☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-33912
Enterprise Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts
04-3308902
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
222 Merrimack Street,
Lowell,
Massachusetts
01852
(Address of principal executive offices)
(Zip code)
(978)459-9000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value per share
EBTC
NASDAQ Stock Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yeso No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). x Yeso No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition for "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filerx
Non-accelerated filer ☐Smaller reporting company ☐Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐Yes x No
As of July 29, 2022, there were 12,115,248 shares of the issuer's common stock outstanding, par value $0.01 per share.
Notes to the Unaudited Consolidated Interim Financial Statements
(1)Summary of Significant Accounting Policies
(a) Organization of the Company and Basis of Presentation
The accompanying unaudited consolidated interim financial statements and these notes should be read in conjunction with the December 31, 2021 audited consolidated financial statements and notes thereto contained in the 2021 Annual Report on Form 10-K of Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our") as filed with the Securities and Exchange Commission (the "SEC") on March 10, 2022 (the "2021 Annual Report on Form 10-K"). The Company has not materially changed its significant accounting policies from those disclosed in its 2021 Annual Report on Form 10-K. See Item (c), "Recent Accounting Pronouncements," below in this Note 1.
The accompanying unaudited consolidated interim financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Enterprise Bank and Trust Company, commonly referred to as Enterprise Bank (the "Bank"). The Bank is a Massachusetts trust company and state chartered commercial bank organized in 1989. Substantially all of the Company's operations are conducted through the Bank and its subsidiaries.
The Bank's subsidiaries include Enterprise Insurance Services, LLC and Enterprise Wealth Services, LLC, both organized under the laws of the State of Delaware, to engage in insurance sales activities and offer non-deposit investment products and services, respectively, and 239 Littleton Road, LLC, organized in April 2021 under the laws of the Commonwealth of Massachusetts for the purpose of maintaining and disposing of real estate acquired through the Bank's foreclosure process. In addition, the Bank has the following subsidiaries that are incorporated in the Commonwealth of Massachusetts and classified as security corporations in accordance with applicable Massachusetts General Laws: Enterprise Security Corporation; Enterprise Security Corporation II; and Enterprise Security Corporation III. The security corporations, which hold various types of qualifying securities, are limited to conducting investment activities that the Bank itself would be allowed to conduct under applicable laws. The services offered through the Bank and its subsidiaries are managed as one strategic unit and represent the Company's only reportable operating segment.
The accompanying unaudited consolidated interim financial statements, and notes thereto, in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022 (this "Form 10-Q"), have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the SEC instructions for Quarterly Reports on Form 10-Q. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all necessary adjustments, consisting of normal recurring accruals and elimination of intercompany balances, for a fair presentation. Certain previous years' amounts in the unaudited consolidated financial statements, and notes thereto, have been reclassified to conform to the current year's presentation.Interim results are not necessarily indicative of results to be expected for the entire year, or any future period.
(b) Uses of Estimates
In preparing the unaudited consolidated interim financial statements in conformity with GAAP, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. These assumptions and estimates affect the reported values of assets and liabilities as of the balance sheet dates and income and expenses for the period then ended. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates should the assumptions and estimates used be incorrect or change over time due to changes in circumstances. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the consolidated financial statements and results of operations in future periods.
As discussed in the Company's 2021 Annual Report on Form 10-K, the most significant areas in which management applies critical assumptions and estimates are: the estimates of the allowance for credit losses ("ACL") for loans and available for sale securities, the reserve for unfunded commitments, and the impairment review of goodwill. Refer to Note 1, "Summary of Significant Accounting Policies," to the Company's audited consolidated financial statements included in the Company's 2021 Annual Report on Form 10-K for accounting policies related to these significant estimates.
Notes to the Unaudited Consolidated Interim Financial Statements
(c) Recent Accounting Pronouncements
Accounting pronouncements not yet adopted by the Company
In March 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method. This ASU clarifies the guidance on fair value hedge accounting of interest rate risk for portfolios of financial assets. The ASU amends the guidance in ASU 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, that, among other things, established the "last-of-layer" method for making the fair value hedge accounting for these portfolios more accessible. ASU 2022-01 renames that method the "portfolio layer" method and addresses feedback from stakeholders regarding its application. For entities that have adopted ASU 2017-12, ASU 2022-01 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted if an entity has adopted ASU 2017-12. The Company expects that this ASU will not have a material impact to the consolidated financial statements.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments—Credit Losses (Topic 326), Troubled Debt Restructurings and Vintage Disclosures. This ASU eliminates the accounting guidance for troubled debt restructurings by creditors that have adopted the current expected credit loss ("CECL") methodology for estimating allowances for credit losses and enhances the disclosure requirements for loan restructurings made with borrowers experiencing financial difficulty. In addition, the amendments require a public business entity to disclose current-period gross charge-offs for financing receivables and net investment in leases by year of origination in the vintage disclosures. For entities that have adopted ASU 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, such as the Company, ASU 2022-02 is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted if an entity has adopted ASU 2016-13. The Company expects that this ASU will not have a material impact to the consolidated financial statements.
Accounting pronouncements adopted by the Company
In August 2021, the FASB issued ASU 2021-06, Presentation of Financial Statements (Topic 205), Financial Services—Depository and Lending (Topic 942), and Financial Services—Investment Companies (Topic 946). This ASU incorporates recent SEC rule changes into the FASB Codification, including SEC Final Rule Releases No. 33-10786, Amendments to Financial Disclosures about Acquired and Disposed Businesses, and No. 33-10835, Update of Statistical Disclosures for Bank and Savings and Loan Registrants. The rules reduce the required reporting periods to align them with the relevant financial statement periods required by SEC rules and requires certain statistical disclosures for annual periods, and interim disclosures if a material change in the information, or trend, has occurred. The amendments in this update are effective upon addition to the FASB Codification and apply to fiscal years ending on or after December 15, 2021. However, voluntary early compliance is permitted upon the effective date, provided that the rules are applied in their entirety. The amended disclosures did not have a material impact on the consolidated financial statements.
(d) Subsequent Events
The Company has evaluated subsequent events and transactions from June 30, 2022, through the date this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP and determined there were no material subsequent events requiring recognition or disclosure.
Notes to the Unaudited Consolidated Interim Financial Statements
(2)Investment Securities
Debt Securities
All of the Company's debt securities were classified as available-for-sale and carried at fair value as of the dates specified in the tables below. The amortized cost and fair values of debt securities at the dates specified are summarized as follows:
June 30, 2022
(Dollars in thousands)
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
U.S. treasury securities
$
85,849
$
—
$
4,516
$
81,333
Residential federal agency MBS(1)
424,095
—
51,079
373,016
Commercial federal agency MBS(1)
61,321
—
1,326
59,995
Taxable municipal securities
283,138
36
35,060
248,114
Tax-exempt municipal securities
86,061
177
913
85,325
Corporate bonds
6,470
5
74
6,401
Subordinated corporate bonds
10,000
—
783
9,217
Total debt securities, at fair value
$
956,934
$
218
$
93,751
$
863,401
December 31, 2021
(Dollars in thousands)
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
U.S. treasury securities
$
62,850
$
—
$
684
$
62,166
Residential federal agency MBS(1)
412,902
2,406
9,113
406,195
Commercial federal agency MBS(1)
99,681
3,783
52
103,412
Taxable municipal securities
272,507
5,607
2,264
275,850
Tax-exempt municipal securities
87,024
5,648
—
92,672
Corporate bonds
8,559
441
—
9,000
Subordinated corporate bonds
7,000
135
—
7,135
Total debt securities, at fair value
$
950,523
$
18,020
$
12,113
$
956,430
__________________________________________
(1)These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as investments guaranteed by Ginnie Mae ("GNMA"), a wholly owned government entity.
As of the dates reflected in the tables above, the majority of investments in the residential and commercial federal agency mortgage back securities ("MBS") categories were collateralized mortgage obligations ("CMOs") issued by U.S. government agencies. The remaining MBS investments totaled $21.3 million and $22.9 million at June 30, 2022 and December 31, 2021, respectively.
At June 30, 2022, management performed its quarterly analysis of all securities with unrealized losses and determined that the losses were primarily attributable to significant increases in market interest rates experienced during the first six months of 2022. Management concluded that no ACL for available-for-sale securities was necessary as of June 30, 2022 and anticipates they will mature or be called at par value.
Accrued interest receivable on available-for-sale debt securities, included in the "Accrued Interest Receivable" line item on the Company’s Consolidated Balance Sheets, amounted to $3.7 million and $3.2 million at June 30, 2022 and December 31, 2021, respectively.
Notes to the Unaudited Consolidated Interim Financial Statements
The following tables summarize the duration of unrealized losses for debt securities at June 30, 2022 and December 31, 2021:
June 30, 2022
Less than 12 months
12 months or longer
Total
(Dollars in thousands)
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
# of Holdings
U.S. treasury securities
$
81,333
$
4,516
$
—
$
—
$
81,333
$
4,516
12
Residential federal agency MBS
279,444
32,689
93,571
18,390
373,015
51,079
94
Commercial federal agency MBS
59,700
1,326
—
—
59,700
1,326
16
Taxable municipal securities
231,488
33,726
6,234
1,334
237,722
35,060
258
Tax-exempt municipal securities
52,143
913
—
—
52,143
913
72
Corporate bonds
4,051
74
—
—
4,051
74
21
Subordinated corporate bonds
8,313
688
905
95
9,218
783
5
Total
$
716,472
$
73,932
$
100,710
$
19,819
$
817,182
$
93,751
478
December 31, 2021
Less than 12 months
12 months or longer
Total
(Dollars in thousands)
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
# of Holdings
U.S. treasury securities
$
62,166
$
684
$
—
$
—
$
62,166
$
684
9
Residential federal agency MBS
272,863
6,992
51,281
2,121
324,144
9,113
44
Commercial federal agency MBS
4,897
52
—
—
4,897
52
1
Taxable municipal securities
117,388
2,023
6,727
241
124,115
2,264
118
Total
$
457,314
$
9,751
$
58,008
$
2,362
$
515,322
$
12,113
172
The contractual maturity distribution at June 30, 2022 of debt securities was as follows:
(Dollars in thousands)
Amortized Cost
Fair Value
Due in one year or less
$
12,940
$
12,938
Due after one, but within five years
192,762
187,833
Due after five, but within ten years
270,569
240,374
Due after ten years
480,663
422,256
Total debt securities
$
956,934
$
863,401
Scheduled contractual maturities shown above may not reflect the actual maturities of the investments. The actual MBS/CMO cash flows likely will be faster than presented above due to prepayments and amortization. Similarly, included in the table above are callable securities, comprised of municipal securities and corporate bonds, with a fair value of $158.7 million, which can be redeemed by the issuers prior to the maturity presented above. Management considers these factors when evaluating the interest-rate risk in the Company's asset-liability management program.
From time to time, the Company may pledge debt securities as collateral for deposit account balances of municipal customers, and for borrowing capacity with the FHLB and the Federal Reserve Bank of Boston ("FRB"). The fair value of debt securities pledged as collateral for these purposes was $854.2 million and $949.3 million at June 30, 2022 and December 31, 2021, respectively.
Notes to the Unaudited Consolidated Interim Financial Statements
The Company had no sales of debt securities during the three months ended June 30, 2022 or June 30, 2021. Sales of debt securities for the six months ended June 30, 2022 and June 30, 2021 are summarized as follows:
Six months ended June 30,
(Dollars in thousands)
2022
2021
Amortized cost of debt securities sold (1)
$
31,653
$
2,931
Gross realized gains on sales
1,062
128
Gross realized losses on sales
—
—
Total proceeds from sales of debt securities
$
32,715
$
3,059
_________________________________________
(1)Amortized cost of investments sold is determined on a specific identification basis and includes pending trades based on trade date, if applicable.
Equity Securities
The Company held equity securities with a fair value of $3.2 million at June 30, 2022 and $1.8 million at December 31, 2021. At June 30, 2022, the equity portfolio consisted primarily of investments in equity index funds and in common stock of entities in the financial services industry held to support operations and mutual funds held in conjunction with the Company's supplemental executive retirement and deferred compensation plan.
Gains and losses on equity securities for the three and six months ended June 30, 2022 and June 30, 2021 are summarized as follows:
Three months ended June 30,
Six months ended June 30,
(Dollars in thousands)
2022
2021
2022
2021
Net (losses) gains recognized during the period on equity securities
$
(429)
$
65
$
(495)
$
149
Less: Net gains recognized on equity securities sold during the period
—
6
—
6
Unrealized (losses) gains recognized during the reporting period on equity securities still held at the end of the period (included in other income)
Notes to the Unaudited Consolidated Interim Financial Statements
(3)Loans
Loan Portfolio Classifications
Major classifications of loans at the dates indicated were as follows:
(Dollars in thousands)
June 30, 2022
December 31, 2021
Commercial real estate
$
1,865,198
$
1,680,792
Commercial and industrial
422,006
412,070
Commercial construction
385,752
410,443
SBA Paycheck Protection Program ("PPP")
15,288
71,502
Total commercial loans
2,688,244
2,574,807
Residential mortgages
307,131
256,940
Home equity loans and lines
81,648
80,467
Consumer
7,892
8,470
Total retail loans
396,671
345,877
Total loans
3,084,915
2,920,684
ACL for loans
(50,703)
(47,704)
Net loans
$
3,034,212
$
2,872,980
Net deferred loan origination fees, included in the amortized costs of loans reflected in the table above, amounted to $5.6 million at June 30, 2022 and $7.5 million at December 31, 2021.
Accrued interest receivable on loans amounted to $10.6 million and $10.2 million at June 30, 2022 and December 31, 2021, respectively, and was included in the "Accrued interest receivable" line item on the Company's Consolidated Balance Sheets.
Commercial loans originated by other banks in which the Company is a participating institution are carried at the pro-rata share of ownership and amounted to $88.1 million at June 30, 2022 and $62.6 million at December 31, 2021. See also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.
Paycheck Protection Program
The PPP was created by the Coronavirus Aid, Relief, and Economic Security Act and instituted by the Small Business Administration ("SBA"), with the SBA funding PPP loans beginning in April 2020 and expiring on May 31, 2021. As part of the PPP, the Company originated $717.2 million in short-term PPP loans. Forgiveness of PPP loans by the SBA began in November 2020 and continued through the current period, with approximately 98% of the principal balance of PPP loans originated by the Company forgiven by the SBA through June 30, 2022.
All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding. Management believes the Company's PPP loan portfolio, which had an average loan size of approximately $139 thousand as of June 30, 2022, to be of minimal credit risk. Originations of PPP loans by the Company were limited to existing customers of the Bank, and management expects the majority of outstanding PPP loans will be forgiven by the SBA or otherwise repaid over the next several quarters, with any remaining balance fully guaranteed by the SBA. Management has segmented the PPP loan portfolio as a group of loans with similar risk characteristics in its assessment for credit losses and, as of June 30, 2022, has not recorded an ACL on these loans, but will continue to monitor the PPP loan portfolio.
Loans serviced for others
At June 30, 2022 and December 31, 2021, the Company was servicing residential mortgage loans owned by investors amounting to $9.7 million and $10.4 million, respectively. Additionally, the Company was servicing commercial loans originated by the Company and participated out to various other institutions amounting to $59.6 million and $66.7 million at June 30, 2022 and December 31, 2021, respectively.
Notes to the Unaudited Consolidated Interim Financial Statements
Loans serving as collateral
Loans designated as qualified collateral and pledged to the FHLB for borrowing capacity as of the dates indicated are summarized below:
(Dollars in thousands)
June 30, 2022
December 31, 2021
Commercial real estate
$
120,825
$
143,056
Residential mortgages
281,012
235,744
Home equity
45,376
5,055
Total loans pledged to FHLB
$
447,213
$
383,855
(4)ACL for Loans
On January 1, 2021, the Company adopted CECL under the modified retrospective approach.
There have been no material changes to the Company's ACL methodology, underwriting practices, or credit risk management system used to estimate credit loss exposure since December 31, 2021. See Note 4, "ACL for Loans," to the Company's audited consolidated financial statements contained in the 2021 Annual Report on Form 10-K.
Risk ratings and adversely classified loans
The Company's loan risk rating system classifies loans depending on risk of loss characteristics. The classifications range from
"substantially risk free" for the highest quality loans and loans that are secured by cash collateral, through a satisfactory range
of "minimal," "moderate," "better than average," and "average" risk, all of which are considered "pass" rated credits. Adversely
classified ratings for loans determined to be of weaker credit range from "special mention," for loans that may need additional
monitoring, to the more severe adverse classifications of "substandard," "doubtful," and "loss" based on criteria established
under banking regulations. Loans which are evaluated to be of weaker credit quality are placed on the "watch credit list" and
reviewed on a more frequent basis, with risk ratings adjusted as warranted by management.
Notes to the Unaudited Consolidated Interim Financial Statements
The following tables present the amortized cost basis of the Company's loan portfolio risk ratings within portfolio classifications, by origination date, or revolving status as of the dates indicated:
Notes to the Unaudited Consolidated Interim Financial Statements
Balance at December 31, 2021
Term Loans by Origination Year
(Dollars in thousands)
2021
2020
2019
2018
2017
Prior
Revolving Loans
Revolving Loans Converted to Term
Total
Commercial real estate
Pass
$
402,838
$
220,942
$
239,248
$
120,286
$
173,652
$
479,298
$
3,019
$
—
$
1,639,283
Special mention
—
—
989
802
—
7,626
—
—
9,417
Substandard
—
—
2,628
3,111
12,842
13,336
—
—
31,917
Doubtful
—
—
—
175
—
—
—
—
175
Total commercial real estate
402,838
220,942
242,865
124,374
186,494
500,260
3,019
—
1,680,792
Commercial and industrial
Pass
64,555
40,333
36,177
19,754
14,983
44,835
174,320
1,243
396,200
Special mention
—
644
2,173
958
59
1,431
4,053
18
9,336
Substandard
—
—
15
100
25
3,845
2,440
109
6,534
Total commercial and industrial
64,555
40,977
38,365
20,812
15,067
50,111
180,813
1,370
412,070
Commercial construction
Pass
175,069
106,165
54,907
24,343
4,561
19,489
24,864
—
409,398
Substandard
—
—
—
—
—
—
—
1,045
1,045
Total commercial construction
175,069
106,165
54,907
24,343
4,561
19,489
24,864
1,045
410,443
SBA PPP(1)
66,232
5,270
—
—
—
—
—
—
71,502
Residential mortgages
Pass
79,130
56,948
27,343
22,743
12,886
55,571
—
—
254,621
Special mention
—
—
—
—
—
590
—
—
590
Substandard
—
—
—
—
—
1,729
—
—
1,729
Total residential mortgages
79,130
56,948
27,343
22,743
12,886
57,890
—
—
256,940
Home equity
Pass
486
478
498
—
—
1,727
76,619
414
80,222
Substandard
—
—
—
—
—
245
—
—
245
Total home equity
486
478
498
—
—
1,972
76,619
414
80,467
Consumer
Pass
2,843
1,498
1,619
1,005
617
390
—
473
8,445
Doubtful
25
—
—
—
—
—
—
—
25
Total consumer
2,868
1,498
1,619
1,005
617
390
—
473
8,470
Total loans
$
791,178
$
432,278
$
365,597
$
193,277
$
219,625
$
630,112
$
285,315
$
3,302
$
2,920,684
__________________________________________
(1)All PPP loans were pass-rated at June 30, 2022 and December 31, 2021, as these loans are 100% guaranteed by the SBA.
The total amortized cost basis of adversely classified loans amounted to $48.9 million, or 1.59% of total loans, at June 30, 2022, and $61.0 million, or 2.09% of total loans, at December 31, 2021.
Notes to the Unaudited Consolidated Interim Financial Statements
Past due and non-accrual loans
The following tables present an age analysis of past due loans by portfolio classification as of the dates indicated:
Balance at June 30, 2022
(Dollars in thousands)
30-59 Days Past Due
60-89 Days Past Due
Past Due 90 days or More
Total Past
Due Loans(1)
Current
Loans(1)
Total Loans
Commercial real estate
$
2,934
$
138
$
447
$
3,519
$
1,861,679
$
1,865,198
Commercial and industrial
190
98
74
362
421,644
422,006
Commercial construction
1,004
—
—
1,004
384,748
385,752
SBA PPP
191
—
—
191
15,097
15,288
Residential mortgages
1,258
1,253
—
2,511
304,620
307,131
Home equity
80
74
—
154
81,494
81,648
Consumer
9
—
—
9
7,883
7,892
Total loans
$
5,666
$
1,563
$
521
$
7,750
$
3,077,165
$
3,084,915
Balance at December 31, 2021
(Dollars in thousands)
30-59 Days Past Due
60-89 Days Past Due
Past Due 90 days or More
Total Past
Due Loans(1)
Current
Loans(1)
Total Loans
Commercial real estate
$
1,917
$
—
$
1,719
$
3,636
$
1,677,156
$
1,680,792
Commercial and industrial
564
678
194
1,436
410,634
412,070
Commercial construction
—
—
—
—
410,443
410,443
SBA PPP
162
19
—
181
71,321
71,502
Residential mortgages
182
—
432
614
256,326
256,940
Home equity
45
—
—
45
80,422
80,467
Consumer
7
27
—
34
8,436
8,470
Total loans
$
2,877
$
724
$
2,345
$
5,946
$
2,914,738
$
2,920,684
_______________________________________
(1)The loan balances in the tables above include loans designated as non-accrual according to their payment due status.
At June 30, 2022 and December 31, 2021, all loans past due 90 days or more were carried as non-accrual. In addition, loans that were less than 90 days past due where reasonable doubt existed as to the full and timely collection of interest or principal, have also been designated as non-accrual, despite their payment due status.
The following tables present the amortized cost of non-accrual loans by portfolio classification as of the dates indicated:
Notes to the Unaudited Consolidated Interim Financial Statements
Balance at December 31, 2021
(Dollars in thousands)
Total Non-accrual Loans
Non-accrual Loans without a Specific Reserve
Non-accrual Loans with a Specific Reserve
Related Specific Reserve
Commercial real estate
$
22,870
$
7,144
$
15,726
$
896
Commercial and industrial
1,542
1,337
205
185
Commercial construction
1,045
1,045
—
—
SBA PPP
—
—
—
—
Residential mortgages
794
633
161
161
Home equity
246
246
—
—
Consumer
25
—
25
25
Total loans
$
26,522
$
10,405
$
16,117
$
1,267
The ratio of non-accrual loans to total loans amounted to 0.20% and 0.91% at June 30, 2022 and December 31, 2021, respectively. The decline in non-accrual loans at June 30, 2022 compared to December 31, 2021 was due primarily to two commercial credits that were returned to accrual status due to improved financial strength and consistent payment history.
Non-accrual loans that were not adversely classified amounted to $3 thousand at both June 30, 2022 and December 31, 2021. These balances primarily represented the guaranteed portions of non-performing SBA loans.
At June 30, 2022 and December 31, 2021, additional funding commitments for non-accrual loans were not material.
Collateral dependent loans
Loans that have been individually evaluated and repayment is expected substantially from the operations or ultimate sale of the underlying collateral are deemed to be collateral dependent loans. Collateral dependent loans are adversely classified loans that may also be troubled debt restructurings ("TDRs"). These loans may be accruing or on non-accrual status. Collateral dependent loans are carried at the lower of the recorded investment in the loan or the estimated fair value. When the estimated fair value of the underlying collateral, less estimated costs to sell, is not sufficient to cover the outstanding carrying balance on the loan, a specific reserve is assigned for the amount of the estimated credit loss. These estimated credit losses are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.
The carrying value of collateral dependent loans amounted to $27.1 million at June 30, 2022 compared to $34.6 million at December 31, 2021. Total accruing collateral dependent loans amounted to $20.9 million while non-accrual collateral dependent loans amounted to $6.2 million as of June 30, 2022. Total accruing collateral dependent loans amounted to $8.4 million while non-accrual collateral dependent loans amounted to $26.2 million as of December 31, 2021.
Notes to the Unaudited Consolidated Interim Financial Statements
The following tables present the recorded investment in collateral dependent individually evaluated loans and the related specific allowance by portfolio allocation as of the dates indicated:
Balance at June 30, 2022
(Dollars in thousands)
Unpaid Contractual Principal Balance
Total Recorded Investment in Collateral Dependent Loans
Recorded Investment without a Specific Reserve
Recorded Investment with a Specific Reserve
Related Specific Reserve
Commercial real estate
$
27,834
$
24,655
$
23,337
$
1,318
$
283
Commercial and industrial
5,492
1,368
1,243
125
58
Commercial construction
—
—
—
—
—
SBA PPP
—
—
—
—
—
Residential mortgages
1,036
893
893
—
—
Home equity
400
230
230
—
—
Consumer
—
—
—
—
—
Total
$
34,762
$
27,146
$
25,703
$
1,443
$
341
Balance at December 31, 2021
(Dollars in thousands)
Unpaid Contractual Principal Balance
Total Recorded Investment in Collateral Dependent Loans
Recorded Investment without a Specific Reserve
Recorded Investment with a Specific Reserve
Related Specific Reserve
Commercial real estate
$
29,562
$
27,617
$
11,891
$
15,726
$
896
Commercial and industrial
8,880
4,699
4,191
508
128
Commercial construction
1,181
1,045
1,045
—
—
SBA PPP
—
—
—
—
—
Residential mortgages
1,165
1,033
1,033
—
—
Home equity
347
246
246
—
—
Consumer
—
—
—
—
—
Total
$
41,135
$
34,640
$
18,406
$
16,234
$
1,024
At June 30, 2022 and December 31, 2021, additional funding commitments for collateral dependent loans were not material.
Troubled debt restructurings
Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of
financial difficulties of the borrower, the Company grants the borrower a concession on the terms that would not otherwise be
considered. Typically, such concessions may consist of one or a combination of the following: a reduction in interest-rate to a
below market rate, taking into account the credit quality of the note; extension of additional credit based on receipt of adequate
collateral; or a deferment or reduction of payments (principal or interest) which materially alters the Bank's position or
significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than
those contractually established at the loan's origination. All loans that are modified are reviewed by the Company to identify if a
TDR has occurred. TDR loans are individually reviewed and evaluated, and a specific reserve is assigned for the amount of the
estimated credit loss.
Total TDR loans as of June 30, 2022 amounted to $9.7 million compared to $16.4 million as of December 31, 2021. At June 30, 2022 and December 31, 2021, TDR loans on accrual status amounted to $5.9 million and $8.6 million, respectively, and TDR loans included in non-accrual loans amounted to $3.8 million and $7.8 million, respectively.
The Company continues to work with customers and enter into loan modifications (which may or may not be TDRs) to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the individual financial circumstances and future prospects of the borrower.
Notes to the Unaudited Consolidated Interim Financial Statements
At June 30, 2022 and June 30, 2021, additional funding commitments for TDR loans were not material.
The following table presents the number and balance of loans modified as TDRs, by portfolio classification, during the three months indicated:
Three months ended
June 30, 2022
June 30, 2021
(Dollars in thousands)
Number of Restructurings
Pre-modification Outstanding Recorded Investment
Post-modification Outstanding Recorded Investment
Number of Restructurings
Pre-modification Outstanding Recorded Investment
Post-modification Outstanding Recorded Investment
Commercial real estate
2
$
1,470
$
1,461
—
$
—
$
—
Total
2
$
1,470
$
1,461
—
$
—
$
—
The following table presents the number and balance of loans modified as TDRs, by portfolio classification, during the six months indicated:
Six months ended
June 30, 2022
June 30, 2021
(Dollars in thousands)
Number of Restructurings
Pre-modification Outstanding Recorded Investment
Post-modification Outstanding Recorded Investment
Number of restructurings
Pre-modification outstanding recorded investment
Post-modification outstanding recorded investment
Commercial real estate
4
$
3,188
$
3,154
2
$
991
$
914
Residential mortgages
—
—
—
1
224
224
Total
4
$
3,188
$
3,154
3
$
1,215
$
1,138
There were no subsequent charge-offs associated with the new TDRs noted in the table above during the six months ended June 30, 2022 and June 30, 2021.
Payment defaults by portfolio classification, during the three months indicated, on loans modified as TDRs within the preceding twelve months are detailed below:
Three months ended
June 30, 2022
June 30, 2021
(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
$
1,461
1
$
680
Total
2
$
1,461
1
$
680
Payment defaults by portfolio classification, during the six months indicated, on loans modified as TDRs within the preceding twelve months are detailed below:
Six months ended
June 30, 2022
June 30, 2021
(Dollars in thousands)
Number of TDRs that Defaulted
Post- modification Outstanding Recorded Investment
Number of TDRs that defaulted
Post- modification outstanding recorded investment
Notes to the Unaudited Consolidated Interim Financial Statements
The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the six-month periods indicated:
Six months ended
June 30, 2022
June 30, 2021
(Dollars in thousands)
Number of Restructurings
Amount
Number of Restructurings
Amount
Extended maturity date
—
$
—
1
$
224
Temporary payment reduction and payment re-amortization of remaining principal over extended term
1
1,404
2
914
Temporary interest only payment plan
2
427
—
—
Deferral of interest
1
1,323
—
—
Total
4
$
3,154
3
$
1,138
Amount of ACL for loans associated with TDRs listed above
$
283
$
—
ACL and provision for credit loss activity
Upon adoption of the CECL methodology on January 1, 2021, the Company recorded a reduction to retained earnings of $6.5 million, net of $2.5 million in deferred income taxes. The ACL for loans increased by $6.6 million and the reserve for unfunded commitments (included in other liabilities) increased by $2.4 million.
The following table presents changes in the provision for credit losses on loans and unfunded commitments during the three and six-month periods indicated:
Three months ended
Six months ended
(Dollars in thousands)
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
Provision for credit losses on loans
$
2,195
$
252
$
3,020
$
862
Provision for unfunded commitments
214
(213)
(81)
(143)
Total provision for credit losses
$
2,409
$
39
$
2,939
$
719
Management believes that the Company's ACL for loans and reserve for unfunded commitments were adequate as of June 30, 2022.
ACL for loans
The ACL for loans amounted to $50.7 million and $47.7 million at June 30, 2022 and December 31, 2021, respectively. The ACL for loans to total loans ratio was 1.64% and 1.63% at June 30, 2022 and December 31, 2021, respectively.
The following tables present changes in the ACL for loans by portfolio classification, during the three months indicated:
Notes to the Unaudited Consolidated Interim Financial Statements
(Dollars in thousands)
Commercial Real Estate
Commercial and Industrial
Commercial Construction
Residential Mortgage
Home Equity
Consumer
Total
Beginning Balance at March 31, 2021
$
33,675
$
11,226
$
3,483
$
889
$
292
$
334
$
49,899
Provision for credit losses on loans
294
(275)
294
(46)
(2)
(13)
252
Recoveries
39
28
—
—
5
2
74
Less: Charge-offs
—
179
—
—
—
5
184
Ending Balance at June 30, 2021
$
34,008
$
10,800
$
3,777
$
843
$
295
$
318
$
50,041
The following table presents changes in the ACL for loans by portfolio classification, during the six months indicated:
(Dollars in thousands)
Commercial Real Estate
Commercial and Industrial
Commercial Construction
Residential Mortgage
Home Equity
Consumer
Total
Beginning Balance at December 31, 2021
$
31,847
$
9,574
$
4,090
$
1,405
$
465
$
323
$
47,704
Provision for credit losses for loans
3,532
(636)
(423)
497
82
(32)
3,020
Recoveries
—
110
—
—
7
10
127
Less: Charge-offs
—
110
—
—
—
38
148
Ending Balance at June 30, 2022
$
35,379
$
8,938
$
3,667
$
1,902
$
554
$
263
$
50,703
(Dollars in thousands)
Commercial Real Estate
Commercial and Industrial
Commercial Construction
Residential Mortgage
Home Equity
Consumer
Total
Beginning Balance at December 31, 2020
$
26,755
$
9,516
$
6,129
$
1,530
$
467
$
168
$
44,565
CECL adjustment upon adoption
7,664
1,988
(2,416)
(695)
(158)
177
6,560
Provision for credit losses for loans
1,375
(538)
64
8
(24)
(23)
862
Recoveries
39
83
—
—
10
3
135
Less: Charge-offs
1,825
249
—
—
—
7
2,081
Ending Balance at June 30, 2021
$
34,008
$
10,800
$
3,777
$
843
$
295
$
318
$
50,041
Reserve for unfunded commitments
The Company’s reserve for unfunded commitments amounted to $3.6 million at June 30, 2022 and $3.7 million at December 31, 2021.
Other real estate owned ("OREO")
The Company carried no OREO at June 30, 2022 and December 31, 2021.
At June 30, 2022 and December 31, 2021, the Company had no consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions.
(5)Leases
For the Company, material leases consist of operating leases of branch facilities; leases 12 months or less and immaterial equipment leases have been excluded. As of June 30, 2022, the Company had 16 facilities contracted under various non-cancelable operating leases, most of which provide options to the Company to extend the lease periods and include periodic rent adjustments. While the Company typically exercises its option to extend lease terms, the lease contains provisions that allow the Company, upon notification, to terminate the lease at the end of the lease term, or any option period. Several real estate leases also provide the Company the right of first refusal should the property be offered for sale.
Lease expense for the three and six months ended June 30, 2022 amounted to $400 thousand and $816 thousand, respectively. Lease expense for the three and six months ended June 30, 2021 amounted to $366 thousand and $695 thousand, respectively. Variable lease costs and short-term lease expenses included in lease expense during these periods were immaterial.
The weighted average remaining lease term for operating leases at June 30, 2022 and June 30, 2021 was 29.9 years and 28.7 years, respectively. The weighted average discount rate was 3.45% at June 30, 2022 and 3.69% at June 30, 2021.
Notes to the Unaudited Consolidated Interim Financial Statements
At June 30, 2022, the remaining undiscounted cash flows by year of these lease liabilities were as follows:
(Dollars in thousands)
Operating Leases
2022 (six remaining months)
$
698
2023
1,407
2024
1,435
2025
1,441
2026
1,452
Thereafter
32,848
Total lease payments
39,281
Less: Imputed interest
15,125
Total lease liability
$
24,156
In addition, the Company currently collects rent through non-cancellable leases for a small portion of the overall square-footage within its Lowell, Massachusetts campus headquarters and at one of its branch locations. These leases are deemed immaterial.
See also Item (k), "Leases," contained in Note 1, "Summary of Significant Accounting Policies," to the Company's consolidated financial statements contained in the 2021 Annual Report on Form 10-K, for further information regarding the accounting for the Company's leases.
(6)Deposits
Deposits are summarized as follows as of the periods indicated:
(Dollars in thousands)
June 30, 2022
December 31, 2021
Non-interest checking
$
1,457,220
$
1,364,258
Interest-bearing checking
712,898
743,587
Savings
334,728
310,244
Money market
1,293,453
1,355,701
CDs $250,000 or less
144,084
154,403
CDs greater than $250,000
74,431
52,046
Deposits
$
4,016,814
$
3,980,239
All of the Company's deposits outstanding at both June 30, 2022 and December 31, 2021 were customer deposits. Customer deposits include reciprocal balances from checking, money market deposits and CDs received from participating banks in nationwide deposit networks due to our customers electing to participate in Company offered programs which allow for enhanced Federal Deposit Insurance Corporation ("FDIC") deposit insurance. Essentially, the equivalent of the customers' original deposited funds comes back to the Company and are carried within the appropriate category under deposits. The Company's balances in these reciprocal products were $528.9 million and $546.7 million at June 30, 2022 and December 31, 2021, respectively.
(7)Borrowed Funds and Subordinated Debt
The Company's borrowed funds amounted to $3.0 million and $5.5 million at June 30, 2022 and December 31, 2021, respectively, and were comprised of FHLB advances related to specific lending projects under the FHLB's community development programs.
Borrowed funds at June 30, 2022 and December 31, 2021 are summarized, as follows:
Notes to the Unaudited Consolidated Interim Financial Statements
The Company also had outstanding subordinated debt (net of deferred issuance costs) of $59.0 million at both June 30, 2022 and December 31, 2021. The outstanding subordinated notes are due on July 15, 2030 and callable at the Company's option on or after July 15, 2025.
On March 31, 2021, the Company redeemed $15.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes issued by the Company in January 2015, which were due in January 2030 (the "January 2015 Notes"). The redemption of the January 2015 Notes was recorded as a loss on the extinguishment of subordinated debt in the amount of $713 thousand, consisting of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs.
(8) Derivatives and Hedging Activities
The Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and unknown cash amounts, the value of which are determined by interest rates. In addition, the Company provides certain commercial customers back-to-back swaps, which do not meet hedge accounting requirements and therefore changes in the fair value of both the customer swaps and the counterparty swaps, which have an offsetting relationship, are recognized directly in earnings.
The tables below present a summary of the Company's derivative financial instruments, notional amounts and fair values for the periods presented:
(1) Accrued interest balances related to the Company’s interest-rate swaps are not included in the fair values above and are immaterial.
The Company had no derivative fair value or cash flow hedges at either June 30, 2022 or December 31, 2021.
Each back-to-back swap consists of two interest-rate swaps (a customer swap and offsetting counterparty swap) and amounted to a total number of 4 interest-rate swaps outstanding at June 30, 2022 and 10 at December 31, 2021. As a result of this offsetting relationship, there were no net gains or losses recognized in income on back-to-back swaps during the six months ended June 30, 2022 or June 30, 2021.
Interest-rate swaps with counterparties are subject to master netting agreements, while interest-rate swaps with customers are not. At June 30, 2022, all the back-to-back swaps with the counterparty were in asset positions and at December 31, 2021, all the back-to-back swaps with the counterparty were in liability positions, therefore there was no netting reflected in the Company’s Consolidated Balance Sheets as of the respective dates.
Credit Risk
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
Notes to the Unaudited Consolidated Interim Financial Statements
instruments is mitigated by entering into transactions with highly rated counterparties that management believes to be
creditworthy. Additionally, counterparty interest-rate swaps contain provisions for collateral to be posted if the derivative
exposure exceeds a threshold amount.
The Company had one counterparty and it was rated A and A2 by Standard & Poor's and Moody's, respectively, at June 30, 2022. When the Company has credit risk exposure, collateral is posted by the counterparty. Collateral posted by counterparties is restricted and not considered an asset of the Company, therefore, it is not carried on the Company's Consolidated Balance Sheets. If the Company posts collateral, the restricted cash is carried on the Company's Consolidated Balance Sheets. The Company had credit risk exposure of $435 thousand at June 30, 2022 and no credit risk exposure at December 31, 2021 relating to interest-rate swaps with counterparties. At June 30, 2022 the counterparty posted cash collateral of $500 thousand
while the Company posted restricted cash collateral of $840 thousand at December 31, 2021.
Customer-related credit risk on back-to-back swaps is minimized by the cross collateralization of the loan and the interest-rate swap agreement to the customer's underlying collateral.
Credit-risk-related Contingent Features
There have been no material changes to the credit-risk-related contingent provisions contained within the Company's interest-rate swaps with counterparties since December 31, 2021. See Note 9, "Derivatives and Hedging," to the Company's audited consolidated financial statements contained in the 2021 Annual Report on Form 10-K.
As of June 30, 2022, the fair value of derivatives related to these agreements was at a net asset position of $435 thousand, which excludes any adjustment for nonperformance risk. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and as of June 30, 2022, has not posted collateral related to these agreements.
Other Derivative Related Activity
The Company also participates in loans originated by third party banks, where the originating bank utilizes a back-to-back interest-rate swap structure; however, the Company is not a party to the swap agreements. Under the terms of the loan
participations, the Company has accepted contingent liabilities that would only be realized if the swaps were terminated early
and there were outstanding losses not covered by the underlying borrowers and the borrowers' pledged collateral. If applicable,
the Company's swap-loss exposure would be equal to a percentage of the originating bank's swap loss based on the ratio of the
Company's loan participation to the underlying loan. At both June 30, 2022 and December 31, 2021, the Company had one participation loan where the originating bank utilizes a back-to-back interest-rate swap structure. At June 30, 2022, management considers the risk of material swap-loss exposure related to this participation loan to be unlikely based on the borrower's financial and collateral strength. Management continues to closely monitor for credit changes resulting from the pandemic.
Interest-rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. At June 30, 2022 and December 31, 2021, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.
(9)Regulatory Capital Requirements
Capital Raised and Capital Adequacy Requirements
As of June 30, 2022 and December 31, 2021, the Company met the definition of "well-capitalized" under the applicable regulations of the Board of Governors of the Federal Reserve System and the Bank qualified as "well-capitalized" under the prompt corrective action regulations of Basel III and the FDIC.
Notes to the Unaudited Consolidated Interim Financial Statements
The Company's and the Bank's actual capital amounts and ratios are presented as of June 30, 2022 and December 31, 2021 in the tables below:
Actual
Minimum Capital
for Capital
Adequacy
Purposes(1)
Minimum Capital
to be
Well
Capitalized(2)
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of June 30, 2022
The Company
Total Capital to risk-weighted assets ("RWA")
$
453,382
13.38
%
$
271,128
8.00
%
N/A
N/A
Tier 1 Capital to RWA
351,832
10.38
%
203,346
6.00
%
N/A
N/A
Tier 1 Capital to average assets ("AA") or Leverage Ratio
351,832
8.03
%
175,205
4.00
%
N/A
N/A
Common Equity Tier 1 Capital to RWA
351,832
10.38
%
152,509
4.50
%
N/A
N/A
The Bank
Total Capital to RWA
$
453,025
13.37
%
$
271,128
8.00
%
$
338,910
10.00
%
Tier 1 Capital to RWA
410,514
12.11
%
203,346
6.00
%
271,128
8.00
%
Tier 1 Capital to AA, Leverage Ratio
410,514
9.37
%
175,205
4.00
%
219,006
5.00
%
Common Equity Tier 1 Capital to RWA
410,514
12.11
%
152,509
4.50
%
220,291
6.50
%
Actual
Minimum Capital for Capital Adequacy Purposes(1)
Minimum Capital
to be
Well
Capitalized(2)
(Dollars in thousands)
Amount
Ratio
Amount
Ratio
Amount
Ratio
As of December 31, 2021
The Company
Total Capital to RWA
$
435,328
13.73
%
$
253,610
8.00
%
N/A
N/A
Tier 1 Capital to RWA
336,577
10.62
%
190,208
6.00
%
N/A
N/A
Tier 1 Capital to AA, Leverage Ratio
336,577
7.56
%
177,978
4.00
%
N/A
N/A
Common Equity Tier 1 Capital to RWA
336,577
10.62
%
142,656
4.50
%
N/A
N/A
The Bank
Total Capital to RWA
$
434,430
13.70
%
$
253,610
8.00
%
$
317,013
10.00
%
Tier 1 Capital to RWA
394,658
12.45
%
190,208
6.00
%
253,610
8.00
%
Tier 1 Capital to AA, Leverage Ratio
394,658
8.87
%
177,978
4.00
%
222,473
5.00
%
Common Equity Tier 1 Capital to RWA
394,658
12.45
%
142,656
4.50
%
206,058
6.50
%
__________________________________________
(1)Before application of the capital conservation buffer of 2.50% as of June 30, 2022, and December 31, 2021. See discussion below.
(2)For the Bank to qualify as "well-capitalized," it must maintain at least the minimum ratios listed under the regulatory prompt corrective action framework. This framework does not apply to the Company.
The Company is subject to the Basel III capital ratio requirements which include a "capital conservation buffer" of 2.50% above the regulatory minimum risk-based capital adequacy requirements shown above. If a banking organization dips into its capital conservation buffer it may be restricted in its activities, including its ability to pay dividends and discretionary bonus payments to its executive officers. Both the Company's and the Bank's actual ratios, as outlined in the table above, exceeded the Basel III risk-based capital requirement with the capital conservation buffer as of June 30, 2022.
Failure to meet minimum capital requirements can initiate or result in certain mandatory and possibly additional discretionary
supervisory actions by regulators that, if undertaken, could have a material adverse effect on the Company's consolidated
financial statements. Under applicable capital adequacy requirements and the regulatory framework for prompt corrective
action applicable to the Bank, the Company must meet specific capital guidelines that involve quantitative measures of the
Company's assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The
Company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components,
Notes to the Unaudited Consolidated Interim Financial Statements
(10)Comprehensive Income (Loss)
The following table presents a reconciliation of the changes in the components of other comprehensive income (loss) for the dates indicated, including the amount of income tax (expense) benefit allocated to each component of other comprehensive income (loss):
Three months ended June 30, 2022
Three months ended June 30, 2021
(Dollars in thousands)
Pre-Tax
Tax Benefit
After Tax Amount
Pre-Tax
Tax (Expense)
After Tax Amount
Change in fair value of debt securities
$
(41,404)
$
9,326
$
(32,078)
$
1,028
$
(230)
$
798
Less: net security gains reclassified into non-interest income
—
—
—
—
—
—
Net change in fair value of debt securities
(41,404)
9,326
(32,078)
1,028
(230)
798
Change in fair value of cash flow hedges
—
—
—
392
(111)
281
Less: net cash flow hedges losses reclassified into income
—
—
—
243
(69)
174
Net change in fair value of cash flow hedges
—
—
—
149
(42)
107
Total other comprehensive (loss) income, net
$
(41,404)
$
9,326
$
(32,078)
$
1,177
$
(272)
$
905
Six months ended June 30, 2022
Six months ended June 30, 2021
(Dollars in thousands)
Pre-Tax
Tax Benefit (Expense)
After Tax Amount
Pre-Tax
Tax Benefit (Expense)
After Tax Amount
Change in fair value of debt securities
$
(98,378)
$
22,166
$
(76,212)
$
(10,052)
$
2,228
$
(7,824)
Less: net security gains reclassified into non-interest income
1,062
(234)
828
128
(29)
99
Net change in fair value of debt securities
(99,440)
22,400
(77,040)
(10,180)
2,257
(7,923)
Change in fair value of cash flow hedges
—
—
—
1,439
(405)
1,034
Less: net cash flow hedges losses reclassified into income
—
—
—
479
(135)
344
Net change in fair value of cash flow hedges
—
—
—
960
(270)
690
Total other comprehensive income (loss), net
$
(99,440)
$
22,400
$
(77,040)
$
(9,220)
$
1,987
$
(7,233)
Information on the Company's accumulated other comprehensive income (loss), net of tax, is comprised of the following components as of the periods indicated:
Three months ended June 30, 2022
Three months ended June 30, 2021
(Dollars in thousands)
Unrealized Gains (Losses) on Debt Securities
Unrealized Gains (Losses) on Cash Flow Hedges
Total
Unrealized Gains (Losses) on Debt Securities
Unrealized Gains (Losses) on Cash Flow Hedges
Total
Accumulated other comprehensive (loss) income - beginning balance
$
(40,300)
$
—
$
(40,300)
$
15,495
$
(1,440)
$
14,055
Total other comprehensive loss, net
(32,078)
—
(32,078)
798
107
905
Accumulated other comprehensive (loss) income - ending balance
Notes to the Unaudited Consolidated Interim Financial Statements
Six months ended June 30, 2022
Six months ended June 30, 2021
(Dollars in thousands)
Unrealized Gains (Losses) on Debt Securities
Unrealized Gains (Losses) on Cash Flow Hedges
Total
Unrealized Gains (Losses) on Debt Securities
Unrealized Gains (Losses) on Cash Flow Hedges
Total
Accumulated other comprehensive (loss) income - beginning balance
$
4,662
$
—
$
4,662
$
24,216
$
(2,023)
$
22,193
Total other comprehensive loss, net
(77,040)
—
(77,040)
(7,923)
690
(7,233)
Accumulated other comprehensive (loss) income - ending balance
$
(72,378)
$
—
$
(72,378)
$
16,293
$
(1,333)
$
14,960
(11)Supplemental Retirement Plans and Other Post-Retirement Benefit Obligations
There have been no material changes to the Company's Supplemental Retirement Plans or Supplemental Life Insurance since December 31, 2021.
Supplemental Employee Retirement Plans ("SERP")
The Company provides supplemental benefits upon retirement, through the 2018 Enterprise Bank Supplemental Executive Retirement and Deferred Compensation Plan (the "2018 SERP"), to the Company's named executive officers and certain other officers of the Bank. Total expenses for the 2018 SERP amounted to $76 thousand for both of the three-month periods ended June 30, 2022 and June 30, 2021. Total expenses for the 2018 SERP during the six months ended June 30, 2022 and June 30, 2021, amounted to $245 thousand and $213 thousand, respectively.
The Company also has SERP agreements with two of its current executive officers and one former executive officer. Benefits paid under the SERP amounted to $69 thousand and $138 thousand for both the three and six months ended June 30, 2022 and June 30, 2021, respectively. Total expenses for the SERP were $13 thousand and $26 thousand for the three and six months ended June 30, 2022, respectively, compared to $16 thousand and $31 thousand for the three and six months ended June 30, 2021, respectively. The Company anticipates accruing an additional $26 thousand related to the SERP during the remainder of 2022.
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.
Total net periodic post-retirement benefit cost for supplemental life insurance plans, which consisted mainly of interest costs, was $29 thousand and $58 thousand for the three and six months ended June 30, 2022, respectively, compared to $16 thousand and $32 thousand for the three and six months ended June 30, 2021, respectively.
(12)Stock-Based Compensation
The Company currently has one active stock incentive plan: The Enterprise Bancorp, Inc. 2016 Stock Incentive Plan, as amended (the "2016 plan"). There have been no material changes to the Company's Stock-Based Compensation Plan since December 31, 2021. As of June 30, 2022, 435,971 shares of Company common stock remained available for future grants under the 2016 plan.
Awards previously granted under an earlier, now expired, plan remain outstanding and may be exercised through 2028.
The Company's stock-based compensation expense related to these plans includes stock options and stock awards to officers
and other employees included in salary and benefits expense, and stock awards and stock compensation in lieu of cash fees to
non-employee directors, both included in other operating expenses. Non-employee director fees are accrued and carried in
"Accrued expenses and other liabilities" during the year and distributed to those directors in January of the following year. Total stock-based compensation expense was $637 thousand and $1.1 million for the three and six months ended June 30, 2022, respectively, compared to $540 thousand and $991 thousand for the three and six months ended June 30, 2021, respectively.
A tax benefit associated with employee exercises and vesting of stock compensation of $10 thousand and $131 thousand was recorded as an adjustment to the Company's income tax expense for the three and six months ended June 30, 2022, respectively,
Notes to the Unaudited Consolidated Interim Financial Statements
compared with a tax benefit of $23 thousand and $39 thousand for the three and six months ended June 30, 2021, respectively. These amounts, treated as discrete tax items in the period in which they occur, will vary from year to year as a function of the volume of share-based payments vested or exercised and the then-current market price of the Company's stock in comparison to the compensation cost recognized in the Company's unaudited consolidated financial statements.
Stock Option Awards
The table below provides a summary of the options granted, including the weighted average fair value, the fair value as a percentage of the market value of the stock at the date of grant and the average assumptions used in the model for the periods indicated:
Six months ended June 30,
2022
2021
Options granted
17,060
17,385
Term in years
10
10
Weighted average assumptions used in the fair value model:
Expected volatility
44
%
44
%
Expected dividend yield
3.05
%
3.00
%
Expected life in years
6.5
6.5
Risk-free interest-rate
2.20
%
1.28
%
Weighted average market price on date of grants
$
38.57
$
32.73
Per share weighted average fair value
$
14.40
$
11.95
Fair value as a percentage of market value at grant date
37
%
37
%
Options granted during the first six months of 2022 and 2021 generally vest 50% in year two and 50% in year four, on or about the anniversary date of the awards.
The Company utilizes the Black-Scholes option valuation model to determine the per share grant date fair value of stock option grants.
The Company recognized stock-based compensation expense related to stock option awards of $52 thousand and $100 thousand for the three and six months ended June 30, 2022, respectively, compared to $47 thousand and $92 thousand for the three and six months ended June 30, 2021, respectively.
Restricted Stock Awards
Restricted stock awards are granted at the market price of the Company's common stock on the date of the grant. Employee restricted stock awards generally vest over four years in equal portions beginning on or about the first anniversary date of the restricted stock award or are performance-based restricted stock awards that vest upon the Company achieving certain predefined performance objectives. Non-employee director restricted stock awards generally vest over two years in equal portions beginning on or about the first anniversary date of the restricted stock award.
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)
2022
2021
Two-year vesting
8,823
8,109
Four-year vesting
22,116
23,920
Performance-based vesting
22,254
21,559
Total restricted stock awards granted
53,193
53,588
Weighted average grant date fair value
$
38.57
$
32.73
Stock-based compensation expense recognized in association with stock awards, mainly restricted stock awards, amounted to $521 thousand and $881 thousand for the three and six months ended June 30, 2022, respectively, compared to $436 thousand and $776 thousand for the three and six months ended June 30, 2021, respectively.
Notes to the Unaudited Consolidated Interim Financial Statements
Stock in Lieu of Directors' Fees
In addition to restricted stock awards discussed above, the non-employee members of the Company's Board may opt to receive newly issued shares of the Company's common stock in lieu of cash compensation for attendance at meetings of the Board and committees of the Board. Stock-based compensation expense related to these directors' fees amounted to $64 thousand and $134 thousand for the three and six months ended June 30, 2022, respectively, compared to $57 thousand and $123 thousand for the three and six months ended June 30, 2021, respectively, and is included in other operating expenses and in "Accrued expenses and other liabilities." In January 2022, non-employee directors were issued 7,375 shares of the Company's common stock in lieu of 2021 annual cash fees of $252 thousand at a price of $34.14 per share, based on an average of the quarterly close price of the Company's common stock on the NASDAQ Global Market in 2021.
(13)Earnings per Share
Basic earnings per share are calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding (including participating securities) during the year. The Company's only participating securities are unvested restricted stock awards that contain non-forfeitable rights to dividends. Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.
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,
2022
2021
2022
2021
Basic weighted average common shares outstanding
12,107,804
12,009,358
12,082,041
11,984,283
Dilutive shares
43,908
46,386
54,569
40,745
Diluted weighted average common shares outstanding
12,151,712
12,055,744
12,136,610
12,025,028
There were 48,662 and 34,473 stock options outstanding for the three and six months ended June 30, 2022, respectively, that
were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for those periods. There were 55,618 and 76,925 stock options outstanding for the three and six months ended June 30, 2021, respectively, that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for the respective periods. These stock options, which were not dilutive, may potentially dilute earnings per share in the future.
Unvested participating restricted awards amounted to 126,308 shares and 113,871 shares as of June 30, 2022 and December 31, 2021, respectively.
(14)Fair Value Measurements
The FASB defines the fair value of an asset or liability to be the price which a seller would receive in an orderly transaction between market participants (an exit price) and also establishes a fair value hierarchy segregating fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; and (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed based on the best information available under the circumstances.
Notes to the Unaudited Consolidated Interim Financial Statements
The following tables summarize significant assets and liabilities carried at fair value and placement in the fair value hierarchy at the dates specified:
The Company utilizes third-party pricing vendors to provide valuations on its debt securities. Fair values provided by the vendors were generally determined based upon pricing matrices utilizing observable market data inputs for similar or benchmark securities in active markets and/or based on a matrix pricing methodology which employs The Bond Market Association's standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Therefore, management regards the inputs and methods used by third-party pricing vendors to be "Level 2 inputs and methods" as defined in the "fair value hierarchy." The Company periodically obtains a second price from an impartial third party on debt securities to assess the reasonableness of prices provided by the primary independent pricing vendor.
The Company's equity portfolio fair value is measured based on quoted market prices for the shares; therefore, these securities are categorized as Level 1 within the fair value hierarchy.
The Bank is required to purchase FHLB stock at par value in association with advances from the FHLB. The stock is issued, redeemed, repurchased and transferred by the FHLB only at their fixed par value. This stock is classified as a restricted investment and carried at FHLB par value which management believes approximates fair value; therefore, these securities are categorized as Level 2 measures.
The fair values for the interest-rate swap assets and liabilities, which is comprised of back-to-back swaps and cash flow hedges, represent a FASB Level 2 measurement and are based on settlement values adjusted for credit risks and observable market interest-rate curves. Refer also to Note 8, "Derivatives and Hedging Activities," this Form 10-Q, contained above, for additional information on the Company's interest-rate swaps.
Notes to the Unaudited Consolidated Interim Financial Statements
For loans individually assessed and deemed to be collateral dependent management has estimated the value and the probable credit loss by comparing the loan's amortized cost against the expected realizable fair value of the collateral (appraised value, or internal analysis, less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in these assessments, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent loans carried at realizable fair value are categorized as Level 3 within the fair value hierarchy. A specific reserve is assigned to the collateral dependent loan for the amount of management's estimated probable credit loss. The specific reserve assigned to individually evaluated loans that are collateral dependent amounted to $341 thousand at June 30, 2022, compared to $1.0 million at December 31, 2021.
The following table presents additional quantitative information about assets measured at fair value on a non-recurring basis for which the Company utilized Level 3 inputs (significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability) to determine fair value as of June 30, 2022 and December 31, 2021:
(1)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.
Estimated Fair Values of Assets and Liabilities
In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the Consolidated Balance Sheets, the Company is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the Consolidated Balance Sheets.
Financial instruments for which the fair value is disclosed but not recognized on the Consolidated Balance Sheets are summarized below.The table includes the carrying value, estimated fair value and its placement in the fair value hierarchy as follows:
Notes to the Unaudited Consolidated Interim Financial Statements
Excluded from the tables above are certain financial instruments with carrying values that approximated their fair value at the dates indicated, as they were short-term in nature or payable on demand. These include cash and cash equivalents, accrued interest and non-term deposit accounts. The respective carrying values of these instruments would all be classified within Level 1 in the fair value hierarchy.
Also excluded from these tables are the fair values of commitments for unused portions of lines of credit and commitments to originate loans that were short-term, at current market rates and estimated to have no significant change in fair value.
(15)Supplemental Cash Flow Information
The supplemental cash flow information for the six months ended June 30, 2022 and June 30, 2021 is as follows:
Six months ended June 30,
(Dollars in thousands)
2022
2021
Supplemental financial data:
Cash paid for: interest
$
2,924
$
4,559
Cash paid for: income taxes
9,101
5,864
Cash paid for: lease liability
682
608
Supplemental schedule of non-cash activity:
Net purchases of investment securities not yet settled
—
10,699
Transfer from loans to other real estate owned
—
2,400
ROU lease assets: operating leases(1)
—
2,468
__________________________________________
(1)Represents net new right of use ("ROU") lease assets added in the periods indicated..
Item 2 -Management's Discussion and Analysis of Financial Condition and Results of Operations
Management's discussion and analysis should be read in conjunction with the Company's unaudited consolidated interim financial statements and notes thereto contained in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022 (this "Form 10-Q"), and the audited consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021 (the "2021 Annual Report on Form 10-K") as filed with the Securities and Exchange Commission (the "SEC") on March 10, 2022.
Throughout this Management Discussion & Analysis, certain measures have been adjusted to provide what management believes are more meaningful comparisons between periods. The items principally impacted and reported as non-GAAP were loans (PPP loans), liquidity (interest-earning deposits with banks), shareholders' equity (accumulated other comprehensive income ("AOCI")), and any related measures presented. See "Non-GAAP Measures" below for additional information on the non-GAAP measures of the Company’s performance.
Special Note Regarding Forward-Looking Statements
This Form 10-Q contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Such forward-looking statements about the Company and its industry involve substantial risks and uncertainties. Statements other than statements of current or historical fact, including statements regarding the Company’s future financial condition, results of operations, business plans, liquidity, cash flows, projected costs, and the impact of any laws or regulations applicable to the Company, are forward-looking statements. Forward-looking statements may be identified by reference to a future period or periods or by use of forward-looking terminology such as "will," "should," "could," "anticipates," "believes," "expects," "intends," "may," "plans," "pursue," "views" and similar terms or expressions. We caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.
There are or will be important factors that could cause our actual results to differ materially from those indicated in these forward-looking statements, including, but not limited to, the following:
•the impact, duration and severity of the ongoing COVID-19 pandemic ("pandemic"), and any current or future variants thereof, and the Company’s participation in and execution of government programs related to the pandemic;
•failure of risk management controls and procedures;
•the adequacy of the allowance for credit losses;
•risk specific to commercial loans and borrowers;
•changes in the business cycle and downturns in the local, regional, or national economies, including changes in consumer spending and deterioration in the local real estate market, could negatively impact credit and/or asset quality and result in credit losses and increases in the Company's allowance for credit losses;
•the uncertain inflationary outlook in the United States and our market areas, and its impact on market interest rates, the economy and credit quality;
•deterioration of capital markets, which could adversely affect the value or credit quality of the Company's assets and the availability of funding sources necessary to meet the Company's liquidity needs;
•changes in market interest rates could negatively impact net interest income;
•increases in market interest rates could negatively impact bond market values and result in a lower net book value;
•our ability to successfully manage the current rising market interest-rate environment, our credit risk and the level of future non-performing assets and charge-offs;
•potential decreases or growth of assets, deposits, future non-interest expenditures and non-interest income;
•our ability to maintain adequate liquidity and to raise necessary capital to fund our operations or to meet minimum regulatory capital levels;
•material decreases in the amount of deposits we hold, or a failure to grow our deposit base as necessary to help fund our growth and operations;
•changes in market interest rates that affect the pricing of our loans and deposits and our net interest income, as well as the potential discontinuance of London Interbank Offer Rate ("LIBOR") and the uncertainty around its replacement;
•our ability to keep pace with technological change or difficulties when implementing new technologies;
•technology-related risk, including technological changes and technology service interruptions or failure could adversely impact the Company's operations and increase technology-related expenditures;
•cybersecurity risk including security breaches and identity theft could impact the Company's reputation, increase regulatory oversight, and impact the financial results of the Company;
•increasing competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services could adversely affect the Company's competitive position within its market area and reduce demand for the Company's products and services;
•our ability to retain and increase our aggregate assets under management;
•our ability to enter new markets successfully and capitalize on growth opportunities, including the receipt of required regulatory approvals;
•damage to our reputation in the markets we serve;
•risks associated with fraudulent, negligent, or other acts by our customers, employees or vendors;
•exposure to legal claims and litigation;
•the inability to raise capital, on terms favorable to us, could cause us to fall below regulatory minimum capital adequacy levels and consequently restrict our business and operations;
•our ability to maintain an effective system of disclosure controls and procedures and internal control over financial reporting;
•our ability to attract, hire and retain qualified management personnel;
•recent and future changes in laws and regulations that apply to the Company's business and operations, and any additional regulations, or repeals that may be forthcoming as a result thereof, which could cause the Company to incur additional costs and adversely affect the Company's business environment, operations and financial results;
•future regulatory compliance costs, including any increase caused by new regulations imposed by the government;
•changes in tariffs and trade barriers;
•governmental monetary and fiscal policies, including the policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”);
•our ability to comply with supervisory actions by federal and state banking agencies;
•changes in the scope and cost of Federal Deposit Insurance Corporation (the “FDIC”) insurance and other coverage;
•changes in accounting and/or auditing standards, policies and practices, as may be adopted or established by the regulatory agencies, FASB, or the Public Company Accounting Oversight Board could negatively impact the Company's financial results; and
•systemic risks associated with the soundness of other financial institutions.
The Company cautions readers that the forward-looking statements in this Form 10-Q reflect numerous assumptions that management believes to be reasonable, but which are inherently uncertain and beyond the Company's control. Forward-looking statements involve a number of risks and uncertainties that could cause the Company's actual results to differ materially from those expressed in, or implied by, the forward-looking statement. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and readers should not place undue reliance on such forward-looking information and statements. Any forward-looking statements in this Form 10-Q are based on information available to the Company as of the date of this Form 10-Q, and the Company undertakes no obligation to publicly update or otherwise revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law.
The Company strategically operates with a long-term mindset that is focused on organic growth and supporting such growth by continually investing in our people, products, services, technology, including digital evolution, and both new and existing branches. The relocations of our branches in Lawrence and Lexington, Massachusetts were completed in August 2021 and March 2022, respectively, and our 27th branch located in Londonderry, New Hampshire opened in May of 2022.
Net income for the three months ended June 30, 2022, amounted to $8.2 million, or $0.67 per diluted common share, compared to $11.1 million, or $0.92 per diluted common share, for the three months ended June 30, 2021. The decrease was attributable primarily to increases in the provision for credit losses of $2.4 million and non-interest expense of $1.7 million, partially offset by an increase in net interest income of $535 thousand. The increase in the provision for credit losses of $2.4 million in the second quarter of 2022, compared to the second quarter of 2021, was attributable mainly to loan growth, and to a lesser extent, the worsening of forecasted economic conditions due to the rising interest rate environment and persistent high inflation levels, partially offset by improved credit quality. Net income for the three months ended June 30, 2022, compared to the three months ended June 30, 2021, was also impacted by a decrease in PPP income, included in net interest income, of $5.0 million compared to the prior year period. The decrease in PPP income was offset by other components of net interest income including increases in loan income, excluding PPP income (non-GAAP), of $3.5 million and investment security income of $1.4 million, and a decrease in deposit interest expense of $439 thousand.
Net income for the six months ended June 30, 2022, amounted to $18.4 million, or $1.52 per diluted common share, compared to $21.5 million, or $1.79 per diluted common share, for the six months ended June 30, 2021. The decrease was attributable primarily to increases in the provision for credit losses of $2.2 million and non-interest expense of $2.8 million, partially offset by an increase in non-interest income of $676 thousand. Net income for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was also impacted by a decrease in PPP income, included in net interest income, of $9.5 million, an increase in gains on sales of debt securities, included in non-interest income, of $934 thousand, and a decrease in losses on extinguishment of subordinated debt, included in non-interest expense, of $713 thousand.
Total assets amounted to $4.42 billion at June 30, 2022, compared to $4.45 billion at December 31, 2021. Investment securities at fair value declined $91.6 million during the six months ended June 30, 2022, primarily from a decline in the fair value of debt securities held in the Company's securities portfolio due to the significant increase in market interest rates during the period. Total loans increased $164.2 million consisting of an increase in core loans (non-GAAP) of $220.4 million and a decrease in PPP loans of $56.2 million. Total core loans (non-GAAP) increased 16% versus a year ago. Loan growth was especially strong in the second quarter with an increase of 5% (19% annualized) at June 30, 2022, compared to March 31, 2022, resulting from high customer demand and strong business development efforts.
The non-performing loan to total core loan ratio (non-GAAP) decreased to 0.21% at June 30, 2022 from 0.86% at March 31, 2022 and 1.21% at June 30, 2021. The improvement in the second quarter of 2022 resulted primarily from two credits that were returned to accrual status due to improved financial strength and consistent payment history.
During the six months ended June 30, 2022, customer deposits increased $36.6 million, and shareholders’ equity decreased 61.8 million with the latter due primarily to the decrease in the fair value of debt securities held in the Company’s securities portfolio due to the significant increase in market interest rates during the period, net of tax.
Non-GAAP Measures
The accompanying unaudited consolidated interim financial statements have been prepared in accordance with GAAP. However, certain financial measures we present are supplemental measures that are not required by or are not presented in accordance with GAAP. We refer to any measure that excludes PPP loans as "core" and any measure that excludes PPP loans and interest-earning deposits with banks as "adjusted." The activity which resulted in the Company's use of non-GAAP measures consisted of: (1) the Company originated over $717 million in short-term PPP loans between April 2020 and May 2021; (2) forgiveness of PPP loans by the SBA began in November 2020 and continued through the current period, and approximately 98% of the principal balance of PPP loans originated by the Company has been forgiven by the SBA through June 30, 2022; (3) liquidity, carried as lower-yielding interest-earning deposits with banks, had increased significantly following the trends in customer deposits and PPP loan forgiveness over the past two years; and (4) the significant increase in market interest rates during the first half of 2022 has resulted in unrealized losses in the Company's available-for-sale debt securities portfolio of $93.5 million and an accumulated other comprehensive loss, included in shareholder's equity, of $72.4 million at June 30, 2022.
These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company's GAAP financial information. In addition, the non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies; therefore, these measures may not be comparable to other similarly titled measures as presented by other companies.
The following tables summarize the reconciliation of GAAP to non-GAAP measures related to the impact of PPP loans on total loans and loan interest income:
(Dollars in thousands)
June 30, 2022
December 31, 2021
June 30, 2021
Total Core Loans
Total loans
$
3,084,915
$
2,920,684
$
2,954,189
Adjustment: PPP loans
(15,758)
(73,885)
(309,710)
Adjustment: Deferred PPP fees
470
2,383
9,627
Total core loans (non-GAAP)
$
3,069,627
$
2,849,182
$
2,654,106
Three months ended
Six months ended
June 30,
June 30,
(Dollars in thousands)
2022
2021
2022
2021
Loan Income Excluding PPP Income
Loan income
$
32,148
$
33,660
$
62,843
$
67,310
Adjustment: PPP income
(622)
(5,584)
(2,100)
(11,597)
Loan income excluding PPP income (non-GAAP)
$
31,526
$
28,076
$
60,743
$
55,713
Net Interest Income Excluding PPP Income
Net interest income
$
35,821
$
35,286
$
69,854
$
70,022
Adjustment: PPP income
(622)
(5,584)
(2,100)
(11,597)
Net interest income excluding PPP income (non-GAAP)
The following tables summarize the reconciliation of GAAP to non-GAAP measures related to the impact of PPP loans and interest-earning deposits with banks on net interest margin:
Three months ended
Six months ended
(Dollars in thousands)
June 30, 2022
June 30, 2021
June 30, 2022
June 30, 2021
Adjusted Average Interest-Earning Assets
Total average interest-earning assets
$
4,203,843
$
4,147,580
$
4,222,618
$
4,036,484
Adjustment: Average PPP loans, net
(23,997)
(411,867)
(36,394)
(432,227)
Adjustment: Average interest-earning deposits with banks
(211,844)
(504,649)
(296,212)
(392,844)
Total adjusted average interest-earning assets (non-GAAP)
$
3,968,002
$
3,231,064
$
3,890,012
$
3,211,413
Adjusted Net Interest Income
Net interest income (tax equivalent)
$
36,163
$
35,645
$
70,539
$
70,739
Adjustment: PPP income
(622)
(5,584)
(2,100)
(11,597)
Adjustment: Interest on interest-earning deposits with banks
(380)
(136)
(552)
(204)
Adjusted net interest income (tax equivalent) (non-GAAP)
$
35,161
$
29,925
$
67,887
$
58,938
Adjusted Net Interest Margin
Net interest margin (tax equivalent)
3.45
%
3.45
%
3.36
%
3.53
%
Adjustment: PPP effect(1)
(0.04)
%
(0.22)
%
(0.07)
%
(0.22)
%
Adjustment: Interest-earning deposits with banks effect(2)
0.14
%
0.48
%
0.22
%
0.39
%
Adjusted net interest margin (tax equivalent) (non-GAAP)
3.55
%
3.71
%
3.51
%
3.70
%
__________________________________________
(1)PPP loan adjustments include an elimination of average PPP loans, net of deferred SBA fees, as well as interest income on PPP loans and related SBA fee accretion, included in net interest income.
(2)Interest-earning deposit adjustments include an elimination of average interest-earning deposits with banks, as well as interest income on interest-earning deposits with banks, included in net interest income.
The following tables summarize the reconciliation of GAAP to non-GAAP measures related to the impact of AOCI on the Company's reported book value per common share and return on average shareholders' equity:
At or for the three months ended
(Dollars in thousands, except per share data)
June 30, 2022
December 31, 2021
Shareholders' Equity
Total shareholders' equity (as reported)
$
285,110
$
346,895
Less: accumulated other comprehensive (loss) income
(72,378)
4,662
Shareholders' equity excluding AOCI (non-GAAP)
$
357,488
$
342,233
Book Value Per Common Share
Book value per common share (as reported)
$
23.53
$
28.82
Book value per common share excluding AOCI (non-GAAP)
$
29.51
$
28.43
Average Shareholders' Equity
Total average shareholders' equity (as reported)
$
291,163
$
342,635
Less: average accumulated other comprehensive (loss) income
(69,125)
3,585
Average shareholders' equity excluding AOCI (non-GAAP)
$
360,288
$
339,050
Return on Average Shareholders' Equity
Return on average shareholders' equity (as reported)
11.24
%
12.56
%
Return on average shareholders' equity excluding AOCI (non-GAAP)
Management utilizes a comprehensive enterprise risk management framework that enables a coordinated and structured approach for identifying, assessing and managing risks across the Company and provides reasonable assurance that management has the tools, programs, people, and processes in place to support informed decision making, anticipate risks before they materialize and maintain the Company's risk profile consistent with its strategic planning, and applicable laws and regulations.
See Part I, Item 1, "Business," under the "Risk Management Framework," section of the 2021 Annual Report on Form 10-K for additional information on the Company's key risk mitigation strategies.
In addition to the risks outlined in this Form 10-Q, numerous other factors that could adversely affect the Company's future results of operations and financial condition, and its reputation and business model, are addressed in Part I, Item 1A, "Risk Factors," of the 2021 Annual Report on Form 10-K.
Accounting Policies/Critical Accounting Estimates
As discussed in the Company's 2021 Annual Report on Form 10-K and in this Form 10-Q, the most significant areas in which management applies critical assumptions and estimates are: the estimates of the ACL for loans and available-for-sale securities, the reserve for unfunded commitments and the impairment review of goodwill.
The Company has not materially changed its significant accounting and reporting policies from those disclosed in its 2021 Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 1, Item (c), "Recent Accounting Pronouncements," to the Company's unaudited consolidated interim financial statements in this Form 10-Q for information regarding recent accounting pronouncements.
Results of Operations for the three months ended June 30, 2022 and June 30, 2021
Unless otherwise indicated, the reported results are for the three months ended June 30, 2022 with the "same period," the "prior year period," the "comparable period," and the "prior period" being the three months ended June 30, 2021. Average yields are presented on an annualized tax equivalent basis.
Net Income
Net income for the three months ended June 30, 2022, amounted to $8.2 million, a decrease of $3.0 million, or 27%, compared to the prior year period. Pre-tax income for the three months ended June 30, 2022, decreased by $4.2 million, or 28%, compared to the prior year period. For the three months ended June 30, 2022, the effective tax rate was 23.7%, compared to 25.0% for the three months ended June 30, 2021.
•The decrease in pre-tax income was attributable primarily to increases in the provision for credit losses of $2.4 million and non-interest expense of $1.7 million, partially offset by an increase in net interest income of $535 thousand.
•Tax expense for the three months ended June 30, 2022, benefited from a lower effective tax rate compared to the prior year period due to increases in tax-exempt and lower-taxed income at the Bank's security corporation subsidiaries.
Net Interest Income
Net interest income for the three months ended June 30, 2022, amounted to $35.8 million, an increase of $535 thousand, or 2%, compared to the three months ended June 30, 2021.
•The increase in net interest income was due largely to increases in loan income, excluding PPP income (non-GAAP), of $3.5 million and investment security income of $1.4 million, and a decrease in deposit interest expense of $439 thousand, partially offset by a decrease in PPP income of $5.0 million.
•PPP income amounted to $622 thousand for the three months ended June 30, 2022, compared to $5.6 million for the three months ended June 30, 2021. PPP loans outstanding amounted to $15.3 million at June 30, 2022, compared to $300.1 million at June 30, 2021, due to the continued forgiveness of PPP loans by the SBA during the period.
Tax equivalent net interest margin ("net interest margin" or "margin") was 3.45% for each of the three-month periods ended June 30, 2022 and June 30, 2021.
Key items impacting margin for the three months ended June 30, 2022, compared to the prior year period included:
•Average interest-earning deposits with banks decreased $292.8 million, or 58%, while the yield increased 61 basis points. The decrease in average balance resulted primarily from the funding of growth in the Company's investment and core loan portfolios, partially offset by funds received from the forgiveness of PPP loans by the SBA. The increase in yield reflected higher market interest rates during the three months ended June 30, 2022.
•Average investment securities at fair value increased $379.1 million, or 64%, while the tax-equivalent yield decreased 41 basis points. The increase in average balance resulted from investment security purchases in the second half of 2021 when market interest rates were lower than the three months ended June 30, 2022.
•Average loans decreased $30.2 million, or 1%, and the yield decreased 16 basis points.
◦Average PPP loans outstanding decreased $387.9 million, or 94%.
◦Average core loans (non-GAAP) increased $357.7 million, or 14%, while the yield decreased 5 basis points.
•Average total deposits increased $58.2 million, or 2%, while the yield decreased 5 basis points.
◦Average non-interest checking balances decreased $102.2 million, or 8%.
◦Average brokered deposits decreased $75.0 million, or 100%.
•Adjusted net interest margin (non-GAAP), amounted to 3.55% and 3.71%, respectively.
•Adjusted net interest margin (non-GAAP) for the three months ended March 31, 2022, as disclosed in the March 31, 2022 Form 10-Q, amounted to 3.47%.
Interest-rate risk is reviewed in detail in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.
The following table sets forth, on a tax-equivalent basis, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the three months ended June 30, 2022, compared to the three months ended June 30, 2021. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) volume (change in average portfolio balance multiplied by prior period average rate); and (2) interest-rate (change in average interest-rate multiplied by prior period average balance). Changes attributable to the combined impact of volume and rate have been allocated proportionately based on absolute value to the changes due to volume and the changes due to rate.
Increase (decrease) due to
(Dollars in thousands)
Net Change
Volume
Rate
Interest income
Loans and loans held for sale (tax-equivalent)
$
(1,527)
$
(490)
$
(1,037)
Investment securities (tax-equivalent)
1,351
2,035
(684)
Other interest-earning assets(1)
249
(123)
372
Total interest-earning assets (tax-equivalent)
73
1,422
(1,349)
Interest expense
Interest checking, savings and money market
75
12
63
Certificates of deposit
(255)
(57)
(198)
Brokered CDs
(259)
(129)
(130)
Borrowed funds
(5)
(16)
11
Subordinated debt
(1)
1
(2)
Total interest-bearing funding
(445)
(189)
(256)
Change in net interest income (tax-equivalent)
$
518
$
1,611
$
(1,093)
__________________________________________
(1)Income on other interest-earning assets includes interest on deposits and fed funds sold, and dividends on FHLB stock.
The following table presents the Company's average balance sheet, net interest income and average rates for the three months ended June 30, 2022 and 2021:
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Three months ended June 30, 2022
Three months ended June 30, 2021
(Dollars in thousands)
Average Balance
Interest(1)
Average Yield(1)
Average Balance
Interest(1)
Average Yield(1)
Assets:
Loans and loans held for sale(2) (tax equivalent)
$
3,020,113
$
32,259
4.28
%
$
3,050,289
$
33,786
4.44
%
Investment securities(3) (tax equivalent)
969,563
5,012
2.07
%
590,488
3,661
2.48
%
Other interest-earning assets(4)
214,167
393
0.74
%
506,803
144
0.11
%
Total interest-earnings assets (tax equivalent)
4,203,843
37,664
3.59
%
4,147,580
37,591
3.63
%
Other assets
115,413
157,297
Total assets
$
4,319,256
$
4,304,877
Liabilities and stockholders' equity:
Interest checking, savings and money market
$
2,296,268
456
0.08
%
$
2,234,017
381
0.07
%
CDs
198,766
215
0.43
%
230,028
470
0.82
%
Brokered deposits
—
—
—
%
75,001
259
1.39
%
Borrowed funds
2,961
13
1.73
%
8,625
18
0.83
%
Subordinated debt(5)
59,021
817
5.54
%
58,901
818
5.55
%
Total interest-bearing funding
2,557,016
1,501
0.24
%
2,606,572
1,946
0.30
%
Non-interest checking
1,424,132
—
—
%
1,321,903
—
—
%
Total deposits, borrowed funds and subordinated debt
3,981,148
1,501
0.15
%
3,928,475
1,946
0.20
%
Other liabilities
46,945
42,816
Total liabilities
4,028,093
3,971,291
Stockholders' equity
291,163
333,586
Total liabilities and stockholders' equity
$
4,319,256
$
4,304,877
Net interest-rate spread (tax equivalent)
3.35
%
3.33
%
Net interest income (tax equivalent)
36,163
35,645
Net interest margin (tax equivalent)
3.45
%
3.45
%
Less tax equivalent adjustment
342
359
Net interest income
$
35,821
$
35,286
Net interest margin
3.42
%
3.41
%
________________________________________
(1)Average yields and interest income are presented on a tax equivalent basis, calculated using a U.S. federal income tax rate of 21% in both 2022 and 2021, based on tax equivalent adjustments associated with tax exempt loans and investments interest income.
(2)Average loans and loans held for sale include non-accrual loans and are net of average deferred loan fees.
(3)Average investments are presented at average amortized cost.
(4)Average other interest-earning assets include interest-earning deposits with banks, federal funds sold and FHLB stock.
(5)The subordinated debt is net of average deferred debt issuance costs.
The provision for credit losses for the three months ended June 30, 2022, amounted to $2.4 million, compared to $39 thousand for the three months ended June 30, 2021.
•The provision for the three months ended June 30, 2022, consisted of $2.2 million for loans outstanding and $214 thousand for reserves on unfunded commitments (included in other liabilities).
•Most of the provision for the three months ended June 30, 2022, related to the Company's strong loan growth during the second quarter of 2022, and to a lesser extent, a deterioration in the economic forecast due to the rising interest rate environment and persistent high inflation levels, partially offset by improved credit quality.
The provision for credit losses is a significant factor in the Company's operating results. For further discussion regarding the provision for credit losses and management's assessment of the adequacy of the ACL see "Asset Quality," and "ACL for Loans" under "Financial Condition" in this Item 2, below.
Non-Interest Income
Non-interest income for the three months ended June 30, 2022, amounted to $4.1 million, a decrease of $620 thousand, or 13%, compared to the three months ended June 30, 2021.
•The decrease in non-interest income over the respective periods resulted primarily from a decrease in gains on sales of loans of $490 thousand and a decline in equity investment fair values of $493 thousand (included in other income), partially offset by an increase in deposit and interchange fees of $349 thousand.
Non-Interest Expense
Non-interest expense for the three months ended June 30, 2022, amounted to $26.9 million, an increase of $1.7 million, or 7%, compared to the three months June 30, 2021.
•The increase in non-interest expense over the respective periods resulted primarily from an increase in salaries and employee benefits of $1.3 million, or 8%. The increase in salaries and employee benefit expense included an increase of $596 thousand in performance-based incentive accruals. Excluding this cost, the increases in non-interest expense and salaries and benefits expense amounted to $1.1 million, or 5%, and $715 thousand, or 5%, respectively, compared to the prior year period.
Income Taxes
The effective tax rate for the three months ended June 30, 2022, was 23.7%, compared to 25.0% for the three months ended June 30, 2021. Tax expense for the three months ended June 30, 2022, benefited from a lower effective tax rate compared to the prior year period due to increases in tax-exempt and lower-taxed income at the Bank's security corporation subsidiaries.
Results of Operations for the six months ended June 30, 2022 and June 30, 2021
Unless otherwise indicated, the reported results are for the six months ended June 30, 2022 with the "same period," the "prior year period," the "comparable period," "prior year," and "prior period" being the six months ended June 30, 2021. Average yields are presented on an annualized tax equivalent basis.
Net Income
Net income for the six months ended June 30, 2022, amounted to $18.4 million, a decrease of $3.0 million compared to the prior year period. Pre-tax income for six months ended June 30, 2022, decreased by $4.5 million, or 16%, compared to the prior year period. For the six months ended June 30, 2022, the effective tax rate was 23.2%, compared to 24.6% for the six months ended June 30, 2021.
•The decrease in pre-tax income was attributable primarily to increases in the provision for credit losses of $2.2 million and non-interest expense of $2.8 million, partially offset by an increase in non-interest income of $676 thousand.
•Tax expense for the six months ended June 30, 2022, benefited from a lower effective tax rate compared to the prior year period due to increases in tax-exempt income, lower-taxed income at Bank's security corporation subsidiaries and discrete tax benefits related to stock-based compensation transactions.
Net Interest Income
Net interest income for the six months ended June 30, 2022, amounted to $69.9 million, a decrease of $168 thousand, or 0%, compared to the six months ended June 30, 2021.
•The decrease in net interest income was due largely to a decrease in PPP income of $9.5 million, partially offset by increases in loan income, excluding PPP (non-GAAP), of $5.0 million, investment security income of $2.5 million, and a decrease in interest expense of $1.4 million.
•PPP income amounted to $2.1 million for the six months ended June 30, 2022, compared to $11.6 million for the six months ended June 30, 2021. PPP loans outstanding amounted to $15.3 million at June 30, 2022, compared to $300.1 million at June 30, 2021, due to the continued forgiveness of PPP loans by the SBA during the period.
Net Interest Margin
Net interest margin was 3.36% and 3.53% for the six-month periods ended June 30, 2022 and June 30, 2021, respectively.
Key items impacting margin for the six months ended June 30, 2022, compared to the prior year period included:
•Average interest-earning deposits with banks decreased $96.6 million, or 25%, while the yield increased 28 basis points. The decrease in average balance resulted primarily from the funding of growth in the Company's investment and core loan portfolios, partially offset by funds received from the forgiveness of PPP loans by the SBA. The increase in yield reflected higher market interest rates during the six months ended June 30, 2022.
•Average investment securities at fair value increased $375.0 million, or 64%, while the tax-equivalent yield decreased 45 basis points. The increase in average balance resulted from investment security purchases in the second half of 2021 when market interest rates were lower than the six months ended June 30, 2022.
•Average loans decreased $92.4 million, or 3%, and the yield decreased 16 basis points.
◦Average PPP loans outstanding decreased $395.8 million, or 92%.
◦Average core loans (non-GAAP) increased $303.4 million, or 12%, while the yield decreased 10 basis points.
•Average total deposits increased $188.1 million, or 5%, while the yield decreased 6 basis points.
◦Average non-interest checking balances increased $130.7 million, or 10%.
◦Average brokered deposits decreased $75.0 million, or 100%.
•Adjusted net interest margin (non-GAAP), amounted to 3.51% and 3.70%, respectively.
Interest-rate risk is reviewed in detail in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.
The following table sets forth, on a tax-equivalent basis, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the six months ended June 30, 2022, compared to the six months ended June 30, 2021. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (i) volume (change in average portfolio balance multiplied by prior year average rate); and (ii) interest rate (change in average interest rate multiplied by prior year average balance). Changes attributable to the combined impact of volume and rate have been allocated proportionately based on absolute value to the changes due to volume and the changes due to rate.
Increase (decrease) due to
(Dollars in thousands)
Net Change
Volume
Rate
Interest income
Loans and loans held for sale (tax equivalent)
$
(4,498)
$
(2,193)
$
(2,305)
Investment securities (tax equivalent)
2,546
4,010
(1,464)
Other interest-earning assets(1)
365
(64)
429
Total interest-earning assets (tax equivalent)
(1,587)
1,753
(3,340)
Interest expense
Interest checking, savings and money market
(16)
76
(92)
CDs
(633)
(139)
(494)
Brokered deposits
(513)
(257)
(256)
Borrowed funds
—
(18)
18
Subordinated debt
(225)
(199)
(26)
Total interest-bearing funding
(1,387)
(537)
(850)
Change in net interest income (tax equivalent)
$
(200)
$
2,290
$
(2,490)
__________________________________________
(1)Income on other interest-earning assets includes interest on deposits with banks, federal funds sold, and dividends on FHLB stock.
The following table presents the Company's average balance sheet, net interest income and average rates for the six months ended June 30, 2022 and 2021:
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Six months ended June 30, 2022
Six months ended June 30, 2021
(Dollars in thousands)
Average Balance
Interest(1)
Average Yield(1)
Average Balance
Interest(1)
Average
Yield(1)
Assets:
Loans and loans held for sale(2) (tax equivalent)
$
2,965,998
$
63,064
4.29
%
$
3,058,424
$
67,562
4.45
%
Investment securities(3) (tax equivalent)
958,211
9,833
2.05
%
583,172
7,287
2.50
%
Other interest-earning assets(4)
298,409
574
0.39
%
394,888
209
0.11
%
Total interest-earnings assets (tax equivalent)
4,222,618
73,471
3.50
%
4,036,484
75,058
3.75
%
Other assets
134,683
157,943
Total assets
$
4,357,301
$
4,194,427
Liabilities and stockholders' equity:
Interest checking, savings and money market
$
2,333,587
835
0.07
%
$
2,166,805
851
0.08
%
CDs
200,723
436
0.44
%
235,089
1,069
0.92
%
Brokered deposits
—
—
—
%
75,000
513
1.38
%
Borrowed funds
3,608
26
1.46
%
7,302
26
0.72
%
Subordinated debt(5)
59,006
1,635
5.54
%
66,206
1,860
5.62
%
Total interest-bearing funding
2,596,924
2,932
0.23
%
2,550,402
4,319
0.34
%
Non-interest checking
1,398,840
—
—
%
1,268,133
—
—
%
Total deposits, borrowed funds and subordinated debt
3,995,764
2,932
0.15
%
3,818,535
4,319
0.23
%
Other liabilities
50,051
44,812
Total liabilities
4,045,815
3,863,347
Stockholders' equity
311,486
331,080
Total liabilities and stockholders' equity
$
4,357,301
$
4,194,427
Net interest-rate spread (tax equivalent)
3.27
%
3.41
%
Net interest income (tax equivalent)
70,539
70,739
Net interest margin (tax equivalent)
3.36
%
3.53
%
Less tax equivalent adjustment
685
717
Net interest income
$
69,854
$
70,022
Net interest margin
3.33
%
3.49
%
_______________________________________
(1)Average yields and interest income are presented on a tax equivalent basis, calculated using a U.S. federal income tax rate of 21% in both 2022 and 2021, based on tax equivalent adjustments associated with tax exempt loans and investments interest income.
(2)Average loans and loans held for sale include non-accrual loans and are net of average deferred loan fees.
(3)Average investment balances are presented at average amortized cost.
(4)Average other interest-earning assets includes interest-earning deposits with banks, federal funds sold, and FHLB stock.
(5)The subordinated debt is net of average deferred debt issuance costs.
The provision for credit losses for the six months ended June 30, 2022, amounted to $2.9 million, an increase of $2.2 million, compared to the six months ended June 30, 2021.
•The provision for the six months ended June 30, 2022, consisted of $3.0 million for loans outstanding, partially offset by a reduction of $81 thousand in reserves on unfunded commitments (included in other liabilities).
•Most of the provision for the six months ended June 30, 2022, related to the Company's strong loan growth during the six months ended June 30, 2022, and to a lesser extent, a deterioration in the economic forecast due to the rising interest rate environment and persistent high inflation levels, partially offset by improved credit quality.
The provision for credit losses is a significant factor in the Company's operating results. For further discussion regarding the provision for credit losses and management's assessment of the adequacy of the ACL see "Asset Quality," and "ACL for Loans" under "Financial Condition" in this Item 2, below.
Non-Interest Income
Non-interest income for the six months ended June 30, 2022, amounted to $9.7 million, an increase of $676 thousand, or 7%, compared to the six months ended June 30, 2021.
•The increase in non-interest income resulted primarily from increases in net gains on sales of debt securities of $934 thousand and deposit and interchange fees of $545 thousand, partially offset by a decrease in gains on sales of loans of $596 thousand and a decline in equity investment fair values of $644 thousand (included in other income).
Non-Interest Expense
Non-interest expense for the six months ended June 30, 2022, amounted to $52.6 million, an increase of $2.8 million, or 6%, compared to the six months ended June 30, 2021.
•The increase in non-interest expense over the respective periods resulted primarily from an increase in salaries and employee benefits of $2.4 million, or 7%. The increase in salaries and employee benefit expense during the six months ended June 30, 2022, included an increase of $958 thousand in performance-based incentive accruals. Excluding this cost, the increase in salaries and benefits expense amounted to $1.4 million, or 5%, compared to the prior year period.
•Non-interest expense in the prior year period included a loss on extinguishment of subordinated debt of $713 thousand. Excluding the increase in performance-based incentive accruals above and the non-recurring loss on extinguishment of subordinated debt, the increase in non-interest expense amounted to $2.5 million, or 5%, compared to the prior year period.
Income Taxes
The effective tax rate for the six months ended June 30, 2022, was 23.2%, compared to 24.6% for the six months ended June 30, 2021. Tax expense for the six months ended June 30, 2022, benefited from a lower effective tax rate compared to the prior year period due to increases in tax-exempt income, lower-taxed income at Bank's security corporation subsidiaries and discrete tax benefits related to stock-based compensation transactions.
Financial Condition
Total assets amounted to $4.42 billion at June 30, 2022, compared to $4.45 billion at December 31, 2021, a decrease of $30.4 million, or 1%. The decrease was driven by decreases in interest-earning deposits with banks of $152.7 million, investments securities at fair value of $91.6 million, and PPP loans outstanding of $56.2 million, partially offset by an increase in core loans (non-GAAP) of $220.4 million. The balance sheet composition and changes since December 31, 2021 are discussed below.
Cash and cash equivalents
Cash and cash equivalents may be comprised of cash on hand and cash items due from banks, interest-earning deposits with banks (deposit accounts, excess reserve cash balances, money markets, and money market mutual funds accounts) and federal funds sold ("fed funds"). Cash and cash equivalents at June 30, 2022 decreased $130.1 million since December 31, 2021. At June 30, 2022 and December 31, 2021, cash and cash equivalents amounted to 7% and 10% of total assets, respectively. The decrease in cash and cash equivalents since December 31, 2021 was related primarily to funding core loan growth (non-GAAP) during the six months ended June 30, 2022.
While balances in cash and cash equivalents will fluctuate due primarily to the timing of net cash flows from deposits, borrowings, loans and investments, and the immediate liquidity needs of the Company, management believes customers have generally maintained higher liquidity.
Investments
At June 30, 2022, the fair value of the investment portfolio amounted to $866.6 million, a decrease of $91.6 million, or 10%, since December 31, 2021. The investment portfolio at fair value represented 20% and 22% of total assets at June 30, 2022 and December 31, 2021, respectively. The change resulted primarily from a decrease in the fair value of the Company's investment portfolio of $99.4 million, during the six months ended June 30, 2022, caused primarily by significant increases in market interest rates over the respective periods. As of June 30, 2022 and December 31, 2021, the Company's investment portfolio was comprised primarily of debt securities, classified as available-for-sale, with a small portion of the portfolio invested in equity securities.
During the six months ended June 30, 2022, the Company purchased $90.8 million in debt securities, had principal pay downs, calls and maturities totaling $51.9 million, and sold debt securities with an amortized cost of approximately $31.7 million realizing net gains on sales of $1.1 million.
Net unrealized losses on the debt securities portfolio amounted to $93.5 million at June 30, 2022, compared to net unrealized gains of $5.9 million at December 31, 2021 and $20.9 million at June 30, 2021. The Company attributes the change in net unrealized gains (losses) compared to December 31, 2021 to the significant increases in market interest rates during the respective periods.
The mix of investment securities remained relatively unchanged at June 30, 2022 compared to December 31, 2021. The effective duration of the debt securities portfolio at June 30, 2022 was approximately 5.4 years compared to 4.9 years at December 31, 2021.
Loans
As of June 30, 2022, total loans increased $164.2 million, or 6%, compared to December 31, 2021. The increase in total loans as of June 30, 2022 compared to December 31, 2021 was due primarily to net core loan growth (non-GAAP) of $220.4 million, partially offset by a decrease in PPP loans outstanding of $56.2 million due to forgiveness from the SBA. The mix of loans within the Company's loan portfolio remained relatively unchanged with commercial loans amounting to 87% of total loans at June 30, 2022, compared to 88% at December 31, 2021 and 89% at June 30, 2021.
The following table sets forth the loan balances by loan portfolio segment at the dates indicated and the percentage of each segment to total loans:
•Commercial real estate loans increased $184.4 million, or 11%, compared to December 31, 2021, and $323.8 million, or 21%, compared to June 30, 2021. The increases resulted from strong customer demand.
•Commercial and industrial loans increased by $9.9 million, or 2%, compared to December 31, 2021 and $17.6 million, or 4%, compared to June 30, 2021.
•Commercial construction loans decreased by $24.7 million, or 6%, since December 31, 2021, and increased $1.9 million, or 1%, compared to June 30, 2021. The decrease since December 31, 2021 was driven by relatively high payoff volume during the period.
•PPP loan forgiveness by the SBA amounted to $58.1 million.
•Total retail loans increased by $50.8 million, or 15%, since December 31, 2021, and $72.2 million, or 22%, compared to June 30, 2021. The increase resulted from the Company retaining more residential mortgages on its balance sheet.
At June 30, 2022, commercial loan balances participated out to various banks amounted to $59.6 million, compared to $66.7 million at December 31, 2021, and $67.4 million at June 30, 2021. These balances participated out to other institutions are not carried as assets on the Company's financial statements. Commercial loans originated by other banks in which the Company is a participating institution are carried at the pro-rata share of ownership and amounted to $88.1 million, $62.6 million and $78.7 million at June 30, 2022, December 31, 2021, and June 30, 2021, respectively. See Note 3, "Loans," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form 10-Q above for information on loans serviced for others and loans pledged as collateral.
Asset Quality
The following table sets forth information regarding non-performing assets, TDR loans and delinquent loans 60-89 days past due as to interest or principal, held by the Company at the dates indicated:
(Dollars in thousands)
June 30, 2022
December 31, 2021
June 30, 2021
Non-accrual loan summary:
Commercial real estate
$
4,367
$
22,870
$
24,167
Commercial and industrial
1,223
1,542
4,213
Commercial construction
—
1,045
2,876
Residential mortgages
501
794
389
Home equity
230
246
351
Consumer
—
25
—
Total non-performing loans
6,321
26,522
31,996
OREO
—
—
2,400
Total non-performing assets
$
6,321
$
26,522
$
34,396
Total loans
$
3,084,915
$
2,920,684
$
2,954,189
Accruing TDR loans not included above
$
5,955
$
8,556
$
9,283
Delinquent loans 60-89 days past due and still accruing
$
1,334
$
38
$
11
Loans 60-89 days past due and still accruing to total loans
0.04
%
—
%
—
%
Non-performing loans to total loans
0.20
%
0.91
%
1.08
%
Non-performing assets to total assets
0.14
%
0.60
%
0.78
%
Allowance for credit losses for loans
$
50,703
$
47,704
$
50,041
Allowance for credit losses for loans to non-performing loans
802.14
%
179.87
%
156.40
%
Allowance for credit losses for loans to total loans
1.64
%
1.63
%
1.69
%
The decrease in non-performing loans at June 30, 2022, compared to December 31, 2021, was due primarily to two commercial relationships, amounting to $17.9 million, which were upgraded and restored to accrual status during the second quarter of 2022 due to improved financial strength and consistent payment history, as well as pay-downs and payoffs on several commercial relationships.
As of June 30, 2022, the ACL for loans to total core loans ratio (non-GAAP) was 1.65% at June 30, 2022, compared to 1.67% at December 31, 2021.
The majority of non-accrual loans were also carried as adversely classified during the periods presented. At June 30, 2022 and December 31, 2021, the Company had adversely classified loans (loans carrying "special mention," "substandard," "doubtful" or "loss" classifications) amounting to $48.9 million and $61.0 million, respectively.
Adversely classified loans that were performing but possessed potential weakness and, as a result, could ultimately become non-performing loans amounted to $42.6 million at June 30, 2022 and $34.5 million at December 31, 2021. The remaining balances of adversely classified loans which were non-accrual loans, amounted to $6.3 million at June 30, 2022 and $26.5 million at December 31, 2021.
Total individually evaluated collateral dependent loans amounted to $27.1 million and $34.6 million at June 30, 2022 and December 31, 2021, respectively. Total accruing collateral dependent loans amounted to $20.9 million and $8.4 million at June 30, 2022 and December 31, 2021, respectively, while non-accrual collateral dependent loans amounted to $6.2 million and $26.2 million as of June 30, 2022 and December 31, 2021, respectively.
In management's opinion, the majority of collateral dependent loan balances at June 30, 2022 and December 31, 2021 were supported by the net realizable value of the underlying collateral. Based on management's collateral assessment at June 30, 2022, collateral dependent loans totaling $25.7 million required no specific reserves while collateral dependent loans totaling $1.4 million required specific reserves of $341 thousand. At December 31, 2021, collateral dependent loans totaling $18.4 million required no specific reserves while collateral dependent loans totaling $16.2 million required specific reserves of $1.0 million.
Total TDR loans as of June 30, 2022 and December 31, 2021, were $9.7 million and $16.4 million, respectively. TDR loans on accrual status amounted to $5.9 million and $8.6 million at June 30, 2022 and December 31, 2021, respectively. TDR loans included in non-accrual loans amounted to $3.8 million at June 30, 2022 and $7.8 million at December 31, 2021. The Company continues to work with customers and enters into loan modifications (which may or may not be TDRs) to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the individual financial circumstances and prospects of the borrower.
ACL for Loans
There have been no material changes to the Company's underwriting practices or credit risk management system used to estimate credit loss exposure as described in the 2021 Annual Report on Form 10-K. See Note 4, "ACL for Loans," to the Company's audited consolidated financial statements contained the 2021 Annual Report on Form 10-K.
See Note 4, "ACL for Loans," to the Company's unaudited consolidated interim financial statements, contained in Item 1 in this Form 10-Q, for further information regarding credit quality and the allowance for credit losses and the Company's methodology under CECL.
While management uses available information and judgment to estimate credit losses on loans, future additions to the ACL may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's ACL for loans. Such agencies may require the Company to recognize additions to the ACL based on judgments different from those of management.
The following table summarizes the activity in the ACL for loans for the periods indicated:
Six Months Ended June 30,
(Dollars in thousands)
2022
2021
Balance at beginning of year
$
47,704
$
44,565
Day one CECL adjustment
—
6,560
Provision for credit losses for loans
3,020
862
Recoveries on charged-off loans:
Commercial real estate
—
39
Commercial and industrial
110
83
Commercial construction
—
—
SBA PPP
—
—
Residential mortgages
—
—
Home equity
7
10
Consumer
10
3
Total recovered
127
135
Charged-off loans
Commercial real estate
—
1,825
Commercial and industrial
110
249
Commercial construction
—
—
SBA PPP
—
—
Residential mortgages
—
—
Home equity
—
—
Consumer
38
7
Total charged-off
148
2,081
Net loans charged-off (recovered)
21
1,946
Ending balance
$
50,703
$
50,041
Annualized net loans charged-off to average loans outstanding
—
%
0.13
%
The Commercial real estate charge-offs for the prior year period related primarily to an individually evaluated commercial real estate loan, which was fully reserved for prior to 2021.
See Note 4, "ACL for Loans," to the Company's unaudited consolidated interim financial statements, contained in Item 1 in this Form 10-Q, for further information regarding the ACL for loans and credit quality.
Reserve for unfunded commitments
The reserve for unfunded commitments is classified within "Other liabilities" on the Company's Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates.
The Company’s reserve for unfunded commitments amounted to $3.6 million as of June 30, 2022 and $3.7 million at December 31, 2021. The provision for unfunded commitments amounted to a provision of $214 thousand compared to a benefit of $213 thousand for the three months ended June 30, 2022 and June 30, 2021, respectively. The provision for unfunded commitments amounted to a benefit of $81 thousand and $143 thousand for the six months ended June 30, 2022 and June 30, 2021, respectively.
Management believes that the Company's ACL for loans and the reserve for unfunded commitments were adequate as of June 30, 2022.
Deposits
As of June 30, 2022, customer deposits increased $36.6 million, or 1%, since December 31, 2021, and $127.2 million, or 3%, since June 30, 2021. Since December 31, 2021, the largest growth occurred in non-interest checking accounts of $93.0 million, or 7%.
The following table sets forth the deposit balances by certain categories at the dates indicated and the percentage of each category to total deposits:
June 30, 2022
December 31, 2021
June 30, 2021
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Checking
$
2,170,118
54
%
$
2,107,845
53
%
$
2,067,861
52
%
Money markets and savings
1,628,181
40
%
1,665,945
42
%
1,597,396
41
%
Certificates of deposit ("CDs")
218,515
6
%
206,449
5
%
224,362
5
%
Total customer deposits
4,016,814
100
%
3,980,239
100
%
3,889,619
98
%
Brokered CDs
—
—
%
—
—
%
75,014
2
%
Total deposits
$
4,016,814
100
%
$
3,980,239
100
%
$
3,964,633
100
%
Borrowed Funds
The Company had borrowed funds outstanding of $3.0 million, $5.5 million, and $8.6 million at June 30, 2022, December 31, 2021, and June 30, 2021, respectively, all of which were FHLB advances. FHLB borrowings outstanding at each of these dates were related to specific lending projects under the FHLB's community development and affordable housing programs.
Subordinated Debt
The Company had outstanding subordinated debt, net of deferred issuance costs, of $59.0 million at both June 30, 2022 and December 31, 2021 and $58.9 million at June 30, 2021.
On March 31, 2021, the Company redeemed $15.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes issued by the Company in January 2015, which were due in January 2030 (the "January 2015 Notes"). The redemption of the January 2015 Notes was recorded as a loss on the extinguishment of subordinated debt in the amount of $713 thousand, consisting of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs.
See also Note 7, "Borrowed Funds and Subordinated Debt," to the Company's unaudited consolidated interim financial statements contained in Item 1 above in this Form 10-Q, for further information regarding the Company's subordinated debt.
Shareholders' Equity & Regulatory Capital
Total shareholders' equity amounted to $285.1 million at June 30, 2022, compared to $346.9 million at December 31, 2021, a decrease of $61.8 million, or 18%. The change was attributable primarily to a decrease in AOCI of $77.0 million since December 31, 2021, partially offset by an increase in retained earnings of $13.5 million over the same period. The change in AOCI resulted from a decrease in the fair value of debt securities held in the Company's securities portfolio, which is attributed to the significant increases in market interest rates during the respective periods. The Company classifies all of its debt securities held in the Company's securities portfolio as available-for-sale and anticipates they will mature or be called at par value.
The Company's reported book value per common share and return on average shareholders' equity ratios were impacted by the change in AOCI as follows:
•Book value per common share was $23.53 at June 30, 2022, compared to $28.82 at December 31, 2021, a decrease of 18%. Excluding AOCI (non-GAAP), book value per common share was $29.51 at June 30, 2022 and $28.43 at December 31, 2021, an increase of 4%.
•Return on average shareholders' equity was 11.24% and 12.56% for the quarters ended June 30, 2022, and December 31, 2021, respectively. Return on average shareholders' equity, excluding AOCI (non-GAAP), was 9.09% and 12.69% for the quarters ended June 30, 2022, and December 31, 2021, respectively.
Total Capital and Tier 1 Capital to risk weighted assets, of which AOCI is not of component, amounted to 13.38% and 10.38%, respectively, at June 30, 2022, compared to 13.73% and 10.62%, respectively, at December 31, 2021. The decrease in each ratio was due primarily to strong loan growth over the respective period.
Tier 1 Capital to average assets, of which AOCI is not a component, amounted to 8.03% at June 30, 2022, compared to 7.56% at December 31, 2021. The increase was driven primarily by the increase in retained earnings noted above and to a lesser extent a reduction in average assets.
Derivatives and Hedging
The Company had no derivative fair value or cash flow hedges at either June 30, 2022, December 31, 2021 or June 30, 2021.
The Company also has a "Back-to-Back Swap" program whereby the Bank enters into an interest-rate swap with qualified commercial banking customers and simultaneously enters into an equal and opposite interest-rate swap with a swap counterparty. The customer interest-rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to a fixed-rate payment. The notional value of interest-rate swaps with customers decreased to $7.9 million at June 30, 2022 from $36.3 million at December 31, 2021 and $37.2 million at June 30, 2021. The fair value of assets and corresponding liabilities associated with these swaps and carried on the Company's Consolidated Balance Sheets was $435 thousand at June 30, 2022 compared to $528 thousand at December 31, 2021 and 1.1 million at June 30, 2021.
For further information on the Company's derivatives and hedging activities see Note 8, "Derivatives and Hedging Activities," to the Company's unaudited consolidated interim financial statements contained in Item 1 above in this Form 10-Q.
Liquidity
Liquidity is the ability to meet cash needs arising from, among other things, fluctuations in loans, investments, deposits and
borrowings. Liquidity management is the coordination of activities so that cash needs are anticipated and met readily and
efficiently. The Company's liquidity is maintained by projecting cash needs, balancing maturing assets with maturing liabilities, monitoring various liquidity ratios, monitoring deposit flows, maintaining cash flow within the investment portfolio, and maintaining wholesale funding resources.
The Company's wholesale funding sources included primarily borrowing capacity at the FHLB and brokered deposits. In addition, the Company's secondary funding sources include uncommitted overnight federal fund purchase arrangements with correspondent banks, access to the FRB Discount Window. At June 30, 2022, the Bank had the capacity to borrow additional funds from the FHLB and FRB Discount Window of up to approximately $740.0 million and $310.0 million, respectively.
Management believes that the Company has adequate liquidity to meet its obligations. However, if general economic conditions, the pandemic, changes in market interest rates, the persistence of the inflationary environment in the United States and our market areas, or other events, cause these sources of external funding to become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company's operations and growth.
Capital Resources
Both the Company's and the Bank's regulatory capital ratios, as outlined in Note 9 "Regulatory Capital Requirements," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form 10-Q, exceeded the regulatory "well-capitalized" and Basel III risk-based capital requirements as of June 30, 2022.
On January 1, 2021, the Company's adoption of CECL resulted in the Company recording a net cumulative-effect adjustment that decreased retained earnings by $6.5 million, net of $2.5 million in deferred income taxes.
On March 31, 2021, the Company redeemed the January 2015 Notes. The redemption of the January 2015 Notes was funded through a dividend from the Bank.
For the six months ended June 30, 2022 and June 30, 2021, the Company declared cash dividends of $5.0 million and $4.4 million, respectively. During the six months ended June 30, 2022 and June 30, 2021, shareholders utilized the dividend reinvestment portion of the Company’s dividend reinvestment and direct stock purchase plan to purchase aggregate shares of the Company's common stock amounting to 19,524 shares and 19,307 shares, totaling $699 thousand and $628 thousand, respectively.
On July 19, 2022, the Company announced a quarterly dividend of $0.205 per share to be paid on September 1, 2022 to shareholders of record as of August 11, 2022.
For further information about the Company's capital, see Note 9 "Regulatory Capital Requirements," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form 10-Q.
Wealth Management
Wealth assets under management and wealth assets under administration are not carried as assets on the Company's consolidated balance sheets. The Company provides a wide range of wealth management and wealth services, including investment management, brokerage, annuities, trust, and 401(k) administration.
Wealth assets under management and wealth assets under administration amounted to $849.5 million and $205.6 million, respectively, at June 30, 2022, representing decreases of $191.9 million, or 18%, and $52.2 million, or 20%, respectively, compared to December 31, 2021. The decreases in wealth assets under management and administration were attributable primarily to declines in market values.
Item 3 -Quantitative and Qualitative Disclosures About Market Risk
Interest Margin Sensitivity Analysis
Refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of the Company's 2021 Annual Report on Form 10-K for further information on the Company’s net interest income and net interest margin sensitivity under different interest rate and yield curve scenarios as well as different asset and liability mix scenarios.
At June 30, 2022, the Company's net interest income sensitivity decreased compared to December 31, 2021, resulting primarily from a decreased level of liquidity and growth in the Company's fixed rate commercial real estate and residential mortgage portfolios. The increase in residential mortgages was from the Company retaining more production on the balance sheet instead of selling into the secondary market.
In the declining rate scenario, the percent change in net interest income was relatively consistent to results at December 31, 2021 primarily due to the aforementioned decrease in interest rate sensitivity from the decline in liquidity and the increase in fixed rate loans, mostly offset by an increase in interest rate sensitivity caused by higher yields on short term investments.
Net short-term liquidity, which is included in the table below is defined as interest-earning deposits in banks less short-term wholesale borrowings consisting of brokered deposits and FHLB borrowings. The balance is generally considered to be high at June 30, 2022 and December 31, 2021 and resulted in large part to funds received from the forgiveness of PPP loans offset by core loan growth.
The net interest income simulation model assumes a static balance sheet over 24 months. In the 200 and 400 basis point rising rate scenarios below, net interest income is projected to increase in the first 24 months primarily due to the elevated balance of net short-term liquidity that reprices immediately. In the declining rate scenario, net interest income is projected to decrease as funding costs are at low levels and do not decline as significantly as asset yields.
The following table summarizes the results from the Company’s net interest income simulation model and compares the percent change in net interest income to the rates unchanged scenario, for a 24-month period at June 30, 2022 and December 31, 2021.
(Dollars in thousands, except for percentage data)
June 30, 2022
December 31, 2021
Net liquidity
$
247,305
$
397,525
Changes in interest rates
Percentage Change
Percentage Change
Rates Rise 400 Basis Points
4.28
%
9.73
%
Rates Rise 200 Basis Points
2.32
%
5.37
%
Rates Unchanged
—
%
—
%
Rates Decline 100 Basis Points
(4.77)
%
(4.95)
%
The results in the table above are subject to various assumptions as reported in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of the Company's 2021 Annual Report on Form 10-K. Refer to heading "Results of Operations" contained within Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q for further discussion of margin.
Item 4 -Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures and internal controls designed to ensure that the information required to be disclosed in reports that it files or furnishes to the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.
The Company carried out an evaluation as of the end of the period covered by this Form 10-Q under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective as of June 30, 2022.
Changes in Internal Control over Financial Reporting
There have been no significant changes in the Company's internal control over financial reporting that occurred during the Company's most recent fiscal quarter (i.e., the three months ended June 30, 2022) that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
There are no material pending legal proceedings to which the Company or its subsidiaries are a party or to which any of its property is subject, other than ordinary routine litigation incidental to the business of the Company. Management does not believe resolution of any present litigation will have a material adverse effect on the business, consolidated financial condition or results of operations of the Company.
Item 1A -Risk Factors
Except as provided in the risk factor below, management believes that there have been no material changes in the Company's risk factors as reported in the 2021 Annual Report on Form 10-K.
If the United States or the markets in which we operate encounter sustained economic stress or recession, or if long-term consequences or lagging effects of the pandemic are experienced by our customers and businesses, many of the risk factors identified in the Company's 2021 Annual Report on Form 10-K could become heightened and such effects could have a material adverse impact on the Company in a number of ways related to credit, collateral, customer demand, funding, operations and interest-rate risk.
Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2022, the Company made no repurchases of common stock.
101* The following materials from Enterprise Bancorp, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 were formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2022 and 2021; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 and 2021; (iv) Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2022 and 2021; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021; and (vi) Notes to Unaudited Consolidated Interim Financial Statements.
104* The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2022 has been formatted in Inline XBRL and contained in Exhibit 101.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.