-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IZf4UDp26h3ec7SCGz36KyT4piT8/os13LO55qMOLLoBTEKJ0/1o7deDSrp1cTw0 e7raqLXWWhu1B/7drsphJw== 0000908662-02-000134.txt : 20020514 0000908662-02-000134.hdr.sgml : 20020514 ACCESSION NUMBER: 0000908662-02-000134 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENTERPRISE BANCORP INC /MA/ CENTRAL INDEX KEY: 0001018399 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 333-79135 FILM NUMBER: 02644972 BUSINESS ADDRESS: STREET 1: 222 MERRIMACK ST CITY: LOWELL STATE: MA ZIP: 01852 BUSINESS PHONE: 5084599000 10-Q 1 ebi_10q.txt PERIOD ENDING 03/31/02 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, 2002 [ ] 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: May 13, 2002 Common Stock - Par Value $0.01, 3,464,099 shares outstanding
ENTERPRISE BANCORP, INC. INDEX Page Number Cover Page 1 Index 2 PART I FINANCIAL INFORMATION Item 1 Financial Statements Consolidated Balance Sheets -March 31, 2002 and December 31, 2001 3 Consolidated Statements of Income - Three months ended March 31, 2002 and 2001 4 Consolidated Statement of Changes in Stockholders' Equity - 5 Three months ended March 31, 2002 Consolidated Statements of Cash Flows - Three months ended March 31, 2002 and 2001 6 Notes to Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3 Quantitative and Qualitative Disclosures About Market Risk 17 PART II OTHER INFORMATION Item 1 Legal Proceedings 18 Item 2 Changes in Securities and Use of Proceeds 18 Item 3 Defaults upon Senior Securities 18 Item 4 Submission of Matters to a Vote of Security Holders 18 Item 5 Other Information 18 Item 6 Exhibits and Reports on Form 8-K 18 Signature Page 19
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This report contains certain "forward-looking statements" including statements concerning plans, objectives, future events or performance and assumptions and other statements that are other than statements of historical fact. Enterprise Bancorp, Inc. (the "company") wishes to caution readers that the following important factors, among others, may adversely affect the company's future results and could cause the company's results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein: (i) the effect of unforeseen changes in interest rates; (ii) the effect of changes in the business cycle and downturns in the local, regional or national economies, including unanticipated deterioration in the local real estate market; (iii) changes in asset quality and unanticipated increases in the company's reserve for loan losses; (iv) the effect on the company's competitive position within its market area of the increasing competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services; (v) the effect of technological changes and unanticipated technology-related expenses; (vi) the effect of unforeseen changes in consumer spending; (vii) the effect of changes in laws and regulations that apply to the company's business and operations and unanticipated increases in the company's regulatory compliance costs; (viii) unanticipated increases in employee compensation and benefit expenses; and (ix) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board. ENTERPRISE BANCORP, INC. Consolidated Balance Sheets
March 31, December 31, 2002 2001 (Dollars in thousands) (Unaudited) ----------------- ----------------- Assets Cash and equivalents: Cash and due from banks $ 30,649 $ 31,361 Daily federal funds sold 5,000 6,500 ---------------- ----------------- Total cash and cash equivalents 35,649 37,861 ---------------- ----------------- Investment securities at fair value 196,638 197,060 Loans, less allowance for loan losses of $8,902 at March 31, 2002 and $8,547 at December 31, 2001 378,999 367,780 Premises and equipment 12,989 12,136 Accrued interest receivable 3,609 3,586 Deferred income taxes, net 2,767 2,034 Prepaid expenses and other assets 3,576 2,990 Income taxes receivable - 301 Intangible assets 6,598 6,796 ---------------- ----------------- Total assets $ 640,825 $ 630,544 ================ ================= Liabilities, Trust Preferred Securities and Stockholders' Equity Deposits $ 541,260 $ 526,953 Short-term borrowings 40,191 44,449 Escrow deposits of borrowers 1,418 931 Accrued expenses and other liabilities 3,282 4,185 Income taxes payable 341 - Accrued interest payable 811 805 ---------------- ----------------- Total liabilities 587,303 577,323 ---------------- ----------------- 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; 3,462,974 and 3,461,999 shares issued and outstanding at March 31, 2002 and December 31, 2001, respectively 35 35 Additional paid-in capital 18,662 18,654 Retained earnings 22,096 20,715 Accumulated other comprehensive income 2,229 3,317 ---------------- ----------------- Total stockholders' equity 43,022 42,721 ---------------- ----------------- Total liabilities, trust preferred securities and stockholders' equity $ 640,825 $ 630,544 ================ =================
ENTERPRISE BANCORP, INC. Consolidated Statements of Income Three months ended March 31, 2002 and 2001
(Dollars in thousands, except per share data) March 31, March 31, 2002 2001 (Unaudited) (Unaudited) ------------------ ------------------ Interest and dividend income: Loans $ 6,934 $ 7,076 Investment securities 2,582 3,023 Federal funds sold 37 219 ------------------ ------------------ Total interest income 9,553 10,318 ------------------ ------------------ Interest expense: Deposits 2,328 3,290 Short-term borrowed funds 190 777 ------------------ ------------------ Total interest expense 2,518 4,067 ------------------ ------------------ Net interest income 7,035 6,251 Provision for loan losses 390 210 ------------------ ------------------ Net interest income after provision for loan losses 6,645 6,041 ------------------ ------------------ Non-interest income: Investment management and trust service fees 571 506 Deposit service fees 436 346 Net gains on sales of investment securities 416 390 Gains on sales of loans 102 62 Other income 195 202 ------------------ ------------------ Total non-interest income 1,720 1,506 ------------------ ------------------ Non-interest expense: Salaries and employee benefits 3,553 3,261 Occupancy expenses 1,109 955 Advertising and public relations 179 140 Audit, legal and other professional fees 226 152 Trust professional and custodial expenses 196 182 Office and data processing supplies 115 139 Trust preferred expense 290 290 Amortization of intangible assets 198 198 Other operating expenses 636 609 ------------------ ------------------ Total non-interest expense 6,502 5,926 ------------------ ------------------ Income before income taxes 1,863 1,621 Income tax expense 482 440 ------------------ ------------------ Net income $ 1,381 $ 1,181 ================== ================== Basic earnings per share $ 0.40 $ 0.35 ================== ================== Diluted earnings per share $ 0.39 $ 0.34 ================== ================== Basic weighted average common shares outstanding 3,462,232 3,409,093 ================== ================== Diluted weighted average common shares outstanding 3,578,384 3,489,837 ================== ==================
ENTERPRISE BANCORP, INC. Consolidated Statement of Changes in Stockholders' Equity Three months ended March 31, 2002 (unaudited)
(Dollars in thousands) Common Stock Additional ------------------------- Paid-in Retained Shares Amount Capital Earnings ---------- ----------- --------- -------- Balance at December 31, 2001 3,461,999 $ 35 $ 18,654 $ 20,715 Comprehensive income Net Income 1,381 Unrealized depreciation on securities, net of reclassification (1,088) Total comprehensive income $ 293 Stock options exercised 975 8 ---------- ----------- ----------- ----------- ========== =========== =========== =========== Balance at March 31, 2002 3,462,974 $ 35 $ 18,662 $ 22,096 ========== =========== =========== =========== Comprehensive Income Total ---------------------- Stockholders' Period Accumulated Equity ----------- ----------- ---------- Balance at December 31, 2001 $ 3,317 $ 42,721 Comprehensive income Net Income 1,381 1,381 Unrealized depreciation on securities, net of reclassification (1,088) (1,088) (1,088) ----------- ----------- ----------- Total comprehensive income $ 293 =========== Stock options exercised 8 ----------- ---------- ----------- =========== ========== Balance at March 31, 2002 $ 2,229 $ 43,022 =========== ========== Disclosure of reclassification amount: Gross unrealized depreciation arising during The period $ (1,232) Tax benefit 419 Unrealized holding depreciation, net of tax (813) Less: reclassification adjustment for net gains included in net income (net of $141 tax) 275 =========== Net unrealized depreciation on securities $ (1,088)
ENTERPRISE BANCORP, INC. Consolidated Statements of Cash Flows Three months ended March 31, 2002 and 2001
(Dollars in thousands) March 31, March 31, 2002 2001 (Unaudited) (Unaudited) -------------- -------------- Cash flows from operating activities: Net income $ 1,381 $ 1,181 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 390 210 Depreciation and amortization 657 530 Amortization of intangible assets 198 198 Net gains on sales of investments (416) (390) Gains on sale of loans (102) (62) (Increase) decrease in: Loans held for sale 726 311 Accrued interest receivable (23) 342 Prepaid expenses and other assets (586) (334) Deferred income taxes (173) (105) Income taxes 642 387 Increase (decrease) in: Accrued expenses and other liabilities (903) (66) Accrued interest payable 6 (370) ---------------- ---------------- Net cash provided by operating activities 1,797 1,832 ---------------- ---------------- Cash flows from investing activities: Proceeds from maturities, calls and paydowns of investment securities 11,558 4,091 Proceeds from sales of investment securities 6,049 10,037 Purchase of investment securities (18,498) (23,437) Net increase in loans (12,233) (12,823) Additions to premises and equipment, net (1,429) (557) ---------------- ---------------- Net cash used in investing activities (14,553) (22,689) ---------------- ---------------- Cash flows from financing activities: Net increase in deposits, including escrow deposits 14,794 11,105 Net increase (decrease) in short-term borrowings (4,258) 12,339 Stock options exercised 8 6 ---------------- ---------------- Net cash provided by financing activities 10,544 23,450 ---------------- ---------------- Net increase (decrease) in cash and cash equivalents (2,212) 2,593 Cash and cash equivalents at beginning of period 37,861 54,105 ---------------- ---------------- Cash and cash equivalents at end of period $ 35,649 $ 56,698 ================ ================
ENTERPRISE BANCORP, INC. Consolidated Statements of Cash Flows (Continued) Three months ended March 31, 2002 and 2001
(Dollars in thousands) March 31, March 31, 2002 2001 (Unaudited) (Unaudited) -------------- -------------- Supplemental financial data: Cash paid for: Interest expense $ 2,511 $ 4,722 Income taxes 12 200
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, 2001 audited consolidated financial statements and notes thereto. Interim results are not necessarily indicative of results to be expected for the entire year. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and revenues and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses. In the opinion of management, the accompanying consolidated financial statements reflect all necessary adjustments consisting of normal recurring accruals for a fair presentation. (3) Earnings Per Share Basic earnings per share are calculated by dividing net income by the year-to-date weighted average number of common shares 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 116,152 and 80,744 for the quarters ended March 31, 2002 and March 31, 2001, respectively. (4) 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. The stockholders utilized the DRP to reinvest $650,000 of the dividends paid by the company into 39,770 shares of the company's common stock in 2001. (5) 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 identified intangible assets and goodwill (combined "intangible assets") and is being amortized over a ten-year period. (6) Accounting Rule Changes In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement 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 June 30, 2001 be accounted for using the purchase method of accounting, and prohibits the use of the pooling-of-interests method for such transactions. The new standard also requires that goodwill acquired in such business combinations be measured using the definition included in APB Opinion No. 16, "Business Combinations"' and initially recognized as an asset in the financial statements. The new standard also requires intangible assets acquired in any such business combination to be recognized as an asset apart from goodwill if they meet certain criteria. SFAS No. 142 applies to all goodwill and intangible assets acquired in a business combination. Under the new standard, all goodwill, including goodwill acquired before initial application of the standard, should not be amortized but should be tested for impairment at least annually at the reporting unit level, as defined in the standard. Intangible assets other than goodwill should be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Within six months of initial application of the new standard, a transitional impairment test must be performed on all goodwill. Any impairment loss recognized as a result of the transitional impairment test should be reported as a change in accounting principle before the end of the year of adoption. In addition to the transitional impairment test, the required annual impairment test should be performed in the year of adoption of the standard. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001, and must be adopted as of the beginning of a fiscal year. Retroactive application is not permitted. The company adopted the new standard on January 1, 2002. During 2001, the company reported that the adoption of SFAS No. 142 was expected to increase annual net income by approximately $450,000 over the remaining amortization period ending in June 2010. However, subsequent to the company's disclosure but prior to formal adoption on January 1, 2002, the FASB clarified that goodwill as defined in SFAS No. 142 did not include the excess of amounts paid over liabilities assumed in a branch acquisition and such amounts should continue to be accounted for in accordance with SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions." Consequently, goodwill will continue to be amortized over a ten year life and adoption of SFAS No. 142 is expected to have no impact on the consolidated financial statements of the company although final resolution of this by the FASB has not been determined. (7) Reclassification Certain fiscal 2001 information has been reclassified to conform to the 2002 presentation. ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Capital Resources The company's actual capital amounts and capital adequacy ratios are presented in the table below. The bank's capital amounts and ratios do not differ materially from the amounts and ratios presented.
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, 2002: Total Capital (to risk weighted assets) $ 50,333 11.35% $ 35,464 8.00% $ 44,330 10.00% Tier 1 Capital (to risk weighted assets) 44,750 10.09% 17,732 4.00% 26,598 6.00% Tier 1 Capital* (to average assets) 44,750 7.26% 24,667 4.00% 30,833 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, 2002, total assets increased by $10.3 million, or 1.6%, since December 31, 2001. The increase was primarily attributable to an increase in net loans of $11.2 million, offset by a decrease of $2.0 million in investment securities and federal funds sold. The increase in assets was funded primarily by growth in deposits of $14.3 million, offset by a decrease in short-term borrowings of $4.3 million. 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 three months of 2002. Under this arrangement, management believes that commercial customers will benefit from enhanced interest rate earnings on sweep accounts, while retaining a conservative investment option of the highest quality and safety. Without this transition to Federated, the bank would have had growth in assets and deposits plus repurchase agreements of 5.6% and 6.2%, respectively, at March 31, 2002 as compared to December 31, 2001. Investments At March 31, 2002 all of the company's investment securities were classified as available-for-sale and carried at fair value. The net unrealized appreciation at March 31, 2002 was $3.4 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 company's investment portfolio, as rates rise 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. The unrealized appreciation on the investment portfolio will decrease as interest rates rise or as the securities approach maturity. Loans Total loans, before the allowance for loan losses, were $387.9 million, or 60.5% of total assets, at March 31, 2002, compared to $376.3 million, or 59.7% of total assets, at December 31, 2001. The increase in loans of $11.6 million for the quarter ended March 31, 2002 was primarily attributed to originations of commercial, commercial real estate and construction loans. Deposits and Borrowings Total deposits, including escrow deposits of borrowers, increased $14.8 million, or 2.8%, during the first three months of 2002, from $527.9 million at December 31, 2001, to $542.7 million at March 31, 2002. The increase of $14.8 million consists of growth of $9.8 million in savings, checking and money market deposits primarily attributable to sales efforts and increased market penetration, and a $5.0 million increase in certificates of deposit. Short-term borrowings, consisting of securities sold under agreements to repurchase and Federal Home Loan Bank ("FHLB") borrowings, decreased by $4.2 million, or 9.6%, from $44.4 million at December 31, 2001 to $40.2 million at March 31, 2002. The decrease was attributable to the bank's continuing transition during the first three 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. The sweep balances that remain as of March 31, 2002 on the bank's balance sheet in the form of overnight repurchase agreements secured by municipal securities held by the bank are classified as securities sold under agreements to repurchase. The company also had $470,000 in borrowings outstanding from the FHLB at March 31, 2002. Loan Loss Experience/Non-performing Assets The following table summarizes the activity in the allowance for loan losses for the periods indicated:
Three months ended March 31, -------------------------------------- (Dollars in thousands) 2002 2001 ---------------- ---------------- Balance at beginning of year $ 8,547 $ 6,220 Loans charged off Commercial 46 - Commercial real estate - - Construction - - Residential real estate - - Home equity - - Other 3 20 ---------------- ---------------- 49 20 ---------------- ---------------- Recoveries on loans charged off Commercial - 25 Commercial real estate - - Construction - - Residential real estate 2 20 Home equity - - Other 12 4 ---------------- ---------------- 14 49 ---------------- ---------------- Net loans charged off (recovered) 35 (29) Provision charged to operations 390 210 ---------------- ---------------- Balance at March 31 $ 8,902 $ 6,459 ================ ================ Annualized net loans charged off (recovered): Average loans outstanding 0.04% (0.04%) ================ ================ Allowance for loan losses: Loans 2.29% 1.99% ================ ================ Allowance for loan losses: Non-performing loans 386.37% 614.56% ================ ================
The following table sets forth non-performing assets at the dates indicated:
(Dollars in thousands) March 31, December 31, March 31, 2002 2001 2001 ----------------- ----------------- ---------------- Non-accrual loans $ 2,303 $ 1,874 $ 1,051 Accruing loans > 90 days past due 1 1 - ----------------- ----------------- ---------------- Total non-performing loans 2,304 1,875 1,051 Other real estate owned - - - ----------------- ----------------- ---------------- Total non-performing assets $ 2,304 $ 1,875 $ 1,051 ================= ================= ================ Non-performing loans: Loans 0.59% 0.50% 0.32% ================= ================= ================ Non-performing assets: Total assets 0.36% 0.30% 0.18% ================= ================= ================ Delinquent loans 30-89 days past due: Loans 0.54% 0.30% 0.18% ================= ================= ================
Total non-performing loans increased by $1.3 million from March 31, 2001 to March 31, 2002 and by $0.4 million from December 31, 2001 to March 31, 2002, and the ratio of non-performing loans to gross loans increased from 0.32% to 0.59% and from 0.50% to 0.59% over the same respective periods. The ratio of delinquent loans (30 - 89 days past due) to gross loans increased from 0.18% at March 31, 2001 to 0.30% at December 31, 2001 and from 0.30% to 0.54% from December 31, 2001 to March 31, 2002. Non-performing and delinquent loans at March 31, 2001 are considered to be unusually low. The results at December 31, 2001 and March 31, 2002 were primarily attributable to a weakened economy which began in 2001 and continued, at least to a certain degree, during the first three months of 2002. The bank's level of non-performing assets is largely a function of economic conditions and the overall banking environment. Continuing adverse conditions within the bank's market area, as well as any other adverse changes in local, regional or national economic conditions, could negatively impact the bank's level of non-performing assets in the future, despite prudent loan underwriting. Results of Operations Three Months Ended March 31, 2002 vs. Three Months Ended March 31, 2001 The company reported net income of $1,381,000 for the three months ended March 31, 2002, versus $1,181,000 for the three months ended March 31, 2001. The company had basic earnings per common share of $0.40 and $0.35 and diluted earnings per common share of $0.39 and $0.34 for the three months ended March 31, 2002 and March 31, 2001, respectively. The following table highlights changes, which affected the company's earnings for the periods indicated:
Three months ended March 31, -------------------------------------- (Dollars in thousands) 2002 2001 ---------------- ---------------- Average assets (1) $ 623,263 $ 569,020 Average deposits and short-term borrowings 567,892 518,825 Average investment securities and federal funds sold (1) 192,010 209,924 Average loans, net of deferred loan fees 383,853 315,273 Net interest income 7,035 6,251 Provision for loan losses 390 210 Tax expense 482 440 Average loans: Average deposits and borrowings 67.59% 60.77% Non-interest expense: Average assets (2) 4.23% 4.22% Non-interest income: Average assets (2) (3) 0.85% 0.80% Average tax equivalent rate earned on interest earning assets 6.86% 8.10% Average rate paid on interest bearing deposits and short-term borrowings 2.21% 3.92% Average rate paid on total deposits and borrowings 1.80% 3.18% Net interest margin 5.08% 5.00%
(1) Excludes the effect of SFAS No. 115 (2) Ratios have been annualized based on number of days for the period (3) Excludes net gain on sale of investment securities Net Interest Income The company's net interest income was $7,035,000 for the three months ended March 31, 2002, an increase of $784,000, or 12.5%, from $6,251,000 for the three months ended March 31, 2001. Interest income decreased by $765,000 for the three months ended March 31, 2002 and was $9,553,000 compared to $10,318,000 for the same period ended March 31, 2001. This decrease resulted primarily from a decrease in the average tax equivalent yield on interest earning assets of 124 basis points to 6.86% for the three months ended March 31, 2002 compared to 8.10% for the same period ended March 31, 2001, offset by an increase in the average balance of interest earning assets of $50.7 million or 9.6% to $575.9 million for the three months ended March 31, 2002 compared to $525.1 million for the three months ended March 31, 2001. For the three months ended March 31, 2002, the average loan balance increased by $68.6 million, or 21.8%, and the average investment securities and federal funds sold balance decreased by $17.9 million, or 8.5%, compared to the same period ended March 31, 2001. The average rate earned on loans declined by 177 basis points to 7.33% for the three months ended March 31, 2002, from 9.10% for the same period ended March 31, 2001, while the average tax equivalent yield on investment securities and federal funds sold decreased by 68 basis points to 5.92% for the three months ended March 31, 2002 from 6.60% for the same period ended March 31, 2001. Interest expense for the three months ended March 31, 2002 was $2,518,000 compared to $4,067,000 for the same period ended March 31, 2001, resulting primarily from a decrease in the average interest rate on interest bearing liabilities of 171 basis points to 2.21% for the three months ended March 31, 2002 compared to 3.92% for the same period ended March 31, 2001, offset by an increase in the average balance of interest-bearing deposits and short-term borrowings of $40.2 million, or 9.6%, to $461.4 million for the three months ended March 31, 2002 as compared to $421.2 million for the same period ended March 31, 2001. The average interest rate on savings, checking and money market deposit accounts decreased by 112 basis points for the three months ended March 31, 2002 compared to the same period ended March 31, 2001, due to lower market rates, while the average balance of such deposit accounts increased by $54.4 million, or 26.2%, to $261.8 million for the three months ended March 31, 2002 as compared to $207.4 million for the same period ended March 31, 2001. The average interest rate on time deposits decreased by 164 basis points for the three months ended March 31, 2002 compared to the same period ended March 31, 2001. The average balance on time deposits increased by $5.3 million, or 3.5%, to $156.3 million for the three months ended March 31, 2002 as compared to $151.0 million for the same period ended March 31, 2001. The average interest rate on short-term borrowings, consisting of term repurchase agreements and commercial sweep accounts utilizing overnight repurchase agreements secured by municipal securities held by the bank (together, "repurchase agreements") and FHLB borrowings, decreased to 1.78% for the three months ended March 31, 2002, compared to 5.02% for the three months ended March 31, 2001. The average balance of short-term borrowings for the three months ended March 31, 2002 decreased by $19.5 million, or 31.0%, to $43.3 million as compared to $62.8 million for the three months ended March 31, 2001. The 324 basis point decrease in average rate paid on short-term borrowings resulted primarily from decreases in market rates, while the decrease in average balance was attributable primarily to the transition described above of the bank's commercial sweep accounts from overnight repurchase agreements to Federated money market mutual funds. Net interest margin increased to 5.08% for the three months ended March 31, 2002 from 4.96% for the same period ended March 31, 2001, primarily due to the 171 basis point decrease in the average rate on interest bearing liabilities, offset by the 124 basis point decrease in tax equivalent yield on interest earning assets, and the $50.7 million increase in the average balance of interest earning assets, offset by the $40.2 million increase in the average balance of interest bearing liabilities. 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, 2002 and March 31, 2001, 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). AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES
Three Months Ended March 31, 2002 Three Months Ended March 31, 2001 ------------------------------------- -------------------------------------- (Dollars in thousands) Average Interest Interest Average Interest Balance Rates (3) Balance Interest Rates (3) ------------------------------------- -------------------------------------- Assets: Loans (1) (2) $ 383,853 $ 6,934 7.33% $315,273 $7,076 9.10% Investment securities & federal funds sold (3)(5) 192,010 2,619 5.92% 209,924 3,242 6.60% --------- -------- --------- ------ Total interest earnings assets 575,863 9,553 6.86% 525,197 10,318 8.10% Other assets (4)(5) 47,400 43,823 --------- -------- Total assets (5) $ 623,263 $569,020 ========= ======== Liabilities and stockholders' equity: Savings/PIC/MMDA $ 261,817 837 1.30% $207,408 1,238 2.42% Time deposits 156,279 1,491 3.87% 150,947 2,052 5.51% Short-term borrowings 43,319 190 1.78% 62,813 777 5.02% --------- ------- -------- ------ Total interest-bearing deposits and borrowings 461,415 2,518 2.21% 421,168 4,067 3.92% ========= ======= ======== ====== Net interest rate spread (3) 4.65% 4.18% Non-interest bearing deposits 106,477 97,657 --------- ------- -------- ------ Total deposits and borrowings 567,892 2,518 1.80% 518,825 4,067 3.18% Other liabilities 4,647 3,670 --------- ------- Total liabilities 572,539 522,495 Trust preferred securities 10,500 10,500 Stockholders' equity (5) 40,224 36,025 --------- -------- Total liabilities, trust preferred securities and stockholders' equity (5) $623,263 $569,020 ========= ======== Net interest Income $ 7,035 $ 6,251 ======== ======== Net interest margin 5.08% 4.96% Changes due to ----------------------------------------------- Interest Rate/ Total Volume Rate Volume ----------------------------------------------- Assets: Loans (1) (2) $ (142) $ 1,539 $ (1,381) $ (300) Investment securities & federal funds sold (3)(5) (623) (277) (434) 88 ------- -------- ------- ------- Total interest earnings assets (765) 1,262 (1,815) (212) ------- -------- ------- ------- Other assets (4)(5) Total assets (5) Liabilities and stockholders' equity: Savings/PIC/MMDA (401) 325 (575) (151) Time deposits (561) 72 (612) (21) Short-term borrowings (587) (241) (502) 156 ------- -------- ------- ------ Total interest-bearing deposits and borrowings (1,549) 156 (1,689) (16) ------- -------- ------- ------ Net interest rate spread (3) Non-interest bearing deposits Total deposits and borrowings Other liabilities Total liabilities Trust preferred securities Stockholders' equity (5) Total liabilities, trust preferred securities and stockholders' equity (5) Net interest Income $ 784 $ 1,106 $ (126) $ (196) ======== ======== ====== ====== 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 $224 and $225 for the periods ended March 31, 2002 and March 31, 2001, respectively (4) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, deferred income taxes, intangible assets, and other miscellaneous assets. (5) Excludes the effect of SFAS No. 115 The company manages its earning assets by fully using available capital resources within what management believes are prudent credit and leverage parameters. Loans, investment securities, and federal funds sold comprise the company's earning assets. Provision for Loan Losses The provision for loan losses amounted to $390,000 and $210,000 for the three months ended March 31, 2002 and March 31, 2001, respectively. Although management believes that loan quality continues to be solid, management determined it was prudent to increase the allowance for loan losses in light of current economic uncertainty. 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 increased by $65,000, or 13.0%, for the three months ended March 31, 2002 compared to the same period in 2001. The increase was primarily due to one time fees received in 2002 for estate settlements. Excluding these fees, investment management and trust service fees would have decreased by $10,000, or 2%, for the three months ended March 31, 2002 compared to the same period in 2001. Average investment services and trust assets under management (excluding the commercial sweep balances held in Federated mutual funds) decreased to $286.8 million for the three months ended March 31, 2002 from $297.3 million for the same period in 2001. Deposit service fees increased by $90,000, or 26.0%, for the three months ended March 31, 2002, compared to the three months ended March 31, 2001, due primarily to an increase in the average balance on savings, checking and money market accounts of $54.4 million, or 26.2%, for the three months ended March 31, 2002 compared to the same period in 2001. The average deposit balance increase resulted in higher business checking and overdraft fees. Net gain on sale of investment securities amounted to $416,000 and $390,000 for the three months ended March 31, 2002 and March 31, 2001, respectively. These net gains resulted from management's decision to take advantage of certain investment opportunities and asset/liability repositioning. Gain on sale of loans increased by $40,000 for the three months ended March 31, 2002, compared to the three months ended March 31, 2001, due to increased residential mortgage production resulting from a declining interest rate environment. Other income for the three months ended March 31, 2002, was $195,000 compared to $202,000 for the three months ended March 31, 2001. This decrease was primarily attributable to a decrease in check printing fees offset by an increase in ATM surcharge fees. Non-Interest Expenses Salaries and benefits expense totaled $3,553,000 for the three months ended March 31, 2002, compared to $3,261,000 for the three months ended March 31, 2001, an increase of $292,000 or 9.0%. This increase was primarily due to new hires, company growth, strategic initiatives implemented by the company, and annual pay increases. Occupancy expense was $1,109,000 for the three months ended March 31, 2002, compared to $955,000 for the three months ended March 31, 2001, an increase of $154,000 or 16.1%. The increase was primarily due to increases in rent and common area maintenance fees for leased office space, depreciation of office renovations for operational support departments completed in 2001, and ongoing enhancements to the company's computer systems. Advertising and public relations expenses increased by $39,000, or 27.9%, for the three months ended March 31, 2002 compared to the same period in 2001. The increase was primarily due to expenditures related to the opening of the bank's newest branch office, located at the end of the Lowell Connector, which occurred on April 29, 2002. Audit, legal and other professional expenses increased by $74,000, or 48.7%, for the three months ended March 31, 2002 compared to the same period in 2001. The increase was primarily due to increased compliance and audit related expenses associated with the bank's growth in 2002. Trust professional and custodial expenses increased by $14,000, or 7.7%, for the three months ended March 31, 2002 compared to the same period in 2001. The increase was primarily due to an increase in custodial fees. Office and data processing supplies expense decreased by $24,000, or 17.3%, for the three months ended March 31, 2002 compared to the same period in 2001. The decrease was primarily due to timing differences of the expenditures. Trust preferred expense was $290,000 for the three months ended March 31, 2002 and March 31, 2001. The expense consists of interest costs and the amortization of deferred underwriting costs from the trust preferred securities issued on March 23, 2000. Amortization of intangible assets was $198,000 for the three months ended March 31, 2002 and March 31, 2001. The expense consists of 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. Other operating expense was $636,000 and $609,000 for the three months ended March 31, 2002 and March 31, 2001, respectively. The increase of $27,000, or 4.4%, for the 2002 period was primarily due to the company's growth and consists of increased expenses for bank service charges, training expense, courier services, internet banking and data communication lines, and charitable contributions. Income Tax Expense Income tax expense and the effective tax rate for the three months ended March 31, 2002 and March 31, 2001 were $482,000 and 27.0% and $440,000 and 27.1%, respectively. ITEM 3 - Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, specifically, changes in the interest rate environment. The bank's investment committee is responsible for establishing policy guidelines on acceptable exposure to interest rate risk and liquidity. The investment committee is comprised of certain members of the Board of Directors and certain members of senior management. The primary objectives of the 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 investment 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 and discussed with the investment 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 of interest bearing liabilities is accomplished through the asset/liability management program. The bank's simulation model analyzes various interest rate scenarios. Variations in the interest rate environment affect numerous factors, including prepayment speeds, reinvestment rates, maturities of investments (due to call provisions), and interest rates on various asset and liability accounts. The investment committee periodically reviews 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 10% in the 24-month period following the date of the analysis, in a rising and falling rate shock analysis of 100 and 200 basis points. Management believes there have been no material changes in the interest rate risk reported in the company's Annual Report on Form 10-K for the year ended December 31, 2001. PART II OTHER INFORMATION Item 1 Legal Proceedings Not Applicable 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 The following exhibit is included with this report: 10.23 Change in Control/Noncompetition Agreement dated as of April 3, 2002 by and among the company, the bank and Stephen J. Irish. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENTERPRISE BANCORP, INC. DATE: May 13, 2002 /s/ John P. Clancy, Jr. ------------------------------------------ John P. Clancy, Jr. Treasurer EX-99 3 exhibit.txt CHANGE IN CONTROL/NONCOMPETE AGMT. CHANGE IN CONTROL/NONCOMPETITION AGREEMENT This Change in Control/Noncompetition Agreement (this "Agreement") is entered into as of the 3rd day of April, 2002 by and among Enterprise Bancorp, Inc., a Massachusetts corporation (the "Company"), and its wholly owned subsidiary, Enterprise Bank and Trust Company, a Massachusetts bank and trust company with its main office in Lowell, Massachusetts (the "Bank") (the Bank and the Company shall be hereinafter collectively referred to as the "Employers"), and Stephen J. Irish of 18 East Meadow Lane #122 Lowell, Massachusetts (the "Executive"). 1. Purpose. In order to allow the Executive to consider the prospect of a Change in Control (as defined in Section 2 hereof) in an objective manner and in consideration of the Executive's agreement to abide by the confidentiality and noncompetition provisions set forth in Section 8 hereof and the services to be rendered by the Executive to the Bank, and in order to protect the ongoing business interests and competitiveness of the Employers and in consideration of the Employers' agreement to provide the severance benefits to protect the Executive in the event of a Change in Control as set forth in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by the Executive and the Employers, the parties have entered into this Agreement and have mutually agreed to be bound by the terms and conditions hereof. 2. Change in Control. For purposes of this Agreement, the term "Change in Control" shall have the same meaning as defined in the Company's Amended and Restated 1998 Stock Incentive Plan, as the same may be further amended and continue in effect from time to time hereafter. 3. Terminating Event. For purposes of this Agreement, the term "Terminating Event" shall mean any termination of the employment of the Executive with the Bank for any reason, whether or not such termination is initiated by the Bank, including without limitation termination for cause or by reason of the Executive's death or disability, or by the Executive, including without limitation resignation by reason of retirement or for no reason at all. 4. Severance Payments. (a) If a Terminating Event occurs within two (2) years after the date on which a Change in Control has occurred, then the Executive shall be entitled to receive the following: (i) an aggregate amount equal to 1.5 times the Executive's "Highest Annual Compensation" (as defined in paragraph (c) of this Section 4), such amount to be paid out in equal periodic installments in accordance with the Bank's ordinary payroll practices over the eighteen-month period commencing on the first payroll payment date after the date on which the Executive's employment with the Bank terminates (the "Date of Termination"); (ii) any base salary, commissions or other compensation accrued or earned, but not yet paid, as of the Date of Termination and any annual or other bonus actually awarded, but not yet paid, as of the Date of Termination, such amounts to be paid on the Date of Termination; (iii) reimbursement for all business expenses for which the Executive would ordinarily be reimbursed by the Employers in the ordinary course of business in accordance with the Employers' policies, programs, procedures or practices incurred, but not yet paid, as of the Date of Termination, such amount to be paid on the Date of Termination; (iv) payment of the per diem value of any unused vacation days, whether deemed to be accrued or unaccrued, that would be available to the Executive through the end of the calendar year (but not beyond) in which the Date of Termination occurs; (v) continuation of the Employers' employee welfare benefit plans, programs and practices in which the Executive and his spouse and any other eligible dependents participate or are eligible to participate as of the Date of Termination or, if more favorable to the Executive, as of the date of a Change in Control, at the levels in effect on, and at the same out-of-pocket costs to the Executive as of, the Date of Termination or, if more favorable to the Executive, as of the date of a Change in Control, for the eighteen-month period commencing on the Date of Termination (or, if such continuation is not permitted by applicable law or if the Bank's Board of Directors so determines in its sole discretion, the Bank shall pay to the Executive a cash amount equal to the difference between (A) the aggregate amount that would be required to be paid by the Executive in order for the Executive to obtain a continuation of such benefits and coverages for such eighteen-month period for himself, his spouse and any other eligible dependents under or through one or more plans, programs or other arrangements provided by one or more unaffiliated third parties and (B) the out-of-pocket costs that would be incurred by the Executive in accordance with the terms hereof if such continuation of benefits and coverages were provided under the Employers' employee welfare benefit plans, programs and practices); (vi) reimbursement for the reasonable fees of a professional out-placement service selected by the Executive within ninety (90) days after the Date of Termination, such amount to be paid promptly after the expense is incurred; and (vii) any other compensation and benefits as may be provided in accordance with the terms of any applicable plans, programs, policies, procedures or practices of the Employers. (b) If a Terminating Event occurs within one (1) year prior to the date on which a Change in Control occurs, then the Executive shall be entitled to receive, as provided in this paragraph (b), all of the payments and benefits that he would have been entitled to receive under paragraph (a) of this Section 4 if such Terminating Event had occurred within two (2) years after the date on which a Change in Control has occurred, unless such Terminating Event occurs as a result of a termination for Cause (as such term is defined in paragraph (f) of Section 8 below), in which case no increase or adjustments to the amounts paid or benefits provided to the Executive in connection with such Terminating Event shall be made under this paragraph (b). If required in accordance with the immediately preceding sentence, the amounts paid and benefits provided to the Executive in connection with a Terminating Event that occurs within one (1) year prior to the date on which a Change in Control occurs shall be increased or otherwise adjusted to ensure that the Executive receives the full payments and benefits contemplated by paragraph (a) of this Section 4, as if such Terminating Event had occurred within two (2) years after the date on which a Change in Control has occurred. If the payments and/or benefits to be received by the Executive in connection with a Terminating Event that has occurred within one (1) year prior to the date on which a Change in Control occurs are required to be increased or adjusted under this paragraph (b), then the Executive shall be paid on the first ordinary payroll payment date of the Bank following the occurrence of such Change in Control the cash amount necessary to ensure that as of such date the Executive shall have received the full amounts of the payments and benefits that the Executive would have received as of such date under paragraph (a) of this Section 4 if such Terminating Event had occurred within two (2) years after the date on which a Change in Control has occurred (including without limitation the economic equivalent of any noncash benefits that have not been provided to the Executive during the period from the date on which such Terminating Event occurred and the date on which such Change in Control occurred) and from and after such payroll payment date the Executive shall receive the full amounts of the remaining payments and benefits that the Executive is required to receive under paragraph (a) of this Section 4 in accordance with the terms thereof (including without limitation, to the extent that reimbursement for the reasonable fees of a professional out-placement service selected by the Executive has not already then been paid hereunder, such reimbursement with respect to a professional out-placement service selected by the Executive within ninety (90) days after the occurrence of such Change in Control). (c) For purposes of this Section 4, the Executive's "Highest Annual Compensation" shall mean, as determined as of any Date of Termination, the sum of (i) the highest per annum rate of base salary paid by the Employers to the Executive at any time during the three-year period prior to such Date of Termination, (ii) the highest amount of commission or other compensation (which is not otherwise included in the base salary and bonus amounts referred in clauses (i) and (iii) of this paragraph (c)) paid by the Employers to the Executive with respect to any of the three most recently completed fiscal years of the Bank prior to such Date of Termination, and (iii) the highest annual incentive compensation or other bonus amount paid by the Employers to the Executive (or which would have been paid but for an election by the Executive to defer payment to a later period) with respect to any of the three most recently completed fiscal years of the Bank prior to such Date of Termination. (d) In the event of any dispute concerning payments or other benefits to be received by the Executive under this Section 4, the Executive shall be entitled until the resolution of such dispute to be paid in accordance with the Bank's ordinary payroll practices his then current base salary and to continue to receive all other welfare benefits then being provided to him by the Employers, and there shall be no reduction whatsoever of any amounts subsequently paid to the Executive upon resolution of such dispute as a result of, or in respect to, such interim payments or coverage. (e) In the event that any payments or benefits are to be received by the Executive under this Section 4, the Executive shall be under no obligation to seek other employment or to mitigate damages and there shall be no offset against any amount due the Executive under this Agreement for any reason, including, without limitation, on account of any remuneration or benefits attributable to any subsequent employment that the Executive may obtain. (f) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment or distribution by the Employers to or for the benefit of the Executive, whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this paragraph (f) (collectively, the "Payments"), would be subject to the excise tax imposed by Section 4999 of the Internal Revenue Code of 1986, as amended, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. 5. Employment Status. This Agreement is not an agreement for the employment of the Executive and shall confer no rights on the Executive except as herein expressly provided. 6. Term. This Agreement shall take effect on and as of the date hereof and shall terminate, subject to the applicability of paragraph (b) of Section 4 above, upon the earlier of (a) termination of the employment of the Executive for reason of the Executive's death or permanent disability, in which case any amounts due to the Executive or his estate or legal representative, as the case may be, shall be determined in accordance with Section 4 of this Agreement, if applicable, or otherwise in accordance with the Employers' applicable plans, programs, policies, procedures or practices then in effect, (b) the resignation or termination of the Executive for any reason prior to a Change in Control, or (c) the second anniversary of the date on which a Change in Control shall have occurred; provided, however, that in any event the provisions of Section 8 hereof shall remain in full force and effect in accordance with their terms. 7. Withholding. All payments made by the Employers under this Agreement shall be net of any tax or other amounts required to be withheld by the Employers under applicable law. 8. Confidential Information; Noncompetition. (a) Confidentiality. The Executive shall not, during or after the period during which he is employed by the Bank, disclose any Confidential Information (as defined herein) to any natural person or entity, other than the Employers or any of their affiliates or any of the Employers' or their affiliates' employees, consultants, advisors, agents or other representatives who have a need to know any such information, for any reason or purpose whatsoever. The term "Confidential Information" shall mean all confidential information of or relating to the Employers and any of their affiliates, including without limitation financial information and data, business plans and information regarding prospects and opportunities (such as, by way of example only, client and customer lists and acquisition, disposition, expansion, product development and other strategic plans), but does not include any information that is or becomes public knowledge by means other than the Executive's breach or nonobservance of his obligations described in this paragraph (a). Notwithstanding the foregoing, the Executive may disclose such Confidential Information as he may be legally required to do so on the advice of counsel in connection with any legal or regulatory proceeding; provided, however, that the Executive shall provide the Employers with prior written notice of any such required or potentially required disclosure and shall cooperate with the Employers and use his best efforts under such circumstances to obtain appropriate confidential treatment of any such Confidential Information that may be so required to be disclosed in connection with any such legal or regulatory proceeding. The Executive's obligation to refrain from disclosing any Confidential Information under this paragraph (a) shall continue in effect in accordance with its terms following any termination of this Agreement pursuant to Section 6 above. (b) Noncompetition. If the Executive's employment with the Bank is terminated for any reason prior to a Change in Control (whether or not such termination is initiated by the Bank or by the Executive), then during the period of one (1) year following the date of such termination (and assuming no Change in Control occurs at any time during such one-year period), the Executive shall not: (i) directly or indirectly, whether as owner, partner, shareholder (other than the holder of 1% or less of the common stock of any company the common stock of which is listed on a national stock exchange or quoted on the NASDAQ National Market System or NASDAQ SmallCap Market), consultant, agent, employee or otherwise, engage in competition with the Employers or any of their affiliates within a ten (10) mile radius of any city or town in which the Bank or any affiliate has a branch or other office; or (ii) hire or attempt to hire, or assist in hiring, any employees of the Employers or any of their affiliates, or solicit, encourage or induce any such employee to terminate his or her relationship with the Employers or any such affiliate; or (iii) solicit, encourage or induce any customer or client of the Employers or any of their affiliates to terminate his or its relationship with the Employers or any such affiliate or to do business with anyone other than the Employers and their affiliates. Notwithstanding any of the foregoing provisions contained in this paragraph (b), none of the restrictions contained herein shall apply to the Executive's conduct following any termination of employment with the Bank during any period following the occurrence of a Change in Control. (c) Payments During Noncompetition Period. During the period of restriction on the Executive's conduct following a termination of employment with the Bank, as set forth in paragraph (b) of this Section 8, if such employment has been terminated by the Bank (as distinguished from a termination initiated by the Executive) for any reason other than a termination for Cause (as defined in paragraph (f) of this Section 8), then the Executive shall be paid in equal periodic installments in accordance with the Bank's ordinary payroll practices, commencing on the first payroll payment date after the date on which the Executive's employment with the Bank shall have been terminated, an amount equal, on an annualized basis, to seventy-five percent (75%) of the sum of (i) the per annum rate of base salary paid by the Employers to the Executive as of the date on which the Executive's employment with the Bank is terminated, (ii) the amount of commission or other compensation (which is not otherwise included in the base salary and bonus amounts referenced in clauses (i) and (iii) of this paragraph (c)) paid by the Employers to the Executive with respect to the most recently completed fiscal year prior to such date on which the Executive's employment with the Bank is terminated, and (iii) the annual incentive or other bonus amount paid by the Employers to the Executive (or which would have been paid but for an election by the Executive to defer payment to a later period) with respect to the most recently completed fiscal year prior to such date on which the Executive's employment with the Bank is terminated. (d) Injunctive Relief. The Executive acknowledges and agrees that the Employers will have no adequate remedy at law, and would be irreparably harmed, if the Executive breaches or threatens to breach any of the provisions of this Section 8. The Executive agrees that the Employers shall be entitled to equitable and/or injunctive relief to prevent any breach or threatened breach of this Section 8, and to specific performance of each of the terms of this Section 8 in addition to any other legal or equitable remedies that the Employers may have. The Executive further agrees that he shall not, in any equity proceeding relating to the enforcement of the terms of this Section 8, raise the defense that the Employers have an adequate remedy at law. (e) Special Severability. The terms and provisions of this Section 8 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. (f) Cause Defined. Termination by the Bank of the Executive's employment for "Cause" shall mean termination on the basis of (i) the Executive's willful and continued failure to substantially perform his employment duties (other than any such failure resulting from the Executive's death or incapacity due to physical or mental illness) after (A) a written demand for substantial performance is delivered to the Executive by the Bank's Chief Executive Officer, which demand specifically identifies the manner in which the Chief Executive Officer believes that the Executive has not substantially performed his employment duties, and (B) the Executive has been afforded a reasonable opportunity to meet with the Chief Executive Officer regarding such assertions of nonperformance, or (ii) the Executive's willfully engaging in conduct which is demonstrably and materially injurious to the Bank, monetarily or otherwise. For purposes of this paragraph (f), no act, or failure to act, on the part of the Executive shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that his action or omission was in the best interests of the Bank. The Executive shall be deemed to have been terminated for Cause only at such time as there shall have been delivered to him a written notice of termination by the Bank, which specifies in detail the particulars of the Executive's conduct that serve as the basis for such termination for Cause. 9. Arbitration Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach hereof, other than an action brought by the Employers for injunctive or other equitable relief in the enforcement of the Employers' rights under Section 8 above, in which case such action may be brought in any court of competent jurisdiction, shall be settled by arbitration in accordance with the laws of the Commonwealth of Massachusetts by three arbitrators, one of whom shall be appointed by the Employers, one by the Executive and the third by the first two arbitrators. If the first two arbitrators cannot agree on the appointment of a third arbitrator, then the third arbitrator shall be appointed by the American Arbitration Association in the City of Boston, Massachusetts. Such arbitration shall be conducted in the City of Boston, Massachusetts in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this Section 9. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel and/or incur other costs and expenses in connection with the enforcement of any or all of Executive's rights under this Agreement, the Employers shall pay (or the Executive shall be entitled to recover from the Employers, as the case may be) the Executive's reasonable attorneys' fees and other reasonable costs and expenses in connection with the enforcement of said rights (including the enforcement of any arbitration award in court) regardless of the final outcome, unless and to the extent that the arbitrators shall determine that the Executive has not acted in good faith or that under the circumstances recovery by the Executive of all or part of any such fees and costs and expenses would be inequitable or otherwise unjust. 10. Successors. (a) Each of the Company and the Bank will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of its businesses and/or assets to assume expressly and agree to perform this Agreement in the same manner and to the same extent as if no such succession had taken place. Failure of either the Company or the Bank to obtain such assumption and agreement prior to the effectiveness of any such succession shall be a breach of this Agreement and shall entitle the Executive to compensation in the same amount and on the same terms as he would be entitled to hereunder if a Terminating Event were to occur within two (2) years after a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed to be the date of such Terminating Event. As used in this Agreement, "Company," "Bank" and "Employers" shall mean the Company, the Bank and the Employers as hereinbefore defined and any successor to the business and/or assets of either the Company or the Bank as aforesaid which successor assumes and agrees to perform this Agreement by operation of law or otherwise. (b) This Agreement shall inure to the benefit of and be binding upon the Employers and the Executive, their respective successors, executors, administrators, heirs and permitted assigns. In the event of the Executive's death prior to the completion by the Employers of all payments due him under this Agreement, the Employers shall continue such payments to the Executive's beneficiary designated in writing to the Employers prior to his death (or to his estate, if he fails to make such designation). 11. Enforceability. If any portion or provision of this Agreement shall to any extent be declared illegal or unenforceable by a court of competent jurisdiction, then the remainder of this Agreement, or the application of such portion or provision in circumstances other than those as to which it is so declared illegal or unenforceable, shall not be affected thereby, and each portion and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 12. Waiver. No waiver of any provision hereof shall be effective unless made in writing and signed by the waiving party. The failure of any party to require the performance of any terms or obligation of this Agreement, or the waiver by any party of any breach of this Agreement, shall not prevent any subsequent enforcement of such terms or obligation or be deemed a waiver of any subsequent breach. 13. Notices. Any notices, requests, demands and other communication provided for by this Agreement shall be sufficient if in writing and delivered in person or sent by registered or certified mail, postage prepaid, to the Executive at the last address the Executive has filed in writing with the Employers or, in the case of the Employers, at their executive offices, attention of the Chief Executive Officer. 14. Amendment. This Agreement may be amended or modified only by a written instrument signed by the Executive and by duly authorized representatives of each of the Employers. 15. Governing Law. This is a Massachusetts contract and shall be construed under and is governed in all respect by the laws of the Commonwealth of Massachusetts. 16. Captions. The captions of this Agreement are for convenience of reference only, are not part of the terms of this Agreement and shall have no force or effect in the application or interpretation thereof. 17. Entire Agreement. This Agreement contains the entire agreement between the parties to this Agreement concerning the subject matter hereof and supersedes all prior agreements, understandings, discussions, negotiations and undertakings, whether written or oral, between the parties with respect thereto. 18. Bank Regulatory Limitations. Any payments made to the Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 U.S.C. ss. 1828(k) and any applicable regulations promulgated thereunder. In addition, to the extent required by applicable law, regulation, regulatory policy or other regulatory requirement, the aggregate amount and/or value of the compensation paid as a result of any termination of the Executive's employment with the Employers, regardless of the reason for any such termination of employment, shall not exceed the limit prescribed by such applicable law, regulation, regulatory policy or other regulatory requirement. [Remainder of Page Intentionally Blank] IN WITNESS WHEREOF, this Agreement has been executed as a sealed instrument on behalf of the Employers by their duly authorized officers and by the Executive as of the date first above written. ATTEST: ENTERPRISE BANCORP, INC. /s/ Arnold S. Lerner By: /s/ George L. Duncan - ----------------------------------- ------------------------------------ Arnold S. Lerner George L. Duncan Clerk Chairman and Chief Executive Officer ATTEST: ENTERPRISE BANK AND TRUST COMPANY /s/ Arnold S. Lerner By: /s/ George L. Duncan - ----------------------------------- ------------------------------------ Arnold S. Lerner George L. Duncan Clerk Chairman and Chief Executive Officer WITNESS: EXECUTIVE /s/ Robert R. Gilman /s/ Stephen J. Irish - ----------------------------------- ------------------------------------ Stephen J. Irish -----END PRIVACY-ENHANCED MESSAGE-----