Enterprise Bancorp(EBTC) - 2023 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated interim financial statements present the financial position, results of operations, and cash flows for Q1 2023 and 2022 periods Consolidated Balance Sheets Total assets increased slightly to $4.44 billion at March 31, 2023, driven by net loan growth, while liabilities decreased and equity rose from reduced comprehensive loss Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Total cash and cash equivalents | $215,693 | $267,589 | | Total investment securities at fair value | $830,895 | $820,371 | | Net loans | $3,175,154 | $3,127,878 | | Total assets | $4,441,896 | $4,438,333 | | Liabilities & Equity | | | | Deposits | $4,016,156 | $4,035,806 | | Total liabilities | $4,130,578 | $4,156,066 | | Total shareholders' equity | $311,318 | $282,267 | | Total liabilities and shareholders' equity | $4,441,896 | $4,438,333 | Consolidated Statements of Income Net income for Q1 2023 increased to $10.8 million, primarily driven by a 17.4% rise in net interest income, despite increased expenses Consolidated Income Statement Highlights (in thousands, except per share data) | Account | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :--- | :--- | :--- | | Net interest income | $39,971 | $34,033 | | Provision for credit losses | $2,736 | $530 | | Total non-interest income | $4,757 | $5,595 | | Total non-interest expense | $28,040 | $25,757 | | Net income | $10,768 | $10,287 | | Diluted earnings per share | $0.88 | $0.85 | Consolidated Statements of Comprehensive Income Total comprehensive income for Q1 2023 was $31.0 million, a significant turnaround from a loss in Q1 2022, driven by a positive change in debt securities' fair value Comprehensive Income (Loss) (in thousands) | Component | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :--- | :--- | :--- | | Net income | $10,768 | $10,287 | | Net change in fair value of debt securities | $20,248 | $(44,962) | | Total comprehensive income (loss), net | $31,016 | $(34,675) | Consolidated Statements of Changes in Shareholders' Equity Shareholders' equity increased to $311.3 million at March 31, 2023, driven by net income and other comprehensive income, partially offset by common stock dividends - Key drivers for the change in shareholders' equity in Q1 2023 include net income of $10.8 million, other comprehensive income of $20.2 million, and common stock dividends of $2.8 million[16] Consolidated Statements of Cash Flows Net cash provided by operating activities was $5.7 million in Q1 2023, while investing and financing activities resulted in a $51.9 million net decrease in cash and cash equivalents Net Cash Flow Summary (in thousands) | Cash Flow Activity | Three months ended March 31, 2023 | Three months ended March 31, 2022 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $5,674 | $(3,265) | | Net cash used in investing activities | $(35,227) | $(53,039) | | Net cash (used in) provided by financing activities | $(22,343) | $49,415 | | Net decrease in cash and cash equivalents | $(51,896) | $(6,889) | Notes to Unaudited Consolidated Interim Financial Statements The notes detail accounting policies, including early adoption of new standards, and provide breakdowns of key financial components like investments, loans, ACL, deposits, and regulatory capital - The Company early adopted ASU 2023-02 for a new NMTC investment and ASU 2022-02, which eliminated troubled debt restructuring (TDR) accounting, with neither adoption having a significant impact on financial statements[32][34] - The investment portfolio is primarily composed of debt securities classified as available-for-sale, with unrealized losses of $98.5 million at March 31, 2023, attributed to higher market interest rates[36] - Total loans grew to $3.23 billion, with commercial loans (real estate, C&I, construction) comprising 87% of the portfolio[44][177] - The Allowance for Credit Losses (ACL) for loans increased to $55.0 million (1.70% of total loans) from $52.6 million at year-end 2022[72][73] - Non-accrual loans increased to $7.5 million (0.23% of total loans) at March 31, 2023, from $6.1 million (0.19% of total loans) at year-end 2022[56][57] - The Company and the Bank met all 'well-capitalized' requirements under regulatory frameworks as of March 31, 2023[94] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2023 financial results, highlighting a 5% net income increase driven by higher net interest income, alongside loan growth, stable liquidity, and strong capital and asset quality Overview Net income for Q1 2023 increased to $10.8 million, driven by higher net interest income, with loan growth, slight deposit decrease, and increased shareholders' equity from AOCL reduction - Net income increased to $10.8 million in Q1 2023, up 5% from Q1 2022, driven by higher net interest income[131][150] - Total loans increased by 1.6% (6% annualized) in Q1 2023, while customer deposits decreased by 0.5% (2% annualized)[132][134] - The company maintains strong liquidity with $1.1 billion in secured borrowing capacity from the FHLB and FRB, and uninsured/uncollateralized deposits representing 36% of total deposits[137] Results of Operations Net interest income rose 17% to $40.0 million in Q1 2023, expanding net interest margin, while provision for credit losses and non-interest expense increased, and non-interest income decreased - Net interest income increased by $5.9 million (17%) YoY, driven by higher loan interest income[151] - Tax-equivalent net interest margin was 3.76% for Q1 2023, up from 3.28% for Q1 2022, benefiting from rising interest rates on assets outpacing funding costs[152] - The provision for credit losses increased by $2.2 million to $2.7 million, primarily due to a forecasted increase in the probability and severity of a recession in the allowance model[163][172] - Non-interest income decreased by $838 thousand, largely because Q1 2022 included $1.1 million in net gains on sales of debt securities[165][173] - Non-interest expense increased by $2.3 million (9%), mainly due to a $1.7 million rise in salaries and employee benefits to support strategic growth[166] Financial Condition Total assets remained stable at $4.44 billion at March 31, 2023, with growth in investments and loans, strong asset quality, a slight decrease in deposits, and a 10% increase in shareholders' equity - Total loans increased by $49.6 million (2%) since year-end 2022, with commercial loans making up 87% of the portfolio[177] - Non-performing loans were 0.23% of total loans at March 31, 2023, a slight increase from 0.19% at year-end 2022 but significantly down from 0.85% a year prior[179] - The ACL for loans to total loans ratio was 1.70% at March 31, 2023, compared to 1.66% at December 31, 2022[179] - Customer deposits decreased by $19.7 million since year-end, with a notable shift from checking accounts (-$151.9M) into CDs (+$87.9M) and money market/savings accounts (+$44.3M)[187] - Shareholders' equity increased by $29.1 million (10%) in Q1 2023, primarily due to net income and a $20.2 million (net of tax) reduction in accumulated other comprehensive loss (AOCL)[193] Liquidity and Capital Resources The Company maintains robust liquidity with $1.1 billion in borrowing capacity, expected to increase to $1.4 billion, and strong capital ratios exceeding 'well-capitalized' standards - At March 31, 2023, the Company had borrowing capacity of approximately $790.0 million from the FHLB and $310.0 million from the FRB Discount Window[203] - In April 2023, actions were taken to increase total secured borrowing capacity to approximately $1.4 billion[204] - The Company's capital ratios remain strong, with Total Capital to RWA at 13.55% and Tier 1 Capital to RWA at 10.64% as of March 31, 2023[209] Item 3. Quantitative and Qualitative Disclosures About Market Risk Net interest income sensitivity analysis at March 31, 2023, projects a decrease in net interest income in both rising and declining interest rate scenarios, a shift due to deposit mix and lower short-term liquidity Net Interest Income Sensitivity Analysis (% Change) | Scenario | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Rates Rise 400 Basis Points | (0.73)% | 1.20% | | Rates Rise 200 Basis Points | (0.48)% | 0.45% | | Rates Decline 200 Basis Points | (2.51)% | (5.34)% | - The shift to a negative sensitivity in rising rate scenarios is due to a change in deposit mix towards more rate-sensitive accounts and a lower balance of immediately repricing short-term liquidity[220] Item 4. Controls and Procedures Management concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023, with no significant changes to internal control over financial reporting during the quarter - The principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2023[223] - No significant changes to internal control over financial reporting occurred during the first quarter of 2023[225] PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is not a party to any material pending legal proceedings, with current litigation considered routine and not expected to have a material adverse effect - There are no material pending legal proceedings against the Company, only routine litigation incidental to business[227] Item 1A. Risk Factors A new risk factor highlights that recent bank failures could negatively impact customer confidence, potentially leading to deposit withdrawals, increased funding costs, and reduced lending capacity - A new risk factor highlights that recent bank failures and related market volatility could negatively impact customer confidence, potentially leading to deposit outflows and higher funding costs for the Company[229] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2023, the Company repurchased 5,954 shares of common stock, not under a public plan, but from employees to cover taxes on restricted stock vesting Common Stock Repurchases Q1 2023 | Month | Total Shares Repurchased | Average Price Paid Per Share | | :--- | :--- | :--- | | January | 1,828 | $35.50 | | February | — | $— | | March | 4,126 | $32.39 | Item 3. Defaults Upon Senior Securities Not Applicable Item 4. Mine Safety Disclosures Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits The report lists several exhibits filed with the Form 10-Q, including certifications by executive officers and Inline XBRL data files