Notes to the Unaudited Consolidated Interim Financial Statements
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(1)
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Summary of Significant Accounting Policies
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(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, 2017
audited consolidated financial statements and notes thereto contained in the
2017
Annual Report on Form 10-K of Enterprise Bancorp, Inc. as filed with the Securities and Exchange Commission (the "SEC") on
March 13, 2018
(the "
2017
Annual Report on Form 10-K").
The accompanying unaudited consolidated interim financial statements of Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our"), a Massachusetts corporation, include the accounts of the Company and its wholly owned subsidiary, Enterprise Bank and Trust Company, commonly referred to as Enterprise Bank (the "Bank"). The Bank is a Massachusetts trust company and state chartered commercial bank organized in 1989. Substantially all of the Company's operations are conducted through the Bank and its subsidiaries. The Company has not materially changed its accounting policies from those disclosed in its
2017
Annual Report on Form 10-K. See Item (f) "Recent Accounting Pronouncements" under the subheading "Accounting pronouncements adopted by the Company" below in this Note 1.
The Bank's subsidiaries include Enterprise Insurance Services, LLC and Enterprise Wealth 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.
The Company’s headquarters and the Bank’s main office are located at 222 Merrimack Street in Lowell, Massachusetts. At
June 30, 2018
, the Company had
24
full service branch banking offices serving the Greater Merrimack Valley and North Central regions of Massachusetts and Southern New Hampshire (Southern Hillsborough and Rockingham counties). Through the Bank and its subsidiaries, the Company offers a range of commercial, residential and consumer loan products, deposit products and cash management services, electronic banking options, and insurance services. The Company also provides a range of investment advisory, wealth management and trust services delivered via two channels, Enterprise Wealth Management and Enterprise Wealth Services. The services offered through the Bank and its subsidiaries are managed as
one
strategic unit and represent the Company's only reportable operating segment.
The Federal Deposit Insurance Corporation (the "FDIC") and the Massachusetts Division of Banks (the "Division") have regulatory authority over the Bank. The Bank is also subject to certain regulatory requirements of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") and, with respect to its New Hampshire branch operations, the New Hampshire Banking Department. The business and operations of the Company are subject to the regulatory oversight of the Federal Reserve Board. The Division also retains supervisory jurisdiction over the Company.
The accompanying unaudited consolidated interim financial statements and notes thereto have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions for SEC 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, 2018
through the date this Quarterly Report on Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP and determined that there were no material subsequent events requiring recognition or disclosure.
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ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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(b) Uses of Estimates
In preparing the unaudited consolidated interim financial statements in conformity with GAAP, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. These assumptions and estimates affect the reported values of assets and liabilities as of the balance sheet 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 circumstances. Changes in those estimates resulting from continuing change in the economic environment and other factors will be reflected in the consolidated financial statements and results of operations in future periods.
As discussed in the Company's
2017
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
2017
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
2017
Annual Report on Form 10-K.
(c) Restricted Instruments
Certain of the Company's derivative agreements contain provisions for collateral to be posted if the derivative exposure exceeds a threshold amount. When the Company has pledged cash as collateral for this purpose, the cash is carried as restricted cash within cash and cash equivalents. See Note 7, "Derivatives and Hedging Activities" for more information about the Company's collateral related to its derivatives.
The Bank is also required by the Federal Reserve Bank of Boston (the "FRB") to maintain in reserves certain amounts of vault cash and/or deposits with the FRB. The average daily cash balance on hand for reserve requirements included in “Cash and Due from Banks” was approximately
$8.6 million
, based on the two week computation period encompassing
June 30, 2018
.
As a member of the Federal Home Loan Bank of Boston (the "FHLB"), the Company is required to purchase certain levels of FHLB capital stock at par value in association with outstanding advances from the FHLB. From time to time, the FHLB may initiate the repurchase, at par value, of "excess" levels of its capital stock held by member banks. This stock is classified as a restricted investment and 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) Revenue Recognition-Accounting Standard Codification (“ASC”) Topic 606
On January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers-Topic 606." ("ASC 606") The core principles require an entity to recognize revenue to depict the transfer of goods and services to customers as performance obligations are satisfied. While the majority of the Company’s revenue is generated from contracts with customers, our primary sources of revenue, interest and dividend income (primarily loan interest income), are outside of the scope of ASC 606 and accounted for under other ASC topics. We have not identified any material changes needed in our process of recording revenue or any income statement reclassifications necessary upon the adoption of the new revenue recognition standard.
The primary areas of non-interest income on the Company's Consolidated Statements of Income that are within the scope of ASC 606 are discussed below.
Investment advisory fees consist of income generated through Enterprise Wealth Management and Enterprise Wealth Services. Enterprise Wealth Management income is primarily generated by managing customers' financial assets. Revenue is recognized as our performance obligation is completed each month. Enterprise Wealth Services revenue is generated through a third-party arrangement to refer, manage and service customers. For new sales and referrals along with transactional type
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ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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charges, the performance obligation is based on a point in time and the payment is received and revenue is recognized in the same month as the revenue generating activity. For managing and servicing customers, revenue is recognized when our performance obligation is completed each month.
Deposit and interchange fees are comprised of deposit account related charges and income generated from electronic payment interchanges. Deposit account charges consist of certain transactional analysis fees net of earning balance credits, monthly account service fees, and transactional fees such as overdraft fees. Analysis and monthly services fees are recognized over the period the service is performed. For transactional fees, the performance obligation and the revenue is recognized at a point of time and payment is typically received as the service is rendered. Interchange income is generated primarily from retail debit card transactions processed through the card payment network. The performance obligation and the revenue are recognized when the service is performed.
The following non-interest income components are not subject to ASC 606: income on bank-owned life insurance, net gains on sales of investment securities, and net gains on sales of loans, and are covered under other ASC topics. The remaining revenue items in non-interest income are not material.
For further information on the Company's adoption of ASU 2014-09, see Item (f) "Recent Accounting Pronouncements" under the subheading "Accounting pronouncements adopted by the Company" below in this Note 1.
See also the Company's most recent 2017 Annual Report on Form 10-K Note 1, "Summary of Significant Accounting Policies," to the Company's consolidated financial statements for additional accounting policies on revenue recognition related to loans, investments, gains and losses on debt security sales, and net gains on loans held for sale.
(e) Income Taxes
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and in the states of Massachusetts and New Hampshire within the directives of the respective enacted tax legislation. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax expense or benefit attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities will be adjusted accordingly through the provision for income taxes in the period that includes the enactment date.
The Company's policy is to classify interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company's judgment changes regarding an uncertain tax position.
The income tax provisions will differ from the expense that would result from applying the federal statutory rate to income before taxes, due primarily to the impact of tax-exempt interest from certain investment securities, loans and bank-owned life insurance ("BOLI") and tax benefits from equity compensation deductions.
The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at
June 30, 2018
. The Company is subject to U.S. federal and state income tax examinations by taxing authorities for the
2014
through
2017
tax years.
(f) Recent Accounting Pronouncements
Accounting pronouncements adopted by the Company
In May 2014, the Financial Accounting Standards Board ("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 the first quarter of 2018, the Company adopted ASU 2014-09. Because the largest portion of the Company's revenue, interest income and various loan fees, is specifically excluded from the scope of this ASU, and because
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ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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the Company recognizes the majority of the remaining revenue sources in a manner that is consistent with this ASU, the adoption of this standard in the first quarter of 2018 did not materially impact the Company's consolidated financial statements, results of operations or disclosures.
For further information regarding the Company's revenue policies see Item (d) "Revenue Recognition-ASC Topic 606" above in this Note 1.
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, ASU No. 2016-01:
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•
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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;
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•
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Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and
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•
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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.
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Because the Company's investment in equity securities at
June 30, 2018
was immaterial, the adoption of this ASU by the Company in the first quarter of 2018 did not have a material impact on the Company's consolidated financial statements, results of operations or disclosures. The fair value changes of equity securities that will be recognized in net income in the future will depend on the amount of dollars invested and the magnitude of changes in equity market values.
For further information regarding the Company's recognition and measurement of financial assets and liabilities see Note 2, "Investment Securities," and Note 12, "Fair Value Measurements" in this Form 10-Q.
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 in this update are intended to reduce diversity in practice related to the presentation of eight specific cash flow issues. Because this amendment primarily impacts the presentation and classification of information, this ASU did not materially impact the Company's consolidated financial statements and results of operations upon adoption in the first quarter of 2018.
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. Because this amendment primarily impacts the presentation and classification of information, this ASU did not have a material impact on the Company's consolidated financial statements and results of operations upon adoption in the first quarter of 2018.
For further information regarding the Company's restricted cash see Item (c) "Restricted Instruments" above in this Note 1.
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. Because this amendment primarily impacts the presentation and classification of information, the adoption of this ASU in the first quarter of 2018 did not have a material impact on the Company's consolidated financial statements and results of operations.
For further information regarding the Company's compensation retirement benefits see Note 9, "Supplemental Retirement Plans and Other Post-retirement Benefit Obligations."
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
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ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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exempt an entity from modification accounting under topic 718. The adoption of this ASU in the first quarter of 2018 did not have an impact on the Company's consolidated financial statements, results of operations or disclosures because to date the Company has not made any such modifications.
For further information regarding the Company's stock compensation see Note 10, "Stock-Based Compensation."
Accounting pronouncements not yet adopted by the Company (in order of effective date of implementation)
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842),"
which supersedes previous leasing guidance in Topic 840. 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 years beginning after December 15, 2018, including interim periods within those fiscal years. The FASB has since issued additional related ASU amendments intended to clarify and improve certain aspects of the guidance and implementation of Topic 842 but do not change the core principles of the guidance in Topic 842. The effective dates are the same as the effective date in Topic 842. In accordance with the guidance as amended, the Company may elect to recognize a cumulative effect adjustment to retained earnings upon adoption or use the modified retrospective transition approach for lessees for capital and operating leases existing at, or entered into after, January 1, 2017 for the Company (the beginning of the earliest comparative period presented) in the consolidated financial statements, with certain practical expedients available.
The Company is currently evaluating the effects of this ASU on the Company's consolidated financial statements, results of operations and disclosures. Based on the Company's evaluation to date, management believes the only significant implication of this ASU on the Company relates to operating leases of our facilities, mainly branch leases. As of
June 30, 2018
, the Company had leases on
17
of its locations, including branches and part of its main campus, and 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 June 2018, the FASB issued ASU No. 2018-07, "Compensation-Stock-Based Compensation (Topic 718): Improvements to Nonemployee Shared-Based Payment Accounting."
The amendments in the ASU expand the scope of Topic 718 to include share based payment transactions for acquiring goods and services from nonemployees except for share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract. Additionally, Topic 718 has been updated for specific guidance on inputs to an option pricing model and the attribution of cost (that is, the period of time over which share-based payment awards vest and the pattern of cost recognition over that period). The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. From time to time, the Company issues shares to community members for consulting on regional advisory councils. These shares vest immediately and the cost, which is deemed to be immaterial, is expensed in the period in which the services are rendered and is based on the market price on the date of grant. The adoption of this standard will not have a material impact on the Company's consolidated financial statements, results of operations or disclosures.
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 (commonly known as "CECL").
The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the 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
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ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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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 fair 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.
In April, 2018 banking regulators issued a proposed revision to their capital rules that addresses the regulatory capital treatment of credit loss allowances under the CECL methodology and, if enacted as proposed, would allow banking organizations to phase in the day-one regulatory capital effects of CECL adoption over three years.
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, capital, and disclosures and controls. The impact of the adoption of ASU No. 2016-13 on the Company's operations, financial results, disclosures, and controls is under evaluation.
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 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
$5.7
million at both
June 30, 2018
and
December 31, 2017
. This asset is related to the Company’s acquisition of
two
branch offices in July 2000. The Company does not expect the adoption of ASU No. 2017-01 to have a material impact on the Company's consolidated financial statements and results of operations.
(2)
Investment Securities
As of
June 30, 2018
, the investment portfolio was primarily comprised of debt securities, with a small portion of the portfolio invested in equity securities. The Company had only debt securities at
December 31, 2017
, as the equity portfolio was liquidated during 2017, in order to reduce the magnitude of the impact from market fluctuations on earnings due to new accounting rules in effect on January 1, 2018.
See Note 12, "Fair Value Measurements," below for further information regarding the Company's fair value measurements for available-for-sale securities and refer to Note 1, Item (c) "Restricted Instruments" for information regarding the Company's investment in FHLB stock.
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ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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Debt Securities
The amortized cost and fair values of debt securities at the dates specified are summarized as follows:
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June 30, 2018
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(Dollars in thousands)
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Amortized
cost
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Unrealized
gains
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Unrealized
losses
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Fair Value
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Federal agency obligations
(1)
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$
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48,830
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$
|
—
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$
|
508
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|
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$
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48,322
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Residential federal agency MBS
(1)
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155,088
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5
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|
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4,253
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|
150,840
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Commercial federal agency MBS
(1)
|
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74,403
|
|
|
—
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|
2,238
|
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|
72,165
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Municipal securities
|
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138,873
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|
505
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1,791
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|
137,587
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Corporate bonds
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11,679
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4
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|
|
314
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|
|
11,369
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Certificates of deposits
(2)
|
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950
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|
—
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8
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|
942
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Total debt securities, at fair value
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$
|
429,823
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$
|
514
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$
|
9,112
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$
|
421,225
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December 31, 2017
|
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(Dollars in thousands)
|
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Amortized
cost
|
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Unrealized
gains
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Unrealized
losses
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Fair Value
|
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Federal agency obligations
(1)
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$
|
51,769
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|
$
|
30
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|
|
$
|
82
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|
|
$
|
51,717
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Residential federal agency MBS
(1)
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|
141,054
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|
|
71
|
|
|
971
|
|
|
140,154
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Commercial federal agency MBS
(1)
|
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66,777
|
|
|
9
|
|
|
286
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|
|
66,500
|
|
|
Municipal securities
|
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132,603
|
|
|
2,097
|
|
|
354
|
|
|
134,346
|
|
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Corporate bonds
|
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11,546
|
|
|
63
|
|
|
67
|
|
|
11,542
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Certificates of deposits
(2)
|
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950
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|
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—
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3
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|
947
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Total debt securities, at fair value
|
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$
|
404,699
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$
|
2,270
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|
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$
|
1,763
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$
|
405,206
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__________________________________________
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(1)
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These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as, investments guaranteed by Ginnie Mae ("GNMA"), a wholly-owned government entity.
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(2)
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Certificates of deposit ("CDs") represent term deposits issued by banks that are subject to FDIC insurance and purchased on the open market.
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Included in the residential and commercial federal agency mortgage-backed securities ("MBS") categories were collateralized mortgage obligations ("CMOs") issued by U.S. agencies with fair values totaling
$189.7 million
and
$171.7 million
at
June 30, 2018
and
December 31, 2017
, respectively.
As of the dates reflected in the tables above, all of the Company’s debt securities were classified as available-for-sale and carried at fair value. Net unrealized appreciation and depreciation on debt securities available-for-sale, net of applicable income taxes, are 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 losses on debt securities that are deemed OTTI are generally charged to earnings, as described further in Note 1, "Summary of Significant Accounting Policies" under Item (d) "Investments" to the Company's consolidated financial statements in the Company's recent
2017
Annual Report on Form 10-K. Gains or losses will be recognized in the income statement if the securities are sold.
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ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
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The following tables summarize debt securities 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, 2018
and
December 31, 2017
.
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|
|
|
|
|
June 30, 2018
|
|
|
|
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
|
|
$
|
48,321
|
|
|
$
|
508
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,321
|
|
|
$
|
508
|
|
|
15
|
|
|
Residential federal agency MBS
|
|
142,321
|
|
|
3,939
|
|
|
6,031
|
|
|
314
|
|
|
148,352
|
|
|
4,253
|
|
|
44
|
|
|
Commercial federal agency MBS
|
|
67,146
|
|
|
2,004
|
|
|
5,019
|
|
|
234
|
|
|
72,165
|
|
|
2,238
|
|
|
20
|
|
|
Municipal securities
|
|
80,198
|
|
|
1,258
|
|
|
9,820
|
|
|
533
|
|
|
90,018
|
|
|
1,791
|
|
|
140
|
|
|
Corporate bonds
|
|
7,793
|
|
|
203
|
|
|
2,529
|
|
|
111
|
|
|
10,322
|
|
|
314
|
|
|
61
|
|
|
Certificates of deposit
|
|
942
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
942
|
|
|
8
|
|
|
4
|
|
|
Total temporarily impaired debt securities
|
|
$
|
346,721
|
|
|
$
|
7,920
|
|
|
$
|
23,399
|
|
|
$
|
1,192
|
|
|
$
|
370,120
|
|
|
$
|
9,112
|
|
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
$
|
34,344
|
|
|
$
|
82
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
34,344
|
|
|
$
|
82
|
|
|
9
|
|
|
Residential federal agency MBS
|
|
109,308
|
|
|
882
|
|
|
2,015
|
|
|
89
|
|
|
111,323
|
|
|
971
|
|
|
30
|
|
|
Commercial federal agency MBS
|
|
35,859
|
|
|
205
|
|
|
5,190
|
|
|
81
|
|
|
41,049
|
|
|
286
|
|
|
11
|
|
|
Municipal securities
|
|
16,983
|
|
|
129
|
|
|
10,210
|
|
|
225
|
|
|
27,193
|
|
|
354
|
|
|
50
|
|
|
Corporate bonds
|
|
2,802
|
|
|
23
|
|
|
2,913
|
|
|
44
|
|
|
5,715
|
|
|
67
|
|
|
33
|
|
|
Certificates of deposit
|
|
947
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
947
|
|
|
3
|
|
|
4
|
|
|
Total temporarily impaired debt securities
|
|
$
|
200,243
|
|
|
$
|
1,324
|
|
|
$
|
20,328
|
|
|
$
|
439
|
|
|
$
|
220,571
|
|
|
$
|
1,763
|
|
|
137
|
|
During the
six months ended
June 30, 2018
and
2017
, the Company did not record any fair value impairment charges (OTTI) on its investments in debt securities. At
June 30, 2018
, management did not consider any debt securities to have OTTI and attributes the unrealized losses to increases in current market yields compared to the yields at the time the investments were purchased by the Company. Management regularly reviews the portfolio for debt securities with unrealized losses that are other-than-temporarily impaired. There have been no material changes to the Company's process for assessing investments for OTTI as reported in the
2017
Annual Report on Form 10-K. For more information about the Company's assessment for OTTI see Note 2, "Investment Securities" to the Company's consolidated financial statements in the Company's recent
2017
Annual Report on Form 10-K.
The contractual maturity distribution at
June 30, 2018
of total debt securities was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Amortized Cost
|
|
Fair Value
|
|
Due in one year or less
|
|
$
|
22,688
|
|
|
$
|
22,678
|
|
|
Due after one, but within five years
|
|
86,706
|
|
|
85,675
|
|
|
Due after five, but within ten years
|
|
137,030
|
|
|
133,927
|
|
|
Due after ten years
|
|
183,399
|
|
|
178,945
|
|
|
Total debt securities
|
|
$
|
429,823
|
|
|
$
|
421,225
|
|
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
$75.7
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
million
, which can be redeemed by the issuers prior to the maturity presented above. Management considers these factors when evaluating the interest rate risk in the Company's asset-liability management program.
From time to time, the Company may pledge debt securities as collateral for deposit account balances of municipal customers, and for borrowing capacity with the FHLB and the FRB. The fair value of debt securities pledged as collateral for these purposes was $
420.2 million
at
June 30, 2018
.
No
sales on debt securities were recorded during the three months ended
June 30, 2018
and
June 30, 2017
. Sales of debt securities, including pending trades based on trade date, if applicable, for the
six months ended
June 30, 2018
and
June 30, 2017
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30,
|
|
(Dollars in thousands)
|
|
2018
|
|
2017
|
|
Amortized cost of debt securities sold
(1)
|
|
$
|
668
|
|
|
$
|
2,262
|
|
|
Gross realized gains on sales
|
|
3
|
|
|
32
|
|
|
Gross realized losses on sales
|
|
(2
|
)
|
|
—
|
|
|
Total proceeds from sales of debt securities
|
|
$
|
669
|
|
|
$
|
2,294
|
|
_________________________________________
|
|
|
|
(1)
|
Amortized cost of investments sold is determined on a specific identification basis.
|
Equity Securities
As of
June 30, 2018
, the Company held equity securities with a fair value of
$949 thousand
, compared to
no
equity securities at
December 31, 2017
. At
June 30, 2018
, the equity portfolio consisted primarily of investments in a diversified group of mutual funds, with a portion of the portfolio invested in individual common stock of entities in the financial services industry.
The Company adopted ASU 2016-01 in the first quarter of 2018. As a result, the fair market value fluctuations associated with the equity portfolio are recognized in the Company’s Consolidated Statement of Income in the "Other income" line item. During the
three and six months ended
June 30, 2018
, the related fair value gain/loss on equity securities was immaterial.
There were
no
sales on equity securities in the
three or six months ended
June 30, 2018
. For the
three and six months ended
June 30, 2017
, the amortized cost of equity securities sold based on trade date, if applicable, amounted to
$252 thousand
and
$7.1 million
, resulting in net realized gains of
$229 thousand
and
$737 thousand
, respectively. The amortized cost of equity securities sold is determined on a specific identification basis.
The Company specializes in lending to business entities, non-profit organizations, professional practices and individuals. The Company's primary lending focus is on the development of high quality commercial relationships achieved through active business development efforts, long-term relationships with established commercial developers, strong community involvement and focused marketing strategies. Loans made to businesses include commercial mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and letters of credit. The Company also originates equipment lease financing for businesses. Loans made to individuals include conventional residential mortgage loans, home equity loans and lines, residential construction loans on owner-occupied 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, relationship size and source of repayment 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.
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Major classifications of loans at the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30,
2018
|
|
December 31,
2017
|
|
Commercial real estate
|
|
$
|
1,246,501
|
|
|
$
|
1,201,351
|
|
|
Commercial and industrial
|
|
493,981
|
|
|
498,802
|
|
|
Commercial construction
|
|
246,865
|
|
|
274,905
|
|
|
Total commercial loans
|
|
1,987,347
|
|
|
1,975,058
|
|
|
Residential mortgages
|
|
205,781
|
|
|
195,492
|
|
|
Home equity loans and lines
|
|
98,176
|
|
|
91,706
|
|
|
Consumer
|
|
9,756
|
|
|
10,293
|
|
|
Total retail loans
|
|
313,713
|
|
|
297,491
|
|
|
|
|
|
|
|
|
Gross loans
|
|
2,301,060
|
|
|
2,272,549
|
|
|
Deferred loan origination fees, net
|
|
(2,465
|
)
|
|
(2,645
|
)
|
|
Total loans
|
|
2,298,595
|
|
|
2,269,904
|
|
|
Allowance for loan losses
|
|
(34,797
|
)
|
|
(32,915
|
)
|
|
Net loans
|
|
$
|
2,263,798
|
|
|
$
|
2,236,989
|
|
Loan Portfolio Classifications
-
Commercial loans:
Commercial real estate loans include loans secured by both owner-use and non-owner occupied real estate. These loans are typically secured by a variety of commercial and industrial property types, including one-to-four and multi-family apartment buildings, office, industrial or mixed-use facilities, strip shopping centers, or other commercial properties, and are generally guaranteed by the principals of the borrower. Commercial real estate loans generally have repayment periods of approximately
fifteen
to
twenty-five
years. Variable interest rate loans have a variety of adjustment terms and underlying interest rate indices, and are generally fixed for an initial period before periodic rate adjustments begin.
Commercial and industrial loans include seasonal revolving lines of credit, working capital loans, equipment financing (including equipment leases), and term loans. Also included in commercial and industrial loans are loans partially guaranteed by the U.S. Small Business Administration ("SBA"), and loans under various programs and agencies. Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the borrower. Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally having fixed initial periods. Commercial and industrial loans have average repayment periods of
one
to
seven
years.
Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property, and loans for the purchase and improvement of raw land. These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrowers. In many cases, these loans move into the permanent commercial real estate portfolio when the construction phase is completed.
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 at the Bank or by independent outside inspection companies. Commercial construction loans generally are variable rate loans and lines of credit 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
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
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
$79.0 million
at
June 30, 2018
and
$91.6 million
at
December 31, 2017
. See also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.
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 mortgage 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.
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.
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
-
Consumer loans:
Consumer loans consist primarily of secured or unsecured personal loans, unsecured loans under energy efficiency financing programs in conjunction with Massachusetts public utilities, and unsecured 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, 2018
and
December 31, 2017
, the Company was servicing residential mortgage loans owned by investors amounting to
$17.8 million
and
$18.4 million
, respectively. Additionally, the Company was servicing commercial loans originated by the Company and participated out to various other institutions amounting to
$74.7 million
and
$70.7 million
at
June 30, 2018
and
December 31, 2017
, 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,
2018
|
|
December 31,
2017
|
|
Commercial real estate
|
|
$
|
211,661
|
|
|
$
|
224,703
|
|
|
Residential mortgages
|
|
187,266
|
|
|
187,524
|
|
|
Home equity
|
|
8,904
|
|
|
9,405
|
|
|
Total loans pledged to FHLB
|
|
$
|
407,831
|
|
|
$
|
421,632
|
|
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
2017
Annual Report on Form 10-K. Refer to Note 4, "Allowance for Loan Losses," to the Company's consolidated financial statements contained in the
2017
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.
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
The balances of loans as of
June 30, 2018
by portfolio classification and evaluation method are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Loans individually
evaluated for
impairment
|
|
Loans collectively
evaluated for
impairment
|
|
Gross Loans
|
|
Commercial real estate
|
|
$
|
13,234
|
|
|
$
|
1,233,267
|
|
|
$
|
1,246,501
|
|
|
Commercial and industrial
|
|
12,571
|
|
|
481,410
|
|
|
493,981
|
|
|
Commercial construction
|
|
1,686
|
|
|
245,179
|
|
|
246,865
|
|
|
Residential mortgages
|
|
562
|
|
|
205,219
|
|
|
205,781
|
|
|
Home equity loans and lines
|
|
494
|
|
|
97,682
|
|
|
98,176
|
|
|
Consumer
|
|
164
|
|
|
9,592
|
|
|
9,756
|
|
|
Total gross loans
|
|
$
|
28,711
|
|
|
$
|
2,272,349
|
|
|
$
|
2,301,060
|
|
The balances of loans as of
December 31, 2017
by portfolio classification and evaluation method are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Loans individually
evaluated for
impairment
|
|
Loans collectively
evaluated for
impairment
|
|
Gross Loans
|
|
Commercial real estate
|
|
$
|
13,739
|
|
|
$
|
1,187,612
|
|
|
$
|
1,201,351
|
|
|
Commercial and industrial
|
|
10,096
|
|
|
488,706
|
|
|
498,802
|
|
|
Commercial construction
|
|
1,624
|
|
|
273,281
|
|
|
274,905
|
|
|
Residential mortgages
|
|
397
|
|
|
195,095
|
|
|
195,492
|
|
|
Home equity loans and lines
|
|
371
|
|
|
91,335
|
|
|
91,706
|
|
|
Consumer
|
|
35
|
|
|
10,258
|
|
|
10,293
|
|
|
Total gross loans
|
|
$
|
26,262
|
|
|
$
|
2,246,287
|
|
|
$
|
2,272,549
|
|
See "Financial Condition," in Item 2, "Management's Discussion and Analysis," under the headings "Credit Risk" and "Allowance for Loan Losses" in this Form 10-Q for additional information about changes in the Company's credit quality indicators since
December 31, 2017
.
Credit quality indicators
Early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors internal credit quality indicators such as, among others, the risk classification of adversely classified loans, past due and non-accrual loans, impaired and restructured loans, and the level of foreclosure activity. 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. The classifications range from "substantially risk free" for the highest quality loans and loans that are secured by cash collateral, through a satisfactory range of "minimal," "moderate," "better than average," and "average" risk, to the regulatory problem-asset classifications of "criticized," for loans that may need additional monitoring, and the more severe adverse classifications of "substandard," "doubtful," and "loss" based on criteria established under banking regulations. Loans which are evaluated to be of weaker credit quality are placed on the "watch credit list" and reviewed on a more frequent basis by management.
Adversely classified loans may be accruing or in non-accrual status and may be additionally designated as impaired or restructured, or some combination thereof.
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
The following tables present the Company's credit risk profile for each portfolio classification by internally assigned adverse risk rating category as of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
Adversely Classified
|
|
Not Adversely
|
|
|
|
(Dollars in thousands)
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Classified
|
|
Gross Loans
|
|
Commercial real estate
|
|
$
|
16,933
|
|
|
$
|
493
|
|
|
$
|
—
|
|
|
$
|
1,229,075
|
|
|
$
|
1,246,501
|
|
|
Commercial and industrial
|
|
14,018
|
|
|
—
|
|
|
—
|
|
|
479,963
|
|
|
493,981
|
|
|
Commercial construction
|
|
1,686
|
|
|
—
|
|
|
—
|
|
|
245,179
|
|
|
246,865
|
|
|
Residential mortgages
|
|
1,502
|
|
|
—
|
|
|
—
|
|
|
204,279
|
|
|
205,781
|
|
|
Home equity loans and lines
|
|
543
|
|
|
—
|
|
|
—
|
|
|
97,633
|
|
|
98,176
|
|
|
Consumer
|
|
183
|
|
|
9
|
|
|
—
|
|
|
9,564
|
|
|
9,756
|
|
|
Total gross loans
|
|
$
|
34,865
|
|
|
$
|
502
|
|
|
$
|
—
|
|
|
$
|
2,265,693
|
|
|
$
|
2,301,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
Adversely Classified
|
|
Not Adversely
|
|
|
|
(Dollars in thousands)
|
|
Substandard
|
|
Doubtful
|
|
Loss
|
|
Classified
|
|
Gross Loans
|
|
Commercial real estate
|
|
$
|
12,895
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,188,456
|
|
|
$
|
1,201,351
|
|
|
Commercial and industrial
|
|
9,915
|
|
|
48
|
|
|
1
|
|
|
488,838
|
|
|
498,802
|
|
|
Commercial construction
|
|
1,624
|
|
|
—
|
|
|
—
|
|
|
273,281
|
|
|
274,905
|
|
|
Residential mortgages
|
|
1,355
|
|
|
—
|
|
|
—
|
|
|
194,137
|
|
|
195,492
|
|
|
Home equity loans and lines
|
|
513
|
|
|
—
|
|
|
—
|
|
|
91,193
|
|
|
91,706
|
|
|
Consumer
|
|
52
|
|
|
10
|
|
|
—
|
|
|
10,231
|
|
|
10,293
|
|
|
Total gross loans
|
|
$
|
26,354
|
|
|
$
|
58
|
|
|
$
|
1
|
|
|
$
|
2,246,136
|
|
|
$
|
2,272,549
|
|
Total adversely classified loans amounted to
1.54%
of total loans at
June 30, 2018
, as compared to
1.16%
at
December 31, 2017
.
Past due and non-accrual loans
The following tables present an age analysis of past due loans by portfolio classification as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
(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
|
|
$
|
5,209
|
|
|
$
|
137
|
|
|
$
|
4,149
|
|
|
$
|
9,495
|
|
|
$
|
1,237,006
|
|
|
$
|
1,246,501
|
|
|
$
|
6,512
|
|
|
Commercial and industrial
|
|
950
|
|
|
432
|
|
|
1,579
|
|
|
2,961
|
|
|
491,020
|
|
|
493,981
|
|
|
3,438
|
|
|
Commercial construction
|
|
1,710
|
|
|
—
|
|
|
—
|
|
|
1,710
|
|
|
245,155
|
|
|
246,865
|
|
|
187
|
|
|
Residential mortgages
|
|
547
|
|
|
946
|
|
|
—
|
|
|
1,493
|
|
|
204,288
|
|
|
205,781
|
|
|
429
|
|
|
Home equity loans and lines
|
|
442
|
|
|
—
|
|
|
38
|
|
|
480
|
|
|
97,696
|
|
|
98,176
|
|
|
494
|
|
|
Consumer
|
|
110
|
|
|
2
|
|
|
—
|
|
|
112
|
|
|
9,644
|
|
|
9,756
|
|
|
17
|
|
|
Total gross loans
|
|
$
|
8,968
|
|
|
$
|
1,517
|
|
|
$
|
5,766
|
|
|
$
|
16,251
|
|
|
$
|
2,284,809
|
|
|
$
|
2,301,060
|
|
|
$
|
11,077
|
|
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 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
|
|
$
|
4,200
|
|
|
$
|
69
|
|
|
$
|
3,569
|
|
|
$
|
7,838
|
|
|
$
|
1,193,513
|
|
|
$
|
1,201,351
|
|
|
$
|
6,751
|
|
|
Commercial and industrial
|
|
374
|
|
|
527
|
|
|
327
|
|
|
1,228
|
|
|
497,574
|
|
|
498,802
|
|
|
1,294
|
|
|
Commercial construction
|
|
2,526
|
|
|
518
|
|
|
—
|
|
|
3,044
|
|
|
271,861
|
|
|
274,905
|
|
|
193
|
|
|
Residential mortgages
|
|
1,931
|
|
|
93
|
|
|
89
|
|
|
2,113
|
|
|
193,379
|
|
|
195,492
|
|
|
262
|
|
|
Home equity loans and lines
|
|
491
|
|
|
120
|
|
|
12
|
|
|
623
|
|
|
91,083
|
|
|
91,706
|
|
|
463
|
|
|
Consumer
|
|
51
|
|
|
5
|
|
|
45
|
|
|
101
|
|
|
10,192
|
|
|
10,293
|
|
|
69
|
|
|
Total gross loans
|
|
$
|
9,573
|
|
|
$
|
1,332
|
|
|
$
|
4,042
|
|
|
$
|
14,947
|
|
|
$
|
2,257,602
|
|
|
$
|
2,272,549
|
|
|
$
|
9,032
|
|
At
June 30, 2018
and
December 31, 2017
, all loans past due 90 days or more were carried as non-accrual, in addition to those loans less than 90 days past due where reasonable doubt existed as to the full and timely collection of interest or principal that have also been designated as non-accrual, despite their payment due status shown in the tables above.
Non-accrual loans that were not adversely classified amounted to
$64 thousand
at
June 30, 2018
and
$21 thousand
at
December 31, 2017
. 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
0.48%
at
June 30, 2018
and
0.40%
at
December 31, 2017
.
At
June 30, 2018
, additional funding commitments for non-accrual loans were not material.
Impaired loans
Impaired loans are individually significant loans for which management considers it probable that not all amounts due (principal and interest) will be collected in accordance with the original contractual terms. Impaired loans include loans that have been modified in a troubled debt restructuring ("TDR"), see "troubled debt restructurings" below. 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 carrying value of impaired loans amounted to
$28.7 million
and
$26.3 million
at
June 30, 2018
and
December 31, 2017
, respectively. Total accruing impaired loans amounted to
$18.1 million
and
$17.4 million
at
June 30, 2018
and
December 31, 2017
, respectively, while non-accrual impaired loans amounted to
$10.6 million
and
$8.9 million
as of
June 30, 2018
and
December 31, 2017
, respectively.
The following tables set forth the recorded investment in impaired loans and the related specific allowance allocated by portfolio classification as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2018
|
|
(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
|
|
$
|
14,436
|
|
|
$
|
13,234
|
|
|
$
|
13,029
|
|
|
$
|
205
|
|
|
$
|
42
|
|
|
Commercial and industrial
|
|
13,003
|
|
|
12,571
|
|
|
7,539
|
|
|
5,032
|
|
|
2,621
|
|
|
Commercial construction
|
|
1,747
|
|
|
1,686
|
|
|
1,686
|
|
|
—
|
|
|
—
|
|
|
Residential mortgages
|
|
687
|
|
|
562
|
|
|
429
|
|
|
133
|
|
|
3
|
|
|
Home equity loans and lines
|
|
712
|
|
|
494
|
|
|
494
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
|
165
|
|
|
164
|
|
|
147
|
|
|
17
|
|
|
17
|
|
|
Total
|
|
$
|
30,750
|
|
|
$
|
28,711
|
|
|
$
|
23,324
|
|
|
$
|
5,387
|
|
|
$
|
2,683
|
|
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 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
|
|
$
|
15,132
|
|
|
$
|
13,739
|
|
|
$
|
12,850
|
|
|
$
|
889
|
|
|
$
|
59
|
|
|
Commercial and industrial
|
|
10,458
|
|
|
10,096
|
|
|
7,053
|
|
|
3,043
|
|
|
1,284
|
|
|
Commercial construction
|
|
1,678
|
|
|
1,624
|
|
|
1,624
|
|
|
—
|
|
|
—
|
|
|
Residential mortgages
|
|
511
|
|
|
397
|
|
|
262
|
|
|
135
|
|
|
5
|
|
|
Home equity loans and lines
|
|
543
|
|
|
371
|
|
|
371
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
|
36
|
|
|
35
|
|
|
—
|
|
|
35
|
|
|
35
|
|
|
Total
|
|
$
|
28,358
|
|
|
$
|
26,262
|
|
|
$
|
22,160
|
|
|
$
|
4,102
|
|
|
$
|
1,383
|
|
The following table presents the average recorded investment in impaired loans by portfolio classification and the related interest recognized during the three months indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Three Months Ended June 30, 2017
|
|
(Dollars in thousands)
|
|
Average recorded
investment
|
|
Interest income
recognized
|
|
Average recorded
investment
|
|
Interest income
recognized
|
|
Commercial real estate
|
|
$
|
13,506
|
|
|
$
|
95
|
|
|
$
|
14,403
|
|
|
$
|
78
|
|
|
Commercial and industrial
|
|
11,601
|
|
|
89
|
|
|
12,367
|
|
|
76
|
|
|
Commercial construction
|
|
1,676
|
|
|
23
|
|
|
1,622
|
|
|
22
|
|
|
Residential mortgages
|
|
644
|
|
|
1
|
|
|
279
|
|
|
—
|
|
|
Home equity loans and lines
|
|
499
|
|
|
—
|
|
|
565
|
|
|
—
|
|
|
Consumer
|
|
66
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
Total
|
|
$
|
27,992
|
|
|
$
|
208
|
|
|
$
|
29,251
|
|
|
$
|
176
|
|
The following table presents the average recorded investment in impaired loans by portfolio classification and the related interest recognized during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2017
|
|
(Dollars in thousands)
|
|
Average recorded
investment
|
|
Interest income
recognized
|
|
Average recorded
investment
|
|
Interest income recognized
|
|
Commercial real estate
|
|
$
|
13,611
|
|
|
$
|
189
|
|
|
$
|
13,891
|
|
|
$
|
179
|
|
|
Commercial and industrial
|
|
11,124
|
|
|
166
|
|
|
12,623
|
|
|
181
|
|
|
Commercial construction
|
|
1,656
|
|
|
45
|
|
|
2,017
|
|
|
49
|
|
|
Residential mortgages
|
|
629
|
|
|
—
|
|
|
283
|
|
|
—
|
|
|
Home equity loans and lines
|
|
487
|
|
|
—
|
|
|
552
|
|
|
(2
|
)
|
|
Consumer
|
|
49
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
Total
|
|
$
|
27,556
|
|
|
$
|
400
|
|
|
$
|
29,380
|
|
|
$
|
407
|
|
At
June 30, 2018
, additional funding commitments for impaired loans was not material. 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 one or a combination of the following: a reduction in interest rate to a below market rate, taking into account the credit quality of the note; extension of additional credit based on receipt of adequate collateral; or a deferment or reduction of payments (principal or interest) which materially alters the Bank's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan's origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. TDR loans are included in the impaired loan category and, as such, these loans are individually reviewed and evaluated and a specific reserve is assigned for the amount of the estimated probable credit loss.
Total TDR loans, included in the impaired loan balances above, as of
June 30, 2018
and
December 31, 2017
, were
$21.0 million
and
$20.3 million
, respectively. TDR loans on accrual status amounted to
$18.1 million
and
$17.4 million
at
June 30, 2018
and
December 31, 2017
, respectively. TDR loans included in non-performing loans amounted to
$2.9 million
at both
June 30, 2018
and
December 31, 2017
. The Company continues to work with customers, particularly commercial relationships, and enters into loan modifications (which may or may not be TDRs) to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the individual financial circumstances and future prospects of the borrower.
At
June 30, 2018
, additional funding commitments for TDR loans were not material. The Company's obligation to fulfill the additional funding commitments on TDR loans is generally contingent on the borrower's compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company's discretion.
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
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
(Dollars in thousands)
|
|
Number of
restructurings
|
|
Amount
|
|
Number of
restructurings
|
|
Amount
|
|
Loan advances with adequate collateral
|
|
—
|
|
|
$
|
—
|
|
|
1
|
|
|
$
|
367
|
|
|
Extended maturity date
|
|
—
|
|
|
—
|
|
|
6
|
|
|
5,739
|
|
|
Temporary payment reduction and payment re-amortization of remaining principal over extended term
|
|
5
|
|
|
222
|
|
|
5
|
|
|
1,086
|
|
|
Temporary interest only payment plan
|
|
2
|
|
|
148
|
|
|
7
|
|
|
1,016
|
|
|
Other payment concessions
|
|
1
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
8
|
|
|
$
|
382
|
|
|
19
|
|
|
$
|
8,208
|
|
|
Amount of specific reserves included in the allowance for loan losses associated with TDRs listed above
|
|
|
|
$
|
73
|
|
|
|
|
$
|
376
|
|
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Loans modified as TDRs during the
three
month periods ended
June 30, 2018
and
June 30, 2017
are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
(Dollars in thousands)
|
|
Number of
restructurings
|
|
Pre-modification
outstanding recorded
investment
|
|
Post-modification
outstanding recorded
investment
|
|
Number of
restructurings
|
|
Pre-modification
outstanding recorded
investment
|
|
Post-modification
outstanding recorded
investment
|
|
Commercial real estate
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
3
|
|
|
$
|
929
|
|
|
$
|
928
|
|
|
Commercial and industrial
|
|
2
|
|
|
20
|
|
|
17
|
|
|
10
|
|
|
2,213
|
|
|
2,326
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
1,420
|
|
|
1,419
|
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Home equity loans and lines
|
|
2
|
|
|
112
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
4
|
|
|
$
|
132
|
|
|
$
|
121
|
|
|
15
|
|
|
$
|
4,562
|
|
|
$
|
4,673
|
|
Payment defaults, during the
three
month period ended
June 30, 2018
and
June 30, 2017
on loans modified as TDRs within the preceding twelve months are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
(Dollars in thousands)
|
|
Number of TDRs that defaulted
|
|
Post-
modification outstanding
recorded investment
|
|
Number of TDRs that defaulted
|
|
Post-
modification outstanding
recorded investment
|
|
Commercial real estate
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Commercial and industrial
|
|
1
|
|
|
73
|
|
|
5
|
|
|
1,457
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Home equity loans and lines
|
|
1
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
2
|
|
|
$
|
85
|
|
|
5
|
|
|
$
|
1,457
|
|
Loans modified as TDRs during the
six
month periods ended
June 30, 2018
and
June 30, 2017
by portfolio classification are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
(Dollars in thousands)
|
|
Number of
restructurings
|
|
Pre-modification
outstanding recorded
investment
|
|
Post-modification
outstanding recorded
investment
|
|
Number of
restructurings
|
|
Pre-modification
outstanding recorded
investment
|
|
Post-modification
outstanding recorded
investment
|
|
Commercial real estate
|
|
2
|
|
|
$
|
131
|
|
|
$
|
148
|
|
|
4
|
|
|
$
|
1,304
|
|
|
$
|
1,299
|
|
|
Commercial and industrial
|
|
4
|
|
|
162
|
|
|
130
|
|
|
12
|
|
|
5,165
|
|
|
5,290
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
1,626
|
|
|
1,619
|
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Home equity loans and lines
|
|
2
|
|
|
112
|
|
|
104
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
8
|
|
|
$
|
405
|
|
|
$
|
382
|
|
|
19
|
|
|
$
|
8,095
|
|
|
$
|
8,208
|
|
There were
$22 thousand
subsequent charge-offs associated with the new TDRs noted in the table above during the
six months ended
June 30, 2018
and there were
none
for the
six months ended
June 30, 2017
.
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Payment defaults by portfolio classification, during the
six
month period ended
June 30, 2018
and
June 30, 2017
on loans modified as TDRs within the preceding twelve months are detailed below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
|
(Dollars in thousands)
|
|
Number of TDRs that defaulted
|
|
Post-
modification outstanding
recorded investment
|
|
Number of TDRs that defaulted
|
|
Post-
modification outstanding
recorded investment
|
|
Commercial real estate
|
|
—
|
|
|
$
|
—
|
|
|
2
|
|
|
$
|
734
|
|
|
Commercial and industrial
|
|
1
|
|
|
73
|
|
|
6
|
|
|
1,687
|
|
|
Commercial construction
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Residential mortgages
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Home equity loans and lines
|
|
1
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
Consumer
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
2
|
|
|
$
|
85
|
|
|
8
|
|
|
$
|
2,421
|
|
Other real estate owned (
"
OREO
"
)
The Company carried
no
OREO at
June 30, 2018
,
December 31, 2017
or
June 30, 2017
. There were
no
additions, sales or write downs on OREO during the
six months ended
June 30, 2018
or
2017
.
At
June 30, 2018
, the Company had
no
consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions compared with
$101 thousand
at
December 31, 2017
.
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
$34.8 million
at
June 30, 2018
, compared to
$32.9 million
at
December 31, 2017
, and
$32.0 million
at
June 30, 2017
. For the
six months ended
June 30, 2018
and
June 30, 2017
, the provision for loan losses amounted to
$1.9 million
and
$405 thousand
, respectively. The increase in the provision for loan losses compared to the prior year periods, which was largely in the first quarter or 2018, was due primarily to an increase in the balance of the allowance for loan losses allocated to impaired and classified loans of
$1.6 million
for the
six months ended
June 30, 2018
, compared to a
decrease
of
$745 thousand
during the
six months ended
June 30, 2017
.
The allowance for loan losses to total loans ratio was
1.51%
at
June 30, 2018
,
1.45%
at
December 31, 2017
and
1.51%
at
June 30, 2017
. 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, 2018
.
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Changes in the allowance for loan losses by portfolio classification for the
three
months ended
June 30, 2018
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, 2018
|
|
$
|
18,300
|
|
|
$
|
11,171
|
|
|
$
|
3,283
|
|
|
$
|
914
|
|
|
$
|
629
|
|
|
$
|
227
|
|
|
$
|
34,524
|
|
|
Provision
|
|
114
|
|
|
(109
|
)
|
|
261
|
|
|
25
|
|
|
16
|
|
|
(7
|
)
|
|
300
|
|
|
Recoveries
|
|
—
|
|
|
57
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12
|
|
|
69
|
|
|
Less: Charge offs
|
|
—
|
|
|
76
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
96
|
|
|
Ending Balance at June 30, 2018
|
|
$
|
18,414
|
|
|
$
|
11,043
|
|
|
$
|
3,544
|
|
|
$
|
939
|
|
|
$
|
645
|
|
|
$
|
212
|
|
|
$
|
34,797
|
|
Changes in the allowance for loan losses by portfolio classification for the
six months ended
June 30, 2018
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, 2017
|
|
$
|
17,545
|
|
|
$
|
9,669
|
|
|
$
|
3,947
|
|
|
$
|
904
|
|
|
$
|
608
|
|
|
$
|
242
|
|
|
$
|
32,915
|
|
|
Provision
|
|
869
|
|
|
1,326
|
|
|
(403
|
)
|
|
35
|
|
|
36
|
|
|
37
|
|
|
1,900
|
|
|
Recoveries
|
|
—
|
|
|
165
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
17
|
|
|
183
|
|
|
Less: Charge offs
|
|
—
|
|
|
117
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
201
|
|
|
Ending Balance at June 30, 2018
|
|
$
|
18,414
|
|
|
$
|
11,043
|
|
|
$
|
3,544
|
|
|
$
|
939
|
|
|
$
|
645
|
|
|
$
|
212
|
|
|
$
|
34,797
|
|
|
Ending allowance balance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allocated to loans individually evaluated for impairment
|
|
$
|
42
|
|
|
$
|
2,621
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
2,683
|
|
|
Allocated to loans collectively evaluated for impairment
|
|
$
|
18,372
|
|
|
$
|
8,422
|
|
|
$
|
3,544
|
|
|
$
|
936
|
|
|
$
|
645
|
|
|
$
|
195
|
|
|
$
|
32,114
|
|
Changes in the allowance for loan losses by portfolio classification 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 classification 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
|
|
Deposits are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
June 30, 2018
|
|
December 31, 2017
|
|
Non-interest bearing demand deposits
|
|
$
|
739,890
|
|
|
$
|
705,846
|
|
|
Interest-bearing checking
|
|
442,944
|
|
|
391,111
|
|
|
Savings
|
|
198,666
|
|
|
193,385
|
|
|
Money market
|
|
859,611
|
|
|
807,931
|
|
|
Certificates of deposit $250,000 or less
|
|
184,858
|
|
|
150,445
|
|
|
Certificates of deposit more than $250,000
|
|
55,585
|
|
|
45,154
|
|
|
Total customer deposits
|
|
2,481,554
|
|
|
2,293,872
|
|
|
Brokered deposits
(1)
|
|
178,800
|
|
|
147,490
|
|
|
Total deposits
|
|
$
|
2,660,354
|
|
|
$
|
2,441,362
|
|
___________________________________
|
|
|
|
(1)
|
Brokered CDs $250,000 and under.
|
Total customer deposits (deposits excluding brokered deposits) include reciprocal balances received from participating banks in nationwide deposit networks as a result of our customers electing to participate in Company offered programs which allow for enhanced FDIC insurance. Essentially, the equivalent of the customers' original deposited funds comes back to the Company as customer deposits within the appropriate category under total customer deposits. The Company's balances in these reciprocal products were
$301.9 million
and
$249.6 million
at
June 30, 2018
and
December 31, 2017
, 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
|
The Company had
$501 thousand
in borrowed funds at
June 30, 2018
linked to outstanding commercial loans under various community reinvestment programs of the FHLB. At
December 31, 2017
, borrowed funds consisted of FHLB borrowings amounting to
$89.0 million
.
The Company had
$14.9 million
of outstanding subordinated debt (net of deferred issuance costs) at
June 30, 2018
and
$14.8 million
at
December 31, 2017
, 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. Original debt issuance costs were
$190
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
thousand
and have been netted against the subordinated debt on the consolidated balance sheet in accordance with accounting guidance. These costs are being amortized to interest expense over the life of the Notes.
The Notes are intended to qualify as Tier 2 capital for regulatory purposes and pay interest at a fixed rate of
6.00%
per annum through
January 30, 2025
, after which floating rates apply. Refer to Note 7, "Borrowed Funds and Subordinated Debt," to the Company's consolidated financial statements contained in the
2017
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. See Note 2, "Investments," and Note 3, "Loans" above for further information regarding securities and loans pledged for borrowed funds. Refer to the "Liquidity" section in Item 2, "Management's Discussion and Analysis," for additional information about other sources of funding available to the Company.
|
|
|
|
(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, 2018
and
December 31, 2017
, the estimated fair value of the Company's interest rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.
The Company may use interest rate swaps as part of its interest rate risk management strategy. Interest rate swap agreements may be entered into as hedges against future interest rate fluctuations on specifically identified assets or liabilities. The Company had no derivative fair value hedges or derivative cash flow hedges at
June 30, 2018
or
December 31, 2017
.
The Company has a “Back-to-Back Swap” program whereby the Bank enters into an interest rate swap with a qualified commercial banking customer and simultaneously enters into an equal and opposite interest rate swap with a swap counterparty. The customer interest rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to a fixed-rate payment.
The 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; rather, the transactions result from a service the Company provides to certain commercial 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, 2018
or
June 30, 2017
.
Each Back-to-Back Swap transaction consists of two interest-rate swaps (a customer swap and offsetting counterparty swap) and amounted to a total number of
six
interest rate swaps outstanding at both
June 30, 2018
and
December 31, 2017
, with an aggregate notional amount of
$29.0 million
and
$29.4 million
on those respective dates.
Asset derivatives are included in the line item prepaid expenses and other assets and liability derivatives are included in the accrued expenses and other liabilities line item on the consolidated balance sheets, respectively.
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
The table below presents the fair value and classification of the Company’s derivative financial instruments for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
As of December 31, 2017
|
|
(Dollars in thousands)
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Interest rate contracts - pay floating, received fixed
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
25
|
|
|
$
|
568
|
|
|
Interest rate contracts - pay fixed, receive floating
|
|
1,000
|
|
|
—
|
|
|
543
|
|
|
—
|
|
|
Total interest rate swaps
|
|
$
|
1,000
|
|
|
$
|
1,000
|
|
|
$
|
568
|
|
|
$
|
568
|
|
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. The counterparty was rated A / A2 by S&P and Moody’s, respectively, at
June 30, 2018
. Additionally, counterparty interest rate swaps contain provisions for collateral to be posted if the derivative exposure exceeds a threshold amount.
The Company had credit risk exposure amounting to
$1.0 million
and
$543 thousand
at
June 30, 2018
and
December 31, 2017
, respectively, relating to interest rate swaps with counterparties. The Company held cash collateral of
$930 thousand
at
June 30, 2018
and
$480 thousand
at
December 31, 2017
. Collateral held by the Company is restricted and not considered an asset of the Company. Therefore, it is not carried on the Company's consolidated balance sheet.
Interest rate swaps with the counterparty are subject to master netting agreements. The table below presents the Company's asset derivative positions and the potential effect of those netting arrangements on its financial position, as of the periods presented. Interest rate swaps with customers are not subject to master netting agreements and therefore are not included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2018
|
|
(Dollars in thousands)
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Statement of Financial Position
|
|
Net Amounts of Assets Presented in the Statement of Financial Position
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
Interest rate contracts - pay fixed, receive floating
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
(Dollars in thousands)
|
|
Gross Amounts of Recognized Assets
|
|
Gross Amounts Offset in the Statement of Financial Position
|
|
Net Amounts of Assets Presented in the Statement of Financial Position
|
|
Asset Derivatives
|
|
|
|
|
|
|
|
Interest rate contracts - pay fixed, receive floating
|
|
$
|
568
|
|
|
$
|
25
|
|
|
$
|
543
|
|
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
The Company's interest rate swaps with counterparties contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness.
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, 2018
the Company had
one
such participation loan and at
December 31, 2017
the Company had
two
. Management considers the risk of material swap loss exposure related to these participation loans to be unlikely based on the swap market value, as well as the borrower's financial and collateral strength.
Shares Authorized and Share Issuance
The Company’s authorized capital is divided into common stock and preferred stock. The Company is authorized to issue
40,000,000
shares of common stock, with a par value of
$0.01
, and as of
June 30, 2018
had
11,696,204
shares issued and outstanding. The Company is authorized to issue
1,000,000
shares of preferred stock, with a par value of
$0.01
.
No
preferred stock has been issued as of the date of this Form 10-Q. Holders of common stock are entitled to
one
vote per share, and are entitled to receive dividends if and when declared by the Company's Board of Directors (the "Board"). Dividend and liquidation rights of the common stock may be subject to the rights of any outstanding preferred stock.
The Company has a shareholders rights plan. Under the plan, each share of common stock includes a right to purchase under certain circumstances
one one-hundredth
of a share of the Company’s Series A Junior Participating Preferred Stock, par value
$0.01
per share, at a purchase price of
$122.50
per
one one-hundredth
of a preferred share, subject to adjustment, or, in certain circumstances, to receive cash, property, shares of common stock or other securities of the Company. The rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events that would ordinarily be associated with an unsolicited acquisition or attempted acquisition of
10%
or more of the Company’s outstanding shares of common stock. The rights have no voting or dividend privileges, and unless and until they become exercisable, have no dilutive effect on the earnings of the Company. The rights will expire, unless earlier redeemed, exchanged, or otherwise rescinded by the Company, on January 13, 2028.
The Company's stock incentive plans permit the Board to grant, under various terms, stock options (for the purchase of newly issued shares of common stock), restricted stock awards, restricted stock units and stock appreciation rights to officers and other employees, non-employee 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
114,559
shares and
117,219
shares as of
June 30, 2018
and
December 31, 2017
, 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 and returned to the pool of shares reserved for issuance under the incentive plans. 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 reacquired by a Massachusetts company will be treated as authorized but unissued shares.
The Company's stock incentive plans also allow for newly issued shares of common stock to be issued without restrictions to officers and other employees, non-employee directors and consultants. From time to time, the Company issues shares to community members for consulting on regional advisory councils and grants shares of fully vested stock as employee anniversary awards. These shares vest immediately and the cost, which is deemed to be immaterial, is expensed in the period in which the services are rendered and is based on the market price on the date of grant.
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
In addition to shares issued to employees, non-employee directors and community members for consulting on regional advisory councils, and shares issued through equity offerings, 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.
See Note 10, "Stock-Based Compensation," below for additional information regarding the Company's stock incentive plans. See Note 11, "Earnings per Share," below for additional information regarding unvested participating restricted awards and the Company's earnings per share calculation.
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. At
June 30, 2018
, the Company's only other comprehensive income component is the net unrealized holding gains or losses on available-for-sale debt securities, net of deferred income taxes. Prior to the adoption of ASU No. 2016-01, other comprehensive income also included unrealized holding gains or losses on available-for-sale equity securities. 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 debt securities are sold. When debt securities are sold, the reclassification of realized gains and losses on available-for-sale securities are included on the Consolidated Statements of Income under the "non-interest income" subheading on the line item "net gains 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
2017
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
$26 thousand
and
$52 thousand
for the
three and six months ended
June 30, 2018
, respectively, compared to
$29 thousand
and
$58 thousand
for the
three and six months ended
June 30, 2017
, respectively.
Benefits paid amounted to
$69 thousand
and
$138 thousand
for both the
three and six months ended
June 30, 2018
and
June 30, 2017
, respectively. The Company anticipates accruing an additional
$52 thousand
to the SERP during the remainder of
2018
.
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.
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
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)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Service Cost
|
|
$
|
(18
|
)
|
|
$
|
(3
|
)
|
|
$
|
(35
|
)
|
|
$
|
(6
|
)
|
|
Interest Cost
|
|
62
|
|
|
23
|
|
|
124
|
|
|
46
|
|
|
Net periodic benefit cost
|
|
$
|
44
|
|
|
$
|
20
|
|
|
$
|
89
|
|
|
$
|
40
|
|
|
|
|
|
(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, 2018
, an aggregate of
412,212
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
$500 thousand
and
$885 thousand
for the
three and six months ended
June 30, 2018
, compared to
$496 thousand
and
$820 thousand
for the
three and six months ended
June 30, 2017
.
A tax benefit associated with employee exercises and vesting of stock compensation of approximately
$235 thousand
was recorded as a reduction of the Company's income tax expense for the
six months ended
June 30, 2018
, compared with
$788 thousand
for the
six months ended
June 30, 2017
. These amounts, treated as discrete tax items in the period in which they occur, will vary from year to year as a function of the volume of share-based payments vested or exercised and the then current market price of the Company's stock in comparison to the compensation cost recognized in the Company's consolidated financial statements.
Stock Option Awards
The Company recognized stock-based compensation expense related to stock option awards of
$51 thousand
and
$102 thousand
for the
three and six months ended
June 30, 2018
, respectively, compared to
$41 thousand
and
$103 thousand
for the
three and six months ended
June 30, 2017
, respectively.
The table below provides a summary of the options granted, including the fair value as a percentage of the market value of the stock at the date of grant and the average assumptions used during the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2018
|
|
2017
|
|
Options granted
|
14,755
|
|
|
15,009
|
|
|
Term in years
|
10
|
|
|
10
|
|
|
Weighted average assumptions used in the fair value model:
|
|
|
|
|
Expected volatility
|
37
|
%
|
|
40
|
%
|
|
Expected dividend yield
|
2.10
|
%
|
|
2.09
|
%
|
|
Expected life in years
|
6.5
|
|
|
7
|
|
|
Risk-free interest rate
|
2.86
|
%
|
|
2.35
|
%
|
|
Weighted average market price on date of grants
|
$
|
34.33
|
|
|
$
|
30.46
|
|
|
Per share weighted average fair value
|
$
|
11.98
|
|
|
$
|
11.34
|
|
|
Fair value as a percentage of market value at grant date
|
35
|
%
|
|
37
|
%
|
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
Options granted during the first
six
months of
2018
and
2017
generally vest
50%
in year two and
50%
in year four, on the anniversary date of the awards.
The Company utilizes the Black-Scholes option valuation model in order to determine the per share grant date fair value of option grants.
Stock Awards
Stock-based compensation expense recognized in association with stock awards amounted to
$387 thousand
and
$646 thousand
for the
three and six months ended
June 30, 2018
, respectively, compared to
$384 thousand
and
$571 thousand
for the
three and six months ended
June 30, 2017
, respectively.
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 or about 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 or about 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 (Number of underlying shares)
|
|
2018
|
|
2017
|
|
Two year vesting
|
|
7,280
|
|
|
6,944
|
|
|
Four year vesting
|
|
16,666
|
|
|
16,253
|
|
|
Performance-based vesting
|
|
20,559
|
|
|
25,623
|
|
|
Total restricted stock awards granted
|
|
44,505
|
|
|
48,820
|
|
|
Weighted average grant date fair value
|
|
$
|
34.33
|
|
|
$
|
30.46
|
|
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
$62 thousand
and
$137 thousand
for the
three and six months ended
June 30, 2018
, respectively, compared to
$71 thousand
and
$146 thousand
for the
three and six months ended
June 30, 2017
, respectively, and is included in other operating expenses. In
January 2018
, non-employee directors were issued
7,326
shares of common stock in lieu of
2017
annual cash fees of
$281 thousand
at a market value price of
$38.39
per share, the market value of the common stock on the opt-in measurement date of
January 3, 2017
.
For further information regarding the Company's stock awards, see Note 8, "Stockholders' Equity," above under the caption "Shares Authorized and Share Issuance." There have been no material changes to the terms of the Company's stock incentive plans or the terms for vesting, forfeiture and settlement for options and restricted stock awards granted and outstanding under such plans as reported in the
2017
Annual Report on Form 10-K. Refer to Note 12 "Stock-Based Compensation Plans," in the Company's
2017
Annual Report on Form 10-K for further information on the Company's stock incentive plans, stock options and restricted awards including descriptions of the assumptions used in the valuation model for stock options.
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," above for further information regarding the Company's participating securities. Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.
|
|
|
|
|
|
|
|
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,
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Basic weighted average common shares outstanding
|
11,687,182
|
|
|
11,572,430
|
|
|
11,658,046
|
|
|
11,540,796
|
|
|
Dilutive shares
|
77,229
|
|
|
80,259
|
|
|
75,345
|
|
|
84,916
|
|
|
Diluted weighted average common shares outstanding
|
11,764,411
|
|
|
11,652,689
|
|
|
11,733,391
|
|
|
11,625,712
|
|
There were
29,260
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, 2018
. 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, 2018
|
|
|
|
|
|
Fair Value Measurements using:
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
421,225
|
|
|
$
|
—
|
|
|
$
|
421,225
|
|
|
$
|
—
|
|
|
Equity securities
|
|
949
|
|
|
949
|
|
|
—
|
|
|
—
|
|
|
FHLB stock
|
|
2,618
|
|
|
—
|
|
|
—
|
|
|
2,618
|
|
|
Interest rate swaps
|
|
1,000
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
2,677
|
|
|
—
|
|
|
—
|
|
|
2,677
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
$
|
1,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
|
|
|
|
Fair Value Measurements using:
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities
|
|
$
|
405,206
|
|
|
$
|
—
|
|
|
$
|
405,206
|
|
|
$
|
—
|
|
|
FHLB stock
|
|
5,215
|
|
|
—
|
|
|
—
|
|
|
5,215
|
|
|
Interest rate swaps
|
|
568
|
|
|
—
|
|
|
568
|
|
|
—
|
|
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
2,696
|
|
|
—
|
|
|
—
|
|
|
2,696
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
568
|
|
|
$
|
—
|
|
|
$
|
568
|
|
|
$
|
—
|
|
The Company did not transfer any assets between the fair value measurement levels during the
six months ended
June 30, 2018
or the year ended
December 31, 2017
.
All of the Company's debt securities are considered "available-for-sale" and are carried at fair value. The debt security category above includes federal agency obligations, commercial and residential federal agency MBS, municipal securities, corporate bonds and 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 fair 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, 2018
compared to
$872 thousand
at
December 31, 2017
.
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 risks and observable market interest rate curves. The settlement values are based on discounted cash flow analysis, a widely accepted valuation technique, reflecting the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. Credit risk adjustments consider factors such as the likelihood of default by the Company and its counterparties, its net exposures and remaining contractual life. The change in value of interest rate swap assets and liabilities attributable to credit risk was not significant during the reported periods. Refer also to Note 7, "Derivatives and Hedging Activities," for additional information on the Company's interest rate swaps.
Letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance of a customer to a third party. The fair value of these commitments was estimated to be the fees charged to enter into similar agreements, and accordingly these fair value measures are deemed to be FASB Level 2 measurements. In accordance with the
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
FASB, the estimated fair values of these commitments are carried on the consolidated balance sheet as a liability and amortized to income over the life of the letters of credit, which are typically
one
year. The estimated fair value of these commitments carried on the consolidated balance sheet at
June 30, 2018
and
December 31, 2017
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, 2018
and
December 31, 2017
, 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, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Fair Value
|
|
Valuation Technique
|
|
Unobservable Input
|
|
Unobservable Input Value or Range
|
|
Assets measured on a recurring basis:
|
|
|
|
|
|
|
|
|
|
FHLB stock
|
|
$
|
2,618
|
|
|
FHLB Stated Par Value
|
|
N/A
|
|
N/A
|
|
Assets measured on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
Impaired loans (collateral dependent)
|
|
$
|
2,677
|
|
|
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 consolidated balance sheet.
The carrying values, estimated fair values and placement in the fair value hierarchy of the Company's consolidated financial instruments for which fair value is only disclosed but not recognized on the consolidated balance sheet at the dates indicated are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
|
|
|
|
|
|
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
|
|
$
|
657
|
|
|
$
|
657
|
|
|
$
|
—
|
|
|
$
|
657
|
|
|
$
|
—
|
|
|
Loans, net
|
|
2,263,798
|
|
|
2,237,361
|
|
|
—
|
|
|
—
|
|
|
2,237,361
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit (including brokered)
|
|
419,243
|
|
|
416,821
|
|
|
—
|
|
|
416,821
|
|
|
—
|
|
|
Borrowed funds
|
|
501
|
|
|
500
|
|
|
—
|
|
|
500
|
|
|
—
|
|
|
Subordinated debt
|
|
14,853
|
|
|
13,848
|
|
|
—
|
|
|
—
|
|
|
13,848
|
|
|
|
|
|
|
|
|
|
ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 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
|
|
$
|
208
|
|
|
$
|
208
|
|
|
$
|
—
|
|
|
$
|
208
|
|
|
$
|
—
|
|
|
Loans, net
|
|
2,236,989
|
|
|
2,236,169
|
|
|
—
|
|
|
—
|
|
|
2,236,169
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit (including brokered)
|
|
343,089
|
|
|
341,765
|
|
|
—
|
|
|
341,765
|
|
|
—
|
|
|
Borrowed funds
|
|
89,000
|
|
|
88,996
|
|
|
—
|
|
|
88,996
|
|
|
—
|
|
|
Subordinated debt
|
|
14,847
|
|
|
14,208
|
|
|
—
|
|
|
—
|
|
|
14,208
|
|
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 unused portions of lines of credit and commitments to originate loans that were short-term, at current market rates and estimated to have no significant change in fair value.