U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _____________ to _______________
Commission file number 0-21021
Enterprise Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts 04-3308902
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes..X... No......
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates of the registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average bid and asked prices of such common equity, as of a specified date
within 60 days prior to the date of filing. $44,025,167 as of February 28, 2002
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: February 28, 2002, Common Stock
- - Par Value $0.01: 3,462,349 shares outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's proxy statement for its annual meeting of stockholders
to be held on May 7, 2002 are incorporated by reference in Part III of this Form
10-K. Such information incorporated by reference shall not be deemed to
specifically incorporate by reference the information referred to in Item
402(a)(8) of Regulation S-K.
1
ENTERPRISE BANCORP, INC.
TABLE OF CONTENTS
Page Number
PART I
Item 1 Business 3
Item 2 Properties 18
Item 3 Legal Proceedings 18
Item 4 Submission of Matters to a Vote of Security Holders 18
PART II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters 19
Item 6 Selected Financial Data 20
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 7A Quantitative and Qualitative Disclosures About Market Risk 33
Item 8 Financial Statements 36
Item 9 Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure 67
Part III
Item 10 Directors and Executive Officers of the Registrant 67
Item 11 Executive Compensation 68
Item 12 Security Ownership of Certain Beneficial Owners and Management 68
Item 13 Certain Relationships and Related Transactions 68
Part IV
Item 14 Exhibits and Reports on Form 8-K 68
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains certain "forward-looking statements" including statements
concerning plans, objectives, future events or performance and assumptions and
other statements that are other than statements of historical fact. Enterprise
Bancorp, Inc. (the "company") wishes to caution readers that the following
important factors, among others, may adversely affect the company's future
results and could cause the company's results for subsequent periods to differ
materially from those expressed in any forward-looking statement made herein:
(i) the effect of unforeseen changes in interest rates; (ii) the effect of
changes in the business cycle and downturns in the local, regional or national
economies, including unanticipated deterioration in the local real estate
market; (iii) changes in asset quality and unanticipated increases in the
company's reserve for loan losses; (iv) the effect on the company's competitive
position within its market area of the increasing competition from larger
regional and out-of-state banking organizations as well as non-bank providers of
various financial services; (v) the effect of technological changes and
unanticipated technology-related expenses; (vi) the effect of unforeseen changes
in consumer spending; (vii) the effect of changes in laws and regulations that
apply to the company's business and operations and unanticipated increases in
the company's regulatory compliance costs; (viii) unanticipated increases in
employee compensation and benefit expenses; and (ix) the effect of changes in
accounting policies and practices, as may be adopted by the regulatory agencies
as well as by the Financial Accounting Standards Board.
2
PART I
Item 1. 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, Tewksbury, and Westford. The bank's deposit gathering and lending
activities are conducted primarily in the city of Lowell and the surrounding
Massachusetts towns of Andover, 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 individuals, professionals and growing businesses.
Lending
The bank specializes in lending to growing 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 Administration (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, 2001, the bank had loans outstanding of $376.3 million, which
represented 59.7% of the company's total assets. The interest rates charged on
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, 2001, the bank's statutory lending limit, based on 20% of
capital, to any single borrower was approximately $9.9 million, subject to
certain exceptions provided under applicable law. At December 31, 2001, the bank
had no outstanding lending relationships or commitments in excess of the legal
lending limit.
3
The following table sets forth the loan balances for certain loan categories at
the dates indicated and the percentage of each category to total loans,
excluding deferred fees.
December 31,
-----------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------- -------------------- --------------------- -------------------- ---------------------
($ in thousands) Amount % Amount % Amount % Amount % Amount %
-------------------- -------------------- --------------------- -------------------- ---------------------
Comm'l real estate $ 159,117 42.1% $ 120,390 38.5% $ 104,940 40.0% $ 80,207 37.1% $ 66,836 36.8%
Commercial 94,762 25.1% 84,284 26.9% 68,177 26.0% 55,570 25.7% 42,202 23.2%
Residential mortgages 59,967 15.9% 57,037 18.2% 50,156 19.1% 44,680 20.7% 42,648 23.5%
Home equity 24,594 6.5% 21,229 6.8% 14,135 5.4% 13,436 6.2% 12,203 6.7%
Construction 32,428 8.6% 21,894 7.0% 18,198 6.9% 16,637 7.7% 13,149 7.2%
Consumer 6,697 1.8% 8,210 2.6% 6,672 2.6% 5,682 2.6% 4,657 2.6%
Deferred fees (1,238) (1,027) (970) (870) (993)
--------- --------- --------- --------- --------
Total loans 376,327 100.0% 312,017 100.0% 261,308 100.0% 215,342 100.0% 180,702 100.0%
Allowance for
Loan losses 8,547 6,220 5,446 5,234 4,290
--------- --------- --------- --------- ---------
Net loans $ 367,780 $ 305,797 255,862 $ 210,108 $ 176,412
========= ========= ========= ========= =========
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, 2001.
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.
($ in thousands) Commercial Construction Real Estate
----------------- ------------------ ------------------
Amounts due:
One year or less 2,907 $ 11,825 $ 2,379
After one year through five years 31,247 1,322 11,096
Beyond five years 60,608 19,281 145,642
----------------- ------------------ ------------------
94,762 $ 32,428 $ 159,117
================= ================== ==================
Interest rate terms on amounts due after one year:
Fixed 18,581 $ 3,821 $ 19,725
Adjustable 73,274 16,782 137,013
Scheduled contractual maturities do 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 $5.0 million, $4.6 million, and $4.0
million as of December 31, 2001, 2000, and 1999, respectively.
Commercial, commercial real estate and construction loans secured by apartment
buildings, office facilities, shopping malls, raw land or other commercial
property, were $264.0 million at December 31, 2001, representing an increase of
$52.5 million, or 24.8%, from the previous year. This compares to an increase of
$31.4 million, or 17.5%, from 1999 to 2000. Included in commercial and
construction loan amounts are unsecured commercial loans and residential
construction loans outstanding of $19.0 million and $3.3 million at December 31,
2001, representing an increase of $7.6 million in unsecured commercial loans and
a decrease of $0.3 million in residential construction from the previous year.
The growth in 2001 is a reflection of the bank's customer-call efforts, service
culture, continued effective advertising and increased market penetration.
4
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 that is insufficient
to assure full repayment. Funds for construction projects are disbursed as
pre-specified stages of construction are completed.
The construction lending committee, consisting of five members of the board of
directors, meets quarterly to review a sample of loan projects included in the
construction loan portfolio. The construction lending committee also reviews
current portfolio statistics, as well as current market conditions and issues
relating to the construction and real estate development industry. The bank has
an independent, internal 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 six members of the board of directors, also
meets quarterly to review and assess all loan delinquencies.
The bank has also established an internal credit review committee, consisting of
senior lending officers and loan review personnel. The committee meets on an as
needed basis to review loan requests for certain commercial borrowers where the
total committed amount to the borrower exceeds $2.5 million, as well as other
borrower relationships recommended for discussion by committee members. The
bank's executive committee approves loans exceeding $2.5 million and the bank's
board of directors also approves loans exceeding $5.0 million.
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 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 $60.0 million at December 31, 2001, representing
an increase of $2.9 million, or 5.1%, from the previous year. This compares to
an increase of $6.9 million, or 13.7%, in 2000 from 1999. Residential loan
origination volume, including both loans sold and retained, increased in 2001
over 2000 due to a continued favorable real estate market, and an increase in
demand for refinancing existing mortgages resulting from a decrease in interest
rates during the period.
5
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 or three years and
subsequently adjust monthly based on changes in the prime rate.
Home equity loans were $24.6 million at December 31, 2001, representing an
increase of $3.4 million, or 15.9%, from the previous year. This compares to an
increase of $7.1 million, or 50.2%, in 2000 from 1999. The increase in the
outstanding loan balance in 2001 was not as significant as the increase in 2000
due to the increased volume in 2001 in residential mortgage refinancing, which
resulted from a decrease in interest rates during 2001.
Consumer Loans
Consumer loans primarily consist of secured or unsecured personal loans and
overdraft protection lines extended to individual customers.
Consumer loans were $6.7 million at December 31, 2001, representing a decrease
of $1.5 million or 18.4%, from the previous year. This compares to an increase
of $1.5 million, or 23.1%, in 2000 from 1999.
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, 2001 and 2000 were $1.4 million and $0.2 million, respectively.
Accruing restructured loans as of December 31, 2001 and 2000 were $146,000 and
$167,000, respectively.
Additional information regarding these risk elements is contained in Item 7,
Management Discussion and Analysis, and Item 8, Financial Statements, contained
in this report and under the heading "Allowance for Loan Losses" below.
6
Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Years Ended December 31,
---------------------------------------------------------------
($ in thousands) 2001 2000 1999 1998 1997
---------- --------- --------- --------- ----------
Average loans outstanding $ 340,593 $ 285,792 $ 232,843 $ 200,491 $ 162,594
========= ========= ========= ========= =========
Balance at beginning of year $ 6,220 $ 5,446 $ 5,234 $ 4,290 $ 3,895
Charged-off loans:
Commercial 182 229 63 87 165
Commercial real estate -- -- -- -- 125
Construction -- -- 100 -- --
Residential mortgage -- -- -- -- --
Home equity -- -- -- -- --
Consumer 43 57 9 53 11
--------- --------- --------- --------- ---------
Total charged-off 225 286 172 140 301
--------- --------- --------- --------- ---------
Recoveries on loans previously charged-off:
Commercial 28 24 54 6 52
Commercial real estate -- 48 2 -- 155
Construction -- 100 25 -- --
Residential mortgage 20 -- -- 6 2
Home equity -- 25 5 7 40
Consumer 24 10 28 35 127
--------- --------- --------- --------- ---------
Total recoveries 72 207 114 54 376
--------- --------- --------- --------- ---------
Net loans charged-off (recovered) 153 79 58 86 (75)
Provision charged to operations 2,480 603 270 1,030 320
Addition related to acquired loans -- 250 -- -- --
--------- --------- --------- --------- ---------
Balance at December 31 $ 8,547 $ 6,220 $ 5,446 $ 5,234 $ 4,290
========= ========= ========= ========= =========
Net loans charged-off (recovered) to
average loans 0.04% 0.03% 0.02% 0.04% (0.05%)
Net loans charged-off (recovered) to
Allowance for loan loss 1.79% 1.27% 1.07% 1.64% (1.75%)
Allowance for loan losses to loans 2.27% 1.99% 2.08% 2.43% 2.37%
Allowance for loan losses to
non-performing loans 455.60% 575.93% 184.86% 384.85% 384.06%
Recoveries to charge-offs 32.18% 72.38% 66.28% 38.57% 124.92%
The ratio of the allowance for loan losses to non-performing loans was 455.60%
at December 31, 2001 compared to 575.93% and 184.86% at December 31, 2000 and
1999, respectively. The decrease in 2001 resulted from an increase in
nonperforming loans and a weakened economy during 2001. Management regularly
reviews the level of non-accrual loans, levels of charge-offs and recoveries,
levels of outstanding loans, and known and inherent risks in the nature of the
loan portfolio. Based on this review, and taking into account considerations of
loan quality, management determined that the allowance for loan loss was
adequate at December 31, 2001. During 2001, the bank added approximately $2.5
million to the allowance for loan losses compared to $0.6 million for the same
period in 2000. Management felt that it was prudent to increase the allowance
for loan losses in light of the economic uncertainty during this period.
7
The following table represents the allocation of the bank's allowance for loan
losses and the percentage of loans in each category to total loans for the
periods ending on the respective dates indicated:
December 31,
-----------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
-------------------- -------------------- --------------------- -------------------- ---------------------
($ in thousands) Amount % Amount % Amount % Amount % Amount %
-------------------- -------------------- --------------------- -------------------- ---------------------
Comm'l real estate $ 3,565 42.1% $ 2,598 38.5% $ 2,312 40.0% $ 2,591 37.1% $ 2,161 36.8%
Commercial 2,482 25.1% 2,120 26.9% 1,490 26.0% 1,111 25.7% 844 23.2%
Construction 776 8.6% 487 7.0% 926 6.9% 665 7.7% 338 7.2%
Residential mortgage 999 15.9% 875 18.2% 635 19.1% 568 20.7% 525 23.5%
Consumer 133 8.3% 140 9.4% 83 8.0% 194 8.8% 167 9.3%
Unallocated 592 - - 105 255
----------- ----------- ------------ ------------ ------------
Total $ 8,547 100.0% $ 6,220 100.0% $ 5,446 100.0% $ 5,234 100.0% $ 4,290 100.0%
=========== =========== ============ ============ ============
There was no unallocated reserve as of December 31, 2000. The increase in the
unallocated reserve to $0.6 million at December 31, 2001 resulted from
increasing the provision for loan losses in the 3rd and 4th quarters of 2001.
Management felt that it was prudent to increase the allowance for loan losses in
light of the economic uncertainty during this period, especially after September
11, 2001. The allocation of the allowance for loan losses above reflects
management's judgment of the relative risks of the various categories of the
bank's loan portfolio. This allocation should not be considered an indication of
the future amounts or types of possible loan charge-offs.
The following table sets forth information regarding non-performing assets,
restructured loans and delinquent loans 30-89 days past due as to interest or
principal, held by the bank at the dates indicated:
December 31,
-----------------------------------------------------------------------------
($ in thousands) 2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- -----------
Non-accrual loans* $ 1,874 $ 1,054 $ 2,898 $ 1,263 $ 1,043
Accruing loans > 90 days past due 1 26 48 97 74
-------------- -------------- -------------- -------------- ------------
Total non-performing loans 1,875 1,080 2,946 1,360 1,117
Other real estate owned - - - 304 393
-------------- -------------- -------------- -------------- ------------
Total non-performing assets $ 1,875 $ 1,080 $ 2,946 $ 1,664 $ 1,510
============== ============== ============== ============== ============
Restructured loans not included above $ 146 $ 167 $ 514 $ 538 $ 260
Delinquent loans 30-89 days past due 1,119 425 1,785 1,473 2,074
Non-performing loans: Loans 0.50% 0.35% 1.13% 0.63% 0.62%
Non-performing assets: Total assets 0.30% 0.19% 0.66% 0.46% 0.47%
Delinquent loans 30-89 days past due: Loans 0.30% 0.14% 0.68% 0.68% 1.15%
* Impaired loans included in non-accrual loans as of December 31, 2001 and
2000 were $1.3 million and $0.5 million, respectively. The increase in
impaired loans in 2001 from 2000 resulted primarily from two borrowers.
Non-accrual loans increased by $0.8 million, to $1.9 million at December 31,
2001, as compared to the prior year. The increase was primarily attributable to
a weakened economy during 2001. The level of non-performing assets is largely a
function of economic conditions and the overall banking environment. Continuing
adverse conditions in the local, regional or national economy could result in a
further increase to non-performing assets in the future, despite prudent loan
underwriting.
8
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 that 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"),
including 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 8 for further information.
At December 31, 2001, 2000, and 1999 all investment securities were classified
as available for sale and were carried at fair market value. The net unrealized
appreciation at December 31, 2001, net of tax effects, is shown as a component
of accumulated comprehensive income in the amount of $3.3 million. The following
table summarizes the fair market value of investments at the dates indicated:
December 31,
-------------------------------
($ in thousands) 2001 2000 1999
--------- -------- ---------
U.S. treasuries and agencies $ 15,659 $ 33,610 $ 29,544
Mortgage backed securities 120,353 95,775 78,431
Municipals 57,747 52,498 42,491
FHLB stock 3,301 3,301 2,961
-------- -------- --------
Total investments available-for-sale $197,060 $185,184 $153,427
======== ======== ========
The contractual maturity distribution, as of December 31, 2001, of the total
bonds and obligations above with the weighted average yield for each category is
as follows:
Under 1 Year 1 - 3 Years 3 - 5 Years 5 - 10 Years Over 10 Years
-------------------- --------------------- --------------------- --------------------- -------------------
($ in thousands) Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield
--------- --------- ---------- ---------- ---------- --------- ---------- ---------- ---------- --------
U.S. treasuries
and agencies $ - -% $ - -% $ 4,905 4.48% $ 10,754 7.36% $ - -%
MBSs - -% 720 6.31% 10,117 5.36% 34,097 5.68% 75,419 6.42%
Municipals* 4,035 5.13% 10,905 5.96% 11,080 6.26% 14,368 5.97% 17,359 6.65%
--------- ---------- --------- ---------- ----------
$ 4,035 5.13% $ 11,625 5.98% $ 26,102 5.58% $ 59,219 6.06% $ 92,778 6.46%
========= ========== ========== ========== ==========
* Municipal security yields and total yields are shown on a tax equivalent
basis.
Scheduled contractual maturities do not reflect the actual expected maturities
of the investments. MBSs are shown at their final maturity. However, due to
prepayments and expected amortization the actual cash flows will be faster than
presented above. Similarly, included in the U.S. treasuries and agencies
category is $10.6 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 increase in investment securities available-for-sale to $197.1 million at
December 31, 2001 from $185.2 million at December 31, 2000, was primarily due to
deposit growth, and an increase in unrealized appreciation from $2.3 million at
December 31, 2000 to $5.0 million at December 31, 2001.
See "Interest Margin Sensitivity Analysis" in Item 7A for additional information
regarding the bank's callable bonds and CMOs.
9
Source of Funds
Deposits
Deposits have traditionally been the principal source of the bank's funds. The
bank offers a broad selection of deposit products to the general public,
including personal interest checking accounts ("PIC"), savings accounts, money
market accounts, individual retirement accounts (IRA) and certificates of
deposit. The bank also offers commercial checking, money market, sweep, Keogh
retirement and business IRA accounts and repurchase agreements to its commercial
business customers. The bank does not currently use brokered deposits. The bank
has offered premium rates on specially designated products from time to time in
order to promote new branches and to attract customers and longer-term deposits.
Management determines the interest rates offered on deposit accounts based on
current and expected economic conditions, competition, liquidity needs, the
volatility of the existing deposits, the asset/liability position of the bank
and the overall objectives of the bank regarding the growth of relationships.
The table below shows the comparison of the bank's average deposits and average
rates paid for the periods indicated. The annualized average rate on total
deposits reflects both interest bearing and non-interest bearing deposits.
December 31,
--------------------------------------------------------------------------------------------------------------
2001 2000 1999
------------------------------------ ------------------------------------ -----------------------------------
($ in thousands) Average Average % of Average Average % of Average Average % of
Balance Rate Deposits Balance Rate Deposits Balance Rate Deposits
----------------------- ------------ ------------ ---------- ------------ ------------ ---------- -----------
Demand $ 104,233 - 21.43% $ 83,194 - 20.70% $ 63,691 - 19.66%
Savings 70,465 2.42% 14.49% 48,622 2.96% 12.10% 26,203 2.37% 8.09%
PIC 100,546 0.88% 20.67% 75,687 1.63% 18.83% 61,293 1.80% 18.92%
Money market 64,534 2.85% 13.27% 36,634 3.33% 9.11% 28,197 2.48% 8.70%
------------ ------------ ------------ ------------ ------------ -----------
235,545 1.88% 48.43% 160,943 2.42% 40.04% 115,693 2.09% 35.71%
Time deposits 146,577 5.00% 30.14% 157,818 5.32% 39.26% 144,629 5.05% 44.63%
------------ ------------ ------------ ------------ ------------ -----------
Total $ 486,355 2.42% 100.00% $ 401,955 3.06% 100.00% $ 324,013 3.00% 100.00%
============ ============ ============ ============ ============ ===========
The decrease in the average rate on savings accounts to 2.42% for 2001 from
2.96% for 2000 resulted primarily from declining interest rates during 2001.
The decrease in the average rate on PIC accounts to 0.88% for 2001 from 1.63%
for 2000 resulted primarily from declining interest rates during 2001.
The decrease in the average rate on money market accounts to 2.85% for 2001 from
3.33% for 2000 resulted primarily from decreases in rates paid on both
commercial money market and personal money market accounts.
The decrease in the average rate on time deposits to 5.00% for 2001 from 5.32%
for 2000 resulted primarily from interest rate decreases during 2001.
The decrease in the average rate paid on total deposits to 2.42% for 2001 from
3.06% for 2000 resulted primarily from decreases in interest rates during 2001.
Growth in non-interest bearing demand accounts also contributed to the overall
reduction in the average rate paid on deposits during 2001.
See note 7 to the consolidated financial statements in Item 8 for further
information.
Borrowings
The bank is a member of the Federal Home Loan Bank of Boston (the "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, 2001 the bank had the capacity to borrow up to approximately $75.2 million
from the FHLB, with actual outstanding balances of $0.5 million at an average
rate of 5.94%. The bank has the opportunity to increase it's capacity to borrow
an additional $84.0 million if the bank pledges it's stock investment in
Enterprise Realty Trust, Inc., which is a substantially owned subsidiary of the
bank that invests in commercial and residential mortgage loans originated by the
bank and in investment securities. The bank anticipates pledging it's stock in
Enterprise Realty Trust, Inc. during the second quarter of 2002. The average
rate paid on FHLB borrowings for the year ended December 31, 2001 was 4.96%.
10
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, 2001, the bank had
$44.0 million in repurchase agreements of all types outstanding with a weighted
average interest rate of 1.64%. Of this total amount outstanding, the repurchase
agreements that represented overnight borrowings, as part of the bank's
commercial sweep accounts, amounted to $43.0 million.
Management has recently evaluated the bank's commercial sweep product along with
certain collateral requirements associated with sweep accounts. On the basis of
these considerations, management has determined that the bank will transition
these sweep account balances to a third party, Federated Investors, Inc.
("Federated"). This transition to Federated commenced during the fourth quarter
of 2001 and is expected to be completed during 2002. Under the arrangements with
Federated, the investment portion of the bank's commercial sweep accounts are
swept into money market mutual funds managed by Federated, rather than into
overnight repurchase agreements secured by municipal securities held by the
bank. Management believes that this transition will provide commercial customers
with an opportunity for enhanced interest rate earnings on sweep accounts, while
continuing to provide these customers with a conservative investment option of
the highest quality and safety. The Federated funds that are used in connection
with the bank's commercial sweep accounts invest in only short-term U.S.
Treasuries, government agency securities and repurchase agreements backed by
government securities.
See note 8 to the consolidated financial statements in Item 8 for further
information.
11
Trust Preferred Securities
On March 10, 2000 the company organized Enterprise (MA) Capital Trust I (the
"Trust"), a statutory business trust created under the laws of Delaware. The
company is the owner of all the common shares of beneficial interest of the
Trust. On March 23, 2000 the Trust issued $10.5 million of 10.875% trust
preferred securities. The trust preferred securities have a thirty-year maturity
and may be redeemed at the option of the Trust after ten years. The proceeds
from the sale of the trust preferred securities were used by the Trust, along
with the company's $0.3 million capital contribution, to acquire $10.8 million
in aggregate principal amount of the company's 10.875% Junior Subordinated
Deferrable Interest Debentures due 2030. The company has, through the
Declaration of Trust establishing the Trust, fully and unconditionally
guaranteed on a subordinated basis all of the Trust's obligations with respect
to distributions and amounts payable upon liquidation, redemption or repayment.
Investment Management and Trust Services
The bank provides a range of investment management services to individuals,
family groups, trusts, foundations and retirement plans. These services include
securities brokerage services through a third party service arrangement with
Commonwealth Equities, Inc., a licensed securities brokerage firm, commercial
sweep accounts through Federated Investor's, Inc. and 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, 2001,
the bank had $311.6 million in assets under management.
Insurance and Investment Services Subsidiaries
On March 21, 2000 the Massachusetts Division of Banks approved the establishment
and capitalization of Enterprise Insurance Services LLC and Enterprise
Investment Services LLC as direct subsidiaries of the bank subject to the bank's
capital investment in each subsidiary not exceeding $50,000 and the bank's
retaining ownership and control of 100% of the common stock of the subsidiaries.
The bank formed these subsidiaries for the purpose of engaging in insurance
sales activities and offering non-deposit investment products and related
securities brokerage services to its present and future customers.
Enterprise Insurance Services LLC conducts insurance sales activities through a
third party service arrangement with C.J. McCarthy Insurance Agency, Inc., a
full service insurance agency headquartered in Wilmington, Massachusetts.
Enterprise Insurance Services provides, through McCarthy Insurance Agency, a
wide array of business-oriented insurance products and services, including
property and casualty insurance, employee benefits, retirement plans, and
risk-management solutions tailored to serve the specific insurance needs of
businesses in a range of industries operating in the bank's market area.
eCommerce Banking
The bank uses an outside service bureau to provide Internet-based banking
services to commercial customers. Major capabilities include: viewing balances;
internal transfers; loan payments; ACH origination; federal tax payments;
initiate stop payments; and initiate wire transfer requests.
The bank uses an in-house turn-key solution from its core banking system vendor
for retail internet banking services. During the second quarter of 2002 the Bank
will be testing a similar turn-key system from the same vendor that will be
designed for commercial customers. Once testing is completed on this system,
commercial customers will be migrated off the service bureau solution to the new
in-house solution. In addition to the services described above, both in-house
solutions also give customers access to images of checks paid as well as
previous account statements.
The bank currently uses an outside vendor to design, support and host its
website. In addition to access to internet banking services, the site provides
information on the bank and its services as well as access to various financial
management tools. The underlying structure of the site provides for dynamic
maintenance of the information by bank personnel via a database driven
architecture. It also includes the following major capabilities (in addition to
providing the access point to various specified banking services): career
opportunities; loan and deposit rates; calculators and an ATM/Branch
Locator/Map.
12
Fleet Branch Acquisition
On July 21, 2000 the bank completed its acquisition of two Fleet National Bank
branch offices (the "Fleet branches") in connection with which the bank
purchased assets comprised of loans having an approximate book value of $7.0
million, furniture, fixtures and equipment having a net book value of
approximately $0.02 million, land and buildings having agreed upon values
totaling $1.5 million, and cash on hand of $0.7 million. As part of this
transaction, the bank assumed approximately $58.3 million in deposits. Fleet
National Bank paid to the bank a cash amount of $43.0 million. The excess of
cost over the fair market value of assets acquired and liabilities assumed of
approximately $7.9 million has been allocated to identified intangible assets
and goodwill (combined "intangible assets") and is being amortized over a
ten-year period.
Competition
The bank faces strong competition to attract deposits and to generate loans. New
England's largest bank is 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. Larger banks have 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
larger banks also allow 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 that 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
confronting financial institutions.
As a general matter, regulation of the banking and financial services industries
continues to undergo significant changes, some of which are intended to ease
legal and regulatory restrictions while others may increase regulatory
requirements. For example, the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"),
which was enacted on November 12, 1999, contains sections that remove the legal
barriers that formerly served to separate the banking industry from the
insurance and securities industries. The GLB Act also includes, however, new
restrictions on financial institutions' sharing of customer information and
additional consumer privacy requirements. The federal banking agencies have
adopted new consumer financial privacy regulations under the GLB Act, and
additional consumer privacy requirements remain under consideration at both the
federal and state levels. In addition, provisions of the United and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001 (the "USA PATRIOT Act"), which was enacted on
October 26, 2001, in response to the September 11th terrorist attacks on the
United States, impose new anti-money laundering requirements, including a
requirement that the United States Department of the Treasury issue minimum
"know your customer" standards within one year following Congress's enactment of
the USA PATRIOT Act. To the extent that changes in the regulation of financial
services may further increase competition, such as the sections of the GLB Act
that remove the legal barriers formerly separating the banking, insurance and
securities industries, these 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
or financial services industries generally, such as the sections of the GLB Act
that impose new consumer privacy requirements as well as the further federal and
state proposals relating to these issues, or the provisions of the USA PATRIOT
Act that impose new anti-money laundering requirements, including the minimum
"know your customer" standards that the United States Department of the Treasury
will be required to issue under this legislation, could result in the bank
incurring additional operating and compliance costs, which in turn 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 the region's larger bank
holding companies, and the resultant consolidation of competitors' banking
operations and services within the bank's market area. Additionally, management
actively seeks to enhance its market position by pursuing opportunities in new
product areas as well as new technologies, in order to maintain a competitive
mix of products and services, which can be delivered through multiple
distribution channels at competitive prices.
13
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, composed principally of
growing and privately held businesses, professionals, and consumers, 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
its customers with highly responsive personal and professional service.
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. Most recently,
the GLB Act has removed the legal barriers that formerly separated the banking,
insurance and securities industries. The GLB Act has also further enhanced the
authority of banks and their holding companies to engage in non-banking
activities. By electing to become a "financial holding company", a qualified
parent company of a banking institution may now engage, directly or through its
non-bank subsidiaries, in any activity that is financial in nature or incidental
to such financial activity or in any other activity that is complimentary to a
financial activity and does not pose a substantial risk to the safety and
soundness of depository institutions or the financial system generally.
Moreover, under the GLB Act, banks may form "financial subsidiaries" to engage
in any activity that is likewise financial in nature or incidental to a
financial activity. 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 information in this report under the heading "Supervision
and Regulation" 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 10 to the consolidated financial statements in Item 8 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 (the "Federal Reserve Board") and files reports with the Federal
Reserve Board as required under the Bank Holding Company Act. Under applicable
Massachusetts's 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.
As described above, the company also now has the ability to expand the range of
activities it may engage in if it elects to become a financial holding company.
A bank holding company will be able to successfully elect to be regulated as a
financial holding company if all of its depositary institution subsidiaries meet
certain prescribed standards pertaining to management, capital adequacy and
compliance with the federal Community Reinvestment Act. Financial holding
companies remain subject to regulation and oversight by the Federal Reserve
Board. The company believes that the bank, which is the company's sole
depository institution subsidiary, presently satisfies all of the requirements
that must be met to enable the company to successfully elect to become a
financial holding company. However, the company has no current intention of
seeking to become a financial holding company. Such a course of action may
become necessary or appropriate at some time in the future depending upon the
company's strategic plan.
14
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,
including 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.
Dividends
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 substantially the same standard upon the
payment of dividends by the bank to the company. The Federal Deposit Insurance
Corporation Improvement 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.
15
Capital Resources
Capital planning by the company and the bank considers current needs and
anticipated future growth. The primary sources of capital have been the sale of
common stock in 1988 and 1989, retention of earnings less dividends paid since
the bank commenced operations, and the issuance of $10.5 million trust preferred
securities in 2000.
See note 10 to the consolidated financial statements in Item 8 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. The intangible assets resulting from the Fleet branch
acquisition must be deducted from Tier 1 capital in calculating the company's
regulatory capital ratios. In addition, trust preferred securities may compose
up to 25% of the company's Tier 1 capital (with any excess allocable to Tier 2
capital). Trust preferred proceeds contributed to the bank from the company are
included in Tier 1 capital of the bank without limitation. The company
contributed $10.3 million of proceeds from the sale of these securities to the
bank.
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 average 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. At the bank level,
as at the company level on a consolidated basis, the intangible assets resulting
from the Fleet branch acquisition must be deducted from Tier 1 capital in
calculating regulatory capital ratios. In addition, the company contributed
$10.3 million of proceeds from the sale of trust preferred securities to the
bank during 2000. The proceeds contributed to the bank from the company are
included in Tier 1 capital of the bank without limitation.
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.
Depository institutions, such as the bank, are also subject to the prompt
corrective action framework for capital adequacy established by 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
16
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 were 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
At December 31, 2001, the bank employed 207 full-time equivalent employees,
including 76 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.
17
Item 2. Property
The company's and the bank's main office is leased and located at 222 Merrimack
Street, Lowell, Massachusetts. The building provides 11,161 square feet of
interior space and has private customer parking along with public parking
facilities in close proximity.
The bank leases 31,831 square feet of space at 21-27 Palmer Street and 170
Merrimack Street, Lowell, Massachusetts. The two buildings are connected and
serve as office space for operational support departments and loan officers.
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 Post 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.
In January 1999, the bank purchased 237 Littleton Road, Westford, Massachusetts.
The existing building was razed and a new branch facility was constructed. The
branch opened on November 22, 1999. The branch has 5,200 square feet of finished
interior space, plus 2,800 square feet of storage in the basement and 21 parking
spaces.
On July 21, 2000, the bank purchased a former Fleet National Bank branch located
at 20 Drum Hill Road, Chelmsford, Massachusetts. The branch has 3,579 square
feet of interior space, two drive-ups windows, an ATM, and ample parking.
On July 21, 2000, the bank purchased a former Fleet National Bank branch located
at 233 Boston Road, N. Billerica, Massachusetts. 4,288 square feet of interior
space, three drive-ups windows, an ATM, and ample parking.
The bank leases space at 430-434 Gorham Street, Lowell, Massachusetts. The
branch office provides 3,120 square feet of interior space and 7 parking spaces.
Management believes that the bank's present facilities are adequate and suitable
for its current purposes.
Item 3. Legal Proceedings
The company is involved in various legal proceedings incidental to its business.
Management does not believe resolution of any present litigation will have a
material adverse effect on the financial condition of the company.
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, 2001.
18
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market for Common Stock
There is no established public 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.
Trading Share Price Share Price
Fiscal Year Volume High Low
--------------------- ----------------- ---------------- -------------
2001:
1st Quarter 25,500 $ 18.00 $ 18.00
2nd Quarter 10,625 18.00 18.00
3rd Quarter 4,850 18.50 18.00
4th Quarter 1,000 19.00 18.50
2000:
1st Quarter 2,000 $ 16.00 $ 16.00
2nd Quarter 2,952 16.00 16.00
3rd Quarter 3,775 16.00 16.00
4th Quarter 3,225 18.00 16.00
The number of shares outstanding of the company's common stock and number of
shareholders of record as of February 28, 2002, were 3,462,349 and 643,
respectively.
Dividends
The company declared and paid annual cash dividends of $0.2875 per share and
$0.2500 per share in 2001 and 2000, respectively. Although the company expects
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
are deemed "judicious" by the board of directors and will not impair the bank's
capital stock. FDICIA also prohibits a bank from paying any dividends on its
capital stock if the bank is in default on the payment of any assessment to the
FDIC or if the payment of dividends would otherwise cause the bank to become
undercapitalized. 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.
The term "net profits" is not defined under the Massachusetts banking statutes,
but it is generally understood 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, 2001, the bank's undivided profits account
(from which dividends may be paid to the company) had a balance of $13.6
million.
19
Item 6. Selected Financial Data
Year Ended December 31,
-------------------------------------------------------------------------
($ in thousands, except per share data) 2001 2000 1999 1998 1997
-------------------------------------------------------------------------
EARNINGS DATA
Net interest income $ 27,423 $ 22,017 $ 17,239 $ 15,721 $ 13,800
Provision for loan losses 2,480 603 270 1,030 320
----------- ----------- ----------- ----------- -----------
Net interest income after provision 24,943 21,414 16,969 14,691 13,480
for loan losses
Non-interest income 4,564 3,169 2,608 2,441 1,929
Net gains (losses) on sales of investment securities 941 129 183 476 (37)
Non-interest expense 23,800 19,966 14,188 12,651 10,815
----------- ----------- ----------- ----------- -----------
Income before income taxes 6,648 4,746 5,572 4,957 4,557
Income tax expense 1,744 1,142 1,489 1,456 1,645
----------- ----------- ----------- ----------- -----------
Net income $ 4,904 $ 3,604 $ 4,083 $ 3,501 $ 2,912
=========== =========== =========== =========== ===========
COMMON SHARE DATA 1
Basic earnings per share $ 1.43 $ 1.08 $ 1.28 $ 1.11 $ 0.93
Diluted earnings per share 1.39 1.07 1.22 1.06 0.91
Book value per share at year end 2 11.38 10.17 9.35 8.27 7.34
Dividends paid per share 0.2875 0.2500 0.2100 0.1750 0.1625
Basic weighted average shares outstanding 3,432,255 3,322,364 3,187,292 3,165,134 3,152,924
Diluted weighted average shares outstanding 3,530,965 3,369,025 3,335,338 3,299,432 3,224,054
YEAR END BALANCE SHEET AND OTHER DATA
Total assets $ 630,544 $ 572,814 $ 443,095 $ 360,481 $ 322,623
Loans 376,327 312,017 261,308 215,342 180,702
Allowance for loan losses 8,547 6,220 5,446 5,234 4,290
Investment securities at fair value 197,060 185,184 153,427 114,659 112,886
Federal funds sold 6,500 28,025 -- 6,255 3,775
Deposits, repurchase agreements and escrow 571,863 520,882 362,915 329,968 294,908
FHLB borrowings 470 470 50,070 470 1,420
Trust preferred securities 10,500 10,500 -- -- --
Total stockholders' equity 2 39,404 34,670 30,207 26,202 23,210
Mortgage loans serviced for others 21,646 25,699 24,001 26,491 27,307
Investment assets under management 311,648 289,284 216,731 195,361 165,658
Total assets, investment assets under management and
mortgage loans serviced for others 963,838 887,797 683,827 582,333 515,588
RATIOS
Net income to average total assets 2 0.81% 0.71% 1.06% 1.03% 0.95%
Net income to average stockholders' equity 2 13.30% 11.07% 14.59% 14.25% 13.38%
Allowance for loan losses to loans 2.27% 1.99% 2.08% 2.43% 2.37%
Stockholders' equity to assets 2 6.28% 6.07% 6.78% 7.29% 7.21%
1 On January 4, 1999 the company effected a 2:1 split of its common stock
through the payment of a stock dividend. All common share data has been
adjusted to reflect the stock split.
2 Excludes the effect of SFAS No. 115. See Note 1 to the consolidated
financial statements in Item 8 for the accounting policy on investment
securities.
20
Item 7. Management Discussion and Analysis of Financial Condition and Results of
Operations
Management's discussion and analysis should be read in conjunction with the
company's consolidated financial statements and notes thereto contained in Item
8, the information contained in the "Business" section and other financial and
statistical information contained in this annual report.
Financial Condition
Total Assets
Total assets increased $57.7 million, or 10.1%, to $630.5 million at December
31, 2001 from $572.8 million at December 31, 2000. The increase is primarily
attributable to growth in loans of $64.3 million, or 20.6%, as well as an
increase in investment securities of $11.9 or 6.4%, offset by a decrease in
federal funds sold of $21.5 million. The growth was primarily funded through
deposit growth of $64.8 million or 14.0%, offset by a decrease in short-term
borrowings, including repurchase agreements and commercial sweep accounts, of
$13.8 million or 23.7%. The bank had $470,000 in outstanding borrowings from the
FHLB at December 31, 2001.
Loans
Total loans were $376.3 million, or 59.7% of total assets, at December 31, 2001,
compared with $312.0 million, or 54.5% of total assets, at December 31, 2000.
The increase in loans outstanding was attributable to favorable interest rates,
continued customer-call efforts, marketing and advertising, and increased market
penetration. During 2001, commercial real estate loans increased $38.7 million,
or 32.2%, other loans secured by real estate (residential mortgages and
construction loans) increased by $13.5 million, or 17.1%, commercial loans
increased by $10.5 million, or 12.4%, home equity loans increased $3.4 million,
or 15.9%, and consumer loans decreased $1.5 million, or 18.4%.
Asset Quality
The non-performing asset balance increased to $1.9 million, at December 31,
2001, from $1.1 million the previous year. This increase primarily resulted from
a weakened economy during 2001. Delinquencies in the 30-89 day category
increased from $0.4 million at December 31, 2000 to $1.1 million at December 31,
2001. Despite the increase at December 31, 2001 compared to December 31, 2000,
non-performing assets continue to be relatively low by historical measures due
to management's continued efforts to work out existing problem assets and
thereby limit additions to this category.
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, 2001, the bank classified $3.1
million and $0 as substandard and doubtful loans, respectively. Included in the
substandard category is $1.9 million in non-performing loans. The remaining
balance of substandard loans is performing but possess potential weaknesses and,
as a result, could become non-performing loans in the future.
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 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 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 the credit department, an external loan review service,
members of senior management, the overdue loan review committee, the executive
committee and the board of directors.
21
The bank uses a methodology to systematically measure the amount of estimated
loan loss exposure inherent in the portfolio for purposes of establishing a
sufficient allowance for loan losses. The methodology includes three elements:
identification of specific loan losses, general loss allocations for certain
loan types based on credit grade and loss experience factors, and general loss
allocations for other economic or market factors. The methodology includes
analysis of individual loans deemed to be impaired in accordance with the terms
of SFAS 114. Other individual commercial and commercial mortgage loans are
evaluated using an internal rating system and the application of loss allocation
factors. The loan rating system and the related loss allocation factors take
into consideration the borrower's financial condition, the borrower's
performance with respect to loan terms and the adequacy of collateral.
Portfolios of more homogenous populations of loans including residential
mortgages and consumer loans are analyzed as groups taking into account
delinquency ratios and other indicators, the bank's historical loss experience
and comparison to industry standards of loss allocation factors for each type of
credit product. Finally, an additional allowance is maintained based on a
judgmental process whereby management considers qualitative and quantitative
assessments of other factors including industry concentration, results of
regulatory examinations, historical loss ranges, portfolio composition, the
strength of the local and national economy, interest rates and other changes in
the portfolio. The allowance for loan losses is management's best estimate of
the probable loan losses incurred as of the balance sheet date.
The ratio of the allowance for loan losses to non-performing loans decreased to
455.60% at December 31, 2001 from 575.93% and 184.86% at December 31, 2000 and
1999, respectively. The decrease in 2001 resulted from an increase in
non-performing loans, offset by an increase in the allowance for loan losses.
The ratio of the allowance for loan losses to loans increased to 2.27% at
December 31, 2001 from 1.99% at December 31, 2000. The increase in this ratio
has resulted from an increase in the provision for loan losses of $1.9 million
from the previous year. During 2001 management felt it was prudent to increase
the allowance for loan losses in light of economic uncertainty. Net loans
charged-off (recovered) to average loans were 0.04%, 0.03%, 0.02%, 0.04%, and
(0.05)% at December 31, 2001, 2000, 1999, 1998, and 1997, respectively.
Management regularly reviews the levels of non-accrual loans, levels of
charge-offs and recoveries, peer results, levels of outstanding loans and known
and inherent risks in the loan portfolio, and will continue to monitor the need
to add to the bank's allowance for loan losses.
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, 2001.
Investments
Investments (including federal funds sold) totaled $203.6 million, or 32.3% of
total assets, at December 31, 2001, compared to $213.2 million, or 37.2% of
total assets, at December 31, 2000. As of December 31, 2001, the net unrealized
appreciation in the investment portfolio was $5.0 million compared to $2.3
million at December 31, 2000. The net unrealized appreciation/depreciation in
the portfolio fluctuates as interest rates rise and fall. Due to the fixed rate
nature of the bank's investment portfolio, as rates rise the value of the
portfolio declines, and as rates fall the value of the portfolio rises. The
increase in net unrealized appreciation at December 31, 2001 is the result of
lower interest rates at year end. The unrealized appreciation will be realized
if the securities are sold. The unrealized appreciation on the investment
portfolio will also decline as the securities approach maturity.
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 readily 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 FHLB.
22
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 FHLB. Management believes that the bank has adequate
liquidity to meet its commitments.
The company's primary source of funds is dividends from the bank and long-term
borrowings.
Deposits and Borrowings
Deposits, including escrow deposits, increased $64.8 million, or 14.0%, to
$527.9 million, at December 31, 2001, from $463.1 million, at December 31, 2000.
The bank improved its deposit mix during 2001. Lower cost checking and savings
deposits increased $72.1 million during 2001 while certificates of deposit
decreased $7.3 million. The increase in deposits resulted primarily from
continued penetration in existing markets due to the bank's business development
efforts, as well as competitive cash management and Internet banking products.
Total borrowings, consisting of securities sold under agreements to repurchase
(repurchase agreements) and FHLB borrowings, decreased by $13.8 million from
December 31, 2000 to December 31, 2001.
Repurchase agreements decreased $13.8 million or 23.9% during 2001 and include
both commercial sweep accounts and term repurchase agreements. Commercial sweep
accounts decreased from $54.9 million at December 31, 2000 to $43.0 million at
December 31, 2001. The decrease is primarily due to the low rate environment
requiring customers to maintain higher compensating balances in demand deposit
accounts to offset associated commercial sweep account fees. Management has
temporarily reduced commercial sweep account fees in order to maintain balances
in commercial sweep accounts. Term repurchase agreements also decreased from
$2.9 million at December 31, 2000 to $0.9 million at December 31, 2001.
During 2001 and continuing into 2002, the bank has implemented a new commercial
sweep product, which allows customers to sweep their balances into Federated
money market mutual funds, instead of overnight repurchase agreements secured by
municipal securities held by the bank. At December 31, 2001, sweep balances
managed by Federated amounted to $23.2 million. Sweep balances held at Federated
are not liabilities of the bank and are included in investment assets under
management of $311.6 million at December 31, 2001.
FHLB borrowings are unchanged at $0.5 million at December 31, 2001 from December
31, 2000.
Trust Preferred Securities
On March 10, 2000 the company organized Enterprise (MA) Capital Trust I (the
"Trust"), a statutory business trust created under the laws of Delaware. The
company is the owner of all the common shares of beneficial interest of the
Trust. On March 23, 2000 the Trust issued $10.5 million of 10.875% trust
preferred securities. The company used the net proceeds received in this
issuance of trust preferred securities to pay down FHLB borrowings.
23
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, 2001 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.
The intangible assets recorded by the bank upon completion of the Fleet branch
acquisition (which represent the excess of the purchase price paid over the fair
value of the assets purchased and the liabilities assumed) must be deducted from
Tier 1 capital in calculating the company's and the bank's regulatory capital
ratios. The company raised $10.5 million from a private placement of trust
preferred securities during March 2000. Trust preferred securities may compose
up to 25% of the company's Tier 1 capital (with any excess allocable to Tier 2
capital). The company contributed $10.3 million of trust preferred proceeds to
the bank, which amount is included in Tier 1 capital of the bank without
limitation.
For additional information regarding the capital requirements applicable to the
company and the bank and their respective capital levels at December 31, 2001,
see note 10, "Stockholders' Equity", to the consolidated financial statements
contained in Item 8.
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 trust fees, deposit account fees, and gains and
losses on sales of securities and loans, as well as the bank's level of
non-interest expense and income taxes.
24
Rate/Volume Analysis
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, 2001, 2000
and 1999.
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, 2001 and 2000. 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).
December 31,
---------------------------------------------------------------------------------------
2001 vs. 2000 2000 vs. 1999
---------------------------------------------------- ---------------------------------
($ in thousands) Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
-------- -------- -------- ------ ------- ------- ------- -------
Interest Income
Loans $ 5,081 $(2,352) $ (451) $ 2,278 $ 4,715 $ 853 $ 194 $ 5,762
Investments and Federal Funds sold 1,880 (629) (135) 1,116 3,825 163 (42) 3,946
------- ------- ------- ------- ------- ------- ------- -------
Total 6,961 (2,981) (586) 3,394 8,540 1,016 152 9,708
------- ------- ------- ------- ------- ------- ------- -------
Interest Expense
Savings/PIC/MM 1,807 (880) (407) 520 947 381 149 1,477
Time deposits (599) (512) 37 (1,074) 665 401 37 1,103
Borrowed funds 101 (1,519) (40) (1,458) 1,675 316 359 2,350
------- ------- ------- ------- ------- ------- ------- -------
Total 1,309 (2,911) (410) (2,012) 3,287 1,098 545 4,930
------- ------- ------- ------- ------- ------- ------- -------
Change in net interest income $ 5,652 $ (70) $ (176) $ 5,406 $ 5,253 $ (82) $ (393) $ 4,778
======= ======= ======= ======= ======= ======= ======= =======
25
Average Balances, Interest and Average Interest Rates
Year ended December 31, 2001 Year ended December 31, 2000
----------------------------------------- -----------------------------------------
($ in thousands) Average Average Average
Average Interest Average Interest
Balance Interest Rate(4) Balance Interest Rate(4)
----------------------------------------- -----------------------------------------
Assets:
Loans (1)(2) $340,593 $ 28,776 8.45% $285,792 $ 26,498 9.27%
Investment securities and
federal funds sold (4)(5) 219,198 12,764 6.22% 190,488 11,648 6.55%
-------- -------- -------- --------
Total interest earnings assets 559,791 41,540 7.58% 476,280 38,146 8.18%
Other assets (3)(5) 45,025 34,317
-------- --------
Total assets (5) $604,816 $510,597
======== ========
Liabilities and stockholders' equity:
Savings, PIC and money market $235,545 $ 4,419 1.88% $160,943 $ 3,899 2.42%
Time deposits 146,577 7,329 5.00% 157,818 8,403 5.32%
Short-term borrowings 66,233 2,369 3.58% 64,534 3,827 5.93%
-------- -------- -------- --------
Total interest-bearing
deposits and borrowings 448,355 14,117 3.15% 383,295 16,129 4.21%
Net interest rate spread (4)
Non-interest bearing deposits 104,233 83,194
-------- ------- ------- -------
Total deposits and borrowings 552,588 14,117 2.55% 466,489 16,129 3.46%
Other liabilities 4,846 3,585
-------- --------
Total liabilities 557,434 470,074
Trust preferred securities 10,500 7,975
Stockholders' equity (5) 36,882 32,548
-------- -------
Total liabilities, trust
preferred securities and
stockholders' equity (5) $604,816 $510,597
======== ========
Net interest Income $ 27,423 $ 22,017
======== ========
Net interest margin (4) 5.05% 4.80%
26
Year ended December 31, 1999
---------------------------------------
Average
Average Interest
Balance Interest Rate(4)
----------------------------------------
Assets:
Loans (1)(2) $232,843 $ 20,736 8.91%
Investment securities and
federal funds sold (4)(5) 130,937 7,702 6.42%
-------- --------
Total interest earnings assets 363,780 28,438 8.01%
--------
Other assets (3)(5) 21,395
--------
Total assets (5) $385,175
========
Liabilities and stockholders' equity:
Savings, PIC and money market $115,693 $ 2,422 2.09%
Time deposits 144,629 7,300 5.05%
Short-term borrowings 30,243 1,477 4.88%
-------- -------
Total interest-bearing 290,565 11,199 3.85%
deposits and borrowings
Net interest rate spread (4) 4.16%
Non-interest bearing deposits 63,691
-------- -------
Total deposits and borrowings 354,256 11,199 3.16%
Other liabilities 2,765
-------
Total liabilities 357,021
Trust preferred securities --
Stockholders' equity (5) 28,154
--------
Total liabilities, trust
preferred securities and
stockholders' equity (5) $385,175
========
Net interest Income $17,239
=======
Net interest margin (4) 4.93%
(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, deferred income taxes, intangible assets and
other miscellaneous assets.
(4) Average balances are presented at average amortized cost and average
interest rates are presented on a tax-equivalent basis. The tax equivalent
effect was $866, $826, and $710 for the years ended December 31, 2001,
2000 and 1999, respectively.
(5) Excludes the effect of SFAS No. 115
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.
27
COMPARISON OF YEARS ENDED DECEMBER 31, 2001 AND 2000
Net Income
The company had net income in 2001 of $4.9 million, or $1.43 per share and $1.39
per share on a basic and fully diluted basis, respectively, compared with net
income in 2000 of $3.6 million, or $1.08 per share and $1.07 per share on a
basic and fully diluted basis, respectively. The increase in net income of $1.3
million, or 36.1%, was primarily the result of an increase of $5.4 million in
net interest income and $2.2 million in non-interest income, offset by an
increase in provision for loan losses of $1.9 million and an increase in
non-interest expense of $3.8 million, the latter of which was due to the growth
of the bank and the upgrading of facilities, including investment in back office
operations.
Net Interest Income
The bank's net interest income was $27.4 million for the year ended December 31,
2001, an increase of $5.4 million, or 24.6%, from $22.0 million for the year
ended December 31, 2000. This increase was primarily a result of an increase in
the bank's loan and investment balances, which were funded principally by
increases in deposits and commercial sweep accounts, and a decrease in total
interest expense primarily resulting from a decrease in interest rates during
the year.
Interest income on loans increased in the year ended December 31, 2001 to $28.8
million from $26.5 million for the year ended December 31, 2000. The increase
was primarily due to an increase in the average loan balance from $285.8 million
in 2000 to $340.6 million in 2001. The average interest rate earned on loans
decreased from 9.27% in 2000 to 8.45% in 2001. The decrease in the interest rate
earned was primarily attributable to eleven interest rate cuts by the Federal
Reserve Board during 2001.
Interest income on investments and federal funds sold increased for the year
ended December 31, 2001 to $12.8 million from $11.6 million for the year ended
December 31, 2000. The increase was primarily due to an increase in the average
balance from $190.5 million in 2000 to $219.2 million in 2001. The increase in
investments primarily resulted from strong deposit growth within the existing
branch network, and was offset by a decrease in the average interest rate earned
on investments from 6.55% for the year ended December 31, 2000 to 6.22% for the
year ended December 31, 2001, both on a tax equivalent basis.
Interest expense on savings, PIC and money market accounts was $4.4 million and
$3.9 million for the years ended December 31, 2001 and December 31, 2000,
respectively. The increase resulted from an increase in the average balance from
$160.9 million at December 31, 2000 to $235.5 million at December 31, 2001. The
increased interest expense in 2001 was offset by a lower average interest rate
paid on deposits of 1.88% in 2001 compared to 2.42% in 2000. The decrease in
rate is attributable to the lower market interest rates.
Interest expense on time deposits decreased to $7.3 million for the year ended
December 31, 2001 compared to $8.4 million for the year ended December 31, 2000.
The decrease was due to a decrease in the average balance from $157.8 million in
2000 to $146.6 million in 2001 and a decrease in the average interest rate paid
from 5.32% in 2000 to 5.00% in 2001. The decrease in the average interest rate
paid on time deposits reflects a decrease in market rates over the same period.
Interest expense on short-term borrowings, including borrowings from the FHLB
and repurchase agreements, consisting of term repurchases agreements and
commercial sweep accounts, decreased to $2.4 million in 2001 from $3.8 million
in 2000. The decrease resulted from lower interest rates paid offset by a slight
increase in average balance. Due to market conditions rates on these borrowings
decreased substantially during 2001. The average balance was also impacted by
growth in the bank's commercial sweep product, which grew from an average
balance of $33.0 million in 2000 to $62.6 million in 2001. During 2001 the
average balance on term repurchase agreements decreased from $6.8 million at
December 31, 2000 to $3.0 million at December 31, 2001. The average rate paid in
2001 on short-term borrowings decreased due to lower market rates.
28
The net interest rate spread and net interest margin both increased to 4.43% and
5.05%, respectively, for the year ended December 31, 2001, from 3.97% and 4.80%,
respectively, for the year ended December 31, 2000, both on a tax equivalent
basis. The increase in spread and margin primarily resulted from a declining
rate environment, during which the company's margin increases in the short term
due to interest sensitive liabilities re-pricing more quickly than interest
earning assets. Over the long term, however, the company's net margin would be
expected to decrease in a declining rate environment due to a significant
concentration of the loan portfolio re-pricing downward to rate levels based
upon the then current prime rate. The increase in net interest rate spread is
also a result of an improved deposit mix during 2001. The average balances on
lower cost checking and savings deposits increased $74.6 million for the year
ended December 31, 2001 while the average balances on certificates of deposit
decreased $11.2 million.
Provision for Loan Losses
The provision for loan losses amounted to $2,480,000 and $603,000 for the years
ended December 31, 2001 and 2000, respectively. Loans, before the allowance for
loan losses, increased from $312.0 million, at December 31, 2000 to $376.3
million, at December 31, 2001, an increase of 20.6%. Despite the growth in the
bank's loan portfolio, there has not been a significant change in the bank's
underwriting practices or significant increases in loan charge-offs. Management
regularly reviews the level of non-accrual loans, levels of charge-offs and
recoveries, levels of outstanding loans, and known and inherent risks in the
nature of the loan portfolio.
The allowance for loan losses to loan ratio increased from 1.99% at December 31,
2000 to 2.27% at December 31, 2001. The increase in this ratio was attributable
to an increase in provision for loan losses of $1.9 million from the previous
year. Management felt it was prudent to increase the allowance for loan losses
in light of the current economic uncertainty.
Non-Interest Income
Non-interest income, exclusive of net gains or losses on sales of securities,
increased by $1,395,000 to $4,564,000 for the year ended December 31, 2001,
compared to $3,169,000 for the year ended December 31, 2000. The increase was
primarily attributable to increases in deposit service fees, investment
management and trust service fees, and gains on sales of loans.
Investment management and trust service fees increased by $311,000, or 20.4%,
due primarily to an increase in investment assets under management. Included in
investment management and trust service fees is commission income in the amount
of $255,000 for the year ended December 31, 2001 and $90,000 for the year ended
December 31, 2000, from brokerage services provided through a third party
service arrangement. Investment assets under management amounted to $311.6
million at December 31, 2001 compared to $289.3 million at December 31, 2000.
Deposit service fees increased from $938,000 in 2000 to $1,548,000 in 2001. The
increase was due to deposit growth and the declining interest rate environment
requiring higher compensating demand deposit account balances to offset charges.
Gains on sales of loans increased by $276,000 from 2000 to 2001 due to increased
residential mortgage production resulting from a declining interest rate
environment.
Other income increased by $198,000 from 2000 to 2001. The increase was primarily
from higher fee income compared to the year ended December 31, 2000 for debit
cards, ATM's, safe deposit boxes, and wire transfer fees.
Gains (Losses) on Sales of Securities
Net gains from the sales of investment securities totaled $941,000 in 2001
compared to net gains of $129,000 in 2000. The net gain resulted from sales of
securities based on management's decision to take advantage of certain
investment opportunities and asset/liability repositioning.
29
Non-Interest Expense
Salaries and benefits expense totaled $13,225,000 for the year ended December
31, 2001, compared with $10,847,000 for the same period in 2000, an increase of
$2,378,000, or 21.9%. The increase resulted primarily from additional staff
hired in 2001 and 2000 to support growth and strategic initiatives implemented.
Occupancy expense was $4,043,000 for the year ended December 31, 2001, compared
with $3,217,000 for the same period in 2000, an increase of $826,000 or 25.7%,
primarily resulting from office expansion for operational support departments,
growth and ongoing enhancements to the bank's computer systems.
Audit, legal and other professional expenses decreased by $58,000, or 9.1%, in
2001 primarily resulting from a decrease in legal costs associated with the
establishment of securities brokerage and insurance sales operations during
2000.
Advertising and public relations expenses decreased to $378,000 for the year
ended December 31, 2001 from $644,000 for the same period in 2000 primarily due
the marketing efforts associated with the Fleet branch acquisition reflected in
2000.
Office and data processing supplies expense decreased to $475,000 for the year
ended December 31, 2001 compared to $705,000 for the same period in 2000
primarily due to one time costs associated with the Fleet branch acquisition
reflected in 2000.
Trust professional and custodial expenses increased by $140,000, or 27.8%, due
to an increase in investment assets under management, additional services being
provided by the financial services department, and increased professional fees
as a percentage of assets.
Amortization of intangible assets, associated with the Fleet branch acquisitions
on July 21, 2000, increased to $792,000 for the year ended December 31, 2001
compared to $351,000 for the same period in 2000 due to the full year effect in
2001.
Trust preferred expense, relating to the issuance of trust preferred securities
on March 23, 2000, increased to $1,158,000 for the year ended December 31, 2001
compared to $895,000 for the same period in 2000 due to the full year effect in
2001.
Other operating expense increased to $2,508,000 for the year ended December 31,
2001 compared to $2,168,000 for the same period in 2000 primarily due to the
bank's growth, as well as the numerous strategic initiatives implemented during
the year. The primary increases were for ATM's, contributions, and courier
service, offset by decreases in office supplies and training expenses that were
one time costs associated with the branch acquisitions.
Income Tax Expense
The company's effective tax rate for the year ended December 31, 2001 was 26.2%
compared to 24.1% for the year ended December 31, 2000. The increase in rate was
primarily due to higher pretax income, which lessened the impact of tax exempt
municipal securities.
30
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999
Net Income
The company had net income in 2000 of $3.6 million, or $1.08 per share and $1.07
per share on a basic and fully diluted basis, respectively, compared with net
income in 1999 of $4.1 million, or $1.28 per share and $1.22 per share on a
basic and fully diluted basis, respectively. The decrease in net income of $0.5
million, or 12%, was primarily the result of increased expenses and start up
costs associated with numerous strategic initiatives accomplished in 2000,
including the purchase of the Fleet branches, the establishment of a securities
brokerage operation, numerous eCommerce initiatives, the expansion of deposit
product offerings, the establishment of insurance sales operations, the
upgrading of facilities, and the investment in back office operations. These
expenses were offset by a $4.8 million or 28% increase in net interest income.
Net Interest Income
The bank's net interest income was $22.0 million for the year ended December 31,
2000, an increase of $4.8 million, or 28%, from $17.2 million for the year ended
December 31, 1999. This increase was primarily a result of an increase in the
bank's loan and investment balances, which were funded principally by increases
in deposits and commercial sweep accounts and the issuance of trust preferred
securities.
Interest income on loans increased in the year ended December 31, 2000 to $26.5
million from $20.7 million for the year ended December 31, 1999. The increase
was primarily due to an increase in the average loan balance from $232.8 million
in 1999 to $285.8 million in 2000. The average interest rate earned on loans
also increased from 8.91% in 1999 to 9.27% in 2000. The increase in the interest
rate earned was primarily attributable to six interest rate increases by the
Federal Reserve Board during the second half of 1999 through the first half of
2000. The effect of these rate increases was offset partially by the bank's
decision to maintain its loan rates at competitive levels, which enabled the
bank to realize substantial additional loan originations during 2000.
Interest income on investments increased for the year ended December 31, 2000 to
$11.3 million from $7.6 million for the year ended December 31, 1999. The
increase was primarily due to an increase in the average investment portfolio
balance from $129.3 million in 1999 to $185.2 million in 2000. The increase in
investments primarily resulted from strong deposit growth within the existing
branch network and $58.3 million in deposits assumed from Fleet National Bank.
Also contributing to this increase in investment income was a higher average
interest rate earned on investments from 6.51% in 1999 to 6.65% in 2000, both on
a tax equivalent basis.
Interest expense on savings, PIC and money market accounts was $3.9 million and
$2.4 million for the years ended December 31, 2000 and December 31, 1999,
respectively. The increase resulted from an increase in the average balance from
$115.7 million at December 31, 1999 to $160.9 million at December 31, 2000.
Included in the December 31, 2000 average balance was $44.3 million in savings,
PIC and money market accounts assumed from Fleet National Bank on July 21, 2000.
The increased interest expense in 2000 was also attributable to a higher average
interest rate paid on deposits of 2.42% in 2000 compared to 2.09% in 1999. The
increase in rate was attributable to higher market interest rates, the full year
impact of a tiered rate savings account introduced in the latter half of 1999
and implementation of a tiered rate personal money market account in July 2000.
Interest expense on time deposits increased to $8.4 million for the year ended
December 31, 2000 compared to $7.3 million for the year ended December 31, 1999.
The increase was due to an increase in the average balance from $144.6 million
in 1999 to $157.8 million in 2000 and an increase in the average interest rate
paid from 5.05% in 1999 to 5.32% in 2000. The increase in the interest rate paid
on time deposits reflected an increase in market rates over the same period.
31
Interest expense on short-term borrowings, including borrowings from the FHLB
and repurchase agreements, consisting of term repurchases agreements and
commercial sweep accounts, increased to $3.8 million in 2000 from $1.5 million
in 1999. The increase resulted from both higher average balances and higher
interest rates paid. The increase in average balance resulted from FHLB
borrowings entered into during the latter half of 1999 in anticipation of the
Fleet branch acquisition. Due to market conditions rates on these borrowings
increased substantially during 2000. These borrowings were paid off in August
2000 after the bank assumed $58.3 million in deposits from Fleet National Bank.
The average balance was also impacted by growth in the bank's commercial sweep
product which grew from an average balance of $18.0 million in 1999 to $39.8
million in 2000. During 2000 the average balance on term repurchase agreements
increased from $4.3 million at December 31, 1999 to $6.8 million at December 31,
2000. The average rate paid in 2000 on short-term borrowings increased due to
higher market rates, growth in average balances, and a full year's impact of
growth in the second half of 1999.
The net interest rate spread and net interest margin both decreased to 3.99% and
4.82%, respectively, for the year ended December 31, 2000, from 4.18% and 4.96%,
respectively, for the year ended December 31, 1999, both on a tax equivalent
basis. The decrease in spread and margin primarily resulted from an increase in
short term borrowings in anticipation of the Fleet branch acquisition and a
rising rate environment during which the company's margin declined in the short
term due to interest sensitive liabilities re-pricing more quickly than interest
earning assets. Over the long term, however, the company's net margin would be
expected to increase in a rising rate environment due to a significant
concentration of the loan portfolio re-pricing upward to rate levels based upon
the then current prime rate.
Provision for Loan Losses
The provision for loan losses amounted to $603,000 and $270,000 for the years
ended December 31, 2000 and 1999, respectively. Loans, before the allowance for
loan losses, increased from $261.2 million, at December 31, 1999 to $311.8
million, at December 31, 2000, an increase of 19.4%. Growth during 2000 included
$7.0 million in loans purchased from Fleet National Bank. Despite the growth in
the bank's loan portfolio, there was not a significant change in the bank's
underwriting practices or significant increases in loan charge-offs. Management
regularly reviews the level of non-accrual loans, levels of charge-offs and
recoveries, levels of outstanding loans, and known and inherent risks in the
nature of the loan portfolio.
The allowance for loan losses to gross loan ratio declined from 2.08% at
December 31, 1999 to 1.99% at December 31, 2000. The decrease was attributable
to an increase in loans outstanding that outpaced the increase in the allowance
for loan losses at December 31, 2000.
Non-Interest Income
Non-interest income, exclusive of net gains or losses on sales of securities,
increased by $561,000 to $3,169,000 for the year ended December 31, 2000,
compared to $2,608,000 for the year ended December 31, 1999. The increase was
primarily attributable to increases in trust income, investment commission and
other income.
Trust fees increased by $215,000, or 18%, due primarily to an increase in trust
assets under management. Trust assets under management amounted to $280.3
million at December 31, 2000 compared to $216.7 million at December 31, 1999.
During the first quarter of 2000 the company established a brokerage operation
through a third party service arrangement to provide securities brokerage
services to customers. Commission income from these services amounted to $93,000
for the year ended December 31, 2000.
Deposit fees increased slightly from $882,000 in 1999 to $938,000 in 2000. The
increase was due to deposit growth and $44.3 million in savings and checking
accounts assumed from Fleet National Bank on July 21, 2000.
Gains on sales of loans decreased by $59,000 from 1999 to 2000 due to slower
residential mortgage production resulting from higher interest rates.
Other income increased by $256,000 from 1999 to 2000. The increase was primarily
from higher fee income compared to the year ended December 31, 1999 for check
printing, debit cards, ATM's, and safe deposit boxes.
32
Gains (Losses) on Sales of Securities
Net gains from the sales of investment securities totaled $129,000 in 2000
compared to net gains of $183,000 in 1999. The net gain resulted from sales of
securities based on management's decision to take advantage of certain
investment opportunities and asset/liability repositioning.
Non-Interest Expense
Salaries and benefits expense totaled $10,847,000 for the year ended December
31, 2000, compared with $8,395,000 in 1999, an increase of $2,452,000, or 29%.
The increase resulted primarily from additional staff hired in 2000 and 1999 to
support growth and strategic initiatives implemented.
Occupancy expense was $3,217,000 for the year ended December 31, 2000, compared
with $2,448,000 in 1999, an increase of $769,000 or 31% due to the opening of
the Westford branch, the acquisition of the Fleet branches, office renovations
for operational support departments and loan officers and ongoing enhancements
to the bank's computer systems.
Audit, legal and other professional expenses decreased by $61,000, or 9%, in
2000 primarily resulting from a decrease in year 2000 readiness preparation
expense incurred in 1999, offset by increased legal costs associated with the
establishment of securities brokerage and insurance sales operations during
2000.
Advertising and public relations expenses increased to $644,000 for the year
ended December 31, 2000 from $502,000 for the same period in 1999 primarily due
to increased marketing efforts associated with the Fleet branch acquisition and
the bank's growth.
Office and data processing supplies expense increased to $705,000 for the year
ended December 31, 2000 compared to $369,000 for the same period in 1999
primarily due to one time costs associated with the Fleet branch acquisition,
bank growth, and enhancements made to marketing materials.
Trust professional and custodial expenses increased by $164,000, or 48%, due to
an increase in trust assets under management, additional services being provided
by the trust department, and increased professional fees as a percentage of
assets.
Other operating expense increased to $2,168,000 for the year ended December 31,
2000 compared to $1,438,000 for the same period in 1999 primarily due to the
bank's growth, one time costs associated with the branch acquisition, and the
numerous strategic initiatives implemented during the year. The primary
increases were for postage, ATM's, internet banking, telephones, training,
contributions, and courier services.
Income Tax Expense
The company's effective tax rate for the year ended December 31, 2000 was 24.1%
compared to 26.7% for the year ended December 31, 1999. The reduction in rate
was primarily due to the combination of lower pretax income and income from tax
exempt municipal securities.
Accounting Rule Changes
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standard ("SFAS") No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141 requires that all
business combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting, and prohibits the use of the pooling-of-interests
method for such transactions. The new standard also requires that goodwill
acquired in such business combinations be measured using the definition included
in APB Opinion No. 16, "Business Combinations," and initially recognized as an
asset in the financial statements. The new standard also requires intangible
assets acquired in any such business combination to be recognized as an asset
apart from goodwill if they meet certain criteria.
33
SFAS No. 142 applies to all goodwill and intangible assets acquired in a
business combination. Under the new standard, all goodwill, including goodwill
acquired before initial application of the standard, should not be amortized but
should be tested for impairment at least annually at the reporting unit level,
as defined in the standard. Intangible assets other than goodwill should be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Within six months of initial application
of the new standard, a transitional impairment test must be performed on all
goodwill. Any impairment loss recognized as a result of the transitional
impairment test should be reported as a change in accounting principle. In
addition to the transitional impairment test, the required annual impairment
test should be performed in the year of adoption of the standard.
SFAS No. 142 is effective for fiscal years beginning after December 15, 2001,
and must be adopted as of the beginning of a fiscal year. Retroactive
application is not permitted. The company adopted the new standard on January 1,
2002. During 2001, the company reported that the adoption of SFAS No. 142 was
expected to increase annual net income by approximately $450,000 over the
remaining amortization period ending in June 2010. However, subsequent to the
company's disclosure but prior to formal adoption on January 1, 2002, the FASB
clarified that goodwill as defined in SFAS No. 142 did not include the excess of
amounts paid over liabilities assumed in a branch acquisition and such amounts
should continue to be accounted for in accordance with SFAS No. 72, "Accounting
for Certain Acquisitions of Banking or Thrift Institutions." Consequently,
goodwill will continue to be amortized over a ten year life and adoption of SFAS
No. 142 is expected to have no impact on the consolidated financial statements
of the company although final resolution of this by the FASB has not been
determined.
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 7A and other maturity and repricing information of
the bank's assets and liabilities in this report contain additional information.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
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, Federal Home Loan Bank
borrowing capacity and loan to deposit ratio. The asset/liability strategies are
reviewed on a periodic basis 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.
34
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 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 the future interest rate environment affects prepayment speeds,
reinvestment rates, maturities of investments due to call provisions, changes in
interest rates on various assets 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 the cumulative 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 cumulative net interest income for
a 24-month period from the company's interest bearing assets and liabilities as
of December 31, 2001, 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.
December 31,2001
----------------------------------------------------
Rates Rise Rates Rates Fall
200 BP Unchanged 200 BP
---------------- ---------------- ----------------
Interest Earning Assets:
Loans $ 64,086 $ 57,743 $ 51,487
Mortgage backed securities 15,179 13,883 12,586
Other investments & federal 9,350 8,605 7,878
funds sold ---------------- ---------------- ----------------
Total interest income 88,615 80,231 71,951
---------------- ---------------- ----------------
Interest Earning Liabilities:
Time deposits 12,446 9,612 6,777
PIC, money market, savings 10,471 7,415 4,358
FHLB borrowings and 2,065 1,463 862
repurchase agreements ---------------- ---------------- ----------------
Total interest expense 24,982 18,490 11,997
---------------- ---------------- ----------------
Net interest income $ 63,633 $ 61,741 $ 59,954
================ ================ ================
As of December 31, 2001, analysis indicates that the sensitivity of the net
interest margin was in compliance with the bank's current asset/liability
policy. Management estimates that over a 24-month period net interest income
will increase in a rising rate environment and decrease in a declining rate
environment due to the company being more asset than liability sensitive.
The results and conclusions reached from the December 31, 2001 simulation are
not significantly different from the December 31, 2000 simulation.
December 31,2000
-------------------------------------------------
($ in thousands) Rates Rise Rates Rates Fall
200 BP Unchanged 200 BP
--------------------- ---------------- ---------
Interest Earning Assets $ 88,451 $ 81,754 $ 75,139
Interest Earning 38,505 31,750 26,376
Liabilities --------------------- ---------------- --------
Net interest income $ 49,946 $ 50,004 $ 48,763
===================== ================ ========
35
Maturity and composition information of the company's loan portfolio, investment
portfolio, certificates of deposit, and short-term borrowings are contained in
Part I, Item 1, under the captions "Lending", "Investment Activities" and
"Source of funds" and in Part II, Item 8 in Notes 2,3,7 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 mortgage backed securities
(including collateralized mortgage obligations) and callable securities as rates
change.
Management also periodically 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.
36
Item 8. Financial Statements
Index to Consolidated Financial Statements
Page
Independent Auditors' Report 37
Consolidated Balance Sheets as of December 31, 2001 and 2000 38
Consolidated Statements of Income for the years ended 39
December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity 40
for the years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the years ended 41
December 31, 2001, 2000 and 1999
Notes to the Consolidated Financial Statements 43
37
Independent Auditors' Report
The Board of Directors
Enterprise Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of Enterprise
Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2001 and 2000,
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, 2001. 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 auditing standards generally accepted
in the United States of America. 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 subsidiaries at December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001 in conformity with accounting principles generally
accepted in the United States of America.
/s/KPMG LLP
- ----------------------
January 9, 2002
Boston, Massachusetts
38
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
December 31, 2001 and 2000
($ in thousands) 2001 2000
------------------- ------------------
Assets
Cash and equivalents:
Cash and due from banks (Note 15) $ 31,361 $ 26,080
Daily federal funds sold 6,500 28,025
------------------- ------------------
Total cash and cash equivalents 37,861 54,105
------------------- ------------------
Investment securities at fair value (Notes 2 and 8) 197,060 185,184
Loans, less allowance for loan losses of $8,547
in 2001 and $6,220 in 2000 (Notes 3 and 8) 367,780 305,797
Premises and equipment (Note 4) 12,136 10,903
Accrued interest receivable (Note 5) 3,586 4,078
Deferred income taxes, net (Note 13) 2,034 2,209
Prepaid expenses and other assets 2,990 2,536
Income taxes receivable 301 415
Intangible assets, net 6,796 7,587
------------------- ------------------
Total assets $ 630,544 $ 572,814
=================== ==================
Liabilities, Trust Preferred Securities and
Stockholders' Equity
Deposits (Note 7) $ 526,953 $ 461,975
Short-term borrowings (Notes 2 and 8) 44,449 58,271
Escrow deposits of borrowers 931 1,106
Accrued expenses and other liabilities 4,185 3,776
Accrued interest payable 805 1,031
------------------- ------------------
Total liabilities 577,323 526,159
------------------- ------------------
Commitments and contingencies (Notes 4, 8, 14 and 15)
Trust preferred securities (Note 9) $ 10,500 $ 10,500
Stockholders' equity (Notes 1, 10 and 11):
Preferred stock, $0.01 par value per share;
1,000,000 shares authorized; no shares issued
- -
Common stock $0.01 par value per share; 10,000,000 shares authorized at
December 31, 2001 and 2000, respectively; 3,461,999 and 3,408,667
shares issued and outstanding at December 31, 2001 and 2000,
respectively
35 34
Additional paid-in capital 18,654 17,843
Retained earnings 20,715 16,793
Accumulated other comprehensive income 3,317 1,485
------------------- ------------------
Total stockholders' equity 42,721 36,155
------------------- ------------------
Total liabilities, trust preferred securities $ 630,544 $ 572,814
and stockholders' equity =================== ==================
See accompanying notes to consolidated financial statements.
39
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 2001, 2000 and 1999
($ in thousands, except per share data) 2001 2000 1999
-------------- -------------- --------------
Interest and divided income:
Loans $ 28,776 26,498 20,736
Investment securities 11,927 11,307 7,624
Federal funds sold 837 341 78
-------------- -------------- --------------
Total interest income 41,540 38,146 28,438
-------------- -------------- --------------
Interest expense:
Deposits 11,748 12,302 9,722
Borrowed funds 2,369 3,827 1,477
-------------- -------------- --------------
Total interest expense 14,117 16,129 11,199
-------------- -------------- --------------
Net interest income 27,423 22,017 17,239
Provision for loan losses (Note 3) 2,480 603 270
-------------- -------------- --------------
Net interest income after provision for loan losses
24,943 21,414 16,969
-------------- -------------- --------------
Non-interest income:
Investment management and trust service fees 1,834 1,523 1,215
Deposit service fees 1,548 938 882
Net gains on sales of investment
Securities (Note 2)
941 129 183
Gains on sales of loans 371 95 154
Other income 811 613 357
-------------- -------------- --------------
Total non-interest income 5,505 3,298 2,791
-------------- -------------- --------------
Non-interest expense:
Salaries and employee benefits (Note 12) 13,225 10,847 8,395
Occupancy expenses (Note 4 and 14) 4,043 3,217 2,448
Audit, legal and other professional fees 577 635 696
Advertising and public relations 378 644 502
Office and data processing supplies 475 705 369
Trust professional and custodial expenses 644 504 340
Amortization of intangible assets 792 351 -
Trust preferred expense 1,158 895 -
Other operating expenses 2,508 2,168 1,438
-------------- -------------- --------------
Total non-interest expense 23,800 19,966 14,188
-------------- -------------- --------------
Income before income taxes 6,648 4,746 5,572
Income tax expense (Note 13) 1,744 1,142 1,489
-------------- -------------- --------------
Net income $ 4,904 3,604 4,083
============== ============== ==============
Basic earnings per share $ 1.43 1.08 1.28
============== ============== ==============
Diluted earnings per share $ 1.39 1.07 1.22
============== ============== ==============
Basic weighted average common shares outstanding 3,432,255 3,322,364 3,187,292
============== ============== ==============
Diluted weighted average common shares outstanding 3,530,965 3,369,025 3,335,338
============== ============== ==============
See accompanying notes to consolidated financial statements.
40
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2001, 2000 and 1999
($ in thousands) Common Stock Additional
---------------------------- Paid-in Retained
Shares Amount Capital Earnings
------------- ----------- ----------- -------------
Balance at December 31, 1998 3,167,684 $ 32 $ 15,560 $ 10,610
============= ============ =========== ============
Comprehensive income
Net Income 4,083
Unrealized depreciation on securities, net of
reclassification
Total comprehensive income
Common stock dividend declared ($0.2100 per share) (667)
Common stock issued 27,054 - 388
Stock options exercised (Note 11) 35,155 - 201
----------- ------------- ------------- -------------
Balance at December 31, 1999 3,229,893 $ 32 $ 16,149 $ 14,026
=========== ============= ============= =============
Comprehensive income
Net Income 3,604
Unrealized appreciation on securities, net of
reclassification
Total comprehensive income
Tax benefit on non-qualified stock options
exercised - 377
Common stock dividend declared ($0.2500 per share) (837)
Common stock issued 55,804 1 585
Stock options exercised (Note 11) 122,970 1 732
------------- ------------ ------------- -------------
Balance at December 31, 2000 3,408,667 $ 34 $ 17,843 $ 16,793
============= ============= ============= =============
Comprehensive income
Net Income 4,904
Unrealized appreciation on securities, net of
reclassification
Total comprehensive income
Common stock dividend declared ($0.2875 per share) (982)
Common stock issued 48,182 1 763
Stock options exercised (Note 11) 5,150 - 48
------------- ------------- ------------- -------------
Balance at December 31, 2001 3,461,999 $ 35 $ 18,654 $ 20,715
============= ============= ============= =============
41
($in thousands) Comprehensive Income Total
-------------------------- Stockholders'
Period Accumulated Equity
---------- ----------- ----------
Balance at December 31, 1998 $ 996 $ 27,198
=========== ==========
Comprehensive incom
Net Income 4,083 4,083
Unrealized depreciation on securities,
net of reclassification (3,740) (3,740) (3,740)
----------
Total comprehensive income $ 343
==========
Common stock dividend declared
($0.2100 per share) (667)
Common stock issued 338
Stock options exercised (Note 11) 201
----------- ----------
Balance at December 31, 1999 $ (2,744) $ 27,463
=========== ==========
Comprehensive income
Net Income 3,604 3,604 3,604
Unrealized appreciation on securities,
net of reclassification 4,229 4,229 4,229
---------
Total comprehensive income $ 7,833
=========
Tax benefit on non-qualified stock
options exercised 377
Common stock dividend declared
($0.2500 per share) (837)
Common stock issued 586
Stock options exercised (Note 11) ----------- ----------
Balance at December 31, 2000 $ 1,485 $ 36,155
=========== ==========
Comprehensive income
Net Income 4,904 4,904
Unrealized appreciation on securities,
net of reclassification 1,832 1,832 1,832
---------
Total comprehensive income $ 6,736
=========
Common stock dividend declared
($0.2875 per share) (982)
Common stock issued 764
Stock options exercised (Note 11) 48
----------- ----------
Balance at December 31, 2001 $ 3,317 $ 42,721
=========== ==========
Disclosure of reclassification amount: 2001 2000 1999
------------- ------------- -------------
Gross unrealized appreciation (depreciation) arising $ 3,717 $ 6,515 $ (5,567)
during the period
Tax (expense) benefit (1,264) (2,201) 1,947
-------- ---------- --------
Unrealized holding appreciation (depreciation), net
of tax 2,453 4,314 (3,620)
---------- ----------- --------
Less: reclassification adjustment on gains
included in net income (net of $320, $44, $63
tax, respectively) 621 85 120
---------- ----------- ---------
Net unrealized appreciation (depreciation) on
securities, net of reclassification $ 1,832 $ 4,229 $ (3,740)
========== =========== =========
See accompanying notes to consolidated financial statements.
42
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2001, 2000 and 1999
($ in thousands) 2001 2000 1999
------------- --------------- -------------
Cash flows from operating activities:
Net income $ 4,904 $ 3,604 $ 4,083
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 2,480 603 270
Depreciation and amortization 2,312 1,717 1,374
Amortization of intangible assets 791 351 -
Net gains on sale of investments (941) (129) (183)
Gain on sale of loans (371) (95) (154)
Loss on sale of real estate - - 54
(Increase) decrease in:
Loans held for sale, net of gain 12 (3) (735)
Accrued interest receivable 492 (814) (840)
Prepaid expenses and other assets (454) (1,145) (727)
Deferred income taxes (767) (325) (274)
Income taxes receivable 114 (160) 16
Increase (decrease) in:
Accrued expenses and other liabilities 409 1,486 (290)
Accrued interest payable (226) 674 92
------------- --------------- -------------
Net cash provided by operating activities 8,755 5,764 2,686
------------- --------------- -------------
Cash flows from investing activities:
Proceeds from sales of investment securities 17,589 10,971 12,524
Proceeds from maturities, calls and pay-downs of investment securities 57,671 14,392 17,539
Purchase of investment securities (83,608) (50,558) (74,558)
Proceeds from sales of real estate acquired by foreclosure - - 250
Net increase in loans (64,104) (50,645) (45,111)
Additions to premises and equipment, net (3,358) (4,946) (4,633)
Cash paid for assets in excess of liabilities - (7,688) -
------------- --------------- -------------
Net cash used in investing activities (75,810) (88,474) (93,989)
------------- --------------- -------------
Cash flows from financing activities:
Net increase in deposits 64,978 128,552 15,757
Net increase (decrease) in short-term borrowings (13,822) (20,496) 66,682
Proceeds from issuance of trust preferred securities - 10,500 -
Net (decrease) increase in escrow deposits of borrowers (175) 311 108
Cash dividends paid (982) (837) (667)
Proceeds from issuance of common stock 764 586 388
Proceeds from exercise of stock options 48 1,110 201
------------- --------------- -------------
Net cash provided by financing activities 50,811 119,726 82,469
------------- --------------- -------------
Net increase (decrease) in cash and cash equivalents (16,244) 37,016 (8,834)
Cash and cash equivalents at beginning of year 54,105 17,089 25,923
------------- --------------- -------------
Cash and cash equivalents at end of year $ 37,861 $ 54,105 $ 17,089
============= =============== =============
See accompanying notes to consolidated financial statements.
43
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 2001, 2000 and 1999
($ in thousands) 2001 2000 1999
--------- -------- -------
Supplemental financial data:
Cash Paid For:
Interest $14,343 16,337 11,107
Income taxes 2,462 1,348 1,588
See accompanying notes to consolidated financial statements.
44
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2001, 2000 and 1999
(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 "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.
(b) Basis of Presentation
The consolidated financial statements of Enterprise Bancorp, Inc. include
the accounts of the company and its wholly owned subsidiaries,
Enterprise Bank and Trust Company and Enterprise (MA) Capital Trust I
(the "Trust"). The Trust is a statutory business trust created under
the laws of Delaware and was organized on March 10, 2000 for the
purpose of issuing trust preferred securities.
The bank has two wholly owned subsidiaries, Enterprise Insurance Services
LLC and Enterprise Investment Services LLC. These subsidiaries were
organized on March 21, 2000 for the purpose of engaging in insurance
sales activities and offering non-deposit investment products and
related securities brokerage services to its present and future
customers. The bank also has a substantially owned subsidiary,
Enterprise Realty Trust, Inc., which invests in commercial and
residential mortgage loans originated by the bank and in investment
securities.
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, Dracut,
Massachusetts in November of 1997, and Westford, Massachusetts in
November 1999. The bank also purchased two branches (in Chelmsford
and Billerica) in July 2000. 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 individuals, professionals and growing
businesses.
45
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 then ended. Actual results, particularly regarding the
estimate of the allowance for loan losses may differ significantly
from these estimates.
(c) Reclassification
Certain amounts in previous years' financial statements have been
reclassified to conform to the current year's presentation.
(d) 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 appreciation and depreciation on investments
available for sale, net of applicable income taxes, are reflected as
a component of accumulated comprehensive income. 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, 2001 and 2000, 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 that
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.
(e) 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, and
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.
46
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.
(f) 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 bank uses a methodology to systematically measure the amount of
estimated loan loss exposure inherent in the portfolio for purposes
of establishing a sufficient allowance for loan losses. The
methodology includes three elements: identification of specific loan
losses, general loss allocations for certain loan types based on
credit grade and loss experience factors, and general loss
allocations for other economic or market factors. The methodology
includes analysis of individual loans deemed to be impaired in
accordance with the terms of SFAS 114. Other individual commercial
and commercial mortgage loans are evaluated using an internal rating
system and the application of loss allocation factors. The loan
rating system and the related loss allocation factors take into
consideration the borrower's financial condition, the borrower's
performance with respect to loan terms and the adequacy of
collateral. Portfolios of more homogenous populations of loans
including residential mortgages and consumer loans are analyzed as
groups taking into account delinquency ratios and other indicators,
the bank's historical loss experience and comparison to industry
standards of loss allocation factors for each type of credit product.
Finally, an additional allowance is maintained based on a judgmental
process whereby management considers qualitative and quantitative
assessments of other factors including industry concentration,
results of regulatory examinations, historical loss ranges, portfolio
composition, the strength of the local and national economy, interest
rates and other changes in the portfolio. The allowance for loan
losses is management's best estimate of the probable loan losses
incurred as of the balance sheet date.
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.
47
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.
(g) Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less
accumulated depreciation and amortization. Fully depreciated assets
have been removed from the premises and equipment inventory.
Depreciation and amortization are computed on a straight-line basis
over the estimated useful lives of the related asset categories as
follows:
Buildings 25 years
Leasehold improvements 10 years
Computer software and equipment 3 to 5 years
Furniture, fixtures and equipment 3 to 5 years
(h) 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.
(i) Intangible Assets
On July 21, 2000 the bank completed its acquisition of two Fleet
National Bank branch offices (the "Fleet branches"). The excess of
cost over the fair market value of assets acquired and liabilities
assumed of approximately $7.9 million has been allocated to
identified intangible assets and goodwill (combined "intangible
assets") and is being amortized over a ten-year period.
48
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(j) 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.
(k) 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.
(l) Investment Management & Trust Services
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. Investment assets under management, consisting
of assets managed by the Trust Division, Investment Services
Division, and the Federated sweep product, totaled $311.6 million and
$289.3 million at December 31, 2001 and 2000 respectively. Income is
reported on an accrual basis.
(m) Earnings Per Share
Basic earnings per share are 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 98,710, 46,661, and 148,046 for the years ended
December 31, 2001, 2000 and 1999, respectively.
(n) Reporting Comprehensive Income
Comprehensive Income is defined as net income plus revenues, expenses,
gains, and losses that under accounting principles generally accepted
in the United States of America are excluded from net income. The
bank classifies items of comprehensive income by their nature in the
financial statements, and displays the accumulated balance of
comprehensive income separately from retained earnings and
additional-paid-in capital in the equity section of the balance
sheet. Reporting comprehensive income only affects the presentation
in the financial statements and has no impact on the bank's results
of operations.
49
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(o) Derivatives
The company recognizes all derivatives as either assets or liabilities in
its balance sheet and measures those instruments at fair market
value. The company establishes at the inception of a 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. The company had no material derivatives or hedge
accounting transactions at December 31, 2001 and 2000, respectively.
(p) Other Accounting Rule Changes
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Intangible
Assets." SFAS No. 141 requires that all business combinations
initiated after June 30, 2001 be accounted for using the purchase
method of accounting, and prohibits the use of the
pooling-of-interests method for such transactions. The new standard
also requires that goodwill acquired in such business combinations be
measured using the definition included in APB Opinion No. 16,
"Business Combinations," and initially recognized as an asset in the
financial statements. The new standard also requires intangible
assets acquired in any such business combination to be recognized as
an asset apart from goodwill if they meet certain criteria.
SFAS No. 142 applies to all goodwill and intangible assets acquired in a
business combination. Under the new standard, all goodwill, including
goodwill acquired before initial application of the standard, should
not be amortized but should be tested for impairment at least
annually at the reporting unit level, as defined in the standard.
Intangible assets other than goodwill should be amortized over their
useful lives and reviewed for impairment in accordance with SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of." Within six months of initial
application of the new standard, a transitional impairment test must
be performed on all goodwill. Any impairment loss recognized as a
result of the transitional impairment test should be reported as a
change in accounting principle. In addition to the transitional
impairment test, the required annual impairment test should be
performed in the year of adoption of the standard.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001, and must be adopted as of the beginning of a fiscal year.
Retroactive application is not permitted. The company adopted the new
standard on January 1, 2002. During 2001, the company reported that
the adoption of SFAS No. 142 was expected to increase annual net
income by approximately $450,000 over the remaining amortization
period ending in June 2010. However, subsequent to the company's
disclosure but prior to formal adoption on January 1, 2002, the FASB
clarified that goodwill as defined in SFAS No. 142 did not include
the excess of amounts paid over liabilities assumed in a branch
acquisition and such amounts should continue to be accounted for in
accordance with SFAS No. 72, "Accounting for Certain Acquisitions of
Banking or Thrift Institutions." Consequently, goodwill will continue
to be amortized over a ten year life and adoption of SFAS No. 142 is
expected to have no impact on the consolidated financial statements
of the company although final resolution of this by the FASB has not
been determined.
50
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(2) Investment Securities
The amortized cost and estimated fair values of investment securities at
December 31, are summarized as follows:
2001
---------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair value
cost appreciation depreciation
($ in thousands) --------------- --------------------- --------------------- ----------------
U.S. agency obligations $ 14,791 $ 963 $ 95 $ 15,659
Mortgage-backed securities 117,598 2,813 58 120,353
Municipal obligations 56,345 1,594 192 57,747
--------------- --------------------- --------------------- ----------------
Total bonds and obligations 188,734 5,370 345 193,759
Federal Home Loan Bank stock, at cost 3,301 - - 3,301
--------------- --------------------- --------------------- ----------------
Total investment securities $ 192,035 $ 5,370 $ 345 $ 197,060
=============== ===================== ===================== ================
2000
---------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair value
cost appreciation depreciation
($ in thousands) --------------- --------------------- --------------------- ----------------
U.S. agency obligations $ 32,341 $ 1,292 $ 23 $ 33,610
Mortgage-backed securities 95,480 703 408 95,775
Municipal obligations 51,811 687 - 52,498
--------------- --------------------- --------------------- ----------------
Total bonds and obligations 179,632 2,682 431 181,883
Federal Home Loan Bank stock, at cost 3,301 - - 3,301
--------------- --------------------- --------------------- ----------------
Total investment securities $ 182,933 $ 2,682 $ 431 $ 185,184
=============== ===================== ===================== ================
Included in U.S. agency securities are investments that can be called
prior to final maturity with fair values of $10,753,000 and
$32,601,000 at December 31, 2001 and 2000, respectively. Included in
mortgage-backed securities are collateralized mortgage-backed
obligations with fair values of $111,355,000 and $93,138,000 at
December 31, 2001 and 2000, respectively.
51
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
At December 31, 2001, securities with a fair value of $73,876,000 were
pledged as collateral for short-term borrowings (Note 8) and
securities with a fair value of $1,034,000 were pledged as
collateral for treasury, tax and loan deposits. At December 31,
2000, securities with a fair value of $62,9333,000 were pledged as
collateral for short-term borrowings (Note 8) and securities with a
fair value of $998,000 were pledged as collateral for treasury, tax
and loan deposits.
The contractual maturity distribution of total bonds and obligations at
December 31, 2001 is as follows:
($ in thousands) Amortized Fair
cost Percent Value Percent
--------------- ------------------ ------------------ ----------------
Within one year $ 3,995 2.12% $ 4,035 2.08%
After one but within three years 11,299 5.99 11,625 6.00
After three but within five years 25,517 13.52 26,102 13.47
After five but within ten years 57,324 30.37 59,219 30.57
After ten years 90,599 48.00 92,778 47.88
--------------- ------------------ ------------------ ----------------
Total investment securities $ 188,734 100.00% $ 193,759 100.00%
=============== ================== ================== ================
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.
Sales and calls of investment securities for the years ended December 31,
2001, 2000, and 1999 are summarized as follows:
($ in thousands) 2001 2000 1999
------------------ ------------------ ----------------
Book value of securities sold or called $ 45,828 $ 11,252 $ 22,951
Gross realized gains on sales/calls 941 139 184
Gross realized losses on sales/calls - (10) (1)
------------------ ------------------ ----------------
Total proceeds from sales or calls of investment securities $ 46,769 $ 11,381 $ 23,134
================== ================== ================
(3) Loans and Loans Held for Sale
Major classifications of loans and loans held for sale at December 31, are
as follows:
($ in thousands) 2001 2000
------------------ ------------------
Real estate:
Commercial $ 159,117 $ 120,390
Construction 32,428 21,894
Residential 59,967 57,037
------------------ ------------------
Total real estate 251,512 199,321
Commercial 94,762 84,284
Home equity 24,594 21,229
Consumer 6,697 8,210
------------------ ------------------
Total loans 377,565 313,044
Deferred loan origination fees (1,238) (1,027)
Allowance for loan losses (8,547) (6,220)
------------------ ------------------
Net loans and loans held for sale $ 367,780 $ 305,797
================== ==================
52
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, 2001, and 2000, the outstanding loan balances to
directors and officers of the company and their associates was $6.3
million and $7.2 million, respectively. Unadvanced portions of lines
of credit available to directors and officers were $3.3 million and
$1.8 million, as of December 31, 2001 and 2000, respectively. During
2001, new loans and net increases in loan balances on lines of credit
under existing commitments of $0.3 million were made and principal
paydowns of $1.2 million were received. All loans to these related
parties are current.
Non-accrual loans at December 31, are summarized as follows:
($ in thousands) 2001 2000
----------------- ----------------
Real estate $ 503 $ 465
Commercial 1,337 539
Consumer, including home equity 34 50
----------------- ----------------
Total non-accrual $ 1,874 $ 1,054
================= ================
There were no commitments to lend additional funds to those borrowers
whose loans were classified as non-accrual at December 31, 2001,
2000, and 1999. The increase /reduction in interest income for the
years ended December 31, associated with non-accruing loans is
summarized as follows:
($ in thousands) 2001 2000 1999
-------------- --------------- --------------
Income in accordance with original loan terms $ 287 $ 269 $ 392
Income recognized 128 306 242
-------------- --------------- --------------
Reduction/(increase) in interest income $ 159 $ (37) $ 150
============== =============== ==============
The increase in interest income at December 31, 2000 resulted primarily
from non accrual loans at December 31, 1999 that were returned to
accrual status during 2000.
At December 31, 2001 and 2000, total impaired loans were $1.3 million
and $0.5 million, respectively. In the opinion of management, there
were no impaired loans requiring an allocated reserve at December 31,
2001 and 2000, respectively. All of the $1.3 million of impaired
loans have been measured using the fair value of the collateral
method. During the years ended December 31, 2001 and 2000, the
average recorded value of impaired loans was $0.9 million and $1.2
million, respectively. Included in the (increase)/reduction in
interest income in the table above is $85,000 and $75,000 of interest
income that was not recognized on loans that were deemed impaired as
of December 31, 2001 and 2000, respectively. All payments received on
non-accrual loans deemed to be impaired loans are applied to
principal. The company is not committed to lend additional funds on
any loans that are considered impaired.
53
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Changes in the allowance for loan losses for the years ended December 31,
are summarized as follows:
($ in thousands) 2001 2000 1999
-------------- --------------- --------------
Balance at beginning of year $ 6,220 $ 5,446 $ 5,234
Provision charged to operations 2,480 603 270
Addition related to acquired loans - 250 -
Loan recoveries 72 207 114
Loans charged-off (225) (286) (172)
-------------- --------------- --------------
Balance at end of year $ 8,547 $ 6,220 $ 5,446
============== =============== ==============
At December 31, 2001, 2000 and 1999, the bank was servicing mortgage
loans sold to investors amounting to $21,646,000, $25,699,000, and
$24,001,000, respectively.
(4) Premises and Equipment
Premises and equipment at December 31, are summarized as follows:
($ in thousands) 2001 2000
----------------- ----------------
Land $ 1,373 $ 1,373
Buildings and leasehold improvements 10,255 7,731
Computer software and equipment 4,295 4,006
Furniture, fixtures and equipment 2,727 2,182
----------------- ----------------
18,650 15,292
Less accumulated depreciation (6,514) (4,389)
----------------- ----------------
$ 12,136 $ 10,903
================= ================
The company is obligated under various non-cancelable operating leases,
some of which provide for periodic adjustments. At December 31, 2001
minimum lease payments for these operating leases were as follows:
($ in thousands)
Payable in:
2002 $ 596
2003 407
2004 338
2005 132
Thereafter 21
------------------
Total minimum lease payments $ 1,494
==================
Total rent expense for the years ended December 31, 2001, 2000 and 1999
amounted to $638,000, $581,000 and $488,000, respectively.
54
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(5) Accrued Interest Receivable
Accrued interest receivable consists of the following at December 31:
($ in thousands) 2001 2000
----------------- -----------------
Investments $ 1,640 $ 1,911
Loans and loans held for sale 1,946 2,167
----------------- -----------------
$ 3,586 $ 4,078
================= =================
(6) Real Estate Acquired by Foreclosure
There were no real estate acquired by foreclosure balances or
transactions during the years ended December 31, 2001 and 2000,
respectively.
(7) Deposits
Deposits at December 31, are summarized as follows:
($ in thousands) 2001 2000
----------------- -----------------
Demand $ 107,000 $ 100,917
Savings 70,970 53,412
Personal interest checking 118,844 97,417
Money market 77,817 50,653
Time deposits less than $100,000 103,249 99,231
Time deposits of $100,000 or more 49,073 60,345
----------------- -----------------
$ 526,953 $ 461,975
================= =================
Interest expense on time deposits with balances of $100,000 or more
amounted to $2,353,000 in 2001, $3,438,000 in 2000, and $2,438,000 in
1999.
The following table shows the scheduled maturities of time deposits with
balances less than $100,000 and greater than $100,000 at December 31,
2001:
($ in thousands) Less
than Greater than
$100,000 $100,000 Total
-------------- --------------- --------------
Due in less than three months $ 30,568 $ 21,157 $ 51,725
Due in over three through twelve months 53,003 23,401 76,404
Due in over twelve through thirty six months 19,551 4,515 24,066
Due in over three years 127 - 127
-------------- --------------- --------------
$ 103,249 $ 49,073 $ 152,322
============== =============== ==============
55
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(8) Short-Term Borrowings
Borrowed funds at December 31, are summarized as follows:
2001 2000 1999
------------------------------------------------------ --------------------------
($ in thousands) Amount Average Rate Amount Average Rate Amount Average Rate
------------------------------------------------------ --------------------------
Securities sold under agreements to
repurchase $ 43,979 1.64% $ 57,801 5.86% $ 28,697 4.99%
Federal Home Loan Bank of Boston
borrowings 470 5.94% 470 5.94% 50,070 4.68%
------------- -------------- -------------
$ 44,449 1.68% $ 58,271 5.86% $ 78,767 4.78%
============= ============== =============
Securities sold under agreement to repurchase averaged $65,511,000,
$39,782,000, and $18,002,000 during 2001, 2000, and 1999,
respectively. Maximum amounts outstanding at any month end during
2001, 2000, and 1999 were $76,129,000, $57,801,000, and $28,697,000,
respectively. The average cost of repurchase agreements was 3.56%,
5.71%, and 4.43% during 2001, 2000, and 1999, respectively.
The bank became a member of the Federal Home Loan Bank of Boston ("FHLB")
in March 1994. FHLB borrowings averaged $722,000, $24,753,000, and
$12,241,000 during 2001, 2000, and 1999, respectively. Maximum
amounts outstanding at any month end during 2001, 2000, and 1999 were
$470,000, $61,300,000, and $50,070,000, respectively. The average
cost of FHLB borrowings was 4.96%, 6.29%, and 5.55% during 2001,
2000, and 1999, 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, 2001, the bank had the
additional capacity to borrow up to approximately $74,765,000 from
the FHLB.
(9) Trust Preferred Securities
On March 10, 2000 the company organized Enterprise (MA) Capital Trust I
(the "Trust"), a statutory business trust created under the laws of
Delaware. The company is the owner of all the common shares of
beneficial interest of the Trust. On March 23, 2000 the Trust issued
$10.5 million of 10.875% trust preferred securities. The trust
preferred securities have a thirty-year maturity and may be redeemed
at the option of the Trust after ten years. The proceeds from the
sale of the trust preferred securities were used by the Trust, along
with the company's $0.3 million capital contribution, to acquire
$10.8 million in aggregate principal amount of the company's 10.875%
Junior Subordinated Deferrable Interest Debentures due 2030. The
company has, through the Declaration of Trust establishing the Trust,
fully and unconditionally guaranteed on a subordinated basis all of
the Trust's obligations with respect to distributions and amounts
payable upon liquidation, redemption or repayment.
56
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(10) Stockholders' Equity
The company's authorized capital is divided into common stock and
preferred stock. The company is authorized to issue 10,000,000 shares
of common stock and 1,000,000 shares of preferred stock.
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.
The company maintains a dividend reinvestment plan pursuant to which
shareholders may elect to reinvest some or all of any cash dividends
they may receive in shares of the company's common stock at a
purchase price equal to fair market value. Shares issued under the
plan may be newly issued or treasury shares. In 2001 the company
issued 39,770 shares under the plan at a per share purchase price of
$16.35. In 2000 the company issued 47,800 shares under the plan at a
per share purchase price of $10.32.
The company maintains a shareholders rights plan pursuant to which each
share of common stock includes a right to purchase under certain
circumstances one-two hundredth of a share of the company's Series A
Junior Participating Preferred Stock, par value $0.01 per share, at a
purchase price of $37.50 per one-two hundredth of a preferred share,
subject to adjustment, or, in certain circumstances, to receive cash,
property, shares of common stock or other securities of the company.
The rights are not presently exercisable and remain attached to the
shares of common stock until the occurrence of certain triggering
events that would ordinarily be associated with an unsolicited
acquisition or attempted acquisition of 10% or more of the company's
outstanding shares of common stock. The rights will expire, unless
earlier redeemed or exchanged by the company, on January 13, 2008.
The rights have no voting or dividend privileges, and unless and
until they become exercisable have no dilutive effect on the earnings
of the company.
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 average 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, 2001.
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.
57
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
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, 2001, that the company meets
all capital adequacy requirements to which it is subject.
As of December 31, 2001, 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.
Minimum Capital Minimum Capital
for Capital Adequacy To Be
Actual Purposes Well Capitalized
------------------------------------------------------ --------------------------
($ in thousands) Amount Ratio Amount Ratio Amount Ratio
------------------------------------------------------ --------------------------
As of December 31, 2001
Total Capital
(to risk weighted assets) $ 48,568 11.31% $ 34,343 8.0% $ 42,929 10.0%
Tier 1 Capital
(to risk weighted assets) 43,163 10.05% 17,171 4.0% 25,757 6.0%
Tier 1 Capital*
(to average assets) 43,163 6.92% 24,954 4.0% 31,192 5.0%
As of December 31, 2000
Total Capital
(to risk weighted assets) $ 42,124 11.79% $ 28,572 8.0% $ 35,715 10.0%
Tier 1 Capital
(to risk weighted assets) 37,638 10.54% 14,286 4.0% 21,429 6.0%
Tier 1 Capital*
(to average assets) 37,638 6.66% 22,618 4.0% 28,273 5.0%
* 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.
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.
58
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(11) 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 permitted 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. While
no further grants of options may be made under the 1988 plan, all
currently outstanding and unexercised options previously granted
under the 1988 plan remain outstanding in accordance with their
terms.
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. . In 2001, both the board of directors and the
shareholders of the company approved an amendment and restatement of
the 1998 plan to increase the number of shares that may be issued
thereunder. The 1998, as so amended and restated, plan permits the
board of directors to grant incentive and non-qualified options (as
well as shares of stock, with or without restrictions, and stock
appreciation rights) to officers and other employees, directors and
consultants for the purchase of up to 328,023 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.
In the absence of an active trading market for the company's common
stock, the company utilizes a systematic valuation methodology to
determine the fair market value on the date of grant of shares
subject to options. Accordingly, the per share exercise price on all
stock options granted under the 1998 plan has been determined on the
basis of a valuation methodology provided to the company by an
outside financial advisor, which does not necessarily reflect the
actual prices at which shares of the common stock have been purchased
and sold in privately negotiated transactions.
All options that have been granted through December 31, 2001 under either
the 1988 plan or the 1998 plan, generally become 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 after 1997 expire 7
years from the date of grant. All options granted under either plan
are categorized as incentive stock options, with the exception of
stock options granted in 1999 that were to non employee directors and
are non-qualified options.
Stock option transactions are summarized as follows:
2001 2000 1999
------------------------------------------------------ --------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------- -------------- ------------------------- ------------- ------------
Outstanding at beginning of year 230,235 $ 9.61 355,130 $ 8.35 379,550 $ 7.97
Granted 50,650 13.44 -- -- 12,760 12.50
Exercised (5,150) 7.83 (122,970) 5.97 (35,155) 5.62
Forfeited (3,475) 12.72 (1,925) 9.04 (2,025) 11.54
Outstanding at end of year 272,260 10.32 230,235 9.61 355,130 8.35
Exercisable at end of year 200,070 9.31 179,835 8.97 251,580 7.25
Shares reserved for future grants 170,407 50,654 56,385
59
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
A summary of options outstanding and exercisable by exercise price as of
December 31, 2001 follows:
Outstanding Exercisable
---------------------------------- ----------------
Wtd. Avg.
Remaining
Exercise Price # Shares Life # Shares
-------------------- ---------------- ---------------- ----------------
$5.50 1,100 1.04 1,100
$6.00 3,100 2.33 3,100
$6.75 37,900 3.51 37,900
$7.00 44,700 4.51 44,700
$9.00 42,050 5.50 42,050
$12.50 94,960 3.97 71,220
$13.44 48,450 6.09 -
---------------- ----------------
272,260 4.58 200,070
================ ================
During 2001 and 2000, respectively, 8,412 and 8,004 shares of stock were
issued to members of the Board of Directors in lieu of cash
compensation for attendance at Board and Board Committee meetings.
These shares were issued at a fair market value price of $13.44 and
$11.46 and were issued from the shares reserved for future grants
under the 1998 plan.
In addition to the 122,970 options exercised under the company's option
plans in 2000, certain executives of the bank exercised options in
February 2000 to acquire an aggregate of 104,000 shares of company
common stock from the company's chief executive officer. The options
were granted to them in connection with their recruitment at the time
the bank was organized and constitute non-qualified options of the
company for tax purposes. Accordingly, in connection with the
exercise of the options the company realized a compensation expense
for tax purposes, which resulted in a tax benefit to the company of
$0.4 million. The tax benefit is recorded as an adjustment to
additional paid-in capital.
The company applies APB Opinion No. 25 in accounting for stock options
and, accordingly, no compensation expense has been recognized in the
financial statements. Had the company determined compensation expense
based on the fair value at the grant date for its stock options under
SFAS 123, the company's net income would have been reduced to the pro
forma amounts indicated below:
($ in thousands, except per share data) 2001 2000 1999
--------------- -------------- --------------
Net income as reported $ 4,904 $ 3,604 $ 4,083
Pro forma net income 4,741 3,455 3,915
Basic earnings per share as reported 1.43 1.08 1.28
Pro forma basic earnings per share 1.38 1.04 1.23
Fully diluted earnings per share as reported 1.39 1.07 1.22
Pro forma fully diluted earnings per share 1.34 1.03 1.17
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 above since options granted prior to January 1, 1995 are not
considered. The per share weighted average fair value of stock
options was determined to be $4.30 and $4.00 for options granted in
2001 and 1999. There were no options granted in 2000. 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. The
assumptions used in the model at the last option grant date for the
risk-free interest rate, expected volatility and expected life in
years were 4.91%, 15%, and 8, respectively.
60
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(12) 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 2001, 2000 and 1999 were
75%, 75% and 101%, respectively, up to the first 6% contributed by
the employee. The company's expense for the 401(k) plan match for the
years ended December 31, 2001, 2000 and 1999 was $384,000, $300,000,
and $329,000, 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.
Employee Bonus Program
The company bonus program includes all employees. 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. Participants
are paid a share of the bonus pool, based on a pre-determined
allocation depending upon which group the employee falls into: vice
president and above, officer, and non-officer employees. In 2001,
2000 and 1999, gross payments charged to salaries and benefits
expense under the plan were $1,992,000, $1,217,000, and $993,000,
respectively. In 2001, in addition to the $1,992,000 increase in
salaries, the bank also increased the employer contribution to the
401(k) plan by $116,000, or an additional 25% of employee
contributions up to the first 6% contributed by the employee. The
$116,000 increase on employer match on the company's 401(k) plan is
also included in salaries and benefits for 2001.
The company maintains a supplemental cash bonus plan for its top two
executive officers. The goals, objectives and payout schedule of this
plan are set by the compensation committee. The plan provides for
payment of cash bonuses based on the achievement of a bonus payout to
all employees in the employee bonus program discussed in the previous
paragraph and the achievement of certain earnings per share goals. In
2001, 2000, and 1999, $292,000, $0, and $222,000, 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 and in 1999 the company increased this plan. In 1999
the company also adopted plans for the president and an executive
vice president. The plans provide for the company to fund the
purchase of a cash value life insurance policy owned by the
executive. 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 under the three plans are $393,800
through 2004, $127,000 through 2010 and $93,000 through 2012,
respectively. The amount charged to expense for these benefits was
$10,000, $10,000, and 23,000 in 2001, 2000, and 1999, respectively.
61
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(13) Income Taxes
The components of income tax expense for the years ended December 31 were
calculated using the liability method as follows:
($ in thousands) 2001 2000 1999
------------------ ------------------ ----------------
Current tax expense:
Federal $ 2,467 $ 1,417 $ 1,715
State 44 49 48
------------------ ------------------ ----------------
Total current tax expense 2,511 1,466 1,763
------------------ ------------------ ----------------
Deferred tax benefit:
Federal (767) (324) (274)
State - - -
------------------ ------------------ ----------------
Total deferred tax benefit (767) (324) (274)
------------------ ------------------ ----------------
Total income tax expense $ 1,744 $ 1,142 $ 1,489
================== ================== ================
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate (34%) as follows:
2001 2000 1999
----------------------- ----------------------- ----------------------
($ in thousands) Amount % Amount % Amount %
------------ --------- ------------ --------- ------------ --------
Computed income tax expense at statutory
rate $ 2,260 34.0% $ 1,614 34.0% $ 1,894 34.0%
State income taxes, net of federal tax
benefit 29 0.4% 32 0.7% 32 0.6%
Municipal bond interest (654 ) (9.8% ) (624 ) (13.1% ) (536 ) (9.6% )
Other 109 1.6% 120 2.5% 99 1.7%
------------ --------- ------------ --------- ------------ --------
Income tax expense $ 1,744 26.2% $ 1,142 24.1% $ 1,489 26.7%
============ ========= ============ ========= ============ ========
At December 31 the tax effects of each type of income and expense item
that give rise to deferred taxes are:
($ in thousands) 2001 2000
--------------- ---------------
Deferred tax asset:
Allowance for loan losses $ 2,964 $ 2,120
Depreciation 607 562
Goodwill 129 40
Other 42 253
--------------- ---------------
Total 3,742 2,975
Deferred tax liability:
Net unrealized appreciation on
Investment securities 1,708 766
--------------- ---------------
Net deferred tax asset $ 2,034 $ 2,209
=============== ===============
Management believes that it is more likely than not that current
recoverable income taxes and the results of future operations will
generate sufficient taxable income to realize the deferred tax asset
existing at December 31, 2001.
62
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(14) Related Party Transactions
The company's offices in Lowell, Massachusetts, are leased from realty
trusts, the beneficiaries of which included during the years ended
December 31, 2001, 2000 and 1999 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,
2001, 2000, and 1999, were $617,000, $474,000 and $366,000,
respectively.
(15) Commitments, Contingencies and Financial Instruments with Off-Balance
Sheet Risk and Concentrations of Credit Risk
The company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
originate loans, standby letters of credit and unadvanced lines of
credit.
The instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheets. The contract
amounts of those instruments reflect the extent of involvement the
company has in the particular classes of financial instruments.
The company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments and
standby letters of credit is represented by the contractual amounts
of those instruments. The company uses the same credit policies in
making commitments and conditional obligations as it does for
on-balance sheet instruments.
Financial instruments with off-balance sheet credit risk at December 31,
2001 and 2000, are as follows:
($ in thousands) 2001 2000
---------------- ----------------
Commitments to originate loans $ 14,562 $ 17,700
Standby letters of credit 5,032 3,187
Unadvanced portions of consumer loans
(including credit card loans) 3,738 2,252
Unadvanced portions of construction loans 20,662 9,901
Unadvanced portions of home equity loans 22,798 19,063
Unadvanced portions of commercial lines of credit 59,323 49,835
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.
63
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The company originates residential mortgage loans under agreements to
sell such loans, generally with servicing released. At December 31,
2001 and 2000, the company had commitments to sell loans totaling
$4,903,000 and $806,000, 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 $2,800,000 and $1,500,000 at December 31, 2001, and
2000.
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.
(16) 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.
64
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Financial liabilities: The fair values of time deposits were estimated
using discounted cash flow analysis using rates offered by the bank
on December 31, 2001 for similar instruments. The fair value of trust
preferred securities was estimated using discounted cash flow
analysis using a market rate of interest at December 31, 2001.
Limitations: The estimates of fair value of financial instruments were
based on information available at December 31, 2001 and 2000 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.
In addition, the tax ramifications related to the realization of the
unrealized appreciation and depreciation 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.
2001 2000
--------------------------- ---------------------------
($ in thousands) Carrying Carrying
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
Financial assets:
Cash and cash equivalents $ 37,861 $ 37,861 $ 54,105 $ 54,105
Investment securities 197,060 197,060 185,184 185,184
Loans, net 367,780 380,374 305,797 310,852
Accrued interest receivable 3,586 3,586 4,078 4,078
Financial liabilities:
Non-interest bearing demand deposits 107,000 107,000 100,917 100,917
Savings, PIC and money market 267,631 267,631 201,482 201,482
Time deposits 152,322 153,056 159,576 159,988
Short-term borrowings 44,449 44,449 58,271 58,271
Escrow deposit of borrowers 931 931 1,106 1,106
Accrued interest payable 805 805 1,031 1,031
Trust preferred securities 10,500 10,674 10,500 10,923
65
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(17) Parent Company Only Financial Statements
Balance Sheets
December 31,
-------------------------------------
($ in thousands) 2001 2000
----------------- ----------------
Assets
Cash and due from subsidiary $ 388 $ 427
Investment in subsidiary 53,166 46,548
Other assets 362 375
----------------- ----------------
Total assets $ 53,916 $ 47,350
================= ================
Liabilities and Stockholders' Equity
Junior subordinated deferrable interest debentures 10,825 10,825
Accrued interest payable 370 370
----------------- ----------------
Total liabilities 11,195 11,195
----------------- ----------------
Stockholder's equity:
Preferred stock, $0.01 par value per share;
1,000,000 shares authorized;
no shares issued $ - $ -
Common stock, $0.01 par value per share;
10,000,000 shares authorized at December 31,
2001 and 2000, respectively; 3,461,999 and
3,408,667 shares issued and outstanding at
December 31, 2001 and 2000, respectively 35 34
Additional paid-in capital 18,654 17,843
Retained earnings 20,715 16,793
Accumulated other comprehensive income 3,317 1,485
----------------- ----------------
Total stockholders' equity $ 42,721 $ 36,155
----------------- ----------------
Total liabilities and stockholders' equity $ 53,916 $ 47,350
================= ================
66
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Statements of Income
For the years ended
December 31,
----------------------------------------------------
($ in thousands) 2001 2000 1999
---------------- ---------------- ----------------
Undistributed equity in net income of
Subsidiary $ 4,786 $ 4,203 $ 3,811
Dividends received from subsidiary 918 16 278
---------------- ---------------- ----------------
Total subsidiary income 5,704 4,219 4,089
---------------- ---------------- ----------------
Interest expense 1,177 909 -
Other operating expenses 15 11 (6)
---------------- ---------------- ----------------
Total operating expenses 1,192 920 (6)
---------------- ---------------- ----------------
Income before income taxes 4,512 3,299 4,083
Income tax benefit 392 305 -
---------------- ---------------- ----------------
Net income $ 4,904 $ 3,604 $ 4,083
================ ================ ================
Statements of Cash Flows
For the years ended
December 31,
----------------------------------------------------
($ in thousands) 2001 2000 1999
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 4,904 $ 3,604 $ 4,083
Undistributed equity in net income
of subsidiary (4,786) (4,203) (3,811)
Increase/(decrease) in other assets 13 (366) (9)
Increase in other liabilities - 370 -
---------------- ---------------- ----------------
Net cash (used in) provided by
operating activities 131 (595) 263
---------------- ---------------- ----------------
Cash flows from investing activities:
Investments in subsidiaries - (10,996) -
---------------- ---------------- ----------------
Net cash used in
investing activities - (10,996) -
---------------- ---------------- ----------------
Cash flows from financing activities:
Proceeds from issuance of junior
subordinated deferrable interest
debentures - 10,825 -
Cash dividends paid (982) (837) (667)
Proceeds from issuance of common stock 764 586 388
Proceeds from exercise of stock options 48 1,110 201
---------------- ---------------- ----------------
Net cash (used in) provided by
Financing activities (170) 11,684 (78)
---------------- ---------------- ----------------
Net increase/(decrease) in cash and
cash equivalents (39) 93 185
Cash and cash equivalents, beginning of period 427 334 149
---------------- ---------------- ----------------
Cash and cash equivalents, end of period $ 388 $ 427 $ 334
================ ================ ================
Cash and cash equivalents include cash and due from subsidiary.
67
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(18) Quarterly Results of Operations (Unaudited)
2001
----------------------------------------------------------------------------
($ in thousands, except share data) First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ----------------- ------------------ -----------------
Interest and dividend income $ 10,318 $ 10,364 $ 10,629 $ 10,229
Interest expense 4,067 3,652 3,521 2,877
------------------ ----------------- ------------------ -----------------
Net interest income 6,251 6,712 7,108 7,352
Provision for loan losses 210 420 850 1,000
------------------ ----------------- ------------------ -----------------
Net interest income after provision 6,041 6,292 6,258 6,352
for loan losses
Non-interest income 1,506 1,155 1,472 1,372
Non-interest expense 5,926 5,790 6,049 6,035
------------------ ----------------- ------------------ -----------------
Income before income taxes 1,621 1,657 1,681 1,689
Income tax expense 440 455 430 419
------------------ ----------------- ------------------ -----------------
Net income $ 1,181 $ 1,202 $ 1,251 $ 1,270
================== ================= ================== =================
Basic earnings per share $ 0.35 $ 0.35 $ 0.36 $ 0.37
Diluted earnings per share $ 0.34 $ 0.34 $ 0.35 $ 0.36
2000
----------------------------------------------------------------------------
($ in thousands, except share data) First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ----------------- ------------------ -----------------
Interest and dividend income $ 8,355 $ 9,267 $ 10,110 $ 10,414
Interest expense 3,635 4,086 4,165 4,243
------------------ ----------------- ------------------ -----------------
Net interest income 4,720 5,181 5,945 6,171
Provision for loan losses 126 159 159 159
------------------ ----------------- ------------------ -----------------
Net interest income after provision 4,594 5,022 5,786 6,012
for loan losses
Non-interest income 668 741 827 1,062
Non-interest expense 3,956 4,611 5,504 5,895
------------------ ----------------- ------------------ -----------------
Income before income taxes 1,306 1,152 1,109 1,179
Income tax expense 337 273 260 272
------------------ ----------------- ------------------ -----------------
Net income $ 969 $ 879 $ 849 $ 907
================== ================= ================== =================
Basic earnings per share $ 0.30 $ 0.27 $ 0.25 $ 0.26
Diluted earnings per share $ 0.29 $ 0.27 $ 0.25 $ 0.26
68
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Part III
Item 10. Directors and Executive Officers of the Registrant
(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 7, 2002, 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
Retired; former Executive Vice President of the Bank
Kenneth S. Ansin
President, Norwood Cabinet Company
Gerald G. Bousquet, M.D.
Physician; director and partner in several health care entities
Kathleen M. Bradley
Retired; 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
Dr. Carole A. Cowan
President, Middlesex Community College
Nancy L. Donahue
Chair of the Board of Trustees, Merrimack Repertory Theatre
Lucy A. Flynn
Former Executive Vice President, Marketing, of ADS Financial Service Solutions
Eric W. Hanson
Chairman and President, D.J. Reardon Company, Inc., a beer distributorship
John P. Harrington
Energy Consultant for Tennessee Gas Pipeline Company
Arnold S. Lerner
Vice Chairman and Clerk of the Company and the Bank
Director, Courier Corporation, a commercial printing company
Charles P. Sarantos
Chairman, C&I Electrical Supply Co., Inc.
Michael A. Spinelli
Owner, Merrimack Travel Service, Inc.
Chairman Emeritus, Vacation.com
69
Additional Executive Officers of the Company
- --------------------------------------------
Name Position
- ---- --------
John P. Clancy, Jr. Treasurer of the Company; Executive 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 Executive Vice President, Chief Information Officer and
Chief Operations Officer of the Bank
Items 11, 12 and 13.
The information required in Items 11, 12 and 13 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 7, 2002, 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.
Part IV
Item 14. Exhibits List and Reports on Form 8-K
Exhibit # Exhibit Description
- --------------------------------------
2.1 Purchase and Assumption Agreement dated as of September 22,
1999 by and among Fleet Financial Group, Inc., Fleet National
Bank, Enterprise Bancorp, Inc. and Enterprise Bank and Trust
Company (exclusive of disclosure schedules), incorporated by
reference to Exhibit 2.1 to the company's Form 10-Q for the
quarter ended September 30, 1999.
3.1 Restated Articles of Organization of the Company, as amended
through May 10, 1999, incorporated by reference to Exhibit
3.1 to the company's Form 10-Q for the quarter ended March
31, 1999.
3.2 Amended and Restated Bylaws of the company, incorporated by
reference to Exhibit 3.1 to the company's Form 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, incorporated by reference to
Exhibit 4.1 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,
incorporated by reference to Exhibit 4.2 to the company's
Registration Statement on Form 8-A filed on January 14, 1998.
4.3 Summary of Rights to Purchase Shares of Series A Junior
Participating Preferred Stock, incorporated by reference to
Exhibit 4.3 to the company's Registration Statement on Form
8-A filed on January 14, 1998.
4.4 Form of Rights Certificate, incorporated by reference to
Exhibit 4.4 to the company's Registration Statement on Form
8-A filed on January 14, 1998.
70
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, incorporated by reference to
Exhibit 10.1 to the company's Form 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, incorporated by
reference to Exhibit 10.2 to the company's Form 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,
incorporated by reference to Exhibit 10.3 to the company's
Form 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,
incorporated by reference to Exhibit 10.4 to the company's
Form 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, incorporated by reference to
Exhibit 10.5 to the company's Form 10-QSB for the quarter
ended June 30, 1996.
10.6 Employment Agreement dated as of June 1, 2001 by and among
the company, the bank and George L. Duncan, incorporated by
reference to Exhibit 10.41 to the company's Form 10-Q for the
quarter ended June 30, 2001.
10.7 Employment Agreement dated as of June 1, 2001 by and among
the company, the bank and Richard W. Main, incorporated by
reference to Exhibit 10.42 to the company's Form 10-Q for the
quarter ended June 30, 2001.
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, incorporated by reference to
Exhibit 10.10 to the company's Form 10-KSB for the year ended
December 31, 1996.
10.9 Split Dollar Agreement for George L. Duncan, incorporated by
reference to Exhibit 10.13 to the company's Form 10-KSB for
the year ended December 31, 1996.
10.10 Lease agreement dated April 7, 1993 between the bank and
Merrimack Realty Trust for 4,375 square feet relating to
premises at 21-27 Palmer Street, Lowell, Massachusetts,
incorporated by reference to Exhibit 10.12 to the company's
Form 10-KSB for the year ended December 31, 1997.
10.11 Lease agreement dated September 1, 1997, between the bank and
Merrimack Realty Trust to premises at 129 Middle Street,
Lowell, Massachusetts, incorporated by reference to Exhibit
10.13 to the company's Form 10-KSB for the year ended
December 31, 1997.
10.12 Lease agreement dated May 2, 1997 between the bank and First
Lakeview Avenue Limited Partnership to premises at 1168
Lakeview Avenue, Dracut, Massachusetts, incorporated by
reference to Exhibit 10.14 to the company's Form 10-KSB for
the year ended December 31, 1997.
10.13 Enterprise Bancorp, Inc. 1988 Stock Option Plan, incorporated
by reference to Exhibit 10.15 to the company's Form 10-KSB
for the year ended December 31, 1997.
10.14 Enterprise Bancorp, Inc. Amended and Restated 1998 Stock
Incentive Plan, incorporated by reference to Exhibit 4.1 to
the company's Registration Statement on Form S-8 (Reg. No.
333-60036), filed May 2, 2001.
71
10.15 Enterprise Bancorp, Inc. automatic dividend reinvestment
plan, incorporated by reference to the section of the
company's Registration Statement on Form S-3 (Reg. No.
333-79135), filed May 24, 1999, appearing under the heading
"The Plan".
10.16 Split Dollar Agreement for Richard W. Main, incorporated by
reference to Exhibit 10.17 to the company's Form 10-Q for the
quarter ended March 31, 1999.
10.17 Split Dollar Agreement for Robert R. Gilman, incorporated by
reference to Exhibit 10.18 to the company's Form 10-Q for the
quarter ended March 31, 1999.
10.18 Additional Split Dollar Agreement for George L. Duncan,
incorporated by reference to Exhibit 10.40 to the company's
Form 10-K for the year ended December 31, 1999.
10.19 Change in Control/Noncompetition Agreement dated as of July
17, 2001 by and among the company, the bank and Diane J.
Silva, incorporated by reference to Exhibit 10.43 to the
company's Form 10-Q for the quarter ended September 30, 2001.
10.20 Change in Control/Noncompetition Agreement dated as of July
17, 2001 by and among the company, the bank and Brian H.
Bullock, incorporated by reference to Exhibit 10.44 to the
company's Form 10-Q for the quarter ended September 30, 2001.
10.21 Change in Control/Noncompetition Agreement dated as of August
1, 2001 by and among the company, the bank and Robert R.
Gilman, incorporated by reference to Exhibit 10.45 to the
company's Form 10-Q for the quarter ended September 30, 2001.
10.22 Change in Control/Noncompetition Agreement dated as of August
7, 2001 by and among the company, the bank and Chester J.
Szablak Jr., incorporated by reference to Exhibit 10.46 to
the company's Form 10-Q for the quarter ended September 30,
2001.
21.0 Subsidiaries of the Registrant.
23.0 Consent of KPMG LLP.
(b)Reports on Form 8-K
The company has not filed any report on Form 8-K during the
quarter ended December 31, 2001.
72
ENTERPRISE BANCORP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
ENTERPRISE BANCORP, INC.
Date: March 19, 2002 By: /s/ John P. Clancy, Jr.
-----------------------
John P. Clancy, Jr.
Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ George L. Duncan Chairman, Chief Executive March 19, 2002
- ------------------------------ Officer and Director
George L. Duncan
/s/ Richard W. Main President, Chief Operating March 19, 2002
- ------------------------------ Officer and Director
Richard W. Main
/s/ John P. Clancy, Jr. Treasurer (Principal Financial March 19, 2002
- ------------------------------ (Officer)
John P. Clancy Jr.
/s/ Joseph R. Lussier (Principal Accounting Officer) March 19, 2002
- ------------------------------
Joseph R. Lussier
- ------------------------------ Director March 19, 2002
Kenneth S. Ansin
/s/ Walter L. Armstrong Director March 19, 2002
- ------------------------------
Walter L. Armstrong
/s/ Gerald G. Bousquet, M.D. Director March 19, 2002
- ------------------------------
Gerald G. Bousquet, M.D.
/s/ Kathleen M. Bradley Director March 19, 2002
- ------------------------------
Kathleen M. Bradley
/s/ John R. Clementi Director March 19, 2002
- ------------------------------
John R. Clementi
/s/ James F. Conway, III Director March 19, 2002
- ------------------------------
James F. Conway, III
/s/ Carole A. Cowan Director March 19, 2002
- ------------------------------
Carole A. Cowan
/s/ Nancy L. Donahue Director March 19, 2002
- ------------------------------
Nancy L. Donahue
/s/ Lucy A. Flynn Director March 19, 2002
- ------------------------------
Lucy A. Flynn
/s/ Eric W. Hanson Director March 19, 2002
- ------------------------------
Eric W. Hanson
/s/ John P. Harrington Director March 19, 2002
- ------------------------------
John P. Harrington
73
/s/ Arnold S. Lerner Director, Vice Chairman March 19, 2002
- ------------------------------ and Clerk
Arnold S. Lerner
/s/ Charles P. Sarantos Director March 19, 2002
- ------------------------------
Charles P. Sarantos
/s/ Michael A. Spinelli Director March 19, 2002
- ------------------------------
Michael A. Spinelli
74