Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File Number 0-21021
Enterprise Bancorp, Inc.
(Exact name of registrant 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) (Zip code)
(978) 459-9000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days. Yes ..X.... No......
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
July 31, 2000 Common Stock - Par Value $0.01, 3,396,488 shares
outstanding
1
<PAGE>
ENTERPRISE BANCORP, INC.
INDEX
Page Number
Cover Page 1
Index 2
PART I FINANCIAL INFORMATION
============================
Item 1 Financial Statements
Consolidated Balance Sheets
June 30, 2000 and December 31, 1999 3
Consolidated Statements of Income
Three months and six months ended June 30, 2000 and 1999 4
Consolidated Statements of Changes in Stockholders' Equity 5
Six months ended June 30, 2000
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999 6
Notes to Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk 20
PART II OTHER INFORMATION
=========================
Item 1 Legal Proceedings 21
Item 2 Changes in Securities and Use of Proceeds 21
Item 3 Defaults upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
Signature Page 22
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; and (v) the effect of
changes in the business cycle and downturns in the local, regional or national
economies.
2
<PAGE>
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30,
2000 December 31,
($ in thousands) (Unaudited) 1999
--------------- ---------
Assets
<S> <C> <C>
Cash and cash equivalents $ 24,352 17,089
Investment securities at fair value 192,174 153,427
Loans, less allowance for loan losses of $5,829
at June 30, 2000 and $5,446 December 31, 1999 278,352 255,708
Premises and equipment 8,043 7,691
Accrued interest receivable 3,884 3,264
Prepaid expenses and other assets 2,911 1,590
Income taxes receivable 801 255
Deferred income taxes, net 4,474 4,071
--------- ---------
Total assets $ 514,991 443,095
========= =========
Liabilities and Stockholders' Equity
Deposits $ 384,467 333,423
Short-term borrowings 86,575 78,767
Escrow deposits of borrowers 896 795
Accrued expenses and other liabilities 1,747 1,932
Accrued interest payable 1,273 715
--------- ---------
Total liabilities 474,958 415,632
--------- ---------
Trust preferred securities 10,500 --
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued -- --
Common stock $.01 par value; 10,000,000 shares authorized;
3,347,413 and 3,229,893 shares issued and
outstanding at June 30, 2000 and December 31, 1999,
respectively 33 32
Additional paid-in capital 17,685 16,149
Retained earnings 15,037 14,026
Accumulated other comprehensive income (3,222) (2,744)
--------- ---------
Total stockholders' equity 29,533 27,463
--------- ---------
Total liabilities and stockholders' equity $ 514,991 443,095
========= =========
</TABLE>
3
<PAGE>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three and six months ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
($ in thousands) 2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ----------- ----------- -----------
(Unaudited) Interest and dividend income:
<S> <C> <C> <C> <C>
Loans $ 6,372 4,949 12,267 9,723
Investment securities 2,893 1,712 5,352 3,424
Federal funds sold 2 20 3 64
----------- ----------- ----------- -----------
Total interest income 9,267 6,681 17,622 13,211
----------- ----------- ----------- -----------
Interest expense:
Deposits 2,829 2,392 5,509 4,790
Borrowed funds 1,257 174 2,212 326
----------- ----------- ----------- -----------
Total interest expense 4,086 2,566 7,721 5,116
----------- ----------- ----------- -----------
Net interest income 5,181 4,115 9,901 8,095
Provision for loan losses 159 135 285 270
----------- ----------- ----------- -----------
Net interest income after provision for
loan losses 5,022 3,980 9,616 7,825
Non-interest income:
Deposit service fees 210 221 424 426
Investment services income 392 293 725 578
Gain on sale of loans 10 66 19 120
(Loss)/gain on sale of investments (2) 103 (2) 103
Other income 131 84 243 163
----------- ----------- ----------- -----------
Total non-interest income 741 767 1,409 1,390
----------- ----------- ----------- -----------
Non-interest expense:
Salaries and employee benefits 2,478 1,972 4,823 3,845
Occupancy expenses 795 584 1,516 1,161
Advertising and public relations 138 157 222 281
Office and data processing supplies 122 74 233 135
Audit, legal and other professional fees 206 200 331 319
Trust professional and custodial expenses 130 85 229 152
Other operating expenses 453 310 895 597
Trust preferred expense 289 -- 318 --
----------- ----------- ----------- -----------
Total non-interest expense 4,611 3,382 8,567 6,490
----------- ----------- ----------- -----------
Income before income taxes 1,152 1,365 2,458 2,725
Income tax expense 273 354 610 753
----------- ----------- ----------- -----------
Net income $ 879 1,011 1,848 1,972
=========== =========== =========== ===========
Basic earnings per average common share outstanding $ 0.27 0.32 0.57 0.62
=========== =========== =========== ===========
Diluted earnings per average common share outstanding $ 0.27 0.30 0.56 0.59
=========== =========== =========== ===========
Basic weighted average common shares outstanding 3,263,873 3,171,016 3,247,220 3,169,889
=========== =========== =========== ===========
Diluted weighted average common shares outstanding 3,299,405 3,330,411 3,312,101 3,329,284
=========== =========== =========== ===========
</TABLE>
4
<PAGE>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Six months ended June 30, 2000
<TABLE>
<CAPTION>
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> <C>
Balance at December 31, 1999 3,229,893 $ 32 $ 16,149 $14,026 $(2,744) $27,463
Comprehensive income
Net income 1,848 $1,848 1,848
Unrealized depreciation on,
securities net of
reclassification (478) (478) (478)
------
Total comprehensive income, net of tax $1,370
======
Tax benefit on non-qualified stock
options exercised -- 372 372
Dividend declared on common stock
($.25 per share)* -- -- 493 (837) (344)
Stock options exercised 117,520 1 671 67
----------- ----- -------- ------- ------- -------
Balance at June 30, 2000* 3,347,413 $ 33 $ 17,685 $15,037 $(3,222) $29,533
=========== ===== ======== ======= ======= =======
Disclosure of reclassification amount:
Gross unrealized holding depreciation arising during the period $ (719)
Tax benefit 240
-------
Unrealized holding depreciation, net of tax (479)
-------
Less: reclassification adjustment for gains/(losses) included
in net income (net of $1 tax) (1)
-------
Net unrealized depreciation on securities $ (478)
=======
</TABLE>
* Dividends declared were $0.25 per share, totaling $837,000. The dividend
was split between cash of $344,000, which was paid on July 3, 2000, and
47,800 shares valued at $493,000, which were issued on July 3, 2000
pursuant to the company's dividend reinvestment plan. The table above
presents the entire value of the shares that were issued as an increase to
additional paid-in capital at June 30, 2000. However, the shares were
actually issued on July 3, 2000. The issuance of the shares increased
shares outstanding by 47,800 to 3,395,213 outstanding at July 3, 2000.
5
<PAGE>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Six months ended June 30, 2000 and 1999
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
($ in thousands) (Unaudited) (Unaudited)
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 1,848 1,972
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 285 270
Depreciation and amortization 802 668
Gains on sales of loans (19) (120)
Loss(gain) on sales of securities 2 (103)
Increase in accrued interest receivable (620) (242)
Increase in prepaid expenses and other assets (1,321) (552)
Increase in deferred income taxes (164) (65)
Decrease in accrued expenses and other liabilities (185) (403)
Increase (decrease) in accrued interest payable 558 (43)
Increase in income taxes receivable (546) (175)
-------- --------
Net cash provided by operating activities 640 1,207
-------- --------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns
of investment securities 3,056 13,885
Purchase of investment securities (44,515) (33,694)
Proceeds from sales of investment securities 1,984 7,420
Net increase in loans (22,910) (15,576)
Additions to premises and equipment, net (1,143) (1,478)
-------- --------
Net cash used in investing activities (63,528) (29,443)
-------- --------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 51,145 9,327
Net increase in short-term borrowings 7,808 10,483
Dividends on common stock (837) (278)
Proceeds from issuance of trust preferred securities 10,500 --
Stock options exercised 1,535 39
-------- --------
Net cash provided by financing activities 70,151 19,571
-------- --------
Net increase (decrease) in cash and cash equivalents 7,263 (8,665)
Cash and cash equivalents at beginning of period 17,089 25,923
-------- --------
Cash and cash equivalents at end of period $ 24,352 17,258
======== ========
Supplemental financial data:
Cash paid for:
Interest on deposits and short-term borrowings $ 7,163 5,159
Income taxes 948 993
</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.
(2) Basis of Presentation
The accompanying unaudited financial statements should be read in conjunction
with the company's December 31, 1999, 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 were outstanding for the
period. 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) Dividend Reinvestment Plan
The company maintains a Dividend Reinvestment Plan (the "DRP"). The DRP enables
stockholders, at their discretion, to elect to reinvest dividends paid on their
outstanding shares of company common stock by purchasing additional shares of
company common stock from the company.
(5) Trust Preferred Securities
On March 10, 2000 the company organized Enterprise (MA) Capital Trust I (the
"Trust"), a statutory business trust created under the laws of Delaware. The
company is the owner of all the common shares of beneficial interest of the
Trust. On March 23, 2000 the Trust issued $10.5 million of 10.875% trust
preferred securities. The trust preferred securities have a thirty-year maturity
and may be redeemed at the option of the Trust after ten years. The proceeds
from the sale of the trust preferred securities were used by the Trust, along
with the company's $0.3 million capital contribution, to acquire $10.8 million
in aggregate principal amount of the company's 10.875% Junior Subordinated
Deferrable Interest Debentures due 2030. The company has, through the
Declaration of Trust establishing the Trust, fully and unconditionally
guaranteed on a subordinated basis all of the Trust's obligations with respect
to distributions and amounts payable upon liquidation, redemption or repayment.
7
<PAGE>
(6) Insurance and Investment Services Subsidiaries
On March 21, 2000 the Massachusetts Division of Banks approved the establishment
and capitalization of Enterprise Insurance Services LLC and Enterprise
Investment Services LLC as direct subsidiaries of the bank subject to the bank's
capital investment in each subsidiary not exceeding $50,000 and the bank's
retaining ownership and control of 100% of the common stock of the subsidiaries.
The bank has formed these subsidiaries for the purpose of engaging in insurance
sales activities and offering non-deposit investment products and related
securities brokerage services to its present and future customers.
The bank may not begin to sell insurance products through Enterprise Insurance
Services LLC until the Division of Banks approves its plan of operation, which
is currently pending, and the Massachusetts Division of Insurance has issued all
required insurance licenses.
(7) Tax benefit on non-qualified stock options exercised
During the six months ended June 30, 2000, options granted under the company's
incentive stock option plan were exercised for 117,520 shares of company common
stock. In February 2000, certain executives of the bank exercised options to
acquire an aggregate of 104,000 shares of company common stock from the
company's chief executive officer. The options were granted to them in
connection with their recruitment at the time the bank was organized and
constitute non-qualified options of the company for tax purposes. Accordingly,
in connection with the exercise of the options the company realized a
compensation expense for tax purposes, which resulted in a tax benefit to the
company of $0.4 million. The tax benefit is recorded as an adjustment to
additional paid in capital.
(8) Reclassification
Certain fiscal 1999 information has been reclassified to conform to the 2000
presentation.
(9) Recent Developments - Completion of Fleet Branch Acquisition
On September 22, 1999, the company and the bank entered into a Purchase and
Assumption Agreement with Fleet Financial Group, Inc. and its principal banking
subsidiary, Fleet National Bank, pursuant to which the bank agreed to purchase
two branch offices of Fleet National Bank. This transaction was completed on
July 21, 2000, pursuant to which the bank purchased assets comprised of loans
having an approximate book value of $7.0 million, furniture, fixtures and
equipment having a net book value of approximately $0.02 million and land and
buildings having agreed upon values totaling $1.5 million, and cash on hand of
$0.7 million. As part of this transaction, the bank assumed approximately $58.3
million in deposits, in exchange for a premium of approximately 13.6% of total
deposits or approximately $7.9 million. On the date of closing, Fleet National
Bank paid to the bank a cash amount of $43.0 million, which was intended to
equal the value of the assumed deposits, less the values of the various
purchased assets, the deposit premium and the cash on hand at the branches at
the time of closing. The closing date payment was based on a valuation of assets
and liabilities at the close of business on the fifth business day preceding the
closing date and will be adjusted, as necessary, to reflect such values as of
the close of business on the closing date. In connection with such adjustment,
the company anticipates a final payment back to Fleet National Bank equal to
approximately $2.0 million, primarily because the final deposit and cash on hand
amounts differed from the amounts used to calculate the closing date payment.
Management used the proceeds of the closing date payment to reduce the bank's
current Federal Home Loan Bank borrowings.
8
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Capital Resources
The company's actual capital amounts and capital adequacy ratios are presented
in the table below.
<TABLE>
<CAPTION>
Minimum Capital Minimum Capital
for Capital to be
Actual Adequacy Purposes Well Capitalized
------------------------- ------------------------ ---------------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
-------------- --------- ------------- --------- ------------ ------------
As of June 30, 2000:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk weighted assets) $ 47,416 14.51% $ 26,136 8.00% $ 32,670 10.00%
Tier 1 Capital
(to risk weighted assets) 43,311 13.26% 13,068 4.00% 19,602 6.00%
Tier 1 Capital*
(to average assets) 43,311 8.74% 19,812 4.00% 24,765 5.00%
</TABLE>
* For the bank to qualify as "well capitalized", it must maintain a
leverage 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.
Trust preferred securities may compose up to 25% of the company's Tier 1
capital. Any trust-preferred proceeds contributed to the bank from the company
are included in Tier 1 capital of the bank without limitation. At June 30, 2000,
$10.5 million in proceeds from the issuance of trust preferred securities were
included in Tier 1 capital of the company and $10.3 million of the proceeds had
been contributed to the bank's capital.
The deposit premium paid by the bank upon the completion of the Fleet branch
acquisition, which closed on July 21, 2000, will be accounted for as "goodwill",
which is an intangible asset and must be deducted from Tier 1 capital in
calculating the company's and the bank's regulatory capital ratios.
On April 18, 2000, the board of directors declared a dividend in the amount of
$0.25 per share, which was paid on July 3, 2000 to shareholders of record as of
the close of business on June 9, 2000. The board of directors intends to
consider the payment of future dividends on an annual basis.
Balance Sheet
Total Assets
Total assets increased $71.9 million, or 16.2 %, since December 31, 1999. The
increase is primarily attributable to increases in investment securities of
$38.7 million and gross loans of $23.0 million. The increase in assets was
funded primarily by deposit growth of $51.0 million, issuance of trust preferred
securities of $10.5 million and an increase in short-term borrowings of $7.8
million.
Investments
At June 30, 2000 all of the bank's investment securities were classified as
available-for-sale and carried at fair value. The net unrealized depreciation at
June 30, 2000 was $4.9 million compared to $4.2 million at December 31, 1999.
The net unrealized appreciation/depreciation in the portfolio fluctuates as
interest rates rise and fall. Due to the fixed rate nature of the bank's
investment portfolio, as rates rise the value of the portfolio declines, and as
rates fall the value of the portfolio rises. This unrealized depreciation will
only be realized if the securities are sold. The unrealized depreciation on the
investment portfolio will decline as interest rates fall or as the securities
approach maturity.
9
<PAGE>
Loans
Total loans, before the allowance for loan losses, were $284.2 million, or 55.2%
of total assets, at June 30, 2000, compared to $261.2 million, or 58.9% of total
assets, at December 31, 1999. The increase in loans of $23.0 million for the six
months ended June 30, 2000 compared to an increase of $15.8 million for the same
period in 1999. The growth during the period in 2000 was primarily attributed to
loan originations in the commercial real estate and commercial construction loan
portfolios.
Prepaid expenses and other assets
At June 30, 2000 prepaid assets and other assets increased to $2.9 million from
$1.6 million at December 31, 1999. The increase is primarily attributable to
$0.4 million in underwriting costs associated with the issuance of trust
preferred securities, a $0.2 million increase in the cash surrender value of
life insurance policies on certain executive officers, an increase in prepaid
expenses of $0.5 million due to timing and the bank's growth and an increase in
acquisition costs of $0.2 million associated with the acquisition of the Fleet
branches.
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $51.1 million,
or 15.3%, during the first six months of 2000, from $334.2 million at December
31, 1999, to $385.4 million at June 30, 2000. The increase is primarily
attributable to growth in business deposit accounts.
Short-term borrowings, consisting of securities sold under agreements to
repurchase and Federal Home Loan Bank ("FHLB") borrowings, increased $7.8
million, or 9.9%, from $78.8 million at December 31, 1999 to $86.6 million at
June 30, 2000. The increase was primarily attributable to growth in repurchase
agreements. Management actively uses FHLB borrowings in managing the bank's
asset/liability position. The bank had FHLB borrowings outstanding of $49.5
million at June 30, 2000, and had the ability to borrow approximately an
additional $114.1 million. Management periodically takes advantage of
opportunities to fund asset growth with borrowings, but on a long-term basis the
bank seeks to replace FHLB borrowings with deposits. The cash proceeds received
by the bank in the acquisition of the Fleet Branches were used to reduce
existing FHLB borrowings.
10
<PAGE>
Loan Loss Experience/Non-performing Assets
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Six months ended June 30,
-------------------------
($ in thousands) 2000 1999
--------- ---------
Balance at beginning of year $ 5,446 5,234
Loans charged-off
Commercial 74 11
Commercial real estate -- --
Construction 2 --
Residential real estate -- --
Home equity -- --
Other 2 9
------- -------
78 20
Recoveries on loans charged off
Commercial 22 43
Commercial real estate 48 2
Construction 103 --
Residential real estate 1 --
Home equity 1 3
Other 1 54
------- -------
176 102
Net loans (recovered)/charged off (98) (82)
Provision charged to income 285 270
------- -------
Balance at June 30 $ 5,829 5,586
======= =======
Annualized net (recoveries)/charge-offs: Average
loans outstanding (0.07%) (0.07%)
======= =======
Allowance for loan losses: Gross loans 2.05% 2.41%
======= =======
Allowance for loan losses: Non-performing loans 1327.79% 858.06%
======= =======
The following table sets forth non-performing assets at the dates indicated:
<TABLE>
<CAPTION>
($ in thousands) June 30, December 31, June 30,
Loans on non-accrual: 2000 1999 1999
----------- ----------- ----------
<S> <C> <C> <C>
Commercial $ 223 368 426
Residential real estate 41 92 112
Commercial real estate 120 223 --
Construction -- 2,168 --
Consumer, including home equity 45 47 54
----- ----- -----
Total loans on non-accrual 429 2,898 592
Loans past due >90 days, still accruing 10 48 59
----- ----- -----
Total non-performing loans 439 2,946 651
Other real estate owned -- -- 304
----- ----- -----
Total non-performing loans and real estate owned $ 439 2,946 955
===== ===== =====
Non-performing loans: Gross loans 0.15% 1.12% 0.28%
===== ===== =====
Non-performing loans and real estate owned: Total assets 0.09% 0.66% 0.25%
===== ===== =====
Delinquent loans 30-89 days past due: Gross loans 0.55% 0.68% 0.46%
===== ===== =====
</TABLE>
11
<PAGE>
Total non-performing loans decreased $2.5 million from December 31, 1999 to June
30, 2000. The primary cause for the declines was the workout of one construction
loan. The bank recognized a full recovery in 2000 of principal previously
charged off on this loan. The ratio of non-performing loans to gross loans
decreased from 1.12% as of December 31, 1999 to 0.15% as of June 30, 2000, as
result of this change.
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. Non-performing loans remain at historically low levels for the
periods shown. Adverse changes in local, regional or national economic
conditions could negatively impact the level of non-performing assets in the
future, despite prudent underwriting.
Results of Operations
Six Months Ended June 30, 2000 vs. Six Months Ended June 30, 1999
The company reported net income of $1,848,000 for the six months ended June 30,
2000, versus $1,972,000 for the six months ended June 30, 1999. The company had
basic earnings per common share of $0.57 and diluted earnings per share of $0.56
for the six months ending June 30, 2000 and basic earnings per common share of
$0.62 and diluted earnings per share of $0.59 for the six months ended June 30,
1999.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
<TABLE>
<CAPTION>
Six months ended June 30,
($ in thousands) 2000 1999
----------- ----------
<S> <C> <C>
Average assets (1) $469,933 361,125
Average deposits and short-term borrowings 432,702 330,693
Average investment securities (1) 176,654 116,282
Average loans, net of deferred loan fees 268,990 221,985
Net interest income 9,901 8,095
Provision for loan losses 285 270
Tax expense 610 753
Average loans: Average deposits and borrowings 62.17% 67.13%
Non-interest expense: Average assets (2) 3.67% 3.62%
Non-interest income: Average assets (2) .60% .72%
Average tax equivalent rate earned on interest earning assets 8.15% 8.06%
Average rate paid on interest bearing deposits and
short-term borrowings 4.28% 3.80%
Net interest margin 4.67% 5.04%
</TABLE>
(1) Excludes the effect of SFAS No. 115
(2) Ratios have been annualized based on number of days for the period
Net Interest Income
The company's net interest income was $9,901,000 for the six months ended June
30, 2000, an increase of $1,806,000 or 22.3% from $8,095,000 for the six months
ended June 30, 1999. Interest income increased $4,411,000, primarily a result of
an increase of average loan balances of $47.0 million, or 21.2%, and average
investment security balances of $60.4 million, or 51.9%, from the six months
ended June 30, 1999 to the six months ended June 30, 2000. The increase in
interest income for the 2000 period was partially offset by an increase in
interest expense of $2,605,000 for such period, primarily due to an increase in
average short-term borrowings of $60.3 million for the six months ended June 30,
2000 as compared to the prior year period.
12
<PAGE>
The average tax-equivalent yield on earning assets in the six months ended June
30, 2000, was 8.15%, up 9 basis points from 8.06% in the six months ended June
30, 1999. The average rate paid on interest bearing deposits and short-term
borrowings in the six months ended June 30, 2000, was 4.28%, an increase of 48
basis points from 3.80% in the six months ended June 30, 1999. The resulting
interest rate spread decreased 39 basis points to 3.87% in the six months ended
June 30, 2000, from 4.26% in the six months ended June 30, 1999. The increase in
the average loan yield from 8.83% to 9.17%, from June 30, 1999 to June 30, 2000,
was primarily a result of higher interest rates due to increases in the prime
rate. The average rate paid on short-term borrowings, which includes repurchase
agreements and FHLB borrowings, rose not only because interest rates on these
borrowings increased along with general market interest rates, but also because
the bank increased the relative portion of such borrowings that were funded
through FHLB borrowings, which bear higher interest rates than repurchase
agreements.
Net interest margin declined from 5.04% for the six months ended June 30, 1999
to 4.67% for the six months ended June 30, 2000, primarily due to increased FHLB
borrowings. Management used the proceeds from the Fleet branch acquisition to
reduce the bank's short-term borrowings.
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, 2000, and June 30, 1999, respectively. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (1) volume (change in
average portfolio balance multiplied by prior 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).
13
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
June 30, 2000 June 30,1999 Changes Due To
-------------------------------- ---------------------------- -------------------------------
Average Interest Average Interest Interest Rate/
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3) Total Volume Rate Volume
------ ---------- -------- ---------- ------- -------- ---------- ------- ------ -------- ------
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1)(2) $268,990 $12,267 9.17% $221,985 $9,723 8.83% $2,544 $2,064 $375 $105
Investment securities (3)(5) 176,654 5,352 6.60 116,282 3,424 6.68 1,928 2,005 (46) (31)
Federal funds sold 95 3 6.35 2,762 64 4.67 (61) (62) 23 (22)
------- -------- ------- ------ -------- ------ ---- ------ ------ ---- ------
Total interest
earnings assets 445,739 17,622 8.15% 341,029 13,211 8.06% 4,411 4,007 352 52
Other assets (4)(5) 24,194 20,096 ------ ------ ----- ---- ------
-------- --------
Total assets (5) $ 469,933 $361,125
========= ========
Liabilities and stockholders'
equity:
Savings, NOW and money market $ 131,375 1,517 2.32% $112,487 1,142 2.05% 375 193 151 31
Time deposits 155,437 3,992 5.16 143,553 3,648 5.12 344 303 29 12
Short-term borrowings 75,592 2,212 5.88 15,338 326 4.29 1,886 1,285 121 480
--------- ------- ----- -------- ----- ----- ----- ---- ----
Interest bearing
deposits and borrowings 362,404 7,721 4.28% 271,378 5,116 3.80% 2,605 1,781 301 523
--------- ------ ----- -------- ----- ----- ----- --- ----
Non-interest bearing deposits 70,298 59,315
Other liabilities 7,838 3,116
--------- --------
Total liabilities 440,540 333,809
Stockholders' equity (5) 29,393 27,316
--------- --------
Total liabilities and
Stockholders' equity (5) $ 469,933 $361,125
========= ========
Net interest rate spread 3.87% 4.26%
Net interest income $ 9,901 $ 8,095 $1,806 $2,226 $ 51 $ (471)
======= ======== ====== ====== ==== ======
Net yield on average earning assets 4.67% 5.04%
</TABLE>
(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, deferred income taxes and other miscellaneous
assets.
(5) Excludes the effect of SFAS No. 115
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.
14
<PAGE>
The provision for loan losses amounted to $285,000 and $270,000 for the six
months ended June 30, 2000 and June 30, 1999, respectively. 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 is a significant factor in the bank's
operating results.
Non-Interest Income
Non-interest income, excluding security gains, increased by $124,000 to
$1,411,000 for the six months ended June 30, 2000, compared to $1,287,000 for
the six months ended June 30, 1999. This increase was primarily caused by
increases in investment services income of $147,000, and other income of
$80,000, offset by a decrease in net gain on loan sales of $101,000.
Investment services income includes trust income and income generated from the
financial planning and securities brokerage services provided through the bank's
subsidiary, Enterprise Investment Services LLC, which was established on March
21, 2000. Investment services income increased by $147,000 for the six months
ended June 30, 2000 compared to the same period in 1999 primarily due to an
increase in trust assets. Trust assets increased to $239.2 million at June 30,
2000 from $203.3 million at June 30, 1999. Income from Enterprise Investment
Services LLC accounted for $26,000 of the increase.
Gain on sale of loans declined to $19,000 from $120,000 for the six months ended
June 30, 2000 compared to the same period in 1999 due to a decline in mortgage
loan refinancing and origination due to increased interest rates.
Other income for the six months ended June 30, 2000, was $243,000 compared to
$163,000 for the six months ended June 30, 1999, due primarily to an increase in
ATM surcharges, debit card fees and wire fees.
Non-Interest Expenses
Salaries and benefits expense totaled $4,823,000 for the six months ended June
30, 2000, compared with $3,845,000 for the six months ended June 30, 1999, an
increase of $978,000. This increase was primarily the result of new hires due to
bank growth, strategic initiatives implemented by the bank, and in preparation
for the anticipated general operational support needed after the Fleet branch
acquisition.
Occupancy expense was $1,516,000 for the six months ended June 30, 2000,
compared with $1,161,000 for the six months ended June 30, 1999, an increase of
$355,000. The increase was primarily due to the opening of the Westford branch,
office renovations for operational support departments and loan officers and
ongoing enhancements to the bank's computer systems.
Advertising and public relations expenses decreased by $59,000 for the six
months ended June 30, 2000 compared to the same period in 1999. The decrease was
primarily attributed to the timing of expenses associated with the advertising
programs.
Office and data processing supplies expense increased by $98,000 for the six
months ended June 30, 2000 compared to the same period in the prior year. The
increase was primarily due to the timing of purchases, supplies for new hires,
new office space, and preparation for the Fleet branch acquisition.
Trust professional and custodial expenses increased by $77,000 for the six
months ended June 30, 2000 as compared to the same period in 1999. The increase
was primarily due to asset growth and an increase in the professional management
fees that are paid by the bank to an outside investment manager as a percentage
of assets under the management of such outside investment manager.
Other operating expense increased $298,000 for the six months ended June 30,
2000 compared to the same period in the prior year. The increase was primarily
due to increased postage, training, and internet banking expenses associated
with the implementation of strategic initiatives and the bank's growth.
Trust preferred expense was $318,000 for the six months ended June 30, 2000 and
is comprised of interest costs and amortization of deferred underwriting costs
from the trust preferred securities issued on March 23, 2000.
15
<PAGE>
The company's effective tax rate for the six months ending June 30, 2000 was
24.8% compared to 27.6% for the six months ended June 30, 1999. The reduction in
rate was primarily due to an increase in tax exempt investment securities.
Results of Operations
Three Months Ended June 30, 2000 vs. Three Months Ended June 30, 1999
The company reported net income of $879,000 for the three months ended June 30,
2000, versus $1,011,000 for the three months ended June 30, 1999. The company
had basic earnings per common share of $0.27 and diluted earnings per share of
$0.27 for the three months ending June 30, 2000 and basic earnings per common
share of $.32 and diluted earnings per share of $.30 for the three months ended
June 30, 1999.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
<TABLE>
<CAPTION>
Three months ended June 30,
($ in thousands) 2000 1999
----------- -----------
<S> <C> <C>
Average assets (1) $492,317 366,413
Average deposits and short-term borrowings 449,372 335,811
Average investment securities (1) 188,659 117,528
Average loans, net of deferred loan fees 277,669 226,760
Net interest income 5,181 4,115
Provision for loan losses 159 135
Tax expense 273 354
Average loans: Average deposits and borrowings 61.79% 67.53%
Non-interest expense: Average assets (2) 3.77% 3.70%
Non-interest income: Average assets (2) .61% .73%
Average tax equivalent rate earned on interest earning assets 8.10% 8.01%
Average rate paid on interest bearing deposits and
short-term borrowings 4.31% 3.75%
Net interest margin 4.62% 5.04%
</TABLE>
(1) Excludes the effect of SFAS No. 115
(2) Ratios have been annualized based on number of days for the period
Net Interest Income
The company's net interest income was $5,181,000 for the three months ended June
30, 2000, an increase of $1,066,000 or 25.9% from 4,115,000 for the three months
ended June 30, 1999. Interest income increased $2,586,000, primarily a result of
an increase of average loan balances of $50.9 million and average investment
security balances of $71.1 million from the quarter ended June 30, 1999 to the
quarter ended June 30, 2000. The increase in interest income for the 2000 period
was partially offset by an increase in interest expense of $1,520,000 for such
period, primarily due to an increase in short-term borrowings of $67.1 million
for the quarter ended June 30, 2000 as compared to the prior year period.
The average tax-equivalent yield on earning assets in the three months ended
June 30, 2000, was 8.10%, up 9 basis points from 8.01% in the three months ended
June 30, 1999. The average rate paid on interest bearing deposits and short-term
borrowings in the three months ended June 30, 2000, was 4.31%, an increase of 56
basis points from 3.75% in the three months ended June 30, 1999. The resulting
interest rate spread decreased 47 basis points to 3.79% in the three months
ended June 30, 2000, from 4.26% in the three months ended June 30, 1999. The
increase in the average loan yield from 8.75% to 9.13%, from June 30, 1999 to
June 30, 2000, was primarily a result of higher interest rates due to increases
in the prime rate and income recognition on loans that had been previously
classified as non-accrual loans. The average rate paid on short-term borrowings,
which includes repurchase agreements and FHLB borrowings, rose not only because
interest rates on these borrowings increased along with general market interest
rates, but also because the bank increased the relative portion of such
borrowings that were funded through FHLB borrowings, which bear higher interest
rates than repurchase agreements.
Net interest margin declined to 4.62% for the three months ended June 30, 2000
from 5.04% for the three months ended June 30, 1999, primarily due to increased
FHLB borrowings.
16
<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, 2000, and June 30, 1999, respectively.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to: (1) volume (change in
average portfolio balance multiplied by prior 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).
17
<PAGE>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
<TABLE>
<CAPTION>
Three Months Ended June 30, 2000 Three Months Ended June 30, 1999 Changes due to
-------------------------------- -------------------------------- --------------------------------
Average Interest Average Interest Interest Rate/
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3) Total Volume Rate Volume
------- -------- --------- ------- -------- --------- ----- ------ ---- ------
Assets:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans (1)(2) $277,669 $ 6,372 9.13% $226,760 $ 4,949 8.75% $1,423 $1,108 $214 $101
Investment securities (3)(5) 188,659 2,893 6.59 117,528 1,712 6.62 1,181 1,171 (9) 19
Federal funds sold 123 2 6.47 1,695 20 4.73 (18) (18) 7 (7)
-------- ------- -------- ------- ------ ------ ---- ----
Total interest earnings
assets 466,451 9,267 8.10% 345,983 6,681 8.01% 2,586 2,261 212 113
------- ------- ------ ------ --- ----
Other assets (4)(5) 25,866 20,430
-------- --------
Total assets (5) $492,317 $366,413
======== ========
Liabilities and stockholders'
equity:
Savings, NOW and money
market $136,707 787 2.29% $115,166 588 2.05% 199 110 69 20
Time deposits 156,933 2,042 5.18 142,746 1,804 5.07 238 179 39 20
Short-term borrowings 83,345 1,257 6.00 16,286 174 4.29 1,083 715 69 299
-------- ------- -------- ------- ------ ------ ---- ----
Interest bearing deposits
and borrowings 376,985 4,086 4.31% 274,198 2,566 3.75% 1,520 1,004 177 339
-------- ------- -------- ------- ------ ------ ---- ----
Non-interest bearing
deposits 72,387 61,613
Other liabilities 12,896 2,475
-------- --------
Total liabilities 462,268 338,286
Stockholders' equity (5) 30,049 28,127
-------- --------
Total liabilities and
Stockholders' equity (5) $492,317 $366,413
======== ========
Net interest rate spread 3.79% 4.26%
Net interest income $ 5,181 $ 4,115 $1,066 $1,257 $ 35 $(226)
======= ======= ====== ====== ===== =====
Net yield on average earning
assets 4.62% 5.04%
</TABLE>
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(6) Average balances are presented at average amortized cost and average
interest rates are presented on a tax-equivalent basis.
(7) Other assets include cash and due from banks, accrued interest receivable,
allowance for loan losses, deferred income taxes and other miscellaneous
assets.
(8) Excludes the effect of SFAS No. 115
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.
18
<PAGE>
The provision for loan losses amounted to $159,000 and $135,000 for the three
months ended June 30, 2000 and June 30, 1999, respectively.
Non-Interest Income
Non-interest income, excluding security gains, increased by $79,000 to $743,000
for the three months ended June 30, 2000, compared to $664,000 for the three
months ended June 30, 1999. This increase was primarily caused by increases in
trust fees of $99,000, and other income of $47,000, offset by a decrease in net
gain on loan sales of $56,000.
Trust fees increased by $99,000 for the three months ended June 30, 2000
compared to the same period in 1999 due primarily to an increase in trust
assets. Trust assets increased to $239.2 million at June 30, 2000 from $203.3
million at June 30, 1999. Income from Enterprise Investment Services LLC
accounted for $26,000 of the increase.
Gain on sale of loans declined to $10,000 from $66,000 for the three months
ended June 30, 2000 compared to the same period in 1999 due to a decline in
mortgage loan refinancing and origination due to increased interest rates.
Other income for the three months ended June 30, 2000, was $131,000 compared to
$84,000 for the three months ended June 30, 1999, due primarily to an increase
in ATM surcharges and debit card fees.
Non-Interest Expenses
Salaries and benefits expense totaled $2,478,000 for the three months ended June
30, 2000, compared with $1,972,000 for the three months ended June 30, 1999, an
increase of $506,000. The increase in salaries and benefits was due to the
significant investments made in products, services and technology, over the past
year, as well as additional staffing to support the overall infrastructure of
the bank.
Occupancy expense was $795,000 for the three months ended June 30, 2000,
compared with $584,000 for the three months ended June 30, 1999, an increase of
$211,000. The increase was primarily due to the opening of the Westford branch,
office renovations for operational support departments and loan officers and
ongoing enhancements to the bank's computer systems.
Office and data processing supplies expense increased by $48,000 for the three
months ended June 30, 2000 compared to the same period in the prior year. The
increase was primarily due to the timing of purchases, supplies for new hires,
new office space, and preparation for the Fleet branch acquisition.
Trust professional and custodial expenses increased by $45,000 for the three
months ended June 30, 2000 as compared to the same period in 1999. The increase
was primarily due to asset growth and an increase in the professional management
fees that are paid by the bank to an outside investment manager as a percentage
of assets under the management of such outside investment manager.
Other operating expense increased $143,000 for the three months ended June 30,
2000 compared to the same period in the prior year. The increase was primarily
due to increased postage, training, and internet banking expenses associated
with the implementation of strategic initiatives and the bank's growth.
Trust preferred expense was $289,000 for the three months ended June 30, 2000
and is comprised of interest costs and amortization of deferred underwriting
costs from the trust preferred securities issued on March 23, 2000.
The company's effective tax rate for the three months ending June 30, 2000 was
23.7% compared to 25.9% for the three months ended June 30, 1999. The reduction
in rate was primarily due to an increase in tax exempt municipal investment
securities.
19
<PAGE>
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
The company's primary market risk is interest rate risk, specifically, changes
in the interest rate environment. The bank's investment committee is responsible
for establishing policy guidelines on acceptable exposure to interest rate risk
and liquidity. The investment committee is comprised of certain members of the
Board of Directors and certain members of senior management. The primary
objectives of the company's asset/liability policy is to monitor, evaluate and
control the bank's interest rate risk, as a whole, within certain tolerance
levels while ensuring adequate liquidity and adequate capital. The investment
committee establishes and monitors guidelines for the net interest margin
sensitivity, equity to capital ratios, liquidity, FHLB borrowing capacity and
loan to deposit ratio. The asset/liability strategies are reviewed regularly by
management and presented and discussed with the investment committee on at least
a quarterly basis. The asset/liability strategies are revised based on changes
in interest rate levels, general economic conditions, competition in the
marketplace, the current position of the bank, anticipated growth of the bank
and other factors.
One of the principal factors in maintaining planned levels of net interest
income is the ability to design effective strategies to manage the impact of
changes in interest rates on future net interest income. The balancing of
changes in interest income from interest earning assets and interest expense of
interest bearing liabilities is accomplished through the asset/liability
management program. The bank's simulation model analyzes various interest rate
scenarios. Variations in the interest rate environment affect numerous factors,
including prepayment speeds, reinvestment rates maturities of investments (due
to call provisions), and interest rates on various asset and liability accounts.
The investment committee periodically reviews guidelines or restrictions
contained in the asset/liability policy and adjusts them accordingly. The bank's
current asset/liability policy is designed to limit the impact on net interest
income to 10% in the 24 month period following the date of the analysis, in a
rising and falling rate shock analysis of 100 and 200 basis points.
Management believes there have been no material changes in the interest rate
risk reported in the company's Annual Report on Form 10-K for the year ended
December 31, 1999.
20
<PAGE>
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities and Use of Proceeds
Not Applicable
Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the company was held on May 2,
2000. Votes were cast as follows:
1. To elect five Directors of the company, each for a three-year
term:
Nominee For Against Abstain
===============================================================
Gerald G. Bousquet, M.D 2,866,341 0 26,073
Kathleen M. Bradley 2,866,541 0 25,873
James F. Conway, III 2,866,541 0 25,873
Nancy L. Donahue 2,866,541 0 25,873
Lucy A. Flynn 2,866,541 0 25,873
2. To ratify the Board of Directors' appointment of KPMG LLP as
the company's independent auditors for the fiscal year ending
December 31, 2000
For Against Abstain
===============================================================
2,882,915 5,093 4,406
Item 5 Other Information
The company completed its acquisition of two branch offices of Fleet National
Bank on July 21, 2000. In accordance with the terms of the transaction, the bank
purchased assets comprised of loans having an approximate book value of $7.0
million, furniture, fixtures and equipment having a net book value of
approximately $0.02 million and land and buildings having agreed upon values
totaling $1.5 million, and cash on hand of $0.7 million. As part of the
transaction, the bank assumed approximately $58.3 million in deposits, in
exchange for a premium of approximately 13.6% of total deposits or approximately
$7.9 million. On the date of closing, Fleet National Bank paid to the bank a
cash amount of $43.0 million, which was intended to equal the value of the
assumed deposits, less the values of the various purchased assets, the deposit
premium and the cash on hand at the branches at the time of closing. The closing
date payment was based on a valuation of assets and liabilities at the close of
business on the fifth business day preceding the closing date and will be
adjusted, as necessary, to reflect such values as of the close of business on
the closing date. In connection with such adjustment, the company anticipates a
final payment back to Fleet National Bank equal to approximately $2.0 million,
primarily because the final deposit and cash on hand amounts differed from the
amounts used to calculate the closing date payment. Management used the proceeds
of the closing date payment to reduce the bank's current FHLB borrowings.
Item 6 Exhibits and Reports on Form 8-K
The following exhibits are included with this report:
27.0 Financial data schedule (electronic copy only)
21
<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 14, 2000 By: /s/ John P. Clancy, Jr.
----------------------------
John P. Clancy, Jr.
Treasurer
22
