Notes to the Unaudited Consolidated Interim Financial Statements
|
|
(1)
|
Summary of Significant Accounting Policies
|
(a) Organization of Holding Company and Basis of Presentation
The accompanying unaudited consolidated interim financial statements and these notes should be read in conjunction with the
December 31, 2016
audited consolidated financial statements and notes thereto contained in the
2016
Annual Report on Form 10-K of Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our"), a Massachusetts corporation, as filed with the Securities and Exchange Commission (the "SEC") on
March 14, 2017
(the "
2016
Annual Report on Form 10-K"). The Company has not changed its accounting policies from those disclosed in its
2016
Annual Report on Form 10-K.
The Company's unaudited consolidated interim financial statements include the accounts of the Company and its wholly owned subsidiary, Enterprise Bank and Trust Company (the "Bank"). The Bank is a Massachusetts trust company organized in 1989. Substantially all of the Company's operations are conducted through the Bank and its subsidiaries.
The Bank's subsidiaries include Enterprise Insurance Services, LLC and Enterprise Investment Services, LLC, organized under the laws of the State of Delaware for the purposes of engaging in insurance sales activities and offering non-deposit investment products and services, respectively. In addition, the Bank has the following subsidiaries that are incorporated in the Commonwealth of Massachusetts and classified as security corporations in accordance with applicable Massachusetts General Laws: Enterprise Security Corporation; Enterprise Security Corporation II; and Enterprise Security Corporation III. The security corporations, which hold various types of qualifying securities, are limited to conducting securities investment activities that the Bank itself would be allowed to conduct under applicable laws.
At
June 30, 2017
, the Company had
23
full service branches serving the Greater Merrimack Valley and North Central regions of Massachusetts and Southern New Hampshire (Southern Hillsborough and Rockingham counties). In July 2017, the Company opened its 24
th
branch, located in Windham, New Hampshire. Through the Bank and its subsidiaries, the Company offers a range of commercial, residential and consumer loan products, deposit products and cash management services, as well as investment advisory and wealth management, trust and insurance 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 unaudited consolidated interim financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions for Form 10-Q through the rules and interpretive releases of the SEC under federal securities law. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all necessary adjustments consisting of normal recurring accruals for a fair presentation. All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated interim financial statements. Certain previous years' amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to the current year's presentation. Interim results are not necessarily indicative of results to be expected for the entire year, or any future period.
The Company has evaluated subsequent events and transactions from
June 30, 2017
through the date of this Quarterly report on Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP and determined that there were no material subsequent events requiring recognition or disclosure.
(b) Critical Accounting Estimates
In preparing the unaudited consolidated interim financial statements in conformity with GAAP, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. These assumptions and estimates affect the reported values of assets and liabilities as of the balance sheet date and income and expenses for the period then ended. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates should the assumptions and estimates used change over time due to changes in
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
circumstances. Changes in those estimates resulting from continuing change in the economic environment and other factors will be reflected in the financial statements and results of operations in future periods.
As discussed in the Company's
2016
Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates are the estimates of the allowance for loan losses, impairment review of investment securities and the impairment review of goodwill. Refer to Note 1, "Summary of Significant Accounting Policies," to the Company's consolidated financial statements included in the Company's
2016
Annual Report on Form 10-K for accounting policies related to these significant estimates. The Company has not changed its significant accounting policies from those disclosed in its
2016
Annual Report on Form 10-K.
(c) Restricted Instruments
Certain of the Company's derivative agreements contain provisions that require the Company to post collateral if the derivative exposure exceeds a threshold amount. When the Company has pledged cash as collateral for this purpose, the cash is carried as restricted cash within cash and cash equivalents.
As a member of the Federal Home Loan Bank of Boston ("FHLB"), the Company is required to purchase certain levels of FHLB capital stock at par value in association with outstanding advances from the FHLB. From time-to-time, the FHLB may initiate the repurchase, at par value, of "excess" levels of its capital stock held by member banks. This stock is classified as a restricted investment and carried at cost, which management believes approximates fair value. FHLB stock represents the only restricted investment held by the Company.
Management regularly reviews its holdings of FHLB stock for other-than-temporary-impairment ("OTTI"). Based on management's periodic review, the Company has not recorded any OTTI charges on this investment to date. If it was determined that a write-down of FHLB stock was required, impairment would be recognized through a charge to earnings.
See Note 2, "Investment Securities," for additional information on management's OTTI review.
(d) Income Taxes
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.
The Company's policy is to classify interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company's judgment changes regarding an uncertain tax position.
The income tax provisions will differ from the expense that would result from applying the federal statutory rate to income before taxes, due primarily to the impact of tax-exempt interest from certain investment securities, loans and bank-owned life insurance.
The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at
June 30, 2017
. The Company is subject to U.S. federal and state income tax examinations by taxing authorities for the
2013
through
2016
tax years.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
(e) Recent Accounting Pronouncements
Accounting pronouncements adopted by the Company
In March 2016, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU" or "Update") No. 2016-09, "Compensation - Stock Compensation (Topic 718): Improvement to Employee Share-Based Payment Accounting."
The new standard was effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years.
The Company adopted ASU No. 2016-09 in the first quarter of 2017. Several aspects of the accounting are simplified including, generally: a) income tax consequences; b) classification of awards as either equity or liabilities; c) accounting for forfeitures; and d) classification on the statement of cash flows. Upon adoption, the most significant impact of this amendment resulted from the prospective application of current excess tax benefits and deficiencies being recognized in income tax expense, which would previously have been recognized in additional paid-in capital, in the reporting period in which they occur. For the
six months ended
June 30, 2017
, this reduced the Company's provision for income taxes, increasing earnings by approximately
$788 thousand
. For the year ended December 31, 2016, the Company recognized
$789 thousand
in additional paid-in-capital in this regard, which, if under the new ASU, would have been recognized as income tax benefit in the income statement. This amount, treated as discrete items in the period in which they occur, will vary from year to year as a function of the volume of share-based payments vested or exercised and the then current market price of the Company's stock in comparison to the compensation cost recognized in the financial statements.
Additionally upon adoption, the Company made a policy election to record forfeitures as they occur rather than make use of an estimate. Using a modified retrospective approach, the Company recorded an immaterial cumulative effect adjustment from retained earnings to additional paid-in-capital. The other provisions did not have a material impact on the Company's financial statements upon adoption.
Accounting pronouncements not yet adopted by the Company (in order of effective date of implementation)
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)."
This ASU is intended to create a single source of revenue guidance which is more principles based than current revenue guidance. The guidance affects any entity that either enters into contracts with customers to transfer goods or services, or enters into contracts for the transfer of non-financial assets, unless those contracts are within the scope of other standards. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date" to amend the effective date of ASU 2014-09. The amendments in ASU 2014-09 are effective for annual and interim periods within fiscal years beginning after December 15, 2017. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The FASB has since issued additional related ASUs amendments intended to clarify certain aspects and improve understanding of the implementation guidance of Topic 606 but do not change the core principles of the guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements of Topic 606.
The Company is currently evaluating the potential impact of the ASU and its amendments on the Company's financial statements, results of operations, and disclosures and does not currently plan to early adopt. Based on the Company's preliminary evaluations to date, and because the largest portion of the Company's revenue, interest income and various loan fees, are specifically excluded from the scope of this ASU, and because the Company currently recognizes the majority of the remaining revenue sources in a manner that management believes is consistent with the new ASU, management believes that revenue recognized under the new standard will generally approximate revenue recognized under current GAAP. The foregoing observations are subject to change as management completes their evaluation.
In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,"
which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments.
Among other things, the new guidance:
|
|
•
|
Requires equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income;
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
•
|
Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and
|
|
|
•
|
Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements.
|
The new guidance is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.
The Company is currently evaluating the effects of this ASU on the Company's financial statements, results of operations and disclosures. Based on the Company's evaluation to date, management believes the more significant implications upon adoption of this ASU will be the potential recognition of changes in fair value of the Company's equity portfolio in net income. Under current GAAP, net unrealized appreciation or depreciation on the equity portfolio, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income. The net unrealized gain or loss on equity securities will fluctuate based on changes in the market value of the mutual funds and individual securities held in the portfolio. For the
six months ended
June 30, 2017
, other comprehensive income, net of taxes, generated from the equity portfolio amounted to
$47 thousand
, compared to other comprehensive loss of
$28 thousand
generated for the
six months ended
June 30, 2016
. Any potential future changes in fair value of the equity portfolio will depend on the amount of dollars invested in the portfolio and the potential magnitude of changes in equity market values. The foregoing observations are subject to change as management completes their evaluation.
In August 2016, the FASB issued ASU No. 2016-15, "Statement of Cash flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments."
The amendments are intended to reduce diversity in practice related to the presentation of eight specific cash flow issues. For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Because this amendment primarily impacts the presentation and classification of information, the Company does not expect this ASU to have an impact on the Company's financial statements and results of operations.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash flows-Restricted Cash (Topic 230)."
The amendments in this Update clarify the inclusion of restricted cash in the cash and cash equivalents beginning-of-period and end-of period reconciliation on the statement of cash flows. For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Because this amendment primarily impacts the presentation and classification of information, the Company does not expect this ASU to have an impact on the Company's financial statements and results of operations.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost."
The amendments in this Update outline the presentation, classification and disclosure requirements for service cost and other components of net benefit costs. For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted. Because this amendment primarily impacts the presentation and classification of information, the Company does not expect this ASU to have an impact on the Company's financial statements and results of operations.
In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting."
The amendments in this Update apply to entities that change the terms of an outstanding share-based payment award. The amendments are intended to reduce diversity in practice as well as cost and complexity when applying guidance in Topic 718 to the modification of the terms and conditions of a share-based payment award. This ASU provides guidance on the three modifications to share-based payment awards and conditions that must be met in order to exempt an entity from modification accounting under topic 718. The amendments in this Update apply prospectively to award modifications on or after the adoption date, and are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company currently does not expect that adoption of the ASU will have a material impact on its financial statements, results of operations or disclosures.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842),"
which supersedes previous leasing guidance in Topic 840, Leases. Under the new guidance, lessees are required to recognize lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available.
The Company is currently evaluating the effects of this ASU on the Company's financial statements, results of operations and disclosures. Based on the Company's evaluation to date, management believes the more significant implication of this ASU on the Company relates to operating leases of our facilities, mainly branch leases. As of
June 30, 2017
, the Company had leases on
17
of its locations, including branches and part of its main campus, and expects that upon adoption of this ASU the balance sheet will reflect both lease liabilities, equal to the present value of lease payments, and right-of-use assets, equal to the lease liability plus payments made to lessors adjusted for prepaid or accrued rent and any initial direct cost incurred. In addition, the Company will recognize lease expense in the income statement on a straight-line basis similar to current operating leases. The straight-line expense will reflect the interest expense on the lease liability (effective interest method) and amortization of the right-of-use asset. Lease expense will be presented as a single line item in the operating expense section of the income statement. Management believes that lease expense under the new standard will generally approximate lease expense under current GAAP. The foregoing observations are subject to change as management completes their evaluation.
In March 2017, the FASB issued ASU No. 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities."
The amendments shorten the amortization period to the earliest call date for certain callable debt securities held at a premium. The accretion for securities held at a discount is not affected by this statement and remains unchanged. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective basis is required upon adoption. Early adoption is permitted. The Company has assessed the impact of this ASU and does not expect that it will have a material impact on the Company's financial statements, results of operations and disclosures upon adoption.
In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments
- Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments."
The amendments in this ASU require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss and generally recognition of the full amount of credit losses was delayed until the loss was probable of occurring. The amendments in this ASU eliminate the probable initial recognition threshold in current GAAP and, instead, reflect an entity’s current estimate of all expected credit losses.
The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The income statement reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.
Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments in this Update require that credit losses be presented as an allowance rather than as a write-down. Unlike current GAAP, the ASU provides for reversals of credit losses in future period net income in situations where the estimate of loss declines.
An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption for fiscal years beginning after December 15, 2018 is permitted.
The Company has established an implementation committee and an enterprise-wide implementation plan for this ASU, which will consider the impact to operations, financial results, disclosures and controls. At present, the impact of the adoption of ASU No. 2016-13 on the Company's operations, financial results, disclosures, and controls is unknown.
In January 2017, the FASB issued ASU No. 2017-04, "Intangibles-Goodwill and Other (Topic 350)-Simplifying the Test for Goodwill Impairment."
The main provision in this ASU eliminated Step 2 of the goodwill impairment test and instead
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
requires an entity to perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount. An impairment charge would be recognized for the amount the carrying value exceeds the reporting unit's fair value as long as the amount recognized doesn't exceed the amount of goodwill allocated to the reporting unit. For public business entities that are SEC filers, such as the Company, the amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for impairment tests performed on testing dates after January 1, 2017. Goodwill carried on the Company’s consolidated financial statements was
$5.7
million at both
June 30, 2017
and
December 31, 2016
. This asset is related to the Company’s acquisition of
two
branch offices in July 2000. The Company does not expect the adoption of ASU No. 2017-01 to have a material impact on the Company's financial statements and results of operations.
|
|
(2)
|
Investment Securities
|
The amortized cost and carrying values of investment securities at the dates specified are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
(Dollars in thousands)
|
|
Amortized
cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair Value
|
Federal agency obligations
(1)
|
|
$
|
74,736
|
|
|
$
|
492
|
|
|
$
|
39
|
|
|
$
|
75,189
|
|
Residential federal agency MBS
(1)
|
|
96,307
|
|
|
339
|
|
|
932
|
|
|
95,714
|
|
Commercial federal agency MBS
(1)
|
|
76,800
|
|
|
380
|
|
|
743
|
|
|
76,437
|
|
Municipal securities
|
|
119,598
|
|
|
2,866
|
|
|
306
|
|
|
122,158
|
|
Corporate bonds
|
|
11,269
|
|
|
129
|
|
|
31
|
|
|
11,367
|
|
Certificates of deposits
(2)
|
|
950
|
|
|
3
|
|
|
—
|
|
|
953
|
|
Total debt securities
|
|
379,660
|
|
|
4,209
|
|
|
2,051
|
|
|
381,818
|
|
Equity investments
|
|
3,884
|
|
|
2,311
|
|
|
8
|
|
|
6,187
|
|
Total investment securities, at fair value
|
|
$
|
383,544
|
|
|
$
|
6,520
|
|
|
$
|
2,059
|
|
|
$
|
388,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
(Dollars in thousands)
|
|
Amortized
cost
|
|
Unrealized
gains
|
|
Unrealized
losses
|
|
Fair Value
|
Federal agency obligations
(1)
|
|
$
|
74,682
|
|
|
$
|
432
|
|
|
$
|
45
|
|
|
$
|
75,069
|
|
Residential federal agency MBS
(1)
|
|
94,818
|
|
|
96
|
|
|
1,561
|
|
|
93,353
|
|
Commercial federal agency MBS
(1)
|
|
71,993
|
|
|
15
|
|
|
1,730
|
|
|
70,278
|
|
Municipal securities
|
|
112,401
|
|
|
922
|
|
|
1,520
|
|
|
111,803
|
|
Corporate bonds
|
|
10,734
|
|
|
51
|
|
|
90
|
|
|
10,695
|
|
Certificates of deposits
(2)
|
|
950
|
|
|
—
|
|
|
1
|
|
|
949
|
|
Total debt securities
|
|
365,578
|
|
|
1,516
|
|
|
4,947
|
|
|
362,147
|
|
Equity investments
|
|
10,413
|
|
|
2,532
|
|
|
302
|
|
|
12,643
|
|
Total investment securities, at fair value
|
|
$
|
375,991
|
|
|
$
|
4,048
|
|
|
$
|
5,249
|
|
|
$
|
374,790
|
|
__________________________________________
|
|
(1)
|
These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as, investments guaranteed by Ginnie Mae ("GNMA"), a wholly-owned government entity.
|
|
|
(2)
|
Certificates of deposits ("CDs") represent term deposits issued by banks that are subject to FDIC insurance and purchased on the open market.
|
Included in the residential and commercial federal agency MBS categories were collateralized mortgage obligations (“CMOs”) issued by U.S. agencies with fair values totaling
$106.0 million
and
$107.0 million
at
June 30, 2017
and
December 31, 2016
, respectively.
At
June 30, 2017
, the equity portfolio consisted of investments in mutual funds, as well as investments in individual common stock of entities in the financial services industry (approximately
46%
).
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
As of the dates reflected in the tables above, all of the Company’s investment securities were classified as available-for-sale and carried at fair value. Net unrealized appreciation and depreciation on investments available-for-sale, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income (loss).
The net unrealized gain or loss in the Company's debt security portfolio fluctuates as market interest rates rise and fall. Due to the predominantly fixed rate nature of this portfolio, as market rates fall, the value of the portfolio rises, and as market rates rise, the value of the portfolio declines. The unrealized gains or losses on debt securities will also decline as the securities approach maturity. Unrealized gains or losses will be recognized in the income statement if the securities are sold. However, if an unrealized loss on a debt security portfolio is deemed to be other than temporary, the credit loss portion is charged to earnings and the noncredit portion is recognized in accumulated other comprehensive income (loss).
The net unrealized gain or loss on equity securities will fluctuate based on changes in the market value of the mutual funds and individual securities held in the portfolio. Unrealized gains or losses will be recognized in the statements of income if the securities are sold. However, if an unrealized loss on an equity security is deemed to be other than temporary prior to a sale, the loss is charged to earnings.
The following tables summarize investments (debt and equity) having temporary impairment, due to the fair market values having declined below the amortized costs of the individual investments, and the period that the investments have been temporarily impaired at
June 30, 2017
and
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
(Dollars in thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
# of holdings
|
Federal agency obligations
|
|
$
|
18,006
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18,006
|
|
|
$
|
39
|
|
|
5
|
|
Residential federal agency MBS
|
|
42,216
|
|
|
573
|
|
|
11,990
|
|
|
359
|
|
|
54,206
|
|
|
932
|
|
|
23
|
|
Commercial federal agency MBS
|
|
38,490
|
|
|
743
|
|
|
—
|
|
|
—
|
|
|
38,490
|
|
|
743
|
|
|
11
|
|
Municipal securities
|
|
19,527
|
|
|
266
|
|
|
1,045
|
|
|
40
|
|
|
20,572
|
|
|
306
|
|
|
29
|
|
Corporate bonds
|
|
2,713
|
|
|
27
|
|
|
425
|
|
|
4
|
|
|
3,138
|
|
|
31
|
|
|
19
|
|
Certificates of deposit
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Equity investments
|
|
215
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
215
|
|
|
8
|
|
|
4
|
|
Total temporarily impaired investment securities
|
|
$
|
121,167
|
|
|
$
|
1,656
|
|
|
$
|
13,460
|
|
|
$
|
403
|
|
|
$
|
134,627
|
|
|
$
|
2,059
|
|
|
91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
(Dollars in thousands)
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
Fair
Value
|
|
Unrealized
Losses
|
|
# of holdings
|
Federal agency obligations
|
|
$
|
13,956
|
|
|
$
|
45
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,956
|
|
|
$
|
45
|
|
|
3
|
Residential federal agency MBS
|
|
68,138
|
|
|
1,236
|
|
|
8,008
|
|
|
325
|
|
|
76,146
|
|
|
1,561
|
|
|
31
|
Commercial federal agency MBS
|
|
60,060
|
|
|
1,730
|
|
|
—
|
|
|
—
|
|
|
60,060
|
|
|
1,730
|
|
|
18
|
Municipal securities
|
|
60,436
|
|
|
1,520
|
|
|
—
|
|
|
—
|
|
|
60,436
|
|
|
1,520
|
|
|
107
|
Corporate bonds
|
|
5,729
|
|
|
90
|
|
|
—
|
|
|
—
|
|
|
5,729
|
|
|
90
|
|
|
37
|
Certificates of deposit
|
|
949
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
949
|
|
|
1
|
|
|
4
|
Equity investments
|
|
1,185
|
|
|
20
|
|
|
2,743
|
|
|
282
|
|
|
3,928
|
|
|
302
|
|
|
3
|
Total temporarily impaired investment securities
|
|
$
|
210,453
|
|
|
$
|
4,642
|
|
|
$
|
10,751
|
|
|
$
|
607
|
|
|
$
|
221,204
|
|
|
$
|
5,249
|
|
|
203
|
During the
six months ended
June 30, 2017
and
2016
, the Company did not record any fair value impairment charges on its investments. Management regularly reviews the portfolio for securities with unrealized losses that are other-than-temporarily impaired. At
June 30, 2017
, management attributes the unrealized losses in the portfolio to increases in current market yields compared to the yields at the time the investments were purchased by the Company for debt securities and the impact of
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
market value fluctuations on the equity portion of our portfolio. As of
June 30, 2017
, management did not consider its debt securities to be other-than-temporarily impaired because (1) the decline in market value is not attributable to a fundamental deterioration in quality of the securities or the issuers, and (2) the Company did not intend to sell, and it is more likely than not that it will not be required to, sell those investments prior to a market price recovery or maturity with recovery of the amortized cost. Management did not consider equity investments to be other than temporarily impaired at June 30, 2017 because (1) the decline in market value is not attributable to a fundamental deterioration in the issuer or the equity fund and (2) the Company has the ability and intent to hold the investment until an anticipated market price recovery.
In assessing the Company's investments in federal agency mortgage-backed securities and federal agency obligations, the contractual cash flows of these investments are guaranteed by the respective government sponsored enterprise (FHLMC, FNMA, FFCB, or FHLB) or wholly-owned government corporation (GNMA). Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company's investments. Management's assessment of other debt securities within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investments' materiality, and duration of the investments' unrealized loss position. In addition, the Company utilizes an outside registered investment adviser to manage the corporate and municipal bond portfolios, within prescribed guidelines set by management, and to provide assistance in assessing the credit risk of those portfolios. At
June 30, 2017
, the Company's corporate and municipal bond portfolios did not contain any securities below investment grade, as reported by major credit rating agencies. For equities and funds, management's assessment includes the severity of the declines, whether it is unlikely that the security or fund will completely recover its unrealized loss within a reasonable time period and if the equity security or fund exhibits fundamental deterioration.
The contractual maturity distribution at
June 30, 2017
of total debt securities was as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
|
$
|
18,242
|
|
|
$
|
18,283
|
|
Due after one, but within five years
|
|
112,036
|
|
|
113,033
|
|
Due after five, but within ten years
|
|
138,224
|
|
|
139,270
|
|
Due after ten years
|
|
111,158
|
|
|
111,232
|
|
Total debt securities
|
|
$
|
379,660
|
|
|
$
|
381,818
|
|
Scheduled contractual maturities shown above may not reflect the actual maturities of the investments. The actual MBS/CMO cash flows likely will be faster than presented above due to prepayments and amortization. Similarly, included in the fair value of debt securities above are callable securities, comprised of municipal securities and corporate bonds totaling
$52.2 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.
From time to time, the Company may pledge securities as collateral for deposit account balances of municipal customers, and for borrowing capacity with the FHLB and the Federal Reserve Bank of Boston (the "FRB"). The fair value of securities pledged as collateral for these purposes was $
378.7 million
at
June 30, 2017
.
Sales of investments, including pending trades based on trade date, if applicable, for the
three
and
six months ended
June 30, 2017
and
June 30, 2016
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Amortized cost of investments sold
(1)
|
|
$
|
252
|
|
|
$
|
1,460
|
|
|
$
|
9,368
|
|
|
$
|
1,764
|
|
Gross realized gains on sales
|
|
229
|
|
|
63
|
|
|
875
|
|
|
65
|
|
Gross realized losses on sales
|
|
—
|
|
|
—
|
|
|
(106
|
)
|
|
—
|
|
Total proceeds from sales of investments
|
|
$
|
481
|
|
|
$
|
1,523
|
|
|
$
|
10,137
|
|
|
$
|
1,829
|
|
_________________________________________
|
|
(1)
|
Amortized cost of investments sold is determined on a specific identification basis.
|
See Note 12, "Fair Value Measurements," below for further information regarding the Company's fair value measurements for available-for-sale securities.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
The Company specializes in lending to business entities, non-profit organizations, professionals and individuals. The Company's primary lending focus is on the development of high quality commercial relationships achieved through active business development efforts, long-term relationships with established commercial developers, strong community involvement and focused marketing strategies. Loans made to businesses include commercial mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and standby letters of credit. The Company also originates equipment lease financing for businesses. Loans made to individuals include conventional residential mortgage loans, home equity loans and lines, residential construction loans on primary and secondary residences, and secured and unsecured personal loans and lines of credit. The Company manages its loan portfolio to avoid concentration by industry and relationship size to lessen its credit risk exposure.
See Note 4, "Allowance for Loan Losses," for information on the Company's credit risk management, non-accrual, impaired and troubled debt restructured loans and the allowance for loan losses.
Major classifications of loans at the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
Commercial real estate
|
|
$
|
1,107,714
|
|
|
$
|
1,038,082
|
|
Commercial and industrial
|
|
505,240
|
|
|
490,799
|
|
Commercial construction
|
|
218,277
|
|
|
213,447
|
|
Total commercial loans
|
|
1,831,231
|
|
|
1,742,328
|
|
Residential mortgages
|
|
188,941
|
|
|
180,560
|
|
Home equity loans and lines
|
|
86,394
|
|
|
91,065
|
|
Consumer
|
|
10,064
|
|
|
10,845
|
|
Total retail loans
|
|
285,399
|
|
|
282,470
|
|
|
|
|
|
|
Gross loans
|
|
2,116,630
|
|
|
2,024,798
|
|
Deferred loan origination fees, net
|
|
(2,230
|
)
|
|
(2,069
|
)
|
Total loans
|
|
2,114,400
|
|
|
2,022,729
|
|
Allowance for loan losses
|
|
(31,958
|
)
|
|
(31,342
|
)
|
Net loans
|
|
$
|
2,082,442
|
|
|
$
|
1,991,387
|
|
Loan Categories
- Commercial loans:
Commercial real estate loans include loans secured by both owner-use and non-owner occupied real estate. These loans are typically secured by a variety of commercial and industrial property types, including one-to-four and multi-family apartment buildings, office, industrial or mixed-use facilities, strip shopping centers, or other commercial properties, and are generally guaranteed by the principals of the borrower. Commercial real estate loans generally have repayment periods of approximately
fifteen
to
twenty-five
years. Variable interest rate loans have a variety of adjustment terms and underlying interest rate indices, and are generally fixed for an initial period before periodic rate adjustments begin.
Commercial and industrial loans include seasonal revolving lines of credit, working capital loans, equipment financing (including equipment leases), and term loans. Also included in commercial and industrial loans are loans partially guaranteed by the U.S. Small Business Administration ("SBA"), and loans under various programs and agencies. Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the borrower. Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally having fixed initial periods. Commercial and industrial loans have average repayment periods of
one
to
seven
years.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by underlying real estate collateral and are generally guaranteed by the principals of the borrowers. Construction lenders work to cultivate long-term relationships with established developers. The Company limits the amount of financing provided to any single developer for the construction of properties built on a speculative basis. Funds for construction projects are disbursed as pre-specified stages of construction are completed. Regular site inspections are performed, prior to advancing additional funds, at each construction phase, either by experienced construction lenders on staff or by independent outside inspection companies. Commercial construction loans generally are variable rate loans and lines with interest rates that are periodically adjusted and generally have terms of
one
to
three
years.
From time to time, the Company participates with other banks in the financing of certain commercial projects. Participating loans with other institutions provide banks the opportunity to retain customer relationships and reduce credit risk exposure among each participating bank, while providing customers with larger credit vehicles than the individual bank might be willing or able to offer independently. In some cases, the Company may act as the lead lender, originating and servicing the loans, but participating out a portion of the funding to other banks. In other cases, the Company may participate in loans originated by other institutions. In each case, the participating bank funds a percentage of the loan commitment and takes on the related pro-rata risk. In each case in which the Company participates in a loan, the rights and obligations of each participating bank are divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks. When the participation qualifies as a sale under GAAP, the balances participated out to other institutions are not carried as assets on the Company's financial statements. The Company performs an independent credit analysis of each commitment and a review of the participating institution prior to participation in the loan, and an annual review thereafter of each participating institution. Loans originated by other banks in which the Company is a participating institution are carried in the loan portfolio at the Company's pro rata share of ownership. Loans originated by other banks in which the Company is a participating institution amounted to
$86.6 million
at
June 30, 2017
and
$85.2 million
at
December 31, 2016
. See also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.
Standby 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.
- Residential loans:
Enterprise originates conventional mortgage loans on one-to-four family residential properties. These properties may serve as the borrower's primary residence, or as vacation homes or investment properties. Loan-to-value limits vary, generally from
75%
for multi-family, owner-occupied properties, up to
97%
for single family, owner-occupied properties, with mortgage insurance coverage required for loan-to-value ratios greater than
80%
based on program parameters. In addition, financing is provided for the construction of owner-occupied primary and secondary residences. Residential mortgage loans may have terms of up to
30
years at either fixed or adjustable rates of interest. Fixed and adjustable rate residential mortgage loans are generally originated using secondary market underwriting and documentation standards.
Depending on the current interest rate environment, management projections of future interest rates and the overall asset-liability management program 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. The Company may retain or sell the servicing when selling the loans. Loans sold are subject to standard secondary market underwriting and eligibility representations and warranties over the life of the loan and are subject to an early payment default period covering the first
four
payments for certain loan sales. Loans classified as held for sale are carried as a separate line item on the balance sheet.
- Home equity loans and lines of credit:
Home equity term loans are originated for one-to-four family residential properties with maximum original loan-to-value ratios generally up to
80%
of the automated valuation or appraised value of the property securing the loan. Home equity loan payments consist of monthly principal and interest based on amortization ranging from
three
to
fifteen
years. The rates may be variable or fixed.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
The Company originates home equity revolving lines of credit for one-to-four family residential properties with maximum original loan-to-value ratios generally up to
80%
of the automated valuation or appraised value of the property securing the loan. Home equity lines generally have interest rates that adjust monthly based on changes in the Wall Street Journal Prime Rate, although minimum rates may be applicable. Some home equity line rates may be fixed for a period of time and then adjusted monthly thereafter. The payment schedule for home equity lines requires interest only payments for the first
ten
years of the lines. Generally at the end of ten years, the line may be frozen to future advances, and principal plus interest payments are collected over a
fifteen
-year amortization schedule or, for eligible borrowers meeting certain requirements, the line availability may be extended for an additional interest only period.
- Consumer loans:
Consumer loans consist primarily of secured or unsecured personal loans, loans under energy efficiency financing programs in conjunction with Massachusetts public utilities, and overdraft protection lines on checking accounts extended to individual customers. The aggregate amount of overdrawn deposit accounts are reclassified as loan balances.
Loans serviced for others
At
June 30, 2017
and
December 31, 2016
, the Company was servicing residential mortgage loans owned by investors amounting to
$17.5 million
and
$18.7 million
, respectively. Additionally, the Company was servicing commercial loans participated out to various other institutions amounting to
$65.8 million
and
$62.3 million
at
June 30, 2017
and
December 31, 2016
, respectively. See the discussion above under the heading "Commercial loans" for further information regarding commercial participations.
Loans serving as collateral
Loans designated as qualified collateral and pledged to the FHLB for borrowing capacity for the periods indicated are summarized below:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30,
2017
|
|
December 31,
2016
|
Commercial real estate
|
|
$
|
233,768
|
|
|
$
|
247,664
|
|
Residential mortgages
|
|
176,766
|
|
|
170,247
|
|
Home equity
|
|
10,449
|
|
|
12,340
|
|
Total loans pledged to FHLB
|
|
$
|
420,983
|
|
|
$
|
430,251
|
|
See Note 12, "Fair Value Measurements," below for further information regarding the Company's fair value measurements for loans, and Note 7, "Derivatives and Hedging Activities," below for information regarding interest-rate swap agreements related to certain commercial loans.
|
|
(4)
|
Allowance for Loan Losses
|
Allowance for probable loan losses methodology
On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company uses a systematic methodology to measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology makes use of specific reserves for loans individually evaluated and deemed impaired, and general reserves for larger groups of homogeneous loans, which are collectively evaluated relying on a combination of qualitative and quantitative factors that may affect credit quality of the pool.
There have been no material changes to the Company's underwriting practices, credit risk management system, or to the allowance assessment methodology used to estimate loan loss exposure as reported in the
2016
Annual Report on Form 10-K. Refer to Note 4, "Allowance for Loan Losses," to the Company's consolidated financial statements contained in the
2016
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Annual Report on Form 10-K for further discussion of management's methodology used to estimate a sufficient allowance for loan losses, the credit risk management function and adversely classified loan rating system.
The balances of loans as of
June 30, 2017
by segment 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
|
|
$
|
15,584
|
|
|
$
|
1,092,130
|
|
|
$
|
1,107,714
|
|
Commercial and industrial
|
|
12,503
|
|
|
492,737
|
|
|
505,240
|
|
Commercial construction
|
|
1,619
|
|
|
216,658
|
|
|
218,277
|
|
Residential mortgages
|
|
272
|
|
|
188,669
|
|
|
188,941
|
|
Home equity loans and lines
|
|
494
|
|
|
85,900
|
|
|
86,394
|
|
Consumer
|
|
13
|
|
|
10,051
|
|
|
10,064
|
|
Total gross loans
|
|
$
|
30,485
|
|
|
$
|
2,086,145
|
|
|
$
|
2,116,630
|
|
The balances of loans as of
December 31, 2016
by segment 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
|
|
$
|
14,261
|
|
|
$
|
1,023,821
|
|
|
$
|
1,038,082
|
|
Commercial and industrial
|
|
13,372
|
|
|
477,427
|
|
|
490,799
|
|
Commercial construction
|
|
3,364
|
|
|
210,083
|
|
|
213,447
|
|
Residential mortgages
|
|
289
|
|
|
180,271
|
|
|
180,560
|
|
Home equity loans and lines
|
|
509
|
|
|
90,556
|
|
|
91,065
|
|
Consumer
|
|
1
|
|
|
10,844
|
|
|
10,845
|
|
Total gross loans
|
|
$
|
31,796
|
|
|
$
|
1,993,002
|
|
|
$
|
2,024,798
|
|
Credit quality indicators
Early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors internal credit quality indicators such as the risk classification of individual loans, individual review of problem assets, past due and non-accrual loans, impaired and restructured loans, and the level of foreclosure activity, as well as trends in the general levels of these indicators. These credit quality indicators are discussed below.
Adversely classified loans
The Company's loan risk rating system classifies loans depending on risk of loss characteristics. Loans which are evaluated to be of weaker credit quality are placed on the "watch credit listing" and reviewed on a more frequent basis by management. The classifications range from "substantially risk free" for the highest quality loans and loans that are secured by cash collateral, through a satisfactory range of "minimal," "moderate," "better than average," and "average" risk, to the regulatory problem-asset classifications of "criticized," for loans that may need additional monitoring, and the more severe adverse classifications of "substandard," "doubtful," and "loss" based on criteria established under banking regulations.
Adversely classified loans may be accruing or in non-accrual status and may be additionally designated as impaired or restructured, or some combination thereof.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
The following tables present the Company's credit risk profile for each class of loan in its portfolio by internally assigned adverse risk rating category as of the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
|
Adversely Classified
|
|
Not Adversely
|
|
|
(Dollars in thousands)
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Classified
|
|
Gross Loans
|
Commercial real estate
|
|
$
|
15,915
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,091,799
|
|
|
$
|
1,107,714
|
|
Commercial and industrial
|
|
11,673
|
|
|
54
|
|
|
1
|
|
|
493,512
|
|
|
505,240
|
|
Commercial construction
|
|
1,620
|
|
|
—
|
|
|
—
|
|
|
216,657
|
|
|
218,277
|
|
Residential mortgages
|
|
1,380
|
|
|
—
|
|
|
—
|
|
|
187,561
|
|
|
188,941
|
|
Home equity loans and lines
|
|
644
|
|
|
—
|
|
|
—
|
|
|
85,750
|
|
|
86,394
|
|
Consumer
|
|
41
|
|
|
—
|
|
|
—
|
|
|
10,023
|
|
|
10,064
|
|
Total gross loans
|
|
$
|
31,273
|
|
|
$
|
54
|
|
|
$
|
1
|
|
|
$
|
2,085,302
|
|
|
$
|
2,116,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
Adversely Classified
|
|
Not Adversely
|
|
|
(Dollars in thousands)
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Classified
|
|
Gross Loans
|
Commercial real estate
|
|
$
|
16,003
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,022,079
|
|
|
$
|
1,038,082
|
|
Commercial and industrial
|
|
12,770
|
|
|
99
|
|
|
2
|
|
|
477,928
|
|
|
490,799
|
|
Commercial construction
|
|
3,364
|
|
|
—
|
|
|
—
|
|
|
210,083
|
|
|
213,447
|
|
Residential mortgages
|
|
1,414
|
|
|
—
|
|
|
—
|
|
|
179,146
|
|
|
180,560
|
|
Home equity loans and lines
|
|
666
|
|
|
—
|
|
|
—
|
|
|
90,399
|
|
|
91,065
|
|
Consumer
|
|
30
|
|
|
—
|
|
|
—
|
|
|
10,815
|
|
|
10,845
|
|
Total gross loans
|
|
$
|
34,247
|
|
|
$
|
99
|
|
|
$
|
2
|
|
|
$
|
1,990,450
|
|
|
$
|
2,024,798
|
|
Total adversely classified loans amounted to
1.48%
of total loans at
June 30, 2017
, as compared to
1.70%
at
December 31, 2016
.
Past due and non-accrual loans
The following tables present an age analysis of past due loans as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
(Dollars in thousands)
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Past Due 90 days or more
|
|
Total Past
Due Loans
|
|
Current Loans
|
|
Gross
Loans
|
|
Non-accrual Loans
|
Commercial real estate
|
|
$
|
1,703
|
|
|
$
|
74
|
|
|
$
|
4,420
|
|
|
$
|
6,197
|
|
|
$
|
1,101,517
|
|
|
$
|
1,107,714
|
|
|
$
|
8,446
|
|
Commercial and industrial
|
|
308
|
|
|
1,411
|
|
|
1,463
|
|
|
3,182
|
|
|
502,058
|
|
|
505,240
|
|
|
3,744
|
|
Commercial construction
|
|
1,140
|
|
|
—
|
|
|
—
|
|
|
1,140
|
|
|
217,137
|
|
|
218,277
|
|
|
200
|
|
Residential mortgages
|
|
128
|
|
|
—
|
|
|
186
|
|
|
314
|
|
|
188,627
|
|
|
188,941
|
|
|
272
|
|
Home equity loans and lines
|
|
88
|
|
|
96
|
|
|
212
|
|
|
396
|
|
|
85,998
|
|
|
86,394
|
|
|
594
|
|
Consumer
|
|
47
|
|
|
17
|
|
|
7
|
|
|
71
|
|
|
9,993
|
|
|
10,064
|
|
|
20
|
|
Total gross loans
|
|
$
|
3,414
|
|
|
$
|
1,598
|
|
|
$
|
6,288
|
|
|
$
|
11,300
|
|
|
$
|
2,105,330
|
|
|
$
|
2,116,630
|
|
|
$
|
13,276
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
(Dollars in thousands)
|
|
30-59 Days
Past Due
|
|
60-89 Days
Past Due
|
|
Past Due 90 days or more
|
|
Total Past
Due Loans
|
|
Current Loans
|
|
Gross Loans
|
|
Non-accrual Loans
|
Commercial real estate
|
|
$
|
5,993
|
|
|
$
|
923
|
|
|
$
|
1,399
|
|
|
$
|
8,315
|
|
|
$
|
1,029,767
|
|
|
$
|
1,038,082
|
|
|
$
|
4,876
|
|
Commercial and industrial
|
|
267
|
|
|
4
|
|
|
1,544
|
|
|
1,815
|
|
|
488,984
|
|
|
490,799
|
|
|
3,174
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
213,447
|
|
|
213,447
|
|
|
519
|
|
Residential mortgages
|
|
648
|
|
|
—
|
|
|
99
|
|
|
747
|
|
|
179,813
|
|
|
180,560
|
|
|
289
|
|
Home equity loans and lines
|
|
270
|
|
|
—
|
|
|
269
|
|
|
539
|
|
|
90,526
|
|
|
91,065
|
|
|
616
|
|
Consumer
|
|
94
|
|
|
13
|
|
|
11
|
|
|
118
|
|
|
10,727
|
|
|
10,845
|
|
|
11
|
|
Total gross loans
|
|
$
|
7,272
|
|
|
$
|
940
|
|
|
$
|
3,322
|
|
|
$
|
11,534
|
|
|
$
|
2,013,264
|
|
|
$
|
2,024,798
|
|
|
$
|
9,485
|
|
At
June 30, 2017
and
December 31, 2016
, all loans past due 90 days or more were carried as non-accrual, in addition to those loans where reasonable doubt exists 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
$81 thousand
at
June 30, 2017
and
$220 thousand
at
December 31, 2016
. These balances primarily represented the guaranteed portions of non-performing SBA loans. The majority of the non-accrual loan balances were also carried as impaired loans during the periods noted, and are discussed further below.
The ratio of non-accrual loans to total loans amounted to
0.63%
at
June 30, 2017
, and
0.47%
at
December 31, 2016
.
At
June 30, 2017
, additional funding commitments for non-accrual loans was not material.
Impaired loans
Impaired loans are individually significant loans for which management considers it probable that not all amounts due (principal and interest) in accordance with the original contractual terms will be collected. Impaired loans are individually evaluated for credit loss and a specific allowance reserve is assigned for the amount of the estimated probable credit loss. The majority of impaired loans are included within the non-accrual balances; however, not every loan on non-accrual status has been designated as impaired. Impaired loans include loans that have been modified in a troubled debt restructuring ("TDR,") see below.
The carrying value of impaired loans amounted to
$30.5 million
and
$31.8 million
at
June 30, 2017
and
December 31, 2016
, respectively. Total accruing impaired loans amounted to
$17.3 million
and
$22.4 million
at
June 30, 2017
and
December 31, 2016
, respectively, while non-accrual impaired loans amounted to
$13.2 million
and
$9.4 million
as of
June 30, 2017
and
December 31, 2016
, respectively.
The following tables set forth the recorded investment in impaired loans and the related specific allowance allocated as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2017
|
(Dollars in thousands)
|
|
Unpaid
contractual
principal
balance
|
|
Total recorded
investment in
impaired loans
|
|
Recorded
investment
with no
allowance
|
|
Recorded
investment
with
allowance
|
|
Related specific
allowance
|
Commercial real estate
|
|
$
|
17,181
|
|
|
$
|
15,584
|
|
|
$
|
13,213
|
|
|
$
|
2,371
|
|
|
$
|
393
|
|
Commercial and industrial
|
|
13,183
|
|
|
12,503
|
|
|
8,749
|
|
|
3,754
|
|
|
1,771
|
|
Commercial construction
|
|
1,667
|
|
|
1,619
|
|
|
1,619
|
|
|
—
|
|
|
—
|
|
Residential mortgages
|
|
381
|
|
|
272
|
|
|
272
|
|
|
—
|
|
|
—
|
|
Home equity loans and lines
|
|
659
|
|
|
494
|
|
|
494
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
14
|
|
|
13
|
|
|
—
|
|
|
13
|
|
|
13
|
|
Total
|
|
$
|
33,085
|
|
|
$
|
30,485
|
|
|
$
|
24,347
|
|
|
$
|
6,138
|
|
|
$
|
2,177
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
(Dollars in thousands)
|
|
Unpaid
contractual
principal
balance
|
|
Total recorded
investment in
impaired loans
|
|
Recorded
investment
with no
allowance
|
|
Recorded
investment
with
allowance
|
|
Related specific
allowance
|
Commercial real estate
|
|
$
|
16,010
|
|
|
$
|
14,261
|
|
|
$
|
12,444
|
|
|
$
|
1,817
|
|
|
$
|
370
|
|
Commercial and industrial
|
|
14,291
|
|
|
13,372
|
|
|
9,366
|
|
|
4,006
|
|
|
2,222
|
|
Commercial construction
|
|
3,408
|
|
|
3,364
|
|
|
3,051
|
|
|
313
|
|
|
28
|
|
Residential mortgages
|
|
388
|
|
|
289
|
|
|
289
|
|
|
—
|
|
|
—
|
|
Home equity loans and lines
|
|
665
|
|
|
509
|
|
|
509
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
2
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Total
|
|
$
|
34,764
|
|
|
$
|
31,796
|
|
|
$
|
25,659
|
|
|
$
|
6,137
|
|
|
$
|
2,621
|
|
The following table presents the average recorded investment in impaired loans and the related interest recognized during the three months indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2017
|
|
Three Months Ended June 30, 2016
|
(Dollars in thousands)
|
|
Average recorded
investment
|
|
Interest income
recognized
|
|
Average recorded
investment
|
|
Interest income
recognized
|
Commercial real estate
|
|
$
|
14,403
|
|
|
$
|
78
|
|
|
$
|
12,700
|
|
|
$
|
64
|
|
Commercial and industrial
|
|
12,367
|
|
|
76
|
|
|
8,090
|
|
|
39
|
|
Commercial construction
|
|
1,622
|
|
|
22
|
|
|
3,089
|
|
|
37
|
|
Residential mortgages
|
|
279
|
|
|
—
|
|
|
304
|
|
|
—
|
|
Home equity loans and lines
|
|
565
|
|
|
—
|
|
|
306
|
|
|
—
|
|
Consumer
|
|
15
|
|
|
—
|
|
|
20
|
|
|
—
|
|
Total
|
|
$
|
29,251
|
|
|
$
|
176
|
|
|
$
|
24,509
|
|
|
$
|
140
|
|
The following table presents the average recorded investment in impaired loans and the related interest recognized during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2017
|
|
Six Months Ended June 30, 2016
|
(Dollars in thousands)
|
|
Average recorded
investment
|
|
Interest income
recognized
|
|
Average recorded
investment
|
|
Interest income
recognized
|
Commercial real estate
|
|
$
|
13,891
|
|
|
$
|
179
|
|
|
$
|
11,184
|
|
|
$
|
107
|
|
Commercial and industrial
|
|
12,623
|
|
|
181
|
|
|
8,257
|
|
|
65
|
|
Commercial construction
|
|
2,017
|
|
|
49
|
|
|
3,032
|
|
|
74
|
|
Residential mortgages
|
|
283
|
|
|
—
|
|
|
306
|
|
|
—
|
|
Home equity loans and lines
|
|
552
|
|
|
(2
|
)
|
|
276
|
|
|
(2
|
)
|
Consumer
|
|
14
|
|
|
—
|
|
|
21
|
|
|
—
|
|
Total
|
|
$
|
29,380
|
|
|
$
|
407
|
|
|
$
|
23,076
|
|
|
$
|
244
|
|
At
June 30, 2017
, additional funding commitments for impaired loans totaled
$394 thousand
. The Company's obligation to fulfill the additional funding commitments on impaired loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Troubled debt restructurings
Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Bank grants the borrower a concession on the terms, that would not otherwise be considered. Typically, such concessions may consist of 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.
Total TDR loans, included in the impaired loan balances above, as of
June 30, 2017
and
December 31, 2016
, were
$23.3 million
and
$27.0 million
, respectively. TDR loans on accrual status amounted to
$17.3 million
and
$22.4 million
at
June 30, 2017
and
December 31, 2016
, respectively. TDR loans included in non-performing loans amounted to
$6.0 million
and
$4.6 million
at
June 30, 2017
and
December 31, 2016
, respectively. The Company continues to work with customers, particularly commercial relationships, and enters into loan modifications 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
June 30, 2017
, additional funding commitments for TDR loans totaled
$394 thousand
. The Company's obligation to fulfill the additional funding commitments on TDR loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion.
The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
(Dollars in thousands)
|
|
June 30, 2017
|
|
|
June 30, 2016
|
|
Loan advances with adequate collateral
|
|
$
|
367
|
|
|
$
|
6,337
|
|
Extended maturity date
|
|
5,739
|
|
|
201
|
|
Temporary payment reduction and payment re-amortization of remaining principal over extended term
|
|
1,086
|
|
|
—
|
|
Temporary interest only payment plan
|
|
1,016
|
|
|
594
|
|
Total
|
|
$
|
8,208
|
|
|
$
|
7,132
|
|
Loans modified as TDRs during the
three
month period ended
June 30, 2017
are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2017
|
(Dollars in thousands)
|
|
Number of
restructurings
|
|
Pre-modification
outstanding recorded
investment
|
|
Post-modification
outstanding recorded
investment
|
Commercial real estate
|
|
3
|
|
|
$
|
929
|
|
|
$
|
928
|
|
Commercial and industrial
|
|
10
|
|
|
2,213
|
|
|
2,326
|
|
Commercial construction
|
|
2
|
|
|
1,420
|
|
|
1,419
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
Home equity loans and lines
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
15
|
|
|
$
|
4,562
|
|
|
$
|
4,673
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Payment defaults, during the
three
month period ended
June 30, 2017
, on loans modified as TDRs within the preceding twelve months are detailed below.
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2017
|
(Dollars in thousands)
|
|
Number of TDRs that defaulted
|
|
Post-
modification outstanding
recorded investment
|
Commercial real estate
|
|
—
|
|
|
$
|
—
|
|
Commercial and industrial
|
|
5
|
|
|
1,457
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
Home equity loans and lines
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
Total
|
|
5
|
|
|
$
|
1,457
|
|
Loans modified as TDRs during the
six
month period ended
June 30, 2017
are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2017
|
(Dollars in thousands)
|
|
Number of
restructurings
|
|
Pre-modification
outstanding recorded
investment
|
|
Post-modification
outstanding recorded
investment
|
Commercial real estate
|
|
4
|
|
|
$
|
1,304
|
|
|
$
|
1,299
|
|
Commercial and industrial
|
|
12
|
|
|
5,165
|
|
|
5,290
|
|
Commercial construction
|
|
3
|
|
|
1,626
|
|
|
1,619
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
Home equity loans and lines
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
19
|
|
|
$
|
8,095
|
|
|
$
|
8,208
|
|
There were
no
subsequent charge-offs associated with the new TDRs noted in the table above during the
six months ended
June 30, 2017
. At
June 30, 2017
, there were
$376 thousand
specific reserves allocated to the TDRs entered into during the
2017
period as management considered it likely that the majority of outstanding principal will ultimately be collected.
Payment defaults, during the
six
month period ended
June 30, 2017
, on loans modified as TDRs within the preceding twelve months are detailed below.
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2017
|
(Dollars in thousands)
|
|
Number of TDRs that defaulted
|
|
Post-
modification outstanding
recorded investment
|
Commercial real estate
|
|
2
|
|
|
$
|
734
|
|
Commercial and industrial
|
|
6
|
|
|
1,687
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
Home equity loans and lines
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
Total
|
|
8
|
|
|
$
|
2,421
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Loans modified as TDRs during the
three
month period ended
June 30, 2016
are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
(Dollars in thousands)
|
|
Number of
restructurings
|
|
Pre-modification
outstanding recorded
investment
|
|
Post-modification
outstanding recorded
investment
|
Commercial real estate
|
|
4
|
|
|
$
|
5,093
|
|
|
$
|
5,059
|
|
Commercial and industrial
|
|
5
|
|
|
1,794
|
|
|
1,810
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
Home equity loans and lines
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
9
|
|
|
$
|
6,887
|
|
|
$
|
6,869
|
|
Payment defaults, during the
three
months ended
June 30, 2016
, on loans modified as TDRs within the preceding twelve months are detailed below.
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2016
|
(Dollars in thousands)
|
|
Number of TDRs that defaulted
|
|
Post-
modification outstanding
recorded investment
|
Commercial real estate
|
|
—
|
|
|
$
|
—
|
|
Commercial and industrial
|
|
2
|
|
|
417
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
Residential
|
|
—
|
|
|
—
|
|
Home Equity
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
Total
|
|
2
|
|
|
$
|
417
|
|
Loans modified as TDRs during the
six
month period ended
June 30, 2016
are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
(Dollars in thousands)
|
|
Number of
restructurings
|
|
Pre-modification
outstanding recorded
investment
|
|
Post-modification
outstanding recorded
investment
|
Commercial real estate
|
|
4
|
|
|
$
|
5,093
|
|
|
$
|
5,059
|
|
Commercial and industrial
|
|
6
|
|
|
2,058
|
|
|
2,073
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
Home equity loans and lines
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
|
10
|
|
|
$
|
7,151
|
|
|
$
|
7,132
|
|
For the TDRs entered into during the 2016 period, there were
no
subsequent charge-offs associated, and there was
$169 thousand
in specific reserves allocated to these TDRs, as management considered it likely that the unreserved principal will ultimately be collected.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Payment defaults, during the
six months ended
June 30, 2016
, on loans modified as TDRs within the preceding twelve months are detailed below.
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2016
|
(Dollars in thousands)
|
|
Number of TDRs that defaulted
|
|
Post-
modification outstanding
recorded investment
|
Commercial real estate
|
|
—
|
|
|
—
|
|
Commercial and industrial
|
|
2
|
|
|
$
|
417
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
Home equity loans and lines
|
|
—
|
|
|
—
|
|
Consumer
|
|
—
|
|
|
—
|
|
Total
|
|
2
|
|
|
$
|
417
|
|
Other real estate owned (
"
OREO
"
)
The Company carried
no
OREO at
June 30, 2017
,
December 31, 2016
or
June 30, 2016
. There were
no
additions, sales or write downs on OREO during the
six months ended
June 30, 2017
or
2016
.
At
June 30, 2017
, the Company had 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 with carrying amounts totaling
$301 thousand
compared with
$200 thousand
at
December 31, 2016
.
Allowance for loan loss activity
The allowance for loan losses is established through a provision for loan losses, a direct charge to earnings. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance.
The allowance for loan losses amounted to
$32.0 million
at
June 30, 2017
, compared to
$31.3 million
at
December 31, 2016
, and
$30.3 million
at
June 30, 2016
. For the
six months ended
June 30, 2017
and
June 30, 2016
, the provision for loan losses amounted to
$405 thousand
and
$1.1 million
, respectively. The decrease in the provision for the
six months ended
June 30, 2017
was due primarily to generally improving credit quality metrics and underlying collateral values, partially offset by the higher level of loan growth during the
2017
period, as compared to the
2016
period.
The allowance for loan losses to total loans ratio was
1.51%
at
June 30, 2017
,
1.55%
at
December 31, 2016
and
1.60%
at
June 30, 2016
. Based on management's judgment as to the existing credit risks inherent in the loan portfolio, as discussed above under the heading "Credit Quality Indicators," management believes that the Company's allowance for loan losses is adequate to absorb probable losses from specifically known and other probable credit risks associated with the portfolio as of
June 30, 2017
.
Changes in the allowance for loan losses by portfolio segment for the
three
months ended
June 30, 2017
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Cmml Real
Estate
|
|
Cmml and
Industrial
|
|
Cmml
Constr
|
|
Resid.
Mortgage
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
Beginning Balance at March 31, 2017
|
|
$
|
15,294
|
|
|
$
|
11,178
|
|
|
$
|
3,364
|
|
|
$
|
978
|
|
|
$
|
635
|
|
|
$
|
234
|
|
|
$
|
31,683
|
|
Provision
|
|
295
|
|
|
(148
|
)
|
|
120
|
|
|
11
|
|
|
(14
|
)
|
|
16
|
|
|
280
|
|
Recoveries
|
|
56
|
|
|
71
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
130
|
|
Less: Charge offs
|
|
—
|
|
|
114
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
21
|
|
|
135
|
|
Ending Balance at June 30, 2017
|
|
$
|
15,645
|
|
|
$
|
10,987
|
|
|
$
|
3,484
|
|
|
$
|
989
|
|
|
$
|
622
|
|
|
$
|
231
|
|
|
$
|
31,958
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Changes in the allowance for loan losses by portfolio segment for the
six months ended
June 30, 2017
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Cmml Real
Estate
|
|
Cmml and
Industrial
|
|
Cmml
Constr
|
|
Resid.
Mortgage
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
Beginning Balance at December 31, 2016
|
|
$
|
14,902
|
|
|
$
|
11,204
|
|
|
$
|
3,406
|
|
|
$
|
960
|
|
|
$
|
634
|
|
|
$
|
236
|
|
|
$
|
31,342
|
|
Provision
|
|
611
|
|
|
(343
|
)
|
|
78
|
|
|
29
|
|
|
(14
|
)
|
|
44
|
|
|
405
|
|
Recoveries
|
|
132
|
|
|
343
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
5
|
|
|
482
|
|
Less: Charge offs
|
|
—
|
|
|
217
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54
|
|
|
271
|
|
Ending Balance at June 30, 2017
|
|
$
|
15,645
|
|
|
$
|
10,987
|
|
|
$
|
3,484
|
|
|
$
|
989
|
|
|
$
|
622
|
|
|
$
|
231
|
|
|
$
|
31,958
|
|
Ending allowance balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to loans individually evaluated for impairment
|
|
$
|
393
|
|
|
$
|
1,771
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
2,177
|
|
Allocated to loans collectively evaluated for impairment
|
|
$
|
15,252
|
|
|
$
|
9,216
|
|
|
$
|
3,484
|
|
|
$
|
989
|
|
|
$
|
622
|
|
|
$
|
218
|
|
|
$
|
29,781
|
|
Changes in the allowance for loan losses by portfolio segment for the
three
months ended
June 30, 2016
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Cmml Real
Estate
|
|
Cmml and
Industrial
|
|
Cmml
Constr
|
|
Resid.
Mortgage
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
Beginning Balance at March 31, 2016
|
|
$
|
13,827
|
|
|
$
|
10,278
|
|
|
$
|
3,964
|
|
|
$
|
1,077
|
|
|
$
|
541
|
|
|
$
|
223
|
|
|
$
|
29,910
|
|
Provision
|
|
865
|
|
|
(714
|
)
|
|
92
|
|
|
8
|
|
|
9
|
|
|
7
|
|
|
267
|
|
Recoveries
|
|
1
|
|
|
480
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
1
|
|
|
484
|
|
Less: Charge offs
|
|
179
|
|
|
131
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
316
|
|
Ending Balance at June 30, 2016
|
|
$
|
14,514
|
|
|
$
|
9,913
|
|
|
$
|
4,056
|
|
|
$
|
1,085
|
|
|
$
|
552
|
|
|
$
|
225
|
|
|
$
|
30,345
|
|
Changes in the allowance for loan losses by portfolio segment for the
six months ended
June 30, 2016
are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Cmml Real
Estate
|
|
Cmml and
Industrial
|
|
Cmml
Constr
|
|
Resid.
Mortgage
|
|
Home
Equity
|
|
Consumer
|
|
Total
|
Beginning Balance at December 31, 2015
|
|
$
|
13,514
|
|
|
$
|
9,758
|
|
|
$
|
3,905
|
|
|
$
|
1,061
|
|
|
$
|
540
|
|
|
$
|
230
|
|
|
$
|
29,008
|
|
Provision
|
|
1,159
|
|
|
(251
|
)
|
|
156
|
|
|
24
|
|
|
15
|
|
|
14
|
|
|
1,117
|
|
Recoveries
|
|
20
|
|
|
609
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
3
|
|
|
634
|
|
Less: Charge offs
|
|
179
|
|
|
203
|
|
|
5
|
|
|
—
|
|
|
5
|
|
|
22
|
|
|
414
|
|
Ending Balance at June 30, 2016
|
|
$
|
14,514
|
|
|
$
|
9,913
|
|
|
$
|
4,056
|
|
|
$
|
1,085
|
|
|
$
|
552
|
|
|
$
|
225
|
|
|
$
|
30,345
|
|
Ending allowance balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to loans individually evaluated for impairment
|
|
$
|
541
|
|
|
$
|
990
|
|
|
$
|
550
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
18
|
|
|
$
|
2,099
|
|
Allocated to loans collectively evaluated for impairment
|
|
$
|
13,973
|
|
|
$
|
8,923
|
|
|
$
|
3,506
|
|
|
$
|
1,085
|
|
|
$
|
552
|
|
|
$
|
207
|
|
|
$
|
28,246
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Deposits are summarized as follows:
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2017
|
|
December 31, 2016
|
Non-interest bearing demand deposits
|
|
$
|
700,415
|
|
|
$
|
646,115
|
|
Interest bearing checking
|
|
406,077
|
|
|
372,696
|
|
Savings
|
|
199,018
|
|
|
178,637
|
|
Money market
|
|
793,131
|
|
|
844,216
|
|
Certificates of deposit $250,000 or less
|
|
128,346
|
|
|
125,580
|
|
Certificates of deposit more than $250,000
|
|
39,335
|
|
|
42,315
|
|
Total customer deposits
|
|
2,266,322
|
|
|
2,209,559
|
|
Brokered deposits
(1)
|
|
87,460
|
|
|
59,362
|
|
Total deposits
|
|
$
|
2,353,782
|
|
|
$
|
2,268,921
|
|
___________________________________
|
|
(1)
|
Primarily brokered CDs $250,000 and under
|
Total customer deposits (deposits excluding brokered deposits) include reciprocal 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 full FDIC insurance. Essentially, the equivalent of the customers' original deposited funds comes back to the Company as customer deposits within the appropriate category under total deposits on the consolidated balance sheet. The Company's customers' balances in these reciprocal products were
$252.4 million
and
$281.6 million
at
June 30, 2017
and
December 31, 2016
, respectively.
See Note 12, "Fair Value Measurements," below for further information regarding the Company's fair value measurements for deposits.
|
|
(6)
|
Borrowed Funds and Subordinated Debt
|
Borrowed funds, consisting of FHLB borrowings, amounted to
$44.3 million
at
June 30, 2017
, compared to
$10.7 million
at
December 31, 2016
.
The Company also carried subordinated debt of
$14.8 million
(net of deferred issuance costs) at both
June 30, 2017
and
December 31, 2016
, which consisted of
$15.0 million
in aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Notes"), issued in
January 2015
, with a
15
year term. The Notes are intended to qualify as Tier 2 capital for regulatory purposes, and pay interest at a fixed rate of
6.00%
per annum through
January 30, 2025
. Refer to Note 7, "Borrowed Funds and Subordinated Debt," to the Company's consolidated financial statements contained in the
2016
Annual Report on Form 10-K for additional information about the Company's subordinated debt.
See Note 12, "Fair Value Measurements," below for further information regarding the Company's fair value measurements for borrowed funds and subordinated debt.
|
|
(7)
|
Derivatives and Hedging Activities
|
Interest rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. The Company generally does not pool mortgage loans for sale, but instead, sells the loans on an individual basis. To reduce the net interest rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest rate lock commitment is quoted on the origination of the loan. The Company estimates the fair value of these derivatives based on current secondary mortgage market prices. At
June 30, 2017
and
December 31, 2016
, the estimated fair values of these derivative instruments were considered to be immaterial.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
The Company may use interest-rate contract swaps as part of its interest-rate risk management strategy. Interest-rate swap agreements are entered into as hedges against future interest-rate fluctuations on specifically identified assets or liabilities. The Company did not have derivative fair value hedges or derivative cash flow hedges at either
June 30, 2017
or
December 31, 2016
.
The Company also has a “Back-to-Back Swap” program whereby the Bank enters into an interest rate swap with a qualified commercial banking customer and simultaneously enters into an equal and opposite interest rate swap with a counterparty. The customer interest rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to fixed-rate payment.
The transaction structure effectively minimizes the Bank’s net risk exposure resulting from such transactions. Customer-related credit risk is minimized by the cross collateralization of the loan and the interest rate swap agreement.
Back-to-Back Swaps are not speculative but rather, result from a service the Company provides to certain customers. Back-to-Back Swaps do not meet hedge accounting requirements and therefore changes in the fair value of both the customer swaps and the counterparty swaps, which have an offsetting relationship, are recognized directly in earnings. As a result of this offsetting relationship, there were
no
net gains or losses recognized in income on Back-to-Back Swaps during the
six months ended
June 30, 2017
or
June 30, 2016
.
The Company had
six
interest-rate swaps at
June 30, 2017
with an aggregate notional amount of
$29.8 million
compared to
four
interest-rate swaps with an aggregate notional amount of
$26.7 million
at
December 31, 2016
.
Asset derivatives and liability derivatives are included in prepaid expenses and other assets and accrued expenses and other liabilities on the consolidated balance sheets, respectively.
The table below presents the fair value and classification of the Company’s derivative financial instruments for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017
|
|
As of December 31, 2016
|
(Dollars in thousands)
|
Asset Derivatives
|
Liability Derivatives
|
|
Asset Derivatives
|
Liability Derivatives
|
Back-to-Back Swaps
|
$
|
459
|
|
$
|
459
|
|
|
$
|
610
|
|
$
|
610
|
|
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. As the swaps are subject to master netting agreements, the Company had reduced exposure relating to interest rate swaps with institutional counterparties at
June 30, 2017
. The Company had unsecured counterparty credit risk exposure of
$459 thousand
and
$610 thousand
on interest rate swaps at
June 30, 2017
and
December 31, 2016
, respectively. The counterparty was rated A / A2 by S&P and Moody’s, respectively, at
June 30, 2017
.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Certain counterparty interest rate swaps contain provisions that require the Company to post collateral if the derivative exposure exceeds a threshold amount. See the table below for amounts held at each period presented. The table below also presents the Company's asset and liability derivative positions and the potential effect of netting arrangements on its financial position, as of the periods presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Gross Amounts of Recognized Asset/Liabilities
|
Gross Amounts Offset in the Statement of Financial Position
|
Net Amounts of Assets Presented in the Statement of Financial Position
|
Gross amounts not offset in the Statement of Financial Position
|
(Dollars in thousands)
|
|
|
|
Financial Instruments
|
Cash collateral (Received)/Posted
|
Net Amount
|
Asset Derivatives
|
|
|
|
|
|
|
Back-to-Back Swaps
|
$
|
459
|
|
$
|
—
|
|
$
|
459
|
|
$
|
—
|
|
$
|
—
|
|
$
|
459
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
Back-to-Back Swaps
|
$
|
459
|
|
$
|
—
|
|
$
|
459
|
|
$
|
—
|
|
$
|
—
|
|
$
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Gross Amounts of Recognized Asset/Liabilities
|
Gross Amounts Offset in the Statement of Financial Position
|
Net Amounts of Assets Presented in the Statement of Financial Position
|
Gross amounts not offset in the Statement of Financial Position
|
(Dollars in thousands)
|
|
|
|
Financial Instruments
|
Cash collateral (Received)/Posted
|
Net Amount
|
Asset Derivatives
|
|
|
|
|
|
|
Back-to-Back Swaps
|
$
|
610
|
|
$
|
—
|
|
$
|
610
|
|
$
|
—
|
|
$
|
—
|
|
$
|
610
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
|
|
|
|
|
Back-to-Back Swaps
|
$
|
610
|
|
$
|
—
|
|
$
|
610
|
|
$
|
—
|
|
$
|
—
|
|
$
|
610
|
|
The Company has interest rate swaps with counterparties that contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness.
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 the percentage of the Company’s participation in the underlying loan applied to the originating bank's swap loss. At
June 30, 2017
and
December 31, 2016
, the Company had
two
such participation loans and management considers the risk of material swap loss exposure to be unlikely based on the borrower's financial and collateral strength.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Shares authorized and share issuance
The Company’s authorized capital is divided into common stock and preferred stock. At the Company's annual meeting on May 2, 2017, shareholders voted to amend the Company’s Restated Articles of Organization to increase the number of shares of common stock that the Company is authorized to issue from
20,000,000
shares to
40,000,000
shares. The Company is authorized to issue
1,000,000
shares of preferred stock.
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
$52.00
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 exercisable, have no dilutive effect on the earnings of the Company. The rights will expire, unless earlier redeemed, exchanged, or otherwise rescinded by the Company, on January 13, 2018. The Company is currently evaluating the renewal of the plan in anticipation of this expiration date.
The Company's stock incentive plans permit the Board of Directors to grant, under various terms, stock options (for the purchase of newly issued shares of common stock), restricted stock, restricted stock units and stock appreciation rights to officers and other employees, directors and consultants. These plans also allow for newly issued shares of common stock to be issued without restrictions to officers and other employees, directors and consultants.
The Company issues stock options and restricted stock awards to officers and other employees and restricted stock awards and stock compensation in lieu of cash fees to non-employee directors. The restricted stock awards allow for the non-forfeitable receipt of dividends, and the voting of all shares, whether or not vested, throughout the vesting periods at the same proportional level as common shares outstanding. The unvested restricted stock awards are the Company's only participating securities and are included in shares outstanding. Unvested participating restricted awards amounted to
126,770
shares and
141,580
shares as of
June 30, 2017
and
December 31, 2016
, respectively.
Upon vesting, restricted stock awards may be net share-settled to cover payment for employee tax obligations, resulting in shares of common stock being reacquired by the Company. Chapter 156D of the Massachusetts General Laws, a statute known as the Massachusetts Business Corporation Act, which applies to Massachusetts corporations such as the Company, eliminates the concept of “treasury stock” and provides that shares a Massachusetts company reacquires will be treated as authorized but unissued shares.
See Note 10, "Stock-Based Compensation," below for additional information regarding the Company's stock incentive plans.
In addition to shares issued to employees, directors and consultants and shares issued through equity offerings (see below), the Company maintains a dividend reinvestment and direct stock purchase plan (“DRSPP”) for stockholders and new investors to reinvest or purchase additional shares of common stock directly from the Company.
Capital Raised
In the second quarter of 2016, the Company completed a combined shareholder subscription rights offering and supplemental community offering (the "Offering"), at an offering price of
$21.50
per share, under its
$40 million
shelf registration statement (Reg No. 333-190017). The Company issued
930,232
shares of common stock and received gross proceeds of
$20.0 million
(
$19.7 million
, net of offering costs) in the Offering. The Company contributed the net proceeds to the Bank to support future asset growth and for general corporate purposes.
See Note 11, "Earnings per Share," below for addition information regarding the impact of common stock and options issued.
Comprehensive Income
Comprehensive income is defined as all changes to stockholders' equity except investments by and distributions to stockholders. Net income is one component of comprehensive income, with other components referred to in the aggregate as other comprehensive income. The Company's only other comprehensive income component is the net unrealized holding gains
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
or losses on investments available-for-sale, net of deferred income taxes. Pursuant to GAAP, the Company initially excludes these unrealized holding gains and losses from net income; however, they are later reported as reclassifications out of accumulated other comprehensive income into net income when the securities are sold. When securities are sold, the reclassification of realized gains and losses on available-for-sale securities are included on the Consolidated Statements of Income under the "non-interest income" subheading on the line item "net gains on sales of investment securities" and the related income tax expense is included in the line item "provision for income taxes," both of which are also detailed on the Consolidated Statements of Comprehensive Income under the subheading "reclassification adjustment for net gains included in net income."
Refer to Note 10, "Stockholders' Equity," to the Company's consolidated financial statements included in the Company's
2016
Annual Report on Form 10-K for additional information relating to capital adequacy requirements, dividends and the DRSPP.
|
|
(9)
|
Supplemental Retirement Plan and Other Post-retirement Benefit Obligations
|
Supplemental Employee Retirement Plan ("SERP")
The Company has salary continuation agreements with
two
of its current executive officers and
one
former executive officer. These salary continuation agreements provide for predetermined fixed-cash supplemental retirement benefits to be provided for a period of
20 years
after each individual reaches a defined "benefit age." The individuals covered under the SERP have reached the defined benefit age and are receiving payments under the plan. Additionally, the Company has not recognized service costs in the current or prior year as each officer had previously attained their individually defined benefit age and was fully vested under the plan.
This non-qualified plan represents a direct liability of the Company, and as such has no specific assets set aside to settle the benefit obligation. The funded status is the aggregate amount accrued, or the "accumulated benefit obligation," which is equal to the present value of the benefits to be provided to the employee or any beneficiary. Because the Company's benefit obligations provide for predetermined fixed-cash payments, the Company does not have any unrecognized costs to be included as a component of accumulated other comprehensive income.
Total net periodic benefit costs, comprised of interest costs only, were
$29 thousand
and
$58 thousand
for the
three and six months ended
June 30, 2017
, respectively, compared to
$31 thousand
and
$62 thousand
for the
three and six months ended
June 30, 2016
, respectively.
Benefits paid amounted to
$69 thousand
and
$138 thousand
for both the
three and six months ended
June 30, 2017
and
June 30, 2016
, respectively. The Company anticipates accruing an additional
$58 thousand
to the SERP during the remainder of
2017
.
Supplemental Life Insurance
The Company has provided supplemental life insurance through split-dollar life insurance arrangements for certain executive and senior officers on whom the Bank owns bank-owned life insurance ("BOLI").
These arrangements provide a death benefit to the officer's designated beneficiaries that extend to postretirement periods for some of the supplemental life insurance plans. The Company has recognized a liability for these future postretirement benefits.
These non-qualified plans represent a direct liability of the Company, and as such has no specific assets set aside to settle the benefit obligation. The funded status is the aggregate amount accrued, or the "accumulated postretirement benefit obligation," which is the present value of the post-retirement benefits associated with this arrangement.
The following table illustrates the net periodic post-retirement benefit cost for the supplemental life insurance plans for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
(Dollars in thousands)
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Service Cost
|
|
$
|
(3
|
)
|
|
$
|
(3
|
)
|
|
$
|
(6
|
)
|
|
$
|
(5
|
)
|
Interest Cost
|
|
23
|
|
|
21
|
|
|
46
|
|
|
42
|
|
Net periodic post-retirement benefit cost
|
|
$
|
20
|
|
|
$
|
18
|
|
|
$
|
40
|
|
|
$
|
37
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
(10)
|
Stock-Based Compensation
|
The Company currently has
two
individual stock incentive plans: the 2009 plan, as amended in 2015, and the 2016 plan. As of
June 30, 2017
, an aggregate of
440,470
shares remain available for future grants under the plans.
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
$496 thousand
and
$820 thousand
for the
three and six months ended
June 30, 2017
, respectively, compared to
$462 thousand
and
$905 thousand
for the
three and six months ended
June 30, 2016
, respectively.
Stock Option Awards
The Company recognized stock-based compensation expense related to stock option awards of
$41 thousand
and
$103 thousand
for the
three and six months ended
June 30, 2017
, respectively, compared to
$63 thousand
and
$142 thousand
for the
three and six months ended
June 30, 2016
, respectively.
The Company utilizes the Black-Scholes option valuation model in order to determine the per share grant date fair value of option grants.
The table below provides a summary of the options granted in during the periods indicated:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2017
|
|
2016
|
Options granted
|
15,009
|
|
|
31,047
|
|
Term in years
|
10
|
|
|
10
|
|
Weighted average assumptions used in the fair value model:
|
|
|
|
Expected volatility
|
40
|
%
|
|
42
|
%
|
Expected dividend yield
|
2.09
|
%
|
|
3.02
|
%
|
Expected life in years
|
7
|
|
|
7
|
|
Risk-free interest rate
|
2.35
|
%
|
|
1.91
|
%
|
Weighted average market price on date of grants
|
$
|
30.46
|
|
|
$
|
21.91
|
|
Per share weighted average fair value
|
$
|
11.34
|
|
|
$
|
7.91
|
|
Fair value as a percentage of market value at grant date
|
37
|
%
|
|
36
|
%
|
Options granted during the first
six
months of
2017
and
2016
generally vest
50%
in year two and
50%
in year four, on the anniversary date of the awards. Vested options are only exercisable while the employee remains employed with the Bank and for a limited time thereafter. For all awards, if a grantee’s employment or other service relationship, such as service as a director, is terminated for any reason, then any stock options granted that have not vested as of the time of such termination generally must be forfeited, unless the Compensation Committee or the Board of Directors, as the case may be, waives such forfeiture requirement.
Refer to Note 12 "Stock-Based Compensation Plans," in the Company's
2016
Annual Report on Form 10-K for a further description of the assumptions used in the valuation model.
Stock Awards
Stock-based compensation expense recognized in association with stock awards amounted to
$384 thousand
and
$571 thousand
for the
three and six months ended
June 30, 2017
, respectively, compared to
$323 thousand
and
$617 thousand
for the
three and six months ended
June 30, 2016
, respectively.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Restricted stock awards are granted at the market price on the date of the grant. Employee awards generally vest over
four years
in equal portions beginning on the first anniversary date of the award or are performance based awards that vest upon the Company achieving certain predefined performance objectives. Non-employee director awards generally vest over
two years
in equal portions beginning on the first anniversary date of the award.
The table below provides a summary of restricted stock awards granted during the periods indicated:
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
Restricted Stock Awards (no. of underlying shares)
|
2017
|
|
2016
|
Two Year Vesting
|
6,944
|
|
|
9,060
|
|
Four Year Vesting
|
16,253
|
|
|
18,298
|
|
Performance-Based Vesting
|
25,623
|
|
|
35,071
|
|
Total Restricted Stock Awards
|
48,820
|
|
|
62,429
|
|
|
|
|
|
Weighted average grant date fair value
|
$
|
30.46
|
|
|
$
|
21.90
|
|
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 Committee or the Board of Directors, as the case may be, waives such forfeiture requirement.
The restricted stock awards allow for the 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 share-settled to cover payment for employee tax obligations, resulting in shares of common stock being reacquired by the Company.
Any shares that are returned to the Company prior to vesting or as payment for employee tax obligations upon vesting shall remain available for issuance under such plan, while the plan is still open.
Stock in Lieu of Directors' Fees
In addition to restricted stock awards discussed above, the non-employee members of the Company's Board of Directors may opt to receive newly issued shares of the Company's common stock in lieu of cash compensation for attendance at Board and Board Committee meetings. Stock-based compensation expense related to these directors' fees amounted to
$71 thousand
and
$146 thousand
for the
three and six months ended
June 30, 2017
, respectively, compared to
$76 thousand
and
$146 thousand
for the
three and six months ended
June 30, 2016
, respectively, and is included in other operating expenses. In
January 2017
, non-employee directors were issued
12,992
shares of common stock in lieu of
2016
annual cash fees of
$286 thousand
at a market value price of
$22.04
per share, the market value of the common stock on the opt-in measurement date of
January 4, 2016
.
In the first quarter of
2017
, the Company adopted ASU 2016-09. For further information regarding the implementation of this update and the financial statement impact, refer to Note 1, "Summary of Significant Accounting Policies," Item (e), "Recent Accounting Pronouncements" above.
For further information regarding the Company's stock awards, see Note 8, "Stockholders' Equity," above under the caption "Shares authorized and share issuance."
Basic earnings per share are calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding (including participating securities) during the year. The Company's only participating securities are unvested restricted stock awards that contain non-forfeitable rights to dividends. See Note 8, "Stockholders' Equity," under the caption "Shares authorized and share issuance," below for further information regarding the Company's participating securities. Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
The table below presents the increase in average shares outstanding, using the treasury stock method, for the diluted earnings per share calculation for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30,
|
|
Six months ended June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Basic weighted average common shares outstanding
|
11,572,430
|
|
|
10,561,680
|
|
|
11,540,796
|
|
|
10,483,396
|
|
Dilutive shares
|
80,259
|
|
|
68,220
|
|
|
84,916
|
|
|
67,446
|
|
Diluted weighted average common shares outstanding
|
11,652,689
|
|
|
10,629,900
|
|
|
11,625,712
|
|
|
10,550,842
|
|
Basic and diluted weighted average common shares outstanding for the
three and six months ended
June 30, 2017
include the full impact of the
930,232
shares of common stock issued in the Company’s
2016
equity offering, while the respective weighted averages for the
2016
periods were only marginally affected from the issue date of June 23, 2016 through period end.
There were
15,009
options outstanding that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for the
six months ended
June 30, 2017
. These options, which were not dilutive at that date, may potentially dilute earnings per share in the future.
|
|
(12)
|
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 on the basis of 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Fair Value Measurements using:
|
(Dollars in thousands)
|
|
Fair Value
|
|
(level 1)
|
|
(level 2)
|
|
(level 3)
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
381,818
|
|
|
$
|
—
|
|
|
$
|
381,818
|
|
|
$
|
—
|
|
Equity securities
|
|
6,187
|
|
|
6,187
|
|
|
—
|
|
|
—
|
|
FHLB stock
|
|
4,364
|
|
|
—
|
|
|
—
|
|
|
4,364
|
|
Interest-rate swaps
|
|
459
|
|
|
—
|
|
|
459
|
|
|
—
|
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
3,919
|
|
|
—
|
|
|
—
|
|
|
3,919
|
|
|
|
|
|
|
|
|
|
|
Liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
Interest-rate swaps
|
|
459
|
|
|
—
|
|
|
459
|
|
|
—
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
Fair Value Measurements using:
|
(Dollars in thousands)
|
|
Fair Value
|
|
(level 1)
|
|
(level 2)
|
|
(level 3)
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
362,147
|
|
|
$
|
—
|
|
|
$
|
362,147
|
|
|
$
|
—
|
|
Equity investments
|
|
12,643
|
|
|
12,643
|
|
|
—
|
|
|
—
|
|
FHLB stock
|
|
2,094
|
|
|
—
|
|
|
—
|
|
|
2,094
|
|
Interest-rate swaps
|
|
610
|
|
|
—
|
|
|
610
|
|
|
—
|
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
3,481
|
|
|
—
|
|
|
—
|
|
|
3,481
|
|
|
|
|
|
|
|
|
|
|
Liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
Interest-rate swaps
|
|
610
|
|
|
—
|
|
|
610
|
|
|
—
|
|
The Company did not transfer any assets between the fair value measurement levels during the
six months ended
June 30, 2017
or the year ended
December 31, 2016
.
All of the Company's debt and equity securities that are considered "available-for-sale" are carried at fair value. The debt security category above includes federal agency obligations, commercial and residential federal agency MBS, municipal securities, corporate bonds and certificates of deposits, 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; this stock is classified as a restricted investment and carried at cost which management believes approximates fair value; therefore, these securities are categorized as Level 3 measures. See Note 1, "Summary of Significant Accounting Policies," Item (c) "Restricted Instruments" for further information regarding the Company's fair value assessment of FHLB capital stock.
Impaired loan balances in the table above represent those collateral dependent impaired commercial loans where management has estimated the probable credit loss by comparing the loan's carrying value against the expected realizable fair value of the collateral (appraised value, or internal analysis less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in these assessments, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans are categorized as Level 3 within the fair value hierarchy. A specific allowance is assigned to the collateral dependent impaired loan for the amount of management's estimated probable credit loss. The specific allowances assigned to the collateral dependent impaired loans amounted to
$1.6 million
at
June 30, 2017
compared to
$1.9 million
at
December 31, 2016
.
The fair values for the interest-rate swap assets and liabilities represent a FASB Level 2 measurement and are based on settlement values adjusted for credit risk and observable market interest rate curves. The settlement values are based on discounted cash flow analysis, a widely accepted valuation technique, reflecting the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. Credit risk adjustments consider factors such as the likelihood of default by the Company and its counterparties, its net exposures and remaining contractual life. The change in value of interest-rate swap assets and liabilities attributable to credit risk was not significant during the reported periods. Refer also to Note 7, "Derivatives and Hedging Activities," for additional information on the Company's interest-rate swaps.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Standby letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance of a customer to a third party. The fair value of these commitments was estimated to be the fees charged to enter into similar agreements, and accordingly these fair value measures are deemed to be FASB Level 2 measurements. In accordance with the FASB, the estimated fair values of these commitments are carried on the balance 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 balance sheet at
June 30, 2017
and
December 31, 2016
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
June 30, 2017
and
December 31, 2016
, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgages loans were deemed immaterial.
The following table presents additional quantitative information about assets measured at fair value on a recurring and non-recurring basis for which the Company utilized Level 3 inputs (significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability) to determine fair value as of
June 30, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Unobservable Input Value or Range
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
FHLB stock
|
|
$
|
4,364
|
|
|
FHLB Stated Par Value
|
|
N/A
|
|
N/A
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
$
|
3,919
|
|
|
Appraisal of collateral
|
|
Appraisal adjustments
(1)
|
|
5% - 50%
|
(1)
Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
Estimated Fair Values of Assets and Liabilities
In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the consolidated balance sheet, the Company is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the balance sheet.
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 balance sheet at the dates indicated are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Fair value measurement
|
(Dollars in thousands)
|
|
Carrying
Amount
|
|
Fair Value
|
|
Level 1 inputs
|
|
Level 2 Inputs
|
|
Level 3 Inputs
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
856
|
|
|
$
|
857
|
|
|
$
|
—
|
|
|
$
|
857
|
|
|
$
|
—
|
|
Loans, net
|
|
2,082,442
|
|
|
2,089,802
|
|
|
—
|
|
|
—
|
|
|
2,089,802
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit (including brokered)
|
|
255,141
|
|
|
254,349
|
|
|
—
|
|
|
254,349
|
|
|
—
|
|
Borrowed funds
|
|
44,255
|
|
|
44,249
|
|
|
—
|
|
|
44,249
|
|
|
—
|
|
Subordinated debt
|
|
14,841
|
|
|
14,246
|
|
|
—
|
|
|
—
|
|
|
14,246
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Fair value measurement
|
(Dollars in thousands)
|
|
Carrying
Amount
|
|
Fair Value
|
|
Level 1 inputs
|
|
Level 2 Inputs
|
|
Level 3 Inputs
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans held for sale
|
|
$
|
1,569
|
|
|
$
|
1,569
|
|
|
$
|
—
|
|
|
$
|
1,569
|
|
|
$
|
—
|
|
Loans, net
|
|
1,991,387
|
|
|
1,997,887
|
|
|
—
|
|
|
—
|
|
|
1,997,887
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit (including brokered)
|
|
227,257
|
|
|
226,536
|
|
|
—
|
|
|
226,536
|
|
|
—
|
|
Borrowed funds
|
|
10,671
|
|
|
10,670
|
|
|
—
|
|
|
10,670
|
|
|
—
|
|
Subordinated debt
|
|
14,834
|
|
|
14,011
|
|
|
—
|
|
|
—
|
|
|
14,011
|
|
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, and non-term deposit accounts. The respective carrying values of these instruments would all be considered to be classified within Level 1 of their fair value hierarchy.
Also excluded from these tables are the fair values of commitments for the unused portion of lines of credit and letters of credit, which were estimated to be the fees currently charged to enter into similar agreements and are deemed to be immaterial, as well as commitments to originate loans which were short-term, at current market rates and estimated to have no significant change in fair value.
When determining fair values noted in the tables above, in cases where quoted fair values are not available, fair values are based upon estimates using various valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:
Loans held for sale:
Loans held for sale are recorded
at the lower of aggregate amortized cost or market value. The fair value is based on comparable market prices for loans with similar rates and terms.
Loans:
The fair value of loans was determined using discounted cash flow analysis, using interest rates currently being offered by the Company. The incremental credit risk for adversely classified loans was considered in the determination of the fair value of the loans. This method of estimating fair value does not incorporate the exit price concept of fair value.
Financial liabilities:
The fair values of certificates of deposit and borrowings were estimated using discounted cash flow analysis using rates offered by the Bank or advance rates offered by the FHLB on
June 30, 2017
and
December 31, 2016
for similar instruments. The fair value of subordinated debt was estimated using discounted cash flow analysis using a market rate of interest at
June 30, 2017
and
December 31, 2016
.
Limitations:
The estimates of fair value of financial instruments were based on information available at
June 30, 2017
and
December 31, 2016
and are not indicative of the fair market value of those instruments as of the date of this Quarterly Report on Form 10-Q. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. The fair value of the Company's time deposit liabilities do not take into consideration the value of the Company's long-term relationships with depositors, which may have significant value.
Because no active market exists for a portion of the Company's financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Fair value estimates were based on existing on and off-balance sheet financial instruments without an attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including premises and equipment and foreclosed real estate, if any.
In addition, the tax ramifications related to the realization of the unrealized appreciation and depreciation can have a significant effect on fair value estimates and have not been considered in any of the estimates. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.