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 March 31, 2002
[ ] 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:
May 13, 2002 Common Stock - Par Value $0.01, 3,464,099 shares
outstanding
ENTERPRISE BANCORP, INC.
INDEX
Page Number
Cover Page 1
Index 2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets -March 31, 2002 and December 31, 2001 3
Consolidated Statements of Income -
Three months ended March 31, 2002 and 2001 4
Consolidated Statement of Changes in Stockholders' Equity - 5
Three months ended March 31, 2002
Consolidated Statements of Cash Flows -
Three months ended March 31, 2002 and 2001 6
Notes to Consolidated 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 17
PART II OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 2 Changes in Securities and Use of Proceeds 18
Item 3 Defaults upon Senior Securities 18
Item 4 Submission of Matters to a Vote of Security Holders 18
Item 5 Other Information 18
Item 6 Exhibits and Reports on Form 8-K 18
Signature Page 19
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 (ix) 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.
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
March 31, December 31,
2002 2001
(Dollars in thousands) (Unaudited)
----------------- -----------------
Assets
Cash and equivalents:
Cash and due from banks $ 30,649 $ 31,361
Daily federal funds sold 5,000 6,500
---------------- -----------------
Total cash and cash equivalents 35,649 37,861
---------------- -----------------
Investment securities at fair value 196,638 197,060
Loans, less allowance for loan losses of $8,902 at March 31, 2002 and
$8,547 at December 31, 2001 378,999 367,780
Premises and equipment 12,989 12,136
Accrued interest receivable 3,609 3,586
Deferred income taxes, net 2,767 2,034
Prepaid expenses and other assets 3,576 2,990
Income taxes receivable - 301
Intangible assets 6,598 6,796
---------------- -----------------
Total assets $ 640,825 $ 630,544
================ =================
Liabilities, Trust Preferred Securities and Stockholders' Equity
Deposits $ 541,260 $ 526,953
Short-term borrowings 40,191 44,449
Escrow deposits of borrowers 1,418 931
Accrued expenses and other liabilities 3,282 4,185
Income taxes payable 341 -
Accrued interest payable 811 805
---------------- -----------------
Total liabilities 587,303 577,323
---------------- -----------------
Trust preferred securities $ 10,500 $ 10,500
Stockholders' equity:
Preferred stock, $0.01 per value; 1,000,000 shares
Authorized; no shares issued
- -
Common stock $0.01 par value; 10,000,000 shares authorized; 3,462,974 and
3,461,999 shares issued and outstanding at
March 31, 2002 and December 31, 2001, respectively 35 35
Additional paid-in capital 18,662 18,654
Retained earnings 22,096 20,715
Accumulated other comprehensive income 2,229 3,317
---------------- -----------------
Total stockholders' equity 43,022 42,721
---------------- -----------------
Total liabilities, trust preferred
securities and stockholders' equity $ 640,825 $ 630,544
================ =================
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three months ended March 31, 2002 and 2001
(Dollars in thousands, except per share data) March 31, March 31,
2002 2001
(Unaudited) (Unaudited)
------------------ ------------------
Interest and dividend income:
Loans $ 6,934 $ 7,076
Investment securities 2,582 3,023
Federal funds sold 37 219
------------------ ------------------
Total interest income 9,553 10,318
------------------ ------------------
Interest expense:
Deposits 2,328 3,290
Short-term borrowed funds 190 777
------------------ ------------------
Total interest expense 2,518 4,067
------------------ ------------------
Net interest income 7,035 6,251
Provision for loan losses 390 210
------------------ ------------------
Net interest income after provision for loan losses 6,645 6,041
------------------ ------------------
Non-interest income:
Investment management and trust service fees 571 506
Deposit service fees 436 346
Net gains on sales of investment securities 416 390
Gains on sales of loans 102 62
Other income 195 202
------------------ ------------------
Total non-interest income 1,720 1,506
------------------ ------------------
Non-interest expense:
Salaries and employee benefits 3,553 3,261
Occupancy expenses 1,109 955
Advertising and public relations 179 140
Audit, legal and other professional fees 226 152
Trust professional and custodial expenses 196 182
Office and data processing supplies 115 139
Trust preferred expense 290 290
Amortization of intangible assets 198 198
Other operating expenses 636 609
------------------ ------------------
Total non-interest expense 6,502 5,926
------------------ ------------------
Income before income taxes 1,863 1,621
Income tax expense 482 440
------------------ ------------------
Net income $ 1,381 $ 1,181
================== ==================
Basic earnings per share $ 0.40 $ 0.35
================== ==================
Diluted earnings per share $ 0.39 $ 0.34
================== ==================
Basic weighted average common shares outstanding 3,462,232 3,409,093
================== ==================
Diluted weighted average common shares outstanding 3,578,384 3,489,837
================== ==================
ENTERPRISE BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
Three months ended March 31, 2002 (unaudited)
(Dollars in thousands)
Common Stock Additional
------------------------- Paid-in Retained
Shares Amount Capital Earnings
---------- ----------- --------- --------
Balance at December 31, 2001 3,461,999 $ 35 $ 18,654 $ 20,715
Comprehensive income
Net Income 1,381
Unrealized depreciation on securities,
net of reclassification (1,088)
Total comprehensive income $ 293
Stock options exercised 975 8
---------- ----------- ----------- -----------
========== =========== =========== ===========
Balance at March 31, 2002 3,462,974 $ 35 $ 18,662 $ 22,096
========== =========== =========== ===========
Comprehensive Income Total
---------------------- Stockholders'
Period Accumulated Equity
----------- ----------- ----------
Balance at December 31, 2001 $ 3,317 $ 42,721
Comprehensive income
Net Income 1,381 1,381
Unrealized depreciation on securities,
net of reclassification (1,088) (1,088) (1,088)
----------- ----------- -----------
Total comprehensive income $ 293
===========
Stock options exercised 8
----------- ---------- -----------
=========== ==========
Balance at March 31, 2002 $ 2,229 $ 43,022
=========== ==========
Disclosure of reclassification amount:
Gross unrealized depreciation arising during
The period $ (1,232)
Tax benefit 419
Unrealized holding depreciation, net of tax (813)
Less: reclassification adjustment for net gains
included in net income (net of $141 tax) 275
===========
Net unrealized depreciation on securities $ (1,088)
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Three months ended March 31, 2002 and 2001
(Dollars in thousands) March 31, March 31,
2002 2001
(Unaudited) (Unaudited)
-------------- --------------
Cash flows from operating activities:
Net income $ 1,381 $ 1,181
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 390 210
Depreciation and amortization 657 530
Amortization of intangible assets 198 198
Net gains on sales of investments (416) (390)
Gains on sale of loans (102) (62)
(Increase) decrease in:
Loans held for sale 726 311
Accrued interest receivable (23) 342
Prepaid expenses and other assets (586) (334)
Deferred income taxes (173) (105)
Income taxes 642 387
Increase (decrease) in:
Accrued expenses and other liabilities (903) (66)
Accrued interest payable 6 (370)
---------------- ----------------
Net cash provided by operating activities 1,797 1,832
---------------- ----------------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of investment securities 11,558 4,091
Proceeds from sales of investment securities 6,049 10,037
Purchase of investment securities (18,498) (23,437)
Net increase in loans (12,233) (12,823)
Additions to premises and equipment, net (1,429) (557)
---------------- ----------------
Net cash used in investing activities (14,553) (22,689)
---------------- ----------------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 14,794 11,105
Net increase (decrease) in short-term borrowings (4,258) 12,339
Stock options exercised 8 6
---------------- ----------------
Net cash provided by financing activities 10,544 23,450
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (2,212) 2,593
Cash and cash equivalents at beginning of period 37,861 54,105
---------------- ----------------
Cash and cash equivalents at end of period $ 35,649 $ 56,698
================ ================
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Continued)
Three months ended March 31, 2002 and 2001
(Dollars in thousands) March 31, March 31,
2002 2001
(Unaudited) (Unaudited)
-------------- --------------
Supplemental financial data:
Cash paid for:
Interest expense $ 2,511 $ 4,722
Income taxes 12 200
ENTERPRISE BANCORP, INC.
Notes to Consolidated 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 consolidated financial statements should be read in
conjunction with the company's December 31, 2001 audited consolidated financial
statements and notes thereto. Interim results are not necessarily indicative of
results to be expected for the entire year.
In preparing the consolidated 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 consolidated 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 116,152 and 80,744 for the
quarters ended March 31, 2002 and March 31, 2001, 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 $650,000 of the dividends paid by the company into 39,770 shares of the
company's common stock in 2001.
(5) Intangible Assets
On July 21, 2000 the bank completed its acquisition of two Fleet National Bank
branch offices. The excess of cost over the fair market value of assets acquired
and liabilities assumed of approximately $7.9 million has been allocated to
identified intangible assets and goodwill (combined "intangible assets") and is
being amortized over a ten-year period.
(6) Accounting Rule Changes
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("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 any 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 before
the end of the year of adoption. 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 adopted the new standard on January 1,
2002. During 2001, the company reported that the adoption of SFAS No. 142 was
expected to increase annual net income by approximately $450,000 over the
remaining amortization period ending in June 2010. However, subsequent to the
company's disclosure but prior to formal adoption on January 1, 2002, the FASB
clarified that goodwill as defined in SFAS No. 142 did not include the excess of
amounts paid over liabilities assumed in a branch acquisition and such amounts
should continue to be accounted for in accordance with SFAS No. 72, "Accounting
for Certain Acquisitions of Banking or Thrift Institutions." Consequently,
goodwill will continue to be amortized over a ten year life and adoption of SFAS
No. 142 is expected to have no impact on the consolidated financial statements
of the company although final resolution of this by the FASB has not been
determined.
(7) Reclassification
Certain fiscal 2001 information has been reclassified to conform to the 2002
presentation.
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
-------------------------- ------------------------------------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
-------------------------- ------------------------------------------------------
As of March 31, 2002:
Total Capital
(to risk weighted assets) $ 50,333 11.35% $ 35,464 8.00% $ 44,330 10.00%
Tier 1 Capital
(to risk weighted assets) 44,750 10.09% 17,732 4.00% 26,598 6.00%
Tier 1 Capital*
(to average assets) 44,750 7.26% 24,667 4.00% 30,833 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.
Balance Sheet
Total Assets
At March 31, 2002, total assets increased by $10.3 million, or 1.6%, since
December 31, 2001. The increase was primarily attributable to an increase in net
loans of $11.2 million, offset by a decrease of $2.0 million in investment
securities and federal funds sold. The increase in assets was funded primarily
by growth in deposits of $14.3 million, offset by a decrease in short-term
borrowings of $4.3 million. During the fourth quarter of 2001, the bank began to
transition the investment portion of the bank's commercial sweep accounts from
overnight repurchase agreements secured by municipal securities held by the bank
to money market mutual funds managed by Federated Investors, Inc. ("Federated").
The balances transferred to Federated do not represent obligations of the bank.
This transition from overnight repurchase agreements to Federated mutual funds
continued during the first three months of 2002. Under this arrangement,
management believes that commercial customers will benefit from enhanced
interest rate earnings on sweep accounts, while retaining a conservative
investment option of the highest quality and safety. Without this transition to
Federated, the bank would have had growth in assets and deposits plus repurchase
agreements of 5.6% and 6.2%, respectively, at March 31, 2002 as compared to
December 31, 2001.
Investments
At March 31, 2002 all of the company's investment securities were classified as
available-for-sale and carried at fair value. The net unrealized appreciation at
March 31, 2002 was $3.4 million compared to $5.0 million at December 31, 2001.
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 $387.9 million, or 60.5%
of total assets, at March 31, 2002, compared to $376.3 million, or 59.7% of
total assets, at December 31, 2001. The increase in loans of $11.6 million for
the quarter ended March 31, 2002 was primarily attributed to originations of
commercial, commercial real estate and construction loans.
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $14.8 million,
or 2.8%, during the first three months of 2002, from $527.9 million at December
31, 2001, to $542.7 million at March 31, 2002. The increase of $14.8 million
consists of growth of $9.8 million in savings, checking and money market
deposits primarily attributable to sales efforts and increased market
penetration, and a $5.0 million increase in certificates of deposit.
Short-term borrowings, consisting of securities sold under agreements to
repurchase and Federal Home Loan Bank ("FHLB") borrowings, decreased by $4.2
million, or 9.6%, from $44.4 million at December 31, 2001 to $40.2 million at
March 31, 2002. The decrease was attributable to the bank's continuing
transition during the first three months of 2002 of the investment portion of
the bank's commercial sweep accounts from overnight repurchase agreements
secured by municipal securities held by the bank to money market mutual funds
managed by Federated. The sweep balances that remain as of March 31, 2002 on the
bank's balance sheet in the form of overnight repurchase agreements secured by
municipal securities held by the bank are classified as securities sold under
agreements to repurchase. The company also had $470,000 in borrowings
outstanding from the FHLB at March 31, 2002.
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,
--------------------------------------
(Dollars in thousands) 2002 2001
---------------- ----------------
Balance at beginning of year $ 8,547 $ 6,220
Loans charged off
Commercial 46 -
Commercial real estate - -
Construction - -
Residential real estate - -
Home equity - -
Other 3 20
---------------- ----------------
49 20
---------------- ----------------
Recoveries on loans charged off
Commercial - 25
Commercial real estate - -
Construction - -
Residential real estate 2 20
Home equity - -
Other 12 4
---------------- ----------------
14 49
---------------- ----------------
Net loans charged off (recovered) 35 (29)
Provision charged to operations 390 210
---------------- ----------------
Balance at March 31 $ 8,902 $ 6,459
================ ================
Annualized net loans charged off (recovered): Average loans outstanding 0.04% (0.04%)
================ ================
Allowance for loan losses: Loans 2.29% 1.99%
================ ================
Allowance for loan losses: Non-performing loans 386.37% 614.56%
================ ================
The following table sets forth non-performing assets at the dates indicated:
(Dollars in thousands) March 31, December 31, March 31,
2002 2001 2001
----------------- ----------------- ----------------
Non-accrual loans $ 2,303 $ 1,874 $ 1,051
Accruing loans > 90 days past due 1 1 -
----------------- ----------------- ----------------
Total non-performing loans 2,304 1,875 1,051
Other real estate owned - - -
----------------- ----------------- ----------------
Total non-performing assets $ 2,304 $ 1,875 $ 1,051
================= ================= ================
Non-performing loans: Loans 0.59% 0.50% 0.32%
================= ================= ================
Non-performing assets: Total assets 0.36% 0.30% 0.18%
================= ================= ================
Delinquent loans 30-89 days past due: Loans 0.54% 0.30% 0.18%
================= ================= ================
Total non-performing loans increased by $1.3 million from March 31, 2001 to
March 31, 2002 and by $0.4 million from December 31, 2001 to March 31, 2002, and
the ratio of non-performing loans to gross loans increased from 0.32% to 0.59%
and from 0.50% to 0.59% over the same respective periods. The ratio of
delinquent loans (30 - 89 days past due) to gross loans increased from 0.18% at
March 31, 2001 to 0.30% at December 31, 2001 and from 0.30% to 0.54% from
December 31, 2001 to March 31, 2002.
Non-performing and delinquent loans at March 31, 2001 are considered to be
unusually low. The results at December 31, 2001 and March 31, 2002 were
primarily attributable to a weakened economy which began in 2001 and continued,
at least to a certain degree, during the first three months of 2002. The bank's
level of non-performing assets is largely a function of economic conditions and
the overall banking environment. Continuing adverse conditions within the bank's
market area, as well as any other adverse changes in local, regional or national
economic conditions, could negatively impact the bank's level of non-performing
assets in the future, despite prudent loan underwriting.
Results of Operations
Three Months Ended March 31, 2002 vs. Three Months Ended March 31, 2001
The company reported net income of $1,381,000 for the three months ended March
31, 2002, versus $1,181,000 for the three months ended March 31, 2001. The
company had basic earnings per common share of $0.40 and $0.35 and diluted
earnings per common share of $0.39 and $0.34 for the three months ended March
31, 2002 and March 31, 2001, respectively.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
Three months ended March 31,
--------------------------------------
(Dollars in thousands) 2002 2001
---------------- ----------------
Average assets (1) $ 623,263 $ 569,020
Average deposits and short-term borrowings 567,892 518,825
Average investment securities and federal funds sold (1) 192,010 209,924
Average loans, net of deferred loan fees 383,853 315,273
Net interest income 7,035 6,251
Provision for loan losses 390 210
Tax expense 482 440
Average loans: Average deposits and borrowings 67.59% 60.77%
Non-interest expense: Average assets (2) 4.23% 4.22%
Non-interest income: Average assets (2) (3) 0.85% 0.80%
Average tax equivalent rate earned on interest earning assets 6.86% 8.10%
Average rate paid on interest bearing deposits and short-term borrowings 2.21% 3.92%
Average rate paid on total deposits and borrowings 1.80% 3.18%
Net interest margin 5.08% 5.00%
(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 $7,035,000 for the three months ended
March 31, 2002, an increase of $784,000, or 12.5%, from $6,251,000 for the three
months ended March 31, 2001. Interest income decreased by $765,000 for the three
months ended March 31, 2002 and was $9,553,000 compared to $10,318,000 for the
same period ended March 31, 2001. This decrease resulted primarily from a
decrease in the average tax equivalent yield on interest earning assets of 124
basis points to 6.86% for the three months ended March 31, 2002 compared to
8.10% for the same period ended March 31, 2001, offset by an increase in the
average balance of interest earning assets of $50.7 million or 9.6% to $575.9
million for the three months ended March 31, 2002 compared to $525.1 million for
the three months ended March 31, 2001.
For the three months ended March 31, 2002, the average loan balance increased by
$68.6 million, or 21.8%, and the average investment securities and federal funds
sold balance decreased by $17.9 million, or 8.5%, compared to the same period
ended March 31, 2001. The average rate earned on loans declined by 177 basis
points to 7.33% for the three months ended March 31, 2002, from 9.10% for the
same period ended March 31, 2001, while the average tax equivalent yield on
investment securities and federal funds sold decreased by 68 basis points to
5.92% for the three months ended March 31, 2002 from 6.60% for the same period
ended March 31, 2001.
Interest expense for the three months ended March 31, 2002 was $2,518,000
compared to $4,067,000 for the same period ended March 31, 2001, resulting
primarily from a decrease in the average interest rate on interest bearing
liabilities of 171 basis points to 2.21% for the three months ended March 31,
2002 compared to 3.92% for the same period ended March 31, 2001, offset by an
increase in the average balance of interest-bearing deposits and short-term
borrowings of $40.2 million, or 9.6%, to $461.4 million for the three months
ended March 31, 2002 as compared to $421.2 million for the same period ended
March 31, 2001.
The average interest rate on savings, checking and money market deposit accounts
decreased by 112 basis points for the three months ended March 31, 2002 compared
to the same period ended March 31, 2001, due to lower market rates, while the
average balance of such deposit accounts increased by $54.4 million, or 26.2%,
to $261.8 million for the three months ended March 31, 2002 as compared to
$207.4 million for the same period ended March 31, 2001.
The average interest rate on time deposits decreased by 164 basis points for the
three months ended March 31, 2002 compared to the same period ended March 31,
2001. The average balance on time deposits increased by $5.3 million, or 3.5%,
to $156.3 million for the three months ended March 31, 2002 as compared to
$151.0 million for the same period ended March 31, 2001.
The average interest rate on short-term borrowings, consisting of term
repurchase agreements and commercial sweep accounts utilizing overnight
repurchase agreements secured by municipal securities held by the bank
(together, "repurchase agreements") and FHLB borrowings, decreased to 1.78% for
the three months ended March 31, 2002, compared to 5.02% for the three months
ended March 31, 2001. The average balance of short-term borrowings for the three
months ended March 31, 2002 decreased by $19.5 million, or 31.0%, to $43.3
million as compared to $62.8 million for the three months ended March 31, 2001.
The 324 basis point decrease in average rate paid on short-term borrowings
resulted primarily from decreases in market rates, while the decrease in average
balance was attributable primarily to the transition described above of the
bank's commercial sweep accounts from overnight repurchase agreements to
Federated money market mutual funds.
Net interest margin increased to 5.08% for the three months ended March 31, 2002
from 4.96% for the same period ended March 31, 2001, primarily due to the 171
basis point decrease in the average rate on interest bearing liabilities, offset
by the 124 basis point decrease in tax equivalent yield on interest earning
assets, and the $50.7 million increase in the average balance of interest
earning assets, offset by the $40.2 million increase in the average balance of
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 affected interest income and expense during the
three months ended March 31, 2002 and March 31, 2001, respectively. For each
category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to: (1) volume (change in
average portfolio balance multiplied by prior year average rate); (2) interest
rate (change in average interest rate multiplied by prior year average balance);
and (3) rate and volume (the remaining difference).
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended March 31, 2002 Three Months Ended March 31, 2001
------------------------------------- --------------------------------------
(Dollars in thousands) Average Interest Interest Average Interest
Balance Rates (3) Balance Interest Rates (3)
------------------------------------- --------------------------------------
Assets:
Loans (1) (2) $ 383,853 $ 6,934 7.33% $315,273 $7,076 9.10%
Investment securities & federal funds
sold (3)(5) 192,010 2,619 5.92% 209,924 3,242 6.60%
--------- -------- --------- ------
Total interest earnings assets 575,863 9,553 6.86% 525,197 10,318 8.10%
Other assets (4)(5) 47,400 43,823
--------- --------
Total assets (5) $ 623,263 $569,020
========= ========
Liabilities and stockholders' equity:
Savings/PIC/MMDA $ 261,817 837 1.30% $207,408 1,238 2.42%
Time deposits 156,279 1,491 3.87% 150,947 2,052 5.51%
Short-term borrowings 43,319 190 1.78% 62,813 777 5.02%
--------- ------- -------- ------
Total interest-bearing deposits and
borrowings 461,415 2,518 2.21% 421,168 4,067 3.92%
========= ======= ======== ======
Net interest rate spread (3) 4.65% 4.18%
Non-interest bearing deposits 106,477 97,657
--------- ------- -------- ------
Total deposits and borrowings 567,892 2,518 1.80% 518,825 4,067 3.18%
Other liabilities 4,647 3,670
--------- -------
Total liabilities 572,539 522,495
Trust preferred securities 10,500 10,500
Stockholders' equity (5) 40,224 36,025
--------- --------
Total liabilities, trust preferred
securities and stockholders' equity (5) $623,263 $569,020
========= ========
Net interest Income $ 7,035 $ 6,251
======== ========
Net interest margin 5.08% 4.96%
Changes due to
-----------------------------------------------
Interest Rate/
Total Volume Rate Volume
-----------------------------------------------
Assets:
Loans (1) (2) $ (142) $ 1,539 $ (1,381) $ (300)
Investment securities & federal funds
sold (3)(5) (623) (277) (434) 88
------- -------- ------- -------
Total interest earnings assets (765) 1,262 (1,815) (212)
------- -------- ------- -------
Other assets (4)(5)
Total assets (5)
Liabilities and stockholders' equity:
Savings/PIC/MMDA (401) 325 (575) (151)
Time deposits (561) 72 (612) (21)
Short-term borrowings (587) (241) (502) 156
------- -------- ------- ------
Total interest-bearing deposits and
borrowings (1,549) 156 (1,689) (16)
------- -------- ------- ------
Net interest rate spread (3)
Non-interest bearing deposits
Total deposits and borrowings
Other liabilities
Total liabilities
Trust preferred securities
Stockholders' equity (5)
Total liabilities, trust preferred
securities and stockholders' equity (5)
Net interest Income $ 784 $ 1,106 $ (126) $ (196)
======== ======== ====== ======
Net interest margin
(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. The tax equivalent
effect was $224 and $225 for the periods ended March 31, 2002 and March 31,
2001, respectively
(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.
Provision for Loan Losses
The provision for loan losses amounted to $390,000 and $210,000 for the three
months ended March 31, 2002 and March 31, 2001, 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 $65,000, or 13.0%, for
the three months ended March 31, 2002 compared to the same period in 2001. The
increase was primarily due to one time fees received in 2002 for estate
settlements. Excluding these fees, investment management and trust service fees
would have decreased by $10,000, or 2%, for the three months ended March 31,
2002 compared to the same period in 2001. Average investment services and trust
assets under management (excluding the commercial sweep balances held in
Federated mutual funds) decreased to $286.8 million for the three months ended
March 31, 2002 from $297.3 million for the same period in 2001.
Deposit service fees increased by $90,000, or 26.0%, for the three months ended
March 31, 2002, compared to the three months ended March 31, 2001, due primarily
to an increase in the average balance on savings, checking and money market
accounts of $54.4 million, or 26.2%, for the three months ended March 31, 2002
compared to the same period in 2001. The average deposit balance increase
resulted in higher business checking and overdraft fees.
Net gain on sale of investment securities amounted to $416,000 and $390,000 for
the three months ended March 31, 2002 and March 31, 2001, respectively. These
net gains resulted from management's decision to take advantage of certain
investment opportunities and asset/liability repositioning.
Gain on sale of loans increased by $40,000 for the three months ended March 31,
2002, compared to the three months ended March 31, 2001, due to increased
residential mortgage production resulting from a declining interest rate
environment.
Other income for the three months ended March 31, 2002, was $195,000 compared to
$202,000 for the three months ended March 31, 2001. This decrease was primarily
attributable to a decrease in check printing fees offset by an increase in ATM
surcharge fees.
Non-Interest Expenses
Salaries and benefits expense totaled $3,553,000 for the three months ended
March 31, 2002, compared to $3,261,000 for the three months ended March 31,
2001, an increase of $292,000 or 9.0%. This increase was primarily due to new
hires, company growth, strategic initiatives implemented by the company, and
annual pay increases.
Occupancy expense was $1,109,000 for the three months ended March 31, 2002,
compared to $955,000 for the three months ended March 31, 2001, an increase of
$154,000 or 16.1%. The increase was primarily due to increases in rent and
common area maintenance fees for leased office space, depreciation of office
renovations for operational support departments completed in 2001, and ongoing
enhancements to the company's computer systems.
Advertising and public relations expenses increased by $39,000, or 27.9%, for
the three months ended March 31, 2002 compared to the same period in 2001. The
increase was primarily due to expenditures related to the opening of the bank's
newest branch office, located at the end of the Lowell Connector, which occurred
on April 29, 2002.
Audit, legal and other professional expenses increased by $74,000, or 48.7%, for
the three months ended March 31, 2002 compared to the same period in 2001. The
increase was primarily due to increased compliance and audit related expenses
associated with the bank's growth in 2002.
Trust professional and custodial expenses increased by $14,000, or 7.7%, for the
three months ended March 31, 2002 compared to the same period in 2001. The
increase was primarily due to an increase in custodial fees.
Office and data processing supplies expense decreased by $24,000, or 17.3%, for
the three months ended March 31, 2002 compared to the same period in 2001. The
decrease was primarily due to timing differences of the expenditures.
Trust preferred expense was $290,000 for the three months ended March 31, 2002
and March 31, 2001. 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 $198,000 for the three months ended March
31, 2002 and March 31, 2001. The expense consists of the amortization of
intangible assets resulting from the acquisition of two branches from Fleet
National Bank on July 21, 2000. These intangible assets are being amortized on a
straight-line basis over ten years.
Other operating expense was $636,000 and $609,000 for the three months ended
March 31, 2002 and March 31, 2001, respectively. The increase of $27,000, or
4.4%, for the 2002 period was primarily due to the company's growth and consists
of increased expenses for bank service charges, training expense, courier
services, internet banking and data communication lines, and charitable
contributions.
Income Tax Expense
Income tax expense and the effective tax rate for the three months ended March
31, 2002 and March 31, 2001 were $482,000 and 27.0% and $440,000 and 27.1%,
respectively.
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 bank'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. These asset/liability strategies are reviewed regularly
by management and presented and discussed with the investment committee on at
least a quarterly basis. The bank's asset/liability strategies may be revised
periodically 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 the guidelines or restrictions
contained in the bank's 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, 2001.
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 exhibit is included with this report:
10.23 Change in Control/Noncompetition Agreement dated
as of April 3, 2002 by and among the company, the
bank and Stephen J. Irish.
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 13, 2002 /s/ John P. Clancy, Jr.
------------------------------------------
John P. Clancy, Jr.
Treasurer