-----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, K2sf7wJScK+kjsjZ2geI3FG/wobePETIcVPsI3A6JpxYwlsKMmf0TiyxoMfLSS8A 5gnbX7DGFWm/rEWgIjJ9Kw== 0001010521-03-000140.txt : 20030514 0001010521-03-000140.hdr.sgml : 20030514 20030514112723 ACCESSION NUMBER: 0001010521-03-000140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030514 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: 03697427 BUSINESS ADDRESS: STREET 1: 222 MERRIMACK ST CITY: LOWELL STATE: MA ZIP: 01852 BUSINESS PHONE: 5084599000 10-Q 1 file10q.txt ENTERPRISE BANCORP, INC. 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 EX-10 3 ex1024.txt CHANGE IN CONTROL/NONCOMPETITION AGREEMENT Exhibit 10.24 CHANGE IN CONTROL/NONCOMPETITION AGREEMENT ------------------------------------------ This Change in Control/Noncompetition Agreement (this "Agreement") is entered into as of the 20th day of April, 2003 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 Christopher W. McCarthy of Holden, 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 2 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. 3 (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 4 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. 5 (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 6 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. 7 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] 8 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/ John P. Clancy, Jr. /s/ Christopher W. McCarthy - ------------------------ ------------------------------------ 9 EX-99 4 ex99.txt COVER LETTER Exhibit 99 May 13, 2003 Securities and Exchange Commission Judiciary Plaza 450 Fifth Street, N.W. Washington, D.C. 20549 Re: Enterprise Bancorp, Inc. - Quarterly Report on Form 10-Q for Period Ended March 31, 2003 (Commission File No. 0-21021) Ladies and Gentlemen: In connection with the Quarterly Report of Enterprise Bancorp, Inc. (the "Company") on Form 10-Q for the period ended on March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned, in his respective capacities indicated below, hereby certifies, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge and belief, (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Very truly yours, /s/ George L. Duncan ------------------------------------ George L. Duncan Chairman and Chief Executive Officer (Principal Executive Officer) /s/ John P. Clancy, Jr. ------------------------------------ John P. Clancy, Jr. President and Treasurer (Principal Financial Officer) A signed original of this written statement required by Section 906 has been provided to Enterprise Bancorp, Inc. and will be retained by Enterprise Bancorp, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----