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Enterprise Bancorp 10-Q 2014

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32
  5. Ex-32
EBTC-9.30.2014-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
Form 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014

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)
 
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 Yes   o  No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files)  x Yes  o  No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition for “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one): 
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
 
 
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 November 3, 2014, there were 10,164,892 shares of the issuer's common stock outstanding- Par Value $0.01 per share





ENTERPRISE BANCORP, INC.
INDEX

 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I-FINANCIAL INFORMATION

Item 1 -
Financial Statements
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
(Dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
 
(Unaudited)
 
 
Assets
 
 

 
 

Cash and cash equivalents:
 
 

 
 

Cash and due from banks
 
$
49,310

 
$
41,362

Interest-earning deposits
 
5,457

 
10,153

Fed funds sold
 

 
2,218

Total cash and cash equivalents
 
54,767

 
53,733

Investment securities at fair value
 
236,753

 
215,369

Federal Home Loan Bank Stock
 
3,357

 
4,324

Loans held for sale
 
1,645

 
1,255

Loans, less allowance for loan losses of $27,029 at September 30, 2014 and $26,967 at December 31, 2013
 
1,585,745

 
1,497,089

Premises and equipment
 
30,000

 
29,891

Accrued interest receivable
 
6,684

 
6,186

Deferred income taxes, net
 
12,645

 
13,927

Bank-owned life insurance
 
16,215

 
15,902

Prepaid income taxes
 
1,636

 
443

Prepaid expenses and other assets
 
7,592

 
6,150

Goodwill
 
5,656

 
5,656

Total assets
 
$
1,962,695

 
$
1,849,925

Liabilities and Stockholders’ Equity
 
 

 
 

Liabilities
 
 

 
 

Deposits
 
$
1,768,796

 
$
1,635,992

Borrowed funds
 
1,004

 
36,534

Junior subordinated debentures
 
10,825

 
10,825

Accrued expenses and other liabilities
 
19,317

 
14,675

Accrued interest payable
 
251

 
565

Total liabilities
 
$
1,800,193

 
$
1,698,591

Commitments and Contingencies
 


 


Stockholders’ Equity
 
 

 
 

Preferred stock, $0.01 par value per share; 1,000,000 shares authorized; no shares issued
 

 

Common stock $0.01 par value per share; 20,000,000 shares authorized; 10,153,933 shares issued and outstanding at September 30, 2014 (including 159,828 shares of unvested participating restricted awards) and 9,992,560 shares issued and outstanding at December 31, 2013 (including 170,365 shares of unvested participating restricted awards)
 
102

 
100

Additional paid-in-capital
 
55,763

 
52,936

Retained earnings
 
103,172

 
96,153

Accumulated other comprehensive income
 
3,465

 
2,145

Total stockholders’ equity
 
$
162,502

 
$
151,334

Total liabilities and stockholders’ equity
 
$
1,962,695

 
$
1,849,925

 
See the accompanying notes to the unaudited consolidated interim financial statements.

3


ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands, except per share data)
 
2014
 
2013
 
2014
 
2013
Interest and dividend income:
 
 

 
 

 
 
 
 
Loans and loans held for sale
 
$
18,234

 
$
17,104

 
$
53,117

 
$
50,130

Investment securities
 
1,131

 
823

 
3,204

 
2,427

Other interest-earning assets
 
29

 
19

 
84

 
40

Total interest and dividend income
 
19,394

 
17,946

 
56,405

 
52,597

Interest expense:
 
 

 
 

 
 
 
 
Deposits
 
1,005

 
1,013

 
3,031

 
3,043

Borrowed funds
 
3

 
6

 
33

 
92

Junior subordinated debentures
 
294

 
294

 
883

 
883

Total interest expense
 
1,302

 
1,313

 
3,947

 
4,018

Net interest income
 
18,092

 
16,633

 
52,458

 
48,579

Provision for loan losses
 
765

 
583

 
1,165

 
1,900

Net interest income after provision for loan losses
 
17,327

 
16,050

 
51,293

 
46,679

Non-interest income:
 
 

 
 

 
 
 
 
Investment advisory fees
 
1,202

 
1,102

 
3,451

 
3,163

Deposit and interchange fees
 
1,268

 
1,229

 
3,727

 
3,518

Income on bank-owned life insurance, net
 
99

 
111

 
313

 
346

Net gains on sales of investment securities
 
215

 
83

 
830

 
1,031

Gains on sales of loans
 
135

 
171

 
283

 
728

Other income
 
621

 
472

 
1,679

 
1,574

Total non-interest income
 
3,540

 
3,168

 
10,283

 
10,360

Non-interest expense:
 
 

 
 

 
 
 
 
Salaries and employee benefits
 
9,454

 
8,548

 
27,852

 
25,247

Occupancy and equipment expenses
 
1,588

 
1,449

 
4,881

 
4,508

Technology and telecommunications expenses
 
1,248

 
1,085

 
3,844

 
3,441

Advertising and public relations expenses
 
575

 
481

 
1,932

 
2,047

Audit, legal and other professional fees
 
453

 
439

 
1,294

 
1,264

Deposit insurance premiums
 
297

 
287

 
851

 
820

Supplies and postage expenses
 
257

 
232

 
776

 
719

Investment advisory and custodial expenses
 
143

 
134

 
409

 
394

Other operating expenses
 
1,100

 
1,126

 
3,546

 
3,256

Total non-interest expense
 
15,115

 
13,781

 
45,385

 
41,696

Income before income taxes
 
5,752

 
5,437

 
16,191

 
15,343

Provision for income taxes
 
1,921

 
1,904

 
5,540

 
5,298

Net income
 
$
3,831

 
$
3,533

 
$
10,651

 
$
10,045

 
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
0.38

 
$
0.36

 
$
1.05

 
$
1.02

Diluted earnings per share
 
$
0.37

 
$
0.35

 
$
1.05

 
$
1.01

 
 
 
 
 
 
 
 
 
Basic weighted average common shares outstanding
 
10,143,055

 
9,932,060

 
10,099,593

 
9,824,984

Diluted weighted average common shares outstanding
 
10,228,501

 
10,026,588

 
10,184,264

 
9,909,019

 
See the accompanying notes to the unaudited consolidated interim financial statements.

4



ENTERPRISE BANCORP, INC.
Consolidated Statements of Comprehensive Income
(Unaudited)

 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
Net income
 
$
3,831

 
$
3,533

 
$
10,651

 
$
10,045

Other comprehensive income (loss), net of taxes:
 
 
 
 
 
 
 
 
Gross unrealized holding gains (losses) on investments arising during the period
 
(283
)
 
431

 
2,905

 
(1,955
)
Income tax (expense) benefit
 
113

 
(136
)
 
(1,049
)
 
748

Net unrealized holding gains (losses), net of tax
 
(170
)
 
295

 
1,856

 
(1,207
)
Less: Reclassification adjustment for net gains included in net income
 
 
 
 
 
 
 
 
Net realized gains on sales of securities during the period
 
215

 
83

 
830

 
1,031

Income tax expense
 
(75
)
 
(30
)
 
(294
)
 
(369
)
Reclassification adjustment for gains realized, net of tax
 
140

 
53

 
536

 
662

 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
 
(310
)
 
242

 
1,320

 
(1,869
)
Comprehensive income
 
$
3,521

 
$
3,775

 
$
11,971

 
$
8,176




See the accompanying notes to the unaudited consolidated interim financial statements.



5


ENTERPRISE BANCORP, INC.
Consolidated Statement of Changes in Stockholders’ Equity
(Unaudited)

 
(Dollars in thousands)
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Stockholders’
Equity
Balance at December 31, 2013
 
$
100

 
$
52,936

 
$
96,153

 
$
2,145

 
$
151,334

Net income
 
 
 
 
 
10,651

 
 
 
10,651

Other comprehensive income, net
 
 
 
 
 
 
 
1,320

 
1,320

Tax benefit from exercise of stock options
 
 
 
3

 
 
 
 
 
3

Common stock dividend paid ($0.36 per share)
 
 
 
 
 
(3,632
)
 
 
 
(3,632
)
Common stock issued under dividend reinvestment plan
 
1

 
916

 
 
 
 
 
917

Stock-based compensation
 
1

 
1,338

 
 
 
 
 
1,339

Stock options exercised, net
 

 
570

 
 
 
 
 
570

Balance at September 30, 2014
 
$
102

 
$
55,763

 
$
103,172

 
$
3,465

 
$
162,502

 
See the accompanying notes to the unaudited consolidated interim financial statements.


6


ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
 
 
 
Nine months ended September 30,
(Dollars in thousands)
 
 
2014
 
2013
Cash flows from operating activities:
 
 
 
 
 
Net income
 
 
$
10,651

 
$
10,045

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
Provision for loan losses
 
 
1,165

 
1,900

Depreciation and amortization
 
 
4,089

 
3,686

Stock-based compensation expense
 
 
1,325

 
1,239

Mortgage loans originated for sale
 
 
(13,948
)
 
(31,751
)
Proceeds from mortgage loans sold
 
 
13,841

 
39,975

Net gains on sales of loans
 
 
(283
)
 
(728
)
Net gains on sales of OREO
 
 

 
(121
)
Net gains on sales of investments
 
 
(830
)
 
(1,031
)
Income on bank-owned life insurance, net
 
 
(313
)
 
(346
)
OREO fair value adjustment
 
 

 
23

Changes in:
 
 
 
 
 
Accrued interest receivable
 
 
(498
)
 
(7
)
Prepaid expenses and other assets
 
 
(1,726
)
 
6,686

Deferred income taxes
 
 
527

 
176

Accrued expenses and other liabilities
 
 
5,083

 
3,599

Accrued interest payable
 
 
(314
)
 
(336
)
Net cash provided by operating activities
 
 
18,769

 
33,009

Cash flows from investing activities:
 
 
 
 
 
Proceeds from sales of investment securities available for sale
 
 
24,329

 
8,293

Net proceeds (purchases) from FHLB capital stock
 
 
967

 
(64
)
Proceeds from maturities, calls and pay-downs of investment securities
 
 
30,311

 
13,730

Purchase of investment securities
 
 
(74,752
)
 
(35,301
)
Net increase in loans
 
 
(90,316
)
 
(113,364
)
Additions to premises and equipment, net
 
 
(2,949
)
 
(4,281
)
Proceeds from OREO sales and payments
 
 

 
652

Purchase of OREO
 
 
(457
)
 

Net cash used in investing activities
 
 
(112,867
)
 
(130,335
)
Cash flows from financing activities:
 
 
 
 
 
Net increase in deposits
 
 
132,804

 
178,920

Net decrease in borrowed funds
 
 
(35,530
)
 
(24,660
)
Cash dividends paid
 
 
(3,632
)
 
(3,389
)
Proceeds from issuance of common stock
 
 
917

 
948

Proceeds from the exercise of stock options
 
 
570

 
1,655

Tax benefit from the exercise of stock options
 
 
3

 
24

Net cash provided by financing activities
 
 
95,132

 
153,498

 
 
 
 
 
 
Net increase in cash and cash equivalents
 
 
1,034

 
56,172

Cash and cash equivalents at beginning of period
 
 
53,733

 
52,735

Cash and cash equivalents at end of period
 
 
$
54,767

 
$
108,907

 
 
 
 
 
 
Supplemental financial data:
 
 
 
 
 
Cash Paid For: Interest
 
 
$
4,261

 
$
4,354

Cash Paid For: Income Taxes
 
 
6,175

 
5,634

 
 
 
 
 
 
Supplemental schedule of non-cash investing activity:
 
 
 
 
 
Purchases of investment securities not yet settled
 
 

 
400

Transfer from loans to other real estate owned
 
 
290

 
168

Transfer from loans to other assets
 
 
205

 

Capital expenditures incurred not yet paid
 
 
276

 
247

 See accompanying notes to the unaudited consolidated interim financial statements.

7


ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 
(1)
Summary of Significant Accounting Policies

(a) Organization of Holding Company and Basis of Presentation

The accompanying unaudited consolidated interim financial statements and these notes should be read in conjunction with the December 31, 2013 audited consolidated financial statements and notes thereto contained in the 2013 Annual Report on Form 10-K of Enterprise Bancorp, Inc. (the “Company” or “Enterprise”), a Massachusetts corporation, as filed with the Securities and Exchange Commission (the “SEC”) on March 14, 2014.  The Company has not changed its reporting policies from those disclosed in its 2013 Annual Report on Form 10-K.

The Company's unaudited consolidated interim financial statements include the accounts of the Company and its wholly owned subsidiary, Enterprise Bank and Trust Company (the “Bank”).  The Bank is a Massachusetts trust company organized in 1989. Substantially all of the Company’s operations are conducted through the Bank.

The Bank’s subsidiaries include Enterprise Insurance Services, LLC and Enterprise Investment Services, LLC, organized under the laws of the State of Delaware for the purposes of engaging in insurance sales activities and offering non-deposit investment products and services, respectively.  In addition, the Bank has the following subsidiaries that are incorporated in the Commonwealth of Massachusetts and classified as security corporations in accordance with applicable Massachusetts General Laws: Enterprise Security Corporation; Enterprise Security Corporation II; and Enterprise Security Corporation III, which hold various types of qualifying securities.  The security corporations are limited to conducting securities investment activities that the Bank itself would be allowed to conduct under applicable laws.

The Company has 22 full service branches serving the Merrimack Valley and North Central regions of Massachusetts and Southern New Hampshire. Through the Bank and its subsidiaries, the Company offers a range of commercial and consumer loan products, deposit and cash management products, investment advisory and wealth management, trust and insurance services.  The services offered through the Bank and its subsidiaries are managed as one strategic unit and represent the Company’s only reportable operating segment.

Pursuant to the Accounting Standards Codification (“ASC”) Topic 810 “Consolidation of Variable Interest Entities,” issued by the Financial Accounting Standards Board (“FASB”), the Company carries Junior Subordinated Debentures as a liability on its consolidated interim financial statements, along with the related interest expense. The debentures were issued by a statutory business trust (the “Trust”) created by the Company in March 2000 under the laws of the State of Delaware, and the trust preferred securities issued by the Trust, and the related non-interest expense, are excluded from the Company’s consolidated interim financial statements.

The Federal Deposit Insurance Corporation (the “FDIC”) and the Massachusetts Division of Banks (the “Division”) have regulatory authority over the Bank.  The Bank is also subject to certain regulatory requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) and, with respect to its New Hampshire branch operations, the New Hampshire Banking Department.  The business and operations of the Company are subject to the regulatory oversight of the Federal Reserve Board.  The Division also retains supervisory jurisdiction over the Company.

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions for Form 10-Q through the rules and interpretive releases of the SEC under federal securities law. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all necessary adjustments consisting of normal recurring accruals for a fair presentation.  All significant intercompany balances and transactions have been eliminated in the accompanying unaudited consolidated interim financial statements. Interim results are not necessarily indicative of results to be expected for the entire year.

8

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 



(b) Critical Accounting 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 estimates and assumptions affect the reported values of assets and liabilities as of the balance sheet date and income and expenses for the period then ended.  As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates should the assumptions and estimates used change over time due to changes in circumstances.  Changes in those estimates resulting from continuing change in the economic environment and other factors will be reflected in the financial statements and results of operations in future periods.

As discussed in the Company’s 2013 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, impairment review of investment securities and the impairment review of goodwill.  Refer to Note 1,“Summary of Significant Accounting Policies,” to the Company’s consolidated financial statements included in the Company’s 2013 Annual Report on Form 10-K for significant accounting policies. The Company has not changed its significant accounting policies from those disclosed in its 2013 Annual Report filed on Form 10-K.

(c) Reporting Comprehensive Income

Comprehensive income is defined as all changes to equity except investments by and distributions to stockholders.  Net income is one component of comprehensive income, with other components referred to in the aggregate as other comprehensive income.  The Company’s only other comprehensive income component is the net unrealized holding gains or losses on investments available-for-sale, net of deferred income taxes. Pursuant to Accounting Standards Update (“ASU”) No. 2013-02, Comprehensive Income (Topic 220): Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income, the Company initially excludes these unrealized holding gains and losses from net income; however, they are later reported as reclassifications out of accumulated other comprehensive income into net income when the securities are sold. When securities are sold, the reclassification of realized gains and losses on available-for-sale securities are included on the Consolidated Statements of Income under the “non-interest income” subheading on the line item “net gains on sales of investment securities” and the related income tax expense is included in the line item “provision for income taxes,” both of which are also detailed on the Consolidated Statements of Comprehensive Income under the subheading “reclassification adjustment for net gains included in net income.”

(d) Restricted Investments

As a member of the Federal Home Loan Bank of Boston (“FHLB”), the Company is required to purchase certain levels of FHLB capital stock in association with the Company’s borrowing relationship from the FHLB.  This stock is classified as a restricted investment and carried at cost, which management believes approximates fair value.  FHLB stock represents the only restricted investment held by the Company.
 
In conjunction with the other-than-temporary-impairment (“OTTI”) review on available-for-sale investments (See Note 2, "Investments," for additional information), management also regularly reviews its holdings of FHLB stock for OTTI. Based on management’s ongoing review, the Company has not recorded any OTTI charges on this investment to date. If it was determined that a write-down of FHLB stock was required, impairment would be recognized through a charge to earnings.

(e) Income Taxes
 
The Company uses the asset and liability method of accounting for income taxes.  Under this method, deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities.  The deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.  As changes in tax laws or rates are enacted, deferred tax assets and liabilities will be adjusted accordingly through the provision for income taxes.

The Company’s policy is to classify interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law.  The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Company’s judgment changes regarding an uncertain tax position.

9

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


 
The income tax provisions will differ from the expense that would result from applying the federal statutory rate to income before taxes, primarily due to the impact of tax exempt interest from certain investment securities, loans and bank owned life insurance.

The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at September 30, 2014.  The Company is subject to U.S. federal and state income tax examinations by taxing authorities for the 2011 through 2013 tax years.

(f) Recent Accounting Pronouncements

In January 2014, FASB issued ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The amendments are intended to reduce diversity of practice by clarifying when a creditor should be considered to have received physical possession of residential real estate property collateralizing a residential mortgage loan, such that the loan should be removed, and the real estate property recognized, on the financial statements. Additionally, the amendments require interim and annual disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in collateralized residential mortgage loans that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods beginning after December 15, 2014. As this ASU primarily offers clarification of existing standards and added disclosures, the adoption of this ASU in the first quarter of 2015 is not expected to have a material impact on the Company's financial statements, or results of operations.
In January 2014, the FASB issued ASU No. 2014-01, Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects. The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow through entities for tax purposes. The amendments in this ASU eliminate the effective yield election and permit reporting entities to make an accounting policy election to account for such investments using the proportional amortization method if certain conditions are met. Those not electing the proportional amortization method would account for the investment using the equity method or cost method. The decision to apply the proportional amortization method of accounting is an accounting policy decision that must be applied consistently to all qualifying affordable housing project investments rather than a decision to be applied to individual investments. The amendments in this ASU are to be applied retrospectively to all periods presented. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods beginning after December 15, 2014. Early adoption is permitted. The adoption by the Company of this ASU, on the effective date, is not expected to have a material impact on the Company's financial statements, or results of operations.

10

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


(2)Investments
 
The amortized cost and carrying values of investment securities at the dates specified are summarized as follows:

 
 
September 30, 2014
(Dollars in thousands)
 
Amortized
cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair Value
Federal agency obligations (1)
 
$
54,457

 
$
55

 
$
174

 
$
54,338

Federal agency mortgage backed securities (MBS) (1)
 
91,875

 
613

 
945

 
91,543

Municipal securities
 
66,544

 
2,201

 
52

 
68,693

Corporate bonds
 
7,041


58


25


7,074

Total fixed income securities
 
219,917

 
2,927

 
1,196

 
221,648

Equity investments
 
11,543

 
3,568

 
6

 
15,105

Total available for sale securities, at fair value
 
$
231,460

 
$
6,495

 
$
1,202

 
$
236,753

 
 
 
December 31, 2013
(Dollars in thousands)
 
Amortized
cost
 
Unrealized
gains
 
Unrealized
losses
 
Fair Value
Federal agency obligations(1)
 
$
55,440

 
$
146

 
$
43

 
$
55,543

Federal agency mortgage backed securities (MBS) (1)
 
80,997

 
367

 
1,714

 
79,650

Municipal securities
 
60,675

 
1,604

 
325

 
61,954

Corporate bonds
 
5,080

 
29

 
55

 
5,054

Total fixed income securities
 
202,192

 
2,146

 
2,137

 
202,201

Equity investments
 
9,960

 
3,228

 
20

 
13,168

Total available for sale securities, at fair value
 
$
212,152

 
$
5,374

 
$
2,157

 
$
215,369


__________________________________________
(1)
These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae (FNMA), Freddie Mac (FHLMC), Ginnie Mae (GNMA), Federal Farm Credit Bank, or one of several Federal Home Loan Banks.  All agency MBS/Collateralized Mortgage Obligations ("CMOs") investments owned by the Company are backed by residential mortgages.


Included in the carrying amount of the federal agency MBS category were CMOs totaling $14.3 million and $17.4 million at September 30, 2014 and December 31, 2013, respectively.

At September 30, 2014, the equity portfolio consisted primarily of investments in a diversified group of mutual funds, with a small portion of the portfolio (approximately 16%) invested in individual common stock of entities in the financial services industry.

Net unrealized appreciation and depreciation on investments available for sale, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income.

The net unrealized gain or loss in the Company's fixed income portfolio fluctuates as market interest rates rise and fall.  Due to the fixed rate nature of this portfolio, as market rates fall the value of the portfolio rises, and as market rates rise, the value of the portfolio declines.  The unrealized gains or losses on fixed income investments will also decline as the securities approach maturity, or if the issuer is credit impaired. Unrealized gains or losses will be recognized in the statements of income if the securities are sold. However, if an unrealized loss on a fixed income investment is deemed to be other than temporary, the credit loss portion is charged to earnings and the noncredit portion is recognized in accumulated other comprehensive income.


11

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


The net unrealized gain or loss on equity securities will fluctuate based on changes in the market value of the mutual funds and individual securities held in the portfolio.  Unrealized gains or losses will be recognized in the statements of income if the securities are sold. However, if an unrealized loss on an equity security is deemed to be other than temporary prior to a sale, the loss is charged to earnings.

Management regularly reviews the portfolio for securities with unrealized losses that are other-than-temporarily impaired.  During the nine months ended September 30, 2014 and 2013, the Company did not record any fair value impairment charges on its investments. As of September 30, 2014, there were a total of 55 investments (fixed income and equity), with a fair market value of $78.0 million, in an unrealized loss position totaling $1.2 million, including unrealized losses of $950 thousand that have been temporarily impaired for 12 months or longer. Management attributes these unrealized losses to increases in current market yields compared to the yields at the time the investments were purchased by the Company. Management does not consider these investments to be other-than-temporarily impaired at September 30, 2014, because (1) the decline in market value is not attributable to credit quality for fixed income securities or a fundamental deterioration in the equity fund or issuers, and (2) the Company does not intend to, and it is more likely than not that it will not be required to, sell those investments prior to a market price recovery or maturity.  

In assessing the Company's federal agency MBS investments and federal agency obligations, the contractual cash flows of these investments are guaranteed by an agency of the U.S. Government, and the agency that issued these securities is sponsored by the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Company's investments. Management's assessment of other fixed income investments within the portfolio includes reviews of market pricing, ongoing credit quality evaluations, assessment of the investment's materiality, and duration of the unrealized loss position. In addition, the Company utilizes an outside registered investment adviser to manage the corporate and municipal bond portfolios, within prescribed guidelines set by management. At September 30, 2014, the Company's corporate and municipal bond portfolios did not contain any securities below investment grade, as reported by major credit rating agencies. For equities and funds, management's assessment includes the severity of the declines, whether it is unlikely that the security or fund will completely recover its unrealized loss within a reasonable time period and if the equity security or fund exhibits fundamental deterioration.

The contractual maturity distribution at September 30, 2014 of total fixed income investments is as follows:

 
Within One Year
 
After One, But Within 
Five Years
 
After Five, But Within
Ten Years
 
After Ten Years
 
Amortized
Cost
 
Yields
 
Amortized
Cost
 
Yields
 
Amortized
Cost
 
Yields
 
Amortized
Cost
 
Yields
At amortized cost:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal agency obligations
$
5,003

 
0.59
%
 
$
28,011

 
1.37
%
 
$
21,443

 
1.95
%
 
$

 
%
MBS
4

 
1.29
%
 
2,423

 
2.49
%
 
5,896

 
2.98
%
 
83,552

 
2.16
%
Municipal securities
4,670

 
2.05
%
 
24,538

 
3.30
%
 
26,664

 
4.24
%
 
10,672

 
4.73
%
Corporate bonds
100

 
1.26
%
 
4,287

 
1.60
%
 
2,654

 
3.02
%
 

 
%
Total fixed income securities
$
9,777

 
1.29
%
 
$
59,259

 
2.23
%
 
$
56,657

 
3.18
%
 
$
94,224

 
2.45
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total fixed income securities
$
9,811

 
 
 
$
60,186

 
 
 
$
57,654

 
 
 
$
93,997

 
 

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 carrying value of fixed income investments above are callable securities, comprised of municipal securities, federal agency obligations and corporate bonds totaling $36.1 million, which can be redeemed by the issuer prior to the maturity presented above.  Management considers these early payment factors when evaluating the interest rate risk in the Company’s asset-liability management program.

From time to time, the Company may pledge securities as collateral against deposit account balances of municipal deposit customers, and for borrowing capacity with the FHLB and the Federal Reserve Bank of Boston (the "FRB").  The fair value of securities pledged as collateral for these purposes was $221.6 million at September 30, 2014

12

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 



See Note 8, “Fair Value Measurements” below for further information regarding the Company’s fair value measurements for available-for-sale securities.

(3)
Loans

The Company specializes in lending to business entities, non-profit organizations, professionals and individuals. The Company’s primary lending focus is on the development of high quality commercial relationships achieved through active business development efforts, long-term relationships with established commercial developers, strong community involvement and focused marketing strategies.  Loans made to businesses include commercial mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and standby letters of credit.  The Company also originates equipment lease financing for businesses. Loans made to individuals include conventional residential mortgage loans, home equity loans and lines, residential construction loans on primary and secondary residences, and secured and unsecured personal loans and lines of credit. The Company manages its loan portfolio to avoid concentration by industry and loan size to lessen its credit risk exposure.

See Note 4, "Allowance for Loan Losses," for information on the Company's credit risk management, non-accrual, impaired and troubled debt restructured loans and the allowance for loan losses.
 
Major classifications of loans at the periods indicated are as follows:
 
(Dollars in thousands)
 
September 30,
2014
 
December 31,
2013
Commercial real estate
 
$
843,648

 
$
820,299

Commercial and industrial
 
396,990

 
357,056

Commercial construction
 
142,352

 
132,507

Total commercial loans
 
1,382,990

 
1,309,862

Residential mortgages
 
143,825

 
132,721

Home equity loans and lines
 
77,983

 
74,354

Consumer
 
9,654

 
8,643

Total retail loans
 
231,462

 
215,718

 
 
 
 
 
Gross loans
 
1,614,452

 
1,525,580

Deferred loan origination fees, net
 
(1,678
)
 
(1,524
)
Total loans
 
1,612,774

 
1,524,056

Allowance for loan losses
 
(27,029
)
 
(26,967
)
Net loans
 
$
1,585,745

 
$
1,497,089

 

Loan Categories
 
- Commercial loans:

Commercial real estate loans include loans secured by both owner-use and non-owner occupied real estate.  These loans are typically secured by a variety of commercial and industrial property types including one-to-four and multi-family apartment buildings, office or mixed-use facilities, strip shopping centers, or other commercial property and are generally guaranteed by the principals of the borrower. Commercial real estate loans generally have repayment periods of approximately fifteen to twenty-five years.  Variable interest rate loans have a variety of adjustment terms and indices, and are generally fixed for an initial period before periodic rate adjustments begin.
 
Commercial and industrial loans include seasonal revolving lines of credit, working capital loans, equipment financing (including equipment leases), and term loans.  Also included in commercial and industrial loans are loans partially guaranteed by the U.S. Small Business Administration ("SBA"), loans under various programs issued in conjunction with the

13

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


Massachusetts Development Finance Agency and other agencies.  Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables, and are generally guaranteed by the principals of the borrower.  Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally having fixed initial periods.  Commercial and industrial loans have average repayment periods of one to seven years.
 
Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property, and loans for the purchase and improvement of raw land.  These loans are secured in whole or in part by the underlying real estate collateral and are generally guaranteed by the principals of the borrowers.  Construction lenders work to cultivate long-term relationships with established developers. The Company limits the amount of financing provided to any single developer for the construction of properties built on a speculative basis.  Funds for construction projects are disbursed as pre-specified stages of construction are completed.  Regular site inspections are performed, either by experienced construction lenders on staff or by independent outside inspection companies, at each construction phase, prior to advancing additional funds.  Commercial construction loans generally are variable rate loans and lines with interest rates that are periodically adjusted and generally have terms of one to three years.

From time to time, the Company participates with other banks in the financing of certain commercial projects.  In some cases, the Company may act as the lead lender, originating and servicing the loans, but participating out a portion of the funding to other banks.  In other cases, the Company may participate in loans originated by other institutions. In each case, the participating bank funds a percentage of the loan commitment and takes on the related risk.  In each case in which the Company participates in a loan, the rights and obligations of each participating bank are divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks.  The balances participated out to other institutions are not carried as assets on the Company’s financial statements.  Loans originated by other banks in which the Company is the participating institution are carried in the loan portfolio at the Company’s pro rata share of ownership.  The Company performs an independent credit analysis of each commitment and a review of the participating institution prior to participation in the loan.  Loans originated by other banks in which the Company is the participating institution amounted to $51.7 million at September 30, 2014 and $34.5 million at December 31, 2013.
 
Standby letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance by a customer to a third party.  The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  If the letter of credit is drawn upon, a loan is created for the customer, generally a commercial loan, with the same criteria associated with similar commercial loans.
 
- Residential loans:

Enterprise originates conventional mortgage loans on one-to-four family residential properties.  These properties may serve as the borrower’s primary residence, vacation homes, or investment properties.  Loan to value limits vary, generally from 80% for adjustable rate and multi-family, owner occupied properties, up to 97% for fixed rate loans on single family, owner-occupied properties, with mortgage insurance coverage required for loan-to-value ratios greater than 80% based on program parameters.  In addition, financing is provided for the construction of owner-occupied primary and secondary residences.  Residential mortgage loans may have terms of up to 30 years at either fixed or adjustable rates of interest.  Fixed and adjustable rate residential mortgage loans are generally originated using secondary market underwriting and documentation standards.
 
Depending on the current interest rate environment, management projections of future interest rates and the overall asset-liability management program of the Company, management may elect to sell those fixed and adjustable rate residential mortgage loans which are eligible for sale in the secondary market, or hold some or all of this residential loan production for the Company’s portfolio.  Mortgage loans are generally not pooled for sale, but instead sold on an individual basis. The Company may retain or sell the servicing when selling the loans.  Loans sold are subject to standard secondary market underwriting and eligibility representations and warranties over the life of the loan and are subject to an early payment default period covering the first four payments for certain loan sales. Loans classified as held for sale are carried as a separate line item on the balance sheet.
 
- Home equity loans and lines of credit:

Home equity term loans are originated for one-to-four family residential properties with maximum original loan to value ratios generally up to 80% of the assessed or appraised value of the property securing the loan.  Home equity loan payments consist of

14

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


monthly principal and interest based on amortization ranging from three to fifteen years.  The rates may also be fixed for three to fifteen years.
 
The Company originates home equity revolving lines of credit for one-to-four family residential properties with maximum original loan to value ratios generally up to 80% of the appraised value of the property securing the loan.  Home equity lines generally have interest rates that adjust monthly based on changes in the Prime Rate, although minimum rates may be applicable.  Some home equity line rates may be fixed for a period of time and then adjusted monthly thereafter. The payment schedule for home equity lines requires interest only payments for the first ten years of the lines. Generally at the end of ten years, the line may be frozen to future advances, and principal plus interest payments are collected over a fifteen-year amortization schedule or, for eligible borrowers meeting certain requirements, the line availability may be extended for an additional interest only period.
 
- Consumer loans:

Consumer loans primarily consist of secured or unsecured personal loans, loans under energy efficiency financing programs in conjunction with Massachusetts public utilities, and overdraft protection lines on checking accounts extended to individual customers. The aggregate amount of overdrawn deposit accounts are reclassified as loan balances.
 
Loans serviced for others
 
At September 30, 2014 and December 31, 2013, the Company was servicing residential mortgage loans owned by investors amounting to $19.2 million and $20.6 million, respectively.  Additionally, the Company was servicing commercial loans participated out to various other institutions amounting to $41.4 million and $52.1 million at September 30, 2014 and December 31, 2013, respectively. See the discussion above for further information regarding commercial participations.
 
Loans serving as collateral
 
Loans designated as qualified collateral and pledged to the FHLB for borrowing capacity are summarized below:

(Dollars in thousands)
September 30,
2014
 
December 31,
2013
Commercial real estate
$
289,394

 
$
320,908

Residential mortgages
106,941

 
97,626

Home equity
16,630

 
17,548

Total loans pledged to FHLB
$
412,965

 
$
436,082


(4)
Allowance for Loan Loss
 
While the Company manages its loan portfolio to avoid concentration by industry and loan size to lessen its credit risk exposure, inherent in the lending process is the risk of loss due to customer non-payment, or “credit risk.”  The Company endeavors to minimize this risk through sound underwriting practices and the risk management function, however, management recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio and economic conditions. The allowance for loan losses is an estimate of probable credit risk inherent in the loan portfolio as of the specified balance sheet dates. 

Allowance for probable loan losses methodology

On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated credit losses.  The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated losses from specifically known and other credit risks associated with the portfolio.  The Company uses a systematic methodology to measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology makes use of specific reserves for loans individually evaluated and deemed impaired, and general reserves for larger groups of homogeneous loans. In making its assessment on the adequacy of the allowance, management considers several quantitative and qualitative factors that could have an effect on the credit quality of the portfolio including, individual assessment of larger and high risk credits, delinquency trends and the level of non-performing loans, impaired and restructured loans, net charge-offs, the growth and composition of the loan portfolio,

15

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


expansion in geographic market area and the strength of the local and national economy, among other factors.

There have been no material changes in the Company’s underwriting practices, credit risk management system, or to the allowance assessment methodology used to estimate loan loss exposure as reported in the Company’s most recent Annual Report on Form 10-K.  Refer to heading “Allowance for probable loan losses methodology” contained in Note 4 “Allowance For Loan Losses,” to the Company’s consolidated financial statements contained in the Company’s 2013 Annual Report on Form 10-K for further discussion of management’s methodology used to estimate the loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance.

The balances of loans as of September 30, 2014 by segment and evaluation method are summarized as follows: 
(Dollars in thousands)
 
Loans individually
evaluated for
impairment
 
Loans collectively
evaluated for
impairment
 
Total Loans
Commercial real estate
 
$
13,940

 
$
829,708

 
$
843,648

Commercial and industrial
 
10,877

 
386,113

 
396,990

Commercial construction
 
2,900

 
139,452

 
142,352

Residential
 
1,625

 
142,200

 
143,825

Home equity
 
205

 
77,778

 
77,983

Consumer
 
22

 
9,632

 
9,654

Deferred Fees
 

 
(1,678
)
 
(1,678
)
Total loans
 
$
29,569

 
$
1,583,205

 
$
1,612,774

 
The balances of loans as of December 31, 2013 by segment and evaluation method are summarized as follows:
(Dollars in thousands)
 
Loans individually
evaluated for
impairment
 
Loans collectively
evaluated for
impairment
 
Total Loans
Commercial real estate
 
$
15,139

 
$
805,160

 
$
820,299

Commercial and industrial
 
10,579

 
346,477

 
357,056

Commercial construction
 
3,358

 
129,149

 
132,507

Residential
 
619

 
132,102

 
132,721

Home equity
 
108

 
74,246

 
74,354

Consumer
 
23

 
8,620

 
8,643

Deferred Fees
 

 
(1,524
)
 
(1,524
)
Total loans
 
$
29,826

 
$
1,494,230

 
$
1,524,056


Credit Quality Indicators

The level of adversely classified loans and delinquent and non-performing assets is largely a function of economic conditions, the overall banking environment, the Company's underwriting, and credit risk management standards. The Company’s commercial lending focus may entail significant additional risks compared to long term financing on existing, owner-occupied residential real estate.  The Company endeavors to minimize this risk through sound underwriting practices and the risk management function. The credit risk management function focuses on a wide variety of factors, including, among others, current and expected economic conditions, the real estate market, the financial condition of borrowers, the ability of borrowers to adapt to changing conditions or circumstances affecting their business and the continuity of borrowers’ management teams.  Early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors these factors, among others, through ongoing credit reviews by the Credit Department, an external loan review service, reviews by members of senior management and the Loan Committee of the Board of Directors. This review includes the assessment of internal credit quality indicators such as the risk classification of individual loans, adversely classified loans, past due and non-accrual loans, impaired and restructured loans, and the level of foreclosure activity, as well as trends in the general levels of these indicators. However, despite prudent loan underwriting and ongoing credit risk management, adverse changes within the Company's market area or deterioration in the local, regional or national economic conditions could negatively impact the portfolio's credit risk profile and the Company's asset quality in the future.


16

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


The loan portfolio has experienced a level of modest credit stabilization compared to the 2013 periods, as indicated by the improving statistics related to adversely classified, non-accrual, and impaired loans, and the low number and level of Other Real Estate Owned ("OREO") properties held as of September 30, 2014. Given the size and commercial mix of the Company's loan portfolio, management considers the current statistics to be reflective of the lagging effect that the regional economic environment has had on the local commercial markets and its impact on the credit profile of such a portfolio. 

Adversely Classified Loans

The Company’s loan risk rating system classifies loans depending on risk of loss characteristics.  The classifications range from “substantially risk free” for the highest quality loans and loans that are secured by cash collateral, to the more severe adverse classifications of “substandard,” “doubtful” and “loss” based on criteria established under banking regulations.
 
Loans classified as substandard include those loans characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.  These loans are inadequately protected by the sound net worth and paying capacity of the borrower; repayment has become increasingly reliant on collateral liquidation or reliance on guaranties; credit weaknesses are well-defined; and, borrower cash flow is insufficient to meet required debt service specified in loan terms and to meet other obligations, such as trade debt and tax payments.
 
Loans classified as doubtful have all the weaknesses inherent in a substandard rated loan with the added characteristic that the weaknesses make collection or full payment from liquidation, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  The probability of loss is extremely high, but because of certain important and reasonably specific pending factors which may work to the advantage and strengthening of the loan, its classification as an estimated loss is deferred until more exact status may be determined.

Loans classified as loss are generally considered uncollectible at present, although long term recovery of part or all of loan proceeds may be possible.  These “loss” loans would require a specific loss reserve or charge-off.
 
Adversely classified loans may be accruing or on non-accrual status and may be additionally designated as impaired or restructured, or some combination thereof.  Loans which are evaluated to be of weaker credit quality are reviewed on a more frequent basis by management.
 
The following tables present the Company's credit risk profile for each class of loan in its portfolio by internally assigned risk rating category at the periods indicated. 
 
 
September 30, 2014
 
 
Adversely Classified
 
Not Adversely
 
 
(Dollars in thousands)
 
Substandard
 
Doubtful
 
Loss
 
Classified
 
Gross Loans
Commercial real estate
 
$
9,865

 
$
1,207

 
$
30

 
$
832,546

 
$
843,648

Commercial and industrial
 
11,242

 
49

 
90

 
385,609

 
396,990

Commercial construction
 
2,983

 

 

 
139,369

 
142,352

Residential
 
2,050

 

 

 
141,775

 
143,825

Home equity
 
495

 

 

 
77,488

 
77,983

Consumer
 
40

 

 

 
9,614

 
9,654

Total gross loans
 
$
26,675

 
$
1,256

 
$
120

 
$
1,586,401

 
$
1,614,452




17

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


 
 
December 31, 2013
 
 
Adversely Classified
 
Not Adversely
 
 
(Dollars in thousands)
 
Substandard
 
Doubtful
 
Loss
 
Classified
 
Gross Loans
Commercial real estate
 
$
13,545

 
$
1,266

 
$

 
$
805,488

 
$
820,299

Commercial and industrial
 
7,908

 
51

 
236

 
348,861

 
357,056

Commercial construction
 
3,358

 

 

 
129,149

 
132,507

Residential
 
1,012

 

 

 
131,709

 
132,721

Home equity
 
500

 

 

 
73,854

 
74,354

Consumer
 
40

 

 

 
8,603

 
8,643

Total gross loans
 
$
26,363

 
$
1,317

 
$
236

 
$
1,497,664

 
$
1,525,580


The minor shift in adversely classified loan balances amongst the categories since the prior period was due to a variety of activity including: credit rating upgrades, primarily in commercial real estate; payoffs; the foreclosure sale of underlying collateral with payoff on a larger commercial real estate relationship; and charge-offs, primarily commercial real estate and commercial and industrial loans; partially offset by additional credit downgrades, particularly in commercial and industrial and residential mortgage loans during the period.
Past Due and Non-Accrual Loans
Loans on which the accrual of interest has been discontinued are designated as non-accrual loans.  Accrual of interest on loans is generally discontinued when a loan becomes contractually past due, with respect to interest or principal, by 90 days, or when reasonable doubt exists as to the full and timely collection of interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest payments received on loans in a non-accrual status are generally applied to principal on the books of the Company. Interest accruals are resumed on such loans only when payments are brought current and have remained current for a period of 180 days and when, in the judgment of management, the collectability of both principal and interest is reasonably assured. Additionally, deposit accounts overdrawn for 90 or more days are included in the consumer non-accrual numbers below.
 The following tables present age analysis of past due loans as of the dates indicated. 
Balance at September 30, 2014
(Dollars in thousands)
 
Loans
30-59 Days
Past Due
 
Loans
60-89 Days
Past Due
 
Loans 90 or
More Days
Past Due (non-
accrual)
 
Total Past
Due Loans
 
Current Loans
 
Gross
Loans
Commercial real estate
 
$
4,265

 
$
2,902

 
$
8,028

 
$
15,195

 
$
828,453

 
$
843,648

Commercial and industrial
 
1,638

 
540

 
5,865

 
8,043

 
388,947

 
396,990

Commercial construction
 
3,833

 
68

 
669

 
4,570

 
137,782

 
142,352

Residential
 
537

 
685

 
1,677

 
2,899

 
140,926

 
143,825

Home equity
 
29

 

 
276

 
305

 
77,678

 
77,983

Consumer
 
18

 
13

 
25

 
56

 
9,598

 
9,654

Total gross loans
 
$
10,320

 
$
4,208

 
$
16,540

 
$
31,068

 
$
1,583,384

 
$
1,614,452


 

18

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


Balance at December 31, 2013
(Dollars in thousands)
 
Loans
30-59 Days
Past Due
 
Loans
60-89 Days
Past Due
 
Loans 90 or
More Days
Past Due (non-
accrual)
 
Total Past
Due Loans
 
Current Loans
 
Gross Loans
Commercial real estate
 
$
1,142

 
$
1,575

 
$
10,561

 
$
13,278

 
$
807,021

 
$
820,299

Commercial and industrial
 
680

 
908

 
5,743

 
7,331

 
349,725

 
357,056

Commercial construction
 
196

 

 
1,118

 
1,314

 
131,193

 
132,507

Residential
 
1,110

 
127

 
633

 
1,870

 
130,851

 
132,721

Home equity
 
211

 
10

 
281

 
502

 
73,852

 
74,354

Consumer
 
106

 
18

 
10

 
134

 
8,509

 
8,643

Total gross loans
 
$
3,445

 
$
2,638

 
$
18,346

 
$
24,429

 
$
1,501,151

 
$
1,525,580

 
At September 30, 2014 and December 31, 2013, all loans 90 days or more past due were carried as non-accrual. Included in the consumer non-accrual numbers in the table above were $16 thousand and $3 thousand of overdraft deposit account balances 90 days or more past due at September 30, 2014 and December 31, 2013, respectively. Total non-performing loans amounted to $16.5 million and $18.3 million at September 30, 2014 and December 31, 2013, respectively. Non-accrual loans which were not adversely classified amounted to $229 thousand at September 30, 2014 and $577 thousand at December 31, 2013. These balances primarily represented the guaranteed portions of non-performing SBA loans. The majority of the non-accrual loan balances were also carried as impaired loans during the periods noted, and are discussed further below. The increase in loans 30-59 days past due occurred within the commercial portfolios at September 30, 2014, with the majority of these loans having subsequent payments made by mid-October.

The ratio of non-accrual loans to total loans amounted to 1.03% at September 30, 2014, 1.20% at December 31, 2013, and 1.35% at September 30, 2013.
 
At September 30, 2014, additional funding commitments for loans on non-accrual status totaled $100 thousand. The Company’s obligation to fulfill the additional funding commitments on non-accrual loans is generally contingent on the borrower’s compliance with the terms of the credit agreement. If the borrower is not in compliance, additional funding commitments may or may not be made at the Company’s discretion.
 
Impaired Loans
 
Impaired loans are individually significant loans for which management considers it probable that not all amounts due (principal and interest) in accordance with the original contractual terms will be collected.  Impaired loans may be included within the non-accrual balances; however, not every loan in non-accrual status has been designated as impaired.  Impaired loans include troubled debt restructured ("TDR") loans.  Impaired loans exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment and loans that are measured at fair value, unless the loan is amended in a TDR. 

Management does not set any minimum delay of payments as a factor in reviewing for impaired classification.  Management considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. An impaired or TDR loan classification will be considered for upgrade based on the borrower's sustained performance over time and their improving financial condition. Consistent with the criteria for returning non-accrual loans to accrual status, the expectation of the borrower's ability to continue to service the loan in accordance the original or modified terms and the collectability of the remaining balance, and in the case of TDR loans, an interest rate at, or greater than, a market rate for a similar credit at the time of modification is assessed. 

Impaired loans are individually evaluated for credit loss and a specific allowance reserve is assigned for the amount of the estimated credit loss.  Refer to heading “Allowance for probable loan losses methodology” contained in Note 4 “Allowance For Loan Losses,” to the Company’s consolidated financial statements contained in the Company’s 2013 Annual Report on Form 10-K for further discussion of management’s methodology used to estimate specific reserves for impaired loans.
 
Total impaired loans amounted to $29.6 million and $29.8 million, at September 30, 2014 and December 31, 2013, respectively.  Total accruing impaired loans amounted to $13.5 million and $11.9 million at September 30, 2014 and

19

ENTERPRISE BANCORP, INC.
Notes to the Unaudited Consolidated Interim Financial Statements
 


December 31, 2013, respectively, while non-accrual impaired loans amounted to $16.1 million and $17.9 million as of September 30, 2014 and December 31, 2013, respectively.  
 
The following tables set forth the recorded investment in impaired loans and the related specific allowance allocated as of the dated indicated.
Balance at September 30, 2014
(Dollars in thousands)
 
Unpaid
contractual
principal balance
 
Total recorded
investment in
impaired loans
 
Recorded
investment
with no
allowance
 
Recorded
investment
with
allowance
 
Related specific
allowance
Commercial real estate
 
$
16,040

 
$
13,940

 
$
13,306

 
$
634

 
$
110

Commercial and industrial
 
11,986

 
10,877

 
4,046

 
6,831

 
2,198

Commercial construction
 
3,125

 
2,900

 
1,082

 
1,818

 
690

Residential
 
1,699

 
1,625

 
1,375

 
250

 
103

Home equity
 
208

 
205

 

 
205

 
46

Consumer
 
22

 
22

 

 
22

 
22

Total
 
$
33,080

 
$
29,569

 
$
19,809

 
$
9,760

 
$
3,169


Balance at December 31, 2013
(Dollars in thousands)
 
Unpaid
contractual
principal balance
 
Total recorded
investment in
impaired loans
 
Recorded
investment
with no
allowance
 
Recorded
investment
with
allowance
 
Related specific
allowance
Commercial real estate
 
$