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 September 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:
October 31, 2000 Common Stock - Par Value $0.01, 3,396,863 shares
outstanding
<PAGE>
ENTERPRISE BANCORP, INC.
INDEX
Page Number
Cover Page 1
Index 2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999 3
Consolidated Statements of Income
Three months and nine months ended September 30, 2000
and 1999 4
Consolidated Statements of Changes in Stockholders' Equity 5
Nine months ended September 30, 2000
Consolidated Statements of Cash Flows
Nine months ended September 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>
September 30, December 31,
2000 1999
($ in thousands) (Unaudited)
--------------- ---------
Assets
<S> <C> <C>
Cash and cash equivalents $ 22,129 17,089
Federal funds sold 10,300 --
Investment securities at fair value 192,260 153,427
Loans, less allowance for loan losses of $ 6,186
at September 30, 2000 and $5,446 December 31, 1999 300,267 255,708
Premises and equipment 10,247 7,691
Accrued interest receivable 3,800 3,264
Prepaid expenses and other assets 2,669 1,590
Income taxes receivable 641 255
Deferred income taxes, net 3,630 4,071
Goodwill 7,694 --
--------- ---------
Total assets $ 553,637 443,095
========= =========
Liabilities and Stockholders' Equity
Deposits $ 459,066 333,423
Short-term borrowings 47,638 78,767
Escrow deposits of borrowers 1,087 795
Accrued expenses and other liabilities 2,101 1,932
Accrued interest payable 1,018 715
--------- ---------
Total liabilities 510,910 415,632
--------- ---------
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;
3,396,738 and 3,229,893 shares issued and
outstanding at September 30, 2000 and December 31, 1999,
respectively 34 32
Additional paid-in capital 17,698 16,149
Retained earnings 15,886 14,026
Accumulated other comprehensive income (1,391) (2,744)
--------- ---------
Total stockholders' equity 32,227 27,463
--------- ---------
Total liabilities and stockholders' equity $ 553,637 443,095
========= =========
</TABLE>
3
<PAGE>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three and nine months ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
($ in thousands) 2000 1999 2000 1999
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
------------- ------------------ ------------ -----------
(Unaudited) Interest and dividend income:
<S> <C> <C> <C> <C>
Loans $ 6,993 5,423 19,260 15,146
Investment securities 3,010 1,934 8,362 5,358
Federal funds sold 107 2 110 67
---------- ---------- ---------- ----------
Total interest income 10,110 7,359 27,732 20,571
---------- ---------- ---------- ----------
Interest expense:
Deposits 3,299 2,441 8,808 7,231
Borrowed funds 849 411 3,061 737
---------- ---------- ---------- ----------
Total interest expense 4,148 2,852 11,869 7,968
---------- ---------- ---------- ----------
Net interest income 5,962 4,507 15,863 12,603
Provision for loan losses 159 -- 444 270
---------- ---------- ---------- ----------
Net interest income after provision for loan losses 5,803 4,507 15,419
12,333
Non-interest income:
Deposit service fees 238 222 662 648
Investment services income 383 305 1,108 883
Gain on sale of loans 42 28 61 148
(Loss)/gain on sale of investments -- 80 (2) 183
Other income 164 89 407 253
---------- ---------- ---------- ----------
Total non-interest income 827 724 2,236 2,115
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits 3,005 2,207 7,828 6,052
Occupancy expenses 809 648 2,325 1,809
Advertising and public relations 211 124 433 405
Office and data processing supplies 258 98 486 234
Audit, legal and other professional fees 149 190 480 510
Trust professional and custodial expenses 117 97 346 250
Other operating expenses 535 419 1,435 1,015
Trust preferred expense 288 -- 606 --
Amortization of goodwill 149 -- 149 --
---------- ---------- ---------- ----------
Total non-interest expense 5,521 3,783 14,088 10,275
---------- ---------- ---------- ----------
Income before income taxes 1,109 1,448 3,567 4,173
Income tax expense 260 384 870 1,137
---------- ---------- ---------- ----------
Net income $ 849 1,064 2,697 3,036
========== ========== ========== ==========
Basic earnings per average common share outstanding $ .25 .33 .82 .95
========== ========== ========== ==========
Diluted earnings per average common share outstanding $ .25 .32 .80 .91
========== ========== ========== ==========
Basic weighted average common shares outstanding 3,395,338 3,202,412 3,296,953 3,180,730
========== ========== ========== ==========
Diluted weighted average common shares outstanding 3,412,512 3,361,275 3,370,421 3,339,593
========== ========== ========== ==========
</TABLE>
4
<PAGE>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Nine months ended September 30, 2000
<TABLE>
<CAPTION>
Common Stock Additional Comprehensive Income
------------------------- Paid-in Retained -------------------- Stockholders'
($ in thousands) Shares Amount Capital Earnings Period Accumulated Equity
----------- ---------- -------- --------- ------- ------------ -----------
<S> <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 2,697 2,697 2,697
Unrealized appreciation on securities,
net of reclassification 1,353 1,353 1,353
--------
Total comprehensive income, net of tax $ 4,050
========
Tax benefit on non-qualified stock
options exercised -- 372 372
Common stock dividend declared
($.25 per share)* (837) (837)
Common stock issued - Dividend
Reinvestment Plan* 47,800 1 493 494
Stock options exercised 119,045 1 684 685
---------- -------- ------- --------- ---------
Balance at September 30, 2000* 3,396,738 $ 34 $17,698 $ 15,886 $(1,391) $ 32,227
=========== ======== ======== ========= ======== ========
Disclosure of reclassification amount:
Gross unrealized holding appreciation
arising during the period $ 2,056
Tax expense (704)
--------
Unrealized holding appreciation, net of tax 1,352
--------
Less: reclassification adjustment for
gains/(losses) included in net income (1)
--------
Net unrealized appreciation on securities $ 1,353
========
</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 $493,000, which were issued on July 3, 2000 pursuant to the
company's dividend reinvestment plan.
5
<PAGE>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Nine months ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
($ in thousands) (Unaudited) (Unaudited)
--------------- ------------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,697 3,036
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 444 270
Depreciation and amortization 1,407 1,020
Gains on sales of loans (61) (148)
Loss (gain) on sales of securities 2 (183)
Write-downs of foreclosed property -- 50
Increase in accrued interest receivable (536) (305)
Increase in prepaid expenses and other assets (1,079) (758)
Increase in deferred income taxes (264) (74)
Increase (decrease) in accrued expenses
and other liabilities 169 (336)
Increase (decrease) in accrued interest payable 303 (35)
Increase in income taxes receivable (386) (378)
--------- ---------
Net cash provided by operating activities 2,696 2,159
--------- ---------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns
of investment securities 6,602 15,585
Proceeds from sales of investment securities 1,984 12,524
Purchase of investment securities (45,365) (57,675)
Net increase in loans (45,192) (27,688)
Additions to premises and equipment, net (3,812) (2,686)
Cash paid for assets in excess of liabilities (7,593) --
--------- ---------
Net cash used in investing activities (93,376) (59,940)
--------- ---------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 125,935 15,614
Net (decrease) increase in short-term borrowings (31,129) 38,101
Dividends paid (837) (666)
Common stock issued - Dividend Reinvestment 494 388
Proceeds from issuance of trust preferred securities 10,500 --
Stock options exercised 1,057 46
--------- ---------
Net cash provided by financing activities 106,020 53,483
--------- ---------
Net increase (decrease) in cash and cash equivalents 15,340 (4,298)
Cash and cash equivalents at beginning of period 17,089 25,923
--------- ---------
Cash and cash equivalents at end of period $ 32,429 21,625
========= =========
Supplemental financial data:
Cash paid for:
Interest on deposits and short-term borrowings $ 11,566 8,003
Income taxes 1,148 1,498
</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's plan of operation to engage in insurance sales activities through
Enterprise Insurance Services LLC has been approved by the Massachusetts
Division of Banks. The bank's commencement of such insurance sales activities
remains subject to the Massachusetts Division of Insurance's issuing the
required insurance license to Enterprise Insurance Services LLC.
(7) Tax benefit on non-qualified stock options exercised
During the nine months ended September 30, 2000, options granted under the
company's incentive stock option plan were exercised for 119,045 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
The bank completed its acquisition of two Fleet National Bank branch offices
(the "Fleet branches") on July 21, 2000, in connection with 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, 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. Fleet National Bank paid to the bank a cash amount of $43.0
million. The company is amortizing the goodwill over a ten-year period.
8
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Capital Resources
The company's actual capital amounts and capital adequacy ratios are presented
in the table below. The bank's capital amounts and ratios do not differ
materially from the amounts and ratios presented.
<TABLE>
<CAPTION>
Minimum Capital Minimum Capital
for Capital to be
Actual Adequacy Purposes Well Capitalized
------------------------- ------------------------ ---------------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
-------------- --------- ------------- --------- ------------ ------------
As of September 30, 2000:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk weighted assets) $ 40,855 11.61% $ 27,854 8.00% $ 34,818 10.00%
Tier 1 Capital
(to risk weighted assets) 36,480 10.35% 13,927 4.00% 20,890 6.00%
Tier 1 Capital*
(to average assets) 36,480 6.89% 21,496 4.00% 26,870 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. This calculation
for the company is reflected for informational purposes.
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 September 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 recorded by the bank upon the completion of the Fleet branch
acquisition, which closed on July 21, 2000, is 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 by $110.5 million, or 24.9%, since December 31, 1999. The
increase is primarily attributable to increases in investment securities of
$38.8 million and gross loans of $45.3 million. The increase in assets was
funded primarily by deposit growth of $125.6, including $58.3 million in
deposits acquired from the Fleet branch acquisition, and the issuance of trust
preferred securities of $10.5 million offset by a decrease in short-term
borrowings of $31.1 million.
Investments
At September 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
September 30, 2000 was $2.1 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 $306.5 million, or 55.4%
of total assets, at September 30, 2000, compared to $261.2 million, or 58.9% of
total assets, at December 31, 1999. The increase in loans of $45.2 million for
the nine months ended September 30, 2000 compared to an increase of $27.9
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,
commercial and construction loan portfolios.
Prepaid expenses and other assets
At September 30, 2000 prepaid assets and other assets increased to $2.7 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 and an increase in prepaid
expenses of $0.3 million.
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased by $125.9
million, or 37.7%, during the first nine months of 2000, from $334.2 million at
December 31, 1999, to $460.2 million at September 30, 2000. Excluding deposits
acquired as part of the Fleet branch acquisition of $58.3 million, deposits
increased by $67.6 million, or 20.2%, during the first nine months of 2000. The
growth in 2000 was due to the combination of the addition of several new bank
products, the enhancement of the bank's Internet and cash management services
and the bank's ability to increase its market share as a result of opportunities
presented by the continuing consolidation among banking institutions operating
in the bank's market area.
Short-term borrowings, consisting of securities sold under agreements to
repurchase and Federal Home Loan Bank ("FHLB") borrowings, decreased by $31.1
million, or 39.5%, from $78.8 million at December 31, 1999 to $47.6 million at
September 30, 2000. The cash proceeds received by the bank as part of the Fleet
branch acquisition were used to reduce existing FHLB borrowings. The bank had
FHLB borrowings outstanding of $0.5 million at September 30, 2000, and had the
ability to borrow approximately an additional $106.2 million. Management
actively uses FHLB borrowings in managing the bank's asset/liability position.
Management periodically takes advantage of opportunities to fund asset growth
with FHLB borrowings, but on a long-term basis the bank seeks to replace these
borrowings with deposits.
10
<PAGE>
Loan Loss Experience/Non-performing Assets
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
Nine months ended September 30,
($ in thousands) 2000 1999
------------- --------------
<S> <C> <C>
Balance at beginning of year $ 5,446 5,234
Loans charged-off
Commercial 97 51
Commercial real estate 48 -
Construction - -
Residential real estate - -
Home equity - -
Other - 9
------------- --------------
145 60
Recoveries on loans charged off
Commercial 25 45
Commercial real estate 48 2
Construction 100 -
Residential real estate 1 -
Home equity 13 4
Other 4 54
------------- --------------
191 105
Net loans recovered/(charged off) 46 45
Allowance on acquired loans 250 -
Provision charged to income 444 270
------------- --------------
Balance at September 30 $ 6,186 5,549
============= ==============
Annualized net recoveries/(charge-offs): Average
loans outstanding .02% 0.02%
============= ==============
Allowance for loan losses: Gross loans 2.02% 2.28%
============= ==============
Allowance for loan losses: Non-performing loans 554.30% 652.06%
============= ==============
The following table sets forth non-performing assets at the dates indicated:
($ in thousands) September 30, December 31, September 30,
Loans on non-accrual: 2000 1999 1999
------------- ------------- -------------
Commercial $ 649 368 396
Residential real estate 72 92 72
Commercial real estate 341 223 270
Construction - 2,168 -
Consumer, including home equity 2 47 64
------------- ------------- -------------
Total loans on non-accrual 1,064 2,898 802
Loans past due >90 days, still accruing 52 48 49
------------- ------------- -------------
Total non-performing loans 1,116 2,946 851
Other real estate owned - - 254
------------- ------------- -------------
Total non-performing loans and real estate owned $ 1,116 2,946 1,105
============= ============= =============
Non-performing loans: Gross loans .36% 1.12% 0.35%
============= ============= =============
Non-performing loans and real estate owned: Total assets .20% 0.66% 0.27%
============= ============= =============
Delinquent loans 30-89 days past due: Gross loans .42% 0.68% 0.53%
============= ============= =============
</TABLE>
11
<PAGE>
Total non-performing loans decreased by $1.8 million from December 31, 1999 to
September 30, 2000. The primary cause for the decline was the successful 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 0.36% as of
September 30, 2000, primarily 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
Nine Months Ended September 30, 2000 vs. Nine Months Ended September 30, 1999
The company reported net income of $2,697,000 for the nine months ended
September 30, 2000, versus $3,036,000 for the nine months ended September 30,
1999. The company had basic earnings per common share of $0.82 and diluted
earnings per share of $0.80 for the nine months ending September 30, 2000 and
basic earnings per common share of $0.95 and diluted earnings per share of $0.91
for the nine months ended September 30, 1999. The decrease in earnings is
principally due to startup costs associated with the acquisition of two branches
from Fleet in July and the opening of the Westford branch in November 1999. In
addition, significant enhancements and investments have been made during 2000 to
products and services, back-office operations, technology and other
infrastructure to support the new branches and to provide for growth in the
years ahead. These investments negatively impact earnings in the short term, but
they have dramatically improved the bank's competitive market position, thus
fueling significant growth.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
<TABLE>
<CAPTION>
Nine months ended September 30,
($ in thousands) 2000 1999
------------- --------------
<S> <C> <C> <C>
Average assets (1) $ 491,800 371,555
Average deposits and short-term borrowings 452,190 340,905
Average investment securities (1) 183,168 122,067
Average loans, net of deferred loan fees 277,985 227,004
Net interest income 15,863 12,603
Provision for loan losses 444 270
Tax expense 870 1,137
Average loans: Average deposits and borrowings 61.48% 66.59%
Non-interest expense: Average assets (2) 3.83% 3.70%
Non-interest income: Average assets (2) .61% 0.70%
Average tax equivalent rate earned on interest earning assets 8.22% 8.08%
Average rate paid on interest bearing deposits and
short-term borrowings 4.22% 3.81%
Net interest margin 4.79% 5.05%
</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 $15,863,000 for the nine months ended
September 30, 2000, an increase of $3,260,000 or 25.9% from $12,603,000 for the
nine months ended September 30, 1999. Interest income for the nine months ended
September 30, 2000 increased by $7,161,000, primarily as a result of an increase
in average loan balances of $51.0 million, or 22.5%, and an increase in average
investment security balances of $61.1 million, or 50.1%, compared to the nine
months ended September 30, 1999. The increase in interest income for the nine
months ended September 30, 2000 was partially offset by an increase in interest
expense for such period of $3,901,000, which was primarily due to an increase in
average short-term borrowings of $47.4 million for such period, as compared to
interest expense for such period during the prior year.
12
<PAGE>
The average tax-equivalent yield on earning assets in the nine months ended
September 30, 2000, was 8.22%, up 14 basis points from 8.08% in the nine months
ended September 30, 1999. The average rate paid on interest bearing deposits and
short-term borrowings in the nine months ended September 30, 2000, was 4.22%, an
increase of 41 basis points from 3.81% in the nine months ended September 30,
1999. The resulting interest rate spread decreased 27 basis points to 4.00% in
the nine months ended September 30, 2000, from 4.27% in the nine months ended
September 30, 1999. The increase in rate on earning assets and increase in cost
of funds were both due to increases in the prime lending rate, the discount rate
and U.S. treasury rates. In addition, the average rate paid on short-term
borrowings, which includes repurchase agreements and FHLB borrowings, rose
during the nine months ended September 30, 2000, as compared to such period
during the prior year, 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 5.05% for the nine months ended September 30,
1999 to 4.79% for the nine months ended September 30, 2000, primarily due to
increased FHLB borrowings. Management used the proceeds received by the bank as
part of the Fleet branch acquisition, which was completed on July 21, 2000, to
reduce the bank's FHLB 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 nine months ended September 30, 2000, and September 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>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Nine Months Ended Nine Months Ended Changes
September 30, 1999 September 30, 2000 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) $277,985 $ 19,260 9.29% $ 227,004 $ 15,146 8.92%$ $ 4,114 3,392 626 96
Investment securities (3)(5) 183,168 8,362 6.62 122,067 5,358 6.58 3,004 2,999 36 (31)
Federal funds sold 2,255 110 6.54 1,911 67 4.69 43 12 26 5
-------- -------- ------- --------- --------- -------- ------- ------ ------- ----
Total interest earnings assets 463,408 27,732 8.22% 350,982 20,571 8.08% 7,161 6,403 688 70
Other assets (4)(5) 28,392 20,573
-------- --------
Total assets (5) $ 491,800 $371,555
======== ========
Liabilities and stockholders' equity:
Savings, NOW and money market $150,426 2,646 2.36% $ 114,421 1,774 2.07% 872 556 248 68
Time Deposits 157,292 6,162 5.25 143,860 5,457 5.07 705 508 193 4
Short-term borrowings 68,929 3,061 5.95 21,521 737 4.58 2,324 1,620 220 484
-------- -------- ------- --------- --------- -------- ------- ------ ------- ----
Interest bearing deposits
and borrowings 376,647 11,869 4.22% 279,802 7,968 3.81% 3,901 2,684 661
-------- -------- ------- --------- --------- -------- ------- ------ -------
Non-interest bearing deposits 75,543 61,103
Other liabilities 7,580 2,793
-------- --------
Total liabilities 459,770 343,698
Stockholders' equity(5) 32,030 27,857
-------- --------
Total liabilities and
Stockholders' equity (5) $491,800 $371,555
-------- --------
Net interest rate spread 4.00% 4.27%
Net interest income $ 15,863 $ 12,603 $ 3,260 $3,719 $ 27 $486)
======== ========= ======= ====== ====== =====
Net yield on average earning assets 4.79% 5.05%
</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 $444,000 and $270,000 for the nine
months ended September 30, 2000 and September 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 $306,000 to
$2,238,000 for the nine months ended September 30, 2000, compared to $1,932,000
for the nine months ended September 30, 1999. This increase was primarily due to
increases in investment services income of $225,000, and other income of
$154,000, which were partially offset by a decrease in net gain on loan sales of
$87,000.
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 $225,000 for the nine months
ended September 30, 2000 compared to the same period in 1999 primarily due to an
increase in trust assets. Trust assets increased to $252.9 million at September
30, 2000 from $200.8 million at September 30, 1999. Income from Enterprise
Investment Services LLC accounted for $54,000 of this increase in investment
services income.
Gain on sale of loans declined to $61,000 from $148,000 for the nine months
ended September 30, 2000 compared to the same period in 1999 due to a decline in
mortgage loan refinancing and origination due to increased interest rates
through the majority of the current nine month period as compared to such period
in the prior year.
Other income for the nine months ended September 30, 2000, was $407,000 compared
to $253,000 for the nine months ended September 30, 1999, due primarily to
increased fees generated from the operations of the newly acquired Fleet
branches, ATM surcharges, debit card fees and the receipt of a sales tax
abatement.
Non-Interest Expenses
Salaries and benefits expense totaled $7,828,000 for the nine months ended
September 30, 2000, compared with $6,052,000 for the nine months ended September
30, 1999, an increase of $1,776,000. This increase was primarily the result of
costs incurred in connection with new hires due to bank growth, including the
additional staff that came with the newly acquired Fleet branches, strategic
initiatives implemented by the bank (which included the initial commencement of
securities brokerage services and the expansion of existing cash management and
internet banking services), and actions taken in preparing for the additional
operational support that was required with respect to the newly acquired Fleet
branches as well as other bank growth.
Occupancy expense was $2,325,000 for the nine months ended September 30, 2000,
compared with $1,809,000 for the nine months ended September 30, 1999, an
increase of $516,000. The increase was primarily due to the acquisition of the
Fleet branches, 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 increased by $28,000 for the nine
months ended September 30, 2000 compared to the same period in 1999. The
increase was primarily due to advertising associated with the Fleet branch
acquisition.
Office and data processing supplies expense increased by $252,000 for the nine
months ended September 30, 2000 compared to the same period in the prior year.
The increase was primarily due to costs associated with the Fleet branch
acquisition, overall bank growth and enhancements to marketing materials.
Trust professional and custodial expenses increased by $96,000 for the nine
months ended September 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.
15
<PAGE>
Other operating expense increased by $420,000 for the nine months ended
September 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, the acquisition of
the Fleet branches and overall bank growth.
Trust preferred expense was $606,000 for the nine months ended September 30,
2000 and is comprised of interest costs and amortization of deferred
underwriting costs from the trust preferred securities issued on March 23, 2000.
Amortization of goodwill booked in connection with the Fleet branch acquisition
totaled $149,000 for the nine months ended September 30, 2000. This goodwill is
being amortized on a straight-line basis over 10 years. The company's effective
tax rate for the nine months ending September 30, 2000 was 24.4% compared to
27.2% for the nine months ended September 30, 1999. The reduction in rate was
primarily due to a decline in pre-tax income and the resulting increased
benefit, as a percentage of pre-tax income, realized from tax exempt municipal
securities owned by the bank.
Results of Operations
Three Months Ended September 30, 2000 vs. Three Months Ended September 30, 1999
The company reported net income of $849,000 for the three months ended September
30, 2000, versus $1,064,000 for the three months ended September 30, 1999. The
company had basic earnings per common share of $0.25 and diluted earnings per
share of $0.25 for the three months ending September 30, 2000 and basic earnings
per common share of $.33 and diluted earnings per share of $.32 for the three
months ended September 30, 1999.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
<TABLE>
<CAPTION>
Three months ended September 30,
($ in thousands) 2000 1999
------------- --------------
<S> <C> <C> <C>
Average assets (1) $ 535,060 392,072
Average deposits and short-term borrowings 490,743 361,020
Average investment securities (1) 192,522 133,447
Average loans, net of deferred loan fees 295,961 236,879
Net interest income 5,962 4,507
Provision for loan losses 159 -
Tax expense 260 384
Average loans: Average deposits and borrowings 60.31% 65.61%
Non-interest expense: Average assets (2) 4.09% 3.83%
Non-interest income: Average assets (2) .61% 0.65%
Average tax equivalent rate earned on interest earning assets 8.31% 8.11%
Average rate paid on interest bearing deposits and
short-term borrowings 4.14% 3.82%
Net interest margin 4.98% 5.06%
</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 $5,962,000 for the three months ended
September 30, 2000, an increase of $1,455,000 or 32.3% from $4,507,000 for the
three months ended September 30, 1999. Interest income for the three months
ended September 30, 2000 increased by $2,751,000, primarily as a result of an
increase in average loan balances of $59.1 million and an increase in average
investment security balances of $59.1 million, compared to the quarter ended
September 30, 1999. The increase in interest income for the quarter ended
September 30, 2000 was partially offset by an increase in interest expense for
such period of $1,296,000, primarily due to an increase in average deposits in
all categories for such period, as compared to interest expense for such period
during the prior year.
16
<PAGE>
The average tax-equivalent yield on earning assets in the three months ended
September 30, 2000, was 8.31%, up 20 basis points from 8.11% in the three months
ended September 30, 1999. The average rate paid on interest bearing deposits and
short-term borrowings in the three months ended September 30, 2000, was 4.14%,
an increase of 32 basis points from 3.82% in the three months ended September
30, 1999. The resulting interest rate spread decreased 12 basis points to 4.17%
in the three months ended September 30, 2000, from 4.29% in the three months
ended September 30, 1999. The increase in the average loan yield from 9.08% to
9.40%, for the quarter ended September 30, 1999 as compared to the quarter ended
September 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 partially 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 4.98% for the three months ended September 30,
2000 from 5.06% for the three months ended September 30, 1999, primarily due to
a lower loan:deposit ratio for the third quarter of 2000 as compared to such
period of 1999.
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 September 30, 2000, and September 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>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended Three Months Ended
September 30, 2000 September 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) 295,961 6,993 9.40% $236,879 $ 5,423 9.08% $1,570 1,349 189 32
Investment securities (3)(5) 192,522 3,010 6.71 133,447 1,934 6.40 1,076 951 103 22
Federal funds sold 6,613 107 6.44 235 2 4.00 105 64 1 40
-------- ------- ---- -------- -------- -------- ------ ----- --- --
Total interest earnings assets 495,096 10,110 8.31 370,561 7,359 8.11 2,751 2,364 293 94
Other assets (4)(5) 39,964 21,511
-------- --------
Total assets (5) $535,060 $392,072
======== ========
Liabilities and stockholders' equity:
Savings, NOW and money market $182,342 1,129 2.46% $118,224 632 2.12% 497 342 102 53
Time deposits 160,963 2,170 5.36 144,464 1,809 4.97 361 206 144 11
Short-term borrowings 55,748 849 6.06 33,684 411 4.84 438 268 103 67
Interest bearing deposits
and borrowings 399,053 4,148 4.14% 296,372 2,852 3.82% 1,296 816 349 131
Non-interest bearing deposits 91,690 64,648
Other liabilities 12,468 2,130
-------- --------
Total liabilities 503,211 363,150
Stockholders' equity (5) 31,849 28,922
-------- --------
Total liabilities and
Stockholders' equity (5) $535,060 $392,072
======== ========
Net interest rate spread 4.17% 4.29%
Net interest income $ 5,962 $4,507 $1,455 $1,548 $ (56) (37)
======== ======== ====== ====== ======= ===
Net yield on average earning assets 4.98% 5.06%
(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.
</TABLE>
18
<PAGE>
The provision for loan losses amounted to $159,000 and $0 for the three months
ended September 30, 2000 and September 30, 1999, respectively.
Non-Interest Income
Non-interest income, excluding security gains, increased by $183,000 to $827,000
for the three months ended September 30, 2000, compared to $644,000 for the
three months ended September 30, 1999. This increase was primarily due to
increases in investment services income of $78,000, and other income of $75,000.
Investment services income increased by $78,000 for the three months ended
September 30, 2000 compared to the same period in 1999 due primarily to an
increase in trust assets. Trust assets increased to $252.9 million at September
30, 2000 from $200.8 million at September 30, 1999. Income from Enterprise
Investment Services LLC accounted for $27,000 of this increase in investment
services income.
Gain on sale of loans increased to $42,000 from $28,000 for the three months
ended September 30, 2000 compared to the same period in 1999 due to an increase
in mortgage loan origination in the third quarter largely due to lower interest
rates available in the third quarter of 2000 as compared to the first half of
the year.
Other income for the three months ended September 30, 2000, was $164,000
compared to $89,000 for the three months ended September 30, 1999. The increase
was primarily due to increased fees generated from the operations of the newly
acquired Fleet branches, ATM surcharges, debit card fees and the receipt of a
sales tax abatement.
Non-Interest Expenses
Salaries and benefits expense totaled $3,005,000 for the three months ended
September 30, 2000, compared with $2,207,000 for the three months ended
September 30, 1999, an increase of $798,000. This increase was primarily the
result of costs incurred in connection with new hires due to bank growth,
including the additional staff that came with the newly acquired Fleet branches,
strategic initiatives implemented by the bank (which included the initial
commencement of securities brokerage services and the expansion of existing cash
management and internet banking services), and actions taken in preparing for
the additional operational support that was required with respect to the newly
acquired Fleet branches as well as other bank growth.
Occupancy expense was $809,000 for the three months ended September 30, 2000,
compared with $648,000 for the three months ended September 30, 1999, an
increase of $161,000. The increase was primarily due to the acquisition of the
Fleet branches, office renovations for operational support departments and loan
officers and ongoing enhancements to the bank's computer systems.
Advertising and public relations expenses increased by $87,000 for the three
months ended September 30, 2000 compared to the same period in 1999. The
increase was primarily due to advertising associated with the Fleet branch
acquisition.
Office and data processing supplies expense increased by $160,000 for the three
months ended September 30, 2000 compared to the same period in the prior year.
The increase was primarily due to costs associated with the Fleet branch
acquisition, overall bank growth and enhancements to marketing materials.
Trust professional and custodial expenses increased by $20,000 for the three
months ended September 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 by $116,000 for the three months ended
September 30, 2000 compared to the same period in the prior year. The increase
was primarily due to increased postage and internet banking expenses as well as
expenses associated with the Fleet branch acquisition and overall bank growth.
Trust preferred expense was $288,000 for the three months ended September 30,
2000 and is comprised of interest costs and amortization of deferred
underwriting costs from the trust preferred securities issued on March 23, 2000.
19
<PAGE>
Amortization of goodwill booked in connection with the Fleet branch acquisition
totaled $149,000 for the three months ended September 30, 2000. This goodwill is
being amortized on a straight-line basis over 10 years.
The company's effective tax rate for the three months ending September 30, 2000
was 23.4% compared to 26.5% for the three months ended September 30, 1999. The
reduction in rate was primarily due to a decline in pre-tax income and the
resulting increased benefit, as a percentage of pre-tax income, realized from
tax exempt municipal securities owned by the bank.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
The company's primary market risk is interest rate risk, and 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
Not Applicable
Item 5 Other Information
Not Applicable
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: November 14, 2000 By: /s/ John P. Clancy, Jr.
------------------------------------
John P. Clancy, Jr.
Treasurer
22
