report dated March 10, 2022 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Boston, Massachusetts
March 10, 2021