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 March 31, 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:
April 30, 2000 Common Stock - Par Value $0.01, 3,231,493 shares outstanding
1
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
INDEX
Page Number
<S> <C> <C>
Cover Page 1
Index 2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 3
Consolidated Statements of Income -
Three months ended March 31, 2000 and 1999 4
Consolidated Statements of Changes in Stockholders' Equity- 5
Three months ended March 31, 2000
Consolidated Statements of Cash Flows -
Three months ended March 31, 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 16
PART II OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 3 Defaults upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
Signature Page 18
</TABLE>
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
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
March 31, December 31,
2000 1999
($ in thousands) (Unaudited)
----------- -----------
<S> <C> <C>
Assets
Cash and cash equivalents $ 16,858 17,089
Investment securities at fair value 166,438 153,427
Loans, less allowance for loan losses of $5,578
at March 31, 2000 and $5,446 December 31, 1999 259,250 255,708
Premises and equipment 7,862 7,691
Accrued interest receivable 3,184 3,264
Prepaid expenses and other assets 2,597 1,590
Income taxes receivable 240 255
Deferred income taxes, net 4,418 4,071
--------- ---------
Total assets $ 460,847 443,095
========= =========
Liabilities and Stockholders' Equity
Deposits $ 366,412 333,423
Short-term borrowings 52,875 78,767
Escrow deposits of borrowers 937 795
Accrued expenses and other liabilities 993 1,932
Accrued interest payable 863 715
--------- ---------
Total liabilities 422,080 415,632
--------- ---------
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;
3,231,268 and 3,229,893 shares issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively 32 32
Additional paid-in capital 16,532 16,149
Retained earnings 14,995 14,026
Accumulated other comprehensive income (3,292) (2,744)
--------- ---------
Total stockholders' equity 28,267 27,463
--------- ---------
Total liabilities and stockholders' equity $ 460,847 443,095
========= =========
</TABLE>
3
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three months ended March 31, 2000 and 1999
March 31, March 31,
2000 1999
($ in thousands, except per share data) (Unaudited) (Unaudited)
------------ -----------
<S> <C> <C>
Interest and dividend income:
Loans $ 5,895 4,774
Investment securities 2,460 1,712
Federal funds sold -- 44
---------- ----------
Total interest income 8,355 6,530
---------- ----------
Interest expense:
Deposits 2,680 2,398
Borrowed funds 955 152
---------- ----------
Total interest expense 3,635 2,550
---------- ----------
Net interest income 4,720 3,980
Provision for loan losses 126 135
---------- ----------
Net interest income after provision for loan losses 4,594 3,845
---------- ----------
Non-interest income:
Deposit service fees 214 205
Trust fees 333 285
Net gain on sales of loans 10 54
Other income 111 78
---------- ----------
Total non-interest income 668 622
---------- ----------
Non-interest expense:
Salaries and employee benefits 2,345 1,873
Occupancy expenses 721 577
Advertising and public relations 84 124
Audit, legal and other professional fees 125 120
Trust professional and custodial expenses 99 67
Office and data processing supplies 102 61
Trust preferred expense 29 --
Other operating expenses 451 286
---------- ----------
Total non-interest expense 3,956 3,108
---------- ----------
Income before income taxes 1,306 1,359
Income tax expense 337 398
---------- ----------
Net income $ 969 961
========== ==========
Basic earnings per average common share outstanding $ 0.30 0.30
========== ==========
Diluted earnings per average common share outstanding $ 0.29 0.29
========== ==========
Basic weighted average common shares outstanding 3,230,538 3,168,761
========== ==========
Diluted weighted average common shares outstanding 3,324,767 3,331,050
========== ==========
</TABLE>
4
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Three months ended March 31, 2000
Common Stock Additional Comprehensive Income Total
----------------- Paid-in Retained --------------------------- Stockholders'
($ in thousands) Shares Amount Capital Earnings Period Accumulated Equity
--------- ------ ---------- -------- -------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1999 3,229,893 $ 32 $ 16,149 $ 14,026 $ (2,744) $ 27,463
Comprehensive income
Net income 969 $ 969 969
Unrealized depreciation on securities,
net of reclassification (548) (548) (548)
------
Total comprehensive income, net of tax $ 421
======
Tax benefit on non-qualified
stock options exercised -- 372 372
Stock options exercised 1,375 -- 11 11
--------- ---- -------- -------- -------- ---------
Balance at March 31, 2000 3,231,268 $ 32 $ 16,532 $ 14,995 $ (3,292) $ 28,267
========= ==== ======== ======== ======== =========
Disclosure of reclassification amount:
Gross unrealized holding depreciation arising during the period $ (832)
Tax benefit 284
------
Unrealized holding depreciation, net of tax (548)
------
Less: reclassification adjustment for gains/(losses) included
in net income (net of $0 tax) --
------
Net unrealized depreciation on securities $ (548)
======
</TABLE>
5
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Three months ended March 31, 2000 and 1999
March 31, March 31,
2000 1999
($ in thousands) (Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 969 961
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 126 135
Depreciation and amortization 393 318
Gains on sales of loans (10) (54)
(Increase) decrease in accrued interest receivable 80 (128)
Increase in prepaid expenses and other assets (1,007) (127)
Increase in deferred income taxes (63) (12)
Decrease in accrued expenses and other liabilities (939) (869)
Increase in accrued interest payable 148 6
Decrease in income taxes receivable 15 359
-------- --------
Net cash (used in) provided by operating activities (288) 589
-------- --------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns
of investment securities 1,488 11,844
Purchase of investment securities (15,347) (12,911)
Net increase in loans (3,658) (6,500)
Additions to premises and equipment, net (548) (760)
-------- --------
Net cash used in investing activities (18,065) (8,327)
-------- --------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 33,131 3,167
Net increase (decrease) in short-term borrowings (25,892) 3,786
Proceeds from issuance of trust preferred securities 10,500 --
Stock options exercised 383 11
-------- --------
Net cash provided by financing activities 18,122 6,964
-------- --------
Net decrease in cash and cash equivalents (231) (774)
Cash and cash equivalents at beginning of period 17,089 25,923
-------- --------
Cash and cash equivalents at end of period $ 16,858 25,149
======== ========
Supplemental financial data:
Cash paid for:
Interest on deposits and short-term borrowings $ 3,487 2,544
Income taxes 438 51
</TABLE>
6
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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. The
increase in average shares outstanding, using the treasury stock method, for the
diluted earnings per share calculation were 94,229 and 162,289 for the quarters
ended March 31, 2000 and March 31, 1999, respectively.
(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. The stockholders utilized the DRP to
reinvest $388,000 of the dividends paid by the company in 1999 in 27,054 shares
of the company's common stock.
(5) 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 will purchase two
branch offices of Fleet National Bank. Upon the completion of this transaction,
the bank will purchase assets comprised of loans having an approximate book
value of $7.0 million, furniture, fixtures and equipment having a net book value
of approximately $0.1 million and land and buildings having agreed upon values
totaling approximately $1.5 million. As part of this transaction, the bank will
assume approximately $66.5 million in deposits, in exchange for a premium of
approximately 13.6% of total deposits, presently estimated to be $9.1 million.
The acquisition will close with a net cash payment from Fleet National Bank in
an amount substantially equal to 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. Management anticipates using the
proceeds to repay the bank's current Federal Home Loan Bank ("FHLB") borrowings
and/or to increase the bank's investment portfolio.
The bank has received the required federal and state regulatory approvals to
acquire the branches. The parties presently anticipate that the bank's
acquisition of the branches will be completed in the third quarter of 2000.
7
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(6) 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) 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.
(8) Tax benefit on non-qualified stock options exercised
During the three months ended March 31, 2000, options granted under the
company's incentive stock option plan were exercised for 1,375 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 $0.4 million. The tax benefit is recorded as an adjustment to
additional paid in capital.
(9) Reclassification
Certain fiscal 1999 information has been reclassified to conform to the 2000
presentation.
8
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ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Capital Resources
The company's actual capital amounts and capital adequacy ratios are presented
in the table below. The bank's capital amounts and ratios do not differ
materially from the amounts and ratios presented.
<TABLE>
<CAPTION>
Minimum Capital Minimum Capital
for Capital to be
Actual Adequacy Purposes Well Capitalized
--------------------- ---------------------- ----------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
---------- --------- ----------- --------- ---------- --------
As of March 31, 2000:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk weighted assets) $ 45,864 15.39% $ 23,837 8.00% $ 29,797 10.00%
Tier 1 Capital
(to risk weighted assets) 42,116 14.13% 11,919 4.00% 17,878 6.00%
Tier 1 Capital*
(to average assets) 42,116 9.34% 17,902 4.00% 22,378 5.00%
<FN>
* 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.
</FN>
</TABLE>
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 March 31,
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
were contributed to the bank's capital.
The deposit premium to be paid by the bank upon the completion of the Fleet
branch acquisition, expected to close in the third quarter of 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 to be paid on or about 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 $17.8 million, or 4.0 %, since December 31, 1999. The
increase is primarily attributable to increases in investment securities of
$13.0 million and gross loans of $3.7 million. The increase in assets was funded
primarily by deposit growth of $33.1 million and trust preferred securities of
$10.5 million, offset by a $25.9 million reduction in borrowings.
Investments
At March 31, 2000 all of the bank's investment securities were classified as
available-for-sale and carried at fair value. The net unrealized depreciation at
March 31, 2000 was $5.0 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
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Loans
Total loans, before the allowance for loan losses, were $264.8 million, or 57.5%
of total assets, at March 31, 2000, compared to $261.2 million, or 58.9% of
total assets, at December 31, 1999. The increase in loans of $3.7 million was
primarily attributed to loan origination in the commercial real estate and
commercial construction loan portfolios. The decrease in growth compared to the
prior year is attributable to timing as the commercial loan pipeline was at
historically high levels at March 31, 2000.
Prepaid expenses and other assets
At March 31, 2000 prepaid assets and other expenses increased to $2.6 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 due to timing and the bank's growth.
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $33.1 million,
or 9.9%, during the first three months of 2000, from $334.2 million at December
31, 1999, to $367.3 million at March 31, 2000. The increase is primarily
attributable to growth in certificates of deposit of $15.0 million and business
investment savings of $7.4 million resulting from increased market penetration
and a higher interest rate environment since December 31, 1999.
Short-term borrowings, consisting of securities sold under agreements to
repurchase and Federal Home Loan Bank ("FHLB") borrowings, decreased $25.9
million, or 32.9%, from $78.8 million at December 31, 1999 to $52.9 million at
March 31, 2000. The decrease was attributable to deposit growth and the issuance
of trust preferred securities of $10.5 million. Management actively uses FHLB
borrowings in managing the bank's asset/liability position. The bank had FHLB
borrowings outstanding of $18.4 million at March 31, 2000, and had the ability
to borrow approximately an additional $81.4 million. Management periodically
takes advantage of opportunities to fund asset growth with borrowings, but on a
long-term basis the bank seeks to replace FHLB borrowings with deposits.
10
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Loan Loss Experience/Non-performing Assets
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Three months ended March 31,
----------------------------
($ in thousands) 2000 1999
-------- --------
Balance at beginning of year $ 5,446 5,234
Loans charged-off
Commercial 24 4
Commercial real estate -- --
Construction -- --
Residential real estate -- --
Home equity -- --
Other 2 9
------- -------
26 13
Recoveries on loans charged off
Commercial 21 30
Commercial real estate 11 2
Construction -- --
Residential real estate -- --
Home equity -- 2
Other -- 26
------- -------
32 60
Net loans (recovered)/charged off (6) (47)
Provision charged to income 126 135
------- -------
Balance at March 31 $ 5,578 5,416
======= =======
Annualized net (recoveries)/charge-offs: Average
loans outstanding (0.01%) (0.09%)
======= =======
Allowance for loan losses: Gross loans 2.10% 2.44%
======= =======
Allowance for loan losses: Non-performing loans 242.21% 664.54%
======= =======
<TABLE>
<CAPTION>
The following table sets forth non-performing assets at the dates indicated:
($ in thousands) March 31, December 31, March 31,
2000 1999 1999
------------- ------------- ---------
<S> <C> <C> <C>
Loans on non-accrual:
Commercial $ 402 368 459
Residential real estate 72 92 112
Commercial real estate 204 223 18
Construction 1,562 2,168 --
Consumer, including home equity 54 47 138
------ ------ ------
Total loans on non-accrual 2,294 2,898 727
Loans past due >90 days, still accruing 9 48 88
------ ------ ------
Total non-performing loans 2,303 2,946 815
Other real estate owned -- -- 304
------ ------ ------
Total non-performing loans and real estate owned $2,303 2,946 1,119
====== ====== ======
Non-performing loans: Gross loans 0.87% 1.12% 0.37%
====== ====== ======
Non-performing loans and real estate owned: Total assets 0.50% 0.66% 0.30%
====== ====== ======
Delinquent loans 30-89 days past due: Gross loans 0.41% 0.68% 0.72%
====== ====== ======
</TABLE>
11
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Total non-performing loans and real estate owned increased $1.2 million from
March 31, 1999 to March 31, 2000, and the ratio of non-performing loans to gross
loans increased from 0.30% to 0.50% over the same period. The increases are
primarily attributable to one construction loan that was classified as
non-performing in December 1999. Under the bank's present loan loss reserve
methodology, reserves have been allocated to this credit and management does not
anticipate unreserved future losses on this loan.
Total non-performing loans decreased $0.6 million from December 31, 1999 to
March 31, 2000. The primary cause for the declines was the removal of several
construction loans from non-accrual status. The ratio of non-performing loans to
gross loans decreased from 1.12% as of December 31, 1999 to 0.87% as of March
31, 2000. 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.
Year 2000 Compliance
Year 2000 compliance was a high priority item in 1999. The new year arrived
uneventfully and we continue to monitor and confirm the functionality and
accuracy of all company systems on an ongoing basis.
12
<PAGE>
Results of Operations
Three Months Ended March 31, 2000
vs. Three Months Ended March 31, 1999
The company reported net income of $969,000 for the three months ended March 31,
2000, versus $961,000 for the three months ended March 31, 1999. The company had
basic earnings per common share of $0.30 and diluted earnings per share of $0.29
for both the three months ending March 31, 2000 and March 31, 1999,
respectively.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
<TABLE>
<CAPTION>
Three months ended March 31,
------------------------------
($ in thousands) 2000 1999
---------- ---------
<S> <C> <C>
Average assets (1) $451,006 355,779
Average deposits and short-term borrowings 416,031 325,519
Average investment securities (1) 164,628 115,022
Average loans, net of deferred loan fees 260,128 217,157
Net interest income 4,720 3,980
Provision for loan losses 126 135
Tax expense 337 398
Average loans: Average deposits and borrowings 62.53% 66.71%
Non-interest expense: Average assets (2) 3.53% 3.54%
Non-interest income: Average assets (2) .60% .71%
Average tax equivalent rate earned on interest earning assets 8.10% 8.07%
Average rate paid on interest bearing deposits and
short-term borrowings 4.20% 3.85%
Net interest margin 4.66% 4.99%
<FN>
(1) Excludes the effect of SFAS No. 115
(2) Ratios have been annualized based on number of days for the period
</FN>
</TABLE>
Net Interest Income
The company's net interest income was $4,720,000 for the three months ended
March 31, 2000, an increase of $740,000 or 18.6% from $3,980,000 for the three
months ended March 31, 1999. Interest income increased $1,825,000, primarily a
result of an increase of average loan balances of $43.0 million, or 19.8%, and
average investment security balances of $49.6 million, or 43%, from the quarter
ended March 31, 1999 to the quarter ended March 31, 2000. The increase in
interest income was partially offset by an increase in interest expense of
$1,085,000, primarily due to an increase in average interest earning deposits
and short-term borrowings of $79.3 million over the same period.
The average tax-equivalent yield on earning assets in the three months ended
March 31, 2000, was 8.10%, up 3 basis points from 8.07% in the three months
ended March 31, 1999. The average rate paid on interest bearing deposits and
short-term borrowings in the three months ended March 31, 2000, was 4.20%, an
increase of 35 basis points from 3.85% in the three months ended March 31, 1999.
The resulting interest rate spread decreased 32 basis points to 3.90% in the
three months ended March 31, 2000, from 4.22% in the three months ended March
31, 1999. The increase in the average loan yield from 8.92% to 9.11%, from March
31, 1999 to March 31, 2000, was primarily a result of higher interest rates due
to increases in prime and income recognition on previously classified
non-accrual loans. The average rate paid on short-term borrowings, which
includes repurchase agreements and FHLB borrowings, rose primarily due to
increased FHLB borrowings.
Net interest margin declined from 4.99% at March 31, 1999 to 4.66% at March 31,
2000, primarily due to increased FHLB borrowings, which were originated in
anticipation of the Fleet branch acquisition, expected to close in the third
quarter of 2000. Management anticipates using the proceeds from the Fleet branch
acquisition to repay the bank's short-term borrowings and/or increase its
investment portfolio.
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 March 31, 2000, and 1999. 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
Three Months Ended March 31, 2000 Three Months Ended March 31, 1999
----------------------------------- ------------------------------------
Average Interest Average Interest
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3)
-------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (1) (2) $ 260,128 $ 5,895 9.11% $217,157 $4,774 8.92%
Investment securities (3) 164,628 2,460 6.49 115,022 1,712 6.58
Federal funds sold -- -- -- 3,842 44 4.64
---------- ------- -------- ------
Total interest earnings assets 424,756 8,355 8.10% 336,021 6,530 8.07%
------- ------
Other assets (4) 26,250 19,758
---------- --------
Total assets $ 451,006 $355,779
========== ========
Liabilities and stockholders' equity:
Savings, NOW and money market $ 126,074 730 2.33% $109,779 553 2.04%
Time deposits 153,941 1,950 5.09 144,369 1,845 5.18
Short-term borrowings 67,838 955 5.66 14,380 152 4.29
---------- ------- -------- ------
Interest bearing deposits and borrowings 347,853 3,635 4.20% 268,528 2,550 3.85%
---------- ------- -------- ------
Non-interest bearing deposits 68,178 56,991
Other liabilities 2,780 3,706
---------- --------
Total liabilities 418,811 329,283
Stockholders' equity 32,195 26,496
---------- --------
Total liabilities and
Stockholders' equity $ 451,006 $355,779
========== ========
Net interest rate spread 3.90% 4.22%
Net interest income $ 4,720 $3,980
======= ======
Net yield on average earning assets 4.66% 4.99%
<CAPTION>
($ in thousands) Changes due to
---------------------------------------------------
Interest Rate/
Total Volume Rate Volume
----- ------ -------- ------
<S> <C> <C> <C> <C>
Assets:
Loans (1) (2) $ 1,121 $ 953 $ 103 $ 65
Investment securities (3) 748 812 (26) (38)
Federal funds sold (44) (44) -- --
------- ------- ------- -------
Total interest earnings assets 1,825 1,721 77 27
------- ------- ------- -------
Other assets (4)
Total assets
Liabilities and stockholders' equity:
Savings, NOW and money market 177 83 79 15
Time deposits 105 123 (32) 14
Short-term borrowings 803 570 49 184
------- ------- ------- -------
Interest bearing deposits and borrowings 1,085 776 96 213
------- ------- ------- -------
Non-interest bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
Stockholders' equity
Net interest rate spread
Net interest income $ 740 $ 945 $ (19) $ (186)
======= ======= ======= =======
Net yield on average earning assets
<FN>
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis.
(4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, deferred income taxes and
other miscellaneous assets.
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.
</FN>
</TABLE>
14
<PAGE>
The provision for loan losses amounted to $126,000 and $135,000 for the three
months ended March 31, 2000 and March 31, 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, increased by $46,000 to $668,000 for the three months ended
March 31, 2000, compared to $622,000 for the three months ended March 31, 1999.
This increase was primarily caused by increases in trust fees of $48,000, and
other income of $33,000, offset by a decrease in net gain on loan sales of
$44,000.
Trust fees increased by $48,000, or 16.8%, for the three months ended March 31,
2000 compared to the same period in 1999 due to an increase in trust assets.
Trust assets increased from $200.7 million at March 31, 1999 to $238.8 million
at March 31, 2000.
Deposit fees increased by $9,000, or 4.4%, for the three months ended March 31,
2000, compared to the three months ended March 31, 1999, due primarily to an
increase in overdraft fees.
Other income for the three months ended March 31, 2000, was $111,000 compared to
$78,000 for the three months ended March 31, 1999, due primarily to an increase
in ATM surcharges and letter of credit fees.
Non-Interest Expenses
Salaries and benefits expense totaled $2,345,000 for the three months ended
March 31, 2000, compared with $1,873,000 for the three months ended March 31,
1999, an increase of $472,000 or 25.2%. This increase was primarily the result
of new hires due to bank growth, strategic initiatives implemented by the bank,
and annual pay raises.
Occupancy expense was $721,000 for the three months ended March 31, 2000,
compared with $577,000 for the three months ended March 31, 1999, an increase of
$144,000 or 25.0%. 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 $40,000, or 32.3%, for
the three months ended March 31, 2000 compared to the same period in 1999. The
decrease was primarily attributed to the timing of expenses associated with the
advertising programs.
Trust professional and custodial expenses increased by $32,000, or 47.8%, for
the three months ended March 31, 2000 as compared to the same period in 1999.
The increase was primarily due to growth and an increase in the professional
management fees as a percentage of assets.
Office and data processing supplies expense increased by $41,000 or 67.2%, for
the three months ended March 31, 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 preferred expense was $29,000 for the three months ended March 31, 2000
and is comprised of interest costs and amortization of deferred underwriting
costs from the trust preferred securities issued on March 23, 2000.
Other operating expense increased $165,000 or 57.7%, for the three months ended
March 31, 2000 compared to the same period in the prior year. The increase was
primarily due to increased postage, training, charitable contributions, and
internet banking expenses associated with the implementation of strategic
initiatives and the bank's growth.
15
<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.
16
<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
None
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)
17
<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: May 15, 2000 /s/ John P. Clancy, Jr.
John P. Clancy, Jr.
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
unaudited financial statements of Enterprise Bancorp, Inc. at and for the period
ended March 31, 2000 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 16,858
<INT-BEARING-DEPOSITS> 297,326
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 166,438
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 265,937
<ALLOWANCE> 5,578
<TOTAL-ASSETS> 460,847
<DEPOSITS> 367,349
<SHORT-TERM> 52,875
<LIABILITIES-OTHER> 1,856
<LONG-TERM> 10,500
0
0
<COMMON> 32
<OTHER-SE> 28,235
<TOTAL-LIABILITIES-AND-EQUITY> 460,847
<INTEREST-LOAN> 5,895
<INTEREST-INVEST> 2,460
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,355
<INTEREST-DEPOSIT> 2,680
<INTEREST-EXPENSE> 3,635
<INTEREST-INCOME-NET> 4,720
<LOAN-LOSSES> 126
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,956
<INCOME-PRETAX> 1,306
<INCOME-PRE-EXTRAORDINARY> 1,306
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 969
<EPS-BASIC> 0.30
<EPS-DILUTED> 0.29
<YIELD-ACTUAL> 4.47
<LOANS-NON> 2,294
<LOANS-PAST> 9
<LOANS-TROUBLED> 405
<LOANS-PROBLEM> 1,078
<ALLOWANCE-OPEN> 5,446
<CHARGE-OFFS> 26
<RECOVERIES> 32
<ALLOWANCE-CLOSE> 5,578
<ALLOWANCE-DOMESTIC> 5,578
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
