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, 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: April 30, 2001 Common Stock - Par Value $0.01, 3,411,167 shares outstanding 1
ENTERPRISE BANCORP, INC. INDEX Page Number Cover Page 1 Index 2 PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets - March 31, 2000 and December 31, 2000 3 Consolidated Statements of Income - Three months ended March 31, 2001 and 2000 4 Consolidated Statements of Changes in Stockholders' Equity-Three months ended March 31, 2001 5 Consolidated Statements of Cash Flows - Three months ended March 31, 2001 and 2000 6 Notes to Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 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 (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
<TABLE> <CAPTION> ENTERPRISE BANCORP, INC. Consolidated Balance Sheets March 31, December 31, 2001 2000 ($ in thousands) (Unaudited) ------------- ------------ Assets Cash and cash equivalents <S> <C> <C> Cash and due from banks $ 26,698 26,080 Daily federal funds sold 30,000 28,025 ------------- ------------ Total cash and cash equivalents 56,698 54,105 Investment securities at fair value 196,661 185,184 Loans, less allowance for loan losses of $6,459 at March 31, 2001 and $6,220 at December 31 2000, respectively 317,962 305,598 Premises and equipment 10,960 10,903 Accrued interest receivable 3,736 4,078 Deferred income taxes, net 1,700 2,209 Prepaid expenses and other assets 3,069 2,735 Income taxes receivable 28 415 Intangible assets, net of amortization 7,389 7,587 ------------- ------------- Total assets $ 598,203 572,814 ============= ============= Liabilities, Trust Preferred Securities and Stockholders' Equity Deposits $ 472,948 461,975 Short-term borrowings 70,610 58,271 Escrow deposits of borrowers 1,238 1,106 Accrued expenses and other liabilities 3,352 3,418 Accrued interest payable 1,019 1,389 ------------- ------------- Total liabilities 549,167 526,159 ------------- ------------- 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; 3,409,542 and 3,408,667 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively 34 34 Additional paid-in capital 17,849 17,843 Retained earnings 17,974 16,793 Accumulated other comprehensive income 2,679 1,485 ------------- -------------- Total stockholders' equity 38,536 36,155 ------------- -------------- Total liabilities, trust preferred securities and stockholders' equity $ 598,203 572,814 ============= ============== </TABLE> 3
<TABLE> <CAPTION> ENTERPRISE BANCORP, INC. Consolidated Statements of Income Three months ended March 31, 2001 and 2000 March 31, March 31, ($ in thousands, except per share data) 2001 2000 (Unaudited) (Unaudited) ---------------- -------------- Interest and dividend income: <S> <C> <C> Loans $ 7,076 5,895 Investment securities 3,023 2,460 Federal funds sold 219 - -------------- -------------- Total interest income 10,318 8,355 ------------- -------------- Interest expense: Deposits 3,290 2,680 Short-term borrowings 777 955 ------------- -------------- Total interest expense 4,067 3,635 ------------- -------------- Net interest income 6,251 4,720 Provision for loan losses 210 126 ------------- -------------- Net interest income after provision for loan losses 6,041 4,594 ------------- -------------- Non-interest income: Investment management and trust service fees 506 333 Deposit service fees 346 214 Net gains on sales of investment securities 390 - Gains on sales of loans 62 10 Other income 202 111 ------------- -------------- Total non-interest income 1,506 668 ------------- -------------- Non-interest expense: Salaries and employee benefits 3,261 2,345 Occupancy expenses 955 721 Advertising and public relations 140 84 Audit, legal and other professional fees 152 125 Trust professional and custodial expenses 182 99 Office and data processing supplies 139 102 Trust preferred expense 290 29 Amortization of intangible assets 198 - Other operating expenses 609 451 ------------- -------------- Total non-interest expense 5,926 3,956 ------------- -------------- Income before income taxes 1,621 1,306 Income tax expense 440 337 ------------- -------------- Net income $ 1,181 969 ============= ============== Basic earnings per average common share outstanding $ 0.35 0.30 ============= ============== Diluted earnings per average common share outstanding $ 0.34 0.29 ============= ============== Basic weighted average common shares outstanding 3,409,093 3,230,538 ============= ============== Diluted weighted average common shares outstanding 3,489,837 3,324,767 ============= ============== </TABLE> 4
<TABLE> <CAPTION> ENTERPRISE BANCORP, INC. Consolidated Statements of Changes in Stockholders' Equity Three months ended March 31, 2001 Common Stock Additional Comprehensive Income Total -------------------------- Paid-in Retained ----------------------- Stockholders' ($ in thousands) Shares Amount Capital Earnings Period Accumulated Equity ---------- ---------- ----------- ----------- -------- ------------ ----------- <S> <C> <C> <C> <C> <C> <C> Balance at December 3,408,667 $ 34 $ 17,843 $ 16,793 $ 1,485 $36,155 31, 2000 Comprehensive income Net income 1,181 $ 1,181 1,181 Unrealized appreciation on securities, net of reclassification 1,194 1,194 1,194 ------- Total comprehensive income, $ 2,375 net of tax ======= Stock options exercised 875 - 6 6 --------- ------ -------- --------- -------- ------- Balance at March 31, 3,409,542 $ 34 $ 17,849 $ 17,974 $ 2,679 $38,536 2001 ========= ====== ======== ========= ======== ======= Disclosure of reclassification amount: Gross unrealized holding appreciation $ 2,198 arising during the period Tax expense (747) ------- Unrealized holding appreciation, net 1,451 of tax ------- Less: reclassification adjustment for net gains included in net income (net 257 of $133 tax) ------- Net unrealized appreciation on $ 1,194 securities ======= </TABLE> 5
<TABLE> <CAPTION> ENTERPRISE BANCORP, INC. Consolidated Statements of Cash Flows Three months ended March 31, 2001 and 2000 March 31, March 31, 2001 2000 ($ in thousands) (Unaudited) (Unaudited) --------------- --------------- Cash flows from operating activities: <S> <C> <C> Net income $ 1,181 969 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 210 126 Depreciation and amortization 530 393 Amortization of intangible assets 198 - Net gains on sales of investment securities (390) - Gains on sales of loans (62) (10) (Increase) decrease in: Loans held for sale 311 752 Accrued interest receivable 342 80 Prepaid expenses and other assets (334) (1,007) Deferred income taxes (105) (63) Income taxes receivable 387 15 Increase (decrease) in: Accrued expenses and other liabilities (66) (939) Accrued interest payable (370) 148 ------------- -------------- Net cash provided by operating activities 1,832 464 ------------- -------------- Cash flows from investing activities: Proceeds from maturities, calls and paydowns of investment securities 4,091 1,488 Proceeds from sales of investment securities 10,037 - Purchase of investment securities (23,437) (15,347) Net increase in loans (12,823) (4,410) Additions to premises and equipment, net (557) (548) ------------- -------------- Net cash used in investing activities (22,689) (18,817) ------------- -------------- Cash flows from financing activities: Net increase in deposits, including escrow deposits 11,105 33,131 Net increase (decrease) in short-term borrowings 12,339 (25,892) Proceeds from issuance of trust preferred securities - 10,500 Stock options exercised 6 383 ------------- -------------- Net cash provided by financing activities 23,450 18,122 ------------- -------------- Net increase (decrease) in cash and cash equivalents 2,593 (231) Cash and cash equivalents at beginning of period 54,105 17,089 ------------- -------------- Cash and cash equivalents at end of period $ 56,698 16,858 ============= ============== </TABLE> 6
<TABLE> <CAPTION> ENTERPRISE BANCORP, INC. Consolidated Statements of Cash Flows (Continued) Three months ended March 31, 2001 and 2000 Supplemental financial data: Cash paid for: <S> <C> <C> Interest expense $ 4,722 3,487 Income taxes 200 438 </TABLE> 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. The increase in average shares outstanding, using the treasury stock method, for the diluted earnings per share calculation were 80,744 and 94,229 for the quarters ended March 31, 2001 and March 31, 2000, 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 $493,000 of the dividends paid by the company in 2000 into 47,800 shares of the company's common stock. (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 to identified intangible assets and goodwill (combined "intangible assets") and is being amortized over a ten-year period. (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 $10.8 million in aggregate principal amount of the company's 10.875% Junior Subordinated Deferrable Interest Debentures due 2030. The company has, through the Declaration of Trust establishing the Trust, fully and unconditionally guaranteed on a subordinated basis all of the Trust's obligations with respect to distributions and amounts payable upon liquidation, redemption or repayment. (7) Reclassification Certain fiscal 2000 information has been reclassified to conform to the 2001 presentation. 8
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Capital Resources The company's actual capital amounts and capital adequacy ratios are presented in the table below. The bank's capital amounts and ratios do not differ materially from the amounts and ratios presented. <TABLE> <CAPTION> Minimum Capital Minimum Capital for Capital to be Actual Adequacy Purposes Well Capitalized ------------------------- ------------------------ --------------------------- ($ in thousands) Amount Ratio Amount Ratio Amount Ratio -------------- --------- ------------- --------- ------------ ------------ As of March 31, 2001: Total Capital <S> <C> <C> <C> <C> <C> <C> (to risk weighted assets) $ 43,618 11.93% $ 23,837 8.00% $ 29,797 10.00% Tier 1 Capital (to risk weighted assets) 39,023 10.67% 11,919 4.00% 17,878 6.00% Tier 1 Capital* (to average assets) 39,023 6.96% 17,902 4.00% 22,378 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. </TABLE> On April 17, 2001, the board of directors declared a dividend in the amount of $0.2875 per share to be paid on or about 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 $25.4 million, or 4.4 %, since December 31, 2000. The increase is primarily attributable to increases in investment securities of $11.5 million and gross loans of $12.6 million. The increase in assets was funded primarily by growth in deposits and short-term borrowings of $11.1 and $12.3 million, respectively. Investments At March 31, 2001 all of the bank's investment securities were classified as available-for-sale and carried at fair value. The net unrealized appreciation at March 31, 2001 was $4.1 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 bank'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 $324.4 million, or 54.2% of total assets, at March 31, 2001, compared to $311.8 million, or 54.4% of total assets, at December 31, 2000. The increase in loans of $12.6 million for the quarter ended March 31, 2001 was primarily attributed to originations for commercial and commercial real estate loans and drawdowns on commercial lines of credit. 9
Deposits and Borrowings Total deposits, including escrow deposits of borrowers, increased $11.1 million, or 2.4%, during the first three months of 2001, from $463.1 million at December 31, 2000, to $474.2 million at March 31, 2001. The increase of $11.1 million consists of growth of $25.9 million in savings, checking and money market deposits primarily attributable to sales efforts and increased market penetration, offset by a $14.8 million decrease in certificates of deposit primarily attributable to interest rate decreases during the first quarter of 2001. Short-term borrowings, consisting of securities sold under agreements to repurchase and Federal Home Loan Bank ("FHLB") borrowings, increased $12.3 million, or 21.2%, from $58.3 million at December 31, 2000 to $70.6 million at March 31, 2001. The increase was primarily attributable to growth of $12.4 million in commercial sweep balances, which along with term repurchase agreements are classified as securities sold under agreements to repurchase. The bank had $470,000 in borrowings outstanding from the FHLB at March 31, 2001. Loan Loss Experience/Non-performing Assets The following table summarizes the activity in the allowance for loan losses for the periods indicated: <TABLE> <CAPTION> Three months ended March 31, ($ in thousands) 2001 2000 ------------- -------------- <S> <C> <C> Balance at beginning of year $ 6,220 5,446 Loans charged-off Commercial - 24 Commercial real estate - - Construction - - Residential real estate - - Home equity - - Other 20 2 ------------- -------------- 20 26 Recoveries on loans charged off Commercial 25 21 Commercial real estate - 11 Construction - - Residential real estate 20 - Home equity - - Other 4 - ------------- -------------- 49 32 Net loan recoveries 29 6 Provision charged to operations 210 126 ------------- -------------- Balance at March 31 $ 6,459 5,578 ============= ============== Annualized net recoveries: Average loans outstanding 0.04% 0.01% ============= ============== Allowance for loan losses: Gross loans 1.98% 2.10% ============= ============== Allowance for loan losses: Non-performing loans 614.56% 242.21% ============= ============== </TABLE> 10
<TABLE> <CAPTION> The following table sets forth non-performing assets at the dates indicated: ($ in thousands) March 31, December 31, March 31, 2001 2000 2000 ------------- ------------- ------------- <S> <C> <C> <C> Non-accrual loans $ 1,051 1,054 2,294 Accruing loans > 90 days past due - 26 9 ------------- ------------- ------------- Total non-performing loans 1,051 1,080 2,303 Other real estate owned - - - ------------- ------------- ------------- Total non-performing assets $ 1,051 1,080 2,303 ============= ============= ============= Non-performing loans: Gross loans 0.32% 0.34% 0.87% ============= ============= ============= Non-performing assets: Total assets 0.18% 0.19% 0.50% ============= ============= ============= Delinquent loans 30-89 days past due: Gross loans 0.18% 0.14% 0.41% ============= ============= ============= </TABLE> Total non-performing assets decreased $1.3 million from March 31, 2000 to March 31, 2001, and the ratio of non-performing loans to gross loans decreased from 0.50% to 0.18% over the same period. The decreases are primarily attributable to non-performing loans paid off and a strong economy during 2000. The level of non-performing assets is largely a function of economic conditions and the overall banking environment, as well as the strength of the bank's loan underwriting. Adverse changes in local, regional or national economic conditions could negatively impact the level of non-performing assets in the future, despite prudent underwriting. 11
Results of Operations Three Months Ended March 31, 2001 vs. Three Months Ended March 31, 2000 The company reported net income of $1,181,000 for the three months ended March 31, 2001, versus $969,000 for the three months ended March 31, 2000. The company had basic earnings per common share of $0.35 and $0.30 and diluted earnings per share of $0.34 and $0.29 for the three months ending March 31, 2001 and March 31, 2000, respectively. The following table highlights changes, which affected the company's earnings for the periods indicated: <TABLE> <CAPTION> Three months ended March 31, ($ in thousands) 2001 2000 ------------- -------------- <S> <C> <C> <C> Average assets (1) $ 569,020 451,006 Average deposits and short-term borrowings 518,825 416,031 Average investment securities and fed funds sold (1) 209,924 164,628 Average loans, net of deferred loan fees 315,273 260,128 Net interest income 6,251 4,720 Provision for loan losses 210 126 Tax expense 440 337 Average loans: Average deposits and borrowings 60.77% 62.53% Non-interest expense: Average assets (2) 4.22% 3.53% Non-interest income: Average assets (2) (3) 0.80% 0.60% Average tax equivalent rate earned on interest 8.14% 8.11% earning assets Average rate paid on interest bearing deposits and short-term borrowings 3.92% 4.20% Net interest margin 5.00% 4.67% (1) Excludes the effect of SFAS No. 115 (2) Ratios have been annualized based on number of days for the period (3)Excludes net gains on sales of investment securities </TABLE> Net Interest Income The company's net interest income was $6,251,000 for the three months ended March 31, 2001, an increase of $1,531,000 or 32.4% from $4,720,000 for the three months ended March 31, 2000. Interest income increased $1,963,000, primarily resulting from increases in average loan balances of $55.1 million, or 21.2%, and average investment security and fed funds sold balances of $45.3 million, or 27.5%, from the quarter ended March 31, 2000 to the quarter ended March 31, 2001. Included in the average loan balance at March 31, 2001 are $7.0 million in loans purchased from Fleet National Bank. The increase in interest income was partially offset by an increase in interest expense of $432,000, primarily due to an increase of $508,000 in savings, personal interest checking ("PIC") and money market interest expense resulting from an average balance increase of $81.3 million and an increases in time deposit interest expense of $102,000 offset by a decrease in short-term borrowing expense of $178,000 over the same period. The average balance on time deposits decreased to $150.9 million at March 31, 2001 from $153.9 million at March 31, 2000. The average balance on short-term borrowings decreased to $62.8 million at March 31, 2001 from $67.8 million at March 31, 2000. The change consists of an increase in repurchase agreements of $32.5 million offset by a decrease in FHLB borrowings of $37.5 million. Included in the average deposit balance at March 31, 2001 are $34.7, $14.0 and $9.6 million in savings/PIC/MMDA, time, and non-interest bearing deposits, respectively, assumed from Fleet National Bank on July 21, 2000. The average tax-equivalent yield on earning assets in the three months ended March 31, 2001, was 8.14%, up 3 basis points from 8.11% in the three months ended March 31, 2000. The average rate earned on loans decreased 1 basis point from 9.11% at March 31, 2000 to 9.10% at March 31, 2001. The average tax equivalent rate earned on investment securities increased to 6.79% at March 31, 2001 from 6.53 % at March 31, 2000 primarily due to investment securities purchased during the 2nd quarter of 2000 when market rates were at a higher point in the interest rate cycle. 12
The average rate paid on interest bearing deposits and short-term borrowings for the three months ended March 31, 2001, was 3.92%, a decrease of 28 basis points from 4.20% for the three months ended March 31, 2000. The resulting interest rate spread increased 31 basis points to 4.22% for the three months ended March 31, 2001, from 3.91% for the three months ended March 31, 2000. The average rate paid on savings/PIC/money markets accounts increased to 2.42% from 2.33% for the period ended March 31, 2001 versus the same period in 2000, primarily from growth in tiered rate business savings and tiered rate personal money market accounts, which were introduced in late 1999 and mid 2000, respectively. The average rate paid on certificates of deposit increased to 5.51% at March 31, 2001 compared to 5.09% March 31, 2000. The increase is primarily attributable to higher market rates on certificates of deposit originated in 2000. The average rate paid on short-term borrowings, which includes repurchase agreements and FHLB borrowings, decreased from 5.66% at March 31, 2000 to 5.02% at March 31, 2001 primarily due to pay downs of higher costing FHLB borrowings, which were accomplished in part through the use of the net proceeds received by the bank in connection with the Fleet Branch acquisition. Net interest margin increased to 5.00% at March 31, 2001 from 4.67% at March 31, 2000, primarily due to the 28 basis point decrease in the rate paid on interest bearing deposits and short-term borrowings and the 3 basis point increase in yield on interest earning assets. 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, 2001, and March 31, 2000, respectively. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to: (1) volume (change in average portfolio balance multiplied by prior year average rate); (2) interest rate (change in average interest rate multiplied by prior year average balance); and (3) rate and volume (the remaining difference). 13
<TABLE> <CAPTION> AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES Three Months Ended March 31, 2001 Three Months Ended March 31, 2000 ------------------------------------- ------------------------------------------- Average Interest Average Interest ($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3) ---------- ------------ --------- ------------ -------------- --------- Assets: <S> <C> <C> <C> <C> <C> <C> <C> <C> Loans (1) (2) $ 315,273 $ 7,076 9.10% $ 260,128 $ 5,895 9.11% Investment securities (3) (5) 194,120 3,023 6.79 164,628 2,460 6.53 Federal funds sold 15,804 219 5.61 - - - ---------- ---------- ---------- ---------- Total interest earnings assets 525,197 10,318 8.14% 424,756 8,355 8.11% ---------- ---------- Other assets (4) (5) 43,823 26,250 ---------- ---------- Total assets (5) $ 569,020 $ 451,006 ========== ========== Liabilities and stockholders' equity: Savings/PIC/MMDA $ 207,408 1,238 2.42% $ 126,074 730 2.33% Time deposits 150,947 2,052 5.51 153,941 1,950 5.09 Short-term borrowings 62,813 777 5.02 67,838 955 5.66 Interest bearing deposits and 421,168 4,067 3.92% 347,853 3,635 4.20% Borrowings ---------- ---------- ---------- Non-interest bearing deposits 97,657 68,178 Other liabilities 3,670 3,039 ---------- ---------- Total liabilities 522,495 419,070 Trust preferred securities 10,500 1,038 Stockholders' equity (5) 36,025 30,898 ---------- ---------- Total liabilities, trust preferred securities and stockholders' equity $ 569,020 $ 451,006 (5) ========== ========== Net interest rate spread 4.22% 3.91% Net interest income $ 6,251 $ 4,720 ========== ========== Net interest margin 5.00% 4.67% </TABLE> 14
<TABLE> <CAPTION> Changes due to ($ in thousands) ----------------------------------------------------------------- Interest Rate/ Assets: Total Volume Rate Volume ---------- ------------ ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Loans (1) (2) $ 1,181 $ 1,239 $ (8) $ (50) Investment securities (3) (5) 563 475 105 (17) Federal funds sold 219 219 - - ---------- ------------ ----------- ----------- Total interest earnings assets 1,963 1,933 97 (67) ---------- ------------ ----------- ----------- Other assets (4) (5) Total assets (5) Liabilities and stockholders' equity: Savings/PIC/MMDA 508 467 29 12 Time deposits 102 (38) 159 (19) Short-term borrowings (178) (70) (108) - --------- ----------- ----------- ----------- Interest bearing deposits and Borrowings $ 432 359 80 (7) --------- ----------- ----------- ----------- Non-interest bearing deposits Other liabilities Total liabilities Trust preferred securities Stockholders' equity (5) Total liabilities, trust preferred securities and stockholders' equity (5) Net interest rate spread Net interest income 1,531 $ 1,574 $ 17 $ (60) ========= ============ ============ ============ Net interest margin </TABLE> (1) Average loans include non-accrual loans. (2) Average loans are net of average deferred loan fees. (3) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis. (4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, deferred income taxes, intangible assets, and other miscellaneous assets. (5) Excludes the effect of SFAS No. 115 The bank manages its earning assets by fully using available capital resources within what management believes are prudent credit and leverage parameters. Loans, investment securities, and federal funds sold comprise the bank's earning assets. 15
Provision for Loan Losses The provision for loan losses amounted to $210,000 and $126,000 for the three months ended March 31, 2001 and March 31, 2000, respectively. The provision reflects real estate values and economic conditions in New England and in Greater Lowell, in particular, the level of non-accrual loans, levels of charge-offs and recoveries, levels of outstanding loans, known and inherent risks in the nature of the loan portfolio and management's assessment of current risk. The provision for loan losses is a significant factor in the bank's operating results. Non-Interest Income Non-interest income increased by $838,000 to $1,506,000 for the three months ended March 31, 2001, compared to $668,000 for the three months ended March 31, 2000. This increase was primarily caused by increases in net gains on security sales of $390,000, investment management and trust service fees of $173,000, deposit service fees of $132,000, gains on loan sales of $52,000 and other income of $91,000. Net gains on sales of investment securities amounted to $390,000 and $0 for the three months ended March 31, 2001 and March 31, 2000, respectively. The gains resulted from management's decision to take advantage of certain investment opportunities and asset/liability repositioning. Investment management and trust service fees increased by $173,000, or 52.0%, for the three months ended March 31, 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 increased from $238.8 million at March 31, 2000 to $276.2 million at March 31, 2001. Deposit service fees increased by $132,000, or 61.7%, for the three months ended March 31, 2001, compared to the three months ended March 31, 2000, due primarily to an increase in savings, checking and money market balances of $124.0 million, or 60% from March 31, 2000 to March 31, 2001. The deposit balance increase resulted in higher checking and overdraft fees. Included in the aforementioned deposit growth are $44.3 million in savings, PIC, and money market balances assumed from Fleet National Bank on July 21, 2000. Gains on loan sales increased by $52,000 for the three months ended March 31, 2001, compared to the three months ended March 31, 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 March 31, 2001, was $202,000 compared to $111,000 for the three months ended March 31, 2000, due primarily to increases in debit card fees, ATM surcharges, check printing fees, safe deposit fees and wire transfer fees. Non-Interest Expenses Salaries and benefits expense totaled $3,261,000 for the three months ended March 31, 2001, compared with $2,345,000 for the three months ended March 31, 2000, an increase of $916,000 or 39.1%. This increase was primarily due to the acquisition of the Fleet branches, new hires due to bank growth, strategic initiatives implemented by the bank, and annual pay raises. Occupancy expense was $955,000 for the three months ended March 31, 2001, compared with $721,000 for the three months ended March 31, 2000, an increase of $234,000 or 32.5%. The increase was primarily due to the acquisition of the Fleet branches, office renovations for operational support departments and loan officers and ongoing enhancements to the bank's computer systems. Advertising and public relations expenses increased by $56,000 for the three months ended March 31, 2001 compared to the same period in 2000 primarily due to the timing of expenses associated with the advertising programs and bank growth. Audit, legal and other professional expenses increased by $27,000 for the three months ended March 31, 2001 compared to the same period in 2000 primarily resulting from increased compliance and audit related expenses associated with the bank's growth. 16
Trust professional and custodial expenses increased by $83,000 for the three months ended March 31, 2001 as compared to the same period in 2000. The increase was primarily due to asset growth and an increase in professional management fees as a percentage of assets. Office and data processing supplies expense increased by $37,000 for the three months ended March 31, 2001 compared to the same period in 2000. The increase was primarily due to the timing of purchases and growth. Trust preferred expense was $290,000 and $29,000 for the three months ended March 31, 2001 and March 31, 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 $198,000 and $0 for the three months ended March 31, 2001 and March 31, 2000, respectively. The expense consists of intangible assets acquired in connection with the Fleet branch acquisition, which are being amortized over ten years. Other operating expense was $609,000 and $451,000 for the three months ended March 31, 2001 and March 31, 2000, respectively. The increase of $158,000 is primarily due to the bank's growth and consists of increased expenses for ATM's, courier services, general insurance, telephone, postage, internet banking and EDP system security. Income Tax Expense Income tax expense and the effective tax rate for the three months ended March 31, 2001 and March 31, 2000 were $440,000 and 27.1% and $337,000 and 25.8%, 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 and 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. 17
PART II OTHER INFORMATION Item 1 Legal Proceedings Not Applicable Item 2 Changes in Securities and Use of Proceeds Not Applicable Item 3 Defaults upon Senior Securities Not Applicable Item 4 Submission of Matters to a Vote of Security Holders Not Applicable Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K The following exhibits are included with this Report: 27.0 Financial data schedule (electronic copy only) 18
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 11, 2001 /s/ John P. Clancy, Jr. ------------------------ John P. Clancy, Jr. Treasurer 19