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, 2010
or
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-33912
Enterprise Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts |
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04-3308902 |
(State or other jurisdiction of |
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(I.R.S. Employer Identification No.) |
incorporation or organization) |
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222 Merrimack Street, Lowell, Massachusetts |
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01852 |
(Address of principal executive offices) |
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(Zip code) |
(978) 459-9000
(Registrants telephone number, including area code)
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. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) o Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition for large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Large accelerate filer o |
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Accelerated filer x |
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Non-accelerated filer o |
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Smaller reporting company o |
(Do not check if smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes x No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
May 5, 2010 Common Stock - Par Value $0.01: 9,210,026 shares outstanding
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Page Number |
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1 |
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2 |
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PART I FINANCIAL INFORMATION |
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Item 1 |
Financial Statements |
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Consolidated Balance Sheets March 31, 2010 and December 31, 2009 |
3 |
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Consolidated Statements of Income -
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4 |
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Consolidated Statement of Changes in Stockholders
Equity -
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5 |
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Consolidated Statements of Cash Flows -
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6 |
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7 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
17 |
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36 |
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37 |
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37 |
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37 |
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38 |
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38 |
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38 |
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38 |
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38 |
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38 |
ENTERPRISE BANCORP, INC.
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March 31, |
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December 31, |
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(Dollars in thousands) |
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2010 |
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2009 |
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(Unaudited) |
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Assets |
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Cash and cash equivalents: |
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Cash and due from banks |
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$ |
23,711 |
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$ |
25,851 |
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Short-term investments |
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61,279 |
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6,759 |
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Total cash and cash equivalents |
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84,990 |
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32,610 |
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Investment securities |
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139,870 |
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139,109 |
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Loans, less allowance for loan losses of $18,490 at March 31, 2010, and $18,218 at December 31, 2009, respectively |
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1,072,721 |
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1,064,612 |
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Premises and equipment |
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23,168 |
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22,924 |
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Accrued interest receivable |
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5,558 |
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5,368 |
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Deferred income taxes, net |
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10,253 |
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10,345 |
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Bank-owned life insurance |
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13,971 |
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13,835 |
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Prepaid expenses and other assets |
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9,806 |
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9,466 |
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Core deposit intangible, net of amortization |
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43 |
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76 |
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Goodwill |
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5,656 |
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5,656 |
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Total assets |
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$ |
1,366,036 |
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$ |
1,304,001 |
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Liabilities and Stockholders Equity |
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Liabilities |
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Deposits |
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$ |
1,188,201 |
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$ |
1,144,948 |
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Borrowed funds |
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45,301 |
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24,876 |
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Junior subordinated debentures |
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10,825 |
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10,825 |
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Accrued expenses and other liabilities |
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10,080 |
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14,270 |
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Income taxes payable |
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454 |
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98 |
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Accrued interest payable |
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726 |
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1,320 |
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Total liabilities |
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1,255,587 |
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1,196,337 |
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Commitments and Contingencies |
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Stockholders Equity |
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Preferred stock, $0.01 par value per share; 1,000,000 shares authorized; no shares issued |
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Common stock $0.01 par value per share; 20,000,000 shares authorized; 9,210,026 and 9,090,518 shares issued and outstanding at March 31, 2010, and December 31, 2009, respectively |
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92 |
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91 |
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Additional paid-in capital |
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41,099 |
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40,453 |
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Retained earnings |
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67,017 |
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65,042 |
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Accumulated other comprehensive income |
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2,241 |
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2,078 |
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Total stockholders equity |
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110,449 |
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107,664 |
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Total liabilities and stockholders equity |
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$ |
1,366,036 |
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$ |
1,304,001 |
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See the accompanying notes to the unaudited consolidated financial statements.
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
(Unaudited)
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Three Months Ended March 31, |
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(Dollars in thousands, except per share data) |
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2010 |
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2009 |
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Interest and dividend income: |
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Loans |
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$ |
14,769 |
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$ |
13,620 |
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Investment securities |
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1,090 |
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1,583 |
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Short-term investments |
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6 |
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17 |
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Total interest and dividend income |
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15,865 |
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15,220 |
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Interest expense: |
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Deposits |
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2,331 |
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3,639 |
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Borrowed funds |
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57 |
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95 |
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Junior subordinated debentures |
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294 |
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294 |
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Total interest expense |
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2,682 |
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4,028 |
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Net interest income |
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13,183 |
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11,192 |
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Provision for loan losses |
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879 |
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1,102 |
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Net interest income after provision for loan losses |
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12,304 |
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10,090 |
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Non-interest income: |
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Investment advisory fees |
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854 |
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649 |
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Deposit service fees |
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972 |
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873 |
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Income on bank-owned life insurance |
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156 |
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155 |
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Other than temporary impairment on investment securities |
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(1 |
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(758 |
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Net gains on sales of investment securities |
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501 |
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971 |
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Gains on sales of loans |
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81 |
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122 |
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Other income |
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528 |
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361 |
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Total non-interest income |
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3,091 |
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2,373 |
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Non-interest expense: |
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Salaries and employee benefits |
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6,446 |
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5,902 |
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Occupancy and equipment expenses |
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1,307 |
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1,335 |
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Technology and telecommunications expenses |
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912 |
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756 |
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Audit, legal and other professional fees |
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267 |
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274 |
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Advertising and public relations expenses |
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526 |
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546 |
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Deposit insurance premiums |
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460 |
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373 |
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Supplies and postage expenses |
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196 |
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202 |
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Investment advisory and custodial expenses |
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136 |
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103 |
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Other operating expenses |
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883 |
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834 |
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Total non-interest expense |
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11,133 |
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10,325 |
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Income before income taxes |
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4,262 |
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2,138 |
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Provision for income taxes |
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1,376 |
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620 |
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Net income |
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$ |
2,886 |
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$ |
1,518 |
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Basic earnings per share |
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$ |
0.32 |
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$ |
0.19 |
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Diluted earnings per share |
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$ |
0.32 |
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$ |
0.19 |
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Basic weighted average common shares outstanding |
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9,124,696 |
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8,059,337 |
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Diluted weighted average common shares outstanding |
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9,129,024 |
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8,065,636 |
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See the accompanying notes to the unaudited consolidated financial statements.
ENTERPRISE BANCORP, INC.
Consolidated Statement of Changes in Stockholders Equity
(Unaudited)
Three months ended March 31, 2010
See the accompanying notes to the unaudited consolidated financial statements.
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
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Three months ended March 31, |
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(Dollars in thousands) |
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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income |
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$ |
2,886 |
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$ |
1,518 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for loan losses |
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879 |
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1,102 |
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Depreciation and amortization |
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917 |
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764 |
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Amortization of intangible assets |
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33 |
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33 |
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Stock-based compensation expense |
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196 |
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154 |
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Mortgage loans originated for sale |
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(7,139 |
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(15,387 |
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Proceeds from mortgage loans sold |
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7,029 |
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15,404 |
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Gains on sales of loans |
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(81 |
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(122 |
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Gains on sales of OREO |
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(110 |
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Net gains on sales of investment securities |
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(501 |
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(971 |
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Other-than-temporary-impairment on investment securities |
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1 |
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758 |
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Income on bank-owned life insurance, net of costs |
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(136 |
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(136 |
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Decrease (increase) in: |
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Accrued interest receivable |
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(190 |
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125 |
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Prepaid expenses and other assets |
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108 |
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529 |
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Increase (decrease) in: |
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Accrued expenses and other liabilities |
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4 |
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253 |
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Accrued interest payable |
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(594 |
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(540 |
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Net cash provided by operating activities |
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3,302 |
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3,484 |
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Cash flows from investing activities: |
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Proceeds from sales of investment securities available for sale |
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1,505 |
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38,865 |
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Proceeds from maturities, calls and pay-downs of investment securities |
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7,832 |
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8,240 |
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Purchase of investment securities |
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(13,125 |
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(5,535 |
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Net increase in loans |
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(10,117 |
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(28,629 |
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Additions to premises and equipment, net |
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(1,066 |
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(1,586 |
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Proceeds from REO sales and payments |
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982 |
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555 |
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Net cash (used in) provided by investing activities |
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(13,989 |
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11,910 |
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Cash flows from financing activities: |
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Net increase in deposits |
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43,253 |
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49,694 |
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Net decrease (increase) in borrowed funds |
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20,425 |
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(17,006 |
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Cash dividends paid |
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(911 |
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(763 |
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Proceeds from issuance of common stock |
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300 |
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267 |
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Net cash provided by financing activities |
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63,067 |
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32,192 |
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Net increase in cash and cash equivalents |
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52,380 |
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47,586 |
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Cash and cash equivalents at beginning of period |
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32,610 |
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25,276 |
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Cash and cash equivalents at end of period |
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$ |
84,990 |
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$ |
72,862 |
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Supplemental financial data: |
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Cash Paid For: Interest |
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$ |
3,276 |
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$ |
4,568 |
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Income taxes |
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1,020 |
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490 |
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Supplemental schedule of non-cash investing activity: |
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Purchase of investment securities not yet settled |
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2,001 |
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1,236 |
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Transfer from loans to other real estate owned |
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350 |
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555 |
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Transfer from loans to other assets |
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970 |
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See accompanying notes to the unaudited consolidated financial statements.
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
(1) Organization of Holding Company
The consolidated financial statements of Enterprise Bancorp, Inc. (the Company or Enterprise) include the accounts of the Company and its wholly owned subsidiary Enterprise Bank and Trust Company (the Bank). The Bank is a Massachusetts trust company organized in 1989. Substantially all of the Companys operations are conducted through the Bank.
The Bank has five wholly owned subsidiaries. The Banks subsidiaries include Enterprise Insurance Services, LLC and Enterprise Investment Services, LLC, organized for the purposes of engaging in insurance sales activities and offering non-deposit investment products and services, respectively. In addition, the Bank has three subsidiary security corporations (Enterprise Security Corporation, Enterprise Security Corporation II, and Enterprise Security Corporation III), which hold various types of qualifying securities. The security corporations are limited to conducting securities investment activities that the Bank itself would be allowed to conduct under applicable laws.
Through the Bank and its subsidiaries, the Company offers a range of commercial and consumer loan products, deposit and cash management products, investment advisory and management, trust and insurance services. The services offered through the Bank and subsidiaries are managed as one strategic unit and represent the Companys only reportable operating segment.
The Federal Deposit Insurance Corporation (the FDIC) and the Massachusetts Commissioner of Banks (the Commissioner) have regulatory authority over the Bank. The Bank is also subject to certain regulatory requirements of the Board of Governors of the Federal Reserve System (the Federal Reserve Board) and, with respect to its New Hampshire branch operations, the New Hampshire Banking Department. The business and operations of the Company are subject to the regulatory oversight of the Federal Reserve Board. The Commissioner also retains supervisory jurisdiction over the Company.
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements and these notes should be read in conjunction with the Companys December 31, 2009 audited consolidated financial statements and notes thereto contained in the Companys 2009 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 12, 2010. Interim results are not necessarily indicative of results to be expected for the entire year.
The Company has not changed its significant accounting and reporting policies from those disclosed in its 2009 Annual Report on Form 10-K.
In the opinion of management, the accompanying consolidated financial statements reflect all necessary adjustments consisting of normal recurring accruals for a fair presentation. All significant intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.
Certain amounts in previous years financial statements have been reclassified to conform to the current years presentation, particularly under the subtitle Non-interest expense on the Consolidated Statements of Income, where changes were made, primarily to identify technology and telecommunications expense separately, in order to provide a more useful presentation.
(3) Critical Accounting Estimates
In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. These estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period then ended. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates should the assumptions and estimates used change over time due to changes in circumstances. Changes in those estimates resulting from continuing change in the economic environment and other factors will be reflected in the financial statements and results of operations in future periods.
As discussed in the Companys 2009 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, impairment review of investment securities and the impairment review of goodwill and other intangible assets. Refer to
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
note 1 to the Companys consolidated financial statements included in the Companys 2009 Annual Report on Form 10-K for significant accounting policies.
(4) Reporting Comprehensive Income
Comprehensive income is defined as all changes to equity except investments by and distributions to stockholders. Net income is one component of comprehensive income, with other components referred to in the aggregate as other comprehensive income. The Companys only other comprehensive income component is the net unrealized holding gains or losses on investments available for sale, net of deferred income taxes.
The following table summarized the components of other comprehensive income (loss) for the three month periods ended March 31, 2010 and 2009.
Disclosure of other comprehensive income (loss): |
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2010 |
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2009 |
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Gross unrealized holding gains (losses) arising during the period |
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$ |
755 |
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$ |
(114 |
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Income tax benefit (expense) |
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(267 |
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18 |
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Net unrealized holding gains (losses), net of tax |
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488 |
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(96 |
) |
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Less: Reclassification adjustment for impairment included in net income: |
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Other than temporary impairment loss arising during the period |
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(1 |
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(758 |
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Income tax benefit |
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258 |
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Reclassification adjustment for impairment realized, net of tax |
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(1 |
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(500 |
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Less: Reclassification adjustment for net gains (losses) included in net income |
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Net realized gains on sales of securities during the period |
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501 |
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971 |
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Income tax expense |
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(175 |
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(339 |
) |
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Reclassification adjustment for gains realized, net of tax |
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326 |
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632 |
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Other comprehensive income (loss), net of reclassifications |
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$ |
163 |
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$ |
(228 |
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(5) Accounting for Income Taxes
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax attributable to differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities will be adjusted accordingly through the provision for income taxes.
The Companys policy is to classify interest resulting from underpayment of income taxes as income tax expense in the first period the interest would begin accruing according to the provisions of the relevant tax law. The Company classifies penalties resulting from underpayment of income taxes as income tax expense in the period for which the Company claims or expects to claim an uncertain tax position or in the period in which the Companys judgment changes regarding an uncertain tax position.
The Company did not have any unrecognized tax benefits accrued as income tax liabilities or receivables or as deferred tax items at March 31, 2010. The Companys tax years beginning after December 31, 2005 are open to federal and state income tax examinations.
(6) Stock-Based Compensation
The Company currently has three individual stock incentive plans. The Company has not significantly changed the general terms and conditions of these plans from those disclosed in the Companys 2009 Annual Report on Form 10-K.
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
The Companys stock-based compensation expense includes restricted stock awards and stock option awards to officers, other employees and directors, and stock compensation in lieu of cash fees to directors. Total stock-based compensation expense was $196 thousand and $154 thousand for the three months ended March 31, 2010 and 2009, respectively.
Restricted Stock Awards
Stock-based compensation expense recognized in association with restricted stock awards amounted to $92 thousand and $24 thousand for the three months ended March 31, 2010 and 2009, respectively .
During the first quarter of 2010, the Company granted 77,963 shares of common stock in the form of restricted stock awards comprised of 70,475 shares awarded to employees, vesting over four years, and 7,488 shares awarded to directors vesting over two years. The grant date fair value of the restricted stock awarded was $12.51 per share, which reflects the market value of the common stock on the grant date. The 2010 awards vest, in each case, in equal portions starting on the first anniversary date of the award.
During the first quarter of 2009, the Company granted 83,200 shares of common stock to employees as restricted stock awards. The grant date fair value of the restricted stock awarded was $8.75 per share, which reflects the market value of the common stock on the grant date. Of the 2009 award, 43,200 shares vest twenty-five percent per year and 40,000 shares vest fifty percent per year, in each case starting on the first anniversary date of the award. There have been 150 awards forfeited to date.
The restricted stock awards allow for the receipt of dividends, and the voting of all shares, whether or not vested, throughout the vesting periods.
If a grantees employment or other service relationship, such as service as a director, is terminated for any reason, then any shares of restricted stock that have not vested as of the time of such termination must be forfeited, unless the compensation Committee or the Board of Directors, as the case may be, waives such forfeiture requirement.
Stock Option Awards
The Company recognized stock-based compensation expense related to stock option awards of $65 thousand and $79 thousand for the three months ended March 31, 2010 and 2009, respectively.
There were 63,775 and 51,050 stock option awards granted to employees during the three month periods ended March 31, 2010 and 2009, respectively. All of the options granted in 2010 and 2009 generally become exercisable at the rate of twenty-five percent per year on the anniversary date of the original grant, and provide for accelerated vesting of the entire grant for those who are age 62 on the grant date or upon attaining age 62 during the normal vesting period. Vested options are only exercisable while the employee remains employed with the Bank and for a limited period thereafter, and the options expire seven years from the date of grant.
The Company utilizes the Black-Scholes option valuation model in order to determine the per share grant date fair value of option grants. The table below provides a summary of the options granted, fair value, the fair value as a percentage of the market value of the stock at the date of grant and the average assumptions used in the model for the options granted in 2010 and 2009.
|
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
Options granted |
|
63,775 |
|
51,050 |
|
||
Per share weighted average fair value |
|
$ |
4.35 |
|
$ |
2.51 |
|
Market price on date of grant |
|
$ |
12.51 |
|
$ |
8.75 |
|
Percentage of market value at grant date |
|
35 |
% |
29 |
% |
||
Average assumptions used in the model: |
|
|
|
|
|
||
Expected volatility |
|
43 |
% |
40 |
% |
||
Expected dividend yield |
|
2.98 |
% |
4.54 |
% |
||
Expected life in years |
|
5.5 |
|
5.5 |
|
||
Risk-free interest rate |
|
2.66 |
% |
2.32 |
% |
Refer to note 9 Stock Based Compensation Plans in the Companys 2009 Annual Report on Form 10-K for a further description of the assumptions used in the valuation model.
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
Director Stock-based Compensation
Stock-based compensation expense related to Directors election to receive shares of common stock in lieu of cash fees for attendance at Board and Board Committee meetings amounted to $39 thousand and $51 thousand for the three months ended March 31, 2010 and 2009, respectively. In January 2010, 16,897 shares of common stock were issued to directors in lieu of cash fees related to 2009 annual directors stock-based compensation expense of $190 thousand.
(7) Supplemental Retirement Plan and Other Postretirement Benefit Obligations
Supplemental Retirement Plan
The Company has salary continuation agreements with three of its senior officers. These salary continuation agreements (SERPs) provide for a predetermined fixed-cash supplemental retirement benefit, the amount subject to vesting requirements, to be provided for a period of 20 years after the individual reaches a defined retirement age.
The following table illustrates the net periodic benefit cost for the SERPs for the periods indicated:
|
|
Three months ended March 31, |
|
||||
(Dollars in thousands) |
|
2010 |
|
2009 |
|
||
Service Cost |
|
$ |
41 |
|
$ |
41 |
|
Interest Cost |
|
46 |
|
44 |
|
||
Net periodic benefit cost |
|
$ |
87 |
|
$ |
85 |
|
Benefits paid amounted to $45 thousand for the three months ended March 31, 2010 and 2009. The Company anticipates accruing an additional $152 thousand to the plan during the remainder of 2010.
Bank Owned Life Insurance
The Company has purchased bank owned life insurance (BOLI) on certain senior and executive officers. The cash surrender value carried on the balance sheet at March 31, 2010 and December 31, 2009 amounted to $14.0 million and $13.8 million, respectively. There are no associated surrender charges under the outstanding policies.
Supplemental Life Insurance
For certain senior and executive officers on whom the Bank owns BOLI, the Bank has provided supplemental life insurance which provides a death benefit to the officers designated beneficiaries.
The following table illustrates the net periodic post retirement benefit cost for the supplemental life insurance plans for the periods indicated:
|
|
Three months ended March 31, |
|
||||
(Dollars in thousands) |
|
2010 |
|
2009 |
|
||
Service Cost |
|
$ |
1 |
|
$ |
5 |
|
Interest Cost |
|
5 |
|
20 |
|
||
Net periodic post retirement benefit cost |
|
$ |
6 |
|
$ |
25 |
|
(8) Earnings per share
Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects 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.
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
The table below presents the increase in average shares outstanding, using the treasury stock method, for the diluted earnings per share calculation and the effect of those shares on earnings, for the periods indicated:
|
|
Three months ended March 31, |
|
||||
|
|
2010 |
|
2009 |
|
||
Basic weighted average common shares outstanding |
|
9,124,696 |
|
8,059,337 |
|
||
Dilutive shares |
|
4,328 |
|
6,299 |
|
||
Diluted weighted average common shares outstanding |
|
9,129,024 |
|
8,065,636 |
|
||
|
|
|
|
|
|
||
Basic earnings per share |
|
$ |
0.32 |
|
$ |
0.19 |
|
Effect of dilutive shares |
|
0.00 |
|
0.00 |
|
||
Diluted earnings per share |
|
$ |
0.32 |
|
$ |
0.19 |
|
For the three months ended March 31, 2010, there were an additional 648,055 average stock options outstanding which were excluded from the year-to-date calculation of diluted earnings per share due to the exercise price of these options exceeding the average market price of the Companys common stock for the period. These options, which were not dilutive at that date, may potentially dilute earnings per share in the future.
(9) Investment Securities
The amortized cost and carrying values of investment securities at the dates specified are summarized as follows:
|
|
March 31, 2010 |
|
||||||||||
(Dollars in thousands) |
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Carrying
|
|
||||
Federal agency obligations (1) |
|
$ |
29,730 |
|
$ |
58 |
|
$ |
8 |
|
$ |
29,780 |
|
Federal agency mortgage backed securities (MBS) (1) |
|
37,767 |
|
764 |
|
28 |
|
38,503 |
|
||||
Non-agency MBS |
|
3,265 |
|
|
|
100 |
|
3,165 |
|
||||
Municipal securities |
|
58,258 |
|
1,632 |
|
54 |
|
59,836 |
|
||||
Total fixed income securities |
|
129,020 |
|
2,454 |
|
190 |
|
131,284 |
|
||||
Equity investments |
|
2,654 |
|
1,192 |
|
|
|
3,846 |
|
||||
Total available for sale securities, at fair value |
|
131,674 |
|
3,646 |
|
190 |
|
135,130 |
|
||||
FHLB Boston stock, at cost (2) |
|
4,740 |
|
|
|
|
|
4,740 |
|
||||
Total investment securities |
|
$ |
136,414 |
|
$ |
3,646 |
|
$ |
190 |
|
$ |
139,870 |
|
|
|
December 31, 2009 |
|
||||||||||
(Dollars in thousands) |
|
Amortized
|
|
Unrealized
|
|
Unrealized
|
|
Carrying
|
|
||||
Federal agency Obligations(1) |
|
$ |
25,653 |
|
$ |
45 |
|
$ |
67 |
|
$ |
25,631 |
|
MBS(1) |
|
39,299 |
|
606 |
|
168 |
|
39,737 |
|
||||
Non-agency MBS |
|
3,479 |
|
|
|
34 |
|
3,445 |
|
||||
Municipal securities |
|
59,278 |
|
1,466 |
|
152 |
|
60,592 |
|
||||
Total fixed income securities |
|
127,709 |
|
2,117 |
|
421 |
|
129,405 |
|
||||
Equity investments |
|
3,459 |
|
1,505 |
|
|
|
4,964 |
|
||||
Total available for sale securities, at fair value |
|
131,168 |
|
3,622 |
|
421 |
|
134,369 |
|
||||
FHLB stock, at cost(2) |
|
4,740 |
|
|
|
|
|
4,740 |
|
||||
Total investment securities |
|
$ |
135,908 |
|
$ |
3,622 |
|
$ |
421 |
|
$ |
139,109 |
|
(1) Investments issued or guaranteed by government sponsored enterprises such as Fannie Mae (FNMA), Freddie Mac (FHLMC), Ginnie Mae (GNMA) or one of several Federal Home Loan Banks (FHLB). All agency MBS investments owned by the Company are backed by residential mortgages.
(2) The Bank is required to purchase FHLB stock in association with advances from the FHLB; this stock is classified as a restricted investment and carried at cost, which management believes approximates fair value.
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
See Note 10, Fair Value Measurements below for further information regarding the Companys fair value measurements for available-for-sale securities.
The net unrealized gain or loss in the Companys fixed income portfolio fluctuates as market interest rates rise and fall. Due to the fixed rate nature of this portfolio, as market rates fall the value of the portfolio rises, and as market rates rise, the value of the portfolio declines. The unrealized gains or losses on fixed income investments will also decline as the securities approach maturity. Unrealized gains or losses will be recognized in the statements of income if the securities are sold. However, if an unrealized loss on the fixed income portfolio is deemed to be other than temporary, the credit loss portion is charged to earnings and the noncredit portion is recognized in accumulated other comprehensive income.
As of March 31, 2010, the unrealized losses on the federal agency obligations and federal agency MBS investments were limited to four individual securities, which were attributed to market volatility. The contractual cash flows of those investments are guaranteed by an agency of the U.S. Government, and the agencies that issued these securities are sponsored by the U.S. Government. Accordingly, it is expected that the securities would not be settled at a price less than the par value of the Companys investment. The Company does not consider those investments to be other-than-temporarily impaired at March 31, 2010, because the decline in market value is attributable to changes in interest rate volatility and not credit quality, additionally, the Company does not intend to, and it is more likely than not that it will not be required to, sell those investments prior to a market price recovery or maturity.
As of March 31, 2010, the Companys non-agency MBS portfolio consisted of one residential mortgage backed security. The unrealized loss was due to market conditions which resulted generally in lower prices for most non-agency MBSs in relation to government issued and agency securities. The Company does not consider this investment to be other-than-temporarily impaired at March 31, 2010 due to the AAA rating of the security and the high credit quality of the underlying loans. In addition, the Company does not intend to, and it is more likely than not that it will not be required to, sell those investments prior to a market price recovery or maturity.
As of March 31, 2010, the unrealized losses on the Companys municipal securities were related to seven obligations and were attributed to market volatility and not a fundamental deterioration in the issuers. The Company does not consider these investments to be other-than-temporarily impaired at March 31, 2010 due to the securities being classified as investment grade and also because of the lower risk nature of municipal investments. In addition, the Company does not intend to, and it is more likely than not that it will not be required to, sell those investments prior to a market price recovery or maturity.
The net unrealized gain or loss on equity securities will fluctuate based on changes in the market value of the funds and individual securities held in the portfolio. Unrealized gains or losses will be recognized in the statements of income if the securities are sold. However, if an unrealized loss on an equity security is deemed to be other than temporary prior to a sale, the loss is charged to earnings.
At March 31, 2010, the equity portfolio consisted primarily of investments in a diversified group of mutual funds, with a small portion of the portfolio (approximately 13%) invested in funds or individual common stock of entities in the financial services industry. At March 31, 2010, after the minor impairment charge discussed below, the Company did not have any investments in its equity portfolio with unrealized losses.
During the three months ended March 31, 2010, the Company recorded fair value impairment charges of $1 thousand, on a certain previously impaired equity investment contained in its equity portfolio. During the three months ended March 31, 2009, the Company recorded fair value impairment charges of $758 thousand, on certain investments contained in its equity portfolio, to reflect the impact of declines in the equities markets at that time. Managements decision to record this charge was based primarily on the severity of the declines and the uncertainty of recovery in the short-term for these equities. The 2009 pretax impairment charges of $758 thousand represented a $501 thousand after tax charge against earnings. During the three months ended March 31, 2010, the Company sold $1.0 million of previously impaired equity funds and recognized gains of $501 thousand.
As a member of the Federal Home Loan Bank of Boston (FHLB), the Company is required to purchase FHLB capital stock at par value in association with the Banks advances from the FHLB; this stock is classified as a restricted investment and carried at cost. The FHLB is currently operating with retained earnings below its target level. The FHLB has instituted a plan to increase retained earnings which includes suspending its quarterly dividend and a moratorium on the repurchase of excess capital stock from member banks, among other programs. If further deterioration in the FHLB financial condition or capital levels occurs, the FHLB capital stock may become other than temporarily impaired to some degree and its carrying value correspondingly reduced.
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
Management reviews its investment in FHLB stock for other than temporary impairment based on an assessment of the ultimate recoverability of the par value. Managements most recent evaluation considered the long term nature of the investments, the liquidity position of the FHLB, actions taken by FHLB to address the issue, and the Companys intent and ability to hold the investment for sufficient time to recover the par value. Based on this review, management concluded that no other than temporary impairment charge on FHLB stock was necessary as of March 31, 2010.
(10) Fair Value Measurements
FASB defines the fair value to be the price which a seller would receive in an orderly transaction between market participants (an exit price) and also establishes a fair value hierarchy segregating fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed on the basis of the best information available under the circumstances.
The following tables summarize significant assets and liabilities carried at fair value at the dates specified:
Investment securities that are considered available for sale are carried at fair value. The fixed income category above includes, federal agency obligations, federal agency MBS, non-agency MBS, and municipal securities, as held at those periods. The Company utilizes third-party pricing vendors to provide valuations on its fixed income securities. Fair values provided by the vendors were generally determined based upon pricing matrices utilizing observable market data inputs for similar or benchmark securities in active markets and/or based on a matrix pricing methodology which employs The Bond Market Associations standard calculations for cash flow and price/yield analysis, live benchmark bond pricing and terms/condition data available from major pricing sources. Therefore, management regards the inputs and methods used by third party pricing vendors to be Level 2 inputs and methods as defined in the fair value hierarchy provided in ASC Topic 820.
The Companys equity portfolio fair value is measured based on quoted market prices for the shares, therefore these securities are categorized as Level 1 within the fair value hierarchy.
Net unrealized appreciation and depreciation on investments available for sale, net of applicable income taxes, are reflected as a component of accumulated other comprehensive income.
The Bank is required to purchase Federal Home Loan Bank of Boston (FHLB) stock at par value in association with advances from the FHLB; this stock is classified as a restricted investment and carried at cost which management believes approximates
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
fair value, therefore these securities are categorized as Level 3 measures. See the discussion regarding FHLB stock in Note 9, Investment Securities above, for further information regarding the Companys fair value assessment of FHLB capital stock.
Impaired loan balances in the table above represent those collateral dependent impaired commercial loans where management has estimated the credit loss by comparing the loans carrying value against the expected realizable fair value of the collateral (appraised value less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in appraisals, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans are categorized as Level 3 within the fair value hierarchy. A specific allowance is assigned to the collateral dependent impaired loan for the amount of managements estimated credit loss. The specific allowances assigned to the collateral dependent impaired loans at March 31, 2010 amounted to $2.2 million, compared to $2.0 million at December 31, 2009, a net increase of $246 thousand.
Real estate acquired by the Company through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as Other Real Estate Owned (OREO). When property is acquired, it is generally recorded at the lesser of the loans remaining principal balance, net of unamortized deferred fees, or the estimated fair value of the property acquired, less estimated costs to sell. The estimated fair value is based on market appraisals. Certain inputs used in appraisals are not always observable, and therefore, OREO may be categorized as Level 3 within the fair value hierarchy.
Other Guarantees and Commitments
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance by a customer to a third party. The fair value of these commitments was estimated to be the fees charged to enter into similar agreements, and accordingly these fair value measures are deemed to be FASB Level 2 measurements. In accordance with the FASB, the estimated fair values of these commitments are carried on the balance sheet as a liability and amortized to income over the life of the letters of credit, which are typically one year. The estimated fair value of these commitments carried on the balance sheet was $41 thousand and $53 thousand at March 31, 2010 and December 31, 2009, respectively, and were deemed immaterial.
Interest rate lock commitments related to the origination of mortgage loans that will be sold are considered derivative instruments. The Company estimates the fair value of these derivatives using the difference between the guaranteed interest rate in the commitment and the current market interest rate. To reduce the net interest rate exposure arising from its loan sale activity, the Company enters into the commitment to sell these loans at essentially the same time that the interest rate lock commitment is quoted on the origination of the loan. The commitments to sell loans are also considered derivative instruments, with estimated fair values based on changes in current market rates. These commitments represent the Companys only derivative instruments and are accounted for in accordance with FASB guidance. The fair values of the Companys derivative instruments are deemed to be FASB Level 2 measurements. At March 31, 2010 and December 31, 2009, the estimated fair value of the Companys derivative instruments was considered to be immaterial.
Estimated Fair Values of Assets and Liabilities
In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the balance sheet, the Company is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the balance sheet. In cases where quoted fair values are not available, fair values are based upon estimates using various valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:
The respective carrying values of certain financial instruments approximated their fair value, as they were short-term in nature or payable on demand. These include cash and due from banks, total short-term investments, accrued interest receivable, repurchase agreements, accrued interest payable and non-certificate deposit accounts.
Investments: Fair values for investments were based on quoted market prices, where available, as provided by third-party accounting and pricing vendors. If quoted market prices were not available, fair values provided by the vendors were based on quoted market prices of comparable instruments in active markets and/or based on a matrix pricing methodology. See the discussion regarding fair value of investment securities above for further information regarding the Companys fair value measurements of investments.
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
The carrying amount of FHLB stock reported approximates fair value. See the discussion regarding FHLB stock in Note 9, Investment Securities above, for further information regarding the Companys fair value assessment of FHLB capital stock.
Loans: The fair value of loans was determined using discounted cash flow analysis, using interest rates currently being offered by the Company. The incremental credit risk for non-accrual loans was considered in the determination of the fair value of the loans.
Commitments: The fair values of the unused portion of lines of credit and letters of credit were estimated to be the fees currently charged to enter into similar agreements. Commitments to originate non-mortgage loans were short-term and were at current market rates and estimated to have no significant change in fair value.
Financial liabilities: The fair values of certificates of deposit and FHLB borrowings were estimated using discounted cash flow analysis using rates offered by the Bank, or advance rates offered by the FHLB on March 31, 2010 and December 31, 2009 for similar instruments. The fair value of junior subordinated debentures was estimated using discounted cash flow analysis using a market rate of interest at March 31, 2010 and December 31, 2009.
Limitations: The estimates of fair value of financial instruments were based on information available at March 31, 2010 and December 31, 2009 and are not indicative of the fair market value of those instruments as of the date of this report. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Companys entire holdings of a particular financial instrument.
Because no active market exists for a portion of the Companys financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates were based on existing on- and off-balance sheet financial instruments without an attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including premises and equipment and foreclosed real estate.
In addition, the tax ramifications related to the realization of the unrealized appreciation and depreciation can have a significant effect on fair value estimates and have not been considered in any of the estimates. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The carrying values and estimated fair values of the Companys financial instruments at the dates indicated are summarized as follows:
|
|
March 31, 2010 |
|
December 31, 2009 |
|
||||||||
(Dollars in thousands) |
|
Carrying
|
|
Fair Value |
|
Carrying
|
|
Fair Value |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
||||
Cash and cash equivalents |
|
$ |
84,990 |
|
$ |
84,990 |
|
$ |
32,610 |
|
$ |
32,610 |
|
Investment securities |
|
139,870 |
|
139,870 |
|
139,109 |
|
139,109 |
|
||||
Loans, net |
|
1,072,721 |
|
1,069,909 |
|
1,064,612 |
|
1,058,786 |
|
||||
Accrued interest receivable |
|
5,558 |
|
5,558 |
|
5,368 |
|
5,368 |
|
||||
|
|
|
|
|
|
|
|
|
|
||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
||||
Non-interest demand deposits |
|
199,230 |
|
199,230 |
|
192,515 |
|
192,515 |
|
||||
Interest bearing checking, savings, money market accounts |
|
711,438 |
|
711,438 |
|
655,401 |
|
655,401 |
|
||||
Certificates of deposit (including brokered) |
|
277,533 |
|
277,856 |
|
297,032 |
|
297,431 |
|
||||
Borrowed funds |
|
45,301 |
|
45,343 |
|
24,876 |
|
24,927 |
|
||||
Junior subordinated debentures |
|
10,825 |
|
10,825 |
|
10,825 |
|
10,825 |
|
||||
Accrued interest payable |
|
726 |
|
726 |
|
1,320 |
|
1,320 |
|
||||
ENTERPRISE BANCORP, INC.
Notes to Unaudited Consolidated Financial Statements
(11) Recent Accounting Pronouncements
In June 2009, the FASB amended the consolidation guidance applicable to variable interest entities (VIEs) by eliminating exceptions to consolidating qualifying special-purpose entities, changing the approach to determining a VIEs primary beneficiary, and requiring a company to more frequently reassess whether VIEs must be consolidated. This amended guidance is effective for the Company beginning in fiscal year 2010. The adoption of this guidance did not have a material impact on the Companys consolidated financial position or results of operations.
In June 2009, the FASB amended its guidance related to transfers and servicing of financial assets and extinguishments of liabilities to address certain practices that have developed that the FASB determined are not consistent with the original intent and key requirement of the prior guidance, and to address concerns that financial assets that have been derecognized should continue to be reported in the financial statements of the transferors. The new guidance is intended to improve the information that a reporting entity provides in its financial reports about the transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows. The appropriateness of derecognition is evaluated based on whether or not the transferor has surrendered control of the transferred assets. The evaluation must consider any continuing involvement by the transferor in the financial assets. New disclosure requirements must be applied to transfers that occurred both before and after the effective date of this new guidance, which is effective for the first interim and annual periods that begin after November 15, 2009 and for interim and annual periods thereafter. Earlier application is prohibited. The implementation of this guidance did not have a material impact on the Companys financial position or results of operations.
Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements discussion and analysis should be read in conjunction with the Companys consolidated financial statements and notes thereto contained in this report and the Companys 2009 Annual Report on Form 10-K.
Special Note Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning plans, objectives, future events or performance and assumptions and other statements that are other than statements of historical fact. Forward-looking statements may be identified by reference to a future period or periods or by use of forward-looking terminology such as anticipates, believes, expects, intends, may, plans, pursue, views and similar terms or expressions. Various statements contained in Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations and Item 3 Quantitative and Qualitative Disclosures About Market Risk, including, but not limited to, statements related to managements views on the banking environment and the economy, competition and market expansion opportunities, the interest rate environment, credit risk and the level of future non-performing assets and charge-offs, potential asset and deposit growth, future non-interest expenditures and non-interest income growth, and borrowing capacity are forward-looking statements. The Company wishes to caution readers that such forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties that may adversely affect the Companys future results. The following important factors, among others, could cause the Companys results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein: (i) changes in interest rates could negatively impact net interest income; (ii) changes in the business cycle and downturns in the local, regional or national economies, including deterioration in the local real estate market, could negatively impact credit and/or asset quality and result in credit losses and increases in the Companys allowance for loan losses; (iii) changes in consumer spending could negatively impact the Companys credit quality and financial results; (iv) increasing competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services could adversely affect the Companys competitive position within its market area and reduce demand for the Companys products and services; (v) deterioration of securities markets could adversely affect the value or credit quality of the Companys assets and the availability of funding sources necessary to meet the Companys liquidity needs; (vi) changes in technology could adversely impact the Companys operations and increase technology-related expenditures; (vii) increases in employee compensation and benefit expenses could adversely affect the Companys financial results; (viii) changes in laws and regulations that apply to the Companys business and operations could increase the Companys regulatory compliance costs and adversely affect the Companys business environment, operations and financial results; (ix) changes in accounting standards, policies and practices, as may be adopted or established by the regulatory agencies, the Financial Accounting Standards Board (the FASB) or the Public Company Accounting Oversight Board could negatively impact the Companys financial results; and (x) some or all of the risks and uncertainties described in Item 1A of the Companys 2009 Annual Report on Form 10-K could be realized, which could have a material adverse effect on the Companys business, financial condition and results of operation. Therefore, the Company cautions readers not to place undue reliance on any such forward-looking information and statements.
Overview
Management continues to believe that the current banking environment provides many opportunities for community banks like Enterprise Bank, as customers continue to migrate from larger, national banks to local community banks, choosing to do their banking business with local professional bankers that can make decisions based on individualized circumstances. Enterprise reported strong quarterly financial results and continued to successfully grow deposits and loans, while expanding the branch network and investing in infrastructure, communities and in employees, in order to seize current market opportunities which will position Enterprise for further long-term growth.
Net income amounted to $2.9 million for the three months ended March 31, 2010, compared to $1.5 million for the three months ended March 31, 2009, an increase of 90%. Diluted earnings per share were $0.32 compared to $0.19 for the same period in 2009, an increase of 68%. Total deposits, excluding brokered deposits, increased $71.2 million, or 6%, since December 31, 2009, representing an annualized growth rate of 26%. Since March 31, 2009, total deposits, excluding brokered deposits, have increased $263.2 million, or 28%. Loans have increased by $8.4 million, or 1%, since December 31, 2009 and $114.8 million, or 12%, since March 31, 2009.
Composition of Earnings
The increase in net income for the quarter ended March 31, 2010, when compared to the same period in 2009, was primarily due to increases in net interest income and non-interest income and a decrease in the provision for loan losses, partially offset by increases in non-interest expenses.
The Companys earnings are largely dependent on its net interest income, which is the difference between interest earned on loans and investments and the cost of funding (primarily deposits and borrowings). Net interest income expressed as a percentage of average interest earning assets is referred to as net interest margin. The re-pricing frequency of the Companys assets and liabilities are not identical, and therefore subject the Company to the risk of adverse changes in interest rates. This is often referred to as interest rate risk and is reviewed in more detail in Item 3, Quantitative and Qualitative Disclosures About Market Risk, of this Form 10-Q.
Net interest income for the quarter ended March 31, 2010 amounted to $13.2 million, compared to $11.2 million in the March 2009 quarter, an increase of $2.0 million, or 18%. The increase in net interest income over the comparable prior-year period was due primarily to strong loan growth. Average loan balances increased $126.3 million, or 13%, for the quarter ended March 31, 2010 compared to the first quarter in 2009. Additionally, net interest margin increased to 4.44% for the three months ended March 31, 2010, compared to 4.17% for the quarter ended March 31, 2009. Net interest margin was 4.42% for the fourth quarter of 2009.
The provision for loan losses amounted to $879 thousand for the three months ended March 31, 2010 compared to $1.1 million for the same period in 2009. The provision for loan losses was primarily impacted by the level of loan growth, non-performing loans, and net charge-offs. Loan growth during the first quarter of 2010 amounted to $8.4 million compared to $27.8 million for the same period in 2009. For the year-to-date period ended March 31, 2010, the Company recorded net charge-offs of $607 thousand, compared to net charge-offs of $386 thousand for the period ended March 31, 2009. Annualized net charge-offs for the three months ended March 31, 2010 amounted to 0.23% of average total loans, and non-performing assets to total assets were 1.36% at March 31, 2010. The levels of charge-offs and non-performing assets, which reflect more normalized levels compared to the historic lows of recent years, are a function of the current economic environment and remain favorable compared to peer levels. The allowance for loan losses to total loans ratio was 1.69% at March 31, 2010, compared to 1.68% at December 31, 2009 and 1.64% at March 31, 2009.
Non-interest income for the three months ended March 31, 2010 amounted to $3.1 million, an increase of $718 thousand, or 30%, compared to the first quarter of 2009. Net gains on security sales and other than temporary impairment charges on certain equity securities, combined, increased $287 thousand compared to the quarter ended March 31, 2009. Investment advisory income increased $205 thousand in the first quarter of 2010 over the same period in the prior year. The increase in investment advisory income primarily relates to net asset growth, both from market appreciation and new business, during the second half of 2009.
Non-interest expense for the three months ended March 31, 2010, amounted to $11.1 million, an increase of $808 thousand, or 8%, compared to the same quarter last year. The increase in non-interest expense was related primarily to the Companys strategic growth initiatives resulting in increases in compensation-related costs and technology expenses.
The effective tax rate for the three months ended March 31, 2010 was 32.3% compared to 29.0% in the 2009 period. The increase in the effective tax rate was primarily due to the higher level of taxable income as compared to 2009 levels.
The Companys primary sources of funds are deposits, brokered CDs, FHLB borrowings, current earnings and proceeds from the sales, maturities and paydowns on loans and investment securities. Additionally, in the fourth quarter of 2009 the Company raised $8.9 million ($8.8 million, net of costs) through a combined shareholder subscription rights and supplemental community stock offering. These funds have been used to originate loans, purchase investment securities, conduct operations, expand the branch network, and pay dividends to shareholders.
Total assets amounted to $1.37 billion at March 31, 2010, an increase of 5% since December 31, 2009. The Companys core asset strategy is to grow loans, primarily high quality commercial loans. Total loans increased $8.4 million, or 1%, since December 31, 2009 and amounted to $1.09 billion, or 80% of total assets. Total commercial loans amounted to $933.3 million, or 85% of gross loans, which was consistent with the level at December 31, 2009. Management closely monitors the credit quality of individual delinquent and non-performing credit relationships, portfolio mix and industry concentrations, the local and regional real estate markets and current economic conditions. Although March 31, 2010 non-performing statistics have declined slightly since December 31, 2009, they have increased from the comparable 2009 period, as would be expected during the current economic
environment. Management does not consider the increase to be indicative of significant deterioration in the overall credit quality of the general loan portfolio at March 31, 2010.
The investment portfolio is the other key component of earning assets and is primarily used to invest excess funds, provide liquidity and to manage the Companys asset-liability position. The carrying value of total investments amounted to $139.9 million at March 31, 2010, or 10% of total assets, and was comparable to the ratio of 11% at December 31, 2009.
Managements preferred strategy for funding asset growth is to grow low cost deposits (comprised of demand deposit accounts, interest and business checking accounts and traditional savings accounts). Asset growth in excess of low cost deposits is typically funded through higher cost deposits (comprised of money market accounts, commercial tiered rate savings accounts and certificates of deposit), customer repurchase agreements, wholesale funding (brokered CDs and FHLB borrowings), and investment portfolio cash flow.
At March 31, 2010, deposits, excluding brokered CDs, amounted to $1.19 billion, representing $71.2 million, or 6%, in growth over December 31, 2009 balances. At March 31, 2010 higher cost money market account balances increased $59.9 million, or 19%, non-brokered CDs increased $8.4 million, or 3%, while commercial savings and low cost deposit balances increased $2.9 million, or 0.5%, compared to balances at December 31, 2009. The deposit growth is attributed to expansion and sales efforts to attract relationship customers seeking a competitive, but secure, alternative to the larger regional and national banks and mutual funds.
Wholesale funding amounted to $43.9 million at March 31, 2010, compared to $51.4 million at December 31, 2009. At March 31, 2010, there were no outstanding brokered CDs and wholesale funding was comprised solely of FHLB borrowings. At December 31, 2009, wholesale funding included $27.9 million in brokered CDs and FHLB borrowings amounting to $23.5 million. The declines in wholesale funding were achieved due to the strong deposit growth during the period.
While the current economic environment continues to present significant challenges for all companies, management also believes that it has created opportunities for growth and customer acquisition, not withstanding the competition discussed below, as customers seek out local, stable community banks with which to do their banking business. Management views the Companys product offerings, its customer service culture, and its focus on the communities we serve, as key elements in positioning Enterprise to take advantage of these market opportunities to grow both deposits and loans.
The Company faces strong competition from multiple sources within its market area. National and larger regional banks have a local presence in the Companys market area. These established larger banks, as well as recent larger entrants into the market area, have certain competitive advantages, including the ability to make larger loans to a single borrower than is possible for the Company, and greater financial resources. Numerous local savings banks, commercial banks, cooperative banks and credit unions also operate in the Companys market area. The expanded commercial lending capabilities of credit unions and the shift to commercial lending by traditional savings banks also allow them to compete for the Companys targeted commercial customers. In addition, the non-taxable status of credit unions allows them certain advantages as compared to taxable institutions. Competition for loans, investment advisory assets and deposits also comes from other businesses that provide financial services, including consumer finance companies, mortgage brokers, private lenders, insurance companies, securities brokerage firms, institutional mutual funds, registered investment advisors and internet based banks.
The Company has built a reputation within its market area based on customer service and community involvement, differentiating itself through its people, who act as trusted advisors to clients, possess strong technical skills, deliver a superior level of customer service, and uphold the Companys core values, including deep community involvement, which has lead to a strong network with business and community leaders. The Company seeks to increase deposit share, in both existing and new markets, with continual review of deposit product offerings targeted to customer needs, focused and dynamic marketing strategies, and with carefully planned expansion into neighboring markets and new branch development. In the past two years, the Company has increased its branch network by three locations, expanding its existing presence in Middlesex and Essex Counties of Massachusetts and in southern New Hampshire. During this time, the Company has also made significant investments in renovations to its established branches and operations center, and relocated the Salem NH branch to a larger facility in response to strong growth in that market.
Management believes that Enterprise is also well positioned to capitalize on market opportunity and grow both the commercial and residential loan portfolios, by utilizing a disciplined and consistent lending approach, conservative credit review practices, and strong customer service standards which have served to provide quality asset growth over varying economic cycles during the
Companys twenty-one year history. The Company has a solid lending sales force with a broad breadth of business knowledge and depth of lending experience to draw upon.
Management continues to undertake significant strategic initiatives, including investments in employee training and development, marketing and public relations, technology, operating facilities improvement, branch expansion and ongoing updates and renovations of existing branches. While management recognizes that such investments increase expenses in the short-term, it believes that such initiatives are an investment in the long-term growth and earnings of the Company and are reflective of the opportunities in the current marketplace for community banks such as Enterprise.
The Companys ability to achieve its long-term growth and market share objectives, will depend upon the Companys continued success in differentiating itself from competitors, developing strong relationships with business and community leaders, and providing a full range of diversified financial products and services delivered through consistent, responsive and superior personalized customer service. Management believes that Enterprise is well positioned, both financially and strategically, to capitalize on opportunities created by the current challenging banking landscape. Management believes the Enterprise business model, strong service and technology cultures, active community involvement, its focus on relationship-banking, experienced banking professionals, in-depth knowledge of our markets and trusted reputation within the community, creates opportunities for the Company to be the leading provider of banking and investment management services in its growing market area.
Notwithstanding the market opportunities that management believes the current economic environment has created, any long-term consequences of the nationwide or regional recession, or possible lagging effects, could further weaken the local New England economy, and have adverse repercussions on local industries leading to increased unemployment and foreclosures, further deterioration of local commercial real estate values, or other unforeseen complications, which could have a severe negative impact on the Companys financial condition, capital position, liquidity, and performance. In addition, the loan portfolio consists primarily of commercial real estate, commercial and industrial and construction loans. These types of loans are typically larger and are generally viewed as having more risk of default than owner occupied residential real estate loans or consumer loans. The underlying commercial real estate values, customer cash flow and payment expectations and, in the case of commercial construction loans, the actual costs necessary to complete a construction project, can be more easily influenced by adverse conditions in the local or national economy, the real estate market, or the related industries. Any significant deterioration in the commercial loan portfolio or underlying collateral values due to a continuation or worsening of the current economic environment could have a material adverse effect on the Companys financial condition and results of operations.
The value of the investment portfolio as a whole, or individual securities held, including bonds issued by government agencies or municipalities and restricted FHLB capital stock could be negatively impacted by any continued volatility in the financial markets, tightening of credit markets, and any possible subsequent effects of the current economic recession, which could possibly result in the recognition of additional other-than-temporary-impairment (OTTI) charges in the future.
Any further changes in government regulation or oversight, including responses to the recent financial crisis, could affect the Company in substantial and unpredictable ways, including, but not limited to, subjecting the Company to additional operating and compliance costs. Changes in the FDICs deposit insurance rates applicable to all insured banks and the Companys participation in the FDICs Transaction Account Guaranty Program have already increased the Companys ongoing FDIC-related costs, and the FDICs ability to impose additional future special assessments to restore its Deposit Insurance Fund could further increase these costs.
Additional significant challenges facing the Company continue to be the effective management of interest rate and credit risk, liquidity management, capital adequacy and operational risk.
The re-pricing frequency of interest earning assets and liabilities are not identical, and therefore subject the Company to the risk of adverse changes in interest rates. This is often referred to as interest rate risk and is reviewed in more detail under Item 3, Quantitative and Qualitative Disclosures About Market Risk below.
The risk of loss due to customers non-payment of loans or lines of credit is called credit risk. Credit risk management is reviewed below in this Item 2 under the heading Credit Risk/Asset Quality and the Allowance for Loan Losses.
Liquidity management is the coordination of activities so that cash needs are anticipated and met, readily and efficiently. Liquidity management is reviewed further below in this Item 2 under the heading Liquidity.
Federal banking agencies require the Company and the Bank to meet minimum capital requirements. At March 31, 2010, the Company was categorized as well capitalized; however future unanticipated charges against capital could impact that
regulatory capital designation. For information regarding the capital requirements applicable to the Company and the Bank and their respective capital levels at March 31, 2010, see the section entitled Capital Resources contained in this Item 2 below.
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people or systems, or from external events. Operational risk management is also a key component of the Companys risk management process, particularly as it relates to technology administration, information security, and business continuity.
Management utilizes a combination of third party information security assessments, key technologies and ongoing internal evaluations in order to protect non-public customer information and continually monitor and safeguard information on its operating systems and those of third party service providers. The Company contracts with outside parties to perform a broad scope of both internal and external information security assessments on the Companys systems on a regular basis. These third parties test the network configuration and security controls, and assess internal practices aimed at protecting the Companys operating systems. In addition, an outside service provider monitors usage patterns and identifies unusual activity on bank issued debit/ATM cards. The Company also utilizes firewall technology and a combination of software and third-party monitoring to detect intrusion, protect against unauthorized access and continuously scan for computer viruses on the Companys information systems.
The Business Continuity Plan consists of the information and procedures required to enable rapid recovery from an occurrence that would disable the Company for an extended period. The plan addresses issues and concerns regarding the loss of personnel, loss of information and/or loss of access to information under various scenarios including: the inability of staff or customers to travel to bank offices and the physical destruction or damage of facilities, infrastructure or systems. The plan, which is reviewed annually, establishes responsibility for assessing a disruption of business, contains alternative strategies for the continuance of critical business functions during an emergency situation, assigns responsibility for restoring services, and sets priorities by which critical services will be restored. Any contingency plan, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the plan are met as the assumptions used change over time or due to changes in circumstances and events.
In addition to the risks discussed above, numerous other factors that could adversely affect the Companys future results of operations and financial condition are addressed in Item 1A, Risk Factors, included in the Companys 2009 Annual Report on Form 10-K. This Opportunities and Risks discussion should be read in conjunction with Item 1A.
Financial Condition
Total assets increased $62.0 million, or 5%, since December 31, 2009, to $1.37 billion at March 31, 2010. The balance sheet composition and changes since December are discussed below:
As of March 31, 2010, short-term investments amounted to $61.3 million, or 4% of total assets, an increase of $54.5 million compared to December 31, 2009. Short-term investments carried as cash equivalents consist of overnight and term federal funds sold and money market mutual funds. The balance of these investments will fluctuate depending on deposit inflows, investment sales proceeds and the immediate liquidity needs of the Company.
At March 31, 2010, the investment portfolio was relatively flat compared to December 31, 2009. The carrying value of the investment portfolio represented 10% of total assets at March 31, 2010 and 11% at December 31, 2009.
The following table summarizes investments at the dates indicated:
(Dollars in thousands) |
|
March 31, 2010 |
|
December 31,
|
|
March 31, 2009 |
|
|||
|
|
|
|
|
|
|
|
|||
Federal agency obligations (1) |
|
$ |
29,780 |
|
$ |
25,631 |
|
$ |
1,495 |
|
Federal agency mortgage backed securities (MBS) (1) |
|
38,503 |
|
39,737 |
|
41,615 |
|
|||
Non-agency MBS |
|
3,165 |
|
3,445 |
|
4,210 |
|
|||
Municipal securities |
|
59,836 |
|
60,592 |
|
62,437 |
|
|||
Total fixed income securities |
|
$ |
131,284 |
|
$ |
129,405 |
|
$ |
109,757 |
|
|
|
|
|
|
|
|
|
|||
Equity investments |
|
3,846 |
|
4,964 |
|
4,444 |
|
|||
Total available for sale securities at fair value |
|
$ |
135,130 |
|
$ |
134,369 |
|
$ |
114,201 |
|
|
|
|
|
|
|
|
|
|||
Federal Home Loan Bank stock (2) |
|
4,740 |
|
4,740 |
|
4,740 |
|
|||
Total investment securities |
|
$ |
139,870 |
|
$ |
139,109 |
|
$ |
118,941 |
|
(1) Investments issued or guaranteed by government sponsored enterprises such as Fannie Mae (FNMA), Freddie Mac (FHLMC), Ginnie Mae (GNMA) or one of several Federal Home Loan Banks (FHLB). All agency MBS investments owned by the Company are backed by residential mortgages.
(2) The Bank is required to purchase FHLB stock in association with advances from the FHLB; this stock is classified as a restricted investment and carried at cost, which management believes approximates fair value.
During the three months ended March 31, 2010, the Company sold $1.0 million in equity mutual funds, and recognized net gains of $501 thousand. During the same period, the total principal paydowns, calls and maturities on fixed income securities amounted to $7.8 million. These portfolio cash inflows were offset by the purchase of $9.4 million in securities, primarily federal agency securities.
Net unrealized gains amounted to $3.5 million at March 31, 2010 compared to $3.2 million at December 31, 2009 and $1.4 million at March 31, 2009. See Note 9, Investment Securities and Note 10, Fair Value Measurements to the Companys unaudited consolidated financial statements contained in Item 1 above for further information regarding the Companys unrealized gain and losses on debt and equity securities, including information about investments in an unrealized loss position for which an other-than-temporary impairment has or has not been recognized and the Companys fair value measurements for available-for-sale securities.
From time to time the Company may pledge securities from its investment portfolio as collateral for various municipal deposit accounts and repurchase agreements, the fair value of securities pledged as collateral for these purposes was $27.7 million at March 31, 2010. Securities designated as qualified collateral for FHLB borrowing capacity amounted to $40.5 million at March 31, 2010. Securities designated as qualified collateral for borrowing from the Federal Reserve Bank of Boston (the FRB) through its discount window amounted to $58.8 million at March 31, 2010.
The Company specializes in lending to business entities, non-profit organizations, professionals and individuals. The Companys primary lending focus is on the development of high quality commercial relationships achieved through active business development efforts, strong community involvement and focused marketing strategies. Loans made by the Company to businesses include commercial mortgage loans, construction and land development loans, secured and unsecured commercial loans and lines of credit, and standby letters of credit. The Company also originates equipment lease financing for businesses. Loans made to individuals include conventional residential mortgage loans, home equity loans, residential construction loans on primary residences, secured and unsecured personal loans and lines of credit. The Company does not have a sub-prime mortgage program. The Company seeks to manage its loan portfolio to avoid concentration by industry or loan size to minimize its credit risk exposure.
Total loans increased $8.4 million, or 1%, compared to December 31, 2009, and $114.8 million, or 12%, since March 31, 2009. Total loans represented 80% of total assets at March 31, 2010 and 83% at December 31, 2009. The majority of the growth since December has been focused in the commercial portfolio, as total commercial loans have increased $9.0 million, over the period.
The following table sets forth the loan balances by certain loan categories at the dates indicated and the percentage of each category to gross loans.
|
|
March 31, 2010 |
|
December 31, 2009 |
|
March 31, 2009 |
|
|||||||||
(Dollars in thousands) |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Commercial real estate |
|
$ |
566,053 |
|
51.8 |
% |
$ |
553,768 |
|
51.1 |
% |
$ |
488,550 |
|
50.0 |
% |
Commercial and industrial |
|
270,075 |
|
24.7 |
% |
263,151 |
|
24.3 |
% |
242,133 |
|
24.8 |
% |
|||
Commercial construction |
|
97,209 |
|
8.9 |
% |
107,467 |
|
9.9 |
% |
97,205 |
|
9.9 |
% |
|||
Total commercial loans |
|
933,337 |
|
85.4 |
% |
924,386 |
|
85.3 |
% |
827,888 |
|
84.7 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Residential mortgages |
|
88,948 |
|
8.1 |
% |
90,468 |
|
8.3 |
% |
87,240 |
|
8.9 |
% |
|||
Residential construction |
|
5,798 |
|
0.5 |
% |
6,260 |
|
0.6 |
% |
4,895 |
|
0.5 |
% |
|||
Home equity |
|
59,969 |
|
5.5 |
% |
58,732 |
|
5.4 |
% |
51,994 |
|
5.3 |
% |
|||
Consumer |
|
3,883 |
|
0.4 |
% |
3,824 |
|
0.4 |
% |
3,705 |
|
0.4 |
% |
|||
Loans held for sale |
|
569 |
|
0.1 |
% |
378 |
|
0.0 |
% |
1,701 |
|
0.2 |
% |
|||
Gross loans |
|
1,092,504 |
|
100.0 |
% |
1,084,048 |
|
100.0 |
% |
977,423 |
|
100.0 |
% |
|||
Deferred fees, net |
|
(1,293 |
) |
|
|
(1,218 |
) |
|
|
(989 |
) |
|
|
|||
Total loans |
|
1,091,211 |
|
|
|
1,082,830 |
|
|
|
976,434 |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Allowance for loan losses |
|
(18,490 |
) |
|
|
(18,218 |
) |
|
|
(15,985 |
) |
|
|
|||
Net loans |
|
$ |
1,072,721 |
|
|
|
$ |
1,064,612 |
|
|
|
$ |
960,449 |
|
|
|
Commercial real estate loans increased $12.3 million, or 2%, as of March 31, 2010, compared to December 31, 2009, and 16% compared to March 31, 2009. Commercial real estate loans include loans secured by both owner-use and non-owner occupied real estate. These loans are typically secured by a variety of commercial and industrial property types including apartment buildings, office or mixed-use facilities, strip shopping malls or other commercial property.
Commercial and industrial loans increased by $6.9 million, or 3%, since December 31, 2009, and 12% as compared to March 31, 2009. These loans include seasonal revolving lines of credit, working capital loans, equipment financing (including equipment leases), and term loans. Also included in commercial and industrial loans are loans under various U.S. Small Business Administration programs. These commercial and industrial loans include unsecured loans or lines to financially strong borrowers, loans secured in whole or in part by real estate unrelated to the principal purpose of the loan, or secured by inventories, equipment and/or receivables. Commercial and industrial loans are generally guaranteed by the principals of the borrower.
Commercial construction loans decreased $10.3 million, or 10%, since December 31, 2009, and were relatively flat compared to March 31, 2009. The decrease since December 31, 2010 reflects the limited new construction projects by qualified builders due to the environment in the construction industry over that time frame. The increase in 2009 occurred primarily during the third quarter as a result of select opportunities in the market place to lend to strong developers. Commercial construction loans include the development of residential housing and condominium projects, the development of commercial and industrial use property and loans for the purchase and improvement of raw land. The Company limits the amount of financing provided to any single developer for the construction of properties built on a speculative basis. Funds for construction projects are disbursed as pre-specified stages of construction are completed. Regular site inspections are performed, either by experienced construction lenders on staff or by independent outside inspection companies, at each construction phase, prior to advancing additional funds.
Residential mortgages, residential construction, home equity mortgages and consumer loans combined represented approximately 15% of the total loan portfolio at both March 31, 2010 and December 31, 2009. These loans remained relatively flat since December 31, 2009 and increased by $10.8 million, or 7%, since March 31, 2009. The increases were primarily within the home equity portfolio due to favorable market rates over the period.
Depending on the current interest rate environment, management projections of future interest rates and the overall asset-liability management program of the Company, management may elect to sell those fixed and adjustable rate residential mortgage loans which are eligible for sale in the secondary market, or hold some or all of this residential loan production for the Companys portfolio. The Company generally does not pool mortgage loans for sale, but instead sells the loans on an individual basis. The Company may retain or sell the servicing when selling the loans. All loans sold are currently sold without recourse, subject to an early payment default period covering the first four payments for certain loan sales. During the three months ended March 31, 2010, the Company originated $7.1 million in residential loans designated for sale, compared to $15.4 million for the comparable
period in the prior year. The decrease in volume of residential loan production was due to the slightly more favorable market rates in 2009. Loans sold generated gains on sales of $81 thousand and $122 thousand for the three month periods ended March 31, 2010 and 2009, respectively.
At March 31, 2010, the Company had commercial loan balances participated out to various banks amounting to $34.6 million, compared to $34.7 million at December 31, 2009, and $20.1 million at March 31, 2009. Balances participated out to other institutions are not carried as assets on the Companys financial statements. Loans originated by other banks in which the Company is the participating institution are carried in the loan portfolio at the Companys pro rata share of ownership and amounted to $32.9 million, $31.5 million and $23.9 million at March 31, 2010, December 31, 2009 and March 31, 2009, respectively. The Company performs an independent credit analysis of each commitment prior to participation in any loan.
Loans designated as qualified collateral for FHLB borrowing capacity amounted to $295.4 million and $301.9 million at March 31, 2010 and December 31, 2009, respectively.
There have been no material changes to the Companys underwriting practices or to the allowance for loan loss methodology used to estimate loan loss exposure as reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. The provision for loan losses is a significant factor in the Companys operating results.
The Company manages its loan portfolio to avoid concentration by industry or loan size to minimize its credit risk exposure. In addition, the Company does not have a sub-prime mortgage program. However, inherent in the lending process is the risk of loss due to customer non-payment, or credit risk. The Companys commercial lending focus may entail significant additional risks compared to long term financing on existing owner occupied residential real estate. These types of loans are typically larger and are generally viewed as having more risk of default than owner occupied residential real estate loans or consumer loans. The underlying commercial real estate values, customer cash flow and payment expectations and, in the case of commercial construction loans, the actual costs necessary to complete a construction project, can be more easily influenced by adverse conditions in the local or national economy, the real estate market, or the related industries. As such, an extended downturn in the national or local economy or real estate markets, among other factors, could have a material impact on the borrowers ability to repay outstanding loans and on the value of the collateral securing these loans. While the Company endeavors to minimize this risk through the risk management function, management recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio and economic conditions.
The Companys credit risk management function focuses on a wide variety of factors, including, among others, current and expected economic conditions, the real estate market, the financial condition of borrowers, the ability of borrowers to adapt to changing conditions or circumstances affecting their business and the continuity of borrowers management teams. Early detection of credit issues is critical to minimize credit losses. Accordingly, management regularly monitors these factors, among others, through ongoing credit reviews by the Credit Department, an external loan review service, reviews by members of senior management and the Loan Committee of the Board of Directors.
The Companys loan risk rating system classifies loans depending on risk of loss characteristics. The classifications range from substantially risk free for the highest quality loans and loans that are secured by cash collateral, to the most severe adverse classifications of substandard, doubtful and loss based on criteria established under banking regulations. Loans classified as substandard include those characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all the weaknesses inherent in a substandard rated loan with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans classified as loss are generally considered uncollectible at present, although long term recovery of part or all of loan proceeds may be possible. These loss loans would require a specific loss reserve or charge-off. Adversely classified loans may be accruing or in non-accrual status and may be additionally designated as impaired or restructured, or some combination thereof. Loans which are evaluated to be of weaker credit quality are reviewed on a more regular basis by management.
Impaired loans are individually significant loans for which management considers it probable that not all amounts due in accordance with original contractual terms will be collected. The majority of impaired loans are included within the non-accrual balances; however, not every loan in non-accrual status has been designated as impaired. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms.
When a loan is deemed to be impaired, management estimates the credit loss by comparing the loans carrying value against either 1) the present value of the expected future cash flows discounted at the loans effective interest rate; 2) the loans observable market price; or 3) the expected realizable fair value of the collateral, in the case of collateral dependent loans. A specific allowance is assigned to the impaired loan for the amount of estimated credit loss. Impaired loans are charged off, in whole or in part, when management believes that the recorded investment in the loan is uncollectible.
Impaired loans exclude large groups of smaller-balance homogeneous loans, such as residential mortgage loans and consumer loans, which are collectively evaluated for impairment, and loans that are measured at fair value, unless such loan is amended in a troubled debt restructure.
Loans are designated as a troubled debt restructured (or TDR) when a concession is made on a credit as a result of financial difficulties of the borrower. Typically, such concessions consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, or a deferment of payments, principal or interest, which materially alters the Banks position or significantly extends the notes maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loans origination. TDR loans are included in the impaired loan category.
Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is generally discontinued when a loan becomes contractually past due, with respect to interest or principal, by ninety days, or when reasonable doubt exists as to the full and timely collection of interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when payments are brought current and have remained current for a period of ninety days or when, in the judgment of management, the collectability of both principal and interest is reasonably assured. Interest payments received on loans in a non-accrual status are generally applied to principal.
Real estate acquired by the Company through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as Other Real Estate Owned (OREO). When property is acquired, it is generally recorded at the lesser of the loans remaining principal balance or the estimated fair value of the property acquired, less estimated costs to sell. Any loan balance in excess of the estimated realizable fair value on the date of transfer is charged to the allowance for loan losses on that date. All costs incurred thereafter in maintaining the property, as well as subsequent declines in fair value are charged to non-interest expense.
Non-performing assets are comprised of non-accrual loans, deposit account overdrafts that are more than 90 days past due and OREO. The designation of a loan or other asset as non-performing does not necessarily indicate that loan principal and interest will ultimately be uncollectible. However, management recognizes the greater risk characteristics of these assets and therefore considers the potential risk of loss on assets included in this category in evaluating the adequacy of the allowance for loan losses.
On a quarterly basis, management prepares an estimate of the allowance necessary to cover estimated credit losses. The allowance for loan losses is an estimate of probable credit risk inherent in the loan portfolio as of the specified balance sheet date. The Company maintains the allowance at a level that it deems adequate to absorb all reasonably anticipated losses from specifically known and other credit risks associated with the portfolio.
In making its assessment on the adequacy of the allowance, management considers several quantitative and qualitative factors that could have an effect on the credit quality of the portfolio including individual assessment of larger and high risk credits, delinquency trends and the level of non-performing loans, net charge-offs, the growth and composition of the loan portfolio, expansion in geographic market area, the strength of the local and national economy, and comparison to industry peers, among other factors. Except for loans specifically identified as impaired, as discussed above, the estimate is a two-tiered approach that allocates loan loss reserves to adversely classified loans by credit rating and to non-classified loans by credit type. The general loss allocations take into account the historic loss experience as well as the quantitative and qualitative factors identified above. The allowance for loan losses is established through a provision for loan losses, a direct charge to earnings. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged off are credited to the allowance.
There were no significant changes in the Companys underwriting, credit risk management system, or the allowance assessment methodology used to estimate loan loss exposure as reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2009.
The allowance for loan losses to total loans ratio was 1.69% and 1.68% at March 31, 2010 and December 31, 2009 respectively, compared to the March 31, 2009 ratio of 1.64%. Based on the foregoing, as well as managements judgment as to the risks inherent in the loan portfolio, the Companys allowance for loan losses was deemed adequate to absorb probable losses from specifically known and other credit risks associated with the portfolio as of March 31, 2010.
Management closely monitors the credit quality of individual delinquent and non-performing relationships, industry concentrations, the local and regional real estate market and current economic conditions. The level of delinquent and non-performing assets is largely a function of economic conditions and the overall banking environment. Despite prudent loan underwriting, adverse changes within the Companys market area or further deterioration in the local, regional or national economic conditions could negatively impact the Companys level of non-performing assets requiring addition provisions to the allowance for loan losses in the future.
The following table sets forth information regarding non-performing assets and past due loans at the dates indicated:
(Dollars in thousands) |
|
March 31,
|
|
December 31,
|
|
March 31,
|
|
|||
|
|
|
|
|
|
|
|
|||
Commercial real estate |
|
$ |
10,890 |
|
$ |
11,789 |
|
$ |
4,945 |
|
Commercial and industrial |
|
3,063 |
|
2,748 |
|
3,320 |
|
|||
Commercial construction |
|
3,362 |
|
4,662 |
|
1,400 |
|
|||
Residential |
|
1,067 |
|
1,379 |
|
975 |
|
|||
Home Equity |
|
68 |
|
18 |
|
293 |
|
|||
Consumer |
|
4 |
|
8 |
|
11 |
|
|||
Total non-accrual loans |
|
18,454 |
|
20,604 |
|
10,944 |
|
|||
Overdrafts > 90 days past due |
|
3 |
|
5 |
|
10 |
|
|||
Total non-performing loans |
|
18,457 |
|
20,609 |
|
10,954 |
|
|||
Other real estate owned (OREO) |
|
161 |
|
1,086 |
|
318 |
|
|||
Total non-performing assets |
|
$ |
18,618 |
|
$ |
21,695 |
|
$ |
11,272 |
|
|
|
|
|
|
|
|
|
|||
Total Loans |
|
$ |
1,091,211 |
|
$ |
1,082,830 |
|
$ |
976,434 |
|
Accruing restructured loans not included above |
|
24,804 |
|
20,125 |
|
6,294 |
|
|||
Delinquent loans 60 89 day past due |
|
122 |
|
2,104 |
|
638 |
|
|||
|
|
|
|
|
|
|
|
|||
Non-performing loans to total loans |
|
1.69 |
% |
1.90 |
% |
1.12 |
% |
|||
Non-performing assets to total assets |
|
1.36 |
% |
1.66 |
% |
0.93 |
% |
|||
Loans 60-89 days past due to total loans |
|
0.01 |
% |
0.19 |
% |
0.07 |
% |
|||
Adversely classified loans to total loans |
|
2.33 |
% |
2.38 |
% |
1.77 |
% |
|||
|
|
|
|
|
|
|
|
|||
Allowance for loan losses |
|
$ |
18,490 |
|
$ |
18,218 |
|
$ |
15,985 |
|
Allowance for loan losses: Non-performing loans |
|
100.18 |
% |
88.40 |
% |
145.93 |
% |
|||
Allowance for loan losses: Total loans |
|
1.69 |
% |
1.68 |
% |
1.64 |
% |
Although non-performing statistics have improved slightly since December 31, 2009, in general, non-performing statistics trended upward since early 2009, which is consistent with the regional economic environment and its impact on the local commercial markets. Management does not consider the March 2010 levels to be significantly different than the levels at December 31, 2009. Management believes that the recent levels of non-performing statistics are reflective of more normalized commercial credit statistics compared to the historically low statistics seen in 2004 through 2007, as indicated by the following factors: the reasonable ratio of non-performing loans given the size and mix of the Companys loan portfolio; the minimal level of OREO; the low levels of loans 60-89 days delinquent; and managements assessment that the majority of impaired loans at March 31, 2010 will ultimately be collected.
The $2.2 million net decrease in total non-performing loans, and the resulting decrease in the ratio of non-performing loans as a percentage of total loans outstanding, was due primarily to net reductions within the commercial portfolio. The reduction was primarily due to the net settlement of two relationships (commercial real estate and commercial construction) of approximately $3.4 million, which included a charge-off of $552 thousand. These reductions were partially offset by non-performing loans added within the commercial real estate and commercial and industrial portfolios. The majority of non-accrual loans as of March 31, 2010 were also carried as impaired loans during the period, and are discussed further below.
Total impaired loans amounted to $42.2 million and $39.7 million at March 31, 2010 and December 31, 2009, respectively. Total accruing impaired loans amounted to $24.8 million and $20.2 million at March 31, 2010 and December 31, 2009, respectively, while, nonaccrual impaired commercial loans amounted to $17.4 million and $19.5 million at March 31, 2010 and December 31, 2009, respectively. The increase in total impaired loans was primarily due to two larger commercial relationships added to impaired status during 2010 amounting to $5.5 million at March 31, 2010, comprised of $4.9 million, which remained on accrual status during the period, and $616 thousand which was in non-accrual status. The additions were partially offset by the non-performing loan settlements discussed above.
In managements opinion the majority of impaired loan balances at March 31, 2010 were adequately supported by expected future cash flows or the net realizable value of the underlying collateral and management expects that the majority of these principal advances will ultimately be collected. Based on managements assessment at March 31, 2010, impaired loans amounting to $31.8 million required no specific reserves and impaired loans totaling $10.4 million required specific reserves of $2.2 million. At December 31, 2009, impaired loans totaling $29.6 million required no specific reserves and impaired loans totaling $10.1 million required specific reserve allocations of $2.1 million. Management closely monitors these relationships for collateral or credit deterioration.
Total TDR loans, included in the impaired loan figures above as of March 31, 2010 and December 31, 2009 were $34.2 million and $28.3 million, respectively. The increase was due primarily to the addition of the impaired accruing relationship referred to above. TDR loans on accrual status amounted to $24.8 million and $20.1 million at March 31, 2010 and December 31, 2009, respectively. Restructured loans included in non-performing loans amounted to $9.4 million and $8.2 million at March 31, 2010 and December 31, 2009, respectively. The Company continues to work closely with classified relationships and enters into loan modifications to the extent deemed to be necessary or appropriate to ensure the best mutual outcome given the current economic environment.
At March 31, 2010, the Company had adversely classified loans (loans carrying substandard, doubtful or loss classifications) amounting to $25.5 million, compared to $25.8 million at December 31, 2009. There were no loans classified as Loss at March 31, 2010, and there was $13 thousand classified as Loss at December 31, 2009 which was subsequently charged off in March 2010. Adversely classified loans which were performing but possessed potential weaknesses and, as a result, could ultimately become non-performing loans amounted to $8.8 million and $7.0 million, at March 31, 2010 and December 31, 2009, respectively. The remaining balances of adversely classified loans were non-accrual loans, amounting to $16.7 million and $18.8 million at March 31, 2010 and December 31, 2009, respectively. Non-accrual loans which were not adversely classified amounted to $1.8 million at both March 31, 2010 and December 31, 2009 and primarily represented the guaranteed portions of non-performing Small Business Administration loans.
The carrying value of OREO at March 31, 2010 was $161 thousand and consisted of one property taken by foreclosure in 2008. The carrying value of OREO at December 31, 2009 was $1.1 million and consisted of five properties. During the three months ended March 31, 2010, one property was added to OREO through foreclosure, which was subsequently sold during the period and four additional properties that had been held at December 31, 2009 were also sold during the period. Net gains realized on these sales amounted to $110 thousand for the three months ended March 31, 2010. There were no gains or losses on OREO sales during the three months ended March 31, 2009.
The following tables summarize the activity in the allowance for loan losses for the periods indicated:
|
|
Three months ended March 31, |
|
||||
(Dollars in thousands) |
|
2010 |
|
2009 |
|
||
|
|
|
|
|
|
||
Balance at beginning of year |
|
$ |
18,218 |
|
$ |
15,269 |
|
|
|
|
|
|
|
||
Charged-off loans: |
|
|
|
|
|
||
Commercial real estate |
|
(552 |
) |
(254 |
) |
||
Commercial and industrial |
|
(53 |
) |
(101 |
) |
||
Commercial construction |
|
|
|
|
|
||
Residential |
|
(1 |
) |
(12 |
) |
||
Home equity |
|
|
|
|
|
||
Consumer |
|
(19 |
) |
(41 |
) |
||
Total Charged off |
|
(625 |
) |
(408 |
) |
||
|
|
|
|
|
|
||
Recoveries on charged-off loans: |
|
|
|
|
|
||
Commercial real estate |
|
|
|
|
|
||
Commercial and industrial |
|
11 |
|
13 |
|
||
Commercial construction |
|
|
|
|
|
||
Residential |
|
|
|
|
|
||
Home equity |
|
|
|
7 |
|
||
Consumer |
|
7 |
|
2 |
|
||
Total recoveries |
|
18 |
|
22 |
|
||
|
|
|
|
|
|
||
Net loans charged-off |
|
(607 |
) |
(386 |
) |
||
|
|
|
|
|
|
||
Provision charged to operations |
|
879 |
|
1,102 |
|
||
Balance at March 31, |
|
$ |
18,490 |
|
$ |
15,985 |
|
|
|
|
|
|
|
||
Annualized net loans charged-off: Average loans outstanding |
|
0.23 |
% |
0.16 |
% |
The allowance reflects managements estimate of loan loss reserves necessary to support the level of credit risk inherent in the portfolio during the period. Refer to Credit Risk/Asset Quality and Allowance for Loan Losses contained in Item 7, Managements Discussion and Analysis of Financial Condition and Results of Operations, included in the Companys 2009 Annual Report on Form 10-K for additional information regarding the Companys credit risk management process and allowance for loan losses.
FDIC Deposit Insurance Assessment
The Companys deposit accounts are insured by the FDICs Deposit Insurance Fund (the DIF) up to the maximum amount provided by law. As a result of nationwide bank failures in 2008 and 2009, the FDIC took several actions in order to restore the DIF reserves, which included increases in insurance premium assessments and special surcharges for all insured institutions. The FDIC also required all insured institutions to make a one-time prepayment, on December 30, 2009, of estimated insurance assessments for 2010, 2011 and 2012. If the prepaid assessment is exhausted prior to the fourth quarter of 2012, due to deposit growth or other unanticipated factors, institutions would be required to make additional quarterly payments to cover actual assessments. Any prepaid assessment not exhausted will be returned to the institution. At March 31, 2010, the Company carried the remaining balance of its prepaid assessment totaling approximately $5.4 million as a prepaid asset on its balance sheet.
The FDIC retains the ability to impose additional special assessments or implement future changes to the assessment rate or payment schedules.
Total deposits increased $43.3 million, or 4%, compared to December 31, 2009, and increased $190.6 million, or 19%, since March 31, 2009.
The following table sets forth the deposit balances by certain categories at the dates indicated and the percentage of each category to total deposits.
|
|
March 31, 2010 |
|
December 31, 2009 |
|
March 31, 2009 |
|
|||||||||
(Dollars in thousands) |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Non-interest bearing demand deposits |
|
$ |
199,230 |
|
16.8 |
% |
$ |
192,515 |
|
16.8 |
% |
$ |
169,362 |
|
17.0 |
% |
Interest bearing checking |
|
176,586 |
|
14.8 |
% |
185,693 |
|
16.2 |
% |
177,631 |
|
17.8 |
% |
|||
Total checking |
|
375,816 |
|
31.6 |
% |
378,208 |
|
33.0 |
% |
346,993 |
|
34.8 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Retail savings/money markets |
|
230,603 |
|
19.4 |
% |
203,544 |
|
17.8 |
% |
157,416 |
|
15.8 |
% |
|||
Commercial savings/money markets |
|
304,249 |
|
25.6 |
% |
266,164 |
|
23.3 |
% |
166,288 |
|
16.6 |
% |
|||
Total savings/money markets |
|
534,852 |
|
45.0 |
% |
469,708 |
|
41.1 |
% |
323,704 |
|
32.4 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Certificates of deposit |
|
277,533 |
|
23.4 |
% |
269,120 |
|
23.5 |
% |
254,258 |
|
25.5 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Total non-brokered deposits |
|
1,188,201 |
|
100.0 |
% |
1,117,036 |
|
97.6 |
% |
924,955 |
|
92.7 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Brokered certificates of deposit |
|
|
|
|
% |
27,912 |
|
2.4 |
% |
72,642 |
|
7.3 |
% |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
1,188,201 |
|
100.0 |
% |
$ |
1,144,948 |
|
100.0 |
% |
$ |
997,597 |
|
100.00 |
% |
Excluding brokered CDs, deposit balances increased $71.2 million, or 6%, since December 31, 2009. Balance increases were primarily in money market accounts. Money market accounts increased $59.9 million, or 19%, since December 31, 2009.
At March 31, 2010, brokered CDs decreased by $27.9 million since December 31, 2009. Management utilizes both brokered CDs and FHLB borrowings (as discussed below) as alternative wholesale funding sources for continued loan growth. The decline in brokered CDs was due primarily to the strong deposit growth during the period.
Borrowed funds, consisting of securities sold under agreements to repurchase (repurchase agreements) and FHLB borrowings, increased $20.4 million, or 82%, since December 31, 2009, but decreased $58.9 million, or 57%, since March 31, 2009. FHLB advances continue to be a cost effective funding source to support the Companys loan growth.
The following table sets forth the borrowed funds by categories at the dates indicated and the percentage of each category to total borrowed funds.
|
|
March 31, 2010 |
|
December 31, 2009 |
|
March 31, 2009 |
|
|||||||||
(Dollars in thousands) |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Repurchase agreements |
|
$ |
1,416 |
|
3.1 |
% |
$ |
1,416 |
|
5.7 |
% |
$ |
1,412 |
|
1.4 |
% |
FHLB borrowings |
|
43,885 |
|
96.9 |
% |
23,460 |
|
94.3 |
% |
102,832 |
|
98.6 |
% |
|||
Total borrowed funds |
|
$ |
45,301 |
|
100.0 |
% |
$ |
24,876 |
|
100.0 |
% |
$ |
104,244 |
|
100.0 |
% |
At March 31, 2010, the Bank had the capacity to borrow additional funds from the FHLB of up to $155.8 million and capacity to borrow from the FRB of $55.7 million.
Investment assets under management amounted to $448.2 million at March 31, 2010 compared to $433.0 million at December 31, 2009, an increase of 4%. The increase is attributable primarily to asset growth, both from new business and market value appreciation, during the second half of 2009.
Total assets under management amounted to $1.87 billion at March 31, 2010 and $1.79 billion at December 31, 2009.
Accounting Policies/Critical Accounting Estimates
The Company has not changed its significant accounting and reporting policies from those disclosed in its 2009 Annual Report on Form 10-K. In preparing the consolidated financial statements in conformity with U.S. generally accepted accounting principles, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. These estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ should the assumptions and estimates used change over time due to changes in circumstances.
As discussed in the Companys 2009 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, impairment review of investment securities and the impairment review of goodwill and other intangible assets. Refer to note 1 to the Companys consolidated financial statements included in the Companys 2009 Annual Report on Form 10-K for significant accounting policies.
Liquidity
Liquidity is the ability to meet cash needs arising from, among other things, fluctuations in loans, investments, deposits and borrowings. Liquidity management is the coordination of activities so that cash needs are anticipated and met readily and efficiently. The Companys liquidity policies are set and monitored by the Companys Asset-Liability Committee of the Board of Directors. The Companys asset-liability objectives are to engage in sound balance sheet management strategies, maintain liquidity, provide and enhance access to a diverse and stable source of funds, provide competitively priced and attractive products to customers and conduct funding at a low cost relative to current market conditions. Funds gathered are used to support current commitments, to fund earning asset growth, and to take advantage of selected leverage opportunities.
Management believes that the Company has adequate liquidity to meet its obligations. The Company currently funds earning assets primarily with deposits, brokered CDs, repurchase agreements, FHLB borrowings, junior subordinated debentures, proceeds from stock offerings and earnings.
The Companys liquidity is maintained by projecting cash needs, balancing maturing assets with maturing liabilities, monitoring various liquidity ratios, monitoring deposit flows, maintaining cash flow within the investment portfolio, and maintaining wholesale funding resources. The Companys wholesale funding sources include borrowing capacity in the brokered CD market, at the FHLB, through the FRB Discount Window, and through fed fund purchase arrangements with correspondent banks.
Under the Temporary Liquidity Guarantee Program (the TLGP) that concluded on October 31, 2009, certain newly issued senior unsecured debt of banks, thrifts and certain holding companies could be issued with the protection of an FDIC guarantee for a fee paid by the issuer. In October 2009, the FDIC, established a limited six month emergency guarantee program under which those institutions can seek approval from the FDIC to issue FDIC guaranteed debt (issued between October 31, 2009 through April 30, 2010), with a minimum fee of 300 basis points. As of March 31, 2010, the Company had not issued, and does not anticipate issuing, any debt guaranteed under the TLGP .
Capital Resources
As of March 31, 2010, both the Company and the Bank qualify as well capitalized under applicable regulations of the Federal Reserve Board and the Federal Deposit Insurance Corporation. To be categorized as well capitalized, the Company and the Bank must maintain minimum total, Tier 1 and, in the case of the Bank, leverage capital ratios as set forth in the table below.
Although the Company believes its current capital is adequate to support ongoing operations, on September 10, 2009, the Company filed a shelf registration of rights and common stock with the Securities and Exchange Commission for the flexibility to raise, over a three year period, up to $25 million in capital, in order to increase capital to ensure the Company is positioned to take advantage of growth and market share opportunities. In the fourth quarter of 2009, the Company successfully completed a combined shareholder subscription rights offering and supplemental community offering under the shelf registration, raising $8.9 million in new capital ($8.8 million net of offering expenses). The Company contributed the net proceeds from the combined offerings to the Bank.
The Companys actual capital amounts and ratios are presented as of March 31, 2010 in the table below. The Banks capital amounts and ratios do not differ materially from the amounts and ratios presented for the Company.
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Actual |
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Minimum Capital
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Minimum Capital
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(Dollars in thousands) |
|
Amount |
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Ratio |
|
Amount |
|
Ratio |
|
Amount |
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Ratio |
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Total Capital (to risk weighted assets) |
|
$ |
127,647 |
|
11.18 |
% |
$ |
91,326 |
|
8.00 |
% |
$ |
114,128 |
|
10.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Tier 1 Capital (to risk weighted assets) |
|
$ |
112,789 |
|
9.88 |
% |
$ |
45,663 |
|
4.00 |
% |
$ |
68,495 |
|
6.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
Tier 1 Capital (to average assets) |
|
$ |
112,789 |
|
8.66 |
% |
$ |
52,074 |
|
4.00 |
% |
$ |
65,092 |
|
5.00 |
%* |
* This requirement does not apply to the Company and is reflected in the table merely for informational purposes with respect to the Bank. For the Bank to qualify as well capitalized, it must also maintain a leverage capital ratio (Tier 1 capital to average assets) of at least 5%.
The Company maintains a dividend reinvestment plan (the DRP). The DRP enables stockholders, at their discretion, to elect to reinvest dividends paid on their shares of the Companys common stock by purchasing additional shares of common stock from the Company at a purchase price equal to fair market value. Shareholders utilized the DRP to invest $300 thousand of the $911 thousand cash dividend paid through March 31, 2010, into 24,648 shares of the Companys common stock.
As previously announced on April 20, 2010, the Company declared a quarterly dividend of $0.10 per share to be paid on June 1, 2010, to shareholders of record as of May 11, 2010, compared to a quarterly dividend of $0.095 per share paid in June 2009. The quarterly dividend represents a 5.3% increase over the 2009 dividend rate.
Results of Operations
Three Months Ended March 31, 2010 vs. Three Months Ended March 31, 2009
Unless otherwise indicated, the reported results are for the three months ended March 31, 2010 with the comparable period, prior year and prior period being the three months ended March 31, 2009. Average yields are presented on a tax equivalent basis.
The Company reported first quarter 2010 net income of $2.9 million compared to $1.5 million for the same period in 2009, an increase of 90%. Diluted earnings per common share were $0.32 for the three months ended March 31, 2010 compared to $0.19 for the comparable 2009 period, an increase of 68%.
The increase in net income for the quarter ended March 31, 2010, when compared to the same period in 2009, was primarily due to increases in net interest income and non-interest income and a decrease in the provision for loan losses, partially offset by increases in non-interest expenses.
Net Interest Margin
The Companys tax equivalent net interest margin (margin) was 4.44% for the three months ended March 31, 2010, compared to 4.17% in the comparable 2009 period. This increase resulted primarily from the cost of funds declining at a faster rate than asset yields in the latter half of 2009. The cost of funding declined by 59 basis points compared to the three months ended March 31, 2009, while interest earning asset yields declined 31 basis points over the same period. The margin for the first quarter of 2010 was relatively flat compared to the fourth quarter of 2009.
Rate / Volume Analysis
The following table sets forth 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, 2010 compared to the three months ended March 31, 2009. 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 period average rate); (2) interest rate (change in average interest rate multiplied by prior period average balance); and (3) rate and volume (the remaining difference).
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|
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Increase (decrease) due to |
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(Dollars in thousands) |
|
Net
|
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Volume |
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Rate |
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Rate/
|
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||||
|
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Interest Income |
|
|
|
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|
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||||
Loans |
|
$ |
1,149 |
|
$ |
1,790 |
|
$ |
(542 |
) |
$ |
(99 |
) |
Investments (1) |
|
(504 |
) |
(142 |
) |
(413 |
) |
51 |
|
||||
Total interest earnings assets |
|
645 |
|
1,648 |
|
(955 |
) |
(48 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Interest Expense |
|
|
|
|
|
|
|
|
|
||||
Int chkg, savings and money market |
|
(162 |
) |
573 |
|
(511 |
) |
(224 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Certificates of deposit |
|
(767 |
) |
144 |
|
(846 |
) |
(65 |
) |
||||
Brokered certificates of deposit |
|
(379 |
) |
(357 |
) |
(222 |
) |
200 |
|
||||
Total Certificates of Deposit |
|
(1,146 |
) |
(213 |
) |
(1,068 |
) |
135 |
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||||
|
|
|
|
|
|
|
|
|
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||||
Borrowed funds |
|
(38 |
) |
(55 |
) |
47 |
|
(30 |
) |
||||
Junior subordinated debentures |
|
|
|
|
|
|
|
|
|
||||
Total interest-bearing deposits, borrowed funds and debentures |
|
(1,346 |
) |
305 |
|
(1,532 |
) |
(119 |
) |
||||
|
|
|
|
|
|
|
|
|
|
||||
Change in net interest income |
|
$ |
1,991 |
|
$ |
1,343 |
|
$ |
577 |
|
$ |
71 |
|
(1) Investments include investment securities and short-term investments.
The following table presents the Companys average balance sheet, net interest income and average rates for the three months ended March 31, 2010 and 2009.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
|
|
Three Months Ended March 31, 2010 |
|
Three Months Ended March 31, 2009 |
|
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(Dollars in thousands) |
|
Average
|
|
Interest |
|
Average
|
|
Average
|
|
Interest |
|
Average
|
|
||||
|
|
|
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|
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Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Loans (2) |
|
$ |
1,085,394 |
|
$ |
14,769 |
|
5.55 |
% |
$ |
959,059 |
|
$ |
13,620 |
|
5.78 |
% |
Investments (3) |
|
149,936 |
|
1,096 |
|
3.68 |
% |
162,031 |
|
1,600 |
|
4.70 |
% |
||||
Total interest earnings assets |
|
1,235,330 |
|
15,865 |
|
5.32 |
% |
1,121,090 |
|
15,220 |
|
5.63 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
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|
||||
Other assets |
|
76,373 |
|
|
|
|
|
70,462 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total assets |
|
$ |
1,311,703 |
|
|
|
|
|
$ |
1,191,552 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
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|
||||
Liabilities and stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Int chkg, savings and money market |
|
$ |
664,445 |
|
1,135 |
|
0.69 |
% |
$ |
460,554 |
|
1,297 |
|
1.14 |
% |
||
Certificates of deposit |
|
275,185 |
|
1,179 |
|
1.74 |
% |
256,150 |
|
1,946 |
|
3.08 |
% |
||||
Brokered Certificates of deposit |
|
8,587 |
|
17 |
|
0.80 |
% |
87,637 |
|
396 |
|
1.83 |
% |
||||
Borrowed funds |
|
45,747 |
|
57 |
|
0.50 |
% |
115,600 |
|
95 |
|
0.33 |
% |
||||
Junior subordinated debentures |
|
10,825 |
|
294 |
|
10.88 |
% |
10,825 |
|
294 |
|
10.88 |
% |
||||
Total interest-bearing funding |
|
1,004,789 |
|
2,682 |
|
1.08 |
% |
930,766 |
|
4,028 |
|
1.75 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest rate spread |
|
|
|
|
|
4.24 |
% |
|
|
|
|
3.88 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Demand deposits |
|
186,597 |
|
|
|
|
|
158,460 |
|
|
|
|
|
||||
Total deposits, borrowed funds and debentures |
|
1,191,386 |
|
2,682 |
|
0.91 |
% |
1,089,226 |
|
4,028 |
|
1.50 |
% |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other liabilities |
|
11,187 |
|
|
|
|
|
10,034 |
|
|
|
|
|
||||
Total liabilities |
|
1,202,573 |
|
|
|
|
|
1,099,260 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stockholders equity |
|
109,130 |
|
|
|
|
|
92,292 |
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total liabilities and stockholders equity |
|
$ |
1,311,703 |
|
|
|
|
|
$ |
1,191,552 |
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest income |
|
|
|
$ |
13,183 |
|
|
|
|
|
$ |
11,192 |
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net interest margin (tax equivalent) |
|
|
|
|
|
4.44 |
% |
|
|
|
|
4.17 |
% |
(1) Average yields are presented on a tax equivalent basis. The tax equivalent effect associated with loans and investments, which was not included in the interest amount above, was $374 thousand and $376 thousand for the periods ended March 31, 2010 and March 31, 2009 respectively.
(2) Average loans include non-accrual loans and are net of average deferred loan fees.
(3) Average investment balances are presented at average amortized cost and include investment securities and short-term investments.
Net Interest Income
The Companys net interest income for the quarter ended March 31, 2010 amounted to $13.2 million, compared to $11.2 million in the March 2009 quarter, an increase of $2.0 million, or 18%. The increase in net interest income over the comparable prior-year period was due primarily to strong loan growth and the net interest margin increase noted above.
Interest Income
For the first quarter of 2010, total interest income amounted to $15.9 million, an increase of $645 thousand, or 4%, compared to the prior period. The increase resulted primarily from an increase of $114.2 million, or 10%, in the average balance of interest earning assets, partially offset by a 31 basis point decline in the yield on interest earning assets.
Interest income on loans, which accounts for the majority of interest income, amounted to $14.8 million for the quarter ended March 31, 2010, an increase of $1.1 million, or 8%, over the comparable period, due primarily to loan growth. The average loan balances increased $126.3 million, or 13%, compared to the prior period, while the average yield on loans declined 23 basis points compared to the prior period and amounted to 5.55% for the three months ended March 31, 2010.
Total investment income, which represents the remainder of interest income, amounted to $1.1 million for the three months ended March 31, 2010, a decrease of $504 thousand, or 32%, compared to the prior period. The decrease resulted from the impact of a 102 basis point decrease in the average yield on investment securities and to a lesser extent the $12.1 million, or 7%, decrease in average balances of investments over the comparable period.
Interest Expense
For the three months ended March 31, 2010, total interest expense amounted to $2.7 million, a decrease of $1.3 million, or 33%, compared to the prior period. The decrease resulted primarily from a 59 basis point decrease in the average cost of funding due to the reduction in deposit market interest rates over the period. This decrease was partially offset by the expense associated with the $102.2 million, or 9%, increase in the average balance of these funding sources (primarily money market account balances). There were several contributing factors that resulted in deposit growth over the prior year including: expansion and sales efforts; consumers seeking competitive secure products as alternative investment options; and commercial customers transitioning from our off-balance sheet sweep product to our on-balance sheet sweep account. This deposit growth has provided the Company with the ability to continue to grow loans and reduce wholesale funding balances.
Interest expense on interest checking, savings and money market accounts amounted to $1.1 million for the quarter ended March 31, 2010, a decrease of $162 thousand, or 12%, over the same quarter in the prior period. The average cost of these accounts decreased 45 basis points to 0.69%, while the average balances increased $203.9 million, or 44% over the prior period. Average balance increases were noted primarily in our money market accounts, including our commercial sweep product.
Interest expense on total CDs (brokered and non-brokered) decreased $1.1 million, or 49%, compared to the prior period and amounted to $1.2 million for the three months ended March 31, 2010.
· Non-Brokered CDs:
For the first quarter of 2010, interest expense on non-brokered CDs amounted to $1.2 million, a decrease of $767 thousand, or 39%, over the comparable period. The average cost of non-brokered CDs decreased 134 basis points, to 1.74%, for the three months ended March 31, 2010, while average balances increased $19.0 million, or 7%, compared to the prior period.
· Brokered CDs:
Interest expense on brokered CDs amounted to $17 thousand, a decrease of $379 thousand, or 96%, over the comparable period. The decrease resulted from both lower balances and declines in rates. The average cost of brokered CDs decreased 103 basis points, to 0.80%, for the three months ended March 31, 2010 and the average balances decreased by $79.1 million compared to the 2009 period, as deposit balances have increased as noted above.
Interest expense on borrowed funds, consisting of FHLB borrowings and repurchase agreements, amounted to $57 thousand for the first quarter of 2010, a decrease of $38 thousand, or 40%, over the same period last year. The decrease was primarily attributed to the reduction in average balances of approximately $69.9 million compared to the prior period.
The interest expense and average rate on junior subordinated debentures remained the same at $294 thousand and 10.88% for both the three months ended March 31, 2010 and March 31, 2009.
The average balance of non-interest bearing demand deposits, for the three months ended March 31, 2010, increased $28.1 million or 18% as compared to the same period in 2009. Non-interest bearing demand deposits are an important component of the Companys core funding strategy. This non-interest bearing funding represented 16% of total average deposit balances for both the three months ended March 31, 2010 and 2009, respectively.
Provision for Loan Loss
The provision for loan losses decreased $223 thousand compared to the same period last year and amounted to $879 thousand for the three months ended March 31, 2010. The provision for loan losses was primarily impacted by the level of loan growth, non-performing loans, and net charge-offs.
There have been no material changes to the Companys underwriting practices or to the allowance for loan loss methodology used to estimate loan loss exposure as reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. The provision for loan losses is a significant factor in the Companys operating results.
For further discussion regarding the provision for loan losses and managements assessment of the adequacy of the allowance for loan losses see Financial Condition Credit Risk/Asset Quality and the Allowance for Loan Losses in this Item 2 above and Risk Elements/Asset Quality and Allowance for Loan Losses in the Financial Condition section of Managements Discussion and Analysis of Financial Condition and Results of Operations in the Companys 2009 Annual Report on Form 10-K.
Non-Interest Income
Non-interest income for the three months ended March 31, 2010 amounted to $3.1 million, an increase of $718 thousand, or 30%, as compared to the three months ended March 31, 2009 . The significant changes are discussed below.
Net gains on security sales and other than temporary impairment charges on certain equity securities, combined, increased $287 thousand, or 135%, in the quarter ended March 31, 2010 compared to the quarter ended March 31, 2009. Net gains on security sales were $501 thousand in the first quarter of 2010 resulting from the sales of $1 million in equity securities, compared to $971 thousand from the sale of $37.9 million in investment securities in 2009. The OTTI charge on a certain previously impaired equity investment was $1 thousand in the first quarter of 2010 compared to $758 thousand in the comparable period in 2009.
Investment advisory income increased $205 thousand, or 32%, in the first quarter of 2010 over the same period in the prior year. The increase in investment advisory income primarily relates to net asset growth, both from market appreciation and new business, during the second half of 2009.
Deposit service fees increased $99 thousand, or 11%, in the three months ended March 31, 2010 as compared to the same period last year primarily in business checking and overdraft fees.
Net gains on sales of OREO increased $110 thousand in the first quarter of 2010 over the first quarter of 2009 due to the sales of five properties during the quarter. There were no sales of OREO during the first quarter of 2009.
Non-Interest Expense
Non-interest expense for the three months ended March 31, 2010 amounted to $11.1 million, an increase of $808 thousand, or 8%, compared to the same period in 2009. The significant changes are discussed below.
Salaries and employee benefits increased $544 thousand, or 9%. The increase is primarily due to the personnel costs necessary to support the Companys strategic growth initiatives, as well as salary adjustments since the prior period, and increased expenses for performance-based incentive compensation.
Technology and telecommunications expense for the three months ended March 31, 2010 increased $156 thousand, or 21%, over the same period last year primarily due to growth and expansion costs to support the Companys strategic initiatives, including the build out of a back-up data center. The Company continually invests in technology initiatives to provide our customers with new product features, in addition to investments to maintain data security and improve overall efficiency.
For the three months ended March 31, 2010, deposit insurance premiums increased $87 thousand, or 23%, due to changes in assessment charges and deposit growth. Refer to item (m) FDIC Deposit Insurance Assessment contained in Note 1 Summary of Significant Accounting Policies, to the Companys consolidated financial statements contained in the Companys 2009 Annual Report on Form 10-K for further discussion of the FDIC assessment changes.
Income Tax Expense
Income tax expense for the three months ended March 31, 2010 and 2009 was $1.4 million and $620 thousand, respectively. The effective tax rate for the three months ended March 31, 2010 and 2009 was 32.3% and 29.0%, respectively. The increase in the effective tax rate was primarily due to the higher level of taxable earnings in the current period.
Item 3 Quantitative and Qualitative Disclosures About Market Risk
The Companys primary market risk is interest rate risk and interest rate risk management is centered on the Companys Asset-Liability Committee (the committee). The committee is comprised of six outside directors of the Company and three executive officers of the Company, who are also members of the Board of Directors. In addition, several directors who are not on the committee rotate in on a regular basis. Annually, the committee approves the Companys asset-liability management policy, which provides management with guidelines for controlling interest rate risk, as measured through net interest income sensitivity to changes in interest rates, within certain tolerance levels. The committee also establishes and monitors guidelines for the Companys liquidity and capital ratios.
The asset-liability management strategies are reviewed on a periodic basis by management and presented and discussed with the committee on at least a quarterly basis. The asset-liability management strategies and guidelines are revised based on changes in interest rate levels, general economic conditions, competition in the marketplace, the current interest rate risk position of the Company, anticipated growth 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 interest rate changes on future net interest income. Quarterly, management completes a net interest income sensitivity analysis, which is presented to the committee. This analysis includes a simulation of the Companys net interest income under 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 Company can be subject to margin compression depending on the economic environment and the shape of the yield curve. Under the Companys current balance sheet position, the Companys net interest margin generally performs slightly better over time in a rising rate environment and a parallel yield curve shift, while it generally decreases when the yield curve is flattening, inverting or declining.
Under a flattening yield curve scenario, margin compression occurs as the spread between the cost of funding and the yield on interest earning assets narrows. Under this scenario the degree of margin compression is highly dependent on the Companys ability to fund asset growth through lower cost deposits. However, if the curve is flattening, while short-term rates are rising, the adverse impact on margin may be somewhat delayed, as increases in the prime rate will initially result in the Companys asset yields re-pricing more quickly than funding costs.
Under an inverted yield curve situation, shorter-term rates exceed longer-term rates, and the impact on margin is similar but more adverse than the flat curve scenario. Again, however, the extent of the impact on margin is highly dependent on the Companys balance sheet mix.
Under a declining yield curve scenario, margin compression will eventually occur as the yield on interest earning assets decreases more rapidly than decreases in funding costs. The primary causes would be the impact of interest rate decreases (including decreases in the prime rate) on adjustable rate loans and the fact that decreases in deposit rates may be limited or lag decreases in
the prime rate. The Company continued to experience the effects of a declining rate environment into early 2009 as the Federal Reserve Board reduced its Fed Funds Target rate late in the fourth quarter of 2008 to a range of 0.0% to 0.25%.
Given the length of the current low rate environment the Companys net interest margin (margin) improved during the latter half of 2009 as cost of funds declined at a faster rate than asset yields. The margin for the first quarter of 2010 was relatively flat compared to the fourth quarter of 2009.
There have been no material changes in the results of the Companys net interest income sensitivity analysis as reported in the Companys Annual Report on Form 10-K for the year ended December 31, 2009. At March 31, 2010, management continues to consider the Companys primary interest rate risk exposure to be margin compression that may result from changes in interest rates and/or changes in the mix of the Companys balance sheet components. Specifically, these components include fixed versus variable rate loans and investments on the asset side, and higher cost deposits and borrowings versus lower cost deposits on the liability side.
Item 4 Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures and internal controls designed to ensure that the information required to be disclosed in reports that it files or submits to the United States Securities and Exchange commission (the SEC) under the Securities Exchange Act of 1934, as amended (the Exchange Act), is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms.
The Company carried out an evaluation as of the end of the period covered by this report under the supervision and with the participation of the Companys management, including its chief executive officer and chief financial officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon that evaluation, the Companys chief executive officer and chief financial officer concluded that the Companys disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There has been no change in the Companys internal control over financial reporting that has occurred during the Companys most recent fiscal quarter (i.e., the three months ended March 31, 2010) that has materially affected, or is reasonably likely to materially affect, such internal controls.
There are no material pending legal proceedings to which the Company or its subsidiaries are a party, other than ordinary routine litigation incidental to the business of the Company. Management does not believe resolution of any present litigation will have a material adverse effect on the consolidated financial condition or results of operations of the Company.
Management believes that there have been no material changes in the Companys risk factors as reported in the Annual Report on Form 10-K for the year ended December 31, 2009.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
The Company has not sold any equity securities that were not registered under the Securities Act of 1933 during the three months ended March 31, 2010. Neither the Company nor any affiliated purchaser (as defined in the SECs Rule 10b-18(a)(3)) has repurchased any of the Companys outstanding shares, nor caused any such shares to be repurchased on its behalf, during the three months ended March 31, 2010.
Item 3 - Defaults upon Senior Securities
Not Applicable
Not Applicable
Exhibit No. and Description |
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3.2 |
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Amended and Restated By-laws of the Company, as adopted by the Companys Board of Directors on March 15, 2010 |
10.1 |
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Description of Directors Compensation Arrangements (as amended and effective as of March 29, 2010) |
10.2 |
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Specimen Restricted Stock Agreement for grants of restricted stock to officers and directors under the Enterprise Bancorp, Inc. 2009 Stock Incentive Agreement |
31.1 |
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Certification of Principal Executive Officer under Securities Exchange Act Rule 13a-14(a) |
31.2 |
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Certification of Principal Financial Officer under Securities Exchange Act Rule 13a-14(a) |
32 |
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Certification of Principal Executive Officer and Principal Financial Officer under 18 U.S.C. § 1350 Furnished Pursuant to Securities Exchange Act Rule 13a-14(b) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ENTERPRISE BANCORP, INC. |
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DATE: May 10, 2010 |
By: |
/s/ James A. Marcotte |
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James A. Marcotte |
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Executive Vice President, |
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Chief Financial Officer and Treasurer |
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(Principal Financial Officer) |
Exhibit 3.2
AS APPROVED BY THE BOARD
OF DIRECTORS ON March 15, 2010
AMENDED AND RESTATED BY-LAWS
of
ENTERPRISE BANCORP, INC.
ARTICLE I
ORGANIZATION
The name of this Corporation is Enterprise Bancorp, Inc.. The main office of the Corporation shall be located in Lowell, Massachusetts and may be changed from time to time by the Directors of the Corporation. Other Offices hereafter established shall be located and operated in accordance with law. The Corporation shall have and may exercise all powers and authority, express and implied, available to it under applicable law.
ARTICLE II
STOCKHOLDERS
SECTION l. Annual Meeting . The annual meeting of shareholders shall be held on the first Tuesday in May at 4:00 p.m. at the main office of the Corporation in Massachusetts, unless a different hour, date or place within Massachusetts (or elsewhere in the United States) is fixed by the Board of Directors, the Chairman of the Board or the Chief Executive Officer. If no annual meeting has been held on the date fixed as above provided, a special meeting in lieu thereof may be held, and such special meeting shall be treated for all purposes as an annual meeting.
SECTION 2. Stockholder Notice of Matters to be considered at Annual Meeting. If the Board of Directors, or a designated committee thereof, determines that the information provided in a stockholders notice, given pursuant to the requirements of Section 8 of Article VI of the Articles of Organization, does not satisfy the informational requirements of said Section 8 of Article VI in any material respect, the Secretary of the Corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five days from the date such deficiency notice is mailed to the stockholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of Section 8 of Article VI in any material respect, then the Board of Directors may reject such stockholders proposal. The Secretary of the Corporation shall notify a stockholder in writing whether his proposal has been made in accordance with the time and informational requirements of Section 8 of Article VI. Notwithstanding the procedure set forth in this paragraph, if neither the Board of Directors nor such committee makes a determination as to the validity of any stockholder proposal, the presiding officer of the annual meeting shall
determine and declare at the annual meeting whether the stockholder proposal was made in accordance with the terms of Section 8 of Article VI of the Articles of Organization. If the presiding officer of the annual meeting determines that a stockholder proposal was made in accordance with the terms of Section 8 of Article VI of the Articles of Organization, he shall so declare at the annual meeting and ballots shall be made available for use at the meeting with respect to any such proposal. If the presiding officer of the annual meeting determines that a stockholder proposal was not made in accordance with the terms of Section 8 of Article VI of the Articles of Organization, he shall so declare at the annual meeting and any such proposal shall not be acted upon at the annual meeting. If there is an Interested Stockholder, any determinations to be made by the Board of Directors or a designated committee thereof pursuant to the provisions of this paragraph shall also require the concurrence of a majority of the Continuing Directors then in office.
This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, Directors and committees of the Board of Directors, but in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed and received as herein provided.
As used in these By-Laws, the terms Interested Stockholder, Affiliate and Continuing Director shall have the same respective meanings assigned to them in the Articles of Organization, as amended from time to time. Any determination of beneficial ownership of securities under these By-Laws shall be made in the manner specified in the Articles of Organization, as amended from time to time.
SECTION 3. Special Meetings. Special meetings of the shareholders for any purpose or purposes shall be called as provided for in the Articles of Organization.
SECTION 4. Notice of Meetings; Adjournments. A written notice of all annual and special meetings of shareholders stating the hour, date, place and purposes of such meetings shall be given at least eleven days before the meeting to each stockholder entitled to vote or to each stockholder who, under the Articles of Organization or under these By-Laws, is entitled to such notice by mailing it addressed to such stockholder at the address of such stockholder as it appears on the stock transfer books of the Corporation. Such notice shall be given by the Secretary or an Assistant Secretary, by any other officer or by a person designated either by the Secretary, an Assistant Secretary, by the person or persons calling the meeting, or by the Board of Directors. Such notice shall be deemed to be delivered when deposited in the mail so addressed, with postage prepaid. When any shareholders meeting, either annual or special, is adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the hour, date or place of any meeting adjourned for less than thirty days or of the business to be transacted thereat, other than an announcement at the meeting at which such adjournment is taken of the hour, date and place to which the meeting is adjourned. A written waiver of notice, executed before or after a meeting by a stockholder or by an authorized attorney of a stockholder and filed with the records of the meeting, shall be
deemed equivalent to notice of the meeting. The Chairman of the Board or, in his absence, the Chief Executive Officer or, in his absence, the Vice Chairman or, in his absence, the President or, in his absence, such other officer or Director of the Corporation as may be appointed temporary chair by the majority of the Directors then in attendance, shall preside at all stockholder meetings and shall have the power, among other things, to adjourn such meeting at any time and from time to time, subject to Section 5 of this Article II.
SECTION 5. Quorum . The holders of a majority in interest of all stock issued, outstanding and entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of shareholders; but if less than a quorum is present at a meeting, a majority in interest of the shareholders present may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice, except as provided in Section 4 of this Article II. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. The shareholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum.
SECTION 6. Voting and Proxies. Stockholders, unless otherwise provided by law, shall have such voting rights as are provided in the Articles of Organization. Stockholders may vote either in person or by written proxy dated not more than eleven (11) months before the meeting named therein. Proxies shall be filed with the secretary of the meeting, or of any adjournment thereof, before being voted. Except as otherwise limited therein, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting, but they shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by or on behalf of any one of them unless at or prior to the exercise of the proxy the Corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger.
SECTION 7. Action at Meeting. When a quorum is present, any matter properly before the meeting shall be decided by a vote of the holders of a majority of the shares of stock present and voting on such matter, except where a larger vote is required by law, by the Articles of Organization or by these By-Laws. Any election by shareholders shall be determined by a plurality of the votes cast, except where a larger vote is required by law, by the Articles of Organization or by these By-Laws. No ballot shall be required for elections provided, however, that any stockholder personally present at a meeting may request a ballot to register the vote of such stockholder.
SECTION 8. No Stockholder Action by Written Consent . Subject to the rights of the holders of any series of preferred stock as set forth in the Articles of Organization to elect additional directors under specific circumstances or to consent to specific actions taken by the Corporation, any action required or permitted to be taken by the stockholders of the
Corporation must be effected at an annual or special meeting of stockholders of the Corporation and may not be effected by any consent in writing by such stockholders.
ARTICLE III
DIRECTORS
SECTION 1. Powers . The business and affairs of the Corporation shall be managed by a Board of Directors who may exercise all the powers and authority of the Corporation except as otherwise provided by law, by the Articles of Organization or by these By-Laws.
SECTION 2. Composition and Term. The Board of Directors shall be composed of: (a) those persons designated in the Articles of Organization of the Corporation, such persons to serve as Directors until the respective expiration dates of their terms as set forth therein and until their successors are elected and qualified; and (b) such other persons who may be elected as Directors from time to time as provided herein. Subject to the rights of the holders of any series of preferred stock as set forth in the Articles of Organization to elect Directors under specified circumstances, the number of Directors shall be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the Board of Directors (provided that if at any time of such action there is an Interested Stockholder, a majority vote of the Continuing Directors then in office shall also be required), but shall consist of not fewer than three individuals. The Board of Directors shall be divided into three classes, such classes to be as nearly equal in number as practicable. One of such classes of Directors shall be elected annually by the shareholders. Except as otherwise provided in accordance with these By-Laws, the members of each class shall be elected for a term of three years and until their successors are elected and qualified. The staggered terms of office of the three classes of Directors will result in only approximately one-third of the Directors being elected each year.
SECTION 3. Director Nominations. Nominations of candidates for election as Directors at any annual meeting of shareholders may be made by, or at the direction of, a majority of the Board of Directors (unless there is an Interested Stockholder, in which case the affirmative vote of a majority of the Continuing Directors shall also be required) or by any stockholder entitled to vote at such annual meeting. Only persons nominated in accordance with the procedures set forth in this Section 3 shall be eligible for election as Directors at an annual meeting.
Nominations, other than those made by, or at the direction of, the Board of Directors (or by the Continuing Directors, if required), shall be made pursuant to timely notice in writing to the Secretary of the Corporation as set forth in this Section 3. To be timely, a stockholders notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than sixty days nor more than one hundred and fifty days prior to the date of the scheduled annual meeting, regardless of postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than seventy days notice or prior public disclosure of the date of the scheduled annual meeting is given or
made, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the tenth day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. Such stockholders notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a Director and as to the stockholder giving the notice (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporations capital stock which are beneficially owned by such person on the date of such stockholder notice, and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies with respect to nominees for election as Directors, pursuant to regulations promulgated by the Securities and Exchange Commission ( SEC ), or any successor agency thereto, under the Securities Exchange Act of 1934, as amended, including, but not limited to, such persons written consent to being named in the proxy statement as a nominee and to serving as a director if elected; and (b) as to the stockholder giving the notice (i) the name and address, as they appear on the Corporations books, of such stockholder and any other stockholders known by such stockholder to be supporting such nominees and (ii) the class and number of shares of the Corporations capital stock which are beneficially owned by such stockholder on the date of such stockholder notice and by any other stockholders known by such stockholder to be supporting such nominees on the date of such stockholder notice. At the request of the Board of Directors, any person nominated by, or at the direction of, the Board of Directors for election as a Director at an annual meeting shall furnish to the Secretary of the Corporation that information required to be set forth in the stockholders notice of nomination which pertains to the nominee. Notwithstanding the foregoing, the Board of Directors shall have the right to conduct a due diligence investigation relating to the qualifications of any nominee proposed for election to the Board of Directors by any stockholder, the relationship of that nominee to the stockholder and any relationship such person may have with any entity other than the Corporation (i) in which such person holds an equity interest of 2% or more; (ii) from whom such person has any indemnification or other agreement with respect to the actions such person will take as a Director of the Corporation; (iii) at whose instance such person has agreed to be a nominee for election as a Director of the Corporation (a Related Entity), and to require an undertaking by such person that if elected as a Director of the Corporation, such person will abstain from voting on any matter in which any entity described in subsections has a direct, material, pecuniary interest.
No person shall be elected as a Director of the Corporation unless nominated in accordance with the procedures set forth in this Section 3. Ballots bearing the names of all the persons who have been nominated for election as Directors at an annual meeting in accordance with the procedures set forth in this Section 3 shall be made available for use at the annual meeting.
The Board of Directors may reject any nomination by a stockholder not timely made in accordance with the requirements of this Section 3. If the Board of Directors, or a designated committee thereof, determines that the information provided in a stockholders
notice does not satisfy the informational requirements of this Section 3 in any material respect, the Secretary of the Corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the Secretary within such period of time, not to exceed five days from the date such deficiency notice is given to the stockholder, as the Board of Directors or such committee shall reasonably determine. If the deficiency is not cured within such period, or if the Board of Directors or such committee reasonably determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of this Section 3 in any material respect, then the Board of Directors may reject such stockholders nomination. The Secretary of the Corporation shall notify a stockholder in writing whether his nomination has been made in accordance with the time and informational requirements of this Section 3. Notwithstanding the procedure set forth in this paragraph, if neither the Board of Directors nor such committee makes a determination as to the validity of any nominations by a stockholder, the presiding officer of the annual meeting shall determine and declare at the annual meeting whether a nomination was made in accordance with the terms of this Section 3. If the presiding officer determines that a nomination was made in accordance with the terms of this Section 3, he shall so declare at the annual meeting and ballots shall be made available for use at the meeting with respect to such nominee. If the presiding officer determines that a nomination was not made in accordance with the terms of this Section 3, he shall so declare at the annual meeting and such nomination shall be disregarded. If there is an Interested Stockholder, any determinations to be made by the Board of Directors or a designated committee thereof pursuant to the provisions of this paragraph shall also require the concurrence of a majority of the Continuing Directors then in office.
SECTION 4. Qualification. Each Director shall have such qualifications as are required by applicable law. To the extent required by law, each Director, when appointed or elected, shall take an oath that he will faithfully perform the duties of his office. Any such oath shall be taken before a notary public or justice of the peace, who is not an officer of the Corporation, and a record of such oath shall be made a part of the records of the Corporation. Each Director shall currently or in the past have maintained a residence, business interest or had community involvement within the Commonwealth of Massachusetts or the State of New Hampshire. More than one-half (50%) of the Board of Directors shall be citizens and residents of the Commonwealth of Massachusetts.
SECTION 5. Resignation. Any Director may resign at any time by written notice to the Chairman of the Board, the Chief Executive Officer or the Board of Directors. A resignation shall be effective when accepted by the Board of Directors.
SECTION 6. Removal. Any Director may be removed from office as provided in the Articles of Organization.
SECTION 7. Vacancies. Any vacancy occurring on the Board of Directors as a result of resignation, removal, death or increase in the authorized number of Directors may be filled
by vote of a majority of the remaining Directors (unless there is an Interested Stockholder, in which case the affirmative vote of a majority of the Continuing Directors shall also be required). A Director elected to fill such a vacancy shall be elected to serve for the remainder of the full term of the class of Directors in which the vacancy occurred or the new directorship was created and until such directors successor has been elected and qualified.
SECTION 8. Compensation. The members of the Board of Directors and the members of either standing or special committees shall receive such compensation as the Board of Directors may determine. Directors who are also employees of the Corporation shall not receive compensation for serving on the Board of Directors.
SECTION 9. Regular Meetings. A regular meeting of the Board of Directors shall be held without other notice than this By-Law on the same date and at the same place as the annual meeting of shareholders; provided, however, i f the Board of Directors is unable to meet at this time, then any business that it would have taken up at such meeting may be completed at its next regularly scheduled meeting or, at the discretion of the Board, at an earlier-called special meeting following such annual meeting of shareholders. The Board of Directors may provide the hour, date and place for the holding of regular meetings by resolution without other notice than such resolution. The Board of Directors shall meet at least once in each calendar quarter at a place or places fixed from time to time by the Board of Directors, the Chairman of the Board or the Chief Executive Officer.
SECTION 10. Special Meetings . Special meetings of the Board of Directors may be called by or at the request of the Chairman of the Board, the Chief Executive Officer or a majority of the Directors, unless there is an Interested Stockholder, in which case by a majority of the Continuing Directors. The person or persons authorized to call special meetings of the Board of Directors may fix the hour, date and place for holding a special meeting.
SECTION 11 . Notice of Special Meetings. Notice of the hour, date and place of all special meetings of the Board of Directors shall be given to each Director by the Secretary or an Assistant Secretary, or in the case of the death, absence, incapacity or refusal of such persons, by the officer or one of the Directors calling the meeting. In any case, it shall be deemed that sufficient notice has been given to a Director if notice is delivered to such Director at least forty-eight (48) hours before the meeting, which notice may be delivered by mail or personal hand delivery, by facsimile or other electronic transmission if actual receipt by the Director is confirmed, or by telephone if delivered by phone directly to the Director or if actual receipt by the Director of any message left by phone is confirmed, or such Director has actual knowledge of the date, time and place of a meeting at least forty-eight (48) hours before the meeting. Mail notices shall be addressed to a Director at the Directors usual or last known business or residence address. Notices given by facsimile or other electronic transmission or by telephone shall be addressed to a Director and transmitted to the Directors usual or last known business or residence fax number, electronic message address or telephone number. When any Board of Directors meeting, either regular or special, is
adjourned for thirty days or more, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give any notice of the hour, date or place of any meeting adjourned for less than thirty days or of the business to be transacted thereat, other than an announcement at the meeting at which such adjournment is taken of the hour, date and place to which the meeting is adjourned. A written waiver of notice executed before or after a meeting by a Director and filed with the records of the meeting shall be deemed to be equivalent to notice of the meeting. The attendance of a Director at a meeting shall constitute a waiver of notice of such meeting, except where a Director attends a meeting for the express purpose of objecting to the transaction of any business because such meeting is not lawfully called or convened. Unless otherwise require by law, the Articles of Organization or these By-laws, neither the business to be transacted at, nor the purpose of, any meeting of the Board of Directors need be specified in the notice or waiver of notice of such meeting.
SECTION 12. Quorum. A majority of the number of Directors then in office shall constitute a quorum for the transaction of business at any meeting of the Board of Directors, but if less than a quorum is present at a meeting, a majority of the Directors present may adjourn the meeting from time to time, and the meeting may be held as adjourned without further notice, except as provided in Section 11 of this Article III. Any business which might have been transacted at the meeting as originally noticed may be transacted at such adjourned meeting at which a quorum is present.
SECTION 13. Action at a Meeting. The act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless a greater number is prescribed by law, by the Articles of Organization or by these By-Laws.
SECTION 14. Action by Consent. Any action required or permitted to be taken at any meeting of the Board of Directors may be taken without a meeting if a written consent thereto is signed, or delivered to the Corporation by electronic transmission, by all the Directors and such written or electronically transmitted consent is filed with the records of the meetings of the Directors. Such consent shall be treated as a vote at a meeting for all purposes. Such consents may be executed in one or more counterparts or electronically delivered in individual transmissions from each of the Directors, including any combination thereof so long as a consent is properly delivered by each Director, and, with respect to signed counterparts, not every Director need sign the same counterpart.
SECTION 15. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors at which action on any Corporation matter is taken shall be presumed to have assented to the action taken unless his dissent or abstention shall be entered in the minutes of the meeting or unless he shall file a written dissent to such action with the person acting as the Secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the Secretary of the Corporation within five days after the date a copy of the minutes of the meeting is received. Such right to dissent shall not apply to a Director who voted in favor of such action.
SECTION 16. Committees. The Board of Directors may, by resolution adopted by a majority of the Board of Directors, designate one or more committees, including without limitation an executive committee, each committee to consists of not fewer than three members elected by the Board of Directors from among its members. The Board of Directors may delegate to an executive committee or such other committees some or all of its powers except those which by law, by the Articles of Organization or by these By-Laws may not be delegated. Except as the Board of Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Board of Directors or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these By-Laws for the Board of Directors. All members of such committees shall hold such offices at the pleasure of the Board of Directors. The Board of Directors may abolish any such committee at any time, subject to applicable law. Any committee to which the Board of Directors delegates any of its powers or duties shall keep written records of its meetings and shall report its actions to the Board of Directors. The Board of Directors shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect.
SECTION 17. Manner of Participation. Members of the Board of Directors or of committees elected by the Board pursuant to Section 16 of this Article III may participate in meetings of the Board or of such committees by means of conference telephone or similar communications equipment by which all persons participating in the meeting can hear each other. Such participation shall constitute presence in person for all purposes with respect to any such meeting.
ARTICLE IV
OFFICERS
SECTION 1. Enumeration . The officers of the Corporation shall consist of a President, a Treasurer, a Secretary and such other officers, including, without limitation a Chairman of the Board, a Vice Chairman, a Chief Executive Officer, a Chief Operating Officer, a Chief Financial Officer and one or more Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Assistant Vice Presidents, Assistant Treasurers and Assistant Secretaries, as the Board of Directors may determine to be necessary or appropriate for the management of the Corporation.
SECTION 2. Appointment. The Chairman of the Board, any Vice Chairman, the President, the Chief Executive Officer and the Secretary will be appointed annually by the Board of Directors at the meeting of the Board of Directors held on the same date and at the same place as the annual meeting of the shareholders or at such other regularly scheduled or special meeting following such annual meeting as contemplated by Section 9 of Article III above or may otherwise be appointed by the Board of Directors at such time and from time to time as the Board may deem to be necessary or appropriate. All other officers of the Corporation may be appointed by the Board of Directors or by the Chief Executive Officer, if and to the extent that the authority for such has been granted by the Board of Directors to the
Chief Executive Officer, at such time and from time to time as the Board or the Chief Executive Officer, as the case may be, shall deem to be necessary or appropriate. The Chief Executive Officer may in turn delegate any such authority to appoint officers that has been granted to him or her hereunder to such other person and on such basis as the Chief Executive Officer may determine; provided, however, that the authority to appoint members of the Corporations executive management may not be further delegated by the Chief Executive Officer under any circumstances.
SECTION 3. Qualification. Any two or more offices may be held by any one person. Any officer may be required by the Board of Directors to give bond for the faithful performance of his duties in such amount and with such sureties as the Board of Directors may determine.
SECTION 4. Tenure. All officers shall hold office from the date of their respective appointments until the meeting of the Board of Directors held on the same date and at the same place as the next annual meeting of shareholders or until such other regularly scheduled or special meeting following such next annual meeting as contemplated by Section 9 of Article III above, or for such shorter terms as the Board of Directors or the Chief Executive Officer (including any delegatee thereof), if an officer is appointed directly or indirectly by the Chief Executive Officer, may fix at the time such officers are chosen. Any officer may resign at any time in accordance with such procedures for resignation as may be prescribed by the Corporation at any time and from time to time. Such resignation shall be effective upon the date thereof unless the resignation otherwise provides. Appointment of an officer, employee or agent shall not of itself create contract rights. The Board of Directors may, however, authorize the Corporation to enter into an employment contract with any officer in accordance with law, but no such contract right shall impair the right of the Board of Directors to remove any officer at any time in accordance with Section 5 of this Article IV.
SECTION 5. Removal. The Board of Directors may remove any officer with or without cause by a vote of a majority of the entire number of Directors then in office; provided, however, that if at the time of such action there is an Interested Stockholder, such action shall in addition require a majority vote of the Continuing Directors then in office; and further provided, however, that such removal, other than for cause, shall be without prejudice to the contract rights, if any, of the persons involved. If an officer has been appointed by the Chief Executive Officer, then such officer may also be removed with or without cause by the Chief Executive Officer.
SECTION 6. Absence or Disability. In the event of the absence or disability of any officer, the Board of Directors or the Chief Executive Officer, if such officer has been appointed by the Chief Executive Officer, may designate another officer to act temporarily in place of such absent or disabled officer.
SECTION 7. Vacancies. Any vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors or, if such vacancy is with respect to an office
that may otherwise be filled by appointment by the Chief Executive Officer, by the Chief Executive Officer.
SECTION 8. Chief Executive Officer. The Chief Executive Officer shall, subject to the direction of the Board of Directors, have general supervision and control of the Corporations business.
SECTION 9. Chairman and Vice Chairman. The Chairman of the Board of Directors shall preside, when present, at all meetings of the Board of Directors and of the Corporations stockholders. If the Chairman of the Board is absent from any meeting of the Board of Directors, then the Vice Chairman shall preside at such meeting of the Board of Directors. If both the Chairman of the Board and the Chief Executive Officer are absent from any meeting of the stockholders, then the Vice Chairman shall preside at such meeting of the stockholders. The Chairman of the Board and the Vice Chairman may also have such other powers and perform such other duties, if any, as the Board of Directors may from time to time designate.
SECTION 10. The President . Unless the Board of Directors shall otherwise provide, the President shall serve in the capacity of Chief Executive Officer. If the President does not serve in such capacity, then the President shall have such powers and perform such duties as the Board of Directors or the Chief Executive Officer may from time to time designate.
SECTION 11. Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Treasurer and Other Officers. Any Executive Vice President, any Senior Vice President, any Vice President, the Treasurer and any other officers whose powers and duties are not otherwise specifically provided for herein shall have such powers and shall perform such duties as are customarily incident to such office and as the Board of Directors or the Chief Executive Officer may from time to time designate.
SECTION 12. Secretary and Assistant Secretaries. The Secretary or, in the absence of the Secretary, any Assistant Secretary shall keep a record of the meetings of shareholders and a record of the meetings of the Board of Directors. Otherwise a Temporary Secretary designated by the person presiding at the meeting shall perform the Secretarys duties. Unless the Board of Directors shall otherwise designate, the Secretary shall also serve as the Corporations registered agent for all purposes required by law.
ARTICLE V
CAPITAL STOCK
SECTION 1. Certificates of Stock . Unless otherwise provided by the Board of Directors, each stockholder shall be entitled to a certificate of the capital stock of the Corporation in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed either manually or in facsimile by (i) the Chairman of the Board, the Chief Executive Officer, the President or any Executive Vice President and (ii) the
Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer and every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall contain such legend with respect thereto as is required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer and unless otherwise provided by the Board of Directors, shares of stock may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate therefore properly endorsed or accompanied by a written assignment and power of attorney properly executed, with transfer stamps (if necessary) affixed, and with such proof of the authenticity of signature as the Corporation or its transfer agent may reasonably require.
SECTION 3. Record Holders. Except as otherwise required by law, by the Articles of Organization or by these By-Laws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-Laws. It shall be the duty of each stockholder to notify the Corporation of his post office address.
SECTION 4. Record Date. The Board of Directors may fix in advance a time of not more than seventy (70) days before the date of any meeting of the shareholders or the date for the payment of any dividend or the making of any distribution to shareholders or the last day on which the consent or dissent of shareholders may be effectively expressed for any purpose, as the record date for determining the shareholders having the right to notice of and to vote at such meeting, and any adjournment thereof, or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case, only shareholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the Corporation after the record date. Without fixing such record date, the Board of Directors may for any of such purposes close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed, (a) the record date for determining shareholders having the right to notice of or to vote at a meeting of shareholders shall be at the close of business on the day next preceding the day on which notice is given, and (b) the record date for determining shareholders for any other purpose shall be at the close of business on the date on which the Board of Directors acts with respect thereto.
SECTION 5. Replacement of Certificates. In case of the alleged loss, destruction or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms as the Board of Directors may prescribe.
SECTION 6. Issuance of Capital Stock. Except as provided by law, the Board of Directors shall have the authority to issue or reserve for issue from time to time the whole or any part of the capital stock of the Corporation which may be authorized from time to time, to such persons or organizations, for such consideration, whether cash, property, services or expenses and on such terms as the Board of Directors may determine, including, without limitation, the granting of options, warrants or conversion or other rights to subscribe to said capital stock.
SECTION 7. Dividends. Subject to applicable law, the Articles of Organization and these By-Laws, the Board of Directors may from time to time declare, and the Corporation may pay, dividends on shares of its capital stock entitled to dividends.
ARTICLE VI
INDEMNIFICATION
SECTION 1. Definitions . For purposes of this Article: (a) Officer means any person who serves or has served as a Director of the Corporation or in any other office filled by appointment by the Board of Directors and any heirs or personal representatives of such person; (b) Non-Officer Employee means any person who serves or has served as an employee of the Corporation but who is not or was not an Officer and any heirs or personal representatives of such person; (c) Proceeding means any action, suit or proceeding, whether civil, criminal, derivative, administrative or investigative, brought or threatened in or before any court, tribunal, administrative or legislative body or agency and any claim which could be the subject of a Proceeding; and (d) Expenses means any liability fixed by a judgment, order, decree or award in a Proceeding, any amount reasonably paid in settlement of a Proceeding and any professional fees or other disbursements reasonably incurred in a Proceeding.
SECTION 2. Officers. Except as provided in Sections 4 and 5 of this Article VI, each Officer of the Corporation shall be indemnified by the Corporation against all Expenses incurred by such Officer in connection with any Proceedings in which such Officer is involved as a result of serving or having served (a) as an Officer or employee of the Corporation; (b) as a director, officer or employee of any corporation, organization, partnership, joint venture, trust or other entity the majority of the equity of which is owned by the Corporation; or (c) in any capacity with any other corporation, organization, partnership, joint venture, trust or other entity at the request or direction of the Board of Directors.
SECTION 3. Non-Officer Employees. Except as provided in Sections 4 and 5 of this Article VI, each Non-Officer Employee of the Corporation may, in the discretion of the Board of Directors, be indemnified against any or all Expenses incurred by such Non-Officer Employee in connection with any Proceeding in which such Non-Officer Employee is involved as a result of serving or having served (a) as a Non-Officer Employee of the Corporation; (b) as a director, officer or employee of any corporation, organization,
partnership, joint venture, trust or other entity the majority of the equity of which is owned by the Corporation; or (c) in any capacity with any other corporation, organization, partnership, joint venture, trust or other entity at the request or direction of the Corporation.
SECTION 4. Service at the Request or Direction of the Board of Directors. No indemnification shall be provided to an Officer or Non-Officer Employee with respect to serving or having served in any of the capacities described in Section 2(c) or 3(c) above unless the following two conditions are met: (a) such service was requested or directed in each specific case by vote of the Board of Directors prior to the occurrence of the event to which the indemnification relates, and (b) the Corporation maintains insurance coverage for the type of indemnification sought. In no event shall the Corporation be liable for indemnification under Section 2(c) or 3(c) for any amount in excess of the proceeds of insurance received with respect to such coverage as the Corporation in its discretion may elect to carry. The Corporation may but shall not be required to maintain insurance coverage with respect to indemnification under Section 2(c) or 3(c) above. Notwithstanding any other provision of this Section 4, the Board of Directors may provide an Officer or Non-Officer Employee with indemnification under Section 2(c) or 3(c) above as to a specific Proceeding even if one or both of the two conditions specified in this Section 4 have not been met and even if the amount of the indemnification exceeds the amount of the proceeds of any insurance which the Corporation may have elected to carry, provided that the Board of Directors in its discretion determines it to be in the best interests of the Corporation to do so.
SECTION 5. Good Faith. Notwithstanding the foregoing, indemnification shall be provided to an Officer pursuant to Section 2 above or may be provided to a Non-Officer Employee pursuant to Section 3 above only with respect to a matter as to which such person shall have been adjudicated in a Proceeding to have satisfied the following relevant standard of conduct: (i) such person acted in good faith; (ii) such person reasonably believed that his conduct was in or at least not opposed to the best interests of the Corporation; and (iii) in the case of any criminal proceeding, such person had no reasonable cause to believe that his conduct was unlawful. In the event that a Proceeding is compromised or settled on any basis, or if the Officer or Non-Officer Employee otherwise enters a plea of nolo contendere in such Proceeding, or if there shall otherwise not be any adjudication in such Proceeding as to the Officers or Non-Officer Employees relevant standard of conduct, then whether or not indemnification shall be provided to said Officer pursuant to Section 2 above or may be provided to said Non-Officer Employee pursuant to Section 3 above with respect to a matter shall depend upon the determination of whether such person satisfied the foregoing relevant standard of conduct to be made in accordance with the following sentence. The determination shall be made by a majority vote of those Directors who are not involved in such Proceeding; provided, however, if more than half of the Directors are involved in such Proceeding, the determination shall be made by a majority vote of a committee of three disinterested Directors chosen by the disinterested Directors at a regular or special meeting; and provided further, however, if there are less than three disinterested Directors, the determination shall be based upon the opinion of the Corporations regular outside counsel, unless such counsel has been involved in any way in such Proceeding or in any matter that is
the subject of or otherwise related in any way to such Proceeding, in which case the determination shall be based upon the opinion of an independent outside counsel that has no such prior involvement in the Proceeding or any related matter. The termination of any Proceeding by judgment, order, settlement or conviction, or upon a plea of nolo contendere, shall not, of itself and without an accompanying determination as to whether the Officer or Non-Officer Employee has satisfied the relevant standard of conduct as provided herein, be determinative as to whether or not such Officer or Non-Officer Employee satisfied the relevant standard of conduct described in this Section 5.
SECTION 6. Prior to Final Disposition. To the extent authorized by the Board of Directors, by the committee of Directors referred to in Section 5 of this Article VI or by the opinion of the counsel referred to in such Section 5, any indemnification provided for under this Article VI may include payment by the Corporation of Expenses incurred in defending a Proceeding in advance of the final disposition of such Proceeding upon receipt of an undertaking by the Officer or Non-Officer Employee seeking indemnification to repay such payment if such Officer or Non-Officer Employee shall be adjudicated or determined to be not entitled to indemnification under this Article VI.
SECTION 7. Insurance. The Corporation may purchase and maintain insurance to protect itself and any Officer or Non-Officer Employee against any liability of any character asserted against or incurred by the Corporation or any such Officer or Non-Officer Employee, or arising out of any such status, whether or not the Corporation would have the power to indemnify such person against such liability by law or under the provisions of this Article VI.
SECTION 8. Other Indemnification Rights. Nothing in this Article VI shall limit any lawful rights to indemnification existing independently of this Article VI.
SECTION 9. Merger or Consolidation . If the Corporation is merged into or consolidated with another corporation and the Corporation is not the surviving corporation, the surviving corporation shall assume the obligations of the Corporation under this Article VI with respect to any Proceeding arising out of or relating to any actions, transactions or facts occurring at or prior to the date of such merger or consolidation.
SECTION 10. Savings Clause . If this Article VI or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify and advance expenses to each indemnitee as to any expenses (including reasonable attorneys fees), judgments, fines, liabilities, losses, and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article VI that shall not have been invalidated and to the fullest extent permitted by applicable law.
SECTION 11. Subsequent Legislation . If the Massachusetts General Laws are amended after adoption of this Article VI to expand further the indemnification permitted to
an indemnitee, then the Corporation shall indemnify all such persons to the fullest extent permitted by the Massachusetts General Laws, as so amended.
ARTICLE VII
MISCELLANEOUS PROVISIONS
SECTION 1. Amendment of By-Laws . These By-Laws may be adopted, altered, amended, changed or repealed as provided in the Articles of Organization.
SECTION 2. Fiscal Year. Except as otherwise determined by the Board of Directors, the fiscal year of the Corporation shall be the twelve months ending December 31 or on such other date as may be required by law.
SECTION 3. Seal. The Board of Directors shall have power to adopt and alter the seal of the Corporation.
SECTION 4. Execution of Instruments. All deeds, leases, transfers, contracts, bonds, notes and other obligations to be entered into by the Corporation in the ordinary course of its business without Board of Directors action may be executed on behalf of the Corporation by the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer or any other officer, employee or agent of the Corporation as the Board of Directors or the Executive Committee may authorize.
SECTION 5. Voting of Securities. Unless otherwise provided by the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer or the Treasurer may waive notice of and act on behalf of the Corporation, or appoint another person or persons to act as proxy or attorney in fact for the Corporation with or without discretionary power and/or power of substitution, at any meeting of shareholders of any other organization, any of whose securities are held by the Corporation. Any person or persons authorized or otherwise designated in the manner provided herein shall have full right, power and authority to vote any shares of stock issued by another corporation in the name of the Corporation.
SECTION 6. Articles of Organization. All references in these By-Laws to the Articles of Organization shall be deemed to refer to the Articles of Organization of the Corporation, as may be amended and/or restated and otherwise in effect from time to time.
SECTION 7. Registered Office. Unless the Board of Directors shall otherwise designate, the Corporations principal place of business shall also serve as the Corporations registered office for all purposes required by law.
Exhibit 10.1
ENTERPRISE BANCORP, INC.
Directors Compensation Arrangements
As of March 16, 2010, Enterprise Bank and Trust Company (the Bank), which is the principal subsidiary of Enterprise Bancorp, Inc. (the Company), has updated the compensation arrangements for its outside directors (i.e., non-employee directors), to be effective as of March 29, 2010, as shown below.
Monthly Retainer Fees
· All directors - $600 ($7,200 annually)
· All members of Executive Committee - $200 ($2,400 annually)
Quarterly Retainer Fees
· Chair of Audit Committee - $1,875 ($7,500 annually)
· Vice Chair of Audit Committee - $1,000 ($4,000 annually)
· Chair of all other committees (other than Marketing and Business Development and Executive Committees) - $1,500 ($6,000 annually)
· Secretary - $125 ($500 annually)
Per Meeting Fees
· Board of Directors meetings - $350
· Executive Committee meetings - $450
· Audit Committee meetings - $450
· All other committee meetings - $350
· Annual Board strategic planning session - $1,000
Equity Compensation Awards
As of March 16, 2010, each outside director has received a grant of restricted stock, which vests over a period of two years (50% vesting on the first and second anniversary of the date of grant), with an aggregate fair market value on the date of grant of approximately $7,200. Outside directors may receive additional future grants of restricted stock or other equity-based compensation awards on an annual or other periodic basis as may be determined by the Board of Directors on the recommendation of the Compensation Committee.
Right to Elect Stock in Lieu of Fees
Each outside director has the right to make an irrevocable election for each year (by no later than December 31 st of the preceding year) to receive shares of the Companys common stock in lieu of receiving an elected portion of cash fees. The number of shares issued to an outside director in any year of service pursuant to this election is based on the fair market value of the common stock as of the first trading day of the year for which the election applies.
Exhibit 10.2
ENTERPRISE BANCORP, INC.
Restricted Stock Agreement
This Agreement is entered into as of this XXth day of , XXXX (the Grant Date) by and between Enterprise Bancorp, Inc., a Massachusetts corporation (the Company), and (the Grantee).
WITNESSETH THAT:
WHEREAS, the Company has instituted a program entitled Enterprise Bancorp, Inc. 2009 Stock Incentive Plan (the Plan); and
WHEREAS, the Compensation Committee of the Board of Directors, or the full Board of Directors, as the case may be, of the Company has authorized the grant of shares of the Companys common stock to the Grantee upon the terms and conditions set forth below; and
WHEREAS, the Compensation Committee or the full Board of Directors, as the case may be, has authorized the grant of shares of the Companys common stock to the Grantee pursuant and subject to the terms of the Plan, a copy of which is attached hereto and incorporated herein;
NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the Company and the Grantee agree as follows.
1. Grant . Subject to the terms of the Plan and this Agreement, the Company hereby grants to the Grantee, and the Grantee hereby accepts, shares of the Companys common stock, par value $0.01 per share (the Restricted Stock). The term Restricted Stock shall include any additional shares of stock of the Company issued on account of the foregoing shares by reason of stock dividends, stock splits or recapitalizations (whether by way of mergers, consolidations, combinations or exchanges of shares or the like).
2. Vesting Schedule . The interest of the Grantee in the Restricted Stock shall vest in accordance with the schedule attached to this Agreement as Exhibit 1, which is incorporated herein and made a part hereof by this reference; provided, however, that such vesting of shares of the Restricted Stock shall be and hereby is conditioned upon the Grantees continuing employment with the Company and continuing compliance with all applicable employee confidentiality, noncompetition and other agreements with the Company and any of its subsidiaries as of each date upon which such vesting shall occur in accordance with such schedule.
3. Restrictions on Stock . Until the termination of restrictions and the vesting of the shares of Restricted Stock as provided in Section 2 above, none of the Restricted Stock may be sold, assigned, transferred, pledged, or otherwise encumbered except as provided in this Agreement.
If the Grantees employment with the Company is terminated for any reason, whether with or without cause and whether voluntarily or involuntarily, then all shares of Restricted Stock that have not yet vested as of the time of the Grantees termination of employment, if any,
shall be forfeited and returned to the Company, unless the Compensation Committee of the Board of Directors, or the full Board of Directors, as the case may be, of the Company, in its sole discretion shall otherwise determine.
4. Rights as Stockholder . Except for the restrictions and other limitations and conditions provided in this Agreement, the Grantee as owner of the Restricted Stock shall have all the rights of a stockholder, including but not limited to the right to receive all dividends paid on such Restricted Stock and the right to vote all of the shares of such Restricted Stock.
5. Stock Certificates . Each certificate issued for shares of Restricted Stock shall be registered in the name of the Grantee and deposited by the Grantee, together with a stock power endorsed in blank, with the Company or its duly appointed transfer agent and shall bear the following (or a similar) legend:
The transferability of this certificate and the shares of stock represented hereby are subject to the terms, conditions and restrictions (including forfeiture) contained in a Restricted Stock Agreement between the registered owner and Enterprise Bancorp, Inc. A copy of such Restricted Stock Agreement will be furnished to the holder of this certificate upon written request and without charge.
Upon the termination of the restrictions imposed under this Agreement as to any shares of Restricted Stock, the Company shall return to the Grantee (or to such Grantees legal representative, beneficiary or heir) certificates, without a legend, for the shares of common stock deposited with it or its transfer agent pursuant to this Section 5 as to which the restrictions have been terminated.
Notwithstanding the foregoing, if and to the extent that the Company also provides to its shareholders generally a means to hold title to shares on a noncertificated basis, then the shares of Restricted Stock issued to the Grantee under this Agreement may be issued on such a noncertificated basis if mutually agreed upon by the Company and the Grantee and otherwise permissible under applicable law and the rules of any applicable stock exchange. If any such shares of Restricted Stock are so issued on a noncertificated basis, then the Company shall adopt alternative measures in lieu of the foregoing stock certificate legend to ensure that the restrictions on such shares of Restricted Stock required under this Agreement are properly observed.
6. Tax Consequences; Withholding . The Grantee has reviewed with the Grantees own tax advisors the federal, state, local and foreign tax consequences of the investment and the transactions contemplated by this Agreement. The Grantee is relying solely on such advisors and not on any statements or representations of the Company or any of its agents or representatives. The Grantee understands that the Grantee shall be liable for any and all taxes, including withholding taxes, arising out of this grant or the vesting of the shares of Restricted Stock hereunder. The Company shall have the right to deduct from amounts otherwise payable to the Grantee, or to require the Grantee to pay, any taxes required by law to be withheld with respect to the Restricted Stock.
7. Notice of Election Under Section 83(b) . If the Grantee makes an election under Section 83(b) of the Internal Revenue Code of 1986, as amended, and the regulations and rulings
promulgated thereunder, he will provide a copy thereof to the Company within thirty days of the filing of such election with the Internal Revenue Service.
8. Securities and Other Laws; Lock-Up Agreement . In any case in which in the opinion of the Compensation Committee of the Board of Directors, or the full Board of Directors, as the case may be, of the Company, the issue and/or delivery of shares of common stock under this Agreement would violate requirements of federal or state securities or other laws, or the requirements of any securities exchange on which the stock is listed, the Company shall be entitled to postpone such issue and/or delivery until such requirements have been met. The Compensation Committee or the full Board of Directors, as the case may be, may require representations and agreements from the Grantee in order to ensure such compliance with federal or state securities or other laws or the requirements of any securities exchange.
The Grantee hereby further agrees that as a condition to his receipt of the Restricted Stock, he will execute an agreement in a form acceptable to the Company to the effect that the shares of such Restricted Stock shall be subject to any underwriters lock-up agreement in connection with a public offering of any securities of the Company that may from time to time apply to shares held by officers and employees of the Company, and such agreement or a successor agreement must be in full force and effect.
9. Grantees Investment Representations . Grantee represents that he is acquiring the shares of Restricted Stock for his own account for investment purposes and not with a view towards distribution of the shares to the public.
10. Adjustment in Provisions . In the event that there are any changes in the outstanding common stock of the Company by reason of stock dividends, stock splits, or recapitalizations (whether by way of mergers, consolidations, combinations, or exchanges of shares or the like), the divisions of shares of Restricted Stock into parts, the provisions for termination of restrictions on parts of Restricted Stock, and any other relevant portions of this Agreement shall be appropriately adjusted by the Compensation Committee of the Board of Directors, or the full Board of Directors, as the case may be, of the Company, if necessary, to reflect equitably such change or changes.
11. [Intentionally Omitted]
12. Termination or Amendment of Plan . The Compensation Committee of the Board of Directors, or the full Board of Directors, as the case may be, of the Company may terminate or amend the Plan at any time. No such termination or amendment will affect the parties respective rights and obligations under this Agreement, as and to the extent that this Agreement then remains in effect.
13. Effect Upon Employment . Nothing in this Agreement or the Plan shall be construed to impose any obligation upon the Company or any of its subsidiaries to employ the Grantee or to retain the Grantee in its employ.
14. [Intentionally Omitted]
15. General Provisions .
(a) Amendment; Waivers . This Agreement, including the Plan, contains the full and complete understanding and agreement of the parties hereto as to the subject matter hereof and, except as otherwise permitted by the express terms of the Plan and this Agreement, it may not be modified or amended nor may any provision hereof be waived, except by a further written agreement duly signed by each of the parties; provided, however, that a modification or amendment that does not materially diminish the rights of the Grantee hereunder, as they may exist immediately before the effective date of the modification or amendment, shall be effective upon written notice of its provisions to the Grantee. The waiver by either of the parties hereto of any provision hereof in any instance shall not operate as a waiver of any other provision hereof or in any other instance.
(b) Binding Effect . This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, executors, administrators, representatives, successors and assigns.
(c) Governing Law. This Agreement has been executed in Massachusetts and shall be governed by and construed in accordance with the laws of The Commonwealth of Massachusetts.
(d) Construction . This Agreement is to be construed in accordance with the terms of the Plan. In case of any conflict between the Plan and this Agreement, the Plan shall control. The titles of the sections of this Agreement and of the Plan are included for convenience only and shall not be construed as modifying or affecting their provisions. The masculine gender shall include both sexes; the singular shall include the plural and the plural the singular unless the context otherwise requires. Capitalized terms not defined herein shall have the meanings given to them in the Plan.
(e) Notices . Any notice in connection with this Agreement shall be deemed to have been properly delivered if it is in writing and is delivered by hand or facsimile or sent by registered mail, postage prepaid, to the party addressed as follows, unless another address has been substituted by notice so given:
To the Grantee: |
To his address as set forth on the signature page hereof. |
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To the Company: |
Enterprise Bancorp, Inc. |
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222 Merrimack Street |
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Lowell, Massachusetts 01852 |
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Attn: Mr. James A. Marcotte |
(f) Transfers in Violation of Restrictions Void . The Company shall not be required to transfer on its books any shares of Restricted Stock that shall have been sold or transferred by Grantee or otherwise in violation of any of the provisions set forth in this Agreement or to treat as owner of any such shares or to accord the right to vote as such owner or to pay dividends to any transferee to whom such shares shall have been so transferred.
IN WITNESS WHEREOF, the Company has caused this Restricted Stock Agreement to be executed as a sealed instrument by its officer thereunto duly authorized as of the date first set forth above.
ACCEPTANCE
The undersigned hereby accepts, as of the date of grant, the foregoing grant of Restricted Stock in accordance with the terms and conditions of this Restricted Stock Agreement and the terms and conditions of the Enterprise Bancorp, Inc. 2009 Stock Incentive Plan.
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(Signature of Grantee) |
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Notice Address: |
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Exhibit 1 to
Restricted Stock Agreement
Employee name (Grantee):
Date of grant:
Number of shares granted:
Vesting schedule:
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Date: |
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[To be determined by the Board of Directors]
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George L. Duncan, Chairman |
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
UNDER SECURITIES EXCHANGE ACT RULE 13a-14(a)
I, John P. Clancy, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enterprise Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 10, 2010 |
/s/ John P. Clancy, Jr. |
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John P. Clancy, Jr. |
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Chief Executive Officer |
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(Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECURITIES EXCHANGE ACT RULE 13a-14(a)
I, James A. Marcotte, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enterprise Bancorp, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
5. The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting.
Date: May 10, 2010 |
/s/ James A. Marcotte |
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James A. Marcotte |
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Executive Vice
President, Chief Financial Officer and
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CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL OFFICER
UNDER 18 U.S.C. § 1350 FURNISHED PURSUANT TO SECURITIES EXCHANGE ACT RULE 13a-14(b)
In connection with the Quarterly Report of Enterprise Bancorp, Inc. (the Company) on Form 10-Q for the period ended on March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the Report), each of the undersigned, in his respective capacities indicated below, hereby certifies, pursuant to 18 U.S.C. § 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge and belief, (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: May 10, 2010
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/s/ John P. Clancy, Jr. |
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John P. Clancy, Jr. |
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Chief Executive Officer |
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(Principal Executive Officer) |
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/s/ James A. Marcotte |
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James A. Marcotte |
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Executive Vice President, Chief Financial Officer |
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and Treasurer (Principal Financial Officer) |
A signed original of this written statement required by Section 906 has been provided to Enterprise Bancorp, Inc. and will be retained by Enterprise Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.