U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
[ ] TRANSITION REPORT PURSUANT TO 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 (IRS Employer
of incorporation or organization) Identification No.)
222 Merrimack Street, Lowell, Massachusetts, 01852
(Address of principal executive offices) (Zip code)
(978) 459-9000
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ...... No ..X....
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: May 13, 2003 Common Stock - Par
Value $0.01, 3,536,828 shares outstanding
1
ENTERPRISE BANCORP, INC.
INDEX
Page Number
Cover Page 1
Index 2
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets -March 31, 2003 and December 31, 2002 3
Consolidated Statements of Income -
Three months ended March 31, 2003 and 2002 4
Consolidated Statement of Changes in Stockholders' Equity - 5
Three months ended March 31, 2003
Consolidated Statements of Cash Flows -
Three months ended March 31, 2003 and 2002 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 19
Item 4 Disclosure Controls and Procedures 20
PART II OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in Securities and Use of Proceeds 21
Item 3 Defaults upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
Signature Page 22
Officer Certifications 23
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, auditing or other standards, policies and practices, as may be adopted by the regulatory
agencies, the Financial Accounting Standards Board or the Public Accounting Oversight Board.
2
ENTERPRISE BANCORP, INC.
Consolidated Balance Sheets
March 31, December 31,
2003 2002
(Dollars in thousands) (Unaudited)
----------------- -----------------
Assets
- ------
Cash and equivalents:
Cash and due from banks $ 34,252 $ 45,778
Federal funds sold 38,500 -
----------------- -----------------
Total cash and cash equivalents 72,752 45,778
----------------- -----------------
Investment securities at fair value 208,002 239,096
Loans, less allowance for loan losses of $9,744 at March 31, 2003 and
$9,371 at December 31, 2002 421,850 404,752
Premises and equipment 13,271 13,144
Accrued interest receivable 3,216 3,406
Deferred income taxes, net 2,989 1,978
Prepaid expenses and other assets 3,921 3,786
Income taxes receivable - 93
Core deposit intangible, net of amortization 974 1,007
Goodwill, net of amortization 5,656 5,656
----------------- -----------------
Total assets $ 732,631 $ 718,696
================= =================
Liabilities, Trust Preferred Securities and Stockholders' Equity
- ----------------------------------------------------------------
Deposits $ 650,022 $ 636,777
Short-term borrowings 11,433 17,233
Escrow deposits of borrowers 1,411 1,256
Accrued expenses and other liabilities 7,948 2,364
Income taxes payable 2,100 -
Accrued interest payable 449 486
----------------- -----------------
Total liabilities 673,363 658,116
----------------- -----------------
Trust preferred securities 10,500 10,500
Stockholders' equity:
Preferred stock, $0.01 per value; 1,000,000 shares
Authorized; no shares issued - -
Common stock $0.01 par value; 10,000,000 shares authorized; 3,534,303 and
3,532,128 shares issued and outstanding at
March 31, 2003 and December 31, 2002, respectively 35 35
Additional paid-in capital 19,721 19,704
Retained earnings 26,377 25,873
Accumulated other comprehensive income 2,635 4,468
--------------- -----------------
Total stockholders' equity 48,768 50,080
--------------- -----------------
Total liabilities, trust preferred
securities and stockholders' equity $ 732,631 $ 718,696
================= =================
3
ENTERPRISE BANCORP, INC.
Consolidated Statements of Income
Three months ended March 31, 2003 and 2002
March 31, March 31,
2003 2002
(Dollars in thousands, except per share data) (Unaudited) (Unaudited)
------------------ ------------------
Interest and dividend income:
Loans $ 6,890 $ 6,881
Investment securities 2,502 2,582
Federal funds sold 24 37
------------------ ------------------
Total interest income 9,416 9,500
------------------ ------------------
Interest expense:
Deposits 1,852 2,328
Short-term borrowed funds 26 190
------------------ ------------------
Total interest expense 1,878 2,518
------------------ ------------------
Net interest income 7,538 6,982
Provision for loan losses 300 390
------------------ ------------------
Net interest income after provision for loan losses 7,238 6,592
------------------ ------------------
Non-interest income:
Investment management and trust service fees 435 571
Deposit service fees 500 436
Net gains on sales of investment securities 1,316 416
Gains on sales of loans 324 102
Other income 321 248
------------------ ------------------
Total non-interest income 2,896 1,773
------------------ ------------------
Non-interest expense:
Salaries and employee benefits 3,394 3,553
Occupancy expenses 1,246 1,130
Advertising and public relations expenses 185 237
Audit, legal and other professional fees 196 226
Trust professional and custodial expenses 160 196
Supplies, data processing, and telecommunications expense 293 336
Trust preferred expense 290 290
Amortization of core deposit intangible assets 33 33
Other operating expenses 372 336
------------------ ------------------
Total non-interest expense 6,169 6,337
------------------ ------------------
Income before income taxes 3,965 2,028
Income tax expense 3,461 539
------------------ ------------------
Net income $ 504 $ 1,489
================== ==================
Basic earnings per share $ 0.14 $ 0.43
================== ==================
Diluted earnings per share $ 0.14 $ 0.42
================== ==================
Basic weighted average common shares outstanding 3,533,488 3,462,232
================== ==================
Diluted weighted average common shares outstanding 3,660,855 3,578,384
================== ==================
4
ENTERPRISE BANCORP, INC.
Consolidated Statement of Changes in Stockholders' Equity
Three months ended March 31, 2003 (unaudited)
Common Stock Comprehensive Income
---------------------- Additional ------------------------ Total
Paid-in Retained Stockholders'
(Dollars in thousands) Shares Amount Capital Earnings Period Accumulated Equity
---------- --------- ----------- ----------- ---------- ------------- ------------
Balance at December 31, 2002 3,532,128 $ 35 19,704 $ 25,873 $ 4,468 $ 50,080
Comprehensive income
Net Income 504 504 504
Unrealized depreciation on securities,
net of reclassification (1,833) (1,833) (1,833)
--------
Total comprehensive loss $ (1,329)
========
Stock options exercised 2,175 17 17
---------- --------- --------- ---------- -------- -----------
Balance at March 31, 2003 3,534,303 $ 35 19,721 $ 26,377 $ 2,635 $ 48,768
========== ========= ========= ========== ======== ===========
Disclosure of reclassification amount:
Gross unrealized depreciation arising during
the period $ (1,788)
Tax benefit 732
--------
Unrealized holding depreciation, net of tax (1,056)
--------
Less: reclassification adjustment for net gains
included in net income (net of $539 tax) 777
--------
Net unrealized depreciation on securities arising $ (1,833)
during the period ========
5
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
Three months ended March 31, 2003 and 2002
March 31, March 31,
2003 2002
(Dollars in thousands) (Unaudited) (Unaudited)
-------------- --------------
Cash flows from operating activities:
Net income $ 504 $ 1,489
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300 390
Depreciation and amortization 1,012 657
Amortization of intangible assets 33 33
Net gains on sales of investments (1,316) (416)
Gains on sale of loans (324) (102)
(Increase) decrease in:
Loans held for sale 1,045 726
Accrued interest receivable 190 (23)
Prepaid expenses and other assets (135) (586)
Deferred income taxes (534) (173)
Income taxes 2,193 699
Increase (decrease) in:
Accrued expenses and other liabilities 5,584 (903)
Accrued interest payable (37) 6
--------------- ----------------
Net cash provided by operating activities 8,515 1,797
--------------- ----------------
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of investment securities 15,534 11,558
Proceeds from sales of investment securities 29,307 6,049
Purchase of investment securities (15,090) (18,498)
Net increase in loans (18,119) (12,233)
Additions to premises and equipment, net (790) (1,429)
--------------- ----------------
Net cash provided by (used in) investing activities 10,842 (14,553)
--------------- ----------------
Cash flows from financing activities:
Net increase in deposits, including escrow deposits 13,400 14,794
Net decrease in short-term borrowings (5,800) (4,258)
Stock options exercised 17 8
--------------- ----------------
Net cash provided by financing activities 7,617 10,544
--------------- ----------------
Net increase (decrease) in cash and cash equivalents 26,974 (2,212)
Cash and cash equivalents at beginning of period 45,778 37,861
--------------- ----------------
Cash and cash equivalents at end of period $ 72,752 $ 35,649
=============== ================
6
ENTERPRISE BANCORP, INC.
Consolidated Statements of Cash Flows
(Continued)
Three months ended March 31, 2003 and 2002
March 31, March 31,
2003 2002
(Dollars in thousands) (Unaudited) (Unaudited)
-------------- --------------
Supplemental financial data:
Cash paid for:
Interest expense $ 1,915 $ 2,511
Income taxes 1,800 12
7
ENTERPRISE BANCORP, INC.
Notes to Consolidated Financial Statements
(1) Organization of Holding Company
Enterprise Bancorp, Inc. (the "company") is a Massachusetts corporation, which
was organized on February 29, 1996, at the direction of Enterprise Bank and
Trust Company, a Massachusetts trust company (the "bank"), for the purpose of
becoming the holding company for the bank.
(2) Basis of Presentation
The accompanying unaudited consolidated financial statements should be read in
conjunction with the company's December 31, 2002 audited consolidated financial
statements and notes thereto. Interim results are not necessarily indicative of
results to be expected for the entire year. The company has not changed its
significant accounting and reporting policies from those disclosed in its 2002
annual report.
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the balance sheet and revenues and
expenses for the period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to change relate to the
determination of the allowance for loan losses and impairment valuation of
goodwill.
In the opinion of management, the accompanying consolidated financial statements
reflect all necessary adjustments consisting of normal recurring accruals for a
fair presentation. All significant intercompany balances and transactions have
been eliminated in the accompanying consolidated financial statements.
(3) Stock Options
The company measures compensation cost for stock-based compensation plans using
the intrinsic value method under which no compensation cost is recorded if, at
the grant date, the exercise price of the options is equal to or greater than
the fair market value of the company's common stock.
Had the company determined compensation expense using the fair value method,
based on the fair value at the grant date for its stock options, the company's
net income would have been reduced to the pro forma amounts indicated below:
For the three months ended March 31,
($ in thousands, except per share data) 2003 2002
-------------- ---------------
Net income as reported $ 504 $ 1,489
Pro forma net income 452 1,444
Basic earnings per share as reported 0.14 0.43
Pro forma basic earnings per share 0.13 0.42
Fully diluted earnings per share as reported 0.14 0.42
Pro forma fully diluted earnings per share 0.12 0.40
The per share weighted average fair value of stock options was determined to be
$4.78 for options granted in 2002. There were no options granted in 2003. The
fair value of the options was determined to be 24% of the market value of the
stock at the date of grant in 2002. The value was determined by using the
Black-Scholes 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.
(4) Earnings Per Share
Basic earnings per share are calculated by dividing net income by the
year-to-date weighted average number of common shares that were outstanding for
the period. Diluted earnings per share reflect the effect on weighted average
shares outstanding of the number of additional shares outstanding if dilutive
stock options were converted into common stock using the treasury stock method.
The increase in average shares outstanding, using the treasury stock method, for
the diluted earnings per share calculation were 127,367 and 116,152 for the
quarters ended March 31, 2003 and March 31, 2002, respectively.
8
(5) Dividend Reinvestment Plan
The company maintains a Dividend Reinvestment Plan (the "DRP"). The DRP enables
stockholders, at their discretion, to elect to reinvest dividends paid on their
outstanding shares of company common stock by purchasing additional shares of
company common stock from the company. In 2002, the stockholders utilized the
DRP to reinvest $778,000 of the dividends paid by the company in June into
42,717 shares of the company's common stock. On April 15, 2003 the board of
directors of the company approved an annual dividend of $0.38 per share, payable
on June 27, to shareholders of record as of June 6, 2003.
(6) Intangible Assets
On July 21, 2000 the bank acquired 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 was allocated to core deposit intangible
assets and goodwill, which were valued at $1.3 million and $6.6 million,
respectively, at the acquisition date.
(7) Accounting Rule Changes
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards ("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 adopted SFAS 145 on January 1, 2003.
Adoption of the standard did not materially affect the company's financial
condition, results of operations, earnings per share or cash flows.
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 company adopted this Interpretation
beginning on January 1, 2003. Adoption of the Interpretation did not materially
affect the company's financial condition, results of operations, earnings per
share or cash flows.
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 original SFAS No.
123 transition rule created in the year of adoption. Companies can now choose to
elect a method that will provide for comparability amongst years reported. In
addition, SFAS No. 148 amends the disclosure requirement of SFAS 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 are required for interim periods beginning after
December 15, 2002. See Note (3) above for pro forma information under SFAS No.
123 as amended by SFAS No. 148.
In April 2003, the FASB announced that it will issue new rules requiring all
companies to expense the value of employee stock options. Companies will be
required to measure the cost according to the fair value of the options at the
grant date. The FASB has not yet clarified how the fair value of the options is
to be determined. The FASB plans to issue an exposure draft later this year that
could become effective in 2004.
9
(8) 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, and continuing through the end of 2002, the company paid state income
taxes to the Commonwealth of Massachusetts based upon the position that the bank
was 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, owed 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. On this basis, the company would also be required to pay additional
Massachusetts income tax for the tax year ended December 31, 2002 totaling
approximately $1.2 million. To the company's knowledge, it is one of
approximately sixty-five banks located in Massachusetts that are involved in a
tax dispute of this type with the DOR.
In addition, in March 2003 the state legislature passed, and the governor of
Massachusetts signed, a supplemental budget bill, which, among other provisions,
changed 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 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 retroactive changes to
the state's tax laws contained in the recently passed legislation are subject to
constitutional challenge.
Nonetheless, as a result of the enactment of the legislation, in the first
quarter of 2003 the company recorded 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 with the first quarter of 2003, the company has recorded,
and will continue to record for the periods thereafter, state income tax
liability on ERT's taxable income.
(9) 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.
10
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.
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. At March 31, 2003 and 2002 these
amounts were not material and therefore are not reflected on the balance sheets.
The company originates residential mortgage loans under agreements to sell such
loans, generally with servicing released. At March 31, 2003 and 2002, the
company had commitments to sell loans totaling $10,403,000 and $1,467,000,
respectively.
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.
(10) Reclassification
Certain fiscal 2002 information has been reclassified to conform to the 2003
presentation.
11
ITEM 2 - Management's 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 this
report.
Capital Resources
The company's actual capital amounts and capital adequacy ratios are presented
in the table below. The bank's capital amounts and ratios do not differ
materially from the amounts and ratios presented.
Minimum Capital Minimum Capital
for Capital to be
Actual Adequacy Purposes Well Capitalized
-------------------------- -------------------------- ----------------------------
(Dollars in thousands) Amount Ratio Amount Ratio Amount Ratio
------------ ------------- ------------- ------------ ------------- --------------
As of March 31, 2003:
Total Capital
(to risk weighted assets) $ 56,379 11.22% $ 40,195 8.00% $ 50,244 10.00%
Tier 1 Capital
(to risk weighted assets) 50,056 9.96% 20,098 4.00% 30,146 6.00%
Tier 1 Capital*
(to average assets) 50,056 7.26% 27,568 4.00% 34,460 5.00%
* For the bank to qualify as "well capitalized", it must 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
merely for informational purposes with respect to the bank.
Balance Sheet
Total Assets
At March 31, 2003, total assets increased by $13.9 million, or 1.9%, since
December 31, 2002. The increase was primarily attributable to increases in
federal funds sold of $38.5 million and loans of $17.5 million, offset by a
decrease of $31.1 million in investment securities. The increase in assets was
funded primarily by growth in deposits, including escrow accounts of depositors,
of $13.4 million, offset by a decrease in short-term borrowings of $5.8 million.
Federal funds sold
The balance of $38.5 million at March 31, 2003 consisted of $10.5 million in
proceeds from investment sales received March 26th and month-end deposit
inflows. The balance included $4.5 million of money market preferred securities
with a forty-five day term. The average federal funds sold balance during the
three months ended March 31, 2003 was $8.9 million.
Investments
At March 31, 2003, all of the company's investment securities were classified as
available-for-sale and carried at fair value. At March 31, 2003, the investment
portfolio represented 28.4% of total assets. The net unrealized appreciation at
March 31, 2003 was $4.5 million compared to $6.8 million at December 31, 2002.
The decrease in net unrealized appreciation was primarily due to recognition of
$1.3 million in gains on sales of $29.3 million of securities. In January 2003,
the company began implementing a long-term strategy of investing in a
professionally managed portfolio of blue chip growth and income equity
securities. At March 31, 2003, the balance of this equity portfolio was $0.3
million. The net unrealized appreciation/depreciation in the company's bond
portfolio fluctuates as interest rates rise and fall. Due to the fixed rate
nature of the company's bond portfolio, as rates rise, or the securities
approach maturity, the value of the portfolio declines, and as rates fall the
value of the portfolio rises. The unrealized appreciation will only be realized
if the securities are sold.
12
Loans
Total loans, before the allowance for loan losses, were $431.6 million, or 58.9%
of total assets, at March 31, 2003, compared to $414.1 million, or 57.6% of
total assets, at December 31, 2002. The increase in loans of $17.5 million for
the quarter ended March 31, 2003 was primarily attributed to originations of
commercial real estate and construction loans.
Deposits and Borrowings
Total deposits, including escrow deposits of borrowers, increased $13.4 million,
or 2.1%, during the first three months of 2003, from $638.0 million and 88.8% of
total assets at December 31, 2002, to $651.4 million and 88.9% of total assets
at March 31, 2003. The increase consists of growth of $12.0 million in retail
savings, checking and money market deposits, and $2.7 in certificates of
deposit, offset by a decline of $1.3 million in business and municipal savings
deposits.
Short-term borrowings, consisting of securities sold under agreements to
repurchase and Federal Home Loan Bank ("FHLB") borrowings, decreased by $5.8
million, or 33.7%, from $17.2 million at December 31, 2002 to $11.4 million at
March 31, 2003.
Accrued expenses and other liabilities
Accrued expenses and other liabilities increased $5.6 million from $2.4 million
at December 31, 2002 to $7.9 million at March 31, 2003. The increase is
primarily attributed to month-end activity associated with the daily investment
of the bank's commercial sweep accounts with Federated Investors, Inc.
("Federated").
Non-performing Assets /Loan Loss Experience
The following table sets forth non-performing assets at the dates indicated:
March 31, December 31, March 31,
(Dollars in thousands) 2003 2002 2002
----------------- ----------------- ----------------
Non-accrual loans $ 1,839 $ 1,915 $ 2,303
Accruing loans > 90 days past due - 3 1
---------------- ----------------- ----------------
Total non-performing loans 1,839 1,918 2,304
Other real estate owned - - -
---------------- ----------------- ----------------
Total non-performing assets $ 1,839 $ 1,918 $ 2,304
================ ================= ================
Non-performing loans: Loans 0.43% 0.46% 0.59%
================ ================= ================
Non-performing assets: Total assets 0.25% 0.27% 0.36%
================ ================= ================
Delinquent loans 30-89 days past due: Loans 0.51% 0.31% 0.54%
================ ================= ================
Total non-performing loans decreased by $0.5 million from March 31, 2002 to
March 31, 2003 and by $0.1 million from December 31, 2002 to March 31, 2003. The
ratio of non-performing loans to gross loans decreased from 0.59% to 0.43% and
from 0.46% to 0.43% over the same respective periods. These declining ratios are
due to the declining non-performing loan balances compared to the increase in
loans outstanding at March 31, 2003, of 4.2% since December 31, 2002, and 11.3%
since March 31, 2002.
The ratio of delinquent loans (30 - 89 days past due) to gross loans decreased
from 0.54% at March 31, 2002 to 0.31% at December 31, 2002, and increased from
0.31% to 0.51% from December 31, 2002 to March 31, 2003. The increase at March
31, 2003 is primarily due to an increase in commercial mortgage loans past due
59 days or less.
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.
13
The following table summarizes the activity in the allowance for loan losses for
the periods indicated:
Three months ended March 31,
--------------------------------------
(Dollars in thousands) 2003 2002
---------------- ----------------
Balance at beginning of year $ 9,371 $ 8,547
Loans charged off
Commercial 46
Commercial real estate - -
Construction - -
Residential real estate - -
Home equity - -
Other 39 3
--------------- ----------------
39 49
--------------- ----------------
Recoveries on loans charged off
Commercial 110 -
Commercial real estate - -
Construction - -
Residential real estate - 2
Home equity - -
Other 2 12
--------------- ----------------
112 14
--------------- ----------------
Net loans (charged off) recovered 73 (35)
Provision charged to operations 300 390
--------------- ----------------
Balance at March 31 $ 9,744 $ 8,902
=============== ================
Annualized net loans (charged off) recovered: Average loans outstanding 0.07% (0.04)%
=============== ================
Allowance for loan losses: Loans 2.26% 2.29%
=============== ================
Allowance for loan losses: Non-performing loans 529.85% 386.37%
=============== ================
The ratio of the allowance for loan losses to non-performing loans was 529.85%
at March 31, 2003 compared to 386.37% at March 31, 2002. The increase in 2003
resulted from an increase of 9.5% in the balance of the allowance for loan
losses due to provisions of $1.2 million, offset by charge offs of $0.4 million,
from April 1, 2002 through March 31, 2003. The level of non-performing loans
decreased from $2.3 million at March 31, 2002 to $1.8 million at March 31, 2003.
Also during the period, the bank's ratio of the allowance for loan losses to
loans decreased from 2.29% at March 31, 2002 to 2.26% at March 31, 2003.
Although non-performing loans have decreased management considered it prudent to
continue to provide for loan losses based on growth in the commercial loan
portfolio and concerns over the stability of the local economy. The Labor
Department statistics for 2002 indicate that "the metropolitan region made up of
Lowell, Lawrence (Massachusetts) and southern New Hampshire lost 5,200 jobs in
2002, the fourth-largest percentage increase in unemployment in the nation."
(The Lowell Sun, 3/28/03)
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 losses was adequate at March 31, 2003.
14
Results of Operations
Three Months Ended March 31, 2003 vs. Three Months Ended March 31, 2002
The company reported net income of $504,000 for the three months ended March 31,
2003, versus $1,488,000 for the three months ended March 31, 2002. The company
had basic earnings per common share of $0.14 and $0.43 and diluted earnings per
common share of $0.14 and $0.42 for the three months ended March 31, 2003 and
March 31, 2002, respectively.
The following table highlights changes, which affected the company's earnings
for the periods indicated:
Three months ended March 31,
--------------------------------------
(Dollars in thousands) 2003 2002
---------------- ----------------
Average assets $ 700,181 $ 626,570
Average deposits and short-term borrowings 633,686 567,893
Average investment securities and federal funds sold at book value 219,028 192,010
Average loans, net of deferred loan fees 425,596 383,853
Net interest income 7,538 6,982
Provision for loan losses 300 390
Tax expense 3,461 539
Average loans: Average deposits and borrowings 67.16% 67.59%
Non-interest expense: Average assets (1) 3.57% 4.10%
Non-interest income: Average assets (1) (2) 0.92% 0.88%
Average tax equivalent rate earned on interest earning assets 6.05% 6.82%
Average rate paid on interest bearing deposits and short-term borrowings 1.47% 2.21%
Average rate paid on total deposits and borrowings 1.20% 1.80%
Net interest margin 4.87% 5.05%
(1) Ratios have been annualized based on number of days for the period
(2) Excludes net gains on sale of investment securities
Net Interest Income
The company's net interest income was $7,538,000 for the three months ended
March 31, 2003, an increase of $556,000, or 8.0%, from $6,982,000 for the three
months ended March 31, 2002.
Interest income decreased by $84,000 for the three months ended March 31, 2003
and was $9,416,000 compared to $9,500,000 for the same period ended March 31,
2002. This decrease resulted primarily from a decrease in the average tax
equivalent yield on interest earning assets of 77 basis points to 6.05% for the
three months ended March 31, 2003 compared to 6.82% for the same period ended
March 31, 2002, offset by an increase in the average balance of interest earning
assets of $68.7 million or 11.9% to $644.6 million for the three months ended
March 31, 2003 compared to $575.9 million for the three months ended March 31,
2002.
The $68.7 million increase in average balance of interest earning assets was due
to increases in the average loan balance of $41.7 million, or 10.9%, and the
average investment securities and federal funds sold balance of $27.0 million,
or 14.1%, compared to the same period ended March 31, 2002. The average rate
earned on loans declined by 70 basis points to 6.57% for the three months ended
March 31, 2003, from 7.27% for the same period ended March 31, 2002. The average
tax equivalent yield on investment securities and federal funds sold decreased
by 88 basis points to 5.04% for the three months ended March 31, 2003 from 5.92%
for the same period ended March 31, 2002.
15
Interest expense for the three months ended March 31, 2003 was $1,878,000
compared to $2,518,000 for the same period ended March 31, 2002, resulting
primarily from a decrease in the average interest rate paid on interest bearing
liabilities of 74 basis points to 1.47% for the three months ended March 31,
2003 compared to 2.21% for the same period ended March 31, 2002, offset by an
increase in the average balance of interest-bearing deposits and short-term
borrowings of $58.4 million, or 12.7%, to $519.8 million for the three months
ended March 31, 2003 as compared to $461.4 million for the same period ended
March 31, 2002.
The average interest rate paid on savings, checking and money market deposit
accounts decreased by 37 basis points for the three months ended March 31, 2003
compared to the same period ended March 31, 2002. The decrease in the average
rate paid was offset by an increase in the average balance of such deposit
accounts of $97.7 million, or 37.7%, to $359.5 million for the three months
ended March 31, 2003 as compared to $261.8 million for the same period ended
March 31, 2002. The decrease in rate is attributable to lower market interest
rates.
The average interest rate on time deposits decreased by 118 basis points, to
2.69%, for the three months ended March 31, 2003 compared to 3.87% for the same
period ended March 31, 2002. The average balance on time deposits decreased by
$2.1 million, or 1.4%, to $154.1 million for the three months ended March 31,
2003 as compared to $156.3 million for the same period ended March 31, 2002.
The average interest rate on short-term borrowings, consisting of term
repurchase agreements and commercial sweep and FHLB borrowings, decreased to
1.71% for the three months ended March 31, 2003, compared to 1.78% for the three
months ended March 31, 2002. The average balance of short-term borrowings for
the three months ended March 31, 2003 decreased by $37.2 million, or 85.8%, to
$6.2 million as compared to $43.3 million for the three months ended March 31,
2002. The decrease in average balance was attributable primarily to the
completion of the transition of the bank's commercial sweep accounts from
overnight repurchase agreements to Federated money market mutual funds during
the second quarter of 2002.
Net interest margin decreased to 4.87% for the three months ended March 31, 2003
from 5.05% for the same period ended March 31, 2002, primarily due to a decrease
of 77 basis points in the tax equivalent yield on interest earning assets offset
by a 74 basis point decrease in the rate paid on interest bearing deposits and
by the $68.7 million increase in the average balance of interest earning assets.
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 affected interest income and expense during the
three months ended March 31, 2003 and March 31, 2002, respectively. For each
category of interest earning assets and interest bearing liabilities,
information is provided on changes attributable to: (1) volume (change in
average portfolio balance multiplied by prior year average rate); (2) interest
rate (change in average interest rate multiplied by prior year average balance);
and (3) rate and volume (the remaining difference).
16
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended March 31, 2003 Three Months Ended March 31, 2002
------------------------------------- --------------------------------------
Average Interest Average Interest
(Dollars in thousands) Balance Interest Rates (3) Balance Interest Rates (3)
------------ ------------ ----------- ------------ ------------ ------------
Assets:
Loans (1) (2) $ 425,596 $ 6,890 6.57% $ 383,853 $ 6,881 7.27%
Investment securities & federal funds
sold (3) 219,028 2,526 5.04% 192,010 2,619 5.92%
------------- ------------ ------------- ------------
Total interest earnings assets 644,624 9,416 6.05% 575,863 9,500 6.82%
------------ ------------
Other assets (4) 55,557 50,707
------------- -------------
Total assets $ 700,181 $ 626,570
============= =============
Liabilities and stockholders' equity:
Savings/PIC/MMDA $ 359,535 828 0.93% $ 261,817 837 1.30%
Time deposits 154,146 1,024 2.69% 156,279 1,491 3.87%
Short-term borrowings 6,166 26 1.71% 43,319 190 1.78%
------------- ------------ ------------- ------------
Total interest-bearing deposits and
borrowings 519,847 1,878 1.47% 461,415 2,518 2.21%
------------- ------------ ------------- ------------
Net interest rate spread (3) 4.58% 4.61%
Non-interest bearing deposits 113,839 106,478
------------- ------------ ------------- ------------
Total deposits and borrowings 633,686 1,878 1.20% 567,893 2,518 1.80%
Other liabilities 5,399 4,646
------------- -------------
Total liabilities 639,085 572,539
Trust preferred securities 10,500 10,500
Stockholders' equity 50,596 43,531
------------- -------------
Total liabilities, trust preferred
Securities and stockholders' equity $ 700,181 $ 626,570
============= =============
Net interest Income $ 7,538 $ 6,982
============ ============
Net interest margin 4.87% 5.05%
Changes due to
-------------------------------------------
Interest Rate/
(Dollars in thousands) Total Volume Rate Volume
---------- ---------- ---------- --------
Assets:
Loans (1) (2) $ 9 $ 748 $ (663) $ (76)
Investment securities & federal funds
sold (3) (93) 400 (422) (71)
--------- ---------- --------- -------
Total interest earnings assets (84) 1,148 (1,085) (147)
--------- ---------- --------- -------
Other assets (4)
Total assets
Liabilities and stockholders' equity:
Savings/PIC/MMDA (9) 313 (239) (83)
Time deposits (467) (20) (455) 8
Short-term borrowings (164) (163) (7) 7
--------- ---------- --------- -------
Total interest-bearing deposits and
borrowings (640) 130 (701) (68)
--------- ---------- --------- -------
Net interest rate spread (3)
Non-interest bearing deposits
Total deposits and borrowings
Other liabilities
Total liabilities
Trust preferred securities
Stockholders' equity
Total liabilities, trust preferred
Securities and stockholders' equity
Net interest Income $ 556 $ 1,018 $ (384) $ (79)
========= ========== ========= =======
Net interest margin
(1) Average loans include non-accrual loans.
(2) Average loans are net of average deferred loan fees.
(3) Average balances are presented at average amortized cost and average
interest rates are presented on a tax equivalent basis. The tax equivalent
effect was $235 and $224 for the periods ended March 31, 2003 and
March 31, 2002, respectively
(4) Other assets include cash and due from banks, FAS 115 market value
adjustment, accrued interest receivable, allowance for loan losses, deferred
income taxes, intangible assets, and other miscellaneous assets.
17
Provision for Loan Losses
The provision for loan losses amounted to $300,000 and $390,000 for the three
months ended March 31, 2003 and March 31, 2002, respectively. Although
non-performing loans have decreased, management considered it prudent to
continue to provide for loan losses based on growth in the commercial loan
portfolio and concerns over the stability of the local economy. The provision
reflects real estate values and economic conditions in New England and in
Greater Lowell, in particular, the level of non-accrual loans, levels of
charge-offs and recoveries, levels of outstanding loans, known and inherent
risks in the nature of the loan portfolio and management's assessment of current
risk. The provision for loan losses is a significant factor in the company's
operating results.
Non-Interest Income
Investment management and trust service fees decreased by $136,000, or 23.8%,
for the three months ended March 31, 2003 compared to the same period in 2002.
The decrease was primarily due to declining investment market values and,
consequently, the fees charged as a percentage of that market value, offset by
growth in assets under management.
Deposit service fees increased by $64,000, or 14.7%, for the three months ended
March 31, 2003, compared to the three months ended March 31, 2002. This increase
was primarily due to higher overdraft and miscellaneous fees. 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.
The earnings credit offsets the service charges assessed by the bank.
Net gains on sales of investment securities amounted to $1.3 million and $0.4
million for the three months ended March 31, 2003 and March 31, 2002,
respectively. These net gains were realized from securities sales of $29.3
million and $6.0 million in 2003 and 2002, respectively. These net gains
resulted from management's decision to take advantage of certain investment
opportunities and asset-liability repositioning.
Gains on sales of loans increased by $222,000 for the three months ended March
31, 2003, compared to the three months ended March 31, 2002, due to increased
sales of fixed rate residential mortgage production resulting from the declining
interest rate environment.
Other income for the three months ended March 31, 2003, was $321,000 compared to
$248,000 for the three months ended March 31, 2002. This increase was primarily
attributable to increases in loan fees, ATM surcharges and debit card fees, and
processing fees generated from the Federated commercial sweep product.
Non-Interest Expenses
Salaries and benefits expense totaled $3,394,000 for the three months ended
March 31, 2003, compared to $3,553,000 for the three months ended March 31,
2002, a decrease of $159,000 or 4.5%. This decrease was due to a reduction in
the provision for the 2003 employee bonus due to the $1.9 million income tax
charge related to the company's real estate investment trust subsidiary booked
in March 2003 (which is explained further in note 8, "Massachusetts Department
of Revenue Tax Dispute", to the company's consolidated financial statements
contained in Item 1 of Part I of this report), offset by increases in health
insurance premiums, payroll taxes, and salaries attributable to additional staff
hired in 2002 to support the company's growth and strategic initiatives.
Occupancy expense was $1,246,000 for the three months ended March 31, 2003,
compared to $1,130,000 for the three months ended March 31, 2002, an increase of
$116,000 or 10.3%. The increase was primarily due to increases in depreciation
expense, mainly due to the opening of the Lowell Connector branch in April 2002
and other infrastructure improvements, utility expenses, and maintenance and
servicing of equipment.
Advertising and public relations expenses decreased by $52,000, or 21.9%, for
the three months ended March 31, 2003 compared to the same period in 2002. The
decrease was primarily due to the timing of the expenditures.
Audit, legal and other professional expenses decreased by $30,000, or 13.3%, for
the three months ended March 31, 2003 compared to the same period in 2002,
primarily due to reduced technology related consulting fees.
18
Trust professional and custodial expenses decreased by $36,000, or 18.4%, for
the three months ended March 31, 2003 compared to the same period in 2002. The
reduction was due to declining investment market values as well as the
restructuring of fee schedules.
Supplies, data processing, and telecommunication expense decreased by $43,000,
or 12.8%, for the three months ended March 31, 2003 compared to the same period
in 2002. The decrease was primarily due to a reduction in data processing
expenses due to timing differences of the expenditures.
Trust preferred expense was $290,000 for the three months ended March 31, 2003
and March 31, 2002. The expense consists of interest costs and the amortization
of deferred underwriting costs from the trust preferred securities, which are
utilized to support operating capital.
Amortization of intangible assets was $33,000 for the three months ended March
31, 2003 and March 31, 2002. The expense relates to the amortization of
intangible assets resulting from the acquisition of two branches. These
intangible assets are being amortized on a straight-line basis over ten years.
Other operating expense was $372,000 and $336,000 for the three months ended
March 31, 2003 and March 31, 2002, respectively. The increase of $36,000, or
10.7%, for the 2003 period was primarily due to the company's growth and
consists of increases in expenses for out sourced services, loan workout
expenses and insurance offset by reductions in dues and entertainment, training
and bad check expenses.
Income Tax Expense
Income tax expense and the effective tax rate for the three months ended March
31, 2003 and March 31, 2002 were $3.5 million and 87.3% and $539,000 and 26.6%,
respectively. The current year expense reflects the $1.9 million income tax
expense for the tax years 1999 through 2002 due to retroactive enactment of
state tax legislation in March 2003. For further details on this current year
tax expense, see note 8, "Massachusetts Department of Revenue Tax Dispute", to
the company's consolidated financial statements contained in Item 1 of Part I of
this report. Excluding this charge, the effective tax rate for the three months
ended March 31, 2003 would have been 39.4%. The increase in this effective tax
rate over the 2002 period reflects the effect of the new legislation on the
current period, and the impact of security gains recognized during the 2003
quarter, which minimized the impact of the tax exempt interest from municipal
securities.
ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk
The company's primary market risk is interest rate risk, specifically, changes
in the interest rate environment. The bank's investment 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 and certain members of
senior management. The primary objectives of the bank's asset-liability policy
is to monitor, evaluate and control the bank's interest rate risk, as a whole,
within certain tolerance levels while ensuring adequate liquidity and adequate
capital. The committee establishes and monitors guidelines for the net interest
margin sensitivity, equity to capital ratios, liquidity, FHLB borrowing capacity
and loan to deposit ratio. These asset-liability strategies are reviewed
regularly by management and presented to and discussed with the committee on at
least a quarterly basis. The bank's asset-liability strategies may be revised
periodically based on changes in interest rate levels, general economic
conditions, competition in the marketplace, the current position of the bank,
anticipated growth of the bank and other factors.
One of the principal factors in maintaining planned levels of net interest
income is the ability to design effective strategies to manage the impact of
changes in interest rates on future net interest income. The balancing of
changes in interest income from interest earning assets and interest expense
from interest bearing liabilities is accomplished through the asset-liability
management program. The bank's simulation model analyzes various interest rate
scenarios. Variations in the interest rate environment affect numerous factors,
including prepayment speeds, reinvestment rates, maturities of investments (due
to call provisions), and interest rates on various asset and liability accounts.
The committee periodically reviews the guidelines or restrictions contained in
the bank's asset-liability policy and adjusts them accordingly. The bank's
current asset-liability policy is designed to limit the impact on net interest
income to 7.5% in a 12-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 period.
Management believes there have been no material changes in the interest rate
risk reported in the company's Annual Report on Form 10-K for the year ended
December 31, 2002.
19
Item 4 - 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.
20
PART II OTHER INFORMATION
Item 1 Legal Proceedings
Not Applicable, except for the matters described in note 8,
"Massachusetts Department of Revenue Tax Dispute", to the
company's consolidated financial statements contained in Item
1 of Part I of this report.
Item 2 Changes in Securities and Use of Proceeds
Not Applicable
Item 3 Defaults upon Senior Securities
Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 Other Information
None
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Exhibit No. and Description
---------------------------
10.24 Change in Control/Noncompetition Agreement dated as
of April 20, 2003 by and among the company, the bank
and Christopher W. McCarthy.
99 Certification of the company's principal executive
officer and principal financial officer as required
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
-------------------
Current Report on Form 8-K filed on March 7, 2003 providing
disclosure under Item 9 (Regulation FD Disclosure).
Current Report on Form 8-K/A filed on March 7, 2003 providing
disclosure under Item 9 (Regulation FD Disclosure).
Current Report on Form 8-K filed on March 24, 2003 providing
disclosure under Item 7 (Exhibits) and Item 9 (Regulation FD
Disclosure).
Current Report on Form 8-K filed on April 29, 2003 providing
disclosure under Item 9 (Regulation FD Disclosure) and Item 12
(Results of Operations and Financial Condition), including the
company's statements of income for the three months ended
March 31, 2003 and 2002 and balance sheets at March 31, 2003,
December 31, 2002 and March 31, 2002.
21
SIGNATURES
Pursuant to the requirements 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: May 13, 2003 /s/ John P. Clancy, Jr.
-----------------------------
John P. Clancy, Jr.
President and Treasurer
(Principal Financial Officer)
22
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
UNDER SECURITIES EXCHANGE ACT RULES 13a-14 AND 15d-14
I, John P. Clancy, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enterprise Bancorp,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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
quarterly 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 : May 13, 2003 /s/ John P. Clancy, Jr.
----------------------------
John P. Clancy, Jr.
President and Treasurer
(Principal Financial Officer)
23
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 quarterly report on Form 10-Q of Enterprise Bancorp,
Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly 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
quarterly 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: May 13, 2003 /s/ George L. Duncan
---------------------------
George L. Duncan
Chairman and CEO
(Principal Executive Officer)
24