U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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:
August 13, 2002 Common Stock - Par Value $0.01 3,522,516 shares outstanding
ENTERPRISE BANCORP, INC.
INDEX
Page Number
Cover Page 1
Index 2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets -June 30, 2002 and December 31, 2001 3
Consolidated Statements of Income -
Three and six months ended June 30, 2002 and 2001 4
Consolidated Statement of Changes in Stockholders' Equity - 5
Six months ended June 30, 2002
Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures About Market Risk 21
PART II OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities and Use of Proceeds 22
Item 3 Defaults upon Senior Securities 22
Item 4 Submission of Matters to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
Signature Page 23
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, auditing or other standards, policies and practices, as may be
adopted or established by the regulatory agencies, the Financial Accounting
Standards Board or the Public Company Accounting Oversight Board.
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
June 30,2002 Dec. 31, 2001
(Dollars in thousands) (Unaudited)
----------------- -----------------
Assets
Cash and equivalents:
Cash and due from banks $ 33,845 $ 31,361
Daily federal funds sold 24,500 6,500
--------------- ---------------
Total cash and cash equivalents 58,345 37,861
--------------- ---------------
Investment securities at fair value 202,605 197,060
Loans, less allowance for loan losses of $8,900 at June 30, 2002 and
$8,547 at December 31, 2001 387,555 367,780
Premises and equipment 13,341 12,136
Accrued interest receivable 3,575 3,586
Deferred income taxes, net 2,009 2,034
Prepaid expenses and other assets 3,585 2,990
Income taxes receivable 479 301
Intangible assets 6,400 6,796
---------------- ---------------
Total assets $ 677,894 $ 630,544
================ ===============
Liabilities, Trust Preferred Securities and Stockholders' Equity
Deposits $ 612,012 $ 526,953
Short-term borrowings 3,453 44,449
Escrow deposits of borrowers 1,212 931
Accrued expenses and other liabilities 4,108 4,185
Accrued interest payable 596 805
---------------- ---------------
Total liabilities 621,381 577,323
---------------- ---------------
Commitments and contingencies
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; 3,521,866 and
3,461,999 shares issued and outstanding at
June 30, 2002 and December 31, 2001, respectively 35 35
Additional paid-in capital 19,554 18,654
Retained earnings 22,364 20,715
Accumulated other comprehensive income 4,060 3,317
--------------- ----------------
Total stockholders' equity 46,013 42,721
--------------- ---------------
Total liabilities, trust preferred
securities and stockholders' equity $ 677,894 $ 630,544
================ ===============
See the accompanying notes to the consolidated financial statements
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three and six months ended June 30, 2002 and 2001 (unaudited)
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ --------------------------------
(Dollars in thousands, except per share data) 2002 2001 2002 2001
------------ -------------- -------------- --------------
Interest and dividend income:
Loans $ 7,061 7,085 13,995 14,161
Investment securities 2,649 2,967 5,232 5,990
Federal funds sold 30 312 66 531
------------ -------------- -------------- --------------
Total interest income 9,740 10,364 19,293 20,682
------------ -------------- -------------- --------------
Interest expense:
Deposits 2,368 2,977 4,696 6,267
Short-term borrowed funds 100 675 290 1,452
------------ -------------- -------------- --------------
Total interest expense 2,468 3,652 4,986 7,719
------------ -------------- -------------- --------------
Net interest income 7,272 6,712 14,307 12,963
Provision for loan losses 380 420 770 630
------------ -------------- -------------- --------------
Net interest income after
provision for loan losses 6,892 6,292 13,537 12,333
------------ -------------- -------------- --------------
Non-interest income:
Investment management and trust service fees 467 459 1,039 965
Deposit service fees 460 376 896 722
Net gains on sales of investment securities 449 21 865 411
Gains on sales of loans 81 89 183 151
Other income 210 210 404 412
------------ -------------- -------------- --------------
Total non-interest income 1,667 1,155 3,387 2,661
------------ -------------- -------------- --------------
Non-interest expense:
Salaries and employee benefits 3,595 3,208 7,148 6,469
Occupancy expenses 1,243 983 2,357 1,942
Advertising and public relations 162 95 342 235
Audit, legal and other professional fees 245 154 472 306
Trust professional and custodial expenses 181 178 377 361
Office and data processing supplies 115 128 245 278
Trust preferred expense 290 289 579 579
Amortization of intangible assets 198 198 396 396
Other operating expenses 613 557 1,229 1,150
------------ -------------- -------------- --------------
Total non-interest expense 6,642 5,790 13,145 11,716
------------ -------------- -------------- --------------
Income before income taxes 1,917 1,657 3,779 3,278
Income tax expense 501 455 982 895
------------ -------------- -------------- --------------
Net income $ 1,416 1,202 2,797 2,383
============ ============== ============== ==============
Basic earnings per share $ 0.41 0.35 0.81 0.70
============ ============== ============== ==============
Diluted earnings per share $ 0.39 0.34 0.78 0.68
============ ============== ============== ==============
Basic weighted average common shares outstanding 3,469,705 3,412,500 3,465,989 3,410,805
============ ============== ============== ==============
Diluted weighted average common shares outstanding 3,593,862 3,505,228 3,586,143 3,497,541
============ ============== ============== ==============
See the accompanying notes to the consolidated financial statements
ENTERPRISE BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
Six months ended June 30, 2002 (unaudited)
(Dollars in thousands) Additional Comprehensive Income Total
Paid-in Retained Stockholders'
Common Stock Capital Earnings Equity
----------------- ---------- ------------ ------------------------ -------------
Shares Amount Period Accumulated
--------- ------- ------------ -----------
Balance at December 31, 2001 3,461,999 $ 35 $ 18,654 $ 20,715 $ 3,317 $ 42,721
Comprehensive income
Net Income 2,797 2,797 2,797
Unrealized appreciation on securities,
Net of reclassification 743 743 743
------------
Total comprehensive income 3,540
============
Common stock dividend * (1,148) (1,148)
Common stock issued, dividend reinvestment plan * 42,717 778 778
Stock options exercised 17,150 122 122
--------- ------- ---------- ------------ ----------- -------------
Balance at June 30, 2002 3,521,866 35 19,554 22,364 4,060 46,013
========= ======= ========== ============ =========== =============
Disclosure of reclassification amount:
Gross unrealized appreciation arising during this period $ 1,991
Tax benefit (677)
------------
------------
Unrealized holding appreciation, net of tax 1,314
------------
Less: reclassification adjustment for net gains
included in net income (net of $294 tax) 571
------------
Net unrealized appreciation on securities $ 743
============
*Dividends declared were $0.33 per share, totaling $1,148,000. The dividend was
split between cash of $370,000, which was paid on June 28, 2002, and 42,717
shares valued at $778,000, which were issued on June 28, 2002 pursuant to the
Company's dividend reinvestment plan.
See the accompanying notes to the consolidated financial statements
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Six months ended June 30, 2002 and 2001 (unaudited)
(Dollars in thousands) June 30, 2002 June 30, 2001
-------------- --------------
Cash flows from operating activities:
Net income $ 2,797 $ 2,383
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 770 630
Depreciation and amortization 732 1,076
Amortization of intangible assets 396 395
Net gains on sales of investments (865) (411)
Gains on sale of loans (183) (151)
(Increase) decrease in:
Loans held for sale 84 568
Accrued interest receivable 11 229
Prepaid expenses and other assets (595) (1,469)
Deferred income taxes (359) (323)
Income taxes receivable (178) 77
Increase (decrease) in:
Accrued expenses and other liabilities (78) (902)
Accrued interest payable (208) (206)
-------------- --------------
Net cash provided by operating activities 2,324 1,896
-------------- --------------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of investment securities 22,600 15,064
Proceeds from sales of investment securities 21,582 7,059
Purchase of investment securities (47,883) (37,560)
Net increase in loans (20,446) (28,577)
Additions to premises and equipment, net (1,789) (1,615)
-------------- --------------
Net cash used in investing activities (25,936) (45,629)
-------------- --------------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 85,340 31,273
Net increase (decrease) in short-term borrowings (40,996) 17,949
Common stock dividends (1,148) (981)
Common stock issued- dividend reinvestment plan 778 650
Common stock issued- employee stock options 122 27
-------------- --------------
Net cash provided by financing activities 44,096 48,918
-------------- --------------
Net increase in cash and cash equivalents 20,484 5,185
Cash and cash equivalents at beginning of period 37,861 54,105
-------------- --------------
Cash and cash equivalents at end of period $ 58,345 $ 59,290
============== ==============
Supplemental financial data:
Cash paid for:
Interest expense $ 5,170 $ 7,925
Income taxes 1,519 1,200
See the accompanying notes to the consolidated financial statements
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.
Intercompany balances and transactions have been eliminated in the consolidated
financial statements of Enterprise Bancorp, Inc. and its wholly subsidiaries
Enterprise Bank and Trust Co. and Enterprise (MA) Capital Trust I.
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 dilutive shares, using the treasury stock method, for
the diluted earnings per share calculation were 124,157 and 92,728 for the
quarters ended June 30, 2002 and June 30, 2001, respectively and 120,154 and
86,736 for the six months ended June 30, 2002 and June 30, 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 $778,000 of the dividends paid by the company into 42,717 shares of the
company's common stock in 2002.
(5) Intangible Assets
On July 21, 2000 the bank acquired 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
Statements 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.
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.
(8) Massachusetts Department of Revenue - Notice of Intent to Assess
Enterprise Realty Trust, Inc. (ERT) is a real estate investment trust, which is
99.9% owned by the bank. The bank has received a Notice of Intent to Assess
("NIA") dated June 4, 2002 from the Commonwealth of Massachusetts Department of
Revenue ("DOR"), pursuant to which the DOR has indicated that it intends to
assess the bank for additional state taxes plus interest totaling an aggregate
amount of $1,068,672 for the tax years ended December 31, 1999 and 2000. In the
NIA delivered to the bank, the DOR has indicated that it is of the view that any
income received by the bank in the form of dividends from ERT is fully taxable
under applicable Massachusetts tax laws. This is in conflict with the position
taken by the bank that it is authorized under the express provisions of the
applicable Massachusetts statute to exclude 95% of all dividends received by the
bank from ERT in calculating the bank's taxable income for Massachusetts state
tax purposes. If the position taken by the DOR were also applied to the bank's
tax year ended December 31, 2001, and the six months ended June 30, 2002, then
the bank would be subject on such basis to additional Massachusetts income tax
for such periods totaling approximately $1,145,000 and $571,000, respectively.
To the company's knowledge, the bank is one of approximately forty banking
institutions located in Massachusetts that has received an NIA of this type.
The Company believes that it has complied fully with the applicable
Massachusetts tax laws in deducting 95% of the dividends received by the bank
from ERT in calculating the bank's taxable income for Massachusetts tax
purposes. Accordingly, no provision has been made in the Company's financial
statements for the amounts that the DOR has indicated will be assessed for the
tax years ended December 31, 1999 and 2000 or for any additional amounts that
may be assessed for any future periods, including without limitation the tax
year ended December 31, 2001, and the six months ended June 30, 2002. The
Company intends to vigorously dispute the NIA that the bank has received and to
pursue all available means to defend its current position regarding the bank's
payment of Massachusetts income taxes.
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 June 30, 2002:
Total Capital (to risk weighted assets) $ 51,880 11.29% $ 36,702 8.00% $ 45,877 10.00%
Tier 1 Capital (to risk weighted assets) 46,106 10.05% 18,351 4.00% 27,526 6.00%
Tier 1 Capital (to average assets)* 46,106 7.29% 25,287 4.00% 31,609 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 June 30, 2002, total assets increased by $47.4 million, or 7.5 %, since
December 31, 2001. The increase was primarily attributable to increases of $18
million, or 277%, in daily federal funds sold and $19.8 million, or 5.4%, in net
loans (i.e., loans after the allowance for loan losses). The increase in assets
was funded primarily by growth in deposits of $85.3 million, offset by a
decrease in short-term borrowings and repurchase agreements of $41.0 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 five months of 2002 and was completed in mid-May.
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 12.3% and 12.5%, respectively, at June 30, 2002 as
compared to December 31, 2001.
Investments
At June 30, 2002 all of the company's investment securities were classified as
available-for-sale and carried at fair value. The net unrealized appreciation at
June 30, 2002 was $6.2 million compared to $5.0 million at December 31, 2001.
The net unrealized appreciation or depreciation, as the case may be, 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.
Unrealized appreciation on the investment portfolio will decrease as the
securities approach maturity. The unrealized appreciation will only be realized
if the securities are sold. The Company may expand its investment activities to
include a limited amount of equity securities in the future. All such equity
investment activities would be undertaken in accordance with applicable
regulatory limitations.
Loans
Total loans, before the allowance for loan losses, were $396.5 million, or 58.5%
of total assets, at June 30, 2002, compared to $376.3 million, or 59.7% of total
assets, at December 31, 2001. The increase in total loans of $20.1 million at
June 30, 2002 compared to December 31, 2001, was primarily attributed to
originations of commercial real estate and construction loans.
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $85.3 million,
or 16.2%, during the first six months of 2002, to $613.2 million at June 30,
2002 compared to $527.9 million at December 31, 2001. The increase consists of
growth of $63.0 million in money market and business savings deposits, and a
$21.2 million increase in demand deposit and checking accounts. The growth in
deposits is primarily attributable to increased market penetration and strong
sales efforts.
Short-term borrowings, consisting of securities sold under agreements to
repurchase and Federal Home Loan Bank ("FHLB") borrowings, decreased by $41.0
million, or 92.2%, to $3.5 million at June 30, 2002. The decrease was
attributable to the bank's continued transition during the first five 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 company had $470,000 in
borrowings outstanding from the FHLB at both June 30, 2002 and December 31,
2001.
Non-performing Assets/Loan Loss Experience
The following table sets forth non-performing assets at the dates indicated:
(Dollars in thousands) June 30, 2002 Dec. 31, 2001 June 30, 2001
----------------- ----------------- ----------------
Non-accrual loans $ 2,171 $ 1,874 $ 970
Accruing loans > 90 days past due 2 1 3
----------------- ----------------- ----------------
Total non-performing loans 2,173 1,875 973
Other real estate owned - - -
----------------- ----------------- ----------------
Total non-performing assets $ 2,173 $ 1,875 $ 973
================= ================= ================
Non-performing loans: Loans outstanding 0.55% 0.50% 0.29%
================= ================= ================
Non-performing assets: Total assets 0.32% 0.30% 0.16%
================= ================= ================
Delinquent loans 30-89 days past due: Loans 0.36% 0.30% 0.49%
================= ================= ================
Total non-performing loans increased by $1.2 million from June 30, 2001 to June
30, 2002 and by $0.3 million from December 31, 2001 to June 30, 2002, and the
ratio of non-performing loans to total loans (i.e., loans before the allowance
for loan losses) increased from 0.29% to 0.55% and from 0.50% to 0.55% over the
same respective periods. The ratio of delinquent loans (30 - 89 days past due)
to total loans decreased from 0.49% at June 30, 2001 to 0.30% at December 31,
2001 and increased from 0.30% to 0.36% from December 31, 2001 to June 30, 2002.
Non-performing and delinquent loans at June 30, 2001 are considered to be
unusually low. The results at December 31, 2001 and June 30, 2002 were primarily
attributable to a weakened economy, which began in 2001 and continued through
the first six months of 2002. The increase in the ratio of non-performing loans
to loans outstanding is offset by an increase in the ratio of the allowance for
loan losses to loans outstanding to 2.24% at June 30, 2002 from 2.01% at June
30, 2001. 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.
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Six months ended June 30,
--------------------------------------
(Dollars in thousands) 2002 2001
---------------- ----------------
Balance at beginning of year $ 8,547 $ 6,220
Loans charged off
Commercial 428 29
Commercial real estate - -
Construction - -
Residential real estate - -
Home equity - -
Consumer 10 41
---------------- ----------------
438 70
---------------- ----------------
Recoveries on loans charged off
Commercial 13 25
Commercial real estate - -
Construction - -
Residential real estate 2 20
Home equity - -
Other 6 12
---------------- ----------------
21 57
---------------- ----------------
Net loans charged off 417 13
Provision charged to operations 770 630
---------------- ----------------
Balance at June 30 $ 8,900 $ 6,837
================ ================
Annualized net loans charged off: Average loans outstanding 0.22% 0.01%
================ ================
Allowance for loan losses: Loans outstanding 2.24% 2.01%
================ ================
Allowance for loan losses: Non-performing loans 409.57% 702.67%
================ ================
The ratio of allowance for loan losses to non-performing loans decreased from
702.67% at June 30, 2001 to 406.57% at June 30, 2002 due to the increase of $1.2
million in non-performing loans, offset by an increase of $2.1 million in the
allowance for loan losses. Management regularly reviews the level of non-accrual
loans, levels of charge-offs and recoveries, levels of loans outstanding, and
known and inherent risks in the nature of the loan portfolio. Management also
analyzes the adequacy of the allowance for loan losses on a quarterly basis. See
"Results of Operations - Provision for loan losses."
Results of Operations
Six Months Ended June 30, 2002 vs. Six Months Ended June 30, 2001
The company reported net income of $2,797,000 for the six months ended June 30,
2002, versus $2,383,000 for the six months ended June 30, 2001. The company had
basic earnings per common share of $0.81 and $0.70 and diluted earnings per
common share of $0.78 and $0.68 for the six months ended June 30, 2002 and June
30, 2001, respectively.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
Six months ended June 30,
--------------------------------------
(Dollars in thousands) 2002 2001
---------------- ----------------
Average assets (1) $ 630,963 $ 583,071
Average deposits and short-term borrowings 574,920 532,486
Average investment securities and federal funds sold (1) 196,037 216,991
Average loans, net of deferred loan fees 387,138 321,796
Net interest income 14,307 12,963
Provision for loan losses 770 630
Tax expense 982 895
Average loans: Average deposits and borrowings 67.34% 60.43%
Non-interest expense: Average assets (2) 4.20% 4.05%
Non-interest income: Average assets (2) (3) 0.81% 0.78%
Average tax equivalent rate earned on interest earning assets 6.81% 7.87%
Average rate paid on interest bearing deposits and short-term borrowings 2.15% 3.60%
Average rate paid on total deposits and borrowings 1.75% 2.92%
Net interest margin (tax equivalent basis) 5.09% 4.98%
(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 $14,307,000 for the six months ended June
30, 2002, an increase of $1,344,000, or 10.4%, from $12,963,000 for the six
months ended June 30, 2001.
Interest income decreased by $1,389,000 for the six months ended June 30, 2002
to $19,293,000 compared to $20,682,000 for the same period ended June 30, 2001.
This decrease resulted from a decrease in the average tax equivalent yield on
interest earning assets of 106 basis points to 6.81% for the six months ended
June 30, 2002 compared to 7.87% for the same period ended June 30, 2001, offset
by an increase in the average balance of interest earning assets of $44.4
million or 8.2% to $583.2 million for the six months ended June 30, 2002
compared to $538.8 million for the six months ended June 30, 2001.
For the six months ended June 30, 2002, the average loan balance increased by
$65.3 million, or 20.3%, and the average investment securities and federal funds
sold balance decreased by $20.9 million, or 9.2%, compared to the same period
ended June 30, 2001. The average rate earned on loans declined by 158 basis
points to 7.29% for the six months ended June 30, 2002, from 8.87% for the same
period ended June 30, 2001, while the average tax equivalent yield on investment
securities and federal funds sold decreased by 53 basis points to 5.86% for the
six months ended June 30, 2002, from 6.39% for the same period ended June 30,
2001.
Interest expense for the six months ended June 30, 2002 was $4,986,000 compared
to $7,719,000 for the same period ended June 30, 2001, a decrease of $2,733,000
or 35.4%. This decrease resulted from a reduction in the average interest rate
on interest bearing liabilities of 145 basis points to 2.15% for the six months
ended June 30, 2002, compared to 3.60% for the same period ended June 30, 2001,
offset by an increase in the average balance of interest-bearing deposits and
short-term borrowings of $34.7 million, or 8.0%, to $466.8 million for the six
months ended June 30, 2002, as compared to $432.1 million for the same period
ended June 30, 2001. The average interest rate on savings, checking and money
market deposit accounts decreased 82 basis points for the six months ended June
30, 2002 compared to the same period ended June 30, 2001, due to lower market
rates, while the average balance of such deposit accounts increased by $62.3
million, or 28.8%, to $278.9 million for the six months ended June 30, 2002 as
compared to $216.6 million for the same period ended June 30, 2001.
The average interest rate on time deposits decreased by 169 basis points for the
six months ended June 30, 2002 compared to the same period ended June 30, 2001.
The average balance on time deposits increased by $8.1 million, or 5.4%, to
$156.0 million for the six months ended June 30, 2002 as compared to $147.9
million for the same period ended June 30, 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 1.83%, for
the six months ended June 30, 2002, compared to 4.34% for the six months ended
June 30, 2001. The average balance of short-term borrowings for the six months
ended June 30, 2002 decreased by $35.6 million, or 52.7%, to $31.9 million as
compared to $67.5 million for the six months ended June 30, 2001. The 251 basis
point decrease in average rate paid on short-term borrowings resulted from
decreases in market rates, while the decrease in average balance was
attributable 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 5.09% for the six months ended June 30, 2002
from 4.98% for the same period ended June 30, 2001, primarily due to the 145
basis point decrease in the average rate on interest bearing liabilities, offset
by the 106 basis point decrease in tax equivalent yield on interest earning
assets, and the $44.4 million increase in the average balance of interest
earning assets, offset by the $34.8 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
six months ended June 30, 2002 and June 30, 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).
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.
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Six Months Ended June 30, 2002 Six Months Ended June 30, 2001 Changes due to
------------------------------ ------------------------------ -------------------------------
(Dollars in thousands) Average Yield/ Average Yield/ Rate/
Balance Interest Rates (3) Balance Interest Rates (3) Total Volume Rate Volume
----------- -------- --------- --------- -------- ----------- -------- ------- -------- ------
Assets:
Loans (1) (2) $ 387,138 $ 13,995 7.29% $ 321,796 $ 14,161 8.87% $ (166) $2,875 $(2,521) $(520)
Investment securities & federal funds
sold (3) (5) 196,037 5,298 5.86% 216,991 6,521 6.39 (1,223) (551) (875) 203
----------- -------- --------- -------- ------ -------- ------
Total interest earnings assets 583,175 19,293 6.81% 538,787 20,682 7.87% (1,389) 2,324 (3,396) (317)
----------- -------- --------- -------- -------- ------ -------- ------
Other assets (4) (5) 47,788 44,284
----------- ---------
Total assets (5) $ 630,963 $ 583,071
=========== =========
Liabilities and stockholders' equity:
Savings/PIC/MMDA $ 278,881 1,836 1.33% $ 216,597 2,311 2.15% (475) 665 (881) (259)
Time deposits 156,008 2,860 3.70% 147,946 3,956 5.39% (1,096) 216 (1,240 (72)
Short-term borrowings 31,949 290 1.83% 67,534 1,452 4.34% (1,162) (765) (841) 444
----------- -------- --------- -------- -------- ------ -------- ------
Total interest-bearing deposits and
borrowings 466,838 4,986 2.15% 432,077 7,719 3.60% (2,733) 116 (2,962) 113
----------- -------- --------- -------- -------- ------ -------- ------
Net interest rate spread (3) 4.66% 4.27%
Non-interest bearing deposits 108,082 100,409
----------- -------- --------- --------
Total deposits and borrowings 574,920 4,986 1.75% 532,486 7,719 2.92%
Other liabilities 4,660 4,282
----------- ---------
Total liabilities 579,580 536,768
Trust preferred securities 10,500 10,500
Stockholders' equity (5) 40,883 35,803
----------- ---------
Total liabilities, trust preferred
Securities and stockholders' equity
(5) $ 630,963 $ 583,071
=========== =========
Net interest Income $ 14,307 $ 12,963 $ 1,344 $2,208 $ (434) $(430)
======== ======== ======== ====== ======== ======
Net interest margin 5.09% 4.98%
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average investment balances are presented at average amortized cost and
average yields are presented on a tax equivalent basis.
The tax equivalent effect was $446 and $412 for the periods ended
June 30, 2002 and June 30, 2001, respectively
(4) Other assets include cash and due from banks, accrued interest receivable,
allowance for loan losses, intangible assets, and other miscellaneous assets.
(5) Excludes the effect of SFAS No. 115
Provision for Loan Losses
The provision for loan losses amounted to $770,000 and $630,000 for the six
months ended June 30, 2002 and June 30, 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. There have been no material changes to the company's
allowance for loan loss methodology used to estimate loan loss exposure as
reported in the company's Annual Report on Form 10-K for the year ended December
31, 2001. 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 $74,000, or 7.7%, for
the six months ended June 30, 2002 compared to the same period in 2001. The
increase was primarily due to one-time fees of $76,000, booked in the first
quarter of 2002 for estate settlements. Excluding these fees, investment
management and trust service fees would have decreased by $2,000, or 2%, for the
six months ended June 30, 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 $14.3 million, or 4.8%,
to $283.0 million for the six months ended June 30, 2002 from $297.3 million for
the same period in 2001.
Deposit service fees increased by $174,000, or 24.1%, for the six months ended
June 30, 2002, compared to the six months ended June 30, 2001, due primarily to
an increase in the average balance on savings, checking and money market
accounts of $70.0 million, or 22.1%, for the six months ended June 30, 2002
compared to the same period in 2001. The fee increase was also due to a
reduction in the earnings credit posted to business checking accounts, which
offsets the service charges assessed by the bank.
Net gain on sale of investment securities amounted to $865,000 and $411,000 for
the six months ended June 30, 2002 and June 30, 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 $32,000 to $183,000 for the six months ended
June 30, 2002, compared to the six months ended June 30, 2001, due to increased
residential mortgage production resulting from a declining interest rate
environment.
Other income for the six months ended June 30, 2002, was $404,000 compared to
$412,000 for the six months ended June 30, 2001. This decrease of $8,000 was
primarily attributable to a reduction of the earnings credit on account balances
related to sales of third party bank checks, due to the decline in market rates,
offset by an increase in processing income earned on the Federated sweep
product.
Non-Interest Expenses
Salaries and benefits expense totaled $7,148,000 for the six months ended June
30, 2002, compared to $6,469,000 for the six months ended June 30, 2001, an
increase of $679,000 or 10.50%. This increase was primarily due to the salary
and related benefits of new employees hired to support the Company's growth and
strategic initiatives, as well as annual pay increases.
Occupancy expense amounted to $2,357,000 for the six months ended June 30, 2002,
compared to $1,942,000 for the six months ended June 30, 2001, an increase of
$415,000 or 21.4%. The increase was primarily due to depreciation of office
renovations for operational support departments completed in 2001, ongoing
enhancements to the company's computer systems in the current year, start-up
costs associated with the bank's newest branch office, located at the end of the
Lowell Connector, which opened on April 29, 2002, and increases generally in
rent and common area maintenance fees for the bank's leased office space.
Advertising and public relations expenses increased by $107,000, or 45.5%, for
the six months ended June 30, 2002 compared to the same period in 2001. The
increase was due to expenditures, in the early part of this year, related to the
opening of the bank's Lowell Connector office in April, increases in advertising
expenditures for the commercial lending and trust divisions and market research
associated with a new branch office planned for the Fitchburg market, which is
scheduled to open in the spring of 2003.
Audit, legal and other professional expenses increased by $166,000, or 54.2%,
for the six months ended June 30, 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, as well as consulting expenses
related to technology initiatives undertaken in the first six months of the
year.
Trust professional and custodial expenses increased by $16,000, or 4.4%, for the
six months ended June 30, 2002 compared to the same period in 2001. The increase
was primarily due to an increase in custodial and advisory fees.
Office and data processing supplies expense decreased by $33,000, or 11.9%, for
the six months ended June 30, 2002 compared to the same period in 2001. The
decrease was primarily due to timing differences of the expenditures.
Trust preferred expense was $579,000 for the six months ended June 30, 2002 and
June 30, 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 $396,000 for the six months ended June 30,
2002 and June 30, 2001. The expense relates to 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 expenses were $1,229,000 and $1,150,000 for the six months ended
June 30, 2002 and June 30, 2001, respectively. The increase of $79,000, or 6.9%,
for the 2002 period was primarily due to the company's growth and consisted of
increased expenses for correspondent bank service charges, charitable
contributions, training expenses and expenses related to loan workouts, offset
by timing related reductions in dues and entertainment expenses.
Income Tax Expense
Income tax expense and the effective tax rate for the six months ended June 30,
2002 and June 30, 2001 were $982,000 and 26.0% and $895,000 and 27.3%,
respectively. The difference in the effective tax rate is due to the timing of
income tax accruals for the six months ended June 30, 2002.
Results of Operations
Three Months Ended June 30, 2002 vs. Three Months Ended June 30, 2001
The company reported net income of $1,416,000 for the three months ended June
30, 2002, versus $1,202,000 for the three months ended June 30, 2001. The
company had basic earnings per common share of $0.41 and $0.35 and diluted
earnings per common share of $0.39 and $0.34 for the three months ended June 30,
2002 and June 30, 2001, respectively.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
Three months ended June 30,
--------------------------------------
(Dollars in thousands) 2002 2001
---------------- ----------------
Average assets (1) $ 638,579 $ 596,969
Average deposits and short-term borrowings 581,871 545,996
Average investment securities and federal funds sold (1) 200,019 223,980
Average loans, net of deferred loan fees 390,387 328,052
Net interest income 7,272 6,712
Provision for loan losses 380 420
Tax expense 501 455
Average loans: Average deposits and borrowings 67.09% 60.08%
Non-interest expense: Average assets (2) 4.17% 3.89%
Non-interest income: Average assets (2) (3) 0.77% 0.76%
Average tax equivalent rate earned on interest earning assets 6.76% 7.68%
Average rate paid on interest bearing deposits and short-term borrowings 2.10% 3.31%
Average rate paid on total deposits and borrowings 1.70% 2.68%
Net interest margin (tax equivalent basis) 5.09% 5.02%
(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 $7,272,000 for the three months ended June
30, 2002, an increase of $560,000, or 8.3%, from $6,712,000 for the three months
ended June 30, 2001.
Interest income decreased by $624,000 for the three months ended June 30, 2002
and was $9,740,000 compared to $10,364,000 for the same period ended June 30,
2001. This decrease resulted primarily from a decrease in the average tax
equivalent yield on interest earning assets of 92 basis points to 6.76% for the
three months ended June 30, 2002 compared to 7.68% for the same period ended
June 30, 2001, offset by an increase in the average balance of interest earning
assets of $38.4 million, or 7.0%, to $590.4 million for the three months ended
June 30, 2002 compared to $552.0 million for the three months ended June 30,
2001.
For the three months ended June 30, 2002, the average loan balance increased by
$62.3 million, or 19.0%, and the average investment securities and federal funds
sold balance decreased by $24.0 million, or 10.7%, compared to the same period
ended June 30, 2001. The average rate earned on loans declined by 141 basis
points to 7.25% for the three months ended June 30, 2002, from 8.66% for the
same period ended June 30, 2001, while the average tax equivalent yield on
investment securities and federal funds sold decreased by 43 basis points to
5.80% for the three months ended June 30, 2002 from 6.23% for the same period
ended June 30, 2001.
Interest expense for the three months ended June 30, 2002 was $2,468,000
compared to $3,652,000 for the same period ended June 30, 2001, resulting
primarily from a decrease in the average interest rate on interest bearing
liabilities of 121 basis points to 2.10% for the three months ended June 30,
2002 compared to 3.31% for the same period ended June 30, 2001, offset by an
increase in the average balance of interest-bearing deposits and short-term
borrowings of $29.3 million, or 6.6%, to $472.2 million for the three months
ended June 30, 2002 as compared to $442.9 million for the same period ended June
30, 2001.
The average interest rate on savings, checking and money market deposit accounts
decreased by 56 basis points for the three months ended June 30, 2002 compared
to the same period ended June 30, 2001, due to lower market rates, while the
average balance of such deposit accounts increased by $70.1 million, or 31.0%,
to $295.8 million for the three months ended June 30, 2002 as compared to $225.7
million for the same period ended June 30, 2001.
The average interest rate on time deposits decreased by 174 basis points for the
three months ended June 30, 2002 compared to the same period ended June 30,
2001. The average balance on time deposits increased by $10.8 million, or 7.4%,
to $155.7 million for the three months ended June 30, 2002 as compared to $145.0
million for the same period ended June 30, 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 181 basis
points to 1.94% for the three months ended June 30, 2002, compared to 3.75% for
the three months ended June 30, 2001. The average balance of short-term
borrowings for the three months ended June 30, 2002 decreased by $51.5 million,
or 71.3%, to $20.7 million as compared to $72.2 million for the three months
ended June 30, 2001. The 181 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 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 5.09% for the three months ended June 30, 2002
from 5.02% for the same period ended June 30, 2001, primarily due to the 121
basis point decrease in the average rate on interest bearing liabilities, offset
by the 92 basis point decrease in tax equivalent yield on interest earning
assets, and the $38.4 million increase in the average balance of interest
earning assets, offset by the $29.3 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 June 30, 2002 and June 30, 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).
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.
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended June 30, 2002 Three Months Ended June 30, 2001 Changes due to
------------------------------ ------------------------------ -------------------------------
(Dollars in thousands) Average Yield/ Average Yield/ Rate/
Balance Interest Rates (3) Balance Interest Rates (3) Total Volume Rate Volume
----------- -------- --------- --------- -------- ----------- -------- ------- --------------
Assets:
Loans (1) (2) $ 390,387 $ 7,061 7.25% $ 328,052 $ 7,085 8.66% $ (24) $ 1,346 $(1,151)$(219)
Investment securities & federal funds
sold (3) (5) 200,019 2,679 5.80% 223,980 3,279 6.23% (600) (269) (462) 131
----------- -------- --------- -------- -------- ------- -------- -----
Total interest earnings assets 590,406 9,740 6.76% 552,032 10,364 7.68% (624) 1,077 (1,613 (88)
-------- -------- -------- ------- -------- -----
Other assets (4) (5) 48,173 44,937
----------- ---------
Total assets (5) $ 638,579 $ 596,969
=========== =========
Liabilities and stockholders' equity:
Savings/PIC/MMDA $ 295,758 999 1.35% $ 225,684 1,073 1.91% (74) 333 (315) (92)
Time deposits 155,741 1,369 3.53% 144,978 1,904 5.27% (535) 141 (630) (46)
Short-term borrowings 20,703 100 1.94% 72,203 675 3.75% (575) (481) (326) 232
----------- -------- --------- -------- -------- ------- -------- -----
Total interest-bearing deposits and
borrowings 472,202 2,468 2.10% 442,865 3,652 3.31% (1,184) (7) (1,271) 94
----------- -------- --------- -------- -------- ------- -------- -----
Net interest rate spread (3) 4.66% 4.37%
Non-interest bearing deposits 109,669 103,131
----------- -------- --------- --------
Total deposits and borrowings 581,871 2,468 1.70% 545,996 3,652 2.68%
Other liabilities 4,667 4,889
----------- ---------
Total liabilities 586,538 550,885
Trust preferred securities 10,500 10,500
Stockholders' equity (5) 41,541 35,584
----------- ---------
Total liabilities, trust preferred
securities and stockholders' equity
(5) $ 638,579 $ 596,969
=========== =========
Net interest Income $ 7,272 $ 6,712 $ 560 $ 1,084 $ (342) $182)
======== ======== ======== ======= ======== =====
Net interest margin 5.09% 5.02%
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average investment balances are presented at average amortized cost and
average yields are presented on a tax equivalent basis.
The tax equivalent effect was $222 and $210 for the periods ended
June 30, 2002 and June 30, 2001, respectively
(4) Other assets include cash and due from banks, accrued interest receivable,
allowance for loan losses, intangible assets, and other miscellaneous assets.
(5) Excludes the effect of SFAS No. 115
Provision for Loan Losses
The provision for loan losses amounted to $380,000 and $420,000 for the three
months ended June 30, 2002 and June 30, 2001, respectively. Although management
believes that loan quality continues to be solid, management determined it was
prudent to provide 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. There have been no material changes to the company's allowance for loan
loss methodology used to estimate loan loss exposure as reported in the
company's Annual Report on Form 10-K for the year ended December 31, 2001. 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 $8,000, or 1.7%, for
the three months ended June 30, 2002 compared to the same period in 2001. The
increase was primarily due to increases in investment commission and fees offset
by decreases in trust income. Average investment services and trust assets under
management (excluding the commercial sweep balances held in Federated mutual
funds) decreased to $279.1 million for the three months ended June 30, 2002 from
$298.3 million for the same period in 2001.
Deposit service fees increased by $84,000, or 22.3%, for the three months ended
June 30, 2002, compared to the three months ended June 30, 2001, due primarily
to an increase in the average balance on savings, checking and money market
accounts of $76.6 million, or 23.3%, for the three months ended June 30, 2002
compared to the same period in 2001. The fee increase was also due to a
reduction in the earnings credit posted to business checking accounts, which
offsets the service charges assessed by the bank.
Net gain on sale of investment securities amounted to $449,000 and $21,000 for
the three months ended June 30, 2002 and June 30, 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 decreased by $8,000 to $81,000 for the three months ended
June 30, 2002, compared to the three months ended June 30, 2001, due to the
reduction in premiums paid on sales in the current declining interest rate
environment.
Other income for the three months ended June 30, 2002, was $210,000, which was
the same amount for the three months ended June 30, 2001. The 2002 figure
includes $13,000 in processing income earned on the Federated sweep product and
increases in ATM and debit card fees, which were completely offset by a decrease
of the earnings credit on account balances related to sales of third party bank
checks.
Non-Interest Expenses
Salaries and benefits expense totaled $3,595,000 for the three months ended June
30, 2002, compared to $3,208,000 for the three months ended June 30, 2001, an
increase of $387,000 or 12.1%. This increase was primarily due to new hires,
company growth, strategic initiatives implemented by the company, and annual pay
increases.
Occupancy expense was $1,243,000 for the three months ended June 30, 2002,
compared to $983,000 for the three months ended June 30, 2001, an increase of
$260,000 or 26.4%. The increase was primarily due to depreciation of office
renovations for operational support departments completed in 2001, ongoing
enhancements to the company's computer systems in the current year, start-up
costs associated with the bank's newest branch office, which opened on April 29,
2002, and increases generally in rent, real estate taxes, and common area
maintenance fees for the bank's leased office space.
Advertising and public relations expenses increased by $67,000, or 70.5%, for
the three months ended June 30, 2002 compared to the same period in 2001. The
increase was primarily due to increases in advertising expenditures for the
commercial lending and trust divisions and market research associated with a new
branch office planned for the Fitchburg market, which is scheduled to open in
the spring of 2003.
Audit, legal and other professional expenses increased by $91,000, or 59.1%, for
the three months ended June 30, 2002 compared to the same period in 2001. The
increase was due to increased compliance and audit related expenses associated
with the bank's growth in 2002, as well as consulting expenses related to
technology initiatives undertaken in 2002.
Trust professional and custodial expenses increased by $3,000, or 1.7%, for the
three months ended June 30, 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 $13,000, or 10.2%, for
the three months ended June 30, 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 June 30, 2002
and $289,000 for the quarter ended June 30, 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 June
30, 2002 and June 30, 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 expenses were $613,000 and $557,000 for the three months ended
June 30, 2002 and June 30, 2001, respectively. The increase of $56,000, or
10.1%, for the 2002 period consists of increased expenses for charitable
contributions, expenses related to the employee Celebration of Success held in
February, training expenses, bank service charges, and loan workout expenses,
offset by decreases in telephone, ATM and security expenditures due primarily to
timing differences in 2002.
Income Tax Expense
Income tax expense and the effective tax rate for the three months ended June
30, 2002 and June 30, 2001 were $501,000 and 26.1% and $455,000 and 27.5%,
respectively. The difference in the effective tax rate is due to the timing of
income tax accruals for the three months ended June 30, 2002.
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 7.5% in the 12-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
As described in further detail in footnote No. 8 to the Company's financial
statements included in Item 1 of this report, set forth at page 8 above, the
bank has received a Notice of Intent to Assess ("NIA") from the Commonwealth of
Massachusetts Department of Revenue ("DOR"), pursuant to which the DOR has
indicated that it intends to assess the bank for additional state taxes in
connection with the bank's operation of a real estate investment trust
subsidiary. The Company intends to vigorously dispute the NIA that the bank has
received and to pursue all available means to defend its current position
regarding the bank's payment of Massachusetts income taxes.
Item 2 Changes in Securities and Use of Proceeds
Not Applicable
Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the company was held on
May 7, 2002. Votes were cast as follows:
1. To elect six Directors of the company, each for a three-year term:
Nominee For Against Abstain
Kenneth S. Ansin 3,026,138 - -
John R. Clementi 3,026,138 - -
Carole A. Cowan 3,006,574 19,564 -
Eric W. Hanson 3,026,138 - -
Arnold S. Lerner 3,026,138 - -
Richard W. Main 3,026,138 - -
2. To ratify the Board of Directors' appointment of KPMG LLP
as the company's independent auditors for the fiscal year
ending December 31, 2002:
For Against Abstain
3,003,324 20,486 2,328
Item 5 Other Information
Not Applicable
Item 6 Exhibits and Reports on Form 8-K
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERPRISE BANCORP, INC.
DATE: August 14, 2002 By: /s/ John P. Clancy, Jr.
------------------------------
John P. Clancy, Jr.
Treasurer
(Principal Financial Officer)