☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
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 August 4, 2023, there were 12,242,817 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, 2022 audited consolidated financial statements and notes thereto contained in the Annual Report on Form 10-K of Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our") for the year ended December 31, 2022 (the "2022 Annual Report on Form 10-K") as filed with the Securities and Exchange Commission (the "SEC") on March 8, 2023. The Company has not materially changed its significant accounting policies from those disclosed in its 2022 Annual Report on Form 10-K. See Item (e), "Recent Accounting Pronouncements," below in this Note 1.
The accompanying unaudited consolidated interim financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, Enterprise Bank and Trust Company, commonly referred to as Enterprise Bank (the "Bank"). The Bank is a Massachusetts trust company and state chartered commercial bank organized in 1989. Substantially all of the Company's operations are conducted through the Bank and its subsidiaries.
The Bank's subsidiaries include Enterprise Insurance Services, LLC and Enterprise Wealth Services, LLC, both organized under the laws of the State of Delaware, to engage in insurance sales activities and offer non-deposit investment products and services, respectively. In addition, the Bank has the following subsidiaries that are incorporated in the Commonwealth of Massachusetts and classified as security corporations in accordance with applicable Massachusetts General Laws: Enterprise Security Corporation; Enterprise Security Corporation II; and Enterprise Security Corporation III. The security corporations, which hold various types of qualifying securities, are limited to conducting investment activities that the Bank itself would be allowed to conduct under applicable laws. In February 2023, the Bank organized the EBTC NMTC Investment Fund - CHC, LLC (the "NMTC Investment Fund") under the laws of the State of Delaware, in conjunction with the Bank's investment in a qualifying New Market Tax Credit ("NMTC") project. The NMTC Investment Fund is the Company's only unconsolidated Variable Interest Entity ("VIE"). Otherwise, 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, 2023 (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.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 2022 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, available for sale securities and 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 2022 Annual Report on Form 10-K for accounting policies related to these significant estimates.
In March 2023, the Bank made an equity contribution to the NMTC Investment Fund, a newly formed Delaware limited liability company, in order to invest in the NMTC program administered by the U.S. Department of the Treasury's Community Development Financial Institutions Fund and allocated to Community Development Entities ("CDE").
The NMTC program provides federal tax incentives for investments in distressed communities and promotes economic improvements through the development of successful businesses in these communities. The NMTCs are available to investors
Notes to the Unaudited Consolidated Interim Financial Statements
over a seven-year period and are subject to recapture if certain events occur during such period. The Bank invested $3.7 million in the Investment Fund and anticipates receiving $4.8 million of federal tax credits over the next seven years (5% in each of the first three years, and 6% in each of the next four years). The underlying project is structured through a qualified CDE, which in turn has made loans to a qualified active low-income business. The Bank has no unfunded commitments associated with its NMTC investment. The Company has elected to account for the tax equity investment using the proportional amortization method. Under this accounting method, the NMTC Investment Fund is not consolidated with the Company and, instead, the initial cost of the investment is amortized in proportion to the amount of tax credits and other tax benefits received over the allotment period. The investment is carried within the line "Prepaid expenses and other assets" on the Company's Consolidated Balance Sheet and the investment amortization expense and tax credits are presented on a net basis within the line "Provision for income taxes" on the Company's Consolidated Statements of Income. During the three and six months ended June 30, 2023, the related amortization expense amounted to $147 thousand and $191 thousand, respectively, and the related tax credits amounted to $153 thousand and $306 thousand, respectively.
(d) Income Taxes
Deferred income taxes are recognized based on the expected future tax consequences of differences between the financial statement and tax basis of assets and liabilities, calculated using currently enacted tax rates. Management records net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making this determination, we consider all available positive and negative evidence, including recent financial operations and projected future taxable income.
During the second quarter of 2023, the Company sold debt securities with an amortized cost of approximately $87.2 million realizing net losses of $2.4 million. For the majority of the realized losses, the Company had capital gains available for loss carry-back. At June 30, 2023, the Company established a $206 thousand valuation allowance against the capital loss carryforward deferred tax asset, for the amount management believes is not more-likely-than-not to be realized during the five-year capital loss carryforward period.
(e) Recent Accounting Pronouncements
Accounting pronouncements adopted by the Company
In March 2023, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-02, "Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." ASU 2023-02 permits reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. The election can be made for each individual qualifying tax credit investment. Under the proportional amortization method, the initial cost of an investment is amortized in proportion to the amount of tax credits and other tax benefits received, with the amortization and tax credits recognized as a component of income tax expense. To qualify for the proportional amortization method, all of the following conditions must be met: (1) It is probable that the income tax credits allocated to the tax equity investor will be available; (2) The tax equity investor does not have the ability to exercise significant influence over the operating and financial policies of the underlying project; (3) Substantially all of the projected benefits are from income tax credits and other income tax benefits; (4) The tax equity investor's projected yield based solely on the cash flows from the income tax credits and other income tax benefits is positive; and (5) The tax equity investor is a limited liability investor in the limited liability entity for both legal and tax purposes, and the tax equity investor's liability is limited to its capital investment. Under the proportional amortization method, the investment shall be tested for impairment when events or changes in circumstances indicate that it is more likely than not that the carrying amount of the investment will not be realized. An impairment loss shall be measured as the amount by which the carrying amount of an investment exceeds its fair value. A previously recognized impairment loss shall not be reversed. ASU 2023-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2023. The Company has elected to early adopt ASU 2022-01 effective on January 1, 2023, applying the new guidance to a new investment in NMTC made in the first quarter of 2023, and the adoption did not have a significant impact on the financial statements.
In March 2022, the FASB issued 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. The Company adopted ASU 2022-01 effective on January 1, 2023 and the adoption did not have a significant impact on the financial statements.
Notes to the Unaudited Consolidated Interim 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. The Company adopted ASU 2022-02 effective on January 1, 2023, prospectively, and the adoption did not have a significant impact on the financial statements.
(f) Subsequent Events
The Company has evaluated subsequent events and transactions from June 30, 2023 through the date this Form 10-Q was filed with the SEC for potential recognition or disclosure as required by GAAP and determined there were no material subsequent events requiring recognition or disclosure.
(2) Investment Securities
Debt Securities
All of the Company's debt securities were classified as available-for-sale and carried at fair value as of the dates specified in the tables below. The amortized cost and fair values of debt securities at the dates specified are summarized as follows:
June 30, 2023
(Dollars in thousands)
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Federal agency obligations
$
5,010
$
—
$
65
$
4,945
U.S. treasury securities
45,969
—
2,049
43,920
Federal agency collateralized mortgage obligations ("CMO")
419,088
—
64,922
354,166
Federal agency mortgage-backed securities ("MBS")
21,930
20
2,985
18,965
Taxable municipal securities
263,699
22
40,616
223,105
Tax-exempt municipal securities
48,305
68
558
47,815
Corporate bonds
4,050
—
150
3,900
Subordinated corporate bonds
11,953
—
1,816
10,137
Total debt securities, at fair value
$
820,004
$
110
$
113,161
$
706,953
December 31, 2022
(Dollars in thousands)
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Federal agency obligations
$
5,014
$
—
$
37
$
4,977
U.S. treasury securities
45,942
—
2,691
43,251
Federal agency CMO
474,777
3
67,798
406,982
Federal agency MBS
24,172
27
3,178
21,021
Taxable municipal securities
287,435
29
48,187
239,277
Tax-exempt municipal securities
84,457
66
870
83,653
Corporate bonds
6,480
—
186
6,294
Subordinated corporate bonds
11,950
—
1,303
10,647
Total debt securities, at fair value
$
940,227
$
125
$
124,250
$
816,102
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 $3.4 million and $4.0 million at June 30, 2023 and December 31, 2022, respectively.
At June 30, 2023, 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 last fifteen months. Management concluded that no ACL for available-for-sale securities was necessary as of June 30, 2023 and anticipates they will mature or be called at par value.
Notes to the Unaudited Consolidated Interim Financial Statements
The following tables summarize the duration of unrealized losses for debt securities at June 30, 2023 and December 31, 2022:
June 30, 2023
Less than 12 months
12 months or longer
Total
(Dollars in thousands)
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
# of Holdings
Federal agency obligations
$
4,945
$
65
$
—
$
—
$
4,945
$
65
1
U.S. treasury securities
—
—
43,920
2,049
43,920
2,049
6
Federal agency CMO
36,832
713
317,334
64,209
354,166
64,922
89
Federal agency MBS
—
—
17,266
2,985
17,266
2,985
10
Taxable municipal securities
3,704
358
218,378
40,258
222,082
40,616
251
Tax-exempt municipal securities
29,053
224
7,342
334
36,395
558
80
Corporate bonds
1,574
36
2,326
114
3,900
150
18
Subordinated corporate bonds
1,705
248
8,432
1,568
10,137
1,816
6
Total
$
77,813
$
1,644
$
614,998
$
111,517
$
692,811
$
113,161
461
December 31, 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
Federal agency obligations
$
4,977
$
37
$
—
$
—
$
4,977
$
37
1
U.S. treasury securities
2,878
109
40,373
2,582
43,251
2,691
6
Federal agency CMO
164,391
13,004
233,051
54,794
397,442
67,798
102
Federal agency MBS
9,923
797
9,165
2,381
19,088
3,178
11
Taxable municipal securities
93,345
10,411
144,903
37,776
238,248
48,187
273
Tax-exempt municipal securities
66,277
870
—
—
66,277
870
112
Corporate bonds
6,294
186
—
—
6,294
186
31
Subordinated corporate bonds
6,206
743
4,440
560
10,646
1,303
6
Total
$
354,291
$
26,157
$
431,932
$
98,093
$
786,223
$
124,250
542
The contractual maturity distribution at June 30, 2023 of debt securities was as follows:
(Dollars in thousands)
Amortized Cost
Fair Value
Due in one year or less
$
41,405
$
40,647
Due after one, but within five years
85,373
81,634
Due after five, but within ten years
274,555
233,048
Due after ten years
418,671
351,624
Total debt securities
$
820,004
$
706,953
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 $131.8 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 $696.8 million and $804.2 million at June 30, 2023 and December 31, 2022, respectively.
Notes to the Unaudited Consolidated Interim Financial Statements
Debt security sales during the three and six months ended June 30, 2023 were made in order to improve the Company's balance sheet positioning and enhance future earnings. Sales of debt securities for the three and six months ended June 30, 2023 and June 30, 2022 are summarized as follows:
Three months ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Amortized cost of debt securities sold (1)
$
87,198
$
—
$
87,198
$
31,653
Gross realized gains on sales
—
—
—
1,062
Gross realized losses on sales
(2,419)
—
(2,419)
—
Total proceeds from sales of debt securities
$
84,779
$
—
$
84,779
$
32,715
_________________________________________
(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 $5.9 million at June 30, 2023 and $4.3 million at December 31, 2022. At June 30, 2023, the equity portfolio consisted of investments in broad-based equity index funds and common stock of entities in the financial services industry. The equity portfolio also included mutual funds held in conjunction with the Company's supplemental executive retirement and deferred compensation plan.
Gains and losses on equity securities for the three and six months ended June 30, 2023 and June 30, 2022 are summarized as follows:
Three months ended June 30,
Six months ended June 30,
(Dollars in thousands)
2023
2022
2023
2022
Net gains (losses) recognized during the period on equity securities
$
189
$
(429)
$
173
$
(495)
Less: Net losses recognized on equity securities sold during the period
(29)
—
(29)
—
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the end of the period
$
218
$
(429)
$
202
$
(495)
(3)Loans
Loan Portfolio Classifications
Major classifications of loans and their amortized cost as of the dates indicated were as follows:
(Dollars in thousands)
June 30, 2023
December 31, 2022
Commercial real estate
$
2,009,263
$
1,921,410
Commercial and industrial
420,095
414,490
Commercial construction
487,018
424,049
Total commercial loans
2,916,376
2,759,949
Residential mortgages
346,523
332,632
Home equity loans and lines
74,374
79,807
Consumer
8,394
8,130
Total retail loans
429,291
420,569
Total loans
3,345,667
3,180,518
ACL for loans
(56,899)
(52,640)
Net loans
$
3,288,768
$
3,127,878
Net deferred loan origination fees, included in the amortized costs of loans reflected in the table above, amounted to $5.4 million at June 30, 2023 and $5.2 million at December 31, 2022. Accrued interest receivable on loans amounted to
Notes to the Unaudited Consolidated Interim Financial Statements
$13.5 million and $13.1 million at June 30, 2023 and December 31, 2022, 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 $107.6 million at June 30, 2023 and $94.8 million at December 31, 2022. See also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.
Loans serviced for others
At June 30, 2023 and December 31, 2022, the Company was servicing residential mortgage loans owned by investors amounting to $8.3 million and $8.9 million, respectively. Additionally, the Company was servicing commercial loans originated by the Company and participated out to various other institutions amounting to $68.9 million and $59.1 million at June 30, 2023 and December 31, 2022, respectively.
Loans serving as collateral
Loans designated as qualified collateral and pledged to the FHLB for borrowing capacity as of the dates indicated are summarized below:
(Dollars in thousands)
June 30, 2023
December 31, 2022
Commercial real estate
$
370,940
$
113,830
Residential mortgages
324,544
309,023
Home equity
30,836
39,724
Total loans pledged to FHLB
$
726,320
$
462,577
(4)ACL for Loans
There have been no material changes to the Company's ACL for loans methodology, underwriting practices, or credit risk management system used to estimate credit loss exposure since December 31, 2022. See Note 4, "ACL for Loans," to the Company's audited consolidated financial statements contained in the 2022 Annual Report on Form 10-K.
Risk ratings and adversely classified loans
The Company's loan risk rating system classifies loans depending on risk of loss characteristics. Adversely classified ratings for loans determined to be of weaker credit range from "special mention," for loans that may need additional monitoring, to the more severe adverse classifications of "substandard," "doubtful," and "loss" based on criteria established under banking regulations.
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, 2022
Term Loans by Origination Year
(Dollars in thousands)
2022
2021
2020
2019
2018
Prior
Revolving Loans
Revolving Loans Converted to Term
Total
Commercial real estate
Pass
$
391,515
$
381,771
$
204,125
$
218,664
$
114,175
$
577,354
$
1,347
$
200
$
1,889,151
Special mention
—
—
—
507
2,041
16,248
—
—
18,796
Substandard
—
289
—
1,160
1,404
10,610
—
—
13,463
Total commercial real estate
391,515
382,060
204,125
220,331
117,620
604,212
1,347
200
1,921,410
Commercial and industrial
Pass
59,824
53,059
33,027
29,293
13,364
43,724
171,670
3,235
407,196
Special mention
—
—
—
11
66
278
3,132
—
3,487
Substandard
—
19
—
8
138
325
2,964
353
3,807
Total commercial and industrial
59,824
53,078
33,027
29,312
13,568
44,327
177,766
3,588
414,490
Commercial construction
Pass
151,107
169,549
35,651
31,189
7,729
3,379
19,778
1,473
419,855
Special mention
—
—
—
3,900
—
—
—
—
3,900
Substandard
—
294
—
—
—
—
—
—
294
Total commercial construction
151,107
169,843
35,651
35,089
7,729
3,379
19,778
1,473
424,049
Residential mortgages
Pass
112,804
73,955
49,549
20,140
18,799
54,620
—
—
329,867
Special mention
—
—
—
—
—
325
—
—
325
Substandard
—
—
—
1,060
—
1,380
—
—
2,440
Total residential mortgages
112,804
73,955
49,549
21,200
18,799
56,325
—
—
332,632
Home equity
Pass
328
596
456
345
—
1,220
75,324
1,054
79,323
Substandard
—
273
—
—
—
211
—
—
484
Total home equity
328
869
456
345
—
1,431
75,324
1,054
79,807
Consumer
Pass
3,144
1,852
1,063
1,045
606
420
—
—
8,130
Total consumer
3,144
1,852
1,063
1,045
606
420
—
—
8,130
Total loans
$
718,722
$
681,657
$
323,871
$
307,322
$
158,322
$
710,094
$
274,215
$
6,315
$
3,180,518
The total amortized cost basis of adversely classified loans amounted to $42.1 million, or 1.26% of total loans, at June 30, 2023, and $47.0 million, or 1.48% of total loans, at December 31, 2022.
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, 2023
(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
$
2,937
$
—
$
1,998
$
4,935
$
2,004,328
$
2,009,263
Commercial and industrial
434
—
500
934
419,161
420,095
Commercial construction
715
3,509
—
4,224
482,794
487,018
Residential mortgages
274
—
1,055
1,329
345,194
346,523
Home equity
185
—
—
185
74,189
74,374
Consumer
6
—
—
6
8,388
8,394
Total loans
$
4,551
$
3,509
$
3,553
$
11,613
$
3,334,054
$
3,345,667
Balance at December 31, 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
$
2,818
$
1,268
$
1,631
$
5,717
$
1,915,693
$
1,921,410
Commercial and industrial
786
39
217
1,042
413,448
414,490
Commercial construction
412
—
294
706
423,343
424,049
Residential mortgages
1,119
55
149
1,323
331,309
332,632
Home equity
163
—
73
236
79,571
79,807
Consumer
21
—
—
21
8,109
8,130
Total loans
$
5,319
$
1,362
$
2,364
$
9,045
$
3,171,473
$
3,180,518
_______________________________________
(1)The loan balances in the tables above include loans designated as non-accrual according to their payment due status.
At June 30, 2023 and December 31, 2022, all loans past due 90 days or more were carried as non-accrual, however, not all non-accrual loans were 90 days or more past due in their payments. 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, 2022
(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
$
3,355
$
2,317
$
1,038
$
298
Commercial and industrial
730
348
382
382
Commercial construction
294
294
—
—
Residential mortgages
1,532
1,532
—
—
Home equity
211
211
—
—
Consumer
—
—
—
—
Total loans
$
6,122
$
4,702
$
1,420
$
680
The ratio of non-accrual loans to total loans amounted to 0.23% and 0.19% at June 30, 2023 and December 31, 2022, respectively.
At June 30, 2023 and December 31, 2022, additional funding commitments for non-accrual loans were not material.
Collateral dependent loans
The total recorded investment in collateral dependent loans amounted to $9.6 million at June 30, 2023 compared to $25.2 million at December 31, 2022. Total accruing collateral dependent loans amounted to $2.1 million while non-accrual collateral dependent loans amounted to $7.5 million as of June 30, 2023. As of December 31, 2022, total accruing collateral dependent loans amounted to $19.5 million, while non-accrual collateral dependent loans amounted to $5.7 million.
The following tables present the recorded investment in collateral dependent loans and the related specific allowance by portfolio allocation as of the dates indicated:
Balance at June 30, 2023
(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
$
7,767
$
6,353
$
5,339
$
1,014
$
274
Commercial and industrial
3,356
1,043
1,005
38
12
Commercial construction
—
—
—
—
—
Residential mortgages
1,896
1,691
1,691
—
—
Home equity
612
539
266
273
85
Consumer
—
—
—
—
—
Total
$
13,631
$
9,626
$
8,301
$
1,325
$
371
Balance at December 31, 2022
(Dollars in thousands)
Unpaid Contractual Principal Balance
Total Recorded Investment in Collateral Dependent Loans
Notes to the Unaudited Consolidated Interim Financial Statements
At June 30, 2023 and December 31, 2022, additional funding commitments for collateral dependent loans were not material.
Loan modifications to borrowers experiencing financial difficulty
Effective on January 1, 2023, the Company adopted ASU 2022-02, "Financial Instruments—Credit Losses (Topic 326), Troubled Debt Restructurings ("TDR") and Vintage Disclosures," which eliminated the accounting guidance for TDRs and enhanced the disclosure requirements for loan restructurings made with borrowers experiencing financial difficulty. The adoption did not have a significant impact on the financial statements.
The Company continues to work with loan customers experiencing financial difficulty and may enter into loan modifications to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the individual financial circumstances and future prospects of the borrower. An assessment of whether a borrower is experiencing financial difficulty is made on the date of the modification. Modifications made for borrowers experiencing financial difficulty may be concessions in the form of principal forgiveness, interest rate reductions, payment deferrals of principal, interest or both, or term extensions, or some combination thereof. When a debt has been previously modified, the Company considers the cumulative effect of modifications made within the prior twelve-month period before the current modification, when determining whether or not a delay in payment resulting from the current modification is insignificant.
The following table presents the amortized cost basis of loan modifications made to borrowers experiencing financial difficulty by type of concession granted during the period indicated:
Three months ended
June 30, 2023
(Dollars in thousands)
Payment Deferrals
% of Loan Class Total
Residential mortgages
$
33
0.01
%
Home equity loans and lines
421
0.57
%
Total
$
454
0.01
%
The following table presents the amortized cost basis of loan modifications made to borrowers experiencing financial difficulty by type of concession granted during the period indicated:
Six months ended
June 30, 2023
(Dollars in thousands)
Payment Deferrals
% of Loan Class Total
Commercial real estate
$
276
0.01
%
Commercial and industrial
37
0.01
%
Residential mortgages
33
0.01
%
Home equity loans and lines
421
0.57
%
Total
$
767
0.02
%
The following table presents the financial effect of loan modifications made to borrowers experiencing financial difficulty during the period indicated:
Notes to the Unaudited Consolidated Interim Financial Statements
The following table presents the financial effect of loan modifications made to borrowers experiencing financial difficulty during the period indicated:
Six months ended
June 30, 2023
Weighted-Average Payment Deferrals
Commercial real estate
0.5 years
Commercial and industrial
0.5 years
Residential mortgages
0.5 years
Home equity loans and lines
0.5 years
The Company closely monitors the performance of loans that are modified for borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table presents the performance status of loans that had been modified within the preceding twelve months for borrowers experiencing financial difficulty, at the period indicated.
Balance at June 30, 2023
(Dollars in thousands)
Current
30-59 Days Past Due
60-89 Days Past Due
Past Due 90 Days or More
Total Past Due
Commercial real estate
$
395
$
—
$
—
$
—
$
—
Commercial and industrial
236
—
—
—
—
Commercial construction
—
—
—
—
—
Residential mortgages
33
—
—
—
—
Home equity
421
—
—
—
—
Consumer
—
—
—
—
—
Total
$
1,085
$
—
$
—
$
—
$
—
During the six months ended June 30, 2023, there were no subsequent defaults on loans that had been modified within the preceding twelve months for borrowers experiencing financial difficulty, and at June 30, 2023, additional funding commitments to borrowers experiencing financial difficulty who were party to a loan modification were immaterial.
Prior to adopting the new accounting standard on loan modifications, the Company accounted for modifications of loans to borrowers experiencing financial difficulty as TDRs, when the modification resulted in a concession and specific reserves were charged to the ACL if necessary for the amount of estimated credit loss. The following discussion reflects loans that were considered TDRs prior to January 1, 2023. For further information on the Company's TDR accounting policies, see Note 1, "Summary of Significant Accounting Policies," to the Company's audited consolidated financial statements contained in the 2022 Annual Report on Form 10-K.
At June 30, 2022, additional funding commitments for TDR loans were immaterial.
The following table presents the number and balance of loans modified as TDRs, by portfolio classification, during the three months indicated:
Notes to the Unaudited Consolidated Interim Financial Statements
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
(Dollars in thousands)
Number of Restructurings
Pre-modification Outstanding Recorded Investment
Post-modification Outstanding Recorded Investment
Commercial real estate
4
$
3,188
$
3,154
Total
4
$
3,188
$
3,154
There were no subsequent charge-offs associated with the TDRs noted in the table above during the six months ended June 30, 2022.
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
(Dollars in thousands)
Number of TDRs that Defaulted
Post-modification Outstanding Recorded Investment
Commercial real estate
2
$
1,461
Total
2
$
1,461
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
(Dollars in thousands)
Number of TDRs that Defaulted
Post- modification Outstanding Recorded Investment
Commercial real estate
4
$
3,154
Total
4
$
3,154
The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the six-month period indicated:
Six months ended
June 30, 2022
(Dollars in thousands)
Number of Restructurings
Amount
Temporary payment reduction and payment re-amortization of remaining principal over extended term
1
$
1,404
Temporary interest only payment plan
2
427
Other payment concessions
1
1,323
Total
4
$
3,154
Amount of ACL for loans associated with TDRs listed above
Notes to the Unaudited Consolidated Interim Financial Statements
ACL for loans and provision for credit loss activity
The following table presents changes in the provision for credit losses on loans and unfunded commitments during the three- and six-month periods indicated:
Three months ended
Six months ended
(Dollars in thousands)
June 30, 2023
June 30, 2022
June 30, 2023
June 30, 2022
Provision for credit losses on loans
$
2,043
$
2,195
$
4,361
$
3,020
Provision for unfunded commitments
225
214
643
(81)
Total provision for credit losses
$
2,268
$
2,409
$
5,004
$
2,939
ACL for loans
The ACL for loans amounted to $56.9 million and $52.6 million at June 30, 2023 and December 31, 2022, respectively. The ACL for loans to total loans ratio was 1.70% and 1.66% at June 30, 2023 and December 31, 2022, respectively.
The following tables present changes in the ACL for loans by portfolio classification, during the three months indicated:
(Dollars in thousands)
Commercial Real Estate
Commercial and Industrial
Commercial Construction
Residential Mortgage
Home Equity
Consumer
Total
Beginning Balance at March 31, 2023
$
37,725
$
9,378
$
4,453
$
2,378
$
712
$
356
$
55,002
Provision for credit losses on loans
1,852
(138)
265
75
(16)
5
2,043
Recoveries
—
84
—
—
2
3
89
Less: Charge-offs
—
220
—
—
—
15
235
Ending Balance at June 30, 2023
$
39,577
$
9,104
$
4,718
$
2,453
$
698
$
349
$
56,899
(Dollars in thousands)
Commercial Real Estate
Commercial and Industrial
Commercial Construction
Residential Mortgage
Home Equity
Consumer
Total
Beginning Balance at March 31, 2022
$
33,936
$
8,950
$
3,518
$
1,322
$
454
$
244
$
48,424
Provision for credit losses on loans
1,443
(93)
149
580
97
19
2,195
Recoveries
—
86
—
—
3
5
94
Less: Charge-offs
—
5
—
—
—
5
10
Ending Balance at June 30, 2022
$
35,379
$
8,938
$
3,667
$
1,902
$
554
$
263
$
50,703
The following tables present changes in the ACL for loans by portfolio classification, during the six months indicated:
Notes to the Unaudited Consolidated Interim Financial Statements
Reserve for unfunded commitments
The Company's reserve for unfunded commitments amounted to $5.0 million at June 30, 2023 and $4.3 million at December 31, 2022. Management believes that the Company's ACL for loans and reserve for unfunded commitments were adequate as of June 30, 2023.
Other real estate owned ("OREO")
The Company carried no OREO at June 30, 2023 and December 31, 2022.
At June 30, 2023, the Company had $1.1 million in 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. The Company had no such loans at December 31, 2022.
(5)Leases
As of June 30, 2023, the Company had 16 facilities contracted under various non-cancelable operating leases, most of which provide options to the Company to extend the lease periods and include periodic rent adjustments.
Lease expense for the three and six months ended June 30, 2023 amounted to $397 thousand and $801 thousand, respectively, compared to $400 thousand and $816 thousand for the three and six months ended June 30, 2022, 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, 2023 and June 30, 2022 was 29.0 years and 29.9 years, respectively. The weighted average discount rate was 3.51% at June 30, 2023 and 3.45% at June 30, 2022.
At June 30, 2023, the remaining undiscounted cash flows by year of these lease liabilities were as follows:
(Dollars in thousands)
Operating Leases
2023 (six remaining months)
$
721
2024
1,435
2025
1,441
2026
1,452
2027
1,454
Thereafter
32,346
Total lease payments
38,849
Less: Imputed interest
14,701
Total lease liability
$
24,148
(6)Deposits
Deposits are summarized as follows as of the periods indicated:
(Dollars in thousands)
June 30, 2023
December 31, 2022
Non-interest checking
$
1,273,968
$
1,361,588
Interest-bearing checking
701,701
678,715
Savings
310,321
326,666
Money market
1,373,816
1,381,645
CDs $250,000 or less
244,114
187,758
CDs greater than $250,000
171,678
99,434
Deposits
$
4,075,598
$
4,035,806
All of the Company's deposits outstanding at both June 30, 2023 and December 31, 2022 were customer deposits, and the Company had no brokered deposits at either June 30, 2023 or December 31, 2022. 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 third-party enhanced Federal Deposit
Notes to the Unaudited Consolidated Interim Financial Statements
Insurance Corporation ("FDIC") deposit insurance. Under this enhanced deposit insurance program, 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 $796.8 million and $589.7 million at June 30, 2023 and December 31, 2022, respectively.
(7)Borrowed Funds and Subordinated Debt
Borrowed funds at June 30, 2023 and December 31, 2022 are summarized, as follows:
June 30, 2023
December 31, 2022
(Dollars in thousands)
Balance
Rate
Balance
Rate
Over 5 years
$
3,334
1.52
%
$
3,216
1.55
%
Total borrowed funds
$
3,334
1.52
%
$
3,216
1.55
%
The Company's borrowed funds at June 30, 2023 and December 31, 2022 were comprised of FHLB advances related to specific lending projects under the FHLB's community development and affordable housing programs as well as a small portion of borrowed funds from the New Hampshire Business Finance Authority borrowing under a New Hampshire community development program.
The Company also had outstanding subordinated debt (net of deferred issuance costs) of $59.3 million at June 30, 2023 and $59.2 million at December 31, 2022. The outstanding subordinated notes are due on July 15, 2030 and callable at the Company's option on or after July 15, 2025.
(8) Derivatives and Hedging Activities
For further information on the Company's derivatives and hedging activities, see Note 9, "Derivatives and Hedging," to the Company's audited consolidated financial statements contained in the 2022 Annual Report on Form 10-K.
The tables below present a summary of the Company's derivative financial instruments, notional amounts and fair values at the periods presented:
Notes to the Unaudited Consolidated Interim Financial Statements
The Company had no derivatives designated as cash flow hedges at either June 30, 2023 or December 31, 2022.
Derivatives designated as hedging instruments
Fair value hedges
Derivatives designated as fair value hedges are utilized to mitigate the risk of adverse interest-rate fluctuations on specifically identified assets or liabilities. The Company's fair value hedges are used to manage its exposure to changes in the fair value of hedged items caused by changes in interest rates.
During the second quarter of 2023, the Company entered into two pay fixed, receive float, interest rate swaps to hedge against fixed-rate commercial real estate loan pools. Each swap has a notional value of $25.0 million and a term of two years. At June 30, 2023, these interest rate swaps were designated as fair value hedges and involve the net settlement of receiving floating-rate payments from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
Derivatives not subject to hedge accounting
Interest-rate Contracts
Each back-to-back interest-rate swap consists of two interest-rate swaps (a customer swap and offsetting counterparty swap) and amounted to a total number of four interest-rate swaps outstanding at June 30, 2023 and December 31, 2022. 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, 2023 or June 30, 2022.
Interest-rate swaps with counterparties are subject to master netting agreements, while interest-rate swaps with customers are not. At June 30, 2023 and December 31, 2022, all back-to-back swaps with the counterparty were in asset positions, therefore there was no netting reflected in the Company's Consolidated Balance Sheets as of the respective dates.
Risk Participation Agreements
The Company enters into risk participation agreements ("RPAs") for which the Company has assumed credit risk for customers' performance under interest-rate swap agreements related to the customers' commercial loan and receives fee income commensurate with the risk assumed. The RPAs and the customers' loan are secured by the same collateral.
Credit Risk
The Company had two active interest-rate swap institutional counterparties which were rated A and A+ by Standard & Poor's and A2 by Moody's, at June 30, 2023. When the Company has credit risk exposure, collateral is posted by counterparties. 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. At June 30, 2023, the Company had $991 thousand credit risk exposure relating to interest-rate swaps with counterparties and the cash collateral posted by counterparties amounted to $390 thousand. At December 31, 2022, the Company had credit risk exposure relating to interest-rate swaps with counterparties of $708 thousand and the cash collateral posted by counterparties amounted to $20 thousand.
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, 2022. As of June 30, 2023, the fair value of derivatives related to these agreements was at a net asset position of $991 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, 2023, has not posted collateral related to these agreements.
Other Derivative Related Activity
At both June 30, 2023 and December 31, 2022, the Company had one participation loan for which the originating bank utilizes a back-to-back interest-rate swap structure and the Company has assumed a contingent liability commensurate with its participation percentage in the loan. At June 30, 2023, management considers the risk of material swap loss exposure related to
Notes to the Unaudited Consolidated Interim Financial Statements
this participation loan to be unlikely based on the borrower's financial and collateral strength.
Interest-rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. At June 30, 2023 and December 31, 2022, 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
As of June 30, 2023 and December 31, 2022, 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 the FDIC and the Basel III capital guidelines.
The Company's and the Bank's actual capital amounts and ratios are presented as of June 30, 2023 and December 31, 2022 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, 2023
The Company
Total Capital to risk-weighted assets ("RWA")
$
495,246
13.37
%
$
296,233
8.00
%
N/A
N/A
Tier 1 Capital to RWA
389,427
10.52
%
222,174
6.00
%
N/A
N/A
Tier 1 Capital to average assets ("AA") or Leverage Ratio
389,427
8.62
%
180,715
4.00
%
N/A
N/A
Common Equity Tier 1 Capital to RWA
389,427
10.52
%
166,631
4.50
%
N/A
N/A
The Bank
Total Capital to RWA
$
494,658
13.36
%
$
296,233
8.00
%
$
370,291
10.00
%
Tier 1 Capital to RWA
448,179
12.10
%
222,174
6.00
%
296,233
8.00
%
Tier 1 Capital to AA, Leverage Ratio
448,179
9.92
%
180,715
4.00
%
225,894
5.00
%
Common Equity Tier 1 Capital to RWA
448,179
12.10
%
166,631
4.50
%
240,689
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, 2022
The Company
Total Capital to RWA
$
476,307
13.49
%
$
282,567
8.00
%
N/A
N/A
Tier 1 Capital to RWA
372,817
10.56
%
211,926
6.00
%
N/A
N/A
Tier 1 Capital to AA, Leverage Ratio
372,817
8.10
%
184,194
4.00
%
N/A
N/A
Common Equity Tier 1 Capital to RWA
372,817
10.56
%
158,944
4.50
%
N/A
N/A
The Bank
Total Capital to RWA
$
475,668
13.47
%
$
282,567
8.00
%
$
353,209
10.00
%
Tier 1 Capital to RWA
431,359
12.21
%
211,926
6.00
%
282,567
8.00
%
Tier 1 Capital to AA, Leverage Ratio
431,359
9.37
%
184,194
4.00
%
230,243
5.00
%
Common Equity Tier 1 Capital to RWA
431,359
12.21
%
158,944
4.50
%
229,586
6.50
%
__________________________________________
(1)Before application of the capital conservation buffer of 2.50% as of June 30, 2023, and December 31, 2022. 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.
Notes to the Unaudited Consolidated Interim Financial Statements
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, 2023. At June 30, 2023, the capital conservation buffer amounted to $92.6 million for both the Company and the Bank.
(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, 2023
Three months ended June 30, 2022
(Dollars in thousands)
Pre-Tax
Tax Benefit
After Tax Amount
Pre-Tax
Tax Benefit
After Tax Amount
Change in fair value of debt securities
$
(17,505)
$
3,986
$
(13,519)
$
(41,404)
$
9,326
$
(32,078)
Less: net security losses reclassified into non-interest income
(2,419)
534
(1,885)
—
—
—
Net change in fair value of debt securities
(15,086)
3,452
(11,634)
(41,404)
9,326
(32,078)
Total other comprehensive loss, net
$
(15,086)
$
3,452
$
(11,634)
$
(41,404)
$
9,326
$
(32,078)
Six months ended June 30, 2023
Six months ended June 30, 2022
(Dollars in thousands)
Pre-Tax
Tax (Expense) Benefit
After Tax Amount
Pre-Tax
Tax Benefit (Expense)
After Tax Amount
Change in fair value of debt securities
$
8,655
$
(1,926)
$
6,729
$
(98,378)
$
22,166
$
(76,212)
Less: net security (losses) gains reclassified into non-interest income
(2,419)
534
(1,885)
1,062
(234)
828
Net change in fair value of debt securities
11,074
(2,460)
8,614
(99,440)
22,400
(77,040)
Total other comprehensive income (loss), net
$
11,074
$
(2,460)
$
8,614
$
(99,440)
$
22,400
$
(77,040)
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, 2023
Three months ended June 30, 2022
(Dollars in thousands)
Unrealized Losses on Debt Securities
Total
Unrealized Losses on Debt Securities
Total
Accumulated other comprehensive loss - beginning balance
$
(75,959)
$
(75,959)
$
(40,300)
$
(40,300)
Total other comprehensive loss, net
(11,634)
(11,634)
(32,078)
(32,078)
Accumulated other comprehensive loss - ending balance
$
(87,593)
$
(87,593)
$
(72,378)
$
(72,378)
Six months ended June 30, 2023
Six months ended June 30, 2022
(Dollars in thousands)
Unrealized Losses on Debt Securities
Total
Unrealized Gains (Losses) on Debt Securities
Total
Accumulated other comprehensive loss - beginning balance
$
(96,207)
$
(96,207)
$
4,662
$
4,662
Total other comprehensive income (loss), net
8,614
8,614
(77,040)
(77,040)
Accumulated other comprehensive loss - ending balance
$
(87,593)
$
(87,593)
$
(72,378)
$
(72,378)
(11)Stock-Based Compensation
There have been no material changes to The Enterprise Bancorp, Inc. 2016 Stock Incentive Plan (the "2016 Plan") since December 31, 2022. As of June 30, 2023, 369,178 shares of Company common stock remained available for future grants under the 2016 Plan.
Notes to the Unaudited Consolidated Interim Financial Statements
Total stock-based compensation expense was $629 thousand and $1.2 million for the three and six months ended June 30, 2023, compared to $637 thousand and $1.1 million for the three and six months ended June 30, 2022.
Stock Option Awards
The Company issued no stock options during the six months ended June 30, 2023. 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 prior period:
Six months ended
June 30, 2022
Options granted
17,060
Term in years
10
Weighted average assumptions used in the fair value model:
Expected volatility
44
%
Expected dividend yield
3.05
%
Expected life in years
6.5
Risk-free interest-rate
2.20
%
Weighted average market price on date of grants
$
38.57
Per share weighted average fair value
$
14.40
Fair value as a percentage of market value at grant date
37
%
Options granted during the first six months of 2022 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 $46 thousand and $96 thousand for the three and six months ended June 30, 2023, respectively, compared to $52 thousand and $100 thousand for the three and six months ended June 30, 2022, 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)
2023
2022
Two-year vesting
9,915
8,823
Four-year vesting
32,719
22,116
Performance-based vesting
31,270
22,254
Total restricted stock awards granted
73,904
53,193
Weighted average grant date fair value
$
32.04
$
38.57
Stock-based compensation expense recognized in association with stock awards, mainly restricted stock awards, amounted to $525 thousand and $932 thousand for the three and six months ended June 30, 2023, respectively, compared to $521 thousand and $881 thousand for the three and six months ended June 30, 2022, respectively.
Notes to the Unaudited Consolidated Interim Financial Statements
Stock in Lieu of Directors' Fees
Non-employee members of the Company's Board of Directors (the "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 $58 thousand and $123 thousand for the three and six months ended June 30, 2023, respectively, compared to $64 thousand and $134 thousand for the three and six months ended June 30, 2022, respectively.
(12)Earnings per Share
The table below presents basic earnings per share and the increase in average shares outstanding, using the treasury stock method, for the diluted earnings per share calculation for the periods indicated:
Three months ended June 30,
Six months ended June 30,
2023
2022
2023
2022
Basic weighted average common shares outstanding
12,228,081
12,107,804
12,191,857
12,082,041
Dilutive shares
16,782
43,908
26,878
54,569
Diluted weighted average common shares outstanding
12,244,863
12,151,712
12,218,735
12,136,610
Stock options outstanding that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares amounted to 105,719 and 48,373 for the three and six months ended June 30, 2023, respectively, compared to 48,662 and 34,473 for the three and six months ended June 30, 2022, respectively. These stock options, which were not dilutive, may potentially dilute earnings per share in the future.
Unvested participating restricted stock awards amounted to 136,939 shares and 106,658 shares as of June 30, 2023 and December 31, 2022, respectively.
(13)Fair Value Measurements
The FASB defines the fair value of an asset or liability to be the price which a seller would receive in an orderly transaction between market participants (an exit price) and also establishes a fair value hierarchy segregating fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; and (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed based on the best information available under the circumstances.
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.
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 of derivative assets and liabilities, which are comprised of back-to-back swaps, fair value hedges and risk participation agreements, represent a FASB Level 2 measurement and are based on settlement values adjusted for credit risks and observable market interest-rate curves. The Company utilizes third-party vendors to provide valuations on its derivative assets and liabilities. 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.
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,
Notes to the Unaudited Consolidated Interim Financial Statements
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 $371 thousand at June 30, 2023, compared to $298 thousand at December 31, 2022.
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, 2023 and December 31, 2022:
(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 Company's 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 Company's Consolidated Balance Sheets.
Financial instruments for which the fair value is disclosed but not recognized on the Company's 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:
June 30, 2023
Fair Value Measurement
(Dollars in thousands)
Carrying Value
Fair Value
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
Financial assets:
Loans, net
$
3,288,768
$
3,112,928
$
—
$
—
$
3,112,928
Financial liabilities:
CDs
415,792
410,528
—
410,528
—
Borrowed funds
3,334
2,217
—
2,217
—
Subordinated debt
59,340
53,366
—
53,366
—
December 31, 2022
Fair Value Measurement
(Dollars in thousands)
Carrying Value
Fair Value
Level 1 Inputs
Level 2 Inputs
Level 3 Inputs
Financial assets:
Loans, net
$
3,127,878
$
2,952,778
$
—
$
—
$
2,952,778
Financial liabilities:
CDs
287,192
281,800
—
281,800
—
Borrowed funds
3,216
2,006
—
2,006
—
Subordinated debt
59,182
55,407
—
55,407
—
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.
Notes to the Unaudited Consolidated Interim Financial Statements
Also excluded from these tables are the fair values of commitments for unused portions of lines of credit and commitments to originate loans that were short-term, at current market rates and estimated to have no significant change in fair value.
(14)Supplemental Cash Flow Information
The supplemental cash flow information for the six months ended June 30, 2023 and June 30, 2022 is as follows:
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 Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our") unaudited consolidated interim financial statements and notes thereto contained in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2023 (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, 2022 (the "2022 Annual Report on Form 10-K") as filed with the Securities and Exchange Commission (the "SEC") on March 8, 2023.
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:
•potential recession in the United States and our market areas;
•the impacts related to or resulting from recent bank failures and any continuation of the recent uncertainty in the banking industry, including the associated impact to the Company and other financial institutions of any regulatory changes or other mitigation efforts taken by government agencies in response thereto;
•increased competition for deposits and related changes in deposit customer behavior;
•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 effects of declines in housing prices in the United States and our market areas
•declines in commercial real estate prices;
•the persistence of the current inflationary environment in the United States and our market areas, and its impact on market interest rates, the economy and credit quality;
•increases in unemployment rates in the United States and our market areas;
•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 the pricing of our loans and deposits and decrease our net interest income or net interest margin;
•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;
•inability to maintain adequate liquidity;
•the inability to raise the necessary capital to fund our operations or to meet minimum regulatory capital levels would restrict our business and operations;
•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;
•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;
•our ability to maintain an effective system of disclosure controls and procedures and internal control over financial reporting;
•inability to attract, hire and retain qualified management personnel;
•recent and future changes in laws and regulations that apply to the Company's business and operations, and any additional regulations, or repeals that may be forthcoming as a result thereof, which could cause the Company to incur additional costs and adversely affect the Company's business environment, operations and financial results;
•future regulatory compliance costs, including any increase caused by new regulations imposed by the government;
•changes in tariffs and trade barriers;
•our ability to navigate the uncertain impacts of quantitative tightening and current and future governmental monetary and fiscal policies, including the current and future policies of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board");
•uncertainty regarding United States fiscal debt and budget matters, severe weather, natural disasters, acts of war or terrorism or other external events;
•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 operates with a long-term outlook, which is focused on organic growth, supported by continually investing in our people, products, services, technology, and branches.
Key Financial Highlights
Key financial results at or for the three months ended June 30, 2023 are as follows:
•Net income amounted to $9.7 million, or $0.79 per diluted common share, compared to $8.2 million, or $0.67 per diluted common share, for the three months ended June 30, 2022, compared to $10.8 million, or $0.88 per diluted common share, for the three months ended March 31, 2023.
•Included in pre-tax income were $3.4 million in Employee Retention Credits ("ERC"), which the Company recorded as a reduction to salary and benefits expense, a loss on the sale of debt securities of $2.4 million and a provision for credit losses of $2.3 million.
•On balance sheet liquidity remained strong at June 30, 2023 with cash and cash equivalents amounting to $258.8 million, while wholesale borrowings amounted to only $3.3 million.
•Total investment securities at fair value amounted to $712.9 million at June 30, 2023, compared to $830.9 million at March 31, 2023, a decrease of $118.0 million, or 14%. The decrease was attributable principally to the sale of debt securities during the period and, to a lesser extent, principal pay downs, calls and maturities.
•Total loans amounted to $3.35 billion, an increase of $115.5 million, or 4%, compared to March 31, 2023. Loans outstanding have increased 9% compared to June 30, 2022.
•Total customer deposits amounted to $4.08 billion, an increase of $59.4 million, or 1%, compared to March 31, 2023. Customer deposits have increased 1% compared to June 30, 2022.
•As part of its asset liability management strategy, the Company undertook the initiatives noted below to increase asset sensitivity and enhance future earnings.
◦The Company sold $84.8 million in debt securities and reinvested the proceeds into higher yielding short-term investments.
◦The Company entered into two, pay fixed, receive float, interest rate swaps to hedge against fixed-rate commercial real estate loan pools. Each swap has a notional value of $25.0 million and a term of two years.
◦The Company estimates that these initiatives provide an annualized increase to interest income of approximately $2.0 million, based on interest rates and balances outstanding at June 30, 2023.
Liquidity & Funding Capacity
All balances and ratios presented in this section are at June 30, 2023 unless otherwise indicated.
•Overnight and short-term investment amounted to $208.8 million, which were reported on the Company's consolidated balance sheet as interest-earning deposits with banks.
•Uninsured deposits amounted to 36% of total deposits.
•Deposit balances that utilize third-party enhanced Federal Deposit Insurance Corporation ("FDIC") insured products amounted to $796.8 million. Additional capacity to utilize these enhanced FDIC insured products exceeds the Company's total deposits balance.
•There were no brokered deposits outstanding. Borrowed funds amounted to $3.3 million and related to the Company's participation in specific pass-through community development programs under the Federal Home Loan Bank of Boston ("FHLB") and, to a lesser extent, the New Hampshire Business Finance Authority.
•FHLB and Federal Reserve Bank of Boston secured borrowing capacity amounted to $1.1 billion.
•The Company has several brokered deposit relationships (unsecured borrowings) which management estimated could provide an additional $800.0 million in funding capacity.
(1)Ratio also represents common equity tier 1 capital to risk weighted assets as of the periods presented.
(2)Tax-equivalent net interest margin is net interest income adjusted for the tax-equivalent effect associated with tax-exempt loan and investment income, expressed as a percentage of average interest-earning assets.
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," of the Company's 2022 Annual Report on Form 10-K, for additional information on the Company's key risk mitigation strategies, and Part I, Item 1A, "Risk Factors," section of the Company's 2022 Annual Report on Form 10-K for numerous factors that could adversely affect the Company's future results of operations and financial condition, and its reputation and business model.
Accounting Policies/Critical Accounting Estimates
As discussed in the Company's 2022 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 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 2022 Annual Report on Form 10-K.
Recent Accounting Pronouncements
See Note 1, Item (e), "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, 2023 and June 30, 2022
Unless otherwise indicated, the reported results are for the three months ended June 30, 2023 with the "prior year period" being the three months ended June 30, 2022. Average yields are presented on an annualized tax equivalent basis.
Net Income
Net income for the three months ended June 30, 2023, amounted to $9.7 million, an increase of $1.5 million, or 19%, compared to the three months ended June 30, 2022.
•The increase in net income during the period was due primarily to an increase in net interest income of $2.3 million and a decrease in non-interest expense of $1.2 million, partially offset by a decrease in non-interest income of $1.3 million. The components of the increase in net income are detailed below.
Net Interest Income
Net interest income for the three months ended June 30, 2023, amounted to $38.1 million, an increase of $2.3 million, or 6%, compared to the three months ended June 30, 2022.
•The increase in net interest income during the period was due largely to increases in loan interest income of $9.7 million and other interest-earning asset income of $1.5 million, partially offset by an increase in deposit interest expense of $9.0 million, due primarily to higher market interest rates over the comparable periods and increased competition for deposits from bank and non-bank alternatives.
Net Interest Margin
Three months ended – June 30, 2023 compared to June 30, 2022
Tax-equivalent net interest margin ("net interest margin") (non-GAAP) was 3.55% for the three months ended June 30, 2023, compared to 3.45% for the three months ended June 30, 2022.
Net interest margin compared to the prior year quarter was impacted by the following factors:
•Average interest-earning deposits with banks decreased $58.3 million, or 28%, while the yield increased 413 basis points. The decrease in average balance resulted primarily from funding loan growth, partially offset by a decrease in
average debt securities and an increase in average total deposits. The increase in yield reflected a significant increase in market interest rates during the period.
•Average debt securities decreased $54.3 million, or 6%, while the tax-equivalent yield increased 20 basis points. The decrease in average balance resulted from principal pay-downs, calls, maturities and sales of debt securities during the three months ended June 30, 2023, with funds redeployed into higher yielding interest earning deposits.
•Average loan balances increased $248.5 million, or 8%, and the tax-equivalent yield increased 86 basis points. The increase in loan yields resulted primarily from increases in market interest rates during the period.
•Average total deposits increased $94.6 million, or 2%, and the yield increased 90 basis points from increases in market interest rates, a shift in deposit mix to higher-yielding products and competition from bank and non-bank alternatives. The yield increases occurred principally over the last nine months.
Refer to the Company's Form 10-Q for the quarterly period ended March 31, 2023, filed with the SEC on May 9, 2023, for further disclosure on the calculation of adjusted margin for the respective period.
Interest-rate risk is reviewed in detail in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.
Rate / Volume Analysis
The following table sets forth, on a tax-equivalent basis, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the three months ended June 30, 2023, compared to the three months ended June 30, 2022. 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)
$
9,671
$
2,719
$
6,952
Investment securities (tax-equivalent)
177
(287)
464
Other interest-earning assets(1)
1,524
(135)
1,659
Total interest-earning assets (tax-equivalent)
11,372
2,297
9,075
Interest expense
Interest checking, savings and money market
6,424
12
6,412
Certificates of deposit
2,597
382
2,215
Borrowed funds
17
9
8
Subordinated debt
50
4
46
Total interest-bearing funding
9,088
407
8,681
Change in net interest income (tax-equivalent)
$
2,284
$
1,890
$
394
__________________________________________
(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, 2023 and 2022:
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Three months ended June 30, 2023
Three months ended June 30, 2022
(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)
$
3,268,586
$
41,930
5.14
%
$
3,020,113
$
32,259
4.28
%
Investment securities(3) (tax equivalent)
917,965
5,189
2.26
%
969,563
5,012
2.07
%
Other interest-earning assets(4)
155,934
1,917
4.93
%
214,167
393
0.74
%
Total interest-earnings assets (tax equivalent)
4,342,485
49,036
4.53
%
4,203,843
37,664
3.59
%
Other assets
92,909
115,413
Total assets
$
4,435,394
$
4,319,256
Liabilities and stockholders' equity:
Interest checking, savings and money market
$
2,351,011
6,880
1.17
%
$
2,296,268
456
0.08
%
CDs
393,387
2,812
2.87
%
198,766
215
0.43
%
Borrowed funds
4,595
30
2.58
%
2,961
13
1.73
%
Subordinated debt(5)
59,293
867
5.85
%
59,021
817
5.54
%
Total interest-bearing funding
2,808,286
10,589
1.51
%
2,557,016
1,501
0.24
%
Non-interest checking
1,269,339
—
—
%
1,424,132
—
—
%
Total deposits, borrowed funds and subordinated debt
4,077,625
10,589
1.04
%
3,981,148
1,501
0.15
%
Other liabilities
50,113
46,945
Total liabilities
4,127,738
4,028,093
Stockholders' equity
307,656
291,163
Total liabilities and stockholders' equity
$
4,435,394
$
4,319,256
Net interest-rate spread (tax equivalent)
3.02
%
3.35
%
Net interest income (tax equivalent)
38,447
36,163
Net interest margin (tax equivalent)
3.55
%
3.45
%
Less tax equivalent adjustment
354
342
Net interest income
$
38,093
$
35,821
Net interest margin
3.52
%
3.42
%
________________________________________
(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 2023 and 2022, 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, 2023, amounted to $2.3 million, compared to $2.4 million for the three months ended June 30, 2022.
•The provision expense for the second quarter of 2023 resulted mainly from an increase in loans outstanding and, to a lesser extent, an increase in off balance sheet commitments during the period.
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, 2023, amounted to $2.8 million, a decrease of $1.3 million, or 32%, compared to the three months ended June 30, 2022.
•Non-interest income for the three months ended June 30, 2023 included losses on sales of debt securities of $2.4 million and gains on equity securities of $189 thousand. Non-interest income during the three months ended June 30, 2022 had no losses on sales of debt securities and losses on equity securities of $429 thousand.
•Excluding the items above, non-interest income increased $487 thousand, or 11%, due primarily to an increase in deposit and interchange fees of $295 thousand.
Non-Interest Expense
Non-interest expense for the three months ended June 30, 2023, amounted to $25.6 million, a decrease of $1.2 million, or 5%, compared to the three months ended June 30, 2022. The decrease resulted primarily from a decrease in salaries and employee benefits of $1.6 million, due primarily to the receipt of $3.4 million in ERC, which were recorded as a reduction to salary and benefits expense.
•Excluding the ERC, non-interest expense increased $2.2 million, or 8%, due primarily to an increase in salaries and benefits of $1.8 million, or 10%.
•The increase in non-interest expense, excluding the ERC, was impacted by increases in advertising and public relations expenses of $244 thousand and deposit insurance premiums of $249 thousand, partially offset by a decrease in technology and telecommunications expenses of $283 thousand.
Income Taxes
The effective tax rate for the three months ended June 30, 2023, was 25.6%, compared to 23.7% for the three months ended June 30, 2022. The increase in the effective rate for the current quarter compared to the prior year quarter resulted primarily from the transfers of funds from the Bank's investment subsidiary corporations and a partially non-deductible loss on the sale of debt securities. The Company established a valuation allowance against the capital loss carryforward deferred tax asset which resulted from the sale of securities.
Results of Operations for the six months ended June 30, 2023 and June 30, 2022
Unless otherwise indicated, the reported results are for the six months ended June 30, 2023 with the "prior year period," being the six months ended June 30, 2022. Average yields are presented on an annualized tax equivalent basis.
Net Income
Net income for the six months ended June 30, 2023, amounted to $20.5 million, an increase of $2.0 million, or 11%, compared to the six months ended June 30, 2022.
•The increase in net income during the current period was due primarily to an increase in net interest income of $8.2 million, partially offset by an increase in the provision for credit losses of $2.1 million and a decrease in non-interest income of $2.2 million. The components of the increase in net income are detailed below.
Net interest income for the six months ended June 30, 2023, amounted to $78.1 million, an increase of $8.2 million, or 12%, compared to the six months ended June 30, 2022.
•The increase in net interest income during the current period was due largely to increases in loan interest income of $18.5 million and other interest-earning asset income of $3.6 million, partially offset by an increase in deposit interest expense of $14.4 million.
Net Interest Margin
Six months ended – June 30, 2023 compared to June 30, 2022
Net interest margin was 3.65% for the six months ended June 30, 2023, compared to 3.36% for the six months ended June 30, 2022.
Net interest margin compared to the prior year was impacted by the following factors:
•Average interest-earning deposits with banks decreased $121.4 million, or 41%, while the yield increased 426 basis points. The decrease in average balance resulted primarily from funding loan growth, partially offset by a decrease in average debt securities and an increase in average total deposits. The increase in yield reflected a significant increase in market interest rates since the prior period.
•Average debt securities decreased $33.4 million, or 3%, while the tax-equivalent yield increased 21 basis points. The decrease in average balance resulted from principal pay-downs, calls, maturities and sales of debt securities during the six months ended June 30, 2023, with funds redeployed into higher yielding interest-earning deposits.
•Average loan balances increased $268.9 million, or 9%, and the tax-equivalent yield increased 79 basis points. The increase in loan yields resulted primarily from increases in market interest rates during the period.
•Average total deposits increased $78.7 million, or 2%, and the yield increased 72 basis points from increases in market interest rates, a shift in deposit mix to higher-yielding products and competition from bank and non-bank alternatives. The yield increases occurred principally over the last nine months.
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, 2023, compared to the six months ended June 30, 2022. 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)
$
18,545
$
5,833
$
12,712
Investment securities (tax equivalent)
656
(334)
990
Other interest-earning assets(1)
3,551
(325)
3,876
Total interest-earning assets (tax equivalent)
22,752
5,174
17,578
Interest expense
Interest checking, savings and money market
10,150
7
10,143
CDs
4,258
613
3,645
Borrowed funds
16
2
14
Subordinated debt
99
7
92
Total interest-bearing funding
14,523
629
13,894
Change in net interest income (tax equivalent)
$
8,229
$
4,545
$
3,684
__________________________________________
(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, 2023 and 2022:
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
Six months ended June 30, 2023
Six months ended June 30, 2022
(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)
$
3,234,901
$
81,609
5.08
%
$
2,965,998
$
63,064
4.29
%
Investment securities(3) (tax equivalent)
927,620
10,489
2.26
%
958,211
9,833
2.05
%
Other interest-earning assets(4)
177,219
4,125
4.69
%
298,409
574
0.39
%
Total interest-earnings assets (tax equivalent)
4,339,740
96,223
4.47
%
4,222,618
73,471
3.50
%
Other assets
89,762
134,683
Total assets
$
4,429,502
$
4,357,301
Liabilities and stockholders' equity:
Interest checking, savings and money market
$
2,352,978
10,985
0.94
%
$
2,333,587
835
0.07
%
CDs
365,529
4,694
2.59
%
200,723
436
0.44
%
Borrowed funds
3,904
42
2.17
%
3,608
26
1.46
%
Subordinated debt(5)
59,253
1,734
5.85
%
59,006
1,635
5.54
%
Total interest-bearing funding
2,781,664
17,455
1.26
%
2,596,924
2,932
0.23
%
Non-interest checking
1,293,303
—
—
%
1,398,840
—
—
%
Total deposits, borrowed funds and subordinated debt
4,074,967
17,455
0.86
%
3,995,764
2,932
0.15
%
Other liabilities
51,880
50,051
Total liabilities
4,126,847
4,045,815
Stockholders' equity
302,655
311,486
Total liabilities and stockholders' equity
$
4,429,502
$
4,357,301
Net interest-rate spread (tax equivalent)
3.21
%
3.27
%
Net interest income (tax equivalent)
78,768
70,539
Net interest margin (tax equivalent)
3.65
%
3.36
%
Less tax equivalent adjustment
704
685
Net interest income
$
78,064
$
69,854
Net interest margin
3.62
%
3.33
%
_______________________________________
(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 2023 and 2022, 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 six months ended June 30, 2023, amounted to $5.0 million, an increase of $2.1 million, compared to the six months ended June 30, 2022.
•The increase in the provision for credit losses resulted primarily from growth in the Company's loan portfolio and off-balance sheet commitments and, to a lesser extent, an increased probability and severity of forecasted economic conditions in our allowance model.
The provision for credit losses is a significant factor in the Company's operating results. For further discussion regarding the provision for credit losses and management's assessment of the adequacy of the ACL for loan, 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, 2023, amounted to $7.6 million, a decrease of $2.2 million, or 22%, compared to the six months ended June 30, 2022.
•Non-interest income for the six months ended June 30, 2023 included losses on sales of debt securities of $2.4 million and gains on equity securities of $173 thousand. Non-interest income during the six months ended June 30, 2022 had gains on sales of debt securities of $1.1 million and losses on equity securities of $495 thousand.
•Excluding the items above, non-interest income increased $661 thousand, or 7%, due primarily to increases in deposit and interchange fees of $541 thousand.
Non-Interest Expense
Non-interest expense for the six months ended June 30, 2023, amounted to $53.7 million, an increase of $1.1 million, or 2%, compared to the six months ended June 30, 2022.
•Non-interest expense for the six months ended June 30, 2023 included $3.6 million in ERC, which were recorded as a reduction to salary and benefits expense. Excluding the ERC, non-interest expense increased $4.7 million, or 9%, primarily due to an increase in salaries and benefits, excluding ERC, of $3.8 million, or 11%.
•The increase in non-interest expense, excluding the ERC, was also impacted by increases in advertising and public relations expenses of $258 thousand, deposit insurance premiums of $368 thousand and other operating expenses of $341 thousand.
Income Taxes
The effective tax rate for the six months ended June 30, 2023, was 24.2%, compared to 23.2% for the six months ended June 30, 2022. The increase in the effective tax rate for the current year compared to the prior year resulted primarily from the transfers of funds from the Bank's investment subsidiary corporations and a partially non-deductible loss on the sale of debt securities. The Company established a valuation allowance against the capital loss carryforward deferred tax asset which resulted from the sale of securities.
Financial Condition
Total assets amounted to $4.50 billion at June 30, 2023, compared to $4.44 billion at December 31, 2022, representing an increase of $64.0 million, or 1%. The balance sheet composition and changes since December 31, 2022, are discussed below.
Cash and cash equivalents
Cash and cash equivalents at June 30, 2023 decreased $8.8 million since December 31, 2022. At both June 30, 2023 and December 31, 2022, cash and cash equivalents amounted to 6% of total assets. The decrease was due primarily to the funding of loan growth, partially offset by sales of debt securities, investment cash flows and deposit growth.
Investments
At June 30, 2023, the fair value of the investment securities portfolio amounted to $712.9 million, a decrease of $107.5 million, or 13%, since December 31, 2022. The investment securities portfolio at fair value represented 16% and 18% of total assets at June 30, 2023 and December 31, 2022, respectively. The decrease was attributable principally to sales of debt securities and, to a lesser extent, principal pay downs, calls and maturities. Debt security sales during the three and six months ended June 30, 2023 were made in order to improve the Company's balance sheet positioning and enhance future earnings. As of June 30, 2023
and December 31, 2022, the Company's investment securities 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, 2023, the Company purchased no debt securities, had principal pay-downs, calls and maturities totaling $32.4 million, and sold debt securities with an amortized cost of approximately $87.2 million realizing net losses on sales of $2.4 million.
Net unrealized losses on the debt securities portfolio amounted to $113.1 million at June 30, 2023, compared to $124.1 million at December 31, 2022. The Company attributes the change in net unrealized losses compared to December 31, 2022 to changes in market interest rates during the period.
The mix of investment securities remained relatively unchanged at June 30, 2023 compared to December 31, 2022. The effective duration of the debt securities portfolio at June 30, 2023 was approximately 5.1 years compared to 5.0 years at December 31, 2022.
Loans
As of June 30, 2023, total loans increased $165.1 million, or 5%, compared to December 31, 2022. The mix of loans within the Company's loan portfolio remained relatively unchanged and commercial loans amounted to 87% of total loans at both June 30, 2023 and December 31, 2022.
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:
June 30, 2023
December 31, 2022
June 30, 2022
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Commercial real estate
$
2,009,263
60
%
$
1,921,410
61
%
$
1,865,198
60
%
Commercial and industrial
420,095
13
%
414,490
13
%
422,006
14
%
Commercial construction
487,018
15
%
424,049
13
%
385,752
13
%
SBA PPP
—
—
%
—
—
%
15,288
—
%
Total commercial loans
2,916,376
88
%
2,759,949
87
%
2,688,244
87
%
Residential mortgages
346,523
10
%
332,632
10
%
307,131
10
%
Home equity
74,374
2
%
79,807
3
%
81,648
3
%
Consumer
8,394
—
%
8,130
—
%
7,892
—
%
Total retail loans
429,291
12
%
420,569
13
%
396,671
13
%
Total loans
3,345,667
100
%
3,180,518
100
%
3,084,915
100
%
Allowance for credit losses
(56,899)
(52,640)
(50,703)
Net loans
$
3,288,768
$
3,127,878
$
3,034,212
As of June 30, 2023, and compared to December 31, 2022,
•Commercial real estate loans increased $87.9 million, or 5%.
•Commercial and industrial loans increased by $5.6 million, or 1%.
•Commercial construction loans increased by $63.0 million, or 15%. The increase was due primarily to strong demand from existing customers partially driven by low housing inventory.
•Total retail loans increased by $8.7 million, or 2%.
At June 30, 2023, commercial loan balances participated out to various banks amounted to $68.9 million, compared to $59.1 million at December 31, 2022. 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 $107.6 million and $94.8 million at June 30, 2023 and December 31, 2022, 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.
The following table sets forth information regarding the Company's loan portfolio asset quality at the dates indicated:
(Dollars in thousands)
June 30, 2023
December 31, 2022
June 30, 2022
Non-accrual loan summary:
Commercial real estate
$
4,609
$
3,355
$
4,367
Commercial and industrial
988
730
1,223
Commercial construction
—
294
—
Residential mortgages
1,546
1,532
501
Home equity
504
211
230
Consumer
—
—
—
Total non-performing loans
7,647
6,122
6,321
Total loans
$
3,345,667
$
3,180,518
$
3,084,915
Delinquent loans 60-89 days past due and still accruing
$
3,509
$
1,307
$
1,334
Loans 60-89 days past due and still accruing to total loans
0.10
%
0.04
%
0.04
%
Non-performing loans to total loans
0.23
%
0.19
%
0.20
%
Non-performing assets to total assets
0.17
%
0.14
%
0.14
%
Allowance for credit losses for loans
$
56,899
$
52,640
$
50,703
Allowance for credit losses for loans to non-performing loans
744.07
%
859.85
%
802.14
%
Allowance for credit losses for loans to total loans
1.70
%
1.66
%
1.64
%
The Company had no OREO at June 30, 2023, December 31, 2022 or June 30, 2022, and therefore non-performing loans were the only component of non-performing assets.
At June 30, 2023 and December 31, 2022, adversely classified loans amounted to $42.1 million and $47.0 million, respectively. Adversely classified loans that were performing amounted to $34.5 million and $40.9 million at June 30, 2023 and December 31, 2022, respectively. Adversely classified loans in non-accrual status amounted to $7.6 million and $6.1 million at June 30, 2023 and December 31, 2022, respectively.
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 2022 Annual Report on Form 10-K. See Note 4, "ACL for Loans," to the Company's audited consolidated financial statements contained in the 2022 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 under the current expected credit loss ("CECL") methodology.
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 for loans based on judgments different from those of management.
The following table presents changes in the provision for credit losses on loans and unfunded commitments during the six-month periods indicated:
Six months ended
(Dollars in thousands)
June 30, 2023
June 30, 2022
Provision for credit losses on loans
$
4,361
$
3,020
Provision for unfunded commitments
643
(81)
Total provision for credit losses
$
5,004
$
2,939
The following table summarizes the activity in the ACL for loans for the periods indicated:
Six months ended June 30,
(Dollars in thousands)
2023
2022
Balance at beginning of year
$
52,640
$
47,704
Provision for credit losses for loans
4,361
3,020
Recoveries on charged-off loans:
Commercial real estate
—
—
Commercial and industrial
211
110
Commercial construction
—
—
Residential mortgages
—
—
Home equity
5
7
Consumer
6
10
Total recovered
222
127
Charged-off loans
Commercial real estate
—
—
Commercial and industrial
303
110
Commercial construction
—
—
Residential mortgages
—
—
Home equity
—
—
Consumer
21
38
Total charged-off
324
148
Net loans charged-off
102
21
Ending balance
$
56,899
$
50,703
Annualized net loans (recovered) charged-off to average loans outstanding
0.01
%
—
%
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 non-cancellable 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 $5.0 million as of June 30, 2023 and $4.3 million at December 31, 2022. The provision for unfunded commitments for the three months ended June 30, 2023 amounted to $225 thousand compared to $214 thousand for the three months ended June 30, 2022. The provision for unfunded commitments for the six months ended June 30, 2023 amounted to $643 thousand compared to a benefit of $81 thousand. The increase in the provision for unfunded commitments resulted primarily from growth in the Company's off-balance sheet commitments.
Based on the foregoing, management believes that the Company's ACL for loans and reserve for unfunded commitments is adequate as of June 30, 2023.
Deposits
As of June 30, 2023, customer deposits increased $39.8 million, or 1%, since December 31, 2022. Checking account balances decreased $64.6 million, or 3%, money market and savings account balances decreased $24.2 million, or 1%, and certificates of deposit ("CD") account balances increased $128.6 million, or 45%, as customers sought higher yielding deposit products in the rising market rate environment.
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, 2023
December 31, 2022
June 30, 2022
(Dollars in thousands)
Amount
Percent
Amount
Percent
Amount
Percent
Checking
$
1,975,669
49
%
$
2,040,303
51
%
$
2,170,118
54
%
Money markets and savings
1,684,137
41
%
1,708,311
42
%
1,628,181
40
%
CDs
415,792
10
%
287,192
7
%
218,515
6
%
Deposits
$
4,075,598
100
%
$
4,035,806
100
%
$
4,016,814
100
%
Total customer deposits include reciprocal balances from checking, money market deposits and CDs received from participating banks in nationwide deposit networks as a result of our customers electing to participate in Company offered programs which allow for third-party enhanced FDIC insurance. Under this enhanced deposit insurance program, the equivalent of the customers' original deposited funds are reciprocated back through the network to the Company and are carried within the appropriate category under deposits. The Company's balances in these reciprocal enhanced insurance products were $796.8 million and $589.7 million, at June 30, 2023 and December 31, 2022, respectively.
As of June 30, 2023, uninsured deposits amounted to 36% of total deposits. Additional capacity to utilize these enhanced FDIC insured products exceeds the Company's total deposits balance at June 30, 2023. Additional capacity to utilize these third-party enhanced FDIC insured products exceeds the Company's total deposits balance.
Borrowed Funds
The Company had borrowed funds outstanding of $3.3 million at both June 30, 2023 and December 31, 2022, which were comprised of FHLB advances related to specific lending projects under the FHLB's community development and affordable housing programs as well as a small portion of borrowed funds from a New Hampshire Business Finance Authority borrowing under a New Hampshire community development program linked to a commercial loan.
See also "Liquidity" below for additional information on borrowing capacity.
Subordinated Debt
The Company had outstanding subordinated debt, net of deferred issuance costs, of $59.3 million at June 30, 2023 compared to $59.2 million at December 31, 2022.
See also Note 7, "Borrowed Funds and Subordinated Debt," to the Company's unaudited consolidated interim financial statements contained in Item 1 above in this Form 10-Q, for further information regarding the Company's subordinated debt.
Shareholders' Equity
Total shareholders' equity amounted to $307.5 million at June 30, 2023, compared to $282.3 million at December 31, 2022, an increase of $25.2 million, or 9%. The increase was due primarily to an increase in retained earnings and a decrease in the
accumulated other comprehensive loss, which resulted from an increase in the fair value of debt securities.
For the six months ended June 30, 2023 and June 30, 2022, the Company declared cash dividends of $5.6 million and $5.0 million, respectively, and shareholders utilized the dividend reinvestment portion of the Company's dividend reinvestment and direct stock purchase plan to purchase aggregate shares of the Company's common stock amounting to 24,219 shares and 19,524 shares, totaling $746 thousand and $699 thousand, respectively.
On July 18, 2023, the Company announced a quarterly dividend of $0.23 per share to be paid on September 1, 2023 to shareholders of record as of August 11, 2023.
Derivatives and Hedging
In June of 2023, the Company entered into two pay fixed, receive float, interest rate swaps with a combined notional value of $50.0 million and maturities of two years. Under the interest rate swap agreements, the Company pays a combined fixed interest rate of 4.43% and receives the Secured Overnight Financing Rate. The fair value of these swaps, carried on the Company's Consolidated Balance Sheets as assets, was $260 thousand at June 30, 2023.
The notional value of back-to-back interest-rate swaps with customers and counterparties amounted to $7.7 million at June 30, 2023 and $7.8 million at December 31, 2022. The fair value of assets and corresponding liabilities associated with these swaps and carried on the Company's Consolidated Balance Sheets was $753 thousand at June 30, 2023 compared to $782 thousand at December 31, 2022.
The notional value of RPAs sold amounted to $46.9 million at June 30, 2023 and $24.7 million at December 31, 2022. The fair value of RPAs, carried on the Company's Consolidated Balance Sheets as a liability, was $81 thousand at June 30, 2023 and $73 thousand at December 31, 2022.
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 and access to the FRB Discount Window. At June 30, 2023, the Bank had the capacity to borrow additional funds from the FHLB and FRB Discount Window of up to approximately $830.0 million and $310.0 million, respectively.
Management believes that the Company has adequate liquidity to meet its obligations. However, if general economic conditions, potential recession in the United States and our market areas, continuation of recent uncertainty in the banking industry, changes in market interest rates, the persistence of the current inflationary environment in the United States and our
market areas, increased competition for deposits and related changes in deposit customer behavior, or other events, cause these sources of external funding to become restricted or are eliminated, the Company may not be able to raise adequate funds or may incur substantially higher funding costs or operating restrictions in order to raise the necessary funds to support the Company's operations and growth.
Capital Resources
The principal cash requirement of the Company is the payment of interest on subordinated debt and the payment of dividends on our common stock. The Company's Board of Directors approves cash dividends on a quarterly basis after careful analysis and consideration of various factors, including our capital position, economic conditions, growth rates, earnings performance and projections as well as strategic initiatives and related capital requirements.
The Company's primary source of cash is dividends paid by the Bank, which are limited to the Bank's net income for the current year plus its retained net income for the prior two years.
The Company's total capital and tier 1 capital to risk weighted assets amounted to 13.37% and 10.52%, respectively, at June 30, 2023, compared to 13.49% and 10.56%, respectively, at December 31, 2022. The decreases were driven primarily by commercial loan growth, partially offset by an increase in retained earnings during the period.
Tier 1 capital to average assets amounted to 8.62% at June 30, 2023, compared to 8.10% at December 31, 2022. The increase was driven primarily by the increase in retained earnings noted above and a decrease in average assets.
For further information about the Company's capital, see Note 9 "Regulatory Capital Requirements," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form 10-Q.
Wealth Management
Wealth assets under management and wealth assets under administration are not carried as assets on the Company's consolidated balance sheets. The Company provides a wide range of wealth management and wealth services, including investment management, brokerage, annuities, trust, and 401(k) administration.
Wealth assets under management and wealth assets under administration amounted to $1.0 billion and $214.1 million, respectively, at June 30, 2023, representing increases of $117.9 million, or 13%, and $15.5 million, or 8%, respectively, compared to December 31, 2022. The increase in assets under management resulted from an increase in market values as well as assets attracted through new and expanded client relationships.
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 2022 Annual Report on Form 10-K for further information on the Company's net interest income and net interest margin sensitivity under different interest rate and yield curve scenarios as well as different asset and liability mix scenarios.
The table below summarizes the results from and compares the percent change in net interest income to the rates unchanged scenario, assuming a static balance sheet, for a 24-month period at June 30, 2023 and December 31, 2022.
•In the 200 and 400 basis point increasing interest rate scenarios, net interest income was projected to be relatively flat in the first 24 months compared to an increase at December 31, 2022 primarily due to a shift in deposit composition from non-interest-bearing account balances into interest-bearing account balances that have a higher level of interest rate sensitivity.
•In the 200 basis point decreasing interest rate scenario, the percent decrease in net interest income was lower compared to the results at December 31, 2022. At June 30, 2023, deposit yields increased above the lower levels experienced at December 31, 2022 when deposit yields were closer to zero. As deposit yields increase, it allows for a higher level of rate declines in the 200 basis point declining rate scenario, which improved net interest income sensitivity results.
(Dollars in thousands, except for percentage data)
June 30, 2023
December 31, 2022
Changes in interest rates
Percentage Change
Percentage Change
Rates Rise 400 Basis Points
0.12
%
1.20
%
Rates Rise 200 Basis Points
(0.10)
%
0.45
%
Rates Unchanged
—
%
—
%
Rates Decline 200 Basis Points
(2.22)
%
(5.34)
%
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 2022 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.
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, 2023.
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, 2023) that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1 -Legal Proceedings
There are no material pending legal proceedings to which the Company or its subsidiaries are a party or to which any of its property is subject, other than ordinary routine litigation incidental to the business of the Company. Management does not believe resolution of any present litigation will have a material adverse effect on the business, consolidated financial condition or results of operations of the Company.
Item 1A -Risk Factors
Except as provided in the risk factor below, management believes that there have been no material changes in the Company's risk factors as reported in the 2022 Annual Report on Form 10-K. However, if the United States or the markets in which we operate encounter sustained economic stress or recession, many of the risk factors identified in the Company’s 2022 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 key risk areas including Economic & Financial Markets, Liquidity, Credit and Collateral, Capital and Operations, among others.
Recent bank failures and the related negative impact on customer confidence in the safety and soundness of the banking industry may adversely affect our business, earnings and financial condition.
When other financial institutions experience severe financial difficulties it could result in an adverse impact on the regional banking industry, generally, and the business environment in which the Company operates. The failures of three large regional banks in 2023 have resulted in significant market volatility among publicly traded bank holding companies which has caused uncertainty in the investor community and bank customers, generally. This uncertainty may negatively impact customer confidence in the safety and soundness of regional banks and, as a result, the Company’s customers may choose to withdraw some or all of their deposited funds, and seek higher yielding alternatives, which could have a materially adverse impact on our liquidity, cost of funding, loan funding capacity, net interest margin, capital and results of operations.
Management continues to monitor the ongoing events concerning the recent bank failures, potential bank failures and volatility within the financial services industry generally, together with any responsive measures that may be taken by the banking regulators in an attempt to mitigate or manage potential turmoil in the financial services industry.
Item 2 -Unregistered Sales of Equity Securities and Use of Proceeds
The following table represents information with respect to repurchases of common stock made by the Company during the three months ended June 30, 2023:
Total number of shares repurchased(1)
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Announced
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
April
1,410
$
28.45
—
—
May
—
$
—
—
—
June
240
$
28.94
—
—
________________________________
(1)Amounts include shares repurchased that were not part of a publicly announced repurchase plan or program. These shares were owned and tendered by employees as payment for taxes upon vesting of restricted stock (net settlement of shares).
Item 3 -Defaults upon Senior Securities
Not Applicable.
Item 4 -Mine Safety Disclosures
Not Applicable.
Item 5 -Other Information
During the three months ended June 30, 2023, no directors or officers of the Company adopted or terminated a "Rule 10b5-1 trading arrangement" or a "non-Rule 10b5-1 trading arrangement," as each term is defined in Item 408 of Regulation S-K.
101* The following materials from Enterprise Bancorp, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 were formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2023 and 2022; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and 2022; (iv) Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2023 and 2022; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022; 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, 2023 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.