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, 2002
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 ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ____ No __X__
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was last sold, or the average bid price and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter. $49,289,640
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: February 28, 2003, Common Stock
- - Par Value $0.01: 3,533,778 shares outstanding
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's proxy statement for its annual meeting of stockholders
to be held on May 6, 2003 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.
ENTERPRISE BANCORP, INC.
TABLE OF CONTENTS
Page Number
PART I
Item 1 Business 3
Item 2 Properties 16
Item 3 Legal Proceedings 17
Item 4 Submission of Matters to a Vote of Security Holders 17
PART II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters 18
Item 6 Selected Financial Data 19
Item 7 Management's Discussion and Analysis of Financial Condition 20
and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About Market Risk 36
Item 8 Financial Statements and Supplementary Data 38
Item 9 Changes In and Disagreements with Accountants on Accounting 71
and Financial Disclosure
Part III
Item 10 Directors and Executive Officers of the Registrant 71
Item 11 Executive Compensation 72
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 72
Item 13 Certain Relationships and Related Transactions 72
Item 14 Controls and Procedures 72
Part IV
Item 15 Exhibits, Financial Statement Schedules and Reports on Form 8-K 73
Signature page 76
Officer Certification 77
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 standards, policies and practices, as may be adopted or established
by the regulatory agencies, the Financial Accounting Standards Board or the
Public Company Accounting Oversight Board.
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.
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 of the bank
are located in the Massachusetts cities and towns of Billerica, Chelmsford,
Dracut, Leominster, Lowell, 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 and 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 loans and lines of credit and
mortgage loans on investment and vacation properties.
At December 31, 2002, the bank had loans, net of deferred fees, outstanding of
$414.1 million, which represented 57.6% 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, 2002, the bank's statutory lending limit, based on 20% of
capital, to any single borrower was approximately $11.1 million, subject to
certain exceptions provided under applicable law. At December 31, 2002, the bank
had no outstanding lending relationships or commitments in excess of the legal
lending limit.
The following table sets forth the loan balances by certain loan categories at
the dates indicated and the percentage of each category to total loans,
excluding deferred fees.
December 31,
----------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
-------------------- -------------------- -------------------- -------------------- ---------------------
($ in thousands) Amount % Amount % Amount % Amount % Amount %
-------------------- -------------------- -------------------- -------------------- ---------------------
Comm'l real estate $ 171,637 41.3% $ 159,117 42.1% $ 120,390 38.5% $ 104,940 40.0% $ 80,207 37.1%
Commercial 122,144 29.4% 94,762 25.1% 84,284 26.9% 68,177 26.0% 55,570 25.7%
Residential mortgages 47,607 11.5% 59,967 15.9% 57,037 18.2% 50,156 19.1% 44,680 20.7%
Construction 39,078 9.4% 32,428 8.6% 21,894 7.0% 18,198 6.9% 16,637 7.7%
Home equity 29,937 7.2% 24,594 6.5% 21,229 6.8% 14,135 5.4% 13,436 6.2%
Consumer 5,075 1.2% 6,697 1.8% 8,210 2.6% 6,672 2.6% 5,682 2.6%
----------- ----------- ----------- ------------ ------------
Gross loans 415,478 100.0% 377,565 100.0% 313,044 100.0% 262,278 100.0% 216,212 100.0%
Deferred fees (1,355) (1,238) (1,027) (970) (870)
----------- ----------- ----------- ------------ ------------
Loans, net of fees 414,123 376,327 312,017 261,308 215,342
Allowance for
Loan losses (9,371) (8,547) (6,220) (5,446) (5,234)
---------- ----------- ----------- ------------ ------------
Net loans $ 404,752 $ 367,780 $ 305,797 $ 255,862 $ 210,108
=========== =========== =========== ============ ============
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, 2002.
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.
Commercial
($ in thousands) Commercial Construction Real Estate
---------- ------------ ------------
Amounts due:
One year or less 66,187 $ 20,738 $ 12,605
After one year through five years 31,168 5,542 10,253
Beyond five years 24,789 12,798 148,779
-------- -------- --------
122,144 $ 39,078 $171,637
======== ======== ========
Interest rate terms on amounts
due after one year:
Fixed 18,625 $ 4,985 $ 14,339
Adjustable 37,332 13,355 144,693
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 $5.7 million, $5.0 million, and $4.6
million as of December 31, 2002, 2001, and 2000, respectively.
Commercial, commercial real estate and construction loans secured by apartment
buildings, office facilities, shopping malls, raw land or other commercial
property, were $302.1 million at December 31, 2002, representing an increase of
$38.1 million, or 14.4%, from the previous year. This compares to an increase of
$52.5 million, or 24.8%, from 2000 to 2001. Included in commercial and
construction loan amounts are unsecured commercial loans and residential
construction loans outstanding of $26.3 million and $4.4 million at December 31,
2002, representing increases of $7.3 million in unsecured commercial loans and
$1.1 million in residential construction from the previous year. The growth in
2002 is a reflection of the bank's customer-call efforts, service culture,
continued effective advertising and increased market penetration. Commercial
real estate lending may entail significant additional risks compared to
residential mortgage lending. Loan size is typically larger and payment
expectations 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 ensure 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 monthly to discuss loan policy and
procedures, as well as 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 $2.0 million, as well as other
borrower relationships recommended for discussion by committee members. The
bank's executive committee approves loan relationships exceeding $2.5 million
and the bank's board of directors also approves loan relationships 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 residential loan
production for the bank's portfolio. 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. The gains realized on the sale
of loans was $0.5 million and $0.4 million for the years ended December 31, 2002
and 2001, respectively.
Residential mortgage loans outstanding were $47.6 million at December 31, 2002,
representing a decrease of $12.4 million, or 20.6%, from the previous year. This
compares to an increase of $2.9 million, or 5.1%, in 2001 from 2000. The
decrease in outstanding loans in 2002 resulted from the refinancing of mortgage
loans held in the bank's portfolio, which were replaced by mortgage loans
originated for sale. Residential mortgage loan origination volume, including
both loans sold and retained, increased in 2002 over 2001 due to a continued
favorable real estate market, and an increase in demand for refinancing of
existing mortgages resulting from a decrease in interest rates during the
period.
Home Equity Loans
Home equity loans and lines 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 interest rates that adjust monthly based on
changes in the prime rate.
Home equity loans and lines were $29.9 million at December 31, 2002,
representing an increase of $5.3 million, or 21.7%, from the previous year. This
compares to an increase of $3.4 million, or 15.9%, in 2001 from 2000. The
increase in the outstanding balance in 2002 resulted from the favorable real
estate market and a decrease in interest rates during the period.
Consumer Loans
Consumer loans primarily consist of secured or unsecured personal loans and
overdraft protection lines on checking accounts extended to individual
customers.
Consumer loans were $5.1 million at December 31, 2002, representing a decrease
of $1.6 million or 24.2%, from the previous year. This compares to a decrease of
$1.5 million, or 18.4%, in 2001 from 2000.
Risk Elements
Non-performing assets consist of non-performing loans and other real estate
owned ("OREO"). 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. 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 were $1.9 million at December
31, 2002 and 2001. There were no OREO balances during the years ended December
31, 2002 or 2001.
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, 2002 and 2001 were $3.0 million and $1.4 million, respectively. The
increase in restructured loans of $1.6 million in 2002 was primarily attributed
to three individual loan relationships that were categorized as restructured
during the year. Accruing restructured loans as of December 31, 2002 and 2001
were $2.1 million and $0.1 million respectively.
Additional information regarding these risk elements is contained in Item 7,
Management Discussion and Analysis, and Item 8, Financial Statements, contained
in this report and under the heading "Allowance for Loan Losses" below.
Allowance for Loan Losses
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Years Ended December 31,
-------------------------------------------------------------------------------
($ in thousands) 2002 2001 2000 1999 1998
------------- ------------- ------------- ------------- -------------
Average loans outstanding $395,356 $340,593 $285,792 $232,843 $200,491
============= ============= ============= ============= =============
Balance at beginning of year $8,547 $6,220 $5,446 $5,234 $4,290
Charged-off loans:
Commercial 532 182 229 63 87
Commercial real estate - - - - -
Construction - - - 100 -
Residential mortgage - - - - -
Home equity - - - - -
Consumer 216 43 57 9 53
------------- ------------- ------------- ------------- -------------
Total charged-off 748 225 286 172 140
------------- ------------- ------------- ------------- -------------
Recoveries on loans previously charged-off:
Commercial 193 28 24 54 6
Commercial real estate - - 48 2 -
Construction - - 100 25 -
Residential mortgage 43 20 - - 6
Home equity - - 25 5 7
Consumer 11 24 10 28 35
------------- ------------- ------------- ------------- -------------
Total recoveries 247 72 207 114 54
------------- ------------- ------------- ------------- -------------
Net loans charged-off (recovered) 501 153 79 58 86
Provision charged to operations 1,325 2,480 603 270 1,030
Addition related to acquired loans - - 250 - -
------------- ------------- ------------- ------------- -------------
Balance at December 31 $9,371 $8,547 $6,220 $5,446 $5,234
============= ============= ============= ============= =============
Net loans charged-off (recovered) to
average loans 0.13% 0.04% 0.03% 0.02% 0.04%
Net loans charged-off (recovered) to
allowance for loan loss 5.35% 1.79% 1.27% 1.07% 1.64%
Allowance for loan losses to loans 2.26% 2.27% 1.99% 2.08% 2.43%
Allowance for loan losses to
non-performing loans 488.84% 455.60% 575.93% 184.86% 384.85%
Recoveries to charge-offs 33.02% 32.18% 72.38% 66.28% 38.57%
The ratio of the allowance for loan losses to non-performing loans was 488.84%
at December 31, 2002 compared to 455.60% and 575.93% at December 31, 2001 and
2000, respectively. The increase in 2002 resulted from an increase of 10% in the
balance of the allowance for loan losses due to the provision of $1.3 million,
offset by net charge-offs of $0.5 million. The level of non-performing loans
remained relatively flat at $1.9 million during 2002. Also during the period,
the bank's ratio of the allowance for loan losses to loans decreased from 2.27%
at December 31, 2001 to 2.26% at December 31, 2002.
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, 2002. During 2002, the bank provided
approximately $1.3 million to the allowance for loan losses compared to $2.5
million for the same period in 2001. The 2001 provision reflected management's
decision in the third quarter of that year, to increase the allowance for loan
losses in light of the economic uncertainty during the period, especially after
September 11, 2001. Management felt that it was prudent to continue to provide
for loan losses in 2002 due to the level of non-accrual loans, level of charge
offs and recoveries, growth in the portfolio, and the continuing economic
uncertainty during this period.
The following table represents the allocation of the bank's allowance for loan
losses among the different categories of loans and the percentage of loans in
each category to total loans for the periods ending on the respective dates
indicated:
December 31,
----------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------- -------------------- -------------------- -------------------- --------------------
($ in thousands) % of % of % of % of % of
each each each each each
category category category category category
to total to total to total to total to total
Amount loans Amount loans Amount loans Amount loans Amount loans
------------------- -------------------- -------------------- -------------------- --------------------
Comm'l real estate $ 3,932 41.3% $ 3,565 42.1% $ 2,598 38.5% $ 2,312 40.0% $ 2,591 37.1%
Commercial 3,650 29.4% 2,482 25.1% 2,120 26.9% 1,490 26.0% 1,111 25.7%
Construction 866 9.4% 776 8.6% 487 7.0% 926 6.9% 665 7.7%
Residential mortgage 838 11.5% 999 15.9% 875 18.2% 635 19.1% 568 20.7%
Consumer 85 8.4% 133 8.3% 140 9.4% 83 8.0% 194 8.8%
Unallocated - 592 - - 105
--------- ---------- ---------- ---------- ----------
Total $ 9,371 100.0% $ 8,547 100.0% $ 6,220 100.0% $ 5,446 100.0% $ 5,234 100.0%
========= ========== ========== ========== ==========
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. The unallocated allowance at December 31, 2001 was due to provisions
made in the second half of that year. That provision reflected management's
decision to increase the allowance for loan losses in light of the economic
uncertainty during that period, especially after September 11, 2001. The
decrease in the unallocated allowance was due to the growth in portfolio and an
increase in classified loans, which require higher reserves, as a percentage of
loans, net of fees. 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) 2002 2001 2000 1999 1998
------------ -------------- -------------- --------------- --------------
Non-accrual loans $ 1,915 $ 1,874 $ 1,054 $ 2,898 $ 1,263
Accruing loans > 90 days past due 2 1 26 48 97
------------ -------------- -------------- --------------- --------------
Total non-performing loans 1,917 1,875 1,080 2,946 1,360
Other real estate owned - - - - 304
------------ -------------- -------------- --------------- --------------
Total non-performing assets $ 1,917 $ 1,875 $ 1,080 $ 2,946 $ 1,664
============ ============== ============== =============== ==============
Accruing restructured loans not included above $ 2,086 $ 146 $ 167 $ 514 $ 538
Delinquent loans 30-89 days past due 1,287 1,119 425 1,785 1,473
Non-performing loans to Loans 0.46% 0.50% 0.35% 1.13% 0.63%
Non-performing assets to total assets 0.26% 0.30% 0.19% 0.66% 0.46%
Delinquent loans 30-89 days past due to Loans 0.31% 0.30% 0.14% 0.68% 0.68%
Non-accrual loans were $1.9 million at both periods ended December 31, 2002 and
2001. Accruing restructured loans increased by $1.9 million in 2002, which was
primarily attributed to three individual loan relationships that were
categorized as restructured during the year. Total impaired loans were $3.3
million and $1.3 million at December 31, 2002 and 2001, respectively. Impaired
loans included in non-accrual loans were $1.2 million as of December 31, 2002
and 2001. The level of non-performing assets is largely a function of economic
conditions and the overall banking environment. Despite prudent loan
underwriting, continuing adverse conditions within the bank's market area, as
well as any other adverse changes in the local, regional or national economic
conditions, could negatively impact the bank's level of non-performing assets in
the future.
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 diversification 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, mortgage-backed securities ("MBSs"), including
collateralized mortgage obligations ("CMOs"), Federal Home Loan Bank of Boston
("FHLB") stock, federal funds, certificates of deposit 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 MBS's 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, "Investment Securities", to the consolidated financial statements in
Item 8 for further information.
At December 31, 2002, 2001, and 2000, all investment securities were classified
as available for sale and were carried at fair market value. At December 31,
2002, the investment portfolio represented 33.3% of total assets. In 2002, the
investment portfolio produced interest and dividend income of $10.6 million, or
27.0% of the total interest and dividend income earned by the bank. The bank
recognized net gains on the sale of investments of $1.3 million in 2002. The net
unrealized appreciation at December 31, 2002, net of tax effects, is shown as a
component of accumulated comprehensive income in the amount of $4.5 million.
The following table summarizes the fair market value of investments at the dates
indicated:
December 31,
-------------------------------------------------
($ in thousands) 2002 2001 2000
---------------- --------------- ---------------
U.S. treasuries and agencies $ - $ 15,659 $ 33,610
Collateralized mortgage obligations and other
mortgage backed securities 181,023 120,353 95,775
Municipals 53,772 57,747 52,498
Certificates of deposit 1,000 - -
FHLB stock 3,301 3,301 3,301
---------------- --------------- ---------------
Total investments available for sale $ 239,096 $ 197,060 $ 185,184
================ =============== ===============
The contractual maturity distribution, as of December 31, 2002, 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
--------- ------- ----------- -------- ---------- ------- --------- ------- ------------ ---------
MBS/CMO - -% $ 296 6.11% 6,089 4.50% 21,457 5.77% 153,181 4.75%
Municipals* 3,443 6.55% 12,315 6.67% 11,260 6.46% 11,927 6.57% 14,827 7.49%
Certificates 1,000 2.55% - -% - -% - -% - -%
--------- ----------- ---------- --------- ------------
4,443 5.65% $ 12,611 6.66% 17,349 5.77% 33,384 6.06% 168,008 4.99%
========= =========== ========== ========= ============
* 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. MBS/CMOs 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 municipal category is $28.0 million
in securities which can be "called" before maturity. Actual maturity of these
callable securities could be shorter if the current low interest rate
environment persist. 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 $239.1 million at
December 31, 2002 from $197.1 million at December 31, 2001, was primarily due
the utilization of funds from deposit growth and loan payments to purchase
CMO's, and the increase in unrealized appreciation from $5.0 million at December
31, 2001 to $6.8 million at December 31, 2002.
See "Interest Margin Sensitivity Analysis" in Item 7A for additional information
regarding the bank's callable investment securities.
Source of Funds
Deposits
Deposits have traditionally been the principal source of the bank's funds. The
bank offers a broad selection of deposit products to the general public,
including personal interest checking accounts ("PIC"), savings accounts, money
market accounts, individual retirement accounts ("IRA") and certificates of
deposit. The bank also offers commercial checking, money market, sweep, Keogh
retirement and business IRA accounts and repurchase agreements to its commercial
business and municipal customers. The bank does not currently use brokered
deposits. The bank has offered premium rates on specially designated products
from time to time in order to promote new branches and to attract customers and
longer-term deposits.
Management determines the interest rates offered on deposit accounts based on
current and expected economic conditions, competition, liquidity needs, the
volatility of the existing deposits, the asset-liability position of the bank
and the overall objectives of the bank regarding the growth of relationships.
The table below shows the comparison of the bank's average deposits and average
rates paid for the periods indicated. The annualized average rate on total
deposits reflects both interest bearing and non-interest bearing deposits.
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------ ----------------------------------- -----------------------------------
($ in thousands) Average Average % of Average Average % of Average Average % of
Balance Rate Deposits Balance Rate Deposits Balance Rate Deposits
---------------------- ------------ ----------- ---------- ----------- ------------ ---------- -----------
Demand $ 112,362 - 19.29% $ 104,233 - 21.43% $ 83,194 - 20.70%
Savings 103,542 1.71% 17.77% 70,465 2.42% 14.49% 48,622 2.96% 12.10%
PIC 120,111 0.53% 20.62% 100,546 0.88% 20.67% 75,687 1.63% 18.83%
Money market 91,023 1.86% 15.63% 64,534 2.85% 13.27% 36,634 3.33% 9.11%
------------ ------------ ----------- ----------- ------------ -----------
314,676 1.30% 54.02% 235,545 1.88% 48.43% 160,943 2.42% 40.04%
Time deposits 155,500 3.41% 26.69% 146,577 5.00% 30.14% 157,818 5.32% 39.26%
------------ ------------ ----------- ----------- ------------ -----------
Total $ 582,538 1.61% 100.00% $ 486,355 2.42% 100.00% $ 401,955 3.06% 100.00%
============ ============ =========== =========== ============ ===========
The decrease in the average rate paid on total deposit accounts to 1.61% for
2002 from 2.42% for 2001 resulted primarily from declining interest rates during
2002.
See note 6, "Deposits", 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 ("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, 2002 the bank had the capacity to borrow up to approximately $189.8 million
from the FHLB, with actual outstanding balances of $16.5 million at an average
rate of 1.44%. The outstanding balance was composed of $16.0 million in
overnight advances, at 1.31%, and $0.5 million of term advances, at 5.94%. The
average rate paid on FHLB borrowings for the year ended December 31, 2002 was
3.47%. FHLB borrowings averaged $1,167,000, $722,000, and $24,753,000 during
2002, 2001, and 2000, respectively. Maximum amounts outstanding at any month end
during 2002, 2001, and 2000 were $16,470,000, $470,000, and $61,300,000,
respectively.
In 2002, the bank increased its capacity to borrow from the FHLB by pledging its
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 mortgage backed investment securities.
The bank also borrows funds from customers secured by investment securities from
the bank's portfolio. 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 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. At December 31, 2002, the bank had $0.8 million in term repurchase
agreements outstanding with an average interest rate of 1.40%, and no
outstanding overnight borrowings, as part of the bank's commercial sweep
accounts. Securities sold under agreement to repurchase averaged $15,960,000,
$65,511,000, and $39,782,000 during 2002, 2001, and 2000, respectively. Maximum
amounts outstanding at any month end during 2002, 2001, and 2000 were
$48,058,000, $76,129,000, and $57,801,000, respectively.
During the fourth quarter of 2001, the bank began to transition the investment
portion of the bank's commercial sweep accounts from overnight repurchase
agreements secured by municipal securities held by the bank to money market
mutual funds managed by Federated Investors, Inc. ("Federated"). The balances
transferred to Federated do not represent obligations of the bank. This
transition from overnight repurchase agreements to Federated mutual funds
continued during the first five months of 2002 and was completed in mid-May.
Under this arrangement, management believes that commercial customers will
benefit from enhanced interest rate options on sweep accounts, while retaining a
conservative investment option of the highest quality and safety.
See note 7, "Other Borrowings", to the consolidated financial statements in Item
8 for further information.
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.
Trust and Investment Management Division
The company provides a range of investment management services to individuals,
family groups, trusts, foundations and retirement plans. These services include:
securities brokerage services via Enterprise Investment Services LLC, through a
third party service arrangement with Commonwealth Equities, Inc., a licensed
securities brokerage firm; management of equity, fixed income, balanced and
strategic cash management portfolios through the bank's trust division; and
commercial sweep accounts through Federated Investor's, Inc. for the bank's
commercial deposit customers. Portfolios are managed based on the investment
objectives of each client. At December 31, 2002, the bank had $314.1 million in
assets under management compared to $311.6 million at December 31, 2001. Each
component of this portfolio is affected by fluctuations in the financial
markets. The 0.80% increase in the portfolio over the prior year consists of
asset growth, offset by declining investment market values primarily resulting
from declining stock market values.
Enterprise Insurance Services
Enterprise Insurance Services LLC engages in 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 in-house turn-key solution from its core banking system vendor
for retail internet banking services. The bank uses a combination of outside
service bureau and in-house turn-key solution from its core banking system
vendor to provide internet-based banking services to commercial customers. Major
capabilities include balance inquiry; internal transfers; loan payments; ACH
origination; federal tax payments; placement of stop payments; and initiation of
request for wire transfers. Commercial customers are being migrated off the
service bureau solution to the in-house solution. This migration is expected to
be completed during 2003. 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 providing the access point to various specified banking
services, the site provides information on the bank and its services as well as
access to various financial management tools. It also includes the following
major capabilities: career opportunities; loan and deposit rates; calculators
and an ATM/Branch Locator/Map. The underlying structure of the site provides for
dynamic maintenance of the information by bank personnel. The bank's internet
web address is: www.EnterpriseBankandTrust.com
Competition
The bank faces strong competition to attract deposits and to generate loans. New
England's two largest banking organizations are headquartered in neighboring
Boston, and numerous other commercial banks, savings banks, cooperative banks,
credit unions and savings and loan associations have one or more offices in
Greater Lowell and in the Leominster/Fitchburg, Massachusetts area. 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 signed into
law 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 new customer
identification standards.
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 new anti-money laundering provisions
of the USA PATRIOT Act, including currently pending U.S. Treasury proposals that
would require banks to implement written, risk-based customer identification
programs, 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 banking
organizations, 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.
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 are 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 9, "Stockholders' Equity", 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.
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
bank is also subject to certain requirements of the Federal Reserve Board.
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.
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, the issuance of $10.5 million of trust preferred
securities in 2000, and retention of earnings less dividends paid since the bank
commenced operations.
See Note 9, "Stockholders' Equity", 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 average 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 total 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
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.
At December 31, 2002 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.
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, 2002, the bank employed 220 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.
Item 2. Properties
The company's and the bank's main office is leased and located at 222 Merrimack
Street, Lowell, Massachusetts. The building provides 11,601 square feet of
interior space, has one walk up Automatic Teller Machine (ATM), and 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
and a canopy area of 990 square feet. The facility has one walk up and one
drive-up ATM, and two drive-up teller lanes. The facility was purchased at a
cost of approximately 25% 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, and has one ATM. The building was purchased for approximately 40% of its
replacement value.
The bank leases space at 26 Central Street, Leominster, Massachusetts. The
branch office provides 3,960 square feet of interior space, one ATM, 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 facility has one ATM and
one drive-up teller lane.
The bank leases space at 1168 Lakeview Avenue, Dracut, Massachusetts. The branch
office provides 4,922 square feet of interior space, two drive-up teller lanes,
an ATM, 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 and 21 parking spaces. The branch offers one ATM and two drive-up
teller lanes.
In July, 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, two ATMs, and ample parking.
In July, 2000, the bank purchased a former Fleet National Bank branch located at
233 Boston Road, N. Billerica, Massachusetts. The branch has 4,288 square feet
of interior space, two drive-ups teller lanes, two ATMs, 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, an ATM, and 7
parking spaces. An additional ten parking spaces located across the street are
leased from the city.
The bank leases space in a retail plaza, on John Fitch Highway, Fitchburg,
Massachusetts. The facility provides 3,262 square feet of interior space and has
ample parking that is shared with other tenants of the plaza. The facility is
currently undergoing renovations, and is scheduled to open as a new branch
office in the spring of 2003.
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.
The Department of Revenue of the Commonwealth of Massachusetts (the "DOR") has
asserted that the company owes additional state taxes and interest for prior
years in connection with the bank's operation of a real estate investment trust
subsidiary. In addition, in 2003 the state legislature has passed, and Governor
Romney has signed, a supplemental budget bill, which, among other provisions,
makes certain changes to the state's tax laws on a current and retroactive basis
to 1999, which, if enforceable, would require the company to pay the additional
taxes that the DOR seeks to collect.
The company is currently disputing the DOR's assertion that it owes additional
taxes for any prior years. The company has also been advised that the
retroactive changes to the state's tax laws contained in the recently passed
legislation are subject to constitutional challenge.
See "Massachusetts Department of Revenue Tax Dispute" below and also in Note 15
to the consolidated financial statements contained in Item 8 for further details
regarding this dispute and a description of the adverse effect that this new
legislation will have on the company's earnings in future periods.
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, 2002.
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.
Fiscal Year Trading Share Price Share Price
Volume High Low
- ----------------- ------------- ---------------- -----------------
2002:
1st Quarter 6,800 $ 20.00 $ 19.00
2nd Quarter 2,750 20.00 20.00
3rd Quarter 5,700 21.00 20.00
4th Quarter 8,200 22.00 21.00
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
The number of shares outstanding of the company's common stock and number of
shareholders of record as of February 28, 2003, were 3,533,778 and 682
respectively.
Dividends
The company declared and paid annual cash dividends of $0.3300 per share and
$0.2875 per share in 2002 and 2001, 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, the tax effect on individual
stockholders, 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, 2002, the bank's undivided profits account
(from which dividends may be paid to the company) had a balance of $19.6
million.
Item 6. Selected Financial Data
Year Ended December 31,
-----------------------------------------------------------------------------
($ in thousands, except per share data) 2002 2001 2000 1999 1998
-----------------------------------------------------------------------------
EARNINGS DATA
Net interest income $ 29,506 $ 27,423 $ 22,017 $ 17,239 $ 15,721
Provision for loan losses 1,325 2,480 603 270 1,030
-------------- ------------- --------------- ------------- --------------
Net interest income after provision 28,181 24,943 21,414 16,969 14,691
for loan losses
Non-interest income 5,271 4,564 3,169 2,608 2,441
Net gains on sales of investment securities 1,341 941 129 183 476
Non-interest expense 26,092 23,800 19,966 14,188 12,651
-------------- ------------- --------------- ------------- --------------
Income before income taxes 8,701 6,648 4,746 5,572 4,957
Income tax expense 2,395 1,744 1,142 1,489 1,456
-------------- ------------- --------------- ------------- --------------
Net income $ 6,306 $ 4,904 $ 3,604 $ 4,083 $ 3,501
============== ============= =============== ============= ==============
COMMON SHARE DATA 1
Basic earnings per share $ 1.80 $ 1.43 $ 1.08 $ 1.28 $ 1.11
Diluted earnings per share 1.75 1.39 1.07 1.22 1.06
Book value per share at year end 2 12.91 11.38 10.17 9.35 8.27
Dividends paid per share 0.3300 0.2875 0.2500 0.2100 0.1750
Basic weighted average shares outstanding 3,494,818 3,432,255 3,322,364 3,187,292 3,165,134
Diluted weighted average shares outstanding 3,611,712 3,530,965 3,369,025 3,335,338 3,299,432
YEAR END BALANCE SHEET AND OTHER DATA
Total assets $ 718,696 $ 630,544 $ 572,814 $ 443,095 $ 360,481
Loans 414,123 376,327 312,017 261,308 215,342
Allowance for loan losses 9,371 8,547 6,220 5,446 5,234
Investment securities at fair value 239,096 197,060 185,184 153,427 114,659
Federal funds sold - 6,500 28,025 - 6,255
Deposits, repurchase agreements and escrow 638,796 571,863 520,882 362,915 329,968
FHLB borrowings 16,470 470 470 50,070 470
Trust preferred securities 10,500 10,500 10,500 - -
Total stockholders' equity 2 45,612 39,404 34,670 30,207 26,202
Mortgage loans serviced for others 16,861 21,646 25,699 24,001 26,491
Investment assets under management 314,095 311,648 289,284 216,731 195,361
Total assets, investment assets under
management and mortgage loans serviced
for others 1,049,652 963,838 887,797 683,827 582,333
RATIOS
Net income to average total assets 2 0.96% 0.81% 0.71% 1.06% 1.03%
Net income to average stockholders' equity 2 14.86% 13.30% 11.07% 14.59% 14.25%
Allowance for loan losses to loans 2.26% 2.27% 1.99% 2.08% 2.43%
Stockholders' equity to assets 2 6.39% 6.28% 6.07% 6.78% 7.29%
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.
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.
Critical Accounting Estimates
The company's significant accounting policies are described in Note 1, "Summary
of Significant Accounting Policies", to the consolidated financial statements
contained in Item 8. In applying these accounting policies, management is
required to exercise judgment in determining many of the methodologies,
assumptions and estimates to be utilized. Certain of the critical accounting
estimates are more dependent on such judgment and in some cases may contribute
to volatility in the company's reported financial performance should the
assumptions and estimates used change over time due to changes in circumstances.
The two more significant areas in which management applies critical assumptions
and estimates include the areas described further below.
Allowance for Loan and Lease 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. The credit risk of the portfolio depends on a wide
variety of factors, including, among others, 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
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.
The allowance for loan and lease losses is an accounting estimate of credit
losses inherent in the loan portfolio. The bank's allowance is accounted for in
accordance with SFAS No. 114, as amended by SFAS No. 118, "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures", and SFAS
No. 5, "Accounting for Contingencies". 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 maintains the allowance at a
level that it deems adequate to absorb all reasonably anticipated losses from
specifically known and other credit risks associated with the portfolio.
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, if necessary,
based on a subjective process whereby management considers qualitative and
quantitative assessments of other factors, including industry concentrations,
results of regulatory examinations, historical charge-off and recovery
experience, character and size of the loan portfolio, trends in loan volume,
delinquencies and non-performing loans, the strength of the local and national
economy, interest rates and other changes in the portfolio. The allowance for
loan losses is management's estimate of the probable loan losses incurred as of
the balance sheet date.
Accounting for Acquisitions and Impairment Review of Goodwill and
Other Intangible Assets
In connection with the bank's acquisition of two Fleet branches, the company
recorded as assets on its financial statements both identifiable intangible
assets (known as core deposit intangibles) and goodwill, an intangible asset
which is equal to the excess of the purchase price paid over the estimated fair
value of the assets acquired and the liabilities assumed. Core deposit
intangible assets are amortized to expense over their estimated useful life and
reviewed for impairment regularly. Due to a change in accounting standards since
January 1, 2002, the company is no longer required to amortize the amount of
goodwill through a charge to expense over the period of its estimated life, and
instead, at least annually, must evaluate whether the carrying value of the
goodwill has become impaired, in which case the company must reduce its carrying
value through a charge to earnings. Impairment of the goodwill occurs when the
estimated fair value of the company is less than its recorded value. The
estimated fair value assessment utilizes various techniques, including earnings
multiples and book value multiples that are subject to change based on market
conditions.
Financial Condition
Total Assets
Total assets increased $88.2 million, or 14.0%, to $718.7 million at December
31, 2002 from $630.5 million at December 31, 2001. The increase is primarily
attributable to an increase in loans, net of fees, of $37.8 million, or 10.0%,
as well as growth in investment securities of $42.0 million or 21.3%. The growth
was primarily funded through deposit growth, including escrow deposits of
borrowers, of $110.1 million or 20.9%, offset by a decrease in short-term
borrowings, including repurchase agreements and commercial sweep accounts, of
$27.2 million or 61.2%.
Loans
Total loans, net of fees, were $414.1 million, or 57.6% of total assets, at
December 31, 2002, compared with $376.3 million, or 59.7% of total assets, at
December 31, 2001. The increase in loans outstanding was attributable to
continued customer-call efforts, marketing and advertising, and increased market
penetration. During 2002, commercial real estate loans increased $12.5 million,
or 7.9%, other loans secured by real estate (residential and construction loans)
and home equity mortgages decreased by $0.4 million, or 0.3%, commercial loans
increased by $27.4 million, or 28.9%, and consumer loans decreased $1.6 million
or 24.2%.
Asset Quality
The non-performing asset balance was $1.9 million at December 31, 2002 and 2001.
Delinquencies in the 30-89 day category increased slightly from $1.1 million at
December 31, 2001 to $1.3 million at December 31, 2002. Management continues
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, 2002, the bank classified $4.5
million and $0 as substandard and doubtful loans, respectively. Included in the
substandard category is $1.7 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
The ratio of the allowance for loan losses to non-performing loans was 488.84%
at December 31, 2002 compared to 455.60% and 575.93% at December 31, 2001 and
2000, respectively. The increase in 2002 resulted from an increase of 10% in the
balance of the allowance for loan losses due to the provision of $1.3 million,
offset by net charge-offs of $0.5 million. The level of non-performing loans
remained relatively flat at $1.9 million during 2002.
The ratio of the allowance for loan losses to loans was 2.26% at December 31,
2002 and 2.27% at December 31, 2001. The slight decrease in this ratio resulted
from the net increase in the allowance for loan losses of $0.8 million, offset
by the $37.8 million increase in loans. Net loans charged-off to average loans
were 0.13%, 0.04%, 0.03%, 0.02%, and 0.04% at December 31, 2002, 2001, 2000,
1999, and 1998, 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 reasonably anticipated losses from specifically known and
other credit risks associated with the portfolio as of December 31, 2002.
See "Critical Accounting Estimates" above, and "Risk Elements" and "Allowance
for Loan Losses" in Item I for further information regarding the loan loss
allowance.
Investments
As of December 31, 2002, all of the company's investment securities were
classified as available for sale and carried at fair market value. Investments
(including federal funds sold) totaled $239.1 million, or 33.3% of total assets,
at December 31, 2002, compared to $203.6 million, or 32.3% of total assets, at
December 31, 2001. As of December 31, 2002, the net unrealized appreciation in
the investment portfolio was $6.8 million compared to $5.0 million at December
31, 2001. 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, 2002 is the result of growth in the
portfolio and 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
capacity at the FHLB.
The bank's asset-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 of borrowers, increased $110.1 million, or
20.9%, to $638.0 million, at December 31, 2002, from $527.9 million, at December
31, 2001. The bank's deposit mix remained favorable during 2002. Lower cost
checking and savings deposits increased $109.8 million, or 29.2%, during 2002
while certificates of deposit remained relatively flat, increasing only $0.4
million. The increase in deposits resulted primarily from continued penetration
in existing markets due to the bank's business development efforts, competitive
cash management and internet banking products, and consumers seeking
alternatives to the stock market.
Total borrowings, consisting of securities sold under agreements to repurchase
(repurchase agreements) and FHLB borrowings, decreased by $27.2 million from
December 31, 2001 to December 31, 2002.
Repurchase agreements decreased $43.2 million or 98.3% during 2002 and include
both commercial sweep accounts and term repurchase agreements. The decrease is
primarily due to the decrease of $43.0 million in commercial sweep accounts.
During the fourth quarter of 2001, the bank began to transition the investment
portion of the bank's commercial sweep accounts from overnight repurchase
agreements secured by municipal securities held by the bank to money market
mutual funds managed by Federated Investors, Inc. ("Federated"). The balances
transferred to Federated do not represent obligations of the bank and are
included in investment assets under management. This transition from overnight
repurchase agreements to Federated mutual funds continued during the first five
months of 2002 and was completed in mid-May. Under this arrangement, management
believes that commercial customers will benefit from enhanced interest rate
options on sweep accounts, while retaining a conservative investment option of
the highest quality and safety. Sweep balances managed by Federated amounted to
$52.9 million and $23.2 million, at December 31, 2002 and 2001, respectively.
FHLB borrowings increased $16.0 million, to $16.5 million at December 31, 2002,
from $0.5 million at December 31, 2001. The increase was due to a $16.0 million
short-term advance, taken at the end of December, to support the bank's
liquidity needs.
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, 2002 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, 2002,
see note 9, "Stockholders' Equity", to the consolidated financial statements
contained in Item 8.
Contractual Obligations and Commitments
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 loans and 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 these
instruments reflect the extent of involvement the company has in the particular
classes of financial instruments.
The following table summarizes the contractual obligations and commitments at
December 31, 2002.
(Dollars in thousands)
Payments Due By Period
-----------------------------------------------------------------------------------
Total Less than 1 - 3 4 - 5 After 5
1 Year Years Years Years
-------------- ---------------- ------------- -------------- --------------
Contractual Cash Obligations:
Repurchase agreements $ 763 $ 763 $ - $ - $ -
FHLB borrowings 16,470 16,000 - - 470
Trust preferred securities 10,500 - - - 10,500
Operating lease obligations 1,591 643 794 154 -
---------------- ---------------- ------------- -------------- --------------
Total contractual obligations $ 29,324 $ 17,406 $ 794 $ 154 $ 10,970
================ ================ ============= ============== ==============
Commitment Expiration - Per Period
-----------------------------------------------------------------------------------
Total Less than 1 - 3 4 - 5 After 5
1 Year Years Years Years
---------------- ---------------- ------------- -------------- --------------
Other Commitments:
Unadvanced loans $ 137,487 $ 83,044 $ 9,544 $ 5,956 $ 38,943
Standby letters of Credit 6,720 6,582 138 - -
Commitments to originate loans 46,283 46,283 - - -
Commitment sell loans (8,584) (8,584) - - -
---------------- ---------------- -------------- -------------- --------------
Total commitments $ 181,906 $ 127,325 $ 9,682 $ 5,956 $ 38,943
================ ================ ============= ============== ==============
For additional information regarding Contractual Obligations and Commitments,
see Note 14, "Commitments, Contingencies and Financial Instruments with
Off-Balance Sheet Risk and Concentrations of Credit Risk", 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.
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, 2002, 2001
and 2000.
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, 2002 and 2001. 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,
------------------------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
-------------------------------------------------- --------------------------------------------
($ in thousands) Rate/ Rate/
Volume Rate Volume Total Volume Rate Volume Total
---------- ------------------------ ------------ ---------- ---------------------------------
Interest Income
Loans $ 4,627 $ (4,291) $ (704) $ (368) $ 5,080 $ (2,343) $ (459) $ 2,278
Investments and Federal Funds
sold (332) (1,666) 55 (1,943) 1,881 (629) (136) 1,116
---------- ------------ ----------- ------------ ---------- ---------- ---------- ----------
Total 4,295 (5,957) (649) (2,311) 6,961 (2,972) (595) 3,394
---------- ------------ ----------- ------------ ---------- ---------- ---------- ----------
Interest Expense
Savings/PIC/MM 1,488 (1,366) (440) (318) 1,805 (869) (416) 520
Time deposits 446 (2,331) (146) (2,031) (598) (505) 29 (1,074)
Borrowed funds (1,758) (1,119) 832 (2,045) 101 (1,517) (42) (1,458)
---------- ------------ ----------- ------------ ---------- ---------- ---------- ----------
Total 176 (4,816) 246 (4,394) 1,308 (2,891) (429) (2,012)
----------- ------------ ----------- ------------ ---------- ---------- ---------- ---------
Change in net interest income $ 4,119 $ (1,141) $ (895) $ 2,083 $ 5,653 $ (81) $ (166) $ 5,406
========== ============ =========== ============ ========== ========== ========== ==========
Average Balances, Interest and Average Interest Rates
-----------------------------------------------------
Year ended December 31, 2002 Year ended December 31, 2001
----------------------------------------- -----------------------------------------
($ in thousands) Average Average
Average Interest Average Interest
Balance Interest Rate(4) Balance Interest Rate(4)
----------------------------------------- -----------------------------------------
Assets:
Loans (1)(2) $395,356 $ 28,408 7.19% $340,593 $ 28,776 8.45%
Investment securities and
federal funds sold (4)(5) 213,854 10,821 5.46% 219,198 12,764 6.22%
------- ------ --------- --------
Total interest earnings assets 609,210 39,229 6.58% 559,791 41,540 7.58%
Other assets (3)(5) 48,267 ------ 45,025 --------
------- ---------
Total assets (5) $657,477 $604,816
======== ========
Liabilities and stockholders' equity:
Savings, PIC and money market $314,676 $ 4,101 1.30% $235,545 $ 4,419 1.88%
Time deposits 155,500 5,298 3.41% 146,577 7,329 5.00%
Short-term borrowings 17,127 324 1.89% 66,233 2,369 3.58%
-------- -------- -------- --------
Total interest-bearing
deposits and borrowings 487,303 9,723 2.00% 448,355 14,117 3.15%
Net interest rate spread (4)
Non-interest bearing deposits 112,362 104,233
------- -------- ------- --------
Total deposits and borrowings 599,665 9,723 1.62% 552,588 14,117 2.55%
Other liabilities 4,886 4,846
------- -------- -------
Total liabilities 604,551 557,434
Trust preferred securities 10,500 10,500
Stockholders' equity (5) 42,426 36,882
------ ------
Total liabilities, trust
Preferred securities and
Stockholders' equity (5) $657,477 $604,816
======== ========
Net interest Income $ 29,506 $ 27,423
======== ========
Net interest margin (4) 4.98% 5.05%
Average Balances, Interest and Average Interest Rates
-----------------------------------------------------
Year ended December 31, 2000
-----------------------------------------
Average
Average Interest
Balance Interest Rate(4)
-----------------------------------------
Assets:
Loans (1)(2) $ 285,792 $26,498 9.27%
Investment securities and
federal funds sold (4)(5) 190,488 11,648 6.55%
--------- -------
Total interest earnings assets 476,280 38,146 8.18%
Other assets (3)(5) 34,317 -------
---------
Total assets (5) $ 510,597
Liabilities and stockholders' equity:
Savings, PIC and money market $ 160,943 $ 3,899 2.42%
Time deposits 157,818 8,403 5.32%
Short-term borrowings 64,534 3,827 5.93%
---------- ---------
Total interest-bearing 383,295 16,129 4.21%
deposits and borrowings
Net interest rate spread (4) 3.97%
Non-interest bearing deposits 83,194
--------- ---------
Total deposits and borrowings 466,489 16,129 3.46%
Other liabilities 3,585
--------
Total liabilities 470,074
Trust preferred securities 7,975
Stockholders' equity (5) 32,548
--------
Total liabilities, trust
Preferred securities and
Stockholders' equity (5) $510,597
========
Net interest Income $ 22,017
========
Net interest margin (4) 4.80%
(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 $858, $866, and $826 for the years ended December 31, 2002, 2001
and 2000, respectively.
(5) Excludes the effect of SFAS No. 115
COMPARISON OF YEARS ENDED DECEMBER 31, 2002 AND 2001
Net Income
The company had net income in 2002 of $6.3 million, or $1.80 per share and $1.75
per share on a basic and diluted basis, respectively, compared with net income
in 2001 of $4.9 million, or $1.43 per share and $1.39 per share on a basic and
diluted basis, respectively. The increase in net income of $1.4 million, or
28.6%, was the result of increases of $2.1 million in net interest income and
$1.1 million in non-interest income, as well as a reduction in the provision for
loan losses of $1.2 million, offset by increases in non-interest expense of $2.3
million and tax expense of $0.7 million. The current year net income results
reflect the adoption of the Statement of Financial Accounting Standard ("SFAS")
No. 147, issued on October 1, 2002, which requires all companies to eliminate
the amortization of goodwill expense associated with the acquisition of branch
deposits qualifying as a business combination and to make a retroactive
adjustment to January 1, 2002. The adjustment positively impacted net income by
$0.4 million, net of taxes, for the year ended December 31, 2002. Excluding the
SFAS No. 147 adjustment, net income increased by 20% for the year ended December
31, 2002, compared to the same period in 2001.
See item (o), "Other Accounting Rule Changes", in Note 1 to the consolidated
financial statements in Item 8 for further information regarding the accounting
for branch acquisitions under SFAS 147.
Retroactive changes to Massachusetts tax law, enacted in March 2003, will
require the company to record a one-time income tax expense of $1.9 million, net
of federal income tax benefit and deferred tax asset, in the first quarter of
2003 related to the tax years 1999 through 2002. This change in state tax law
will result in an increase in the company's effective tax rate from 27.5% in
2002 to approximately 37.0%, excluding the one-time tax expense of $1.9 million,
in 2003. Management expects that the change in state tax law will continue to
have an adverse impact on the effective tax rate in future periods. Furthermore,
this one-time expense and increase in the effective tax rate will reduce the
company's net income in 2003 and for ongoing periods thereafter.
See also "Massachusetts Department of Revenue Tax Dispute" below and Note 15 to
the consolidated financial statements contained in Item 8 for further details
regarding state tax matters that will affect the company's future earnings.
Net Interest Income
The bank's net interest income was $29.5 million for the year ended December 31,
2002, an increase of $2.1 million, or 7.6%, from $27.4 million for the year
ended December 31, 2001. This increase was a result of a decrease in total
interest expense of $4.4 million, offset by a decrease in total interest income
of $2.3 million, primarily resulting from a decrease in interest rates during
the year.
Interest income on loans decreased in the year ended December 31, 2002 to $28.4
million from $28.8 million for the year ended December 31, 2001. The decrease
resulted from a decrease in the average rate earned on loans of 126 basis
points, from 8.45% in 2001 to 7.19% in 2002. The decrease in the average rate
earned was primarily attributable to the lower market interest rates. The
decrease in the average loan rate was offset by an increase in the average loan
balance of $54.8 million, or 16.1%, from $340.6 million in 2001 to $395.4
million in 2002.
Interest income on investments and federal funds sold decreased for the year
ended December 31, 2002 to $10.8 million from $12.8 million for the year ended
December 31, 2001. The decrease was primarily due to a decrease in the average
tax equivalent yield on investment securities and federal funds sold of 76 basis
points to 5.46% for the year ended December 31, 2002, from 6.22% for the year
ended December 31, 2001, due to the low rate environment which began in 2001 and
continued through 2002. The average investment securities and federal funds sold
balance decreased $5.3 million, from $219.2 million in 2001 to 213.9 million in
2002.
Interest expense on savings, personal interest checking and money market
accounts was $4.1 million and $4.4 million for the years ended December 31, 2002
and December 31, 2001, respectively. The decrease resulted primarily from a
decrease of 58 basis points in the average interest rate paid on deposits from
1.88% in 2001 to 1.30% in 2002. The decrease in the average rate paid was offset
by an increase in the average balance of $79.1 million, or 33.6%, from $235.5
million for the year ended December 31, 2001, to 314.6 million for the year
ended December 31, 2002. The decrease in rate is attributable to lower market
interest rates.
Interest expense on time deposits decreased $2.0 million to $5.3 million for the
year ended December 31, 2002 compared to $7.3 million for the year ended
December 31, 2001. The decrease was due to a decrease of 159 basis points in the
average rate paid from 5.00% in 2001 to 3.41% in 2002. The lower rate was offset
by an increase in the average balance of time deposits of $8.9 million, or 6.1%,
from $146.6 million in 2001 to $155.5 million in 2002. The decrease in the
average interest rate paid on time deposits reflects a substantial 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 repurchase agreements and
commercial sweep accounts utilizing overnight repurchase agreements secured by
municipal securities held by the bank, decreased by $2.0 million, to $0.3
million in 2002 from $2.3 million in 2001. The decrease resulted from the $49.1
million reduction in the average balance, from $66.2 in 2001 to $17.1 million in
2002, as well as the decrease in the average rate paid of 169 basis points to
1.89% in 2002, compared to 3.58% in 2001. The decrease in average balance was
attributable to the transition of the bank's commercial sweep accounts from
overnight repurchase agreements to Federated money market mutual funds, as
described above.
The tax equivalent net interest margin decreased from 5.05% to 4.98% for the
year ended December 31, 2002. The decrease in margin primarily resulted from the
declining rate environment during the year in which a significant concentration
of the loan portfolio and investment securities re-priced downward and cash
flows from the payment of principal and interest on loans was reinvested at
lower market rates. The bank's deposit mix aided in reducing the effect of the
lower rate environment. The average balances on lower cost checking and savings
deposits increased $79.1 million for the year ended December 31, 2002 while the
average balances on certificates of deposit increased $8.9 million during the
same period.
Provision for Loan Losses
The provision for loan losses amounted to $1.3 million and $2.5 million for the
years ended December 31, 2002 and 2001, respectively. The 2001 provision
reflected management's decision in the third quarter of that year to increase
the allowance for loan losses in light of the economic uncertainty during the
period, especially after September 11, 2001. During 2002 economic uncertainty in
the local and national economy continued and the bank provided $1.3 million in
additional reserves.
Loans, before the allowance for loan losses, increased from $376.3 million, at
December 31, 2001 to $414.1 million, at December 31, 2002, an increase of 10.0%.
Net loans charged off to average loans increased from 0.04% at December 31, 2001
to 0.13% at December 31, 2002. Despite the growth in the bank's loan portfolio,
there has not been a significant change in the bank's underwriting practices or
the methodology used to estimate loan loss exposure. The provision for loan
losses is a significant factor in the company's operating results.
The allowance for loan losses to loan ratio decreased from 2.27% at December 31,
2001 to 2.26% at December 31, 2002. The slight decrease in this ratio has
resulted from the net increase in the allowance for loan losses of $0.8 million,
offset by the $37.8 million increase in loans.
The provision reflects real estate values and economic conditions in New
England, and in Greater Lowell in particular, the level of non-accrual loans,
the level of charge-offs and recoveries, levels of outstanding loans, known and
inherent risks in the nature of the loan portfolio and management's assessment
of current risk.
Non-Interest Income
Non-interest income, exclusive of net gains or losses on sales of securities,
increased by $707,000, or 15.5%, to $5,271,000 for the year ended December 31,
2002, compared to $4,564,000 for the year ended December 31, 2001. The increase
was primarily attributable to increases in deposit service fees, gains on sales
of loans, and investment management and trust service fees.
Investment management and trust service fees increased by $158,000, or 8.6%, due
primarily to one-time fees of $76,000 booked in 2002 for estate settlements and
an increase in trust fees assessed. Included in investment management and trust
service fees is commission income in the amount of $244,000 for the year ended
December 31, 2002 and $255,000 for the year ended December 31, 2001, from
brokerage services provided through a third party service arrangement. Average
trust and brokerage assets under management decreased by $17.4 million, or 6.0%,
and amounted to $274.0 million for the year ended December 31, 2002 compared to
$291.4 million for the year ended December 31, 2001. Each of these components is
affected by fluctuations in the financial markets. The decrease in average
balances during the year consists of asset growth, more than offset by declining
investment market values, which resulted primarily from declining stock market
values.
Deposit service fees increased by $311,000, or 20.1%, from $1,548,000 in 2001,
to $1,859,000 in 2002. The increase was due to growth of $109.8 million, or
29.2%, during the year in the balance of saving, checking and money market
accounts. The increase in fees was also partially due to the declining interest
rate environment, which caused a reduction in the earnings credit posted to
business checking accounts, which in turn offset the service charges assessed by
the bank.
Gains on sales of loans increased by $176,000 from 2001 to 2002 due to increased
fixed rate residential mortgage production resulting from a declining interest
rate environment.
Other income increased by $62,000 from 2001 to 2002. The increase was primarily
attributable to higher insurance commissions, increased ATM/Debit card fee
income, and increased processing income earned on the Federated sweep product,
offset by lower earnings credit on account balances related to the sales of
third party bank checks, due to the decline in market rates.
Non-Interest Expense
Salaries and benefits expense totaled $14,339,000 for the year ended December
31, 2002, compared with $13,225,000 for the same period in 2001, an increase of
$1,114,000, or 8.4%. The increase resulted primarily from additional staff hired
in 2002 and 2001 to support growth and strategic initiatives implemented.
Occupancy expense was $4,908,000 for the year ended December 31, 2002, compared
with $4,043,000 for the same period in 2001, an increase of $865,000 or 21.4%.
The increase was primarily due to a full year of depreciation on office
renovations for operational support departments completed in 2001, ongoing
enhancements to the company's computer systems in 2002, start-up costs
associated with the bank's newest branch office, which opened in April 2002, and
increases in real estate taxes, bank insurance and common area maintenance fees
for the bank's leased office space.
Audit, legal and other professional expenses increased by $486,000, or 84.2%, in
2002. The increase was primarily due to onetime consulting expenses related to
bankwide technology investments undertaken during the year, as well as increased
compliance and internal audit related expenses associated with the bank's growth
in 2002. The 2002 expenses also reflect estimated legal and audit related
expenses related to the company's pending dispute with the DOR, as described
further in Item 3 and in Note 15, "Massachusetts Department of Revenue Tax
Dispute", to the consolidated financial statements contained in Item 8.
Advertising and public relations expenses increased $253,000, or 66.9%, to
$631,000 for the year ended December 31, 2002 from $378,000 for the same period
in 2001. The increase was due to expenditures, in the early part of this year,
related to the opening of the bank's newest branch office in April, increases in
advertising expenditures for the commercial lending division and advertising and
public relations initiatives undertaken on behalf of the trust division.
Office and data processing supplies expense increased by $82,000, or 17.3%, to
$557,000 for the year ended December 31, 2002, compared to $475,000 for the same
period in 2001. The increase was primarily due to increased data processing
costs associated with the technology initiatives undertaken during the year.
Trust professional and custodial expenses increased by $105,000, or 16.3%, due
primarily to an increase in custodial and advisory fees paid to third parties.
Amortization of core deposit intangible assets was $133,000 for each of the
years ended December 31, 2002 and 2001. The expense relates to the amortization
of intangible assets resulting from the acquisition of two branches from Fleet
National Bank in 2000. These intangible assets are being amortized on a
straight-line basis over ten years.
Goodwill amortization expense was $0 for the year ended December 31, 2002,
compared to $659,000 for the same period in 2001. The current period reflects
the restatement of amortization expense in accordance with SFAS 147, as
discussed in paragraph (0), "Other Accounting Rule Changes", included in Note 1
to the consolidated financial statements contained in Item 8.
Trust preferred expense was $1,158,000 for each of the years ended December 31,
2002 and 2001. The expense consists of interest costs and the amortization of
deferred underwriting costs from the trust preferred securities issued on March
23, 2000.
Other operating expense increased to $2,554,000 for the year ended December 31,
2002 compared to $2,508,000 for the same period in 2001. The increase of
$46,000, or 1.8%, for the 2002 period consisted of increased expenses for
correspondent bank service charges, training expenses and expenses related to
loan workouts, offset by reductions in telephone and ATM supplies and security
expenses due to the timing differences of the expenditures.
Income Tax Expense
The company's effective tax rate for the year ended December 31, 2002 was 27.5%
compared to 26.2% for the year ended December 31, 2001. The increase in rate was
primarily due to higher pretax income, which lessened the impact of tax exempt
municipal securities. As a result of changes in Massachusetts tax law, the
company expects to incur an increase in income tax expense and a higher
effective tax rate in future periods. The effective tax rate will approximate
37.0% in 2003, excluding the one-time tax expense of $1.9 million due to the
retroactive change in the state tax law. See "Massachusetts Department of
Revenue Tax Dispute" below and in Note 15 to the consolidated financial
statements contained in Item 8 for further details regarding state tax matters.
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 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.
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 increased 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 was
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 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 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 economic uncertainty during the 2001 period.
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 was 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,
which required 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.
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 completed 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
completed 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 core deposit intangible assets was $133,000 for each of the
years ended December 31, 2001 and 2000. The expense relates to the amortization
of intangible assets resulting from the acquisition of two branches from Fleet
National Bank on July 21, 2000. These intangible assets are being amortized on a
straight-line basis over ten years.
Goodwill amortization expense associated with the Fleet branch acquisition
increased to $659,000 for the year ended December 31, 2001, compared to $295,000
for the same period in 2000, due to the full year in effect in 2001, versus five
months in 2000.
Trust preferred expense, relating to the issuance of trust preferred securities
in March 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 and the numerous strategic initiatives implemented during the 2001
period. 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 in 2000 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.
Accounting Rule Changes
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", and SFAS No. 142, "Goodwill and Intangible Assets." SFAS No. 141
requires that all business combinations initiated after September 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 before
the end of the year of adoption.
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 net
liabilities assumed in a bank or thrift 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 continued to be amortized over a ten-year life and adoption of SFAS No.
142 was expected to have no impact on the consolidated financial statements of
the company.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain Financial
Institutions". SFAS 147 states that the excess of amounts paid over the fair
value of the assets acquired and liabilities assumed in a bank or thrift branch
acquisition that meets the definition of a business combination does represent
goodwill, and should be accounted for under SFAS 142, and not under SFAS No. 72.
Upon adoption of SFAS 147, the excess paid over the fair value of the assets
acquired and net liabilities assumed in a business combination is required to be
reclassified to goodwill, and any amortization expense recognized in 2002 must
be reversed. The FASB permitted adoption of SFAS 147 as of September 30, 2002,
and the company has adopted this new standard as of that date. The consolidated
financial statements contained herein reflect these reclassifications
retroactive to January 1, 2002.
Adoption of SFAS No. 147 is expected to increase the company's annual net income
by approximately $435,000, net of taxes. However, an annual impairment test is
required, with any resulting decline in the value of the goodwill associated
with the prior branch acquisition being charged as an expense on the income
statement and a reduction of such goodwill on the balance sheet.
Financial institutions that adopt SFAS No. 147 are required to restate
previously issued financial statements as if the standard were in place for the
institution upon adoption of SFAS No. 142 on January 1, 2002.
See Note 1 to the consolidated financial statements contained in Item 8 for
further information regarding adoption of SFAS No. 147.
In December 2002, the FASB issued SFAS No 148, "Accounting for Stock Based
Compensation - Transition and Disclosure". SFAS No. 148 amends SFAS No. 123, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation.
Companies are able to eliminate a "ramp-up" effect that the SFAS No. 123
transition rule created in the year of adoption. Companies can choose to elect a
method that will provide for comparability amongst years reported. In addition,
this Statement amends the disclosure requirement of Statement No. 123 to require
prominent disclosures in both the annual and interim financial statements about
the fair value based method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The amendments to SFAS
No. 123 are effective for financial statements for fiscal years ending after
December 15, 2002.
See paragraph (j), "Stock Options", included in Note 1 to the consolidated
financial statements contained in Item 8.
In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others". This Interpretation requires the
recording at fair value of the issuance of guarantees, which would include the
issuance of standby letters of credit. The disclosure provisions of this
Interpretation have been implemented as of December 31, 2002 and the initial
recognition and measurement provisions will be implemented beginning January 1,
2003. Adoption of the Interpretation is not expected to materially affect the
company's financial condition, results of operations, earnings per share or cash
flows.
See "Commitments, contingencies and Financial Instruments with Off-Balance Sheet
Risk and Concentrations of Credit Risk", in Note 14 to the consolidated
financial statements contained in Item 8.
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4, which
required all gains and losses from extinguishment of debt to be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. Additionally, SFAS No. 145 amends SFAS No. 13 to require that certain
lease modifications that have economic effects similar to sale-leaseback
transactions be accounted for in the same manner as sale-leaseback transactions.
The company will adopt SFAS 145 in 2003. Adoption of the standard is not
expected to materially affect the company's financial condition, results of
operations, earnings per share or cash flows.
Massachusetts Department of Revenue Tax Dispute
Enterprise Realty Trust, Inc. ("ERT") is a real estate investment trust, which
is 99.9% owned by the bank. Since the organization of ERT as a subsidiary of the
bank, the company has paid state income taxes to the Commonwealth of
Massachusetts based upon the position that the bank is authorized under the
express provisions of the applicable Massachusetts statute to exclude 95% of all
dividends received by the bank from ERT in calculating the bank's taxable income
for Massachusetts state tax purposes and that ERT, as a qualified real estate
investment trust, owes no state taxes on the amounts paid as dividends to the
bank. The DOR has asserted that the company owes additional state taxes and
interest totaling an aggregate amount of $2.3 million for the tax years ended
December 31, 1999, 2000 and 2001 in connection with the bank's operation of ERT.
The DOR has taken the position that either the income received by the bank in
the form of dividends from ERT is fully taxable under applicable Massachusetts
tax law or ERT itself should be subject directly to tax on such amounts. If the
position that has been taken by the DOR is also applied to the tax year ended
December 31, 2002, then the company would be required to pay additional
Massachusetts income tax for such period totaling approximately $1.2 million. To
the company's knowledge, it is one of approximately forty banking organizations
located in Massachusetts that is involved in a tax dispute of this type with the
DOR.
In addition, in 2003 the state legislature has passed, and Governor Romney has
signed, a supplemental budget bill, which, among other provisions, makes certain
changes to the state's tax laws on a current and retroactive basis back to 1999,
which, if enforceable, would require the company to pay the additional taxes
that the DOR seeks to collect for its tax years 1999 through 2002.
The company is currently disputing the DOR's assertion that it owes additional
taxes for any prior years. The company has also been advised that the
retroactive changes to the state's tax laws contained in the recently passed
legislation are subject to constitutional challenge.
The company believes that it has complied fully with the applicable
Massachusetts tax laws in deducting 95% of the dividends received by the bank
from ERT in calculating its taxable income for Massachusetts tax purposes. The
company also believes that ERT is a properly qualified real estate investment
trust and, as such, owes no taxes to the Commonwealth of Massachusetts on any
amounts that it has paid as dividends to the bank in prior years. Moreover, the
company has been advised that the constitutionality of the retroactive changes
to the state's tax laws contained in the recently passed legislation is
questionable.
Nonetheless, as a result of the enactment of this new legislation, in the first
quarter of 2003 the company will be required to record a one-time income tax
expense of $1.9 million, net of federal income tax benefit and deferred tax
asset, for the tax years ended December 31, 1999 through 2002.
The $1.9 million income tax expense consists of $3.5 million of state income tax
liability, net of $1.2 million in federal income tax benefit and $0.4 million in
deferred tax asset. The $3.5 million in state income tax liability consists of
the following:
(i) payment to the Commonwealth of Massachusetts of $1.2 million as
estimated state taxes due for the tax year ended December 31, 2002,
which amount would be refunded if the company prevails in its current
dispute with the DOR and if the retroactive feature of the new
legislation, as it applies to 2002, is held to be unconstitutional;
and
(ii) a liability for state income taxes to be paid of $2.3 million for the
tax years ended December 31, 2001, 2000 and 1999, which will become
payable to the Commonwealth of Massachusetts if the DOR prevails in
its current dispute with the company or if the retroactive feature of
the new legislation withstands constitutional challenge.
In addition, beginning in 2003 and for the periods thereafter, the company will
record state income tax liability on ERT's taxable income.
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 bank's primary market risk is interest rate risk, specifically, changes in
the interest rate environment. The bank's investment and asset-liability
committee ("the committee") is responsible for establishing policy guidelines on
acceptable exposure to interest rate risk and liquidity. The committee is
comprised of certain members of the Board of Directors of the company and
certain senior managers of the bank. The primary objectives of the bank's
asset-liability policy is to monitor, evaluate and control interest rate risk,
as a whole, within certain tolerance levels while ensuring adequate liquidity
and adequate capital. The committee establishes and monitors guidelines for the
net interest margin sensitivity, equity to capital ratios, liquidity, FHLB
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
committee on at least a quarterly basis. The asset-liability strategies are
revised based on changes in interest rate levels, general economic conditions,
competition in the marketplace, the current position of the bank, anticipated
growth of the bank and other factors.
One of the principal factors in maintaining planned levels of net interest
income is the ability to design effective strategies to cope with the impact on
future net interest income 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
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 analysis of 100 and 200 basis points,
spread evenly over the applicable time frame.
The following table summarizes the projected cumulative net interest income for
a 24-month period as of December 31, 2002, simulated under three rate scenarios:
(i) a 200 basis point upward shift in the prime rate, (ii) no change in the
prime rate, and (iii) a 100 basis point downward shift in the prime rate. Rates
on the bank's interest sensitive asset and liabilities (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 31,2002
----------------------------------------------
($ in thousands) Rates Rise Rates Rates Fall
200 BP Unchanged 100 BP
-------------- -------------- -------------
Interest Earning Assets:
Loans $ 55,297 $ 48,595 $ 45,288
Mortgage backed securities 17,732 17,985 16,734
Other investments 7,580 6,592 6,592
-------------- -------------- -------------
Total interest income 80,609 73,172 68,614
-------------- -------------- -------------
Interest Earning Liabilities:
Time deposits 9,543 7,297 6,318
PIC, money market, savings 11,202 7,001 4,623
FHLB borrowings and repurchase
agreements 1,017 505 249
-------------- -------------- -------------
Total interest expense 21,762 14,803 11,190
-------------- -------------- -------------
Net interest income $ 58,847 $ 58,369 $ $ 57,424
============== ============== =============
As of December 31, 2002, the above 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, 2002 simulation are
not significantly different from the December 31, 2001 simulation set forth
below, which used a 200 basis point rate shock methodology.
December 31,2001
---------------------------------------------
($ in thousands) Rates Rise Rates Rates Fall
200 BP Unchanged 200 BP
------------ ------------ -----------
Interest Earning Assets $ 88,615 $ 80,231 $ 71,951
Interest Earning Liabilities 24,982 18,490 11,997
------------- ------------ -----------
Net interest income $ 63,633 $ 61,741 $ 59,954
============ ============ ==========
Maturity and composition information of the bank's loan portfolio, investment
portfolio, certificates of deposit, and other 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 2,3,6 and 7 to the company's
consolidated 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 company 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 (Market Value of Equity, "MVE") 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 MVE on at least an annual basis. Although management
does consider the effect on the MVE when making asset-liability strategy
decisions, the primary focus is on managing the effect on the net interest
margin under changing rate environments.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Independent Auditors' Report 39
Consolidated Balance Sheets as of December 31, 2002 and 2001 40
Consolidated Statements of Income for the years ended 41
December 31, 2002, 2001 and 2000
Consolidated Statements of Changes in Stockholders' Equity 42
for the years ended December 31, 2002, 2001 and 2000
Consolidated Statements of Cash Flows for the years ended 43
December 31, 2002, 2001 and 2000
Notes to the Consolidated Financial Statements 45
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, 2002 and 2001,
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, 2002. 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, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, effective
January 1, 2002, the company adopted Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets", and SFAS No. 147,
"Acquisition of Certain Financial Institutions."
/s/ KPMG LLP
-----------------------------------
March 6, 2003
Boston, MA
March 6, 2003
Boston, Massachusetts
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
December 31, 2002 and 2001
($ in thousands) 2002 2001
-------------- -----------
Assets
Cash and equivalents:
Cash and due from banks (Note 14) $ 45,778 $ 31,361
Daily federal funds sold - 6,500
-------------- -----------
Total cash and cash equivalents 45,778 37,861
-------------- -----------
Investment securities at fair value (Notes 2 and 7) 239,096 197,060
Loans, less allowance for loan losses of $9,371
in 2002 and $8,547 in 2001 (Notes 3 and 7) 404,752 367,780
Premises and equipment (Note 4) 13,144 12,136
Accrued interest receivable (Note 5) 3,406 3,586
Deferred income taxes, net (Note 12) 1,978 2,034
Prepaid expenses and other assets 3,786 2,990
Income taxes receivable 93 301
Core deposit intangible, net of amortization 1,007 1,140
Goodwill, net of amortization 5,656 5,656
-------------- -----------
Total assets $ 718,696 $ 630,544
============== ===========
Liabilities, Trust Preferred Securities and
Stockholders' Equity
Deposits (Note 6) $ 636,777 $ 526,953
Short-term borrowings (Notes 2 and 7) 17,233 44,449
Escrow deposits of borrowers (Note 6) 1,256 931
Accrued expenses and other liabilities 2,364 4,185
Accrued interest payable 486 805
-------------- -----------
Total liabilities 658,116 577,323
-------------- -----------
Commitments and contingencies (Notes 4, 7, 13 and 14)
Trust preferred securities (Note 8) $ 10,500 $ 10,500
Stockholders' equity (Notes 1, 9 and 10):
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; 3,532,128 and 3,461,999 shares
issued and outstanding at December 31, 2002 and
2001, respectively
35 35
Additional paid-in capital 19,704 18,654
Retained earnings 25,873 20,715
Accumulated other comprehensive income 4,468 3,317
-------------- -----------
Total stockholders' equity 50,080 42,721
-------------- -----------
Total liabilities, trust preferred securities
and stockholders' equity $ 718,696 $ 630,544
============== ===========
See accompanying notes to consolidated financial statements.
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Years Ended December 31, 2002, 2001 and 2000
($ in thousands, except per share data) 2002 2001 2000
---------- ---------- ----------
Interest and divided income:
Loans $ 28,408 $ 28,776 $ 26,498
Investment securities 10,588 11,927 11,307
Federal funds sold 233 837 341
---------- ---------- ----------
Total interest income 39,229 41,540 38,146
---------- ---------- ----------
Interest expense:
Deposits 9,399 11,748 12,302
Borrowed funds 324 2,369 3,827
---------- ---------- ----------
Total interest expense 9,723 14,117 16,129
---------- ---------- ----------
Net interest income 29,506 27,423 22,017
Provision for loan losses (Note 3) 1,325 2,480 603
---------- ---------- ----------
Net interest income after provision for
loan losses
28,181 24,943 21,414
---------- ---------- ----------
Non-interest income:
Investment management and trust service fees 1,992 1,834 1,523
Deposit service fees 1,859 1,548 938
Net gains on sales of investment
securities (Note 2)
1,341 941 129
Gains on sales of loans 547 371 95
Other income 873 811 613
---------- ---------- ----------
Total non-interest income 6,612 5,505 3,298
---------- ---------- ----------
Non-interest expense:
Salaries and employee benefits (Note 11) 14,339 13,225 10,847
Occupancy expenses (Note 4 and 13) 4,908 4,043 3,217
Audit, legal and other professional fees 1,063 577 635
Advertising and public relations 631 378 644
Office and data processing supplies 557 475 705
Trust professional and custodial expenses 749 644 504
Core deposit intangible amortization expense 133 133 56
Goodwill amortization expense -- 659 295
Trust preferred expense 1,158 1,158 895
Other operating expenses 2,554 2,508 2,168
---------- ---------- ----------
Total non-interest expense 26,092 23,800 19,966
---------- ---------- ----------
Income before income taxes 8,701 6,648 4,746
Income tax expense (Note 12) 2,395 1,744 1,142
---------- ---------- ----------
Net income $ 6,306 $ 4,904 $ 3,604
========== ========== ==========
Basic earnings per share $ 1.80 $ 1.43 $ 1.08
========== ========== ==========
Diluted earnings per share $ 1.75 $ 1.39 $ 1.07
========== ========== ==========
Basic weighted average common shares
outstanding 3,494,818 3,432,255 3,322,364
========== ========== ==========
Diluted weighted average common shares
outstanding 3,611,712 3,530,965 3,369,025
========== ========== ==========
See accompanying notes to consolidated financial statements.
ENTERPRISE BANCORP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000
($ in thousands) Common Stock Additional Comprehensive Income Total
--------------------------- Paid-in Retained ----------------------- Stockholders'
Shares Amount Capital Earnings Period Accumulated Equity
------------- ---------- --------- --------- --------- ----------- -------------
Balance at December 31, 1999 3,229,893 32 $16,149 $ 14,026 $(2,744) $27,463
========= ======== ======= ======== ======= =======
Comprehensive income
Net Income 3,604 3,604 3,604
Unrealized depreciation on securities,
net of reclassification 4,229 4,229 4,229
-------
Total comprehensive income $7,833
=======
Tax benefit on non-qualified
stock option exercised - 377 377
Common stock dividend declared
($0.2500 per share) (837) (837)
Common stock issued 55,804 1 585 586
Stock options exercised (Note 10) 122,970 1 732 733
--------- ---------- ------- -------- ------- -------
Balance at December 31, 2000 3,408,667 $ 34 $17,843 $ 16,793 $ 1,485 $36,155
========= ========== ======= ======== ======= =======
Comprehensive income
Net Income 4,904 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) (982)
Common stock issued 48,182 1 763 764
Stock options exercised (Note 10) 5,150 - 48 48
--------- ---------- ------- -------- ------- -------
Balance at December 31, 2001 3,461,999 $ 35 $18,654 $ 20,715 $ 3,317 $42,721
========= ========== ======= ======== ======= =======
Comprehensive income
Net Income 6,306 6,306 6,306
Unrealized appreciation on securities, net
of reclassification 1,151 1,151 1,151
------- -------
Total comprehensive income $7,457
=======
Tax benefit on non-qualified stock options - 4 4
Exercised
Common stock dividend declared ($0.3300 per
share) (1,148) (1,148)
Common stock issued 49,779 - 896 896
Stock options exercised (Note 10) 20,350 - 150 150
--------- ---------- ------- -------- ------- -------
Balance at December 31, 2002 3,532,128 $ 35 $19,704 $ 25,873 $4,468 $50,080
========= ========== ======= ======== ======= =======
Disclosure of reclassification amount: 2002 2001 2000
------------- -------- ---------
Gross unrealized appreciation arising during $ 3,085 $ 3,717 $ 6,515
the period
Income taxes (1,049) (1,264) (2,201)
--------- ---------- -------
Net unrealized holding appreciation, net of tax 2,036 2,453 4,314
--------- ---------- -------
Less: reclassification adjustment on gains 885 621 85
included in net income (net of
$456, $320, $44 tax, respectively)
--------- ---------- -------
Net unrealized appreciation on securities, $ 1,151 $ 1,832 $ 4,229
net of reclassification ========= ========== =======
See accompanying notes to consolidated financial statements.
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Years Ended December 31, 2002, 2001 and 2000
($ in thousands) 2002 2001 2000
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 6,306 $ 4,904 $ 3,604
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 1,325 2,480 603
Depreciation and amortization 3,212 2,312 1,717
Amortization of intangible assets 133 791 351
Net gains on sale of investments (1,341) (941) (129)
Gain on sale of loans (547) (371) (95)
(Increase) decrease in:
Loans held for sale, net of gain (2,124) 12 (3)
Accrued interest receivable 180 492 (814)
Prepaid expenses and other assets (796) (454) (1,145)
Deferred income taxes (537) (767) (325)
Income taxes receivable 208 114 (160)
Increase (decrease) in:
Accrued expenses and other liabilities (1,821) 409 1,486
Accrued interest payable (319) (226) 674
---------------- ---------------- ----------------
Net cash provided by operating activities 3,879 8,755 5,764
---------------- ---------------- ----------------
Cash flows from investing activities:
Proceeds from sales of investment securities 42,075 17,589 10,971
Proceeds from maturities, calls and pay-downs of investment securities 59,071 57,671 14,392
Purchase of investment securities (140,739) (83,608) (50,558)
Net increase in loans (35,626) (64,104) (50,645)
Additions to premises and equipment, net (3,578) (3,358) (4,946)
Cash paid for assets in excess of liabilities - - (7,688)
---------------- ---------------- ----------------
Net cash used in investing activities (78,797) (75,810) (88,474)
---------------- ---------------- ----------------
Cash flows from financing activities:
Net increase in deposits 109,824 64,978 128,552
Net decrease in short-term borrowings (27,216) (13,822) (20,496)
Proceeds from issuance of trust preferred securities - - 10,500
Net (decrease) increase in escrow deposits of borrowers 325 (175) 311
Cash dividends paid (1,148) (982) (837)
Proceeds from issuance of common stock 896 764 586
Proceeds from exercise of stock options 154 48 1,110
---------------- ---------------- ----------------
Net cash provided by financing activities 82,835 50,811 119,726
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 7,917 (16,244) 37,016
Cash and cash equivalents at beginning of year 37,861 54,105 17,089
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 45,778 $ 37,861 $ 54,105
================ ================ ================
See accompanying notes to consolidated financial statements.
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 2002, 2001 and 2000
($ in thousands) 2002 2001 2000
------------- ---------------- -------------
Supplemental financial data:
Cash Paid For:
Interest $10,042 $14,343 $16,337
Income taxes 2,069 2,462 1,348
See accompanying notes to consolidated financial statements.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Years Ended December 31, 2002, 2001 and 2000
(1) Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements of Enterprise Bancorp, Inc. (the
"company") include the accounts of the company and its wholly owned
subsidiaries, Enterprise Bank and Trust Company (the "bank")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.
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, Westford, Massachusetts in November
of 1999, and Lowell, Massachusetts in April of 2002. The bank also
purchased two branches (in Chelmsford and Billerica) in July of 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.
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 and impairment valuation of
goodwill and other intangible assets may differ from these estimates.
(b) Reclassification
Certain amounts in previous years' financial statements have been
reclassified to conform to the current year's presentation.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(c) Investment Securities
Investment securities that are intended to be held for indefinite periods
of time but which may not be held to maturity or on a long-term basis
are considered to be "available for sale" and are carried at fair
value. Net unrealized 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, 2002 and 2001 all of the company's investment securities
were classified as available for sale and carried at fair value. If a
decline in market value of a security is considered other than
temporary, the cost basis of the individual security is written down
to market value and the loss is charged to net gains on sales of
investment securities.
Investment securities' discounts are accreted and premiums are amortized
over the period of estimated principal repayment using methods that
approximate the interest method.
Gainsor losses on the sale of investment securities are recognized at the
time of sale on a specific identification basis.
(d) Loans
The company grants single family and multi-family residential loans,
commercial real estate loans, commercial loans and a variety of
consumer loans. In addition, the company grants loans for the
construction of residential homes, multi-family properties, 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, offset by
direct loan origination costs, are deferred and amortized using the
straight line method over five to seven years for lines of credit and
demand notes or over the life of the related loans using the
level-yield method for all other types of loans. When loans are sold
or paid off, the unamortized fees and costs are recognized as income.
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.
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
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
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.
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.
(e) Allowance for Loan Losses
The allowance for loan losses is established through a provision for loan
losses charged to operations. Loan losses are charged against the
allowance when management believes that the collectability of the loan
principal is unlikely. Recoveries on loans previously charged-off are
credited to the allowance.
The 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, if necessary,
based on a subjective process whereby management considers qualitative
and quantitative assessments of other factors, including industry
concentrations, results of regulatory examinations, historical
charge-off and recovery experience, character and size of the loan
portfolio, trends in loan volume, delinquencies and non-performing
loans, the strength of the local and national economy, interest rates
and other changes in the portfolio. The allowance for loan losses is
management's 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.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(f) 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 or amortization is computed on a straight-line basis over
the lesser of the estimated useful lives of the asset or the
respective lease term (with renewal options) for leasehold
improvements as follows:
Buildings 25 years
Building renovations 10 to 15 years
Leasehold improvements 10 years
Computer software and equipment 3 to 5 years
Furniture, fixtures and equipment 3 to 7 years
(g) Impairment of Impairment of Long-Lived Assets Other than Goodwill
The bank reviews long-lived assets, including premises and equipment, for
impairment on an ongoing basis or whenever events or changes in
business circumstances indicate that the remaining useful life may
warrant revision or that the carrying amount of the long-lived asset
may not be fully recoverable. If impairment is determined to exist,
any related impairment loss is recognized through a charge to
earnings. Impairment losses on assets disposed of, if any, are based
on the estimated proceeds to be received, less cost of disposal.
(h) Goodwill and Core Deposit Intangible Assets
On July 21, 2000 the bank completed its acquisition of two Fleet National
Bank branch offices. The excess of cost over the fair market value of
assets acquired and liabilities assumed of approximately $7.9 million
has been allocated to core deposit intangible assets and goodwill,
which were valued at $1.3 million and $6.6 million, respectively, at
the acquisition date. Core deposit intangible assets are reviewed for
impairment regularly. Goodwill is evaluated for impairment at least
annually using various fair value techniques including earnings and
book value multiples.
(i) Income Taxes
The company uses the asset and liability method of accounting for income
taxes. Under this method deferred tax assets and liabilities are
reflected at currently enacted income tax rates applicable to the
period in which the deferred tax assets or liabilities are expected to
be realized or settled. As changes in tax laws or rates are enacted,
deferred tax assets and liabilities will be adjusted accordingly
through the provision for income taxes.
(j) Stock Options
The company measures compensation cost for stock-based compensation plans
under Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock Issued to Employees." Under APB No. 25, no compensation cost
is recorded if, at the grant date, the exercise price of the options
is equal or greater than to the fair market value of the company's
common stock.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Had the company determined compensation expense based on the fair value at
the grant date for its stock options under SFAS 123, the company's net
income would have been reduced to the pro forma amounts indicated
below:
($ in thousands, except per share data) 2002 2001 2000
--------------- -------------- ------------
Net income as reported $ 6,306 $ 4,904 $ 3,604
Pro forma net income 6,176 4,771 3,490
Basic earnings per share as reported 1.80 1.43 1.08
Pro forma basic earnings per share 1.77 1.39 1.05
Fully diluted earnings per share as reported 1.75 1.39 1.07
Pro forma fully diluted earnings per share 1.71 1.35 1.04
The per share weighted average fair value of stock options was determined
to be $4.78 and $4.59 for options granted in 2002 and 2001. There were
no options granted in 2000. The fair value of the options was
determined to be 24% and 29% of the market value of the stock at the
date of grant in 2002 and 2001, respectively. The value was determined
by a binomial distribution model. The assumptions used in the model at
the last option grant date for the risk-free interest rate, expected
volatility, dividend yield and expected life in years were 4.58%,
12.5%, 1.65% and 6, respectively. The assumptions used for the 2001
grant for the risk-free interest rate, expected volatility, dividend
yield and expected life in years were 4.96%, 12.5%, 1.80% and 6,
respectively.
(k) 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 $314.1 million and $311.6
million at December 31, 2002 and 2001 respectively. Income is reported
on an accrual basis.
(l) 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 116,894, 98,710, and 46,661 for the years ended
December 31, 2002, 2001 and 2000, respectively.
(m) Reporting Comprehensive Income
Comprehensive Income is defined as all changes to equity except investments
by and distributions to stockholders. Net income is one component of
comprehensive income, with other components referred to in the
aggregate as other comprehensive income.
(n) 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 and no hedge accounting
transactions at December 31, 2002 and 2001, respectively.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(o) Other Accounting Rule Changes
In June 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. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets".
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 before the
end of the year of adoption.
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 net liabilities assumed in
a bank or thrift 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 continued to be amortized over a ten-year life and adoption
of SFAS No. 142 was expected to have no impact on the consolidated
financial statements of the company.
In October 2002, the FASB issued SFAS No. 147, "Acquisition of Certain
Financial Institutions". SFAS 147 states that the excess of amounts
paid over the fair value of the assets acquired and liabilities
assumed in a bank or thrift branch acquisition that meets the
definition of a business combination does represent goodwill, and
should be accounted for under SFAS 142, and not under SFAS No. 72.
Upon adoption of SFAS 147, the excess paid over the fair value of the
assets acquired and net liabilities assumed in a business combination
is required to be reclassified to goodwill, and any amortization
expense recognized in 2002 must be reversed. The FASB permitted
adoption of SFAS 147 as of September 30, 2002, and the company has
adopted this new standard as of that date. The consolidated financial
statements contained herein reflect these reclassifications
retroactive to January 1, 2002.
Adoption of SFAS 147 increased the company's annual net income by
approximately $435,000, net of taxes. However, an annual impairment
test is required, with any resulting decline in the value of the
goodwill associated with the prior branch acquisition being charged as
an expense on the income statement and a reduction of such goodwill on
the balance sheet.
Financial institutions that adopt SFAS 147 are required to restate
previously issued financial statements as if the standard were in
place for the institution upon adoption of SFAS 142 on January 1,
2002.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The changes in the carrying amount of goodwill and core deposit
intangibles for the years ended December 31, 2001 and 2002 are as
follows:
Total
Core Deposit Identifiable
($ in thousands) Goodwill Intangible Intangibles
---------- ----------- ------------
Balance at December 31, 2000 $6,315 $1,273 $7,588
Amortization expense 659 133 792
------ ------ ------
Balance at December 31, 2001 5,656 1,140 6,796
Amortization expense -- 133 133
------ ------ ------
Balance at December 31, 2002 $5,656 $1,007 $6,663
====== ====== ======
Annual amortization expense is expected to remain at $133,000 through 2010.
The following information reflects the retroactive application of SFAS No.
147 for the years ended December 31, 2002, 2001 and 2000 had the
standard been applicable in 2000:
($ in thousands, except per share data) 2002 2001 2000
------- ------- --------
Net income as reported $6,306 $4,904 $3,604
Goodwill amortization, net of tax - 435 195
------- -------
-------
Adjusted net income $6,306 $5,339 $3,799
======= ======= =======
Earnings per share:
Basic
Net income as reported $ 1.80 $ 1.43 $ 1.08
Goodwill amortization, net of tax - 0.13 0.06
------- ------- -------
Adjusted net income $ 1.80 $ 1.56 $ 1.14
======= ======= =======
Diluted:
Net income as reported $ 1.75 $ 1.39 $ 1.07
Goodwill amortization, net of tax - 0.12 0.06
------- ------- -------
Adjusted net income $ 1.75 $ 1.51 $ 1.13
======= ======= =======
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock
Based Compensation - Transition and Disclosure". SFAS No. 148 amends
SFAS No. 123, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for
stock-based employee compensation. Companies are able to eliminate a
"ramp-up" effect that the SFAS No. 123 transition rule created in the
year of adoption. Companies can choose to elect a method that will
provide for comparability amongst years reported. In addition, this
Statement amends the disclosure requirement of Statement No. 123 to
require prominent disclosures in both the annual and interim financial
statements about the fair value based method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The amendments to SFAS No. 123 are effective for
financial statements for fiscal years ended after December 15, 2002,
while the disclosures to be provided in interim financial reports will
be required for interim periods beginning after December 15, 2002. See
paragraph (j) above for pro forma information under SFAS No. 123.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
In November 2002, the FASB issued FASB Interpretation No. 45 "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". This Interpretation
requires the recording at fair value the issuance of guarantees, which
would include the issuance of standby letters of credit. The
disclosure provisions of this Interpretation have been implemented as
of December 31, 2002 and the initial recognition and measurement
provisions will be implemented beginning January 1, 2003. Adoption of
the Interpretation is not expected to materially affect the company's
financial condition, results of operations, earnings per share or cash
flows. See "Commitments, contingencies and Financial Instruments with
Off-Balance Sheet Risk and Concentrations of Credit Risk", in Note 14
to the consolidated financial statements contained in Item 8.
In April 2002, the FASB issued SFAS No. 145, which rescinds SFAS No. 4,
which required all gains and losses from extinguishment of debt to be
aggregated and, if material, classified as an extraordinary item, net
of related income tax effect. Additionally, SFAS No. 145 amends SFAS
No. 13 to require that certain lease modifications that have economic
effects similar to sale-leaseback transactions be accounted for in the
same manner as sale-leaseback transactions. The company will adopt
SFAS 145 in 2003. Adoption of the standard is not expected to
materially affect the company's financial condition, results of
operations, earnings per share or cash flows.
(2) Investment Securities
The amortized cost and estimated fair values of investment securities at
December 31, are summarized as follows:
2002
----------------------------------------------------------------------------
($ in thousands) Amortized Unrealized Unrealized
cost appreciation depreciation Fair value
--------------- --------------------- --------------------- ----------------
MBS/CMO $177,579 $ 3,702 $ 258 $181,023
Municipal obligations 50,447 3,325 -- 53,772
-------- -------- -------- --------
Total bonds and obligations 228,026 7,027 258 234,795
Certificates of Deposit 1,000 -- -- 1,000
Federal Home Loan Bank stock, at cost 3,301 -- -- 3,301
-------- -------- -------- --------
Total investment securities $232,327 $ 7,027 $ 258 $239,096
======== ======== ======== ========
2001
----------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
($ in thousands) cost appreciation depreciation value
--------------- --------------------- --------------------- ----------------
U.S. agency obligations $ 14,791 $ 963 $ 95 $ 15,659
MBS/CMO 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
======== ======== ======== ========
Included in municipal obligations are investments that can be called prior
to final maturity with fair values of $28,032,000 and $28,235,000 at
December 31, 2002 and 2001, respectively.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
At December 31, 2002, securities with a fair value of $13,891,000 were
pledged as collateral for short-term borrowings (Note 7) and
securities with a fair value of $1,005,000 were pledged as collateral
for treasury, tax and loan deposits. At December 31, 2001, securities
with a fair value of $73,876,000 were pledged as collateral for
short-term borrowings (Note 7) and securities with a fair value of
$1,034,000 were pledged as collateral for treasury, tax and loan
deposits.
The contractual maturity distribution of total bonds and obligations at
December 31, 2002 is as follows:
($ in thousands) Amortized cost Percent Fair Value Percent
--------------- ------------------ ------------------ ----------------
Within one year $ 3,363 1.47% $ 3,443 1.47%
After one but within three years 11,901 5.22 12,611 5.37
After three but within five years 16,284 7.14 17,349 7.39
After five but within ten years 31,258 13.71 33,384 14.22
After ten years 165,220 72.46 168,008 71.55
-------- ------ -------- ------
Total investment securities $228,026 100.00% $234,795 100.00%
======== ====== ======== ======
Mortgage-backed securities are shown at their final maturity but are
expected to have shorter average lives due to principal prepayments
Sales and calls of investment securities for the years ended December 31,
2002, 2001, and 2000 are summarized as follows:
($ in thousands) 2002 2001 2000
---------- --------- ----------
Book value of securities sold or called $ 42,803 $ 45,828 $ 11,252
Gross realized gains on sales/calls 1,348 941 139
Gross realized losses on sales/calls (7) -- (10)
-------- -------- --------
Total proceeds from sales or calls of investment securities $ 44,144 $ 46,769 $ 11,381
======== ======== ========
(3) Loans and Loans Held for Sale
Major classifications of loans and loans held for sale at December 31, are
as follows:
($ in thousands) 2002 2001
----------- -----------
Real estate:
Commercial $ 171,637 $ 159,117
Construction 39,078 32,428
Residential 47,607 59,967
--------- ---------
Total real estate 258,322 251,512
Commercial 122,144 94,762
Home equity 29,937 24,594
Consumer 5,075 6,697
--------- ---------
Total loans 415,478 377,565
Deferred loan origination fees (1,355) (1,238)
Allowance for loan losses (9,371) (8,547)
--------- ---------
Net loans and loans held for sale $ 404,752 $ 367,780
========= =========
ENTERPRISE BANCORP, INC
Notes to Consolidated Financial Statements
Included in the residential loan category are loans held for sale amounting
to $2.8 million and $0.7 million at December 31, 2002 and 2001,
respectively.
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, 2002 and 2001, the outstanding loan balances to directors and
officers of the company and their associates was $6.3 million and $6.5
million, respectively. Unadvanced portions of lines of credit
available to directors and officers were $7.5 million and $3.3
million, as of December 31, 2002 and 2001, respectively. During 2002,
new loans and net increases in loan balances on lines of credit under
existing commitments of $2.1 million were made and principal pay-downs
of $2.3 million were received. All loans to these related parties are
current.
Non-accrual loans at December 31, are summarized as follows:
($ in thousands) 2002 2001
------------ ------------
Real estate $ 453 $ 503
Commercial 1,451 1,337
Consumer, including home equity 11 34
------ ------
Total non-accrual $1,915 $1,874
====== ======
There were no commitments to lend additional funds to those borrowers whose
loans were classified as non-accrual at December 31, 2002, 2001, and
2000. The reduction or increase in interest income for the years ended
December 31, associated with non-accruing loans is summarized as
follows:
($ in thousands) 2002 2001 2000
---- ---- ----
Income in accordance with original loan terms $ 229 $ 287 $ 269
Income recognized 213 128 306
----- ----- -----
Reduction/(increase) in interest income $ 16 $ 159 $ (37)
===== ===== =====
The increase in income recognized in 2002 resulted primarily from the
settlement of a loan relationship that had been carried as
non-performing and impaired since 1992.
At December 31, 2002 and 2001, total impaired loans were $3.3 million and
$1.3 million, respectively. In the opinion of management, there were
no impaired loans requiring an allocated reserve at December 31, 2002
and 2001, respectively. All of the $3.3 million of impaired loans have
been measured using the fair value of the collateral method. During
the years ended December 31, 2002 and 2001, the average recorded value
of impaired loans was $1.7 million and $0.9 million, respectively.
Included in the reduction /(increase) in interest income in the table
above is $99,000 and $85,000 of interest income that was not
recognized on loans that were deemed impaired as of December 31, 2002
and 2001, respectively. All payments received on non-accrual loans
deemed to be impaired loans are applied to principal. The company is
not committed to lend additional funds on any loans that are
considered impaired.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Changes in the allowance for loan losses for the years ended December 31,
are summarized as follows:
($ in thousands) 2002 2001 2000
-------------- --------------- --------------
Balance at beginning of year $ 8,547 $ 6,220 $ 5,446
Provision charged to operations 1,325 2,480 603
Addition related to acquired loans - - 250
Loan recoveries 247 72 207
Loans charged off (748) (225) (286)
-------------- --------------- --------------
Balance at end of year $ 9,371 $ 8,547 $ 6,220
============== =============== ==============
At December 31, 2002, 2001 and 2000, the bank was servicing mortgage
loans sold to investors amounting to $16,861,000, $21,646,000, and
$25,699,000, respectively.
(4) Premises and Equipment
Premises and equipment at December 31, are summarized as follows:
($ in thousands) 2002 2001
--------------- --------------
Land $ 1,374 $ 1,373
Buildings and leasehold improvements 10,786 10,255
Computer software and equipment 4,801 4,295
Furniture, fixtures and equipment 3,455 2,727
--------------- --------------
20,416 18,650
Less accumulated depreciation (7,272) (6,514)
--------------- --------------
$ 13,144 $ 12,136
=============== ==============
The company is obligated under various non-cancelable operating leases,
some of which provide for periodic adjustments. At December 31, 2002
minimum lease payments for these operating leases were as follows:
($ in thousands)
Payable in:
2003 $ 643
2004 544
2005 250
2006 101
Thereafter 53
---------------
Total minimum lease payments $ 1,591
===============
Total rent expense for the years ended December 31, 2002, 2001 and 2000
amounted to $662,000, $638,000 and $581,000, respectively.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(5) Accrued Interest Receivable
Accrued interest receivable consists of the following at December 31:
($ in thousands) 2002 2001
------ ------
Investments $1,531 $1,640
Loans and loans held for sale 1,875 1,946
------ ------
$3,406 $3,586
====== ======
(6) Deposits and Escrow Deposits of Borrowers
Deposits at December 31, are summarized as follows:
($ in thousands) 2002 2001
-------- --------
Demand and escrow deposits of customers $118,440 $107,931
Savings 126,595 70,970
Personal interest checking 148,873 118,844
Money market 91,450 77,817
Time deposits less than $100,000 105,564 103,249
Time deposits of $100,000 or more 47,111 49,073
-------- --------
$638,033 $527,884
======== ========
Interest expense on time deposits with balances of $100,000 or more
amounted to $1,642,000, $2,353,000, and $3,438,000, in 2002, 2001 and
2000, respectively
The following table shows the scheduled maturities of time deposits with
balances less than $100,000 and greater than $100,000 at December 31,
2002:
($ in thousands) Less Greater
than than
$100,000 $100,000 Total
----------- ----------- ----------
Due in less than three months $ 32,013 $ 21,275 $ 53,288
Due in over three through twelve months 50,802 19,539 70,341
Due in over twelve through thirty six months 22,749 6,297 29,046
Due in over three years -- -- --
-------- -------- --------
$105,564 $ 47,111 $152,675
======== ======== ========
(7) Other Borrowings
Borrowed funds at December 31, are summarized as follows:
2002 2001 2000
------------------------- -------------------------- ------------------------
($ in thousands) Average Average Average
Amount Rate Amount Rate Amount Rate
------------------------- -------------------------- ------------------------
Securities sold under agreements to
repurchase $ 763 1.40% $43,979 1.64% $57,801 5.86%
Federal Home Loan Bank of Boston
Borrowings 16,470 1.44% 470 5.94% 470 5.94%
-------- ------- -------
$17,233 1.44% $44,449 1.68% $58,271 5.86%
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Securities sold under agreement to repurchase averaged $15,960,000,
$65,511,000, and $39,782,000 during 2002, 2001, and 2000,
respectively. Maximum amounts outstanding at any month end during
2002, 2001, and 2000 were $48,058,000, $76,129,000, and $57,801,000,
respectively. The average cost of repurchase agreements was 1.77%,
3.56%, and 5.71% during 2002, 2001, and 2000, respectively. The
reductions in 2002 reflects the bank's continued transition during the
first five months of 2002 of the investment portion of the bank's
commercial sweep accounts from overnight repurchase agreements secured
by municipal securities held by the bank to money market mutual funds
managed by Federated Investors, Inc.
Securities sold under agreements to repurchase at December 31, 2002 have
maturities ranging from one to six months, with a weighted average
term of 56 days. Federal Home Loan Bank borrowings consisted of two
advances: $16.0 million in overnight borrowings and $0.5 million in a
fifteen year term advance maturing in 2013.
The bank became a member of the Federal Home Loan Bank of Boston ("FHLB")
in March 1994. FHLB borrowings averaged $1,167,000, $722,000, and
$24,753,000 during 2002, 2001, and 2000, respectively. Maximum amounts
outstanding at any month end during 2002, 2001, and 2000 were
$16,470,000, $470,000, and $61,300,000, respectively. The average cost
of FHLB borrowings was 3.47%, 4.96%, and 6.29% during 2002, 2001, and
2000, respectively. Borrowings from the FHLB are secured by the bank's
investment portfolio not otherwise pledged, FHLB stock, 1-4 family
owner occupied residential loans and the bank's pledge of its stock
investment in Enterprise Realty Trust, Inc.
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, 2002, the bank had the additional
capacity to borrow up to approximately $173,354,000 from the FHLB,
which includes a pre-approved overnight line of credit in the amount
of $11.0 million.
(8) 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.
(9) 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.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
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 2002 the company issued 42,717
shares under the plan at a per share purchase price of $18.22. In 2001
the company issued 39,770 shares under the plan at a per share
purchase price of $16.35.
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
and trust preferred securities) 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, 2002.
The company is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate or result in certain mandatory, and
possibly additional discretionary, actions by regulators that, if
undertaken, could have a material adverse effect on the company's
financial statements. Under applicable capital adequacy requirements
and the regulatory framework for prompt corrective action applicable
to the bank, the company must meet specific capital guidelines that
involve quantitative measures of the company's assets, liabilities,
and certain off-balance sheet items as calculated under regulatory
accounting practices. The company's capital amounts and
classifications are also subject to qualitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the company to maintain the minimum capital amounts and ratios
(set forth in the table below) of total and Tier 1 capital (as defined
in the regulations) to risk-weighted assets (as defined). Management
believes, as of December 31, 2002, that the company meets all capital
adequacy requirements to which it is subject.
As of December 31, 2002, 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.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
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, 2002
Total Capital
(to risk weighted assets) $55,582 11.5% $38,645 8.0% $48,306 10.0%
Tier 1 Capital
(to risk weighted assets) 49,502 10.3% 19,323 4.0% 28,984 6.0%
Tier 1 Capital*
(to average assets) 49,502 7.2% 27,639 4.0% 34,548 5.0%
As of December 31, 2001
Total Capital
(to risk weighted assets) $48,568 11.3% $34,343 8.0% $42,929 10.0%
Tier 1 Capital
(to risk weighted assets) 43,163 10.1% 17,171 4.0% 25,757 6.0%
Tier 1 Capital*
(to average assets) 43,163 7.0% 24,954 4.0% 31,192 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.
(10) Stock Option Plans
The board of directors of the bank adopted a 1988 Stock Option Plan (the
"1988 plan"), which was approved by the shareholders of the bank in
1989. The 1988 plan 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 the company upon the completion of the
bank's reorganization into a holding company structure in 1996. 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 plan, as so amended and restated, 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.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
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, incentive stock 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, 2002, 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:
2002 2001 2000
---------------------------- -------------------------- -----------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
---------------------------- -------------------------- -----------------------
Outstanding at beginning of year 272,260 $ 10.32 230,235 $ 9.61 355,130 $ 8.35
Granted 81,500 18.22 50,650 13.44 -- --
Exercised (20,350) 7.35 (5,150) 7.83 (122,970) 5.97
Forfeited (3,925) 13.47 (3,475) 12.72 (1,925) 9.04
------- ------- ------- ------- ------ ----
Outstanding at end of year 329,485 12.42 272,260 10.32 230,235 9.61
======= ======= ======= ====
Exercisable at end of year 229,010 10.37 200,070 9.31 179,835 8.97
Shares reserved for future grants 78,235 170,407 50,654
A summary of options outstanding and exercisable by exercise price as of
December 31, 2002 follows:
Outstanding Exercisable
---------------------------------- -----------------
Wtd. Avg.
Exercise Remaining
Price # Shares Life # Shares
-------------- -------------- ---------------- -----------------
$ 5.50 200 0.02 200
6.00 2,800 1.51 2,800
6.75 22,550 2.51 22,550
7.00 44,300 3.50 44,300
9.00 40,100 4.50 40,100
12.50 91,360 2.93 91,360
13.44 47,475 5.02 23,700
18.22 80,700 6.43 4,000
----------- -------------
329,485 4.31 229,010
============ ==============
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
During 2002 and 2001, respectively, 7,062 and 8,412 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 $16.63 and
$13.44 and were issued from the shares reserved for future grants
under the 1998 plan. Expense recognized in associated with the
issuance of these shares was $117,000 and $113,000 in 2002 and 2001,
respectively.
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 constituted non-qualified options of the
company for tax purposes. Accordingly, in connection with the exercise
of these 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.
See paragraph (j), "Stock Options", in Note 1 above to these consolidated
financial statements for further information related to equity
compensation plans.
(11) Employee Benefit Plans
401(k) Defined Contribution Plan
The company has a 401(k) defined contribution employee benefit plan. The
401(k) plan allows eligible employees to contribute a base percentage,
plus a supplemental percentage, of their pre-tax earnings to the plan.
A portion of the base percentage, as determined by the board of
directors, is matched by the company. No company contributions are
made for supplemental contributions made by participants. The
percentage matched for 2002, 2001 and 2000 was 75%, up to the first 6%
contributed by the employee. The company's total expense for the
401(k) plan match, including bonus match and the discretionary match
discussed below, was $399,000, $384,000, and $300,000, respectively,
for the years ended December 31, 2002, 2001, and 2000.
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 2002, 2001
and 2000, gross payments charged to salaries and benefits expense
under the plan were $1,944,000, $1,992,000, and $1,217,000,
respectively. In 2002, in addition to the $1,944,000 in salaries and
benefits, the bank also made a discretionary employer contribution to
the 401(k) plan of $134,000, or an additional 25% of employee
contributions up to the first 6% contributed by the employee. The
$134,000 increase to the employer match on the company's 401(k) plan
was included in salaries and benefits expense for 2002.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
The company maintains a supplemental cash bonus plan for its top five
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
2002, 2001, and 2000, $366,000, $292,0000, and $0, 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 of the bank. 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 $4,000, $10,000, and $10,000
in 2002, 2001, and 2000, respectively.
(12) Income Taxes
The components of income tax expense for the years ended December 31 were
calculated using the asset and liability method as follows:
($ in thousands) 2002 2001 2000
----------------- ------------------ -----------------
Current tax expense:
Federal $ 2,932 $ 2,467 $ 1,417
State - 44 49
----------------- ------------------ -----------------
Total current tax expense 2,932 2,511 1,466
----------------- ------------------ -----------------
Deferred tax benefit:
Federal (537) (767) (324)
State - - -
----------------- ------------------ -----------------
Total deferred tax benefit (537) (767) (324)
----------------- ------------------ -----------------
Total income tax expense $ 2,395 $ 1,744 $ 1,142
================= ================== =================
The provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate (34%) as follows:
2002 2001 2000
----------------------- ------------------------ -----------------------
($ in thousands) Amount % Amount % Amount %
------------ --------- ------------- --------- ------------ ---------
Computed income tax expense at statutory
rate $ 2,958 34.0% $ 2,260 34.0% $ 1,614 34.0%
State income taxes, net of federal tax
benefit - 0.0% 29 0.4% 32 0.7%
Municipal bond interest (648 ) (7.4% ) (654 ) (9.8% ) (624 ) (13.1% )
Other 85 0.9% 109 1.6% 120 2.5%
------------ --------- ------------- --------- ------------ ---------
Income tax expense $ 2,395 27.5% $ 1,744 26.2% $ 1,142 24.1%
============ ========= ============= ========== ============ =========
As a result of changes in Massachusetts tax law, the company expects to
incur an increase in income tax expense and a higher effective tax
rate in future periods. See Note 15 below for further details
regarding state tax matters.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
At December 31 the tax effects of each type of income and expense item
that give rise to deferred taxes are:
($ in thousands) 2002 2001
----------------- ----------------
Deferred tax asset:
Allowance for loan losses $ 3,461 $ 2,964
Depreciation 777 607
Goodwill - 129
Other 134 42
----------------- ----------------
Total 4,372 3,742
----------------- ----------------
Deferred tax liability:
Net unrealized appreciation on
investment securities 2,301 1,708
Goodwill 93 -
----------------- ----------------
Total 2,394 1,708
----------------- ----------------
Net deferred tax asset $ 1,978 $ 2,034
================= ================
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, 2002.
(13) 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, 2002, 2001 and 2000 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,
2002, 2001, and 2000, were $513,000, $617,000 and $474,000,
respectively. The 2001 payment included $154,000 of one-time fees
related to electrical systems upgrades.
(14) Commitments, Contingencies and Financial Instruments with Off-Balance Sheet
Risk and Concentrations of Credit Risk
The company is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its
customers. These financial instruments include commitments to
originate loans, standby letters of credit and unadvanced lines of
credit.
The instruments involve, to varying degrees, elements of credit risk in
excess of the amount recognized in the balance sheets. The contract
amounts of these instruments reflect the extent of involvement the
company has in the particular classes of financial instruments.
The company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments and
standby letters of credit is represented by the contractual amounts of
those instruments. The company uses the same credit policies in making
commitments and conditional obligations as it does for on-balance
sheet instruments.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Financial instruments with off-balance sheet credit risk at December 31,
2002 and 2001, are as follows:
($ in thousands) 2002 2001
---------------- ----------------
Commitments to originate loans $ 46,283 $ 14,562
Standby letters of credit 6,720 5,032
Unadvanced portions of consumer loans
(including credit card loans) 3,688 3,738
Unadvanced portions of construction loans 26,142 20,662
Unadvanced portions of home equity loans 28,871 22,798
Unadvanced portions of commercial lines of credit 78,786 59,323
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. If
the letter of credit is drawn upon the bank creates a loan for the
customer with the same criteria associated with similar loans. The
fair value of these commitments were estimated to be the fees charged
to enter into similar agreements and were estimated to be $0.1 million
at December 31, 2002 and 2001. The fair value of these commitments
were not reflected on the balance sheet.
The company originates residential mortgage loans under agreements to sell
such loans, generally with servicing released. At December 31, 2002
and 2001, the company had commitments to sell loans totaling
$8,584,000 and $5,644,000, 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 $3,150,000 and $2,800,000 at December 31, 2002, and
2001.
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.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(15) Massachusetts Department of Revenue Tax Dispute
Enterprise Realty Trust, Inc. ("ERT") is a real estate investment trust,
which is 99.9% owned by the bank. Since the organization of ERT as a
subsidiary of the bank, the company has paid state income taxes to the
Commonwealth of Massachusetts based upon the position that the bank is
authorized under the express provisions of the applicable
Massachusetts statute to exclude 95% of all dividends received by the
bank from ERT in calculating the bank's taxable income for
Massachusetts state tax purposes and that ERT, as a qualified real
estate investment trust, owes no state taxes on the amounts paid as
dividends to the bank. The Massachusetts Department of Revenue (the
"DOR") has asserted that the company owes additional state taxes and
interest totaling an aggregate amount of $2.3 million for the tax
years ended December 31, 1999, 2000 and 2001 in connection with the
bank's operation of ERT. The DOR has taken the position that either
the income received by the bank in the form of dividends from ERT is
fully taxable under applicable Massachusetts tax law or ERT itself
should be subject directly to tax on such amounts. If the position
that has been taken by the DOR is also applied to the tax year ended
December 31, 2002, then the company would be required to pay
additional Massachusetts income tax for such period totaling
approximately $1.2 million. To the company's knowledge, it is one of
approximately forty banking organizations located in Massachusetts
that is involved in a tax dispute of this type with the DOR.
In addition, in 2003 the state legislature has passed, and Governor
Romney has signed, a supplemental budget bill, which, among other
provisions, makes certain changes to the state's tax laws on a current
and retroactive basis back to 1999, which, if enforceable, would
require the company to pay the additional taxes that the DOR seeks to
collect for its tax years 1999 through 2002.
The company is currently disputing the DOR's assertion that it owes
additional taxes for any prior years. The company has also been
advised that the retroactive changes to the state's tax laws contained
in the recently passed legislation are subject to constitutional
challenge.
The company believes that it has complied fully with the applicable
Massachusetts tax laws in deducting 95% of the dividends received by
the bank from ERT in calculating its taxable income for Massachusetts
tax purposes. The company also believes that ERT is a properly
qualified real estate investment trust and, as such, owes no taxes to
the Commonwealth of Massachusetts on any amounts that it has paid as
dividends to the bank in prior years. Moreover, the company has been
advised that the constitutionality of the retroactive changes to the
state's tax laws contained in the recently passed legislation is
questionable.
Nonetheless, as a result of the enactment of this new legislation, in the
first quarter of 2003 the company will be required to record a
one-time income tax expense of $1.9 million, net of federal income tax
benefit and deferred tax asset, for the tax years ended December 31,
1999 through 2002.
The $1.9 million income tax expense consists of $3.5 million of state
income tax liability, net of $1.2 million in federal income tax
benefit and $0.4 million in deferred tax asset. The $3.5 million in
state income tax liability consists of the following:
(i) payment to the Commonwealth of Massachusetts of $1.2 million as
estimated state taxes due for the tax year ended December 31, 2002,
which amount would be refunded if the company prevails in its current
dispute with the DOR and if the retroactive feature of the new
legislation, as it applies to 2002, is held to be unconstitutional;
and
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(ii) a liability for state income taxes to be paid of $2.3 million for
the tax years ended December 31, 2001, 2000 and 1999, which will
become payable to the Commonwealth of Massachusetts if the DOR
prevails in its current dispute with the company or if the retroactive
feature of the new legislation withstands constitutional challenge.
In addition, beginning in 2003 and for the periods thereafter, the
company will record state income tax liability on ERT's taxable
income.
(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.
Commitments: The fair values of the unused portion of lines of credit and
letters of credit were estimated to be the fees currently charged to
enter into similar agreements. Commitments to originate non-mortgage
loans were short-term and were at current market rates and estimated
to have no fair value.
Financial liabilities: The fair values of time deposits were estimated
using discounted cash flow analysis using rates offered by the bank on
December 31, 2002 for similar instruments. The fair values of FHLB
borrowings were determined using a discounted cash flow analysis using
advance rates offered by the FHLB at December 31, 2002. The fair value
of trust preferred securities was estimated using discounted cash flow
analysis using a market rate of interest at December 31, 2002.
Limitations: The estimates of fair value of financial instruments were
based on information available at December 31, 2002 and 2001 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.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
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.
2002 2001
--------------------------- ---------------------------
($ in thousands) Carrying Carrying
Amount Fair Value Amount Fair Value
------------- ------------- ------------- -------------
Financial assets:
Cash and cash equivalents $ 45,778 $ 45,778 $ 37,861 $ 37,861
Investment securities 239,096 239,096 197,060 197,060
Loans, net 404,752 417,252 367,780 380,374
Accrued interest receivable 3,406 3,406 3,586 3,586
Financial liabilities:
Non-interest bearing demand deposits 117,184 117,184 107,000 107,000
Savings, PIC and money market 366,917 366,917 267,631 267,631
Time deposits 152,675 154,046 152,322 153,056
Borrowings 17,233 17,269 44,449 44,449
Escrow deposit of borrowers 1,256 1,256 931 931
Accrued interest payable 486 486 805 805
Trust preferred securities 10,500 10,663 10,500 10,674
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(17) Parent Company Only Financial Statements
Balance Sheets
December 31,
-------------------------------------
($ in thousands) 2002 2001
----------------- ----------------
Assets
Cash and due from subsidiary $ 636 $ 388
Investment in subsidiary 60,289 53,166
Other assets 350 362
----------------- ----------------
Total assets $ 61,275 $ 53,916
================= ================
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,
2002 and 2001, respectively; 3,532,128 and
3,461,999 shares issued and outstanding at
December 31, 2002 and 2001, respectively 35 35
Additional paid-in capital 19,704 18,654
Retained earnings 25,873 20,715
Accumulated other comprehensive income 4,468 3,317
----------------- ----------------
Total stockholders' equity $ 50,080 $ 42,721
----------------- ----------------
Total liabilities and stockholders' equity $ 61,275 $ 53,916
================= ================
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
Statements of Income
For the years ended
December 31,
----------------------------------------------------
($ in thousands) 2002 2001 2000
---------------- ---------------- ----------------
Undistributed equity in net income of
Subsidiary $ 5,972 $ 4,786 $ 4,203
Dividends received from subsidiary 1,122 918 16
---------------- ---------------- ----------------
Total subsidiary income 7,094 5,704 4,219
---------------- ---------------- ----------------
Interest expense 1,177 1,177 909
Other operating expenses 14 15 11
---------------- ---------------- ----------------
Total operating expenses 1,191 1,192 920
---------------- ---------------- ----------------
Income before income taxes 5,903 4,512 3,299
Income tax benefit 403 392 305
---------------- ---------------- ----------------
Net income $ 6,306 $ 4,904 $ 3,604
================ ================ ================
Statements of Cash Flows
For the years ended
December 31,
----------------------------------------------------
($ in thousands) 2002 2001 2000
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 6,306 $ 4,904 $ 3,604
Undistributed equity in net income
Of subsidiary (5,972) (4,786) (4,203)
(Increase)/decrease in other assets 12 13 (366)
Increase in other liabilities - - 370
---------------- ---------------- ----------------
Net cash (used in) provided by
operating activities 346 131 (595)
---------------- ---------------- ----------------
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 (1,148) (982) (837)
Proceeds from issuance of common stock 896 764 586
Proceeds from exercise of stock options 154 48 1,110
---------------- ---------------- ----------------
Net cash (used in) provided by
Financing activities (98) (170) 11,684
---------------- ---------------- ----------------
Net increase/(decrease) in cash and
Cash equivalents 248 (39) 93
Cash and cash equivalents, beginning of period 388 427 334
---------------- ---------------- ----------------
Cash and cash equivalents, end of period $ 636 $ 388 $ 427
================ ================ ================
Cash and cash equivalents include cash and due from subsidiary.
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(18) Quarterly Results of Operations (Unaudited)
2002
----------------------------------------------------------------------------
($ in thousands, except share data) First Quarter Second Quarter Third Quarter Fourth Quarter
------------------ ----------------- ------------------ -----------------
Interest and dividend income $ 9,553 $ 9,740 $ 9,900 $ 10,036
Interest expense 2,518 2,468 2,484 2,253
------------------ ----------------- ------------------ -----------------
Net interest income 7,035 7,272 7,416 7,783
Provision for loan losses 390 380 278 277
------------------ ----------------- ------------------ -----------------
Net interest income after provision 6,645 6,892 7,138 7,506
for loan losses
Non-interest income 1,720 1,667 1,721 1,504
Non-interest expense 6,337 6,477 6,654 6,624
------------------ ----------------- ------------------ -----------------
Income before income taxes 2,028 2,082 2,205 2,386
Income tax expense 539 557 604 695
------------------ ----------------- ------------------ -----------------
Net income, as reported $ 1,489 $ 1,525 $ 1,601 $ 1,691
================== ================= ================== =================
Basic earnings per share $ 0.43 $ 0.44 $ 0.45 $ 0.48
Diluted earnings per share $ 0.42 $ 0.42 $ 0.44 $ 0.47
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
Part III
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
None
Item 10. Directors and Executive Officers of the Registrant
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 6, 2003, 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, 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
Nickolas Stavropoulos
Executive Vice President of KeySpan Corporation
President of KeySpan Energy Delivery New England
Additional Executive Officers of the Company
- --------------------------------------------
Name Position
- ---- --------
John P. Clancy, Jr. President and 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 6, 2003, 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.
Item 14 - Controls and Procedures
Evaluation of Controls and Procedures
The company maintains a set of disclosure controls and procedures and internal
controls designed to ensure that the information required to be disclosed in
reports that it files or submits to the Securities and Exchange Commission (the
"SEC") under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms.
Within 90 days prior to the date of the company's filing of this report, the
company carried out an evaluation, under the supervision and with the
participation of the company's management, including its chief executive officer
and chief financial officer, of the effectiveness of the design and operation of
the company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the company's chief executive officer and
chief financial officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company (including its consolidated subsidiaries) required to be
included in the company's periodic SEC filings.
Changes in Controls and Procedures
Subsequent to the date of management's evaluation referred to above, there have
been no significant changes in the company's internal controls or in other
factors that could significantly affect such internal controls, nor were any
corrective actions required with regard to any significant deficiencies or
material weaknesses with respect to such internal controls.
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this annual report:
Financial Statements
--------------------
See Index to Consolidated Financial Statements contained in Item 8 above.
Financial Statement Schedules
-----------------------------
None (information included in financial statements)
Exhibits
--------
Exhibit No. and 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.
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.
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.
10.23 Change in Control/Noncompetition Agreement dated as of April 3, 2002
by and among the company, the bank and Stephen J. Irish, incorporated
by reference to Exhibit 10.23 to the company's Form 10-Q for the
quarter ended March 31, 2002.
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, 2002.
(c) Exhibits required by Item 601 of Regulation S-K
The exhibits listed above either have been previously filed and are
incorporated herein by reference to the applicable prior filing or are
filed herewith.
(d) Additional Financial Statement Schedules
None
ENTERPRISE BANCORP, INC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
ENTERPRISE BANCORP, INC.
Date: March 18, 2003 By: /s/ John P. Clancy, Jr.
-----------------------
John P. Clancy, Jr.
President and 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 18, 2003
- ------------------------ Officer and Director
George L. Duncan
/s/ John P. Clancy, Jr. President and Treasurer March 18, 2003
- ------------------------- Chief Financial Officer
John P. Clancy Jr. of the bank
/s/ Joseph R. Lussier (Principal Accounting March 18, 2003
- ---------------------------- Officer of the bank)
Joseph R. Lussier
/s/ Kenneth S. Ansin Director March 18, 2003
- ----------------------------
Kenneth S. Ansin
Director March 18, 2003
- ----------------------------
Walter L. Armstrong
/s/ Gerald G. Bousquet, M.D. Director March 18, 2003
- ----------------------------
Gerald G. Bousquet, M.D.
/s/ Kathleen M. Bradley Director March 18, 2003
- ----------------------------
Kathleen M. Bradley
/s/ John R. Clementi Director March 18, 2003
- ----------------------------
John R. Clementi
/s/ James F. Conway, III Director March 18, 2003
- ----------------------------
James F. Conway, III
/s/ Carole A. Cowan Director March 18, 2003
- ----------------------------
Carole A. Cowan
Director March 18, 2003
- ----------------------------
Nancy L. Donahue
Director March 18, 2003
- ----------------------------
Lucy A. Flynn
/s/ Eric W. Hanson Director March 18, 2003
- ----------------------------
Eric W. Hanson
/s/ John P. Harrington Director March 18, 2003
- ----------------------------
John P. Harrington
/s/ Arnold S. Lerner Director, Vice Chairman March 18, 2003
- ---------------------------- and Clerk
Arnold S. Lerner
/s/ Richard W. Main Director, President March 18, 2003
- ---------------------------- of the bank
Richard W. Main
/s/ Charles P. Sarantos Director March 18, 2003
- ----------------------------
Charles P. Sarantos
/s/ Michael A. Spinelli Director March 18, 2003
- ----------------------------
Michael A. Spinelli
Director March 18, 2003
- ----------------------------
Nickolas Stavropoulos
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
I, John P. Clancy, certify that:
1. I have reviewed this annual report on Form 10-K of Enterprise Bancorp,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a -14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date : March 18, 2003 /s/ John P. Clancy, Jr.
-----------------------------------
John P. Clancy, Jr.
President and Treasurer
(Principal Financial Officer)
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
UNDER SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
I, George L. Duncan, certify that:
1. I have reviewed this annual report on Form 10-K of Enterprise Bancorp,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a -14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 18, 2003 /s/ George L. Duncan
--------------------------------------------
George L. Duncan
Chairman and CEO
(Principal Executive Officer)