Enterprise Bancorp(EBTC) - 2020 Q2 - Quarterly Report

PART I Item 1. Financial Statements (unaudited) This section presents the unaudited consolidated interim financial statements, including balance sheets, income statements, and cash flows, detailing the impact of the COVID-19 pandemic and PPP on the company's financials Consolidated Balance Sheets Total assets significantly increased to $4.04 billion by June 30, 2020, driven by a surge in loans, including PPP loans, and a substantial rise in deposits Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $4,037,229 | $3,235,049 | | Total cash and cash equivalents | $254,763 | $63,794 | | Loans, net | $3,133,818 | $2,531,845 | | Total Liabilities | $3,720,553 | $2,938,408 | | Total Deposits | $3,648,108 | $2,786,730 | | Total stockholders' equity | $316,676 | $296,641 | Consolidated Statements of Income Net income decreased to $7.3 million for Q2 2020 and $11.3 million for H1 2020, primarily due to a significant increase in the provision for loan losses offsetting net interest income growth Key Income Statement Data (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $32,526 | $28,778 | $62,422 | $56,862 | | Provision for loan losses | $2,675 | $955 | $8,822 | $555 | | Net income | $7,256 | $7,763 | $11,273 | $16,459 | | Diluted earnings per share | $0.61 | $0.66 | $0.95 | $1.39 | Consolidated Statements of Cash Flows Net cash provided by operating activities was $14.1 million, while investing activities used $588.8 million primarily for loans, funded by $765.7 million from financing activities, leading to a $191.0 million increase in cash Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $14,093 | $13,362 | | Net cash used in investing activities | ($588,803) | ($51,630) | | Net cash provided by financing activities | $765,679 | $162,027 | | Net increase in cash and cash equivalents | $190,969 | $123,759 | Notes to Unaudited Consolidated Interim Financial Statements The notes detail accounting policies, including the delay of CECL adoption and suspension of TDR accounting under the CARES Act, and provide breakdowns of loan portfolios, PPP loans, and allowance for loan losses - The Company elected to delay the adoption of the Current Expected Credit Loss (CECL) methodology under the CARES Act until the earlier of the end of the national emergency or December 31, 2020[42] - The Company is suspending Troubled Debt Restructuring (TDR) accounting for short-term payment deferrals on certain loans related to the COVID-19 pandemic, as permitted by the CARES Act[43] - As of June 30, 2020, the company had funded 2,636 Paycheck Protection Program (PPP) loans totaling $505.6 million, recording $17.0 million in related SBA processing fees being accreted into interest income[71][72] - The allowance for loan losses increased to $42.3 million at June 30, 2020, from $33.6 million at year-end 2019, with the provision for loan losses for the first six months of 2020 surging to $8.8 million from $555 thousand in the prior-year period due to pandemic-related economic weakness[109][110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, highlighting the COVID-19 pandemic's impact, including declining net income due to higher loan loss provisions, strong asset and deposit growth from PPP, and net interest margin compression Overview Net income for H1 2020 declined to $11.3 million due to increased loan loss provisions, while PPP loans totaling $505.6 million significantly boosted assets and deposits, and $594.8 million in loan deferrals were granted Financial Highlights - Six Months Ended June 30 | Metric | 2020 | 2019 | | :--- | :--- | :--- | | Net Income | $11.3 million | $16.5 million | | Diluted EPS | $0.95 | $1.39 | - The company funded 2,636 PPP loans totaling $505.6 million as of June 30, 2020, which significantly impacted asset and deposit growth[230] - As of June 30, 2020, short-term payment deferrals were granted on 1,130 loans amounting to $594.8 million, or 22% of the loan portfolio (excluding PPP loans)[235] - On July 7, 2020, the Company completed a private placement of $60.0 million in subordinated notes to support regulatory capital and growth[237] Financial Condition Total assets grew 25% to $4.04 billion, driven by a 24% increase in loans including PPP, and a 28% rise in deposits, while the allowance for loan losses (ex-PPP) reached 1.58% Loan Portfolio Composition (in thousands) | Loan Category | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Commercial real estate | $1,471,586 | $1,394,179 | | Commercial and industrial | $454,455 | $501,227 | | Commercial construction | $404,008 | $317,477 | | SBA PPP loans | $505,557 | $— | | Gross loans | $3,194,723 | $2,568,562 | Asset Quality Ratios | Ratio | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Non-performing assets to total assets | 0.53% | 0.46% | | Allowance for loan losses to total loans | 1.33% | 1.31% | | Allowance for loan losses to non-performing loans | 198.38% | 227.57% | - Industries considered most at-risk from the pandemic (retail, restaurants, hotels, fitness centers) represent 13% of total gross loans (ex-PPP) and 28% of the total deferred balance[310] - The allowance for loan losses to total loans, excluding the government-guaranteed PPP loans, was 1.58% at June 30, 2020[327] Results of Operations Net interest income increased for both Q2 and H1 2020, driven by loan growth and PPP, but was significantly offset by a surge in the provision for loan losses, while non-interest expenses also rose Net Interest Margin (Tax-Equivalent) | Period | Q2 2020 | Q1 2020 | Q2 2019 | | :--- | :--- | :--- | :--- | | T/E Net Interest Margin | 3.59% | 3.89% | 3.96% | | T/E Net Interest Margin (ex-PPP) | 3.68% | N/A | N/A | - The provision for loan losses for Q2 2020 was $2.7 million, an increase of $1.7 million from Q2 2019, primarily due to general reserve increases related to the pandemic's economic impact[399] - For the six months ended June 30, 2020, the provision for loan losses was $8.8 million, compared to just $555 thousand for the same period in 2019[433] - Non-interest expense for Q2 2020 increased 12% year-over-year to $24.3 million, driven by higher salaries and benefits (including PPP-related awards) and technology costs[404] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, with its net interest income simulation model indicating increased asset sensitivity as of June 30, 2020, due to higher liquidity and near-zero deposit rates Net Interest Income Sensitivity Analysis (% Change over 24 Months) | Scenario | June 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Rates Rise 400 Bps | +4.93% | +0.77% | | Rates Rise 200 Bps | +2.75% | +0.83% | | Rates Decline 100 Bps | -3.14% | -1.24% | - The company's interest rate risk profile has become more asset-sensitive since year-end 2019, primarily due to an increase in on-balance sheet liquidity and deposit rates having limited capacity for further decline[457] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no significant changes to internal control over financial reporting during Q2 2020 - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2020[463] - No significant changes were made to the Company's internal control over financial reporting during the second quarter of 2020[466] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material pending legal proceedings beyond routine litigation incidental to its business operations - The Company is not involved in any material pending legal proceedings outside of ordinary routine litigation[469] Item 1A. Risk Factors Existing risk factors are heightened by the COVID-19 pandemic, including increased credit losses, PPP-related risks, market volatility, liquidity constraints, and elevated operational and cybersecurity risks from remote work - The COVID-19 pandemic has heightened existing risk factors, potentially leading to a material adverse impact on credit, collateral, customer demand, funding, and operations[470] - The company faces heightened credit risk as the pandemic may cause customers to be unable to make scheduled loan payments, potentially leading to significant delinquencies and credit losses[472] - Participation in the Paycheck Protection Program (PPP) introduces risks, such as holding loans at unfavorable rates if forgiveness is not granted, and potential credit losses if the SBA does not honor its guarantee on defaulted loans[474] - Increased remote work due to the pandemic elevates technology and cybersecurity risks, including phishing, malware attacks, and potential disruptions to IT infrastructure[484] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2020, the company repurchased 1,633 common shares at an average price of $26.01 per share, primarily for employee tax obligations upon restricted stock vesting Common Stock Repurchases (Q2 2020) | Month | Total Shares Repurchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April | 1,633 | $26.01 | | May | — | — | | June | — | — | Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including officer certifications and financial data in Inline XBRL format - Exhibits filed with the report include officer certifications under SEC rules 13a-14(a) and 18 U.S.C. § 1350, as well as financial data formatted in Inline XBRL[492]