U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _____________ to _______________
Commission file number 0-21021
Enterprise Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3308902
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
222 Merrimack Street, Lowell, Massachusetts, 01852
(Address of principal executive offices) (Zip code)
(978) 459-9000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ..X.... No......
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
October 31, 1999, Common Stock - Par Value $0.01, 3,202,588 shares outstanding
ENTERPRISE BANCORP, INC.
INDEX
Page Number
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements of Enterprise Bancorp, Inc.
Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three months and nine months ended September 30, 1999 and 1998 4
Consolidated Statement of Changes in Stockholders' Equity 5
Nine months ended September 30, 1999
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998 6
Notes to Financial Statements 7
Item 2 Management's Discussion and
Analysis of Financial Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk 22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Changes in Securities 23
Item 3 Defaults upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits and Reports on Form 8-K 23
Signature Page 24
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact. Enterprise
Bancorp, Inc. (the "company") wishes to caution readers that the following
important factors, among others, may have affected and could in the future
affect the company's results and could cause the company's results for
subsequent periods to differ materially from those expressed in any
forward-looking statement made herein: (i) the effect of changes in laws and
regulations, including federal and state banking laws and regulations, with
which the company or its subsidiaries must comply, and the associated costs of
compliance with such laws and regulations either currently or in the future as
applicable; (ii) the effect of changes in accounting policies and practices, as
may be adopted by the regulatory agencies as well as by the Financial Accounting
Standards Board, or of changes in the company's organization, compensation or
benefit plans; (iii) the effect on the company's competitive position within its
market area of the increasing competition from larger regional and out-of-state
banking organizations as well as non-bank providers of various financial
services; (iv) the effect of changes in interest rates; (v) the effect of
changes in the business cycle and downturns in the local, regional or national
economies; (vi) the effect of changes in federal and state income tax
regulations; and (viii) the potential for the company to materially
underestimate the cost to be incurred and/or the time required in connection
with systems preparation for Year 2000 compliance.
2
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
September 30, December 31,
1999 1998
($ in thousands) (Unaudited)
------------ ------------
Assets
Cash and cash equivalents $ 15,350 19,668
Daily federal funds sold 6,275 6,255
Investment securities, at fair value 140,075 114,659
Loans, less allowance for loan losses of $5,549
at September 30, 1999 and $5,234 at December 31, 1998 237,544 209,978
Premises and equipment 6,062 4,272
Accrued interest receivable 2,729 2,424
Prepaid expenses and other assets 1,621 863
Income taxes receivable 649 271
Real estate acquired by foreclosure 254 304
Deferred income taxes, net 3,471 1,787
--------- ---------
Total assets $ 414,030 360,481
========= =========
Liabilities and Stockholders' Equity
Deposits $ 333,162 317,666
Short-term borrowings 50,186 12,085
Escrow deposits of borrower 805 687
Accrued expenses and other liabilities 1,886 2,222
Accrued interest payable 588 623
--------- ---------
Total liabilities 386,627 333,283
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized,
no shares issued at September 30, 1999 -- --
Common stock $.01 par value; 10,000,000 and 5,000,000
shares authorized, 3,202,588 and 3,167,684 shares
issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 32 32
Additional paid-in capital 15,994 15,560
Retained earnings 12,980 10,610
Accumulated other comprehensive income (loss) (1,603) 996
--------- ---------
Total stockholders' equity 27,403 27,198
--------- ---------
Total liabilities and stockholders' equity $ 414,030 360,481
========= =========
3
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three months and nine months ended September 30, 1999 and 1998
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
($ in thousands) 1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Interest and dividend income:
Loans $ 5,423 4,876 15,146 13,845
Investment securities 1,934 1,441 5,358 4,767
Federal funds sold 2 314 67 396
---------- ---------- ---------- ----------
Total interest income 7,359 6,631 20,571 19,008
---------- ---------- ---------- ----------
Interest expense:
Deposits 2,441 2,442 7,231 6,998
Borrowed funds 411 99 737 409
---------- ---------- ---------- ----------
Total interest expense 2,852 2,541 7,968 7,407
---------- ---------- ---------- ----------
Net interest income 4,507 4,090 12,603 11,601
Provision for loan losses -- 440 270 710
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 4,507 3,650 12,333 10,891
Non-interest income:
Deposit service fees 222 225 648 674
Trust fees 305 244 883 703
Gain on sale of loans 28 57 148 132
Gain on sale of investments 80 268 183 433
Losses on sale of real estate acquired by foreclosure -- (14) -- (14)
Other income 89 75 253 229
---------- ---------- ---------- ----------
Total non-interest income 724 855 2,115 2,157
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits 2,207 1,854 6,052 5,262
Occupancy expenses 648 535 1,809 1,629
Advertising and public relations 124 137 405 359
Office and data processing supplies 98 83 234 269
Audit, legal and other professional fees 190 324 510 614
Trust professional and custodial expenses 97 80 250 225
Other operating expenses 419 354 1,015 938
---------- ---------- ---------- ----------
Total non-interest expense 3,783 3,367 10,275 9,296
---------- ---------- ---------- ----------
Income before income taxes 1,448 1,138 4,173 3,752
Income tax expense 384 246 1,137 1,179
---------- ---------- ---------- ----------
Net income $ 1,064 892 3,036 2,573
========== ========== ========== ==========
Basic earnings per average common share outstanding $ 0.33 0.28 0.95 0.81
========== ========== ========== ==========
Diluted earnings per average common share outstanding $ 0.32 0.27 0.91 0.78
========== ========== ========== ==========
Basic weighted average common shares outstanding 3,202,412 3,167,090 3,180,730 3,164,330
========== ========== ========== ==========
Diluted weighted average common shares outstanding 3,361,275 3,307,094 3,339,593 3,287,968
========== ========== ========== ==========
4
ENTERPRISE BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
Nine months ended September 30, 1999
Common Stock Additional Comprehensive Income(Loss) Total
----------------- Paid-in Retained --------------------------- Stockholders'
($ in thousands) Shares Amount Capital Earnings Period Accumulated Equity
--------- ------ ---------- -------- -------- ----------- -------------
Balance at December 31, 1998 3,167,684 $ 32 $ 15,560 $ 10,610 $ 996 $ 27,198
Comprehensive income
Net income 3,036 $ 3,036 3,036
Unrealized loss on securities,
net of reclassification (2,599) (2,599) (2,599)
-------
Total comprehensive income, net of tax $ 437
=======
Dividends paid ($.21 per share) (666) (666)
Common stock issued-Dividend Reinvestment Plan 27,054 -- 388 388
Stock Stock Stock options exercised 7,850 -- 46 46
--------- ------ --------- -------- ------- ---------
Balance at September 30, 1999 3,202,588 $ 32 $ 15,994 $ 12,980 $(1,603) $ 27,403
========= ====== ========= ======== ======= =========
Disclosure of reclassification amount:
Gross unrealized holding loss arising during the period $(4,027)
Less: tax effect 1,548
-------
Unrealized holding loss, net of tax (2,479)
-------
Less: reclassification adjustment for gains included
in net income (net of $63 tax expense) 120
-------
Unrealized loss on securities, net of reclassification $(2,599)
=======
5
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Nine months ended September 30, 1999 and 1998
September 30, September 30,
1999 1998
($ in thousands) (Unaudited) (Unaudited)
------------- -------------
Cash flows from operating activities:
Net income $ 3,036 2,573
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 270 710
Depreciation and amortization 1,020 820
Gains on sales of loans (148) (132)
Gains on sales of securities (183) (433)
Losses on sales of real estate owned -- 14
Write-downs of foreclosed property 50 --
Change in loans held for sale, net of gains 98 (663)
(Increase)/Decrease:
Accrued interest receivable (305) 617
Prepaid expenses and other assets (758) (66)
Deferred income taxes (74) (321)
Increase/(Decrease):
Accrued expenses and other liabilities (336) 481
Accrued interest payable (35) 10
Change in income taxes receivable (378) (16)
-------- --------
Net cash provided by operating activities 2,257 3,594
-------- --------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns
of investment securities 15,585 32,062
Proceeds from sales of investment securities 12,524 20,253
Purchase of investment securities (57,675) (42,460)
Net proceeds from sales of real estate acquired by foreclosure -- 148
Net increase in loans (27,786) (26,180)
Additions to premises and equipment, net (2,686) (777)
-------- --------
Net cash used in investing activities (60,038) (16,954)
-------- --------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 15,614 26,586
Change in short term borrowings 38,101 4,051
Dividends paid (666) (554)
Common stock issued - Dividend Reinvestment 388 --
Stock options exercised 46 44
-------- --------
Net cash provided by financing activities 53,483 30,127
-------- --------
Net (decrease) increase in cash and cash equivalents (4,298) 16,767
Cash and cash equivalents at beginning of period 25,923 23,554
-------- --------
Cash and cash equivalents at end of period $ 21,625 40,321
======== ========
Supplemental financial data:
Cash paid for:
Interest on deposits and short-term borrowings $ 8,003 7,397
Income taxes 1,498 1,521
Transfers from loans to real estate acquired by foreclosure -- 73
6
ENTERPRISE BANCORP, INC.
Notes to Financial Statements
(1) Organization of Holding Company
Enterprise Bancorp, Inc. (the "company") is a Massachusetts corporation, which
was organized on February 29, 1996, at the direction of Enterprise Bank and
Trust Company, a Massachusetts trust company (the "bank"), for the purpose of
becoming the holding company for the bank. The company had no material assets or
operations prior to completion of the holding company reorganization on July 26,
1996.
(2) Basis of Presentation
The accompanying unaudited financial statements should be read in conjunction
with the company's December 31, 1998, audited financial statements and notes
thereto. Interim results are not necessarily indicative of results to be
expected for the entire year.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the allowance
for loan losses.
In the opinion of management, the accompanying financial statements reflect all
necessary adjustments consisting of normal recurring accruals for a fair
presentation.
(3) Earnings per share
Basic earnings per share are calculated by dividing net income by the year to
date weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect the effect on weighted average shares
outstanding of the number of additional shares outstanding if dilutive stock
options were converted into common stock using the treasury stock method.
(4) Dividend Reinvestment Plan
The Board of Directors adopted a Dividend Reinvestment Plan (the "DRP"). The DRP
enables stockholders, at their discretion, to elect to reinvest dividends paid
on their outstanding shares of company common stock by purchasing additional
shares of company common stock from the company. The stockholders utilized the
DRP to reinvest $388,000 of the dividends paid by the company in 1999 in 27,054
shares of the company's common stock.
(5) Purchase and Assumption Agreement
On September 22, 1999, the company and the bank entered into a Purchase and
Assumption Agreement (the "Agreement") with Fleet Financial Group, Inc. and its
principal banking subsidiary, Fleet National Bank, pursuant to which the bank
will purchase two branch offices of Fleet National Bank. The bank's acquisition
of these branch offices is part of the overall sale of 306 branch offices of
Fleet National Bank and BankBoston, N.A. to be completed in accordance with a
divestiture order of the United States Department of Justice issued in
connection with the merger of BankBoston Corporation with Fleet Financial Group,
Inc. The bank's acquisition of the branches remains subject to the parties'
receipt of required federal and state regulatory approvals and satisfaction of
various other customary closing conditions specified in the Agreement. The
parties presently anticipate that the bank's acquisition of the branches will be
completed in the second or third quarter of 2000.
(6) Reclassification
Certain fiscal 1998 information has been reclassified to conform to the 1999
presentation.
7
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Capital Resources
The company's actual capital amounts and capital adequacy ratios are presented
in the table below. The bank's capital amounts and ratios do not differ
materially from the amounts and ratios presented.
Minimum Capital Minimum Capital
for Capital to be
Actual Adequacy Purposes Well Capitalized
------------------------- ------------------------ ---------------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
-------------- --------- ------------- --------- ------------ ------------
As of September 30, 1999:
Total Capital
(to risk weighted assets) $ 32,062 11.82% $ 21,694 8.00% $ 27,117 10.00%
Tier 1 Capital
(to risk weighted assets) 28,641 10.56% 10,847 4.00% 16,270 6.00%
Tier 1 Capital*
(to average assets) 28,641 7.31% 15,668 4.00% 19,585 5.00%
<FN>
* For the bank to qualify as "well capitalized", it must maintain a leveraged capital ratio (Tier 1 capital
to average assets) of at least 5%. This requirement does not apply to the company and is reflected merely
for informational purposes with respect to the bank.
</FN>
On April 20, 1999, the Board of Directors declared a dividend in the amount of
$0.21 per share to be paid on or about July 1, 1999 to shareholders of record as
of the close of business on June 11, 1999. The Board of Directors intends to
consider the payment of future dividends on an annual basis. The Board of
Directors adopted a Dividend Reinvestment Plan (the "DRP"). The DRP enables
stockholders, in their discretion, to elect to reinvest dividends paid on their
outstanding shares of company common stock by purchasing additional shares of
company common stock from the company. The stockholders utilized the DRP to
reinvest $388,000 of the dividends paid by the company in 1999 in 27,054 shares
of the company's common stock.
On September 22, 1999, the company and the bank entered into a Purchase and
Assumption Agreement (the "Agreement") with Fleet Financial Group, Inc. and its
principal banking subsidiary, Fleet National Bank, pursuant to which the bank
will purchase two branch offices of Fleet National Bank. The bank will purchase
approximately $7.1 million in loans, furniture, fixtures, and equipment with a
net book value of approximately $0.1 million, and will purchase the land and
buildings at agreed upon values totaling approximately $1.5 million. The bank
will assume $66.5 million in deposits, in exchange for a premium of
approximately 13.6% of total deposits, presently estimated to be $9.1 million.
The acquisition will close with a net cash payment from Fleet National Bank to
the bank. Management anticipates using the proceeds to repay the bank's current
Federal Home Loan Bank ("FHLB") borrowings and/or to increase the bank's
investment portfolio.
The bank's acquisition of these branch offices is part of the overall sale of
306 branch offices of Fleet National Bank and BankBoston, N.A. to be completed
in accordance with a divestiture order of the United States Department of
Justice issued in connection with the merger of BankBoston Corporation with
Fleet Financial Group, Inc. The bank's acquisition of the branches remains
subject to the parties' receipt of required federal and state regulatory
approvals and satisfaction of various other customary closing conditions
specified in the Agreement. The parties presently anticipate that the bank's
acquisition of the branches will be completed in the second or third quarter of
2000. However, no assurance can be given that the acquisition will be
consummated.
8
The company presently intends to raise approximately $14.5 million from an
offering of trust preferred securities to be made in the fourth quarter of 1999
or the first quarter of 2000. However, no assurance can be given that the
offering will be consummated. The company currently intends to contribute a
portion of the offering proceeds to the bank. This anticipated capital
contribution is intended to ensure that the bank remains "well capitalized" for
regulatory purposes following the completion of the acquisition. The completion
of the trust preferred offering is not a condition to the parties respective
obligations under the Agreement and management does not believe that the company
would be required to raise additional capital in order to obtain the regulatory
approvals required for the transactions contemplated by the Agreement.
9
Balance Sheet
Total Assets
Total assets increased $53.5 million, or 14.9%, since December 31, 1998. The
increase is primarily attributable to an increase in gross loans of $27.9
million, and in increase in investments of $25.4 million. The increase in assets
was funded by an increase in short-term borrowings of $38.1 million and an
increase in deposits of $15.6 million.
Investments
At September 30, 1999, all of the company's investment securities were
classified as available-for-sale and carried at fair value. The net unrealized
loss at September 30, 1999 was $2.6 million, compared to an unrealized gain at
December 31, 1998 of $1.6 million. The net unrealized gain (loss), after tax
effects, is shown under accumulated other comprehensive income (loss), a
separate component of stockholders' equity, in the amounts of $(1.6) million and
$996 thousand at September 30, 1999 and December 31, 1998, respectively. The tax
effects are recorded as a change to deferred income taxes, as discussed below.
The change in the net unrealized gain (loss) was due to an increase in market
interest rates since the end of 1998.
Loans
Total loans, before the allowance for loan losses, were $243.1 million, or 58.7%
of total assets, at September 30, 1999, compared to $215.2 million, or 59.7% of
total assets, at December 31, 1998. The increase in loans of $27.9 million was
primarily attributed to continued strong loan origination in the commercial real
estate and commercial loan portfolios. The bank continues to pursue active
customer calling efforts as well as increased marketing and advertising to
identify quality-lending opportunities.
Premises and Equipment
Premises and equipment increased by $1.8 million from December 31, 1998 to
September 30, 1999. The increase was primarily attributed to the construction of
the new Westford branch, scheduled for opening in November of 1999, and from
various leasehold improvements for administrative and executive office space
necessary due to the bank's growth.
Deferred Income Taxes
The increase in deferred income taxes was caused primarily by a decrease in
investment market values from an unrealized gain at December 31, 1998 of $1.6
million to an unrealized loss of $2.6 million at September 30, 1999. This
resulted in the deferred tax asset increasing from a $0.6 million deferred tax
liability as of December 31, 1998 to a $1.0 million deferred tax asset at
September 30, 1999. Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $15.6 million,
or 4.9%, during the first nine months of 1999 from $318.4 million at December
31, 1998, to $334.0 million at September 30, 1999. The increase was primarily
due to increased market penetration of the bank's newer branches and aggressive
customer calling efforts.
Total borrowings, consisting of securities sold under agreements to repurchase
and FHLB (Federal Home Loan Bank) borrowings, increased $38.1 million, or
315.3%, from $12.1 million at December 31, 1998 to $50.2 million at September
30, 1999. Management periodically takes advantage of opportunities to fund asset
growth with borrowings, but on a long-term basis the bank intends to replace any
FHLB borrowings with deposits. Management also actively uses FHLB borrowings in
managing the bank's asset/liability position. The bank had FHLB borrowings
outstanding of $25.5 million at September 30, 1999 compared to $0.5 million at
December 31, 1998. The bank had the ability to borrow approximately an
additional $58.1 million at September 30, 1999.
10
Loan Loss Experience/Non-Performing Assets
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Nine months ended September 30,
---------------------------------------
($ in thousands) 1999 1998
------------- --------------
Balance at beginning of year $5,234 4,290
Loans charged-off
Commercial 51 72
Commercial real estate -- --
Construction -- --
Residential real estate -- --
Home equity -- --
Other 9 11
------ ------
60 83
Recoveries on loans charged off
Commercial 45 5
Commercial real estate 2 --
Construction -- --
Residential real estate -- 6
Home equity 4 5
Other 54 34
------ ------
105 50
Net loans recovered (charged off) 45 (33)
Provision charged to income 270 710
------ ------
Balance at September 30 $5,549 4,967
====== ======
Allowance for loan losses: Gross loans 2.28% 2.39%
====== ======
Annualized net recoveries (charge-offs): Average loans outstanding 0.02% (0.02%)
====== ======
Allowance for loan losses: Non-performing loans 652.06% 436.85%
====== ======
The following table sets forth non-performing assets at the dates indicated:
($ in thousands) September 30, December 31, September 30,
1999 1998 1998
------------ ------------ -------------
Loans on non-accrual:
Commercial $ 396 754 519
Residential real estate 72 113 74
Commercial real estate 270 63 104
Construction -- 174 178
Consumer, including home equity 64 159 159
------ ------ ------
Total loans on non-accrual 802 1,263 1,034
Loans past due >90 days, still accruing 49 97 103
------ ------ ------
Total non-performing loans 851 1,360 1,137
Other real estate owned 254 304 304
------ ------ ------
Total non-performing loans and real estate owned $1,105 1,664 1,441
====== ====== ======
Non-performing loans: Gross loans 0.35% 0.63% 0.55%
====== ====== ======
Non-performing loans and real estate owned: Total assets 0.27% 0.46% 0.40%
====== ====== ======
Delinquent loans 30-89 days past due: Gross loans 0.53% 0.68% 0.88%
====== ====== ======
Total non-performing loans decreased $0.3 million from September 30, 1998
through September 30, 1999. The ratio of non-performing loans to gross loans
decreased from 0.55% to 0.35% during this period. The primary cause for the
declines was the removal of several commercial and consumer loans from
non-accrual status. These loans were either paid in full or brought current and
assessed as fully collectable by management.
11
Total non-performing loans decreased $0.5 million from December 31, 1998 to
September 30, 1999. The ratio of non-performing loans to gross loans decreased
from 0.63% as of December 31, 1998 to 0.35% during this period. The primary
cause for the decline was the pay-off of several commercial loans that were
classified as non-accrual. The level of non-performing assets is largely a
function of economic conditions and the overall banking environment, as well as
the strength of the bank's loan underwriting. Adverse changes in local, regional
or national economic conditions could negatively impact the level of
non-performing assets in the future, despite prudent underwriting.
Year 2000 Compliance
The statements in the following section include "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
This section contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended. The company's readiness
for the Year 2000, and the eventual effects of the Year 2000 on the company may
be materially different than projected.
The company has determined, tested and remediated the impact of the so-called
"millennium" or "Y2K" bug (i.e., that many existing computer chips and programs
use only two digits to identify the year in a date field and if such programs
are not corrected many computer applications or computer chip dependent
operations could fail or create erroneous results by or beginning in the year
2000). Every department and function of the company is affected and is included
in the company's analysis and compliance process. The remediation efforts
discussed below relate to both information technology systems (i.e. computer
systems, phone systems, telecommunications, etc.) and non-information technology
systems (i.e. alarm systems, security systems, elevators, electrical systems,
etc.).
The company primarily utilized internal resources to manage the Y2K remediation
process and test, update, and/or replace all software information systems for
Y2K modifications. The company has a "Year 2000 Steering Committee" consisting
of various members of senior management and all department managers. The Year
2000 Steering Committee's purpose is to evaluate risks, formulate timetables and
allocate resources to ensure timely and effective completion of Y2K testing,
remediation and contingency planning. The company also has a technology
committee, consisting of certain members of the Board of Directors and
management, which oversees the Year 2000 Steering Committee and is responsible
for ensuring proper reporting of results to the full Board of Directors. One
full time information system specialist and one consultant on a part time basis
are solely devoted to Y2K issues. Many other employees are also actively
involved including each department manager and members of their staff. The
company also utilizes external resources (information systems consultants,
auditors, speakers, accountants, etc.) as deemed necessary by the various
committees and management.
The company is addressing the Y2K issue in accordance with regulatory guidelines
promulgated by the Federal Financial Institutions Examination Council ("FFIEC").
The company does not perform any in-house programming and, according to our
vendor, since 1987, the system we use for our core loan and deposit processing
was designed to process dated data into the next century and beyond. Management
has completed testing of internal mission critical information systems.
Management has also completed the testing required for mission critical systems
associated with service providers including the trust accounting system. Mission
critical systems are those critical to daily operations and failure of which
would result in definite disruption to business. Testing of the company's
non-mission critical applications will continue through 1999 and will be
completed prior to any anticipated impact on its operating systems. Contingency
plans have been developed for each function so that the company is adequately
prepared in the event of a system failure, despite remediation efforts. A
sub-committee of the Y2K Steering Committee has been formed to facilitate
preparation of contingency plans. These contingency plans will be reviewed,
enhanced and updated, as needed, throughout the remainder of the year.
Additionally, the bank has formed a coalition with surrounding financial
institutions to periodically meet and discuss contingency plans and pool
resources to deal with potential disruptions (i.e., failure of security systems,
failure of electrical grids, cash needs, etc.).
12
Included in other non-interest expenses are charges incurred in connection with
the preparation, testing, modification or replacement of software and hardware
in connection with the process of rendering the company's computer systems Y2K
compliant. Excluding internal salary and benefit costs, approximately $10,000 in
costs associated with Y2K remediation efforts were expended in the year ended
December 31, 1998 and $111,000 through the third quarter of 1999. Management
expects that the costs incurred to replace or upgrade existing hardware and
software will be capitalized and amortized in accordance with the company's
existing accounting policies, while miscellaneous consulting, salary,
maintenance and modification costs will be expensed as incurred. Anticipated
future costs, excluding internal salary and benefit costs, associated with Y2K
compliance are estimated at $75,000, which mostly consists of consulting costs.
Due to short-term personnel constraints it was necessary to engage consultants
to assist in the Year 2000 management process. Other than the one dedicated
information system specialist the company does not separately track the portion
of its salary and benefit costs allocable to the Y2K project. It is not
anticipated that material incremental costs will be incurred in any single
period.
The cost of the project and the date on which the company plans to complete the
Y2K modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party availability and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, employee turnover,
non-compliance of the company's vendors or service providers and similar
uncertainties. The company is working closely with all of its vendors and
service providers to determine the extent to which the company is vulnerable to
those third parties' failure to remediate their own Y2K issues.
Management recognizes the potential risk of Y2K on the bank's customers. The
bank has approached the credit risk component of Y2K through education of all
lending officers, education of customers, analysis of the bank's loan portfolio,
and consideration of Y2K in the underwriting of loans. All lending officers were
required to undergo internal training to learn the potential risks of Y2K. The
bank has sponsored numerous seminars for bank customers, in addition to
distribution of literature regarding Y2K to all customers. In 1998, an analysis
of the bank's commercial loan portfolio was performed to determine potential
exposure to Y2K risks. Increases in the allowance for loan losses, solely as a
result of Y2K, were not deemed necessary. Any new commercial loans require an
assessment of the customer's Y2K compliance as part of preliminary underwriting.
The need for additional provisions to the bank's allowance for loan losses
resulting from borrowers' Y2K compliance problems will be considered, on an
ongoing basis, based on management's assessment of the potential exposure of its
customer base to such problems.
In addition, Enterprise Bank's Trust Division is working with its business
partners to make sure that analysts are routinely monitoring quarterly, annual
and other financial reports on the companies they invest in and that they are
monitoring reports for the required SEC disclosure. For international companies
where there is no SEC mandate, we are making inquiries of our business partners
to verify that analysts are looking for satisfactory disclosure of Y2K readiness
and if none is present that they are contacting management directly to determine
Y2K status.
The internal and external risks associated with Y2K are numerous. The company is
addressing the Y2K issue in accordance with regulatory guidelines promulgated by
the FFIEC. However, there can be no guarantee that the systems of the company,
bank customers or other associated companies (i.e. electric company, telephone
company, printing companies, office supply companies, etc.) will be timely
remediated. There can be no guarantee that the systems of third party vendors on
which the company's systems rely will be timely remediated. The failure of the
company or a critical third party vendor to timely remediate Y2K issues may
cause systems malfunctions, incorrect or incomplete transaction processing, the
inability to reconcile accounting books and records, or other problematic
situations.
The company's operations and/or financial condition could possibly be negatively
impacted to the extent the company, customers or entities doing business with
the company are unsuccessful in timely and properly addressing their respective
Y2K compliance responsibilities.
13
Results of Operations
Nine Months Ended September 30, 1999 vs. Nine Months Ended September 30, 1998
The company reported net income of $3,036,000 for the nine months ended
September 30, 1999, versus $2,573,000 for the nine months ended September 30,
1998, or an increase of 18.0%. The company had basic earnings per common share
of $0.95 and $0.81 for the nine months ended September 30, 1999 and September
30, 1998, respectively. Diluted earnings per share were $0.91 and $0.78 for the
nine months ending September 30, 1999 and September 30, 1998, respectively.
The following table highlights changes that affected the company's earnings for
the periods indicated:
Nine months ended September 30,
-------------------------------
($ in thousands) 1999 1998
---------- ----------
Average assets $371,555 333,297
Average deposits and short-term borrowings 340,905 306,220
Average investment securities (1) 122,067 104,491
Average loans 227,004 196,436
Net interest income 12,603 11,601
Provision for loan losses 270 710
Tax expense 1,137 1,179
Average loans: Average deposits and borrowings 66.59% 64.15%
Non interest expense: Average assets (2) 3.70% 3.73%
Non interest income, exclusive of securities
gains: Average assets (2) 0.70% 0.69%
Average tax equivalent rate earned on interest earning assets 8.08% 8.32%
Average rate paid on interest bearing deposits and
short-term borrowings 3.81% 3.91%
Net interest margin 5.05% 5.13%
<FN>
(1) Average investment securities are shown at average amortized cost
(2) Ratios have been annualized based on number of days for the period
</FN>
Net Interest Income
The company's net interest income was $12,603,000 for the nine months ended
September 30, 1999, an increase of $1,002,000 or 8.6% from $11,601,000 for the
nine months ended September 30, 1998. Interest income increased $1,563,000,
primarily a result of an increase of average loan balances of $30.6 million and
average investment balances of $17.6 million. The increase in interest income
was partially offset by an increase in interest expense of $561,000, primarily
due to an increase in average deposits and short-term borrowings.
The average tax-equivalent yield on earning assets in the nine months ended
September 30, 1999, was 8.08%, down 24 basis points from 8.32% for the nine
months ended September 30, 1998. The decrease in average yield on earning assets
is primarily attributable to a decrease in yield on loans, partially offset by
an increase in yield on investment securities. The decrease in yield on loans is
primarily attributable to a 75 basis point decrease in the prime lending rate
during the fourth quarter of 1998, slightly offset by a 50 basis point increase
during the third quarter of 1999. The increase in the tax equivalent yield on
investment securities from 6.51% to 6.58% was primarily a result of a change in
investment mix to higher yielding securities, such as collateralized mortgage
obligations and tax-exempt municipal securities. The average rate paid on
interest bearing deposits and short-term borrowings in the nine months ended
September 30, 1999, was 3.81%, a decrease of 10 basis points from 3.91% in the
nine months ended September 30, 1998, primarily due to a drop in rates paid on
certificates of deposit. The average rate on short-term borrowings increased
from 3.67% to 4.58% as a result of an increase in sweep account rates and
increased borrowings from the FHLB.
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the nine months ended September 30, 1999, and 1998. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average balance
multiplied by prior year average rate); (2) interest rate (change in average
interest rate multiplied by prior year average balance); and (3) rate and volume
(the remaining difference).
14
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Nine Months Ended September 30, 1999 Nine Months Ended September 30, 1998
------------------------------------ --------------------------------------
Average Interest Average Interest
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3)
-------- ---------- --------- ------- ---------- ---------
Assets:
Loans (1) (2) $227,004 $ 15,146 8.92% $196,436 $ 13,845 9.42%
Investment securities (3) 122,067 5,358 6.58 104,491 4,767 6.51
Federal funds sold 1,911 67 4.69 9,666 396 5.48
-------- -------- -------- --------
Total interest earnings assets 350,982 20,571 8.08% 310,593 19,008 8.32%
-------- --------
Other assets (4) 20,573 22,704
-------- --------
Total assets $371,555 $333,297
======== ========
Liabilities and stockholders' equity:
Savings, NOW and money market $114,421 1,774 2.07% $110,234 1,819 2.21%
Time deposits 143,860 5,457 5.07 127,835 5,179 5.42
Short-term borrowings 21,521 737 4.58 14,918 409 3.67
-------- -------- -------- --------
Interest bearing deposits and borrowings 279,802 7,968 3.81% 252,987 7,407 3.91%
-------- --------
Non-interest bearing deposits 61,103 53,233
Other liabilities 2,793 2,414
-------- --------
Total liabilities 343,698 308,634
Stockholders' equity 27,857 24,663
-------- --------
Total liabilities and
Stockholders' equity $371,555 $333,297
======== ========
Net interest rate spread 4.27% 4.41%
Net interest income $ 12,603 $ 11,601
======== ========
Net interest margin 5.05% 5.13%
($ in thousands) Changes due to
-----------------------------------------------------
Interest Rate/
Total Volume Rate Volume
------- -------- -------- --------
Assets:
Loans (1) (2) $1,301 $2,154 $ (735) $ (118)
Investment securities (3) 591 856 55 (320)
Federal funds sold (329) (318) (57) 46
------- ------ ------ --------
Total interest earnings assets 1,563 2,692 (737) (392)
------- ------ ------ --------
Other assets (4)
Total assets
Liabilities and stockholders' equity:
Savings, NOW and money market (45) 69 (115) 1
Time deposits 278 650 (335) (37)
Short-term borrowings 328 181 102 45
------- ------ ------ --------
Interest bearing deposits and borrowings 561 900 (348) 9
------- ------ ------ --------
Non-interest bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
Stockholders' equity
Net interest rate spread
Net interest income $ 1,002 $1,792 $ (389) $ (401)
======= ====== ======= ======
Net interest margin
<FN>
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis.
(4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, real estate acquired by
foreclosure, deferred income taxes and other miscellaneous assets.
</FN>
The bank manages its earning assets by fully using available capital resources
within what management believes are prudent credit and leverage parameters.
Loans, investment securities, and federal funds sold comprise the bank's earning
assets.
15
The provision for loan losses amounted to $270,000 and $710,000 for the
nine-month periods ended September 30, 1999 and 1998, respectively. Loans,
before the allowance for loan losses, have increased from $207.5 million, at
September 30, 1998, to $243.1 million, at September 30, 1999, or an increase of
17.2%. Despite the increase in the bank's loan portfolio, there has not been an
increase in problem assets or a significant change in the bank's basic
underwriting practices. Management regularly reviews the levels of non-accrual
loans, levels of charge-offs and recoveries, levels of outstanding loans, and
known and inherent risks in the loan portfolio. Based on this review, and taking
into account loan quality, and a net recovery position for the nine months ended
September 30, 1999, management determined that further additions to the
allowance for loan losses were not necessary during the third quarter.
Non-Interest Income
Non-interest income, exclusive of security gains, increased by $208,000 to
$1,932,000 for the nine months ended September 30, 1999, compared to $1,724,000
for the nine months ended September 30, 1998. This increase was caused primarily
by an increase in trust fees of $180,000.
Trust fees increased by $180,000, or 25.6%, for the nine months ended September
30, 1999 compared to the same period in 1998 due to an increase in trust assets.
Deposit fees decreased by $26,000, or 3.9%, for the nine months ended September
30, 1999, compared to the nine months ended September 30, 1998, due primarily to
a reduction in overdraft charges.
Gains on sales of loans increased from $132,000 for the nine months ended
September 30, 1998, to $148,000 for the nine months ended September 30, 1999, as
a result of increased loan volume caused by low interest rates in the first six
months of the year and a strong real estate market.
Other income for the nine months ended September 30, 1999, was $253,000, an
increase of 10.5%, from $229,000 for the nine months ended September 30, 1998,
primarily due to increases in ATM fees, safe deposit fees, wire fees and debit
card fees.
Net gains on sales of investment securities decreased by $250,000 for the nine
months ended September 30, 1999, from $433,000 for the nine months ended
September 30, 1998. The decrease was due to relatively higher interest rates in
1999, resulting in less opportunity to restructure the investment portfolio.
Non-Interest Expense
Salaries and benefits expense totaled $6,052,000 for the nine months ended
September 30, 1999, compared with $5,262,000 for the nine months ended September
30, 1998, an increase of $790,000 or 15.0%. This increase was primarily the
result of new hires, to support the overall growth of the bank, and annual
salary increases.
Occupancy expense was $1,809,000 for the nine months ended September 30, 1999,
compared with $1,629,000 for the nine months ended September 30, 1998, an
increase of $180,000 or 11.0%. The increase was primarily due to the addition
and renovation of new facilities for the bank's accounting and loan servicing
departments, executive offices, commercial lending offices, customer service
center and the Westford branch.
Advertising and public relations expenses increased by $46,000, or 12.8%, for
the nine months ended September 30, 1999 compared to the same period in 1998.
The increase was primarily attributed to increased advertising associated with
the bank's growth.
Office and data processing supplies expense decreased by $35,000, or 13.0%, for
the nine months ended September 30, 1999 compared to the same period in the
prior year. The decrease was primarily due to various cost savings programs.
Audit, legal and other professional expenses decreased by $104,000, or 16.9%,
for the nine months ended September 30, 1999 compared to the prior year period,
primarily as a result of professional services incurred in 1998 relating to tax
saving strategies.
16
Trust, professional and custodial expenses increased by $25,000, or 11.1%, for
the nine months ended September 30, 1999 as compared to the same period in 1998.
The increase was due to an increase in trust assets under management as well as
additional services provided by the trust department.
The company's effective tax rate for the nine months ending September 30, 1999
was 27.3% compared to 31.4% for the nine months ended September 30, 1998. The
reduction in rate was a result of the implementation of certain tax strategies
in 1998. Expenses for these strategies were fully absorbed in 1998.
17
Results of Operations
Three Months Ended September 30, 1999 vs. Three Months Ended September 30, 1998
The company reported net income of $1,064,000 for the three months ended
September 30, 1999, versus $892,000 for the three months ended September 30,
1998, or an increase of 19.3%. The company had basic earnings per common share
of $0.33 and $0.28 for the three months ended September 30, 1999 and September
30, 1998, respectively. Diluted earnings per share were $0.32 and $0.27 for the
three months ending September 30, 1999 and September 30, 1998, respectively.
The following table highlights changes that affected the company's earnings for
the periods indicated:
Three months ended September 30,
--------------------------------
($ in thousands) 1999 1998
---------- ---------
Average assets $ 392,072 342,689
Average deposits and short-term borrowings 361,020 314,122
Average investment securities (1) 133,447 93,730
Average loans 236,879 205,103
Net interest income 4,507 4,090
Provision for loan losses -- 440
Tax expense 384 246
Average loans: Average deposits and borrowings 65.61% 65.29%
Non interest expense: Average assets (2) 3.83% 3.90%
Non interest income, exclusive of securities
gains: Average assets (2) 0.65% 0.68%
Average tax equivalent rate earned on interest earning assets 8.11% 8.34%
Average rate paid on interest bearing deposits and
short-term borrowings 3.82% 3.88%
Net interest margin 5.06% 5.20%
<FN>
(1) Average investment securities are shown at average amortized cost
(2) Ratios have been annualized based on number of days for the period
</FN>
Net Interest Income
The company's net interest income was $4,507,000 for the three months ended
September 30, 1999, an increase of $417,000 or 10.2% from $4,090,000 for the
three months ended September 30, 1998. Interest income increased $728,000,
primarily a result of an increase of $31.8 million in the average loan balance
and $39.7 million in the average investment balance. The increase in interest
income was partially offset by an increase in interest expense of $311,000,
primarily due to an increase in average time deposits and short-term borrowings.
The average tax-equivalent yield on earning assets in the three months ended
September 30, 1999, was 8.11%, down 23 basis points from 8.34% in the three
months ended September 30, 1998. The decrease in average yield on earning assets
is primarily attributable to a decrease in yield on loans, and a decrease in
yield on investment securities. The decrease in yield on loans is primarily
attributable to a 75 basis point decrease in the prime lending rate during the
fourth quarter of 1998, slightly offset by a 50 basis point increase during the
third quarter of 1999. The decrease in the tax equivalent yield on investment
securities from 6.65% to 6.40% was primarily a result of a decline in investment
rates during the fourth quarter of 1998 and the re-investment of funds from
sales and calls of investment securities during that period. The average rate
paid on interest bearing deposits and short-term borrowings in the three months
ended September 30, 1999, was 3.82%, a decrease of 6 basis points from 3.88% in
the three months ended September 30, 1998, primarily due to a drop in rates paid
on certificates of deposit. The average rate on short-term borrowings increased
from 3.03% to 4.84% as a result of an increase in interest rates on sweep
accounts and increased borrowings from FHLB.
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the three months ended September 30, 1999, and 1998. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average balance
multiplied by prior year average rate); (2) interest rate (change in average
interest rate multiplied by prior year average balance); and (3) rate and volume
(the remaining difference).
18
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended September 30, 1999 Three Months Ended September 30, 1998
------------------------------------- --------------------------------------
Average Interest Average Interest
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3)
-------- ---------- --------- ------- ---------- ---------
Assets:
Loans (1) (2) $236,879 $ 5,423 9.08% $205,103 $ 4,876 9.43%
Investment securities (3) 133,447 1,934 6.40 93,730 1,441 6.65
Federal funds sold 235 2 4.00 22,773 314 5.47
-------- ------- -------- -------
Total interest earnings assets 370,561 7,359 8.11% 321,606 6,631 8.34%
------- -------
Other assets (4) 21,511 21,083
-------- --------
Total assets $392,072 $342,689
======== ========
Liabilities and stockholders' equity:
Savings, NOW and money market $118,224 632 2.12% $111,042 605 2.16%
Time deposits 144,464 1,809 4.97 136,105 1,837 5.35
Short-term borrowings 33,684 411 4.84 12,943 99 3.03
-------- ------- -------- -------
Interest bearing deposits and borrowings 296,372 2,852 3.82% 260,090 2,541 3.88%
------- -------
Non-interest bearing deposits 64,648 54,032
Other liabilities 2,130 2,503
-------- --------
Total liabilities 363,150 316,625
Stockholders' equity 28,922 26,064
-------- --------
Total liabilities and
Stockholders' equity $392,072 $342,689
======== ========
Net interest rate spread 4.29% 4.46%
Net interest income $ 4,507 $ 4,090
======= =======
Net interest margin 5.06% 5.20%
($ in thousands) Changes due to
-----------------------------------------------------
Interest Rate/
Total Volume Rate Volume
------- -------- -------- --------
Assets:
Loans (1) (2) $547 $755 $ (181) $ (27)
Investment securities (3) 493 666 (59) (114)
Federal funds sold (312) (311) (84) 83
------ ----- ------ ------
Total interest earnings assets 728 1,110 (324) (58)
------ ----- ------ ------
Other assets (4)
Total assets
Liabilities and stockholders' equity:
Savings, NOW and money market 27 39 (11) (1)
Time deposits (28) 113 (130) (11)
Short-term borrowings 312 158 59 95
------ ----- ------ ------
Interest bearing deposits and borrowings 311 310 (82) 83
------ ----- ------ ------
Non-interest bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
Stockholders' equity
Net interest rate spread
Net interest income $ 417 $ 800 $ (242) $ (141)
====== ===== ====== ======
Net interest margin
<FN>
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis.
(4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, real estate acquired by
foreclosure, deferred income taxes and other miscellaneous assets.
</FN>
The bank manages its earning assets by fully using available capital resources
within what management believes are prudent credit and leverage parameters.
Loans, investment securities, and federal funds sold comprise the bank's earning
assets.
19
The provision for loan losses amounted to $0 and $440,000 for the three-month
periods ended September 30, 1999 and 1998, respectively. Loans, before the
allowance for loan losses, have increased from $207.5 million, at September 30,
1998, to $243.1 million, at September 30, 1999, or an increase of 17.2%. Despite
the growth in the bank's loan portfolio, there has not been an increase in
problem assets or significant change in the bank's basic underwriting practices,
and the company has recorded a net recovery to the allowance for loan losses for
the nine month period ended September 30, 1999. Management regularly reviews the
level of non-accrual loans, levels of charge-offs and recoveries, levels of
outstanding loans, and known and inherent risks in the nature of the loan
portfolio. Based on this review, and taking into account considerations of loan
quality and the net recovery position, management determined that further
additions to the allowance for loan loss were not necessary at this time.
Non-Interest Income
Non-interest income, exclusive of security gains, increased by $57,000 to
$644,000 for the three months ended September 30, 1999, compared to $587,000 for
the three months ended September 30, 1998. This increase was primarily caused by
an increase in trust fees of $61,000.
Trust fees increased by $61,000, or 25.0%, for the three months ended September
30, 1999 compared to the same period in 1998 due to an increase in trust assets.
Deposit fees decreased by $3,000, or 1.3%, for the three months ended September
30, 1999, compared to the three months ended September 30, 1998, primarily due
to a reduction in overdraft fees.
Other income for the three months ended September 30, 1999, was $89,000, an
increase of 18.7%, from $75,000 for the three months ended September 30, 1998,
primarily due to increases in ATM fees, safe deposit fees, wire transfer fees,
and debit card fees.
Net gains on sales of investments decreased to $80,000 for the three months
ended September 30, 1999, compared to $268,000 in the three months ended
September 30, 1998. The decrease was due to relatively higher interest rates in
1999, resulting in less opportunity to restructure the investment portfolio.
Non-Interest Expense
Salaries and benefits expense totaled $2,207,000 for the three months ended
September 30, 1999, compared with $1,854,000 for the three months ended
September 30, 1998, an increase of $353,000 or 19.0%. This increase was
primarily the result of new hires, to support the overall growth of the bank,
and annual salary increases.
Occupancy expense was $648,000 for the three months ended September 30, 1999,
compared with $535,000 for the three months ended September 30, 1998, an
increase of $113,000 or 21.1%. The increase was primarily due to the addition
and renovation of new facilities for the bank's accounting and loan servicing
departments, executive office space, commercial lending offices, customer
service center, and the Westford branch.
Advertising and public relations expenses decreased by $13,000, or 9.5%, for the
three months ended September 30, 1999 compared to the same period in 1998. The
decrease is due to timing of expenses, as advertising expenditures have
increased for the nine months ended September 30, 1999, as compared to the prior
year period.
Office and data processing supplies expense increased by $15,000, or 18.1%, for
the three months ended September 30, 1999 compared to the same period in the
prior year. The increase was primarily due to overall growth of the bank.
Audit, legal and other professional expenses decreased by $134,000, or 41.4%,
for the three months ended September 30, 1999 compared to the prior year period,
primarily due to consulting fees incurred in 1998 relating to the implementation
of certain tax strategies.
Trust, professional and custodial expenses increased by $17,000, or 21.3%, for
the three months ended September 30, 1999 as compared to the same period in
1998. The increase was due to an increase in trust assets under management as
well as additional services provided by the trust department.
20
The company's effective tax rate for the three months ending September 30, 1999
was 26.5% compared to 21.6% for the three months ended September 30, 1998.
During the third quarter of 1998, the company implemented certain tax saving
strategies. The effective rate for the three months ended September 30, 1998 was
lower due to accelerating these strategies to achieve full year benefit for
1998.
21
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
The company's primary market risk is interest rate risk, specifically, changes
in the interest rate environment. The bank's investment committee is responsible
for establishing policy guidelines on acceptable exposure to interest rate risk
and liquidity. The investment committee is comprised of certain members of the
Board of Directors and certain members of senior management. The primary
objectives of the company's asset/liability policy is to monitor, evaluate and
control the bank's interest rate risk, as a whole, within certain tolerance
levels while ensuring adequate liquidity and adequate capital. The investment
committee establishes and monitors guidelines for the net interest margin
sensitivity, equity to capital ratios, liquidity, Federal Home Loan Bank
borrowing capacity and loan to deposit ratio. The asset/liability strategies are
reviewed regularly by management and presented and discussed with the investment
committee on at least a quarterly basis. The asset/liability strategies are
revised based on changes in interest rate levels, general economic conditions,
competition in the marketplace, the current position of the bank, anticipated
growth of the bank and other factors.
One of the principal factors in maintaining planned levels of net interest
income is the ability to design effective strategies to manage the impact of
changes in interest rates on future net interest income. The balancing of
changes in interest income from interest earning assets and interest expense of
interest bearing liabilities is accomplished through the asset/liability
management program. The bank's simulation model analyzes various interest rate
scenarios. Variations in the interest rate environment affect numerous factors,
including prepayment speeds, reinvestment rates, maturities of investments (due
to call provisions), and interest rates on various asset and liability accounts.
The investment committee periodically reviews guidelines or restrictions
contained in the asset/liability policy and adjusts them accordingly. The bank's
current asset/liability policy is designed to limit the impact on net interest
income to 10% in the 24 month period following the date of the analysis, in a
rising and falling rate shock analysis of 100 and 200 basis points.
Management believes there have been no material changes in the interest rate
risk reported in the company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities
Not Applicable
Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) The following exhibits are included with this report:
2.1 Purchase and Assumption Agreement dated as
of September 22, 1999 by and among Fleet
Financial Group, Inc., Fleet National Bank,
Enterprise Bancorp, Inc. and Enterprise Bank
and Trust Company (exclusive of disclosure
schedules)
27.1 Financial Data Schedule (included with
electronic copy only)
(b) Reports on Form 8-K. The company filed a report on
Form 8-K on September 24,1999, reporting that the
company and the bank had entered into a Purchase and
Assumption Agreement with Fleet Financial Group, Inc.
and Fleet National Bank on September, 22, 1999,
pursuant to which the bank would purchase two branch
offices of Fleet National Bank.
23
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERPRISE BANCORP, INC.
DATE: November 12, 1999 /s/ John P. Clancy, Jr.
John P. Clancy, Jr.
Senior Vice President, Chief Financial Officer,
Chief Investment Officer and Treasurer
24