U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission File Number 0-21021
Enterprise Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3308902
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
222 Merrimack Street, Lowell, Massachusetts, 01852
(Address of principal executive offices) (Zip code)
(978) 459-9000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d)of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ..X.... No......
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable date:
July 31, 2001 Common Stock - Par Value $0.01, 3,451,637 shares outstanding
ENTERPRISE BANCORP, INC.
INDEX
Page Number
Cover Page 1
Index 2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 3
Consolidated Statements of Income -
Three and six months ended June 30, 2001 and 2000 4
Consolidated Statements of Changes in Stockholders' Equity - 5
Six months ended June 30, 2001
Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2000 6
Notes to Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
PART II OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities and Use of Proceeds 23
Item 3 Defaults upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
Signature Page 24
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 that are other than statements of historical fact. Enterprise
Bancorp, Inc. (the "company") wishes to caution readers that the following
important factors, among others, may adversely affect the company's future
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 unforeseen changes in interest rates; (ii) the effect of
changes in the business cycle and downturns in the local, regional or national
economies, including unanticipated deterioration in the local real estate
market; (iii) changes in asset quality and unanticipated increases in the
company's reserve for loan losses; (iv) 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; (v) the effect of technological changes and
unanticipated technology-related expenses; (vi) the effect of unforeseen changes
in consumer spending; (vii) the effect of changes in laws and regulations that
apply to the company's business and operations and unanticipated increases in
the company's regulatory compliance costs; (viii) unanticipated increases in
employee compensation and benefit expenses; and (xi) 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.
2
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
June 30, December 31,
2001 2000
($ in thousands) ...................................................................... (Unaudited)
------------- ------
Assets
- ------
Cash and cash equivalents
Cash and due from banks ............................................................... $ 31,090 26,080
Daily federal funds sold .......................................................... 28,200 28,025
-------- --------
Total cash and cash equivalents ......................................... 59,290 54,105
Investment securities at fair value .................................................... 203,316 185,184
Loans, less allowance for loan losses of $6,837 at June 30,
2001 and $6,220 at December 31, 2000, respectively ............................... 333,128 305,598
Premises and equipment ................................................................. 11,507 10,903
Prepaid expenses and other assets ...................................................... 4,204 2,735
Accrued interest receivable ............................................................ 3,849 4,078
Deferred income taxes, net ............................................................. 1,732 2,209
Income taxes receivable ................................................................ 338 415
Intangible assets, net of amortization ................................................. 7,192 7,587
-------- --------
Total assets ............................................................ $624,556 572,814
======== ========
Liabilities, Trust Preferred Securities and Stockholders' Equity
- ----------------------------------------------------------------
Deposits ................................................................................... $493,155 461,975
Short-term borrowings ...................................................................... 76,220 58,271
Escrow deposits of borrowers ............................................................... 1,199 1,106
Accrued expenses and other liabilities ..................................................... 2,874 3,776
Accrued interest payable ................................................................... 825 1,031
-------- --------
Total liabilities ........................................................... 574,273 526,159
-------- --------
Trust preferred securities ................................................................. 10,500 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;
3,451,575 and 3,408,667 shares issued and outstanding
at June 30, 2001 and December 31, 2000, respectively ............................... 35 34
Additional paid-in capital ................................................................. 18,519 17,843
Retained earnings .......................................................................... 18,195 16,793
Accumulated other comprehensive income ..................................................... 3,034 1,485
-------- --------
Total stockholders' equity ............................................... 39,783 36,155
-------- --------
Total liabilities, trust preferred
securities and stockholders' equity .................................... $624,556 572,814
======== ========
3
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three and six months ended June 30, 2001 and 2000
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
($ in thousands) ........................................... 2001 2000 2001 2000
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Interest and dividend income:
Loans ................................................. $ 7,085 6,372 14,161 12,267
Investment securities ...................................... 2,967 2,893 5,990 5,352
Federal funds sold ......................................... 312 2 531 3
---------- ---------- ---------- ----------
Total interest income ....................... 10,364 9,267 20,682 17,622
---------- ---------- ---------- ----------
Interest expense:
Deposits .............................................. 2,977 2,829 6,267 5,509
Short term borrowings ...................................... 675 1,257 1,452 2,212
---------- ---------- ---------- ----------
Total interest expense ...................... 3,652 4,086 7,719 7,721
---------- ---------- ---------- ----------
Net interest income ......................... 6,712 5,181 12,963 9,901
Provision for loan losses .................................. 420 159 630 285
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses ............................... 6,292 5,022 12,333 9,616
---------- ---------- ---------- ----------
Non-interest income:
Investment management and trust service fees .......... 459 392 965 725
Deposit service fees ....................................... 376 210 722 424
Net gain (loss) on sale of investment securities ...... 21 (2) 411 (2)
Gain on sale of loans ................................. 89 10 151 19
Other income .......................................... 210 131 412 243
---------- ---------- ---------- ----------
Total non-interest income ................... 1,155 741 2,661 1,409
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits ........................ 3,208 2,478 6,469 4,823
Occupancy expenses .................................... 982 795 1,937 1,516
Trust professional and custodial expenses ............. 178 130 360 229
Audit, legal and other professional fees .............. 154 206 306 331
Office and data processing supplies ................... 117 122 256 233
Advertising and public relations ...................... 95 138 235 222
Trust preferred expense .................................... 289 289 579 318
Amortization of intangible assets ..................... 197 -- 395 --
Other operating expenses .............................. 570 453 1,179 895
---------- ---------- ---------- ----------
Total non-interest expense .................. 5,790 4,611 11,716 8,567
---------- ---------- ---------- ----------
Income before income taxes ................................... 1,657 1,152 3,278 2,458
Income tax expense ........................................... 455 273 895 610
---------- ---------- ---------- ----------
Net income .................................... $ 1,202 879 2,383 1,848
========== ========== ========== ==========
Basic earnings per average common share outstanding .......... $ 0.35 0.27 0.70 0.57
========== ========== ========== ==========
Diluted earnings per average common share outstanding ........ $ 0.34 0.27 0.68 0.56
========== ========== ========== ==========
Basic weighted average common shares outstanding ............. 3,412,500 3,263,873 3,410,805 3,247,220
========== ========== ========== ==========
Diluted weighted average common shares outstanding ........... 3,505,228 3,299,405 3,497,541 3,312,101
========== ========== ========== ==========
4
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Six months ended June 30, 2001
Additional Total
Common Stock Paid-in Retained Comprehensive Income Stockholders'
----------- ------------- -------------------------
($ in thousands) ................ Shares Amount Capital Earnings Period Accumulated Equity
----------- ----------- ----------- ----------- ---------- ----------- -------------
Balance at December 31, 2000 .... 3,408,667 $ 34 $ 17,843 $ 16,793 $ 1,485 $ 36,155
Comprehensive income
Net income ............................................................. 2,383 $ 2,383 2,383
Unrealized appreciation on securities, net of reclassification ........... 1,549 1,549 1,549
-------------
Total comprehensive income, net of tax ....................................... $ 3,932
=============
Common stock dividend * .................................................. (981) (981)
Common stock issued,
dividend reinvestment plan * 39,708 1 649 650
Stock options exercised ....... 3,200 - 27 27
Balance at June 30, 2001 ........ 3,451,575 $ 35 $ 18,519 $ 18,195 $ 3,034 $ 39,783
=========== =========== =========== =========== =========== =============
Disclosure of reclassification amount:
Gross unrealized holding appreciation arising during the period .............. $ 2,758
Tax expense .................................................................. (938)
-------------
Unrealized holding appreciation, net of tax .................................. 1,820
-------------
Less: reclassification adjustment for net gains included
in net income (net of $140 tax) .......................................... 271
-----------
Net unrealized appreciation on securities .................................... $ 1,549
=============
o Dividends declared were $0.2875 per share, totaling $981,000. The dividend
was split between cash of $331,000, which was paid on June 28, 2001, and
39,708 shares valued at $650,000, which were issued on June 28, 2001
pursuant to the company's dividend reinvestment plan.
5
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Six months ended June 30, 2001 and 2000
June 30, June 30,
2001 2000
($ in thousands) .......................................................................... (Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
Net income ........................................................................... $ 2,383 1,848
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses .......................................... ........... 630 285
Depreciation and amortization .................................................. 1,076 802
Amortization of intangible assets .............................................. 395 -
Net (gain) loss on sale of investment securities ............................... (411) 2
Gain on sale of loans .......................................................... (151) (19)
(Increase) decrease in:
Loans held for sale ........................................................ 568 145
Accrued interest receivable ................................................ 229 (620)
Prepaid expenses and other assets .......................................... (1,469) (1,321)
Deferred income taxes ...................................................... (323) (164)
Income taxes receivable .................................................... 77 (546)
Increase (decrease) in:
Accrued expenses and other liabilities ..................................... (902) 128
Accrued interest payable ................................................... (206) 245
-------- --------
Net cash provided by operating activities ............................... 1,896 785
-------- --------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns
of investment securities .......................................................... 15,064 3,056
Proceeds from sales of investment securities ......................................... 7,059 1,984
Purchase of investment securities .................................................... (37,560) (44,515)
Net increase in loans ................................................................ (28,577) (23,055)
Additions to premises and equipment, net ............................................. (1,615) (1,143)
-------- --------
Net cash used in investing activities ................................... (45,629) (63,673)
-------- --------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits .................................. 31,273 51,145
Net increase in short-term borrowings ................................................ 17,949 7,808
Common stock dividends ............................................................... (981) (837)
Proceeds from issuance of trust preferred securities ................................. - 10,500
Common stock issued-dividend reinvestment plan ....................................... 650 -
Common stock issued-employee stock options ........................................... 27 1,535
-------- --------
Net cash provided by financing activities ............................... 48,918 70,151
-------- --------
Net increase in cash and cash equivalents ................................................. 5,185 7,263
Cash and cash equivalents at beginning of period .......................................... 54,105 17,089
-------- --------
Cash and cash equivalents at end of period ................................................ $ 59,290 24,352
======== ========
6
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Continued)
Six months ended June 30, 2001 and 2000
Supplemental financial data:
Cash paid for:
Interest expense .......................... $7,925 7,476
Income taxes .............................. 1,200 948
7
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, 2000, 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. The stockholders utilized the DRP to
reinvest $650,000 of the dividends paid by the company into 39,708 shares of the
company's common stock in 2001.
(5) Fleet Branch Acquisition
On July 21, 2000 the bank completed its acquisition of two Fleet National Bank
branch offices (the "Fleet branches"). The excess of cost over the fair market
value of assets acquired and liabilities assumed of approximately $7.9 million
has been allocated as $6.6 million in goodwill and $1.3 million in identified
intangible assets (combined "intangible assets") and is being amortized over a
ten-year period.
8
(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) Accounting Rule Changes
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting, and prohibits the use of the pooling-of-interests
method for such transactions. The new standard also requires that goodwill
acquired in such business combinations be measured using the definition included
in APB Opinion No. 16, "Business Combinations"' and initially recognized as an
asset in the financial statements. The new standard also requires intangible
assets acquired in such business combination to be recognized as an asset apart
from goodwill if they meet certain criteria.
SFAS No. 142 applies to all goodwill and intangible assets acquired in a
business combination. Under the new standard, all goodwill, including goodwill
acquired before initial application of the standard, should not be amortized but
should be tested for impairment at least annually at the reporting unit level,
as defined in the standard. Intangible assets other than goodwill should be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Within six months of initial application
of the new standard, a transitional impairment test must be performed on all
goodwill. Any impairment loss recognized as a result of the transitional
impairment test should be reported as a change in accounting principle. In
addition to the transitional impairment test, the required annual impairment
test should be performed in the year of adoption of the standard.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001, and must be adopted as of the beginning of a fiscal year. Retroactive
application is not permitted. The Company will adopt the new standard on January
1, 2002, and has evaluated the potential impact of the standard on its financial
position and results of operations. Adoption of SFAS No. 142 is expected to
increase annual net income by approximately $450,000 over the remaining
amortization period ending in June 2010.
(8) Reclassification
Certain fiscal 2000 information has been reclassified to conform to the 2001
presentation.
9
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Capital Resources
The company's actual capital amounts and capital adequacy ratios are presented
in the table below. The bank's capital amounts and ratios do not differ
materially from the amounts and ratios presented.
Minimum Capital Minimum Capital
for Capital to be
Actual Adequacy Purposes Well Capitalized
------------------------- ------------------ ----------------
($ in thousands) ........................ Amount Ratio Amount Ratio Amount Ratio
-------- ----- ------- ----- ------ -----
As of June 30, 2001:
Total Capital
(to risk weighted assets) ..........$ 44,968 11.64% $30,918 8.00% $38,648 10.00%
Tier 1 Capital
(to risk weighted assets) ......... 40,112 10.38% 15,459 4.00% 23,189 6.00%
Tier 1 Capital*
(to average assets) ................... 40,112 6.80% 23,591 4.00% 29,489 5.00%
* 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.
On April 17, 2001, the board of directors declared a dividend in the amount of
$0.2875 per share to be paid on June 28, 2001 to shareholders of record as of
the close of business on June 8, 2001. The board of directors intends to
consider the payment of future dividends on an annual basis.
Balance Sheet
Total Assets
Total assets increased $51.7 million, or 9.0%, since December 31, 2000. The
increase is primarily attributable to increases in investment securities of
$18.1 million and net loans of $27.5 million. The increase in assets was funded
primarily by growth in deposits and short-term borrowings of $31.3 and $17.9
million, respectively.
Investments
At June 30, 2001 all of the company's investment securities were classified as
available-for-sale and carried at fair value. The net unrealized appreciation at
June 30, 2001 was $4.6 million compared to $2.3 million at December 31, 2000.
The net unrealized appreciation/depreciation in the portfolio fluctuates as
interest rates rise and fall. Due to the fixed rate nature of the company's
investment portfolio, as rates rise the value of the portfolio declines, and as
rates fall the value of the portfolio rises. The unrealized appreciation will
only be realized if the securities are sold. The unrealized appreciation on the
investment portfolio will decrease as interest rates rise or as the securities
approach maturity.
Loans
Total loans, before the allowance for loan losses, were $340.0 million, or 54.4%
of total assets, at June 30, 2001, compared to $311.8 million, or 54.4% of total
assets, at December 31, 2000. The increase in loans of $28.1 million for the six
months ended June 30, 2001 was primarily attributed to originations for
commercial and commercial real estate loans and drawdowns on commercial lines of
credit.
10
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $31.3 million,
or 6.8%, during the first six months of 2001, from $463.1 million at December
31, 2000, to $494.4 million at June 30, 2001. The increase of $31.3 million
consists of growth of $46.8 million in savings, checking and money market
deposits primarily attributable to sales efforts and increased market
penetration, offset by a $15.5 million decrease in certificates of deposit
primarily attributable to interest rate decreases during the first six months of
2001.
Short-term borrowings, consisting of securities sold under agreements to
repurchase and Federal Home Loan Bank ("FHLB") borrowings, increased $17.9
million, or 30.8%, from $58.3 million at December 31, 2000 to $76.2 million at
June 30, 2001. The increase was attributable to growth of $15.0 million in
commercial sweep balances and of $2.9 million in term repurchase agreements,
which are both classified as securities sold under agreements to repurchase. The
company had $470,000 in borrowings outstanding from the FHLB at June 30, 2001
and December 31, 2000, respectively.
Loan Loss Experience/Non-performing Assets
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Six months ended June 30,
-------------------------
($ in thousands) .................................. 2001 2000
---------- ----------
Balance at beginning of year ...................... $ 6,220 5,446
Loans charged-off
Commercial ................................... 29 74
Commercial real estate ....................... - -
Construction ................................. - 2
Residential real estate ...................... - -
Home equity .................................. - -
Consumer ..................................... 41 2
------- -------
70 78
------- -------
Recoveries on loans charged off
Commercial ................................... 25 22
Commercial real estate ....................... - 48
Construction ................................. - 103
Residential real estate ...................... 20 1
Home equity .................................. - 1
Consumer ..................................... 12 1
------ -------
57 176
------- -------
Net loan (charge-offs) recoveries ................. (13) 98
Provision charged to operations ................... 630 285
------- -------
Balance at June 30 ................................ $ 6,837 5,829
======= =======
Annualized net (charge-offs) recoveries: Average
loans outstanding ................................. (0.01)% 0.07%
======= =======
Allowance for loan losses: Gross loans ............ 2.00 % 2.05%
======= =======
Allowance for loan losses: Non-performing loans ... 702.65 % 1,327.79%
======= =======
11
The following table sets forth non-performing assets at the dates indicated:
($ in thousands) ......................................... June 30, December 31, June 30,
2001 2000 2000
-------- ------------------- ---------
Non-accrual loans ........................................ $ 970 1,054 429
Accruing loans > 90 days past due ........................ 3 26 10
-------- ------------------- ---------
Total non-performing loans ............................... 973 1,080 439
Other real estate owned .................................. - - ---------
-------- ------------------- -
Total non-performing assets ......................... $ 973 1,080 439
======== =================== =========
Non-performing loans: Gross loans ........................ 0.29% 0.34% 0.15%
======== =================== =========
Non-performing assets: Total assets ...................... 0.16% 0.19% 0.09%
======== =================== =========
Delinquent loans 30-89 days past due: Gross loans ........ 0.49% 0.14% 0.55%
======== =================== =========
Non-performing loans at June 30, 2001 are consistent with December 31, 2000 and
reflect no significant change in the overall credit quality of the portfolio.
Non-performing loans at June 30, 2000 are considered to be unusually low. The
increase in 30-89 day delinquencies consists primarily of loans less than 40
days past due and is not considered indicative of a significant change in the
credit quality of the loan portfolio.
The level of non-performing assets is largely a function of economic conditions
and the overall banking environment, as well as the strength of the bank's loan
underwriting. Adverse changes in local, regional or national economic conditions
could negatively impact the level of non-performing assets in the future,
despite prudent underwriting.
12
Results of Operations
Six Months Ended June 30, 2001 vs. Six Months Ended June 30, 2000
The company reported net income of $2,383,000 for the six months ended June 30,
2001, versus $1,848,000 for the six months ended June 30, 2000. The company had
basic earnings per average common share of $0.70 and $0.57 and diluted earnings
per average common share of $0.68 and $0.56 for the six months ending June 30,
2001 and June 30, 2000, respectively.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
Six months ended June 30,
($ in thousands) ....................................................... 2001 2000
-------- --------
Average assets (1) ................................................... $583,071 473,155
Average deposits and short-term borrowings ........................... 532,486 432,702
Average investment securities and fed funds sold (1) ................. 216,991 176,654
Average loans, net of deferred loan fees ............................. 321,600 268,899
Net interest income .................................................. 12,963 9,901
Provision for loan losses ............................................ 630 285
Tax expense .......................................................... 895 610
Average loans: Average deposits and borrowings ....................... 60.40% 62.14%
Non-interest expense: Average assets (2) ............................. 4.05% 3.64%
Non-interest income: Average assets (2) (3) .......................... 0.78% 0.60%
Average tax equivalent rate on interest earning assets ............... 7.90% 8.13%
Average rate on interest bearing deposits and
short-term borrowings ............................................. 3.60% 4.28%
Net interest margin .................................................. 5.01% 4.65%
(1) Excludes the effect of SFAS No. 115
(2) Ratios have been annualized based on number of days for the period (3)
Excludes net gain on sale of investment securities
Net Interest Income
The company's net interest income was $12,963,000 for the six months ended June
30, 2001, an increase of $3,062,000 or 30.9% from $9,901,000 for the six months
ended June 30, 2000.
Interest income increased $3,060,000 for the six months ended June 30, 2001 and
was $20,682,000 compared to $17,622,000 for the same period ended June 30, 2000,
resulting primarily from an increase in the interest earning asset average
balance of $93.0 million or 20.9% to $538.6 million at June 30, 2001 compared to
$445.6 million at June 30, 2000, offset by a decrease in the average tax
equivalent yield on interest earning assets of 23 basis points to 7.90% for the
six months ended June 30, 2001 compared to 8.13% for the same period ended June
30, 2000.
The average loan balances increased $52.7 million, or 19.6%, and the average
investment security and fed funds sold balance increased $40.3 million, or
22.8%, at June 30, 2001 compared to June 30, 2000. The average rate earned on
loans declined 29 basis points to 8.88% for the six months ended June 30, 2001,
from 9.17% for the same period ended June 30, 2000, while the average tax
equivalent yield on investment securities and federal funds sold decreased 11
basis points to 6.44% for the six months ended June 30, 2001 from 6.55% for the
same period ended June 30, 2000. The Company purchased $7.0 million in loans
from Fleet National Bank on July 21, 2000.
Interest expense for the six months ended June 30, 2001 was $7,719,000 compared
to $7,721,000 for the same period ended June 30, 2000, resulting primarily from
a decrease in the average interest rate on interest bearing liabilities of 68
basis points to 3.60% at June 30, 2001 compared to 4.28% at June 30, 2000,
offset by an increase in the average balance of $69.7 million or 19.2% to $432.1
million at June 30, 2001.
The average interest rate on Savings/PIC/MMDA deposit accounts decreased 17
basis points due to lower market rates, while the average balance increased
$85.2 million or 64.9%. The Company assumed $34.7 million in savings/PIC/MMDA
deposits from Fleet National Bank on July 21, 2000.
The average interest rate on time deposits increased 23 basis points for the six
months ended June 30, 2001 compared to the same period ended June 30, 2000. The
increase in rate was offset by a decrease in the average balance of $7.5 million
to $147.9 million at June 30, 2001 compared to $155.4 million at June 30, 2000.
The Company assumed $14.0 million in time deposits from Fleet National Bank on
July 21, 2000.
13
The average interest rate on short-term borrowings, consisting of term
repurchase agreements and commercial sweep accounts (together, "repurchase
agreements") and Federal Home Loan Bank borrowings, decreased to 4.34% for the
six months ended June 30, 2001, compared to 5.88% for the six months ended June
30, 2000. The average balance decreased $8.1 million to $67.5 million at June
30, 2001 compared to June 30, 2000. The 154 basis point decrease in average rate
resulted primarily from decreases in market rates and a change in the funding
mix, which resulted in a decrease in the FHLB borrowing average balance of $42.5
million and an increase in the lower costing commercial sweep average balance of
$38.0 million at June 30, 2001 compared to June 30, 2000.
Net interest margin increased to 5.01% for the six months ended June 30, 2001
from 4.65% for the same period ended June 30, 2000, primarily due to the 68
basis point decrease in the average rate on interest bearing liabilities, offset
by the 23 basis point decrease in tax equivalent yield on interest earning
assets, and the $93.0 million increase in average balance on interest earning
assets, offset by the $69.7 million increase in average balance on interest
bearing liabilities.
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest earning assets
and interest bearing liabilities have affected interest income and expense
during the six months ended June 30, 2001, and June 30, 2000. For each category
of interest earning assets and interest bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average portfolio
balance multiplied by prior year average rate); (2) interest rate (change in
average interest rate multiplied by prior year average balance); and (3) rate
and volume (the remaining difference).
14
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Six Months Ended June 30, 2001 Six Months Ended June 30, 2000 Changes due to
------------------------------ ------------------------------ ---------------------------------
Average Interest Average Interest Interest Rate/
($ in thousands) ................Balance Interest Rates (3) Balance Interest Rates (3) Total Volume Rate Volume
------- -------- --------- ------- -------- --------- ----- ------ -------- ------
Assets:
Loans(1)(2) $ 321,600 $ 14,161 8.88% $ 268,899 $ 12,267 9.17% $1,894 $2,398 $ (393) $ (111)
Investment securities &
federal funds sold (3)(5) 216,991 6,521 6.44 176,654 5,355 6.55 1,166 1,310 (95) (49)
Total interest earnings assets 538,591 20,682 7.90% 445,553 17,622 8.13% 3,060 3,708 (488) (160)
-------- -------- ------ ------ -------- -------
Other assets (4)(5) 44,480 27,602
-------- --------
Total assets (5) $583,071 $473,155
======== ========
Liabilities and stockholders' equity:
Savings/PIC/MMDA ... $ 216,597 2,311 2.15% $131,375 1,517 2.32% 794 981 (111) (76)
Time deposits ........... 147,946 3,956 5.39 155,437 3,992 5.16 (36) (192) 175 (19)
Short-term borrowings ... 67,534 1,452 4.34 75,592 2,212 5.88 (760) (235) (581) 56
--------- -------- --------- -------- ------ ----- --------- -------
Interest bearing deposits
and borrowings .......... 432,077 7,719 3.60% 362,404 7,721 4.28% (2) 554 (517) (39)
--------- -------- --------- -------- ------ ----- --------- -------
Non-interest bearing deposits 100,409 70,298
Other liabilities .......... 4,282 2,467
--------- ---------
Total liabilities ....... 536,768 435,169
--------- ---------
Trust preferred securities ..... 10,500 5,423
Stockholders' equity (5) 35,803 32,563
--------- ---------
Total liabilities, trust
preferred securities and
stockholders' equity (5) $ 583,071 $ 473,155
========= =========
Net interest rate spread 4.30% 3.85%
Net interest income .............. .. $ 12,963 $ 9,901 $ 3,062 $3,154 $ 29 $ (121)
========= ========= ======== ====== ========= ========
Net interest margin ................................... 5.01% 4.65%
(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, intangible assets, and
other miscellaneous assets.
(5) Excludes the effect of SFAS No. 115
The company 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
company's earning assets.
15
Provision for Loan Losses
The provision for loan losses amounted to $630,000 and $285,000 for the six
months ended June 30, 2001 and June 30, 2000, respectively. Although management
believes that loan quality continues to be solid, management determined it was
prudent to increase the allowance for loan losses in light of current economic
uncertainty. 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 company's operating results.
Non-Interest Income
Investment management and trust service fees increased by $240,000, or 33.1%,
for the six months ended June 30, 2001 compared to the same period in 2000 due
to an increase in trust assets and the establishment of an investment services
unit. Trust assets under management increased from $239.2 million at June 30,
2000 to $275.3 million at June 30, 2001.
Deposit service fees increased by $298,000, or 70.3%, for the six months ended
June 30, 2001, compared to the six months ended June 30, 2000, due primarily to
an increase in savings, checking and money market balances of $85.2 million, or
51% from June 30, 2000 to June 30, 2001. The deposit balance increase resulted
in higher checking and overdraft fees. The Company assumed $44.3 million in
savings, checking, and money market balances from Fleet National Bank on July
21, 2000.
Net gain (loss) on sale of investment securities amounted to $411,000 and
$(2,000) for the six months ended June 30, 2001 and June 30, 2000, respectively.
The net gain resulted from management's decision to take advantage of certain
investment opportunities and asset/liability repositioning in the first quarter.
Gain on loan sales increased by $132,000 for the six months ended June 30, 2001,
compared to the six months ended June 30, 2000, due primarily to decreases in
interest rates beginning in December of 2000 that have resulted in increased
refinance and sales volume.
Other income for the six months ended June 30, 2001, was $412,000 compared to
$243,000 for the six months ended June 30, 2000, and is primarily attributable
to bank growth. The primary increases were in debit card fees, ATM surcharges,
check printing fees, safe deposit fees and wire transfer fees.
Non-Interest Expenses
Salaries and benefits expense totaled $6,469,000 for the six months ended June
30, 2001, compared with $4,823,000 for the six months ended June 30, 2000, an
increase of $1,646,000 or 34.1%. This increase was primarily due to the
acquisition of the Fleet branches, new hires due to company growth, strategic
initiatives implemented by the company, and annual pay increases.
Occupancy expense was $1,937,000 for the six months ended June 30, 2001,
compared with $1,516,000 for the six months ended June 30, 2000, an increase of
$421,000 or 27.8%. The increase was primarily due to the acquisition of the
Fleet branches, office renovations for operational support departments and
ongoing enhancements to the company's computer systems.
Trust professional and custodial expenses increased by $131,000 for the six
months ended June 30, 2001 as compared to the same period in 2000. The increase
was primarily due to growth in trust assets under management.
Audit, legal and other professional expenses decreased by $25,000 for the six
months ended June 30, 2001 compared to the same period in 2000 primarily
resulting from legal costs incurred in 2000 relating to the formation of two
subsidiaries offset by increased compliance and audit related expenses
associated with the bank's growth in 2001.
Office and data processing supplies expense increased by $23,000 for the six
months ended June 30, 2001 compared to the same period in 2000. The increase was
primarily due to the timing of purchases and growth.
16
Advertising and public relations expenses increased by $13,000 for the six
months ended June 30, 2001 compared to the same period in 2000. The increase was
primarily due to the timing of expenses and growth. Expenditures in 2000 were
related primarily to growth and the Fleet branch acquisition.
Trust preferred expense was $579,000 and $318,000 for the six months ended June
30, 2001 and June 30, 2000, respectively. The expense consists of interest costs
and the amortization of deferred underwriting costs from the trust preferred
securities issued on March 23, 2000.
Amortization of intangible assets was $395,000 and $0 for the six months ended
June 30, 2001 and June 30, 2000, respectively. The expense consists of the
amortization of intangible assets resulting from the acquisition of two branches
from Fleet National Bank on July 21, 2000. Intangible assets are being amortized
over ten years.
Other operating expense was $1,179,000 and $895,000 for the six months ended
June 30, 2001 and June 30, 2000, respectively. The increase of $284,000, or
31.7%, is primarily due to the company's growth and primarily consists of
increased expenses for ATM's, courier services, internet banking, and EDP system
security.
Income Tax Expense
Income tax expense and the effective tax rate for the six months ended June 30,
2001 and June 30, 2000 were $895,000 and 27.3% and $610,000 and 24.8%,
respectively. The increase in effective tax rate resulted primarily from higher
pre-tax income, which decreases the impact of tax exempt municipal income.
17
Results of Operations
Three Months Ended June 30, 2001 vs. Three Months Ended June 30, 2000
The company reported net income of $1,202,000 for the three months ended June
30, 2001, versus $879,000 for the three months ended June 30, 2000. The company
had basic earnings per common share of $0.35 and $0.27 and diluted earnings per
share of $0.34 and $0.27 for the three months ending June 30, 2001 and June 30,
2000, respectively.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
Three months ended June 30,
---------------------------
($ in thousands) ................................... 2001 2000
-------- --------
Average assets (1) ..................................... $596,969 495,660
Average deposits and short-term borrowings ............. 545,996 449,373
Average investment securities and fed funds sold (1) ... 223,980 188,782
Average loans, net of deferred loan fees ............... 327,858 277,669
Net interest income .................................... 6,712 5,181
Provision for loan losses .............................. 420 159
Tax expense ............................................ 455 273
Average loans: Average deposits and borrowings ......... 60.05% 61.79%
Non-interest expense: Average assets (2) ............... 3.89% 3.73%
Non-interest income: Average assets (2) (3) ............ 0.76% 0.60%
Average tax equivalent rate on interest earning assets . 7.69% 8.15%
Average rate on interest bearing deposits and
short-term borrowings ................................... 3.31% 4.35%
Net interest margin ........................................ 5.03% 4.64%
(1) Excludes the effect of SFAS No. 115
(2) Ratios have been annualized based on number of days for the period (3)
Excludes net gain on sale of investment securities
Net Interest Income
The company's net interest income was $6,712,000 for the three months ended June
30, 2001, an increase of $1,531,000 or 29.6% from $5,181,000 for the three
months ended June 30, 2000.
Interest income increased $1,097,000 for the three months ended June 30, 2001
and was $10,364,000 compared to $9,267,000 for the same period ended June 30,
2000, resulting primarily from an increase in the interest earning asset average
balance of $85.4 million or 18.3% to $551.8 million at June 30, 2001 compared to
$466.5 million at June 30, 2000, offset by a decrease in the average tax
equivalent yield on interest earning assets of 46 basis points to 7.69% for the
three months ended June 30, 2001 compared to 8.15% for the same period ended
June 30, 2000.
The average loan balances increased $50.2 million, or 18.1%, and the average
investment security and fed funds sold balances increased $35.2 million, or
18.6%, at June 30, 2001 compared to June 30, 2000. The average rate earned on
loans declined 53 basis points to 8.67% for the three months ended June 30,
2001, from 9.20% for the same period ended June 30, 2000, while the average tax
equivalent yield on investment securities and federal funds sold decreased 35
basis points to 6.25% for the three months ended June 30, 2001 from 6.60% for
the same period ended June 30, 2000. The Company purchased $7.0 million in loans
from Fleet National Bank on July 21, 2000.
Interest expense for the three months ended June 30, 2001 was $3,652,000
compared to $4,086,000 for the same period ended June 30, 2000, resulting
primarily from a decrease in the average interest rate on interest bearing
liabilities of 104 basis points to 3.31% for the three months ended June 30,
2001 compared to 4.35% for the same period ended June 30, 2000, offset by an
increase in the average balance of $65.9 million or 17.5% to $442.9 million at
June 30, 2001.
The average interest rate on Savings/PIC/MMDA deposit accounts decreased 40
basis points due to lower market rates, while the average balance increased
$89.0 million or 65.1%. The Company assumed $34.7 million in savings/PIC/MMDA
deposits from Fleet National Bank on July 21, 2000.
The average interest rate on time deposits increased 5 basis points for the
three months ended June 30, 2001 compared to the same period ended June 30,
2000. The increase in rate was offset by a decrease in the average balance of
$12.0 million to $145.0 million at June 30, 2001 compared to $156.9 million at
June 30, 2000. The Company assumed $14.0 million in time deposits from Fleet
National Bank on July 21, 2000.
18
The average interest rate on short term borrowings, consisting of term
repurchase agreements and commercial sweep accounts (together, "repurchase
agreements") and Federal Home Loan Bank borrowings, decreased to 3.75% for the
three months ended June 30, 2001, compared to 6.05% for the three months ended
June 30, 2000. The 230 basis point decrease in average rate resulted primarily
from decreases in market rates and a change in funding mix, which resulted in a
decrease in the FHLB borrowing average balance of $47.5 million and an increase
in the lower costing commercial sweep average balance of $40.1 million at June
30 2001 compared to June 30, 2000.
Net interest margin increased to 5.03% for the three months ended June 30, 2001
from 4.64% for the same period ended June 30, 2000, primarily due to the 104
basis point decrease in average rate on interest bearing liabilities, offset by
the 46 basis point decrease in the tax equivalent yield on interest earning
assets, and the $85.4 million increase in average balance on interest earning
assets, offset by the $65.9 million increase in average balance on interest
bearing liabilities.
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest earning assets
and interest bearing liabilities have affected interest income and expense
during the three months ended June 30, 2001, and June 30, 2000. For each
category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to: (1) volume (change in
average portfolio balance multiplied by prior year average rate); (2) interest
rate (change in average interest rate multiplied by prior year average balance);
and (3) rate and volume (the remaining difference).
19
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended June 30, 2001 Three Months Ended June 30, 2000 Changes due to
-------------------------------- -------------------------------- ---------------------------------
Average Interest Average Interest Interest Rate/
($ in thousands) ................Balance Interest Rates (3) Balance Interest Rates (3) Total Volume Rate Volume
------- -------- --------- ------- -------- --------- ----- ------ -------- ------
Assets:
Loans (1)(2) $ 327,858 $ 7,085 8.67% $ 277,669 $ 6,372 9.20% $ 713 $1,152 $ (372) $ (67)
Investment securities &
federal funds sold (3)(5) 223,980 3,279 6.25 188,782 2,895 6.60 384 579 (164) (31)
--------- --------- --------- --------- -------- --------- ----- ------ -------- ------
Total interest earnings assets 551,838 10,364 7.69% 466,451 9,267 8.15% 1,097 1,731 (536) (98)
--------- -------- ----- ------ -------- ------
Other assets (4)(5) ........ 45,131 29,209
--------- ---------
Total assets (5) $ 596,969 $ 495,660
========= =========
Liabilities and stockholders' equity:
Savings/PIC/MMDA $ 225,684 1,073 1.91% $ 136,677 787 2.31% 286 513 (137) (90)
Time deposits ............. 144,978 1,904 5.27 156,934 2,042 5.22 (138) (156) 19 (1)
Short-term borrowings .... 72,203 675 3.75 83,345 1,257 6.05 (582) (168) (478) 64
--------- --------- --------- -------- ----- ------ -------- ------
Interest bearing deposits
and borrowings ........... 442,865 3,652 3.31% 376,956 4,086 4.35% (434) 189 (596) (27)
--------- --------- --------- -------- ----- ------ -------- ------
Non-interest bearing deposits 103,131 72,417
Other liabilities ............ 4,889 2,396
--------- ---------
Total liabilities ....... 550,885 451,769
Trust preferred securities ..... 10,500 10,500
Stockholders' equity (5) 35,584 33,391
--------- ---------
Total liabilities, trust
preferred securities and
stockholders' equity (5) $ 596,969 $ 495,660
========= =========
Net interest rate spread ........................... 4.38% 3.80%
Net interest income .....................$ 6,712 $ 5,181 $1,531 $1,542 $ 60 $ (71)
========= ========= ====== ====== ====== ======
Net interest margin .................................. 5.03% 4.64%
(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, intangible assets, and other
miscellaneous assets.
(5) Excludes the effect of SFAS No. 115
The company 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
company's earning assets.
20
Provision for Loan Losses
The provision for loan losses amounted to $420,000 and $159,000 for the three
months ended June 30, 2001 and June 30, 2000, respectively. Although management
believes that loan quality continues to be solid, management determined it was
prudent to increase the allowance for loan losses in light of current economic
uncertainty. 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 company's operating results.
Non-Interest Income
Investment management and trust service fees increased by $67,000, or 17.1%, for
the three months ended June 30, 2001 compared to the same period in 2000 due to
an increase in trust assets and the establishment of an investment services
unit. Trust assets under management increased from $239.2 million at June 30,
2000 to $275.3 million at June 30, 2001.
Deposit service fees increased by $166,000, or 79.0%, for the three months ended
June 30, 2001, compared to the three months ended June 30, 2000, due primarily
to an increase in the average savings, checking and money market balances of
$89.0 million, or 65%, from June 30, 2000 to June 30, 2001. The deposit balance
increase resulted in higher checking and overdraft fees. The Company assumed
$44.3 million in savings, checking, and money market balances from Fleet
National Bank on July 21, 2000.
Net gain (loss) on sale of investment securities amounted to $21,000 and
$(2,000) for the three months ended June 30, 2001 and June 30, 2000,
respectively. The net gain resulted from management's decision to take advantage
of certain investment opportunities and asset/liability repositioning.
Gain on loan sales increased by $79,000 for the three months ended June 30,
2001, compared to the three months ended June 30, 2000, due primarily to
decreases in interest rates beginning in December of 2000 that have resulted in
increased refinance and sales volume.
Other income for the three months ended June 30, 2001, was $210,000 compared to
$131,000 for the three months ended June 30, 2000, and is primarily attributable
to company growth. The primary increases were in debit card fees, ATM
surcharges, and safe deposit fees.
Non-Interest Expenses
Salaries and benefits expense totaled $3,208,000 for the three months ended June
30, 2001, compared to $2,478,000 for the three months ended June 30, 2000, an
increase of $730,000 or 29.5%. This increase was primarily due to the
acquisition of the Fleet branches, new hires due to company growth, strategic
initiatives implemented by the company, and annual pay increases.
Occupancy expense was $982,000 for the three months ended June 30, 2001,
compared with $795,000 for the three months ended June 30, 2000, an increase of
$187,000 or 23.5%. The increase was primarily due to the acquisition of the
Fleet branches, office renovations for operational support departments and
ongoing enhancements to the company's computer systems.
Trust professional and custodial expenses increased by $48,000 for the three
months ended June 30, 2001 as compared to the same period in 2000. The increase
was primarily due to growth in trust assets under management.
Audit, legal and other professional expenses decreased by $52,000 for the three
months ended June 30, 2001 compared to the same period in 2000 primarily
resulting from legal costs incurred in 2000 related to the formation of two
subsidiaries.
Office and data processing supplies expense decreased by $5,000 for the three
months ended June 30, 2001 compared to the same period in 2000. Expenditures in
2001 related to the company's growth, while expenditures in 2000 related
primarily to growth and the Fleet branch acquisition.
21
Advertising and public relations expenses decreased by $43,000 for the three
months ended June 30, 2001 compared to the same period in 2000 primarily due to
the timing of expenses associated with the advertising programs and the
company's growth.
Trust preferred expense was $289,000 for the three months ended June 30, 2001
and June 30, 2000, respectively. The expense consists of interest costs and the
amortization of deferred underwriting costs from the trust preferred securities
issued on March 23, 2000.
Amortization of intangible assets was $197,000 and $0 for the three months ended
June 30, 2001 and June 30, 2000, respectively. The expense consists of the
amortization of intangible assets resulting from the acquisition of two branches
from Fleet National Bank on July 21, 2000. Intangible assets are being amortized
over ten years.
Other operating expense was $570,000 and $453,000 for the three months ended
June 30, 2001 and June 30, 2000, respectively. The increase of $117,000 or
25.8%, is primarily due to the company's growth and consists primarily of
increased expenses for ATM's, courier services, internet banking and EDP system
security.
Income Tax Expense
Income tax expense and the effective tax rate for the three months ended June
30, 2001 and June 30, 2000 were $455,000 and 27.5% and $273,000 and 23.7%,
respectively. The increase in effective tax rate resulted primarily from higher
pre-tax income which decreases the impact of tax exempt municipal income.
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, 2000.
22
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities and Use of Proceeds
Not Applicable
Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the company was held on
May 1, 2001. Votes were cast as follows:
1. To elect five Directors of the company, each for a three-year term:
Nominee For Against Abstain
Walter L. Armstrong 2,951,484 0 208
George L. Duncan 2,951,484 0 208
John P. Harrington 2,951,484 0 208
Charles P. Sarantos 2,951,484 0 208
Michael A. Spinelli 2,951,484 0 208
2. To approve the Company's amended and restated 1998 stock incentive plan.
For Against Abstain
2,867,600 70,374 13,718
3. To ratify the Board of Directors' appointment of KPMG LLP as the company's
independent auditors for the fiscal year ending December 31, 2001
For Against Abstain
2,926,654 208 24,830
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
The following exhibits are included with this report:
10.41 Employment Agreement dated as of June 1, 2001 by and
among the company, the bank and George L. Duncan
(supersedes and replaces prior employment agreement
as amended).
10.42 Employment Agreement dated as of June 1, 2001 by and
among the company, the bank and Richard W. Main
(supersedes and replaces prior employment agreement
as amended).
23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERPRISE BANCORP, INC.
DATE: August 14, 2001 /s/ John P. Clancy, Jr.
-----------------------
John P. Clancy, Jr.
Treasurer
24