10-K 1 ebtc12311910k.htm 10-K Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             

Commission file number 001-33912
Enterprise Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts
 
04-3308902
(State or other jurisdiction of incorporation of organization)
 
(IRS Employer Identification No.)
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 Exchange 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
 Securities registered pursuant to Section 12(g) of the Exchange Act:
NONE
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  o Yes ý No
Indicate by check mark if the registrant is not required to file pursuant to Section 13 or Section 15(d) of the Act.  o Yes ý No
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.  ý 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). ý 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 of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o

Smaller reporting company o
Emerging growth company o

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.  o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) o Yes ý No
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid price and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $2,086,685 ($31.71 per share) as of June 28, 2019, the last trading day of the registrant’s most recently completed second quarter.

 
Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date:
March 2, 2020, Common Stock, par value $0.01, 11,840,547 shares outstanding

 DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement for its annual meeting of stockholders to be held on May 5, 2020 are incorporated by reference in Part III of this Form 10-K.



ENTERPRISE BANCORP, INC.
TABLE OF CONTENTS
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
 
Item 1.
Business
 
Organization
 
Enterprise Bancorp, Inc. ("the Company," "Enterprise," "us," "we," or "our") is a Massachusetts corporation organized in 1996, which operates as the parent holding company of Enterprise Bank and Trust Company, commonly referred to as Enterprise Bank ('the Bank"). Substantially all of the Company’s operations are conducted through the Bank and its subsidiaries.  The Bank, a Massachusetts trust company and state chartered commercial bank that commenced banking operations in 1989, has five wholly owned subsidiaries that are included in the Company’s consolidated financial statements:
 
Enterprise Insurance Services, LLC, organized in 2000 in the State of Delaware for the purpose of engaging in insurance sales activities;
Enterprise Wealth Services, LLC, organized in 2000 in the State of Delaware for the purpose of offering non-deposit investment products and services, under the name of "Enterprise Wealth Services;" and
Three Massachusetts security corporations, Enterprise Security Corporation (2005), Enterprise Security Corporation II (2007) and Enterprise Security Corporation III (2007), which hold various types of qualifying securities. The security corporations are limited to conducting securities investment activities that the Bank itself would be allowed to conduct under applicable laws.
 
Enterprise's headquarters are located at 222 Merrimack Street in Lowell, Massachusetts.
 
The services offered through the Bank and its subsidiaries are managed as one strategic unit and represent the Company's only reportable operating segment.
 
All material intercompany balances and transactions have been eliminated in consolidation.

The Company's common stock trades on the NASDAQ Global Market under the trading symbol "EBTC."

Market Area
 
The Company's primary market area is the Greater Merrimack Valley, Nashoba Valley and North Central regions of Massachusetts and Southern New Hampshire (Southern Hillsborough and Rockingham counties).  As of December 31, 2019, Enterprise had 24 full-service branches located in the Massachusetts communities of Lowell (2), Acton, Andover, Billerica (2), Chelmsford (2), Dracut, Fitchburg, Lawrence, Leominster, Methuen, Tewksbury (2), Tyngsborough and Westford and in the New Hampshire communities of Derry, Hudson, Nashua (2), Pelham, Salem and Windham. Our 25th branch in Lexington, MA also recently opened in early March 2020 and our 26th branch in North Andover, MA is scheduled to open in summer 2020.

Management actively seeks to strengthen the Company's market position by capitalizing on market opportunities to grow all business lines and the continued pursuit of organic growth and strategic expansion within existing and into neighboring geographic markets.
 
Products and Services
 
The Company principally is engaged in the business of gathering deposits from the general public and investing primarily in commercial loans and investment securities and utilizing the resulting cash flows to conduct operations, expand service and product offerings, expand the branch network, and pay dividends to stockholders.  Through the Bank and its subsidiaries, the Company offers a range of commercial, residential and consumer loan products, deposit products and cash management services, electronic and digital banking options, commercial insurance services, as well as wealth management, wealth services, and trust services. The integrated branch network serves all product channels with knowledgeable service providers and well-appointed facilities.  Management continually examines new products and technologies in order to maintain a highly competitive mix of offerings and state-of-the-art delivery channels in order to tailor product lines to customers' needs. These products and services are outlined below.

The Company's business is not dependent on one, or a few, customers, or upon a particular industry, the loss of which would have a material adverse impact on the financial condition or operations of the Company.

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Lending Products
 
General
 
The Company specializes in lending to business entities, non-profit organizations, professional practices and individuals. The Company's primary lending focus is on the development of high-quality commercial relationships achieved through active business development efforts, long-term relationships with established commercial businesses, strong community involvement, and focused marketing strategies.  Commercial loans may include commercial real estate mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and letters of credit.  Consumer or "retail" loans may include conventional residential mortgage loans, home equity loans and lines, residential construction loans on owner-occupied primary and secondary residences, and secured and unsecured personal loans and lines of credit.  The Company manages its loan portfolio to avoid concentration by industry, relationship size, and source of repayment to lessen its credit risk exposure.

Interest rates charged on loans may be fixed or variable; variable rate loans may have fixed initial periods before periodic rate adjustments begin. Individual rates offered are dependent on the associated degree of credit risk, term, underwriting and servicing costs, loan amount, and the extent of other banking relationships maintained with the borrower, and may be subject to interest rate floors. Rates are also subject to competitive pressures, the current interest-rate environment, availability of funds, and government regulations. The Company has a "Back-to-Back Swap" program whereby the Bank enters into an interest rate swap with a qualified commercial banking customer 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 transaction structure effectively minimizes the Bank's net interest rate risk exposure resulting from such transactions.

Enterprise employs a seasoned commercial lending staff, with commercial lenders supporting each of the Bank's branch locations.  An internal loan review function assesses the compliance of commercial loan originations with the Company's internal policies and underwriting guidelines and monitors the ongoing credit quality of the loan portfolio. The credit risk management function monitors a wide variety of individual borrower and industry factors; and the Company's internal loan credit risk rating system classifies loans depending on risk of loss characteristics. The Company also contracts with an external loan review company to review, on a pre-determined schedule, the internal credit ratings assigned to loans in the commercial loan portfolio. The review is focused on the non-criticized segment of the portfolio, based on the type, size, credit rating, and overall risk of the loan and generally encompasses 55% or more of the commercial portfolio. This same company is also contracted to perform limited stress testing on the commercial real estate loan portfolio on an annual basis.

The Company's internal residential origination and underwriting staff originate residential loans and are responsible for compliance with residential lending regulations, consumer protection and internal policy guidelines. The Company contracts with an external loan review company to complete a regular quality control review in accordance with secondary market underwriting requirements for residential mortgage loans sold. The sample reviewed is based on loan volume originated since the prior review. Additionally, the Company's internal compliance department monitors the residential loan origination activity for regulatory compliance.

A management loan review committee, consisting of senior lending officers, credit, loan workout, loan operations, risk management and accounting personnel, is responsible for setting loan policy and procedures, as well as reviewing loans on the internal "watched asset list" and classified loan report. An internal credit review committee, consisting of senior lending officers and credit review personnel, meets to review loan requests related to borrowing relationships of certain dollar levels, as well as other borrower relationships recommended for discussion by committee members.
 
The Loan Committee of the Company's Board of Directors (the "Board") approves loan relationships exceeding certain prescribed dollar limits.  The Board's Loan Committee reviews current portfolio statistics, problem credits, construction loan reviews, watched assets, loan delinquencies, and the allowance for loan losses, as well as current market conditions and issues relating to the construction and real estate development industry and the reports from the external loan review company.  The Board's Loan Committee is also responsible for approval of the loan policy and credit-related charge-offs recommended by management, subject to final approval by the full Board.
 

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At December 31, 2019, the Bank's statutory lending limit, based on 20% of capital (capital stock plus surplus and undivided profits, but excluding other comprehensive income), to any individual borrower and related entities was approximately $60.1 million, subject to certain exceptions provided under applicable law.
 
See also Item 1A, "Risk Factors," and "Credit Risk," contained under the heading "Financial Condition," in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in this annual report on Form 10-K ("this Form 10-K") for further discussion on a variety of risks and uncertainties that may affect the Company's loan portfolio.
 
Commercial Real Estate, Commercial and Industrial, and Commercial Construction Loans
 
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, and are generally guaranteed by the principals of the borrower. Commercial real estate loans generally have repayment periods of approximately 15 to 25 years. Variable interest-rate loans have a variety of adjustment terms and underlying interest-rate indices and are generally fixed for an initial period before periodic rate adjustments begin.
 
Commercial and industrial loans include seasonal and formula-based revolving lines of credit, working capital loans, equipment financing, formula-based lines of credit, and term loans. Also included in commercial and industrial loans are loans partially guaranteed by the U.S. Small Business Administration ("SBA"), and loans under various other government and municipal programs and agencies. 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.  Variable rate loans and lines in this portfolio have interest rates that are periodically adjusted, with loans generally having fixed initial periods.  Revolving lines of credit are written on demand and are subject to annual credit review. Commercial and industrial loans have average repayment periods of 1 to 7 years.
 
Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property, and loans for the purchase and improvement of raw land.  These loans are secured in whole or in part by 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. Construction lenders work to cultivate long-term relationships with established developers. The Company limits the amount of financing provided to any single developer for the construction of properties built on a speculative basis.  Funds for construction projects are disbursed as pre-specified stages of construction are completed.  Regular site inspections are performed, prior to advancing additional funds, at each construction phase, either by experienced construction lenders on staff or by independent outside inspection companies.  Commercial construction loans generally are variable rate loans and lines with interest rates that are periodically adjusted and generally have terms of 1 to 3 years.
 
From time to time, the Company participates with other banks in the financing of certain commercial projects.  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. In some cases, the Company may act as the lead lender, originating and servicing the loans, but participating out a portion of the funding to other banks.  In other cases, the Company may participate in loans originated by other institutions. In each case, the participating bank funds a percentage of the loan commitment and takes on the related pro-rata risk. In each case in which the Company participates in a loan, the rights and obligations of each participating bank are divided proportionately among the participating banks in an amount equal to their share of ownership and with equal priority among all banks. Each participation is governed by individual participation agreements executed by the lead bank and the participant at loan origination. When the participation qualifies as a sale under U.S. generally accepted accounting procedures ("GAAP"), the balances participated out to other institutions are not carried as assets on the Company's consolidated financial statements. The Company performs an independent credit analysis of each commitment and a review of the participating institution prior to participation in the loan, and an annual review thereafter of each participating institution. Loans originated by other banks in which the Company is a participating institution are carried in the loan portfolio at the Company’s pro-rata share of ownership.

In addition, the Company participates in various community development loan funds in which local banks contribute to a loan pool that is independently managed. These loan pools make small dollar loans available to local businesses and start-ups that might otherwise not qualify for traditional small business loans directly from banks, with the potential risk spread among the

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participating banks. The goal of these partnerships with community development loan funds is to stimulate local economic development, create jobs, and help small businesses and entrepreneurs to become more viable, bankable and an integrated part of the local community.

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 credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers.  If the letter of credit is drawn upon, a loan is created for the customer, generally a commercial loan, with the same criteria associated with similar commercial loans.
 
Residential Loans
 
Enterprise originates conventional mortgage loans on one-to-four family residential properties.  These properties may serve as the borrower's primary residence, or as vacation homes or investment properties.  Loan-to-value policy limits vary, generally from 75% for multi-family, owner-occupied properties, up to 97% for single family, owner-occupied properties, with mortgage insurance coverage required for loan-to-value ratios greater than 80% based on program parameters.  In addition, financing is provided for the construction of owner-occupied primary and secondary residences.  Residential mortgage loans may have terms of up to 30 years at either fixed or adjustable rates of interest.  Fixed and adjustable rate residential mortgage loans are generally originated using secondary market underwriting and documentation standards.
 
Depending on the current interest-rate environment, management projections of future interest rates and the overall asset-liability management program of the Company, management may elect to sell those fixed and adjustable rate residential mortgage loans which are eligible for sale in the secondary market or hold some or all of this residential loan production for the Company's portfolio. Mortgage loans are generally not pooled for sale, but instead sold on an individual basis. The Company may retain or sell the servicing when selling the loans.  Loans sold are subject to standard secondary market underwriting and eligibility representations and warranties over the life of the loan and are subject to an early payment default period covering the first four payments for certain loan sales. Loans classified as held for sale are carried as a separate line item on the balance sheet.

Home Equity Loans and Lines of Credit ("Home equity")
 
Home equity term loans are originated for one-to-four family residential properties with maximum original loan-to-value ratios generally up to 80% of the automated valuation or appraised value of the property securing the loan. Home equity loan payments consist of monthly principal and interest based on amortization ranging from 3 to 15 years. The rates may be variable or fixed.
 
The Company also originates home equity revolving lines of credit for one-to-four family residential properties with maximum original loan-to-value ratios generally up to 80% of the automated valuation or appraised value of the property securing the loan. Home equity lines generally have interest rates that adjust monthly based on changes in the Wall Street Journal Prime Rate, although minimum rates may be applicable. Some home equity line rates may be fixed for a period of time and then adjusted monthly thereafter. The payment schedule for home equity lines requires interest only payments for the first ten years of the lines. Generally, at the end of ten years, the line may be frozen to future advances, and principal plus interest payments are collected over a 15-year amortization schedule or, for eligible borrowers meeting certain requirements, the line availability may be extended for an additional interest only period.
 
Consumer Loans

Consumer loans 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 extended to individual customers. The aggregate amounts of overdrawn deposit accounts are reclassified as loan balances.

Credit Risk and Allowance for Loan Losses
 
Information regarding the Company's credit risk and allowance for loan losses is contained in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," contained in the section "Financial Condition," under "Loans," in the subsections "Credit Risk," "Asset Quality," and "Allowance for Loan Losses" of this Form 10-K.
 

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Deposit Products
 
Deposits have traditionally been the principal source of the Company's funds. Enterprise offers a broad selection of competitive commercial and retail deposit products, including transactional checking accounts, non-transactional savings and money market accounts, commercial sweep products, and term certificates of deposit ("CDs") typically ranging from 1 month to 36 months. The Company caters its deposit product offerings to commercial businesses, professionals, municipalities, and individuals. As a member of the Federal Deposit Insurance Corporation (the "FDIC"), the Bank's depositors are provided deposit protection up to the maximum FDIC insurance coverage limits.
 
In addition to the deposit products noted above, the Company also provides customers the ability to allocate checking deposits, money markets, and CDs balances to nationwide networks of reciprocating FDIC insured banks. Deposits are placed into nationwide networks in increments that are eligible for FDIC insurance.  This allows the Company to offer enhanced FDIC insurance coverage on larger deposit balances by placing the "excess" funds in FDIC insured accounts or term CDs issued by other banks participating in the networks. In exchange, the other institutions place dollar-for-dollar matching reciprocal and insurable deposits with the Company via the networks.  Essentially, the equivalent of the original deposit comes back to the Company and is available to fund local loan growth. The original funds placed into the networks are not carried as deposits on the Company's Consolidated Balance Sheet, however the network's reciprocal dollar deposits are carried within the appropriate product category under customer deposits on the Consolidated Balance Sheet.
 
Management determines the interest rates offered on deposit accounts based on current and expected economic conditions, competition, liquidity needs, the volatility of existing deposits, the asset-liability position of the Company and the overall objectives of the Company regarding the growth and retention of relationships. Low-cost checking deposits are an important component of the Company's core funding strategy.
 
Enterprise may also utilize brokered deposits, mainly term products, from several available sources, as part of the Company's asset-liability management strategy and as an alternative to borrowed funds to support asset growth in excess of internally generated deposits. Brokered deposits along with borrowed funds are referred to as wholesale funding.

Cash Management Services

In addition to the lending and deposit products discussed above, commercial banking and municipal customers may take advantage of cash management services and products that enhance the reporting on and acceptance of deposited funds, the use of those funds for such purposes as payments, disbursements and overnight investment through the use of investment sweep services including third party FDIC enhanced money markets or third party non-deposit mutual funds. Management believes that commercial customers benefit from the flexibility of these products, while retaining conservative investment options of high quality and safety.  The balances swept on a daily basis into mutual funds do not represent obligations of the Company and are not insured by the FDIC.

Product Delivery Channels

In addition to traditional product access channels, customers may access their bank accounts securely via the internet through personal computers or any mobile device.  Various electronic banking capabilities are delivered through the Bank's online website and mobile apps allowing customers to view account balances, transactions, check images and statements, as well as perform internal and external account transfers, pay bills, and make person-to-person payments and conduct check deposits.

Online and mobile banking tools utilize multiple layers of customer authentication including device, geographic and biometric recognition, personal access ID’s and passwords, as well as digital signatures for certain transactions.

Wealth Management and Wealth Services
 
The Company provides a range of wealth advisory and management services delivered via two channels, Enterprise Wealth Management and Enterprise Wealth Services.
 
Wealth advisory and management services include customized investment management and trust services provided under the label "Enterprise Wealth Management" to individuals, family groups, commercial businesses, trusts, foundations, non-profit organizations, and endowments.
 

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Enterprise Wealth Management primarily utilizes an open-architecture approach to client investment management.  The philosophy is to identify and select high performing mutual funds and independent investment management firms on behalf of our clients.  The Company partners with investment research and due diligence firms to strengthen strategic development and provide performance monitoring capabilities.  These firms perform detailed research and due diligence reviews and provide objective analysis of each independent management firm based on key criteria, and maintains ongoing oversight and monitoring of their performance.  This due diligence is intended to enable the Company to customize investment portfolios to meet each customer’s financial objectives and deliver superior long-term performance.
 
Enterprise Wealth Management also offers the flexibility of an individually-managed portfolio for clients who prefer customized asset management with a variety of investment options, which includes our Large Cap Core Equity Strategy, a proprietary blend of value and growth stocks.
 
Enterprise Wealth Services provides brokerage and management services through a third-party arrangement with Commonwealth Financial Network, a licensed securities brokerage firm, with products designed primarily for the individual investor. Retirement plan services are offered through third-party arrangements with leading 401(k) plan providers.

The Enterprise Wealth Management Committee ("EWMC") of the Board is responsible for overseeing that the fiduciary and investment activities of the Enterprise Wealth Management and Services department are consistent with those powers delegated by the Board and overseeing that prudent care and discretion are followed in the management of client assets including client and Bank risk exposure. EWMC is also responsible for reviewing investment performance of investment advisors, strategic planning initiatives and results, and proposed new products or services, among other responsibilities.

Insurance Services
 
Enterprise Insurance Services, LLC engages in insurance sales activities through a third-party arrangement with HUB International New England, LLC ("HUB"), a full-service insurance agency with offices in Massachusetts and New Hampshire and a part of HUB International Limited, which operates throughout the United States and Canada. Enterprise Insurance Services provides, through HUB, a full array of insurance products tailored to serve the specific insurance needs of businesses in a range of industries operating in the Company's market area.

Investment Activities
 
The Company's investment portfolio activities are an integral part of the overall asset-liability management program of the Company.  The investment function provides readily available funds to support loan growth, as well as to meet withdrawals and maturities of deposits, and attempts to provide maximum return consistent with liquidity constraints and general prudence, including diversification and safety of investments. In addition to the Bank, the Company holds investment securities in three Massachusetts security corporation subsidiaries in order to provide enhanced tax savings associated with certain state tax policies related to investment income.
 
The securities in which the Company may invest are limited by regulation.  In addition, an internal investment policy restricts investments in debt securities to high-quality securities within prescribed categories as approved by the Board. Management utilizes an outside registered investment adviser to manage the corporate and municipal bond portfolios within prescribed guidelines set by management. The Company's internal investment policy also sets sector limits as a percentage of the total portfolio, identifies acceptable and unacceptable investment practices, and denotes approved security dealers. The effect of changes in interest rates, market values, timing of principal payments and credit risk are considered when purchasing securities.
 
Cash equivalents are defined as highly liquid investments with original maturities of three months or less, that are readily convertible to known amounts of cash and present insignificant risk of changes in value due to changes in interest rates.  The Company's cash and cash equivalents may be comprised of cash and due from banks, interest-earning deposits (deposit accounts, excess reserve cash balances, money markets and money market mutual fund accounts and short-term U.S. Agency Discount Notes) and overnight and term federal funds sold ("fed funds") to money center banks.
 
The Company primarily invests in debt securities, with a small portion of the portfolio invested in equities. As of the balance sheet dates reflected in this annual report, all of the debt securities within the Company's investment portfolio were classified as available-for-sale and carried at fair value, with changes in fair value reflected in other comprehensive income. The equity securities are carried at fair value, with changes in fair value recognized in net income.


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Management reports investment transactions, portfolio allocation, effective duration, fair value at risk and projected cash flows to the Board on a periodic basis.  Credit risk inherent in the portfolio is closely monitored by management and presented at least annually to the Board.  The Board also approves the Company's internal investment policy annually and ongoing investment strategy.

The Company is required to purchase Federal Home Loan Bank of Boston ("FHLB") stock at par value in association with the Bank's outstanding advances from the FHLB; this stock is classified as a restricted investment and carried at cost which management believes approximates fair value.
 
See also "Impairment Review of Investment Securities," contained under the heading "Accounting Policies/Critical Accounting Estimates," in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Form 10-K for further discussion on the determination and recognition of impairment.
 
Other Sources of Funds
 
As discussed above, deposit gathering has been the Company's principal source of funds.  Asset growth in excess of deposits may be funded through cash flows from our loan and investment portfolios, or the following sources:
 
Borrowed Funds
 
Total borrowing capacity includes borrowing arrangements at the FHLB and the Federal Reserve Bank ("FRB") Discount Window and borrowing arrangements with correspondent banks.
 
Membership in the FHLB provides borrowing capacity based on qualifying collateral balances pre-pledged to the FHLB, including certain residential loans, home equity lines, commercial loans, U.S. government and agency securities and certain municipal securities. 

Borrowings from the FHLB typically are utilized to fund short-term liquidity needs or specific lending projects under the FHLB's community development programs. The FHLB funding facility is an integral component of the Company's asset-liability management program.
 
The FRB Discount Window borrowing capacity is based on the pledge of qualifying collateral balances to the FRB.  Collateral pledged for this FRB facility consists primarily of certain municipal and corporate securities held in the Company's investment portfolio. Additional types of collateral are available to increase borrowing capacity with the FRB if necessary.
 
Pre-established non-collateralized overnight borrowing arrangements with large national and regional correspondent banks provide additional overnight and short-term borrowing capacity for the Company and are classified as "other borrowings" under Borrowed Funds on the Company's balance sheets.

Subordinated Debt
 
The Company had $14.9 million of outstanding subordinated debt at December 31, 2019 and December 31, 2018, respectively which consisted of $15.0 million in aggregate principal amount of Fixed-to-Floating Rate Subordinated Notes (the "Notes"), net of amortized deferred-issuance costs, issued in January 2015 in a private placement to an accredited investor. See also Note 8, "Borrowed Funds and Subordinated Debt" to the Company's consolidated financial statements contained in Item 8 of this Form 10-K below, for further information regarding the Company's subordinated debt.

Capital Resources
 
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 Company's dividend reinvestment plan and direct stock purchase plan (together, the "DRSPP"). Additional sources of capital for the Company and the Bank have been proceeds from the issuance of common stock and proceeds from the issuance of subordinated debt. The Company believes its current capital is adequate to support ongoing operations.


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The Company is subject to the regulatory capital framework known as the "Basel III Rules" which include risk-based capital ratio requirements which were fully phased-in January 1, 2019. Management believes, as of December 31, 2019, that the Company and the Bank met all capital adequacy requirements to which they were subject under Basel III. As of December 31, 2019, the Company met the definition of "well-capitalized" under the applicable Federal Reserve Board regulations and the Bank qualified as "well-capitalized" under the prompt corrective action regulations of Basel III and the FDIC.

See also "Capital Requirements," and "Capital Requirements under Basel III," under the heading "Supervision and Regulation," contained below, for further information regarding the Company's and the Bank's regulatory capital requirements.  See Note 11, "Stockholders' Equity," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below, for further information regarding the Company's stockholder's equity and capital ratios.

Patents, Trademarks, etc.
 
The Company holds several registered service marks and trademarks related to product names and corporate branding.  The Company holds no other patents, registered trademarks, licenses (other than licenses required to be obtained from appropriate banking regulatory agencies), franchises or concessions that are material to its business.

Employees

At December 31, 2019, the Company employed 538 full-time equivalent employees.  None of the employees are presently represented by a union or covered by a collective bargaining agreement.  Management believes its employee relations are excellent.
 
Company Websites
 
The Company currently uses outside vendors to design, support and host its two primary internet websites: www.enterprisebanking.com, for general banking products and services and Company information, as noted below, and www.enterprisewealth.com, for wealth advisory and management services offered by the Bank. The underlying structure of the websites allows for ongoing maintenance to be performed by third parties, and updates of information to be performed by authorized Company personnel. The information contained on or accessible from our websites does not constitute a part of this report and is not incorporated by reference. 

The Bank's websites provide information on the Company and its products and services. Users have the ability to securely open various deposit accounts, as well as the ability to submit mortgage loan applications online and, via a link, to access their bank accounts and perform various financial transactions, or access various wealth account reports and statements using a secure online banking platform.

The Bank's website also provides the access point to a variety of specified banking services and information, various financial management tools, and Company investor and corporate information, which includes a corporate governance page.  The Company's corporate governance page includes the Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Whistleblower and Non-Retaliation policy, as well as the charters of the Board's Audit, Compensation, and Corporate Governance/Nominating committees.
 
In the Investor Relations section of the Bank's website, under the SEC Filings tab, the Company makes available copies of the Company's annual reports on Form 10-K, quarterly reports on Form 10-Q ("Form 10-Q"), proxy statements and current reports on Form 8-K ("Form 8-K"). Additionally, the site includes current registration statements that the Company has been required to file in connection with the issuance of its shares. The Company similarly makes available all insider stock ownership and transaction reports filed with the SEC by executive officers, directors and any 10% or greater stockholders under Section 16 of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (Forms 3, 4 and 5). Access to all of these reports is made available free of charge and is essentially simultaneous with the SEC's posting of these reports on its EDGAR system through the SEC's website (www.sec.gov).
 

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Competition
 
Enterprise faces robust competition to attract and retain customers within existing and neighboring geographic markets. The Company's ability to achieve its long-term strategic growth and market share objectives will depend in part upon management's continued success in differentiating the Company in the marketplace and its ability to strengthen its competitive position. National and larger regional banks and financial institutions have a local presence in the Company's market area.  These larger institutions have certain competitive advantages, including greater financial resources and the ability to make larger loans to a single borrower. Numerous local savings banks, commercial banks, cooperative banks and credit unions also compete in the Company's market area. The expanded commercial lending capabilities of credit unions and the shift to commercial lending by traditional savings banks means that both types of traditionally consumer-orientated institutions now compete for the Company's targeted commercial customers. In addition, the non-taxable status of credit unions allows them certain advantages as compared to taxable institutions such as Enterprise. Competition for loans, deposits and cash management services, wealth advisory assets, and insurance business also comes from other businesses that provide financial services, including consumer finance companies, mortgage brokers and lenders, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment advisors, internet-based banks, non-bank electronic payment and funding channels, and other financial intermediaries. The evolving financial technology ("Fintech") industry also aims to compete with traditional banking services and delivery methods, although the industry offers opportunities for strategic partnerships, it is also a source for direct competition. Consolidation within the industry and customer disenfranchisement with larger national/international banks are expected to continue to have an impact on the regional competitive market.

The Company faces increasing competition within its marketplace on the pricing and terms of loans. This is expected to be an ongoing competitive challenge; however, the Company is committed to maintaining asset quality and focuses its sales efforts on building long-term relationships, rather than competing for individual transactions or easing loan terms.

The Company actively seeks to increase deposit market share and strengthen its competitive position with an unwavering commitment to providing an enhanced customer experience and through continuous reviews of deposit product offerings, cash management and ancillary services and state-of-the-art secure delivery channels, targeted to businesses, non-profits, professional practice groups, municipalities and consumers' needs.

Enterprise carefully plans market expansion through active development of new branch locations, identifying markets strategically located to complement existing locations while expanding the Company's geographic market footprint.

The increased use and advances in technology and data analytics and storage, such as internet and mobile banking, non-bank electronic payment channels, electronic transaction processing, digital currency, and cloud-computing and storage, among others are expected to have a significant impact on the future competitive landscape confronting financial service businesses.

In addition, the cost of compliance with new government regulations, changes in tax legislation and the interest-rate environment continue to impact competition and consolidation within the industry in various ways, with some participants better equipped to manage these changes than others based on size, depth of resources, or competitive product positioning, among other factors. See also "Supervision and Regulation" below, and Item 1A, "Risk Factors," of this Form 10-K for further discussion on how laws and regulations and other factors may affect the Company's competitive position, growth and/or profitability.

Supervision and Regulation
General

Set forth below is a summary description of the significant elements of the laws and regulations applicable to the Company and the Bank. The description is qualified in its entirety by reference to the full text of the statutes, regulations and policies that are described. Moreover, these statutes, regulations and policies are continually under review by the U.S. Congress and state legislatures and federal and state regulatory agencies. A change in statutes, regulations or regulatory policies applicable to the Company or its principal subsidiary, the Bank, could have a material effect on our business, financial condition or results of operations.



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Regulatory Agencies
As a registered bank holding company, the Company is subject to the supervision and regulation of the Federal Reserve Board and, acting under delegated authority, the FRB pursuant to the Bank Holding Company Act, as amended (the "Bank Holding Company Act"). The Massachusetts Division of Banks (the "Division") also retains supervisory jurisdiction over the Company.

As a Massachusetts state-chartered bank, the Bank is subject to the supervision and regulation of the Division and, with respect to the Bank's New Hampshire branching operations, the New Hampshire Banking Department. As a state-chartered bank that accepts deposits and is not a member of the Federal Reserve System, the Bank is also subject to the supervision and regulation of the FDIC.

Bank Holding Company Regulation
As a registered bank holding company, the Company is required to furnish to the FRB annual and quarterly reports of its financial condition and results of operations and may also be required to furnish such additional information and reports as the Federal Reserve Board or the FRB may require.

Acquisitions by Bank Holding Companies

Under the Bank Holding Company Act, the Company must obtain the prior approval of the Federal Reserve Board or, acting under delegated authority, the FRB before (1) acquiring direct or indirect ownership or control of any class of voting securities of any bank or bank holding company if, after the acquisition, the Company would directly or indirectly own or control 5% or more of such class; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. The Company's acquisition of or merger with another bank holding company or acquisition of another bank would also require the prior approval of the Division.

Under the Bank Holding Company Act, any company must obtain approval of the Federal Reserve Board or, acting under delegated authority, the FRB, prior to acquiring control of the Company or the Bank. For purposes of the Bank Holding Company Act, "control" is defined as ownership of 25% or more of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank.

Control Acquisitions

The Change in Bank Control Act, as amended (the "Change in Bank Control Act"), and the related regulations of the Federal Reserve Board require any person or groups of persons acting in concert (except for companies required to make application under the Bank Holding Company Act), to file a written notice with the Federal Reserve Board or, acting under delegated authority, the appropriate Federal Reserve Bank, before the person or group acquires control of the Company. The Change in Bank Control Act defines "control" as the direct or indirect power to vote 25% or more of any class of voting securities or to direct the management or policies of a bank holding company or an insured bank. A rebuttable presumption of control arises under the Change in Bank Control Act where a person or group controls 10% or more, but less than 25%, of a class of the voting stock of a company or insured bank which is a reporting company under the Exchange Act, such as the Company, or such ownership interest is greater than the ownership interest held by any other person or group.

In addition, the Change in Bank Control Act prohibits any entity from acquiring 25% (or 5% in the case of an acquirer that is a bank holding company) or more of a bank holding company's or bank's voting securities, or otherwise obtaining control or a controlling influence over a bank holding company or bank without the approval of the Federal Reserve Board. On September 22, 2008, the Federal Reserve Board issued a policy statement on equity investments in bank holding companies and banks, which allows the Federal Reserve Board to generally be able to conclude that an entity's investment is not "controlling" if the investment in the form of voting and nonvoting shares represents in the aggregate (i) less than one-third of the total equity of the banking organization (and less than one-third of any class of voting securities, assuming conversion of all convertible nonvoting securities held by the entity) and (ii) less than 15% of any class of voting securities of the banking organization.

Under the Change in Bank Control Act and applicable Massachusetts law, any person or group of persons acting in concert would also be required to file a written notice with the FDIC and the Division before acquiring any such direct or indirect control of the Bank.


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Permissible Activities

The Bank Holding Company Act also limits the investments and activities of bank holding companies. In general, a bank holding company is prohibited from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that is not a bank or a bank holding company or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, providing services for its subsidiaries, and various non-bank activities that are deemed to be closely related to banking. The activities of the Company are subject to these legal and regulatory limitations under the Bank Holding Company Act and the implementing regulations of the Federal Reserve Board.

In connection with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"), Section 13 of the Bank Holding Company Act, commonly known as the "Volcker Rule," was amended to generally prohibit banking entities from engaging in the short-term proprietary trading of securities and derivatives for their own account and bar them from having certain relationships with hedge funds or private equity funds. However, Section 203 of the Economic Growth, Regulatory Relief, and Consumer Protection Act, (the "EGRRCPA"), exempts community banks from the restrictions of the Volcker Rule if (i) the community bank, and every entity that controls it, has total consolidated assets equal to or less than $10 billion; and (ii) trading assets and liabilities of the community bank, and every entity that controls it, is equal to or less than 5% of its total consolidated assets. As the consolidated assets of the Company are less than $10 billion and the Company does not currently exceed the 5% threshold, this aspect of the Volcker Rule does not have any impact on the Company's consolidated financial statements at this time.

A bank holding company may also elect to become a "financial holding company," by which a qualified parent holding company of a banking institution may engage, directly or through its non-bank subsidiaries, in any activity that is financial in nature or incidental to such financial activity or in any other activity that is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. These activities include securities underwriting and dealing, insurance underwriting and making merchant banking investments. A bank holding company will be able to successfully elect to be regulated as a financial holding company if all of its depository institution subsidiaries meet certain prescribed standards pertaining to management, capital adequacy and compliance with the Community Reinvestment Act, as amended (the "Community Reinvestment Act"), such as being "well-managed" and "well-capitalized," and must have a Community Reinvestment Act rating of at least "satisfactory." Financial holding companies remain subject to regulation and oversight by the Federal Reserve Board. The Company believes that the Bank, which is the Company's sole depository institution subsidiary, presently satisfies all of the requirements that must be met to enable the Company to successfully elect to become a financial holding company. However, the Company has no current intention of seeking to become a financial holding company. Such a course of action may become necessary or appropriate at some time in the future depending upon the Company's strategic plan.

Source of Strength

Under the Federal Reserve Board's "source-of-strength" doctrine, a bank holding company is required to act as a source of financial and managerial strength to any of its subsidiary banks. The holding company is expected to commit resources to support its subsidiary bank, including at times when the holding company may not be in a financial position to provide such support. A bank holding company's failure to meet its source-of-strength obligations may constitute an unsafe and unsound practice or a violation of the Federal Reserve Board's regulations, or both. The source-of-strength doctrine most directly affects bank holding companies in situations where the bank holding company's subsidiary bank fails to maintain adequate capital levels. This doctrine was codified by the Dodd-Frank Act, but the Federal Reserve Board has not yet adopted regulations to implement this requirement.

Imposition of Liability for Undercapitalized Subsidiaries

Bank regulators are required to take "prompt corrective action" to resolve problems associated with insured depository institutions whose capital declines below certain levels. In the event an institution becomes "undercapitalized," it must submit a capital restoration plan to its regulators. The capital restoration plan will not be accepted by the regulators unless each company having control of the undercapitalized institution guarantees the subsidiary's compliance with the capital restoration plan up to a certain specified amount. Any such guarantee from a depository institution's holding company is entitled to a priority of payment in bankruptcy.

The aggregate liability of the holding company of an undercapitalized bank is limited to the lesser of 5% of the institution's assets at the time it became undercapitalized or the amount necessary to cause the institution to be "adequately capitalized."

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The bank regulators have greater power in situations where an institution becomes "significantly" or "critically" undercapitalized or fails to submit a capital restoration plan. For example, a bank holding company controlling such an institution can be required to obtain prior Federal Reserve Board approval of proposed dividends, or it may be required to consent to a consolidation or to divest the troubled institution or other affiliates.

Safety and Soundness

The federal banking agencies have adopted the Interagency Guidelines for Establishing Standards for Safety and Soundness. The guidelines establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest-rate exposure, asset growth, asset quality, earnings and compensation, and fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. These guidelines also prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder.

Bank holding companies are not permitted to engage in unsafe or unsound banking practices. The Federal Reserve Board has the power to order a bank holding company to terminate any activity or investment, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or investment or such ownership or control constitutes a serious risk to the financial safety, soundness, or stability of any subsidiary bank of the bank holding company. The Federal Reserve Board also has the authority to prohibit activities of non-banking subsidiaries of bank holding companies which represent unsafe and unsound banking practices or which constitute violations of laws or regulations.

For example, the Federal Reserve Board's Regulation Y requires a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases in the preceding year, is equal to 10% or more of the bank holding company's consolidated net worth. There is an exception for bank holding companies that are well-managed, well-capitalized, and not subject to any unresolved supervisory issues. The Federal Reserve Board may oppose the transaction if it believes that the transaction would constitute an unsafe or unsound practice or would violate any law or regulation. As another example, a holding company may not impair its subsidiary bank's soundness by causing it to make funds available to non-banking subsidiaries or their customers if the Federal Reserve Board believes it not prudent to do so.

The Federal Reserve Board can assess civil money penalties for activities conducted on a knowing and reckless basis, if such unsafe and unsound activities caused a substantial loss to a depository institution. The Financial Institutions Reform, Recovery and Enforcement Act ("FIRREA") expanded the Federal Reserve's authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices, or which constitute violations of laws or regulations. FIRREA increased the amount of civil money penalties which the Federal Reserve can assess for activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution. The penalties can be as high as $1 million for each day the activity continues. FIRREA also expanded the scope of individuals and entities against which such penalties may be assessed.

Capital Requirements

The federal banking agencies have adopted risk-based capital guidelines for bank holding companies and banks that are expected to provide a measure of capital that reflects the degree of risk associated with a banking organization's operations for both transactions reported on the consolidated balance sheet as assets, such as loans, and those recorded as off-balance sheet items, such as commitments, letters of credit and recourse arrangements. The risk-based guidelines apply on a consolidated basis to bank holding companies with consolidated assets of $3 billion or more or with a material amount of equity securities outstanding that are registered with the SEC.

Pursuant to federal regulations, banks and bank holding companies must maintain capital levels commensurate with the level of risk to which they are exposed, including the volume and severity of problem loans. For example, bank holding companies experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. The federal banking agencies may change existing capital guidelines or adopt new capital guidelines in the future and have required many banks and bank holding companies subject to enforcement actions to maintain capital ratios in excess of the minimum ratios otherwise required to be deemed well-capitalized, in which case the affected institution may no longer be deemed well-capitalized and may be subject to restrictions on various activities, including a bank's ability to accept or renew brokered deposits.

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Under these capital guidelines, a banking organization is required to maintain certain minimum capital ratios, which are obtained by dividing its qualifying capital by its total risk-adjusted assets and off-balance sheet items. In general, the dollar amounts of assets and certain off-balance sheet items are "risk-adjusted" and assigned to various risk categories. In addition to such risk adjusted capital requirements, banking organizations are also required to maintain an additional minimum "leverage" capital ratio, which is calculated based on average total assets without any adjustment for risk being made to the value of the assets.

Qualifying capital is classified depending on the type of capital as follows:

"Tier 1 capital" consists of common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, a limited amount of qualifying cumulative perpetual preferred stock and minority interests in the equity accounts of consolidated subsidiaries, less goodwill and certain other intangible assets. In determining bank holding company compliance with holding company level capital requirements, qualifying Tier 1 capital may count trust preferred securities, subject to certain criteria and quantitative limits for inclusion of restricted core capital elements in Tier 1 capital, provided that the bank holding company has total assets of less than $15 billion and such trust preferred securities were issued before May 19, 2010;

"Tier 2 capital" includes, among other things, hybrid capital instruments, perpetual debt, mandatory convertible debt securities, qualifying term subordinated debt, preferred stock that does not qualify as Tier 1 capital, and a limited amount of allowance for loan and lease losses.

Capital Requirements under Basel III

The rules adopted by the regulators implementing the international regulatory capital framework, referred to as the "Basel III Rules," apply to both depository institutions and (subject to certain exceptions not applicable to the Company) their holding companies. Although parts of the Basel III Rules apply only to large, complex financial institutions, substantial portions of the Basel III Rules apply to the Company and the Bank. Under the Basel III Rules, which generally became effective January 1, 2015, and were fully phased in effective January 1, 2019, a bank holding company must satisfy certain capital levels in order to comply with the prompt corrective action framework and to avoid limitations on capital distributions and discretionary bonus payments.

The Basel III Rules also establish a "capital conservation buffer" of 2.5% above the regulatory minimum risk-based capital requirements. An institution will be subject to limitations on certain activities, including payment of dividends, share repurchases and discretionary bonuses to executive officers, if its capital level is below the buffered ratio.

The Basel III minimum capital ratios, as applicable to the Company and the Bank in 2019, with the full capital conservation buffer are summarized in the table below.
 
 
Basel III Minimum for Capital Adequacy Purposes
 
Basel III Additional Capital Conservation Buffer
 
Basel III Ratio with Capital Conservation Buffer
Total Risk Based Capital (total capital to risk weighted assets)
 
8.00%
 
2.50%
 
10.50%
Tier 1 Risk Based Capital (tier 1 to risk weighted assets)
 
6.00%
 
2.50%
 
8.50%
Tier 1 Leverage Ratio (tier 1 to average assets)
 
4.00%
 
—%
 
4.00%
Common Equity Tier 1 Risk Based Capital (CET1 to risk weighted assets)
 
4.50%
 
2.50%
 
7.00%

Under the Basel III Rules, higher or more sensitive risk weights are assigned to various categories of assets, including, certain credit facilities that finance the acquisition, development or construction of real property, certain exposures or credits that are 90 days past due or on non-accrual, foreign exposures and certain corporate exposures. In addition, these rules include greater recognition of collateral and guarantees, and revised capital treatment for derivatives and repo-style transactions.

In addition, the Basel III Rules include certain exemptions to address concerns about the regulatory burden on community banks. For example, banking organizations with less than $15 billion in consolidated assets as of December 31, 2009 are permitted to include in Tier 1 capital trust preferred securities and cumulative perpetual preferred stock issued and included in

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Tier 1 capital prior to May 19, 2010 on a permanent basis, without any phase out. Community banks were also allowed to elect, on a one-time basis in their March 31, 2015 quarterly filings, to permanently opt-out of the requirement to include most accumulated other comprehensive income ("AOCI") components in the calculation of CET1 capital and, in effect, retain the AOCI treatment under the previous capital rules. Under the Basel III Rules, in 2015 the Company made such election to permanently exclude AOCI from capital.

Management believes, as of December 31, 2019, that the Company met all capital adequacy requirements to which it was subject under Basel III. As of December 31, 2019, the Company met the definition of "well-capitalized" under the applicable Federal Reserve Board regulations.

Community Bank Leverage Ratio

On September 17, 2019, the federal banking agencies jointly finalized a rule to be effective January 1, 2020 and intended to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio ("CBLR") framework, as required by Section 201 of the EGRRCPA. Under the final rule, if a qualifying community banking organization opts into the CBLR framework and meets all requirements under the framework, it will be considered to have met the well-capitalized ratio requirements under the Prompt Corrective Action regulations described below and will not be required to report or calculate risk-based capital. In order to qualify for the CBLR framework, a community banking organization must have a tier 1 leverage ratio of greater than 9%, less than $10 billion in total consolidated assets, and limited amounts of off-balance-sheet exposures and trading assets and liabilities. The Company and the Bank will continue to follow Basel III capital requirements as described above.

Regulatory Restrictions on Dividends

The Company is regarded as a legal entity separate and distinct from the Bank. The principal source of the Company's revenues is dividends received from the Bank. Both Massachusetts and federal law limit the payment of dividends by the Company. Under Massachusetts law, the Company is generally prohibited from paying a dividend or making any other distribution if, after making such distribution, it would be unable to pay its debts as they become due in the usual course of business, or if its total assets would be less than the sum of its total liabilities plus the amount that would be needed if it were dissolved at the time of the distribution, to satisfy any preferential rights on dissolution of holders of preferred stock ranking senior in right of payment to the capital stock on which the applicable distribution is made. The Federal Reserve Board also has further authority to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices.
The Federal Reserve Board policy statement and supervisory guidance on the payment of cash dividends by bank holding companies, expresses the view that a bank holding company should pay cash dividends only to the extent that, (1) the company's net income for the past year is sufficient to cover the cash dividends, (2) the rate of earnings retention is consistent with the company's capital needs, asset quality, and overall financial condition, and (3) the minimum regulatory capital adequacy ratios are met. It is also the Federal Reserve Board's policy that bank holding companies should not maintain dividend levels that undermine their ability to serve as a source of strength to their banking subsidiaries.
Bank Regulation
The Bank is subject to the supervision and regulation of the Division and the FDIC, and, with respect to its New Hampshire branching operations, of the New Hampshire Banking Department. Federal and Massachusetts laws and regulations that specifically apply to the Bank's business and operations cover, among other matters, the scope of its business, the nature of its investments, its reserves against deposits, the timing of the availability of deposited funds, its activities relating to dividends, investments, loans, the nature and amount of and collateral for certain loans, borrowings, capital requirements, certain check-clearing activities, branching, and mergers and acquisitions. The Bank is also subject to federal and state laws and regulations that restrict or limit loans or extensions of credit to, or other transactions with, "insiders," including executive officers, directors and principal stockholders, and loans or extension of credit by banks to affiliates or purchases of assets from, or other transactions with, affiliates, including parent holding companies.
The FDIC and the Division may exercise extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. If as a result of an examination, the Division or the FDIC should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, sensitivity to market risk, or other aspects of the Bank's operations are unsatisfactory or that the Bank or its management is violating or has violated any law

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or regulation, the Division and the FDIC have authority to undertake a variety of enforcement measures of varying degrees of severity, including the following:
Requiring the Bank to take affirmative action to correct any conditions resulting from any violation or practice;

Directing the Bank to increase capital and maintain higher specific minimum capital ratios, which may preclude the Bank from being deemed to be well-capitalized and restrict its ability to engage in various activities;

Restricting the Bank's growth geographically, by products and services, or by mergers and acquisitions;

Requiring the Bank to enter into an informal or formal enforcement action to take corrective measures and cease unsafe and unsound practices, including requesting the board of directors to adopt a binding resolution, sign a memorandum of understanding or enter into a consent order;

Requiring prior approval for any changes in senior management or the board of directors;

Removing officers and directors and assessing civil monetary penalties; and

Taking possession of, closing and liquidating the Bank or appointing the FDIC as receiver under certain circumstances.

Permissible Activities
Under the Federal Deposit Insurance Act, as amended (the "FDIA"), and applicable Massachusetts law, the Bank may generally engage in any activity that is permissible under Massachusetts law and either is permissible for national banks or the FDIC has determined does not pose a significant risk to the FDIC's Deposit Insurance Fund ("DIF"). In addition, the Bank may also form, subject to the approvals of the Division and the FDIC, "financial subsidiaries" to engage in any activity that is financial in nature or incidental to a financial activity. In order to qualify for the authority to form a financial subsidiary, the Bank is required to satisfy certain conditions, some of which are substantially similar to those that the Company would be required to satisfy in order to elect to become a financial holding company. The Company believes that the Bank would be able to satisfy all of the conditions that would be required to form a financial subsidiary, although the Bank has no current intention of doing so. Such a course of action may become necessary or appropriate at some time in the future depending upon the Bank's strategic plan.
Capital Adequacy Requirements
The FDIC monitors the capital adequacy of the Bank by using a combination of risk-based guidelines and leverage ratios. The FDIC considers the Bank's capital levels when taking action on various types of applications and when conducting supervisory activities related to the safety and soundness of the Bank and the banking system. As noted above, the Basel III Rules require banks to maintain four minimum capital standards: (1) a Tier 1 capital to adjusted total assets ratio, or "leverage capital ratio," of at least 4.0%, (2) a Tier 1 capital to risk-weighted assets ratio, or "Tier 1 risk-based capital ratio," of at least 6.0%, (3) a total risk-based capital (Tier 1 plus Tier 2) to risk-weighted assets ratio, or "total risk-based capital ratio," of at least 8.0%, and (4) a CET1 capital ratio of 4.5%, which are the same minimum capital standards to which the Company is held on a consolidated basis. In addition, the FDIC's prompt corrective action standards discussed below, in effect, increase the minimum regulatory capital ratios for banking organizations in order to be considered "well capitalized." Higher capital levels may be required if warranted by the particular circumstances or risk profiles of individual institutions, or if required by the banking regulators due to the economic conditions impacting our market. For example, FDIC regulations provide that higher capital may be required to take adequate account of, among other things, interest-rate risk and the risks posed by concentrations of credit, nontraditional activities or securities trading activities.
Management believes, as of December 31, 2019, that Bank exceeded its minimum capital requirements and met all capital adequacy requirements to which it was subject under Basel III.



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Prompt Corrective Action
The federal banking agencies define five categories in which an insured depository institution will be placed, based on the level of its capital ratios: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Insured depository institutions are required to meet the following capital levels in order to qualify as "well-capitalized:" (i) a Total risk-based capital ratio of 10%; (ii) a Tier 1 risk-based capital ratio of 8%; (iii) a Tier 1 leverage ratio of 5%; and (iv) a CET1 risk-based capital ratio of 6.5%. Accordingly, a financial institution may be considered "well-capitalized" under the prompt corrective action framework, but not satisfy the full Basel III capital ratios.
The Bank's regulatory capital ratios were in excess of the levels established for "well-capitalized" institutions as of December 31, 2019. As noted above, as of December 31, 2019, management believes the Bank satisfied all capital adequacy requirements under Basel III.
A bank that may otherwise meet the minimum requirements to be classified as well-capitalized, adequately capitalized, or undercapitalized but may be treated instead as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition, or an unsafe or unsound practice, warrants such treatment. Under the prompt corrective action regulations, a bank that is deemed to be undercapitalized or in a lesser capital category will be required to submit to its primary federal banking regulator a capital restoration plan and to comply with the plan.
Any bank holding company that controls a subsidiary bank that has been required to submit a capital restoration plan will be required to provide assurances of compliance by the bank with the capital restoration plan, subject to limitations on the bank holding company's aggregate liability in connection with providing such required assurances. Failure to restore capital under a capital restoration plan can result in the bank being placed into receivership if it becomes critically undercapitalized. A bank subject to prompt corrective action also may affect its parent holding company in other ways. These include possible restrictions or prohibitions on dividends or subordinated debt payments to the parent holding company by the bank, as well as limitations on other transactions between the bank and the parent holding company. In addition, the Federal Reserve Board may impose restrictions on the ability of the bank holding company itself to pay dividends or require divestiture of holding company affiliates that pose a significant risk to the subsidiary bank, or require divestiture of the undercapitalized subsidiary bank. At each successive lower capital category, an insured bank may be subject to increased operating restrictions by its primary federal banking regulator.
Branching
Massachusetts law provides that a Massachusetts banking company may be "eligible" to submit a notice to the Division and the FDIC to establish a branch within the Commonwealth. A bank is "eligible" to submit a notice to establish a branch in the Commonwealth if the following conditions are met: (i) the bank has received a "satisfactory" or higher Community Reinvestment Act (the "CRA") rating at its most recent CRA examination by the Division or federal regulator; (ii) the bank is "adequately capitalized" as defined under the provisions of the Federal Deposit Insurance Act and the FDIC's Capital Adequacy Regulations; and (iii) the bank has not been notified that it is in troubled condition by the Division or any federal regulatory agency. A bank must also submit a notice to the Division to relocate or close an existing branch. The Division and the FDIC consider several factors when making a decision to approve the notice, including financial condition, capital adequacy, earnings prospects, the needs of the community, and whether competition would be adversely affected.
Previously, under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, (the "Riegle-Neal Act"), a bank's ability to branch into a particular state was largely dependent upon whether the state "opted in" to de novo interstate branching. Many states did not "opt-in," which resulted in branching restrictions in those states. The Dodd-Frank Act amended the Riegle-Neal legal framework for interstate branching to permit national banks and state banks to establish branches in any state if that state would permit the establishment of the branch by a state bank chartered in that state. The Bank may, therefore, also establish branches in any other state if that state would permit the establishment of a branch by a state bank chartered in that state. In this case, the Bank would also be required to file a notice with the Division, the FDIC and potentially the banking authority of the state into which the Bank intends to branch.
Deposit Insurance
The FDIC insures the deposits of federally insured banks, such as the Bank, and thrifts, up to prescribed statutory limits of $250,000 for each depositor, through the DIF and safeguards the safety and soundness of the banking and thrift industries. The

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amount of FDIC assessments paid by each insured depository institution is based on its relative risk of default as measured by regulatory capital ratios and other supervisory factors.
At least semi-annually, the FDIC will update its loss and income projections for the DIF and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking, if required.  However, if there are additional bank or financial institution failures or if the FDIC otherwise determines to increase assessment rates, the Bank may be required to pay higher FDIC insurance premiums. Additionally, under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.
The Bank is generally unable to control the amount of premiums that it is required to pay for FDIC insurance. In connection with the Dodd Frank Act's requirement that insurance assessments be based on assets, in July 2016, the FDIC redefined its deposit insurance premium assessment base to be an institution's average consolidated total assets minus average tangible equity and revised its deposit insurance assessment rate schedule. In addition, the FDIC is considering, and is expected to adopt, a final rule to apply the CBLR framework to the deposit insurance assessment system.
On September 30, 2018, the DIF reserve ratio reached 1.36%. Because the reserve ratio exceeded the targeted 1.35%, two deposit assessment changes occurred under FDIC regulations: (1) surcharges on large banks ended, and the last surcharge on large banks was collected on December 28, 2018; and (2) small banks were awarded assessment credits for the portion of their assessment that contributed to the growth in the reserve ratio from 1.15% to 1.35%, to be applied when the reserve ratio is at least 1.38%. The DIF ratio exceeded 1.38% at both June30, 2019 and September 30, 2019. The Bank's assessment credit as calculated by the FDIC was $683 thousand and was fully utilized towards the Bank's September 2019 and a portion of the December 2019 quarterly Deposit Insurance Assessments.
In addition, all FDIC-insured institutions have historically been required to pay assessments to the FDIC to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the federal government established to recapitalize the predecessor to the DIF. The FICO bonds matured in September 2019 and the last FICO assessment was collected on the March 29, 2019 FDIC Quarterly Assessment Invoice. These assessments were included in the Company's Deposit Insurance Premiums on the Consolidated Statements of Income.
Restrictions on Dividends and Other Capital Distributions
The Company's ability to pay dividends on its shares depends primarily on dividends it receives from the Bank. Both Massachusetts and federal law limit the payment of dividends by the Bank. Under FDIC regulations and applicable Massachusetts law, the dollar amount of dividends and any other capital distributions that the Bank may make depends upon its capital position and recent net income. Any dividend payment that would exceed the total of the Bank's net profits for the current year plus its retained net profits of the preceding two years would require the Massachusetts Division of Banks' approval. Applicable provisions of the FDIA also prohibits a bank from paying any dividends on its capital stock if the bank is in default on the payment of any assessment to the FDIC or if the payment of dividends would otherwise cause the bank to become undercapitalized.  Any restrictions, regulatory or otherwise, on the ability of the Bank to pay dividends to the Company may restrict the ability of the Company to pay dividends to the holders of its common stock. However, if the Bank's capital becomes impaired or the FDIC or Division otherwise determines that the Bank needs more than normal supervision, the Bank may be prohibited or otherwise limited from paying any dividends or making any other capital distributions.
The statutory term "net profits" essentially equates with the accounting term "net income" and is defined under the Massachusetts banking statutes to mean the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting from such total all current operating expenses, actual losses, accrued dividends on any preferred stock and all federal and state taxes.


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Community Reinvestment Act
The Community Reinvestment Act of 1977 and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their entire assessment area, including low-and moderate-income neighborhoods, consistent with the safe and sound operations of such banks. The CRA requires the FDIC and the Division evaluate the record of each financial institution in meeting such credit needs.  The CRA evaluation is also considered by the bank regulatory agencies in evaluating approvals for mergers, acquisitions, and applications to open, relocate or close a branch or facility.  Failure to adequately meet the criteria within CRA guidelines could impose additional requirements and limitations on the Bank.  Additionally, the Bank must publicly disclose the ability to request the Bank's CRA Performance Evaluation and other various related documents.  The Bank received a rating of "High Satisfactory" by the Division and "Satisfactory" by the FDIC on its most recent Community Reinvestment Act examination.
On December 12, 2019, the Office of the Comptroller of the Currency and the FDIC issued a joint proposal to revamp how the agencies will assess banks' performance under the CRA. Among other changes, the proposal (i) expands the concept of assessment area ("AA") to include geographies outside of a bank's current AAs and in which the bank receives at least 5% of its retail deposits and (ii) introduces a series of objective tests for determining a bank's presumptive CRA rating. The proposal will be most noteworthy for banks with at least $500 million in total assets and with significant retail deposits sourced outside of their current AAs. The Company and the Bank will continue to monitor this proposal.
Restrictions on Transactions with Affiliates and Loans to Insiders
Transactions between the Bank and its affiliates are subject to the provisions of Section 23A and 23B of the Federal Reserve Act (the "Affiliates Act"), as such provisions are made applicable to state non-member banks by Section 18(i) of the Federal Deposit Insurance Act. Affiliates of a bank include, among other entities, the bank's holding company and companies that are under common control with the bank.
These provisions place limits on the amount of:
loans or extensions of credit to affiliates;
investment in affiliates;
assets that may be purchased from affiliates, except for real and personal property exempted by the Federal Reserve Board;
the amount of loans or extensions of credit to third parties collateralized by the securities or obligations of affiliates; and
the guarantee, acceptance or letter of credit issued on behalf of an affiliate.

The total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of the Bank's capital and surplus and, as to all affiliates combined, to 20% of its capital and surplus. In addition to the limitation on the amount of these transactions, each of the above transactions must also meet specified collateral requirements and the types of permissible collateral may be limited. The Bank must also comply with other provisions designed to avoid the purchase or acquisition of low-quality assets from affiliates. The Dodd-Frank Act expanded the scope of Section 23A, which now includes investment funds managed by an institution as an affiliate, as well as other procedural and substantive hurdles.
The Bank is also subject to Section 23B of the Federal Reserve Act which, among other things, prohibits the Bank from engaging in any transaction with an affiliate unless the transaction is on terms substantially the same, or at least as favorable to the Bank or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliated companies. The Federal Reserve Board has also issued Regulation W which codifies prior regulations under the Affiliates Act and interpretive guidance with respect to affiliate transactions.
Under both Massachusetts and federal law, the Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal stockholders and their related interests. These extensions of credit (1) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties, (2) must follow the credit underwriting procedures at least as stringent as those applicable to comparable transactions with third parties, and (3) must not involve more than the normal risk of repayment or present other unfavorable features. The Dodd-Frank Act expanded coverage of transactions with insiders by including credit exposure arising from derivative transactions (which are also covered by the expansion of Section 23A). The Dodd-Frank Act prohibits an insured depository institution from purchasing or selling an asset to an executive officer, director, or principal stockholder (or any related interest of such a person) unless the transaction is on market terms, and, if the transaction exceeds 10% of the institution's capital, it is approved in advance by a majority of the disinterested directors.

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Concentrated Commercial Real Estate Lending Regulations
The federal banking agencies, including the FDIC, have promulgated guidance governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a concentration in commercial real estate lending if (i) total reported loans for construction, land development, and other land represent 100% or more of total capital or (ii) total reported loans secured by multifamily and non-farm nonresidential properties (excluding loans secured by owner-occupied properties) and loans for construction, land development, and other land represent 300% or more of total capital and the bank's commercial real estate loan portfolio has increased 50% or more during the prior 36 months. If a concentration is present, management must employ heightened risk management practices that address the following key elements: including board and management oversight and strategic planning, portfolio management, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. As of December 31, 2019, the Bank's concentrations of commercial real estate loans fall near or slightly above the established levels and the Company believes its credit risk administration to be consistent with heightened risk management regulatory guidance.
The Basel III Rules also require loans categorized as "high-volatility commercial real estate," or HVCRE, to be assigned a 150% risk weighting and require additional capital support. However, the EGRRCPA prohibits federal banking regulators from imposing this higher capital standards on HVCRE exposures unless they are for higher risk loans for acquisition, development or construction, or ADC, and clarifying ADC status.
On November 20, 2019, federal banking regulators jointly issued a final rule revising the definition of a HVCRE exposure and providing interpretations of certain aspects of Acquisition Development and Construction loans. The interpretation under this final rule will take effect on April 1, 2020 and may impact the Banks' Consolidated Report of Condition and Income.
The Dodd-Frank Wall Street Reform and Consumer Protection Act
The Dodd-Frank Act implemented significant changes to the regulation of the financial services industry and includes the following provisions that have affected or are likely to affect the Company:
Repeal of the federal prohibitions on the payment of interest on demand deposits effective July 21, 2011, thereby permitting, but not requiring, depository institutions to pay interest on business transaction and other accounts.
Imposition of comprehensive regulation of the over-the-counter derivatives market, including provisions that effectively prohibit insured depository institutions from conducting certain derivatives activities from within the institution.
Implementation of corporate governance revisions, including proxy access requirements for all publicly traded companies.
Increase in the Federal Reserve Board's examination authority with respect to bank holding companies' non-banking subsidiaries.
Limitations on the amount of any interchange fee charged by a debit card issuer to be reasonable and proportional to the cost incurred by the issuer. The interchange rate cap has been set at $0.24 per transaction. While these restrictions do not apply to banks like Enterprise with less than $10 billion in assets, the rule could affect the competitiveness of debit cards issued by smaller banks. We believe that market forces may erode the effectiveness of this exemption now that merchants can select more than one network for transaction routing.
Significant increases in the regulation of mortgage lending and servicing by banks and non-banks.  In particular, requirements that mortgage originators act in the best interests of a consumer and seek to ensure that a consumer will have the capacity to repay a loan that the consumer enters into; requirements that mortgage originators be properly qualified, registered, and licensed and comply with any regulations designed by the Consumer Financial Protection Bureau ("CFPB") to monitor their operations; mandates of comprehensive additional and enhanced residential mortgage loan related disclosures, both prior to loan origination and after; mandates of additional appraisal practices for loans secured by residential dwellings, including potential additional appraisals at the banks cost; mandates of additional collection and reporting requirements on transactions that are reportable under the Home Mortgage Disclosure Act; additional restrictions on the compensation of loan originators; and requirements that mortgage loan securitizers retain a certain amount of risk (as established by the regulatory agencies).  However, mortgages that conform to the new regulatory standards as "qualified residential mortgages" will not be subject to risk retention requirements.

Although the majority of the Dodd-Frank Act's rulemaking requirements have been met with finalized rules, approximately one-fifth of the rulemaking requirements are either still in the proposal stage or have not yet been proposed. On May 24, 2018,

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the EGRRCPA amended provisions in the Dodd-Frank Act with the intent to relieve the regulatory burden on community banks. A theme of the EGRRCPA is to provide broad exemption for smaller banking institutions from certain requirements of the Dodd-Frank Act, by raising the level of consolidated assets an institution must have before it becomes subject to certain regulatory requirements. A number of changes made by the EGRRCPA require agency implementation either through rule making procedures or other action by the federal banking regulators. For those regulations that have been implemented, most will have little to no impact on the Company. However, the Company may be impacted by future agency rulemaking in connection with implementation of the EGRRCPA and it is difficult to anticipate the continued impact this expansive legislation may have on the Company, its customers and the financial industry generally.
For more information on the EGRRCPA, please see the following sections "Permissible Activities, Community Bank Leverage Ratio, and Concentrated Commercial Real Estate Lending Regulations," above, and "Consumer Financial Protection Bureau and HMDA," below.
Consumer Financial Protection Bureau
The Consumer Financial Protection Bureau was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking, supervision and enforcement authority for a wide range of consumer protection laws that would apply to all banks and thrifts, including the Equal Credit Opportunity Act, Truth-in Lending Act ("TILA"), Real Estate Settlement Procedures Act ("RESPA"), Fair Credit Reporting Act, Fair Debt Collection Act, the Consumer Financial Privacy provisions of the Gramm-Leach-Bliley Act and certain other statutes. Banking institutions with total assets of $10 billion or less, such as the Bank, remain subject to the supervision and enforcement of their primary federal banking regulator with respect to the federal consumer financial protection laws and such additional regulations as may be adopted by the CFPB.
The "Ability-to-Repay/Qualified Mortgage" rules, which amended TILA's implementing regulation, Regulation Z generally requires creditors to make a reasonable, good faith determination of a consumer's ability to repay for certain consumer credit transactions secured by a dwelling and establishes certain protections from liability under this requirement for "qualified mortgages." The EGRRCPA provides that for certain insured depository institutions and insured credit unions with less than $10 billion in total consolidated assets, mortgage loans that are originated and retained in portfolio will automatically be deemed to satisfy the "ability to repay" requirement. To qualify for this treatment, the insured depository institutions and credit unions must meet conditions relating to prepayment penalties, points and fees, negative amortization, interest-only features and documentation.
Home Mortgage Disclosure Act ("HMDA")
On October 15, 2015, pursuant to section 1094 of the Dodd-Frank Act, the CFPB issued amended rules in regard to the collection, reporting and disclosure of certain residential mortgage transactions under the Home Mortgage Disclosure Act (the "HMDA Rules"). The Dodd-Frank Act mandated additional loan data collection points in addition to authorizing the Bureau to require other data collection points under implementing Regulation C. Most of the provisions of the HMDA Rule went into effect on January 1, 2018 and apply to data collected in 2018 and reporting in 2019 and later years. The HMDA Rule adopts a uniform loan volume threshold for all financial institutions, modifies the types of transactions that are subject to collection and reporting, expands the loan data information being collected and reported, and modifies procedures for annual submission and annual public disclosures. EGRRCPA amended provisions of the HMDA rule to exempt certain insured institutions from most of the expanded data collection requirements required of the Dodd- =Frank Act. Institutions originating fewer than 500 dwelling secured closed-end mortgage loans or fewer than 500 dwelling secured open-end lines are exempt from the expanded data collection requirements that went into effect January 1, 2018. The Bank does not receive this reporting relief based on the number of dwelling secured mortgage loans reported annually.
UDAP and UDAAP
Banking regulatory agencies have increasingly used a general consumer protection statute to address "unethical" or otherwise "bad" business practices that may not necessarily fall directly under the purview of a specific banking or consumer finance law. The law of choice for enforcement against such business practices has been Section 5 of the Federal Trade Commission Act, referred to as the FTC Act, which is the primary federal law that prohibits unfair or deceptive acts or practices, referred to as UDAP, and unfair methods of competition in or affecting commerce. "Unjustified consumer injury" is the principal focus of the FTC Act. Prior to the Dodd-Frank Act, there was little formal guidance to provide insight to the parameters for compliance with UDAP laws and regulations. However, UDAP laws and regulations have been expanded under the Dodd-Frank Act to apply to "unfair, deceptive or abusive acts or practices," referred to as UDAAP, which have been delegated to the CFPB for rule-making. The federal banking agencies have the authority to enforce such rules and regulations.

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Incentive Compensation
In June 2010, the Federal Reserve Board, the Office of the Comptroller of the Currency and the FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization's incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization's ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.
The Federal Reserve Board will review, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not "large, complex banking organizations." The findings of the supervisory initiatives will be included in reports of examination. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk management control or governance processes, pose a risk to the organization's safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.
In addition, publicly traded companies are required by the SEC to give stockholders a non-binding vote on executive compensation at least every three years and on so-called "golden parachute" payments in connection with approvals of mergers and acquisitions unless previously voted on by stockholders. Also, certain publicly traded companies are required to disclose the ratio of the compensation of its chief executive officer ("CEO") to the median compensation of its employees.
The Dodd-Frank Act directs the federal banking regulators to promulgate rules prohibiting excessive compensation paid to executives of depository institutions and their holding companies with assets in excess of $1 billion, regardless of whether the company is publicly traded or not. In May 2016, the federal banking regulators, joined by the SEC, proposed such a rule that is tailored based on the asset size of the institution. All covered financial institutions would be subject to a prohibition on paying compensation, fees, and benefits that are "unreasonable" or "disproportionate" to the value of the services performed by a person covered by the proposed rule (generally, senior executive officers and employees who are significant risk-takers). Moreover, the proposed rule includes a new requirement which provides that an incentive-based compensation arrangement must (i) include financial and non-financial measures of performance, (ii) be designed to allow non-financial measures of performance to override financial measures of performance, when appropriate (so called safety and soundness factors), and (iii) be subject to adjustment to reflect actual losses, inappropriate risk taking, compliance deficiencies, or other measures or aspects of financial and non-financial performance. Finally, the Dodd-Frank Act gives the SEC authority to prohibit broker discretionary voting on elections of directors and executive compensation matters.
Technology Risk Management and Consumer Privacy
State and federal banking regulators have issued various policy statements emphasizing the importance of technology risk management and supervision in evaluating the safety and soundness of depository institutions with respect to banks that contract with third-party vendors to provide data processing and core banking functions. The use of technology-related products, services, delivery channels and processes expose a bank to various risks, particularly operational, privacy, security, strategic, reputation and compliance risk. Banks are generally expected to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology.
Under Section 501 of the Gramm-Leach-Bliley Act, the federal banking agencies have established appropriate standards for financial institutions regarding the implementation of safeguards to protect the security and confidentiality of customer records and information, protection against any anticipated threats or hazards to the security or integrity of such records and protection against unauthorized access to or use of such records or information in a way that could result in substantial harm or inconvenience to a customer. Among other matters, the rules require each bank to implement a comprehensive written information security program that includes administrative, technical and physical safeguards relating to customer information. In addition, Massachusetts has established Standards for the Protection of Personal Information which create minimum standards to be met in connection with the safeguarding of personal information and outline the content and timing of disclosures required following a system breach or compromise.
Under the Gramm-Leach-Bliley Act, a financial institution must also provide its customers with a notice of privacy policies and practices. Section 502 prohibits a financial institution from disclosing nonpublic personal information about a customer to non-

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affiliated third parties unless the institution satisfies various notice and opt-out requirements and the customer has not elected to opt out of the disclosure. Under Section 504, the agencies are authorized to issue regulations as necessary to implement notice requirements and restrictions on a financial institution's ability to disclose nonpublic personal information about customers to non-affiliated third parties. Under the final rule the regulators adopted, all banks must develop initial and annual privacy notices which describe in general terms the bank's information sharing practices. Banks that share nonpublic personal information about customers with non-affiliated third parties must also provide customers with an opt-out notice and a reasonable period of time for the customer to opt out of any such disclosure (with certain exceptions). Limitations are placed on the extent to which a bank can disclose an account number or access code for credit card, deposit or transaction accounts to any nonaffiliated third-party for use in marketing.
Bank Secrecy Act, and Anti-Money Laundering
Our Company and the Bank are also subject to the Bank Secrecy Act, as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"), which gives the federal government powers to address money laundering and terrorist threats through enhanced domestic security measures, expanded surveillance powers, and mandatory transaction reporting obligations. The Bank Secrecy Act imposes an affirmative obligation on the Bank to report currency transactions that exceed certain thresholds and to report other transactions determined to be suspicious. Financial institutions must take reasonable steps to conduct enhanced scrutiny of account relationships to guard against money laundering and to report any suspicious information maintained by financial institutions. The Bank Secrecy Act requires that all banking institutions develop and provide for the continued administration of a program reasonably designed to assure and monitor compliance with certain record-keeping and reporting requirements regarding both domestic and international currency transactions. These programs must, at a minimum, provide for a system of internal controls to assure ongoing compliance, provide for independent testing of such systems and compliance, designate individuals responsible for such compliance and provide appropriate personnel training.
The Financial Crimes Enforcement Network issued a final rule regarding customer due diligence requirements for covered financial institutions in connection with their Bank Secrecy Act and Anti-Money Laundering policies, that became effective in May 2018. The final rule adds a requirement to understand the nature and purpose of customer relationships and identify the "beneficial owner" (25% or more ownership interest) of legal entity customers. Bank regulators routinely examine institutions for compliance with these obligations and they must consider an institution's anti-money laundering compliance when considering regulatory applications filed by the institution, including applications for bank mergers and acquisitions. The regulatory authorities have imposed "cease and desist" orders and civil money penalty sanctions against institutions found to be violating these obligations.
USA PATRIOT Act and Know-Your-Customer
Under the USA PATRIOT Act, financial institutions are subject to prohibitions against specified financial transactions and account relationships, as well as enhanced due diligence and "know your customer" standards intended to detect, and prevent, the use of the United States financial system for money laundering and terrorist financing activities. The USA PATRIOT Act requires financial institutions, including banks, to establish anti-money laundering programs, including providing for a system of internal controls, designating individuals responsible for compliance, including employee training and independent audit requirements, meet minimum standards specified by the act, follow minimum standards for customer identification and maintenance of customer identification records, and regularly compare customer lists against lists of suspected terrorists, terrorist organizations and money launderers.
Other Operations and Consumer Compliance Laws
The Bank must comply with numerous federal anti-money laundering and consumer protection statutes and implement regulations, including but not limited to the Truth in Savings Act, Electronic Funds Transfer Act, Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Federal Housing Act, the National Flood Insurance Act and various other federal and state privacy protection laws. Failure to comply in any material respect with any of these laws could subject the Bank to lawsuits and could also result in administrative penalties, including fines and reimbursements. The Company and the Bank are also subject to federal and state laws prohibiting unfair or fraudulent business practices, untrue or misleading advertising and unfair competition. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must deal with customers when taking deposits, making loans, collecting loans, and providing other services. Failure to comply in any material respect with any of these laws and regulations could subject the Bank to various penalties, including but not limited to enforcement actions, injunctions, fines or criminal penalties, punitive damages to consumers, and the loss of certain contractual rights.

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Other Pending and Proposed Legislation
From time to time, various legislative and regulatory initiatives are introduced in Congress, as well as by regulatory agencies. Such initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions or proposals to substantially change the financial institution regulatory system. Such legislation could change banking statutes and the operating environment of the Company or Bank in substantial and unpredictable ways. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions. The Company cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. A change in statutes, regulations or regulatory policies applicable to the company or our subsidiaries could have a material effect on the Company's business, financial condition and results of operations.
The Company maintains a Compliance Management Program designed to meet regulatory and legislative requirements. See Key Risk Areas, below under the heading "Risk Management Framework."
See also Item 1A, "Risk Factors," of this Form 10-K for further discussion on how new laws and regulations may affect the Company's business, financial condition and results of operations.
Risk Management Framework

In addition to the risks discussed below, 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 Item 1A, "Risk Factors" of this Form 10-K. This Risk Management Framework discussion should be read in conjunction with Item 1A of this Form 10-K.

Management utilizes a comprehensive risk management framework which enables the aggregation of risk across the Company and provides reasonable assurance that management has the tools, programs 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.

The Company's enterprise risk management framework provides a structured approach for identifying, assessing and managing risks across the Company in a coordinated manner, which includes, but is 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 security, internal controls over financial reporting, physical security, loss and fraud prevention, policy reviews, vendor management (direct and indirect vendors) and contract management, business continuity planning, short and long-term capital projects and facility planning, and corporate governance.

The Company promotes proactive risk management by all Enterprise employees with clear ownership and accountability. Managers in each line of business have responsibility for identifying, assessing and managing the risks in their areas. The Risk Management department is responsible for providing guidance, oversight and input on remediation to business lines to provide reasonable assurance that risk assessments and mitigating controls and procedures are properly designed and functioning with in their areas. The Risk Management department also independently monitors operational risk, including information security, third-party risk management, disaster recovery and business continuity planning. In addition, the Internal Audit department, which is independent of management, through reviews and testing, confirms appropriate risk management controls, processes and systems are in place and functioning effectively. The Company also maintains a package of commercial insurance policies with national insurers, which provides for a broad range of insurance coverage for a variety of risk factors, at levels deemed appropriate by management. Policies are reviewed annually, or as circumstances change, by management for necessary updates and adjustments in coverage.

The CEO has overall responsibility for risk management and manages strategic and reputational risks. The Chief Risk Officer, who also serves as the Information Security Officer, is responsible for establishing and maintaining oversight of the Company's enterprise risk management framework and also oversees operational, legal and compliance risk. The Chief Financial Officer is responsible for overseeing and managing market, interest rate, liquidity, and capital risk management activities, and also evaluating the effectiveness of the design of internal controls over financial reporting. The Credit Director and Chief Lending Officer are responsible for overseeing and managing credit risk. The Chief Information Officer is responsible for technology administration including technology governance, architecture, infrastructure and application support, and the Chief Human Resources Officer is responsible for compensation risk management. Periodic reports

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relating to the Company's risk profile are provided to the Board for analysis and review. Additional risk assessments and management reporting is provided to management and the Board or its committees as deemed necessary.

Key Risk Areas

Compliance risk includes the threat of fines, civil money penalties, lawsuits and restricted growth opportunities resulting from violations and/or non-conformance with laws, rules, regulations, prescribed practices, internal policies and procedures, or ethical standards. The Company maintains a Compliance Management Program (the "CMP") designed to meet regulatory and legislative requirements. The CMP provides a framework for tracking and implementing regulatory changes, monitoring the effectiveness of policies and procedures, conducting compliance risk assessments, managing customer complaints and educating employees in matters relating to regulatory compliance. The Audit Committee of the Board oversees the effectiveness of the CMP.

Operational risk includes the threat of loss from inadequate or failed internal processes, people, systems or external events, due to, among other things: fraud or error; the inability to deliver products or services; failure to maintain a competitive position; lack of, or insufficient information security, cybersecurity or physical security; inadequate procedures or controls followed by third-party service providers; or violations of ethical standards. In addition to intensive and ongoing employee training, and employee and customer awareness campaigns, controls to manage operational risk include, but are not limited to, technology administration, information security, third-party management, and disaster recovery and business continuity planning.

The Company's technology administration includes policies and guidelines for the design, procurement, installation, management and acceptable use of hardware, software and network devices. The Company's project management standards are designed to provide risk-based oversight, coordinate and communicate ideas, and to prioritize and manage project implementation in a manner consistent with corporate objectives.

The Company has implemented layered security approaches for all electronic delivery channels to detect, prevent and respond to rising cybersecurity risks. Management utilizes a combination of third-party information security assessments, key technologies and ongoing internal and external evaluations to provide a level of protection of non-public personal information, to continually monitor and attempt to safeguard information on its operating systems and those of third-party service providers, and to quickly detect attacks. The Company also utilizes firewall technology and a combination of software and third-party monitoring to detect intrusion, and cybersecurity threats, guard against unauthorized access, and continuously identify and prevent computer viruses on the Company's information systems. To minimize debit card losses, the Company works with a third-party provider to establish parameters for allowable transaction activity, monitor transactions, and alert customers of potentially fraudulent activity.

The Company has a third-party risk management program designed to enable management to determine what risk, if any, a particular vendor and indirect vendors or subcontractors, exposes the Company to, and to rate and mitigate that risk by properly performing initial and ongoing due diligence when selecting or maintaining relationships with critical third-party providers and their subcontractors, for both on-premise and off-premise technology solutions.

The Company's Disaster Recovery and Business Continuity Program consists of the information and procedures required to enable a rapid recovery from an occurrence that would disable the Company's operations for an extended period, due to circumstances such as: loss of personnel; loss of data and/or loss of facilities under various scenarios, including unintentional, malicious or criminal intentions; or loss of access to, or the physical destruction or damage of facilities, infrastructure or systems; or denial of access to our systems or information by outside parties. The plan, which is reviewed annually, establishes responsibility for assessing a disruption of business, contains alternative strategies for the continuance of critical business functions during an emergency, assigns responsibility for restoring services, and sets priorities by which critical services will be restored. A bank-owned and maintained secondary data center location provides the Company back-up network processing capabilities if needed.

The Company has developed an Incident Response Plan in order to guide its actions in responding to real and suspected information security incidents. This includes unlawful, unauthorized, or unacceptable actions that involve a computer system or a computer network such as Distributed Denial of Service attacks, Corporate Account Takeover schemes, or ransomware. Additionally, an event that disrupts one of the Bank's service

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channels, whether as a result of a security incident or not, is also considered an incident requiring a response under this program. These disclosure controls and procedures compel the Company to make appropriate accurate and timely disclosures of material events and incidents to both customers and regulatory authorities. The reaction to an incident aims to reduce potential damage and loss and to protect and restore confidence through timely communication and the restoration of normal operating conditions for computers, services and information.

The Bank Technology Committee of the Board oversees the technology and cybersecurity strategies and their alignment with business strategies. The Committee also oversees the effectiveness of the information security program and monitors the results of third-party testing and risk assessments and responses to breaches of customer data, among other project management, cybersecurity and business continuity oversight functions.

Credit risk management is reviewed in detail in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the section 'Loans," under the heading "Credit Risk" of this Form 10-K. The Loan Committee of the Board oversees the effectiveness of the credit risk management.

Liquidity management is reviewed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the section entitled "Financial Condition" under the heading "Liquidity" of this Form 10-K.

Interest rate risk is reviewed in detail under Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of this Form 10-K below.

The Board of Directors oversees the Company's asset–liability management, which includes managing interest rate risk and liquidity.

For information regarding capital planning, current capital framework requirements applicable to the Company and the Bank and their respective capital levels at December 31, 2019, see the section within Item 1, "Business," entitled "Capital Resources" and the sections within "Supervision and Regulation" entitled "Capital Requirements" and "Capital Requirements under Basel III" and for the Bank "Capital Adequacy Requirements" of this Form 10-K and also see Note 11, "Stockholders' Equity," to the consolidated financial statements contained in Item 8, "Financial Statements and Supplementary Data" of this Form 10-K.

The Company maintains a set of internal controls over financial reporting designed to provide reasonable assurance to management that the information required to be disclosed in reports it files with or furnishes to the SEC is prepared and fairly presented based on properly recorded, processed, and summarized information. The Audit Committee of the Board oversees the effectiveness of the internal controls over financial reporting. See Item 9A, "Controls and Procedures," of this Form 10-K for management's reports on its evaluation of disclosure controls and internal controls over financial reporting.

Any system of controls or contingency plan, however well designed and operated, is based in part on certain assumptions and has inherent limitations and may not prevent or detect all risks, and therefore can provide only reasonable, not absolute, assurances that the objectives of the controls and procedures will be met. Any breakdown in the integrity of the design or functioning of the control, or the Company's inability to identify, respond and correct such breakdown, could subject the Company to increased costs and additional regulatory scrutiny, or result in loss of customer business, expose customers' personal information to unauthorized parties, damage the Company's reputation, and expose the Company to regulatory enforcement actions, civil litigation and possible financial liability, additional expenses, or losses, any of which could have a material adverse effect on the Company's business, financial condition and results of operations.

Item 1A.
Risk Factors         

An investment in the Company's common stock is subject to a variety of risks and uncertainties including, without limitation, those set forth below, any of which could cause the Company's actual results to vary materially from recent results or from the other forward-looking statements that the Company may make from time to time in news releases, periodic reports and other written or oral communications. This annual report on Form 10-K is qualified in its entirety by these risk factors. 

Realization of any of the risks outlined in the following sections, or additional risks and uncertainties that management is not aware of, or may deem immaterial, may impair the Company's business in a variety of ways, including, but not limited to, any one or a combination of the following consequences: loss of assets; an interruption in the ability to conduct transactions; loss of

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customer business; loss of key personnel; additional regulatory scrutiny and potential enforcement actions and/or penalties against the Company or the Bank; limit the payment of dividends; damage the Company's reputation; expose the Company to civil litigation and possible financial liability; result in unanticipated charges against capital; increase operational costs; decrease revenue; restrict funding sources, which could adversely impact the Company's ability to meet cash needs; be required to liquidate investments or other assets; limit growth; close locations or reduce staffing; or limit permissible activities. As a result, the Company's overall business, financial condition, results of operations, capital position, liquidity position, and financial performance could be materially and adversely affected.  If this were to happen, the value of the Company's common stock could decline significantly, and stockholders could lose some or all their investment.

The material risks and uncertainties that management believes may affect the Company are outlined below.  These risks and uncertainties are not listed in any order of priority and are not necessarily the only ones facing the Company. 

RISK MANAGEMENT CONTROLS

Risk Management Controls and Procedures Could Fail or Be Circumvented
Management regularly reviews and updates the Company's internal controls, corporate governance policies, compensation policies, Code of Business Conduct and Ethics and security controls to prevent and detect errors, theft, fraud or robbery from both internal and external sources.  Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. The Company is at risk of any circumvention of the Company's internal controls and procedures, whether intentional or unintentional, or failure to comply with regulations related to controls and procedures, or failure to adequately document executed controls and procedures, or a physical theft or robbery, whether by employees, management, directors, or external elements, or any illegal activity conducted by a Bank customer or employee.

See also “Risk Management Framework,” contained above in Item 1, Business,” of this Form 10-K for further information regarding the Company's operational risk management, information security and technology practices, the Company's Disaster Recovery and Business Continuity Plan and third-party risk management.

LENDING

There are inherent risks associated with the Company's lending activities.  These risks include, among other things, the impact of changes in the economic conditions in the market areas in which the Company operates and changes in interest rates.  In addition, the Company may be impacted by the following risks associated with its lending activities:

Commercial Lending Generally Involves a Higher Degree of Risk than Retail Residential Mortgage Lending
The Company's loan portfolio consists primarily of commercial real estate, commercial and industrial, and commercial construction loans.  These types of loans are generally viewed as having more risk of default than owner-occupied residential real estate loans or consumer loans, and typically have larger balances. The underlying commercial real estate values, the actual costs necessary to complete a construction project, or customer cash flow and payment expectations on such loans can be more easily influenced by adverse conditions in the related industries, the real estate market or in the economy in general and are dependent on the skills and experience of the business' management team.
 
The Company May Need to Increase its Allowance for Loan Losses
The determination of the appropriate level of the allowance for loan losses inherently involves a high degree of subjectivity and requires the Company to make significant estimates of current credit risks and non-performing trends, all of which may undergo material changes. In addition, bank regulatory agencies periodically review the Company's allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on judgments that may differ from those of the Company's management.

On January 1, 2020, the Company adopted CECL which will impact the way all banking organizations estimate their allowance for loan losses.

See Note 1, “Summary of Significant Accounting Policies,” Item (v) “Recent Accounting Pronouncements,” to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below, under the section “Accounting pronouncements not yet adopted by the Company” for further information regarding Accounting Standards Update No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments”
  

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Increases in the Company's Non-performing Assets Could Adversely Affect the Company's Results of Operations and Financial Condition in the Future
Non-performing assets adversely affect our net income in various ways. No interest income is recorded on non-accrual loans or other real estate owned, thereby adversely affecting income and returns on assets and equity. In addition, loan administration and workout costs increase, including significant time commitments from management and staff, resulting in additional reductions of earnings. When taking collateral in foreclosures and similar proceedings, the Company is required to carry the property or loan at its then-estimated fair value less estimated cost to sell, which, when compared to the carrying value of the loan, may result in a loss. In addition, any errors in documentation or previously unknown defects in deeds may impact the Company's ability to perfect title of the collateral in foreclosure. These non-performing loans and other real estate owned assets also increase the Company's risk profile and the capital that regulators believe is appropriate in light of such risks and have an impact on the Company's FDIC risk-based deposit insurance premium rate.

The Company's Use of Appraisals in Deciding Whether to Make a Loan Does Not Ensure the Value of the Collateral
In considering whether to make a loan secured by real property or other business assets, the sale of which may provide ultimate recovery of the outstanding balance of the loan, the Company generally requires an internal evaluation or independent appraisal of the collateral supporting the loan. However, these assessment methods are only an estimate of the value of the collateral at the time the assessment is made and involve estimates and assumptions. An error in fact, estimate or judgment could adversely affect the reliability of the valuation. Furthermore, changes in those estimates due to the economic environment and events occurring after the initial assessment, may cause the value of the collateral to differ significantly from the initial valuations. As a result, the value of collateral securing a loan may be less than estimated at the time of assessment, and if a default occurs the Company may not recover the outstanding balance of the loan.

The Company is Subject to Environmental Risks Associated with Real Estate Held as Collateral or Occupied
When a borrower defaults on a loan secured by real property, the Company may purchase the property in foreclosure or accept a deed to the property surrendered by the borrower. The Company may also take over the management of commercial properties whose owners have defaulted on loans. The Company also occupies owned and leased premises where branches and other bank facilities are located. While the Company’s lending, foreclosure and facilities policies and guidelines are intended to exclude properties with an unreasonable risk of contamination, hazardous substances could exist on some of the properties that the Company may own, acquire, manage or occupy. Environmental laws could force the Company to clean up the properties at the Company’s expense. It may cost much more to clean a property than the property is worth, and it may be difficult or impossible to sell contaminated properties. The Company could also be liable for pollution generated by a borrower’s operations if the Company takes a role in managing those operations after a default.

Concentrations in Commercial Real Estate Loans are Subject to Heightened Risk Management and Regulatory Review
If a concentration in commercial real estate lending is present, as measured under government banking regulations, management must employ heightened risk management lending practices that address the following key elements: board and management oversight and strategic planning, portfolio management, development of underwriting standards, portfolio risk assessment and monitoring through market analysis and stress testing, and maintenance of increased capital levels as needed to support the level of commercial real estate lending. If a concentration is determined to exist, the Company may incur additional operating expenses in order to comply with additional risk management practices and increased capital requirements.

See also “Loans,” including the subsections “Credit Risk,” and “Asset Quality,” included in the section entitled “Financial Condition,” contained in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K for further information regarding the Company's commercial loan portfolio and credit risk.

ECONOMICS & FINANCIAL MARKETS

The Company's Profitability Depends Significantly on Economic Conditions in the Company's Primary Market Areas
The Company's financial results are impacted by the general economic conditions of the primary market areas in which the Company operates. Any weakening in general economic conditions in the New England region, or any long-term deterioration of the regional economy could negatively impact the Company’s financial results.

The Company's Investment Portfolio Could Incur Losses or Fair Value Could Deteriorate
There are inherent risks associated with the Company's investment activities.  These risks include the impact from changes in interest rates, weakness in real estate, municipalities, government sponsored enterprises, or other industries, the impact of changes in income tax rates on the value of tax-exempt securities, adverse changes in regional or national economic conditions, and general turbulence in domestic and foreign financial markets, among other things. If an investment's value

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is deemed other-than-temporarily impaired, then the Company is required to write down the fair value of the debt security which may involve a charge to earnings.  These conditions could adversely impact the ultimate collectability of the Company's investments.

The Company is Subject to Interest Rate Risk
The Company's earnings and cash flows are largely dependent upon its net interest income, meaning the difference between interest income earned on interest-earning assets and interest expense paid on interest-bearing liabilities. Changes in interest rates could negatively impact the demand for bank products and adversely impact earnings. Interest rates are highly sensitive to many factors that are beyond the Company's control, including monetary policy of the U.S. federal government, inflation and deflation, volatility of domestic and global financial markets, including credit markets, and competition. In addition, certain assets may have interest rate caps and floors, which restrict the level of interest rate movement that the Company can impose.

Uncertainty related to the London Interbank Offer Rate ("LIBOR") and its replacement
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after December 31, 2021. The Federal Reserve Board and the New York Federal Reserve Bank have jointly formed a committee known as the Alternative Reference Rates Committee (the "ARRC") to help ensure a successful transition from LIBOR. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, the ARRC has proposed the Secured Overnight Financing Rate ("SOFR") as the alternative rate for use in derivatives and other financial contracts currently being indexed to LIBOR. SOFR is a daily index of the interest rate banks and hedge funds pay to borrow money overnight, secured by U.S. Treasury securities. Currently no forward-looking term index (like LIBOR) yet exists and the development of a SOFR-based term rate is ongoing. Historically, SOFR has been lower than LIBOR because it does not take into account bank credit risk. Accordingly, a credit spread adjustment is being considered. Since the proposed SOFR is calculated differently than LIBOR, payments under contracts referencing the new rates may differ from those referencing LIBOR. At this time, it is not possible to predict whether SOFR will attain market traction as a LIBOR replacement tool, and the future of LIBOR is still uncertain.

A relatively small portion of the Company's assets and liabilities are indexed to LIBOR and the transition to an alternative rate is not expected to have a material impact on the Company's earnings.

See also “Impairment Review of Investment Securities,” included in the section entitled “Accounting Policies/Critical Accounting Estimates,” contained in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K, Item (d), “Restricted Cash and Investments” and Item (e), “Investments,” included in Note 1, “Summary of Significant Account Policies,” to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below. See Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” of this Form 10-K for further discussions related to the Company's management of interest-rate risk.

LIQUIDITY

Deposit Outflows May Increase Reliance on Borrowings and Brokered Deposits as Sources of Funds
The Company has traditionally funded asset growth principally through deposits and borrowings.  As a general matter, deposits are typically a lower cost source of funds than external wholesale funding (e.g., brokered deposits and borrowed funds), because interest rates paid for deposits are typically less than interest rates charged for wholesale funding.  If the balance of the Company's deposits decreases relative to the Company's overall banking operations, the Company may have to rely more heavily on wholesale funding or other sources of external funding or may have to increase deposit rates to maintain deposit levels in the future. 

Sources of External Funding Could Become Restricted and Impact the Company's Liquidity
If, as a result of general economic conditions or other events, sources of external funding become restricted or are eliminated, the Company may not be able to raise adequate funds, or may incur substantially higher funding costs in order to raise the necessary funds to support the Company's operations and growth, or may be required to restrict operations or the payment of dividends.

See also “Other Sources of Funds,” contained in Item 1, “Business,” of this Form 10-K and “Liquidity,” included in the section entitled “Financial Condition,” contained in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K for further information regarding the Company's sources of contingent liquidity.


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TECHNOLOGY & INFORMATION SYSTEMS

The Company is Subject to Technology Related Risk
The use of technology related products, services, delivery channels, access points and processes expose the Company to various risks, particularly operational, privacy, cybersecurity, strategic, reputation and compliance risk. Banks are required to prudently manage technology-related risks as part of their comprehensive risk management policies by identifying, measuring, monitoring and controlling risks associated with the use of technology.

Failure to Keep Pace with Technological Change Could Affect the Company's Profitability
The banking industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products, services and delivery channels. Failure to successfully plan or keep pace with technological changes affecting the banking industry, or failure to adequately train and educate staff and customers on the use and risks of new technologies, or failure to comply adequately with regulatory guidance regarding protection of information security systems could have a material adverse effect on the Company's business and, in turn, the Company's financial condition and results of operations. In addition, there may be significant time and expenses associated with upgrading and implementing new technology, technology compliance and information security processes.

Information Systems Could Experience an Interruption, Failure, Breach in Security, or Cyber-Attack
The Company relies heavily on public utilities infrastructures and internal information and operating systems to conduct its business, and these systems could fail in a variety of ways.  In addition, the use of networked operating systems exposes the Company to the increased sophistication and activity of cyber-criminals. A cyber incident is considered to be any adverse event that threatens the confidentiality, integrity or availability of the information resources of the Company. These incidents may be an intentional attack or an unintentional event and could involve gaining unauthorized access directly to our information systems, or indirectly through our vendors and customers systems, for purposes of misappropriating assets, stealing confidential corporate information or customers' Personally Identifiable Financial Information, corrupting data or causing operational disruption. The Company's independent third-party service providers or their subcontractors may also have access to customers' personal information and therefore also expose the Company to cybersecurity risk. Additionally, vendors' and customers' home, business or mobile information systems are at risk of fraudulent corporate account takeovers which the Company may not be able to detect.  There is no guarantee the Company's counter-actions will be successful or that the Company will have the resources or technical expertise to anticipate, detect or prevent rapidly evolving types of cyber-attacks.

The occurrence of any failures or disruptions of infrastructure, or breakdown, breach, failures or interruptions of the Company's information systems, access points (or those of third-party service providers and customers), or the Company's inability to detect, respond, disclose and correct such occurrence or infiltration in a timely manner, could result in an interruption in our ability to conduct transactions for an indeterminable length of time, could expose customers' personal information to unauthorized parties, increase the risk of fraud or customer identity theft, subject the Company to increased operational costs to detect and rectify the situation, damage the Company's reputation and deter customers from using the Company's services, subject the Company to additional regulatory scrutiny, and expose the Company to civil litigation and possible financial liability.

OPERATIONS

The Company Operates in a Competitive Industry and Market Area
The Company faces substantial competition in all areas of its operations from a variety of different competitors, several of which are larger and have more financial resources than the Company.  Competitors within the Company's market area include national, regional, other community banks, internet based banks and credit unions, and various types of other non-bank financial institutions, including, consumer finance companies, mortgage brokers and lenders, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment advisors, other financial intermediaries and non-bank electronic payment and funding channels. The evolving Fintech industry also aims to compete with traditional banking services, and delivery methods, although the industry offers opportunities for strategic partnerships, it is also a source for direct competition. Some of these competitors are not subject to the same degree of government regulation as the Company and thus may have a competitive advantage over the Company. If due to the inability to compete successfully within the Company's target banking markets, the Company encounters difficulties attracting and retaining customers it would have a material adverse effect on the Company's growth and profitability.

The Company May Experience a Prolonged Interruption in its Ability to Conduct Business
The Company relies heavily on its personnel and facilities to conduct its business.  A material loss of people or core

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operating facilities, for any number of reasons including natural disasters or pandemics, could result in interruptions in customer services and our ability to conduct transactions, loss of customer business and damage the Company's reputation.

The Company Relies on External Service Providers
The Company relies on independent third-party firms, including indirect vendors utilized by such third parties, to provide critical services necessary to conducting its business.  These services include but are not limited to: electronic funds delivery networks; check clearing houses; electronic banking services; wealth advisory, management and custodial services; wealth brokerage services; correspondent banking services; information security assessments and technology support services; and loan underwriting and review services. The occurrence of any failures or interruptions of the independent firms' systems or in their delivery of services, or failure to perform in accordance with contracted service level agreements, for any number of reasons could also impact the Company's ability to conduct business and process transactions.

The Company Relies on Financial Counterparty Relationships
The Company routinely executes transactions with counterparties in the financial services industry, in order to maintain correspondent bank relationships, liquidity, manage certain loan participations, mortgage sales activities, interest-rate swaps, engage in securities transactions, and engage in other financial activities with counterparties that are customary to our industry. Many of these transactions expose the Company to counterparty credit, liquidity and/or reputation risk in the event of default by the counterparty, or negative publicity or public complaints, whether real or perceived, about one or more of the Company's financial counterparties, or the financial services industry in general. Although the Company seeks to manage these risks through internal controls and procedures, the Company may experience loss or interruption of business, damage to its reputation, or incur additional costs or liabilities as a result of unforeseen events with these counterparties.

Investment Management Practices and Aggregate Assets Under Management Expose the Company to Financial, Operational and Legal Risk
The Company's Enterprise Wealth Management and Enterprise Wealth Services channels derive their revenues primarily from investment management fees based on assets under management. The Company's ability to maintain or increase investment assets under management is subject to a number of factors, including changes in client investment preferences, investment decisions by us or our third party service provider partners, and various economic conditions, among other factors. Wealth management and wealth services clients can terminate their relationships with us, reduce their aggregate assets under management, or shift their funds to other types of accounts with different rate structures for any number of reasons. Investment performance is one of the most important factors in retaining existing clients and competing for new wealth management clients. Financial markets are affected by many factors, any of which could adversely impact the fair value of customer portfolios. Even when market conditions are generally favorable, our investment performance may be adversely affected by the investment style of our wealth management and investment advisors and the investment decisions that they make.

Any decrease in assets under management, could reduce related fee income. Poor investment performance, whether real or perceived, in either relative or absolute terms, could impair our ability to attract and retain funds from existing and new clients, damage the company’s reputation and expose the Company to litigation and possible financial liability, among other factors.

The Company's Insurance Coverage May Not be Adequate to Prevent Additional Liabilities or Expenses
The Company works with an independent third-party insurance advisor to obtain insurance policies that provide coverage for a variety of business risks at coverage levels that compare favorably to bench-marked coverage for loss exposures that are faced by similarly sized financial institutions.  However, there is no guarantee that the circumstances of an incident will meet the criteria for insurance coverage under a specific policy, and despite the insurance policies in place the Company may experience a loss incident or event which could have a material adverse effect on the Company's business, reputation, financial condition and results of operations.
 
Slower than Expected Growth in New Branches and Products Could Adversely Affect the Company's Profitability
The Company has placed a strategic emphasis on expanding the Bank's branch network and market share through organic growth within existing and into neighboring geographic markets. However, in the future the Company could explore growth opportunities through acquisition of other banks, financial services companies or lines of business.   New branches and new products and services require a significant investment of both financial and personnel resources.  Lower or slower than expected loan and deposit growth in new branches and/or lower than expected fee or other income generated from new branches could decrease anticipated revenues, increase costs and reduce net income generated by such investments.

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Any potential future acquisitions could adversely affect the Company's profitability based on management's ability to successfully complete such acquisitions and integration of the acquired businesses and increase the risk of losing key employees and customers. In addition, branch openings, relocations, and closings require the approval of various state and federal regulatory agencies, which may or may not approve the Company's application for a branch. Adding new branches in existing or new market areas could also divert resources from current core operations and thereby further adversely affect the Company's growth and profitability.

The Company May Not be Able to Attract, Retain or Develop Key Personnel
The Company's success and growth strategy depends, in large part, on its ability to attract, retain and develop top performing banking professional within our markets, and its ability to successfully identify and develop personnel for succession to key executive management positions and to the board of directors. The inability to do so could have a material adverse impact on the Company’s business because of the loss of their skills, knowledge of the Company's market, years of industry or business experience and the difficulty of promptly finding qualified replacements.

See the section entitled “Competition,” contained in Item 1, “Business,” of this Form 10-K for additional information regarding the competitive issues facing the Company.

REGULATION

The Company is Subject to Extensive Government Regulation and Supervision
The Company and the Bank are also subject to a variety of federal and state laws and regulations that are primarily intended to protect depositors' funds, the FDIC insurance fund and the banking system as a whole, not the interests of stockholders.  These regulations, including bank regulatory reform, tax policy and corporate governance rules, affect the Company's lending practices, capital structure, investment practices, dividend policy, growth, and net income, among other things. Federal and state laws and regulations may not always align in principle or statue, and preemptive federal laws may be more or less restrictive than those of a state. The Company cannot predict what legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations, would have on the financial condition or results of operations of the Company. If enacted, such legislation could increase or decrease the cost of doing business, limit or expand permissible activities or affect the competitive balance among banks, savings associations, credit unions, and other financial institutions.

See also the section entitled “Supervision and Regulation,” contained in Item 1, “Business,” of this Form 10-K for additional information regarding the supervisory and regulatory issues facing the Company and the Bank.

ESTIMATES AND ASSUMPTIONS

The Company's Financial Condition and Results of Operation Rely in Part on Management Estimates and Assumptions
In preparing the financial statements in conformity with GAAP, management is required to exercise judgment in determining many of the methodologies, estimates and assumptions to be utilized.  These estimates and assumptions affect the reported values of assets and liabilities at the balance sheet date and income and expenses for the years then ended.  Changes in those estimates resulting from continuing change in the economic environment and other factors will be reflected in the financial statements and results of operations in future periods.  As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates and be adversely affected should the assumptions and estimates used be incorrect or change over time due to changes in circumstances. The three most significant areas in which management applies critical assumptions and estimates are the estimates of the allowance for loan losses, impairment review of investment securities and the impairment review of goodwill.

The Net Deferred Tax Assets (“DTAs”) May be Determined to be Unrealizable in Future Periods
In making its assessment on the future realizability of net DTAs, management considers all available positive and negative evidence, including recent financial operations, projected future taxable income, and recoverable past income tax paid. If in the future, management believes based upon historical and expected future earnings that it is more likely than not that the Company will not generate sufficient taxable income to utilize the DTA balance, then a valuation allowance would be booked against the DTA, with the write down offset to current earnings. Factors beyond management's control can affect future levels of taxable income and there can be no assurances that sufficient taxable income will be generated to fully realize the DTAs in the future. 

See also “Accounting Policies/Critical Accounting Estimates,” contained in Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” of this Form 10-K for further information regarding significant areas that

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management applies estimates and assumptions and Item (v), “Recent Accounting Pronouncements,” included in Note 1, “Summary of Significant Account Policies,” to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below.

REPUTATION

Damage to the Company's Reputation Could Affect the Company's Profitability and Stockholders' Value
The Company is dependent on its reputation within its market area as a trusted and responsible financial company for all aspects of its business with customers, employees, vendors, third-party service providers, and others with whom the Company conducts business or potential future business.  Any negative publicity or public complaints, whether real or perceived, disseminated by word of mouth, by the general media, by electronic or social networking means, or by other methods, could harm the Company's reputation.

The Company is Exposed to Legal Claims and Litigation
The Company is subject to legal challenges under a variety of circumstances in the course of its normal business practices. Regardless of the scope or the merits of any claims by potential or actual litigants, the Company may have to engage in litigation that could be expensive, time-consuming, disruptive to the Company's operations, and distracting to management. Whether claims or legal action are founded or unfounded, if such claims and legal actions are not resolved in a manner favorable to the Company, they may result in significant financial liability, damage the Company's reputation, subject the Company to additional regulatory scrutiny and restrictions, and/or adversely affect the market perception of our products and services, as well as impact customer demand for those products and services.

COMMON STOCK, STOCKHOLDER’S EQUITY, CAPITAL

The Trading Volume in the Company's Common Stock is Less Than That of Larger Companies
Although the Company's common stock is listed for trading on the NASDAQ Global Market, the trading volume in the Company's common stock is substantially less than that of larger companies.  Given the lower trading volume of the Company's common stock, significant purchases or sales of the Company's common stock, or the expectation of such purchases or sales, could cause significant movement in the Company's stock price.

The Market Price of the Company's Common Stock Could be Affected by General Industry Issues
The banking industry may be more affected than other industries by certain economic, credit, regulatory or information security issues.  Although the Company itself may or may not be directly impacted by such issues, the Company's stock price may move up or down due to the influence, both real and perceived, of these issues, among others, on the banking industry in general. Investment in the Company's stock is not insured against loss by the FDIC or any other public or private entity.

Stockholder Dilution Could Occur if Additional Stock is Issued in the Future
If the Company's Board should determine in the future that there is a need to obtain additional capital through the issuance of additional shares of the Company's common stock or securities convertible into shares of common stock, or if the Board decides to grant additional stock awards or options for the purchase of shares of common stock, the issuance of such additional shares, stock awards and/or the issuance of additional shares upon the exercise of such options would expose existing stockholders' ownership interest to dilution.

The Company's Capital Levels Could Fall Below Regulatory Minimums
If the Company's regulatory capital levels decline, or if regulatory requirements increase, and the Company is unable to raise additional capital to offset that decline or meet the increased requirements, then its regulatory capital ratios may fall below regulatory minimum capital adequacy levels. 

The Company's failure to remain “well-capitalized” for bank regulatory purposes could affect customer confidence, restrict the Company's ability to grow (both assets and branching activity), increase the Company's costs of funds and FDIC insurance expense, prohibit the Company's ability to pay dividends on common shares, and restrict its ability to make acquisitions, among other impacts. Under FDIC rules, if the Bank ceases to be a “well-capitalized” institution, its ability to accept brokered deposits and the interest rates that it pays may be restricted.

The Company's Articles of Organization, By-Laws and Stockholders Rights Plan as Well as Certain Banking and Corporate Laws Could Have an Anti-Takeover Effect
Although management believes that certain anti-takeover strategies are in the best interest of the Company and its

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stockholders, provisions of the Company's articles of organization, by-laws, and stockholders rights plan and certain federal and state banking laws and state corporate laws, including regulatory approval requirements for any acquisition of control of the Company, could make it more difficult for a third-party to acquire the Company, even if doing so would be perceived to be beneficial to the Company's stockholders.  The combination of these provisions is intended to prohibit a non-negotiated merger, or other business combination involving an acquisition of the Company, which, in turn, could adversely affect the market price of the Company's common stock.

Directors and Executive Officers Own a Significant Portion of Common Stock
The Company's directors and executive officers, as a group, beneficially own approximately 17% of the Company's outstanding common stock as of December 31, 2019. Management views this ownership commitment by insiders as an integral component of maintaining the Company's local and community-based ownership. However, as a result of this combined ownership interest, the directors and executive officers have the ability, if they vote their shares in a like manner, to significantly influence the outcome of all matters submitted to stockholders for approval, including the election of directors.

The Company Relies on Dividends from the Bank for Substantially All of its Revenue
Holders of the Company’s common stock are entitled to receive dividends only when, and if declared by our Board. Although the Company has historically declared cash dividends on our common stock, we are not required to do so, and our Board may reduce or eliminate our common stock dividend in the future.

The Company is a separate and distinct legal entity from the Bank.  It receives substantially all its revenue from dividends paid by the Bank.  These dividends are the principal source of funds used to pay dividends on the Company’s common stock and interest and principal on the Company’s subordinated debt.  Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company, and certain regulators may prohibit the Bank or the Company from paying future dividends if deemed an unsafe or unsound practice.  If the Bank, due to its capital position, inadequate net income levels, or otherwise, is unable to pay dividends to the Company, then the Company will be unable to service its debt, pay obligations or pay dividends on the Company’s common stock, which could have a material adverse effect on the market price of the Company’s common stock.

See the sections entitled “Supervision and Regulation” and “Capital Resources,” contained in Item 1, “Business,” of this Form 10-K for additional information regarding regulatory capital requirements for the Company and the Bank. See also the section entitled “Dividends,” contained in Item 5, “Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” of this Form 10-K below.


Item 1B.
Unresolved Staff Comments
 
None.

Item 2.
Properties

The Company's main office and operational support offices are located in Lowell, Massachusetts. The main Lowell campus consists of four buildings, three of which are owned, with ample on-site customer parking.  The Company purchased one of the previously leased buildings in its main campus in 2019. The Company also owns and maintains a back-up operations/data facility in the Merrimack Valley region of Massachusetts. As of December 31, 2019, the Company had 24 full-service branch banking offices serving the Greater Merrimack Valley, Nashoba Valley and North Central regions of Massachusetts, and Southern New Hampshire (Southern Hillsborough and Rockingham counties). Our 25th branch in Lexington, MA recently opened in early March 2020 and our 26th branch in North Andover, MA is anticipated to open in summer 2020. The Company also has several ATMs at remote locations within its primary customer service area.

The Company believes that all of its facilities are well maintained and suitable for the purpose for which they are used. However, the Company regularly looks for opportunities to improve its facilities and locations.

At December 31, 2019, the Company had 15 operating real estate leases. See also Note 6, "Leases" to the Company's consolidated financial statements contained in Item 8 of this Form 10-K below for further information regarding the Company's leases and lease obligations.


35


Item 3.
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 4.
Mine Safety Disclosures

Not Applicable.

PART II
 
Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market for Common Stock

The Company's common stock trades on the NASDAQ Global Market under the trading symbol "EBTC."
 
As of March 2, 2020, there were 1,244 registered stockholders of the Company's common stock and 11,840,547 shares of the Company's common stock outstanding.

Dividends
 
In 2019, quarterly dividends of $0.16 per share were paid to the Company's stockholders in March, June, September and December.  Total 2019 dividends of $0.64 per share compared to total dividends of $0.58 per share were paid to the Company's stockholders on a quarterly basis in 2018.
 
The Company maintains a DRSPP.  The DRSPP enables stockholders, at their discretion, to continue 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 have the opportunity to purchase shares of the Company's common stock without brokerage fees, subject to monthly minimums and maximums. See Note 11, "Stockholders' Equity," to the consolidated financial statements in Item 8 of this Form 10-K below for further information regarding the share purchase option under the DRSPP.

For the year ended December 31, 2019, the Company declared $7.5 million in cash dividends to holders of common stock. Stockholders utilized the dividend reinvestment portion of the DRSPP to purchase an aggregate of 39,176 shares of the Company's common stock totaling $1.2 million. In 2018, the Company declared $6.8 million in cash dividends to holders of common stock. Stockholders utilized the dividend reinvestment portion of the DRSPP to purchase 37,999 shares of the Company's common stock totaling $1.3 million.         

On January 21, 2020, the Company announced a quarterly dividend of $0.175 per share, which was paid on March 2, 2020 to stockholders of record as of February 10, 2020.

See the sections within Item 1, "Business," under the heading "Supervision and Regulation" entitled "Regulatory Restrictions on Dividends" and "Restrictions on Dividends and Other Capital Distributions," of this Form 10-K for information on factors that could impact the payment of dividends.


36


Securities Authorized for Issuance under Equity Compensation Plans
 
The following table provides information as of December 31, 2019, with respect to the Company's 2009 Stock Incentive Plan, as amended, and its 2016 Stock Incentive Plan, as amended, which together constitute all of the Company's existing equity compensation plans that have been previously approved by the Company's stockholders. The 2009 plan expired in 2019 and is closed for future grants, although awards previously granted under the 2009 plan remain outstanding and may be exercised through 2028.
   
Plan Category
 
Number of Securities
to be issued upon
exercise of
outstanding options,
warrants and rights
 
Weighted-average
exercise price of
outstanding options,
warrants and rights
 
Number of Securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in second
column from left)
Equity compensation plans approved by security holders
 
159,372

 
$
23.45

 
271,838

Equity compensation plans not approved by security holders
 

 

 

TOTAL
 
159,372

 
$
23.45

 
271,838


Repurchases of Common Stock

During the three months ended December 31, 2019, the Company did not repurchase any shares of its common stock.
 
 
 
 
 
 
 
 
 




37


Performance Graph
 
The following graph compares the cumulative total shareholder return (which assumes the reinvestment of all dividends) on the Company's common stock with the cumulative total return reflected by a broad-based equity market index and an appropriate published industry index.  This graph shows the changes over the five-year period ended on December 31, 2019 in the value of $100 invested in (i) the Company's common stock, (ii) the Standard & Poor's 500 Index, and (iii) the SNL Bank $1B to $5B index.
chart-fd25f39c8b3952e7a79.jpg
 
 
Period Ending
Index
 
12/31/14
 
12/31/15
 
12/31/16
 
12/31/17
 
12/31/18
 
12/31/19
Enterprise Bancorp, Inc.
 
$
100.00

 
$
92.56

 
$
155.49

 
$
143.30

 
$
137.67

 
$
148.10

S&P 500 Index
 
100.00

 
101.38

 
113.51

 
138.29

 
132.23

 
173.86

SNL Bank $1B - $5B Index
 
100.00

 
111.94

 
161.04

 
171.69

 
150.42

 
182.85

 


38


Item 6.
Selected Financial Data
 
 
Year Ended December 31,
(Dollars in thousands, except per share data)
 
2019
 
2018
 
2017
 
2016
 
2015
EARNINGS DATA
 
 

 
 

 
 

 
 

 
 

Net interest income
 
$
115,857

 
$
108,835

 
$
97,522

 
$
86,792

 
$
78,294

Provision for loan losses
 
1,180

 
2,250

 
1,430

 
2,993

 
3,267

Net interest income after provision for loan loss
 
114,677

 
106,585

 
96,092

 
83,799

 
75,027

Non-interest income
 
16,173

 
14,940

 
14,958

 
13,639

 
13,139

Net gains (losses) on sales of available for sale securities
 
146

 
(2,950
)
 
716

 
802

 
1,828

Non-interest expense
 
86,415

 
80,878

 
76,145

 
70,328

 
65,732

Income before income taxes
 
44,581

 
37,697

 
35,621

 
27,912

 
24,262

Provision for income taxes
 
10,381

 
8,816

 
16,228

 
9,161

 
8,114

Net income
 
$
34,200

 
$
28,881

 
$
19,393

 
$
18,751

 
$
16,148

 
 
 
 
 
 
 
 
 
 
 
COMMON SHARE DATA
 
 

 
 

 
 

 
 

 
 

Basic earnings per share
 
$
2.90

 
$
2.47

 
$
1.68

 
$
1.71

 
$
1.56

Diluted earnings per share
 
2.89

 
2.46

 
1.66

 
1.70

 
1.55

Book value per share at year end
 
25.09

 
21.80

 
19.97

 
18.72

 
17.38

Dividends paid per share
 
$
0.64

 
$
0.58

 
$
0.54

 
$
0.52

 
$
0.50

Basic weighted average shares outstanding
 
11,789,570

 
11,679,520

 
11,568,430

 
10,966,333

 
10,323,016

Diluted weighted average shares outstanding
 
11,829,818

 
11,750,462

 
11,651,763

 
11,039,511

 
10,389,934

 
 
 
 
 
 
 
 
 
 
 
YEAR END BALANCE SHEET AND OTHER DATA
 
 

 
 

 
 

 
 

Total assets
 
$
3,235,049

 
$
2,964,358

 
$
2,817,564

 
$
2,526,269

 
$
2,285,531

Loans serviced for others
 
95,905

 
89,232

 
89,059

 
80,996

 
71,272

Investment assets under management
 
916,623

 
800,751

 
844,977

 
725,338

 
678,377

Total assets under management(1)
 
$
4,247,577

 
$
3,854,341

 
$
3,751,600

 
$
3,332,603

 
$
3,035,180

 
 
 
 
 
 
 
 
 
 
 
Total loans
 
$
2,565,459

 
$
2,387,506

 
$
2,269,904

 
$
2,022,729

 
$
1,859,962

Allowance for loan losses
 
33,614

 
33,849

 
32,915

 
31,342

 
29,008

Investment securities
 
505,255

 
432,921

 
405,206

 
374,790

 
300,358

Interest-earning deposits
 
23,867

 
19,255

 
14,496

 
17,428

 
19,177

Customer deposits
 
2,786,730

 
2,507,999

 
2,293,872

 
2,209,559

 
1,911,378

Total deposits (including brokered deposits)
 
2,786,730

 
2,564,782

 
2,441,362

 
2,268,921

 
2,018,148

Borrowed funds
 
96,173

 
100,492

 
89,000

 
10,671

 
53,671

Subordinated debt
 
14,872

 
14,860

 
14,847

 
14,834

 
14,822

Total stockholders' equity
 
296,641

 
255,297

 
231,810

 
214,786

 
180,327

 
 
 
 
 
 
 
 
 
 
 
RATIOS
 
 

 
 

 
 

 
 

 
 

Return on average total assets
 
1.10
%
 
1.00
%
 
0.73
%
 
0.78
%
 
0.76
%
Return on average stockholders' equity
 
12.31
%
 
12.15
%
 
8.58
%
 
9.33
%
 
9.29
%
Allowance for loan losses to total loans
 
1.31
%
 
1.42
%
 
1.45
%
 
1.55
%
 
1.56
%
Stockholders' equity to total assets
 
9.17
%
 
8.61
%
 
8.23
%
 
8.50
%
 
7.89
%
Dividend payout ratio
 
22.07
%
 
23.48
%
 
32.14
%
 
30.41
%
 
32.05
%
(1) Loans serviced for others and investment assets under management are not carried as assets on the Company's Consolidated Balance Sheet, and as such total assets under management is not a financial measurement recognized under GAAP.

39


Item 7.
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 (also referred to herein as "Enterprise," "us," "we," or "our") consolidated financial statements and notes thereto, contained in Item 8, "Financial Statements and Supplementary Data," and the other financial and statistical information contained in this Form 10-K.

Special Note Regarding Forward-Looking Statements

This Form 10-K contains certain forward-looking statements concerning plans, objectives, future events or performance and assumptions and other statements. These statements are not statements of historical fact. 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.
Various statements contained in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of this Form 10-K are forward-looking statements, including, but not limited to statements related to management's views on:

the banking environment and the economy;
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.

The Company cautions readers that such forward-looking statements reflect numerous assumptions made by management, which are inherently uncertain and beyond the Company's control, and involve a number of risks and uncertainties that could cause the Company's actual results to differ materially from those expressed in, or implied by, the forward-looking statement. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and not to place undue reliance on any such forward-looking information and statements. Any forward-looking statements in this Form 10-K are based on information available to the Company as of the date of this Form 10-K, and the Company undertakes no obligation to publicly update or otherwise revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by applicable law. The following important factors, among others, including those listed in our Item 1A - Risk Factors of this Form 10-K could cause the Company's results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein:
(i)
failure of risk management controls and procedures;
(ii)
risk specific to commercial loans and borrowers and the adequacy of the allowance for loan losses;
(iii)
changes in the business cycle and downturns in the local, regional or national economies, including 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;
(iv)
    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;
(v)
changes in interest rates could negatively impact net interest income;
(vi)
liquidity risks;
(vii)
technology-related risk, including technological changes and technology service interruptions or failure could adversely impact the Company's operations and increase technology-related expenditures;
(viii)
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;
(ix)
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;
(x)
our ability to retain and increase our aggregate assets under management;
(xi)
our ability to enter new markets successfully and capitalize on growth opportunities, including the receipt of required regulatory approvals;
(xii)
damage to our reputation in the markets we serve;
(xiii)
exposure to legal claims and litigation;

40


(xiv)
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;
(xv)
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;
(xvi)
future regulatory compliance costs, including any increase caused by new regulations imposed by the government's current administration; and
(xvii)
changes in accounting and/or auditing standards, policies and practices, as may be adopted or established by the regulatory agencies, FASB, or the Public Company Accounting Oversight Board could negatively impact the Company's financial results.

The risks and uncertainties described in the documents that the Company files or furnishes to the SEC, including those discussed above in Item 1A, "Risk Factors," of this Form 10-K which could have a material adverse effect on the Company's business, financial condition and results of operations.

Overview
 
Executive Summary

Net income for the year ended December 31, 2019 amounted to $34.2 million, an increase of $5.3 million compared to the year ended December 31, 2018. Diluted earnings per share were $2.89 for the year ended December 31, 2019, compared to $2.46 for the year ended December 31, 2018.
 
The increase in our 2019 earnings compared to 2018 is largely attributable to solid loan and customer deposit (total deposits excluding brokered deposits) growth and the continuation of positive credit metrics. For 2019, total assets, total loans and total customer deposits increased 9%, 7% and 11%, respectively, compared to December 31, 2018. Strategically, the Company operates with a long-term mindset that is focused on growing organically and supporting growth by continually investing in our people, products, services, technology, digital transformation, and both new and existing branches. Our 25th branch in Lexington, MA recently opened in early March 2020 and our 26th branch in North Andover, MA is scheduled to open in summer 2020.

Composition of Earnings

The Company's earnings are largely dependent on its net interest income, which is primarily the difference between interest earned on loans and investments and the cost of funding (primarily deposits and borrowings).  Net interest income expressed as a percentage of average interest-earning assets is referred to as net interest margin ("Margin").  Margin presented on a tax equivalent basis by factoring in adjustments associated with tax exempt loans and investments interest income is referred to as tax equivalent net interest margin ("T/E Margin").

Net interest income for the year ended December 31, 2019 amounted to $115.9 million, an increase of $7.0 million, or 6%, compared to the year ended December 31, 2018. The increase in net interest income was due largely to interest-earning asset growth, primarily in loans. Average loan balances (including loans held for sale) increased $128.4 million, or 6%, for the year ended December 31, 2019 compared to the same 2018 respective period average. T/E Margin was 3.95% for the year ended December 31, 2019, compared to 3.97% for the year ended December 31, 2018. The decrease resulted from the cost of funds increasing more than interest earning asset yields. T/E Margin was 3.93% for the three months ended December 31, 2019. In the latter half of the year, T/E Margin was impacted by declining interest rates driven by three reductions in the fed funds rate from August through October 2019.

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 Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of this Form 10-K.

The allowance for loan losses to total loans ratio was 1.31% at December 31, 2019, compared to 1.42% at December 31, 2018. For the years ended December 31, 2019 and December 31, 2018, the provisions to the allowance for loan losses amounted to $1.2 million and $2.3 million, respectively. The decrease in the provision for loan losses for 2019 compared to the prior year was due primarily to generally positive credit metrics, partially offset by the impact of loan growth in 2019. Affecting the provision for loan losses for the year ended December 31, 2019 compared to the prior year were:

41



The ratio of impaired and classified loans to total loans amounted to 2.25% at December 31, 2019, compared to 2.41% at December 31, 2018.

The provision for loan loss related to impaired and classified loans was lower in 2019 than in 2018, contributing to a decrease in the overall provision.

Loan growth for the year ended December 31, 2019 was $178.0 million, compared to $117.6 million during the year ended December 31, 2018.

The allowance allocated to non-classified loans was relatively flat for the year ended December 31, 2019 compared to 2018, as provisions necessary for loan growth were largely offset by continued positive credit and economic metrics.

See also "Credit Risk," "Asset Quality," and "Allowance for Loan Losses," included in the "Loans" section within "Financial Condition" below, for further information regarding loan quality statistics and the allowance for loan losses.

Non-interest income for the year ended December 31, 2019 amounted to $16.3 million, an increase of $4.3 million, or 36%, compared to the year ended December 31, 2018. Non-interest income increased for the year ended December 31, 2019 compared to the prior year, due primarily to $2.9 million in realized losses on a discretionary partial restructure of the bond portfolio in 2018. Other changes included increases in deposit and interchange fees in 2019, as well as net gains on equity securities, which are included in other income, compared with net losses on equity securities in the comparable 2018 period, due primarily to fair value adjustments.

Non-interest expense for the year ended December 31, 2019 amounted to $86.4 million, an increase of $5.5 million, or 7%, compared to the year ended December 31, 2018. Increases in non-interest expense for the year ended December 31, 2019 primarily related to the Company's strategic growth initiatives, particularly salaries and employee benefits and technology and telecommunications expenses. Technology initiatives include the Company's multi-year digital transformation strategy to enhance operating efficiency and customer experience. Partially offsetting these expenses was a reduction in deposit insurance premiums primarily resulting from a Small Bank Assessment Credit from the FDIC Deposit Insurance Fund of $683 thousand for the year ended December 31, 2019.

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 and overnight borrowings from correspondent banks. Additionally, funding for the Company may be generated through equity transactions, including the dividend reinvestment and direct stock purchase plan 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, and investing in securities, to expand the branch network, and to pay dividends to stockholders.

The investment portfolio is primarily used to provide liquidity, manage the Company's asset-liability position and to invest excess funds, providing additional sources of revenue. Total investments, a component of interest-earning assets, amounted to $505.3 million at December 31, 2019, an increase of $72.3 million, or 17%, since December 31, 2018 and comprised 16% of total assets at December 31, 2019 and 15% of total assets at December 31, 2018.

Enterprise's main asset strategy is to grow loans, the largest component of interest-earning assets, with a focus on high quality commercial lending relationships. Total loans, comprising 79% of total assets at December 31, 2019 and 81% of total assets at December 31, 2018, amounted to $2.57 billion at December 31, 2019, compared to $2.39 billion at December 31, 2018, an increase of $178.0 million, or 7%. Total commercial loans amounted to $2.21 billion, or 86% of gross loans, at December 31, 2019, which was consistent with the composition at December 31, 2018.

Management's preferred strategy for funding asset growth is to grow relationship-based customer deposit balances, preferably comprised of non-interest checking accounts, interest-bearing checking accounts and traditional savings accounts.  Asset growth in excess of transactional deposits is typically funded through non-transactional deposits (comprised of money market accounts, commercial tiered rate or "investment savings" accounts and term CDs) and wholesale funding (brokered deposits and borrowed funds).

42



At December 31, 2019, customer deposits amounted to $2.79 billion, or 86% of total assets, compared to $2.51 billion, or 85% of total assets at December 31, 2018. Since December 31, 2018, customer deposits increased $278.7 million, or 11%, primarily in money market and checking accounts. See "Deposits" under "Financial Condition" contained in this Item 7 of this Form 10-K for a further breakdown of deposit growth.

Wholesale funding amounted to $96.2 million at December 31, 2019, or 3% of total assets, compared to $157.3 million at December 31, 2018, or 5% of total assets, a decrease of $61.1 million, or 39%. At December 31, 2019, wholesale funding consisted of FHLB advances only, primarily in overnight or short-term borrowings. At December 31, 2018, wholesale funding included brokered CDs of $56.8 million and FHLB advances of $100.5 million. The Company's level of wholesale funding has decreased since December 31, 2018 as increases in customer deposit balances have exceeded loan growth.

Culture and Organic Growth Strategy

The Company's business model is to provide a full range of diversified financial products and services through a highly trained team of knowledgeable banking professionals who have in-depth understanding of our markets and a commitment to open and honest communication with clients.
Management believes the Company has differentiated itself from the competition by building a strong reputation within the local market as a customer-centric, community rooted, and commercially focused community bank, offering competitive products, delivering exceptional customer service and being a community leader in our markets.
The Company's banking professionals are dedicated to upholding the Company's core values, including significant and active involvement in many charitable and civic organizations, and community development programs throughout our service area. This long-held commitment to community not only contributes to the welfare of the communities we serve, it also helps to fuel the local economy, creating new businesses and jobs, and has led to a strong referral network with local businesses, non-profit organizations and community leaders.
Management believes the Company's employee-centric culture, commitment to community, robust product and service lines, including commercial lending, cash management, wealth management and trust services and commercial insurance, delivered by a knowledgeable and dedicated team of community bankers, makes the Enterprise team stand out among the competition.
Management further believes that Enterprise is well equipped to capitalize on market opportunities to grow the commercial and residential loan portfolios through strong business development and referral efforts, while utilizing a disciplined and reliable credit management approach, which has served to provide consistent quality asset growth over varying economic cycles during the Company's history. 
The Company’s loan growth initiatives are executed through a seasoned lending team possessing a broad breadth of business acumen and experience, supported by a highly qualified and experienced commercial credit review function.
Management maintains a long-term focus and continues to invest in strategic growth initiatives, including investments in employee hiring, training and development, community relations, technology and digital transformation, and branch evolution and expansion.
The Company has an ongoing commitment to continually improving the customer experience, and internal efficiencies and productivity, using scalable technology and digitization. As part of the Company's multi-year digital transformation strategy, new technology-driven products, services, delivery channels, and process automation are continually introduced. 
Branch evolution includes enhancing our highly-personalized customer interactions, updating technology and delivery methods, and ongoing facility improvements and renovations. New and renovated branches exhibit a modern, open-concept lobby with advanced technology, such as cash recyclers. These branches are supported by our “Universal Bankers,” who are crossed-trained to fully serve customer needs, and have on-site commercial lenders.
The Company also continually looks to develop new branch locations within, and to complement, our existing footprint. In early March 2020, Enterprise opened its new Lexington, MA location. Additionally, our 26th branch is scheduled to open in North Andover, MA in the summer of 2020.
While management recognizes that such investments increase expenses in the short term, Enterprise believes that such initiatives are a critical investment in the long-term growth and earnings potential of the Company and will help the Company to capitalize on current opportunities in the marketplace for community banks such as Enterprise. However, lower than

43


expected returns on these investments, such as slower than anticipated loan and deposit growth in new branches and/or lower than expected adoption rates or income generated from new technology or initiatives, could decrease anticipated revenues and net income on such investments in the future.
Financial Condition

Total assets increased $270.7 million, or 9%, since December 31, 2018, to $3.24 billion at December 31, 2019. The balance sheet composition and changes since December 31, 2018 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 amounted to 2% of total assets at both December 31, 2019 and December 31, 2018. 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. 

Investments

At December 31, 2019, the fair value of the investment portfolio amounted to $505.3 million, an increase of $72.3 million, or 17%, since December 31, 2018. The increase was primarily due to the investment of funds from growth in customer deposits, the 2018 partial bond portfolio restructure, and increases in market values. The investment portfolio represented 16% of total assets at December 31, 2019 and 15% of total assets at December 31, 2018.  As of December 31, 2019, the investment portfolio was primarily comprised of debt securities, with a small portion of the portfolio invested in equity securities. At both December 31, 2019 and 2018, all investments were carried at fair value and debt securities were classified as available-for-sale.

See Note 2, "Investment Securities," and Note 16, "Fair Value Measurements," to the Company's consolidated financial statements contained in Item 8 of this Form 10-K below, for further information regarding the Company's unrealized gains and losses on debt securities, including information about investments in an unrealized loss position for which impairment has or has not been recognized, and investments pledged as collateral, as well as the Company's fair value measurements for investments.

Debt Securities

The following table summarizes the fair value of debt securities at the dates indicated:
 
 
December 31,
 
 
2019
 
2018
 
2017
(Dollars in thousands)
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Federal agency obligations(1)
 
$
1,004

 
0.2
%
 
$
7,975

 
1.9
%
 
$
51,717

 
12.8
%
Residential federal agency MBS(1)
 
192,658

 
38.2
%
 
172,726

 
40.0
%
 
140,154

 
34.6
%
Commercial federal agency MBS(1)
 
114,635

 
22.7
%
 
93,979

 
21.8
%
 
66,500

 
16.4
%
Municipal securities taxable

 
81,687

 
16.2
%
 
34,741

 
8.1
%
 
11,420

 
2.8
%
Municipal securities tax exempt

 
100,038

 
19.8
%
 
107,302

 
24.8
%
 
122,926

 
30.4
%
Corporate bonds
 
14,311

 
2.8
%
 
13,806

 
3.2
%
 
11,542

 
2.8
%
CDs(2)
 
455

 
0.1
%
 
944

 
0.2
%
 
947

 
0.2
%
Total debt securities
 
$
504,788

 
100.0
%
 
$
431,473

 
100.0
%
 
$
405,206

 
100.0
%
            
(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.  
(2)
CDs represent term deposits issued by banks that are subject to FDIC insurance and purchased on the open market.


44


The majority of residential and commercial federal agency MBS categories were collateralized mortgage obligations ("CMOs") issued by U.S. agencies. The remaining MBS investments totaled $23.5 million, $23.9 million and $35.0 million at December 31, 2019, 2018 and 2017, respectively.

Net unrealized gains on the debt securities portfolio amounted to $13.5 million at December 31, 2019 compared to net unrealized losses of $1.7 million at December 31, 2018.  The Company attributes the increase in net unrealized gains as compared to the net unrealized losses of 2018 to decreases in market yields and restructuring of the debt security portfolio in the fourth quarter of 2018, which overall raised portfolio yields. Unrealized gains or losses on debt securities are carried on the balance sheet and will be recognized in the statements of income if the investments are sold. Should an investment be deemed to have Other than temporary impairment or "OTTI", the Company is required to write-down the fair value of the investment.  See "Impairment Review of Investment Securities" under the heading "Accounting Policies/Critical Accounting Estimates" in this Item 7 of this Form 10-K for additional information regarding the accounting for OTTI.
 
In 2019 and 2018, the Company purchased debt securities totaling $120.0 million and $195.4 million, respectively. The Company also had principal pay downs, calls and maturities totaling $48.8 million during the year ended December 31, 2019 compared with $42.3 million during the year ended December 31, 2018

During the year ended December 31, 2019, the Company realized net gains of $146 thousand on sales of debt securities with an amortized cost of approximately $11.6 million. For the year ended December 31, 2018, the Company realized net losses of $3.0 million on sales of debt securities with an amortized cost of approximately $122.7 million. These losses resulted primarily from a partial, discretionary restructure of the bond portfolio that was undertaken to improve future earnings by selling lower yielding bonds and reinvesting into slightly longer, higher yielding bonds.

The contractual maturity distribution as of December 31, 2019 of the debt securities portfolio with the weighted average tax equivalent yield for each category is set forth below:
 
 
Under 1 Year
 
>1 – 5 Years
 
>5 – 10 Years
 
Over 10 Years
(Dollars in thousands)
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
 
Amount
 
Yield
At amortized cost:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Federal agency obligations
 
$
999

 
2.56
%
 
$

 
%
 
$

 
%
 
$

 
%
Residential federal agency MBS
 
2

 
2.71
%
 

 
%
 
6,406

 
2.87
%
 
183,984

 
2.81
%
Commercial federal agency MBS
 
990

 
3.17
%
 
51,578

 
2.88
%
 
58,614

 
3.03
%
 

 
%
Municipal securities taxable

 

 
%
 
3,865

 
3.17
%
 
71,129

 
3.16
%
 
4,101

 
2.84
%
Municipal securities tax exempt

 
1,419

 
3.61
%
 
9,524

 
3.49
%
 
45,548

 
3.02
%
 
38,851

 
2.68
%
Corporate bonds
 
2,766

 
2.70
%
 
6,728

 
2.79
%
 
4,332

 
3.61
%
 

 
%
CDs
 
454

 
2.30
%
 

 
%
 

 
%
 

 
%
Total debt securities
 
$
6,630

 
2.92
%
 
$
71,695

 
2.97
%
 
$
186,029

 
3.08
%
 
$
226,936

 
2.78
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At fair value:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total debt securities
 
$
6,660

 
 
 
$
73,737

 
 
 
$
193,368

 
 
 
$
231,023

 
 

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 $91.0 million, which can be redeemed by the issuer prior to the maturity presented above.  Management considers these factors when evaluating the interest-rate risk in the Company's asset-liability management program.

Equity Securities

The Company held equity securities with a fair value of $467 thousand and $1.4 million at December 31, 2019, and December 31, 2018, respectively. During the year ended December 31, 2019, the Company's net gains on equity securities recorded in the Consolidated Statement of Income was $367 thousand. During the year ended December 31, 2018, the net losses on equity securities recorded in the Consolidated Statement of Income was $204 thousand.


45


Federal Home Loan Bank Stock

The Bank is required to purchase stock of the FHLB at par value in association with advances from the FHLB; this stock is classified as a restricted investment and carried at cost, which management believes approximates fair value.  The Company's investment in FHLB stock was $4.5 million and $5.4 million at December 31, 2019 and December 31, 2018, respectively. 

See also Note 1, "Summary of Significant Accounting Policies," Item (d) "Restricted Cash and Investments" to the Company's consolidated financial statements, contained in Item 8, "Financial Statements and Supplementary Data," of this Form 10-K below, for further information regarding the Company's investment in FHLB stock.

Loans

This discussion should be read in conjunction with the material presented in Item 1, "Business," under the heading "Lending Products" of this Form 10-K.

Total loans represented 79% of total assets at December 31, 2019 and 81% of total assets at December 31, 2018. Total loans increased $178.0 million, or 7%, for the year ended December 31, 2019 compared to December 31, 2018.  The mix of loans within the portfolio remained relatively unchanged with commercial loans amounting to approximately 86% of gross loans at December 31, 2019 and 2018, reflecting a continued focus on commercial loan growth.

The following table sets forth the loan balances by certain loan categories at the dates indicated and the percentage of each category to gross loans: 
 
 
December 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
(Dollars in thousands)
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
Commercial real estate
 
$
1,394,179

 
54.3
%
 
$
1,303,879

 
54.6
%
 
$
1,201,351

 
52.9
%
 
$
1,038,082

 
51.3
%
 
$
936,921

 
50.3
%
Commercial & industrial
 
501,227

 
19.5
%
 
514,253

 
21.5
%
 
498,802

 
21.9
%
 
490,799

 
24.2
%
 
458,553

 
24.7
%
Commercial construction
 
317,477

 
12.4
%
 
234,430

 
9.8
%
 
274,905

 
12.1
%
 
213,447

 
10.5
%
 
202,993

 
10.9
%
Total commercial loans
 
2,212,883

 
86.2
%
 
2,052,562

 
85.9
%
 
1,975,058

 
86.9
%
 
1,742,328

 
86.0
%
 
1,598,467

 
85.9
%
Residential mortgages
 
247,373

 
9.6
%
 
231,501

 
9.7
%
 
195,492

 
8.6
%
 
180,560

 
8.9
%
 
169,188

 
9.1
%
Home equity loans and lines
 
98,252

 
3.8
%
 
96,116

 
4.0
%
 
91,706

 
4.0
%
 
91,065

 
4.5
%
 
83,373

 
4.4
%
Consumer
 
10,054

 
0.4
%
 
10,241

 
0.4
%
 
10,293

 
0.5
%
 
10,845

 
0.6
%
 
10,747

 
0.6
%
Total retail loans
 
355,679

 
13.8
%
 
337,858

 
14.1
%
 
297,491

 
13.1
%
 
282,470

 
14.0
%
 
263,308

 
14.1
%
Gross loans
 
2,568,562

 
100.0
%
 
2,390,420

 
100.0
%
 
2,272,549

 
100.0
%
 
2,024,798

 
100.0
%
 
1,861,775

 
100.0
%
Deferred fees, net
 
(3,103
)
 
 

 
(2,914
)
 
 

 
(2,645
)
 
 

 
(2,069
)
 
 

 
(1,813
)
 
 

Total loans
 
2,565,459

 
 

 
2,387,506

 
 

 
2,269,904

 
 

 
2,022,729

 
 

 
1,859,962

 
 

Allowance for loan losses
 
(33,614
)
 
 

 
(33,849
)
 
 

 
(32,915
)
 
 

 
(31,342
)
 
 

 
(29,008
)
 
 

Net loans
 
$
2,531,845

 
 

 
$
2,353,657

 
 

 
$
2,236,989

 
 

 
$
1,991,387

 
 

 
$
1,830,954

 
 

 
As of December 31, 2019, commercial real estate loans increased $90.3 million, or 7%, compared to December 31, 2018.  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.
 
Commercial and industrial loans decreased $13.0 million, or 3%, as of December 31, 2019 compared to December 31, 2018. 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, and loans under various programs and agencies. 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 $83.0 million, or 35%, as of December 31, 2019 compared to December 31, 2018.  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

46


cases, these loans move into the permanent commercial real estate portfolio when the construction phase is completed. The increase since December 31, 2018 was due primarily to funding of new and existing loans across a variety of projects including residential housing and condominium projects, and development of commercial use property.

Total retail loan balances increased by $17.8 million, or 5%, as of December 31, 2019 compared to December 31, 2018. Residential secured one-to-four family mortgage loans continue to make up the largest portion of the retail segment. The increase since December 31, 2018 was primarily due to an increase in originations of adjustable rate residential mortgages which are typically held in our portfolio rather than sold.
 
At December 31, 2019, commercial loan balances participated out to various banks amounted to $80.2 million, compared to $72.1 million at December 31, 2018.  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 $104.3 million and $63.5 million at December 31, 2019 and 2018, respectively.  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 Note 3, "Loans," to the Company's consolidated financial statements, contained in Item 8 of this Form 10-K below, for information on related party loans, loans serviced for others and loans pledged as collateral.

The following table sets forth the scheduled maturities of commercial real estate, commercial and industrial and commercial construction loans in the Company's portfolio at December 31, 2019. The table also sets forth the dollar amount of loans which are scheduled to mature after one year which have fixed or adjustable rates.
(Dollars in thousands)
 
Commercial
real estate
 
Commercial &
industrial
 
Commercial
construction
Amounts due(1):
 
 

 
 

 
 

One year or less, and demand notes
 
$
68,342

 
$
246,087

 
$
150,921

After one year through five years
 
249,559

 
132,558

 
54,164

Beyond five years
 
1,076,278

 
122,582

 
112,392

 
 
$
1,394,179

 
$
501,227

 
$
317,477

 
 
 
 
 
 
 
Interest rate terms on amounts due after one year:
 
 

 
 

 
 

Fixed
 
$
45,229

 
$
119,541

 
$
2,933

Adjustable(2)
 
$
1,280,608

 
$
135,599

 
$
163,623

            
(1)
Scheduled contractual maturities may not reflect the actual maturities of loans.  The average maturity of loans may be shorter than their contractual terms principally due to prepayments and demand features.
(2)
Adjustable rate loans may have fixed initial periods before periodic rate adjustments begin.

Credit Risk
 
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.
 
The credit risk management function focuses on a wide variety of factors, including, among others, current and expected economic conditions, the real estate market, the financial condition of borrowers, the ability of borrowers to adapt to changing conditions or circumstances affecting their business and the continuity of borrowers' management teams.  Early detection of

47


credit issues is critical to minimize credit losses. Accordingly, management regularly monitors these factors, among others, through ongoing credit reviews by the Credit Department, an external loan review service, reviews by members of senior management, as well as reviews by the Loan Committee and the Board. This review includes the assessment of internal credit quality indicators such as, among others, 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, as well as trends in the general levels of these indicators and the growth and composition of the loan portfolio. In addition, management monitors expansion in the Company's geographic market areas, the experience level of lenders and any changes in underwriting criteria, and 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.
 
The Company's loan risk rating system classifies loans depending on risk of loss characteristics.  The classifications range from "substantially risk free" for the highest quality loans and loans that are secured by cash collateral, through a satisfactory range of "minimal," "moderate," "better than average," and "average" risk, to the regulatory problem-asset classifications of "criticized," for loans that may need additional monitoring, and 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 by management. Loans classified as "substandard" include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. 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.  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 in non-accrual status and may be additionally designated as impaired or restructured, or some combination thereof.

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans 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. 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 or when, in the judgment of management, the collectability of both principal and interest is reasonably assured.  Interest payments received on loans in a non-accrual status are generally applied to principal on the books of the Company.
 
Impaired loans are individually significant loans for which management considers it probable that not all amounts due (principal and interest) will be collected in accordance with the original contractual terms. Impaired loans include loans that have been modified in a troubled debt restructuring ("TDR"), see "TDR" below. Impaired loans are individually evaluated and exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless the loan is amended in a TDR.

Management does not set any minimum delay of payments as a factor in reviewing for impaired classification.  Management considers the individual payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms.
 
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 Bank 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 included in the impaired loan category and as such, these loans are individually reviewed and evaluated.

Impaired loans are individually evaluated for credit loss and a specific allowance reserve is assigned for the amount of the estimated probable credit loss. When a loan is deemed to be impaired, management estimates the probable credit loss by comparing the loan's carrying value against either: (1) the present value of the expected future cash flows discounted at the loan's effective interest rate; (2) the loan's observable market price; or (3) the expected realizable fair value of the collateral, in

48


the case of collateral dependent loans.  Impaired loans are charged-off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.

An impaired or TDR loan classification will be considered for upgrade based on the borrower's sustained performance over time and their improving financial condition. Consistent with the criteria for returning non-accrual loans to accrual status, the 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.

Real estate acquired by the Company through foreclosure proceedings, or the acceptance of a deed in lieu of foreclosure, is classified as other real estate owned ("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. Any loan balance in excess of the estimated realizable fair value on the date of transfer is charged to the allowance for loan losses on that date. All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value are charged to non-interest expense.
 
Non-performing assets are comprised of non-accrual loans, deposit account overdrafts that are more than 90 days past due and OREO.  The designation of a loan or other asset as non-performing does not necessarily indicate that loan principal and interest will ultimately be uncollectible.  However, management recognizes the greater risk characteristics of these assets and therefore considers the potential risk of loss on assets included in this category in evaluating the adequacy of the allowance for loan losses.  The level of delinquent and non-performing assets is largely a function of economic conditions and the overall banking environment and the individual business circumstances of borrowers. Despite prudent loan underwriting, adverse changes within the Company's market area, or deterioration in local, regional or national economic conditions, could negatively impact the Company's level of non-performing assets in the future.

Asset Quality

At December 31, 2019 and December 31, 2018, the Company had adversely classified loans (loans carrying "substandard," "doubtful" or "loss" classifications) amounting to $37.1 million and $35.5 million, respectively. The increase in adversely classified loans was due to several commercial relationships which were credit downgraded during the year due to individual business circumstances. These additions to adversely classified loans were partially offset by credit upgrades, payoffs and charge-offs. Total adversely classified loans amounted to 1.45% of total loans at December 31, 2019, compared to 1.49% at December 2018.

Adversely classified loans included in the balances above that were performing but possessed potential weaknesses and, as a result, could ultimately become non-performing loans amounted to $22.4 million at December 31, 2019 and $23.8 million December 31, 2018.  The remaining balances of adversely classified loans were non-accrual loans amounting to $14.7 million and $11.7 million at December 31, 2019 and December 31, 2018, respectively. 

Total impaired loans amounted to $31.9 million and $31.5 million at December 31, 2019 and December 31, 2018, respectively.  Total accruing impaired loans amounted to $17.1 million and $19.7 million at December 31, 2019 and December 31, 2018, respectively, while non-accrual impaired loans amounted to $14.8 million and $11.8 million as of December 31, 2019 and December 31, 2018, respectively.

In management's opinion, the majority of impaired loan balances at December 31, 2019 and 2018 were supported by expected future cash flows or, for those collateral dependent loans, the net realizable value of the underlying collateral.  Based on management's assessment at December 31, 2019, impaired loans totaling $29.5 million required no specific reserves and impaired loans totaling $2.4 million required specific reserve allocations of $1.0 million.  At December 31, 2018, impaired loans totaling $26.4 million required no specific reserves and impaired loans totaling $5.1 million required specific reserve allocations of $2.2 million.  The decline in specific reserves since December 31, 2018 was due primarily to the charge-off of a previously impaired commercial relationship. Management closely monitors impaired relationships for the individual business circumstances, and underlying collateral or credit deterioration to determine if additional reserves are necessary.

Total TDR loans included in the impaired loan amounts above as of December 31, 2019 and December 31, 2018 were $21.1 million and $23.1 million, respectively. TDR loans on accrual status amounted to $17.1 million and $19.4 million at December 31, 2019 and December 31, 2018, respectively. TDR loans included in non-performing loans amounted to $4.0 million and $3.7 million at December 31, 2019 and December 31, 2018, respectively. The Company continues to work with

49


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.

At December 31, 2019, accruing loans past due 60-89 days increased $7.6 million from December 31, 2018, due primarily to three commercial relationships that are closely monitored by management for further deterioration. These relationships contain commercial real estate, commercial and industrial, and commercial construction loans. Approximately 50% of the December 31, 2019 outstanding balance of loans past due 60-89 days related to a single relationship which is anticipated to be paid-in-full in the first quarter of 2020.

The Company carried no OREO property at December 31, 2019 or December 31, 2018. There was one property added to OREO in 2019 that was subsequently sold resulting in net gains of $34 thousand. There were no write-downs of OREO during 2019 or 2018, and there were no sales of OREO during 2018.

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:
 
 
December 31,
(Dollars in thousands)
 
2019
 
2018
 
2017
 
2016
 
2015
Non-accrual loan summary:
 
 
 
 
 
 
 
 
 
 
Commercial real estate
 
$
8,280

 
$
6,894

 
$
6,751

 
$
4,876

 
$
8,506

Commercial and industrial
 
3,285

 
3,417

 
1,294

 
3,174

 
4,323

Commercial construction
 
1,735

 
176

 
193

 
519

 
335

Residential mortgages
 
411

 
763

 
262

 
289

 
366

Home equity
 
1,040

 
514

 
463

 
616

 
288

Consumer
 
20

 
17

 
34

 

 
19

  Total non-accrual loans
 
14,771

 
11,781

 
8,997

 
9,474

 
13,837

Overdrafts > 90 days past due
 

 
3

 
35

 
11

 
8

  Total non-performing loans
 
14,771

 
11,784

 
9,032

 
9,485

 
13,845

OREO
 

 

 

 

 

Total non-performing assets
 
$
14,771

 
$
11,784

 
$
9,032

 
$
9,485

 
$
13,845

 
 
 
 
 
 
 
 
 
 
 
Total Loans
 
$
2,565,459

 
$
2,387,506

 
$
2,269,904

 
$
2,022,729

 
$
1,859,962

Accruing TDR loans not included above
 
$
17,103

 
$
19,389

 
$
17,356

 
$
22,418

 
$
10,053

Delinquent loans 60-89 days past due and still accruing
 
$
7,776

 
$
205

 
$
1,026

 
$
940

 
$
2,021

Loans 60-89 days past due and still accruing to total loans
 
0.30
%
 
0.01
%
 
0.05
%
 
0.05
%
 
0.11
%
Adversely classified loans to total loans
 
1.45
%
 
1.49
%
 
1.16
%
 
1.70
%
 
1.33
%
Non-performing loans to total loans
 
0.58
%
 
0.49
%
 
0.40
%
 
0.47
%
 
0.74
%
Non-performing assets to total assets
 
0.46
%
 
0.40
%
 
0.32
%
 
0.38
%
 
0.61
%
Allowance for loan losses
 
$
33,614

 
$
33,849

 
$
32,915

 
$
31,342

 
$
29,008

Allowance for loan losses to non-performing loans
 
227.57
%
 
287.25
%
 
364.43
%
 
330.44
%
 
209.52
%
Allowance for loan losses to total loans
 
1.31
%
 
1.42
%
 
1.45
%
 
1.55
%
 
1.56
%

Allowance for Loan Losses

The allowance for loan losses is an estimate of probable credit loss inherent in the loan portfolio as of the specified balance sheet dates.  On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated probable credit losses. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated probable losses from specifically known and other probable credit risks associated with the portfolio.

Except for loans specifically identified as impaired, as discussed above, the estimate is a two-tiered approach that allocates loan loss reserves to "regulatory problem asset" loans by classified credit rating and to non-classified loans by credit type.  The

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general loss allocations take into account quantitative historic loss experience, qualitative factors, as well as regulatory guidance and industry data.  The allowance for loan losses is established through a provision for loan losses, which is a direct charge to earnings.  Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely.  Recoveries on loans previously charged-off are credited to the allowance.

In making its assessment on the adequacy of the allowance, management considers several quantitative and qualitative factors that could have an effect on the credit quality of the portfolio. Management closely monitors the credit quality of individual delinquent and non-performing relationships, the levels of impaired and adversely classified loans, net charge-offs, the growth and composition of the loan portfolio, expansion in geographic market area, the experience level of lenders and any changes in underwriting criteria, and the strength of the local and national economy, among other factors. 

The level of delinquent and non-performing assets is largely a function of economic conditions and the overall banking environment and the individual business circumstances of borrowers.  Despite prudent loan underwriting, adverse changes within the Company’s market area, or deterioration in local, regional or national economic conditions, could negatively impact management's estimate of probable credit losses.
 
Management continues to closely monitor the necessary allowance levels, including specific reserves. The allowance for loan losses to total loans ratio was 1.31% at December 31, 2019 compared to 1.42% at December 31, 2018.  Continued general positive credit metrics, partially offset by the impact of loan growth in 2019 have contributed to the decline in the allowance to total loans ratio since the prior year.

Based on the foregoing, as well as management's judgment as to the existing credit risks inherent in the loan portfolio, as discussed above under the headings "Credit Risk" and "Asset Quality," management believes that the Company's allowance for loan losses is adequate to absorb probable losses from specifically known and other probable credit risks associated with the portfolio as of December 31, 2019.

The following table sets forth the allocation of the Company's allowance for loan losses among the categories of loans and the percentage of loans in each category to gross loans for the periods ending on the respective dates indicated:
 
 
December 31,
 
 
2019
 
2018
 
2017
 
2016
 
2015
(Dollars in thousands)
 
Allowance
allocation
 
Loan
category
as % of
gross
loans
 
Allowance
allocation
 
Loan
category
as % of
gross
loans
 
Allowance
allocation
 
Loan
category
as % of
gross
loans
 
Allowance
allocation
 
Loan
category
as % of
gross
loans
 
Allowance
allocation
 
Loan
category
as % of
gross
loans
Comml real estate
 
$
18,338

 
54.3
%
 
$
18,014

 
54.6
%
 
$
17,545

 
52.9
%
 
$
14,902

 
51.3
%
 
$
13,514

 
50.3
%
Comml and industrial
 
9,129

 
19.5
%
 
10,493

 
21.5
%
 
9,669

 
21.9
%
 
11,204

 
24.2
%
 
9,758

 
24.7
%