U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _____________ to _______________
Commission file number 0-21021
Enterprise Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Massachusetts 04-3308902
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
222 Merrimack Street, Lowell, Massachusetts, 01852
(Address of principal executive offices)
(978) 459-9000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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. Yes ..X.... No......
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: July 31, 1998, Common Stock - Par
Value $0.01, 1,583,492 shares outstanding
Transitional Small Business Disclosure Format (check one): Yes .... No X......
1
<PAGE>
ENTERPRISE BANCORP, INC.
INDEX
Page Number
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements of Enterprise Bancorp, Inc.
Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three and six months ended June 30, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders' Equity
Six months ended June 30, 1998 5
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997 6
Notes to Financial Statements 7
Item 2 Business Review and Management's Discussion and
Analysis of Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Changes in Securities 19
Item 3 Defaults upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits and Reports on Form 8-K 19
Signature Page 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact. Enterprise
Bancorp, Inc. (the "company") wishes to caution readers that the following
important factors, among others, may have affected and could in the future
affect the company's results and could cause the company's results for
subsequent periods to differ materially from those expressed in any
forward-looking statement made herein: (i) the effect of changes in laws and
regulations, including federal and state banking laws and regulations, with
which the company or its subsidiaries must comply, and the associated costs of
compliance with such laws and regulations either currently or in the future as
applicable; (ii) the effect of changes in accounting policies and practices, as
may be adopted by the regulatory agencies as well as by the Financial Accounting
Standards Board, or of changes in the company's organization, compensation or
benefit plans; (iii) the effect on the company's competitive position within its
market area of the increasing competition from larger regional and out-of-state
banking organizations as well as non-bank providers of various financial
services; (iv) the effect of changes in interest rates; (v) the effect of
changes in the business cycle and downturns in the local, regional or national
economies; and (vi) the potential for the company to materially underestimate
the cost to be incurred and/or the time required in connection with systems
preparation for Year 2000 compliance.
2
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
June 30, 1998 and December 31, 1997
June 30, December 31,
1998 1997
($ in thousands) (Unaudited) (Audited)
----------- ------------
Assets
------
<S> <C> <C>
Cash and cash equivalents $ 21,211 19,779
Daily federal funds sold 20,200 3,775
Investment securities at fair value 93,973 112,886
Loans, less allowance for loan losses of $ 4,534
at June 30, 1998 and $4,290 at December 31, 1997 198,177 176,294
Premises and equipment 3,847 4,079
Accrued interest receivable 2,518 2,971
Prepaid expenses and other assets 693 645
Income taxes receivable 176 220
Real estate acquired by foreclosure 459 393
Deferred income taxes, net 1,688 1,581
-------- --------
Total assets $342,942 322,623
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits $301,142 283,249
Short-term borrowings 13,705 12,467
Escrow deposits of borrowers 561 612
Accrued expenses and other liabilities 1,941 1,884
Accrued interest payable 537 566
-------- --------
Total liabilities 317,886 298,778
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized,
no shares issued at June 30, 1998 -- --
Common stock $.01 par value; 5,000,000 shares authorized,
1,583,317 and 1,580,217 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively 16 16
Additional paid-in capital 15,570 15,531
Retained earnings 8,790 7,663
Accumulated other comprehensive income 680 635
-------- --------
Total stockholders' equity 25,056 23,845
-------- --------
Total liabilities and stockholders' equity $342,942 322,623
======== ========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three months and six months ended June 30, 1998 and 1997
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
($ in thousands) 1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 4,638 3,780 8,969 7,185
Investment securities 1,613 1,928 3,325 3,802
Federal funds sold 58 5 83 20
---------- ---------- ---------- ----------
Total interest income 6,309 5,713 12,377 11,007
---------- ---------- ---------- ----------
Interest expense:
Deposits 2,298 2,084 4,557 4,071
Borrowed funds 140 218 309 453
---------- ---------- ---------- ----------
Total interest expense 2,438 2,302 4,866 4,524
---------- ---------- ---------- ----------
Net interest income 3,871 3,411 7,511 6,483
Provision for loan losses 180 60 270 120
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 3,691 3,351 7,241 6,363
Non-interest income:
Deposit service fees 230 221 449 439
Trust fees 221 158 458 335
Gain on sale of loans 56 4 75 24
Gain on sale of investments 94 -- 165 --
Other income 73 69 157 138
---------- ---------- ---------- ----------
Total non-interest income 674 452 1,304 936
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits 1,731 1,535 3,409 2,941
Occupancy expenses 540 440 1,095 870
Advertising and public relations 116 105 222 277
Office and data processing supplies 93 89 186 170
Audit, legal and other professional fees 162 189 288 265
Trust professional and custodial expenses 72 55 146 105
Other operating expenses 284 286 584 584
---------- ---------- ---------- ----------
Total non-interest expense 2,998 2,699 5,930 5,212
---------- ---------- ---------- ----------
Income before income taxes 1,367 1,104 2,615 2,087
Income tax expense 489 403 934 757
---------- ---------- ---------- ----------
Net income $ 878 701 1,681 1,330
========== ========== ========== ==========
Basic earnings per average common share outstanding $ 0.55 0.44 1.06 0.84
========== ========== ========== ==========
Diluted earnings per average common share outstanding $ 0.53 0.44 1.02 0.83
========== ========== ========== ==========
Basic weighted average common shares outstanding 1,582,734 1,576,192 1,581,475 1,576,192
========== ========== ========== ==========
Diluted weighted average common shares outstanding 1,652,957 1,607,266 1,648,489 1,607,226
========== ========== ========== ==========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Six months ended June 30, 1998
Common Stock Additional Comprehensive Income Total
----------------- Paid-in Retained -------------------- Stockholders'
($ in thousands) Shares Amount Capital Earnings Period Accumulated Equity
--------- ------ ---------- -------- ------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,580,217 $ 16 $15,531 $ 7,663 $ 635 $23,845
Comprehensive income
Net income 1,681 $ 1,681 1,681
Unrealized gains on securities, net
of reclassification 45 45 45
-------
Total comprehensive income, net of tax $ 1,726
=======
Common stock dividend (554) (554)
Stock options exercised 3,100 39 39
--------- ---- ------- ------- ----- -------
Balance at June 30, 1998 1,583,317 $ 16 $15,570 $ 8,790 $ 680 $25,056
========= ==== ======= ======= ===== =======
Disclosure of reclassification amount:
Gross unrealized holding gains arising during the period $ 230
Less: tax effect 84
-------
Unrealized holding gains, net of tax 146
-------
Less: reclassification adjustment for gains included
in net income (net of $64 tax) 101
-------
Unrealized gains on securities, net of reclassification $ 45
=======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Six months ended June 30, 1998 and 1997
June 30, June 30,
1998 1997
($ in thousands) (Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,681 1,330
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 270 120
Depreciation and amortization 544 447
Gains on sales of loans (75) (24)
Gains on sales of securities (165) --
(Increase)/Decrease:
Loans held for sale (397) 97
Accrued interest receivable 453 (344)
Prepaid expenses and other assets (48) (87)
Deferred income taxes (127) 9
Increase/(Decrease):
Accrued expenses and other liabilities 57 787
Accrued interest payable (29) 7
Change in income taxes payable/receivable 44 (149)
-------- --------
Net cash provided by operating activities 2,208 2,193
-------- --------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns
of investment securities 23,408 3,405
Proceeds from sales of investment securities 10,080 --
Purchase of investment securities (14,363) (5,342)
Proceeds from sales of real estate acquired by foreclosure -- 62
Net increase in loans (21,747) (19,204)
Additions to premises and equipment, net (294) (150)
-------- --------
Net cash used in investing activities (2,916) (21,229)
-------- --------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 17,842 17,445
Change in short term borrowings 1,238 6,511
Cash dividends paid on common stock (554) (512)
Stock options exercised 39 --
-------- --------
Net cash provided by financing activities 18,565 23,444
-------- --------
Net increase (decrease) in cash and cash equivalents 17,857 4,408
Cash and cash equivalents at beginning of period 23,554 14,507
-------- --------
Cash and cash equivalents at end of period $ 41,411 18,915
======== ========
Supplemental financial data:
Cash paid for:
Interest on deposits and short-term borrowings $ 4,895 4,518
Income taxes 1,016 898
Transfers from loans to real estate acquired by foreclosure 75 168
</TABLE>
6
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Financial Statements
(1) Organization of Holding Company
Enterprise Bancorp, Inc. (the "company") is a Massachusetts corporation, which
was organized on February 29, 1996, at the direction of Enterprise Bank and
Trust Company, a Massachusetts trust company (the "bank"), for the purpose of
becoming the holding company for the bank. The company had no material assets or
operations prior to completion of the holding company reorganization on July 26,
1996.
(2) Basis of Presentation
The accompanying unaudited financial statements should be read in conjunction
with the company's December 31, 1997, audited financial statements and notes
thereto. Interim results are not necessarily indicative of results to be
expected for the entire year.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the allowance
for loan losses.
In the opinion of management, the accompanying financial statements reflect all
necessary adjustments consisting of normal recurring accruals for a fair
presentation.
(3) Earnings per share
Basic earnings per share are calculated by dividing net income by the year to
date weighted average number of common shares that are outstanding. Diluted
earnings per share reflect 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.
(4) Reclassification
Certain fiscal 1997 information has been reclassified to conform to the 1998
presentation.
7
<PAGE>
ITEM 2 - Business Review and Management's Discussion and Analysis of Financial
Condition and Results of Operations
Capital Resources
The company's actual capital amounts and capital adequacy ratios are presented
in the table below. The bank's capital amounts and ratios do not differ
materially from the amounts and ratios presented.
<TABLE>
<CAPTION>
Minimum Capital Minimum Capital
for Capital to be
Actual Adequacy Purposes Well Capitalized
------------------- ------------------ ------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
------ ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
As of June 30, 1998:
Total Capital
(to risk weighted assets) $26,896 12.69% $16,953 8.00% $21,191 10.00%
Tier 1 Capital
(to risk weighted assets) 24,222 11.43% 8,476 4.00% 12,714 6.00%
Tier 1 Capital*
(to average assets) 24,222 7.24% 13,378 4.00% 16,722 5.00%
<FN>
* For the bank to qualify as "well capitalized", it must maintain a leveraged capital ratio
(Tier 1 capital to average assets) of at least 5%. This requirement does not apply to the
company and is reflected merely for informational purposes with respect to the bank.
</FN>
</TABLE>
On April 21, 1998, the board of directors declared a dividend in the amount of
$0.35 per share to be paid on or about July 1, 1998 to shareholders of record as
of the close of business on June 12, 1998. The board of directors intends to
consider the payment of future dividends on an annual basis.
Balance Sheet
Total Assets
Total assets increased $20.3 million, or 6.3%, since December 31, 1997. The
increase is primarily attributable to an increase in gross loans of $22.1
million. The increase in assets was funded primarily by increases in deposits of
$17.8 million.
Investments
At June 30, 1998 all of the company's investment securities were classified as
available-for-sale and carried at fair value. The net unrealized gains at June
30, 1998, net of tax effects, are shown as accumulated other comprehensive
income, a separate component of stockholders' equity, in the amount of $680,000.
Loans
Total loans, before the allowance for loan losses, were $202.7 million, or 59.1%
of total assets, at June 30, 1998, compared to $180.6 million, or 56.0 % of
total assets, at December 31, 1997. The increase in loans of $22.1 million was
primarily attributed to increased loan origination in the commercial real estate
and commercial loan portfolios. The bank continues to pursue active customer
calling efforts as well as increased marketing and advertising to identify
quality lending opportunities.
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $17.8 million,
or 6.3%, during the first six months of 1998 from $283.9 million at December 31,
1997, to $301.7 million at June 30, 1998. The increase was primarily due to
increased market penetration of the bank's newer branches as well as strong
demand for the bank's new IRA products.
Total borrowings, consisting of securities sold under agreements to repurchase
and FHLB (Federal Home Loan Bank) borrowings, increased $1.2 million, or 9.9%,
from $12.5 million at December 31, 1997 to $13.7 million at June 30, 1998. The
increase was primarily attributable to an increase in securities sold under
agreements to repurchase of $2.2 million, partially offset by a decrease in FHLB
borrowings of $1.0 million. Management periodically takes advantage of
opportunities to fund asset growth with borrowings, but on a long-term basis the
bank intends to replace any FHLB borrowings with deposits. Management also
actively uses FHLB borrowings in managing the bank's asset/liability position.
The bank had FHLB borrowings outstanding of $470,000 at June 30, 1998, and had
the ability to borrow approximately an additional $62.2 million.
8
<PAGE>
Loan Loss Experience/Non-Performing Assets
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Six months ended June 30,
-------------------------
($ in thousands) 1998 1997
------- -------
Balance at beginning of year $ 4,290 3,895
Loans charged-off
Commercial 65 85
Commercial real estate -- --
Construction -- --
Residential real estate -- --
Home equity -- --
Other 5 1
------- -------
70 86
Recoveries on loans charged off
Commercial 3 5
Commercial real estate -- 136
Construction -- --
Residential real estate 6 --
Home equity 3 3
Other 32 4
------- -------
44 148
Net loans charged off 26 (62)
Provision charged to income 270 120
------- -------
Balance at June 30 $ 4,534 4,077
======= =======
Allowance for loan losses : Gross loans 2.24% 2.50%
======= =======
Annualized net charge-offs : Average loans outstanding 0.03% (0.08%)
======= =======
Allowance for loan losses : Non-performing loans 422.55% 172.03%
======= =======
The following table sets forth non-performing assets at the dates indicated:
<TABLE>
<CAPTION>
($ in thousands) June 30, December 31, June 30,
1998 1997 1997
-------- ------------ --------
<S> <C> <C> <C>
Loans on non-accrual:
Commercial $ 609 397 615
Residential real estate 179 180 249
Commercial real estate 3 180 889
Construction -- -- 41
Consumer, including home equity 207 286 461
------ ------ ------
Total loans on non-accrual 998 1,043 2,255
Loans past due >90 days, still accruing 75 74 115
------ ------ ------
Total non-performing loans 1,073 1,117 2,370
Other real estate owned 459 393 189
------ ------ ------
Total non-performing loans and real estate owned $1,532 1,510 2,559
====== ====== ======
Non-performing loans : Gross loans 0.53% 0.61% 1.45%
====== ====== ======
Non-performing loans and real estate owned : Total assets 0.45% 0.47% 0.83%
====== ====== ======
Delinquent loans 30-89 days past due : Gross loans 0.90% 1.14% 1.54%
====== ====== ======
</TABLE>
9
<PAGE>
Total non-performing loans decreased $1.3 million from June 30, 1997 through
December 31, 1997. The ratio of non-performing loans to gross loans decreased
from 1.45% to 0.61% from June 30, 1997 during this period. The primary cause for
the declines was the removal of several commercial and commercial real estate
loans from non-accrual status. These loans were either paid in full or brought
current and assessed as fully collectable by management.
Total non-performing loans increased $44,000 from December 31, 1997 to June 30,
1998, despite an increase of $22.1 million in loan balances since December 30,
1997. The ratio of non-performing loans to gross loans decreased from 0.61% as
of December 31, 1997 to 0.53% as of June 30, 1998. The level of non-performing
assets is largely a function of economic conditions and the overall banking
environment, as well as the strength of the bank's loan underwriting. Adverse
changes in local, regional or national economic conditions could negatively
impact the level of non-performing assets in the future, despite prudent
underwriting.
Year 2000 Compliance
The company is currently in the process of testing remediated systems and
developing contingency plans relative to year 2000 preparedness. The company
anticipates testing to be substantially complete for all "mission critical"
internal systems by December 31, 1998. Management does not anticipate that the
company will incur significant operating expenses or be required to invest
heavily in computer system improvements to achieve year 2000 compliance.
Notwithstanding any of the company's efforts, however, there can be no assurance
that the systems of other companies on which the company's, the company's
vendors' or the company's customers' systems rely will be timely remediated.
Therefore, the company's operations and/or financial condition could be
negatively impacted as a result of the failure of such other entities to
properly address the year 2000 issue in a timely manner. Costs incurred in
connection with year 2000 compliance will be treated as period costs and will be
expensed as incurred. The need for additional provisions to the bank's allowance
for loan losses resulting from borrowers' year 2000 compliance problems will be
considered, on an ongoing basis, based on management's assessment of the
potential exposure of its customer base to such problems.
10
<PAGE>
Results of Operations
Six Months Ended June 30, 1998 vs. Six Months Ended June 30, 1997
The company reported net income of $1,681,000 for the six months ended June 30,
1998, versus $1,330,000 for the six months ended June 30, 1997, or an increase
of 26.4%. The company had basic earnings per common share of $1.06 and $0.84 for
the six months ended June 30, 1998 and June 30, 1997, respectively. Diluted
earnings per share were $1.02 and $0.83 for the six months ending June 30, 1998
and June 30, 1997, respectively.
The following table highlights changes that affected the company's earnings for
the periods indicated:
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
($ in thousands) 1998 1997
--------- -------- ----
<S> <C> <C>
Average assets $328,524 292,689
Average deposits and short-term borrowings 302,202 269,650
Average investment securities (1) 109,961 121,645
Average loans 192,031 151,519
Net interest income 7,511 6,483
Provision for loan losses 270 120
Tax expense 934 757
Average loans : Average deposits and borrowings 63.54% 56.19%
Non interest expense : Average assets (2) 3.64% 3.59%
Non interest income, exclusive of securities
gains : Average assets (2) 0.70% .64%
Average tax equivalent rate earned on interest earning assets 8.31% 8.23%
Average rate paid on interest bearing deposits and
short-term borrowings 3.93% 4.00%
Net interest rate spread 4.38% 4.23%
<FN>
(1) Average investment securities are shown at average amortized cost
(2) Ratios have been annualized based on number of days for the period
</FN>
</TABLE>
Net Interest Income
The company's net interest income was $7,511,000 for the six months ended June
30, 1998, an increase of $1,028,000 or 15.9% from $6,483,000 for the six months
ended June 30, 1997. Interest income increased $1,370,000, primarily a result of
an increase of average loan balances of $40.5 million. The increase in interest
income was partially offset by an increase in interest expense of $342,000,
primarily due to an increase in average deposits and short-term borrowings.
The average tax-equivalent yield on earning assets in the six months ended June
30, 1998, was 8.31%, up 8 basis points from 8.23% in the six months ended June
30, 1997. The decline in the tax equivalent yield on investment securities from
6.59% to 6.45% was primarily a result of higher yielding securities being called
by the issuing agency. The average rate paid on interest bearing deposits and
short-term borrowings in the six months ended June 30, 1998, was 3.93%, a
decrease of 6 basis points from 4.00% in the six months ended June 30, 1997. The
average rate on short term borrowings declined from 4.60% to 3.91% as a result
of the decline in Federal Home Loan Bank borrowings.
The interest rate spread increased 15 basis points to 4.38% in the six months
ended June 30, 1998, from 4.23% in the six months ended June 30, 1997. The
principal reason for the increase in the bank's net interest income during the
first six months of 1998 was the increase in average loans of $40.5 million,
which was funded by an increase of $25.0 million and $11.5 million in average
interest bearing deposits and non-interest bearing deposits, respectively.
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the six months ended June 30, 1998, and 1997. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average balance
multiplied by prior year average rate); (2) interest rate (change in average
interest rate multiplied by prior year average balance); and (3) rate and volume
(the remaining difference).
11
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Six Months Ended June 30, 1998 Six Months Ended June 30, 1997
------------------------------ ------------------------------
Average Interest Average Interest
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3)
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (1) (2) $192,031 $ 8,969 9.42% $151,519 $ 7,185 9.56%
Investment securities (3) 109,961 3,325 6.45 121,645 3,802 6.59
Federal funds sold 3,004 83 5.57 766 20 5.27
-------- ------- -------- -------
Total interest earnings assets 304,996 12,377 8.31% 273,930 11,007 8.23%
------- -------
Other assets (4) 23,528 18,759
-------- --------
Total assets $328,524 $292,689
======== ========
Liabilities and stockholders' equity:
Savings, NOW and money market $109,822 1,213 2.23% $ 99,398 1,121 2.27%
Time deposits 123,632 3,344 5.45 109,044 2,950 5.46
Short-term borrowings 15,922 309 3.91 19,874 453 4.60
-------- ------- -------- -------
Interest bearing deposits and borrowings 249,376 4,866 3.93% 228,316 4,524 4.00%
------- -------
Non-interest bearing deposits 52,826 41,334
Other liabilities 2,369 1,786
-------- --------
Total liabilities 304,571 271,436
Stockholders' equity 23,953 21,253
-------- --------
Total liabilities and
Stockholders' equity $328,524 $292,689
======== ========
Net interest rate spread 4.38% 4.23%
Net interest income $ 7,511 $ 6,483
======= =======
Net yield on average earning assets 5.09% 4.90%
<CAPTION>
Changes due to
--------------------------------------------
Interest Rate/
Total Volume Rate Volume
------- ------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Loans (1) (2) $ 1,784 $ 1,921 $ (105) $ (32)
Investment securities (3) (477) (382) (84) (11)
Federal funds sold 63 58 1 4
------ ------- ------- -------
Total interest earnings assets 1,370 1,597 (188) (39)
------ ------- ------- -------
Other assets (4)
Total assets
Liabilities and stockholders' equity:
Savings, NOW and money market 92 117 (20) (5)
Time deposits 394 395 (5) 4
Short-term borrowings (144) (90) (68) 14
------ ------- ------- -------
Interest bearing deposits and borrowings 342 422 (93) 13
------ ------- ------- -------
Non-interest bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
Stockholders' equity
Net interest rate spread
Net interest income $ 1,028 $ 1,175 $ (95) $ (52)
======= ======= ======= =======
Net yield on average earning assets
<FN>
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis.
(4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, real estate acquired by
foreclosure, deferred income taxes and other miscellaneous assets.
</FN>
</TABLE>
The bank manages its earning assets by fully using available capital resources
within what management believes are prudent credit and leverage parameters.
Loans, investment securities, and federal funds sold comprise the bank's earning
assets.
12
<PAGE>
The provision for loan losses amounted to $270,000 and $120,000 for the
six-month periods ended June 30, 1998 and 1997 respectively. Loans, before the
allowance for loan losses, have increased from $163.3 million, at June 30, 1997,
to $202.7 million, at June 30, 1998, or an increase of 24.1%. Although there has
not been an increase in problem assets or change in the bank's underwriting
practices, management recognizes the increased risk and the need for additional
reserves as the loan balances increase. The provision reflects real estate
values and economic conditions in New England and in Greater Lowell, in
particular, the level of non-accrual loans, levels of charge-offs and
recoveries, levels of outstanding loans, known and inherent risks in the nature
of the loan portfolio and management's assessment of current risk. The provision
for loan losses for the six months ended June 30, 1998, reflects both reserves
for new originations and management's assessment of appropriateness of reserves
on existing balances. The provision for loan losses is a significant factor in
the bank's operating results.
Non-Interest Income
Non-interest income, exclusive of security gains, increased by $203,000 to
$1,139,000 for the six months ended June 30, 1998, compared to $936,000 for the
six months ended June 30, 1997. This increase was primarily caused by an
increase in trust fees of $123,000 and an increase in net gains on sale of loans
of $51,000.
Trust fees increased by $123,000, or 36.7%, for the six months ended June 30,
1998 compared to the same period in 1997 due to an increase in trust assets.
Deposit fees increased by $10,000, or 2.3%, for the six months ended June 30,
1998, compared to the six months ended June 30, 1997. The relative leveling of
income in this category was due to a reduction in overdraft charges offsetting
the increase in deposit fees caused from overall deposit growth.
Gains on sales of loans increased from $24,000 for the six months ended June 30,
1997, to $75,000 for the six months ended June 30, 1998, as a result of
increased loan volume caused by low interest rates and a strong real estate
market.
Other income for the six months ended June 30, 1998, was $157,000, an increase
of 13.8%, from $138,000 for the six months ended June 30, 1997, due primarily to
increases in check printing, safe deposit and wire fees. Net gains on sale of
investment securities increased by $165,000 for the six months ended June 30,
1998, from $0 for the six months ended June 30, 1997. The gains were a result of
both investment sales, as part of the bank's overall investment and
asset/liability strategies and gains on securities that were called.
Non-Interest Expense
Salaries and benefits expense totaled $3,409,000 for the six months ended June
30, 1998, compared with $2,941,000 for the six months ended June 30, 1997, an
increase of $468,000 or 15.9%. This increase was primarily the result of the
addition of the Dracut branch during the fourth quarter of 1997, and annual
salary increases.
Occupancy expense was $1,095,000 for the six months ended June 30, 1998,
compared with $870,000 for the six months ended June 30, 1997, an increase of
$225,000 or 25.9%. The increase was primarily due to the establishment of the
Dracut branch in November of 1997, the addition of the bank's training facility
in September of 1997 and enhancements to the bank's computer systems.
Advertising and public relations expenses declined by $55,000, or 19.9%, for the
six months ended June 30, 1998 compared to the same period in 1997. The decline
was primarily attributed to a reduction in costs related to certain newer
branches.
Office and data processing supplies expense increased by $16,000, or 9.4%, for
the six months ended June 30, 1998 compared to the same period in the prior
year. The increase was primarily due to the addition of the Dracut branch and
the bank's training facility, and the increase in costs resulting from bank-wide
growth.
Audit, legal and other professional expenses increased by $23,000, or 8.7% for
the six months ended June 30, 1998 compared to the prior year period, primarily
as a result of expenses associated with the implementation of certain tax
strategies discussed below.
13
<PAGE>
The company's effective tax rate for the first six months of 1998 was 35.7%. As
a result of the implementation of certain tax strategies, it is expected that
the effective tax rate will decline to approximately 30% for the twelve months
ended December 31, 1998. The company expects that the tax benefits from the use
of these strategies in 1998 will be offset by professional fees and other
expenses incurred in connection with the implementation. Accordingly, it is
anticipated that the implementation of these strategies will not have a material
impact on net income in 1998. Absent a change in tax laws, these strategies are
expected to have a positive effect on the company's net income beginning in
1999.
Trust, professional and custodial expenses increased by $41,000, or 39.0%, for
the six months ended June 30, 1998 as compared to the same period in 1997. The
increase was due to an increase in trust assets under management as well as
additional services provided by the trust department.
14
<PAGE>
Results of Operations
Three Months Ended June 30, 1998 vs. Three Months Ended June 30, 1997
The company reported net income of $878,000 for the three months ended June 30,
1998, versus $701,000 for the three months ended June 30, 1997, or an increase
of 25.2%. The company had basic earnings per common share of $0.55 and $0.44 for
the three months ended June 30, 1998 and June 30, 1997, respectively. Diluted
earnings per share were $0.53 and $0.44 for the three months ending June 30,
1998 and June 30, 1997, respectively.
The following table highlights changes that affected the company's earnings for
the periods indicated:
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
($ in thousands) 1998 1997
-------- -------
<S> <C> <C>
Average assets $333,996 298,898
Average deposits and short-term borrowings 307,169 275,607
Average investment securities (1) 107,351 122,654
Average loans 198,092 156,476
Net interest income 3,871 3,411
Provision for loan losses 180 60
Tax expense 489 403
Average loans : Average deposits and borrowings 64.49% 56.78%
Non interest expense : Average assets (2) 3.60% 3.62%
Non interest income, exclusive of securities
gains : Average assets (2) 0.70% 0.61%
Average tax equivalent rate earned on interest earning assets 8.30% 8.32%
Average rate paid on interest bearing deposits and
short-term borrowings 3.87% 3.97%
Net interest rate spread 4.43% 4.35%
<FN>
(1) Average investment securities are shown at average amortized cost
(2) Ratios have been annualized based on number of days for the period
</FN>
</TABLE>
Net Interest Income
The company's net interest income was $3,871,000 for the three months ended June
30, 1998, an increase of $460,000 or 13.5% from $3,411,000 for the three months
ended June 30, 1997. Interest income increased $596,000, primarily a result of
an increase of $41.6 million in the average loan balance. The increase in
interest income was partially offset by an increase in interest expense of
$136,000, primarily due to an increase in average deposits.
The average tax-equivalent yield on earning assets in the three months ended
June 30, 1998, was 8.30%, down 2 basis points from 8.32% in the three months
ended June 30, 1997. The decline in the tax equivalent yield on investment
securities from 6.59% to 6.40% was primarily a result of higher yielding
securities being called by the issuing agency. The average rate paid on interest
bearing deposits and short-term borrowings in the three months ended June 30,
1998, was 3.87%, a decrease of 10 basis points from 3.97% in the three months
ended June 30, 1997. The average rate on short term borrowings declined from
4.51% to 3.72% as a result of the decline in Federal Home Loan Bank borrowings.
The interest rate spread increased 8 basis points to 4.43% in the three months
ended June 30, 1998, from 4.35% in the three months ended June 30, 1997. The
principal reason for the increase in the bank's net interest income during the
three months ended June 30, 1998 was the increase in average loans of $41.6
million, which was funded by an increase of $24.1 million and $11.7 million in
average interest bearing deposits and non-interest bearing deposits,
respectively.
15
<PAGE>
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the three months ended June 30, 1998, and 1997. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average balance
multiplied by prior year average rate); (2) interest rate (change in average
interest rate multiplied by prior year average balance); and (3) rate and volume
(the remaining difference).
16
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended June 30, 1998 Three Months Ended June 30, 1997
-------------------------------- --------------------------------
Average Interest Average Interest
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3)
-------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (1) (2) $198,092 $ 4,638 9.39% $156,476 $ 3,780 9.69%
Investment securities (3) 107,351 1,613 6.40 122,654 1,928 6.59
Federal funds sold 4,303 58 5.41 367 5 5.46
-------- ------- -------- -------
Total interest earnings assets 309,746 6,309 8.30% 279,497 5,713 8.32%
------- -------
Other assets (4) 24,250 19,401
-------- --------
Total assets $333,996 $298,898
======== ========
Liabilities and stockholders' equity:
Savings, NOW and money market $113,071 625 2.22% $102,526 590 2.31%
Time deposits 124,495 1,673 5.39 110,898 1,494 5.40
Short-term borrowings 15,091 140 3.72 19,380 218 4.51
-------- ------- -------- -------
Interest bearing deposits and borrowings 252,657 2,438 3.87% 232,804 2,302 3.97%
------- -------
Non-interest bearing deposits 54,512 42,803
Other liabilities 2,548 1,877
-------- --------
Total liabilities 309,717 277,484
Stockholders' equity 24,279 21,414
-------- --------
Total liabilities and
Stockholders' equity $333,996 $298,898
======== ========
Net interest rate spread 4.43% 4.35%
Net interest income $ 3,871 $ 3,411
======= =======
Net yield on average earning assets 5.14% 5.02%
<CAPTION>
Changes due to
--------------------------------------------
Interest Rate/
Total Volume Rate Volume
------- ------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Loans (1) (2) $ 858 $ 1,005 $ (117) $ (30)
Investment securities (3) (315) (251) (58) (6)
Federal funds sold 53 54 -- (1)
------- ------- ------- -------
Total interest earnings assets 596 808 (175) (37)
------- ------- ------- -------
Other assets (4)
Total assets
Liabilities and stockholders' equity:
Savings, NOW and money market 35 61 (23) (3)
Time deposits 179 183 (4) --
Short-term borrowings (78) (48) (38) 8
------- ------- ------- -------
Interest bearing deposits and borrowings 136 196 (65) 5
------- ------- ------- -------
Non-interest bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
Stockholders' equity
Net interest rate spread
Net interest income $ 460 $ 612 $ (110) $ (42)
======= ======= ======= =======
Net yield on average earning assets
<FN>
(1) Average loans include non- accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis.
(4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, real estate acquired by
foreclosure, deferred income taxes and other miscellaneous assets.
</FN>
</TABLE>
The bank manages its earning assets by fully using available capital resources
within what management believes are prudent credit and leverage parameters.
Loans, investment securities, and federal funds sold comprise the bank's earning
assets.
17
<PAGE>
The provision for loan losses amounted to $180,000 and $60,000 for the three
month periods ended June 30, 1998 and 1997 respectively. Loans, before the
allowance for loan losses, have increased from $163.3 million, at June 30, 1997,
to $202.7 million, at June 30, 1998, or an increase of 24.1%. Although there has
not been an increase in problem assets or change in the bank's underwriting
practices, management recognizes the increased risk and the need for additional
reserves as the loan balances increase. The provision reflects real estate
values and economic conditions in New England and in Greater Lowell, in
particular, the level of non-accrual loans, levels of charge-offs and
recoveries, levels of outstanding loans, known and inherent risks in the nature
of the loan portfolio and management's assessment of current risk. The provision
for loan losses for the three months ended June 30, 1998, reflects both reserves
for new origination's and management's assessment of appropriateness of reserves
on existing balances. The provision for loan losses is a significant factor in
the bank's operating results.
Non-Interest Income
Non-interest income, exclusive of security gains, increased by $128,000 to
$580,000 for the three months ended June 30, 1998, compared to $452,000 for the
three months ended June 30, 1997. This increase was primarily caused by an
increase in trust fees of $63,000 and an increase in net gains on sale of loans
of $52,000.
Trust fees increased by $63,000, or 39.9%, for the three months ended June 30,
1998 compared to the same period in 1997 due to an increase in trust assets.
Deposit fees increased by $9,000, or 4.1%, for the three months ended June 30,
1998, compared to the three months ended June 30, 1997. The increase was due to
overall deposit growth.
Other income for the three months ended June 30, 1998, was $73,000, an increase
of 5.8%, from $69,000 for the three months ended June 30, 1997, due primarily to
increases in check printing fees.
Net gains on sale of investments increased to $94,000 for the three months ended
June 30, 1998 compared to $0 in the three months ended June 30, 1997. The gains
were a result of both investment sales, as part of the bank's overall investment
and asset/liability strategies, and gains on securities that were called.
Non-Interest Expense
Salaries and benefits expense totaled $1,731,000 for the three months ended June
30, 1998, compared with $1,535,000 for the three months ended June 30, 1997, an
increase of $196,000 or 12.8%. This increase was primarily the result of the
addition of the Dracut branch during the fourth quarter of 1997, and annual
salary increases.
Occupancy expense was $540,000 for the three months ended June 30, 1998,
compared with $440,000 for the three months ended June 30, 1997, an increase of
$100,000 or 22.7%. The increase was primarily due to the establishment of the
Dracut branch in November of 1997 and the addition of the bank's training
facility in September of 1997.
Advertising and public relations expenses increased by $11,000, or 10.5%, for
the three months ended June 30, 1998 compared to the same period in 1997. The
increase was attributed to timing of expenditures.
Office and data processing supplies expense increased by $4,000, or 4.5%, for
the three months ended June 30, 1998 compared to the same period in the prior
year. The increase was primarily due to the addition of the Dracut branch and
the bank's training facility, and the increase in costs resulting from bank-wide
growth.
Audit, legal and other professional expenses decreased by $27,000, or 14.3% for
the three months ended June 30, 1998 compared to the prior year period,
primarily due to timing of expenditures.
Trust, professional and custodial expenses increased by $17,000, or 30.9%, for
the three months ended June 30, 1998 as compared to the same period in 1997. The
increase was due to an increase in trust assets under management as well as
additional services provided by the trust department.
18
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities
Not Applicable
Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERPRISE BANCORP, INC.
DATE: August 6, 1998 /s/ John P. Clancy, Jr.
John P. Clancy, Jr.
Senior Vice President, Chief Financial Officer,
Chief Investment Officer and Treasurer
20
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
unaudited financial statements of Enterprise Bancorp, Inc. at and for the period
ended June 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 21,211
<INT-BEARING-DEPOSITS> 243,906
<FED-FUNDS-SOLD> 20,200
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 93,973
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 203,783
<ALLOWANCE> 4,534
<TOTAL-ASSETS> 342,942
<DEPOSITS> 301,703
<SHORT-TERM> 13,705
<LIABILITIES-OTHER> 2,478
<LONG-TERM> 0
0
0
<COMMON> 16
<OTHER-SE> 25,040
<TOTAL-LIABILITIES-AND-EQUITY> 342,942
<INTEREST-LOAN> 8,969
<INTEREST-INVEST> 3,325
<INTEREST-OTHER> 83
<INTEREST-TOTAL> 12,377
<INTEREST-DEPOSIT> 4,557
<INTEREST-EXPENSE> 4,866
<INTEREST-INCOME-NET> 7,511
<LOAN-LOSSES> 270
<SECURITIES-GAINS> 165
<EXPENSE-OTHER> 5,930
<INCOME-PRETAX> 2,615
<INCOME-PRE-EXTRAORDINARY> 2,615
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,681
<EPS-PRIMARY> 1.06
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 4.97
<LOANS-NON> 998
<LOANS-PAST> 75
<LOANS-TROUBLED> 248
<LOANS-PROBLEM> 1,823
<ALLOWANCE-OPEN> 4,290
<CHARGE-OFFS> 70
<RECOVERIES> 44
<ALLOWANCE-CLOSE> 4,534
<ALLOWANCE-DOMESTIC> 4,534
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 110
</TABLE>
