U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _______________ Commission File Number 0-21021 Enterprise Bancorp, Inc. (Exact name of registrant as specified in its charter) Massachusetts 04-3308902 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 222 Merrimack Street, Lowell, Massachusetts, 01852 (Address of principal executive offices) (Zip code) (978) 459-9000 (Registrant's telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ..X.... No...... Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: November 14, 2001 Common Stock - Par Value $0.01, 3,453,487 shares outstanding 1
ENTERPRISE BANCORP, INC. INDEX Page Number Cover Page 1 Index 2 PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 3 Consolidated Statements of Income - Three and nine months ended September 30, 2001 and 2000 4 Consolidated Statements of Changes in Stockholders' Equity - 5 Nine months ended September 30, 2001 Consolidated Statements of Cash Flows - Nine months ended September 30, 2001 and 2000 6 Notes to Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures About Market Risk 22 PART II OTHER INFORMATION Item 1 Legal Proceedings 23 Item 2 Changes in Securities and Use of Proceeds 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 that are other than statements of historical fact. Enterprise Bancorp, Inc. (the "company") wishes to caution readers that the following important factors, among others, may adversely affect the company's future results and could cause the company's results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein: (i) the effect of unforeseen changes in interest rates; (ii) the effect of changes in the business cycle and downturns in the local, regional or national economies, including unanticipated deterioration in the local real estate market; (iii) changes in asset quality and unanticipated increases in the company's reserve for loan losses; (iv) the effect on the company's competitive position within its market area of the increasing competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (v) the effect of technological changes and unanticipated technology-related expenses; (vi) the effect of unforeseen changes in consumer spending; (vii) the effect of changes in laws and regulations that apply to the company's business and operations and unanticipated increases in the company's regulatory compliance costs; (viii) unanticipated increases in employee compensation and benefit expenses; and (ix) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board. 2
ENTERPRISE BANCORP, INC. Consolidated Balance Sheets <TABLE> <CAPTION> September 30, 2001 December 31, ($ in thousands) (Unaudited) 2000 ------------- ----------- Assets <S> <C> <C> Cash and cash equivalents Cash and due from banks $ 29,965 $ 26,080 Daily federal funds sold 6,500 28,025 -------- -------- Total cash and cash equivalents 36,465 54,105 Investment securities at fair value 213,978 185,184 Loans, less allowance for loan losses of $7,684 at September 30, 2001 and $6,220 at December 31, 2000, respectively 355,781 305,598 Premises and equipment 11,635 10,903 Prepaid expenses and other assets 2,986 2,735 Accrued interest receivable 3,737 4,078 Deferred income taxes, net 619 2,209 Income taxes receivable 230 415 Intangible assets, net of amortization 6,994 7,587 -------- -------- Total assets $632,425 $572,814 ======== ======== Liabilities, Trust Preferred Securities and Stockholders' Equity Deposits $502,720 $461,975 Short-term borrowings 70,638 58,271 Escrow deposits of borrowers 1,245 1,106 Accrued expenses and other liabilities 3,919 3,776 Accrued interest payable 822 1,031 -------- -------- Total liabilities 579,344 526,159 -------- -------- Trust preferred securities 10,500 10,500 Stockholders' equity: Preferred stock, $.01 par value; 1,000,000 shares authorized, no shares issued -- -- Common stock $.01 par value; 10,000,000 shares authorized; 3,452,887 and 3,408,667 shares issued and outstanding at September 30, 2001 and December 31, 2000, respectively 35 34 Additional paid-in capital 18,530 17,843 Retained earnings 19,446 16,793 Accumulated other comprehensive income 4,570 1,485 -------- -------- Total stockholders' equity 42,581 36,155 -------- -------- Total liabilities, trust preferred securities and stockholders' equity $632,425 $572,814 ======== ======== </TABLE> 3
ENTERPRISE BANCORP, INC. Consolidated Statements of Income Three and nine months ended September 30, 2001 and 2000 <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ---------------------------- ($ in thousands) 2001 2000 2001 2000 (Unaudited) (Unaudited) (Unaudited) (Unaudited) ------------- ------------- ----------------------------- <S> <C> <C> <C> <C> (Unaudited) Interest and dividend income: Loans $ 7,360 6,993 21,521 19,260 Investment securities 3,046 3,010 9,036 8,362 Federal funds sold 223 107 754 110 ------------- ------------- ------------- ------------- Total interest income 10,629 10,110 31,311 27,732 ------------- ------------- ------------- ------------- Interest expense: Deposits 2,897 3,316 9,164 8,825 Short-term borrowings 624 849 2,076 3,061 ------------- ------------- ------------- ------------- Total interest expense 3,521 4,165 11,240 11,886 ------------- ------------- ------------- ------------- Net interest income 7,108 5,945 20,071 15,846 Provision for loan losses 850 159 1,480 444 ------------- ------------- ------------- ------------- Net interest income after provision for loan losses 6,258 5,786 18,591 15,402 ------------- ------------- ------------- ------------- Non-interest income: Investment management and trust service fees 453 383 1,418 1,108 Deposit service fees 369 238 1,091 662 Net gain (loss) on sale of investment securities 350 - 761 (2) Gain on sale of loans 101 42 252 61 Other income 199 164 611 407 ------------- ------------- ------------- ------------- Total non-interest income 1,472 827 4,133 2,236 ------------- ------------- ------------- ------------- Non-interest expense: Salaries and employee benefits 3,432 2,989 9,901 7,811 Occupancy expenses 1,052 809 2,989 2,325 Trust professional and custodial expenses 137 117 497 346 Audit, legal and other professional fees 123 149 429 480 Office and data processing supplies 86 258 342 486 Advertising and public relations 64 211 299 433 Trust preferred expense 290 288 869 606 Amortization of intangible assets 198 149 593 149 Other operating expenses 667 534 1,846 1,435 ------------- ------------- ------------- ------------- Total non-interest expense 6,049 5,504 17,765 14,071 ------------- ------------- ------------- ------------- Income before income taxes 1,681 1,109 4,959 3,567 Income tax expense 430 260 1,325 870 ------------- ------------- ------------- ------------- Net income $ 1,251 849 3,634 2,697 ============= ============= ============= ============= Basic earnings per average common share outstanding $ 0.36 0.25 1.06 0.82 ============= ============= ============= ============= Diluted earnings per average common share outstanding $ 0.35 0.25 1.03 0.81 ============= ============= ============= ============= Basic weighted average common shares outstanding 3,452,065 3,395,338 3,424,709 3,296,953 ============= ============= ============= ============= Diluted weighted average common shares outstanding 3,545,329 3,412,512 3,513,621 3,345,931 ============= ============= ============= ============= </TABLE> 4
ENTERPRISE BANCORP, INC. Consolidated Statements of Changes in Stockholders' Equity Nine months ended September 30, 2001 <TABLE> <CAPTION> Common Stock Additional ------------------------ Paid-in Retained ($ in thousands) Shares Amount Capital Earnings ----------- ---------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 2000 3,408,667 $ 34 $ 17,843 $ 16,793 Comprehensive income Net income 3,634 Unrealized appreciation on securities, net of reclassification Total comprehensive income, net of tax $ 6,719 Common stock dividend * (981) Common stock issued, dividend reinvestment plan * 39,770 1 649 Stock options exercised 4,450 38 --------- ---------- ---------- ----------- Balance at September 30, 2001 3,452,887 $ 35 $ 18,530 $ 19,446 ========== ========== ========== =========== Comprehensive Income Total ------------------------- Stockholders' Period Accumulated Equity -------- ------------- ----------- Balance at December 31, 2000 $ 1,485 $ 36,155 Comprehensive income Net income $ 3,634 3,634 Unrealized appreciation on securities, net of reclassification 3,085 3,085 3,085 ---------- Total comprehensive income, net of tax $ 6,719 =========== Common stock dividend * (981) Common stock issued, dividend reinvestment plan * 650 Stock options exercised 38 ----------- ---------- Balance at September 30, 2001 $ 4,570 $ 42,581 =========== ========== Disclosure of reclassification amount: Gross unrealized holding appreciation arising during the period $ 5,435 Tax expense 1,848 ---------- Unrealized holding appreciation, net of tax 3,587 ---------- Less: reclassification adjustment for net gains included in net income (net of $259 tax) 502 ---------- Net unrealized appreciation on securities $ 3,085 ========== </TABLE> * Dividends declared were $0.2875 per share, totaling $981,000. The dividend was split between cash of $331,000, which was paid on June 28, 2001, and 39,770 shares valued at $650,000, which were issued on June 28, 2001 pursuant to the company's dividend reinvestment plan. 5
ENTERPRISE BANCORP, INC. Consolidated Statements of Cash Flows Nine months ended September 30, 2001 and 2000 <TABLE> <CAPTION> September 30, September 30, 2001 2000 ($ in thousands) (Unaudited) (Unaudited) --------------- -------------- <S> <C> <C> Cash flows from operating activities: Net income $ 3,634 $ 2,697 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 1,480 444 Depreciation and amortization 1,696 1,407 Amortization of intangible assets 593 -- Net (gain) loss on sale of investment securities (761) 2 Gain on sale of loans (252) (61) (Increase) decrease in: Loans held for sale 282 318 Accrued interest receivable 341 (536) Prepaid expenses and other assets (251) (1,079) Deferred income taxes -- (264) Income taxes receivable 185 (386) Increase (decrease) in: Accrued expenses and other liabilities 143 169 Accrued interest payable (209) 303 --------- --------- Net cash provided by operating activities 6,881 3,014 --------- --------- Cash flows from investing activities: Proceeds from maturities, calls and paydowns of investment securities 31,348 6,602 Proceeds from sales of investment securities 14,409 1,984 Purchase of investment securities (69,243) (45,365) Net increase in loans (51,692) (45,510) Additions to premises and equipment, net (2,301) (3,812) Cash paid for assets in excess of liabilities -- (7,593) --------- --------- Net cash used in investing activities (77,479) (93,694) --------- --------- Cash flows from financing activities: Net increase in deposits, including escrow deposits 40,884 125,935 Net increase (decrease) in short-term borrowings 12,367 (31,129) Common stock dividends (981) (837) Proceeds from issuance of trust preferred securities -- 10,500 Common stock issued-dividend reinvestment plan 650 494 Common stock issued-employee stock options 38 1,057 --------- --------- Net cash provided by financing activities 52,958 106,020 --------- --------- Net (decrease) increase in cash and cash equivalents (17,640) 15,340 Cash and cash equivalents at beginning of period 54,105 17,089 --------- --------- Cash and cash equivalents at end of period $ 36,465 32,429 ========= ========= </TABLE> 6
ENTERPRISE BANCORP, INC. Consolidated Statements of Cash Flows (Continued) Nine months ended September 30, 2001 and 2000 September 30, September 30, 2001 2000 ($ in thousands) (Unaudited) (Unaudited) ---------- ------------ Supplemental financial data: Cash paid for: Interest expense $11,449 11,566 Income taxes 1,200 1,148 7
ENTERPRISE BANCORP, INC. Notes to Financial Statements (1) Organization of Holding Company Enterprise Bancorp, Inc. (the "company") is a Massachusetts corporation, which was organized on February 29, 1996, at the direction of Enterprise Bank and Trust Company, a Massachusetts trust company (the "bank"), for the purpose of becoming the holding company for the bank. (2) Basis of Presentation The accompanying unaudited financial statements should be read in conjunction with the company's December 31, 2000, audited financial statements and notes thereto. Interim results are not necessarily indicative of results to be expected for the entire year. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses. In the opinion of management, the accompanying financial statements reflect all necessary adjustments consisting of normal recurring accruals for a fair presentation. (3) Earnings Per Share Basic earnings per share are calculated by dividing net income by the year to date weighted average number of common shares that were outstanding for the period. Diluted earnings per share reflect the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method. (4) Dividend Reinvestment Plan The company maintains a Dividend Reinvestment Plan (the "DRP"). The DRP enables stockholders, at their discretion, to elect to reinvest dividends paid on their outstanding shares of company common stock by purchasing additional shares of company common stock from the company. The stockholders utilized the DRP to reinvest $650,000 of the dividends paid by the company into 39,770 shares of the company's common stock in 2001. (5) Fleet Branch Acquisition On July 21, 2000 the bank completed its acquisition of two Fleet National Bank branch offices (the "Fleet branches"). The excess of cost over the fair market value of assets acquired and liabilities assumed of approximately $7.9 million has been allocated as $6.6 million in goodwill and $1.3 million in identified intangible assets (combined "intangible assets") and is being amortized over a ten-year period. 8
(6) Accounting Rule Changes In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for using the purchase method of accounting, and prohibits the use of the pooling-of-interests method for such transactions. The new standard also requires that goodwill acquired in such business combinations be measured using the definition included in APB Opinion No. 16, "Business Combinations"' and initially recognized as an asset in the financial statements. The new standard also requires intangible assets acquired in any such business combination to be recognized as an asset apart from goodwill if they meet certain criteria. SFAS No. 142 applies to all goodwill and intangible assets acquired in a business combination. Under the new standard, all goodwill, including goodwill acquired before initial application of the standard, should not be amortized but should be tested for impairment at least annually at the reporting unit level, as defined in the standard. Intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Within six months of initial application of the new standard, a transitional impairment test must be performed on all goodwill. Any impairment loss recognized as a result of the transitional impairment test should be reported as a change in accounting principle. In addition to the transitional impairment test, the required annual impairment test should be performed in the year of adoption of the standard. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and must be adopted as of the beginning of a fiscal year. Retroactive application is not permitted. The company will adopt the new standard on January 1, 2002, and has evaluated the potential impact of the standard on its financial position and results of operations. Adoption of SFAS No. 142 is expected to increase annual net income by approximately $450,000 over the remaining amortization period ending in June 2010. (7) Reclassification Certain fiscal 2000 information has been reclassified to conform to the 2001 presentation. 9
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Capital Resources The company's actual capital amounts and capital adequacy ratios are presented in the table below. The bank's capital amounts and ratios do not differ materially from the amounts and ratios presented. <TABLE> <CAPTION> Minimum Capital Minimum Capital for Capital to be Actual Adequacy Purposes Well Capitalized ------------------------- ------------------------ --------------------------- ($ in thousands) Amount Ratio Amount Ratio Amount Ratio -------------- --------- ------------- --------- ------------ ------------ As of September 30, 2001: <S> <C> <C> <C> <C> <C> <C> Total Capital (to risk weighted assets) $ 46,682 11.49% $ 32,514 8.00% $ 40,643 10.00% Tier 1 Capital (to risk weighted assets) 41,570 10.23% 16,257 4.00% 24,386 6.00% Tier 1 Capital* (to average assets) 41,570 6.76% 24,591 4.00% 30,739 5.00% </TABLE> * For the bank to qualify as "well capitalized", it must maintain a leverage capital ratio (Tier 1 capital to average assets) of at least 5%. This requirement does not apply to the company and is reflected merely for informational purposes with respect to the bank. Balance Sheet Total Assets Total assets increased $59.6 million, or 10.4%, since December 31, 2000. The increase is primarily attributable to increases in investment securities and federal funds sold of $7.3 million and net loans of $50.2 million. The increase in assets was funded primarily by growth in deposits and short-term borrowings of $40.9 and $12.4 million, respectively. Investments At September 30, 2001 all of the company's investment securities were classified as available-for-sale and carried at fair value. The net unrealized appreciation at September 30, 2001 was $6.9 million compared to $2.3 million at December 31, 2000. The net unrealized appreciation/depreciation in the portfolio fluctuates as interest rates rise and fall. Due to the fixed rate nature of the company's investment portfolio, as rates rise the value of the portfolio declines, and as rates fall the value of the portfolio rises. The unrealized appreciation will only be realized if the securities are sold. The unrealized appreciation on the investment portfolio will decrease as interest rates rise or as the securities approach maturity. Loans Total loans, before the allowance for loan losses, were $363.5 million, or 57.5% of total assets, at September 30, 2001, compared to $311.8 million, or 54.4% of total assets, at December 31, 2000. The increase in loans of $51.7 million for the nine months ended September 30, 2001 was primarily attributed to originations of commercial and commercial real estate loans and drawdowns on commercial lines of credit. 10
Deposits and Borrowings Total deposits, including escrow deposits of borrowers, increased $40.9 million, or 8.8%, during the first nine months of 2001, from $463.1 million at December 31, 2000, to $504.0 million at September 30, 2001. The increase of $40.9 million consists of growth of $58.1 million in savings, checking and money market deposits primarily attributable to sales efforts and increased market penetration, offset by a $17.2 million decrease in certificates of deposit primarily attributable to interest rate decreases during the first nine months of 2001. Short-term borrowings, consisting of securities sold under agreements to repurchase and Federal Home Loan Bank ("FHLB") borrowings, increased $12.4 million, or 21.2%, from $58.3 million at December 31, 2000 to $70.6 million at September 30, 2001. The increase was attributable to growth of $13.6 million in commercial sweep balances, offset by a decrease of $1.2 million in term repurchase agreements, which are both classified as securities sold under agreements to repurchase. The company had $470,000 in borrowings outstanding from the FHLB at September 30, 2001 and December 31, 2000, respectively. Loan Loss Experience/Non-performing Assets The following table summarizes the activity in the allowance for loan losses for the periods indicated: <TABLE> <CAPTION> Nine months ended September 30, ($ in thousands) 2001 2000 ------------- -------------- <S> <C> <C> Balance at beginning of year $ 6,220 5,446 Loans charged-off Commercial 37 97 Commercial real estate - 48 Construction - - Residential real estate - - Home equity - - Consumer 41 - ------------- -------------- 78 145 ------------- -------------- Recoveries on loans charged off Commercial 25 25 Commercial real estate - 48 Construction - 100 Residential real estate 20 1 Home equity - 13 Consumer 17 4 ------------- -------------- 62 191 ------------- -------------- Net loan (charge-offs) recoveries (16) 46 Allowance on acquired loans - 250 Provision charged to operations 1,480 444 ------------- -------------- Balance at September 30 $ 7,684 6,186 ============= ============== Annualized net (charge-offs) recoveries: Average loans outstanding (0.01)% 0.02 % ============== ============== Allowance for loan losses: Gross loans 2.11 % 2.02 % ============== ============== Allowance for loan losses: Non-performing loans 919.20 % 554.30 % ============== ============== </TABLE> 11
The following table sets forth non-performing assets at the dates indicated: <TABLE> <CAPTION> ($ in thousands) September 30, December 31, September 30, 2001 2000 2000 ------------- ------------- ------------- <S> <C> <C> <C> Non-accrual loans $ 833 1,054 1,064 Accruing loans > 90 days past due 3 26 52 ------------- ------------- ------------- Total non-performing loans 836 1,080 1,116 Other real estate owned - - - ------------- ------------- ------------- Total non-performing assets $ 836 1,080 1,116 ============= ============= ============= Non-performing loans: Gross loans 0.23% 0.34% 0.36% ============= ============= ============= Non-performing assets: Total assets 0.13% 0.19% 0.20% ============= ============= ============= Delinquent loans 30-89 days past due: Gross loans 0.56% 0.14% 0.42% ============= ============= ============= </TABLE> Non-performing loans at September 30, 2001 are considered to be unusually low. The increase in 30-89 day delinquencies consists primarily of loans less than 40 days past due and is not considered indicative of a significant change in the credit quality of the loan portfolio. 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. 12
Results of Operations Nine Months Ended September 30, 2001 vs. Nine Months Ended September 30, 2000 The company reported net income of $3,634,000 for the nine months ended September 30, 2001, versus $2,697,000 for the nine months ended September 30, 2000. The company had basic earnings per average common share of $1.06 and $0.82 and diluted earnings per average common share of $1.03 and $0.81 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The following table highlights changes, which affected the company's earnings for the periods indicated: <TABLE> <CAPTION> Nine months ended September 30, ($ in thousands) 2001 2000 ------------- ----------- <S> <C> <C> <C> Average assets (1) $ 596,112 494,724 Average deposits and short-term borrowings 544,862 452,190 Average investment securities and fed funds sold (1) 220,875 185,423 Average loans, net of deferred loan fees 330,418 277,985 Net interest income 20,071 15,846 Provision for loan losses 1,480 444 Income tax expense 1,325 870 Average loans: Average deposits and borrowings 60.64% 61.48% Non-interest expense: Average assets (2) 3.98% 3.80% Non-interest income: Average assets (2) (3) 0.76% 0.60% Average tax equivalent rate on interest earning assets 7.74% 8.17% Average rate on interest bearing deposits and borrowings 3.39% 4.22% Average rate on total deposits and borrowings 2.76% 3.51% Net interest margin 5.02% 4.74% </TABLE> (1) Excludes the effect of SFAS No. 115 (2) Ratios have been annualized based on number of days for the period (3) Excludes net gain on sale of investment securities Net Interest Income The company's net interest income was $20,071,000 for the nine months ended September 30, 2001, an increase of $4,225,000 or 26.7% from $15,846,000 for the nine months ended September 30, 2000. Interest income increased $3,579,000 for the nine months ended September 30, 2001 and was $31,311,000 compared to $27,732,000 for the same period ended September 30, 2000, resulting primarily from an increase in the interest earning asset average balance of $87.9 million or 19% to $551.3 million for the nine months ended September 30, 2001 compared to $463.4 million for the nine months ended September 30, 2000, offset by a decrease in the average tax equivalent yield on interest earning assets of 43 basis points to 7.74% for the nine months ended September 30, 2001 compared to 8.17% for the same period ended September 30, 2000. The average loan balances increased $52.4 million, or 18.9%, and the average investment security and fed funds sold balance increased $35.5 million, or 19.1%, for the nine months ended September 30, 2001 compared to the same period ended September 30, 2000. The average rate earned on loans declined 54 basis points to 8.71% for the nine months ended September 30, 2001, from 9.25% for the same period ended September 30, 2000, while the average tax equivalent yield on investment securities and federal funds sold decreased 23 basis points to 6.30% for the nine months ended September 30, 2001 from 6.53% for the same period ended September 30, 2000. Interest expense for the nine months ended September 30, 2001 was $11,240,000 compared to $11,886,000 for the same period ended September 30, 2000, resulting primarily from a decrease in the average interest rate on interest bearing liabilities of 83 basis points to 3.39% for the nine months ended September 30, 2001 compared to 4.22% for the same period ended September 30, 2000, offset by an increase in the average balance of interest-bearing deposits and short-term borrowings of $66.1 million or 17.5% to $442.7 million for the nine months ended September 30, 2001 as compared to $376.6 million for the same period ended September 30, 2000. 13
The average interest rate on Savings/PIC/MMDA deposit accounts decreased 30 basis points for the nine months ended September 30, 2001 compared to the same period ended September 30, 2000, due to lower market rates, while the average balance of such deposit accounts increased $76.4 million or 50.8% to $226.8 million for the nine months ended September 30, 2001 as compared to $150.4 million for the same period ended September 30, 2000. The average interest rate on time deposits decreased 5 basis points for the nine months ended September 30, 2001 compared to the same period ended September 30, 2000. The average balance on time deposits decreased $10.8 million or 6.9% to $146.5 million for the nine months ended September 30, 2001 as compared to $157.3 million for the same period ended September 30, 2000. The average interest rate on short-term borrowings, consisting of term repurchase agreements and commercial sweep accounts (together, "repurchase agreements") and FHLB borrowings, decreased to 4.00% for the nine months ended September 30, 2001, compared to 5.93% for the nine months ended September 30, 2000. The average balance of short-term borrowings for the nine months ended September 30, 2001 increased $0.4 million or 0.6% to $69.3 million as compared to $68.9 million for the nine months ended September 30, 2000. The 193 basis point decrease in average rate resulted primarily from decreases in market rates and a change in the funding mix, which resulted in a decrease in the higher costing FHLB borrowing average balance of $32.1 million and an increase in the lower costing commercial sweep average balance of $36.7 million for the nine months ended September 30, 2001 as compared to the nine months ended September 30, 2000. Net interest margin increased to 5.02% for the nine months ended September 30, 2001 from 4.74% for the same period ended September 30, 2000, primarily due to the 83 basis point decrease in the average rate on interest bearing liabilities, offset by the 43 basis point decrease in tax equivalent yield on interest earning assets, and the $87.9 million increase in average balance on interest earning assets, offset by the $66.1 million increase in average balance on interest bearing liabilities. The following table sets forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest earning assets and interest bearing liabilities have affected interest income and expense during the nine months ended September 30, 2001 and September 30, 2000, respectively. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to: (1) volume (change in average portfolio balance multiplied by prior year average rate); (2) interest rate (change in average interest rate multiplied by prior year average balance); and (3) rate and volume (the remaining difference). 14
<TABLE> <CAPTION> AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES Nine Months Ended September 30, 2001 Nine Months Ended September 30, 2000 ------------------------------------- -------------------------------------- Average Interest Average Interest ($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3) - ---------------- ---------- ---------- ---------- ------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> <C> Assets: Loans(1)(2) $ 330,418 $ 21,521 8.71% $277,985 $ 19,260 9.25% Investment securities & federal funds sold(3)(5) 220,875 9,790 6.30 185,423 8,472 6.53 ---------- -------- ------- --------- Total interest earnings assets 551,293 31,311 7.74% 463,408 27,732 8.17% Other assets(4)(5) 44,819 31,316 Total assets(5) $ 596,112 $494,724 ========= ======== Liabilities and stockholders' equity: Savings/PIC/MMDA $ 226,846 3,470 2.05% $ 150,426 2,646 2.35% Time deposits 146,507 5,694 5.20 157,292 6,179 5.25 Short-term borrowings 69,345 2,076 4.00 68,929 3,061 5.93 --------- ------- ---- --------- --------- Interest bearing deposits and borrowings 442,698 11,240 3.39% 376,647 11,886 4.22% Non-interest bearing deposits 102,164 - 75,543 - --------- ------- --------- --------- Total deposits and borrowings 544,862 11,240 2.76% 452,190 11,886 3.51% Other liabilities 4,022 2,563 --------- -------- Total liabilities 548,884 454,753 Trust preferred securities 10,500 7,128 Stockholders' equity(5) 36,728 32,843 --------- -------- Total liabilities, trust preferred securities and stockholders' equity(5) $ 596,112 $494,724 ========= ======== Net interest rate spread(3) 4.98% Net interest income $ 20,071 $15,846 ========= ======= Net interest margin 5.02% 4.74% Changes due to ------------------------------------------- Interest Rate/ Total Volume Rate Volume ----- ------ ---- ------ Assets: Loans(1)(2) $ 2,261 $ 3,629 $ (1,136) $ (232) Investment securities & federal funds sold(3)(5) 1,318 1,732 (329) (85) ------- --------- --------- --------- Total interest earnings assets 3,579 5,361 (1,465) (317) ------- --------- --------- --------- Other assets(4)(5) Total assets(5) Liabilities and stockholders' equity: Savings/PIC/MMDA 824 1,343 (343) (176) Time deposits (485) (423) (60) (2) Short-term borrowings (985) 18 (995) (8) ------- --------- --------- --------- Interest bearing deposits and borrowings (646) 938 (1,398) (186) Net interest income $ 4,225 $ 4,423 $ (67) $ (131) ========= ======= =========== ========= </TABLE> (1) Average loans include non-accrual loans. (2) Average loans are net of average deferred loan fees. 15
(3) Average balances are presented at average amortized cost and average interest rates are presented on a tax equivalent basis. (4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, deferred income taxes, intangible assets, and other miscellaneous assets. (5) Excludes the effect of SFAS No. 115 The company manages its earning assets by fully using available capital resources within what management believes are prudent credit and leverage parameters. Loans, investment securities, and federal funds sold comprise the company's earning assets. Provision for Loan Losses The provision for loan losses amounted to $1,480,000 and $444,000 for the nine months ended September 30, 2001 and September 30, 2000, respectively. Although management believes that loan quality continues to be solid, management determined it was prudent to increase the allowance for loan losses in light of current economic uncertainty. The provision reflects real estate values and economic conditions in New England and in Greater Lowell, in particular, the level of non-accrual loans, levels of charge-offs and recoveries, levels of outstanding loans, known and inherent risks in the nature of the loan portfolio and management's assessment of current risk. The provision for loan losses is a significant factor in the company's operating results. Non-Interest Income Investment management and trust service fees increased by $310,000, or 28.0%, for the nine months ended September 30, 2001 compared to the same period in 2000 due to an increase in trust assets and the establishment of an investment services unit. Average trust assets under management increased to $280.9 million for the nine months ended September 30, 2001 from $237.7 million for the nine months ended September 30, 2000. Deposit service fees increased by $429,000, or 64.8%, for the nine months ended September 30, 2001, compared to the nine months ended September 30, 2000, due primarily to an increase in the average balance on savings, checking and money market accounts of $76.4 million, or 50.8%, for the nine months ended September 30, 2001 compared to the same period in 2000. The average deposit balance increase resulted in higher checking and overdraft fees. Net gain (loss) on sale of investment securities amounted to $761,000 and $(2,000) for the nine months ended September 30, 2001 and September 30, 2000, respectively. The net gain for the 2001 period resulted from management's decision to take advantage of certain investment opportunities and asset/liability repositioning. Gain on sale of loans increased by $191,000 for the nine months ended September 30, 2001, compared to the nine months ended September 30, 2000, due primarily to decreases in interest rates beginning in December of 2000 that have resulted in increased refinance and sales volume. Other income for the nine months ended September 30, 2001, was $611,000 compared to $407,000 for the nine months ended September 30, 2000. This increase was primarily attributable to bank growth. The primary increases were in debit card fees, ATM surcharges, check printing fees, safe deposit fees, commercial letter of credit fees and wire transfer fees. Non-Interest Expenses Salaries and benefits expense totaled $9,901,000 for the nine months ended September 30, 2001, compared with $7,811,000 for the nine months ended September 30, 2000, an increase of $2,090,000 or 26.8%. This increase was primarily due to the acquisition of the Fleet branches, new hires due to company growth, strategic initiatives implemented by the company, and annual pay increases. Occupancy expense was $2,989,000 for the nine months ended September 30, 2001, compared with $2,325,000 for the nine months ended September 30, 2000, an increase of $664,000 or 28.6%. The increase was primarily due to the acquisition of the Fleet branches, office renovations for operational support departments and ongoing enhancements to the company's computer systems. Trust professional and custodial expenses increased by $151,000 or 43.6% for the nine months ended September 30, 2001 compared to the same period in 2000. The increase was primarily due to growth in trust assets under management. Audit, legal and other professional expenses decreased by $51,000 or 10.6% for the nine months ended September 30, 2001 compared to the same period in 2000. The decrease was primarily due to higher legal costs incurred in 2000 relating to the formation of two subsidiaries offset by increased compliance and audit related expenses associated with the bank's growth in 2001. 16
Office and data processing supplies expense decreased by $144,000 or 29.6% for the nine months ended September 30, 2001 compared to the same period in 2000. The decrease was primarily due to expenditures in 2000 related to the acquisition of the Fleet branches offset by the timing of purchases and growth in 2001. Advertising and public relations expenses decreased by $134,000 or 30.9% for the nine months ended September 30, 2001 compared to the same period in 2000. The decrease was primarily due to expenditures in 2000 related to the acquisition of the Fleet branches. Trust preferred expense was $869,000 and $606,000 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The expense consists of interest costs and the amortization of deferred underwriting costs from the trust preferred securities issued on March 23, 2000. Amortization of intangible assets was $593,000 and $149,000 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The expense consists of the amortization of intangible assets resulting from the acquisition of two branches from Fleet National Bank on July 21, 2000. Intangible assets are being amortized over ten years. Other operating expense was $1,846,000 and $1,435,000 for the nine months ended September 30, 2001 and September 30, 2000, respectively. The increase of $411,000, or 28.6%, for the 2001 period was primarily due to the company's growth and primarily consists of increased expenses for ATM's, courier services, internet banking, charitable contributions, EDP system security, and merchant credit card charges. Income Tax Expense Income tax expense and the effective tax rate for the nine months ended September 30, 2001 and September 30, 2000 were $1,325,000 and 26.7% and $870,000 and 24.4%, respectively. The increase in effective tax rate resulted primarily from higher pre-tax income, which decreases the impact of tax exempt municipal income. 17
Results of Operations Three Months Ended September 30, 2001 vs. Three Months Ended September 30, 2000 The company reported net income of $1,251,000 for the three months ended September 30, 2001, versus $849,000 for the three months ended September 30, 2000. The company had basic earnings per common share of $0.36 and $0.25 and diluted earnings per share of $0.35 and $0.25 for the three months ending September 30, 2001 and September 30, 2000, respectively. The following table highlights changes, which affected the company's earnings for the periods indicated: <TABLE> <CAPTION> Three months ended September 30, ($ in thousands) 2001 2000 ------------- -------------- <S> <C> <C> <C> Average assets (1) $ 621,768 537,393 Average deposits and short-term borrowings 569,208 490,743 Average investment securities and fed funds sold (1) 228,516 202,670 Average loans, net of deferred loan fees 347,765 295,961 Net interest income 7,108 5,945 Provision for loan losses 850 159 Income tax expense 430 260 Average loans: Average deposits and borrowings 61.10% 60.31% Non-interest expense: Average assets (2) 3.86% 4.06% Non-interest income: Average assets (2) (3) 0.72% 0.61% Average tax equivalent rate on interest earning assets 7.49% 8.24% Average rate on interest bearing deposits and borrowings 3.01% 4.14% Average rate on total deposits and borrowings 2.45% 3.37% Net interest margin 5.07% 4.92% </TABLE> (1) Excludes the effect of SFAS No. 115 (2) Ratios have been annualized based on number of days for the period (3) Excludes net gain on sale of investment securities Net Interest Income The company's net interest income was $7,108,000 for the three months ended September 30, 2001, an increase of $1,163,000 or 19.6% from $5,945,000 for the three months ended September 30, 2000. Interest income increased $519,000 for the three months ended September 30, 2001 and was $10,629,000 compared to $10,110,000 for the same period ended September 30, 2000, resulting primarily from an increase in the interest earning asset average balance of $77.7 million or 15.6% to $576.3 million for the three months ended September 30, 2001 compared to $498.6 million for the three months ended September 30, 2000, offset by a decrease in the average tax equivalent yield on interest earning assets of 75 basis points to 7.49% for the three months ended September 30, 2001 compared to 8.24% for the same period ended September 30, 2000. The average loan balances increased $51.8 million, or 17.5%, and the average investment security and fed funds sold balances increased $25.8 million, or 12.8%, for the three months ended September 30, 2001 compared to the same period ended September 30, 2000. The average rate earned on loans declined 97 basis points to 8.40% for the three months ended September 30, 2001, from 9.37% for the same period ended September 30, 2000, while the average tax equivalent yield on investment securities and federal funds sold decreased 45 basis points to 6.12% for the three months ended September 30, 2001 from 6.57% for the same period ended September 30, 2000. Interest expense for the three months ended September 30, 2001 was $3,521,000 compared to $4,165,000 for the same period ended September 30, 2000, resulting primarily from a decrease in the average interest rate on interest bearing liabilities of 113 basis points to 3.01% for the three months ended September 30, 2001 compared to 4.14% for the same period ended September 30, 2000, offset by an increase in the average balance of interest-bearing deposits and short-term borrowings of $64.5 million or 16.2% to $463.6 million for the three months ended September 30, 2001 as compared to $399.1 million for the same period ended September 30, 2000. 18
The average interest rate on Savings/PIC/MMDA deposit accounts decreased 60 basis points for the three months ended September 30, 2001 compared to the same period ended September 30, 2000, due to lower market rates, while the average balance of such deposit accounts increased $64.7 million or 35.5% to $247.0 million for the three months ended September 30, 2001 as compared to $182.3 million for the three months ended September 30, 2000. The average interest rate on time deposits decreased 59 basis points for the three months ended September 30, 2001 compared to the same period ended September 30, 2000. This decrease in rate was accompanied by a decrease in the average balance of time deposits of $17.3 million or 10.7% to $143.7 million for the three months ended September 30, 2001 as compared to $161.0 million for the three months ended September 30, 2000. The average interest rate on short term borrowings, consisting of repurchase agreements and FHLB borrowings, decreased to 3.40% for the three months ended September 30, 2001, compared to 6.04% for the three months ended September 30, 2000. The average balance of short-term borrowings for the three months ended September 30, 2001 increased $17.2 million or 30.9% to $72.9 million as compared to $55.7 million for the three months ended September 30, 2000. The 264 basis point decrease in average rate resulted primarily from decreases in market rates and a change in funding mix, which resulted in a decrease in the higher costing FHLB borrowing average balance of $11.5 million and an increase in the lower costing commercial sweep average balance of $34.1 million for the three months ended September 30 2001 as compared to the three months ended September 30, 2000. Net interest margin increased to 5.07% for the three months ended September 30, 2001 from 4.92% for the same period ended September 30, 2000, primarily due to the 113 basis point decrease in average rate on interest bearing liabilities, offset by the 75 basis point decrease in the tax equivalent yield on interest earning assets, and the $77.7 million increase in average balance on interest earning assets, offset by the $64.5 million increase in average balance on interest bearing liabilities. The following table sets forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest earning assets and interest bearing liabilities have affected interest income and expense during the three months ended September 30, 2001 and September 30, 2000, respectively. For each category of interest earning assets and interest bearing liabilities, information is provided on changes attributable to: (1) volume (change in average portfolio balance multiplied by prior year average rate); (2) interest rate (change in average interest rate multiplied by prior year average balance); and (3) rate and volume (the remaining difference). 19
<TABLE> <CAPTION> AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES Three Months Ended September 30, 2001 Three Months Ended September 30, 2000 ------------------------------------- --------------------------------------- Average Interest Average Interest ($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3) ---------- ------------ --------- ---------- ---------- --------- Assets: <S> <C> <C> <C> <C> <C> <C> <C> Loans(1)(2) $347,765 $ 7,360 8.40% $295,961 $ 6,993 9.37% Investment securities & federal funds sold(3)(5) 228,516 3,269 6.12 202,670 3,117 6.57 -------- -------- -------- -------- Total interest earnings assets 576,281 10,629 7.49% 498,631 10,110 8.24% Other assets(4)(5) 45,487 38,762 -------- -------- Total assets(5) $621,768 $537,393 ======== ======== Liabilities and stockholders' equity: Savings/PIC/MMDA $247,010 1,159 1.86% $182,342 1,129 2.46% Time deposits 143,675 1,738 4.80 160,963 2,187 5.39 Short-term borrowings 72,907 624 3.40 55,748 849 6.04 -------- ------- -------- ------ Interest bearing deposits and borrowings 463,592 3,521 3.01% 399,053 4,165 4.14% Non-interest bearing deposits 105,616 - 91,690 - -------- -------- --------- ------ Total deposits and borrowings 569,208 3,521 2.45% 490,743 4,165 3.37% Other liabilities 3,514 2,857 -------- -------- Total liabilities 572,722 493,600 Trust preferred securities 10,500 10,500 Stockholders' equity(5) 38,546 33,293 -------- -------- Total liabilities, trust preferred securities and stockholders' equity(5) $621,768 $537,393 ======== ======== Net interest rate spread(3) 5.04% 4.87% Net interest income $ 7,108 $ 5,945 ======== ======== Net interest margin 5.07% 4.92% Change due to ----------------------------------------- Interest Rate/ Total Volume Rate Volume ----- ------ ---- ------ Assets: Loans(1)(2) $ 367 $ 1,224 $(729) $ (128) Investment securities & federal funds sold(3)(5) 152 428 (231) (45) ------- ------- ----- ------- Total interest earnings assets 519 1,652 (960) (173) Other assets(4)(5) Total assets(5) Liabilities and stockholders' equity: Savings/PIC/MMDA 30 400 (273) (97) Time deposits (449) (235) (240) 26 Short-term borrowings (225) 261 (372) (114) ------- ------ ------ -------- Interest bearing deposits and borrowings (644) 426 (885) (185) Net interest income $1,163 $ 1,226 $ (75) $ 12 </TABLE> (1) Average loans include non-accrual loans. (2) Average loans are net of average deferred loan fees. (3) Average balances are presented at average amortized cost and average interest rates are presented on a tax equivalent basis. (4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, deferred income taxes, intangible assets, and other miscellaneous assets. (5) Excludes the effect of SFAS No. 115 The company manages its earning assets by fully using available capital resources within what management believes are prudent credit and leverage parameters. Loans, investment securities, and federal funds sold comprise the company's earning assets. 20
Provision for Loan Losses The provision for loan losses amounted to $850,000 and $159,000 for the three months ended September 30, 2001 and September 30, 2000, respectively. Although management believes that loan quality continues to be solid, management determined it was prudent to increase the allowance for loan losses in light of current economic uncertainty. The provision reflects real estate values and economic conditions in New England and in Greater Lowell, in particular, the level of non-accrual loans, levels of charge-offs and recoveries, levels of outstanding loans, known and inherent risks in the nature of the loan portfolio and management's assessment of current risk. The provision for loan losses is a significant factor in the company's operating results. Non-Interest Income Investment management and trust service fees increased by $70,000, or 18.3%, for the three months ended September 30, 2001 compared to the same period in 2000 due to an increase in trust assets and the establishment of an investment services unit. Average trust assets under management increased to $271.3 million for the three months ended September 30, 2001 from $251.8 million for the three months ended September 30, 2000. Deposit service fees increased by $131,000, or 55.0%, for the three months ended September 30, 2001, compared to the three months ended September 30, 2000, due primarily to an increase in the average balance on savings, checking and money market accounts of $64.7 million, or 35.5%, for the three months ended September 30, 2001 compared to the same period ended September 30, 2000. The deposit balance increase resulted in higher checking and overdraft fees. Net gain on sale of investment securities amounted to $350,000 and $0 for the three months ended September 30, 2001 and September 30, 2000, respectively. The net gain resulted from management's decision to take advantage of certain investment opportunities and asset/liability repositioning. Gain on sale of loans amounted to $101,000 and $42,000 for the three months ended September 30, 2001 and September 30, 2000, respectively, due primarily to decreases in interest rates beginning in December of 2000 that have resulted in increased refinance and sales volume. Other income for the three months ended September 30, 2001, was $199,000 compared to $164,000 for the three months ended September 30, 2000. This increase was primarily attributable to company growth. The primary increases were in debit card fees, ATM surcharges, wire transfer fees, safe deposit fees, and commercial letter of credit fees offset by a decrease in merchant credit card fees. Non-Interest Expenses Salaries and benefits expense totaled $3,432,000 for the three months ended September 30, 2001, compared to $2,989,000 for the three months ended September 30, 2000, an increase of $443,000 or 14.8%. This increase was primarily due to company growth, strategic initiatives implemented by the company, and annual pay increases. Occupancy expense was $1,052,000 for the three months ended September 30, 2001, compared with $809,000 for the three months ended September 30, 2000, an increase of $243,000 or 30.0%. The increase was primarily due to the acquisition of the Fleet branches, office renovations for operational support departments, ongoing enhancements to the company's computer systems and increased maintenance and service contracts resulting from the company's growth. 21
Trust professional and custodial expenses increased by $20,000 or 17.1% for the three months ended September 30, 2001 as compared to the same period in 2000. The increase was primarily due to growth in trust assets under management. Audit, legal and other professional expenses decreased by $26,000 for the three months ended September 30, 2001 compared to the same period in 2000. This decrease was primarily due to higher legal costs incurred in 2000 related to the formation of a new subsidiary. Office and data processing supplies expense decreased by $172,000 for the three months ended September 30, 2001 compared to the same period in 2000. The decrease is due to expenditures in 2000 related primarily to the Fleet branch acquisition and the timing of expenditures in 2001. Advertising and public relations expenses decreased by $147,000 for the three months ended September 30, 2001 compared to the same period in 2000. The decrease was primarily due to expenditures in 2000 related primarily to the Fleet branch acquisition and the timing of expenditures in 2001. Trust preferred expense was $290,000 and $288,000 for the three months ended September 30, 2001 and September 30, 2000, respectively. The expense consists of interest costs and the amortization of deferred underwriting costs from the trust preferred securities issued on March 23, 2000. Amortization of intangible assets was $198,000 and $149,000 for the three months ended September 30, 2001 and September 30, 2000, respectively. The expense consists of the amortization of intangible assets resulting from the acquisition of two branches from Fleet National Bank on July 21, 2000. Intangible assets are being amortized over ten years. Other operating expense was $667,000 and $534,000 for the three months ended September 30, 2001 and September 30, 2000, respectively. The increase of $133,000 or 24.9% for the 2001 period, is primarily due to the company's growth and consists primarily of increased expenses for insurance, telephone system, courier services, charitable contributions, merchant credit card charges, and EDP system security, offset by a decrease in internet banking expense. Income Tax Expense Income tax expense and the effective tax rate for the three months ended September 30, 2001 and September 30, 2000 were $430,000 and 25.6% and $260,000 and 23.4%, respectively. The increase in effective tax rate resulted primarily from higher pre-tax income which decreases the impact of tax exempt municipal income. ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, specifically, changes in the interest rate environment. The bank's investment committee is responsible for establishing policy guidelines on acceptable exposure to interest rate risk and liquidity. The investment committee is comprised of certain members of the Board of Directors and certain members of senior management. The primary objectives of the company's asset/liability policy is to monitor, evaluate and control the bank's interest rate risk, as a whole, within certain tolerance levels while ensuring adequate liquidity and adequate capital. The investment committee establishes and monitors guidelines for the net interest margin sensitivity, equity to capital ratios, liquidity, FHLB borrowing capacity and loan to deposit ratio. The asset/liability strategies are reviewed regularly by management and presented and discussed with the investment committee on at least a quarterly basis. The asset/liability strategies are revised based on changes in interest rate levels, general economic conditions, competition in the marketplace, the current position of the bank, anticipated growth of the bank and other factors. One of the principal factors in maintaining planned levels of net interest income is the ability to design effective strategies to manage the impact of changes in interest rates on future net interest income. The balancing of changes in interest income from interest earning assets and interest expense of interest bearing liabilities is accomplished through the asset/liability management program. The bank's simulation model analyzes various interest rate scenarios. Variations in the interest rate environment affect numerous factors, including prepayment speeds, reinvestment rates, maturities of investments (due to call provisions), and interest rates on various asset and liability accounts. The investment committee periodically reviews guidelines or restrictions contained in the asset/liability policy and adjusts them accordingly. The bank's current asset/liability policy is designed to limit the impact on net interest income to 10% in the 24 month period following the date of the analysis, in a rising and falling rate shock analysis of 100 and 200 basis points. Management believes there have been no material changes in the interest rate risk reported in the company's Annual Report on Form 10-K for the year ended December 31, 2000. 22
PART II OTHER INFORMATION Item 1 Legal Proceedings Not Applicable Item 2 Changes in Securities and Use of Proceeds Not Applicable Item 3 Defaults upon Senior Securities Not Applicable Item 4 Submission of Matters to a Vote of Security Holders Not Applicable Item 5 Other Information None Item 6 Exhibits and Reports on Form 8-K The following exhibits are included with this report: 10.43 Change in Control/Noncompetition Agreement dated as of July 17, 2001 by and among the company, the bank and Diane J. Silva. 10.44 Change in Control/Noncompetition Agreement dated as of July 17, 2001 by and among the company, the bank and Brian H. Bullock. 10.45 Change in Control/Noncompetition Agreement dated as of August 1, 2001 by and among the company, the bank and Robert R. Gilman. 10.46 Change in Control/Noncompetition Agreement dated as of August 7, 2001 by and among the company, the bank and Chester J. Szablak Jr. 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 14, 2001 /s/ John P. Clancy, Jr. ------------------------------------------- John P. Clancy, Jr. Treasurer 24