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
<TABLE> <CAPTION> ENTERPRISE BANCORP, INC. INDEX Page Number <S> <C> <C> 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 </TABLE> 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
<TABLE> <CAPTION> ENTERPRISE BANCORP, INC. Consolidated Balance Sheets September 30, 1999 and December 31, 1998 September 30, December 31, 1999 1998 ($ in thousands) (Unaudited) ------------ ------------ <S> <C> <C> 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 ========= ========= </TABLE> 3
<TABLE> <CAPTION> 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) ----------- ----------- ----------- ----------- <S> <C> <C> <C> <C> 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 ========== ========== ========== ========== </TABLE> 4
<TABLE> <CAPTION> 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 --------- ------ ---------- -------- -------- ----------- ------------- <S> <C> <C> <C> <C> <C> <C> 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 $(2,599) ======= </TABLE> 5
<TABLE> <CAPTION> ENTERPRISE BANCORP, INC. Consolidated Statements of Cash Flows Nine months ended September 30, 1999 and 1998 September 30, September 30, 1999 1998 ($ in thousands) (Unaudited) (Unaudited) ------------- ------------- <S> <C> <C> 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 </TABLE> 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 $388,000 of the dividends paid by the company in 1999 in 27,054 shares of the company's common stock. (5) Purchase and Assumption Agreement On September 22, 1999, the company and the bank entered into a Purchase and Assumption Agreement (the "Agreement") with Fleet Financial Group, Inc. and its principal banking subsidiary, Fleet National Bank, pursuant to which the bank will purchase two branch offices of Fleet National Bank. The bank's acquisition of these branch offices is part of the overall sale of 306 branch offices of Fleet National Bank and BankBoston, N.A. to be completed in accordance with a divestiture order of the United States Department of Justice issued in connection with the merger of BankBoston Corporation with Fleet Financial Group, Inc. The bank's acquisition of the branches remains subject to the parties' receipt of required federal and state regulatory approvals and satisfaction of various other customary closing conditions specified in the Agreement. The parties presently anticipate that the bank's acquisition of the branches will be completed in the second or third quarter of 2000. (6) Reclassification Certain fiscal 1998 information has been reclassified to conform to the 1999 presentation. 7
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Capital Resources The company's actual capital amounts and capital adequacy ratios are presented in the table below. The bank's capital amounts and ratios do not differ materially from the amounts and ratios presented. <TABLE> <CAPTION> Minimum Capital Minimum Capital for Capital to be Actual Adequacy Purposes Well Capitalized ------------------------- ------------------------ --------------------------- ($ in thousands) Amount Ratio Amount Ratio Amount Ratio -------------- --------- ------------- --------- ------------ ------------ As of September 30, 1999: <S> <C> <C> <C> <C> <C> <C> 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> </TABLE> 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 $58.1 million at September 30, 1999. 10
Loan Loss Experience/Non-Performing Assets The following table summarizes the activity in the allowance for loan losses for the periods indicated: <TABLE> <CAPTION> Nine months ended September 30, --------------------------------------- ($ in thousands) 1999 1998 ------------- -------------- <S> <C> <C> 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 $5,549 4,967 ====== ====== Allowance for loan losses: Gross loans 2.28% 2.39% ====== ====== Annualized net recoveries (charge-offs): Average loans outstanding 0.02% (0.02%) ====== ====== Allowance for loan losses: Non-performing loans 652.06% 436.85% ====== ====== </TABLE> <TABLE> The following table sets forth non-performing assets at the dates indicated: ($ in thousands) September 30, December 31, September 30, 1999 1998 1998 ------------ ------------ ------------- <S> <C> <C> <C> 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% ====== ====== ====== </TABLE> 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 $0.78 for the nine months ending September 30, 1999 and September 30, 1998, respectively. The following table highlights changes that affected the company's earnings for the periods indicated: <TABLE> <CAPTION> Nine months ended September 30, ------------------------------- ($ in thousands) 1999 1998 ---------- ---------- <S> <C> <C> 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> </TABLE> 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
<TABLE> <CAPTION> 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) -------- ---------- --------- ------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> 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% <CAPTION> ($ in thousands) Changes due to ----------------------------------------------------- Interest Rate/ Total Volume Rate Volume ------- -------- -------- -------- <S> <C> <C> <C> <C> 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> </TABLE> 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 $0.27 for the three months ending September 30, 1999 and September 30, 1998, respectively. The following table highlights changes that affected the company's earnings for the periods indicated: <TABLE> <CAPTION> Three months ended September 30, -------------------------------- ($ in thousands) 1999 1998 ---------- --------- <S> <C> <C> 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> </TABLE> 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
<TABLE> <CAPTION> 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) -------- ---------- --------- ------- ---------- --------- <S> <C> <C> <C> <C> <C> <C> 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% <CAPTION> ($ in thousands) Changes due to ----------------------------------------------------- Interest Rate/ Total Volume Rate Volume ------- -------- -------- -------- <S> <C> <C> <C> <C> 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> </TABLE> 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