U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT OF 1934
For the transition period from _____________ to _______________
Commission file number 0-21021
Enterprise Bancorp, Inc.
(Exact name of small business issuer 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)
(978) 459-9000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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....
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: October 31, 1998, Common Stock - Par
Value $0.01, 1,583,742 shares outstanding
Transitional Small Business Disclosure Format (check one): Yes.... No..X..
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
INDEX
Page Number
<S> <C>
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements of Enterprise Bancorp, Inc.
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Income
Three months and nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Changes in Stockholders' Equity
Nine months ended September 30, 1998 5
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997 6
Notes to Financial Statements 7
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in Securities 21
Item 3 Defaults upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
Signature Page 22
</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, national
or global economies; and (vi) 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 or the effect of Year 2000 on
its customers.
2
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997
September 30, December 31,
1998 1997
($ in thousands) (Unaudited) (Audited)
------------- ------------
Assets
<S> <C> <C>
Cash and cash equivalents $ 13,721 19,779
Daily federal funds sold 26,600 3,775
Investment securities at fair value 104,297 112,886
Loans, less allowance for loan losses of $4,967
at September 30, 1998 and $4,290 at December 31, 1997 202,486 176,294
Premises and equipment 4,061 4,079
Accrued interest receivable 2,354 2,971
Prepaid expenses and other assets 711 645
Income taxes receivable 236 220
Real estate acquired by foreclosure 304 393
Deferred income taxes, net 1,565 1,581
-------- --------
Total assets $356,335 322,623
======== ========
<CAPTION>
Liabilities and Stockholders' Equity
<S> <C> <C>
Deposits $309,727 283,249
Short-term borrowings 16,518 12,467
Escrow deposits of borrowers 720 612
Accrued expenses and other liabilities 2,365 1,884
Accrued interest payable 576 566
-------- --------
Total liabilities 329,906 298,778
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized;
no shares issued at September 30, 1998 -- --
Common stock $.01 par value; 5,000,000 shares authorized;
1,583,742 and 1,580,217 shares issued and outstanding
at September 30, 1998 and December 31, 1997, respectively 16 16
Additional paid-in capital 15,575 15,531
Retained earnings 9,682 7,663
Accumulated other comprehensive income 1,156 635
-------- --------
Total stockholders' equity 26,429 23,845
-------- --------
Total liabilities and stockholders' equity $356,335 322,623
======== ========
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three months and nine months ended September 30, 1998 and 1997
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
($ in thousands) 1998 1997 1998 1997
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 4,876 4,141 13,845 11,326
Investment securities 1,441 1,891 4,767 5,693
Federal funds sold 314 102 396 122
------------- ------------- ------------- -------------
Total interest income 6,631 6,134 19,008 17,141
------------- ------------- ------------- -------------
Interest expense:
Deposits 2,442 2,285 6,998 6,357
Borrowed funds 99 226 409 679
------------- ------------- ------------- -------------
Total interest expense 2,541 2,511 7,407 7,036
------------- ------------- ------------- -------------
Net interest income 4,090 3,623 11,601 10,105
Provision for loan losses (440) (80) (710) (200)
------------- ------------- ------------- -------------
Net interest income after provision for
loan losses 3,650 3,543 10,891 9,905
Non-interest income:
Deposit service fees 225 236 674 674
Trust fees 244 157 703 493
Gains on sale of loans 57 8 132 31
Gains/(losses) on sale of investments 268 (11) 433 (11)
Losses on sale of real estate acquired by foreclosure (14) (23) (14) (23)
Other income 75 83 229 222
------------- ------------- ------------- -------------
Total non-interest income 855 450 2,157 1,386
------------- ------------- ------------- -------------
Non-interest expense:
Salaries and employee benefits 1,854 1,660 5,262 4,601
Occupancy expenses 535 434 1,629 1,307
Advertising and public relations 137 77 359 355
Office and data processing supplies 83 103 269 274
Audit, legal and other professional fees 324 108 614 374
Trust professional and custodial expenses 80 56 225 160
Other operating expenses 354 294 938 872
------------- ------------- ------------- -------------
Total non-interest expense 3,367 2,732 9,296 7,943
------------- ------------- ------------- -------------
Income before income taxes 1,138 1,261 3,752 3,348
Income tax expense 246 462 1,179 1,219
------------- ------------- ------------- -------------
Net income $ 892 799 2,573 2,129
============= ============= ============= =============
Basic earnings per average common share outstanding $ 0.56 0.51 1.63 1.35
============= ============= ============= =============
Diluted earnings per average common share outstanding $ 0.54 0.50 1.57 1.32
============= ============= ============= =============
Basic weighted average common shares outstanding 1,583,545 1,576,194 1,582,165 1,576,193
============= ============= ============= =============
Diluted weighted average common shares outstanding 1,653,547 1,611,759 1,643,984 1,611,758
============= ============= ============= =============
</TABLE>
4
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Nine months ended September 30, 1998
Common Stock Additional Comprehensive Income Total
--------------------- Paid-in Retained -------------------- Stockholders'
($ in thousands) Shares Amount Capital Earnings Period Accumulated Equity
----------- ------- -------- -------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 1,580,217 $ 16 $ 15,531 $ 7,663 $ 635 $ 23,845
Comprehensive income
Net income 2,573 $ 2,573 2,573
Unrealized gains on securities,
net of reclassification 521 521 521
-------
Total comprehensive income $ 3,094
=======
Common stock dividend (554) (554)
Stock options exercised 3,525 44 44
Balance at September 30, 1998 1,583,742 $ 16 $ 15,575 $ 9,682 $ 1,156 $ 26,429
========= ===== ======== ======= ======= ========
Disclosure of reclassification amount:
Gross unrealized holding gains
arising during the period $ 1,291
Less: tax effect 504
-------
Unrealized holding gains, net of tax 787
Less: reclassification adjustment for
gains included in net income (net of $167 tax) 266
-------
Unrealized gains on securities,
net of reclassification $ 521
=======
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997
September 30, September 30,
1998 1997
($ in thousands) (Unaudited) (Unaudited)
- ---------------- ------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 2,573 2,129
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 710 200
Depreciation and amortization 820 684
Gains on sales of loans (132) (31)
(Gains)/losses on sales of securities (433) 11
Losses on sales of real estate owned 14 23
(Increase)/Decrease:
Loans held for sale (663) 105
Accrued interest receivable 617 (7)
Prepaid expenses and other assets (66) (66)
Deferred income taxes (321) (75)
Increase/(Decrease):
Accrued expenses and other liabilities 481 674
Accrued interest payable 10 64
Change in income taxes payable/receivable (16) (84)
------------- --------------
Net cash provided by operating activities 3,594 3,627
------------- --------------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns
of investment securities 32,062 4,612
Proceeds from sales of investment securities 20,253 4,960
Purchase of investment securities (42,460) (12,381)
Net proceeds from sales of real estate acquired by foreclosure 148 150
Net increase in loans (26,180) (30,402)
Additions to premises and equipment, net (777) (577)
-------------- --------------
Net cash used in investing activities (16,954) (33,638)
-------------- --------------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 26,586 38,868
Change in short term borrowings 4,051 (2,273)
Cash dividends paid on common stock (554) (512)
Stock options exercised 44 -
------------- --------------
Net cash provided by financing activities 30,127 36,083
------------- --------------
Net increase (decrease) in cash and cash equivalents 16,767 6,072
Cash and cash equivalents at beginning of period 23,554 14,507
------------- --------------
Cash and cash equivalents at end of period $ 40,321 20,579
============= ==============
Supplemental financial data:
Cash paid for:
Interest on deposits and short-term borrowings $ 7,397 6,972
Income taxes 1,521 1,379
Transfers from loans to real estate acquired by foreclosure 73 168
</TABLE>
6
<PAGE>
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, 1997, 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) Reclassification
Certain fiscal 1997 information has been reclassified to conform to the 1998
presentation.
7
<PAGE>
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, 1998:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk weighted assets) $ 27,917 12.56% $ 17,779 8.00% $ 22,224 10.00%
Tier 1 Capital
(to risk weighted assets) 25,110 11.30% 8,889 4.00% 13,334 6.00%
Tier 1 Capital*
(to average assets) 25,110 7.34% 13,692 4.00% 17,115 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 21, 1998, the board of directors declared a dividend in the amount of
$0.35 per share paid on July 1, 1998 to shareholders of record as of the close
of business on June 12, 1998. The board of directors intends to consider the
payment of future dividends on an annual basis.
Balance Sheet
Total Assets
Total assets increased $33.7 million, or 10.5%, since December 31, 1997. The
increase is primarily attributable to an increase in gross loans of $26.9
million. The increase in assets was funded primarily by increases in deposits of
$26.6 million.
Investments
At September 30, 1998 all of the company's investment securities were classified
as available-for-sale and carried at fair value. The net unrealized gains at
September 30, 1998, net of tax effects, are shown as accumulated other
comprehensive income, a separate component of stockholders' equity, in the
amount of $1.2 million.
Loans
Total loans, before the allowance for loan losses, were $207.5 million, or 58.2%
of total assets, at September 30, 1998, compared to $180.6 million, or 56.0 % of
total assets, at December 31, 1997. The increase in loans of $26.9 million was
primarily attributed to 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.
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $26.6 million,
or 9.4%, during the first nine months of 1998 from $283.9 million at December
31, 1997, to $310.4 million at September 30, 1998. The increase was primarily
due to increased market penetration of the bank's newer branches as well as
strong demand for the bank's new IRA products.
Total borrowings, consisting of securities sold under agreements to repurchase
and FHLB (Federal Home Loan Bank) borrowings, increased $4.1 million, or 32.5%,
from $12.5 million at December 31, 1997 to $16.5 million at September 30, 1998.
The increase was attributable to an increase in securities sold under agreements
to repurchase of $5.0 million, partially offset by a decrease in FHLB borrowings
of $1.0 million. 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 $.5 million at September 30, 1998, and had the ability
to borrow approximately an additional $45.8 million.
8
<PAGE>
Loan Loss Experience/Non-Performing Assets
<TABLE>
<CAPTION>
The following table summarizes the activity in the allowance for loan losses for the periods indicated:
Nine months ended September 30,
---------------------------------------
($ in thousands) 1998 1997
------------- --------------
<S> <C> <C>
Balance at beginning of year $ 4,290 3,895
Loans charged off
Commercial 72 148
Commercial real estate - -
Construction - -
Residential real estate - -
Home equity - -
Other 11 3
------------- --------------
83 151
Recoveries on loans charged off
Commercial 5 148
Commercial real estate - 155
Construction - -
Residential real estate 6 -
Home equity 5 40
Other 34 26
------------- --------------
50 369
Net loans charged off/(recovered) 33 (218)
Provision charged to income 710 200
------------- --------------
Balance at September 30 $ 4,967 4,313
============= ==============
Allowance for loan losses : Gross loans 2.39% 2.47%
============= ==============
Annualized net charge-offs : Average loans outstanding 0.02% (0.19%)
============= ==============
Allowance for loan losses : Non-performing loans 436.85% 206.46%
============= ==============
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth non-performing assets at the dates indicated:
($ in thousands) September 30, December 31, September 30,
1998 1997 1997
------------- ------------- -------------
<S> <C> <C> <C>
Loans on non-accrual:
Commercial $ 519 397 458
Residential real estate 74 180 249
Commercial real estate 104 180 815
Construction 178 - -
Consumer, including home equity 159 286 456
------------- ------------- -------------
Total loans on non-accrual 1,034 1,043 1,978
Loans past due >90 days, still accruing 103 74 111
------------- ------------- -------------
Total non-performing loans 1,137 1,117 2,089
Other real estate owned 304 393 78
------------- ------------- -------------
Total non-performing loans and real estate owned $ 1,441 1,510 2,167
============= ============= =============
Non-performing loans : Gross loans 0.55% 0.62% 1.19%
============= ============= =============
Non-performing loans and real estate owned : Total assets 0.40% 0.47% 0.67%
============= ============= =============
Delinquent loans 30-89 days past due : Gross loans 0.88% 1.14% 1.12%
============= ============= =============
</TABLE>
9
<PAGE>
Total non-performing loans decreased $1.0 million from September 30, 1997
through September 30, 1998. The ratio of non-performing loans to gross loans
decreased from 1.19% to 0.55% from September 30, 1997 during this period. The
primary cause for the decline was the removal of some commercial real estate
loans from non-accrual status. These loans were either paid in full or brought
current and assessed as fully collectable by management.
Total non-performing loans remained relatively unchanged from December 31, 1997
and are at historic lows. The ratio of non-performing loans to gross loans
decreased from 0.61% as of December 31, 1997 to 0.55% as of September 30, 1998.
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, national or global economic
conditions could negatively impact the level of non-performing assets in the
future, despite prudent underwriting.
Year 2000 Compliance
The company is currently in the process of determining, testing and remediating
the impact of the so-called "millenium problem" or "Y2K" (i.e., that many
existing computer chips and programs use only two digits to identify a year in
the 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). While most view the project as a data processing
or computer concern, every department and function of the company is affected
and must be 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 system,
elevators, electrical systems, etc.).
The company primarily utilizes internal resources to manage the Y2K remediation
process and test, update, and/or replace all software information systems for
Year 2000 modifications. The company has formed 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 and remediation. 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 is solely devoted to Y2K issues. Many other employees are also
actively involved including each department manager, members of their staff and
the entire information systems department. The company also utilizes external
resources (information systems consultants, auditors, speakers, accountants
etc.) as deemed necessary by the various committees and management.
Management has completed its assessment of Year 2000 issues, developed a plan,
begun testing its various software information systems and arranged for the
required resources, based on anticipated needs, to complete the necessary
remediation. Management plans to complete the changes and testing on the
internal mission critical information systems for the Year 2000 project by
December 31, 1998 and mission critical systems associated with service providers
by March 31, 1999. Mission critical systems are those critical to daily
operations and failure of the systems would result in definite disruption to
business. Testing of the company's non-mission critical applications will
continue into 1999 and will be completed prior to any anticipated impact on its
operating systems. Contingency plans are also being developed for each function
so that the company is adequately prepared in the event of a system failure,
despite remediation efforts. These contingency plans will be completed prior to
December 31, 1999.
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 Year
2000 compliant. Excluding internal salary and benefit costs, approximately
$10,000 in costs associated with Y2K remediation efforts were expended through
September 30, 1998. Management expects that the majority of the costs that will
be incurred (as disclosed below) will be to replace or upgrade existing hardware
and software which will be capitalized and amortized in accordance with the
company's existing accounting policy, 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 includes upgrades of security
systems, modifications to the automated teller machines, consulting costs and
changes to the telecommunications network. 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 need for additional provisions to the bank's allowance for
loan losses resulting from borrowers' year 2000 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.
10
<PAGE>
The cost of the project and the date on which the company plans to complete the
Year 2000 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 Year 2000 issues.
The internal and external risks associated with Y2K are numerous. The company is
addressing the Y2K issue and is meeting or ahead of regulatory guidelines
promulgated by the Federal Financial Institution Examination Council. However,
there can be no guarantee that the systems of the company 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 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 might cause, among other things, systems
malfunctions, incorrect or incomplete transaction processing or the inability to
reconcile accounting books and records. Therefore, the company's operations
and/or financial condition could possibly be negatively impacted to the extent
the company or entities not affiliated with the company are unsuccessful in
properly addressing their respective Year 2000 compliance responsibilities.
11
<PAGE>
Results of Operations
Nine Months Ended September 30, 1998 vs. Nine Months Ended September 30, 1997
The company reported net income of $2,573,000 for the nine months ended
September 30, 1998, versus $2,129,000 for the nine months ended September 30,
1997, or an increase of 20.9%. The company had basic earnings per common share
of $1.63 and $1.35 for the nine months ended September 30, 1998 and September
30, 1997, respectively. Diluted earnings per share were $1.57 and $1.32 for the
nine months ending September 30, 1998 and September 30, 1997, respectively.
The following table highlights changes that affected the company's earnings for
the periods indicated:
<TABLE>
<CAPTION>
Nine months ended September 30,
---------------------------------------
($ in thousands) 1998 1997
------------- --------------
<S> <C> <C>
Average assets $ 333,297 301,622
Average deposits and short-term borrowings 306,220 278,090
Average investment securities (1) 104,491 121,537
Average loans 196,436 157,495
Net interest income 11,601 10,105
Provision for loan losses 710 200
Tax expense 1,179 1,219
Average loans : Average deposits and borrowings 64.15% 56.63%
Non interest expense : Average assets (2) 3.73% 3.52%
Non interest income, exclusive of securities
gains : Average assets (2) 0.69% .62%
Average tax equivalent rate earned on interest earning assets 8.32% 8.25%
Average rate paid on interest bearing deposits and
short-term borrowings 3.91% 4.01%
Net yield on average earning assets 5.13% 4.91%
<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 $11,601,000 for the nine months ended
September 30, 1998, an increase of $1,496,000 or 14.8% from $10,105,000 for the
nine months ended September 30, 1997. Interest income increased $1,867,000,
primarily a result of an increase of average loan balances of $38.9 million
partially offset by a decrease in investment and federal funds sold income of
$652,000, as a result of a decline in the average investment and federal funds
sold balances. The increase in interest income was partially offset by an
increase in interest expense of $371,000, 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, 1998, was 8.32%, up 7 basis points from 8.25% in the nine months
ended September 30, 1997. The decline in yield in the loan portfolio from 9.61%
to 9.42% was a result of a decline in the bank's prime rate during the quarter
from 8.5% to 8.0% and increased competition in the market. The decline in the
tax equivalent yield on investment securities from 6.55% to 6.51% was primarily
a result of higher yielding securities being called by the issuing agencies. The
average rate paid on interest bearing deposits and short-term borrowings in the
nine months ended September 30, 1998, was 3.91%, a decrease of 10 basis points
from 4.01% in the nine months ended September 30, 1997. The average rate paid on
savings, NOW and money market accounts decreased primarily due to a change in
mix. The average rate on short-term borrowings declined from 4.57% to 3.67% as a
result of the decline in Federal Home Loan Bank borrowings.
The net yield on average earning assets increased 22 basis points to 5.13% in
the nine months ended September 30, 1998, from 4.91% in the nine months ended
September 30, 1997. The principal reason for the increase in the bank's net
interest income during the first nine months of 1998 was the increase in average
loans of $38.9 million, which was funded primarily by an increase of $23.2
million and $9.9 million in average interest bearing deposits and non-interest
bearing deposits, respectively and a decline in average investment and federal
funds sold balances of $10.4 million.
12
<PAGE>
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the nine months ended September 30, 1998, and 1997. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average balance
multiplied by prior year average rate); (2) interest rate (change in average
interest rate multiplied by prior year average balance); and (3) rate and volume
(the remaining difference).
13
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Nine Months Ended Nine Months Ended
September 30, 1998 September 30, 1997 Changes due to
---------------------------- ---------------------------- --------------------------------
Average Interest Average Interest Interest Rate/
($ in thousands) Balance Interest Rates(3) Balance Interest Rates(3) Total Volume Rate Volume
--------- --------- -------- ---------- -------- -------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total
Assets:
Loans (1) (2) $ 196,436 $ 13,845 9.42% $ 157,495 $ 11,326 9.61% $ 2,519 $ 2,799 $ (224) $ (56)
Investment securities (3) 104,491 4,767 6.51 121,537 5,693 6.55 (926) (835) (36) (55)
Federal funds sold 9,666 396 5.48 3,045 122 5.36 274 265 3 6
--------- --------- ---------- -------- ------- ------- ------ ------
Total interest earnings assets 310,593 19,008 8.32% 282,077 17,141 8.25% 1,867 2,229 (257) (105)
--------- -------- ------- ------- ------ ------
Other assets (4) 22,704 19,545
--------- ----------
Total assets $ 333,297 $ 301,622
========= ==========
Liabilities and stockholders' equity:
Savings, NOW and money market $ 110,234 1,819 2.21% $ 102,506 1,782 2.32% 37 134 (84) (13)
Time deposits 127,835 5,179 5.42 112,359 4,575 5.44 604 630 (17) (9)
Short-term borrowings 14,918 409 3.67 19,867 679 4.57 (270) (169) (134) 33
--------- --------- ---------- -------- ------- ------- ------ ------
Interest bearing deposits
and borrowings 252,987 7,407 3.91% 234,732 7,036 4.01% 371 595 (235) 11
--------- -------- ------- ------- ------ ------
Non-interest bearing deposits 53,233 43,358
Other liabilities 2,414 2,027
--------- ----------
Total liabilities 308,634 280,117
Stockholders' equity 24,663 21,505
--------- ----------
Total liabilities and
stockholders' equity $ 333,297 $ 301,622
========= ==========
Net interest rate spread 4.41% 4.24%
Net interest income $ 11,601 $ 10,105 $ 1,496 $ 1,634 $ (22) $ (116)
========= ======== ======= ======= ====== ======
Net yield on average earning assets 5.13% 4.91%
<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.
14
<PAGE>
The provision for loan losses amounted to $710,000 and $200,000 for the
nine-month periods ended September 30, 1998 and 1997, respectively. Loans,
before the allowance for loan losses, have increased from $174.7 million, at
September 30, 1997, to $207.5 million, at September 30, 1998, or an increase of
18.8%. Although there has not been an increase in problem assets or any change
in the bank's underwriting practices, management recognizes the increased risk
and the need for additional reserves as the loan balances increase. Additionally
the allowance for loan loss:gross loan ratio has declined from 2.91% to 2.47% to
2.39% from September 30, 1996, 1997 and 1998, respectively. 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 for the nine months ended September 30,
1998, reflects both reserves for new origination and related decline in reserve
coverage and management's assessment of appropriateness of reserves on existing
balances. The provision for loan losses is a significant factor in the bank's
operating results.
Non-Interest Income
Non-interest income, exclusive of security gains, increased by $327,000 to
$1,724,000 for the nine months ended September 30, 1998, compared to $1,397,000
for the nine months ended September 30, 1997. This increase was primarily caused
by an increase in trust fees of $210,000 and an increase in net gains on sale of
loans of $101,000.
Trust fees increased by $210,000, or 42.6%, for the nine months ended September
30, 1998 compared to the same period in 1997 due to an increase in trust assets
and additional services offered. As a result of the additional services trust
professional and custodial expenses increased $65,000 or 40.6%. Trust assets
under management increased from $163.7 million at September 30, 1997 to $181.4
million at September 30, 1998.
Deposit fees had no change for the nine months ended September 30, 1998,
compared to the nine months ended September 30, 1997. The relative leveling of
income in this category was due to deposit growth being concentrated in accounts
not generating deposit fee income such as checking accounts that generate
earning credits towards fees or certificates of deposit.
Gains on sales of loans increased from $31,000 for the nine months ended
September 30, 1997, to $132,000 for the nine months ended September 30, 1998, as
a result of increased loan origination volume caused by low interest rates and a
resulting high amount of refinance activity and home purchases.
Other income for the nine months ended September 30, 1998, was $229,000, an
increase of 3.2%, from $222,000 for the nine months ended September 30, 1997,
due primarily to increases in check printing fees.
Net gains on sale of investment securities increased by $444,000 for the nine
months ended September 30, 1998, from a net loss of $11,000 for the nine months
ended September 30, 1997. The gains were a result of both investment sales, as
part of the bank's overall investment and asset/liability strategies, and gains
on securities that were called.
Non-Interest Expense
Salaries and benefits expense totaled $5,262,000 for the nine months ended
September 30, 1998, compared with $4,601,000 for the nine months ended September
30, 1997, an increase of $661,000 or 14.4%. This increase was primarily the
result of the addition of the Dracut branch during the fourth quarter of 1997,
and annual salary increases.
Occupancy expense was $1,629,000 for the nine months ended September 30, 1998,
compared with $1,307,000 for the nine months ended September 30, 1997, an
increase of $322,000 or 24.6%. The increase was primarily due to the
establishment of the Dracut branch in November of 1997, the addition of the
bank's training facility in September of 1997 and enhancements to the bank's
computer systems.
Office and data processing supplies expense decreased by $5,000, or 1.8%, for
the nine months ended September 30, 1998 compared to the same period in the
prior year, primarily due to the implementation of cost savings programs.
Audit, legal and other professional expenses increased by $240,000, or 64.2% for
the nine months ended September 30, 1998 compared to the prior year period,
primarily as a result of expenses associated with the implementation of certain
tax strategies discussed below and Y2K costs.
15
<PAGE>
Trust, professional and custodial expenses increased by $65,000, or 40.6%, for
the nine months ended September 30, 1998 as compared to the same period in 1997.
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 first nine months of 1998 was 31.4%. As
a result of the implementation of certain tax strategies, it is expected that
the effective tax rate will decline to approximately 30% for the year ended
December 31, 1998. The company expects that the tax benefits from the use of
these strategies will be offset by professional fees and other expenses incurred
in connection with the implementation in 1998. Accordingly, it is anticipated
that the implementation of these strategies will not have a material impact on
net income in 1998. Absent a change in tax laws, these strategies are expected
to have a positive effect on the company's net income beginning in 1999.
16
<PAGE>
Results of Operations
Three Months Ended September 30, 1998 vs. Three Months Ended September 30, 1997
The company reported net income of $892,000 for the three months ended September
30, 1998, versus $799,000 for the three months ended September 30, 1997, or an
increase of 11.6%. The company had basic earnings per common share of $0.56 and
$0.51 for the three months ended September 30, 1998 and September 30, 1997,
respectively. Diluted earnings per share were $0.54 and $0.50 for the three
months ending September 30, 1998 and September 30, 1997, respectively.
The following table highlights changes that affected the company's earnings for
the periods indicated:
<TABLE>
<CAPTION>
Three months ended September 30,
---------------------------------------
($ in thousands) 1998 1997
------------- --------------
<S> <C> <C>
Average assets $ 342,689 318,818
Average deposits and short-term borrowings 314,122 294,698
Average investment securities (1) 93,730 121,324
Average loans 205,103 169,251
Net interest income 4,090 3,623
Provision for loan losses 440 80
Tax expense 246 462
Average loans : Average deposits and borrowings 65.29% 57.43%
Non interest expense : Average assets (2) 3.90% 3.40%
Non interest income, exclusive of securities
gains : Average assets (2) 0.68% 0.57%
Average tax equivalent rate earned on interest earning assets 8.34% 8.29%
Average rate paid on interest bearing deposits and
short-term borrowings 3.88% 4.03%
Net yield on average earning assets 5.20% 4.94%
<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 $4,090,000 for the three months ended
September 30, 1998, an increase of $467,000 or 12.9% from $3,623,000 for the
three months ended September 30, 1997. Interest income increased $497,000,
primarily a result of an increase of $35.9 million in the average loan balance
partially offset by a decrease in investment and federal funds sold income of
$238,000 as a result of a decline in average balances.
The average tax-equivalent yield on earning assets in the three months ended
September 30, 1998, was 8.34%, up 5 basis points from 8.29% in the three months
ended September 30, 1997. The decline in yield in the loan portfolio from 9.71%
to 9.43% was a result of a decline of the bank's prime rate during the quarter
from 8.5% to 8.0% and increased competition in the market. The increase in the
tax equivalent yield on investment securities from 6.48% to 6.65% was primarily
a result of the purchase and resulting increase of percentage of total
investments of municipal securities. The average rate paid on interest bearing
deposits and short-term borrowings in the three months ended September 30, 1998,
was 3.88%, a decrease of 15 basis points from 4.03% in the three months ended
September 30, 1997. The average rate paid on savings, NOW and money market
accounts decreased primarily due to a change in mix. The average rate on short
term borrowings declined from 4.52% to 3.03% as a result of the decline in
Federal Home Loan Bank borrowings.
The net yield on average earning assets increased 26 basis points to 5.20% in
the three months ended September 30, 1998, from 4.94% in the three months ended
September 30, 1997. The principal reason for the increase in the bank's net
interest income during the three months ended September 30, 1998 was the
increase in average loans of $35.9 million, which was funded primarily by an
increase of $19.6 million and $6.7 million in average interest bearing deposits
and non-interest bearing deposits, respectively, and a decline in average
investment and federal funds sold balances of $12.3 million.
17
<PAGE>
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the three months ended September 30, 1998, and 1997. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average balance
multiplied by prior year average rate); (2) interest rate (change in average
interest rate multiplied by prior year average balance); and (3) rate and volume
(the remaining difference).
18
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997 Changes due to
--------------------------- --------------------------- -----------------------------
Average Interest Average Interest Interest Rate/
($ in thousands) Balance Interest Rates(3) Balance Interest Rates (3) Total Volume Rate Volume
--------- -------- -------- --------- ------- --------- ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total
Assets:
Loans (1) (2) $ 205,103 $ 4,876 9.43% $ 169,251 $ 4,141 9.71% $ 735 $ 877 $ (119) $ (23)
Investment securities (3) 93,730 1,441 6.65 121,324 1,891 6.48 (450) (451) 52 (51)
Federal funds sold 22,773 314 5.47 7,527 102 5.38 212 207 2 3
--------- -------- --------- ------- ------ ------ ------ -----
Total interest earnings assets 321,606 6,631 8.34% 298,102 6,134 8.28% 497 633 (65) (71)
-------- ------- ------ ------ ------ -----
Other assets (4) 21,083 20,716
--------- ---------
Total assets $ 342,689 $ 318,818
========= =========
Liabilities and stockholders' equity:
Savings, NOW and money market $ 111,042 605 2.16% $ 108,625 661 2.41% (56) 15 (68) (3)
Time deposits 136,105 1,837 5.35 118,880 1,624 5.42 213 235 (21) (1)
Short-term borrowings 12,943 99 3.03 19,854 226 4.52 (127) (79) (75) 27
--------- -------- --------- ------- ------ ------ ------ -----
Interest bearing deposits
and borrowings 260,090 2,541 3.88% 247,359 2,511 4.03% 30 171 (164) 23
-------- ------- ------ ------ ------ -----
Non-interest bearing deposits 54,032 47,339
Other liabilities 2,503 2,122
--------- ---------
Total liabilities 316,625 296,820
Stockholders' equity 26,064 21,998
--------- ---------
Total liabilities and
stockholders' equity $ 342,689 $ 318,818
========= =========
Net interest rate spread 4.46% 4.25%
Net interest income $ 4,090 $ 3,623 $ 467 $ 462 $ 99 $ (94)
======== ======= ====== ====== ====== =====
Net yield on average earning assets 5.20% 4.94%
<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
<PAGE>
The provision for loan losses amounted to $440,000 and $80,000 for the three
month periods ended September 30, 1998 and 1997 respectively. As previously
discussed, the increase in the provision for loan loss is a result of
significant loan growth, decline in the allowance for loan loss:gross loan ratio
and management's assessment of current risks.
Non-Interest Income
Non-interest income, exclusive of security gains, increased by $126,000 to
$587,000 for the three months ended September 30, 1998, compared to $461,000 for
the three months ended September 30, 1997. This increase was primarily caused by
an increase in trust fees of $87,000 and an increase in net gains on sale of
loans of $49,000.
Trust fees increased by $87,000, or 55.4%, for the three months ended September
30, 1998 compared to the same period in 1997 due to an increase in trust assets
and additional services offered. As a result of the additional services trust
professional and custodial expenses increased by $24,000 or 42.9%.
Deposit fees decreased by $11,000, or 4.7%, for the three months ended September
30, 1998, compared to the three months ended September 30, 1997. The decrease
was due to deposit growth being concentrated on accounts not generating deposit
fee income such as checking accounts that generate earnings credits and
certificates of deposit. Net gains on sale of investments increased to $268,000
for the three months ended September 30, 1998 compared to a net loss of $11,000
in the three months ended September 30, 1997. The gains were a result of both
investment sales, as part of the bank's overall investment and asset/liability
strategies, and gains on securities that were called.
Non-Interest Expense
Salaries and benefits expense totaled $1,854,000 for the three months ended
September 30, 1998, compared with $1,660,000 for the three months ended
September 30, 1997, an increase of $194,000 or 11.7%. This increase was
primarily the result of the addition of the Dracut branch during the fourth
quarter of 1997, and annual salary increases.
Occupancy expense was $535,000 for the three months ended September 30, 1998,
compared with $434,000 for the three months ended September 30, 1997, an
increase of $101,000 or 23.3%. The increase was primarily due to the
establishment of the Dracut branch in November of 1997 and the addition of the
bank's training facility in September of 1997.
Advertising and public relations expenses increased by $60,000, or 77.9%, for
the three months ended September 30, 1998 compared to the same period in 1997.
The increase was attributed to timing of expenditures.
Office and data processing supplies expense decreased by $20,000, or 19.4%, for
the three months ended September 30, 1998 compared to the same period in the
prior year. The decrease was primarily due to the implementation of cost savings
programs and timing of expenditures.
Audit, legal and other professional expenses increased by $216,000, or 200.0%
for the three months ended September 30, 1998 compared to the prior year period,
primarily due to the implementation of certain tax strategies and Y2K costs.
Trust, professional and custodial expenses increased by $24,000, or 42.9%, for
the three months ended September 30, 1998 as compared to the same period in
1997. 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 decreased from 36.6% to 21.6% from the quarter ended
September 30, 1997 to September 30, 1998. As previously discussed, the reduction
of the company's effective tax rate is a result of the implementation of certain
tax planning strategies. The expected effective tax rate for the year ended
December 31, 1998 and going forward is approximately 30.0%.
20
<PAGE>
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
Not Applicable
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
None
21
<PAGE>
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 13, 1998 /s/ John P. Clancy, Jr.
John P. Clancy, Jr.
Senior Vice President, Chief Financial Officer,
Chief Investment Officer and Treasurer
22
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
unaudited financial statements of Enterprise Bancorp, Inc. at and for the period
ended September 30, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 13,721
<INT-BEARING-DEPOSITS> 255,770
<FED-FUNDS-SOLD> 26,600
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 104,297
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 208,553
<ALLOWANCE> 4,967
<TOTAL-ASSETS> 356,335
<DEPOSITS> 310,447
<SHORT-TERM> 16,518
<LIABILITIES-OTHER> 2,941
<LONG-TERM> 0
0
0
<COMMON> 16
<OTHER-SE> 26,413
<TOTAL-LIABILITIES-AND-EQUITY> 356,335
<INTEREST-LOAN> 13,845
<INTEREST-INVEST> 4,767
<INTEREST-OTHER> 396
<INTEREST-TOTAL> 19,008
<INTEREST-DEPOSIT> 6,998
<INTEREST-EXPENSE> 7,407
<INTEREST-INCOME-NET> 11,601
<LOAN-LOSSES> 710
<SECURITIES-GAINS> 433
<EXPENSE-OTHER> 9,296
<INCOME-PRETAX> 3,752
<INCOME-PRE-EXTRAORDINARY> 3,752
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,573
<EPS-PRIMARY> 1.63
<EPS-DILUTED> 1.57
<YIELD-ACTUAL> 4.99
<LOANS-NON> 1,034
<LOANS-PAST> 103
<LOANS-TROUBLED> 384
<LOANS-PROBLEM> 1,845
<ALLOWANCE-OPEN> 4,290
<CHARGE-OFFS> 83
<RECOVERIES> 50
<ALLOWANCE-CLOSE> 4,967
<ALLOWANCE-DOMESTIC> 4,967
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 32
</TABLE>
