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Summary of Significant Accounting Policies

12 Months Ended

Dec. 31, 2020

Summary of Significant Accounting Policies

(a) Organization of the Company and Basis of Presentation

The accompanying consolidated financial statements of Enterprise Bancorp, Inc. (the "Company," "Enterprise," "we," or "our"), a Massachusetts corporation, include the accounts of the Company and its wholly owned subsidiary, Enterprise Bank and Trust Company, commonly referred to as Enterprise Bank (the "Bank"). The Bank is a Massachusetts trust company and state chartered commercial bank organized in 1989. Substantially all of the Company's operations are conducted through the Bank and its subsidiaries.

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

The Company's headquarters and the Bank's main office are located at 222 Merrimack Street in Lowell, Massachusetts. At December 31, 2020, the Company had 25 full-service branch banking offices serving the Northern Middlesex, Northern Essex and Northern Worcester counties of Massachusetts and Southern Hillsborough and Southern Rockingham counties in New Hampshire. The Company opened its 26th branch in North Andover, Massachusetts on January 4, 2021, and a branch to be located in Londonderry, New Hampshire is expected to open in late 2021 or early 2022, subject to customary regulatory approvals.

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, and commercial insurance services. The Company also provides a range of wealth management, wealth services and trust services delivered via two channels, Enterprise Wealth Management and Enterprise Trust Services. The services offered through the Bank and its subsidiaries are managed as one strategic unit and represent the Company's only reportable operating segment.

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

The accompanying audited consolidated financial statements and notes thereto have been prepared in accordance with U.S. Generally Accepted Accounting Principles ("GAAP") and the instructions for SEC Form 10-K through the rules and interpretive releases of the SEC under federal securities law. In the opinion of management, the accompanying audited consolidated financial statements reflect all necessary adjustments consisting of normal recurring accruals for a fair presentation. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. Certain previous years' amounts in the consolidated financial statements, and notes thereto, have been reclassified to conform to the current year's presentation.

The Company has evaluated subsequent events and transactions from December 31, 2020 through the filing date of this Annual Report on Form 10-K with the SEC for potential recognition or disclosure as required by GAAP and determined that other than the item noted below, there were no material subsequent events requiring recognition or disclosure.

In January 2021, the Company is participating in the new round of the PPP authorized by The Economic Aid Act, signed into law on December 27, 2020, which extended the authority of lenders to make PPP loans through March 31, 2021. Through March 1, 2021, the SBA has approved $144.8 million of our customer requests for PPP loans as part of round three of the PPP.

(b) Uses of Estimates

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

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 on hand and cash items due from banks, interest-earning deposits (deposit accounts, excess reserve cash balances, money markets, and money market mutual fund accounts) and overnight and term federal funds ("fed funds") sold to money center banks. 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.

(d) Restricted Cash and Investments

Certain of the Company's derivative agreements contain provisions for collateral to be posted if the derivative exposure exceeds a threshold amount. When the Company has pledged cash as collateral in relation to certain derivatives, the cash is carried as restricted cash within "Interest-earning deposits." See Note 9, "Derivatives and Hedging Activities," to the Company's consolidated financial statements of this Form 10-K below for more information about the Company's collateral related to its derivatives.

As a member of the FHLB, the Company is required to purchase certain levels of FHLB capital stock at par value in association with outstanding advances from the FHLB. From time-to-time, the FHLB may initiate the repurchase, at par value, of "excess" levels of its capital stock held by member banks. This stock is classified as a restricted investment and is carried at cost, which management believes approximates fair value. FHLB stock represents the only restricted investment held by the Company.

Management regularly reviews its holdings of FHLB stock for other-than-temporary impairment ("OTTI"). Based on management's periodic review, the Company has not recorded any OTTI charges on this investment to date. If it were determined that a write-down of FHLB stock was required, impairment would be recognized through a charge to earnings.

See Note 2, "Investment Securities," to the Company's consolidated financial statements of this Form 10-K, contained below, for additional information on management's OTTI review.

(e) Investment Securities

Investments in debt securities that are intended to be held for indefinite periods of time, but which may not be held to maturity or on a long-term basis are considered to be "available-for-sale" and are carried at fair value. Net unrealized gains and losses on investments available-for-sale, net of applicable income taxes, are recorded in the Company's Consolidated Statement of Comprehensive Income ted as a component of "Accumulated other comprehensive income (loss)". Included as available-for-sale are debt securities that are purchased in connection with the Company's asset-liability risk management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other related factors. In instances where the Company has the positive intent to hold debt securities to maturity, these securities will be classified as held-to-maturity and carried at amortized cost. As of the balance sheet dates, all of the Company's debt securities were classified as available-for-sale and carried at fair value.

There are inherent risks associated with the Company's investment activities that could adversely impact the fair value and the ultimate collectability of the Company's investments. Management regularly reviews the debt portfolio for securities with unrealized losses to determine if any of the unrealized losses are OTTI. The determination of OTTI involves a high degree of judgment. While management uses available information to measure OTTI at the balance sheet date, future write-downs may be necessary based on extended duration of current unrealized losses, changing market conditions, or circumstances surrounding individual issuers.

If a debt investment is deemed to have an unrealized loss that is OTTI, the Company is required to write-down the investment. For debt securities, OTTI is generally recognized through a charge to earnings as of the balance sheet date, while non-OTTI unrealized losses are recognized in other comprehensive income. Unrealized losses on debt securities are deemed OTTI if (i) the Company intends to sell the security, (ii) it is more likely than not that the Company will be required to sell the security before recovery, or (iii) a credit loss exists, and the Company does not expect to recover the entire amortized cost. For debt securities that have a credit loss, any portion of the loss related to other factors is recorded in other comprehensive income. Once written down, the previous charge on debt securities may not be recovered through earnings until sale or maturity, if in excess of its new cost basis. Any OTTI charges, depending upon the magnitude of the charges, could have a material adverse effect on the Company's financial condition and results of operations. See also Note 2, "Investment Securities," to the Company's consolidated financial statements of this Form 10-K below, for further information on management's OTTI assessment.

At December 31, 2020 and December 31, 2019, the Company's equity securities were recorded on the Company's Consolidated Balance Sheet at fair value with changes in fair value recognized in the Company's Consolidated Income Statement as a component of "Other income." The net gains and losses on equity securities that will be recognized as a component of "Other income" in the future will depend on the amount of dollars invested in equities, the magnitude of changes in equity markets and the amount of gains or losses realized through equity sales.

Investment securities' discounts are accreted and premiums are amortized over the period of estimated principal repayment using methods that approximate the interest method. Gains or losses on the sale of investment securities are recognized on the trade date on a specific identification basis.

(f) Loans Held for Sale

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. Enterprise 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 held for sale are carried at the lower of aggregate amortized cost or fair value on a separate line on the balance sheet. Fair value is based on comparable market prices for loans with similar rates and terms. When loans are sold, a gain or loss is recognized to the extent that the sales proceeds plus unamortized fees and costs exceed, or are less than, the carrying value of the loans. Gains and losses are determined using the specific identification method.

(g) Loans

Loans made by the Company to businesses, non-profits and professional practices include commercial real estate mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and letters of credit. Loans made to individuals 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. Most loans granted by the Company are collateralized by real estate, equipment, or receivables and/or are guaranteed by the principals of the borrower. The ability and willingness of the single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity and real estate values within the borrowers' geographic areas. The ability and willingness of commercial real estate, commercial and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate sector in the borrowers' geographic areas and the general economy, among other factors.

Loans are reported at the principal amount outstanding, net of deferred origination fees and costs. The aggregate amounts of overdrawn deposit accounts are reclassified as loan balances. Loan origination fees received, offset by direct loan origination costs, are deferred and amortized using the straight-line method over three years to five years for lines of credit and demand notes or over the life of the related loans using the level-yield method for all other types of loans. When loans are paid off, the unamortized fees and costs are recognized as an adjustment to interest income.

From time to time, the Company participates with other banks in the financing of certain commercial projects. 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 participants at loan origination. When the participation qualifies as a sale under 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 the participating institution are carried in the loan portfolio at the Company's pro rata share of ownership. See also Note 3, "Loans," to the Company's consolidated financial statements, under "Loan Portfolio Classifications," of this Form 10-K for further information about the Company's participation loans.

(h) Allowance for Loan Losses

The allowance for loan losses is an estimate of probable credit losses inherent in the loan portfolio as of the specified balance sheet dates. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated probable losses from specifically known and other credit risks associated with the portfolio. Arriving at an appropriated level of allowance for estimated loan losses involves a high degree of management judgement. The allowance for loan losses is established through a provision for loan losses, 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.

The Company uses a systematic methodology to measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology uses a two-tiered approach that makes use of specific reserves for loans individually evaluated and deemed impaired and general reserves for larger groups of homogeneous loans, which are collectively evaluated relying on a combination of qualitative and quantitative factors that may affect credit quality of the pool.

On a quarterly basis, the Company prepares an estimate of the allowance necessary to cover estimated credit risk inherent in the portfolio as of the specified balance sheet dates. The adequacy of the allowance for loan losses is reviewed and evaluated on a regular basis by an internal management committee and the full Board.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

In the first quarter of 2020, the Company, in accordance with the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), chose to delay its implementation of the Financial Accounting Standards Board’s Accounting Standards Update ("FASB ASU") 2016-13, Measurement of Credit Losses on Financial Instruments, including the current expected credit losses ("CECL") methodology for estimating the allowance for credit losses. The Consolidated Appropriations Act of 2021, which was signed into law on December 27, 2020, extended the period during which companies may delay the implementation of CECL until the earlier of (i) the first day of the fiscal year that begins after the national emergency termination date or (ii) January 1, 2022. See Item (w) "Recent Accounting Pronouncements," below under the heading "Accounting pronouncements not yet adopted by the Company" in this Note 1 of this Form 10-K for additional information.

See also Note 4, "Allowance for Loan Losses," to the Company's consolidated financial statements of this Form 10-K, contained below, for additional accounting policies related to non-accrual, impaired and troubled debt restructured loans and to the allowance for loan losses.

(i) Other Real Estate Owned

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 estimated fair value of the property acquired, less estimated costs to sell, establishing a new cost basis and carried on the Consolidated Balance Sheet in the line item "Prepaid expenses and other assets." 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.

(j) Premises and Equipment

Land is carried at cost. All other premises and equipment costs are stated at cost less accumulated depreciation and amortization. Depreciation or amortization is computed on a straight-line basis over the lesser of the estimated useful lives of the asset or the respective lease term (including renewal options reasonably certain to be exercised) for leasehold improvements generally as follows:


Bank premises, land improvements, and leasehold improvements						10 to 39 years
Computer software and equipment						3 to 5 years
Furniture, fixtures, and equipment						3 to 10 years

(k) Leases

On January 1, 2019, the Company adopted ASU No. 2016-02, "Leases (Topic 842)." Under this ASU, as amended, lessees are required to recognize right-of-use ("ROU") lease assets and lease liabilities on the balance sheet for all leases with terms longer than 12 months. The lease liability represents the present value of the future lease payments. The ROU asset includes the lease liability, lease prepayments and initial direct costs, less fixed payment lease liabilities. For the Company, this ASU primarily impacted operating leases on our facilities, mainly branch leases, and as a result the Company recorded, on its Consolidated Balance Sheet a lease liability of $18.0 million and ROU asset of $19.0 million on January 1, 2019 related to these leases.

Upon adoption of this ASU, the Company elected the following practical expedients:

•to not reassess, among other things, the historical lease classification, and

•to use hindsight to assess lease terms and impairment of the initial ROU asset.

The Company excludes leases with a term of 12 months or less from the recorded lease liability and ROU asset and accounts for lease and non-lease components (such as common area maintenance) separately. In order to calculate the lease liability, the Company used its incremental borrowing rate as the discount rate to determine the net present value of the lease liability. In determining the term of a lease, the Company included option renewal periods that it considered reasonably certain to be exercised.

The Company recognizes lease expense on a straight-line basis in the "Occupancy and equipment expenses" line item within the non-interest expense section of the Consolidated Statement of Income.

(l) Bank Owned Life Insurance

The Company has purchased bank-owned life insurance ("BOLI") as an investment vehicle, on certain current and former senior and executive officers, utilizing the earnings on BOLI to offset the cost of the Company's benefit plans. The cash surrender value carried on the Consolidated Balance Sheets at December 31, 2020 and December 31, 2019, amounted to $31.4 million and $30.8 million, respectively. There are no associated surrender charges under the outstanding policies.

Information on the Company's benefit plans is contained in Note 13, "Employee Benefit Plans," to the Company's consolidated financial statements of this Form 10-K, contained below.

(m) Impairment of Long-Lived Assets Other than Goodwill

The Company reviews long-lived assets, including premises, equipment, and lease right of use assets for impairment on an ongoing basis or whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. If impairment is determined to exist, any related impairment loss is recognized through a charge to earnings. Impairment losses on assets disposed of, if any, are based on the estimated proceeds to be received, less cost of disposal.

(n) Goodwill

Goodwill carried on the Company's consolidated financial statements was $5.7 million at both December 31, 2020 and December 31, 2019. This asset is related to the Company's acquisition of two branch offices in July 2000.

In accordance with GAAP, the Company does not amortize goodwill and instead, at least annually, evaluates whether the carrying value of goodwill has become impaired. A determination that goodwill has become impaired results in an immediate write-down of goodwill to its determined value with a resulting charge to the Company's Consolidated Statement of Income. Goodwill is evaluated at the reporting unit level. In the case of the Company, the services offered through the Bank and subsidiaries are managed as one strategic unit and represent the Company’s only reportable operating segment.

The Company has the option to perform either (i) a qualitative assessment of whether it is "more likely than not" that the reporting unit's fair value is less than its book value, or (ii) a quantitative assessment.

1.Management's qualitative assessment would take into consideration, among other items, macroeconomic conditions, industry and market considerations, cost or margin factors, financial performance and share price. Based on the qualitative assessment, if the Company were to conclude: a) it is "more likely than not" that the fair value of a reporting unit exceeds its book value, goodwill is deemed not impaired, or b) it is "more likely than not" that the fair value of a reporting unit is less than its book value, a quantitative goodwill analysis must be performed.

2.The Company may elect to forgo the qualitative assessment and perform the quantitative analysis even if management believes that is "more likely than not" that goodwill is not impaired. The quantitative goodwill analysis compares the fair value of the reporting unit with its book value, including goodwill. If the fair value of the reporting unit equals or exceeds its book value, goodwill is deemed not impaired. If the book value of the reporting unit exceeds its fair value, a goodwill impairment loss is recognized for the difference between these amounts, not exceeding the goodwill carrying amount.

At December 31, 2020, based on the Company's quantitative analysis, goodwill was deemed not impaired.

(o) Investment Assets Under Management

Investment assets under management, consisting of assets managed through Enterprise Wealth Management and Enterprise Wealth Services and commercial sweep products, totaled $1.00 billion and $916.6 million at December 31, 2020 and 2019, respectively. Securities and other property held in a fiduciary or agency capacity are not included in the Consolidated Balance Sheets because they are not assets of the Company. See Item (q), "Revenue Recognition-ASC Topic 606," below in this Note 1, of this Form 10-K for information on the Company's accounting policies for wealth management fees.

(p) Derivatives and Hedging

The Company may enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and unknown cash amounts, the value of which are determined by interest rates.

For derivatives designated and that qualify as cash flow hedges, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income ("AOCI"), net of tax and subsequently reclassified into interest income or interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in AOCI related to cash flow hedge derivatives will be reclassified to interest expense as interest is incurred on the Company’s hedge liability or to interest income as interest is earned on the Company's hedge asset. See Note 11, "Comprehensive Income (Loss)," of this Form 10-K for additional information related to the cash flow hedges impact on the Company’s AOCI and Consolidated Statements of Income.

The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply, or the Company elects not to apply hedge accounting. Back-to-Back swaps are not speculative; rather, the transactions result from a service the Company provides to certain commercial customers. As a result, the Company has designated its back-to-back swaps as economic hedges which are not subject to hedge accounting. Any changes in the fair value of both the customer swaps and the counterparty swaps, which have an offsetting relationship, are recognized directly in earnings.

The Company records all derivatives on the balance sheet at fair value. Asset derivatives are included in the line item "Prepaid expenses and other assets," and liability derivatives are included in the "Accrued expenses and other liabilities" line item on the Consolidated Balance Sheets. In accordance with GAAP, the Company elects to measure the credit risk of its derivative financial instruments that are subject to master netting agreements by derivative type on a net basis by counterparty portfolio.

See Note 9, "Derivatives and Hedging Activities," to the Company's consolidated financial statements of this Form 10-K, contained below, for more information about the Company's back-back swaps and cash flow hedges.

Interest-rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The commitments to sell loans are also considered derivative instruments. The Company generally does not pool mortgage loans for sale, but instead, sells the loans on an individual basis. To reduce the net interest rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest-rate lock commitment is quoted on the origination of the loan. The Company estimates the fair value of these derivatives based on current secondary mortgage market prices. At December 31, 2020 and 2019, the estimated fair value of the Company's interest-rate lock commitments and commitments to sell these mortgage loans were deemed immaterial.

(q) Revenue Recognition

While the majority of the Company's revenue is generated from contracts with customers, our primary sources of revenue, interest and dividend income (primarily loan interest income), are outside of the scope of ASC 606, "Revenue from Contracts with Customers," and are accounted for under other ASC topics. The core principles of this standard require an entity to recognize revenue to depict the transfer of goods and services to customers as performance obligations are satisfied.

The primary areas of income within the scope of ASC 606, wealth management fees and deposit and interchange fees, are components of non-interest income on the Company's Consolidated Statements of Income and are discussed below.

Wealth management fees consist of income generated through Enterprise Wealth Management and Enterprise Wealth Services. Enterprise Wealth Management income is primarily generated by managing customers' financial assets. Revenue is recognized as our performance obligation is completed each month. Enterprise Wealth Services revenue is generated through a third-party arrangement to refer, manage and service customers. For new sales and referrals along with transactional type charges, the performance obligation is based on a point in time and the payment is received and revenue is recognized in the same month as the revenue generating activity. For managing and servicing customers, revenue is recognized when our performance obligation is completed each month.

Deposit and interchange fees are comprised of deposit account related charges and income generated from electronic payment interchanges. Deposit account charges consist of certain transactional analysis fees net of earning balance credits, monthly account service fees, and transactional fees such as overdraft fees. Analysis and monthly account services fees are recognized over the period the service is performed. For transactional fees, the performance obligation and the revenue are recognized at a point of time and payment is typically received as the service is rendered. Interchange income is generated primarily from retail debit card transactions processed through the card payment network. The performance obligation and the revenue are recognized when the service is performed.

The following non-interest income components are not subject to ASC 606: income on BOLI, net gains/losses on investment securities, and net gains on sales of loans, and are covered under other ASC topics. The remaining revenue items in non-interest income are not material.

See Item (e), "Investments," Item (f), "Loans Held for Sale," and Item (g), "Loans," above in this Note 1, of this Form 10-K for additional accounting policies on revenue recognition related to income generated on investments, gains and losses on securities, net gains on loans held for sale, and loans.

(r) Stock-Based Compensation

The Company's consolidated financial statements include stock-based compensation expense for the portion of stock option awards and stock awards for which the requisite service has been rendered during the period or the estimate of achieving certain predefined performance objectives. The compensation expense has been recorded based on the estimated grant-date fair value of the stock option awards with no adjustment for estimated forfeitures, or in the case of stock awards, the market value of the common stock on the date of grant. Expense adjustments are made for actual forfeitures as they occur.

The Company will recognize the remaining estimated compensation expense for the portion of outstanding awards and compensation expense for any future awards, net of actual forfeitures, as the requisite service is rendered (i.e., on a straight-line basis over the remaining vesting period of each award) or as performance objectives are met. Stock awards that do not require future service ("vested awards") will be expensed immediately. Stock-based compensation also includes Director stock compensation for stock awards and stock in lieu of cash fees, both included in other operating expenses.

See Note 14, "Stock-Based Compensation," to the Company's consolidated financial statements of this Form 10-K, contained below, for further information on the Company's stock-based compensation.

(s) Income Taxes

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states, within the directives of the respective enacted tax legislation. The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax expense or benefit attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities will be adjusted accordingly through the provision for income taxes in the period that includes the enactment date.

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

The income tax provisions will differ from the expense that would result from applying the federal statutory rate to income before taxes, due primarily to the impact of state tax expense, tax-exempt interest from certain investment securities, loans and BOLI and the tax impact from equity compensation activity.

The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at December 31, 2020 or December 31, 2019. The Company is subject to U.S. federal and state income tax examinations by taxing authorities for the 2017 through 2020 tax years. In addition, the Company's state and federal income tax returns for the 2015 and 2016 tax years, respectively, are subject to income tax examination.

See also Note 15, "Income Taxes," to the Company's consolidated financial statements of this Form 10-K, contained below, for further information about the Company's income taxes and deferred tax assets.

(t) Earnings per Share

Basic earnings per share are calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding (including participating securities) during the year. The Company's only participating securities are unvested restricted stock awards that contain non-forfeitable rights to dividends. Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method.

(u) Reporting Comprehensive Income

Comprehensive income is defined as all changes to stockholders' equity except investments by and distributions to stockholders. Net income is one component of comprehensive income, with other components referred to in the aggregate as other comprehensive income. The Company's other comprehensive income components are the changes in fair value of debt securities, net of deferred income taxes, and for derivatives designated and that qualify as cash flow hedges of interest rate risk, the changes in fair value of cash flow hedges, net of income taxes. Pursuant to GAAP, the Company initially excludes the unrealized holding gains and losses from net income; however, they are later reported as reclassifications out of accumulated other comprehensive income into net income when circumstances warrant.

When debt securities are sold, the reclassification of realized gains and losses on available-for-sale securities are included on the Consolidated Statements of Income under the "Non-interest income" subheading on the line item "Net gains (losses) on sales of available-for-sale debt securities" and the related income tax expense is included in the line item "Provision for income taxes," both of which are also detailed in Note 11, "Comprehensive Income (Loss)," of this Form 10-K.

For cash flow hedges of interest rate risk, the change in fair value will be reclassified in the same period during which the hedged transaction affects earnings, to either interest expense as interest is incurred on the Company's hedge liability, or to interest income as interest is earned on the Company's hedge asset. The reclassification of gain or loss on the derivatives are included on the Consolidated Statements of Income under "Interest income" or "Interest expense" line item and the related income tax expense is included in the line item "Provision for income taxes," both of which are also detailed in Note 11, "Comprehensive Income (Loss)," of this Form 10-K

See Note 11, "Comprehensive Income (Loss)," of this Form 10-K for additional information related to the reconciliation of changes in the components of other comprehensive income / loss and accumulated other comprehensive income / loss.

(v) Other Accounting Policies

The CARES Act allows certain financial institutions the option to delay the adoption CECL during the period

beginning on March 27, 2020 until the earlier of (i) the date on which the national emergency concerning the COVID-19 pandemic ("pandemic") declared under the National Emergencies Act terminates; or (i) December 31, 2020. The Consolidated Appropriations Act, which was signed into law on December 27, 2020, extended the period during which companies may delay the implementation of CECL until the earlier of (i) the first day of the fiscal year that begins after the national emergency termination date or (ii) January 1, 2022. In the first quarter of 2020, the Company elected to delay the adoption of CECL. See Item (w) "Recent Accounting Pronouncements," under the subheading "Accounting pronouncements not yet adopted by the Company," below in this Note 1 for additional information on the Company’s adoption of CECL.

In addition, Section 4013 of the CARES Act provides the option for financial institutions to suspend troubled debt restructuring ("TDR") accounting under GAAP in certain circumstances, during the period beginning March 1, 2020 and ending on the earlier of (i) January 1, 2022 (as amended by the Consolidated Appropriations Act of 2021); or (ii) the date that is 60 days after the date on which the national emergency concerning the pandemic declared under the National Emergencies Act terminates. The Company is suspending TDR accounting, which primarily impacts financial statement disclosure, for loans that have had a short-term payment deferral related to the pandemic since March 1, 2020, as long as those loans were current and risk rated as “pass” as of December 31, 2020.

(w) Recent Accounting Pronouncements

The tables below summarize recent accounting pronouncements issued by the Financial Accounting Standards Board ("FASB") that were either recently adopted by the Company or have not yet been adopted. For pronouncements not yet adopted, the effective date listed below is in line with the required adoption date for public business entities, such as the Company, though certain accounting pronouncements may permit early adoption. For more detailed information regarding these pronouncements, refer to the FASB's ASU.


Accounting pronouncements adopted by the company

Standard/Adoption Date	Description	Effect on Financial Statements or Other Significant Matters
ASU No. 2020-04. Reference Rate Reform (Topic 848) - Facilitation of the Effects of Reference Rate Reform on Financial Reporting Upon Issuance	The amendments in the provision are effective for a limited period and mainly address accounting and reporting challenges due to the transition from LIBOR on existing contracts. The optional expedients may be applied to loans, borrowings, leases, and derivatives. The standard 1) simplifies the accounting analyses for contract modifications and 2) simplifies the hedge effectiveness assessment and allows hedging relationships impacted by the LIBOR transition to continue.	This ASU was effective upon issuance and is applicable until December 31, 2022. The Company adopted this ASU prospectively and made certain optional elections related to its cash flow hedge relationships which did not materially impact our consolidated financial statements. The Company continues to assess the other implications and expedients under this standard, which allows for elections to be made at different time intervals, but does not expect that the ASU will have a material impact on the Company's consolidated financial statements, or results of operations.
ASU No. 2018-13, Fair Value Measurement (ASU Topic 820)-Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement January 1, 2020	The amendments in this ASU modify the disclosure requirements related primarily to level 3 fair value measurements of the fair value hierarchy.	The adoption of ASU No. 2018-13 in January 2020 did not have a material impact on the Company's consolidated financial statements and results of operations because this ASU relates primarily to disclosure requirements and the dollar amounts of related assets held by the Company are immaterial.
ASU No.2018-15, Intangibles-Goodwill and Other- Internal-Use Software (ASU Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract January 1, 2020	The major provision in the amendments in this ASU requires an entity to capitalize certain implementation costs incurred in a hosting arrangement that is a service contract in accordance with current GAAP for internal-use software and expense these costs over the term of the hosting arrangement. Additionally, these capitalized implementation costs are required to be reviewed for impairment in accordance with current GAAP for internal-use software. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption.	The adoption of ASU No. 2018-15 in January 2020 did not have a material impact on the Company's consolidated financial statements and results of operations.
ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (ASU Subtopic 715-20) - Disclosure Framework- Changes to the Disclosure Requirements for Defined Benefit Plans December 31, 2020	The amendments in this ASU modify the disclosure requirements on defined benefit plans including requiring disclosures about significant gains and losses related to changes in the benefit obligation.	The adoption of ASU No. 2018-14 did not have a material impact on the Company's consolidated financial statements and results of operations.


Accounting pronouncements not yet adopted by the Company

Standard/Anticipated Adoption Date	Description	Effect on Financial Statements or Other Significant Matters
ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments The earlier of (i) the date on which the national emergency concerning the pandemic declared by the National Emergencies Act terminates; or (ii) January 1, 2022.	The amendments in this ASU require a financial asset (or a group of financial assets) measured on an amortized cost basis to be presented at the net amount expected to be collected. Previously, when credit losses were measured under GAAP, an entity generally only considered past events and current conditions in measuring the incurred loss and generally recognition of the full amount of credit losses was delayed until the loss was probable of occurring. The amendments in this ASU eliminate the probable initial recognition threshold in current GAAP and, instead, reflect an entity's current estimate of CECL. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the report amount. An entity must use judgment in determining the relevant information and estimation methods that are appropriate in its circumstances. The Statement of Income reflects the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP. However, the amendments in this ASU require that credit losses be presented as an allowance rather than as a write-down. Unlike current GAAP, the ASU provides for reversals of credit losses in future period net income in situations where the estimate of loss declines. Based on current regulatory guidance, as of the adoption date an entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the first day of the fiscal year of adoption (that is, a modified-retrospective approach).	In accordance with the CARES Act, and as amended by the Consolidated Appropriations Act of 2021, the Company elected to defer the adoption of this standard. The Company continues to monitor regulatory guidance related to this deferment. As of December 31, 2020, the Company estimates adoption of CECL would have increased the total allowance for loan losses (credit losses under CECL), including the reserves for unfunded commitments, by $8 million to $10 million and increased the total allowance for credit losses to total loans ratio from 1.45% to a range of 1.70% to 1.80%. The Company anticipates adopting CECL in 2021. Upon adoption, the estimated total increase in the allowance for credit losses net of taxes of approximately $6.0 million to $8.0 million will be recorded through retained earnings. In April 2019, the regulatory banking agencies issued an interim final rule that allows banking institutions that implement CECL to delay for three years the estimated impact of CECL on regulatory capital. The Company is currently assessing its options at this time and will make its election when it adopts CECL.