Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
[ ] TRANSITION REPORT UNDER 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 Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes ..X.... No......
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
April 30, 1999 Common Stock - Par Value $0.01, 3,169,634 shares outstanding
ENTERPRISE BANCORP, INC.
INDEX
Page Number
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements of Enterprise Bancorp, Inc.
Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 3
Consolidated Statements of Income -
Three months ended March 31, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity - 5
Three months ended March 31, 1999
Consolidated Statements of Cash Flows -
Three months ended March 31, 1999 and 1998 6
Notes to Financial Statements 7
Item 2 Management's Discussion and
Analysis of Financial Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures About Market Risk 16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 3 Defaults upon Senior Securities 17
Item 4 Submission of Matters to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
Signature Page 18
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact. Enterprise
Bancorp, Inc. (the "company") wishes to caution readers that the following
important factors, among others, may have affected and could in the future
affect the company's results and could cause the company's results for
subsequent periods to differ materially from those expressed in any
forward-looking statement made herein: (i) the effect of changes in laws and
regulations, including federal and state banking laws and regulations, with
which the company or its subsidiaries must comply, and the associated costs of
compliance with such laws and regulations either currently or in the future as
applicable; (ii) the effect of changes in accounting policies and practices, as
may be adopted by the regulatory agencies as well as by the Financial Accounting
Standards Board, or of changes in the company's organization, compensation or
benefit plans; (iii) the effect on the company's competitive position within its
market area of the increasing competition from larger regional and out-of-state
banking organizations as well as non-bank providers of various financial
services; (iv) the effect of changes in interest rates; (v) the effect of
changes in the business cycle and downturns in the local, regional or national
economies; and (vi) the potential for the company to materially underestimate
the cost to be incurred and/or the time required in connection with systems
preparation for Year 2000 compliance.
2
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
March 31, December 31,
1999 1998
($ in thousands) (Unaudited) (Audited)
----------- ------------
Assets
Cash and cash equivalents $ 15,049 19,668
Daily federal funds sold 10,100 6,255
Investment securities at fair value 114,733 114,659
Loans, less allowance for loan losses of $5,416
at March 31, 1999 and $5,234 December 31, 1998 216,397 209,978
Premises and equipment 4,752 4,272
Accrued interest receivable 2,552 2,424
Prepaid expenses and other assets 990 863
Income taxes receivable -- 271
Real estate acquired by foreclosure 304 304
Deferred income taxes, net 2,161 1,787
-------- --------
Total assets $367,038 360,481
======== ========
Liabilities and Stockholders' Equity
Deposits $320,689 317,666
Short-term borrowings 15,871 12,085
Escrow deposits of borrowers 831 687
Income taxes payable 88 --
Accrued expenses and other liabilities 1,353 2,222
Accrued interest payable 629 623
-------- --------
Total liabilities 339,461 333,283
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares
authorized, no shares issued at March 31, 1999 -- --
Common stock $.01 par value; 5,000,000 shares authorized,
3,169,634 and 3,167,684 shares issued and
outstanding at March 31, 1999 and December 31, 1998,
respectively 32 32
Additional paid-in capital 15,571 15,560
Retained earnings 11,571 10,610
Accumulated other comprehensive income 403 996
-------- --------
Total stockholders' equity 27,577 27,198
-------- --------
Total liabilities and stockholders' equity $367,038 360,481
======== ========
3
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three months ended March 31, 1999 and 1998
March 31, March 31,
1999 1998
($ in thousands, except per share data) (Unaudited) (Unaudited)
----------- ------------
Interest and dividend income:
Loans $ 4,774 4,331
Investment securities 1,712 1,713
Federal funds sold 44 24
---------- ----------
Total interest income 6,530 6,068
---------- ----------
Interest expense:
Deposits 2,398 2,259
Borrowed funds 152 169
---------- ----------
Total interest expense 2,550 2,428
---------- ----------
Net interest income 3,980 3,640
Provision for loan losses 135 90
---------- ----------
Net interest income after provision for loan losses 3,845 3,550
---------- ----------
Non-interest income:
Deposit service fees 205 219
Trust fees 285 237
Net gain on sales of loans 54 19
Net gain on sales of investments -- 71
Other income 78 84
---------- ----------
Total non-interest income 622 630
---------- ----------
Non-interest expense:
Salaries and employee benefits 1,873 1,678
Occupancy expenses 577 555
Advertising and public relations 124 106
Audit, legal and other professional fees 120 126
Trust professional and custodial expenses 67 74
Office and data processing supplies 61 93
Other operating expenses 286 300
---------- ----------
Total non-interest expense 3,108 2,932
---------- ----------
Income before income taxes 1,359 1,248
Income tax expense 398 445
---------- ----------
Net income $ 961 803
========== ==========
Basic earnings per average common share outstanding $ 0.30 0.25
========== ==========
Diluted earnings per average common share outstanding $ 0.29 0.24
========== ==========
Basic weighted average common shares outstanding 3,168,761 3,160,434
========== ==========
Diluted weighted average common shares outstanding 3,331,050 3,288,208
========== ==========
4
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Three months ended March 31, 1999
Common Stock Additional Comprehensive Income Total
--------------------- Paid-in Retained -------------------- Stockholders'
($ in thousands) Shares Amount Capital Earnings Period Accumulated Equity
----------- ------- -------- -------- ------- ----------- -------------
Balance at December 31, 1998 3,167,684 $ 32 $ 15,560 $ 10,610 $ 996 $ 27,198
Comprehensive income
Net income 961 $ 961 961
Unrealized losses on securities,
net of reclassification (593) (593) (593)
------
Total comprehensive income, net of tax $ 368
======
Stock options exercised 1,950 -- 11 11
--------- ----- -------- -------- ------ --------
Balance at March 31, 1999 3,169,634 $ 32 $ 15,571 $ 11,571 $ 403 $ 27,577
========= ===== ======== ======== ====== ========
Disclosure of reclassification amount:
Gross unrealized holding losses arising during the period $ (955)
Less: tax effect 362
------
Unrealized holding losses, net of tax (593)
------
Less: reclassification adjustment for gains/(losses) included
in net income (net of $ 0 tax) --
------
Net unrealized losses on securities $ (593)
======
5
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Three months ended March 31, 1999 and 1998
March 31, March 31,
1999 1998
($ in thousands) (Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
Net income $ 961 803
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 135 90
Depreciation and amortization 318 274
Gains on sales of loans (54) (19)
Gains on sales of securities -- (71)
(Increase) decrease in loans held for sale 9 (507)
(Increase) decrease in accrued interest receivable (128) 335
Increase in prepaid expenses and other assets (127) (258)
Increase in deferred income taxes (12) (17)
Decrease in accrued expenses and other liabilities (869) (561)
Increase in accrued interest payable 6 12
Net change in income taxes payable/receivable 359 277
-------- --------
Net cash provided by operating activities 598 358
-------- --------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns
of investment securities 11,844 9,842
Purchase of investment securities (12,911) (9,080)
Net increase in loans (6,509) (12,250)
Additions to premises and equipment, net (760) (129)
-------- --------
Net cash used in investing activities (8,336) (11,617)
-------- --------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 3,167 9,564
Net increase in short-term borrowings 3,786 3,312
Stock options exercised 11 --
-------- --------
Net cash provided by financing activities 6,964 12,876
-------- --------
Net (decrease) increase in cash and cash equivalents (774) 1,617
Cash and cash equivalents at beginning of period 25,923 23,554
-------- --------
Cash and cash equivalents at end of period $ 25,149 25,171
======== ========
Supplemental financial data:
Cash paid for:
Interest on deposits and short-term borrowings $ 2,544 2,416
Income taxes 51 184
Transfers from loans to real estate acquired by foreclosure -- 76
6
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. The company had no material assets or
operations prior to completion of the holding company reorganization on July 26,
1996.
(2) Basis of Presentation
The accompanying unaudited financial statements should be read in conjunction
with the company's December 31, 1998, 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 and valuation of other real estate owned.
In the opinion of management, the accompanying financial statements reflect all
necessary adjustments consisting of normal recurring accruals for a fair
presentation.
(3) Earnings Per Share
Basic earnings per share are calculated by dividing net income by the year to
date weighted average number of common shares that were outstanding for the
period. Diluted earnings per share reflect the effect on weighted average shares
outstanding of the number of additional shares outstanding if dilutive stock
options were converted into common stock using the treasury stock method. The
increase in average shares outstanding, using the treasury stock method, for the
diluted earnings per share calculation were 162,289 and 127,774 for the quarters
ended March 31, 1999 and March 31, 1998, respectively.
7
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 March 31, 1999:
Total Capital
(to risk weighted assets) $ 30,052 12.56% $ 19,137 8.00% $ 23,921 10.00%
Tier 1 Capital
(to risk weighted assets) 27,030 11.30% 9,568 4.00% 14,353 6.00%
Tier 1 Capital*
(to average assets) 27,030 7.58% 14,265 4.00% 17,831 5.00%
<FN>
* For the bank to qualify as "well capitalized", it must maintain a leverage capital ratio (Tier 1 capital
to average assets) of at least 5%. This requirement does not apply to the company and is reflected merely
for informational purposes with respect to the bank.
</FN>
On April 20, 1999, the board of directors declared a dividend in the amount of
$0.21 per share to be paid on or about July 1, 1999 to shareholders of record as
of the close of business on June 11, 1999. The board of directors intends to
consider the payment of future dividends on an annual basis.
Balance Sheet
Total Assets
Total assets increased $6.6 million, or 1.8 %, since December 31, 1998. The
increase is primarily attributable to an increase in gross loans of $6.6
million. The increase in assets was funded primarily by increases in deposits
and short-term borrowings of $3.0 million and $3.8 million, respectively.
Investments
At March 31, 1999 all of the bank's investment securities were classified as
available-for-sale and carried at fair value. The net unrealized gain at March
31, 1999, net of tax effects, is shown as accumulated other comprehensive
income, a separate component of stockholders' equity, in the amount of $403,000.
The net unrealized gain/loss in the investment portfolio fluctuates as interest
rates rise and fall due to the fixed rate nature of the portfolio.
Loans
Total loans, before the allowance for loan losses, were $221.8 million, or 60.4%
of total assets, at March 31, 1999, compared to $215.2 million, or 59.7% of
total assets, at December 31, 1998. The increase in loans of $6.6 million was
primarily attributed to loan originations in the commercial real estate and
commercial loan portfolios. The bank continues to pursue active customer calling
efforts as well as increased marketing and advertising to identify quality
lending opportunities.
8
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $3.2 million,
or 1.0%, during the first three months of 1999, from $318.3 million at December
31, 1998, to $321.5 million at March 31, 1999. Due to the cyclical nature of
some of the bank's deposits, first quarter deposit growth has historically been
lower than the average quarterly growth in deposits achieved over the remainder
of the year.
Total borrowings, consisting of securities sold under agreements to repurchase
and FHLB (Federal Home Loan Bank) borrowings, increased $3.8 million, or 31.3%,
from $12.1 million at December 31, 1998 to $15.9 million at March 31, 1999. The
increase was attributable to an increase in securities sold under agreements to
repurchase of $3.8 million. Management also actively uses FHLB borrowings in
managing the bank's asset/liability position. The bank had FHLB borrowings
outstanding of $0.5 million at March 31, 1999, and had the ability to borrow
approximately an additional $95.9 million. Management periodically takes
advantage of opportunities t fund asset growth with borrowings, but on a
long-term basis the bank intends to replace any FHLB borrowings with deposits.
Loan Loss Experience/Non-performing Assets
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Three months ended March 31,
----------------------------
($ in thousands) 1999 1998
----------- -----------
Balance at beginning of year $ 5,234 4,290
Loans charged-off
Commercial 4 65
Commercial real estate -- --
Construction -- --
Residential real estate -- --
Home equity -- --
Other 9 --
------- -------
13 65
Recoveries on loans charged off
Commercial 30 1
Commercial real estate 2 --
Construction -- --
Residential real estate -- 6
Home equity 2 2
Other 26 32
------- -------
60 41
Net loans (recovered)/charged off (47) 24
Provision charged to income 135 90
------- -------
Balance at March 31 $ 5,416 4,356
======= =======
Annualized net (recoveries)/charge-offs: Average
loans outstanding (0.09%) 0.05%
======= =======
Allowance for loan losses: Gross loans 2.44% 2.25%
======= =======
Allowance for loan losses: Non-performing loans 664.54% 429.16%
======= =======
9
The following table sets forth non-performing assets at the dates indicated:
($ in thousands) March 31, December 31, March 31,
1999 1998 1998
--------- ------------ ----------
Loans on non-accrual:
Commercial $ 459 754 489
Residential real estate 112 113 76
Commercial real estate 18 63 85
Construction -- 174 --
Consumer, including home equity 138 159 300
------ ------ ------
Total loans on non-accrual 727 1,263 950
Loans past due >90 days, still accruing 88 97 65
------ ------ ------
Total non-performing loans 815 1,360 1,015
Other real estate owned 304 304 469
------ ------ ------
Total non-performing loans and real estate owned $1,119 1,664 1,484
====== ====== ======
Non-performing loans: Gross loans 0.37% 0.63% 0.53%
====== ====== ======
Non-performing loans and real estate owned: Total assets 0.30% 0.46% 0.44%
====== ====== ======
Delinquent loans 30-89 days past due: Gross loans 0.72% 0.68% 0.74%
====== ====== ======
Total non-performing loans decreased $0.2 million from March 31, 1998 to March
31, 1999. The ratio of non-performing loans to gross loans decreased from 0.53%
to 0.37% from March 31, 1998 to March 31, 1999.
Total non-performing loans decreased $0.5 million from December 31, 1998 to
March 31, 1999. The primary cause for the declines was the removal of several
commercial and construction loans from non-accrual status. The ratio of
non-performing loans to gross loans decreased from 0.63% as of December 31, 1998
to 0.37% as of March 31, 1999. The level of non-performing assets is largely a
function of economic conditions and the overall banking environment, as well as
the strength of the bank's loan underwriting. Non-performing loans remain at
historically low levels for the periods shown. Adverse changes in local,
regional or national economic conditions could negatively impact the level of
non-performing assets in the future, despite prudent underwriting.
Year 2000 Compliance
The statements in the following section include "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
This section contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended. The company's readiness
for the Year 2000, and the eventual effects of the Year 2000 on the company may
be materially different than projected.
The company is currently in the process of determining, testing and remediating
the impact of the so-called "millenium" or "Y2K" problem (i.e., that many
existing computer chips and programs use only two digits to identify the year in
a date field and if such programs are not corrected many computer applications
or computer chip dependent operations could fail or create erroneous results by
or beginning in the year 2000). While most view the project as a data processing
or computer concern, every department and function of the company is affected
and is included in the company's analysis and compliance process. The
remediation efforts discussed below relate to both information technology
systems (i.e. computer systems, phone systems, telecommunications, etc.) and
non-information technology systems (i.e. alarm systems, security systems,
elevators, electrical systems, etc.).
10
The company primarily utilizes internal resources to manage the Y2K remediation
process and test, update, and/or replace all software information systems for
Y2K modifications. The company has formed a "Year 2000 Steering Committee"
consisting of various members of senior management and all department managers.
The Year 2000 Steering Committee's purpose is to evaluate risks, formulate
timetables and allocate resources to ensure timely and effective completion of
Y2K testing and remediation. The company also has a technology committee,
consisting of certain members of the Board of Directors and management, which
oversees the Year 2000 Steering Committee and is responsible for ensuring proper
reporting of results to the full Board of Directors. One full time information
system specialist is solely devoted to Y2K issues. Many other employees are also
actively involved including each department manager, members of their staff and
the entire information systems department. The company also utilizes external
resources (information systems consultants, auditors, speakers, accountants,
etc.) as deemed necessary by the various committees and management.
Management has completed its assessment of Y2K issues, developed a plan, begun
testing its various software information systems and arranged for the required
resources, based on anticipated needs, to complete the necessary remediation.
Management has completed the changes to and testing of internal mission critical
information systems for the Y2K project and expects to complete the changes and
testing required for mission critical systems associated with service providers
by June 30, 1999, which is the timeframe established by the Federal Financial
Institutions Examination Council ("FFIEC"). Mission critical systems are those
critical to daily operations and failure of which would result in definite
disruption to business. Testing of the company's non-mission critical
applications will continue through 1999 and will be completed prior to any
anticipated impact on its operating systems. Contingency plans are also being
developed for each function so that the company is adequately prepared in the
event of a system failure, despite remediation efforts. A sub-committee of the
Y2K Steering Committee has been formed to facilitate preparation of contingency
plans. These contingency plans will be completed prior to June 30, 1999, in
accordance with FFIEC guidelines. Additionally, the bank has formed a coalition
with surrounding financial institutions to periodically meet and discuss
contingency plans and pool resources to deal with potential disruptions. (i.e.
failure of security systems, failure of electrical grids, cash needs, etc.).
Included in other non-interest expenses are charges incurred in connection with
the preparation, testing, modification or replacement of software and hardware
in connection with the process of rendering the company's computer systems Y2K
compliant. Excluding internal salary and benefit costs, approximately $10,000 in
costs associated with Y2K remediation efforts were expended through December 31,
1998 and $10,000 in the first quarter of 1999. Management expects that the costs
incurred to replace or upgrade existing hardware and software will be
capitalized and amortized in accordance with the company's existing accounting
policies, while miscellaneous consulting, salary, maintenance and modification
costs will be expensed as incurred. Anticipated future costs, excluding internal
salary and benefit costs, associated with Y2K compliance are estimated at
$150,000, which includes upgrades of security systems, modifications to the
automated teller machines, consulting costs and changes to the
telecommunications network. The estimated expenses in 1999 include consulting
fees for Year 2000 project management of $75,000. Due to short term personnel
constraints it was necessary to engage consultants to assist in the Year 2000
management process. Other than the one dedicated information system specialist
the company does not separately track the portion of its salary and benefit
costs allocable to the Y2K project. It is not anticipated that material
incremental costs will be incurred in any single period.
The cost of the project and the date on which the company plans to complete the
Y2K modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party availability and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, employee turnover,
non-compliance of the company's vendors or service providers and similar
uncertainties. The company is working closely with all of its vendors and
service providers to determine the extent to which the company is vulnerable to
those third parties' failure to remediate their own Y2K issues.
11
Management recognizes the potential risk of Y2K on the bank's customers. The
bank has approached the credit risk component of Y2K through education of all
lending officers, education of customers, analysis of the bank's loan portfolio,
and consideration of Y2K in the underwriting of loans. All lending officers were
required to undergo internal training to learn the potential risks of Y2K. The
bank has sponsored and intends to continue sponsoring numerous seminars for bank
customers, in addition to distribution of literature regarding Y2K to all
customers. In 1998, an analysis of the bank's commercial loan portfolio was
performed to determine potential exposure to Y2K risks. Increases in the
allowance for loan losses, solely as a result of Y2K, were not deemed necessary.
Any new commercial loans require an assessment of the customer's Y2K compliance
as part of preliminary underwriting. The need for additional provisions to the
bank's allowance for loan losses resulting from borrowers' Y2K compliance
problems will be considered, on an ongoing basis, based on management's
assessment of the potential exposure of its customer base to such problems.
The internal and external risks associated with Y2K are numerous. The company is
addressing the Y2K issue in accordance with regulatory guidelines promulgated by
the FFIEC. However, there can be no guarantee that the systems of the company,
bank customers or other associated companies (i.e. electric company, telephone
company, printing companies, office supply companies, etc.) will be timely
remediated. There can be no guarantee that the systems of third party vendors on
which the company's systems rely will be timely remediated. The failure of the
company or a critical third party vendor to timely remediate Y2K issues might
cause, among other things, systems malfunctions, incorrect or incomplete
transaction processing or the inability to reconcile accounting books and
records.
The company's operations and/or financial condition could possibly be negatively
impacted to the extent the company, customers or entities doing business with
the company are unsuccessful in timely and properly addressing their respective
Y2K compliance responsibilities.
12
Results of Operations
Three Months Ended March 31, 1999 vs. Three Months Ended March 31, 1998
The company reported net income of $961,000 for the three months ended March 31,
1999, versus $803,000 for the three months ended March 31, 1998, or an increase
of 19.7%. The company had basic earnings per common share of $0.30 and $0.25 for
the three months ended March 31, 1999 and March 31, 1998, respectively. Diluted
earnings per share were $0.29 and $0.24 for the three months ending March 31,
1999 and March 31,1998, respectively.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
Three months ended March 31,
----------------------------
($ in thousands) 1999 1998
---------- ---------
Average assets $ 355,779 322,992
Average deposits and short-term borrowings 325,519 297,182
Average investment securities (1) 115,022 112,601
Average loans, net of deferred loan fees 217,157 185,902
Net interest income 3,980 3,640
Provision for loan losses 135 90
Tax expense 398 445
Average loans : Average deposits and borrowings 66.71% 62.55%
Non interest expense : Average assets (2) 3.54% 3.68%
Non interest income, exclusive of securities
gains : Average assets (2) .71% .70%
Average tax equivalent rate earned on interest earning assets 8.12% 8.32%
Average rate paid on interest bearing deposits and
short-term borrowings 3.85% 4.00%
Net yield on average earning assets 5.04% 5.04%
<FN>
(1) Average investment securities are shown at average amortized cost
(2) Ratios have been annualized based on number of days for the period
</FN>
Net Interest Income
The company's net interest income was $3,980,000 for the three months ended
March 31, 1999, an increase of $340,000 or 9.3% from $3,640,000 for the three
months ended March 31, 1998. Interest income increased $462,000, primarily a
result of an increase of average loan balances of $31.3 million, or 16.8% from
the quarter ended March 31, 1998 to the quarter ended March 31, 1999. The
increase in interest income was partially offset by an increase in interest
expense of $122,000, primarily due to an increase in average deposits and
short-term borrowings of $22.5 million over the same period.
The average tax-equivalent yield on earning assets in the three months ended
March 31, 1999, was 8.12%, down 20 basis points from 8.32% in the three months
ended March 31, 1998. The average rate paid on interest bearing deposits and
short-term borrowings in the three months ended March 31, 1999, was 3.85%, a
decrease of 15 basis points from 4.00% in the three months ended March 31, 1998.
The resulting interest rate spread decreased 5 basis points to 4.27% in the
three months ended March 31, 1999, from 4.32% in the three months ended March
31, 1998. The decline in the average loan yield from 9.45% to 8.92%, from March
31, 1998 to March 31, 1999, was primarily a result of the prime rate declining
by 75 basis points in the fourth quarter of 1998. Similarly, the decline in
average deposit rates paid was a result of declining market rates offered during
the same period.
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the three months ended March 31, 1999, and 1998. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average portfolio
balance multiplied by prior year average rate); (2) interest rate (change in
average interest rate multiplied by prior year average balance); and (3) rate
and volume (the remaining difference).
13
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended March 31, 1999 Three Months Ended March 31, 1998
--------------------------------- ---------------------------------
Average Interest Average Interest
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3)
-------- -------- --------- ------- -------- ---------
Assets:
Loans (1) (2) $217,157 $4,774 8.92% $185,902 $ 4,331 9.45%
Investment securities (3) 115,022 1,712 6.74 112,601 1,713 6.50
Federal funds sold 3,842 44 4.64 1,691 24 5.76
-------- ------ -------- -------
Total interest earnings assets 336,021 6,530 8.12% 300,194 6,068 8.32%
------ -------
Other assets (4) 19,758 22,798
-------- --------
Total assets $355,779 $322,992
======== ========
Liabilities and stockholders' equity:
Savings, NOW and money market $109,779 553 2.04% $106,538 588 2.24%
Time deposits 144,369 1,845 5.18 122,760 1,671 5.52
Short-term borrowings 14,380 152 4.29 16,762 169 4.09
-------- ------ -------- -------
Interest bearing deposits and borrowings 268,528 2,550 3.85% 246,060 2,428 4.00%
-------- ------ -------- -------
Non-interest bearing deposits 56,991 51,122
Other liabilities 3,706 2,187
-------- --------
Total liabilities 329,283 299,369
Stockholders' equity 26,496 23,623
-------- --------
Total liabilities and
Stockholders' equity $355,779 $322,992
======== ========
Net interest rate spread 4.27% 4.32%
Net interest income $3,980 $3,640
====== ======
Net yield on average earning assets 5.04% 5.04%
($ in thousands) Changes due to
---------------------------------------------------
Interest Rate/
Total Volume Rate Volume
----- ------ -------- ------
Assets:
Loans (1) (2) $ 443 $ 728 $ (243) $ (42)
Investment securities (3) (1) 39 67 (107)
Federal funds sold 20 31 (5) (6)
----- ----- ------ -----
Total interest earnings assets 462 798 (181) (155)
----- ----- ------ -----
Other assets (4)
Total assets
Liabilities and stockholders' equity:
Savings, NOW and money market (35) 18 (53) --
Time deposits 174 294 (103) (17)
Short-term borrowings (17) (24) 8 (1)
----- ----- ------ -----
Interest bearing deposits and borrowings 122 288 (148) (18)
----- ----- ------ -----
Non-interest bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
Stockholders' equity
Net interest rate spread
Net interest income $ 340 $ 510 $ (33) $(137)
===== ===== ====== =====
Net yield on average earning assets
<FN>
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis.
(4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, real estate acquired by
foreclosure, deferred income taxes and other miscellaneous assets.
</FN>
The bank manages its earning assets by fully using available capital resources
within what management believes are prudent credit and leverage parameters.
Loans, investment securities, and federal funds sold comprise the bank's earning
assets.
14
The provision for loan losses amounted to $135,000 and $90,000 for the three
months ended March 31, 1999 and March 31, 1998, respectively. With the growth in
the company's loan portfolio during 1997 and early 1998, the ratio of the
allowance for loan losses to gross loans had declined. In the second quarter of
1998, management determined that further erosion of the ratio was not prudent
and increased the provision to keep pace with further growth in the loan
portfolio. Loans, before the allowance for loan losses, have increased from
$193.3 million, at March 31, 1998, to $221.8 million, at March 31, 1999, or an
increase of 14.8%. Although there has not been an increase in problem assets,
management recognizes the increased risk and the need for additional reserves as
the loan balances increase. The provision reflects real estate values and
economic conditions in New England and in Greater Lowell, in particular, the
level of non-accrual loans, levels of charge-offs and recoveries, levels of
outstanding loans, known and inherent risks in the nature of the loan portfolio
and management's assessment of current risk. The provision for loan losses is a
significant factor in the bank's operating results.
Non-Interest Income
Non-interest income, exclusive of security gains, increased by $63,000 to
$622,000 for the three months ended March 31, 1999, compared to $559,000 for the
three months ended March 31, 1998. This increase was primarily caused by an
increase in trust fees of $48,000.
Trust fees increased by $48,000, or 20.3%, for the three months ended March 31,
1999 compared to the same period in 1998 due to an increase in trust assets.
Trust assets increased from $180.3 million at March 31, 1998 to $200.7 million
at March 31, 1999.
Deposit fees decreased by $14,000, or 6.4%, for the three months ended March 31,
1999, compared to the three months ended March 31, 1998, due primarily to a
decrease in overdrafts.
Other income for the three months ended March 31, 1999, was $78,000, a decrease
of 7.1%, from $84,000 for the three months ended March 31, 1998, due primarily
to a decrease in letter of credit fees.
Non-Interest Expenses
Salaries and benefits expense totaled $1,873,000 for the three months ended
March 31, 1999, compared with $1,678,000 for the three months ended March 31,
1998, an increase of $195,000 or 11.6%. This increase was primarily the result
of new hires to support the overall growth of the bank, and annual salary
increases.
Occupancy expense was $577,000 for the three months ended March 31, 1999,
compared with $555,000 for the three months ended March 31, 1998, an increase of
$22,000 or 4.0%. The increase was primarily due to the addition and renovation
of new facilities for the bank's accounting and loan servicing departments and
the customer service center.
Advertising and public relations expenses increased by $18,000, or 17.0%, for
the three months ended March 31, 1999 compared to the same period in 1998. The
increase was primarily attributed to expenses associated with the advertisements
for new employees and timing of other advertising programs.
Audit, legal and other professional expenses decreased by $6,000, or 4.8% for
the three months ended March 31, 1999 compared to the prior year period,
primarily due to professional services engaged by the bank in 1998, but not in
the three months ended March 31, 1999.
Trust, professional and custodial expenses decreased by $7,000, or 9.5%, for the
three months ended March 31, 1999 as compared to the same period in 1998. The
decrease was primarily due to the timing of certain professional management fees
in 1998.
Office and data processing supplies expense decreased by $32,000, or 34.4%, for
the three months ended March 31, 1999 compared to the same period in the prior
year. The decrease was primarily due to various cost saving initiatives.
15
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, Federal Home Loan Bank
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-KSB for the year ended
December 31, 1998.
16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities and Use of Proceeds
Not Applicable
Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
The following exhibits are included with this report:
3.1 Restated Articles of Organization of the Company, as
amended through May 10,1999.
10.17 Split Dollar Agreement for Richard W. Main
10.18 Split Dollar Agreement for Robert R. Gilman
27.1 Financial Data Schedule (included with electronic
copy only)
17
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 14, 1999 /s/ John P. Clancy, Jr.
John P. Clancy, Jr.
Senior Vice President, Chief Financial Officer,
Chief Investment Officer and Treasurer
18