U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
EXCHANGE ACT
For the transition period from _____________ to _______________
Commission file number 0-21021
Enterprise Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3308902
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
222 Merrimack Street, Lowell, Massachusetts, 01852
(Address of principal executive offices) (Zip code)
(978) 459-9000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ..X.... No......
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date:
July 31, 1999, Common Stock - Par Value $0.01, 3,202,489 shares outstanding
<PAGE>
<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
INDEX
Page Number
<S> <C> <C>
Cover Page 1
Index 2
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements of Enterprise Bancorp, Inc.
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 3
Consolidated Statements of Income
Three months and six months ended June 30, 1999 and 1998 4
Consolidated Statements of Changes in Stockholders' Equity 5
Six months ended June 30, 1999
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998 6
Notes to Financial Statements 7
Item 2 Management's Discussion and
Analysis of Financial Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures about Market Risk 19
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Changes in Securities 20
Item 3 Defaults upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 20
Signature Page 21
</TABLE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements which are other than statements of historical fact. Enterprise
Bancorp, Inc. (the "company") wishes to caution readers that the following
important factors, among others, may have affected and could in the future
affect the company's results and could cause the company's results for
subsequent periods to differ materially from those expressed in any
forward-looking statement made herein: (i) the effect of changes in laws and
regulations, including federal and state banking laws and regulations, with
which the company or its subsidiaries must comply, and the associated costs of
compliance with such laws and regulations either currently or in the future as
applicable; (ii) the effect of changes in accounting policies and practices, as
may be adopted by the regulatory agencies as well as by the Financial Accounting
Standards Board, or of changes in the company's organization, compensation or
benefit plans; (iii) the effect on the company's competitive position within its
market area of the increasing competition from larger regional and out-of-state
banking organizations as well as non-bank providers of various financial
services; (iv) the effect of changes in interest rates; (v) the effect of
changes in the business cycle and downturns in the local, regional or national
economies; 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
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
June 30, 1999 and December 31, 1998
June 30, December 31,
1999 1998
(Unaudited)
----------- ------------
($ in thousands)
<S> <C> <C>
Assets
Cash and cash equivalents $ 17,258 19,668
Daily federal funds sold -- 6,255
Investment securities at fair value 123,037 114,659
Loans, less allowance for loan losses of $5,586
at June 30, 1999 and $5,234 at December 31, 1998 225,404 209,978
Premises and equipment 5,169 4,272
Accrued interest receivable 2,666 2,424
Prepaid expenses and other assets 1,415 863
Income taxes receivable 446 271
Real estate acquired by foreclosure 304 304
Deferred income taxes, net 3,392 1,787
--------- ---------
Total assets $ 379,091 360,481
========= =========
Liabilities and Stockholders' Equity
Deposits $ 326,893 317,666
Short-term borrowings 22,568 12,085
Escrow deposits of borrower 787 687
Accrued expenses and other liabilities 1,819 2,222
Accrued interest payable 580 623
--------- ---------
Total liabilities 352,647 333,283
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000,000 shares authorized,
no shares issued at June 30, 1999 -- --
Common stock $.01 par value; 10,000,000 and 5,000,000
shares authorized, 3,201,538 and 3,167,684 shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 32 32
Additional paid-in capital 15,987 15,560
Retained earnings 11,916 10,610
Accumulated other comprehensive income(loss) (1,491) 996
--------- ---------
Total stockholders' equity 26,444 27,198
--------- ---------
Total liabilities and stockholders' equity $ 379,091 360,481
========= =========
</TABLE>
3
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three months and six months ended June 30, 1999 and 1998
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
($ in thousands) 1999 1998 1999 1998
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest and dividend income:
Loans $ 4,949 4,638 9,723 8,969
Investment securities 1,712 1,613 3,424 3,325
Federal funds sold 20 58 64 83
---------- ---------- ---------- ----------
Total interest income 6,681 6,309 13,211 12,377
---------- ---------- ---------- ----------
Interest expense:
Deposits 2,392 2,298 4,790 4,557
Borrowed funds 174 140 326 309
---------- ---------- ---------- ----------
Total interest expense 2,566 2,438 5,116 4,866
---------- ---------- ---------- ----------
Net interest income 4,115 3,871 8,095 7,511
Provision for loan losses 135 180 270 270
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 3,980 3,691 7,825 7,241
Non-interest income:
Deposit service fees 221 230 426 449
Trust fees 293 221 578 458
Gain on sale of loans 66 56 120 75
Gain on sale of investments 103 94 103 165
Other income 84 73 163 157
---------- ---------- ---------- ----------
Total non-interest income 767 674 1,390 1,304
---------- ---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits 1,972 1,731 3,845 3,409
Occupancy expenses 584 540 1,161 1,095
Advertising and public relations 157 116 281 222
Office and data processing supplies 74 93 135 186
Audit, legal and other professional fees 200 162 319 288
Trust professional and custodial expenses 85 72 152 146
Other operating expenses 310 284 597 584
---------- ---------- ---------- ----------
Total non-interest expense 3,382 2,998 6,490 5,930
---------- ---------- ---------- ----------
Income before income taxes 1,365 1,367 2,725 2,615
Income tax expense 354 489 753 934
---------- ---------- ---------- ----------
Net income $ 1,011 878 1,972 1,681
========== ========== ========== ==========
Basic earnings per average common share outstanding $ 0.32 0.28 0.62 0.53
========== ========== ========== ==========
Diluted earnings per average common share outstanding $ 0.30 0.27 0.59 0.51
========== ========== ========== ==========
Basic weighted average common shares outstanding 3,171,016 3,165,468 3,169,889 3,162,950
========== ========== ========== ==========
Diluted weighted average common shares outstanding 3,330,411 3,305,914 3,329,284 3,296,978
========== ========== ========== ==========
</TABLE>
4
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Six months ended June 30, 1999
Common Stock Additional Comprehensive Income(Loss)
----------------- Paid-in Retained ---------------------------
($ in thousands) Shares Amount Capital Earnings Period Accumulated
--------- ------ ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 3,167,684 $ 32 $ 15,560 $ 10,610 $ 996
Comprehensive income(loss)
Net income 1,972 $ 1,972
Unrealized loss on securities, net of reclassification (2,487) (2,487)
--------
Total comprehensive income(loss), net of tax $ (515)
========
Common stock dividend ($.21 per share) (666)
Common stock issued-Dividend Reinvestment Plan 27,054 -- 388
Stock options exercised 6,800 -- 39
--------- ------ -------- -------- -------
Balance at June 30, 1999 3,201,538 $ 32 $ 15,987 $ 11,916 $(1,491)
========= ====== ======== ======== =======
<CAPTION>
Total
Stockholders'
($ in thousands) Equity
-------------
<S> <C>
Balance at December 31, 1998 $ 27,198
Comprehensive income(loss)
Net income 1,972
Unrealized loss on securities, net of reclassification (2,487)
Total comprehensive income(loss), net of tax
Common stock dividend ($.21 per share) (666)
Common stock issued-Dividend Reinvestment Plan 388
Stock options exercised 39
---------
Balance at June 30, 1999 $ 26,444
=========
<FN>
Disclosure of reclassification amount:
Gross unrealized holding loss arising during the period $ (3,924)
Less: tax effect 1,505
---------
Unrealized holding loss, net of tax (2,419)
---------
Less: reclassification adjustment for gains included
in net income (net of $35 tax expense) 68
---------
Unrealized loss on securities, net of reclassification $ (2,487)
=========
</FN>
</TABLE>
5
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<TABLE>
<CAPTION>
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Six months ended June 30, 1999 and 1998
June 30, June 30,
1999 1998
($ in thousands) (Unaudited) (Unaudited)
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,972 1,681
Adjustments to reconcile net income to net
cash provided by operating activities:
Provision for loan losses 270 270
Depreciation and amortization 668 544
Gains on sales of loans (120) (75)
Gains on sales of securities (103) (165)
(Increase)/Decrease:
Loans held for sale, net of gains 160 (397)
Accrued interest receivable (242) 453
Prepaid expenses and other assets (552) (48)
Deferred income taxes (65) (127)
Increase/(Decrease):
Accrued expenses and other liabilities (403) 57
Accrued interest payable (43) (29)
Change in income taxes receivable (175) 44
-------- --------
Net cash provided by operating activities 1,367 2,208
-------- --------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns
of investment securities 13,885 23,408
Proceeds from sales of investment securities 7,420 10,080
Purchase of investment securities (33,694) (14,363)
Net increase in loans (15,736) (21,747)
Additions to premises and equipment, net (1,478) (294)
-------- --------
Net cash used in investing activities (29,603) (2,916)
-------- --------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 9,327 17,842
Change in short term borrowings 10,483 1,238
Cash dividends on common stock (666) (554)
Common stock issued - Dividend Reinvestment 388 --
Stock options exercised 39 39
-------- --------
Net cash provided by financing activities 19,571 18,565
-------- --------
Net (decrease) increase in cash and cash equivalents (8,665) 17,857
Cash and cash equivalents at beginning of period 25,923 23,554
-------- --------
Cash and cash equivalents at end of period $ 17,258 41,411
======== ========
Supplemental financial data:
Cash paid for:
Interest on deposits and short-term borrowings $ 5,159 4,895
Income taxes 993 1,016
Transfers from loans to real estate acquired by foreclosure -- 75
</TABLE>
6
<PAGE>
ENTERPRISE BANCORP, INC.
Notes to Financial Statements
(1) Organization of Holding Company
Enterprise Bancorp, Inc. (the "company") is a Massachusetts corporation, which
was organized on February 29, 1996, at the direction of Enterprise Bank and
Trust Company, a Massachusetts trust company (the "bank"), for the purpose of
becoming the holding company for the bank. The company had no material assets or
operations prior to completion of the holding company reorganization on July 26,
1996.
(2) Basis of Presentation
The accompanying unaudited financial statements should be read in conjunction
with the company's December 31, 1998, audited financial statements and notes
thereto. Interim results are not necessarily indicative of results to be
expected for the entire year.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and revenues and expenses for the period. Actual
results could differ from those estimates. Material estimates that are
particularly susceptible to change relate to the determination of the allowance
for loan losses.
In the opinion of management, the accompanying financial statements reflect all
necessary adjustments consisting of normal recurring accruals for a fair
presentation.
(3) Earnings per share
Basic earnings per share are calculated by dividing net income by the year to
date weighted average number of common shares outstanding for the period.
Diluted earnings per share reflect the effect on weighted average shares
outstanding of the number of additional shares outstanding if dilutive stock
options were converted into common stock using the treasury stock method.
(4) Dividend Reinvestment Plan
The Board of Directors adopted a Dividend Reinvestment Plan (the "DRP"). The DRP
enables stockholders, at their discretion, to elect to reinvest dividends paid
on their outstanding shares of company common stock by purchasing additional
shares of company common stock from the company. The stockholders utilized the
DRP to reinvest $388,000 of the dividends paid by the company in 1999 in 27,054
shares of the company's common stock.
(5) Reclassification
Certain fiscal 1998 information has been reclassified to conform to the 1999
presentation.
7
<PAGE>
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
Capital Resources
The company's actual capital amounts and capital adequacy ratios are presented
in the table below. The bank's capital amounts and ratios do not differ
materially from the amounts and ratios presented.
<TABLE>
<CAPTION>
Minimum Capital Minimum Capital
for Capital to be
Actual Adequacy Purposes Well Capitalized
-------------------- -------------------- ---------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
--------- ------- --------- ------- -------- --------
As of June 30, 1999:
<S> <C> <C> <C> <C> <C> <C>
Total Capital
(to risk weighted assets) $ 30,861 12.23% $ 20,194 8.00% $ 25,242 10.00%
Tier 1 Capital
(to risk weighted assets) 27,672 10.96% 10,097 4.00% 15,145 6.00%
Tier 1 Capital*
(to average assets) 27,672 7.56% 14,646 4.00% 18,307 5.00%
<FN>
* For the bank to qualify as "well capitalized", it must maintain a leveraged capital ratio (Tier 1 capital
to average assets) of at least 5%. This requirement does not apply to the company and is reflected merely
for informational purposes with respect to the bank.
</FN>
</TABLE>
On April 20, 1999, the board of directors declared a dividend in the amount of
$0.21 per share to be paid on or about July 1, 1999 to shareholders of record as
of the close of business on June 11, 1999. The board of directors intends to
consider the payment of future dividends on an annual basis. The Board of
Directors adopted a Dividend Reinvestment Plan (the "DRP"). The DRP enables
stockholders, in their discretion, to elect to reinvest dividends paid on their
outstanding shares of company common stock by purchasing additional shares of
company common stock from the company. The stockholders utilized the DRP to
reinvest $388,000 of the dividends paid by the company in 1999 in 27,054 shares
of the company's common stock.
Balance Sheet
Total Assets
Total assets increased $18.6 million, or 5.2%, since December 31, 1998. The
increase is primarily attributable to an increase in gross loans of $15.8
million, and in increase in investments of $8.4 million.. The increase in assets
was funded by an increase in short-term borrowings of $10.5 million and an
increase in deposits of $9.3 million.
Investments
At June 30, 1999, all of the company's investment securities were classified as
available-for-sale and carried at fair value. The net unrealized loss at June
30, 1999, net of tax effects, is shown as accumulated other comprehensive
income(loss), a separate component of stockholders' equity, in the amount of
$1.5 million. The change from an unrealized gain of $1,585,000 at December 31,
1998 to an unrealized loss of $2,442,000 was due to an increase in interest
rates.
Loans
Total loans, before the allowance for loan losses, were $231.0 million, or 60.9%
of total assets, at June 30, 1999, compared to $215.2 million, or 59.7% of total
assets, at December 31, 1998. The increase in loans of $15.8 million was
primarily attributed to increased loan origination in the commercial real estate
and commercial loan portfolios. The bank continues to pursue active customer
calling efforts as well as increased marketing and advertising to identify
quality-lending opportunities.
Premises and Equipment
Premises and equipment increased by $.9 million from December 31, 1998 to June
30, 1999. The increase was primarily attributed to the construction of the new
Westford branch, scheduled for opening in the fall of 1999, as well as from
various leasehold improvements for administrative and executive office space.
Deferred Income Taxes
The increase in deferred income taxes was caused by the decrease in the
unrealized gain on investments from an unrealized gain at December 31, 1998 of
$1,585,000 to an unrealized loss of $2,442,000 at June 30, 1999. The change in
the unrealized gain/loss account was due to a significant rise in interest rates
since the end of the prior year.
8
<PAGE>
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $9.3 million,
or 2.9%, during the first six months of 1999 from $318.4 million at December 31,
1998, to $327.7 million at June 30, 1999. The increase was primarily due to
increased market penetration of the bank's newer branches.
Total borrowings, consisting of securities sold under agreements to repurchase
and FHLB (Federal Home Loan Bank) borrowings, increased $10.5 million, or 86.7%,
from $12.1 million at December 31, 1998 to $22.6 million at June 30, 1999. The
increase was attributable to an increase in securities sold under agreements to
repurchase of $10.5 million. Management periodically takes advantage of
opportunities to fund asset growth with borrowings, but on a long-term basis the
bank intends to replace any FHLB borrowings with deposits. Management also
actively uses FHLB borrowings in managing the bank's asset/liability position.
The bank had FHLB borrowings outstanding of $0.5 million at June 30, 1999, and
had the ability to borrow approximately an additional $85.0 million.
9
<PAGE>
Loan Loss Experience/Non-Performing Assets
<TABLE>
<CAPTION>
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Six months ended June 30,
($ in thousands) 1999 1998
-------- --------
<S> <C> <C>
Balance at beginning of year $ 5,234 4,290
Loans charged-off
Commercial 11 65
Commercial real estate -- --
Construction -- --
Residential real estate -- --
Home equity -- --
Other 9 5
------- -------
20 70
Recoveries on loans charged off
Commercial 43 3
Commercial real estate 2 --
Construction -- --
Residential real estate -- 6
Home equity 3 3
Other 54 32
------- -------
102 44
Net loans (recovered) charged off (82) 26
Provision charged to income 270 270
------- -------
Balance at June 30 $ 5,586 4,534
======= =======
Allowance for loan losses: Gross loans 2.41% 2.24%
======= =======
Annualized net (recoveries) / charge-offs: Average loans outstanding (0.07%) 0.03%
======= =======
Allowance for loan losses: Non-performing loans 858.06% 422.55%
======= =======
</TABLE>
<TABLE>
<CAPTION>
The following table sets forth non-performing assets at the dates indicated:
($ in thousands) June 30, December 31, June 30,
1999 1998 1998
-------- ------------ --------
<S> <C> <C> <C>
Loans on non-accrual:
Commercial $ 426 754 609
Residential real estate 112 113 179
Commercial real estate -- 63 3
Construction -- 174 --
Consumer, including home equity 54 159 207
----- ----- -----
Total loans on non-accrual 592 1,263 998
Loans past due >90 days, still accruing 59 97 75
----- ----- -----
Total non-performing loans 651 1,360 1,073
Other real estate owned 304 304 459
----- ----- -----
Total non-performing loans and real estate owned $ 955 1,664 1,532
===== ===== =====
Non-performing loans: Gross loans 0.28% 0.63% 0.53%
===== ===== =====
Non-performing loans and real estate owned: Total assets 0.25% 0.46% 0.45%
===== ===== =====
Delinquent loans 30-89 days past due: Gross loans 0.46% 0.68% 0.90%
===== ===== =====
</TABLE>
Total non-performing loans decreased $0.4 million from June 30, 1998 through
June 30, 1999. The ratio of non-performing loans to gross loans decreased from
0.53% to 0.28% during this period. The primary cause for the declines was the
removal of several commercial and consumer loans from non-accrual status. These
loans were either paid in full or brought current and assessed as fully
collectable by management.
10
<PAGE>
Total non-performing loans decreased $0.7 million from December 31, 1998 to June
30, 1999. The ratio of non-performing loans to gross loans decreased from 0.63%
as of December 31, 1998 to 0.28% during this period. The primary cause for the
decline was the pay-off of several commercial loans that were classified as
non-accrual. The level of non-performing assets is largely a function of
economic conditions and the overall banking environment, as well as the strength
of the bank's loan underwriting. Adverse changes in local, regional or national
economic conditions could negatively impact the level of non-performing assets
in the future, despite prudent underwriting.
Year 2000 Compliance
The statements in the following section include "Year 2000 Readiness Disclosure"
within the meaning of the Year 2000 Information and Readiness Disclosure Act.
This section contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1993, as amended. The company's readiness
for the Year 2000, and the eventual effects of the Year 2000 on the company may
be materially different than projected.
The company is currently in the process of determining, testing and remediating
the impact of the so-called "millennium" 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 is included in the company's analysis and compliance process. The
remediation efforts discussed below relate to both information technology
systems (i.e. computer systems, phone systems, telecommunications, etc.) and
non-information technology systems (i.e. alarm systems, security systems,
elevators, electrical systems, etc.).
The company primarily 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 and one consultant on a part time basis are solely devoted to
Y2K issues. Many other employees are also actively involved including each
department manager, 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.
The company is addressing the Y2K issue in accordance with regulatory guidelines
promulgated by the Federal Financial Institutions Examination Council ("FFIEC").
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, with the exception of the banks imaging system scheduled
for completion by September 1999, for the Y2K project. Management has also
completed the changes and testing required for mission critical systems
associated with service providers. Mission critical systems are those critical
to daily operations and failure of which would result in definite disruption to
business. Testing of the company's non-mission critical applications will
continue through 1999 and will be completed prior to any anticipated impact on
its operating systems. Contingency plans 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.
Initial contingency plans have been completed. These contingency plans will be
reviewed, enhanced and updated, as needed, throughout the year. Additionally,
the bank has formed a coalition with surrounding financial institutions to
periodically meet and discuss contingency plans and pool resources to deal with
potential disruptions. (i.e. failure of security systems, failure of electrical
grids, cash needs, etc.).
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 and $57,000 during 1999, through the second quarter. Management expects
that the costs incurred to replace or upgrade existing hardware and software
will be capitalized and amortized in accordance with the company's existing
accounting policies, while miscellaneous consulting, salary, maintenance and
modification costs will be expensed as incurred. Anticipated future costs,
excluding internal salary and benefit costs, associated with Y2K compliance are
estimated at $110,000, which includes upgrades of security systems,
modifications to the automated teller machines, consulting costs and changes to
the telecommunications network. The estimated expenses in 1999 include
consulting fees for Year 2000 project management of $65,000. Due to short-term
personnel constraints it was necessary to engage consultants to assist in the
Year 2000 management process. Other than the one dedicated information system
specialist the company does not separately track the portion of its salary and
benefit costs allocable to the Y2K project. It is not anticipated that material
incremental costs will be incurred in any single period.
The cost of the project and the date on which the company plans to complete the
Y2K modifications are based on management's best estimates, which were derived
utilizing numerous assumptions of future events including the continued
availability of certain resources, third party availability and other factors.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, employee turnover,
non-compliance of the company's vendors or service providers and similar
uncertainties. The company is working closely with all of its vendors and
service providers to determine the extent to which the company is vulnerable to
those third parties' failure to remediate their own Y2K issues.
11
<PAGE>
Management recognizes the potential risk of Y2K on the bank's customers. The
bank has approached the credit risk component of Y2K through education of all
lending officers, education of customers, analysis of the bank's loan portfolio,
and consideration of Y2K in the underwriting of loans. All lending officers were
required to undergo internal training to learn the potential risks of Y2K. The
bank has sponsored and intends to continue sponsoring numerous seminars for bank
customers, in addition to distribution of literature regarding Y2K to all
customers. In 1998, an analysis of the bank's commercial loan portfolio was
performed to determine potential exposure to Y2K risks. Increases in the
allowance for loan losses, solely as a result of Y2K, were not deemed necessary.
Any new commercial loans require an assessment of the customer's Y2K compliance
as part of preliminary underwriting. The need for additional provisions to the
bank's allowance for loan losses resulting from borrowers' Y2K compliance
problems will be considered, on an ongoing basis, based on management's
assessment of the potential exposure of its customer base to such problems.
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 doing business with
the company are unsuccessful in timely and properly addressing their respective
Y2K compliance responsibilities.
12
<PAGE>
Results of Operations
Six Months Ended June 30, 1999 vs. Six Months Ended June 30, 1998
The company reported net income of $1,972,000 for the six months ended June 30,
1999, versus $1,681,000 for the six months ended June 30, 1998, or an increase
of 17.3%. The company had basic earnings per common share of $0.62 and $0.53 for
the six months ended June 30, 1999 and June 30, 1998, respectively. Diluted
earnings per share were $0.59 and $0.51 for the six months ending June 30, 1999
and June 30, 1998, respectively.
The following table highlights changes that affected the company's earnings for
the periods indicated:
<TABLE>
<CAPTION>
Six months ended June 30,
---------------------------
($ in thousands) 1999 1998
-------- ---------
<S> <C> <C>
Average assets $361,125 328,524
Average deposits and short-term borrowings 330,693 302,202
Average investment securities (1) 116,282 109,961
Average loans 221,985 192,031
Net interest income 8,095 7,511
Provision for loan losses 270 270
Tax expense 753 934
Average loans: Average deposits and borrowings 67.13% 63.54%
Non interest expense: Average assets (2) 3.62% 3.64%
Non interest income, exclusive of securities
gains: Average assets (2) 0.72% 0.70%
Average tax equivalent rate earned on interest earning assets 8.06% 8.31%
Average rate paid on interest bearing deposits and
short-term borrowings 3.80% 3.93%
Net interest rate spread 4.26% 4.38%
<FN>
(1) Average investment securities are shown at average amortized cost
(2) Ratios have been annualized based on number of days for the period
</FN>
</TABLE>
Net Interest Income
The company's net interest income was $8,095,000 for the six months ended June
30, 1999, an increase of $584,000 or 7.8% from $7,511,000 for the six months
ended June 30, 1998. Interest income increased $834,000, primarily a result of
an increase of average loan balances of $30.0 million. The increase in interest
income was partially offset by an increase in interest expense of $250,000,
primarily due to an increase in average deposits and short-term borrowings.
The average tax-equivalent yield on earning assets in the six months ended June
30, 1999, was 8.06%, down 25 basis points from 8.31% for the six months ended
June 30, 1998. The decrease in average yield on earning assets is primarily
attributable to a decrease in yield on loans, partially offset by an increase in
yield on investment securities. The decrease in yield on loans is primarily
attributable to a decrease in prime rate during 1998. The increase in the tax
equivalent yield on investment securities from 6.45% to 6.68% was primarily a
result of a change in investment mix to higher yielding securities and
tax-exempt securities. The average rate paid on interest bearing deposits and
short-term borrowings in the six months ended June 30, 1999, was 3.80%, a
decrease of 13 basis points from 3.93% in the six months ended June 30, 1998,
primarily due to a drop in rates paid on certificates of deposit. The average
rate on short-term borrowings increased from 3.91% to 4.29% as a result of an
increase in the interest-bearing component of the company's sweep account
product.
The bank's net interest income increased during the first six months of 1999
primarily as the result of the increase in average loans of $30.0 million,
partially offset by a decrease in interest rate spread. The interest rate spread
decreased 12 basis points to 4.26% in the six months ended June 30, 1999, from
4.38% in the six months ended June 30, 1998.
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the six months ended June 30, 1999, and 1998. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average balance
multiplied by prior year average rate); (2) interest rate (change in average
interest rate multiplied by prior year average balance); and (3) rate and volume
(the remaining difference).
13
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Six Months Ended June 30, 1999 Six Months Ended June 30, 1998
--------------------------------- ---------------------------------
Average Interest Average Interest
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3)
-------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (1) (2) $ 221,985 $ 9,723 8.83% $ 192,031 $ 8,969 9.42%
Investment securities (3) 116,282 3,424 6.68 109,961 3,325 6.45
Federal funds sold 2,762 64 4.67 3,004 83 5.57
---------- -------- -------- --------
Total interest earnings assets 341,029 13,211 8.06% 304,996 12,377 8.31%
-------- --------
Other assets (4) 20,096 23,528
---------- ---------
Total assets $ 361,125 $ 328,524
========== =========
Liabilities and stockholders' equity:
Savings, NOW and money market $ 112,487 1,142 2.05% $ 109,822 1,213 2.23%
Time deposits 143,553 3,648 5.12 123,632 3,344 5.45
Short-term borrowings 15,338 326 4.29 15,922 309 3.91
---------- -------- --------- --------
Interest bearing deposits and borrowings 271,378 5,116 3.80% 249,376 4,866 3.93%
-------- --------
Non-interest bearing deposits 59,315 52,826
Other liabilities 3,116 2,369
---------- ---------
Total liabilities 333,809 304,571
Stockholders' equity 27,316 23,953
---------- ---------
Total liabilities and
Stockholders' equity $ 361,125 $ 328,524
========== =========
Net interest rate spread 4.26% 4.38%
Net interest income $ 8,095 $ 7,511
======== ========
Net yield on average earning assets 5.04% 5.09%
<CAPTION>
($ in thousands) Changes due to
---------------------------------------------------
Interest Rate/
Total Volume Rate Volume
------- -------- -------- ------
<S> <C> <C> <C> <C>
Assets:
Loans (1) (2) $ 754 $ 1,399 $ (562) $ (83)
Investment securities (3) 99 202 125 (228)
Federal funds sold (19) (7) (13) 1
----- -------- ------ ------
Total interest earnings assets 834 1,594 (450) (310)
----- -------- ------ ------
Other assets (4)
Total assets
Liabilities and stockholders' equity:
Savings, NOW and money market (71) 29 (98) (2)
Time deposits 304 538 (202) (32)
Short-term borrowings 17 (11) 30 (2)
----- ----- ------ ------
Interest bearing deposits and borrowings 250 556 (270) (36)
----- ----- ------ ------
Non-interest bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
Stockholders' equity
Net interest rate spread
Net interest income $ 584 $ 1,038 $ (180) $ (274)
====== ======== ======= ======
Net yield on average earning assets
<FN>
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis.
(4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, real estate acquired by
foreclosure, deferred income taxes and other miscellaneous assets.
</FN>
</TABLE>
The bank manages its earning assets by fully using available capital resources
within what management believes are prudent credit and leverage parameters.
Loans, investment securities, and federal funds sold comprise the bank's earning
assets.
14
<PAGE>
The provision for loan losses amounted to $270,000 for both the six-month
periods ended June 30, 1999 and 1998. Loans, before the allowance for loan
losses, have increased from $202.7 million, at June 30, 1998, to $231.0 million,
at June 30, 1999, or an increase of 13.9%. Although there has not been an
increase in problem assets or change in the bank's underwriting practices,
management recognizes the increased risk and the need for additional reserves as
the loan balances increase. 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-off 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 six months ended June 30, 1999, reflects both reserves for new origination
and management's assessment of appropriateness of reserves on existing balances.
The provision for loan losses is a significant factor in the bank's operating
results.
Non-Interest Income
Non-interest income, exclusive of security gains, increased by $148,000 to
$1,287,000 for the six months ended June 30, 1999, compared to $1,139,000 for
the six months ended June 30, 1998. This increase was primarily caused by an
increase in trust fees of $120,000 and an increase in net gains on sale of loans
of $45,000.
Trust fees increased by $120,000, or 26.2%, for the six months ended June 30,
1999 compared to the same period in 1998 due to an increase in trust assets.
Deposit fees decreased by $23,000, or 5.1%, for the six months ended June 30,
1999, compared to the six months ended June 30, 1998. The decrease of income in
this category was due to a reduction in overdraft charges.
Gains on sales of loans increased from $75,000 for the six months ended June 30,
1998, to $120,000 for the six months ended June 30, 1999, as a result of
increased loan volume caused by low interest rates and a strong real estate
market.
Other income for the six months ended June 30, 1999, was $163,000, an increase
of 3.8%, from $157,000 for the six months ended June 30, 1998, primarily due to
increases in ATM fees, safe deposit fees and wire transfer fees.
Net gains on sale of investment securities decreased by $62,000 for the six
months ended June 30, 1999, from $165,000 for the six months ended June 30,
1998. The decrease was due to relative higher interest rates in 1999, resulting
in less opportunity to restructure the investment portfolio while still
recording investment gains.
Non-Interest Expense
Salaries and benefits expense totaled $3,845,000 for the six months ended June
30, 1999, compared with $3,409,000 for the six months ended June 30, 1998, an
increase of $436,000 or 12.8%. This increase was primarily the result of new
hires, to support the overall growth of the bank, and annual salary increases.
Occupancy expense was $1,161,000 for the six months ended June 30, 1999,
compared with $1,095,000 for the six months ended June 30, 1998, an increase of
$66,000 or 6.0%. The increase was primarily due to the addition and renovation
of new facilities for the bank's accounting and loan servicing departments,
commercial lending and the customer service center.
Advertising and public relations expenses increased by $59,000, or 26.6%, for
the six months ended June 30, 1999 compared to the same period in 1998. The
increase was primarily attributed to advertising for new hires, various
marketing opportunities and an increase in market research.
Office and data processing supplies expense decreased by $51,000, or 27.4%, for
the six months ended June 30, 1999 compared to the same period in the prior
year. The decrease was primarily due to various cost savings programs.
Audit, legal and other professional expenses increased by $31,000, or 10.8% for
the six months ended June 30, 1999 compared to the prior year period, primarily
as a result of the hiring of a consultant for Y2K issues and implementation and
research of various strategic initiatives.
Trust, professional and custodial expenses increased by $6,000, or 4.1%, for the
six months ended June 30, 1999 as compared to the same period in 1998. The
increase was due to an increase in trust assets under management as well as
additional services provided by the trust department.
The company's effective tax rate for the six months ending June 30, 1999 was
27.6% compared to 35.7% for the six months ended June 30, 1998. The reduction in
rate was a result of the implementation of certain tax strategies in 1998.
Expenses for these strategies were fully absorbed in 1998.
15
<PAGE>
Results of Operations
Three Months Ended June 30, 1999 vs. Three Months Ended June 30, 1998
The company reported net income of $1,011,000 for the three months ended June
30, 1999, versus $878,000 for the three months ended June 30, 1998, or an
increase of 15.1%. The company had basic earnings per common share of $0.32 and
$0.28 for the three months ended June 30, 1999 and June 30, 1998, respectively.
Diluted earnings per share were $0.30 and $0.27 for the three months ending June
30, 1999 and June 30, 1998, respectively.
The following table highlights changes that affected the company's earnings for
the periods indicated:
<TABLE>
<CAPTION>
Three months ended June 30,
-----------------------------
($ in thousands) 1999 1998
--------- --------
<S> <C> <C>
Average assets $366,413 333,996
Average deposits and short-term borrowings 335,811 307,169
Average investment securities (1) 117,528 107,351
Average loans 226,760 198,092
Net interest income 4,115 3,871
Provision for loan losses 135 180
Tax expense 354 489
Average loans: Average deposits and borrowings 67.53% 64.49%
Non interest expense: Average assets (2) 3.70% 3.60%
Non interest income, exclusive of securities
gains: Average assets (2) 0.73% 0.70%
Average tax equivalent rate earned on interest earning assets 8.01% 8.30%
Average rate paid on interest bearing deposits and
short-term borrowings 3.76% 3.87%
Net interest rate spread 4.25% 4.43%
<FN>
(1) Average investment securities are shown at average amortized cost
(2) Ratios have been annualized based on number of days for the period
</FN>
</TABLE>
Net Interest Income
The company's net interest income was $4,115,000 for the three months ended June
30, 1999, an increase of $244,000 or 6.3% from $3,871,000 for the three months
ended June 30, 1998. Interest income increased $372,000, primarily a result of
an increase of $28.7 million in the average loan balance. The increase in
interest income was partially offset by an increase in interest expense of
$128,000, primarily due to an increase in average deposits.
The average tax-equivalent yield on earning assets in the three months ended
June 30, 1999, was 8.01%, down 29 basis points from 8.30% in the three months
ended June 30, 1998. The decrease in average yield on earning assets is
primarily attributable to a decrease in yield on loans, partially offset by an
increase in yield on investment securities. The decrease in yield on loans is
primarily attributable to a decline in the prime rate in 1998. The increase in
the tax equivalent yield on investment securities from 6.40% to 6.62% was
primarily a result of a change in investment mix to higher yielding securities
and tax-exempt securities. The average rate paid on interest bearing deposits
and short-term borrowings in the three months ended June 30, 1999, was 3.76%, a
decrease of 11 basis points from 3.87% in the three months ended June 30, 1998,
primarily due to a drop in rates paid on certificates of deposit. The average
rate on short-term borrowings increased from 3.72% to 4.29% as a result of
increased borrowings at the Federal Home Loan Bank.
The increase in the bank's net interest income during the three months ended
June 30, 1999 was primarily due to the increase in average loans of $28.7
million, partially offset by an increase in average deposits and a decrease in
interest rate spread. The interest rate spread decreased 18 basis points to
4.25% in the three months ended June 30, 1999, from 4.43% in the three months
ended June 30, 1998.
The following table sets forth, among other things, the extent to which changes
in interest rates and changes in the average balances of interest-earning assets
and interest-bearing liabilities have affected interest income and expense
during the three months ended June 30, 1999, and 1998. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to: (1) volume (change in average balance
multiplied by prior year average rate); (2) interest rate (change in average
interest rate multiplied by prior year average balance); and (3) rate and volume
(the remaining difference).
16
<PAGE>
<TABLE>
<CAPTION>
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended June 30, 1999 Three Months Ended June 30, 1998
--------------------------------- ---------------------------------
Average Interest Average Interest
($ in thousands) Balance Interest Rates (3) Balance Interest Rates (3)
-------- -------- --------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Loans (1) (2) $ 226,760 $ 4,949 8.75% $ 198,092 $ 4,638 9.39%
Investment securities (3) 117,528 1,712 6.62 107,351 1,613 6.40
Federal funds sold 1,695 20 4.73 4,303 58 5.41
---------- -------- -------- --------
Total interest earnings assets 345,983 6,681 8.01% 309,746 6,309 8.30%
-------- --------
Other assets (4) 20,430 24,250
---------- ---------
Total assets $ 366,413 $ 333,996
========== =========
Liabilities and stockholders' equity:
Savings, NOW and money market $ 115,166 588 2.05% $ 113,071 625 2.22%
Time deposits 142,746 1,804 5.07 124,495 1,673 5.39
Short-term borrowings 16,286 174 4.29 15,091 140 3.72
---------- -------- --------- --------
Interest bearing deposits and borrowings 274,198 2,566 3.76% 252,657 2,438 3.87%
-------- --------
Non-interest bearing deposits 61,613 54,512
Other liabilities 2,475 2,548
---------- ---------
Total liabilities 338,286 309,717
Stockholders' equity 28,127 24,279
---------- ---------
Total liabilities and
Stockholders' equity $ 366,413 $ 333,996
========== =========
Net interest rate spread 4.25% 4.43%
Net interest income $ 4,115 $ 3,871
======== ========
Net yield on average earning assets 5.03% 5.14%
<CAPTION>
($ in thousands) Changes due to
---------------------------------------------------
Interest Rate/
Total Volume Rate Volume
------- -------- -------- ------
<S> <C> <C> <C> <C>
Assets:
Loans (1) (2) $ 311 $ 671 $ (316) $ (44)
Investment securities (3) 99 162 59 (122)
Federal funds sold (38) (35) (7) 4
----- -------- ------ ------
Total interest earnings assets 372 798 (264) (162)
----- -------- ------ ------
Other assets (4)
Total assets
Liabilities and stockholders' equity:
Savings, NOW and money market (37) 12 (48) (1)
Time deposits 131 245 (99) (15)
Short-term borrowings 34 11 21 2
----- ----- ------ ------
Interest bearing deposits and borrowings 128 268 (126) (14)
----- ----- ------ ------
Non-interest bearing deposits
Other liabilities
Total liabilities
Stockholders' equity
Total liabilities and
Stockholders' equity
Net interest rate spread
Net interest income $ 244 $ 530 $ (138) $ (148)
====== ======== ======= ======
Net yield on average earning assets
<FN>
(1) Average loans include non- accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis.
(4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, real estate acquired by
foreclosure, deferred income taxes and other miscellaneous assets.
</FN>
</TABLE>
The bank manages its earning assets by fully using available capital resources
within what management believes are prudent credit and leverage parameters.
Loans, investment securities, and federal funds sold comprise the bank's earning
assets.
17
<PAGE>
The provision for loan losses amounted to $135,000 and $180,000 for the
three-month periods ended June 30, 1999 and 1998 respectively. Loans, before the
allowance for loan losses, have increased from $202.7 million, at June 30, 1998,
to $231.0 million, at June 30, 1999, or an increase of 13.9%. Although there has
not been an increase in problem assets or change in the bank's underwriting
practices, management recognizes the increased risk and the need for additional
reserves as the loan balances increase. 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 three months ended June 30, 1999, reflects both reserves
for new origination and management's assessment of appropriateness of reserves
on existing balances. The provision for loan losses is a significant factor in
the bank's operating results.
Non-Interest Income
Non-interest income, exclusive of security gains, increased by $84,000 to
$664,000 for the three months ended June 30, 1999, compared to $580,000 for the
three months ended June 30, 1998. This increase was primarily caused by an
increase in trust fees of $72,000.
Trust fees increased by $72,000, or 32.6%, for the three months ended June 30,
1999 compared to the same period in 1998 due to an increase in trust assets.
Deposit fees decreased by $9,000, or 3.9%, for the three months ended June 30,
1999, compared to the three months ended June 30, 1998. The decrease was due to
a reduction in overdraft fees.
Other income for the three months ended June 30, 1999, was $84,000, an increase
of 15.1%, from $73,000 for the three months ended June 30, 1998, and primarily
due to increases in ATM fees, safe deposit fees, and wire transfer fees.
Net gains on sale of investments increased to $103,000 for the three months
ended June 30, 1999 compared to $94,000 in the three months ended June 30, 1998.
Non-Interest Expense
Salaries and benefits expense totaled $1,972,000 for the three months ended June
30, 1999, compared with $1,731,000 for the three months ended June 30, 1998, an
increase of $241,000 or 13.9%. This increase was primarily the result of new
hires, to support the overall growth of the bank, and annual salary increases.
Occupancy expense was $584,000 for the three months ended June 30, 1999,
compared with $540,000 for the three months ended June 30, 1998, an increase of
$44,000 or 8.1%. The increase was primarily due to the addition and renovation
of new facilities for the bank's accounting and loan servicing departments,
commercial lending and the customer service center.
Advertising and public relations expenses increased by $41,000, or 35.3%, for
the three months ended June 30, 1999 compared to the same period in 1998. The
increase was attributed to advertising for new hires, and various marketing
opportunities and market research.
Office and data processing supplies expense decreased by $19,000, or 20.4%, for
the three months ended June 30, 1999 compared to the same period in the prior
year. The decrease was primarily due to various costs saving programs.
Audit, legal and other professional expenses increased by $38,000, or 23.5%, for
the three months ended June 30, 1999 compared to the prior year period,
primarily due to the timing of Y2K expenditures.
Trust, professional and custodial expenses increased by $13,000, or 18.1%, for
the three months ended June 30, 1999 as compared to the same period in 1998. The
increase was due to an increase in trust assets under management as well as
additional services provided by the trust department.
The company's effective tax rate for the three months ending June 30, 1999 was
25.9% compared to 35.8% for the three months ended June 30, 1998. The reduction
in rate was a result of implementation of certain tax strategies in 1998.
18
<PAGE>
ITEM 3 - Quantitative and Qualitative Disclosures about Market Risk
The company's primary market risk is interest rate risk, specifically, changes
in the interest rate environment. The bank's investment committee is responsible
for establishing policy guidelines on acceptable exposure to interest rate risk
and liquidity. The investment committee is comprised of certain members of the
Board of Directors and certain members of senior management. The primary
objectives of the company's asset/liability policy is to monitor, evaluate and
control the bank's interest rate risk, as a whole, within certain tolerance
levels while ensuring adequate liquidity and adequate capital. The investment
committee establishes and monitors guidelines for the net interest margin
sensitivity, equity to capital ratios, liquidity, Federal Home Loan Bank
borrowing capacity and loan to deposit ratio. The asset/liability strategies are
reviewed regularly by management and presented and discussed with the investment
committee on at least a quarterly basis. The asset/liability strategies are
revised based on changes in interest rate levels, general economic conditions,
competition in the marketplace, the current position of the bank, anticipated
growth of the bank and other factors.
One of the principal factors in maintaining planned levels of net interest
income is the ability to design effective strategies to manage the impact of
changes in interest rates on future net interest income. The balancing of
changes in interest income from interest earning assets and interest expense of
interest bearing liabilities is accomplished through the asset/liability
management program. The bank's simulation model analyzes various interest rate
scenarios. Variations in the interest rate environment affect numerous factors,
including prepayment speeds, reinvestment rates, maturities of investments (due
to call provisions), and interest rates on various asset and liability accounts.
The investment committee periodically reviews guidelines or restrictions
contained in the asset/liability policy and adjusts them accordingly. The bank's
current asset/liability policy is designed to limit the impact on net interest
income to 10% in the 24 month period following the date of the analysis, in a
rising and falling rate shock analysis of 100 and 200 basis points.
Management believes there have been no material changes in the interest rate
risk reported in the company's Annual Report on Form 10-KSB for the year ended
December 31, 1998.
19
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Not Applicable
Item 2 Changes in Securities
Not Applicable
Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
The annual meeting of shareholders of the bank was held on May
4, 1999. Votes were cast as follows:
1. To elect five Directors of the Company, each for a
three-year term:
Nominee For Against Abstain
Kenneth S. Ansin 2,722,612 0 0
Eric W. Hanson 2,722,612 0 0
Arnold S. Lerner 2,722,612 0 0
Richard W. Main 2,722,612 0 0
John R. Clementi 2,722,612 0 0
2. To approve and adopt an amendment to the Company's
Articles of Organization to increase the number of
shares of common stock that the Company is authorized
to issue from 5,000,000 shares to 10,000,000 shares
For Against Abstain Broker Non-Vote
2,707,106 8,400 7,106
3. To ratify the Board of Directors' appointment of KPMG
Peat Marwick LLP as the Company's independent auditors
for the fiscal year ending December 31, 1999
For Against Abstain Broker Non-Vote
2,715,412 0 7,200
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
The following exhibits are included with this report:
27.1 Financial Data Schedule (included with electronic copy
only)
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ENTERPRISE BANCORP, INC.
DATE: August 9, 1999 /s/ John P. Clancy, Jr.
John P. Clancy, Jr.
Senior Vice President, Chief Financial Officer,
Chief Investment Officer and Treasurer
21
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from
unaudited financial statements of Enterprise Bancorp, Inc. at and for the period
ended June 30, 1999 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 17,258
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123,037
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 232,107
<ALLOWANCE> 5,586
<TOTAL-ASSETS> 379,091
<DEPOSITS> 327,680
<SHORT-TERM> 22,568
<LIABILITIES-OTHER> 2,399
<LONG-TERM> 0
0
0
<COMMON> 32
<OTHER-SE> 26,412
<TOTAL-LIABILITIES-AND-EQUITY> 379,091
<INTEREST-LOAN> 9,723
<INTEREST-INVEST> 3,424
<INTEREST-OTHER> 64
<INTEREST-TOTAL> 13,211
<INTEREST-DEPOSIT> 4,790
<INTEREST-EXPENSE> 5,116
<INTEREST-INCOME-NET> 8,095
<LOAN-LOSSES> 270
<SECURITIES-GAINS> 103
<EXPENSE-OTHER> 6,490
<INCOME-PRETAX> 2,725
<INCOME-PRE-EXTRAORDINARY> 2,725
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,972
<EPS-BASIC> 0.62
<EPS-DILUTED> 0.59
<YIELD-ACTUAL> 4.79
<LOANS-NON> 592
<LOANS-PAST> 59
<LOANS-TROUBLED> 502
<LOANS-PROBLEM> 1,060
<ALLOWANCE-OPEN> 5,234
<CHARGE-OFFS> 20
<RECOVERIES> 102
<ALLOWANCE-CLOSE> 5,586
<ALLOWANCE-DOMESTIC> 5,586
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 94
</TABLE>
