ebtc-20210630

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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 June 30, 2021

☐ 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 Yes o 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 Yes o 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 filer x

Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

☐ Yes x No

As of July 30, 2021, there were 12,020,003 shares of the issuer's common stock outstanding, par value $0.01 per share.

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ENTERPRISE BANCORP, INC.

INDEX


		Page Number
	Cover Page	1

	Index	2
	PART I - FINANCIAL INFORMATION
Item 1	Financial Statements (unaudited)	3
	Consolidated Balance Sheets - June 30 , 2021 and December 31, 2020	3
	Consolidated Statements of Income - Three and six months ended June 30 , 2021 and 2020	4
	Consolidated Statements of Comprehensive Income - Three and six months ended June 30 , 2021 and 2020	5
	Consolidated Statement s of Changes in Stockholders' Equity - Three and six months ended June 30 , 2021 and 2020	6
	Consolidated Statements of Cash Flows - Six months ended J une 30 , 2021 and 2020	8
	Notes to Unaudited Consolidated Interim Financial Statements	9
Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	43
Item 3	Quantitative and Qualitative Disclosures About Market Risk	66
Item 4	Controls and Procedures	66

	PART II - OTHER INFORMATION

Item 1	Legal Proceedings	67
Item 1A	Risk Factors	67
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3	Defaults Upon Senior Securities	68
Item 4	Mine Safety Disclosures	68
Item 5	Other Information	68
Item 6	Exhibits	69
	Signature page	70

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PART I-FINANCIAL INFORMATION

Item 1 -Financial Statements

ENTERPRISE BANCORP, INC.

Consolidated Balance Sheets

(Unaudited)


(Dollars in thousands, except per share data)	June 30, 2021		December 31, 2020
Assets
Cash and cash equivalents:
Cash and due from banks	$	48,335	$	40,636
Interest-earning deposits	690,909		213,146

Total cash and cash equivalents	739,244		253,782
Investments:
Debt securities at fair value (amortized cost of $611,827 and $551,191, respectively)	632,759		582,303
Equity securities at fair value	1,265		746
Total investment securities at fair value	634,024		583,049
Federal Home Loan Bank ("FHLB") stock	2,164		1,905
Loans held for sale	1,304		371
Loans:
Total loans	2,954,189		3,073,860
Allowance for credit losses	(50,041)		(44,565)
Net loans	2,904,148		3,029,295
Premises and equipment, net	45,046		46,708
Lease right-of-use asset	20,550		18,439
Accrued interest receivable	14,042		16,079
Deferred income taxes, net	15,402		11,290
Bank-owned life insurance	31,631		31,363
Prepaid income taxes	1,716		2,449
Prepaid expenses and other assets	13,074		13,938
Goodwill	5,656		5,656
Total assets	$	4,428,001	$	4,014,324
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Customer deposits	$	3,889,619	$	3,476,268
Brokered deposits	75,014		74,995
Total deposits	3,964,633		3,551,263
Borrowed funds	8,620		4,774
Subordinated debt	58,919		73,744
Lease liability	19,726		17,539
Accrued expenses and other liabilities	35,086		30,638

Accrued interest payable	1,700		1,940
Total liabilities	4,088,684		3,679,898
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; 40,000,000 shares authorized; 12,014,933 and 11,937,795 shares issued and outstanding, respectively	120		119
Additional paid-in capital	98,708		97,137
Retained earnings	225,529		214,977
Accumulated other comprehensive income	14,960		22,193
Total stockholders' equity	339,317		334,426
Total liabilities and stockholders' equity	$	4,428,001	$	4,014,324

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

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ENTERPRISE BANCORP, INC.

Consolidated Statements of Income

(Unaudited)


	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands, except per share data)	2021		2020		2021		2020
Interest and dividend income:
Loans and loans held for sale	$	33,660	$	32,693	$	67,310	$	63,991
Investment securities	3,428		3,384		6,822		6,868
Other interest-earning assets	144		79		209		244
Total interest and dividend income	37,232		36,156		74,341		71,103
Interest expense:
Deposits	1,110		3,220		2,433		7,625
Borrowed funds	18		180		26		595
Subordinated debt	818		230		1,860		461
Total interest expense	1,946		3,630		4,319		8,681
Net interest income	35,286		32,526		70,022		62,422
Provision for credit losses	39		2,675		719		8,822
Net interest income after provision for credit losses	35,247		29,851		69,303		53,600
Non-interest income:
Wealth management fees	1,638		1,346		3,250		2,786
Deposit and interchange fees	1,651		1,506		3,257		3,197
Income on bank-owned life insurance, net	132		150		268		303

Net gains on sales of debt securities	—		—		128		100
Net gains on sales of loans	490		338		618		485
Other income	841		670		1,530		1,337
Total non-interest income	4,752		4,010		9,051		8,208
Non-interest expense:
Salaries and employee benefits	16,432		16,417		32,153		31,236
Occupancy and equipment expenses	2,416		2,082		4,797		4,258
Technology and telecommunications expenses	2,740		2,311		5,294		4,499
Advertising and public relations expenses	653		489		1,167		1,134
Audit, legal and other professional fees	577		612		1,144		1,217
Deposit insurance premiums	378		537		734		941
Supplies and postage expenses	178		226		405		473
Loss on extinguishment of subordinated debt	—		—		713		—
Other operating expenses	1,782		1,655		3,433		3,250
Total non-interest expense	25,156		24,329		49,840		47,008
Income before income taxes	14,843		9,532		28,514		14,800
Provision for income taxes	3,704		2,276		7,023		3,527
Net income	$	11,139	$	7,256	$	21,491	$	11,273

Basic earnings per share	$	0.93	$	0.61	$	1.79	$	0.95
Diluted earnings per share	$	0.92	$	0.61	$	1.79	$	0.95

Basic weighted average common shares outstanding	12,009,358		11,902,230		11,984,283		11,871,811
Diluted weighted average common shares outstanding	12,055,744		11,918,620		12,025,028		11,898,727

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

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ENTERPRISE BANCORP, INC.

Consolidated Statements of Comprehensive Income

(Unaudited)


	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2021		2020		2021		2020
Net income	$	11,139	$	7,256	$	21,491	$	11,273
Other comprehensive income (loss), net of tax
Net change in fair value of debt securities	798		6,430		(7,923)		13,790
Net change in fair value of cash flow hedges	107		(301)		690		(2,364)
Total other comprehensive income (loss), net of tax	905		6,129		(7,233)		11,426
Total comprehensive income, net	$	12,044	$	13,385	$	14,258	$	22,699

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

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ENTERPRISE BANCORP, INC.

Consolidated Statement of Changes in Stockholders' Equity

(Unaudited)


	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income/(Loss)		Total Stockholders' Equity
(Dollars in thousands, except per share data)	Shares	Amount
Balance at March 31, 2021	12,007,998	$	120	$	97,970	$	216,610	$	14,055	$	328,755
Net income						11,139				11,139

Other comprehensive income, net								905		905
Common stock dividend declared ($0.185 per share)						(2,220)				(2,220)
Common stock issued under dividend reinvestment plan	9,066	—		315						315
Common stock issued, other	610	—		20						20
Stock-based compensation, net	(985)	—		483						483
Net settlement for employee taxes on restricted stock and options	(2,646)	—		(93)						(93)
Stock options exercised, net	890	—		13						13
Balance at June 30, 2021	12,014,933	$	120	$	98,708	$	225,529	$	14,960	$	339,317

Balance at March 31, 2020	11,897,322	$	119	$	94,920	$	193,791	$	15,807	$	304,637
Net income						7,256				7,256
Other comprehensive income, net								6,129		6,129
Common stock dividend declared ($0.175 per share)						(2,082)				(2,082)
Common stock issued under dividend reinvestment plan	13,781	—		305						305
Common stock issued, other	1,753	—		48						48
Stock-based compensation, net	(35)	—		420						420
Net settlement for employee taxes on restricted stock and options	(1,633)	—		(42)						(42)
Stock options exercised, net	300	—		5						5
Balance at June 30, 2020	11,911,488	$	119	$	95,656	$	198,965	$	21,936	$	316,676

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

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ENTERPRISE BANCORP, INC.

Consolidated Statement of Changes in Stockholders' Equity (continued)

(Unaudited)



	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Income/(Loss)		Total Stockholders' Equity
(Dollars in thousands, except per share data)	Shares	Amount
Balance at December 31, 2020	11,937,795	$	119	$	97,137	$	214,977	$	22,193	$	334,426
Net income						21,491				21,491
Cumulative effect adjustment for ASC326 (CECL) adoption, net of tax						(6,510)				(6,510)
Other comprehensive loss, net								(7,233)		(7,233)
Common stock dividend declared ($0.37 per share)						(4,429)				(4,429)
Common stock issued under dividend reinvestment plan	19,307	—		628						628
Common stock issued, other	861	—		27						27
Stock-based compensation, net	63,740	1		1,153						1,154
Net settlement for employee taxes on restricted stock and options	(7,803)	—		(252)						(252)
Stock options exercised, net	1,033	—		15						15
Balance at June 30, 2021	12,014,933	$	120	$	98,708	$	225,529	$	14,960	$	339,317

Balance at December 31, 2019	11,825,331	$	118	$	94,170	$	191,843	$	10,510	$	296,641
Net income						11,273				11,273
Other comprehensive income, net								11,426		11,426
Common stock dividend declared ($0.35 per share)						(4,151)				(4,151)
Common stock issued under dividend reinvestment plan	24,831	—		608						608
Common stock issued, other	2,226	—		55						55
Stock-based compensation, net	66,022	1		1,026						1,027
Net settlement for employee taxes on restricted stock and options	(7,962)	—		(224)						(224)
Stock options exercised, net	1,040	—		21						21
Balance at June 30, 2020	11,911,488	$	119	$	95,656	$	198,965	$	21,936	$	316,676

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

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ENTERPRISE BANCORP, INC.

Consolidated Statements of Cash Flows

(Unaudited)


	Six months ended June 30,
(Dollars in thousands)	2021		2020
Cash flows from operating activities:
Net income	$	21,491	$	11,273
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	719		8,822
Depreciation and amortization	3,935		3,269
Stock-based compensation expense	991		932
Income on bank-owned life insurance, net	(268)		(303)
Net gains on sales of debt securities	(128)		(100)
Mortgage loans originated for sale	(22,802)		(23,228)
Proceeds from mortgage loans sold	22,487		22,837
Net gains on sales of loans	(618)		(485)
Net (gains) losses on equity securities	(149)		132


Changes in:
Decrease (increase) in other assets	5,309		(7,216)
Decrease in other liabilities	(6,437)		(1,840)
Net cash provided by operating activities	24,530		14,093
Cash flows from investing activities:
Proceeds from sales of debt securities	3,059		2,627
Purchase of debt securities	(95,796)		(6,350)
Proceeds from maturities, calls and pay-downs of debt securities	42,152		27,325
Net purchases of equity securities	(370)		(319)
Net (purchases) sales of FHLB capital stock	(259)		2,470
Net decrease (increase) in loans	115,325		(610,795)
Additions to premises and equipment, net	(1,497)		(3,761)




Net cash provided by (used in) investing activities	62,614		(588,803)
Cash flows from financing activities:
Net increase in deposits	413,370		861,378
Net increase (decrease) in borrowed funds	3,846		(92,008)
Repayment of subordinated debt	(15,600)		—
Loss on extinguishment of subordinated debt	713		—

Cash dividends paid, net of dividend reinvestment plan	(3,801)		(3,543)
Proceeds from issuance of common stock	27		55
Net settlement for employee taxes on restricted stock and options	(252)		(224)
Net proceeds from stock option exercises	15		21
Net cash provided by financing activities	398,318		765,679

Net increase in cash and cash equivalents	485,462		190,969
Cash and cash equivalents at beginning of period	253,782		63,794
Cash and cash equivalents at end of period	$	739,244	$	254,763

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

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ENTERPRISE BANCORP, INC.

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, 2020 audited consolidated financial statements and notes thereto contained in the 2020 Annual Report on Form 10-K of Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our") as filed with the Securities and Exchange Commission (the "SEC") on March 10, 2021 (the "2020 Annual Report on Form 10-K").

The Company has not materially changed its significant accounting policies from those disclosed in its 2020 Annual Report on Form 10-K, other than to elect options for the temporary deferral of certain accounting guidance as allowed under the Coronavirus Aid, Relief, and Economic Security ("CARES") Act as discussed under Item (c), "Recent Accounting Pronouncements," below in this Note 1.

The accompanying unaudited consolidated interim financial statements of Enterprise Bancorp, Inc., a Massachusetts corporation, 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 April 2021, the Bank formed a Massachusetts limited liability company, with the Bank as sole member, in order to hold a commercial property taken by deed-in-lieu of foreclosure.

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, 2021 (this "Form 10-Q"), have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the SEC instructions for Quarterly Reports on Form 10-Q. In the opinion of management, the accompanying unaudited consolidated interim financial statements reflect all necessary adjustments, consisting of normal recurring accruals and elimination of intercompany balances, for a fair presentation. Certain previous years' amounts in the unaudited consolidated financial statements, and notes thereto, have been reclassified to conform to the current year's presentation. Interim results are not necessarily indicative of results to be expected for the entire year, or any future period.

(b) Uses of Estimates

In preparing the unaudited consolidated interim financial statements in conformity with GAAP, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. These assumptions and estimates affect the reported values of assets and liabilities as of the balance sheet dates and income and expenses for the period then ended. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates should the assumptions and estimates used be incorrect or change over time due to changes in circumstances. Changes in those estimates resulting from continuing changes in the economic environment and other factors will be reflected in the consolidated financial statements and results of operations in future periods.

As discussed in the Company's 2020 Annual Report on Form 10-K and updated in this Form 10-Q for the adoption of the current expected credit loss ("CECL") methodology, the most significant areas in which management applies critical assumptions and estimates are: the estimates of the allowance for credit losses for loans, unfunded commitments, and available-for-sale securities, and the impairment review of goodwill. See Item (c), “Recent Accounting Pronouncements,” below in this Note 1.


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

Effective January 1, 2021, the Company adopted the Financial Accounting Standards Board ("FASB") Accounting Standards Update ("ASU") No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU No. 2016-13"), including the CECL methodology for estimating allowances for credit losses ("ACL"). The CECL methodology requires earlier recognition of credit losses using a lifetime credit loss measurement approach that also requires the consideration of reasonable and supportable forecasts in the estimate. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost. It applies to the loan portfolio, off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, which are not unconditionally cancellable. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses be presented as an allowance rather than as a write-down. See the following footnotes for more information on the Company's adoption of CECL: Note 2, "Investment Securities," Note 3, "Loans," and Note 4, "Allowance for Credit Losses for Loans."

In February 2019, the federal bank regulatory agencies issued a final rule (the "2019 CECL Rule") that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting the new accounting standard related to the measurement of current expected credit losses on their regulatory capital ratios (three-year transition option). Upon the adoption of CECL on January 1, 2021, the Company has not elected to delay the impact of CECL on regulatory capital.

(d) Subsequent Events

The Company has evaluated subsequent events and transactions from June 30, 2021 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

As of June 30, 2021, and December 31, 2020, the Company's investment portfolio was comprised primarily of debt securities, with a small portion of the portfolio invested in equity securities.

See section "Restricted Cash and Investments," under Item (d), contained in Note 1, "Summary of Significant Accounting Policies," of the Company's 2020 Annual Report on Form 10-K, for further information regarding the Company's investment in FHLB stock. See Note 14, "Fair Value Measurements," of this Form 10-Q, contained below, for further information regarding the Company's fair value measurements for 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, 2021
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value

Residential federal agency MBS(1)	$	258,944	$	4,116	$	3,420	$	259,640
Commercial federal agency MBS(1)	105,051		6,284		—		111,335
Taxable municipal securities	144,385		7,263		423		151,225
Tax-exempt municipal securities	88,297		6,376		—		94,673
Corporate bonds	9,150		616		—		9,766
Subordinated corporate bonds	6,000		120		—		6,120

Total debt securities, at fair value	$	611,827	$	24,775	$	3,843	$	632,759


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


	December 31, 2020
(Dollars in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value

Residential federal agency MBS(1)	$	209,923	$	6,339	$	287	$	215,975
Commercial federal agency MBS(1)	102,468		7,726		—		110,194
Taxable municipal securities	135,117		9,293		3		144,407
Tax-exempt municipal securities	88,235		7,216		—		95,451
Corporate bonds	10,448		828		—		11,276
Subordinated corporate bonds	5,000		—		—		5,000

Total debt securities, at fair value	$	551,191	$	31,402	$	290	$	582,303

__________________________________________

(1)These categories may include investments issued or guaranteed by government sponsored enterprises such as Fannie Mae ("FNMA"), Freddie Mac ("FHLMC"), Federal Farm Credit Bank ("FFCB"), or one of several Federal Home Loan Banks, as well as investments guaranteed by Ginnie Mae ("GNMA"), a wholly owned government entity.

As of the dates reflected in the tables above, the majority of investments in the residential and commercial federal agency mortgage back securities ("MBS") categories were collateralized mortgage obligations ("CMOs") issued by U.S. government agencies. The remaining MBS investments totaled $22.2 million and $18.7 million at June 30, 2021 and December 31, 2020, respectively.

Net unrealized appreciation and depreciation on debt securities available-for-sale, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income (loss). The net unrealized gain or loss in the Company's debt security 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 debt securities will also decline as the securities approach maturity.

ACL for Available-for-Sale Securities

The Company measures expected credit losses on available-for-sale securities based upon the unrealized gain or loss position of the security. For available-for-sale debt securities in an unrealized loss position, the Company evaluates qualitative criteria to determine any expected loss unless the Company intends to sell, or it is more likely than not that the Company will be required to sell before recovery of the amortized cost. In the latter two circumstances, the Company recognizes the entire difference between the security’s amortized cost basis and its fair value as a write-down of the investment balance with a charge to earnings. Otherwise, management’s analysis considers various factors, which include among other considerations (1) the present value of the cash flows expected to be collected compared to the amortized cost of the security, (2) duration and magnitude of the decline in value, (3) the financial condition of the issuer or issuers, and (4) structure of the security. If the Company does not expect to recover the entire amortized cost basis of the security, an allowance for credit losses for available-for-sale securities would be recorded, with a related charge to earnings, limited by the amount of the fair value of the security less its amortized cost.

At June 30, 2021, management performed its quarterly analysis of all securities with unrealized losses and determined that all were attributable to increases in market yields. Management concluded that no ACL for available-for-sale securities was considered necessary as of June 30, 2021.

The Company has elected, under CECL, to continue to present the accrued interest receivable balance on investment securities separate from amortized cost and to exclude accrued interest from the measurement of the allowance for credit losses for available-for-sale securities, and to continue to write-off uncollectible accrued interest receivable by reversing interest income. Accrued interest receivable on available-for-sale debt securities, included in the "Accrued Interest Receivable” line item on the Company’s Consolidated Balance Sheets, totaled $2.5 million at June 30, 2021.


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

The following tables summarize the duration of unrealized losses for debt securities at June 30, 2021 and December 31, 2020:


	June 30, 2021
	Less than 12 months				12 months or longer				Total
(Dollars in thousands)	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		# of Holdings

Residential federal agency MBS	$	111,807	$	3,420	$	—	$	—	$	111,807	$	3,420	17

Taxable municipal securities	35,174		423		—		—		35,174		423		33



Total temporarily impaired debt securities	$	146,981	$	3,843	$	—	$	—	$	146,981	$	3,843	50


	December 31, 2020
	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

Residential federal agency MBS	$	51,396	$	284	$	2,107	$	3	$	53,503	$	287	10

Taxable municipal securities	1,997		3		—		—		1,997		3		4



Total temporarily impaired debt securities	$	53,393	$	287	$	2,107	$	3	$	55,500	$	290	14

The contractual maturity distribution at June 30, 2021 of debt securities was as follows:


(Dollars in thousands)	Amortized Cost		Fair Value
Due in one year or less	$	14,104	$	14,329
Due after one, but within five years	101,215		107,967
Due after five, but within ten years	191,808		203,303
Due after ten years	304,700		307,160
Total debt securities	$	611,827	$	632,759

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 $130.6 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 $615.2 million at June 30, 2021.

Sales of debt securities for the three and six months ended June 30, 2021 and June 30, 2020 are summarized as follows:


	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2021		2020		2021		2020
Amortized cost of debt securities sold (1)	$	—	$	—	$	2,931	$	2,527
Gross realized gains on sales	—		—		128		100
Gross realized losses on sales	—		—		—		—
Total proceeds from sales of debt securities	$	—	$	—	$	3,059	$	2,627

_________________________________________

(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

Equity securities are accounted for under ASC Topic 321, "Investments-Equity Securities," and are recorded on the Company's Consolidated Balance Sheets at fair value with changes in fair value recognized in the Company's Consolidated Statements of


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

Income as a component of "Other income." The amount recognized in "Other income" is dependent primarily on the amount of dollars invested in equities and the magnitude of changes in equity market values.

The Company held equity securities with a fair value of $1.3 million at June 30, 2021 and $746 thousand at December 31, 2020. At June 30, 2021, the equity portfolio consisted primarily of investments in common stock of individual entities in the financial services industry and mutual funds held in conjunction with the Company's supplemental executive retirement and deferred compensation plan.

Gains and losses on equity securities for the three and six months ended June 30, 2021 and June 30, 2020 are summarized as follows:


	Three months ended June 30,				Six months ended June 30,
(Dollars in thousands)	2021		2020		2021		2020
Net gains (losses) recognized during the period on equity securities	$	65	$	66	$	149	$	(132)
Less: Net gains (losses) recognized on equity securities sold during the period	6		(11)		6		(11)
Unrealized gains (losses) recognized during the reporting period on equity securities still held at the end of the period	$	59	$	77	$	143	$	(121)

(3)Loans

The Company manages its loan portfolio to avoid concentration by industry, relationship size and source of repayment to lessen its credit risk exposure. For additional information on the Company's lending products, including risk characteristics and types of collateral, see the heading "Lending Products" under Item 1, "Business," contained in the Company's 2020 Annual Report on Form 10-K. As part of the adoption of CECL, management evaluated the Company’s loan portfolio classifications and determined that the Company’s loan classifications under CECL would remain consistent with those previously reported.

Loan Portfolio Classifications

Major classifications of loans at the dates indicated were as follows(1):


(Dollars in thousands)	June 30, 2021		December 31, 2020
Commercial real estate	$	1,541,397	$	1,476,236
Commercial and industrial	404,432		435,548
Commercial construction	383,807		371,856
SBA paycheck protection program ("PPP")	300,083		443,070
Total commercial loans	2,629,719		2,726,710

Residential mortgages	233,580		252,995
Home equity loans and lines	82,336		85,178
Consumer	8,554		8,977
Total retail loans	324,470		347,150




Total loans	2,954,189		3,073,860

Allowance for credit losses	(50,041)		(44,565)
Net loans	$	2,904,148	$	3,029,295

__________________________________________

(1) Upon the adoption of CECL, the Company includes deferred fees as part of the portfolio segment balance at amortized cost. The prior period balances have been adjusted to conform to this presentation.

Net deferred loan origination fees amounted to $13.4 million, including $9.6 million of deferred PPP fees, at June 30, 2021 and $13.4 million, including $10.0 million of deferred PPP fees, at December 31, 2020.

Upon the adoption of CECL, effective as of January 1, 2021, the Company elected to continue to present the accrued interest receivable balance on loans separate from amortized costs, exclude accrued interest from the measurement of the allowance for credit losses for loans and to continue to write-off uncollectible accrued interest receivable by reversing interest income.


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

Accrued interest receivable on loans at June 30, 2021 amounted to $11.5 million, 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 $78.7 million at June 30, 2021 and $77.1 million at December 31, 2020. In each case, the participating bank funds a percentage of the loan commitment and takes on the related pro-rata risk. 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. Each participation is governed by individual participation agreements executed by the lead bank and the participant at loan origination. Participating loans with other institutions provide banks the opportunity to retain customer relationships and reduce credit risk exposure among each participating bank, while providing customers with larger credit vehicles than the individual bank might be willing or able to offer independently. See also "Loans serviced for others" below for information related to commercial loans participated out to various other institutions.

Paycheck Protection Program

The PPP was created by the CARES Act and instituted by the Small Business Administration (“SBA”). Until the funding for the PPP expired on May 31, 2021, the PPP allowed entities to apply for a 1.00% interest-rate loan with payments generally deferred until the date the lender receives the applicable forgiveness amount from the SBA. The PPP loans may be partially or fully forgiven by the SBA if the entity meets certain conditions. In addition, PPP loans carry a put-back provision in the event that a PPP loan is fraudulently originated and the Bank is at fault. The maturity term for any principal portion left unforgiven is either 2 or 5 years from the funding date, depending on when the loan was originated. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding.

Management believes the SBA PPP loan portfolio, which has an average loan size of approximately $173 thousand and was limited to existing bank customers, to be of minimal credit risk. Management expects the majority of outstanding PPP loans will be forgiven by the SBA, with any remaining balance fully guaranteed by the SBA. Management has segmented the PPP loan portfolio as a group of loans with similar risk characteristics in its assessment for credit losses and, as of June 30, 2021, has not recorded an allowance for credit losses on these loans, but will continue to monitor the PPP loan portfolio.

Loans serviced for others

At June 30, 2021 and December 31, 2020, the Company was servicing residential mortgage loans owned by investors amounting to $12.6 million and $13.7 million, respectively. Additionally, the Company was servicing commercial loans originated by the Company and participated out to various other institutions amounting to $67.4 million and $65.3 million at June 30, 2021 and December 31, 2020, 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, 2021		December 31, 2020
Commercial real estate	$	168,690	$	195,936
Residential mortgages	213,259		233,050
Home equity	5,495		5,971
Total loans pledged to FHLB	$	387,444	$	434,957

(4)ACL for Loans

Inherent in the lending process is the risk of loss due to customer non-payment, or "credit risk." The Company's commercial lending focus may entail significant additional credit risks compared to long-term financing on existing, owner-occupied residential real estate. The Company seeks to lessen its credit risk exposure by managing its loan portfolio to avoid concentration by industry, relationship size and source of repayment, and through sound underwriting practices and the credit 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.


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

On January 1, 2021, the Company adopted CECL under the modified retrospective approach. Upon adoption, the Company recorded a reduction to retained earnings of $6.5 million, net of $2.5 million in deferred income taxes. The ACL for loans increased by $6.6 million and the ACL for unfunded commitments (included in other liabilities) increased by $2.4 million. Prior to January 1, 2021, the Company measured the allowance under the incurred loss method. The ACL for loans to total loans ratio was 1.69% at June 30, 2021 and 1.66% at January 1, 2021.

There have been no material changes to the Company's underwriting practices or credit risk management system used to estimate loan loss exposure. See Note 4, "Allowance for Loan Losses," to the Company's audited consolidated financial statements contained in the 2020 Annual Report on Form 10-K.

ACL for Loans Methodology

The CECL methodology requires early recognition of credit losses using an estimated lifetime credit loss measurement that takes into consideration reasonable and supportable forecasts. The ACL for loans is established through a provision for credit losses, a direct charge to earnings. The ACL for loans is a valuation account that is deducted from the amortized cost to present the net amount of the loan portfolio expected to be collected. Loan losses are charged against the allowance when management believes that the collectability of the amortized cost of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance, generally at the time cash is received on a charged-off account.

Arriving at an appropriate level of ACL for loans involves a high degree of management judgement. The underlying assumptions, estimates and assessments used to estimate the ACL for loans reflects the Company’s best estimate of model assumptions and forecasted conditions at that time. Changes in such estimates can significantly affect the ACL and the provision for credit losses. It is possible and likely that the Company will experience credit losses that are different from the current estimates.

On a quarterly basis, the Company makes an assessment to estimate the ACL necessary to cover expected credit losses for the loan portfolio as of the specified balance sheet dates. The adequacy of the ACL for loans is reviewed and evaluated on a regular basis by an internal management committee, a sub-committee of the Company's Board of Directors (the "Board") and the full Board.

While management uses available information to recognize losses on loans, future additions to the ACL for loans 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.

In making its assessment on the adequacy of the allowance, management considers several quantitative and qualitative

factors from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts, including: the expected duration of the loans, the trends in risk classification of individual loans; individual review of larger and higher risk problem assets; the level of delinquent loans and non-performing loans; impaired and restructured loans; the level of foreclosure activity; net charge-offs; commercial concentrations by industry, property type and real estate location; the growth and composition of the loan portfolio; as well as trends in the general levels of these indicators. In addition, management monitors expansion in the Company's geographic market area, the experience level of lenders and any changes in underwriting criteria, the strength of the local and national economy, including general conditions in the multi-family, commercial real estate and development and construction markets in the Company's local region as well as for changes in current and forecasted economic conditions, such as changes in gross domestic product, the unemployment rate, real estate values, commercial vacancy rates and other relevant factors. Management also performs a qualitative assessment beyond model estimates and applies qualitative adjustments as management deems necessary.

The Company uses a systematic methodology to measure the amount of estimated loan losses. The methodology uses a two-tiered approach that applies specific reserves for loans individually evaluated and general reserves for larger groups of non-adversely classified homogeneous loans, segmented by loan type and for adversely classified loans not individually evaluated, segmented by internal risk rating.


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

Loans collectively evaluated

Loans that share risk characteristics are evaluated on a pool basis. Management has segmented the portfolio for groups of loans with similar risk characteristics by loan type for non-adversely classified loans (loans risk rated "pass") and by internal risk rating for adversely classified loans not individually evaluated. The general loss allocation factors consider the quantitative historic loss experience, qualitative or environmental factors such as those identified above, forecasts over the estimated life of the loan pools, as well as regulatory guidance and industry data.

The Company uses a two-year reasonable and supportable forecast that considers a weighted average of various economic results. For periods beyond the forecast period, the Company reverts immediately to historical loss rates.

Loans individually evaluated

Loans individually evaluated consist primarily of loans which management considers it probable that not all amounts due (principals and interest) will be collected in accordance with the original contractual terms, loans designated as troubled debt restructurings ("TDRs") and to a lesser extent, if applicable, loans that management deems as individually significant or with unique risk characteristics or for some other reason based on management’s judgement. 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. Management estimates the credit loss by comparing the loan's carrying value against either (i) the present value of the expected future cash flows discounted at the loan's effective interest-rate; (ii) the loan's observable market price; or (iii) the expected realizable fair value of the collateral, in the case of collateral dependent loans. A specific allowance is assigned to the loan for the amount of estimated credit loss. Individually evaluated loans are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.

ACL for unfunded commitments

ASU 2016-13 also applies to off-balance sheet credit exposure for unfunded commitments (commitments to originate loans, additional funding commitments on existing loans, standby letters of credit, financial guarantees and other similar investments) that are not unconditionally cancellable. The ACL for unfunded commitments is classified with "Accrued expenses and other liabilities" on the Company’s Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates.

Based on the foregoing, management believes that the Company's ACL for loans and for unfunded commitments is adequate as of June 30, 2021.

Credit Risk Management

As noted above, the credit risk management function focuses on a wide variety of factors and 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 Company's Credit Department, an external loan review service, reviews by members of senior management as well as reviews by the Board's Loan Committee and the Board. This review includes the assessment of internal credit quality indicators such as, among others, the risk classification of loans, past due and non-accrual loans, individually evaluated and troubled-debt restructured loans, and the level of foreclosure activity. These credit quality indicators are discussed below.

Credit quality indicators

Risk ratings and adversely classified loans

The Company's loan risk rating system classifies loans depending on risk of loss characteristics. The classifications for "pass" risk rated loans range from "substantially risk free" for the highest quality loans and loans that are secured by cash collateral, through a satisfactory range of "minimal," "moderate," "better than average," and "average" risk to "border-line pass." Adversely classified ratings for loans determined to be of weaker credit range from "special mention," for loans that may need additional monitoring, to the more severe adverse classifications of "substandard," "doubtful," and "loss" based on criteria established under banking regulations. Loans which are evaluated to be of weaker credit quality are placed on the "watch credit list" and reviewed on a more frequent basis, with risk ratings adjusted as warranted by management.


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

Loans classified as special mention include loans currently protected by the sound net worth and paying capacity of the guarantor but are potentially weakened due to adverse business circumstances or unfavorable economic conditions. Supporting financial information for the business may be too stale or insufficient to accurately assess borrower ability to support the loan. Borrower cash flow may be impacted by adverse operating trends or an unbalanced financial condition which has not yet jeopardized loan payments, or the trend of payment delinquencies or deposit account overdraft activity may be increasing.

Loans classified as substandard include those loans characterized by the distinct possibility that the Company will sustain some loss if the 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; borrower cash flow is insufficient to meet the required debt service specified in the 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 individually evaluated or restructured, or some combination thereof.

Management does not set any minimum delay of payments as a factor in its review but 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 adverse 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 borrower must demonstrate the ability to continue to service the loan in accordance with the original or modified terms and, in the judgment of management, the collectability of the remaining balances, both principal and interest, are reasonably assured. In the case of TDR loans having had a modified interest-rate, that rate must be at, or greater than, a market rate for a similar credit at the time of modification for an upgrade to be considered.

Current year information is presented below in accordance with CECL; prior year disclosures are reported under legacy GAAP and are included below in this Note 4 under the heading “Prior Period Disclosures under the Incurred Loss Methodology.”


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

The following tables presents the amortized cost basis of the Company's loan portfolio risk ratings within portfolio classifications, by origination date, or revolving status as of June 30, 2021:


	Term Loans By Origination Year
(Dollars in thousands)	2021		2020		2019		2018		2017		Prior		Revolving Loans		Revolving Loans Converted to Term		Total
Commercial real estate
Pass	$	141,657	$	237,418	$	269,104	$	119,657	$	189,956	$	536,172	$	257	$	—	$	1,494,221
Special mention	—		—		905		815		321		11,687		—		—		13,728
Substandard	—		—		2,251		3,212		13,526		14,264		—		—		33,253
Doubtful	—		—		—		195		—		—		—		—		195

Total commercial real estate	141,657		237,418		272,260		123,879		203,803		562,123		257		—		1,541,397

Commercial and industrial
Pass	18,388		46,653		48,772		24,243		20,371		57,659		171,717		975		388,778
Special mention	—		682		—		1,696		16		1,399		3,291		—		7,084
Substandard	—		—		19		134		102		4,281		1,722		69		6,327
Doubtful	—		—		—		—		—		—		2,243		—		2,243

Total commercial and industrial	18,388		47,335		48,791		26,073		20,489		63,339		178,973		1,044		404,432

Commercial construction
Pass	62,274		123,546		95,257		40,739		5,364		27,878		25,384		—		380,442
Special mention	—		—		—		1,575		—		640		—		—		2,215
Substandard	—		—		—		—		—		—		1,150		—		1,150

Total commercial construction	62,274		123,546		95,257		42,314		5,364		28,518		26,534		—		383,807

SBA PPP(1)	196,289		103,794		—		—		—		—		—		—		300,083


Residential mortgages
Pass	20,433		63,000		32,811		32,850		15,860		66,695		—		—		231,649
Special mention	—		—		—		—		—		597		—		—		597
Substandard	—		—		—		—		—		1,334		—		—		1,334

Total residential mortgages	20,433		63,000		32,811		32,850		15,860		68,626		—		—		233,580

Home equity
Pass	349		484		372		—		—		2,238		78,542		—		81,985

Substandard	—		—		—		—		—		264		87		—		351

Total home equity	349		484		372		—		—		2,502		78,629		—		82,336

Consumer
Pass	1,990		1,888		1,955		1,247		800		660		—		—		8,540

Substandard	—		—		—		—		—		14		—		—		14

Total consumer	1,990		1,888		1,955		1,247		800		674		—		—		8,554
Total loans	$	441,380	$	577,465	$	451,446	$	226,363	$	246,316	$	725,782	$	284,393	$	1,044	$	2,954,189

__________________________________________

(1)All SBA PPP loans were "pass" rated at June 30, 2021, as these loans are 100% guaranteed by the SBA.

The total amortized cost basis of adversely classified loans amounted to $68.5 million, or 2.32% of total loans, at June 30, 2021. As of June 30, 2021, the Company had no loans rated as "loss."


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

Past due and non-accrual loans

Loans on which the accrual of interest has been discontinued are designated as non-accrual and the classified portions are credit downgraded to one of the adversely classified categories noted above. 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. Interest payments received on loans in a non-accrual status are generally applied to principal on the books of the Company. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. 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.

The following table presents an age analysis of past due loans by portfolio classification as of the date indicated:


	Balance at June 30, 2021
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 days or More		Total Past Due Loans(1)		Current Loans(1)		Total Loans
Commercial real estate	$	3,045	$	680	$	3,675	$	7,400	$	1,533,997	$	1,541,397
Commercial and industrial	269		9		337		615		403,817		404,432
Commercial construction	359		—		150		509		383,298		383,807
SBA PPP	—		—		—		—		300,083		300,083
Residential mortgages	591		68		—		659		232,921		233,580
Home equity	47		—		87		134		82,202		82,336
Consumer	15		2		—		17		8,537		8,554
Total loans	$	4,326	$	759	$	4,249	$	9,334	$	2,944,855	$	2,954,189

_______________________________________

(1)The loan balances in the table above include loans designated as non-accrual despite their payment due status.

The following table presents the amortized cost of non-accrual loans by portfolio classification as of June 30, 2021:


(Dollars in thousands)	Total Non-accrual Loans		Non-accrual Loans without a Specific Reserve		Non-accrual Loans with a Specific Reserve		Related Specific Reserve
Commercial real estate	$	24,167	$	7,869	$	16,298	$	1,468
Commercial and industrial	4,213		1,318		2,895		2,507
Commercial construction	2,876		2,876		—		—
SBA PPP	—		—		—		—
Residential mortgages	389		389		—		—
Home equity	351		351		—		—
Consumer	—		—		—		—
Total loans	$	31,996	$	12,803	$	19,193	$	3,975

At June 30, 2021, all loans past due 90 days or more were carried as non-accrual, in addition to those loans that were less than 90 days past due where reasonable doubt existed as to the full and timely collection of interest or principal that have also been designated as non-accrual, despite their payment due status.

Non-accrual loans that were not adversely classified amounted to $181 thousand at June 30, 2021. These balances primarily represented the guaranteed portions of non-performing SBA loans.

The ratio of non-accrual loans to total loans amounted to 1.08% at June 30, 2021.

At June 30, 2021, additional funding commitments for non-accrual loans were not material.


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

Collateral-dependent loans

Loans that have been individually evaluated and repayment is expected substantially from the operations or ultimate sale of the underlying collateral are deemed to be collateral-dependent loans. Collateral-dependent loans are adversely classified loans that may also be TDRs. These loans may be accruing or on non-accrual status. Collateral-dependent loans are carried at the lower of the recorded investment in the loan or the estimated fair value. When the estimated fair value of the underlying collateral, less estimated costs to sell, is not sufficient to cover the outstanding carrying balance on the loan, a specific reserve is assigned for the amount of the estimated credit loss. These estimated credit losses are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.

Underlying collateral will vary by type of loan, as discussed below.

Commercial real estate loans include loans secured by both owner-use and non-owner occupied (investor) 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, industrial, or mixed-use facilities, strip shopping centers, or other commercial properties.

Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan or secured by inventories, equipment, or receivables.

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 underlying real estate collateral.

Residential mortgage loans and home equity loans and lines may be secured by one-to-four family residential properties serving as the borrower's primary residence, or as vacation homes or investment properties.

Consumer loans consist primarily 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.

The carrying value of collateral dependent loans amounted to $40.6 million at June 30, 2021. Total accruing collateral dependent loans amounted to $9.1 million while non-accrual collateral dependent loans amounted to $31.5 million as of June 30, 2021.

The following table presents the recorded investment in collateral dependent individually evaluated loans and the related specific allowance by portfolio allocation as of the date indicated:


	Balance at June 30, 2021

(Dollars in thousands)	Unpaid Contractual Principal Balance		Total Recorded Investment in Collateral Dependent Loans		Recorded Investment without a Specific Reserve		Recorded Investment with a Specific Reserve		Related Specific Reserve
Commercial real estate	$	31,089	$	29,436	$	13,026	$	16,410	$	1,468
Commercial and industrial	9,264		7,165		4,112		3,053		2,308
Commercial construction	3,668		2,876		2,876		—		—
SBA PPP	—		—		—		—		—
Residential mortgages	909		792		792		—		—
Home equity	516		351		351		—		—
Consumer	—		—		—		—		—
Total	$	45,446	$	40,620	$	21,157	$	19,463	$	3,776

At June 30, 2021, additional funding commitments for collateral dependent loans was not material.


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

Troubled debt restructurings

Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan as a result of financial difficulties of the borrower, the Company grants the borrower a concession on the terms that would not otherwise be considered. Typically, such concessions may consist of one or a combination of the following: a reduction in interest-rate to a below market rate, taking into account the credit quality of the note; extension of additional credit based on receipt of adequate collateral; or a deferment or reduction of payments (principal or interest) which materially alters the Bank's position or significantly extends the note's maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan's origination. All loans that are modified are reviewed by the Company to identify if a TDR has occurred. TDR loans are individually reviewed and evaluated, and a specific reserve is assigned for the amount of the estimated credit loss.

Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act 2021, provides financial institutions the option to suspend the application of GAAP to any loan modification related to COVID-19 from treatment as a TDR for the period between March 1, 2020 and the earlier of (i) 60 days after the end of the national emergency proclamation or (ii) January 1, 2022. A financial institution may elect to suspend GAAP only for a loan that was not more than 30 days past due as of December 31, 2019. In addition, the temporary suspension of GAAP does not apply to any adverse impact on the credit of a borrower that is not related to COVID-19. The suspension of GAAP is applicable for the entire term of the modification, including an interest-rate modification, a forbearance agreement, a repayment plan, or other agreement that defers or delays the payment of principal and/or interest. Accordingly, a financial institution that elects to suspend GAAP pursuant to the CARES Act is not required to increase its reported TDRs at the end of the period of relief, unless the loans require further modification after the expiration of that period.

At June 30, 2021, payment deferrals related to the COVID-19 pandemic were active on 17 "pass" rated loans amounting to $36.0 million, or 1.22% of the total loans. Under the terms of the CARES Act and the Consolidated Appropriations Act, 2021 as discussed below, these loans remain on accrual status.

Total TDR loans as of June 30, 2021 amounted to $17.0 million. TDR loans on accrual status amounted to $9.3 million and TDR loans included in non-accrual loans amounted to $7.7 million at June 30, 2021.

The Company continues to work with customers and enter into loan modifications (which may or may not be TDRs) to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the individual financial circumstances and future prospects of the borrower.

At June 30, 2021, additional funding commitments for TDR loans were not material. During the three months ended June 30, 2021, there were no loan modifications that resulted in new TDR designations, and one new default of loans modified as TDRs within the preceding twelve months; there were no such defaults in the first quarter of 2021.

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, 2021
(Dollars in thousands)	Number of Restructurings	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
Commercial real estate	2	$	991	$	914
Commercial and industrial	—	—		—
Commercial construction	—	—		—
SBA PPP	—	—		—
Residential mortgages	1	224		224
Home equity	—	—		—
Consumer	—	—		—
Total	3	$	1,215	$	1,138

There were no subsequent charge-offs associated with the new TDRs noted in the table above during the six months ended June 30, 2021.


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

The following table presents loans modified as TDRs within the preceding twelve months, which have defaulted on the

modified terms during the three and six months ended June 30, 2021 as indicated:


	June 30, 2021
(Dollars in thousands)	Number of TDRs that Defaulted	Post- modification Outstanding Recorded Investment
Commercial real estate	1	$	680
Commercial and industrial	—	—
Commercial construction	—	—
SBA PPP	—	—
Residential mortgages	—	—
Home equity	—	—
Consumer	—	—
Total	1	$	680

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, 2021
(Dollars in thousands)	Number of Restructurings	Amount

Extended maturity date	1	$	224
Temporary payment reduction and payment re-amortization of remaining principal over extended term	2	914
Temporary interest only payment plan	—	—
Forbearance of post default rights	—	—
Other payment concessions	—	—
Total	3	$	1,138
Amount of allowance for credit losses for loans associated with TDRs listed above		$	—

See "Financial Condition" in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations," under the headings "Asset Quality" and "Allowance for Credit Losses" in this Form 10-Q for additional information about changes in the Company's credit quality indicators since December 31, 2020.

ACL and provision for credit loss activity

For the three and six months ended June 30, 2021, the total provision for credit losses amounted to $39 thousand and $719 thousand, respectively, and included provisions for credit losses on loans and unfunded commitments.

ACL for loans

The ACL for loans amounted to $50.0 million at June 30, 2021 and the ACL for loans to total loans ratio was 1.69% at June 30, 2021.


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

Changes in the ACL for loans by portfolio classification for the three months ended June 30, 2021 are presented below:


(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Residential Mortgage		Home Equity		Consumer		Total
Beginning Balance at March 31, 2021	$	33,675	$	11,226	$	3,483	$	889	$	292	$	334	$	49,899
Provision	294		(275)		294		(46)		(2)		(13)		252
Recoveries	39		28		—		—		5		2		74
Less: Charge-offs	—		179		—		—		—		5		184
Ending Balance at June 30, 2021	$	34,008	$	10,800	$	3,777	$	843	$	295	$	318	$	50,041

Changes in the ACL for loans by portfolio classification for the six months ended June 30, 2021 are presented below:


(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Residential Mortgage		Home Equity		Consumer		Total
Beginning Balance at December 31, 2020	$	26,755	$	9,516	$	6,129	$	1,530	$	467	$	168	$	44,565
CECL adjustment upon adoption	7,664		1,988		(2,416)		(695)		(158)		177		6,560
Provision for credit losses for loans	1,375		(538)		64		8		(24)		(23)		862
Recoveries	39		83		—		—		10		3		135
Less: Charge-offs	1,825		249		—		—		—		7		2,081
Ending Balance at June 30, 2021	$	34,008	$	10,800	$	3,777	$	843	$	295	$	318	$	50,041

ACL for unfunded commitments

The Company’s ACL for unfunded commitments amounted to $2.3 million as of June 30, 2021 and $2.5 million at January 1, 2021. The provision for unfunded commitments amounted to a reduction of $213 thousand and $143 thousand for the respective three and six months ended June 30, 2021.

Other real estate owned ("OREO")

The Company had one OREO property at June 30, 2021 with a carrying value of $2.4 million that was added in April of 2021 and none at December 31, 2020.

There were no sales and no subsequent write downs of OREO during the six months ended June 30, 2021 or 2020. There were no OREO additions during the six months ended June 30, 2020.

At June 30, 2021, the Company had consumer mortgage loans secured by residential real estate property for which formal foreclosure proceedings were in process according to local requirements of the applicable jurisdictions with carrying amounts totaling $87 thousand. The Company had no consumer mortgage loans in the process of foreclosure at December 31, 2020.

See also Item (i), "Other Real Estate Owned," contained in Note 1, "Summary of Significant Accounting Policies," to the Company's consolidated financial statements contained in the Company's 2020 Annual Report on Form 10-K, for further information regarding the Company's accounting for OREO.

Prior Period Disclosures under the Incurred Loss Methodology

The prior year disclosures below were prepared under the incurred methodology, before the Company adopted CECL. See Note 4, "Allowance for Loan Losses," to the Company's audited consolidated financial statements contained in the 2020 Annual Report on Form 10-K for additional information about the incurred methodology.


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

The balances of loans as of December 31, 2020 by portfolio classification and evaluation method are summarized as follows:


(Dollars in thousands)	Loans Individually Evaluated for Impairment		Loans Collectively Evaluated for Impairment		Gross Loans
Commercial real estate	$	35,915	$	1,442,320	$	1,478,235
Commercial and industrial	8,409		427,251		435,660
Commercial construction	2,999		370,310		373,309
SBA PPP	—		453,084		453,084
Residential mortgages	596		252,375		252,971
Home equity	381		84,625		85,006
Consumer	18		8,963		8,981
Total gross loans	$	48,318	$	3,038,928	$	3,087,246

Adversely classified loans-Prior Period

The following table presents the Company's credit risk profile for each portfolio classification by internally assigned adverse risk rating category as of the period indicated:


	December 31, 2020
	Adversely Classified(1)						Not Adversely
(Dollars in thousands)	Substandard		Doubtful		Loss		Classified		Gross Loans
Commercial real estate	$	40,088	$	197	$	—	$	1,437,950	$	1,478,235
Commercial and industrial	7,901		2,293		—		425,466		435,660
Commercial construction	3,501		—		—		369,808		373,309
SBA PPP	—		—		—		453,084		453,084
Residential mortgages	474		—		—		252,497		252,971
Home equity	381		—		—		84,625		85,006
Consumer	41		—		—		8,940		8,981
Total gross loans	$	52,386	$	2,490	$	—	$	3,032,370	$	3,087,246

__________________________________

(1) Prior to the adoption of CECL, the Company did not include special-mention risk rated loans as adversely classified.

Total adversely classified loans amounted to 1.79% of total loans at December 31, 2020.

Past due and non-accrual loans-Prior Period

The following tables present an age analysis of past due loans by portfolio classification as of the date indicated:


	Balance at December 31, 2020
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 days or More		Total Past Due Loans		Current Loans		Gross Loans		Non-accrual Loans
Commercial real estate	$	6,105	$	499	$	5,592	$	12,196	$	1,466,039	$	1,478,235	$	29,680
Commercial and industrial	417		13		607		1,037		434,623		435,660		4,574
Commercial construction	13,466		—		1,351		14,817		358,492		373,309		2,999
SBA PPP	—		—		—		—		453,084		453,084		—
Residential mortgages	890		—		290		1,180		251,791		252,971		414
Home equity	—		—		255		255		84,751		85,006		381
Consumer	2		1		—		3		8,978		8,981		2
Total gross loans	$	20,880	$	513	$	8,095	$	29,488	$	3,057,758	$	3,087,246	$	38,050


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

At December 31, 2020, all loans past due 90 days or more were carried as non-accrual, in addition to those loans that were less than 90 days past due where reasonable doubt existed as to the full and timely collection of interest or principal that have also been designated as non-accrual, despite their payment due status shown in the tables above.

Non-accrual loans that were not adversely classified amounted to $137 thousand at December 31, 2020. 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 ratio of non-accrual loans to total loans amounted to 1.24% at December 31, 2020.

Impaired Loans-Prior Period

The carrying value of impaired loans amounted to $48.3 million at December 31, 2020. Total accruing impaired loans amounted to $10.3 million while non-accrual impaired loans amounted to $38.0 million as of December 31, 2020.

The following table sets forth the recorded investment in impaired loans and the related specific allowance allocated by portfolio classification as of the date indicated:


	Balance at December 31, 2020
(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	$	37,184	$	35,915	$	14,728	$	21,187	$	3,454
Commercial and industrial	10,628		8,409		4,696		3,713		2,713
Commercial construction	3,668		2,999		2,999		—		—
SBA PPP	—		—		—		—		—
Residential mortgages	699		596		596		—		—
Home equity	539		381		381		—		—
Consumer	18		18		—		18		18
Total	$	52,736	$	48,318	$	23,400	$	24,918	$	6,185

The following table presents the average recorded investment in impaired loans by portfolio classification and the related interest recognized during the three months indicated:


	Three months ended June 30, 2020
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	14,289	$	70
Commercial and industrial	8,664		40
Commercial construction	7,674		5
SBA PPP	—		—
Residential mortgages	898		2
Home equity	419		(1)
Consumer	41		1
Total	$	31,985	$	117


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

The following table presents the average recorded investment in impaired loans by portfolio classification and the related interest recognized during the six months indicated:


	Six months ended June 30, 2020
(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized
Commercial real estate	$	14,781	$	142
Commercial and industrial	8,236		68
Commercial construction	6,215		5
SBA PPP	—		—
Residential mortgages	1,059		4
Home equity	410		(1)
Consumer	41		1
Total	$	30,742	$	219

TDRs-Prior Period

Total TDR loans, included in the impaired loan balances above, as of December 31, 2020, were $17.7 million. TDR loans on accrual status amounted to $10.3 million at December 31, 2020. TDR loans included in non-performing loans amounted to $7.5 million at December 31, 2020.

The following table sets forth the post modification balances of TDRs listed by type of modification for TDRs that occurred during the six-month periods indicated:


	Six months ended
	June 30, 2020
(Dollars in thousands)	Number of Restructurings	Amount

Extended maturity date	2	$	1,743
Temporary payment reduction and payment re-amortization of remaining principal over extended term	2	975

Forbearance of post default rights	4	2,509

Total	8	$	5,227
Amount of specific reserves included in the allowance for loan losses associated with TDRs listed above		$	1,320

Loans modified as troubled debt restructurings during the three-month period ended June 30, 2020 are detailed below:



	Three months ended
		June 30, 2020
(Dollars in thousands)		Number of Restructurings	Pre-modification Outstanding Recorded Investment		Post-modification Outstanding Recorded Investment
Commercial real estate		—	$	—	$	—
Commercial and industrial		—	—		—
Commercial construction		2	1,314		1,518
SBA PPP		—	—		—
Residential mortgages		—	—		—
Home equity loans and lines		—	—		—
Consumer		—	—		—
Total		2	$	1,314	$	1,518


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

The following table presents loans modified as TDRs within the preceding twelve months, which have defaulted on the

modified terms during the during the three months ended June 30, 2020:


	Three months ended
	June 30, 2020
(Dollars in thousands)	Number of TDRs that Defaulted	Post- modification Outstanding Recorded Investment
Commercial real estate	—	$	—
Commercial and industrial	2	64
Commercial construction	—	—
SBA PPP	—	—
Residential mortgages	—	—
Home equity loans and lines	—	—
Consumer	—	—
Total	2	$	64

The following table presents number and balance of loans modified as TDRs, by portfolio classification, during the six months indicated:


	Six months ended
	June 30, 2020
(Dollars in thousands)	Number of Restructurings	Pre-modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Commercial real estate	—	$	—	$	—
Commercial and industrial	1	474		402
Commercial construction	6	4,754		4,825
SBA PPP	—	—		—
Residential mortgages	—	—		—
Home equity	—	—		—
Consumer	1	1		—
Total	8	$	5,229	$	5,227

There were no subsequent charge-offs associated with the new TDRs noted in the table above during the six months ended June 30, 2020.


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

The following table presents loans modified as TDRs within the preceding twelve months, which have defaulted on the

modified terms during the during the six months ended June 30, 2020:


	Six months ended
	June 30, 2020
(Dollars in thousands)	Number of TDRs that Defaulted	Post- modification Outstanding Recorded Investment
Commercial real estate	—	$	—
Commercial and industrial	2	64
Commercial construction	2	1,743
SBA PPP	—	—
Residential mortgages	—	—
Home equity	—	—
Consumer	—	—
Total	4	$	1,807

Allowance for loan loss activity-Prior Period

The allowance for loan losses amounted to $44.6 million at December 31, 2020 and $42.3 million at June 30, 2020. The allowance for loan losses to total loans ratio was 1.45% at December 31, 2020, and 1.33% at June 30, 2020.

Changes in the allowance for loan losses by portfolio classification for the three months ended June 30, 2020 are presented below:



(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Residential Mortgage		Home Equity		Consumer		Total
Beginning Balance at March 31, 2020	$	20,861	$	10,235	$	6,161	$	1,598	$	636	$	273	$	39,764
Provision	1,616		(345)		1,337		130		(26)		(37)		2,675
Recoveries	—		67		—		—		3		15		85
Less: Charge-offs	—		194		—		—		—		6		200
Ending Balance at June 30, 2020	$	22,477	$	9,763	$	7,498	$	1,728	$	613	$	245	$	42,324

Changes in the allowance for loan losses by portfolio classification for the six months ended June 30, 2020 are presented below:


(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Commercial Construction		Residential Mortgage		Home Equity		Consumer		Total
Beginning Balance at December 31, 2019	$	18,338	$	9,129	$	4,149	$	1,195	$	536	$	267	$	33,614
Provision for credit losses for loans	4,139		759		3,349		533		71		(29)		8,822
Recoveries	—		174		—		—		6		25		205
Less: Charge-offs	—		299		—		—		—		18		317
Ending Balance at June 30, 2020	$	22,477	$	9,763	$	7,498	$	1,728	$	613	$	245	$	42,324
Ending allowance balance:
Allocated to loans individually evaluated for impairment	$	37	$	2,351	$	1,440	$	—	$	—	$	39	$	3,867
Allocated to loans collectively evaluated for impairment	$	22,440	$	7,412	$	6,058	$	1,728	$	613	$	206	$	38,457


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

(5)Leases

For the Company, material leases consist of operating leases on our facilities, mainly leased branch locations; leases 12 months or less and immaterial equipment leases have been excluded. As of June 30, 2021, the Company had 16 operating real estate leases, with a new branch lease commencing in the quarter. In addition, the Company has entered into lease agreements which are not included in the table below as the leases have not commenced. The Company is relocating two branches, with lease agreements that are expected to commence in the third quarter of 2021.

The Company's leased facilities are contracted under various non-cancelable operating leases, most of which provide options to the Company to extend the lease periods and include periodic rent adjustments. While the Company typically exercises its option to extend lease terms, the lease contains provisions that allow the Company, upon notification, to terminate the lease at the end of the lease term, or any option period. Several real estate leases also provide the Company the right of first refusal should the property be offered for sale.

Lease expense for the three and six months ended June 30, 2021 were $366 thousand and $695 thousand, respectively. Lease expense for the three and six months ended June 30, 2020 were $324 thousand and $649 thousand, respectively. Variable lease costs and short-term lease expenses included in lease expense during these periods were immaterial.

The weighted average remaining lease term for operating leases at June 30, 2021 and June 30, 2020 was 28.7 years and 27.0 years, respectively. The weighted average discount rate was 3.69% at June 30, 2021 and 3.79% at June 30, 2020.

At June 30, 2021, the remaining undiscounted cash flows by year of these lease liabilities were as follows:


(Dollars in thousands)	Operating Leases
2021 (six remaining months)	$	636
2022	1,251
2023	1,257
2024	1,286
2025	1,292
Thereafter	26,993
Total lease payments	32,715
Less: Imputed interest	12,989
Total lease liability	$	19,726

In addition, the Company currently collects rent through non-cancellable leases for a small portion of the overall square-footage within its Lowell, Massachusetts campus headquarters and at one of its branch locations. These leases are deemed immaterial.

See also Item (k), "Leases," contained in Note 1, "Summary of Significant Accounting Policies," to the Company's consolidated financial statements contained in the 2020 Annual Report on Form 10-K, for further information regarding the accounting for the Company's leases.


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

(6)Deposits

Deposits are summarized as follows as of the periods indicated:


(Dollars in thousands)	June 30, 2021		December 31, 2020
Non-interest checking	$	1,373,353	$	1,164,908
Interest-bearing checking	694,508		599,630
Savings	303,663		256,347
Money market	1,293,733		1,210,414
CDs $250,000 or less	163,821		176,895
CDs greater than $250,000	60,541		68,074
Total customer deposits	3,889,619		3,476,268
Brokered deposits	75,014		74,995
Total deposits	$	3,964,633	$	3,551,263

Total customer deposits include reciprocal balances from checking, money market deposits and CDs received from participating banks in nationwide deposit networks due to our customers electing to participate in Company offered programs which allow for enhanced FDIC insurance. Essentially, the equivalent of the customers' original deposited funds comes back to the Company and are carried within the appropriate category under deposits. The Company's balances in these reciprocal products were $519.6 million and $508.4 million at June 30, 2021 and December 31, 2020, respectively.

The Company's brokered deposit balance at June 30, 2021 and December 31, 2020 consisted of balances used in conjunction with interest-rate-swaps to hedge against adverse interest-rate movements.

See Note 8, "Derivatives and Hedging Activities," of this Form 10-Q, contained below, for additional information on the Company's interest-rate swaps. See Note 14, "Fair Value Measurements," of this Form 10-Q, contained below, for further information regarding the Company's fair value measurements for deposits.

(7)Borrowed Funds and Subordinated Debt

The Company's borrowed funds amounted to $8.6 million and $4.8 million at June 30, 2021 and December 31, 2020, respectively, in FHLB advances.

Borrowed funds at June 30, 2021 and December 31, 2020 are summarized, as follows:


	June 30, 2021				December 31, 2020
(Dollars in thousands)	Balance		Rate		Balance		Rate

Within 12 months	$	5,585	0.30	%	$	4,316	0.33	%
Over 5 years	$	3,035	1.70	%	$	458	—	%

The Company's borrowings at June 30, 2021 and December 31, 2020 were related to specific lending projects under the FHLB's community development programs.

The Company also had outstanding subordinated debt (net of deferred issuance costs) of $58.9 million and $73.7 million at June 30, 2021 and December 31, 2020, respectively.

In January 2015, the Company issued $15.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes, with a 15-year term, callable by the Company at a premium (the "January 2015 Notes"). Original debt issuance costs were $190 thousand and have been netted against the subordinated debt on the Consolidated Balance Sheets in accordance with accounting guidance. On March 31, 2021, the Company redeemed the January 2015 Notes which were due in January 2030. The redemption of the January 2015 Notes was recorded as a loss on the extinguishment of subordinated debt in the amount of $713 thousand, consisting of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs. The January 2015 Notes were outstanding at December 31, 2020.


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

In July 2020, the Company issued $60.0 million in fixed-to-floating rate subordinated notes, with a 10-year term, callable at the Company's option on or after July 15, 2025 (the "July 2020 Notes"). Original debt issuance costs related to the July 2020 Notes were $1.2 million and have been netted against the subordinated debt on the Consolidated Balance Sheets in accordance with accounting guidance. These costs are being amortized to interest expense over the life of the notes. The July 2020 Notes are intended to qualify as Tier 2 capital for regulatory purposes and pay interest at a fixed rate of 5.25% per annum through October 15, 2025, after which floating rates apply.

See Note 2, "Investment Securities," and Note 3, "Loans," of this Form 10-Q, contained above, for further information regarding securities and loans pledged for borrowed funds. Refer to the "Liquidity" and "Borrowed Funds" sections in the "Financial Condition" section in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operation," of this Form 10-Q for additional information about other sources of funding available to the Company and the Company's borrowing capacity.

(8) Derivatives and Hedging Activities

The Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and unknown cash amounts, the value of which are determined by interest rates. In addition, the Company provides certain commercial customers back-to-back swaps, which do not meet hedge accounting requirements and therefore changes in the fair value of both the customer swaps and the counterparty swaps, which have an offsetting relationship, are recognized directly in earnings.

See also Item (p), "Derivatives and Hedging," contained in Note 1, "Summary of Significant Accounting Policies," to the Company's consolidated financial statements contained in the 2020 Annual Report on Form 10-K, for further information regarding the accounting for the Company's derivatives and hedging activities.

The tables below present a summary of the Company's derivative financial instruments, notional amounts and fair values for the periods presented:


	As of June 30, 2021
(Dollars in thousands)	Asset Notional Amount		Asset Derivatives(1)		Liability Notional Amount		Liability Derivatives(1)
Derivatives designated as hedging instruments
Interest-rate contracts - pay fixed, receive floating	$	—	$	—	$	75,000	$	1,855
Total cash flow hedge interest-rate swaps	$	—	$	—	$	75,000	$	1,855

Derivatives not subject to hedge accounting
Interest-rate contracts - pay floating, receive fixed	$	37,151	$	1,086	$	—	$	—
Interest-rate contracts - pay fixed, receive floating	—		—		37,151		1,086
Total back-to-back interest-rate swaps	$	37,151	$	1,086	$	37,151	$	1,086


	December 31, 2020
(Dollars in thousands)	Asset Notional Amount		Asset Derivatives(1)		Liability Notional Amount		Liability Derivatives(1)
Derivatives designated as hedging instruments
Interest-rate contracts - pay fixed, receive floating	$	—	$	—	$	75,000	$	2,814
Total cash flow hedge interest-rate swaps	$	—	$	—	$	75,000	$	2,814

Derivatives not subject to hedge accounting
Interest-rate contracts - pay floating, receive fixed	$	38,027	$	2,286	$	—	$	—
Interest-rate contracts - pay fixed, receive floating	—		—		38,027		2,286
Total back-to-back interest-rate swaps	$	38,027	$	2,286	$	38,027	$	2,286

__________________________________________

(1) Accrued interest balances related to the Company’s interest-rate swaps are not included in the fair values above and are immaterial.


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

The Company had no derivative fair value hedges at either June 30, 2021 or December 31, 2020.

Cash flow hedges

Interest-rate swap agreements may be entered into as hedges against adverse interest-rate fluctuations on specifically identified assets or liabilities. The Company’s cash flow hedges are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s wholesale funding.

The Company’s objectives in using these interest-rate derivatives are to add stability to interest expense and to manage its exposure to interest-rate movements. During the first quarter of 2020, the Company entered into three pay fixed, receive float interest-rate swaps to hedge against adverse interest-rate changes. Each swap has a notional value of $25.0 million with respective maturities from 2023 to 2025. At June 30, 2021, these interest-rate swaps are designated as cash flow hedges and involve the receipt of variable amounts 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.

In relation to the Company's cash flow hedges, the Company estimates that an additional $972 thousand (pre-tax) will be reclassified out of AOCI as an increase to interest expense during the next twelve months.

Back-to-Back swaps

The Company has a "Back-to-Back Swap" program whereby the Bank enters into an interest-rate swap with qualified commercial banking customers and simultaneously enters into equal and opposite interest-rate swap with a swap counterparty. The customer interest-rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to a fixed-rate payment.

Each Back-to-Back swap consists of two interest-rate swaps (a customer swap and offsetting counterparty swap) and amounted to a total number of 10 interest-rate swaps outstanding at both June 30, 2021 and December 31, 2020. The transaction structure effectively minimizes the Bank's interest-rate risk exposure resulting from such transactions. Customer-related credit risk is minimized by the cross collateralization of the loan and the interest-rate swap agreement to the customer's underlying collateral.

Interest-rate swaps with the counterparty are subject to master netting agreements, while interest-rate swaps with customers are not. 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, 2021 or June 30, 2020.

At June 30, 2021 and December 31, 2020, all the Back-to-Back swaps with the counterparty were in the same liability position, therefore there was no netting reflected in the Company’s Consolidated Balance Sheets.

Credit Risk

By using derivative financial instruments, the Company exposes itself to counterparty-credit risk. Credit risk is the risk of failure by the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative is negative, the Company owes the counterparty and, therefore, it does not possess credit risk. The credit risk in derivative instruments is mitigated by entering into transactions with highly-rated counterparties that management believes to be creditworthy. Additionally, counterparty interest-rate swaps contain provisions for collateral to be posted if the derivative exposure exceeds a threshold amount.

The Company had one counterparty and it was rated A and A2 by Standard & Poor's and Moody's, respectively, at June 30, 2021. The Company had no credit risk exposure at either June 30, 2021 or December 31, 2020 relating to interest-rate swaps with counterparties. When the Company has credit risk exposure, collateral is received from the counterparty and held by the Company. Collateral held by the Company 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 cash is restricted, is considered an asset of the Company and is carried on the Company's Consolidated Balance Sheets. The Company posted cash collateral of $3.0 million and $5.3 million at June 30, 2021 and December 31, 2020, respectively.


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

Credit-risk-related Contingent Features

The Company's interest-rate swaps with counterparties contain credit-risk-related contingent provisions. These provisions provide the counterparty with the right to terminate its derivative positions and require the Company to settle its obligations under the agreements if the Company defaults on certain of its indebtedness.

As of June 30, 2021, the fair value of derivatives in a net liability position, which excludes any adjustment for nonperformance risk, related to these agreements was $2.9 million. The Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral at June 30, 2021 as noted above.

Other Derivative Related Activity

The Company also participates in loans originated by third party banks, where the originating bank utilizes a back-to-back interest-rate swap structure; however, the Company is not a party to the swap agreements. Under the terms of the loan participations, the Company has accepted contingent liabilities that would only be realized if the swaps were terminated early and there were outstanding losses not covered by the underlying borrowers and the borrowers' pledged collateral. If applicable, the Company's swap-loss exposure would be equal to a percentage of the originating bank's swap loss based on the ratio of the Company's loan participation to the underlying loan. At both June 30, 2021 and December 31, 2020, the Company had one participation loan where the originating bank utilizes a back-to-back interest-rate swap structure. At June 30, 2021, management considers the risk of material swap-loss exposure related to this participation loan to be unlikely based on the borrower's financial and collateral strength. Management continues to closely monitor for credit changes resulting from the pandemic.

Interest-rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. The Company generally does not pool mortgage loans for sale, but instead sells the loans on an individual basis. To reduce the net interest-rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest-rate lock commitment is quoted on the origination of the loan. The Company estimates the fair value of these derivatives based on current secondary mortgage market prices. At June 30, 2021 and December 31, 2020, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.

(9) Stockholders' Equity

Shares Authorized and Share Issuance

The Company's authorized capital is divided into common stock and preferred stock. The Company is authorized to issue 40,000,000 shares of common stock, with a par value of $0.01 per share, and as of June 30, 2021 had 12,014,933 shares issued and outstanding. Holders of common stock are entitled to one vote per share and are entitled to receive dividends if, as, and when declared by the Board. Dividend and liquidation rights of the common stock may be subject to the rights of any outstanding preferred stock. The Company is also authorized to issue 1,000,000 shares of preferred stock, with a par value of $0.01 per share. No preferred stock has been issued as of the date of this Form 10-Q.

The Company has a stockholders' rights plan. Under the plan, each share of common stock includes a right to purchase under certain circumstances one one-hundredth of a share of the Company's Series A Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of $122.50 per one one-hundredth of a preferred share, subject to adjustment, or, in certain circumstances, to receive cash, property, shares of common stock or other securities of the Company. The rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events that would ordinarily be associated with an unsolicited acquisition or attempted acquisition of 10% or more of the Company's outstanding shares of common stock. The rights have no voting or dividend privileges, and unless and until they become exercisable, have no dilutive effect on the earnings of the Company. The rights will expire, unless earlier redeemed, exchanged, or otherwise rescinded by the Company, on January 13, 2028.

The Company's stock incentive plans permit the Board to grant, under various terms, stock options (for the purchase of newly issued shares of common stock), common stock, restricted stock awards, restricted stock units and stock appreciation rights to officers and other employees, non-employee directors and consultants.

The Company issues stock options and restricted stock awards to officers and other employees and restricted stock awards and stock compensation in lieu of cash fees to non-employee directors. The restricted stock awards allow for the non-forfeitable receipt of dividends, and the voting of all shares, whether or not vested, throughout the vesting periods at the same proportional level as common shares outstanding. The unvested restricted stock awards are the Company's only participating securities and


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

are included in shares outstanding. Unvested participating restricted awards amounted to 124,696 shares and 116,174 shares as of June 30, 2021 and December 31, 2020, respectively. See Note 13, "Earnings per Share," of this Form 10-Q, contained below, for further information regarding unvested participating restricted awards and the Company's earnings per share calculation.

Upon vesting, restricted stock awards may be net settled to cover payment for employee tax obligations, resulting in shares of common stock being reacquired by the Company and returned to the pool of shares reserved for issuance under the incentive plans. In accordance with Massachusetts law, shares reacquired by the Company will be treated as authorized but unissued shares.

The Company's stock incentive plans also allow for newly issued shares of common stock to be issued without restrictions to officers and other employees, non-employee directors and consultants. From time to time, the Company issues shares to community members for consulting on regional advisory councils and grants shares of fully vested stock as employee anniversary awards. These shares vest immediately and the cost, which is based on the market price on the date of grant and deemed to be immaterial, is expensed in the period in which the services are rendered. See Note 12, "Stock-Based Compensation," to the Company's unaudited consolidated interim financial statements of this Form 10-Q, contained below, for additional information regarding the Company's stock incentive plans.

In addition, the Company maintains a dividend reinvestment and direct stock purchase plan ("DRSPP") which enables stockholders, at their discretion, to elect to reinvest cash dividends paid on their shares of the Company's common stock by purchasing additional shares of common stock from the Company at a purchase price equal to fair market value. Under the DRSPP, stockholders and new investors also can purchase shares of the Company's common stock without brokerage fees, subject to monthly minimums and maximums.

See "Capital Resources" in Item 2, "Management's Discussion and Analysis," of this Form 10-Q for the Company's capital ratios and capital adequacy assessment as of June 30, 2021. See Note 10, "Comprehensive (Loss) Income," of this Form 10-Q for changes to stockholders' equity from comprehensive income (loss) as of June 30, 2021. Refer to Note 11, "Stockholders' Equity," to the Company's audited consolidated financial statements included in the Company's 2020 Annual Report on Form 10-K for additional information relating to capital adequacy requirements, dividends and the DRSPP.

(10)Comprehensive Income (Loss)

Comprehensive income is defined as all changes to stockholders' 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. See below for the Company's other components of comprehensive income at the respective dates. Pursuant to GAAP, 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 losses or gains are realized.

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 benefit (expense) allocated to each component of other comprehensive income (loss):


	Three months ended June 30, 2021						Three months ended June 30, 2020
(Dollars in thousands)	Pre-Tax		Tax Benefit (Expense)		After Tax Amount		Pre-Tax		Tax (Expense) Benefit		After Tax Amount
Change in fair value of debt securities	$	1,028	$	(230)	$	798	$	8,256	$	(1,826)	$	6,430
Less: net security gains reclassified into non-interest income	—		—		—		—		—		—
Net change in fair value of debt securities	1,028		(230)		798		8,256		(1,826)		6,430

Change in fair value of cash flow hedges	392		(111)		281		(504)		142		(362)
Less: net cash flow hedges losses reclassified into interest expense	243		(69)		174		(85)		24		(61)
Net change in fair value of cash flow hedges	149		(42)		107		(419)		118		(301)

Total other comprehensive income (loss), net	$	1,177	$	(272)	$	905	$	7,837	$	(1,708)	$	6,129


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


	Six months ended June 30, 2021						Six months ended June 30, 2020
(Dollars in thousands)	Pre-Tax		Tax Benefit (Expense)		After Tax Amount		Pre-Tax		Tax (Expense) Benefit		After Tax Amount
Change in fair value of debt securities	$	(10,052)	$	2,228	$	(7,824)	$	17,830	$	(3,962)	$	13,868
Less: net security gains reclassified into non-interest income	128		(29)		99		100		(22)		78
Net change in fair value of debt securities	(10,180)		2,257		(7,923)		17,730		(3,940)		13,790

Change in fair value of cash flow hedges	1,439		(405)		1,034		(3,348)		941		(2,407)
Less: net cash flow hedges losses reclassified into interest expense	479		(135)		344		(60)		17		(43)
Net change in fair value of cash flow hedges	960		(270)		690		(3,288)		924		(2,364)

Total other comprehensive (loss) income, net	$	(9,220)	$	1,987	$	(7,233)	$	14,442	$	(3,016)	$	11,426

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, 2021						Three months ended June 30, 2020
(Dollars in thousands)	Unrealized gains on debt securities		Unrealized losses on cash flow hedges		Total		Unrealized gains on debt securities		Unrealized losses on cash flow hedges		Total
Accumulated other comprehensive income - beginning balance	$	15,495	$	(1,440)	$	14,055	$	17,870	$	(2,063)	$	15,807
Total other comprehensive income, net	798		107		905		6,430		(301)		6,129
Accumulated other comprehensive income - ending balance	$	16,293	$	(1,333)	$	14,960	$	24,300	$	(2,364)	$	21,936


	Six months ended June 30, 2021						Six months ended June 30, 2020
(Dollars in thousands)	Unrealized gains on debt securities		Unrealized losses on cash flow hedges		Total		Unrealized gains (losses) on debt securities		Unrealized gains (losses) on cash flow hedges		Total
Accumulated other comprehensive income - beginning balance	$	24,216	$	(2,023)	$	22,193	$	10,510	$	—	$	10,510
Total other comprehensive (loss) income, net	(7,923)		690		(7,233)		13,790		(2,364)		11,426
Accumulated other comprehensive income - ending balance	$	16,293	$	(1,333)	$	14,960	$	24,300	$	(2,364)	$	21,936


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

(11)Supplemental Retirement Plans and Other Post-Retirement Benefit Obligations

Supplemental Employee Retirement Plan ("SERP")

The Company has salary continuation agreements with two of its current executive officers and one former executive officer. These salary continuation agreements provide for predetermined fixed-cash supplemental retirement benefits to be provided for a period of 20 years after each individual reaches a defined "benefit age." The individuals covered under the SERP have reached the defined benefit age and are receiving payments under the SERP. Additionally, the Company has not recognized service costs in the current or prior year as each officer had previously attained their individually defined benefit age and was fully vested under the SERP.

This non-qualified plan represents a direct liability of the Company, and as such, the Company has no specific assets set aside to settle the benefit obligation. The aggregate amount accrued, or the "accumulated benefit obligation," is equal to the present value of the benefits to be provided to the employee or any beneficiary. Because the Company's benefit obligations provide for predetermined fixed-cash payments, the Company does not have any unrecognized costs to be included as a component of accumulated other comprehensive income. Benefits paid under the SERP amounted to $69 thousand and $138 thousand for both the three and six months ended June 30, 2021 and June 30, 2020, respectively.

Total expenses for the SERP were $16 thousand and $31 thousand for the three and six months ended June 30, 2021, compared to $20 thousand and $40 thousand for the three and six months ended June 30, 2020. The Company anticipates accruing an additional $30 thousand related to the SERP during the remainder of 2021.

Supplemental Life Insurance

The Company has provided supplemental life insurance through split-dollar life insurance arrangements for certain executive and senior officers on whom the Bank owns bank-owned life insurance.

These arrangements provide a death benefit to the officer's designated beneficiaries that extend to post-retirement periods for some of the supplemental life insurance plans. The Company has recognized a liability for these future post-retirement benefits.

These non-qualified plans represent a direct liability of the Company and, as such, the Company has no specific assets set aside to settle the benefit obligation. The funded status is the aggregate amount accrued, or the "accumulated post-retirement benefit obligation," which is the present value of the post-retirement benefits associated with this arrangement.

Total net periodic post-retirement benefit cost for supplemental life insurance plans, which consisted mainly of interest costs, was $16 thousand and $32 thousand for the three and six months ended June 30, 2021, compared to $23 thousand and $46 thousand for the three and six months ended June 30, 2020.

See also Note 12, "Stock-Based Compensation," of this Form 10-Q, contained below, for further information regarding employee benefits offered in the form of stock options and stock awards.

(12)Stock-Based Compensation

The Company currently has one active stock incentive plan: The Enterprise Bancorp, Inc. 2016 Stock Incentive Plan, as amended (the "2016 plan"). At the Company's 2021 Annual Shareholders' Meeting on May 4, 2021, the shareholders voted to approve an amendment to the 2016 Plan increasing the number of shares of common stock available for awards made under the 2016 Plan by 400,000 shares of common stock. As of June 30, 2021, 506,657 shares of Company common stock remained available for future grants under the 2016 plan.

Awards previously granted under an earlier, now expired, plan remain outstanding and may be exercised through 2028.

The Company's stock-based compensation expense related to these plans includes stock options and stock awards to officers and other employees included in salary and benefits expense, and stock awards and stock compensation in lieu of cash fees to non-employee directors, both included in other operating expenses. Non-employee director fees are accrued and carried in "Accrued expenses and other liabilities" during the year and distributed to those directors in January of the following year. Total stock-based compensation expense was $540 thousand and $991 thousand for the three and six months ended June 30, 2021, compared to $506 thousand and $932 thousand for the three and six months ended June 30, 2020.


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

A tax benefit of $23 thousand and $39 thousand associated with employee exercises and vesting of stock compensation was recorded as an adjustment to the Company's income tax expense for the three and six months ended June 30, 2021, compared with a tax expense of $2 thousand and $34 thousand for the three and six months ended June 30, 2020. These amounts, treated as discrete tax items in the period in which they occur, will vary from year to year as a function of the volume of share-based payments vested or exercised and the then-current market price of the Company's stock in comparison to the compensation cost recognized in the Company's unaudited consolidated financial statements.

Stock Option Awards

The table below provides a summary of the options granted, including the weighted average fair value, the fair value as a percentage of the market value of the stock at the date of grant and the average assumptions used in the model for the periods indicated:


	Six Months Ended June 30,
	2021			2020
Options granted	17,385			24,208
Term in years	10			10
Weighted average assumptions used in the fair value model:
Expected volatility	44		%	37		%
Expected dividend yield	3.00		%	3.43		%
Expected life in years	6.5			6.5
Risk-free interest-rate	1.28		%	1.02		%
Weighted average market price on date of grants	$	32.73		$	28.22
Per share weighted average fair value	$	11.95		$	8.41
Fair value as a percentage of market value at grant date	37		%	30		%

Options granted during the first six months of 2021 and 2020 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 $47 thousand and $92 thousand for the three and six months ended June 30, 2021, respectively, compared to $45 thousand and $90 thousand for the three and six months ended June 30, 2020, 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.


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

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)	2021		2020
Two-year vesting	8,109		8,295
Four-year vesting	23,920		26,015
Performance-based vesting	21,559		25,001
Total restricted stock awards granted	53,588		59,311
Weighted average grant date fair value	$	32.73	$	28.22

Stock-based compensation expense recognized in association with stock awards, mainly restricted stock awards, amounted to $436 thousand and $776 thousand for the three and six months ended June 30, 2021, respectively, compared to $375 thousand and $684 thousand for the three and six months ended June 30, 2020, respectively.

Stock in Lieu of Directors' Fees

In addition to restricted stock awards discussed above, the non-employee members of the Company's Board may opt to receive newly issued shares of the Company's common stock in lieu of cash compensation for attendance at Board and Board committee meetings. Stock-based compensation expense related to these directors' fees amounted to $57 thousand and $123 thousand for the three and six months ended June 30, 2021, respectively, compared to $86 thousand and $158 thousand for the three and six months ended June 30, 2020, respectively, and is included in other operating expenses and in "Accrued expenses and other liabilities." In January 2021, non-employee directors were issued 11,532 shares of the Company's common stock in lieu of 2020 annual cash fees of $286 thousand at a price of $24.77 per share, based on the Company's average quarterly close prices during 2020.

For further information regarding the Company's stock awards, see Note 9, "Stockholders' Equity," of this Form 10-Q, contained above, under the caption "Shares Authorized and Share Issuance." There have been no material changes to the terms of the Company's stock incentive plans or the terms for vesting, forfeiture and settlement for options and restricted stock awards granted and outstanding under such plans as reported in the 2020 Annual Report on Form 10-K. Refer to Note 13, "Stock-Based Compensation Plans," to the Company's audited consolidated financial statements in the Company's 2020 Annual Report on Form 10-K for further information on the Company's stock incentive plans, stock options and restricted awards including descriptions of the assumptions used in the valuation model for stock options.


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

(13)Earnings per Share

Basic earnings per share are calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding (including participating securities) during the year. The Company's only participating securities are unvested restricted stock awards that contain non-forfeitable rights to dividends. See Note 9, "Stockholders' Equity," under the caption "Shares Authorized and Share Issuance," of this Form 10-Q above for further information regarding the Company's participating securities. Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.

The table below presents the increase in average shares outstanding, using the treasury stock method, for the diluted earnings per share calculation for the periods indicated:


	Three months ended June 30,		Six months ended June 30,
	2021	2020	2021	2020
Basic weighted average common shares outstanding	12,009,358	11,902,230	11,984,283	11,871,811
Dilutive shares	46,386	16,390	40,745	26,916
Diluted weighted average common shares outstanding	12,055,744	11,918,620	12,025,028	11,898,727

There were 55,618 and 76,925 stock options outstanding for the three and six months ended June 30, 2021, respectively, that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for those periods. There were 75,979 and 75,545 stock options outstanding for the three and six months ended June 30, 2020, respectively, that were determined to be anti-dilutive and therefore excluded from the calculation of dilutive shares for those periods. These stock options, which were not dilutive at those dates, may potentially dilute earnings per share in the future.

(14)Fair Value Measurements

The FASB defines the fair value of an asset or liability to be the price which a seller would receive in an orderly transaction between market participants (an exit price) and also establishes a fair value hierarchy segregating fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; and (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed based on the best information available under the circumstances.

The following tables summarize significant assets and liabilities carried at fair value and placement in the fair value hierarchy at the dates specified:


	June 30, 2021
			Fair Value Measurements Using:
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets measured on a recurring basis:
Debt securities	$	632,759	$	—	$	632,759	$	—
Equity securities	1,265		1,265		—		—
FHLB stock	2,164		—		2,164		—
Interest-rate swaps	1,086		—		1,086		—
Assets measured on a non-recurring basis:
Individually evaluated loans (collateral dependent)	15,687		—		—		15,687
Other real estate owned	2,400		—		—		2,400

Liabilities measured on a recurring basis:
Interest-rate swaps	$	2,941	$	—	$	2,941	$	—


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


	December 31, 2020
			Fair Value Measurements Using:
(Dollars in thousands)	Fair Value		(Level 1)		(Level 2)		(Level 3)
Assets measured on a recurring basis:
Debt securities	$	582,303	$	—	$	582,303	$	—
Equity securities	746		746		—		—
FHLB stock	1,905		—		1,905		—
Interest-rate swaps	2,286		—		2,286		—
Assets measured on a non-recurring basis:
Collateral dependent loans carried at fair value	18,733		—		—		18,733


Liabilities measured on a recurring basis:
Interest-rate swaps	$	5,100	$	—	$	5,100	$	—

All the Company's debt securities are considered available-for-sale and are carried at fair value. The debt security category above includes federal agency obligations, commercial and residential federal agency MBS, municipal securities, corporate bonds, and CDs, as held at those dates. The Company utilizes third-party pricing vendors to provide valuations on its debt securities. Fair values provided by the vendors were generally determined based upon pricing matrices utilizing observable market data inputs for similar or benchmark securities in active markets and/or based on a matrix pricing methodology which employs The Bond Market Association's standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Therefore, management regards the inputs and methods used by third-party pricing vendors to be "Level 2 inputs and methods" as defined in the "fair value hierarchy." The Company periodically obtains a second price from an impartial third party on debt securities to assess the reasonableness of prices provided by the primary independent pricing vendor.

The Company's equity portfolio fair value is measured based on quoted market prices for the shares; therefore, these securities are categorized as Level 1 within the fair value hierarchy.

The Bank is required to purchase FHLB stock at par value in association with advances from the FHLB. The stock is issued, redeemed, repurchased and transferred by the FHLB only at their fixed par value. This stock is classified as a restricted investment and carried at FHLB par value which management believes approximates fair value; therefore, these securities are categorized as Level 2 measures.

For loans individually assessed and deemed to be collateral dependent management has estimated the value and the probable credit loss by comparing the loan's amortized cost against the expected realizable fair value of the collateral (appraised value, or internal analysis, less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in these assessments, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent loans carried at realizable fair value are categorized as Level 3 within the fair value hierarchy. A specific reserve is assigned to the collateral dependent loan for the amount of management's estimated probable credit loss. The specific reserve assigned to individually evaluated loans that are collateral dependent amounted to $3.8 million at June 30, 2021 compared to $5.8 million at December 31, 2020.

Real estate acquired by the Company through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as OREO. When property is acquired, it is recorded at the estimated fair value of the property acquired, less estimated costs to sell, establishing a new cost basis. The estimated fair value is based on market appraisals and the Company's internal analysis. Certain inputs used in appraisals or the Company's internal analysis, are not always observable, and therefore, OREO may be categorized as Level 3 within the fair value hierarchy.

The fair values for the interest-rate swap assets and liabilities, which is comprised of back-to-back swaps and cash flow hedges, represent a FASB Level 2 measurement and are based on settlement values adjusted for credit risks and observable market interest-rate curves. The settlement values are based on discounted cash flow analysis, a widely accepted valuation technique, reflecting the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest-rate curves. Credit risk adjustments consider factors such as the likelihood of default by the Company and its counterparties, its net exposures and remaining contractual life. The change in value of interest-rate swap assets and liabilities attributable to credit risk was not significant during the reported periods. 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.


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

Letters of credit are conditional commitments issued by the Company to guarantee the financial obligation or performance of a customer to a third party. The fair value of these commitments was estimated to be the fees charged to enter into similar agreements, and accordingly these fair value measures are deemed to be FASB Level 2 measurements. In accordance with the FASB, the estimated fair values of these commitments are carried on the Consolidated Balance Sheets as a liability and amortized to income over the life of the letters of credit, which are typically one year. The estimated fair value of these commitments carried on the Consolidated Balance Sheets at June 30, 2021 and December 31, 2020 were deemed immaterial.

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. The Company generally does not pool mortgage loans for sale, but instead sells the loans on an individual basis. To reduce the net interest-rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest-rate lock commitment is quoted on the origination of the loan. The Company estimates the fair value of these derivatives based on current secondary mortgage market prices. These commitments are accounted for in accordance with FASB guidance. The fair values of the Company's derivative instruments are deemed to be FASB Level 2 measurements. At June 30, 2021 and December 31, 2020, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.

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, 2021 and December 31, 2020:


	Fair Value
(Dollars in thousands)	June 30, 2021		December 31, 2020		Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Assets measured on a non-recurring basis:
Individually evaluated loans (collateral dependent)	$	15,687	$	18,733	Appraisal of collateral	Appraisal adjustments(1)	15% - 50%
Other real estate owned	$	2,400	$	—	Appraisal of collateral	Appraisal adjustments(1)	0% - 20%

__________________________________________

(1)Appraisals may be adjusted by management for qualitative factors such as economic conditions and estimated liquidation expenses.

Estimated Fair Values of Assets and Liabilities

In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the Consolidated Balance Sheets, the Company is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the Consolidated Balance Sheets.

Financial instruments for which the fair value is disclosed but not recognized on the Consolidated Balance Sheets are summarized below. The table includes the carrying value, estimated fair value and its placement in the fair value hierarchy as follows:


	June 30, 2021
					Fair Value Measurement
(Dollars in thousands)	Carrying Value		Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Financial assets:
Loans held for sale	$	1,304	$	1,304	$	—	$	1,304	$	—
Loans, net	2,904,148		2,951,296		—		—		2,951,296
Financial liabilities:
CDs	224,362		225,098		—		225,098		—
Brokered deposits	75,014		75,987		—		75,987		—
Borrowed funds	8,620		8,282		—		8,282		—
Subordinated debt	58,919		59,192		—		59,192		—


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


	December 31, 2020
					Fair Value Measurement
(Dollars in thousands)	Carrying Value		Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs
Financial assets:
Loans held for sale	$	371	$	372	$	—	$	372	$	—
Loans, net	3,029,295		3,064,791		—		—		3,064,791
Financial liabilities:
CDs	244,969		246,498		—		246,498		—
Brokered deposits	74,995		76,652		—		76,652		—
Borrowed funds	4,774		4,684		—		4,684		—
Subordinated debt	73,744		76,769		—		76,769		—

Excluded from the tables above are certain financial instruments with carrying values that approximated their fair value at the dates indicated, as they were short-term in nature or payable on demand. These include cash and cash equivalents, accrued interest and non-term deposit accounts. The respective carrying values of these instruments would all be classified within Level 1 in the fair value hierarchy.

Also excluded from these tables are the fair values of commitments for unused portions of lines of credit and commitments to originate loans that were short-term, at current market rates and estimated to have no significant change in fair value.

(15)Supplemental Cash Flow Information

The supplemental cash flow information for the six months ended June 30, 2021 and June 30, 2020 is as follows:


	Six Months Ended June 30,
(Dollars in thousands)	2021		2020
Supplemental financial data:
Cash paid for: interest	$	4,559	$	8,866
Cash paid for: income taxes	5,864		5,938
Cash paid for: lease liability	608		643
Supplemental schedule of non-cash activity:
Net purchases of investment securities not yet settled	10,699		10,119
Transfer from loans to other real estate owned	2,400		—


ROU lease assets: operating leases(1)	2,468		—

_________________________________________

(1)Represents net new right of use ("ROU") lease assets added in the periods indicated.

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Item 2 -Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis should be read in conjunction with the Company's unaudited consolidated interim financial statements and notes thereto contained in this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 (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, 2020 (the "2020 Annual Report on Form 10-K") as filed with the Securities and Exchange Commission (the "SEC") on March 10, 2021.

Throughout this Management Discussion & Analysis we have noted certain balances, ratios or other measures of the Company’s performance which exclude the impact of Paycheck Protection Program (“PPP”) loans originated by the Company, which we expect to be short-term in nature. We refer to any balance, ratio or measure that excludes PPP loans as "core." The core balances, ratios and measures were derived to provide more meaningful comparisons to prior periods as the majority of PPP loans outstanding are expected to pay off during the next several quarters. See the table below under the heading "Non-GAAP Measurers" which provides a reconciliation of the non-GAAP measures to the information presented under GAAP.

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 including, but not limited to statements related to management's views on:

(i)failure of risk management controls and procedures;

(ii)adequacy of the allowance for loan losses;

(iii)risk specific to commercial loans and borrowers;

(iv)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 loan losses;

(v)deterioration of securities markets 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;

(vi)changes in interest rates could negatively impact net interest income;

(vii)liquidity risks;

(viii)technology-related risk, including technological changes and technology service interruptions or failure could adversely impact the Company's operations and increase technology-related expenditures;

(ix)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;

(x)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;

(xi)our ability to retain and increase our aggregate assets under management;

(xii)our ability to enter new markets successfully and capitalize on growth opportunities, including the receipt of required regulatory approvals;

(xiii)damage to our reputation in the markets we serve;

(xiv)exposure to legal claims and litigation;

(xv)the inability to raise capital, on terms favorable to us, could cause us to fall below regulatory minimum capital adequacy levels and consequently restrict our business and operations;

(xvi)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, could cause the Company to incur additional costs and adversely affect the Company's business environment, operations and financial results;

(xvii)future regulatory compliance costs, including any increase caused by new regulations imposed by the government's current administration;

(xviii)changes in accounting and/or auditing standards, policies and practices, as may be adopted or established by the regulatory agencies, the Financial Accounting Standards Board ("FASB"), or the Public Company Accounting Oversight Board could negatively impact the Company's financial results; and

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(xix)the risks and uncertainties described in the documents that the Company files or furnishes to the SEC, including those discussed under Part II, Item1A, "Risk Factors," of this Form 10-Q and Item 1A, "Risk Factors," of the Company's 2020 Annual Report on Form 10-K, which could have a material adverse effect on the Company's business, financial condition and results of operations.

The Company cautions readers that such forward-looking statements reflect numerous assumptions that management believes to be reasonable, but which are inherently uncertain and beyond the Company's control. Forward-looking statements involve several 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. 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. Therefore, the Company cautions readers not to place undue reliance on any such forward-looking information and statements. The following important factors, among others, could cause the Company's results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein:

•the banking environment and the economy;

•the impact of the COVID-19 pandemic ("pandemic") and the Company’s participation in and execution of government programs related to the pandemic;

•competition and market expansion opportunities;

•the interest-rate environment, credit risk and the level of future non-performing assets and charge-offs;

•potential asset and deposit growth, future non-interest expenditures and non-interest income growth;

•expansion strategy; and

•borrowing capacity.

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Overview

Overall, the Company strategically operates with a long-term mindset that is focused on organic growth and supporting such growth by continually investing in our people, products, services, technology, digital evolution, and both new and existing branches. Our 26th branch located in North Andover, Massachusetts opened on January 4, 2021 and our 27th branch located in Londonderry, New Hampshire is expected to open in early 2022.

COVID-19 Pandemic

The pandemic and its effects have impacted the Company’s financial condition and results of operations, as discussed in this Management Discussion & Analysis. Management underscores that the pandemic may continue to impact the Company's financial condition and results of operations in the coming quarters, particularly due to the economic uncertainty and its potential impact on interest rates, organic growth opportunities and the quality of the loan portfolio.

The Company activated its pandemic response team in March 2020 in response to the emergence of the pandemic and has continued to adjust its operations as the pandemic has evolved. Management's present priorities continue to be the safety and wellness of our team members and customers and on managing through the pandemic and its economic impact. For updated information on business and operating changes impacting customers, please visit our website at www.Enterprisebanking.com.

Paycheck Protection Program

The PPP was established by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and implemented by the Small Business Administration ("SBA") in order to provide loans to help businesses keep their workforce employed during the pandemic. The PPP allowed entities to apply for a 1.00% interest-rate loan with payments generally deferred until the date the lender receives the forgiveness amount from the SBA. The PPP loans may be partially or fully forgiven by the SBA if the borrower meets certain conditions. The maturity term for any principal portion left unforgiven is either 2 or 5 years from the funding date, depending on when the loan was originated. All PPP loans are fully guaranteed by the SBA and are included in total loans outstanding.

As of June 30, 2021, the Company had 1,735 PPP loans outstanding with a principal balance of $309.7 million and deferred SBA fees of $9.6 million compared to 2,633 PPP loans with a principal balance of $453.1 million and deferred SBA fees of $10.0 million at December 31, 2020. The Company anticipates the majority of the deferred SBA fees to be recognized as the PPP loans are forgiven by the SBA or paid off over the next several quarters.

Accounting Implications

As allowed under the CARES Act, the Company delayed the adoption of the FASB's Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments, including the current expected credit losses (“CECL”) methodology in 2020. In the first quarter of 2021, the Company adopted the CECL methodology for estimating the allowance for credit losses ("ACL"). The CECL methodology requires earlier recognition of credit losses using a lifetime credit loss measurement approach that also requires the consideration of reasonable and supportable forecasts in the estimate.

The adoption of CECL resulted in the Company recording a net cumulative-effect adjustment, effective January 1, 2021, that decreased retained earnings by $6.5 million, net of $2.5 million in deferred income taxes. The ACL for loans increased by $6.6 million and the ACL for unfunded commitments (included in other liabilities) increased by $2.4 million.

The Company also suspended TDR accounting as permitted under the CARES Act beginning in the first quarter of 2020 for certain short term loan modifications to borrowers impacted by the pandemic. This election primarily impacts financial statement disclosure, for loans that have had a short-term payment deferral since March 1, 2020 as long as those loans were current, and risk rated as “pass” as of December 31, 2019.

Risk Management Framework

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.

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These risks, and the decisions related thereto, include, but are not limited to: credit risk, market and interest-rate risk, legal and regulatory compliance risk, reputational risk, strategic risk, capital risk, compensation risk, liquidity management, information technology and cybersecurity risk, internal controls over financial reporting, physical security, loss and fraud prevention, policy reviews, third party risk management (direct and indirect vendors), business continuity and succession planning, short and long-term capital projects and facility planning, and corporate governance.

See Part I, Item 1, "Business," under the "Risk Management Framework," section of the 2020 Annual Report on Form 10-K for additional information on the Company's key risk mitigation strategies.

This Form 10-Q discusses certain key risks facing the Company and the Bank, including the following:

•Credit risk management is reviewed in detail in this Item 2 under the heading "Credit Risk," below.

•Liquidity management is the coordination of activities so that cash needs are anticipated and met, readily and efficiently. Liquidity management is reviewed in this Item 2 under the heading "Liquidity," below.

•Capital adequacy risk and regulatory requirements are reviewed in this Item 2, under the heading "Capital Resources," below.

•Interest-rate risk is reviewed under Part I, Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.

In addition, certain heightened risks associated with the ongoing pandemic are outlined in Part II, Item 1A, "Risk Factors," in this Form 10-Q, below.

In March 2020, management activated our pandemic response team in light of the ongoing pandemic and have utilized established business continuity protocols since that time to provide uninterrupted service to our customers and communities. The pandemic response team quickly coordinated resources and responses across the Bank in order to (i) provide for the safety of our team members, customers, and business partners, (ii) maintain sound business operations, and (iii) minimize the risks identified above, among others. Team leaders were and continue to be in constant communication and continually strategize and implement coordinated efforts to mitigate the risk identified above, among others. We have modified our protocols and procedures as circumstances have evolved and we will continue to monitor the impact of the pandemic on many fronts as activities continue towards reopening of local economies and normalizing of business activity.

In addition to the risks outlined in this Form 10-Q, numerous other factors that could adversely affect the Company's future results of operations and financial condition, and its reputation and business model, are addressed in Part I, Item 1A, "Risk Factors," of the 2020 Annual Report on Form 10-K.

Accounting Policies/Critical Accounting Estimates

As discussed in the 2020 Annual Report on Form 10-K and updated in this Form 10-Q for the adoption of CECL, the most significant areas in which management applies critical assumptions and estimates are: the estimates of the allowance for credit losses for loans, unfunded commitments, and available-for-sale securities, as well as the impairment review of goodwill.

On January 1, 2021, the Company adopted ASU 2016-13 “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” including the CECL methodology for estimating the allowance for credit losses. The CECL methodology requires earlier recognition of credit losses using a lifetime credit loss measurement approach that also requires the consideration of reasonable and supportable forecasts in the estimate. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, which for the Company is primarily the loan portfolio. It also applies to off-balance sheet credit exposures such as loan commitments, standby letters of credit, financial guarantees, and other similar instruments, which are not unconditionally cancellable. In addition, this standard made changes to the accounting for available-for-sale debt securities, including the requirement for credit losses be presented as an allowance rather than as a write-down. See the following footnotes for more information on the Company's adoption of CECL: Note 2, "Investment Securities," Note 3, "Loans," and Note 4, "Allowance for Credit Losses for Loans." Prior to the adoption of CECL, the company utilized the incurred loss methodology, under which an entity measured credit losses for loans using past events and current conditions in measuring the incurred loss and generally recognition of the full amount of credit losses was delayed until the loss was probable of occurring.

The Company has not materially changed its significant accounting and reporting policies from those disclosed in its 2020 Annual Report on Form 10-K for the impairment review of goodwill.

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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.

Non-GAAP Measures

The accompanying unaudited consolidated interim financial statements have been prepared in accordance with GAAP. However, certain balances, ratios or other measures of the Company’s performance exclude the impact of PPP loans, which we expect to be short-term in nature. We refer to any balance, ratio or measure that excludes PPP loans as “core.” In addition, we refer to any balance, ratio or measure that excludes PPP loans and interest-earning deposits as “adjusted.” The core and adjusted balances, ratios and measures were derived in order to provide more meaningful comparisons to prior periods as: (i) PPP loans outstanding have been originated within the last 15 months and the majority are expected to pay off during the next several quarters; and (ii) growth in customer deposits and PPP loan pay-downs have resulted in a high balance in low-yielding interest-earning deposits.

These non-GAAP measures are intended to provide the reader with additional supplemental perspectives on operating results, performance trends, and financial condition. Non-GAAP financial measures are not a substitute for GAAP measures; they should be read and used in conjunction with the Company’s GAAP financial information. In addition, the non-GAAP financial measures we present may differ from non-GAAP financial measures used by our peers or other companies.

The following table summarizes the reconciliation of GAAP items to non-GAAP items related to the impact of PPP loans on total loans and assets:


(Dollars in thousands)	June 30, 2021		December 31, 2020
Total loans (GAAP)	$	2,954,189	$	3,073,860
Adjustment: PPP loans	(309,709)		(453,084)
Adjustment: Deferred PPP fees	9,627		10,014
Total core loans (non-GAAP)	$	2,654,107	$	2,630,790

Total assets (GAAP)	$	4,428,001	$	4,014,324
Adjustment: PPP loans	(309,709)		(453,084)
Adjustment: Deferred PPP fees	9,627		10,014
Total core assets (non-GAAP)	$	4,127,919	$	3,571,254

Additional non-GAAP measures provided in this Form 10-Q exclude the impact of PPP loans and interest-earning deposits, which have abnormally impacted margin over the past several quarters. Customer deposit growth has benefited from government stimulus checks and customers proactively building liquidity in response to the economic uncertainty caused by the pandemic. This deposit inflow has in turn increased our liquidity held as short-term interest-earning deposits. We refer to any balance, ratio or measure that excludes the impact of PPP loans and interest-earning deposits as “adjusted.” The Company has normalized for this activity in order to provide a more meaningful comparison to prior periods.

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The following table summarizes the reconciliation of GAAP items to non-GAAP items related to the impact of PPP loans and interest-earning deposits:


	Three months ended			Three months ended			Three months ended
(Dollars in thousands)	June 30, 2021			March 31, 2021			June 30, 2020
ADJUSTED INTEREST-EARNING ASSETS
Total average interest-earning assets	$	4,147,580		$	3,924,153		$	3,681,577
Adjustment: Average PPP loans, net	(411,867)			(452,813)			(367,860)
Adjustment: Average interest-earning deposits	(504,649)			(279,796)			(144,804)
Total adjusted average interest-earning assets	$	3,231,064		$	3,191,544		$	3,168,913

ADJUSTED NET INTEREST INCOME
Net interest income (tax equivalent)	$	35,645		$	35,081		$	32,884
Adjustment: PPP loan income	(5,584)			(6,013)			(2,521)
Adjustment: Interest on interest-earning deposits	(136)			(68)			(39)
Adjusted net interest income (tax equivalent)	$	29,925		$	29,000		$	30,324

ADJUSTED NET INTEREST MARGIN
Net interest margin (tax equivalent)	3.45		%	3.62		%	3.59		%
Adjustment: PPP loan effect(1)	(0.22)		%	(0.23)		%	0.09		%
Adjustment: Interest-earning deposits effect(2)	0.48		%	0.29		%	0.16		%
Adjusted net interest margin (tax equivalent)	3.71		%	3.68		%	3.84		%


	Six months ended			Six months ended
(Dollars in thousands)	June 30, 2021			June 30, 2020
ADJUSTED INTEREST-EARNING ASSETS
Total average interest-earning assets	$	4,036,484		$	3,404,489
Adjustment: Average PPP loans, net	(432,227)			(183,931)
Adjustment: Average interest-earning deposits	(392,844)			(90,170)
Total adjusted average interest-earning assets	$	3,211,413		$	3,130,388

ADJUSTED INTEREST INCOME
Net interest income (tax equivalent)(3)	$	70,739		$	63,140
Adjustment: PPP loan income	(11,597)			(2,521)
Adjustment: Interest on interest-earning deposits	(204)			(132)
Adjusted net interest income (tax equivalent)	$	58,938		$	60,487

ADJUSTED NET INTEREST MARGIN
Net interest margin (tax equivalent)	3.53		%	3.73		%
Adjustment: PPP loan effect(1)	(0.22)		%	0.05		%
Adjustment: Interest-earning deposits effect(2)	0.39		%	0.10		%
Adjusted net interest margin (tax equivalent)	3.70		%	3.88		%

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(1)PPP loan adjustments include an elimination of average PPP loans, net of deferred SBA fees, as well as interest income on PPP loans and related SBA fee accretion, included in interest income.

(2)Interest-earning deposit adjustments include an elimination of average interest-earning deposits, as well as interest income on interest-earning deposits, included in interest income.

(3)Six-month results reflect tax equivalent adjustments as of June 30 of the respective periods.

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Results of Operations for the three months ended June 30, 2021 and June 30, 2020

Unless otherwise indicated, the reported results are for the three months ended June 30, 2021 with the "same period," the "prior year period," the "comparable period," and the "prior period" being the three months ended June 30, 2020. Average yields are presented on an annualized tax equivalent basis.

Net Income

The Company's net income for the three months ended June 30, 2021 amounted to $11.1 million, or $0.92 per diluted common share, compared to $7.3 million, or $0.61 per diluted common share, for the three months ended June 30, 2020. The increase was primarily attributable to an increase in net interest income and a decrease in the provision for credit losses.

Net Interest Income and Margin

The Company's net interest income for the three months ended June 30, 2021 amounted to $35.3 million, an increase of $2.8 million, or 8%, compared to the prior year period. The increase in the current period was due largely to PPP related SBA fee income and lower deposit interest expense, partially offset by lower non-PPP loan income and an increase in subordinated debt interest expense. For the three months ended June 30, 2021, net interest income included PPP interest and SBA fee income of $5.6 million, compared to $2.5 million in the prior year period.

Tax equivalent net interest margin (“net interest margin” or “margin”) was 3.45%, 3.62%, and 3.59% for the three months ended June 30, 2021, March 31, 2021, and June 30, 2020, respectively. Margin has been negatively impacted by large interest-earning deposit balances, which consist primarily of short-term, overnight balances held at the FRB, and to a lesser extent loan pay-downs and lower interest rates, partially offset by accelerated fee income on PPP loan forgiveness.

For the three months ended June 30, 2021, March 31, 2021, and June 30, 2020:

•The average interest-earning deposit balances were $504.6 million, $279.8 million and $144.8 million.

•The average PPP loan balances, net of deferred fees, were $411.9 million, $452.8 million and $367.9 million.

•Adjusted net interest margin was 3.71%, 3.68%, and 3.84%.

Interest and Dividend Income

Total interest and dividend income amounted to $37.2 million for the three months ended June 30, 2021, an increase of $1.1 million, or 3%, compared to the prior period. The increase was attributed primarily to PPP related fee income, partially offset by lower yields on interest-earning assets. The average tax equivalent yield on interest-earning assets has declined 36 basis points compared to the prior period. See the "Net Interest Income and Margin" discussion above for further information on the decrease in yields.

Interest Expense

For the three months ended June 30, 2021, total interest expense amounted to $1.9 million, a decrease of $1.7 million, or 46%, compared to the same period in 2020, due primarily to decreases in interest expense related to customer deposits and wholesale funding (brokered deposits and FHLB borrowings), partially offset by increased interest costs from the increase in subordinated debt. The average cost of funding, including the impact of non-interest-bearing checking accounts balances, decreased 22 basis points. The average balance of checking, savings and money market accounts increased $313.3 million, or 16%, and the average balance of borrowed funds decreased $51.2 million.

Deposit growth since December 31, 2020 was due in large part to customers depositing funds received from round three PPP loan advances, government stimulus checks received during the period, and generally maintaining higher liquidity in response to the pandemic.

Non-interest-bearing checking accounts are an important component of the Company's core funding strategy. For the three months ended June 30, 2021, the average balance of non-interest-bearing checking accounts increased $157.8 million, or 14%, as compared to the same period in 2020, and represented 34% of total average deposit balances for the three months ended June 30, 2021 and June 30, 2020.

Interest-rate risk is reviewed in detail in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.

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The re-pricing frequency of the Company's assets and liabilities are not identical and therefore subject the Company to the risk of adverse changes in interest rates. This is often referred to as "interest-rate risk" and is reviewed in more detail in Part I, Item 3, "Quantitative and Qualitative Disclosures About Market Risk," of this Form 10-Q and in Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of the Company's 2020 Annual Report on Form 10-K.

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, 2021, compared to the three months ended June 30, 2020. 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)	$	964	$	34	$	930
Investment securities (tax-equivalent)	48		770		(722)
Other interest-earning assets(1)	65		116		(51)
Total interest-earning assets (tax-equivalent)	1,077		920		157
Interest Expense
Interest checking, savings and money market	(1,369)		252		(1,621)
Certificates of deposit	(864)		(237)		(627)
Brokered CDs	125		120		5
Borrowed funds	(162)		(119)		(43)
Subordinated debt	587		615		(28)
Total interest-bearing funding	(1,683)		631		(2,314)
Change in net interest income (tax-equivalent)	$	2,760	$	289	$	2,471

__________________________________________

(1)Income on other interest-earning assets includes interest on deposits and fed funds sold, and dividends on FHLB stock.

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The following table presents the Company's average balance sheet, net interest income and average rates for the three months ended June 30, 2021 and 2020:

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS


	Three months ended June 30, 2021						Three months ended June 30, 2020
(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)	$	3,050,289	$	33,786	4.44	%	$	3,056,052	$	32,822	4.32	%
Investments (3) (tax equivalent)	590,488		3,661		2.48	%	477,117		3,613		3.03	%
Other interest-earning assets (4)	506,803		144		0.11	%	148,408		79		0.21	%
Total interest-earning assets (tax equivalent)	4,147,580		37,591		3.63	%	3,681,577		36,514		3.99	%
Other assets	157,297						160,077
Total assets	$	4,304,877					$	3,841,654

Liabilities and stockholders' equity:
Interest checking, savings and money market	$	2,234,017	381		0.07	%	$	1,920,764	1,750		0.37	%
Certificates of deposit	230,028		470		0.82	%	291,003		1,335		1.84	%
Brokered CDs	75,001		259		1.39	%	40,382		135		1.33	%
Borrowed funds	8,625		18		0.83	%	59,786		180		1.21	%
Subordinated debt (5)	58,901		818		5.55	%	14,877		230		6.24	%
Total interest-bearing funding	2,606,572		1,946		0.30	%	2,326,812		3,630		0.63	%

Net interest-rate spread (tax equivalent)					3.33	%					3.36	%

Non-interest checking	1,321,903		—		—		1,164,058		—
Total deposits, borrowed funds and subordinated debt	3,928,475		1,946		0.20	%	3,490,870		3,630		0.42	%
Other liabilities	42,816						39,965
Total liabilities	3,971,291						3,530,835

Stockholders' equity	333,586						310,819
Total liabilities and stockholders' equity	$	4,304,877					$	3,841,654

Net interest income (tax equivalent)			35,645						32,884
Net interest margin (tax equivalent)					3.45	%					3.59	%
Less tax equivalent adjustment			359						358
Net interest income			$	35,286					$	32,526
Net interest margin					3.41	%					3.55	%

________________________________________

(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 2021 and 2020, 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, fed funds sold and FHLB stock.

(5)The subordinated debt is net of average deferred debt issuance costs.

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Provision for Credit Loss

The provision for credit losses for the three months ended June 30, 2021, was determined under the CECL model and amounted to $39 thousand, a decrease of $2.6 million, compared to the same period in 2020, which was under the incurred loss model. The provision for credit losses was impacted by the following:

•The current three-month provision resulted primarily from core loan growth in the second quarter of 2021, partially offset by a reduction in reserves for unfunded commitments, and a reduction in specific reserves due to pay-downs on individually evaluated loans.

•The provision in the prior year period reflects an increase in reserves related to the impact of the COVID-19 pandemic on the credit quality of the loan portfolio and an increase in reserves for individually evaluated loans.

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 allowance for credit losses see "Asset Quality," and "Allowance for Credit Losses" under "Financial Condition" in this Item 2, above.

Non-Interest Income

Non-interest income for the three months ended June 30, 2021, amounted to $4.8 million, an increase of $742 thousand, or 19%, as compared to the same period in 2020. The primary components of the quarter over quarter increase are as follows:

•Wealth management fees increased $292 thousand due primarily to asset growth from market appreciation;

•Deposit interchange fees increased $145 thousand due primarily to higher deposit account activity combined with higher balances in customer accounts and increased consumer spending resulting in higher interchange activity;

•Gains on loan sales increased $152 thousand due primarily to higher volume of loans originated for sale; and

•Other real estate owned ("OREO") income, which is included in other income, increased $108 thousand as the Company transferred a loan into OREO resulting in the acquisition of an income-producing commercial real estate property.

Non-Interest Expense

Non-interest expense for the three months ended June 30, 2021 amounted to $25.2 million, an increase of $827 thousand, or 3%, compared to the prior period. The prior year period salaries and employee benefits expense included additional pandemic-related expenditures, primarily in the second quarter. The other primary components of the quarter over quarter change are as follows:

•Technology and telecommunications increased $429 thousand due primarily to higher infrastructure costs and expenses associated with the Company's multi–year digital evolution strategy to enhance operating efficiency and customer experience.

•Occupancy and equipment increased $334 thousand due primarily to the higher costs related to the opening of two branch locations and one branch relocations.

Income Taxes

The effective tax rate for the three months ended June 30, 2021 was 25.0%, compared to 23.9% for the three months ended June 30, 2020.

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Results of Operations for the six months ended June 30, 2021 and June 30, 2020

Unless otherwise indicated, the reported results are for the six months ended June 30, 2021 with the "same period," the "prior year period," the "comparable period," "prior year," and "prior period" being the six months ended June 30, 2020. Average yields are presented on an annualized tax equivalent basis.

Net Income

The Company's net income for the six months ended June 30, 2021 amounted to $21.5 million or $1.79 per diluted common share, compared to $11.3 million, or $0.95 per diluted common share, for the six months ended June 30, 2020. The increase was primarily attributable to an increase in net interest income and a decrease in the provision for credit losses.

Net Interest Income and Margin

The Company's net interest income for the six months ended June 30, 2021, amounted to $70.0 million, an increase of $7.6 million, or 12%, compared to the prior year period. The increase in the current period was due largely to PPP related SBA fee income and lower deposit interest expense, partially offset by lower non-PPP loan income and an increase in subordinated debt interest expense. For the six months ended June 30, 2021, net interest income included PPP interest and fee income of $11.6 million, compared to $2.5 million in the prior year period.

Net interest margin was 3.53% and 3.73% for the six months ended June 30, 2021, and June 30, 2020. Margin has been negatively impacted by large interest-earning deposit balances, which consist primarily of short-term, overnight balances held at the FRB, and to a lesser extent loan pay-downs and lower interest rates, partially offset by accelerated fee income on PPP loan forgiveness.

For the six months ended June 30, 2021 and 2020:

•The average interest-earning deposit balances were $392.8 million and $90.2 million.

•The average PPP loan balances, net of deferred SBA fees, were $432.2 million and $183.9 million.

•Adjusted net interest margin was 3.70% and 3.88%.

Interest and Dividend Income

Total interest and dividend income amounted to $74.3 million for the six months ended June 30, 2021, an increase of $3.2 million, or 5%, compared to the prior year period. The increase was attributed primarily to PPP related SBA fee income, partially offset by lower yields on interest-earning assets. Average tax equivalent yields on interest-earning asset have declined 49 basis points since the comparable period. See the "Net Interest Income and Margin" discussion above for further information on the decrease in yields.

Interest Expense

For the six months ended June 30, 2021, total interest expense amounted to $4.3 million, a decrease of $4.4 million, or 50%, over the same period in 2020, due primarily to decreases in interest expense related to customer deposits and wholesale funding (brokered deposits and FHLB borrowings), partially offset by increased interest costs from the increase of subordinated debt. The average cost of funding, including the impact of non-interest deposit accounts balances, decreased 31 basis points. The average balance of checking, savings and money market accounts increased $350.8 million, or 19%, and the average balance of borrowed funds decreased $71.2 million.

Deposit growth since December 31, 2020, was due in large part to customers depositing funds received from round three PPP loan advances, government stimulus checks, and generally maintaining higher liquidity in response to the pandemic.

Non-interest deposit accounts are an important component of the Company's core funding strategy. For the six months ended June 30, 2021, the average balance of non-interest checking accounts increased $284.8 million, or 29%, as compared to the same period in 2020. This non-interest-bearing funding source represented 34% and 32% of total average deposit balances for the six months ended June 30, 2021 and June 30, 2020.

Interest-rate risk is reviewed in detail in Item 3, "Quantitative and Qualitative Disclosures About Market Risk," below.

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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 six months ended June 30, 2021, compared to the six months ended June 30, 2020. 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)	$	3,314	$	5,270	$	(1,956)
Investment securities (tax equivalent)	(42)		1,382		(1,424)
Other interest-earning assets(1)	(35)		280		(315)
Total interest-earning assets (tax equivalent)	$	3,237	$	6,932	$	(3,695)

Interest Expense
Interest checking, savings and money market	$	(3,799)	$	736	$	(4,535)
CDs	(1,770)		(519)		(1,251)
Brokered deposits	378		374		4
Borrowed funds	(569)		(360)		(209)
Subordinated debt	1,398		1,448		(50)
Total interest-bearing funding	(4,362)		1,679		(6,041)
Change in net interest income (tax equivalent)	$	7,599	$	5,253	$	2,346

__________________________________________

(1)Income on other interest-earning assets includes interest on deposits, fed funds sold, and dividends on FHLB stock.

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The following table presents the Company's average balance sheet, net interest income and average rates for the six months ended June 30, 2021 and 2020:

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS


	Six months ended June 30, 2021				Six months ended June 30, 2020
(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)	$	3,058,424	$	67,562	4.45	%	$	2,826,991	$	64,248	4.57	%
Investment securities(3) (tax equivalent)	583,172		7,287		2.50	%	482,820		7,329		3.04	%
Other interest-earning assets(4)	394,888		209		0.11	%	94,678		244		0.52	%
Total interest-earnings assets (tax equivalent)	4,036,484		75,058		3.75	%	3,404,489		71,821		4.24	%
Other assets	157,943						154,501
Total assets	$	4,194,427					$	3,558,990

Liabilities and stockholders' equity:
Interest checking, savings and money market	$	2,166,805	851		0.08	%	$	1,815,978	4,650		0.51	%
CDs	235,089		1,069		0.92	%	299,392		2,840		1.91	%
Brokered deposits	75,000		513		1.38	%	20,191		135		1.33	%
Borrowed funds	7,302		26		0.72	%	78,489		595		1.52	%
Subordinated debt(5)	66,206		1,860		5.62	%	14,875		461		6.24	%
Total interest-bearing funding	2,550,402		4,319		0.34	%	2,228,925		8,681		0.78	%

Net interest-rate spread (tax equivalent)					3.41	%					3.46	%

Non-interest checking	1,268,133		—				983,326		—
Total deposits, borrowed funds and subordinated debt	3,818,535		4,319		0.23	%	3,212,251		8,681		0.54	%
Other liabilities	44,812						40,098
Total liabilities	3,863,347						3,252,349

Stockholders' equity	331,080						306,641
Total liabilities and stockholders' equity	$	4,194,427					$	3,558,990

Net interest income (tax equivalent)			70,739						63,140
Net interest margin (tax equivalent)					3.53	%					3.73	%
Less tax equivalent adjustment			717						718
Net interest income			$	70,022					$	62,422
Net interest margin					3.49	%					3.68	%

_______________________________________

(2)Average loans and loans held for sale include non-accrual loans and are net of average deferred loan fees.

(3)Average investment balances are presented at average amortized cost.

(4)Average other interest-earning assets includes interest-earning deposits, fed funds sold, and FHLB stock.

(5)The subordinated debt is net of average deferred debt issuance costs.

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Provision for Credit Losses

The provision for credit losses for the six months ended June 30, 2021 was determined under the CECL model and amounted to $719 thousand a decrease of $8.1 million, compared to the same period in 2020, which was under the incurred loss model. The provision for credit losses was impacted by the following:

•The current six-month provision resulted primarily from core loan growth in the second quarter.

Non-Interest Income

Non-interest income for the six months ended June 30, 2021 amounted to $9.1 million, an increase of $843 thousand, or 10%, compared to the six months ended June 30, 2020. The primary components of the increase are as follows:

•Wealth management fees increased $464 thousand due primarily to asset growth from market appreciation; and

•Increase of $280 thousand in the gain on equity investment fair values, partially offset by a $229 thousand decrease in loan derivative fees, both of which are included in other income.

Non-Interest Expense

Non-interest expense for the six months ended June 30, 2021 amounted to $49.8 million, an increase of $2.8 million, or 6%, compared to the same period in 2020. The primary components of the increase are as follows:

•Salaries and benefits and occupancy and equipment increased $917 thousand and $539 thousand, respectively, due primarily to the Company's continued strategic growth initiatives.

•The prior year salaries and employee benefits expense included additional pandemic-related expenditures, primarily in the second quarter.

•Technology and telecommunications increased $795 thousand due primarily to higher infrastructure costs and expenses associated with the Company's multi–year digital evolution strategy to enhance operating efficiency and customer experience.

•The Company also realized a loss on the extinguishment of subordinated debt of $713 thousand from the early redemption of the January 2015 Notes on March 31, 2021. The loss on the extinguishment of the January 2015 Notes consisted of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs.

Income Taxes

The effective tax rate was 24.6% and 23.8% for the six months ended June 30, 2021 and June 30, 2020, respectively.

Financial Condition

Total assets amounted to $4.43 billion at June 30, 2021, compared to $4.01 billion at December 31, 2020, an increase of $413.7 million, or 10%. Total core assets have increased $556.7 million, or 16%, since December 31, 2020. The increase in the Company’s total assets since December 31, 2020, is related primarily to the increase in interest-earning deposits of $477.8 million. The balance sheet composition and changes since December 31, 2020 are discussed below.

Cash and cash equivalents

Cash and cash equivalents may be comprised of cash on hand and cash items due from banks, interest-earning deposits (deposit accounts, excess reserve cash balances, money markets, and money market mutual funds accounts) and federal funds sold ("fed funds"). Cash and cash equivalents increased $485.5 million since December 31, 2020. At June 30, 2021, cash and cash equivalents amounted to 17% of total assets, compared to 6% of total assets at December 31, 2020.

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The increase in cash and cash equivalents over the prior period was primarily due to total interest-earning deposits, which consists primarily of short-term, overnight balances held at the FRB, and amounted to $690.9 million at June 30, 2021 compared to $213.1 million at December 31, 2020. The increase related primarily to increases in customer deposits and PPP loan forgiveness.

While balances in cash and cash equivalents will fluctuate due primarily to the timing of net cash flows from deposits, borrowings, loans and investments, and the immediate liquidity needs of the Company, management believes customers are generally maintaining higher liquidity in response to the pandemic and have increased cash balances since December 31, 2020.

Investments

At June 30, 2021, the fair value of the investment portfolio amounted to $634.0 million, an increase of $51.0 million, or 9% since December 31, 2020. The investment portfolio at fair value represented 14% and 15% of total assets at June 30, 2021 and December 31, 2020, respectively. As of June 30, 2021, and December 31, 2020, the investment portfolio was comprised primarily of debt securities, classified as available-for-sale, with a small portion of the portfolio invested in equity securities.

See Note 1, Item (c) "Recent Accounting Pronouncements," Note 2, "Investment Securities," and Note 14, "Fair Value Measurements," to the Company's unaudited consolidated interim financial statements contained in Item 1 in this Form 10-Q above for further information regarding the Company's investment portfolio and unrealized gains and losses on debt securities, including information about investments in an unrealized loss position for which an ACL for available-for-sale securities or impairment has or has not been recognized, investments pledged as collateral, and the Company's fair value measurements for investments.

During the six months ended June 30, 2021, the Company purchased $106.5 million in debt securities. The Company had principal pay downs, calls and maturities totaling $42.2 million during the six months ended June 30, 2021.

During the six months ended June 30, 2021, management sold debt securities with an amortized cost of approximately $2.9 million realizing net gains on sales of $128 thousand.

Net unrealized gains on the debt securities portfolio amounted to $20.9 million at June 30, 2021, compared to $31.1 million at December 31, 2020 and $31.2 million at June 30, 2020. The Company attributes the decrease in net unrealized gains as compared to December 31, 2020 to an increase in market yields.

Loans

Total loans decreased $119.7 million, or 4%, compared to December 31, 2020, and decreased $222.0 million, or 7%, since June 30, 2020. The decline during the six months ended June 30, 2021, was primarily due to PPP forgiveness, partially offset by PPP originations and net core loan growth amounted to $23.3 million. The mix of loans within the portfolio remained relatively unchanged with commercial loans amounting to 88% of total core loans at June 30, 2021 and 87% at both December 31, 2020 and June 30, 2020. Since June 30, 2020, there has been a shift within the commercial loan composition as commercial real estate loans have increased, while commercial and industrial and, to a lesser extent, commercial construction loans have decline.

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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(1):


	June 30, 2021				December 31, 2020				June 30, 2020
(Dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Commercial real estate	$	1,541,397	52.2	%	$	1,476,236	48.0	%	$	1,469,641	46.3	%
Commercial and industrial	404,432		13.7	%	435,548		14.2	%	454,447		14.3	%
Commercial construction	383,807		13.0	%	371,856		12.1	%	402,537		12.7	%
SBA PPP	300,083		10.2	%	443,070		14.4	%	490,159		15.4	%
Total commercial loans	2,629,719		89.1	%	2,726,710		88.7	%	2,816,784		88.7	%
Residential mortgages	233,580		7.9	%	252,995		8.2	%	261,817		8.2	%
Home equity	82,336		2.7	%	85,178		2.8	%	88,371		2.8	%
Consumer	8,554		0.3	%	8,977		0.3	%	9,170		0.3	%
Total retail loans	324,470		10.9	%	347,150		11.3	%	359,358		11.3	%




Total loans	2,954,189		100.0	%	3,073,860		100.0	%	3,176,142		100.0	%
Allowance for credit losses	(50,041)				(44,565)				(42,324)
Net loans	$	2,904,148			$	3,029,295			$	3,133,818

__________________________________________

(1) Upon the adoption of CECL, the Company includes deferred fees as part of the portfolio segment balance. Prior periods have been adjusted in this table to align with the CECL presentation.

As of June 30, 2021, commercial real estate loans increased $65.2 million, or 4%, compared to December 31, 2020, and increased $71.8 million, or 5%, compared to June 30, 2020. Commercial real estate loans are typically secured by a variety of owner-use and non-owner occupied (investor) commercial and industrial property types including one-to-four and multi-family apartment buildings, office, industrial or mixed-use facilities, strip shopping centers or other commercial properties and are generally guaranteed by the principals of the borrower.

As of June 30, 2021, commercial and industrial loan balances decreased by $31.1 million, or 7%, compared to December 31, 2020 and $50.0 million, or 11%, compared to June 30, 2020. The decreases reflect a decline in line utilization on revolving lines as business customers made use of alternative government sponsored funding sources and declines in business activity as a result of the pandemic, as well as general pay downs, maturities and reduction in originations. These loans include seasonal and formula-based revolving lines of credit, working capital loans, equipment financing, and term loans. Also included in commercial and industrial loans are loans partially guaranteed by the SBA under various long-established programs (see below regarding the separate PPP loan portfolio). Commercial and industrial credits may be unsecured loans and lines to financially strong borrowers, loans 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.

Commercial construction loans increased by $12.0 million, or 3%, since December 31, 2020, and decreased $18.7 million, or 5%, compared to June 30, 2020. 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 underlying real estate collateral and are generally guaranteed by the principals of the borrowers. In many cases, these loans move into the permanent commercial real estate portfolio when the construction phase is completed.

During the six-month period ended June 30, 2021, PPP forgiveness amounted to $351.2 million, round three PPP originations amounted to $207.8 million with the SBA ending the program on May 31, 2021.

Total retail loan balances decreased by $22.7 million, or 7%, since December 31, 2020, and decreased $34.9 million, or 9.7%, since June 30, 2020. Residential secured one-to-four family mortgage loans continue to make up the largest portion of the retail segment and the primary component of the decline since prior periods. The current active residential real estate market and low interest-rate environment have driven sale and refinance activity during the six-month period ended June 30, 2021,

At June 30, 2021, commercial loan balances participated out to various banks amounted to $67.4 million, compared to $65.3 million at December 31, 2020, and $78.0 million at June 30, 2020. 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 $78.7 million, $77.1 million and $102.5 million at June 30, 2021, December 31, 2020, and June 30, 2020, respectively.

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See Note 3, "Loans," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form

10-Q for information on loans serviced for others and loans pledged as collateral.

Asset Quality

Certain prior period figures have been adjusted to include "special mention" rated loans in the adversely classified loan balance to be consistent with the 2021 CECL presentation.

The following table sets forth information regarding non-performing assets, TDR loans and delinquent loans 60-89 days past due as to interest or principal, held by the Company at the dates indicated:


(Dollars in thousands)	June 30, 2021			December 31, 2020			June 30, 2020
Non-accrual loan summary:
Commercial real estate	$	24,167		$	29,680		$	8,789
Commercial and industrial	4,213			4,574			5,549
Commercial construction	2,876			2,999			5,801
SBA PPP	—			—			—
Residential mortgages	389			414			473
Home equity	351			381			705
Consumer	—			2			18



Total non-performing loans	31,996			38,050			21,335
OREO	2,400			—			—
Total non-performing assets	$	34,396		$	38,050		$	21,335
Total loans	$	2,954,189		$	3,073,860		$	3,176,142
Accruing TDR loans not included above	$	9,283		$	10,268		$	12,182
Delinquent loans 60-89 days past due and still accruing	$	11		$	316		$	2,036
Loans 60-89 days past due and still accruing to total loans	—		%	0.01		%	0.06		%

Non-performing loans to total loans	1.08		%	1.24		%	0.67		%
Non-performing assets to total assets	0.78		%	0.95		%	0.53		%
Allowance for credit losses for loans	$	50,041		$	44,565		$	42,324
Allowance for credit losses for loans to non-performing loans	156.40		%	117.12		%	198.38		%
Allowance for credit losses for loans to total loans	1.69		%	1.45		%	1.33		%

As of June 30, 2021, the ratio of non-performing loans to total core loans ratio was 1.21% and the non-performing assets to total core assets ratio was 0.83%. Additionally, the ACL for loans to total core loans ratio was 1.89% at June 30, 2021. Total core loans exclude PPP loans, as all qualifying PPP loans are fully guaranteed by the SBA.

The majority of non-accrual loans were also carried as adversely classified during the periods presented. At June 30, 2021, December 31, 2020, and June 30, 2020 the Company had adversely classified loans (loans carrying "special mention," "substandard," "doubtful" or "loss" classifications) amounting to $68.5 million, $75.3 million, and $61.3 million, respectively. The increase at June 30, 2021, compared to June 30, 2020, was due to credit downgrades, primarily in the fourth quarter of 2020, partially offset by payoffs, credit upgrades and charge-offs since the prior period. Credit downgrades included three commercial relationships which became non-accrual in the fourth quarter of 2020 and are in industries that have been highly impacted by the pandemic. One of these relationships had a partial charge-off of $1.8 million during the quarter ended March 31, 2021, with the remaining carry value transferred to OREO in April 2021, which largely accounted for the decrease compared to December 31, 2020.

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Adversely classified loans that were performing but possessed potential weakness and, as a result, could ultimately become non-performing loans amounted to $36.7 million at June 30, 2021 and $37.4 million at December 31, 2020. The remaining balances of adversely classified loans were non-accrual loans, amounting to $31.8 million at June 30, 2021 and $37.9 million at December 31, 2020. Non-accrual loans that were not adversely classified amounted to $181 thousand and $137 thousand at June 30, 2021 and December 31, 2020, respectively, and primarily represented the guaranteed portions of non-performing SBA loans.

Total individually evaluated collateral dependent loans amounted to $40.6 million and $48.3 million at June 30, 2021 and December 31, 2020, respectively. Total accruing collateral dependent loans amounted to $9.1 million and $10.3 million at June 30, 2021 and December 31, 2020, respectively, while non-accrual collateral dependent loans amounted to $31.5 million and $38.0 million as of June 30, 2021 and December 31, 2020, respectively.

In management's opinion, the majority of collateral dependent loan balances at June 30, 2021 and December 31, 2020 were supported by the net realizable value of the underlying collateral. Based on management's collateral assessment at June 30, 2021, collateral dependent loans totaling $21.2 million required no specific reserves and loans totaling $19.5 million required specific reserve allocations of $3.8 million. At December 31, 2020, collateral dependent loans totaling $23.4 million required no specific reserves and loans totaling $24.9 million required specific reserve allocations of $6.2 million. The decrease in specific reserves since December 31, 2020 was due primarily to the partial charge-off of one commercial real estate relationship noted above as well as principal pay-downs and payoffs, partially offset by new credit downgrades, for which management determined that the additional provisions were necessary. Management closely monitors all individually evaluated relationships for their individual business circumstances, credit metrics, or underlying collateral value deterioration to determine if additional reserves are necessary.

Total TDR loans as of June 30, 2021 and December 31, 2020 were $17.0 million and $17.7 million, respectively. TDR loans on accrual status amounted to $9.3 million and $10.3 million at June 30, 2021 and December 31, 2020, respectively. TDR loans included in non-accrual loans amounted to $7.7 million at June 30, 2021 and $7.5 million at December 31, 2020. The Company continues to work with customers and enters into loan modifications (which may or may not be TDRs) to the extent deemed to be necessary or appropriate while attempting to achieve the best mutual outcome given the individual financial circumstances and prospects of the borrower.

Management has been proactive with customers since the onset of the pandemic and granted short term payment deferrals to those requesting financial assistance due to the impact of the pandemic. Payment deferrals due to the pandemic remained active on 17 "pass" rated loans, amounting to $36.0 million, or 1.36% of total core loans, at June 30, 2021, compared to 29 loans amounting to $38.2 million, or 1.46% of total core loans, at March 31, 2021. The majority of the active deferrals are loans that were granted subsequent deferrals after the initial three-month deferral period ended. These loans continue to accrue interest in accordance with their initial terms and are not reported as TDR notes.

Management is closely monitoring all deferrals and loans that have recently completed their deferral period and returned to regular payments. These loans are generally secured by real estate, usually have personal guarantees and typically are managed by experienced operators. The Company will continue to maintain frequent contact with our commercial customers and to closely evaluate the effect on credit quality across all industry sectors in our diversified loan portfolio as the results of the pandemic unfold in future quarters. The credit quality of our loans could be further impacted, by the pandemic or otherwise, and additional provisions may be necessary.

ACL for Loans

Inherent in the lending process is the risk of loss due to customer non-payment, or "credit risk." The Company's commercial lending focus may entail significant additional credit risks compared to long-term financing on existing, owner-occupied residential real estate. The Company seeks to lessen its credit risk exposure by managing its loan portfolio to avoid concentration by industry, relationship size and source of repayment, and through sound underwriting practices and the credit risk management function; however, management recognizes that credit losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio and economic conditions.

There have been no material changes to the Company's underwriting practices or credit risk management system used to estimate credit loss exposure. See Note 4, "Allowance for Loan Losses," to the Company's audited consolidated financial statements contained the 2020 Annual Report on Form 10-K.

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On January 1, 2021, the Company adopted CECL under the modified retrospective approach. Upon adoption, the Company recorded a reduction to retained earnings of $6.5 million, net of $2.5 million in deferred income taxes. The ACL for loans increased by $6.6 million and the ACL for unfunded commitments (included in other liabilities) increased by $2.4 million. Prior to 2021, the Company measured the allowance under the incurred loss method.

ACL for Loans Methodology

The CECL methodology requires early recognition of credit losses using an estimated lifetime credit loss measurement that takes into consideration reasonable and supportable forecasts in the estimate. Arriving at an appropriate level of ACL for loans involves a high degree of management judgement. The ACL for loans is established through a provision for credit losses, a direct charge to earnings. Loan losses are charged against the ACL for loans when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance.

On a quarterly basis, the Company determines an estimate of the ACL for loans necessary to cover expected credit losses as of the specified balance sheet dates. The adequacy of the ACL for loans is reviewed and evaluated on a regular basis by an internal management committee, a sub-committee of the Company's Board of Directors (the "Board") and the full Board.

In making its assessment on the adequacy of the allowance, management considers several quantitative and qualitative

factors from internal and external sources relating to past events, current conditions, and reasonable and supportable forecasts, including: the risk classification of individual loans; individual review of larger and higher risk problem assets; the level of delinquent loans and non-performing loans; impaired and restructured loans; the level of foreclosure activity; net charge-offs; commercial concentrations by industry and property type and by real estate location; the growth and composition of the loan portfolio; as well as trends in the general levels of these indicators. In addition, management monitors expansion in geographic market area, the experience level of lenders and any changes in underwriting criteria, the strength of the local and national

economy, including general conditions in the multi-family, commercial real estate and development and construction

markets in the Company's local region as well as for changes in current and forecasted economic conditions, such as changes in gross domestic product, the unemployment rate, real estate values, commercial vacancy rates and other relevant factors. Management also performs a qualitative assessment beyond model estimates, and applies qualitative adjustments as management deems necessary.

The Company uses a systematic methodology to measure the amount of estimated loan losses. The methodology uses a two-tiered approach that applies specific reserves for loans individually evaluated and general reserves for larger groups of homogeneous loans that are collectively evaluated based on similar risk characteristics.

Loans collectively evaluated

Loans that share risk characteristics are evaluated on a pool basis. Management has segmented the loan portfolio for groups of loans with similar risk characteristics by loan type for non-adversely classified loans and by internal risk rating for adversely classified loans not individually evaluated. The general loss allocation factors consider the quantitative historic loss experience, qualitative or environmental factors such as those identified above, as well as regulatory guidance and industry data.

The Company uses a two-year reasonable and supportable forecast that considers a weighted average of various economic

results. For periods beyond the forecast period, the Company reverts immediately to historical loss rates.

Loans individually evaluated

Loans individually evaluated consist primarily of loans which management considers it probable that not all amounts due (principals and interest) will be collected in accordance with the original contractual terms and loans designated as TDRs and to a lesser extent, if applicable, loans that management deems as individually significant or with unique risk characteristics or for some other reason based on management’s judgement. 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. Management estimates the credit loss by comparing the loan's carrying value against either (i) the present value of the expected future cash flows discounted at the loan's effective interest-rate; (ii) the loan's observable market price; or (iii) the expected realizable fair value of the collateral, in the case of collateral dependent loans. A specific allowance is assigned to the loan for the amount of estimated credit loss. Individually evaluated loans are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.

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While management uses available information and judgement to estimate credit losses on loans, future additions to the allowance 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 allowance based on judgments different from those of management.

ACL for loans activity

The following table summarizes the activity in the ACL for loans for the periods indicated:


	Six Months Ended June 30,
(Dollars in thousands)	2021			2020
Balance at beginning of year	$	44,565		$	33,614

Day one CECL adjustment	6,560			—
Provision for credit losses for loans	862			8,822
Recoveries on charged-off loans:
Commercial real estate	39			—
Commercial and industrial	83			174
Commercial construction	—			—
SBA PPP	—			—
Residential mortgages	—			—
Home equity	10			6
Consumer	3			25
Total recovered	135			205
Charged-off loans
Commercial real estate	1,825			—
Commercial and industrial	249			299
Commercial construction	—			—
SBA PPP	—			—
Residential mortgages	—			—
Home equity	—			—
Consumer	7			18
Total charged-off	2,081			317

Net loans charged-off (recovered)	1,946			112
Ending balance	$	50,041		$	42,324
Annualized net loans charged-off to average loans outstanding	0.13		%	0.01		%

Net charge-offs for the six months ended June 30, 2021, related primarily to an individually evaluated commercial real estate loan, which was fully reserved in late 2020 and charged-off in the first quarter of 2021. The charge-off resulted in the loan being recorded at the estimated fair value less cost to sell the underlying collateral. The Company transferred the property to OREO in April 2021 by accepting the deed in-lieu of foreclosure.

See Note 4, "Allowance for Credit Losses 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.

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ACL for unfunded commitments

CECL also applies to off-balance sheet credit exposure for unfunded commitments (commitments to originate loans and additional funding commitments, standby letters of credit, financial guarantees and other similar investments) that are not unconditionally cancellable. The ACL for unfunded commitments is classified within "Accrued expenses and other liabilities" on the Company's Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates.

The Company’s ACL for unfunded commitments amounted to $2.3 million as of June 30, 2021 and the associated provision was a reduction of $143 thousand for the six months ended June 30, 2021.

Based on the foregoing, management believes that the Company's ACL for loans and unfunded commitments is adequate as of June 30, 2021.

Other real estate owned

The Company had one OREO property at June 30, 2021 with a net book value of $2.4 million and none at December 31, 2020, or June 30, 2020. There was one OREO addition during the six months ended June 30, 2021 and none during the six months ended June 30, 2020. There were no sales or subsequent write downs of OREO during the six months ended June 30, 2021 or the six months ended June 30, 2020.

Sources and Uses of Funds

The Company's primary sources of funds are customer deposits, FHLB borrowings, current earnings and proceeds from the sales, maturities and pay-downs on loans and investment securities. The Company may also, from time to time, utilize brokered deposits, overnight borrowings from correspondent banks and borrowings from the FRB. Additionally, funding for the Company may be generated through equity transactions, including the dividend reinvestment and direct stock purchase plan (the "DRSPP") or exercise of stock options, and occasionally the issuance of debt securities or common stock. The Company's sources of funds are intended to be used to conduct operations and to support growth, by funding loans, investing in securities, expanding the branch network, and paying dividends to stockholders.

Deposits

As of June 30, 2021, customer deposits increased $413.4 million, or 12%, since December 31, 2020, and $316.5 million, or 9%, since June 30, 2020. Since December 31, 2020, the largest growth occurred in checking accounts and to a lesser extent money market accounts. Management believes the deposit growth since December 31, 2020 was due in large part to customers depositing funds received from PPP loan advances, stimulus checks, and generally maintaining higher liquidity in response to the pandemic. We anticipate that as customers spend down their PPP loan funds, this will result in a reduction in deposits.

The Company offers its customers the ability to enhance FDIC insurance coverage by electing to participate a portion of their deposit balance into nationwide deposit networks. The Company’s total customer deposits reflect the equal and reciprocal deposits received from other banks' customers participating in the programs. Essentially, the equivalent of the original customers' deposited funds comes back to the Company and are carried within the appropriate category under total customer deposits. The Company's balances in these reciprocal products were $519.6 million, $508.4 million and $520.0 million at June 30, 2021, December 31, 2020 and June 30, 2020, respectively. Savings accounts are not eligible for this program.

At June 30, 2021, December 31, 2020 and June 30, 2020, the Company's brokered deposits, of approximately $75 million outstanding at each period, consisted of balances used in conjunction with interest-rate-swaps to hedge against adverse interest-rate movements.

Borrowed Funds

The Company had borrowed funds outstanding, all of which were FHLB advances, of $8.6 million, $4.8 million, and $4.2 million at June 30, 2021, December 31, 2020, and June 30, 2020, respectively. FHLB borrowings outstanding at each of these dates were related to specific lending projects under the FHLB's community development and affordable housing programs.

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At June 30, 2021, the Bank had the capacity to borrow additional funds from the FHLB, FRB Discount Window, and under the Paycheck Protection Program Liquidity Facility (the "PPPLF") of up to approximately $630.0 million, $231.0 million, and $309.7 million, respectively.

Subordinated Debt

The Company had outstanding subordinated debt, net of deferred issuance costs, of $58.9 million at June 30, 2021, $73.7 million at December 31, 2020, and $14.9 million at June 30, 2020.

On March 31, 2021, the Company redeemed the Notes issued January 2015. The redemption of the January 2015 Notes was recorded as a loss on the extinguishment of subordinated debt in the amount of $713 thousand, consisting of $600 thousand in prepayment penalties and $113 thousand in unamortized issuance costs. The January 2015 Notes were outstanding at June 30, 2020 and December 31, 2020, respectively.

In July 2020, the Company issued $60.0 million in notes callable in July 2025 and due in July 2030. The July 2020 notes were outstanding at June 30, 2021 and December 31, 2020, respectively.

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.

Derivatives and Hedging

During the first quarter of 2020, the Company entered into three pay fixed, receive float interest-rate swaps to hedge against adverse interest-rate movements. The combined notional value of these swaps, maturing from 2023 through 2025, was $75.0 million at June 30, 2021, and the fair value carried as a liability on the Company's Consolidated Balance Sheets was $1.9 million.

The Company also has a "Back-to-Back Swap" program whereby the Bank enters into an interest-rate swap with qualified commercial banking customers and simultaneously enters into an equal and opposite interest-rate swap with a swap counterparty. The customer interest-rate swap agreement allows commercial banking customers to convert a floating-rate loan payment to a fixed-rate payment. The notional value of interest-rate swaps with customers decreased to $37.2 million at June 30, 2021 from $38.0 million at December 31, 2020. The fair value of assets and corresponding liabilities associated with these swaps and carried on the Company's Consolidated Balance Sheets was $1.1 million at June 30, 2021 compared to $2.3 million at December 31, 2020.

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 policies are set and monitored by the Board. The duties and responsibilities related to asset-liability management matters are also covered by the Board. The Company's asset-liability objectives are to engage in sound balance sheet management strategies, maintain liquidity, provide and enhance access to a diverse and stable source of funds, provide competitively priced and attractive products to customers and conduct funding at a low-cost relative to current market conditions. Funds gathered are used to support current commitments, to fund earning asset growth, and to take advantage of selected leverage opportunities.

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.

At June 30, 2021, 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 fed fund purchase arrangements with correspondent banks, access to the FRB Discount Window and the PPPLF, which provides funding secured by PPP pledged loans.

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Management believes that the Company has adequate liquidity to meet its obligations. However, if general economic conditions, the pandemic, 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.

The Company has in the past also increased capital and liquidity by offering for sale shares of the Company's common stock and through the issuance of subordinated debt. On July 7, 2020, the Company issued $60.0 million of fixed-to-floating rate subordinated notes. See "Capital Resources," below for information on the Company's capital planning.

Capital Resources

Capital Raised and Capital Adequacy Requirements

Capital planning by the Company and the Bank considers current needs and anticipated future growth. Ongoing sources of capital include the retention of earnings, less dividends paid, proceeds from the exercise of employee stock options and proceeds from purchases of shares pursuant to the DRSPP. Additional sources of capital for the Company and the Bank have been proceeds from the issuance of the Company's common stock and subordinated debt. The Company believes its current capital is adequate to support ongoing operations.

On July 7, 2020, the Company issued $60.0 million in fixed-to-floating rate subordinated notes due 2030 and redeemable at the option of the Company on or after July 15, 2025. In September 2020, the Company invested $53.0 million of the net proceeds from the issuance into the Bank. The notes, which were classified as a liability on the Company's Consolidated Balance Sheets, qualify as Tier 2 regulatory capital for the Company and the Company's investment in the Bank qualifies as Tier 1 regulatory capital for the Bank.

On January 1, 2021, the Company's adoption of CECL resulted in the Company recording a net cumulative-effect adjustment that decreased retained earnings by $6.5 million, net of $2.5 million in deferred income taxes.

On March 31, 2021, the Company redeemed the January 2015 Notes. The redemption of the January 2015 Notes was funded through a dividend from the Bank.

For the six months ended June 30, 2021, the Company declared $4.4 million in cash dividends. Stockholders utilized the dividend reinvestment portion of the DRSPP to purchase an aggregate of 19,307 shares of the Company's common stock, totaling $628 thousand. The direct purchase component of the DRSPP was used by stockholders to purchase 47 shares of the Company's common stock, totaling $1 thousand, during the six months ended June 30, 2021.

On July 20, 2021, the Company announced a quarterly dividend of $0.185 per share to be paid on September 1, 2021 to stockholders of record as of August 11, 2021.

For further information about the Company's capital, see Note 9 and Note 11, both titled "Stockholders' Equity," to the Company's unaudited consolidated interim financial statements contained in Item 1 of this Form 10-Q and to the Company's audited consolidated financial statements contained in the Company's 2020 Annual Report on Form 10-K, respectively.

Assets Under Management

Total assets under management include total assets and wealth assets under management. Wealth assets under management are not carried as assets on the Company's Consolidated Balance Sheets, and as such, total assets under management are not a financial measurement recognized under GAAP, however management believes its disclosure provides information useful on the Company's operations.

The Company provides a wide range of wealth management and wealth services, including brokerage, trust, and investment management. Excluded from wealth assets under management are additional assets under administration which include 401(k) plans and Trust and Custody accounts.

As of June 30, 2021, wealth assets under management, which are reflected at fair market value, decreased $10.1 million, or 1%, since December 31, 2020, and since June 30, 2020, balances have increased $113.7 million, or 13%. The decrease since December 31, 2020 resulted primarily from the departure of a large, institutional relationship, following the client's merger, partially offset by net new assets and increases in market values.

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As of June 30, 2021, total assets under management increased $403.6 million, or 8% since December 31, 2020 and $504.4 million, or 10% since June 30, 2020. Total core assets under management have increased $432.9 million, or 10%, since December 31, 2020 and $580.9 million, or 13%, since June 30, 2020.

The following table sets forth the value of assets under management and its components at the dates indicated:


(Dollars in thousands)	June 30, 2021		December 31, 2020		June 30, 2020
Total assets	$	4,428,001	$	4,014,324	$	4,037,229

Wealth assets under management	966,393		976,502		852,741
Total assets under management	$	5,394,394	$	4,990,826	$	4,889,970

Additionally, the Company had $236.5 million and $210.9 million at June 30, 2021 and December 31, 2020, respectively, of assets under administration consisting of mostly 401(k) plans and to a lesser extent Trust and Custodial accounts.

Item 3 -Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in the results of the Company's net interest income sensitivity analysis as reported in the

2020 Annual Report on Form 10-K. The Company can be subject to margin compression depending on the economic environment and the shape of the yield curve. The Company's margin generally performs better over time in a rising rate environment, while it generally decreases in a declining rate environment and when the yield curve is flattening or inverted.

At June 30, 2021, the Company's primary interest-rate risk exposure continues to be margin compression that may result from changes in interest rates and/or changes in the mix of the Company's balance sheet components. This would include the mix of fixed versus variable rate loans and investments within assets, and higher cost versus lower cost deposits and overnight borrowings versus term borrowings and certificates of deposit within liabilities.

Consistent with results at December 31, 2020, the net interest income sensitivity model assumed a static balance sheet and did not forecast an increase in liquidity from potential PPP loan forgiveness by the SBA, which, absent any other significant balance sheet changes, would increase the Company’s on balance sheet liquidity and therefore increase the Company’s asset sensitivity. Refer to heading "Results of Operations" contained within Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Form 10-Q for further discussion of margin.

Item 4 -Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures and internal controls designed to ensure that the information required to be disclosed in reports that it files or furnishes to the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.

The Company carried out an evaluation as of the end of the period covered by this Form 10-Q under the supervision and with the participation of the Company's management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective as of June 30, 2021.

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, 2021) that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

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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 2020 Annual Report on Form 10-K.

If the United States or the markets in which we operate encounter sustained economic stress or recession, or if long-term consequences or lagging effects of the pandemic are experienced by our customers and businesses, many of the risk factors identified in the Company's 2020 Annual Report on Form 10-K could become heightened and such effects could have a material adverse impact on the Company in a number of ways related to credit, collateral, customer demand, funding, operations and interest-rate risk, as described in more detail below.

COVID-19 Pandemic

The COVID-19 pandemic has caused extensive disruption to the economy, impacted interest rates, increased economic and financial market uncertainty, disrupted global trade and supply chains, and brought about significant unemployment levels. Both Massachusetts and New Hampshire experienced record high new COVID-19 cases reported in early January 2021, although trends slowed through June 2021. Subsequent to June 2021, further surges in COVID-19 variants cases are being reported. Although many of the state and local governments restrictions have eased or been lifted, these restrictions have resulted in significant lingering adverse effects on our customers and business partners, particularly those in the retail, recreation, hospitality and food and beverage industries, among others, including shut-downs or limitation on service capacity, further resulting in a significant number of layoffs and furloughs of employees in the regions and communities in which we operate. Any pull-back in reopening of the Massachusetts and New Hampshire economies or new capacity restrictions in response to up ticks in reported variant cases, may leave certain types of businesses closed once again, or with largely diminished capacity until comprehensive vaccination has been achieved. Businesses have experienced severe shortfalls in rehiring adequate staff to operate at previous business levels, as well as increased cost of raw materials, impacting their business scale and continued financial viability. In addition, the shift to a remote workforce may have long-term implications for how many businesses operate and in turn, their need for leased office space may contract. This threatened financial viability and reduced need for office space could result in a reduction in our loan demand and in our customers' ability to repay their loans, which in turn may have an adverse effect on our business and results of operation.

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, 2021:


	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	2,589	$33.40	—	—
May	—	—	—	—
June	57	$34.45	—	—

_________________________________

(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).

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Item 3 -Defaults upon Senior Securities

Not Applicable.

Item 4 -Mine Safety Disclosures

Not Applicable.

Item 5 -Other Information

Not Applicable.

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Item 6 -Exhibits

EXHIBIT INDEX

_____________

Exhibit No. Description

3.1.1 Amended and Restated Articles of Organization of the Company, as amended as of June 4, 2013 incorporated by reference to the Company's Current Report on Form 8-K filed June 10, 2013 (File No. 001-33912).

3.1.2 Articles of Amendment to the Restated Articles of Organization of the Company, as amended as of May 16, 2017 incorporated by reference to the Company's Current Report on Form 8-K filed May 18, 2017 (File No. 001-33912).

3.1.3 Articles of Amendment to the Amended and Restated Articles of Organization of the Company, as amended as of January 5, 2018, incorporated by reference to the Company’s Current Report on Form 8-K filed January 11, 2018 (File No. 001-33912).

3.2 Second Amended and Restated Bylaws of the Company, as amended as of January 19, 2021, incorporated by reference to Exhibit 3.1 to the Company's Current Report on Form 8-K filed on January 22, 2021 (File No. 001-33912).

10.1 Enterprise Bank 2021 Variable Compensation Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed April 23, 2021 (File No. 001-33912).

10.2 Enterprise Bank Supplemental Executive Retirement and Deferred Compensation Plan 2021 Addendum, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed April 23, 2021 (File No. 001-33912).

10.3 Amendment No. 1 to the Enterprise Bancorp, Inc. 2016 Stock Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 6, 2021 (File No. 001-33912).

31.1* Certification of Principal Executive Officer under Securities Exchange Act Rule 13a-14(a).

31.2* Certification of Principal Financial Officer under Securities Exchange Act Rule 13a-14(a).

32* Certification of Principal Executive Officer and Principal Financial Officer under 18 U.S.C. § 1350 Furnished Pursuant to Securities Exchange Act Rule 13a-14(b).

101* The following materials from Enterprise Bancorp, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 were formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2021 and December 31, 2020; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2021 and 2020; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2021 and 2020; (iv) Consolidated Statements of Changes in Equity for the three and six months ended June 30, 2021 and 2020; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020; 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, 2021 has been formatted in Inline XBRL and contained in Exhibit 101.

____________________

*Filed herewith

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SIGNATURES

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.


		ENTERPRISE BANCORP, INC.

DATE:	August 6, 2021	By:	/s/ Joseph R. Lussier
			Joseph R. Lussier
			Executive Vice President, Treasurer
			and Chief Financial Officer