U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from _____________ to _______________
Commission file number 0-21021
Enterprise Bancorp, Inc.
(Name of small business issuer in its charter)
Massachusetts 04-3308902
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
222 Merrimack Street, Lowell, Massachusetts, 01852
(Address of principal executive offices) (Zip code)
(978) 459-9000
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value per share
(Title of Class)
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......
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ X ]
State issuer's revenues for its most recent fiscal year. $28,636,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. $29,699,516 as of February 28, 1999
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: February 28, 1999, Common Stock - Par
Value $0.01: 3,169,634 shares outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's proxy statement for its annual meeting of stockholders
to be held on May 4, 1999 are incorporated by reference in Part III of this Form
10-KSB.
Transitional Small Business Disclosure Format (check one): Yes .......... No X
<PAGE>
ENTERPRISE BANCORP, INC.
TABLE OF CONTENTS
Page
Number
PART I
Item 1 Description of Business 3
Item 2 Description of Property 17
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
PART II
Item 5 Market for Common Equity and Related Stockholder Matters 18
Item 6 Management's Discussion and Analysis or Plan of Operation 19
Item 7 Financial Statements 30
Item 8 Changes In and Disagreements with Accountants on Accounting 58
and Financial Disclosure
Part III
Item 9 Directors, Executive Officers, Promoters and Control Persons; 58
Compliance with Section 16(a) of the Exchange Act
Item 10 Executive Compensation 59
Item 11 Security Ownership of Certain Beneficial Owners and Management 59
Item 12 Certain Relationships and Related Transactions 59
Item 13 Exhibits and Reports on Form 8-K 60
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 and
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 unforeseen changes in interest rates; (v) the
effect of changes in the business cycle and downturns in the local, regional or
national 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.
2
<PAGE>
PART I
Item 1. Description of Business
THE COMPANY
General
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. On July 26, 1996, the bank became the
wholly owned subsidiary of the company and the former shareholders of the bank
became shareholders of the company. The business and operations of the company
are subject to the regulatory oversight of the Board of Governors of the Federal
Reserve System. To the extent that this report contains information as of a date
or for a period prior to July 26, 1996, such information pertains to the bank.
The company had no material assets or operations prior to completion of the
holding company reorganization on July 26, 1996.
Substantially all of the company's operations are conducted through the bank.
The bank is a Massachusetts trust company which commenced banking operations on
January 3, 1989. The bank's deposit accounts are insured by the Bank Insurance
Fund of the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum
amount provided by law. The FDIC and the Massachusetts Commissioner of Banks
(the "Commissioner") have regulatory authority over the bank.
The company's headquarters and the bank's main office are located at 222
Merrimack Street in Lowell, Massachusetts. Additional branch offices are located
in the Massachusetts cities and towns of Billerica, Chelmsford, Dracut,
Leominster and Tewksbury. The bank has purchased land in Westford, Massachusetts
and intends to build a branch facility scheduled to open by the fourth quarter
of 1999. The bank's deposit gathering and lending activities are conducted
primarily in the city of Lowell and the surrounding Massachusetts towns of
Billerica, Chelmsford, Dracut, Tewksbury, Tyngsboro, and Westford and in the
cities of Leominster and Fitchburg. The bank offers a range of commercial,
consumer and trust services with a goal of satisfying the needs of consumers,
small and medium-sized businesses and professionals.
Lending
The bank specializes in lending to small and medium-sized businesses,
corporations, partnerships, non-profits, professionals and individuals. Loans
made by the bank to businesses include commercial mortgage loans, loans
guaranteed by the Small Business Association (SBA), construction loans,
revolving lines of credit, working capital loans, equipment financing,
asset-based lending, letters of credit and loans under various programs issued
in conjunction with the Massachusetts Development Finance Agency and other
agencies. The bank also originates equipment lease financing for businesses.
Loans made by the bank to individuals include residential mortgage loans, home
equity loans, residential construction loans, unsecured and secured personal
lines of credit and mortgage loans on investment and vacation properties.
At December 31, 1998, the bank had gross loans outstanding of $216.2 million,
which represented approximately 60% of the company's total assets. The interest
rates charged on these loans vary with the degree of risk, maturity and amount,
and are further subject to competitive pressures, market rates, the availability
of funds, and legal and regulatory requirements.
At December 31, 1998, the bank's statutory lending limit, based on 20% of
capital, to any single borrower was approximately $5.2 million, subject to
certain exceptions provided under applicable law. At December 31, 1998, the bank
had no outstanding lending relationships or commitments in excess of the legal
lending limit.
3
<PAGE>
The following table sets forth the loan balances for certain loan categories at
the dates indicated and the percentage of each category to total gross loans.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------ ------------------ ------------------
($ in thousands) Amount % Amount % Amount % Amount % Amount %
---------- -------- ---------- -------- ---------- ------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Comm'l real estate $ 80,207 37.1% $ 66,836 36.8% $ 52,378 36.1% $ 42,514 36.0% $ 40,267 34.9%
Commercial 55,570 25.7% 42,202 23.2% 38,202 26.3% 28,353 24.0% 25,980 22.5%
Residential mortgages 44,680 20.7% 42,648 23.5% 35,918 24.7% 32,872 27.8% 33,748 29.3%
Home equity 13,436 6.2% 12,203 6.7% 8,255 5.7% 5,250 4.4% 5,877 5.1%
Construction 16,637 7.7% 13,149 7.2% 6,474 4.4% 5,844 4.9% 5,930 5.1%
Other 5,682 2.6% 4,657 2.6% 4,043 2.8% 3,379 2.9% 3,543 3.1%
---------- ---------- ---------- ---------- ---------
Gross loans 216,212 100.0% 181,695 100.0% 145,270 100.0% 118,212 100.0% 115,345 100.0%
Less: Deferred fees 1,000 1,111 950 549 555
Allowance for
loan losses 5,234 4,290 3,895 4,107 4,341
---------- ---------- ---------- ---------- ---------
Net loans $ 209,978 $ 176,294 $ 140,425 $ 113,556 $ 110,449
========== ========== ========== ========== =========
</TABLE>
Commercial, Commercial Real Estate and Construction Loans
The following table sets forth scheduled maturities of commercial, construction
and commercial real estate loans in the bank's portfolio at December 31, 1998.
Loans having no stated maturity (i.e., payable on demand) are reported as due in
one year or less. The following table also sets forth the dollar amount of loans
which are scheduled to mature after one year which have fixed or adjustable
rates.
<TABLE>
<CAPTION>
Commercial
($ in thousands) Commercial Construction Real Estate
---------- ------------ -----------
<S> <C> <C> <C>
Amounts due:
One year or less $ 6,184 $ 9,321 $ 677
After one year through five years 19,453 1,383 5,016
Beyond five years 29,933 5,933 74,514
------- ------- -------
$55,570 $16,637 $80,207
======= ======= =======
Interest rate terms on amounts due after one year:
Fixed $ 8,749 $ 1,104 $10,450
Adjustable 40,637 6,212 69,080
</TABLE>
Scheduled contractual maturities will not reflect the actual maturities of
loans. The average maturity of loans will be shorter than their contractual
terms principally due to prepayments.
Commercial loans include working capital loans, equipment financing (including
equipment leases), standby letters of credit, term loans and revolving lines of
credit. Construction loans include construction loans to both individuals and
businesses. Included in commercial loans are loans under various Small Business
Administration programs amounting to $4.6 million, $5.0 million, and $3.9
million as of December 31, 1998, 1997 and 1996, respectively.
Commercial, commercial real estate and construction loans secured by apartment
buildings, office facilities, shopping malls, raw land or other commercial
property, were $152.4 million at December 31, 1998, representing an increase of
$30.2 million, or 24.7%, from the previous year. This compares to an increase of
$25.1 million or 25.9% from 1996 to 1997. The growth in 1998 is a reflection of
the bank's continued aggressive customer-call efforts, additional lenders hired
during 1997 and 1998, an increase in marketing and advertising and increased
penetration in the markets surrounding the bank's newer branches.
4
<PAGE>
Commercial real estate lending may entail significant additional risks compared
to residential mortgage lending. Loan size is typically larger and payment
experience on such loans can be more easily influenced by adverse conditions in
the real estate market or in the economy in general. Construction financing
involves a higher degree of risk than long term financing on improved occupied
real estate. Property values at completion of construction or development can be
influenced by underestimation of the construction costs that are actually
expended to complete the project. Thus, the bank may be required to advance
funds beyond the original commitment in order to finish the development. If
projected cash flows to be derived from the loan collateral or the values of the
collateral prove to be inaccurate, for example because of unprojected additional
costs or slow unit sales, the collateral may have a value which is insufficient
to assure full repayment. Funds for construction projects are disbursed as
pre-specified stages of construction are completed.
The bank has an independent loan review function that assesses the compliance of
loan originations with the bank's internal policies and underwriting guidelines
and monitors ongoing quality of the loan portfolio. The bank also contracts with
an external loan review company to review loans in the loan portfolio, on a
pre-determined schedule, based on the type, size, rating, and overall risk of
the loan. In addition, a loan review committee, consisting of senior lending
officers and loan review personnel, meets on a periodic basis to discuss loans
on the bank's internal "watch list" and classified loan report. The overdue loan
review committee, consisting of seven members of the board of directors (two of
which are officers of the bank), also meets quarterly to review and assess all
loan delinquencies.
Residential Loans
The bank makes conventional mortgage loans on single family residential
properties with original loan-to-value ratios generally up to 95% of the
appraised value of the property securing the loan. These residential properties
serve as the primary homes of the borrowers. The bank also originates loans on
one to four family dwellings and loans for the construction of owner-occupied
residential housing, with original loan-to-value ratios generally up to 80% of
the property's appraised value.
Residential mortgage loans made by the bank have traditionally been long-term
loans made for periods of up to 30 years at either fixed or adjustable rates of
interest. Depending on the current interest rate environment, management
projections of future interest rates and a review of the asset/liability
position of the bank, management may elect to sell or hold for the bank's
portfolio residential loan production. The bank generally sells fixed rate
residential mortgage loans with maturities greater than 15 years and puts
variable rate loans into the bank's portfolio. The bank may retain or sell the
servicing when selling the loans. The decision to hold or sell new loan
production is made in conjunction with the overall asset/liability management
program of the bank. Long-term fixed rate residential mortgage loans are
generally originated using underwriting standards and standard documentation
allowing their sale in the secondary market. All loans sold are currently sold
without recourse.
Residential mortgage loans were $44.7 million at December 31, 1998, representing
an increase of $2.0 million, or 4.8%, from the previous year. This compares to
an increase of $6.7 million, or 18.7%, in 1997, from the previous year. The
slower growth in 1998 slowed from the previous year due to an increase in
refinancing and the sale of more loan production to the secondary market.
5
<PAGE>
Home Equity Loans
Home equity loans are originated for the bank's portfolio for single family
residential properties with maximum original loan-to-value ratios generally up
to 80% of the appraised value of the property securing the loan. Home equity
loans generally have fixed interest rates for a period of one year and
subsequently adjust monthly based on changes in the prime rate.
Home equity loans were $13.4 million at December 31, 1998, representing an
increase of $1.2 million, or 10.1%, from the previous year. This compares to an
increase of $3.9 million, or 47.8%, in 1997 compared to the previous year. The
slower growth in 1998 is attributable to an increased level of refinancing of
existing mortgages and equity loans due to low interest rates available to
borrowers during the year.
Other Loans
The category "Other Loans" consists of secured or unsecured personal loans,
credit cards and overdraft protection lines extended to individual customers.
Other loans were $5.7 million at December 31, 1998, representing an increase of
$1.0 million or 22.0%, from the previous year. This compares to an increase of
$.6 million, or 15.2%, in 1997 compared to the previous year. The growth in 1998
is a result of the increased penetration in the markets surrounding the newer
branches and the general increase in relationships in more established markets.
Risk Elements
Non-performing assets consist of non-accruing loans, loans past due greater than
90 days and still accruing and other real estate owned ("OREO"). Loans on which
the accrual of interest has been discontinued, including some impaired loans,
are designated as non-accrual loans. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full and timely
collection of interest or principal, or generally when a loan becomes
contractually past due by 60 days or a mortgage loan becomes contractually past
due by 90 days with respect to interest or principal. In certain instances,
loans that have become 90 days past due may remain on accrual status if the
value of the collateral securing the loan is sufficient to cover principal and
interest and the loan is in the process of collection or if the principal and
interest is guaranteed by the federal government or an agency thereof. OREO
consists of real estate acquired through foreclosure proceedings and real estate
acquired through acceptance of a deed in lieu of foreclosure. Non-performing
loans include both non-accrual loans and loans past due 90 days or more but
still accruing. Loans for which management considers it probable that not all
contractual principal and interest will be collected are designated as impaired
loans.
Restructured loans are those where interest rates and/or principal payments have
been restructured to defer or reduce payments as a result of financial
difficulties of the borrower. Total restructured loans outstanding as of
December 31, 1998 and 1997 were $979,000 and $838,000, respectively. Accruing
restructured loans as of December 31, 1998 and 1997 were $538,000 and $260,000,
respectively.
Additional information regarding these risk elements is contained in Item 6,
Management Discussion and Analysis, and Item 7, Financial Statements, contained
in this report and "Allowance for Loan Losses and OREO Activity" below.
6
<PAGE>
Allowance for Loan Losses and OREO Activity
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------------------
($ in thousands) 1998 1997 1996 1995 1994
---------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Average loans outstanding $ 200,491 $ 162,594 $ 128,572 $ 118,248 $ 98,033
========= ========= ========= ========= =========
Balance at beginning of year $ 4,290 $ 3,895 $ 4,107 $ 4,341 $ 4,133
Charged-off loans:
Commercial 87 165 60 87 --
Commercial real estate -- 125 112 265 7
Construction -- -- -- -- --
Residential mortgage -- -- -- 33 --
Home equity -- -- 55 -- 41
Other 53 11 17 20 8
--------- --------- --------- --------- ---------
Total charged-off 140 301 244 405 56
--------- --------- --------- --------- ---------
Recoveries on loans previously charged-off:
Commercial 6 52 2 24 54
Commercial real estate -- 155 21 39 --
Construction -- -- -- 1 185
Residential mortgage 6 2 1 100 5
Home equity 7 40 4 3 1
Other 35 127 4 4 19
--------- --------- --------- --------- ---------
Total recoveries 54 376 32 171 264
--------- --------- --------- --------- ---------
Net loans charged-off (recovered) 86 (75) 212 234 (208)
Provision charged to income 1,030 320 -- -- --
--------- --------- --------- --------- ---------
Balance at December 31 $ 5,234 $ 4,290 $ 3,895 $ 4,107 $ 4,341
========= ========= ========= ========= =========
Net loans charged-off (recovered) to
average loans .04% (.05%) .16% .20% (.21%)
Net loans charged-off (recovered) to
allowance for loan losses 1.64% (1.75%) 5.44% 5.70% (4.79%)
Allowance for loan losses to
ending gross loans 2.42% 2.36% 2.68% 3.47% 3.76%
Allowance for loan losses to
non-performing loans 384.85% 384.06% 165.25% 202.02% 231.64%
Recoveries to charge-offs 38.57% 124.92% 13.11% 42.22% 471.43%
</TABLE>
The following table represents the allocation of the bank's allowance for loan
losses and the percentage of loans in each category to total loans for the
periods ending as indicated:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------- ------------------ ------------------ ------------------
($ in thousands) Amount % Amount % Amount % Amount % Amount %
---------- -------- ---------- -------- ---------- ------- ---------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Comm'l real estate $ 2,591 37.1% $ 2,161 36.8% $ 2,171 36.1% $ 2,371 36.0% $ 2,411 34.9%
Commercial 1,111 25.7% 844 23.2% 723 26.3% 908 24.0% 1,067 22.5%
Construction 665 7.7% 338 7.2% 209 4.4% 143 4.9% 187 5.1%
Residential mortgage 568 20.7% 525 23.5% 372 24.7% 364 27.8% 365 29.3%
Consumer 194 8.8% 167 9.3% 244 8.5% 162 7.3% 138 8.2%
Unallocated 105 255 176 159 173
---------- ---------- ---------- ---------- ---------
Total $ 5,234 100.0% $ 4,290 100.0% $ 3,895 100.0% $ 4,107 100.0% $ 4,341 100.0%
========== ========== ========== ========== =========
</TABLE>
The allocation of the allowance for loan losses above reflects management's
judgment of the relative risks of the various categories of the bank's loan
portfolio. This allocation should not be considered an indication of the future
amounts or types of possible loan charge-offs.
7
<PAGE>
The following table sets forth information regarding non-performing assets,
restructured loans and delinquent loans 30-89 days past due as to interest or
principal, held by the bank at the dates indicated:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
($ in thousands) 1998 1997 1996 1995 1994
------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C>
Non-accrual loans* $1,263 $1,043 $2,237 $2,021 $1,871
Accruing loans > 90 days past due 97 74 120 12 3
------ ------ ------ ------ ------
Total non-performing loans 1,360 1,117 2,357 2,033 1,874
Other real estate owned 304 393 83 417 390
------ ------ ------ ------ ------
Total non-performing assets $1,664 $1,510 $2,440 $2,450 $2,264
====== ====== ====== ====== ======
Restructured loans $ 538 $ 260 $ -- $ -- $ 742
Delinquent loans 30-89 days past due 1,473 2,074 2,280 2,356 534
Non-performing loans : Gross loans .63% .61% 1.62% 1.72% 1.62%
Non-performing assets : Total assets .46% .47% 0.86% 1.09% 1.32%
Delinquent loans 30-89 days past due :
Gross loans .68% 1.14% 1.57% 1.99% 0.46%
<FN>
* Impaired loans included in non-accrual loans as of December 31, 1998 and 1997 were $.5 million and $.9
million, respectively.
</FN>
</TABLE>
Non-accrual loans increased slightly by $0.2 million, to $1.3 million at
December 31, 1998, as compared to the prior year. The increase was primarily
attributable to an increase in non-accruing commercial loans guaranteed by the
SBA. 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 the local, regional and national
economic conditions could result in an increase to non-performing assets in the
future, despite prudent loan underwriting.
Investment Activities
The investment activity of the bank is an integral part of the overall
asset/liability management program of the bank. The investment function provides
readily available funds to support loan growth as well as to meet withdrawals
and maturities of deposits and attempts to provide maximum return consistent
with liquidity constraints and general prudence, including diversity and safety
of investments. The securities in which the bank may invest are subject to
regulation and are limited to securities which are considered "investment grade"
securities. In addition, the bank has an internal investment policy which
restricts investments to the following categories: U.S. treasury securities,
U.S. government agencies, U.S. agency mortgage-backed securities("MBSs") and
collateralized mortgage obligations ("CMOs"), Federal Home Loan Bank of Boston
("FHLB") stock, federal funds, and state, county, and municipal securities
("Municipals"), all of which must be considered investment grade by a recognized
rating service. The effect of changes in interest rates and the resulting impact
on a MBSs' principal repayment speed and the effect on yield and market value
are considered when purchasing MBSs. The credit rating of each security or
obligation in the portfolio is closely monitored and reviewed at least annually
by the bank's investment committee. See note 2 to the consolidated financial
statements in Item 7 for further information.
8
<PAGE>
At December 31, 1998, 1997, and 1996 all investment securities were classified
as available for sale and were carried at fair market value. The net unrealized
gains at December 31, 1998, net of tax effects, are shown as a separate
component of stockholders' equity in the amount of $1.0 million. The following
table summarizes the fair market value of investments at the dates indicated:
December 31,
------------------------------
($ in thousands) 1998 1997 1996
-------- -------- --------
U.S. treasuries and agencies $ 36,178 $ 82,831 $ 92,185
CMOs and MBSs 45,912 12,464 11,760
Municipals 29,608 14,630 12,490
FHLB stock 2,961 2,961 2,961
-------- -------- --------
Total investments available-for-sale $114,659 $112,886 $119,396
======== ======== ========
The contractual maturity distribution, as of December 31, 1998, of the total
bonds and obligations above with the weighted average yield for each category is
as follows:
<TABLE>
<CAPTION>
Under 1 Year 1 - 3 Years 3 - 5 Years 5 - 10 Years Over 10 Years
--------------- ---------------- ---------------- ---------------- -----------------
($ in thousands) Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield
------- ------ -------- ------ ------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. treasuries
and agencies $ 4,975 5.90% $10,468 6.65% $ 7,082 6.56% $11,649 6.84% $ 2,004 6.99%
CMOs and MBSs -- --% -- --% -- --% 13,400 6.35% 32,512 6.18%
Municipals* 1,328 6.89% 4,337 7.39% 2,672 7.54% 15,553 6.83% 5,718 7.05%
------- ------- ------- ------- -------
$ 6,303 6.11% $14,805 6.87% $ 9,754 6.83% $40,602 6.67% $40,234 6.34%
======= ======= ======= ======= =======
<FN>
* Municipal security yields and total yields are shown on a tax equivalent basis.
</FN>
</TABLE>
Scheduled contractual maturities do not reflect the actual expected maturities
of the investments. CMOs and MBSs are shown at their final maturity. However,
due to prepayments and normal amortization the actual cash flows will be faster
than presented above. Similarly, included in the U.S. treasuries and agencies
category is $20.7 million in securities which can be "called" before maturity.
Actual maturity of these callable securities could be shorter in a falling
interest rate environment. Management considers these factors when evaluating
the net interest margin in the bank's asset/liability management program.
The reduction in U.S. treasuries and agencies from $82.8 million at December 31,
1997 to $36.2 million at December 31, 1998 was largely attributed to securities
with a book value of $33.7 million being called and sales of U.S. treasuries
with a book value of $21.1 million to take advantage of opportunities in the
investment market. Proceeds from these transactions were primarily used to
purchase municipal securities with maturities from 8-18 years and CMOs with
varying weighted average lives.
See "Interest Margin Sensitivity Analysis" below for additional information
regarding the bank's callable bonds and CMOs.
9
<PAGE>
Interest Margin Sensitivity Analysis
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 ratio, Federal Home Loan Bank
borrowing capacity and loan to deposit ratio. The asset/liability strategies are
reviewed continually 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 cope with the impact on
future net interest income because of changes in interest rates. The balancing
of the changes in interest income from interest earning assets and the interest
expense of interest bearing liabilities is done through the asset/liability
management program. The bank's simulation model analyzes various interest rate
scenarios. Varying future interest rate environments affects prepayment speeds,
reinvestment rates, maturities of investments due to call provisions, changes in
interest rates on various asset and liability accounts based on different
indices, and other factors which vary under the different scenarios. 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.
The following table summarizes the projected net interest income for a 24-month
period from the company's interest bearing assets and liabilities as of December
31, 1998, resulting from a 200 basis point upward shift in the prime rate, 200
basis point downward shift in the prime rate and no change in the prime rate
scenarios from the bank's asset/liability simulation model. Other rates (i.e.,
deposit, loan, and investment rates) have been changed accordingly.
It should be noted that the interest rate scenarios used do not necessarily
reflect management's view of the "most likely" change in interest rates over the
next 24 months. Furthermore, since a static balance sheet is assumed, the
results do not reflect the anticipated future net interest income of the
company.
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------
Rates Rise Rates Rates Fall
200 BP Unchanged 200 BP
($ in thousands) ---------- ---------- ----------
<S> <C> <C> <C>
Interest Earning Assets:
Variable rate loans $31,631 $27,459 $23,287
Fixed rate loans 9,014 8,763 7,953
Callable securities 2,748 2,609 2,533
Fixed maturity treasury and agency securities 1,330 1,315 1,310
Other investment securities 9,801 9,197 8,650
Federal funds sold 774 657 626
------- ------- -------
Total interest income 55,298 50,000 44,359
------- ------- -------
Interest Earning Liabilities:
Time deposits 16,200 12,965 10,808
NOW, money market, savings 5,572 4,632 3,692
Short term borrowings 1,262 983 808
------- ------- -------
Total interest expense 23,034 18,580 15,308
------- ------- -------
Net interest income $32,264 $31,420 $29,051
======= ======= =======
</TABLE>
10
<PAGE>
As of December 31, 1998, analysis indicated that the sensitivity of the net
interest margin was in compliance with policy. Management estimates that, in a
falling rate environment, there would be a reduction of the net interest income
due to slower reductions in rates paid on deposits and increased cash flows from
the company's loan and investment portfolio, which would be reinvested at lower
marginal rates as rates fall, assuming a static balance sheet. Management
estimates that net interest income will increase less significantly in a rising
rate environment, assuming a static balance sheet, due to increased loan income
being offset by the effect of the extension of the duration of the investment
portfolio and rising cost of funds.
The results and conclusions reached from the December 31, 1998 simulation are
similar to the results of the December 31, 1997 simulation. As shown in the
following table, the 24 month net interest margin projection from the December
31, 1997 model, reflects a decline when interest rates fall and an increase when
rates rise.
December 31, 1997
----------------------------------------
Rates Rise Rates Rates Fall
($ in thousands) 200 BP Unchanged 200 BP
---------- ---------- ----------
Interest earning assets $51,936 $47,000 $42,409
Interest earning liabilities 21,550 17,630 14,698
------- ------- -------
Net interest income $30,386 $29,370 $27,711
======= ======= =======
Maturity information of the company's loan portfolio, investment portfolio,
certificates of deposit, and short-term borrowings is contained above under the
caption "Investment Activities" and in Part II, Item 7 in Notes 7 and 8 to the
company's financial statements. Management uses this information in the
simulation model along with other information about the bank's assets and
liabilities. Management makes certain prepayment assumptions, based on an
analysis of market consensus and management projections, regarding how the
factors discussed above will affect the assets and liabilities of the bank as
rates change. One of the more significant changes in the anticipated maturity of
assets occurs in the investment portfolio, specifically the reaction of CMOs and
callable securities as rates change.
The following table reflects management's estimates of when principal, shown at
amortized cost, of CMOs and callable securities, held in the bank's portfolio as
of December 31, 1998, will be repaid and the securities' weighted average
interest rates under three scenarios: interest rates up 200 basis points (BP),
down 200 basis points and no change. The difference in total yields in each
scenario is caused principally by accelerating or decelerating the
amortization/accretion on discounts and premiums on CMOs due to changing
prepayment speeds.
<TABLE>
<CAPTION>
Up 200 BP No Change Down 200 BP
-------------------- --------------------- --------------------
Amortized Yield Amortized Yield Amortized Yield
($ in thousands) Cost Rate Cost Rate Cost Rate
---------- ------- ----------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
0 - 12 Months $ 4,971 6.08% $12,103 6.12% $21,600 5.87%
13 - 24 Months 8,262 6.28% 15,707 6.32% 26,971 6.04%
25 - 36 Months 6,114 6.09% 15,214 6.48% 12,357 6.52%
37 - 48 Months 9,405 6.44% 5,216 5.95% 2,780 5.69%
Over 48 Months 37,070 6.53% 17,582 6.70% 2,114 5.69%
------- ------- -------
Total $65,822 6.41% $65,822 6.39% $65,822 6.05%
======= ======= =======
</TABLE>
Management also assesses sensitivity of the change in the net value of assets
and liabilities (MVPE) under different scenarios. As interest rates rise, the
value of interest-bearing assets generally declines while the value of
interest-bearing liabilities increases. Management monitors the MVPE on at least
an annual basis. Although management does consider the effect on the MVPE when
making asset/liability strategy decisions, the primary focus is on managing the
effect on the net interest margin under changing rate environments.
11
<PAGE>
Source of Funds
Deposits
Deposits have traditionally been the principal source of the bank's funds. The
bank offers a broad selection of deposit products to the general public,
including NOW accounts, savings accounts, money market accounts, individual
retirement accounts (IRA) and certificates of deposit. The bank also offers
commercial checking, money market, sweep, Keogh retirement and business IRA
accounts and repurchase agreements to its commercial business customers. The
bank does not currently use brokered deposits. The bank has offered premium
rates on specially designated products from time to time in order to promote new
branches and to attract customers and longer term deposits.
Management determines the interest rates offered on deposit accounts based on
current and expected economic conditions, competition, liquidity needs, the
volatility of the existing deposits, the asset/liability position of the bank
and the overall objectives of the bank regarding the growth of relationships.
The table below shows the comparison of the bank's average deposits and average
rates paid for the periods indicated. The annualized average rate on total
deposits reflects both interest bearing and non-interest bearing deposits.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- --------------------------------- ---------------------------------
Average Average % of Average Average % of Average Average % of
Balance Rate Deposits Balance Rate Deposits Balance Rate Deposits
-------- ------- -------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Demand $ 54,161 -- 18.25% $ 45,371 -- 17.16% $ 34,884 -- 15.86%
Savings 22,218 2.23% 7.49% 19,237 2.23% 7.27% 17,037 2.22% 7.75%
NOW 58,062 1.89% 19.57% 53,782 2.14% 20.34% 43,929 2.09% 19.97%
Money market 30,490 2.60% 10.28% 31,422 2.76% 11.88% 24,402 2.56% 11.09%
-------- ------ ------- ------ -------- ------
110,770 2.16% 37.34% 104,441 2.35% 39.49% 85,368 2.25% 38.81%
Time deposits 131,773 5.38% 44.41% 114,656 5.46% 43.35% 99,696 5.63% 45.33%
-------- ------ ------- ------ -------- ------
Total $296,704 3.19% 100.00% $264,468 3.29% 100.00% $219,948 3.42% 100.00%
======== ====== ======== ====== ======== ======
</TABLE>
See note 7 to the consolidated financial statements in Item 7 for further
information.
Borrowings
The bank is a member of the Federal Home Loan Bank of Boston (FHLB). This
membership enables the bank to borrow funds from the FHLB. The bank utilizes
borrowings from the FHLB to fund short term liquidity needs. This facility is an
integral component of the bank's asset/liability management program. At December
31, 1998, the bank had the additional capacity to borrow up to approximately
$55.1 million from the FHLB, with actual outstanding balances of $.5 million at
a rate of 5.94%.
The bank also borrows funds from customers secured by the bank's investment
securities. These repurchase agreements represent a cost competitive funding
source for the bank. These instruments are either term agreements or overnight
borrowings, as a part of the bank's commercial sweep accounts. Interest rates on
the bank's commercial sweep accounts are dependent on changes in the U.S.
treasury market. Interest rates paid by the bank on the term repurchase
agreements are based on market conditions and the bank's need for additional
funds at the time of the transaction. As of December 31, 1998 the bank had $11.6
million in repurchase agreements outstanding with a weighted average interest
rate of 2.70%.
See note 8 to the consolidated financial statements in Item 7 for further
information.
12
<PAGE>
Trust
The bank provides a range of investment management services to individuals,
family groups, trusts, foundations and retirement plans. These services include
management of equity, fixed income, balanced and strategic cash management
portfolios. Portfolios are managed based on the investment objectives of each
client. At December 31, 1998, the bank had $195.4 million in assets under
management.
Competition
The bank faces strong competition to attract deposits and to generate loans.
Several major commercial banks are headquartered in neighboring Boston, and
numerous other commercial banks, savings banks, cooperative banks, credit unions
and savings and loan associations have one or more offices in Greater Lowell and
in the Leominster/Fitchburg, Massachusetts area. The major commercial banks have
several competitive advantages over the bank, including the ability to make
larger loans to a single borrower than is possible for the bank. The greater
financial resources of these banks also allows them to offer a broad range of
automated banking services, to maintain numerous branch offices and to mount
extensive advertising and promotional campaigns. Competition for loans and
deposits also comes from other businesses which provide financial services,
including consumer finance companies, factors, mortgage brokers, insurance
companies, securities brokerage firms, money market mutual funds and private
lenders. Advances in and the increased use of technology, such as internet
banking and PC banking, are expected to have a significant impact on the future
competitive landscape of financial institutions.
As a general matter, regulation of the banking industry continues to undergo
significant changes, including changes in the products and services banks are
permitted to offer, the nature and degree of banks' involvement, directly or
indirectly through affiliates, in non-banking activities, and other contemplated
legislative and regulatory proposals that could, if adopted, alter the
structure, regulation and competitive relationships of financial institutions.
To the extent that changes in banking regulations may further increase
competition, any such changes could result in the bank paying increased interest
rates to obtain deposits while receiving lower interest rates on its loans.
Under such circumstances, the bank's net interest margin would decline. In
addition, any increase in the extent of regulation imposed upon the banking
industry generally could result in the bank incurring additional operating costs
which could impede profitability.
Notwithstanding the substantial competition with which the bank is faced,
management believes that the bank has established a market niche in Greater
Lowell and the Leominster/Fitchburg area which has been enhanced in recent years
by the acquisition of other independent banks by major bank holding companies,
and the resultant consolidation of competitors' banking operations and services
within the bank's market area. Additionally, management actively pursues
opportunities in new technologies that will serve the bank's market niche, in
order to have a competitive mix and pricing of its products.
The bank's officers and directors have substantial business and personal ties in
the cities and towns in which the bank operates. The bank believes that it has
established a market niche by providing its customers, particularly consumers,
smaller and privately held businesses and professionals, with prompt and
personal service based on management's familiarity and understanding of such
customers' banking needs. The bank's past and continuing emphasis is to provide
highly responsive personal and professional service.
13
<PAGE>
Supervision and Regulation
General
Bank holding companies and banks are subject to extensive government regulation
through federal and state statutes and related regulations, which is subject to
changes that can significantly affect the way in which financial service
organizations conduct business. Both legislation enacted in recent years and
regulatory initiatives undertaken by various governmental agencies have
substantially increased the level of competition among commercial banks, thrift
institutions and non-banking financial service companies, including brokerage
firms, investment banks, insurance companies and mutual funds. In addition, the
enactment of the federal Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 has affected the banking industry by, among other things, enabling
banks and bank holding companies to expand the geographic area in which they may
provide banking services. To the extent that the following information describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any changes in applicable
law or regulation may have a material effect on the business and prospects of
the bank and the company.
See note 9 to the consolidated financial statements in Item 7 for further
information regarding regulatory capital requirements for both the company and
the bank.
Regulation of the Holding Company
The company is a registered bank holding company under the federal Bank Holding
Company Act of 1956, as amended (the "Bank Holding Company Act"). It is subject
to the supervision and examination of the Board of Governors of the Federal
Reserve System (Federal Reserve Board) and files reports with the Federal
Reserve Board as required under the Bank Holding Company Act. Under applicable
Massachusetts law, the company is also subject to the supervisory jurisdiction
of the Commissioner.
The Bank Holding Company Act requires prior approval by the Federal Reserve
Board of the acquisition by the company of substantially all the assets or more
than five percent of the voting stock of any bank. The Bank Holding Company Act
also authorizes the Federal Reserve Board to determine (by order or by
regulation) what activities are so closely related to banking as to be a proper
incident of banking, and thus, whether the company, either directly or
indirectly through non-bank subsidiaries, can engage in such activities. The
Bank Holding Company Act prohibits the company and the bank from engaging in
certain tie-in arrangements in connection with any extension of credit, sale of
property or furnishing of services. There are also restrictions on extensions of
credit and other transactions between the bank, on the one hand, and the
company, or other affiliates of the bank, on the other hand.
Regulation of the Bank
As a trust company organized under Chapter 172 of the Massachusetts General
Laws, the deposits of which are insured by the FDIC, the bank is subject to
regulation, supervision and examination by the Commissioner and the FDIC.
The regulations of these agencies govern many aspects of the bank's business,
permitted investments, the opening and closing of branches, the amount of loans
which can be made to a single borrower, mergers, appointment and conduct of
officers and directors, capital levels and terms of deposits. The Federal
Reserve Board also requires the bank to maintain minimum reserves on its
deposits. Federal and state regulators can impose sanctions on the bank and its
management if the bank engages in unsafe or unsound practices or otherwise fails
to comply with regulatory standards. Various other federal and state laws and
regulations, such as truth-in-lending statutes, the Equal Credit Opportunity
Act, the Real Estate Settlement Procedures Act and the Community Reinvestment
Act, also govern the bank's activities.
14
<PAGE>
Under Massachusetts law, the company's board of directors is generally empowered
to pay dividends on the company's capital stock out of its net profits to the
extent that the board of directors considers such payment advisable.
Massachusetts banking law also imposes various specific restrictions upon the
payment of dividends by the bank, including the requirement that the bank's
capital and surplus must equal at least 10% of its deposit liability or a
sufficient amount must be transferred from net profits to surplus prior to
payment of such dividend. The Federal Deposit Insurance Act of 1991 ("FDICIA")
also prohibits a bank from paying any dividends on its capital stock in the
event that the bank is in default on the payment of any assessment to the FDIC
or if the payment of any such dividend would otherwise cause the bank to become
undercapitalized.
Capital Resources
Capital planning by the company and the bank considers current needs and
anticipated future growth. Other than the sale of common stock in 1988 and 1989,
the primary source of additional capital has been retention of earnings since
the bank commenced operations.
See note 9 to the consolidated financial statements in Item 7 for further
information regarding regulatory capital requirements for both the company and
the bank.
The Company
The Federal Reserve Board has adopted capital adequacy guidelines that generally
require bank holding companies to maintain total capital equal to 8% of total
risk-weighted assets, with at least one-half of that amount consisting of core
or Tier 1 capital. Tier 1 capital for the company consists of common
stockholders' equity. Total capital for the company consists of Tier 1 capital
and supplementary or Tier 2 capital. Supplementary capital for the company
includes a portion of the general allowance for loan losses. Assets are adjusted
under the risk-based capital guidelines to take into account different levels of
credit risk, with the categories ranging from 0% (requiring no additional
capital) for assets such as cash, to 100% for the bulk of assets that, by their
nature in the ordinary course of business, pose a direct credit risk to a bank
holding company, including commercial real estate loans, commercial business
loans and consumer loans.
In addition to the risk-based capital requirements, the Federal Reserve Board
requires bank holding companies to maintain a minimum "leverage" ratio of Tier 1
capital to total assets of 3%, with most bank holding companies required to
maintain at least a 4% ratio.
The Bank
The bank is subject to separate capital adequacy requirements of the FDIC, which
are substantially similar to the requirements of the Federal Reserve Board
applicable to the company. Under the FDIC requirements, the minimum total
capital requirement is 8% of assets and certain off-balance sheet items,
weighted by risk. For example, cash and government securities are placed in a 0%
risk category, most home mortgage loans are placed in a 50% risk category and
commercial loans are placed in a 100% risk category. At least 4% of the total 8%
ratio must consist of Tier 1 capital (primarily common equity including retained
earnings) and the remainder may consist of subordinated debt, cumulative
preferred stock and a limited amount of loan loss reserves.
Under the applicable FDIC capital requirements, the bank is also required to
maintain a minimum leverage ratio. The ratio is determined by dividing Tier 1
capital by quarterly average total assets, less intangible assets and other
adjustments. FDIC rules require a minimum of 3% for the highest rated banks.
Banks experiencing high growth rates are expected to maintain capital positions
well above minimum levels.
15
<PAGE>
Depository institutions, such as the bank, are also subject to the prompt
corrective action framework for capital adequacy established by the Federal
Deposit Insurance Company Improvement Act ("FDICIA"). Under FDICIA, the federal
banking regulators are required to take prompt supervisory and regulatory
actions against undercapitalized depository institutions. FDICIA establishes
five capital categories: "well capitalized", "adequately capitalized",
"undercapitalized", "significantly undercapitalized", and "critically
capitalized". A "well capitalized" institution has a total capital to total
risk-weighted assets ratio of at least ten percent, a Tier 1 capital to total
risk-weighted assets ratio of at least six percent, a leverage ratio of at least
five percent and is not subject to any written order, agreement or directive; an
"adequately capitalized" institution has a total capital to total risk-weighted
assets ratio of at least eight percent, a Tier 1 capital to total risk-weighted
assets ratio of at least four percent, and a leverage ratio of at least four
percent (three percent if given the highest regulatory rating and not
experiencing significant growth), but does not qualify as "well capitalized". An
"undercapitalized" institution fails to meet one of the three minimum capital
requirements. A "significantly undercapitalized" institution has a total capital
to total risk-weighted assets ratio of less than six percent, a Tier 1 capital
to total risk-weighted assets ratio of less than three percent, and a leverage
ratio of less than three percent. A "critically capitalized" institution has a
ratio of tangible equity to assets of two percent or less. Under certain
circumstances, a "well capitalized", "adequately capitalized" or
"undercapitalized" institution may be required to comply with supervisory
actions as if the institution was in the next lowest category.
Failure to meet applicable minimum capital requirements, including a depository
institution being classified as less than "adequately capitalized" within
FDICIA's prompt corrective action framework, may subject a bank holding company
or its subsidiary depository institution(s) to various enforcement actions,
including substantial restrictions on operations and activities, dividend
limitations, issuance of a directive to increase capital and, for a depository
institution, termination of deposit insurance and the appointment of a
conservator or receiver.
Patents, Trademarks, etc.
The company holds no patents, registered trademarks, licenses (other than
licenses required to be obtained from appropriate banking regulatory agencies),
franchises or concessions which are material to its business.
Employees
As of December 31, 1998, the bank employed 143 persons (132 full-time and 11
part-time), including 52 officers. None of the bank's employees are presently
represented by a union or covered by a collective bargaining agreement.
Management believes its employee relations to be excellent.
Impact of Inflation and Changing Prices
A bank's asset and liability structure is substantially different from that of
an industrial company in that virtually all assets and liabilities of a bank are
monetary in nature. Management believes the impact of inflation on financial
results depends upon the bank's ability to react to changes in interest rates
and by such reaction, reduce the inflationary impact on performance. Interest
rates do not necessarily move in the same direction, or at the same magnitude,
as the prices of other goods and services. As discussed previously, management
seeks to manage the relationship between interest-sensitive assets and
liabilities in order to protect against wide net interest income fluctuations,
including those resulting from inflation.
Various information shown elsewhere in this annual report will assist in the
understanding of how well the bank is positioned to react to changing interest
rates and inflationary trends. In particular, the Interest Margin Sensitivity
Analysis contained in Item 1 and other maturity and repricing information of the
bank's assets and liabilities in this report contain additional information.
16
<PAGE>
Item 2. Description of Property
The company's and the bank's main office is located at 222 Merrimack Street,
Lowell, Massachusetts. The building provides 12,366 square feet of interior
space and has private customer parking along with public parking facilities in
close proximity.
The bank leases space at 170 Merrimack Street, Lowell, Massachusetts. The
building provides 3,408 square feet of interior space that is under renovation
to house the commercial lending department.
The bank leases 6,495 square feet of space at 21-27 Palmer Street, Lowell,
Massachusetts that is occupied by the mortgage center and loan operations.
The bank leases 9,236 square feet of space at 129 Middle Street, Lowell,
Massachusetts, which contains the bank's training facility, credit department,
accounting department and space being improved for the customer service center
and executive offices.
In April, 1993, the bank purchased the branch building at 185 Littleton Road,
Chelmsford, Massachusetts. The first floor of the building contains 3,552 square
feet of space with a full basement and a canopy area of 945 square feet. The
facility was purchased at a cost of approximately 20% of what it would have cost
to build a similar facility.
In March, 1995, the bank purchased a branch building at 674 Boston Road,
Billerica, Massachusetts. The building previously served as a bank branch and
contains 3,700 square feet of above-grade space and is constructed on a cement
slab. The building was purchased for approximately 40% of its replacement value.
The bank leases space at 2-6 Central Street, Leominster, Massachusetts. The
branch office provides 3,960 square feet of interior space and has seven private
customer parking spaces. The bank has the option to purchase the premises on the
last day of the basic term or at any time during any extended term at the price
of $550,000 as adjusted for increases in the producer's price index.
The bank leases space at 910 Andover Street, Tewksbury, Massachusetts. The
branch office provides 4,800 square feet of interior space and has ample parking
that is shared with other tenants of the building.
The bank leases space at 1168 Lakeview Avenue, Dracut, Massachusetts. The branch
office provides 4,922 square feet of interior space and has ample parking that
is shared with other tenants of the building.
On January 13, 1999 the bank purchased 237 Littleton Road, Westford,
Massachusetts. The existing building will be razed and a new branch facility
will be built. The new branch will have 5,200 square feet of finished interior
space, plus 2,800 square feet of storage in the basement and 21 parking spaces.
The branch is expected to be open by the fourth quarter of 1999.
Item 3. Legal Proceedings
The company is involved in various routine legal proceedings incidental to its
business. Management does not believe resolution of any present litigation will
have a material effect on the financial condition of the company.
Various other legal claims may arise from time to time against the company or
the bank in the course of business, none of which are expected to have a
material adverse effect on the financial condition of either the company or the
bank.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the quarter
ended December 31, 1998.
17
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market for Common Stock
There is no active trading market for the company's common stock. Although there
are periodically private trades of the company's common stock, the company
cannot state with certainty the sales price at which such transactions occur.
The following table sets forth sales volume and price information, to the best
of management's knowledge, for the common stock of the company for the periods
indicated. All information included under this item has been restated to reflect
a 2:1 stock split (effected by a stock dividend) effective January 4, 1999.
Share Share
Trading Price Price
Fiscal year Volume High Low
----------- ------- ------- -------
1998:
1st Quarter 650 $ 10.00 $ 10.00
2nd Quarter 6,280 12.50 11.50
3rd Quarter 1,102 12.50 12.50
4th Quarter 1,400 12.50 12.50
1997:
1st Quarter 4,150 $ 8.50 $ 8.50
2nd Quarter 2,000 8.50 8.50
3rd Quarter 3,550 8.50 8.50
4th Quarter -- -- --
Based on a value of $14.00 per share, which represents the most recent trade on
February 5, 1999, the aggregate market value on December 31, 1998, of the
company's common stock was $44,347,576.
The number of shares outstanding of the company's common stock and number of
shareholders of record as of December 31, 1998, were 3,167,684 and 577,
respectively.
Dividends
The company declared and paid annual cash dividends of $.1750 per share and
$.1625 per share in 1998 and 1997, respectively. Although the company intends to
continue to pay an annual dividend, the amount and timing of any declaration and
payment of dividends by the board of directors will depend on a number of
factors, including capital requirements, regulatory limitations, the company's
operating results and financial condition, anticipated growth of the company and
general economic conditions. As the principal asset of the company, the bank
currently provides the only source of cash for the payment of dividends by the
company. Under Massachusetts law, trust companies such as the bank may pay
dividends only out of "net profits" and only to the extent that such payments
will not impair the bank's capital stock and surplus account. These restrictions
on the ability of the bank to pay dividends to the company may restrict the
ability of the company to pay dividends to the holders of its common stock.
Although Massachusetts law does not define what constitutes "net profits", it is
generally assumed that the term includes a bank's undivided profits account
(retained earnings) and does not include its surplus account (additional paid-in
capital). At December 31, 1998, the bank's undivided profits account had a
balance of $15.8 million and its surplus account had a balance of $8.6 million.
18
<PAGE>
Item 6. Management Discussion and Analysis
Management's discussion and analysis should be read in conjunction with the
company's consolidated financial statements and notes thereto contained in Item
7, and other financial and statistical information contained in this annual
report. In addition, prevailing economic conditions, as well as government
policies and regulations concerning, among other things, monetary and fiscal
affairs, could significantly affect the operations of the company.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Financial Condition
Total Assets
Total assets increased $37.9 million, or 11.7%, to $360.5 million at December
31, 1998 from $322.6 million at December 31, 1997. The increase, funded by
deposit growth, was primarily from an increase in gross loans of $34.5 million,
or 19.0%.
Loans
Total gross loans were $216.2 million, or 60% of total assets, at December 31,
1998, compared with $181.7 million, or 56.3% of total assets, at December 31,
1997. The increase was attributable to favorable economic conditions in the
region, continued customer-call efforts, as well as increased marketing and
advertising, and increased penetration in newer markets. During 1998, commercial
real estate loans increased $13.4 million, or 20.0%, other loans secured by real
estate increased by $5.5 million, or 9.9%, commercial loans increased by $13.4
million, or 31.7%, home equity loans increased $1.2 million, or 10.1%, and
consumer loans increased $1.0 million, or 22.0%.
Asset Quality
The non-performing asset balance increased slightly to $1.7 million, at December
31, 1998, from $1.5 million from the previous year and has increased slightly as
a percentage of gross loans. Delinquencies in the 30-89 day category have
improved from 1.14% of gross loans at December 31, 1997 to .68% at December 31,
1998. Delinquencies in the 30-89 day category decreased from $2.1 million at
December 31, 1997 to $1.5 million at December 31, 1998. Non-performing assets
continue to be at very low levels due to management's continued efforts to work
out existing problem assets and limited additions to this category, prudent
underwriting standards and a strong economy.
The balance of other real estate owned ("OREO") at December 31, 1998 of $.3
million consisted of commercial real estate properties and represents a decrease
of $.1 million compared to the prior year. See also Note 6 to the consolidated
financial statements contained in Item 7.
The bank uses an asset classification system which classifies loans depending on
risk of loss characteristics. The most severe classifications are "substandard"
and "doubtful". At December 31, 1998, the bank classified $1.7 million and $0 as
substandard and doubtful loans, respectively. Included in the substandard
category is $820,000 in non-performing loans. The balance of substandard loans
are performing but possess potential weaknesses and, as a result, could become
non-performing loans in the future.
19
<PAGE>
Allowance for Loan Losses
Inherent in the lending process is the risk of loss. While the bank endeavors to
minimize this risk, management recognizes that loan losses will occur and that
the amount of these losses will fluctuate depending on the risk characteristics
of the loan portfolio, which in turn depends on a wide variety of factors,
including current and expected economic conditions, the financial condition of
borrowers, the ability of borrowers to adapt to changing conditions or
circumstances affecting their business, the continuity of borrowers' management
teams and the credit management process.
The allowance for loan losses is maintained through the provision for loan
losses, which is a charge to earnings. The adequacy of the provision and the
resulting allowance for loan losses is determined after a continuing review of
the loan portfolio, including identification and review of individual problem
situations that may affect the borrower's ability to repay, review of overall
portfolio quality through an analysis of current charge-offs, delinquency and
non-performing loan data, review of regulatory authority examinations and
evaluations of loans, review of reports prepared by an independent loan review
firm hired by the bank, comparisons to peer group ratios, an assessment of
current and expected economic conditions, and review of changes in the size and
character of the loan portfolio. Through this process, the allowance level is
intended to reflect identified loss potential and perceived risk in the
portfolio.
The bank regularly monitors the real estate market and the bank's asset quality
to determine the adequacy of its allowance for loan losses through ongoing
credit reviews by members of senior management, the overdue loan review
committee, the executive committee and the board of directors.
The bank determines the adequacy of its allowance for loan losses by assigning
loans to risk categories based on the type of loan and its classification. Each
category is assessed for risk of loss based on historical experience and
management's evaluation of the loans making up the category, including the level
of loans on non-accrual and other delinquency factors including general economic
conditions. The bank adjusts its analysis periodically to reflect changes in
historical loss experience and the state of the current economy. The bank also
determines the adequacy of its allowance for loan losses by comparison to peer
group ratios. Otherwise, in conducting its analysis, the bank applies consistent
criteria to the facts and circumstances then existing, as understood by the
bank.
The ratio of the reserve to total gross loans outstanding was 2.42% at December
31, 1998 versus 2.36% at December 31, 1997. At year-end 1998, the allowance for
loan losses represented 384.85% of non-performing loans compared to 384.06% at
December 31, 1997. The provision for loan losses increased from $320,000 in 1997
to $1,030,000 in 1998. The increase was primarily a result of the strong loan
growth over the past three years of $34.5 million, $36.4 million and $27.1
million in 1998, 1997 and 1996, respectively. During this time there has not
been an increase in problem assets or any detected weaknesses in the bank's
underwriting process. However, management does recognize the increase in risk
and the need for additional reserves as loan balances and exposure to individual
borrowers increase. While the bank believes that its allowance for loan losses
is adequate to cover losses in its loan portfolio, there are uncertainties
regarding the future of the national, New England, Greater Lowell and Leominster
economies and real estate markets. The loan portfolio, particularly the real
estate portion, could be negatively impacted by adverse changes in general
economic conditions as well as in the local and regional real estate markets. As
a result, there is no assurance that the level of non-accrual loans,
restructured loans and real estate acquired by foreclosure, or similar
proceedings, will not increase.
20
<PAGE>
The classification of a loan or other asset as non-performing does not
necessarily indicate that loan principal and interest will be ultimately
uncollectable. However, management recognizes the greater risk characteristics
of these assets and therefore considers the potential risk of loss on assets
included in this category in evaluating the adequacy of the allowance for loan
losses.
Based on the foregoing, as well as management's judgment as to the risks
inherent in the loan portfolio, the bank's allowance for loan losses is deemed
adequate to absorb all reasonably anticipated losses from specifically known and
other credit risks associated with the portfolio as of December 31, 1998.
Investments
Investments (including federal funds sold) totaled $120.9 million, or 33.5% of
total assets, at December 31, 1998, compared to $116.7 million, or 36.2% of
total assets, at December 31, 1997. As of December 31, 1998, the net unrealized
gain in the investment portfolio was $1.6 million compared to a net unrealized
gain of $1.1 million at December 31, 1997. The net unrealized gain/loss in the
portfolio fluctuates as interest rates rise and fall. Due to the fixed rate
nature of the bank's investment portfolio, as rates rise the value of the
portfolio declines, and as rates fall the value of the portfolio rises.
Liquidity
Liquidity is the ability to meet cash needs arising from, among other things,
fluctuations in loans, investments, deposits and borrowings. Liquidity
management is the coordination of activities so that cash needs are anticipated
and met easily and efficiently. Liquidity policies are set and monitored by the
bank's investment and asset/liability committee. The bank's liquidity is
maintained by projecting cash needs, balancing maturing assets with maturing
liabilities, monitoring various liquidity ratios, monitoring deposit flows,
maintaining liquidity within the investment portfolio and maintaining borrowing
ability at the Federal Home Loan Bank.
The bank's liability management objectives are to maintain liquidity, provide
and enhance access to a diverse and stable source of funds, provide
competitively priced and attractive products to customers, conduct funding at a
low cost relative to current market conditions and engage in sound balance sheet
management strategies. Funds gathered are used to support current asset levels
and to take advantage of selected leverage opportunities. The bank funds earning
assets with deposits, short-term borrowings and stockholders' equity. The bank
does not currently have any brokered deposits. The bank has the ability to
borrow funds from the Federal Home Loan Bank of Boston. Management believes that
the bank has adequate liquidity to meet its commitments.
The company's primary source of funds is dividends from the bank.
Deposits and Borrowings
Deposits, including escrow deposits, increased $34.5 million, or 12.2%, to
$318.4 million, at December 31, 1998, from $283.9 million, at December 31, 1997.
The increase was largely due to branch expansion and increased penetration in
existing markets due to enhancement of the bank's sales culture. Also
contributing to the increase was a favorable customer response to a new IRA
product.
Total borrowings consisting of securities sold under agreements to repurchase
(repurchase agreements) and FHLB borrowings decreased by $.4 million, or 3.1%,
from December 31, 1997 to December 31, 1998. The decrease was attributable to a
decrease in FHLB borrowings of $1.0 million offset by an increase in repurchase
agreements of $.6 million. Management will take advantage of opportunities from
time to time to fund asset growth with borrowings, but on a long-term basis, the
bank's objective is to replace a portion of its borrowings with lower cost core
deposits.
21
<PAGE>
Capital Adequacy
The company is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital requirements
can result in certain mandatory, and possible additional discretionary,
supervisory actions by regulators, which, if undertaken, could have a material
adverse effect on the company's consolidated financial statements. At December
31, 1998 the capital levels of both the company and the bank complied with all
applicable minimum capital requirements of the Federal Reserve Board and the
FDIC, respectively, and both qualified as "well-capitalized" under applicable
Federal Reserve Board and FDIC regulations. For additional information regarding
the capital requirements applicable to the company and the bank and their
respective capital levels at December 31, 1998, see note 9, "Stockholders'
Equity", to the consolidated financial statements contained in Item 7.
Results of Operations
The company's results of operations depend primarily on the results of
operations of the bank. The bank's results of operations depend primarily on the
bank's net interest income, the difference between income earned on its loan and
investment portfolios and the interest paid on its deposits and borrowed funds,
and the size of the provision for loan losses. Net interest income is primarily
affected in the short-term by the level of earning assets as a percentage of
total assets, the level of interest-bearing and non-interest-bearing deposits,
yields earned on assets, rates paid on liabilities, the level of non-accrual
loans and changes in interest rates. The provision for loan losses is primarily
affected by individual problem loan situations, overall loan portfolio quality,
the level of net charge-offs, regulatory examinations, an assessment of current
and expected economic conditions, and changes in the character and size of the
loan portfolio. Earnings are also affected by the bank's non-interest income,
which consists primarily of deposit account fees, trust fees, and gains and
losses on sales of securities and loans, and the bank's level of non-interest
expense and income taxes.
General
The company had net income in 1998 of $3.5 million, or $1.11 per share and $1.06
per share on a basic and fully diluted basis, respectively, compared with net
income in 1997 of $2.9 million, or $.93 per share and $.91 per share on a basic
and fully diluted basis, respectively. (All per share amounts have been restated
to give effect to a 2:1 stock split effective January 4, 1999.) The increase in
net income of $.6 million, or 20%, was primarily a result of an increase in net
interest income of $1.9 million as the result of an increase in loans and an
increase in gains on sales of investments and loans of $.5 million and $.2
million, respectively. These increases were partially offset by an increase in
the provision for loan losses of $.7 million and increases in non-interest
expenses of $1.8 million. The increase in non-interest expense was primarily due
to the increased costs associated with operating the Dracut branch for the first
full year, the increased overhead associated with the overall growth of the
bank, and various strategic initiatives.
22
<PAGE>
Net Interest Income
The table on the following page presents the bank's average balance sheet, net
interest income and average rates for the years ended December 31, 1998, 1997
and 1996.
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the years ended December 31, 1998 and 1997. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to (1) changes in volume (change in average
portfolio balance multiplied by prior year average rate); (2) changes in
interest rates (change in average interest rate multiplied by prior year average
balance); and (3) changes in rate and volume (the remaining difference).
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
------------------------------------------------- -------------------------------------------------
Rate/ Rate/
($ in thousands) Volume Rate Volume Total Volume Rate Volume Total
---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income
Loans $ 3,635 $ (342) $ (80) $ 3,213 $ 3,299 $ (133) $ (35) $ 3,131
Investments (1,043) (107) (127) (1,277) 709 143 (21) 831
Federal funds 478 (4) (13) 461 8 (4) (1) 3
---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Total 3,070 (453) (220) 2,397 4,016 6 (57) 3,965
---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Interest Expense
Savings/NOW/MM 149 (197) (12) (60) 429 83 19 531
Time deposits 934 (91) (14) 829 842 (172) (26) 644
Other borrowings (161) (165) 33 (293) 175 (4) (1) 170
---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Total 922 (453) 7 476 1,446 (93) (8) 1,345
---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Change in net
interest income $ 2,148 $ - $ (227) $ 1,921 $ 2,570 $ 99 $ (49) $ 2,620
========== ========== ========== ========== ========= ========== ========== ==========
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Year Ended December 31, 1998 Year Ended December 31, 1997 Year Ended December 31, 1996
----------------------------- ----------------------------- -----------------------------
Average Average Average
Average Interest Average Interest Average Interest
Balance Interest Rate(4) Balance Interest Rate(4) Balance Interest Rate(4)
------- -------- -------- ------- -------- -------- ------- -------- --------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Loans (1)(2) $200,491 $18,810 9.38% $162,594 $15,597 9.59% $128,572 $12,466 9.70%
Investment securities (4) 105,435 6,307 6.45 121,401 7,584 6.54 110,338 6,753 6.41
Federal funds sold 11,484 602 5.24 2,615 141 5.39 2,476 138 5.57
-------- ------- -------- ------- -------- -------
Total interest earnings assets 317,410 25,719 8.26% 286,610 23,322 8.26% 241,386 19,357 8.15%
------- ------- -------
Other assets (3) 21,626 19,987 14,367
-------- -------- --------
Total assets $339,036 $306,597 $255,753
======== ======== ========
Liabilities and stockholders' equity:
Savings, NOW and money market $110,770 $ 2,392 2.16% $104,441 $ 2,452 2.35% $ 85,368 $ 1,921 2.25%
Time deposits 131,773 7,084 5.38 114,656 6,255 5.46 99,696 5,611 5.63
Short-term borrowings 14,683 522 3.56 18,290 815 4.46 14,392 645 4.48
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits
and borrowings 257,226 9,998 3.89% 237,387 9,522 4.01% 199,456 8,177 4.10%
------- ------- -------
Non-interest bearing deposits 54,161 45,371 34,884
Other liabilities 2,578 2,069 1,766
-------- -------- --------
Total liabilities 313,965 284,827 236,106
Stockholders' equity 25,071 21,770 19,647
-------- -------- --------
Total liabilities and
stockholders' equity $339,036 $306,597 $255,753
======== ======== ========
Net interest rate spread 4.37% 4.25% 4.05%
Net interest income $15,721 $13,800 $11,180
======= ======= =======
Net yield on average earning assets 5.11% 4.94% 4.76%
<FN>
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) 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.
(4) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis.
</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.
24
<PAGE>
Interest income on loans increased in the year ended December 31, 1998 to $18.8
million from $15.6 million for the year ended December 31, 1997. The increase
was primarily due to an increase in the average gross loan balance from $162.6
million in fiscal 1997 to $200.5 million in fiscal 1998. Partially offsetting
the increase was a decrease in the average interest rate earned on loans from
9.59% in fiscal 1997 to 9.38% in fiscal 1998. The decrease in the interest rate
earned was attributed primarily to a decrease in the prime rate.
Interest income on investments decreased for the year ended December 31, 1998 to
$6.3 million from $7.6 million for the year ended December 31, 1997. The
decrease was primarily due to a decrease in the average investment portfolio
balance from $121.4 million in fiscal 1997 to $105.4 million in fiscal 1998.
Also contributing to the decrease was a decrease in the average interest rate
earned on investments from 6.54% in fiscal 1997 to 6.45% in 1998, both on a tax
equivalent basis. The decline in interest rate was attributable to lower
interest rates received on reinvestment of the proceeds from sales of securities
and proceeds from securities called by issuing agencies.
Interest expense on savings, NOW and money market accounts remained consistent
at $2.4 million for the years ended December 31, 1998 and December 31, 1997. An
increase in average balance from $104.4 million in fiscal 1997 to $110.8 million
in fiscal 1998 was offset by a decline in interest rate paid from 2.35% in
fiscal 1997 to 2.16% in fiscal 1998. The decline in rate was due to a change in
mix and decline in interest rates that are indexed to changes in U.S. treasury
rates.
Interest expense on time deposits increased to $7.1 million for the year ended
December 31, 1998 compared to $6.3 million for the year ended December 31, 1997.
The increase was due to an increase in the average balance from $114.7 million
in fiscal 1997 to $131.8 million in fiscal 1998. The increase in balance was
partially offset by a decline in the average interest rate paid from 5.46% in
fiscal 1997 to 5.38% in fiscal 1998. The decline in the interest rate paid on
time deposits was due to both the run-off of higher rate time deposits and the
decline in rates offered by the bank, in response to changes in the market.
Management will, from time to time, offer special programs with interest rates
slightly higher than market on certificates of deposit to generate market share
and penetration at the newer branches.
Interest expense on short-term borrowings, including borrowings from the Federal
Home Loan Bank and repurchase agreements, decreased to $.5 million in fiscal
1998 from $.8 million in fiscal 1997. The decrease was due to both a decrease in
the average balance and interest rate paid. The decline in rate was primarily
due to a change in mix, specifically a reduction in FHLB advances and an
increase in repurchase agreements, which bear a lower rate of interest.
The net interest rate spread and net yield on average earning assets both
increased to 4.37% and 5.11%, respectively, for the year ended December 31,
1998, from 4.25% and 4.94%, respectively, for the year ended December 31, 1997.
The increase in these rates was due to an increase in the loan to deposit ratio
and a decline in the bank's cost of funds.
25
<PAGE>
Provision for Loan Losses
The provision for loan losses amounted to $1,030,000 and $320,000 for the years
ended December 31, 1998 and 1997, respectively. Loans, before the allowance for
loan losses, have increased from $180.6 million, at December 31, 1997 to $215.2
million, at December 31, 1998, or an increase of 19.2%. 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 2.68% at December 31, 1996 to 2.36% and
2.42% at December 31, 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 year ended 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 net gains or losses on sales of securities,
increased by $512,000 to $2,441,000 for the year ended December 31, 1998,
compared to $1,929,000 for the year ended December 31, 1997. This increase was a
result of increases in gains on sales of loans and trust fees.
Deposit fees remained relatively consistent at $905,000 and $900,000 in fiscal
1998 and 1997, respectively, due to the concentration of deposit growth in
accounts not generating deposit fee income, such as checking accounts, which
generate earnings credits towards fees, or time deposits.
Trust fees increased by $297,000, or 41.8%, due to an increase in trust assets
under management.
Gains on sales of loans increased by $194,000 from fiscal 1997 to fiscal 1998,
as a result of increased loan origination volume caused by low interest rates
and a resulting high amount of refinance activity.
Other income increased slightly by $16,000 from fiscal 1997 to fiscal 1998.
Increases in check printing and wire fees were partially offset by a reduction
in loan servicing income.
Gains (Losses) on Sales of Securities
Net gains from the sales of investment securities totaled $476,000 in 1998
versus net losses of $37,000 in 1997. The net gain resulted from sales of
securities based on management's decision to take advantage of certain
investment opportunities and asset/liability repositioning and gains on certain
securities purchased at a discount, which were called by the issuer.
Non-Interest Expense
Salaries and benefits expense totaled $7,327,000 for the year ended December 31,
1998, compared with $6,421,000 in 1997, an increase of $906,000, or 14.1%. This
increase was primarily the result of the addition of staff, a full year's
expense for the Dracut branch, an increase in employee bonuses and annual salary
increases.
26
<PAGE>
Occupancy expense was $2,196,000 for the year ended December 31, 1998, compared
with $1,769,000 in 1997, an increase of $427,000 or 24.1% due to the operation
for a full year of the Dracut branch, which was opened in November of 1997, the
leasing, in September of 1997, of additional space for the bank's training
center and credit department, expansion of the mortgage center in 1998 and
enhancements to the bank's computer systems.
Audit, legal and other professional expenses increased by $280,000, or 60.3%, in
1998 primarily as a result of expenses associated with the implementation of
certain tax strategies discussed below.
Advertising and public relations expenses increased to $499,000 for the year
ended December 31, 1998 from $435,000 in 1997. The increase was primarily due to
increased advertising for the Dracut branch and expenses associated with the
bank's tenth anniversary.
Office and data processing supplies expense decreased by $21,000, or 5.8%, in
the year ended December 31, 1998, primarily due to various cost saving
initiatives.
Trust professional and custodial expenses increased by $62,000, or 27.2%, due to
an increase in trust assets under management, as well as additional services
being provided by the trust department.
The company's effective tax rate for the year ended December 31, 1998 was 29.4%
compared to 36.1% for the year ended December 31, 1997. The reduction in rate is
a result of the implementation of certain tax strategies. Professional fees
associated with these strategies were fully absorbed in 1998. These expenses
offset any tax benefit obtained in 1998. However, absent any change in tax laws,
these strategies are expected to have a positive effect on the company's net
income beginning in 1999.
Year 2000 Compliance
The company is currently in the process of determining, testing and remediating
the impact of the so-called "millenium" or "Y2K" problem (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). 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
Y2K 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.
27
<PAGE>
Management has completed its assessment of Y2K 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 has completed the changes to and testing of internal mission critical
information systems for the Y2K project and expects to complete the changes and
testing required for mission critical systems associated with service providers
by June 30, 1999, which is the timeframe established by the Federal Financial
Institutions Examination Council ("FFIEC"). 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 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. A sub-committee of the
Y2K Steering Committee has been formed to facilitate preparation of contingency
plans. These contingency plans will be completed prior to June 30, 1999, in
accordance with FFIEC guidelines. 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.)
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 through December 31,
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 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 sponsored numerous seminars for bank customers during the year and
distributed literature regarding Y2K to all customers. An analysis of the bank's
commercial loan portfolio was performed to determine potential exposure to the
bank. Increases in the allowance for loan loss, 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.
28
<PAGE>
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 might
cause, among other things, systems malfunctions, incorrect or incomplete
transaction processing or the inability to reconcile accounting books and
records.
The company's operations and/or financial condition could possibly be negatively
impacted to the extent the company, customers or entities affiliated with the
company are unsuccessful in timely and properly addressing their respective Y2K
compliance responsibilities.
Proposed Accounting Rule Changes
In June 1998, the Financial Accounting Standards Board (FASB) issued Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities". This statement establishes accounting and reporting standards for
derivative instruments including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in its balance sheet and measure those instruments at fair
market value. Under this statement, an entity that elects to apply hedge
accounting is required to establish at the inception of the hedge the method it
will use for assessing the effectiveness of the hedging derivative and the
measurement approach for determining the ineffective aspect of the hedge. This
statement is effective for all fiscal quarters of fiscal years beginning after
June 15, 1999. The company does not currently have any instruments that are
covered by this statement. This statement is not expected to have a material
effect on the company's consolidated financial statements.
29
<PAGE>
Item 7. Financial Statements
Index to Consolidated Financial Statements
Page
Independent Auditors' Report 31
Consolidated Balance Sheets as of December 31, 1998 and 1997 32
Consolidated Statements of Income for the years ended 33
December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity 34
for the years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended 35
December 31, 1998, 1997 and 1996
Notes to the Consolidated Financial Statements 37
30
<PAGE>
Independent Auditors' Report
The Board of Directors
Enterprise Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Enterprise
Bancorp, Inc. and subsidiary (the "Company") as of December 31, 1998 and 1997,
and the related consolidated statements of income, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enterprise Bancorp,
Inc. and subsidiary at December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
January 7, 1999
Boston, Massachusetts
31
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
December 31, 1998 and 1997
($ in thousands) 1998 1997
-------- --------
<S> <C> <C>
Assets
------
Cash and cash equivalents:
Cash and due from banks (Note 14) $ 19,668 19,779
Daily federal funds sold 6,255 3,775
-------- --------
Total cash and cash equivalents 25,923 23,554
-------- --------
Investment securities at fair value (Notes 2 and 8) 114,659 112,886
Loans, less allowance for loan losses of $5,234
in 1998 and $4,290 in 1997 (Notes 3 and 8) 209,978 176,294
Premises and equipment (Note 4) 4,272 4,079
Accrued interest receivable (Note 5) 2,424 2,971
Deferred income taxes, net (Note 12) 1,787 1,581
Prepaid expenses and other assets 863 645
Income taxes receivable 271 220
Real estate acquired by foreclosure (Note 6) 304 393
-------- --------
Total assets $360,481 322,623
======== ========
Liabilities and Stockholders' Equity
------------------------------------
Deposits (Note 7) $317,666 283,249
Short-term borrowings (Notes 2 and 8) 12,085 12,467
Escrow deposits of borrowers 687 612
Accrued expenses and other liabilities 2,222 1,884
Accrued interest payable 623 566
-------- --------
Total liabilities 333,283 298,778
-------- --------
Commitments and contingencies (Notes 4, 8, 13 and 14)
Stockholders' equity (Notes 1, 9 and 10):
Preferred stock, $.01 par value; 1,000,000 shares
authorized; no shares issued -- --
Common stock $.01 par value; 5,000,000 shares
authorized; 3,167,684 and 3,160,434 shares issued and
outstanding at December 31, 1998 and December 31, 1997,
respectively 32 32
Additional paid-in capital 15,560 15,515
Retained earnings 10,610 7,663
Accumulated other comprehensive income 996 635
-------- --------
Total stockholders' equity 27,198 23,845
-------- --------
Total liabilities and stockholders' equity $360,481 322,623
======== ========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
($ in thousands, except per share data) 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Interest and dividend income:
Loans $ 18,810 15,597 12,466
Investment securities 6,307 7,584 6,753
Federal funds sold 602 141 138
---------- ---------- ----------
Total interest income 25,719 23,322 19,357
---------- ---------- ----------
Interest expense:
Deposits 9,476 8,707 7,532
Borrowed funds 522 815 645
---------- ---------- ----------
Total interest expense 9,998 9,522 8,177
---------- ---------- ----------
Net interest income 15,721 13,800 11,180
Provision for loan losses (Note 3) 1,030 320 --
---------- ---------- ----------
Net interest income after provision for
loan losses 14,691 13,480 11,180
---------- ---------- ----------
Non-interest income:
Trust fees 1,007 710 631
Deposit service fees 905 900 708
Net gains (losses) on sales of investment
securities (Note 2) 476 (37) 2
Gains on sales of loans 229 35 68
Other income 300 284 311
---------- ---------- ----------
Total non-interest income 2,917 1,892 1,720
---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits (Note 11) 7,327 6,421 5,219
Occupancy expenses (Note 4 and 13) 2,196 1,769 1,503
Audit, legal and other professional fees 744 464 282
Advertising and public relations 499 435 482
Office and data processing supplies 342 363 283
Trust professional and custodial expenses 290 228 223
Other operating expenses 1,253 1,135 1,049
---------- ---------- ----------
Total non-interest expense 12,651 10,815 9,041
---------- ---------- ----------
Income before income taxes 4,957 4,557 3,859
Income tax expense (Note 12) 1,456 1,645 1,447
---------- ---------- ----------
Net income $ 3,501 2,912 2,412
========== ========== ==========
Basic earnings per share $ 1.11 .93 .77
========== ========== ==========
Diluted earnings per share $ 1.06 .91 .76
========== ========== ==========
Basic weighted average common shares outstanding 3,165,134 3,152,924 3,152,046
========== ========== ==========
Diluted weighted average common shares outstanding 3,299,432 3,224,054 3,193,728
========== ========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
Common Stock Additional
---------------------- Paid-in Retained
($ in thousands) Shares Amount Capital Earnings
---------- --------- ---------- --------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 3,151,784 $ 3,152 $ 12,337 $ 3,324
Comprehensive Income
Net income 2,412
Unrealized gains on securities, net of reclassification
Total comprehensive income
Common stock dividend declared ($.15 per share) (473)
Stock options exercised before reorganization
(Note 10) 250 -- 1
Exchange of Enterprise Bank and Trust stock for
Enterprise Bancorp, Inc. stock (Note 1) (3,152,034) (3,152) (12,338)
Issuance of $.01 par Enterprise Bancorp, Inc.
stock (Note 1) 3,152,034 32 15,459
Stock options exercised after reorganization
(Note 10) 350 -- 2
---------- ------- ------- -------
Balance at December 31, 1996 3,152,384 32 15,461 5,263
---------- ------- ------- -------
Comprehensive income
Net income 2,912
Unrealized gains on securities, net of reclassification
Total comprehensive income
Common stock dividend declared ($.1625 per share) (512)
Stock options exercised (Note 10) 8,050 -- 54
---------- ------- ------- -------
Balance at December 31, 1997 3,160,434 32 15,515 7,663
---------- ------- ------- -------
Comprehensive income
Net Income 3,501
Unrealized gains on securities, net of reclassification
Total comprehensive income
Common stock dividend declared ($.175 per share) (554)
Stock options exercised (Note 10) 7,250 -- 45
---------- ------- ------- -------
Balance at December 31, 1998 3,167,684 $ 32 $15,560 $10,610
========== ======= ======= =======
<CAPTION>
Comprehensive Income Total
----------------------- Stockholders'
Period Accumulated Equity
---------- ----------- -------------
<S> <C> <C> <C>
Balance at December 31, 1995 $ 152 $ 18,966
Comprehensive Income
Net income $ 2,412 2,412
Unrealized gains on securities, net of reclassification (260) (260) (260)
--------
Total comprehensive income $ 2,152
========
Common stock dividend declared ($.15 per share) (473)
Stock options exercised before reorganization
(Note 10) 1
Exchange of Enterprise Bank and Trust stock for
Enterprise Bancorp, Inc. stock (Note 1) (15,491)
Issuance of $.01 par Enterprise Bancorp, Inc.
stock (Note 1) 15,491
Stock options exercised after reorganization
(Note 10) 2
------ --------
Balance at December 31, 1996 (108) 20,648
------ --------
Comprehensive income
Net income 2,912 2,912
Unrealized gains on securities, net of reclassification 743 743 743
-------
Total comprehensive income $ 3,655
=======
Common stock dividend declared ($.1625 per share) (512)
Stock options exercised (Note 10) 54
------ --------
Balance at December 31, 1997 635 23,845
------ --------
Comprehensive income
Net Income 3,501 3,501
Unrealized gains on securities, net of reclassification 361 361 361
-------
Total comprehensive income $3,862
=======
Common stock dividend declared ($.175 per share) (554)
Stock options exercised (Note 10) 45
------ --------
Balance at December 31, 1998 $ 996 $ 27,198
====== ========
<CAPTION>
Disclosure of reclassification amount: 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Gross unrealized gains arising during the period $ 994 $ 1,217 $ (449)
Less: tax effect (321) (496) 190
------- ------- -------
Unrealized holding gains, net of tax 673 721 (259)
------- ------- -------
Less: reclassification adjustment for gains/(losses)
included in net income (net of $164,
($15), and $1 tax, respectively) 312 (22) 1
------- ------- -------
Unrealized gains on securities,
net of reclassification $ 361 $ 743 $ (260)
======= ======= =======
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
($ in thousands) 1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,501 2,912 2,412
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,030 320 --
Depreciation and amortization 1,134 945 874
Net (gains) losses on sale of investments (476) 37 (2)
Gain on sale of loans (229) (35) (68)
Loss on sale of real estate 14 23 --
Decrease in loans held for sale, net of gain 229 109 1,849
Decrease (increase) in accrued
interest receivable 547 (271) (877)
Increase in prepaid expenses and
other assets (218) (154) (200)
(Benefit) provision for deferred income taxes (363) (208) 47
Increase in accrued expenses and
other liabilities 338 599 84
Increase (decrease) in accrued
interest payable 57 60 (43)
Increase in income taxes receivable (51) (80) (314)
-------- -------- --------
Net cash provided by operating activities 5,513 4,257 3,762
-------- -------- --------
Cash flows from investing activities:
Proceeds from sales of investment securities 21,252 9,269 5,920
Proceeds from maturities, calls and paydowns
of investment securities 40,388 13,901 9,237
Purchase of investment securities (62,476) (15,505) (56,306)
Proceeds from sales of real estate acquired
by foreclosure 173 200 28
Net increase in loans (34,812) (36,696) (28,344)
Additions to premises and equipment, net (1,270) (1,573) (1,681)
Purchase of real estate owned as a result of
foreclosure/workout activities -- (100) --
-------- -------- --------
Net cash used in investing activities (36,745) (30,504) (71,146)
-------- -------- --------
Cash flows from financing activities:
Net increase in deposits 34,417 39,820 47,412
Net (decrease) increase in short-term borrowings (382) (4,270) 9,756
Net increase in escrow deposits of borrowers 75 201 33
Cash dividends paid (554) (512) (473)
Net proceeds from exercise of stock options 45 54 2
-------- -------- --------
Net cash provided by financing activities 33,601 35,293 56,730
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 2,369 9,046 (10,654)
Cash and cash equivalents at beginning of year 23,554 14,508 25,162
-------- -------- --------
Cash and cash equivalents at end of year $ 25,923 23,554 14,508
======== ======== ========
<CAPTION>
See accompanying notes to consolidated financial statements.
(continued)
35
<PAGE>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1998, 1997 and 1996
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Supplemental financial data:
Cash paid for:
Interest on deposits and short-term borrowings $9,941 9,480 8,233
Income taxes 1,996 1,933 1,714
Transfers from real estate acquired by
foreclosure to loans -- -- 312
Transfers from loans to real estate acquired
by foreclosure 98 433 5
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
36
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 1998, 1997 and 1996
(1) Summary of Significant Accounting Policies
(a) Holding Company Formation - Agreement and Plan of Reorganization
Enterprise Bancorp, Inc. (the "company") was organized on February 29,
1996 at the direction of Enterprise Bank and Trust Company (the
"bank") for the purpose of becoming the holding company of the bank.
The company entered into an Agreement and Plan of Reorganization with
the bank dated as of February 29, 1996 (the "Plan of
Reorganization"). On July 26, 1996, pursuant to the Plan of
Reorganization, the company acquired all of the outstanding common
stock, $1.00 par value, of the bank in a share-for-share exchange for
common stock of the company (the "Reorganization"). Upon the
effectiveness of the Reorganization, the bank became the wholly owned
subsidiary of the company and the former shareholders of the bank
became the shareholders of the company.
At the time of its organization the company's Articles of Organization
provided for 500,000 shares of common stock, $.01 par value, and
10,000 shares of preferred stock, $.01 par value. On July 17, 1996,
the Articles of Organization of the company were amended to increase
the company's authorized capital to 1,000,000 shares of preferred
stock, $.01 par value, and 5,000,000 shares of common stock, $.01 par
value.
(b) Basis of Presentation
The consolidated financial statements of Enterprise Bancorp, Inc. include
the accounts of the company and its wholly owned subsidiary, the
bank, Enterprise Bank and Trust Company. The bank has two wholly
owned subsidiaries Enterprise Securities Corporation, Inc., which was
incorporated on March 1, 1991 to hold certain investment securities,
and ERT Holdings, Inc. ERT Holdings' sole purpose is to serve as the
vehicle for the bank's indirect ownership of Enterprise Realty Trust,
Inc. Enterprise Realty Trust invests in commercial and residential
mortgage loans originated by the bank. All significant intercompany
accounts and transactions have been eliminated in consolidation. The
accounting and reporting policies of the company conform to generally
accepted accounting principles and to prevailing practices within the
banking industry.
The business and operations of the company are subject to the regulatory
oversight of the Board of Governors of the Federal Reserve System.
The Massachusetts Commissioner of Banks also retains supervisory
jurisdiction over the company. To the extent that the accompanying
financial statements contain information as of a date or for a period
prior to July 26, 1996, such information pertains to the bank. The
company had no material assets or operations prior to completion of
the Reorganization on July 26, 1996.
Enterprise Bank and Trust Company is a Massachusetts trust company which
commenced banking operations on January 3, 1989. The bank's main
office is located at 222 Merrimack Street in Lowell, Massachusetts.
The bank began offering trust services in June of 1992. Branch
offices were opened in Chelmsford, Massachusetts in June of 1993,
Leominster, Massachusetts in May of 1995, Billerica, Massachusetts in
June of 1995, Tewksbury, Massachusetts in October of 1996 and Dracut,
Massachusetts in November of 1997. The bank's deposit-gathering and
lending activities are conducted primarily in Lowell and the
surrounding Massachusetts cities and towns of Andover, Billerica,
Chelmsford, Dracut, Tewksbury, Tyngsboro, Westford, Leominster and
Fitchburg. The bank offers a range of commercial and consumer
services with a goal of satisfying the needs of consumers, small and
medium-sized businesses and professionals.
(Continued)
37
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The bank's deposit accounts are insured by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation (the "FDIC") up to the maximum
amount provided by law. The FDIC and the Massachusetts Commissioner
of Banks (the "Commissioner") have regulatory authority over the
bank.
In preparing the financial statements, management is required to make
estimates and assumptions that affect the reported values of assets
and liabilities at the balance sheet date and income and expenses for
the years. Actual results, particularly regarding the estimate of the
allowance for loan losses may differ significantly from these
estimates.
(c) Investment Securities
Investment securities that are intended to be held for indefinite periods
of time but which may not be held to maturity or on a long-term basis
are considered to be "available for sale" and are carried at fair
value. Net unrealized gains and losses on investments available for
sale, net of applicable income taxes, are reflected as a component of
stockholders' equity. Included as available for sale are securities
that are purchased in connection with the company's asset/liability
risk management strategy and that may be sold in response to changes
in interest rates, resultant prepayment risk and other related
factors. In instances where the company has the positive intent to
hold to maturity, investment securities will be classified as held to
maturity and carried at amortized cost. At December 31, 1998 and
1997, all of the company's investment securities were classified as
available for sale and carried at fair value.
Investment securities' discounts are accreted and premiums are amortized
over the period of estimated principal repayment using methods which
approximate the interest method.
Gains or losses on the sale of investment securities are recognized at
the time of sale on a specific identification basis.
(d) Loans
The company grants single family and multi-family residential loans,
commercial real estate loans, commercial loans and a variety of
consumer loans. In addition, the company grants loans for the
construction of residential homes, multi-family properties,
commercial real estate properties and for land development. Most
loans granted by the company are collateralized by real estate or
equipment and/or are guaranteed by the borrower. The ability and
willingness of the single family residential and consumer borrowers
to honor their repayment commitments is generally dependent on the
level of overall economic activity and real estate values within the
borrowers' geographic areas. The ability and willingness of
commercial real estate, commercial and construction loan borrowers to
honor their repayment commitments is generally dependent on the
health of the real estate sector in the borrowers' geographic areas
and the general economy.
Loans are reported at the principal amount outstanding, net of deferred
origination fees and costs. Loan origination fees received are offset
with direct loan origination costs and are deferred and amortized
over the life of the related loans using the level-yield method or
are recognized in income when the related loans are sold or paid off.
(Continued)
38
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Loans on which the accrual of interest has been discontinued are
designated as non-accrual loans. Accrual of interest on loans is
discontinued either when reasonable doubt exists as to the full and
timely collection of interest or principal, or generally when a loan
becomes contractually past due by 60 days or a mortgage loan becomes
contractually past due by 90 days with respect to interest or
principal. When a loan is placed on non-accrual status, all interest
previously accrued but not collected is reversed against current
period interest income. Interest accruals are resumed on such loans
only when payments are brought current and when, in the judgment of
management, the collectability of both principal and interest is
reasonably assured. Payments received on loans in a non-accrual
status are generally applied to principal.
Loans held for sale are carried at the lower of aggregate amortized cost
or market value, giving consideration to commitments to originate
additional loans and commitments to sell loans. When loans are sold,
a gain or loss is recognized to the extent that the sales proceeds
exceed or are less than the carrying value of the loans. Gains and
losses are determined using the specific identification method.
(e) Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loan losses are charged against the
allowance when management believes that the collectability of the
loan principal is unlikely. Recoveries on loans previously
charged-off are credited to the allowance.
The determination of the adequacy of the allowance is based upon
management's assessment of risk elements in the portfolio, factors
affecting loan quality, and assumptions about the economic
environment in which the bank operates. The process includes
identification and analysis of loss potential in various portfolio
segments utilizing a credit risk grading process and specific reviews
and evaluations of significant individual problem loans. In addition,
management reviews overall portfolio quality through an analysis of
current levels and trends in charge-offs, delinquency and
non-performing loan data, peer group data, forecasts of economic
conditions and the overall banking environment. These reviews are
dependent upon estimates, appraisals, and judgments, which can change
quickly because of changing economic conditions and the management's
perception as to how these conditions affect the debtors' economic
prospects.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize losses on loans,
future additions to the allowance may be necessary. In addition,
various regulatory agencies, as an integral part of their examination
process, periodically review the company's allowance for loan losses.
Such agencies may require the company to recognize additions to the
allowance based on judgments different from those of management.
(Continued)
39
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Impaired loans are individually significant commercial and commercial
real estate loans for which it is probable that the company will not
be able to collect all amounts due in accordance with contractual
terms. Impaired loans are accounted for, except those loans that are
accounted for at fair value or at lower of cost or fair value, at the
present value of the expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, in the
case of collateralized loans, the difference between the fair value
of the collateral and the recorded amount of the loans. Impaired
loans exclude large groups of smaller-balance homogeneous loans that
are collectively evaluated for impairment, loans that are measured at
fair value and leases and debt securities as defined in SFAS No. 115.
Management considers the payment status, net worth and earnings
potential of the borrower, and the value and cash flow of the
collateral as factors to determine if a loan will be paid in
accordance with its contractual terms. Management does not set any
minimum delay of payments as a factor in reviewing for impaired
classification. Impaired loans are charged-off when management
believes that the collectability of the loan's principal is remote.
(f) Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation and amortization. Depreciation and
amortization are computed on a straight-line basis over the estimated
useful lives of the related asset categories as follows:
Leasehold improvements 10 years
Computer software and equipment 3 to 5 years
Furniture, fixtures and equipment 3 to 5 years
(g) Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure is comprised of properties acquired
through foreclosure proceedings or acceptance of a deed in lieu of
foreclosure. Real estate formally acquired in settlement of loans is
initially recorded at the lower of the carrying value of the loan or
the fair value of the property constructively or actually received
less estimated selling costs. Loan losses arising from the
acquisition of such properties are charged against the allowance for
loan losses. Operating expenses and any subsequent provisions to
reduce the carrying value to net fair value are charged to real
estate operations in the current period. Gains and losses upon
disposition are reflected in earnings as realized.
(h) Income Taxes
The company uses the asset and liability method of accounting for income
taxes. Under this method deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the
period in which the deferred tax assets or liabilities are expected
to be realized or settled. As changes in tax laws or rates are
enacted, deferred tax assets and liabilities will be adjusted
accordingly through the provision for income taxes.
(i) Stock Options
The company measures compensation cost for stock-based compensation plans
under Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Under APB No. 25, no compensation
cost is recorded if, at the grant date, the exercise price of the
options is equal to the fair market value of the company's common
stock.
(Continued)
40
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(j) Trust Assets
Securities and other property held in a fiduciary or agency capacity are
not included in the consolidated balance sheets because they are not
assets of the company. Trust assets under management at December 31,
1998 and 1997 totaled $195.4 million and $165.7 million,
respectively. Income from trust activities is reported on an accrual
basis.
(k) Earnings Per Share
Basic earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the year.
Diluted earnings per share reflects the effect on weighted average
shares outstanding of the number of additional shares outstanding if
dilutive stock options were converted into common stock using the
treasury stock method. The increase in average shares outstanding,
using the treasury stock method, for the diluted earnings per share
calculation were 134,298, 71,130 and 41,682 for the years ended
December 31, 1998, 1997 and 1996, respectively.
(l) Other Accounting Rule Changes
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS 130 establishes standards of reporting and displaying
comprehensive income, which is defined as all changes to equity
except investments and distributions to shareholders. Net income is a
component of comprehensive income, with all other components referred
to in the aggregate as other comprehensive income. This statement is
effective for the 1998 financial statements.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", which establishes
standards for reporting information about operating segments. An
operating segment is defined as a component of a business for which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how to
allocate resources and evaluate performance. This statement requires
a company to disclose certain income statement and balance sheet
information by operating segment, as well as provide a reconciliation
of operating segment information to the company's consolidated
balances. This statement is effective for 1998 financial statements.
The company reports as one operating segment.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This statement establishes
accounting and reporting standards for derivative instruments
including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets
or liabilities in its balance sheet and measure those instruments at
fair market value. Under this statement, an entity that elects to
apply hedge accounting is required to establish at the inception of
the hedge the method it will use for assessing the effectiveness of
the hedging derivative and the measurement approach for determining
the ineffective aspect of the hedge. This statement is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999.
The company does not currently have any instruments that are covered
by this statement. This statement is not expected to have a material
effect on the company's consolidated financial statements.
(m) Stock Dividend
On January 4, 1999, the company effected a 2:1 stock split through the
payment of a stock dividend. All share and per share data has been
adjusted to reflect the stock split.
(Continued)
41
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(2) Investment Securities
The amortized cost and estimated fair values of investment securities at
December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------
Amortized Unrealized Unrealized Fair
($ in thousands) cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. agency obligations $ 28,277 609 32 28,854
U.S. treasury obligations 7,010 314 -- 7,324
U.S. agency mortgage-backed securities 45,856 137 81 45,912
Municipal obligations 28,970 639 1 29,608
-------- -------- -------- --------
Total bonds and obligations 110,113 1,699 114 111,698
Federal Home Loan Bank stock, at cost 2,961 -- -- 2,961
-------- -------- -------- --------
Total investment securities $113,074 1,699 114 114,659
======== ======== ======== ========
<CAPTION>
1997
-----------------------------------------------------------
Amortized Unrealized Unrealized Fair
($ in thousands) cost gains losses value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
U.S. agency obligations $ 53,998 616 117 54,497
U.S. treasury obligations 28,100 242 8 28,334
U.S. agency mortgage-backed securities 12,416 126 78 12,464
Municipal obligations 14,344 287 1 14,630
-------- -------- -------- --------
Total bonds and obligations 108,858 1,271 204 109,925
Federal Home Loan Bank stock, at cost 2,961 -- -- 2,961
-------- -------- -------- --------
Total investment securities $111,819 1,271 204 112,886
======== ======== ======== ========
</TABLE>
Included in U.S. agency securities are investments that can be called
prior to final maturity with fair values of $20,735,000 and
$43,495,000, at December 31, 1998 and 1997, respectively. Included in
U.S. agency mortgage-backed securities are collateralized
mortgage-backed obligations with fair values of $45,581,000 and
$12,003,000 at December 31, 1998 and 1997, respectively.
At December 31, 1998, securities with a fair value of $15,269,000 were
pledged as collateral for short-term borrowings (Note 8) and
securities with a fair value of $1,025,000 were pledged as collateral
for treasury, tax and loan deposits. At December 31, 1997, securities
with a fair value of $13,024,000 were pledged as collateral for
short-term borrowings (Note 8) and securities with a fair value of
$1,570,000 were pledged as collateral for treasury, tax and loan
deposits.
(Continued)
42
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The contractual maturity distribution of total bonds and obligations at
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Amortized Fair
($ in thousands) Cost Percent Value Percent
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Within one year $ 6,312 5.73% $ 6,303 5.64%
After one but within three years 14,245 12.94 14,805 13.26
After three but within five years 9,588 8.71 9,754 8.73
After five but within ten years 39,788 36.13 40,602 36.35
After ten years 40,180 36.49 40,234 36.02
------- ------ -------- ------
$ 110,113 100.00% $111,698 100.00%
========= ====== ======== ======
</TABLE>
Mortgage-backed securities are shown at their final maturity but are
expected to have shorter average lives due to principal prepayments.
U.S. agency obligations are shown at their final maturity but are
expected to have shorter average lives because issuers of certain
bonds reserve the right to call or prepay the obligations without
call or prepayment penalties and certain U.S. agency lives may be
shorter based on mortgage prepayment rates.
Sales and calls of investment securities for the years ended December 31,
1998, 1997, and 1996 are summarized as follows:
($ in thousands) 1998 1997 1996
------- ------- -------
Book value of securities sold or called $52,072 19,725 11,059
Gross realized gains on sales/calls 476 16 50
Gross realized losses on sales/calls -- (53) (48)
------- ------- -------
Total proceeds from sales or
calls of investment securities $52,548 19,688 11,061
======= ======= =======
(3) Loans and Loans Held for Sale
Major classifications of loans and loans held for sale at December 31,
are as follows:
($ in thousands) 1998 1997
--------- ---------
Real estate:
Commercial $ 80,207 66,836
Construction 16,637 13,149
Residential 44,680 42,648
--------- ---------
Total real estate 141,524 122,633
Commercial 55,570 42,202
Home equity 13,436 12,203
Consumer 5,682 4,657
--------- ---------
Total loans 216,212 181,695
Deferred loan origination fees (1,000) (1,111)
Allowance for loan losses (5,234) (4,290)
--------- ---------
Net loans and loans held for sale $ 209,978 176,294
========= =========
(Continued)
43
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Directors, officers, principal stockholders and their associates are
credit customers of the company in the normal course of business. All
loans and commitments included in such transactions are made on
substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with unaffiliated persons and do not involve more than a
normal risk of collectability or present other unfavorable features.
As of December 31, 1998, and 1997, the outstanding loan balances to
directors and officers of the company and their associates was
$5,097,000 and $2,315,000, respectively. Unadvanced portions of lines
of credit available to directors and officers were $1,734,000 and
$1,422,000, as of December 31, 1998 and 1997, respectively. During
1998, new loans and net increases in loan balances on lines of credit
under existing commitments of $2,944,000 were made and principal
paydowns of $161,000 were received. All loans to these related
parties are current.
Non-accrual loans at December 31, are summarized as follows:
($ in thousands) 1998 1997
------- ------
Real estate $ 350 360
Commercial 754 400
Consumer, including home equity 159 283
------ -----
Total non-accrual $1,263 1,043
====== =====
There were no commitments to lend additional funds to those borrowers
whose loans were classified as non-accrual at December 31, 1998, 1997
and 1996. The reduction in interest income for the years ended
December 31, associated with non-accruing loans is summarized as
follows:
($ in thousands) 1998 1997 1996
------ ------ ------
Income in accordance with original loan terms $239 427 428
Income recognized 108 185 122
---- ---- ----
Reduction in interest income $131 242 306
==== ==== ====
At December 31, 1998 and 1997, total impaired loans were $1,112,000 and
$1,567,000, respectively. In the opinion of management, there were no
impaired loans requiring an allocated reserve at December 31, 1998.
Impaired loans with a book value of $295,000 required allocated
reserves of $50,000, at December 31, 1997. All of the $1,112,000 of
impaired loans have been measured using the fair value of the
collateral method. During the years ended December 31, 1998 and 1997,
the average recorded value of impaired loans was $1,185,000 and
$1,823,000, respectively. Included in the reduction in interest
income in the table above is $76,000 and $105,000 of interest income
that was not recognized on loans that were deemed impaired as of
December 31, 1998 and 1997, respectively. All payments received on
non-accrual loans deemed to be impaired loans are applied to
principal. The company is not committed to lend additional funds on
any loans that are considered impaired.
(Continued)
44
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Changes in the allowance for loan losses for the years ended December 31,
are summarized as follows:
($ in thousands) 1998 1997 1996
------- ------- -------
Balance at beginning of year $ 4,290 3,895 4,107
Provision charged to operations 1,030 320 --
Loan recoveries 54 376 32
Loans charged-off (140) (301) (244)
------- ------- -------
Balance at end of year $ 5,234 4,290 3,895
======= ======= =======
At December 31, 1998, 1997 and 1996, the bank was servicing mortgage
loans sold to investors amounting to $26,491,000, $27,307,000, and
$29,427,000, respectively.
(4) Premises and Equipment
Premises and equipment at December 31, are summarized as follows:
($ in thousands) 1998 1997
------- -------
Land $ 285 270
Buildings and leasehold improvements 4,216 3,676
Computer software and equipment 3,567 3,061
Furniture, fixtures and equipment 1,910 1,701
------- -------
9,978 8,708
Less accumulated depreciation and amortization (5,706) (4,629)
------- -------
$ 4,272 4,079
======= =======
The company is obligated under various non-cancelable operating leases
some of which provide for periodic adjustments. At December 31, 1998
minimum lease payments for these operating leases were as follows:
($ in thousands)
Payable in:
1999 $ 490
2000 214
2001 91
2002 18
Thereafter --
-----
Total minimum lease payments $ 813
=====
Total rent expense for the years ended December 31, 1998, 1997 and 1996
amounted to $403,000, $292,000 and $240,000, respectively.
(Continued)
45
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(5) Accrued Interest Receivable
Accrued interest receivable consists of the following at December 31:
($ in thousands) 1998 1997
-------- -------
Investments $ 1,062 1,756
Loans and loans held for sale 1,362 1,215
-------- -------
$ 2,424 2,971
======== =======
(6) Real Estate Acquired by Foreclosure
Real estate acquired by foreclosure is comprised of commercial real
estate properties of $304,000 and $393,000 at December 31, 1998 and
1997, respectively. An analysis of real estate acquired by
foreclosure for the years ended December 31, is as follows:
($ in thousands) 1998 1997
-------- -------
Balance at beginning of year $ 393 83
Acquisitions as a result of foreclosures 98 533
Sales proceeds and principal repayments,
net of loss on sale (187) (223)
------- ------
Balance at end of year $ 304 393
======= ======
(7) Deposits
Deposits at December 31, are summarized as follows:
($ in thousands) 1998 1997
-------- --------
Demand $ 59,618 51,411
Savings 23,914 19,909
NOW 62,911 66,634
Money market 27,602 29,943
Time deposits less than $100,000 92,652 73,907
Time deposits of $100,000 or more 50,969 41,445
-------- --------
$317,666 283,249
======== ========
Interest expense on time deposits with balances of $100,000 or more
amounted to $2,538,000 in 1998, $2,097,000 in 1997, and $1,560,000 in
1996.
The following table shows the scheduled maturities of time deposits with
balances less than $100,000 and greater than $100,000 at December 31,
1998:
Less Greater
than than
($ in thousands) $100,000 $100,000 Total
-------- -------- --------
Due in less than three months $27,331 30,334 57,665
Due in over three through twelve months 43,366 16,142 59,508
Due in twelve months through thirty months 21,955 4,493 26,448
------- ------- -------
$92,652 50,969 143,621
======= ======= =======
(Continued)
46
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(8) Short-Term Borrowings
Borrowed funds at December 31, are summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- ------------------- -------------------
Average Average Average
($ in thousands) Amount Rate Amount Rate Amount Rate
--------- -------- --------- -------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Securities sold under agreements to
repurchase, due on demand $ 11,615 2.70% $ 11,047 3.35% $ 11,824 3.81%
Federal Home Loan Bank of Boston
borrowings 470 5.94% 1,420 7.05% 4,913 7.32%
-------- -------- --------
$ 12,085 2.83% $ 12,467 3.77% $ 16,737 4.84%
======== ======== ========
</TABLE>
Securities sold under agreement to repurchase averaged $12,673,000,
$13,864,000, and $7,855,000 during 1998, 1997 and 1996, respectively.
Maximum amounts outstanding at any month end during 1998, 1997, and
1996 were $16,426,000, $19,398,000, and $11,824,000, respectively.
The average cost of repurchase agreements was 3.19%, 4.07%, and 3.54%
during fiscal 1998, 1997, and 1996, respectively.
The bank became a member of the Federal Home Loan Bank of Boston ("FHLB")
in March 1994. FHLB borrowings averaged $2,011,000, $4,426,000, and
$6,537,000 during 1998, 1997, and 1996, respectively. Maximum amounts
outstanding at any month end during 1998, 1997, and 1996 were
$7,836,000 $10,372,000, and $13,043,000, respectively. The average
cost of FHLB borrowings was 5.88%, 5.68%, and 5.62% during fiscal
1998, 1997, and 1996, respectively. Borrowings from the FHLB are
secured by FHLB stock, 1-4 family owner occupied residential loans
and the bank's investment portfolio not otherwise pledged.
As a member of the FHLB, the bank has access to a pre-approved overnight
line of credit for up to 5% of its total assets and the capacity to
borrow an amount up to the value of its qualified collateral, as
defined by the FHLB. At December 31, 1998, the bank had the
additional capacity to borrow up to approximately $55.1 million from
the FHLB.
(9) Stockholders' Equity
Holders of common stock are entitled to one vote per share, and are
entitled to receive dividends if and when declared by the board of
directors. Dividend and liquidation rights of the common stock may be
subject to the rights of any outstanding Preferred Stock.
Applicable regulatory requirements require the company to maintain Tier 1
capital (which in the case of the company is composed of common
equity) equal to 4.00% of assets (leverage capital ratio), total
capital equal to 8.00% of risk-weighted assets (total capital ratio)
and Tier 1 capital equal to 4.00% of risk-weighted assets (Tier 1
capital ratio). Total capital includes Tier 1 capital plus Tier 2
capital (which in the case of the company is composed of the general
valuation allowance up to 1.25% of risk-weighted assets). The company
met all regulatory capital requirements at December 31, 1998.
(Continued)
47
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate or result in certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a material adverse effect on the company's
financial statements. Under applicable capital adequacy requirements
and the regulatory framework for prompt corrective action applicable
to the bank, the company must meet specific capital guidelines that
involve quantitative measures of the company's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The company's capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the company to maintain the minimum capital amounts
and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined).
Management believes, as of December 31, 1998, that the company meets
all capital adequacy requirements to which it is subject.
As of December 31, 1998, both the company and the bank qualify as "well
capitalized" under applicable Federal Reserve Board and FDIC
regulations. To be categorized as well capitalized, the company and
the bank must maintain minimum total, Tier 1 and, in the case of the
bank, leverage capital ratios as set forth in the table below.
The company's actual capital amounts and 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
------------- --------- ------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital
(to risk weighted assets) $ 28,990 12.55% $ 18,482 8.0% $ 23,102 10.0%
Tier 1 Capital
(to risk weighted assets) 26,072 11.29% 9,241 4.0% 13,861 6.0%
Tier 1 Capital*
(to average assets) 26,072 7.31% 14,273 4.0% 17,842 5.0%
As of December 31, 1997:
Total Capital
(to risk weighted assets) $ 25,686 13.23% $ 15,536 8.0% $ 19,420 10.0%
Tier 1 Capital
(to risk weighted assets) 23,183 11.94% 7,768 4.0% 11,652 6.0%
Tier 1 Capital*
(to average assets) 23,183 7.21% 12,868 4.0% 16,086 5.0%
<FN>
* For the bank to qualify as "well capitalized", it must also maintain a leverage capital ratio (Tier 1 capital to average
assets) of at least 5%. This requirement does not apply to the company and is reflected in the table merely for
informational purposes with respect to the bank.
</FN>
</TABLE>
Neither the company nor the bank may declare or pay dividends on its
stock if the effect thereof would cause stockholders' equity to be
reduced below applicable regulatory capital requirements or if such
declaration and payment would otherwise violate regulatory
requirements.
(Continued)
48
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(10) Stock Option Plans
The board of directors of the bank adopted a 1988 Stock Option Plan (the
"1988 plan"), which was approved by the shareholders of the bank in
1989. The 1988 plan permits the board of directors to grant both
incentive and non-qualified stock options to officers and full-time
employees for the purchase of up to 307,804 shares of common stock.
The 1988 plan was assumed by and became effective under the company
after the completion of the Reorganization discussed in Note 1.
The board of directors of the company adopted a 1998 stock incentive plan
(the "1998 plan"), which was approved by the shareholders of the
company in 1998. The 1998 plan permits the board of directors to
grant incentive and non-qualified options (as well as shares of
restricted stock and stock appreciation rights) to officers and other
employees, directors and consultants for the purchase of up to
157,620 shares of common stock.
Under the terms of the 1988 plan and 1998 plan, incentive stock options
may not be granted at less than 100% of the fair market value of the
shares on the date of grant and may not have a term of more than ten
years. Any shares of common stock reserved for issuance pursuant to
options granted under the plans which are returned to the company
unexercised shall remain available for issuance under the plans. For
participants owning 10% or more of the company's outstanding common
stock, such options may not be granted at less than 110% of the fair
market value of the shares on the date of grant.
All options granted thus far are generally exercisable at the rate of 25%
a year. All options granted prior to 1998, expire 10 years from the
date of the grant. All options granted in 1998 expire 7 years from
the date of grant. All options granted thus far are categorized as
incentive stock options. Stock option transactions are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------ ----------------------- -----------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 296,750 $ 6.55 255,300 $ 6.07 204,100 $ 5.83
Granted 90,500 12.50 50,900 9.00 52,600 7.00
Exercised (7,250) 6.28 (8,050) 6.72 (600) 5.67
Forfeited (450) 9.00 (1,400) 6.79 (800) 6.00
------- ------- -------
Outstanding at end of year 379,550 7.97 296,750 6.55 255,300 6.07
======= ======= =======
Exercisable at end of year 216,010 6.07 185,950 5.76 163,124 5.61
Shares reserved for future grants 67,120 204 49,704
</TABLE>
A summary of options outstanding and exercisable by exercise price as of
December 31, 1998 follows:
Outstanding Exercisable
------------------------------ -------------
Wtd. Avg.
Remaining
Exercise Price # Shares Life # Shares
-------------- ------------- ------------- -------------
$ 5.50 142,200 1.51 142,200
$ 6.00 4,400 5.35 4,400
$ 6.75 42,800 6.52 32,024
$ 7.00 49,950 7.51 24,952
$ 9.00 49,700 8.50 12,434
$12.50 90,500 6.90 -
------- ---- -------
9,550 5.11 216,010
======= ==== =======
(Continued)
49
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The company applies APB Opinion No. 25 in accounting for stock options
and, accordingly, no compensation expense has been recognized in the
financial statements. Had the company determined compensation expense
based on the fair value at the grant date for its stock options under
SFAS 123, the company's net income would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
($ in thousands, except per share data) 1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Net income as reported $ 3,501 2,912 2,412
Pro forma net income 3,364 2,840 2,371
Basic earnings per share as reported 1.11 .93 .77
Pro forma basic earnings per share 1.06 .90 .75
Fully diluted earnings per share as reported 1.06 .91 .76
Pro forma fully diluted earnings per share 1.02 .88 .75
</TABLE>
Pro forma net income reflects only options granted since 1995. Therefore,
the full impact of calculating the compensation expense for stock
options under SFAS 123 is not reflected in the pro forma net income
amounts abovesince options granted prior to January 1, 1995 are not
considered. The per share weighted average fair value of stock
options issued in 1998, 1997 and 1996, was determined to be $4.00,
$2.88, and $2.24, respectively. The fair value of the options was
determined to be 32% of the market value of the stock at the date of
grant. The value was based on consultation with compensation
consultants hired by the company and subsequent validation by
management using a binomial distribution model in 1998. The
assumptions used in the model for risk-free interest rate, expected
volatility and expected life in years were 4.65%, 15%, and 8 years,
respectively.
(11) Employee Benefit Plans
401(k) Defined Contribution Plan
The company has a 401(k) defined-contribution employee benefit plan. The
401(k) plan allows eligible employees to contribute a base
percentage, plus a supplemental percentage, of their pre-tax earnings
to the plan. A portion of the base percentage, as determined by the
board of directors, is matched by the company. No company
contributions are made for supplemental contributions made by
participants. The percentage matched for the 1998, 1997 and 1996
calendar years was 85%, 84% and 50%, respectively, up to the first 6%
contributed by the employee. The increase from 50% in 1996 to 84% and
85% in 1997 and 1998, respectively, was a result of an additional
match due to favorable performance in the Employee Bonus Program as
discussed below. The company's expense for the 401(k) plan match for
the years ended December 31, 1998, 1997 and 1996 was $227,000,
$186,000, and $87,000, respectively.
All employees, at least 21 years of age, are immediately eligible to
participate. Vesting for the bank's 401(k) plan contribution is based
on years of service with participants becoming 20% vested after 3
years of service, increasing pro-rata to 100% vesting after 7 years
of service. Amounts not distributable to an employee following
termination of employment are returned to the bank.
(Continued)
50
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Employee Bonus Program
The company implemented a bonus program, which includes all employees,
beginning in 1995. Bonuses are paid to the employees based on the
accomplishment of certain goals and objectives that are determined at
the beginning of the fiscal year and approved by the compensation
committee of the board of directors. The goals and objectives include
certain ratios such as return on assets, return on equity, net
interest margin, non-interest expense and income to assets,
non-accrual loans to total loans and the overall growth of the bank's
loan and deposit balances. Participants are paid a share of the bonus
pool, based on a pre-determined allocation depending in which group
the employee falls into including: vice presidents and above,
officers, and non-officer employees. In 1998, 1997 and 1996, gross
payments charged to salaries and benefits expense under the plan were
$896,000, $589,000, and $402,000, respectively. In addition to the
$896,000 increase in gross salaries, the bank also increased the
employer contribution to the 401(k) plan by $95,000, or an additional
35% of employee contributions up to the first 6% contributed by the
employee. The $95,000 increase on employer match on the company's
401(k) plan is also included in salaries and benefits for 1998.
The company established a supplemental cash bonus plan for certain
executive officers. The goals, objectives and pay-out schedule of
this plan were approved by the compensation committee. The plan
provides for payment of cash bonuses based on the achievement of a
bonus pay-out to all employees in the employee bonus program
discussed in the previous paragraph and the achievement of certain
earnings per share goals. In 1998 and 1997, $147,000 and $70,000,
respectively, was charged to salaries and benefits under this plan.
Split-Dollar Plan
The company adopted a Split-Dollar Plan for the company's chief executive
officer in 1996. This plan provides for the company to fund the
purchase of a cash value life insurance policy owned by the
executive. The company accounts for the premiums paid as an interest
free loan. Annual premiums are paid by the company until the
executive retires. At the time of retirement of the executive,
annuity payments are made to the executive. The aggregate amount of
the premiums funded is returned to the company at the time of the
executive's death. Annual premiums of $144,000 are due until 2004
under the current plan. The amount charged to expense for these
benefits was $2,000 and $31,000, in 1998 and 1997, respectively.
(12) Income Taxes
The components of income tax expense for the years ended December 31 were
calculated using the liability method as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997 1996
------------- -------------- -------------
<S> <C> <C> <C>
Current tax expense:
Federal $ 1,791 1,389 1,033
State 28 464 367
------------- -------------- -------------
Total current tax expense 1,819 1,853 1,400
------------- -------------- -------------
Deferred tax expense (benefit):
Federal (369) (155) 35
State 6 (53) 12
------------- -------------- -------------
Total deferred tax expense (benefit) (363) (208) 47
------------- -------------- -------------
Total income tax expense $ 1,456 1,645 1,447
============= ============== =============
</TABLE>
(Continued)
51
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate (34%) as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- --------------------- ----------------------
($ in thousands) Amount % Amount % Amount %
--------- ------ ---------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Computed income tax expense
at statutory rate $ 1,685 34.0% $ 1,549 34.0% $ 1,312 34.0%
State income taxes, net of
federal tax benefit 22 .4% 271 5.9% 250 6.5%
Municipal bond interest (303) (6.1%) (215) (4.7%) (195) (5.1%)
Other 52 1.1% 40 .9% 80 2.1%
--------- ------- ---------- ------- ---------- --------
Income tax expense $ 1,456 29.4% $ 1,645 36.1% $ 1,447 37.5%
========= ======= ========== ======= ========== ========
</TABLE>
At December 31, 1998 and December 31, 1997, the tax effects of each type
of income and expense item that give rise to deferred taxes are:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
------------- -------------
<S> <C> <C>
Deferred tax asset:
Allowance for loan losses $ 1,810 1,611
Depreciation 405 316
Other 161 86
------------- -------------
Total 2,376 2,013
Deferred tax liability:
Net unrealized gain on investment securities 589 432
------------- -------------
Net deferred tax asset $ 1,787 1,581
============= =============
</TABLE>
At December 31, 1998, the net Federal deferred tax asset of $1,330,000
is supported by recoverable income taxes of approximately $4,251,000.
Management believes that existing net deductible temporary
differences which give rise to the net deferred tax asset will
reverse during periods in which the company generates net taxable
income. There was no valuation allowance for the deferred tax asset
at December 31, 1998 and 1997. Management believes that the net
deferred income tax asset at December 31, 1998 is an amount that will
more likely than not be realized.
(13) Related Party Transactions
The company's offices in Lowell, Massachusetts, are leased from realty
trusts, the beneficiaries of which include various bank officers and
directors. The maximum remaining term of the leases including options
is for 20 years.
Total amounts paid to the realty trusts for the years ended December 31,
1998, 1997 and 1996, were $297,000, $230,000, and $170,000,
respectively.
(14) Commitments, Contingencies and Financial Instruments with Off-Balance
Sheet Risk and Concentrations of Credit Risk
The company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
originate loans, standby letters of credit and unadvanced lines of
credit.
(Continued)
52
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheets. The contract
amounts of those instruments reflect the extent of involvement the
company has in the particular classes of financial instruments.
The company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments and
standby letters of credit is represented by the contractual amounts
of those instruments. The company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet credit risk at December 31,
1998 and 1997, are as follows:
<TABLE>
<CAPTION>
($ in thousands) 1998 1997
------------- -------------
<S> <C> <C>
Commitments to originate loans $ 21,165 15,577
Standby letters of credit 3,557 3,267
Unadvanced portions of consumer loans
(including credit card loans) 4,985 4,502
Unadvanced portions of construction loans 7,969 7,204
Unadvanced portions of home equity loans 11,377 10,046
Unadvanced portions of commercial lines of credit 31,696 24,345
</TABLE>
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since some of
the commitments are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The company evaluates each customer's credit worthiness
on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the company upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held
varies, but may include security interests in mortgages, accounts
receivable, inventory, property, plant and equipment and
income-producing properties.
Standby letters of credit are conditional commitments issued by the
company to guarantee the performance by a customer to a third party.
The credit risk involved in issuing letters of credit is essentially
the same as that involved in extending loan facilities to customers.
The company originates residential mortgage loans under agreements to
sell such loans, generally with servicing released. At December 31,
1998 and 1997, the company had commitments to sell loans totaling
$1,071,000 and $0, respectively.
The company manages its loan portfolio to avoid concentration by industry
or loan size to minimize its credit risk exposure. Commercial loans
may be collateralized by the assets underlying the borrower's
business such as accounts receivable, equipment, inventory and real
property. Residential mortgage and home equity loans are secured by
the real property financed. Consumer loans such as installment loans
are generally secured by the personal property financed. Credit card
loans are generally unsecured. Commercial real estate loans are
generally secured by the underlying real property and rental
agreements.
The bank is required to maintain in reserve certain amounts of vault cash
and/or deposits with the Federal Reserve Bank of Boston. The amount
of this reserve requirement, included in "Cash and Due from Banks,"
was approximately $1,300,000 at December 31, 1998, and approximately
$5,887,000 at December 31, 1997.
(Continued)
53
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The company is involved in various legal proceedings incidental to its
business. After review with legal counsel, management does not
believe resolution of any present litigation will have a material
adverse effect on the financial condition or results of operations of
the company.
(15) Fair Values of Financial Instruments
The following methods and assumptions were used by the company in
estimating fair values of its financial instruments:
The respective carrying values of certain financial instruments
approximated their fair value as they were short-term in nature or
payable on demand. These include cash and due from banks, daily
federal funds sold, accrued interest receivable, repurchase
agreements, accrued interest payable and non-certificate deposit
accounts.
Investments: Fair values for investments were based on quoted market
prices, where available. If quoted market prices were not available,
fair values were based on quoted market prices of comparable
instruments. The carrying amount of FHLB stock reported approximates
fair value. If the FHLB stock is redeemed, the company will receive
an amount equal to the par value of the stock.
Loans: The fair values of loans, was determined using discounted cash
flow analysis, using interest rates currently being offered by the
company. The incremental credit risk for non-accrual loans was
considered in the determination of the fair value of the loans.
The fair values of the unused portion of lines of credit and letters of
credit were based on fees currently charged to enter into similar
agreements and were estimated to be the fees charged. Commitments to
originate non-mortgage loans were short-term and were at current
market rates and estimated to have no fair value.
Financial liabilities: The fair values of time deposits were estimated
using discounted cash flow analysis using rates offered by the bank
on December 31, 1998 for similar instruments.
Limitations: The estimates of fair value of financial instruments were
based on information available at December 31, 1998 and 1997 and are
not indicative of the fair market value of those instruments at the
date this report is published. These estimates do not reflect any
premium or discount that could result from offering for sale at one
time the bank's entire holdings of a particular financial instrument.
Because no active market exists for a portion of the bank's financial
instruments, fair value estimates were based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors.
These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be
determined with precision. Changes in assumptions could significantly
affect the estimates.
Fair value estimates were based on existing on and off-balance sheet
financial instruments without an attempt to estimate the value of
anticipated future business and the value of assets and liabilities
that are not considered financial instruments, including premises and
equipment and foreclosed real estate.
(Continued)
54
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
In addition, the tax ramifications related to the realization of the
unrealized gains and losses can have a significant effect on fair
value estimates and have not been considered in any of the estimates.
Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the company.
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
Carrying Fair Carrying Fair
($ in thousands) Amount Value Amount Value
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 25,923 25,923 23,554 23,554
Investment securities 114,659 114,659 112,886 112,886
Loans, net 209,978 215,559 176,294 180,280
Accrued interest receivable 2,424 2,424 2,971 2,971
Financial liabilities:
Non-interest bearing demand deposits 59,618 59,618 51,411 51,411
Savings, NOW and money market 114,427 114,427 116,486 116,486
Time deposits 143,621 144,085 115,352 115,653
Short-term borrowings 12,085 12,085 12,467 12,467
Escrow deposit of borrowers 687 687 612 612
Accrued interest payable 623 623 566 566
</TABLE>
(16) Parent Company Only Financial Statements
<TABLE>
<CAPTION>
Balance Sheets
December 31,
------------------------------
($ in thousands) 1998 1997
------------- -------------
Assets
<S> <C> <C>
Cash and due from subsidiary $ 149 106
Investment in subsidiary 27,049 23,739
------------- -------------
Total assets $ 27,198 23,845
============= =============
Liabilities and Stockholders' Equity
Preferred stock, par value $.01 per share,
1,000,000 shares authorized. No shares
issued $ - -
Common stock, par value $.01 per share, 5,000,000 shares authorized;
3,167,684 and 3,160,434 shares issued and outstanding at
December 31, 1998 and 1997, respectively 32 32
Additional paid-in capital 15,560 15,515
Retained earnings 10,610 7,663
Net unrealized gain on investment securities
available for sale, net 996 635
------------- -------------
Total liabilities and stockholder's equity $ 27,198 23,845
============= =============
</TABLE>
(Continued)
55
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Statements of Income
For the years ended
December 31,
------------------------------------------------
($ in thousands) 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Undistributed equity in net income of
subsidiary $ 2,949 2,400 2,412
Dividends received from subsidiary 552 512 -
------------- ------------- -------------
Net income $ 3,501 2,912 2,412
============= ============= =============
</TABLE>
<TABLE>
<CAPTION>
Statements of Cash Flows
For the years ended
December 31,
------------------------------------------------
($ in thousands) 1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 3,501 2,912 2,412
Undistributed equity in net income
of subsidiary (2,949) (2,400) (2,412)
------------- ------------- -------------
Net cash provided by
operating activities 552 512 -
------------- ------------- -------------
Cash flows from financing activities:
Net proceeds from exercise of stock
options 45 54 2
Initial capitalization of holding
company from the bank - - 50
Cash dividends paid (554) (512) -
------------- ------------- -------------
Net cash (used in) provided by
financing activities (509) (458) 52
------------- ------------- -------------
Net increase in cash and cash equivalents 43 54 52
Cash and cash equivalents,
beginning of period 106 52 -
------------- ------------- -------------
Cash and cash equivalents,
end of period $ 149 106 52
============= ============= =============
</TABLE>
Cash and cash equivalents includes cash and due from subsidiary.
(Continued)
56
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(17) Shareholders Rights Plan
On January, 13, 1998, the company's Board of Directors declared a
dividend of one Preferred Share Purchase Right (a "Right") for each
outstanding share of common stock, pursuant to a Rights Agreement
dated January 13, 1998 between the company and the bank as rights
agent. The distribution was payable to stockholders of record as of
the close of business on January 20, 1998. Each Right entitles the
holder thereof to purchase under certain circumstances one-two
hundredth of a share of a new Series A Junior Participating Preferred
Stock, par value $0.01 per share, or, in certain circumstances, to
receive cash, property, shares of common stock or other securities of
the company, at a purchase price of $37.50 per one-two hundredth of a
preferred share, subject to adjustment.
The Rights are not exercisable and remain attached to the shares of
common stock until the earlier of (i) 10 business days (or such later
date as the company's Board of Directors may determine) following
public announcement by the company that a person or group of
affiliated or associated persons, with certain exceptions (an
"Acquiring Person"), has acquired, or has obtained the right to
acquire, beneficial ownership of 10% or more of the outstanding
shares of common stock (the date of such announcement being the
"Stock Acquisition Date") or (ii) 10 business days (or such later
date as the company's Board of Directors may determine) following the
commencement of a tender offer or exchange offer that would result in
a person becoming an Acquiring Person.
In the event that a person becomes an Acquiring Person (except persuant
to a tender or exchange offer for all outstanding shares of common
stock at a price and on terms which a majority of the company's
Outside Directors (as defined in the Rights Agreement) determines to
be fair to and otherwise in the best interest of the company and its
shareholders (a "fair offer")), each holder of a Right (other than
the Acquiring Person) will thereafter have the right to receive, upon
exercise of such Right, shares of common stock (or in certain
circumstances, cash, property or other securities of the company)
having a current market price equal to two times the exercise price
of the Right. In the event that, at any time on or after a Stock
Acquisition Date, (i) the company takes part in a merger or other
business combination transaction (other than certain mergers that
follow a fair offer) and the company is not the surviving entity or
(ii) the company takes part in a merger or other business combination
transaction in which the shares of common stock are changed or
exchanged (other than certain mergers that follow a fair offer) or
(iii) 50% or more of the company's assets or earning power are sold
or transferred, each holder of a Right (other than an Acquiring
Person) shall thereafter have the right to receive, upon exercise, a
number of shares of common stock of the acquiring company having a
current market price equal to two times the exercise price of the
Right. At any time until 10 business days following a Stock
Acquisition Date, the company may redeem the Rights in whole, but not
in part, at a price of $0.005 per Right. The Rights will expire at
the close of business of January 13, 2008 unless earlier redeemed or
exchanged by the company. The Rights have no voting or dividend
privileges and, until they become exercisable, have no dilutive
effect on the earnings of the company. Any future holders of shares
of Series A Junior Participating Preferred Stock would be entitled to
preferred rights with respect to dividends, voting and liquidation.
57
<PAGE>
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons
(a) Certain information regarding directors and executive officers and
identification of significant employees of the company in response
to this item is incorporated herein by reference from the
discussion under the captions "Information Regarding Executive
Officers and Other Significant Employees" and "Proposal One
Election of Class of Directors" of the proxy statement for the
company's annual meeting of stockholders to be held May 4, 1999,
which it expects to file with the Securities and Exchange
Commission within 120 days of the end of the fiscal year covered by
this report.
Directors of the Company
- ------------------------
George L. Duncan
Chairman and Chief Executive Officer of the Company and the Bank
Richard W. Main
President of the Company; President, Chief Operating Officer and
Chief Lending Officer of the Bank
Walter L. Armstrong
Executive Vice President of the Bank
Kenneth S. Ansin
President and Chief Executive Officer, L.B. Evans Company;
President and Chief Executive Officer of Ansewn Shoe Company
Business Development Officer of the Bank
Gerald G. Bousquet, M.D.
Physician; director and partner in several health care facilities
Kathleen M. Bradley
Former owner, Westford Sports Center, Inc.
John R. Clementi
President, Plastican, Inc., a plastic shipping container manufacturer
James F. Conway, III
Chairman, Chief Executive Officer and President
Courier Corporation, a commercial printing company
Nancy L. Donahue
Chair of the Board of Trustees, Merrimack Repertory Theatre
Lucy A. Flynn
Senior Vice President, Wang Global, a computer service company
Eric W. Hanson
Chairman and President, D.J. Reardon Company, Inc., a beer distributorship
John P. Harrington
Senior Vice President and Director, Colonial Gas Company
Arnold S. Lerner
Partner in WLLH Radio (Lowell) and in several other radio stations; Director,
Courier Corporation, a commercial printing company
Charles P. Sarantos
Chairman, C&I Electrical Supply Co., Inc.
Michael A. Spinelli
Owner, Merrimac Travel and Action Six Travel Network
58
<PAGE>
Additional Executive Officers of the Company
- --------------------------------------------
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
John P. Clancy, Jr. Treasurer of the Company; Senior Vice President, Chief
Financial Officer, Treasurer and Chief Investment Officer of
the Bank
Robert R. Gilman Executive Vice President, Administration, and Commercial
Lender of the Bank
Stephen J. Irish Senior Vice President, Chief Information Officer and Chief
Operations Officer of the Bank
</TABLE>
Items 10, 11 and 12.
The information required in Items 10, 11 and 12 of this part is incorporated
herein by reference to the company's definitive proxy statement for its annual
meeting of stockholders to be held May 4, 1999, which it expects to file with
the Securities and Exchange Commission within 120 days of the end of the fiscal
year covered by this report.
59
<PAGE>
Item 13. Exhibits List and Reports on Form 8-K
Exhibit # Exhibit Description
3.1a Articles of Incorporation of the company dated February 29,
1996, filed as an exhibit to the company's registration
statement on Form 8-A filed on July 16, 1996 relating to its
common stock.
3.1b Amendment to Articles of Incorporation of the company dated
July 17, 1996 incorporated by reference to the form thereof
filed as an exhibit to the company's registration statement
of Form 8-A filed on July 16, 1996 relating to its common
stock.
3.2a Bylaws of the company filed as an exhibit to the company's
registration statement on Form 8-A filed on July 16, 1996
relating to its common stock.
3.2b Amended and Restated Bylaws of the company filed as an
exhibit to the company's 10-QSB for the quarter ended June
30, 1997.
4.1 Rights Agreement dated as of January 13, 1998 between
Enterprise Bancorp, Inc. and Enterprise Bank and Trust
Company, as Rights Agent, filed as an exhibit to the
company's registration statement on Form 8-A filed on January
14, 1998.
4.2 Terms of Series A Junior Participating Preferred Stock,
included as Exhibit A to Rights Agreement, as filed with Form
8-A registration statement on January 14, 1998.
4.3 Summary of Rights to Purchase Shares of Series A Junior
Participating Preferred Stock, included as Exhibit B to
Rights Agreement, as filed with Form 8-A registration
statement on January 14, 1998.
4.4 Form of Rights Certificate, included as Exhibit C to Rights
Agreement, as filed with Form 8-A registration statement on
January 14, 1998.
10.1 Lease agreement dated July 22, 1988, between the bank and
First Holding Trust relating to the premises at 222 Merrimack
Street, Lowell, Massachusetts filed with the company's 10-QSB
for the quarter ended June 30, 1996.
10.2 Amendment to lease dated December 28, 1990, between the bank
and First Holding Trust for and relating to the premises at
222 Merrimack Street, Lowell, Massachusetts filed with the
company's 10-QSB for the quarter ended June 30, 1996.
10.3 Amendment to lease dated August 15, 1991, between the bank
and First Holding Trust for 851 square feet relating to the
premises at 222 Merrimack Street, Lowell, Massachusetts filed
with the company's 10-QSB for the quarter ended June 30,
1996.
10.4 Lease agreement dated May 26, 1992, between the bank and
Shawmut Bank, N.A., for 1,458 square feet relating to the
premises at 170 Merrimack Street, Lowell, Massachusetts filed
with the company's 10-QSB for the quarter ended June 30,
1996.
10.5 Lease agreement dated March 14, 1995, between the bank and
North Central Investment Limited Partnership for 3,960 square
feet related to the premises at 2-6 Central Street,
Leominster, Massachusetts filed with the company's 10-QSB for
the quarter ended June 30, 1996.
60
<PAGE>
10.6 Amended employment agreement between the bank and George L.
Duncan dated December 13, 1995 filed with the company's
10-QSB for the quarter ended June 30, 1997.
10.7 Employment agreement between the bank and Richard W. Main
dated December 13, 1995 filed with the company's 10-QSB for
the quarter ended June 30, 1996.
10.8 Lease agreement dated June 20, 1996, between the bank and
Kevin C. Sullivan and Margaret A. Sullivan for 4,800 square
feet related to the premises at 910 Andover Street,
Tewksbury, Massachusetts filed with the company's 10-KSB for
the year ended December 31, 1996.
10.9 Amendment to employment agreement between the bank and George
L. Duncan dated December 4, 1996 filed with the company's
10-KSB for the year ended December 31, 1996.
10.10 Amendment to employment agreement between the bank and
Richard W. Main dated December 4, 1996 filed with the
company's 10-KSB for the year ended December 31, 1996.
10.11 Split Dollar Agreement for George L. Duncan filed with the
company's 10-KSB for the year ended December 31, 1996.
10.12 Lease agreement dated April 7, 1993 between the bank and
Merrimack Realty Trust for 4,375 square feet relating to
premises at 27 Palmer Street, Lowell, Massachusetts filed
with the company's 10-KSB for the year ended December 31,
1997.
10.13 Lease agreement dated September 1, 1997, between the bank and
Merrimack Realty Trust to premises at 129 Middle Street,
Lowell, Massachusetts filed with the company's 10-KSB for the
year ended December 31, 1997.
10.14 Lease agreement dated May 2, 1997 between the bank and First
Lakeview Avenue Limited Partnership to premises at 1168
Lakeview Avenue, Dracut, Massachusetts filed with the
company's 10-KSB for the year ended December 31, 1997.
10.15 Enterprise Bancorp, Inc. 1988 Stock Option Plan filed with
the company's 10-KSB for the year ended December 31, 1997.
10.16 Enterprise Bancorp, Inc. 1998 Stock Incentive Plan filed as
an exhibit to the company's definitive proxy statement for
the annual meeting of stockholders held May 5, 1998.
21.0 Subsidiaries of the Registrant.
(b)Reports on Form 8-K
None.
61
<PAGE>
ENTERPRISE BANCORP, INC.
SIGNATURES
In accordance with Section 15(d) of the Exchange Act, the registrant has caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
Date: March 15, 1999 /s/ John P. Clancy, Jr.
John P. Clancy, Jr.
Treasurer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities on the dates
indicated.
<TABLE>
<S> <C> <C>
/s/ George L. Duncan Chairman, Chief Executive Officer March 15, 1999
George L. Duncan and Director
/s/ Richard W. Main President, Chief Operating Officer March 15, 1999
Richard W. Main and Director
/s/ John P. Clancy, Jr. Treasurer March 15, 1999
John. P. Clancy Jr. (Principal Financial Officer)
/s/ Todd A. Klibansky Vice President/Controller March 15, 1999
Todd A. Klibansky (Principal Accounting Officer)
/s/ Kenneth S. Ansin Director March 15, 1999
Kenneth S. Ansin
/s/ Walter L. Armstrong Director March 15, 1999
Walter L. Armstrong
/s/ Gerald G. Bousquet, M.D. Director March 15, 1999
Gerald G. Bousquet, M.D.
/s/ Kathleen M. Bradley Director March 15, 1999
Kathleen M. Bradley
/s/ John R. Clementi Director March 15, 1999
John R. Clementi
/s/ James F. Conway, III Director March 15, 1999
James F. Conway, III
/s/ Nancy L. Donahue Director March 15, 1999
Nancy L. Donahue
/s/ Lucy A. Flynn Director March 15, 1999
Lucy A. Flynn
/s/ Eric W. Hanson Director March 15, 1999
Eric W. Hanson
/s/ John P. Harrington Director March 15, 1999
John P. Harrington
/s/ Arnold S. Lerner Director, Vice Chairman and Clerk March 15, 1999
Arnold S. Lerner
/s/ Charles P. Sarantos Director March 15, 1999
Charles P. Sarantos
/s/ Michael A. Spinelli Director March 15, 1999
Michael A. Spinelli
</TABLE>
62
<TABLE>
<CAPTION>
Exhibit 21.0
Subsidiaries of Registrant
- ------------------------------------------------------------------------------------
Subsidiary State of Incorporation Business Name
---------- ---------------------- -------------
<S> <C> <C>
Enterprise Bank and Trust Company Massachusetts same
Enterprise Securities Corporation, Inc. Massachusetts same
ERT Holdings, Inc. Massachusetts same
Enterprise Realty Trust, Inc. Massachusetts same
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
audited financial statements of Enterprise Bancorp, Inc. at and for the year
ended December 31, 1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 19,668
<INT-BEARING-DEPOSITS> 258,048
<FED-FUNDS-SOLD> 6,255
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 114,659
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 216,212
<ALLOWANCE> 5,234
<TOTAL-ASSETS> 360,481
<DEPOSITS> 318,353
<SHORT-TERM> 12,085
<LIABILITIES-OTHER> 2,845
<LONG-TERM> 0
0
0
<COMMON> 32
<OTHER-SE> 27,166
<TOTAL-LIABILITIES-AND-EQUITY> 360,481
<INTEREST-LOAN> 18,810
<INTEREST-INVEST> 6,307
<INTEREST-OTHER> 602
<INTEREST-TOTAL> 25,719
<INTEREST-DEPOSIT> 9,476
<INTEREST-EXPENSE> 9,998
<INTEREST-INCOME-NET> 15,721
<LOAN-LOSSES> 1,030
<SECURITIES-GAINS> 476
<EXPENSE-OTHER> 12,651
<INCOME-PRETAX> 4,957
<INCOME-PRE-EXTRAORDINARY> 4,957
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,501
<EPS-PRIMARY> 1.11
<EPS-DILUTED> 1.06
<YIELD-ACTUAL> 4.95
<LOANS-NON> 1,263
<LOANS-PAST> 97
<LOANS-TROUBLED> 538
<LOANS-PROBLEM> 1,473
<ALLOWANCE-OPEN> 4,290
<CHARGE-OFFS> 140
<RECOVERIES> 54
<ALLOWANCE-CLOSE> 5,234
<ALLOWANCE-DOMESTIC> 5,234
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 105
</TABLE>
