U.S. Securities and Exchange Commission Washington, D.C. 20549 Form 10-K [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _______________ Commission file number 0-21021 Enterprise Bancorp, Inc. ------------------------ (Exact name of registrant as specified in its charter) Massachusetts 04-3308902 ------------- ---------- (State or other jurisdiction of incorporation (IRS Employer Identification or organization) No.) 222 Merrimack Street, Lowell, Massachusetts, 01852 -------------------------------------------------- (Address of principal executive offices) (Zip code) (978) 459-9000 -------------- (Issuer's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: Title of each class Name of each exchange on which registered None --------------------- -------------------------------------------- Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par value per share ------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes..X... No...... Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] State the aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of a specified date within 60 days prior to the date of filing. $42,363,792 as of February 28, 2001 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: February 28, 2001, Common Stock - Par Value $0.01: 3,409,342 shares outstanding DOCUMENTS INCORPORATED BY REFERENCE Portions of the issuer's proxy statement for its annual meeting of stockholders to be held on May 1,2001 are incorporated by reference in Part III of this Form 10-K. Such information incorporated by reference shall not be deemed to specifically incorporate by reference the information referred to in Item 402(a)(8) of Regulation S-K.
ENTERPRISE BANCORP, INC. TABLE OF CONTENTS Page Number PART I Item 1 Business 3 Item 2 Properties 16 Item 3 Legal Proceedings 16 Item 4 Submission of Matters to a Vote of Security Holders 16 PART II Item 5 Market for Registrant's Common Equity and Related Stockholder Matters 17 Item 6 Selected Financial Data 18 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 19 Item 7A Quantitative and Qualitative Disclosures About Market Risk 30 Item 8 Financial Statements 33 Item 9 Changes In and Disagreements with Accountants on Accounting and Financial Disclosure 62 Part III Item 10 Directors and Executive Officers of the Registrant 62 Item 11 Executive Compensation 63 Item 12 Security Ownership of Certain Beneficial Owners and Management 63 Item 13 Certain Relationships and Related Transactions 63 Part IV Item 14 Exhibits and Reports on Form 8-K 63 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 which are other than statements of historical fact. Enterprise Bancorp, Inc. (the "company") wishes to caution readers that the following important factors, among others, may have affected and could in the future affect the company's 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 changes in laws and regulations, including federal and state banking laws and regulations, with which the company or its subsidiaries must comply, and the associated costs of compliance with such laws and regulations either currently or in the future as applicable; (ii) the effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies as well as by the Financial Accounting Standards Board, or of changes in the company's organization, compensation and benefit plans; (iii) 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; (iv) the effect of unforeseen changes in interest rates; and (v) the effect of changes in the business cycle and downturns in the local, regional or national economies. 2
PART I Item 1. Business THE COMPANY General Enterprise Bancorp, Inc. (the "company") is a Massachusetts corporation, which was organized on February 29, 1996, at the direction of Enterprise Bank and Trust Company, a Massachusetts trust company (the "bank"), for the purpose of becoming the holding company for the bank. On July 26, 1996, the bank became the wholly owned subsidiary of the company and the former shareholders of the bank became shareholders of the company. The business and operations of the company are subject to the regulatory oversight of the Board of Governors of the Federal Reserve System. To the extent that this report contains information as of a date or for a period prior to July 26, 1996, such information pertains to the bank. The company had no material assets or operations prior to completion of the holding company reorganization on July 26, 1996. Substantially all of the company's operations are conducted through the bank. The bank is a Massachusetts trust company, which commenced banking operations on January 3, 1989. The bank's deposit accounts are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount provided by law. The FDIC and the Massachusetts Commissioner of Banks (the "Commissioner") have regulatory authority over the bank. The company's headquarters and the bank's main office are located at 222 Merrimack Street in Lowell, Massachusetts. Additional branch offices are located in the Massachusetts cities and towns of Billerica, Chelmsford, Dracut, Leominster, Tewksbury, and Westford. The bank's deposit gathering and lending activities are conducted primarily in the city of Lowell and the surrounding Massachusetts towns of Andover, Billerica, Chelmsford, Dracut, Tewksbury, Tyngsboro, and Westford and in the cities of Leominster and Fitchburg. The bank offers a range of commercial, consumer and trust services with a goal of satisfying the needs of consumers, small and medium-sized businesses and professionals. Fleet Branch Acquisition On July 21, 2000 the bank completed its acquisition of two Fleet National Bank branch offices (the "Fleet branches") in connection with which the bank purchased assets comprised of loans having an approximate book value of $7.0 million, furniture, fixtures and equipment having a net book value of approximately $0.02 million, land and buildings having agreed upon values totaling $1.5 million, and cash on hand of $0.7 million. As part of this transaction, the bank assumed approximately $58.3 million in deposits. Fleet National Bank paid to the bank a cash amount of $43.0 million. The excess of cost over the fair market value of assets acquired and liabilities assumed of approximately $7.9 million has been allocated to identified intangible assets and goodwill (combined "intangible assets") and is being amortized over a ten-year period. Lending The bank specializes in lending to growing businesses, corporations, partnerships, non-profits, professionals and individuals. Loans made by the bank to businesses include commercial mortgage loans, loans guaranteed by the Small Business Administration (SBA), construction loans, revolving lines of credit, working capital loans, equipment financing, asset-based lending, letters of credit and loans under various programs issued in conjunction with the Massachusetts Development Finance Agency and other agencies. The bank also originates equipment lease financing for businesses. Loans made by the bank to individuals include residential mortgage loans, home equity loans, residential construction loans, unsecured and secured personal lines of credit and mortgage loans on investment and vacation properties. At December 31, 2000, the bank had gross loans outstanding of $313.0 million, which represented 54.7% of the company's total assets. Included in gross loans outstanding are $7.0 million in loans acquired from Fleet National Bank on July 21, 2000, consisting of $3.5 million in commercial loans, $3.2 million in residential mortgages and home equity loans and $0.3 million in consumer loans. The interest rates charged on loans vary with the degree of risk, maturity and amount, and are further subject to competitive pressures, market rates, the availability of funds, and legal and regulatory requirements. 3
At December 31, 2000, the bank's statutory lending limit, based on 20% of capital, to any single borrower was approximately $8.9 million, subject to certain exceptions provided under applicable law. At December 31, 2000, the bank had no outstanding lending relationships or commitments in excess of the legal lending limit. The following table sets forth the loan balances for certain loan categories at the dates indicated and the percentage of each category to total gross loans. <TABLE> <CAPTION> December 31, ------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------- ------------------- ------------------ ------------------ ------------------ ($ in thousands) Amount % Amount % Amount % Amount % Amount % ---------- -------- ---------- -------- ---------- ------- ---------- ------- --------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Comm'l real estate $ 120,390 38.5% $ 104,940 40.0% $ 80,207 37.1% $ 66,836 36.8% $ 52,378 36.1% Commercial 84,284 26.9% 68,177 26.0% 55,570 25.7% 42,202 23.2% 38,202 26.3% Residential mortgages 57,037 18.2% 50,156 19.1% 44,680 20.7% 42,648 23.5% 35,918 24.7% Home equity 21,229 6.8% 14,135 5.4% 13,436 6.2% 12,203 6.7% 8,255 5.7% Construction 21,894 7.0% 18,198 6.9% 16,637 7.7% 13,149 7.2% 6,474 4.4% Consumer 8,210 2.6% 6,672 2.6% 5,682 2.6% 4,657 2.6% 4,043 2.8% -------- ---------- ---------- ---------- --------- 2.8% Gross loans 313,044 100.0% 262,278 100.0% 216,212 100.0% 181,695 100.0% 145,270 100.0% Less: Deferred fees 1,226 1,124 1,000 1,111 950 Allowance for loan losses 6,220 5,446 5,234 4,290 3,895 ---------- ---------- ---------- ---------- ---------- Net loans $ 305,598 $ 255,708 $ 209,978 $ 176,294 $ 140,425 ========== ========== ========== ========== ========== </TABLE> Commercial, Commercial Real Estate and Construction Loans The following table sets forth-scheduled maturities of commercial, construction and commercial real estate loans in the bank's portfolio at December 31, 2000. The following table also sets forth the dollar amount of loans which are scheduled to mature after one year which have fixed or adjustable rates. <TABLE> <CAPTION> Commercial Real ($ in thousands) Commercial Construction Estate ---------- ------------ ------ Amounts due: <S> <C> <C> <C> One year or less $ 9,558 $ 13,119 $ 3,775 After one year through five years 29,998 2,237 10,243 Beyond five years 44,728 6,538 106,372 -------- -------- -------- $ 84,284 $ 21,894 $120,390 ======== ======== ======== Interest rate terms on amounts due after one year: Fixed $ 17,047 $ 861 $ 11,489 Adjustable 57,679 7,914 105,126 </TABLE> Scheduled contractual maturities do not reflect the actual maturities of loans. The average maturity of loans will be shorter than their contractual terms principally due to prepayments. Commercial loans include working capital loans, equipment financing (including equipment leases), and standby letters of credit, term loans and revolving lines of credit. Construction loans include construction loans to both individuals and businesses. Included in commercial loans are loans under various Small Business Administration programs amounting to $4.6 million, $4.0 million, and $4.6 million as of December 31, 2000, 1999 and 1998, respectively. 4
Commercial, commercial real estate and construction loans secured by apartment buildings, office facilities, shopping malls, raw land or other commercial property, were $211.5 million at December 31, 2000, representing an increase of $31.4 million, or 17.5%, from the previous year. This compares to an increase of $35.2 million, or 24.3%, from 1998 to 1999. Included in commercial and construction loan amounts are unsecured commercial loans and residential construction loans outstanding of $11.4 million and $3.7 million at December 31, 2000, representing increases of $1.0 million and $1.6 million, respectively. The growth in 2000 is a reflection of the $3.5 million in commercial and commercial real estate loans acquired from Fleet National Bank, the bank's continued aggressive customer-call efforts, additional loan officers hired during 1999 and 2000, continued effective advertising and increased penetration in the markets surrounding the bank's newer branches. Commercial real estate lending may entail significant additional risks compared to residential mortgage lending. Loan size is typically larger and payment experience on such loans can be more easily influenced by adverse conditions in the real estate market or in the economy in general. Construction financing involves a higher degree of risk than long term financing on improved occupied real estate. Property values at completion of construction or development can be influenced by underestimation of the construction costs that are actually expended to complete the project. Thus, the bank may be required to advance funds beyond the original commitment in order to finish the development. If projected cash flows to be derived from the loan collateral or the values of the collateral prove to be inaccurate, for example because of unprojected additional costs or slow unit sales, the collateral may have a value that is insufficient to assure full repayment. Funds for construction projects are disbursed as pre-specified stages of construction are completed. The bank has an independent loan review function that assesses the compliance of loan originations with the bank's internal policies and underwriting guidelines and monitors ongoing quality of the loan portfolio. The bank also contracts with an external loan review company to review loans in the loan portfolio, on a pre-determined schedule, based on the type, size, rating, and overall risk of the loan. In addition, a loan review committee, consisting of senior lending officers and loan review personnel, meets on a periodic basis to discuss loans on the bank's internal "watch list" and classified loan report. The overdue loan review committee, consisting of seven members of the board of directors, also meets quarterly to review and assess all loan delinquencies. Residential Loans The bank makes conventional mortgage loans on single family residential properties with original loan-to-value ratios generally up to 95% of the appraised value of the property securing the loan. These residential properties serve as the primary homes of the borrowers. The bank also originates loans on one to four family dwellings and loans for the construction of owner-occupied residential housing, with original loan-to-value ratios generally up to 80% of the property's appraised value. Residential mortgage loans made by the bank have traditionally been long-term loans made for periods of up to 30 years at either fixed or adjustable rates of interest. Depending on the current interest rate environment, management projections of future interest rates and a review of the asset/liability position of the bank, management may elect to sell or hold for the bank's portfolio residential loan production. The bank generally sells fixed rate residential mortgage loans with maturities greater than 15 years and puts variable rate loans into the bank's portfolio. The bank may retain or sell the servicing when selling the loans. The decision to hold or sell new loan production is made in conjunction with the overall asset/liability management program of the bank. Long-term fixed rate residential mortgage loans are generally originated using underwriting standards and standard documentation allowing their sale in the secondary market. All loans sold are currently sold without recourse. Residential mortgage loans were $57.0 million at December 31, 2000, representing an increase of $6.9 million, or 13.7%, from the previous year. This compares to an increase of $5.5 million, or 12.3%, in 1999, from the previous year. Residential loan origination volume, including both loans sold and retained, increased in 2000 over 1999 due to a continued favorable real estate market, offset by a decrease in demand for refinance mortgages resulting from to an increase in interest rates during the period. Included in the outstanding loan balance at December 31, 2000 are $1.2 million in residential mortgages acquired from Fleet National Bank. 5
Home Equity Loans Home equity loans are originated for the bank's portfolio for single family residential properties with maximum original loan-to-value ratios generally up to 80% of the appraised value of the property securing the loan. Home equity loans generally have fixed interest rates for a period of one or three years and subsequently adjust monthly based on changes in the prime rate. Home equity loans were $21.2 million at December 31, 2000, representing an increase of $7.1 million, or 50.2%, from the previous year. This compares to an increase of $0.7 million, or 5.2%, in 1999 compared to the previous year. The increase in the outstanding loan balance at December 31, 2000 compared to December 31, 1999 resulted primarily from favorable reception to the bank's pricing structure during 2000, which resulted in decreased residential mortgage refinance volume and increased usage of home equity products. Included in the outstanding loan balance at December 31, 2000 are $2.0 million in home equity loans acquired from Fleet National Bank. Consumer Loans Consumer loans primarily consists of secured or unsecured personal loans and overdraft protection lines extended to individual customers. Consumer loans were $8.2 million at December 31, 2000, representing an increase of $1.5 million or 23.1%, from the previous year. This compares to an increase of $1.0 million, or 17.4%, in 1999 compared to the previous year. Risk Elements Non-performing assets consist of non-accruing loans, loans past due greater than 90 days and still accruing and other real estate owned ("OREO"). Loans, on which the accrual of interest has been discontinued, including some impaired loans, are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal, or generally when a loan becomes contractually past due by 60 days or a mortgage loan becomes contractually past due by 90 days with respect to interest or principal. In certain instances, loans that have become 90 days past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection or if the principal and interest is guaranteed by the federal government or an agency thereof. OREO consists of real estate acquired through foreclosure proceedings and real estate acquired through acceptance of a deed in lieu of foreclosure. Non-performing loans include both non-accrual loans and loans past due 90 days or more but still accruing. Loans for which management considers it probable that not all contractual principal and interest will be collected are designated as impaired loans. Restructured loans are those where interest rates and/or principal payments have been restructured to defer or reduce payments as a result of financial difficulties of the borrower. Total restructured loans outstanding as of December 31, 2000 and 1999 were $224,000 and $658,000, respectively. Accruing restructured loans as of December 31, 2000 and 1999 were $167,000 and $514,000, respectively. Additional information regarding these risk elements is contained in Item 7, Management Discussion and Analysis, and Item 8, Financial Statements, contained in this report and under the heading "Allowance for Loan Losses and OREO Activity" below. Allowance for Loan Losses and OREO Activity The following table summarizes the activity in the allowance for loan losses for the periods indicated: 6
<TABLE> <CAPTION> Years Ended December 31, ------------------------------------------------------------------------------- ($ in thousands) 2000 1999 1998 1997 1996 ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Average loans outstanding $ 285,792 $ 232,843 $ 200,491 $ 162,594 $ 128,572 ============= ============= ============= ============= ============= Balance at beginning of year $ 5,446 $ 5,234 $ 4,290 $ 3,895 $ 4,107 Charged-off loans: Commercial 229 63 87 165 60 Commercial real estate - - - 125 112 Construction - 100 - - - Residential mortgage - - - - - Home equity - - - - 55 Consumer 57 9 53 11 17 ------------- ------------- ------------- ------------- ------------- Total charged-off 286 172 140 301 244 ------------- ------------- ------------- ------------- ------------- Recoveries on loans previously charged-off: Commercial 24 54 6 52 2 Commercial real estate 48 2 - 155 21 Construction 100 25 - - - Residential mortgage - - 6 2 1 Home equity 25 5 7 40 4 Consumer 10 28 35 127 4 ------------- ------------- ------------- ------------- ------------- Total recoveries 207 114 54 376 32 ------------- ------------- ------------- ------------- ------------- Net loans charged-off (recovered) 79 58 86 (75) 212 Provision charged to operations 603 270 1,030 320 - Addition related to acquired loans 250 - - - - ------------- ------------- ------------- ------------- ------------- Balance at December 31 $ 6,220 $ 5,446 $ 5,234 $ 4,290 $ 3,895 ============= ============= ============= ============= ============= Net loans charged-off (recovered) to average loans .03% .02% .04% (.05%) .16% Net loans charged-off (recovered) to allowance for loan losses 1.27% 1.07% 1.64% (1.75%) 5.44% Allowance for loan losses to ending gross loans 1.99% 2.08% 2.42% 2.36% 2.68% Allowance for loan losses to non-performing loans 575.93% 184.86% 384.85% 384.06% 165.25% Recoveries to charge-offs 72.38% 66.28% 38.57% 124.92% 13.11% </TABLE> The allowance for loan losses to non-performing loans was 575.93% at December 31, 2000 compared to 184.86% and 384.85% at December 31, 1999 and 1998, respectively. The increase resulted from nonperforming loans paid off and a strong economy during 2000. Management regularly reviews the level of non-accrual loans, levels of charge-offs and recoveries, levels of outstanding loans, and known and inherent risks in the nature of the loan portfolio. Based on this review, and taking into account considerations of loan quality, management determined that the allowance for loan loss was adequate at December 31, 2000. The following table represents the allocation of the bank's allowance for loan losses and the percentage of loans in each category to total loans for the periods ending as indicated: 7
<TABLE> <CAPTION> December 31, ------------------------------------------------------------------------------------------------------ 2000 1999 1998 1997 1996 ------------------- ------------------- ------------------ ------------------ ------------------ ($ in thousands) Amount % Amount % Amount % Amount % Amount % ---------- -------- ---------- -------- ---------- ------- ---------- ------- --------- ------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Comm'l real estate $ 2,598 38.5% $ 2,312 40.0% $ 2,591 37.1% $ 2,161 36.8% $ 2,171 36.1% Commercial 2,120 26.9% 1,490 26.0% 1,111 25.7% 844 23.2% 723 26.3% Construction 487 7.0% 926 6.9% 665 7.7% 338 7.2% 209 4.4% Residential mortgage 875 18.2% 635 19.1% 568 20.7% 525 23.5% 372 24.7% Consumer 140 9.4% 83 8.0% 194 8.8% 167 9.3% 244 8.5% Unallocated - - 105 255 176 ---------- ---------- ---------- ---------- Total $ 6,220 100.0% $ 5,446 100.0% $ 5,234 100.0% $ 4,290 100.0% $ 3,895 100.0% ========== ========== ========== ========== ========= </TABLE> The allocation of the allowance for loan losses above reflects management's judgment of the relative risks of the various categories of the bank's loan portfolio. This allocation should not be considered an indication of the future amounts or types of possible loan charge-offs. The following table sets forth information regarding non-performing assets, restructured loans and delinquent loans 30-89 days past due as to interest or principal, held by the bank at the dates indicated: <TABLE> <CAPTION> December 31, ------------------------------------------------------------------------------- ($ in thousands) 2000 1999 1998 1997 1996 ------------- ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> <C> Non-accrual loans* $ 1,054 $ 2,898 $ 1,263 $ 1,043 $ 2,237 Accruing loans > 90 days past due 26 48 97 74 120 ------------- ------------- ------------- ------------- ------------ Total non-performing loans 1,080 2,946 1,360 1,117 2,357 Other real estate owned - - 304 393 83 ------------- ------------- ------------- ------------- ------------ Total non-performing assets $ 1,080 $ 2,946 $ 1,664 $ 1,510 $ 2,440 ============= ============= ============= ============= ============ Restructured loans, not included above $ 167 $ 514 $ 538 $ 260 $ - Delinquent loans 30-89 days past due 425 1,785 1,473 2,074 2,280 Non-performing loans: Gross loans 0.34% 1.12% 0.63% 0.61% 1.62% Non-performing assets: Total assets 0.19% 0.66% 0.46% 0.47% 0.86% Delinquent loans 30-89 days past due: Gross loans 0.14% 0.68% 0.68% 1.14% 1.57% </TABLE> * Impaired loans included in non-accrual loans as of December 31, 2000 and 1999 were $0.5 million and $1.7 million, respectively. The decrease in impaired loans in 2000 from 1999 resulted primarily from one loan. Non-accrual loans decreased by $1.8 million, to $1.1 million at December 31, 2000, as compared to the prior year. The decrease was primarily attributable to non-performing loans paid off and a strong economy during 2000. The level of non-performing assets is largely a function of economic conditions and the overall banking environment, as well as the bank's prudent loan underwriting. Adverse changes in the local, regional and national economic conditions could result in an increase to non-performing assets in the future, despite prudent loan underwriting. Investment Activities The investment activity of the bank is an integral part of the overall asset/liability management program of the bank. The investment function provides readily available funds to support loan growth as well as to meet withdrawals 8
and maturities of deposits and attempts to provide maximum return consistent with liquidity constraints and general prudence, including diversity and safety of investments. The securities in which the bank may invest are subject to regulation and are limited to securities that are considered "investment grade" securities. In addition, the bank has an internal investment policy which restricts investments to the following categories: U.S. treasury securities, U.S. government agencies, U.S. agency mortgage-backed securities ("MBSs"), including collateralized mortgage obligations ("CMOs"), Federal Home Loan Bank of Boston ("FHLB") stock, federal funds, and state, county, and municipal securities ("Municipals"), all of which must be considered investment grade by a recognized rating service. The effect of changes in interest rates and the resulting impact on a MBSs' principal repayment speed and the effect on yield and market value are considered when purchasing MBSs. The credit rating of each security or obligation in the portfolio is closely monitored and reviewed at least annually by the bank's investment committee. See note 2 to the consolidated financial statements in Item 8 for further information. At December 31, 2000, 1999, and 1998 all investment securities were classified as available for sale and were carried at fair market value. The net unrealized appreciation at December 31, 2000, net of tax effects, is shown as a component of accumulated comprehensive income in the amount of $1.5 million. The following table summarizes the fair market value of investments at the dates indicated: December 31, ($ in thousands) 2000 1999 1998 ---------- --------- --------- U.S. treasuries and agencies $ 33,610 $ 29,544 $ 36,178 Mortgage backed securities 95,775 78,431 45,912 Municipals 52,498 42,491 29,608 FHLB stock 3,301 2,961 2,961 -------- -------- -------- Total investments available-for-sale $185,184 $153,427 $114,659 ======== ======== ======== The contractual maturity distribution, as of December 31, 2000, of the total bonds and obligations above with the weighted average yield for each category is as follows: <TABLE> <CAPTION> Under 1 Year 1 - 3 Years 3 - 5 Years 5 - 10 Years Over 10 Years ------------------ ------------------ ----------------- ----------------- ----------------- ($ in thousands) Balance Yield Balance Yield Balance Yield Balance Yield Balance Yield ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- <S> <C> <C> <C> <C> <C> <C> <C> <C> U.S. treasuries and agencies $ - -% $ 4,009 6.38% $ 6,033 6.98% $ 23,568 7.28% $ - -% MBSs - -% - -% 3,265 7.15% 29,846 6.05% 62,664 6.56% Municipals* 1,257 6.97% 3,098 6.93% 12,213 7.20% 18,511 6.68% 17,419 7.28% ---------- ---------- ---------- ---------- --------- $ 1,257 6.97% $ 7,107 6.62% $ 21,511 7.13% $ 71,925 6.62% $ 80,083 6.72% ========== ========== ========== ========== ======== </TABLE> * Municipal security yields and total yields are shown on a tax equivalent basis. Scheduled contractual maturities do not reflect the actual expected maturities of the investments. MBSs are shown at their final maturity. However, due to prepayments and expected amortization the actual cash flows will be faster than presented above. Similarly, included in the U.S. treasuries and agencies category is $32.6 million in securities which can be "called" before maturity. Actual maturity of these callable securities could be shorter in a falling interest rate environment. Management considers these factors when evaluating the net interest margin in the bank's asset/liability management program. The increase in investment securities available-for-sale to $185.2 million at December 31, 2000 from $153.4 million at December 31, 1999, was primarily due to deposit growth, the acquisition of two branches from Fleet National Bank, and an increase in unrealized appreciation from $(4.2) million at December 31, 1999 to $2.3 million at December 31, 2000. During the second half of 1999 the bank implemented a leveraging strategy in anticipation of the branch acquisition. The net proceeds received from the acquisition were used to pay off the borrowings. 9
See "Interest Margin Sensitivity Analysis" in Item 7A for additional information regarding the bank's callable bonds and CMOs. Source of Funds Deposits Deposits have traditionally been the principal source of the bank's funds. The bank offers a broad selection of deposit products to the general public, including personal interest checking accounts ("PIC"), savings accounts, money market accounts, individual retirement accounts (IRA) and certificates of deposit. The bank also offers commercial checking, money market, sweep, Keogh retirement and business IRA accounts and repurchase agreements to its commercial business customers. The bank does not currently use brokered deposits. The bank has offered premium rates on specially designated products from time to time in order to promote new branches and to attract customers and longer-term deposits. Management determines the interest rates offered on deposit accounts based on current and expected economic conditions, competition, liquidity needs, the volatility of the existing deposits, the asset/liability position of the bank and the overall objectives of the bank regarding the growth of relationships. The table below shows the comparison of the bank's average deposits and average rates paid for the periods indicated. The annualized average rate on total deposits reflects both interest bearing and non-interest bearing deposits. <TABLE> <CAPTION> December 31, --------------------------------------------------------------------------------------------------------- 2000 1999 1998 --------------------------------- --------------------------------- --------------------------------- Average Average % of Average Average % of Average Average % of ($ in thousands) Balance Rate Deposits Balance Rate Deposits Balance Rate Deposits ----------- -------- ----------- ----------- --------- ----------- ----------- --------- ----------- <S> <C> <C> <C> <C> <C> <C> <C> Demand $ 83,194 - 20.70% $ 63,691 - 19.66% $ 54,161 - 18.25% Savings 48,622 2.96% 12.10% 26,203 2.37% 8.09% 22,218 2.23% 7.49% PIC 75,687 1.63% 18.83% 61,293 1.80% 18.92% 58,062 1.89% 19.57% Money market 36,634 3.33% 9.11% 28,197 2.48% 8.70% 30,490 2.60% 10.28% ----------- ----------- ----------- ----------- ----------- ----------- 160,943 2.42% 40.04% 115,693 2.09% 35.71% 110,770 2.16% 37.34% Time deposits 157,818 5.32% 39.26% 144,629 5.05% 44.63% 131,773 5.38% 44.41% ----------- ----------- ----------- ----------- ----------- ----------- Total $ 401,955 3.06% 100.00% $324,013 3.00% 100.00% $296,704 3.19% 100.00% =========== =========== ======== =========== ======== =========== </TABLE> The increase in the average rate on savings accounts to 2.96% at December 31, 2000 from 2.37% at December 31, 1999 resulted primarily from growth in commercial business savings accounts. The increase in the average rate on money market accounts to 3.33% at December 31, 2000 from 2.48% at December 31, 1999 resulted primarily from increases in rates paid on commercial money market accounts and the implementation of a tiered rate personal money market product in July 2000. The increase in the average rate on time deposits to 5.32% at December 31, 2000 from 5.05% at December 31, 1999 resulted primarily from interest rate increases in the second half of 1999. Increases in interest rates were offset by growth in non-interest bearing demand accounts and a lower average rate paid on PIC accounts. See note 7 to the consolidated financial statements in Item 8 for further information. Borrowings The bank is a member of the Federal Home Loan Bank of Boston (the "FHLB"). This membership enables the bank to borrow funds from the FHLB. The bank utilizes borrowings from the FHLB to fund short term liquidity needs. This facility is an integral component of the bank's asset/liability management program. At December 31, 2000 the bank had the additional capacity to borrow up to approximately $115.9 million from the FHLB, with actual outstanding balances of $0.5 million 10
at an average rate of 5.94%. The average rate paid on FHLB borrowings for the year ended December 31, 2000 was 6.29%. The bank also borrows funds from customers secured by the bank's investment securities. These repurchase agreements represent a cost competitive funding source for the bank. These instruments are either term agreements or overnight borrowings, as a part of the bank's commercial sweep accounts. Interest rates on the bank's commercial sweep accounts are dependent on changes in the U.S. treasury market. Interest rates paid by the bank on the term repurchase agreements are based on market conditions and the bank's need for additional funds at the time of the transaction. As of December 31, 2000 the bank had $57.8 million in repurchase agreements outstanding with a weighted average interest rate of 5.86%. See note 8 to the consolidated financial statements in Item 8 for further information. Trust Preferred Securities On March 10, 2000 the company organized Enterprise (MA) Capital Trust I (the "Trust"), a statutory business trust created under the laws of Delaware. The company is the owner of all the common shares of beneficial interest of the Trust. On March 23, 2000 the Trust issued $10.5 million of 10.875% trust preferred securities. The trust preferred securities have a thirty-year maturity and may be redeemed at the option of the Trust after ten years. The proceeds from the sale of the trust preferred securities were used by the Trust, along with the company's $0.3 million capital contribution, to acquire $10.8 million in aggregate principal amount of the company's 10.875% Junior Subordinated Deferrable Interest Debentures due 2030. The company has, through the Declaration of Trust establishing the Trust, fully and unconditionally guaranteed on a subordinated basis all of the Trust's obligations with respect to distributions and amounts payable upon liquidation, redemption or repayment. Investment Management and Trust Services The bank provides a range of investment management services to individuals, family groups, trusts, foundations and retirement plans. These services include management of equity, fixed income, balanced and strategic cash management portfolios. Portfolios are managed based on the investment objectives of each client. At December 31, 2000, the bank had $280.3 million in assets under management. Additionally, in late 1999 the bank added a certified financial planner and in 2000 established securities brokerage services through a third party service arrangement with Commonwealth Equities, Inc., a licensed securities brokerage firm. Insurance and Investment Services Subsidiaries On March 21, 2000 the Massachusetts Division of Banks approved the establishment and capitalization of Enterprise Insurance Services LLC and Enterprise Investment Services LLC as direct subsidiaries of the bank subject to the bank's capital investment in each subsidiary not exceeding $50,000 and the bank's retaining ownership and control of 100% of the common stock of the subsidiaries. The bank formed these subsidiaries for the purpose of engaging in insurance sales activities and offering non-deposit investment products and related securities brokerage services to its present and future customers. During the fourth quarter of 2000 the bank commenced insurance sales activities through Enterprise Insurance Services LLC by entering into a third party service arrangement with C.J. McCarthy Insurance Agency, Inc., a full service insurance agency headquartered in Wilmington, Massachusetts. Enterprise Insurance Services will provide, through McCarthy Insurance Agency, a wide array of business-oriented insurance products and services, including property and casualty insurance, employee benefits, retirement plans, and risk-management solutions tailored to serve the specific insurance needs of businesses in a range of industries operating in the bank's market area. eCommerce Banking The bank uses a service bureau to provide Internet-based banking services to commercial customers. Major capabilities include: viewing balances; internal transfers, loan payments, ACH origination, federal tax payments; initiate stop payments and initiate wire transfer requests. 11
The bank uses an in-house turn-key solution from its core banking system vendor for retail internet banking services. During the second quarter of 2001 the Bank will be testing a similar turn-key system from the same vendor that will be designed for commercial customers. Once testing is completed on this system, commercial customers will be migrated off the service bureau solution to the new in-house solution. In addition to the services described above, both in-house solutions also give customers access to images of checks paid as well as previous account statements. The bank currently uses a vendor to design, support and host its website. In addition to access to internet banking services, the site provides information on the bank and its services as well as access to various financial management tools. The underlying structure of the site provides for dynamic maintenance of the information by bank personnel via a database driven architecture. It also includes the following major capabilities (in addition to the access point to the banking service): career opportunities; loan and deposit rates; calculators and an ATM/Branch Locator/Map. Competition The bank faces strong competition to attract deposits and to generate loans. New England's two largest banks are headquartered in neighboring Boston, and numerous other commercial banks, savings banks, cooperative banks, credit unions and savings and loan associations have one or more offices in Greater Lowell and in the Leominster/Fitchburg, Massachusetts area. Larger banks have several competitive advantages over the bank, including the ability to make larger loans to a single borrower than is possible for the bank. The greater financial resources of larger banks also allow them to offer a broad range of automated banking services, to maintain numerous branch offices and to mount extensive advertising and promotional campaigns. Competition for loans and deposits also comes from other businesses that provide financial services, including consumer finance companies, factors, mortgage brokers, insurance companies, securities brokerage firms, money market mutual funds and private lenders. Advances in and the increased use of technology, such as Internet banking and PC banking, are expected to have a significant impact on the future competitive landscape confronting financial institutions. As a general matter, regulation of the banking and financial services industries continues to undergo significant changes, some of which are intended to ease legal and regulatory restrictions while others may increase regulatory requirements. For example, the Gramm-Leach-Bliley Act of 1999 (the "GLB Act"), which was enacted on November 12, 1999, contains sections that remove the legal barriers that formerly served to separate the banking industry from the insurance and securities industries. The GLB Act also includes, however, new restrictions on financial institutions' sharing of customer information and additional consumer privacy requirements. The federal banking agencies have adopted new consumer financial privacy regulations under the GLB Act, and additional consumer privacy requirements remain under consideration at both the federal and state levels. To the extent that changes in the regulation of financial services may further increase competition, such as the sections of the GLB Act that remove the legal barriers formerly separating the banking, insurance and securities industries, these changes could result in the bank paying increased interest rates to obtain deposits while receiving lower interest rates on its loans. Under such circumstances, the bank's net interest margin would decline. In addition, any increase in the extent of regulation imposed upon the banking or financial services industries generally, such as the sections of the GLB Act that impose new consumer privacy requirements as well as the further federal and state proposals relating to these issues, could result in the bank incurring additional operating costs which could impede profitability. Notwithstanding the substantial competition with which the bank is faced, management believes that the bank has established a market niche in Greater Lowell and the Leominster/Fitchburg area which has been enhanced in recent years by the acquisition of other independent banks by the region's larger bank holding companies, and the resultant consolidation of competitors' banking operations and services within the bank's market area. Additionally, management actively seeks to enhance its market position by pursuing opportunities in new product areas as well as new technologies, in order to maintain a competitive mix of products and services, which can be delivered through multiple distribution channels at competitive prices. The bank's officers and directors have substantial business and personal ties in 12
the cities and towns in which the bank operates. The bank believes that it has established a market niche by providing its customers, composed principally of growing and privately held businesses, professionals, and consumers, with prompt and personal service based on management's familiarity and understanding of such customers' banking needs. The bank's past and continuing emphasis is to provide its customers with highly responsive personal and professional service. Supervision and Regulation General Bank holding companies and banks are subject to extensive government regulation through federal and state statutes and related regulations, which is subject to changes that can significantly affect the way in which financial service organizations conduct business. Both legislation enacted in recent years and regulatory initiatives undertaken by various governmental agencies have substantially increased the level of competition among commercial banks, thrift institutions and non-banking financial service companies, including brokerage firms, investment banks, insurance companies and mutual funds. Most recently, the GLB Act has removed the legal barriers that formerly separated the banking, insurance and securities industries. The GLB Act has also further enhanced the authority of banks and their holding companies to engage in non-banking activities. By electing to become a "financial holding company", a qualified parent company of a banking institution may now engage, directly or through its non-bank subsidiaries, in any activity that is financial in nature or incidental to such financial activity or in any other activity that is complimentary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. Moreover, under the GLB Act, banks may form "financial subsidiaries" to engage in any activity that is likewise financial in nature or incidental to a financial activity. In addition, the enactment of the federal Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 has affected the banking industry by, among other things, enabling banks and bank holding companies to expand the geographic area in which they may provide banking services. To the extent that the information in this report under the heading "Supervision and Regulation" describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any changes in applicable law or regulation may have a material effect on the business and prospects of the bank and the company. See note 10 to the consolidated financial statements in Item 8 for further information regarding regulatory capital requirements for both the company and the bank. Regulation of the Holding Company The company is a registered bank holding company under the federal Bank Holding Company Act of 1956, as amended (the "Bank Holding Company Act"). It is subject to the supervision and examination of the Board of Governors of the Federal Reserve System (Federal Reserve Board) and files reports with the Federal Reserve Board as required under the Bank Holding Company Act. Under applicable Massachusetts's law, the company is also subject to the supervisory jurisdiction of the Commissioner. The Bank Holding Company Act requires prior approval by the Federal Reserve Board of the acquisition by the company of substantially all the assets or more than five percent of the voting stock of any bank. The Bank Holding Company Act also authorizes the Federal Reserve Board to determine (by order or by regulation) what activities are so closely related to banking as to be a proper incident of banking, and thus, whether the company, either directly or indirectly through non-bank subsidiaries, can engage in such activities. The Bank Holding Company Act prohibits the company and the bank from engaging in certain tie-in arrangements in connection with any extension of credit, sale of property or furnishing of services. There are also restrictions on extensions of credit and other transactions between the bank, on the one hand, and the company, or other affiliates of the bank, on the other hand. As described above, the company also now has the ability to expand the range of activities it may engage in if it elects to become a financial holding company. A bank holding company will be able to successfully elect to be regulated as a financial holding company if all of its depositary institution subsidiaries meet certain prescribed standards pertaining to management, capital adequacy and compliance with the federal Community Reinvestment Act. Financial holding companies remain subject to regulation and oversight by the Federal Reserve 13
Board. The company believes that the bank, which is the company's sole depository institution subsidiary, presently satisfies all of the requirements that must be met to enable the company to successfully elect to become a financial holding company. However, the company has no current intention of seeking to become a financial holding company. Such a course of action may become necessary or appropriate at some time in the future depending upon the company's strategic plan. Regulation of the Bank As a trust company organized under Chapter 172 of the Massachusetts General Laws, the deposits of which are insured by the FDIC, the bank is subject to regulation, supervision and examination by the Commissioner and the FDIC. The regulations of these agencies govern many aspects of the bank's business, including permitted investments, the opening and closing of branches, the amount of loans which can be made to a single borrower, mergers, appointment and conduct of officers and directors, capital levels and terms of deposits. The Federal Reserve Board also requires the bank to maintain minimum reserves on its deposits. Federal and state regulators can impose sanctions on the bank and its management if the bank engages in unsafe or unsound practices or otherwise fails to comply with regulatory standards. Various other federal and state laws and regulations, such as truth-in-lending statutes, the Equal Credit Opportunity Act, the Real Estate Settlement Procedures Act and the Community Reinvestment Act, also govern the bank's activities. Dividends Under Massachusetts law, the company's board of directors is generally empowered to pay dividends on the company's capital stock out of its net profits to the extent that the board of directors considers such payment advisable. Massachusetts banking law also imposes substantially the same standard upon the payment of dividends by the bank to the company. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") also prohibits a bank from paying any dividends on its capital stock in the event that the bank is in default on the payment of any assessment to the FDIC or if the payment of any such dividend would otherwise cause the bank to become undercapitalized. Capital Resources Capital planning by the company and the bank considers current needs and anticipated future growth. Other than the sale of common stock in 1988 and 1989, the primary source of additional capital has been retention of earnings since the bank commenced operations. See note 10 to the consolidated financial statements in Item 8 for further information regarding regulatory capital requirements for both the company and the bank. The Company The Federal Reserve Board has adopted capital adequacy guidelines that generally require bank holding companies to maintain total capital equal to 8% of total risk-weighted assets, with at least one-half of that amount consisting of core or Tier 1 capital. Tier 1 capital for the company consists of common stockholders' equity. Total capital for the company consists of Tier 1 capital and supplementary or Tier 2 capital. Supplementary capital for the company includes a portion of the general allowance for loan losses. Assets are adjusted under the risk-based capital guidelines to take into account different levels of credit risk, with the categories ranging from 0% (requiring no additional capital) for assets such as cash, to 100% for the bulk of assets that, by their nature in the ordinary course of business, pose a direct credit risk to a bank holding company, including commercial real estate loans, commercial business loans and consumer loans. The intangible assets resulting from the Fleet branch acquisition must be deducted from Tier 1 capital in calculating the company's regulatory capital ratios. In addition, trust preferred securities may compose up to 25% of the company's Tier 1 capital (with any excess allocable to Tier 2 capital). Trust preferred proceeds contributed to the bank from the company are included in Tier 1 capital of the bank without limitation. The company contributed $10.3 million of proceeds from the sale of these securities to the bank. In addition to the risk-based capital requirements, the Federal Reserve Board requires bank holding companies to maintain a minimum "leverage" ratio of Tier 1 14
capital to total assets of 3%, with most bank holding companies required to maintain at least a 4% ratio. The Bank The bank is subject to separate capital adequacy requirements of the FDIC, which are substantially similar to the requirements of the Federal Reserve Board applicable to the company. Under the FDIC requirements, the minimum total capital requirement is 8% of assets and certain off-balance sheet items, weighted by risk. For example, cash and government securities are placed in a 0% risk category, most home mortgage loans are placed in a 50% risk category and commercial loans are placed in a 100% risk category. At least 4% of the total 8% ratio must consist of Tier 1 capital (primarily common equity including retained earnings) and the remainder may consist of subordinated debt, cumulative preferred stock and a limited amount of loan loss reserves. At the bank level, as at the company level on a consolidated basis, the intangible assets resulting from the Fleet branch acquisition must be deducted from Tier 1 capital in calculating regulatory capital ratios. In addition, the company contributed $10.3 million of proceeds from the sale of trust preferred securities to the bank during 2000. The proceeds contributed to the bank from the company are included in Tier 1 capital of the bank without limitation. Under the applicable FDIC capital requirements, the bank is also required to maintain a minimum leverage ratio. The ratio is determined by dividing Tier 1 capital by quarterly average total assets, less intangible assets and other adjustments. FDIC rules require a minimum of 3% for the highest rated banks. Banks experiencing high growth rates are expected to maintain capital positions well above minimum levels. Depository institutions, such as the bank, are also subject to the prompt corrective action framework for capital adequacy established by FDICIA. Under FDICIA, the federal banking regulators are required to take prompt supervisory and regulatory actions against undercapitalized depository institutions. FDICIA establishes five capital categories: "well capitalized", "adequately capitalized", "undercapitalized", "significantly undercapitalized", and "critically capitalized". A "well capitalized" institution has a total capital to total risk-weighted assets ratio of at least ten percent, a Tier 1 capital to total risk-weighted assets ratio of at least six percent, a leverage ratio of at least five percent and is not subject to any written order, agreement or directive; an "adequately capitalized" institution has a total capital to total risk-weighted assets ratio of at least eight percent, a Tier 1 capital to total risk-weighted assets ratio of at least four percent, and a leverage ratio of at least four percent (three percent if given the highest regulatory rating and not experiencing significant growth), but does not qualify as "well capitalized". An "undercapitalized" institution fails to meet one of the three minimum capital requirements. A "significantly undercapitalized" institution has a total capital to total risk-weighted assets ratio of less than six percent, a Tier 1 capital to total risk-weighted assets ratio of less than three percent, and a leverage ratio of less than three percent. A "critically capitalized" institution has a ratio of tangible equity to assets of two percent or less. Under certain circumstances, a "well capitalized", "adequately capitalized" or "undercapitalized" institution may be required to comply with supervisory actions as if the institution were in the next lowest category. Failure to meet applicable minimum capital requirements, including a depository institution being classified as less than "adequately capitalized" within FDICIA's prompt corrective action framework, may subject a bank holding company or its subsidiary depository institution(s) to various enforcement actions, including substantial restrictions on operations and activities, dividend limitations, issuance of a directive to increase capital and, for a depository institution, termination of deposit insurance and the appointment of a conservator or receiver. Patents, Trademarks, etc. The company holds no patents, registered trademarks, licenses (other than licenses required to be obtained from appropriate banking regulatory agencies), franchises or concessions which are material to its business. Employees At December 31, 2000, the bank employed 196 full-time equivalent employees, including 70 officers. None of the bank's employees are presently represented by a union or covered by a collective bargaining agreement. Management believes its employee relations to be excellent. 15
Item 2. Property The company's and the bank's main office is leased and located at 222 Merrimack Street, Lowell, Massachusetts. The building provides 12,366 square feet of interior space and has private customer parking along with public parking facilities in close proximity. The bank leases 30,385 square feet of space at 21-27 Palmer Street and 170 Merrimack Street, Lowell, Massachusetts. The two buildings are connected and serve as office space for operational support departments and loan officers. In April 1993, the bank purchased the branch building at 185 Littleton Road, Chelmsford, Massachusetts. The first floor of the building contains 3,552 square feet of space with a full basement and a canopy area of 945 square feet. The facility was purchased at a cost of approximately 20% of what it would have cost to build a similar facility. In March 1995, the bank purchased a branch building at 674 Boston Post Road, Billerica, Massachusetts. The building previously served as a bank branch and contains 3,700 square feet of above-grade space and is constructed on a cement slab. The building was purchased for approximately 40% of its replacement value. The bank leases space at 2-6 Central Street, Leominster, Massachusetts. The branch office provides 3,960 square feet of interior space and has seven private customer parking spaces. The bank has the option to purchase the premises on the last day of the basic term or at any time during any extended term at the price of $550,000 as adjusted for increases in the producer's price index. The bank leases space at 910 Andover Street, Tewksbury, Massachusetts. The branch office provides 4,800 square feet of interior space and has ample parking that is shared with other tenants of the building. The bank leases space at 1168 Lakeview Avenue, Dracut, Massachusetts. The branch office provides 4,922 square feet of interior space and has ample parking that is shared with other tenants of the building. In January 1999, the bank purchased 237 Littleton Road, Westford, Massachusetts. The existing building was razed and a new branch facility was constructed. The branch opened on November 22, 1999. The branch has 5,200 square feet of finished interior space, plus 2,800 square feet of storage in the basement and 21 parking spaces. On July 21, 2000, the bank purchased a former Fleet National Bank branch located 20 Drum Hill Road, Chelmsford, Massachusetts. The branch has 3,579 square feet of interior space, two drive-ups windows, an ATM, and ample parking. On July 21, 2000, the bank purchased a former Fleet National Bank branch located 233 Boston Road, N. Billerica, Massachusetts. 4,288 square feet of interior space, three drive-ups windows, an ATM, and ample parking. Management believes that the bank's present facilities are adequate and suitable for its current purposes. Item 3. Legal Proceedings The company is involved in various legal proceedings incidental to its business. Management does not believe resolution of any present litigation will have a material adverse effect on the financial condition of the company. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the quarter ended December 31, 2000. 16
PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market for Common Stock There is no established public trading market for the company's common stock. Although there are periodically private trades of the company's common stock, the company cannot state with certainty the sales price at which such transactions occur. The following table sets forth sales volume and price information, to the best of management's knowledge, for the common stock of the company for the periods indicated. <TABLE> <CAPTION> Share Share Trading Price Price Fiscal year Volume High Low ----------- ------------------ ------------------ ------------------ 2000: <S> <C> <C> <C> <C> 1st Quarter 2,000 $ 16.00 $ 16.00 2nd Quarter 2,952 16.00 16.00 3rd Quarter 3,775 16.00 16.00 4th Quarter 3,225 18.00 16.00 1999: 1st Quarter 1,600 $ 14.00 $ 14.00 2nd Quarter 135 15.00 15.00 3rd Quarter 650 15.00 15.00 4th Quarter 1,375 16.00 15.00 </TABLE> The number of shares outstanding of the company's common stock and number of shareholders of record as of February 28, 2001, were 3,409,342 and 601, respectively. Dividends The company declared and paid annual cash dividends of $0.25 per share and $0.21 per share in 2000 and 1999, respectively. Although the company expects to continue to pay an annual dividend, the amount and timing of any declaration and payment of dividends by the board of directors will depend on a number of factors, including capital requirements, regulatory limitations, the company's operating results and financial condition, anticipated growth of the company and general economic conditions. As the principal asset of the company, the bank currently provides the only source of cash for the payment of dividends by the company. Under Massachusetts law, trust companies such as the bank may pay dividends only out of "net profits" and only to the extent that such payments are deemed "judicious" by the board of directors and will not impair the bank's capital stock. FDICIA also prohibits a bank from paying any dividends on its capital stock if the bank is in default on the payment of any assessment to the FDIC or if the payment of dividends would otherwise cause the bank to become undercapitalized. These restrictions on the ability of the bank to pay dividends to the company may restrict the ability of the company to pay dividends to the holders of its common stock. The term "net profits" is not defined under the Massachusetts banking statutes, but it is generally understood that the term includes a bank's undivided profits account (retained earnings) and does not include its surplus account (additional paid-in capital). In November 1999, the bank transferred $15.0 million from undivided profits to surplus to meet certain Massachusetts statutory requirements related to the bank's pending acquisition of the additional real estate and related improvements associated with the Fleet branches to be acquired by the bank. The transfer is reflected on the bank's regulatory reports only and has no impact on the company's consolidated financial statements presented in accordance with generally accepted accounting principles. At December 31, 2000, the bank's undivided profits account (from which dividends may be paid to the company) had a balance of $8.8 million. 17
Item 6. Selected Financial Data <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------------------------- 2000 1999 1998 1997 1996 ------------------------------------------------------------------------- ($ in thousands, except per share data) EARNINGS DATA <S> <C> <C> <C> <C> <C> Net interest income $ 22,017 $ 17,239 $ 15,721 $ 13,800 $ 11,180 Provision for loan losses 603 270 1,030 320 - ---------- ----------- ----------- ---------- ----------- Net interest income after provision for loan losses 21,414 16,969 14,691 13,480 11,180 Non-interest income 3,169 2,608 2,441 1,929 1,718 Net gains (losses) on sales of investment securities 129 183 476 (37) 2 Non-interest expense 19,966 14,188 12,651 10,815 9,041 ---------- ----------- ----------- ---------- ----------- Income before income taxes 4,746 5,572 4,957 4,557 3,859 Income tax expense 1,142 1,489 1,456 1,645 1,447 ---------- ----------- ----------- ---------- ----------- Net income $ 3,604 $ 4,083 $ 3,501 $ 2,912 $ 2,412 ========== =========== =========== ========== =========== COMMON SHARE DATA 1 Basic earnings per share $ 1.08 $ 1.28 $ 1.11 $ 0.93 $ 0.77 Diluted earnings per share 1.07 1.22 1.06 0.91 0.76 Book value per share at year-end 2 10.17 9.35 8.27 7.34 6.58 Dividends paid per share 0.2500 0.2100 0.1750 0.1625 0.1500 Basic weighted average shares outstanding 3,322,364 3,187,292 3,165,134 3,152,924 3,152,046 Diluted weighted average shares outstanding 3,369,025 3,335,338 3,299,432 3,224,054 3,193,728 YEAR END BALANCE SHEET AND OTHER DATA Total assets $ 572,814 $ 443,095 $ 360,481 $ 322,623 $ 283,016 Gross loans 313,044 262,278 216,212 181,695 145,270 Allowance for loan losses 6,220 5,446 5,234 4,290 3,895 Investment securities at fair value 185,184 153,427 114,659 112,886 119,396 Federal funds sold 28,025 - 6,255 3,775 - Deposits, repurchase agreements and escrow 520,882 362,915 329,968 294,908 255,664 FHLB borrowings 470 50,070 470 1,420 4,913 Trust preferred securities 10,500 - - - - Total stockholders' equity 2 34,670 30,207 26,202 23,210 20,756 Mortgage loans serviced for others 25,699 24,001 26,491 27,307 29,427 Trust assets under management 280,284 216,731 195,361 165,658 126,284 Total assets, trust assets under management and mortgage loans serviced for others 878,797 683,827 582,333 515,588 438,727 RATIOS Net income to average total assets 2 0.71% 1.06% 1.03% 0.95% 0.94% Net income to average stockholders' equity 2 11.07% 14.59% 14.25% 13.38% 12.28% Allowance for loan losses to gross loans 1.99% 2.08% 2.42% 2.36% 2.68% Stockholders' equity to assets 2 6.07% 6.78% 7.29% 7.21% 7.33% </TABLE> 1 On January 4, 1999 the company effected a 2:1 split of its common stock through the payment of a stock dividend. All common share data has been adjusted to reflect the stock split. 2 Excludes the effect of SFAS No. 115. See note 1 to the consolidated financial statements in Item 8 for the accounting policy on investment securities. 18
Item 7. Management Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis should be read in conjunction with the company's consolidated financial statements and notes thereto contained in Item 8, the information contained in the "Business" section and other financial and statistical information contained in this annual report. Financial Condition Total Assets Total assets increased $129.7 million, or 29.3%, to $572.8 million at December 31, 2000 from $443.1 million at December 31, 1999. The increase is primarily attributable to growth in gross loans of $50.8 million, or 19.4%, which includes $7.0 million of loans purchased from Fleet National Bank, and increases in investment securities of $31.8 million, or 20.7% and federal funds sold of $28.0 million. The growth was primarily funded through deposit growth of $128.9 million or 38.6%, which included $58.3 million in deposits assumed from Fleet National Bank, an increase in repurchase agreements, including commercial sweep accounts, of $29.1 million or 101.4%, and the issuance of $10.5 million in trust preferred securities, offset by a $49.6 million decrease in short term borrowings from the FHLB. The bank received $43.0 million in cash from the purchase of the Fleet branches. These cash proceeds were used to pay down FHLB borrowings. The bank had $470,000 in outstanding borrowings from the FHLB at December 31, 2000. Loans Total gross loans were $313.0 million, or 54.7% of total assets, at December 31, 2000, compared with $262.3 million, or 59.2% of total assets, at December 31, 1999. The increase in loans outstanding was attributable to favorable economic conditions in the region, continued customer-call efforts, marketing and advertising, increased penetration in newer markets and the purchase of $7.0 million in loans from Fleet National Bank. During 2000, commercial real estate loans increased $15.5 million, or 14.7%, other loans secured by real estate increased by $10.6 million, or 15.5%, commercial loans increased by $16.1 million, or 23.6%, home equity loans increased $7.1 million, or 50.2%, and consumer loans increased $1.5 million, or 23.1%. Asset Quality The non-performing asset balance decreased to $1.1 million, at December 31, 2000, from $2.9 million the previous year. This decrease resulted from non-performing loans having been paid off and the continued strong economy during 2000. Delinquencies in the 30-89 day category decreased from $1.8 million at December 31, 1999 to $0.4 million at December 31, 2000. Non-performing assets continue to be relatively low by historical measures due to management's continued efforts to work out existing problem assets and thereby limit additions to this category, prudent underwriting standards and a strong economy. The bank uses an asset classification system, which classifies loans depending on risk of loss characteristics. The most severe classifications are "substandard" and "doubtful". At December 31, 2000, the bank classified $2.2 million and $0 as substandard and doubtful loans, respectively. Included in the substandard category is $1.1 million in non-performing loans. The balance of substandard loans are performing but possess potential weaknesses and, as a result, could become non-performing loans in the future. Allowance for Loan Losses Inherent in the lending process is the risk of loss. While the bank endeavors to minimize this risk, management recognizes that loan losses will occur and that the amount of these losses will fluctuate depending on the risk characteristics of the loan portfolio, which in turn depends on a wide variety of factors, including current and expected economic conditions, the financial condition of borrowers, the ability of borrowers to adapt to changing conditions or circumstances affecting their business, the continuity of borrowers' management teams and the credit management process. The allowance for loan losses is established through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance. 19
The bank regularly monitors the real estate market and the bank's asset quality to determine the adequacy of its allowance for loan losses through ongoing credit reviews by the credit department, an external loan review service, members of senior management, the overdue loan review committee, the executive committee and the board of directors. The bank uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other economic or market factors. The methodology includes analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the bank's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other factors including industry concentration, results of regulatory examinations, historical loss ranges, portfolio composition, economic conditions such as interest rates and other changes in the portfolio. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. The allowance for loan losses to non-performing loans increased to 575.93% at December 31, 2000 from 184.86% and 384.85% at December 31, 1999 and 1998, respectively. This substantial improvement in the ratio is due to an increase in the allowance for loan losses combined with a decrease in non-performing loans. The decrease in non-performing loans is primarily attributable to the pay-off of certain previously outstanding non-performing loans and a strong economy during 2000. The ratio of the allowance for loan losses to total gross loans outstanding declined to 1.99% at December 31, 2000 from 2.08% at December 31, 1999. The decrease in this ratio has resulted from continued growth in loans, $50.8 million, $46.1 million and $34.5 million in 2000, 1999 and 1998, respectively, that has outpaced the increase in the allowance amount, and continued improvement in the bank's level of non-performing assets. Net loans charged-off (recovered) to average loans were 0.03%, 0.02%, 0.04%, (0.05)%, and 0.16% at December 31, 2000, 1999, 1998, 1997, and 1996, respectively. Management regularly reviews the levels of non-accrual loans, levels of charge-off and recoveries, peer results, levels of outstanding loans and known and inherent risks in the loan portfolio, and will continue to monitor the need to add to the bank's allowance for loan losses. The classification of a loan or other asset as non-performing does not necessarily indicate that loan principal and interest will be ultimately uncollectable. However, management recognizes the greater risk characteristics of these assets and therefore considers the potential risk of loss on assets included in this category in evaluating the adequacy of the allowance for loan losses. Based on the foregoing, as well as management's judgment as to the risks inherent in the loan portfolio, the bank's allowance for loan losses is deemed adequate to absorb all reasonably anticipated losses from specifically known and other credit risks associated with the portfolio as of December 31, 2000. Investments Investments (including federal funds sold) totaled $213.2 million, or 37.2% of total assets, at December 31, 2000, compared to $153.4 million, or 34.6% of total assets, at December 31, 1999. As of December 31, 2000, the net unrealized appreciation in the investment portfolio was $2.3 million compared to net unrealized depreciation of $4.2 million at December 31, 1999. The net unrealized appreciation/depreciation in the portfolio fluctuates as interest rates rise and fall. Due to the fixed rate nature of the bank's investment portfolio, as rates rise the value of the portfolio declines, and as rates fall the value of the portfolio rises. The increase in net unrealized appreciation at December 31, 2000 is the result of lower interest rates at year end. The unrealized 20
appreciation will be realized if the securities are sold. The unrealized appreciation on the investment portfolio will decline as interest rates rise or as the securities approach maturity. Liquidity Liquidity is the ability to meet cash needs arising from, among other things, fluctuations in loans, investments, deposits and borrowings. Liquidity management is the coordination of activities so that cash needs are anticipated and met readily and efficiently. Liquidity policies are set and monitored by the bank's investment and asset/liability committee. The bank's liquidity is maintained by projecting cash needs, balancing maturing assets with maturing liabilities, monitoring various liquidity ratios, monitoring deposit flows, maintaining liquidity within the investment portfolio and maintaining borrowing ability at the FHLB. The bank's liability management objectives are to maintain liquidity, provide and enhance access to a diverse and stable source of funds, provide competitively priced and attractive products to customers, conduct funding at a low cost relative to current market conditions and engage in sound balance sheet management strategies. Funds gathered are used to support current asset levels and to take advantage of selected leverage opportunities. The bank funds earning assets with deposits, short-term borrowings and stockholders' equity. The bank does not currently have any brokered deposits. The bank has the ability to borrow funds from the FHLB. Management believes that the bank has adequate liquidity to meet its commitments. The company's primary source of funds is dividends from the bank and long term borrowings. Deposits and Borrowings Deposits, including escrow deposits, increased $128.9 million, or 38.6%, to $463.1 million, at December 31, 2000, from $334.2 million, at December 31, 1999. Included in the growth are $58.3 million in deposits assumed from Fleet National Bank on July 21, 2000. The bank improved its deposit mix during 2000. Lower cost checking and savings deposits increased $115.9 million during 2000 while certificates of deposit increased $13.0 million. The increase in deposits resulted primarily from the opening of the Westford branch in November 1999, the acquisition of the Fleet branches in July 2000, the market conditions resulting from the Fleet/BankBoston divestiture, competitive cash management and Internet banking products, and continued penetration in existing markets due to the bank's business development efforts. Total borrowings consisting of securities sold under agreements to repurchase (repurchase agreements) and FHLB borrowings decreased by $20.5 million from December 31, 1999 to December 31, 2000. Repurchase agreements increased $29.1 million or 101.4% during 2000 and include both commercial sweep accounts and term repurchase agreements. Commercial sweep accounts increased from $22.4 million at December 31, 1999 to $54.9 million at December 31, 2000. The increase is primarily due to the success of a tiered rate product introduced in the second half of 1999. The increase in commercial sweep accounts was offset by a decrease in term repurchase agreements from $6.3 million at December 31, 1999 to $2.9 million at December 31, 2000. FHLB borrowings decreased to $0.5 million at December 31, 2000 from $50.1 million at December 31, 1999. During the second half of 1999 the bank implemented an investment strategy to take advantage of increases in interest rates and in anticipation of the Fleet branch acquisition. The completion of the Fleet branch acquisition on July 21, 2000 resulted in net cash proceeds to the bank of $43.0 million. The bank used the cash proceeds from the Fleet branch acquisition, the net proceeds received in the company's issuance of $10.5 million in trust preferred securities and strong deposit growth to pay down FHLB borrowings. Trust Preferred Securities On March 10, 2000 the company organized Enterprise (MA) Capital Trust I (the "Trust"), a statutory business trust created under the laws of Delaware. The company is the owner of all the common shares of beneficial interest of the Trust. On March 23, 2000 Enterprise (MA) Capital Trust I (the "Trust") issued $10.5 million of 10.875% trust preferred securities. The company used the net 21
proceeds received in this issuance of trust preferred securities to pay down FHLB borrowings. Capital Adequacy The company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possible additional discretionary, supervisory actions by regulators, which, if undertaken, could have a material adverse effect on the company's consolidated financial statements. At December 31, 2000 the capital levels of both the company and the bank complied with all applicable minimum capital requirements of the Federal Reserve Board and the FDIC, respectively, and both qualified as "well-capitalized" under applicable Federal Reserve Board and FDIC regulations. The intangible assets recorded by the bank upon completion of the Fleet branch acquisition (which represent the excess of the purchase price paid over the fair value of the assets purchased and the liabilities assumed) must be deducted from Tier 1 capital in calculating the company's and the bank's regulatory capital ratios. The company raised $10.5 million from a private placement of trust preferred securities during March 2000. Trust preferred securities may compose up to 25% of the company's Tier 1 capital (with any excess allocable to Tier 2 capital). The company contributed $10.3 million of trust preferred proceeds to the bank, which amount is included in Tier 1 capital of the bank without limitation. For additional information regarding the capital requirements applicable to the company and the bank and their respective capital levels at December 31, 2000, see note 10, "Stockholders' Equity", to the consolidated financial statements contained in Item 8. Results of Operations The company's results of operations depend primarily on the results of operations of the bank. The bank's results of operations depend primarily on the bank's net interest income, the difference between income earned on its loan and investment portfolios and the interest paid on its deposits and borrowed funds, and the size of the provision for loan losses. Net interest income is primarily affected in the short-term by the level of earning assets as a percentage of total assets, the level of interest-bearing and non-interest-bearing deposits, yields earned on assets, rates paid on liabilities, the level of non-accrual loans and changes in interest rates. The provision for loan losses is primarily affected by individual problem loan situations, overall loan portfolio quality, the level of net charge-offs, regulatory examinations, an assessment of current and expected economic conditions, and changes in the character and size of the loan portfolio. Earnings are also affected by the bank's non-interest income, which consists primarily of trust fees, deposit account fees, and gains and losses on sales of securities and loans, and the bank's level of non-interest expense and income taxes. 22
Rate/Volume Analysis The table on the following page presents the bank's average balance sheet, net interest income and average rates for the years ended December 31, 2000, 1999 and 1998. The following table sets forth, among other things, the extent to which changes in interest rates and changes in the average balances of interest-earning assets and interest-bearing liabilities have affected interest income and expense during the years ended December 31, 2000 and 1999. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (1) changes in volume (change in average portfolio balance multiplied by prior year average rate); (2) changes in interest rates (change in average interest rate multiplied by prior year average balance); and (3) changes in rate and volume (the remaining difference). <TABLE> <CAPTION> December 31, ------------------------------------------------------------------------------------------------------- 2000 vs. 1999 1999 vs. 1998 ------------------------------------------------- ------------------------------------------------- Rate/ Rate/ ($ in thousands) Volume Rate Volume Total Volume Rate Volume Total ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Interest Income <S> <C> <C> <C> <C> <C> <C> <C> <C> Loans $ 4,715 $ 853 $ 194 $ 5,762 $ 3,035 $ (955) $ (154) $ 1,926 Investments 3,670 108 (95) 3,683 1,539 61 (283) 1,317 Federal funds 176 27 60 263 (517) (51) 44 (524) ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Total 8,561 988 159 9,708 4,057 (945) (393) 2,719 ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Interest Expense Savings/PIC/MM 947 381 149 1,477 106 (73) (3) 30 Time deposits 666 401 36 1,103 691 (433) (42) 216 Borrowed funds 1,675 316 359 2,350 553 195 207 955 ---------- ---------- ---------- ---------- --------- ---------- ---------- ---------- Total 3,288 1,098 544 4,930 1,350 (311) 162 1,201 ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------- Change in net interest income $ 5,273 $ (110) $ (385) $ 4,778 $ 2,707 $ (634) $ (555) $ 1,518 ========== ========== ========== ========== ========= ========== ========== ========== </TABLE> 23
AVERAGE BALANCES, INTEREST AND AVERAGE INTEREST RATES <TABLE> <CAPTION> Year Ended December 31, 2000 Year Ended December 31, 1999 Year Ended December 31, 1998 ------------------------------ --------------------------------- ------------------------------------- Average Average Average Average Interest Average Interest Average Interest ($ in thousands) Balance Interest Rate(4) Balance Interest Rate(4) Balance Interest Rate (4) ------- -------- ------- ------- -------- ------- ------- -------- -------- Assets: <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Loans (1)(2) $285,792 $26,498 9.27% $232,843 $20,736 8.91% $200,491 $18,810 9.38% Investment securities (4) 185,194 11,307 6.65 129,311 7,624 6.51 105,43 6,307 6.45 Federal funds sold 5,294 341 6.44 1,626 78 4.80 11,484 602 5.24 -------- ------- ---- -------- ------- ---- -------- ------- ---- Total interest earnings assets 476,280 38,146 8.20% 363,780 28,438 8.03% 317,410 25,719 8.26% -------- -------- ------- ------- Other assets (3) 34,317 21,395 21,626 -------- -------- ------ Total assets $510,597 $385,175 $339,036 ======== ======== ======== Liabilities and stockholders' equity: Savings, PIC and money market $160,943 $ 3,899 2.42% $115,693 $ 2,422 2.09% $110,770 $ 2,392 2.16% Time deposits 157,818 8,403 5.32 144,629 7,300 5.05 131,773 7,084 5.38 Short-term borrowings 64,534 3,827 5.93 30,243 1,477 4.88 14,683 522 3.56 -------- ------- -------- ------- -------- ------- Total interest-bearing deposits and borrowings 383,295 16,129 4.21% 290,565 11,199 3.85% 257,226 9,998 3.89% -------- ------- -------- ------- -------- ------- Non-interest bearing deposits 83,194 63,691 54,161 Other liabilities 2,921 2,765 2,578 -------- -------- -------- Total liabilities 469,410 357,021 313,965 Trust preferred securities 7,975 - - Stockholders' equity 33,212 28,154 25,071 -------- -------- -------- Total liabilities and stockholders' equity $510,597 $385,175 $339,036 ======== ======== ======= Net interest rate spread 3.99% 4.18% 4.37% Net interest income $22,017 $17,239 $15,721 ======= ======= ======= Net interest margin 4.82% 4.96% 5.11% </TABLE> (1) Average loans include non-accrual loans. (2) Average loans are net of average deferred loan fees. (3) Other assets include cash and due from banks, accrued interest receivable, allowance for loan losses, real estate acquired by foreclosure, deferred income taxes, intangible assets and other miscellaneous assets. (4) Average balances are presented at average amortized cost and average interest rates are presented on a tax-equivalent basis. The bank manages its earning assets by fully using available capital resources within what management believes are prudent credit and leverage parameters. Loans, investment securities, and federal funds sold comprise the bank's earning assets. 24
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 1999 Net Income The company had net income in 2000 of $3.6 million, or $1.08 per share and $1.07 per share on a basic and fully diluted basis, respectively, compared with net income in 1999 of $4.1 million, or $1.28 per share and $1.22 per share on a basic and fully diluted basis, respectively. The decrease in net income of $0.5 million, or 12%, was primarily the result of increased expenses and start up costs associated with numerous strategic initiatives accomplished in 2000, including the purchase of the Fleet branches, the establishment of a securities brokerage operation, numerous eCommerce initiatives, the expansion of deposit product offerings, the establishment of insurance sales operations, the upgrading of facilities, and the investment in back office operations. These expenses were offset by a $4.8 million or 28% increase in net interest income. Net Interest Income The bank's net interest income was $22.0 million for the year ended December 31, 2000, an increase of $4.8 million, or 28%, from $17.2 million for the year ended December 31, 1999. This increase was primarily a result of an increase in the bank's loan and investment balances, which were funded principally by increases in deposits and commercial sweep accounts and the issuance of trust preferred securities. Interest income on loans increased in the year ended December 31, 2000 to $26.5 million from $20.7 million for the year ended December 31, 1999. The increase was primarily due to an increase in the average loan balance from $232.8 million in fiscal 1999 to $285.8 million in 2000. The average interest rate earned on loans also increased from 8.91% in 1999 to 9.27% in 2000. The increase in the interest rate earned was primarily attributable to six interest rate increases by the Federal Reserve Board during the second half of 1999 through the first half of 2000. The effect of these rate increases was offset partially by the bank's decision to maintain its loan rates at competitive levels, which enabled the bank to realize substantial additional loan originations during 2000. Interest income on investments increased for the year ended December 31, 2000 to $11.3 million from $7.6 million for the year ended December 31, 1999. The increase was primarily due to an increase in the average investment portfolio balance from $129.3 million in 1999 to $185.2 million in 2000. The increase in investments primarily resulted from strong deposit growth within the existing the branch network and $58.3 million in deposits assumed from Fleet National Bank. Also contributing to this increase in investment income was a higher average interest rate earned on investments from 6.51% in fiscal 1999 to 6.65% in 2000, both on a tax equivalent basis. Interest expense on savings, PIC and money market accounts was $3.9 million and $2.4 million for the years ended December 31, 2000 and December 31, 1999, respectively. The increase resulted from an increase in the average balance from $115.7 million at December 31, 1999 to $160.9 million at December 31, 2000. Included in the December 31, 2000 average balance are $44.3 million in savings, PIC and money market accounts assumed from Fleet National Bank on July 21, 2000. The increased interest expense in 2000 was also attributable to a higher average interest rate paid on deposits of 2.42% in 2000 compared to 2.09% in 1999. The increase in rate is attributable to higher market interest rates, the full year impact of a tiered rate savings account introduced in the latter half of 1999 and implementation of a tiered rate personal money market account in July 2000. Interest expense on time deposits increased to $8.4 million for the year ended December 31, 2000 compared to $7.3 million for the year ended December 31, 1999. The increase was due to an increase in the average balance from $144.6 million in 1999 to $157.8 million in 2000 and an increase in the average interest rate paid from 5.05% in 1999 to 5.32% in 2000. The increase in the interest rate paid on time deposits reflects an increase in market rates over the same period. 25
Interest expense on short-term borrowings, including borrowings from the FHLB and repurchase agreements, consisting of term repurchases agreements and commercial sweep accounts, increased to $3.8 million in 2000 from $1.5 million in 1999. The increase resulted from both higher average balances and higher interest rates paid. The increase in average balance results from FHLB borrowings entered into during the latter half of 1999 in anticipation of the Fleet branch acquisition. Due to market conditions rates on these borrowings increased substantially during 2000. These borrowings were paid off in August 2000 after the bank assumed $58.3 million in deposits from Fleet National Bank. The average balance was also impacted by growth in the bank's commercial sweep product which grew from an average balance of $18.0 million in 1999 to $39.8 million in 2000. During 2000 the average balance on term repurchase agreements increased from $4.3 million at December 31, 1999 to $6.8 million at December 31, 2000. The average rate paid in 2000 on short-term borrowings increased due to higher market rates, growth in average balances, and a full year's impact of growth in the second half of 1999. The net interest rate spread and net interest margin both decreased to 3.99% and 4.82%, respectively, for the year ended December 31, 2000, from 4.18% and 4.96%, respectively, for the year ended December 31, 1999, both on a tax equivalent basis. The decrease in spread and margin primarily resulted from an increase in short term borrowings in anticipation of the Fleet branch acquisition and a rising rate environment during which the company's margin declines in the short term due to interest sensitive liabilities re-pricing more quickly than interest earning assets. Over the long term, the company's net margin is expected to increase in a rising rate environment due to a significant concentration of the loan portfolio re-pricing to the prime-lending rate. Provision for Loan Losses The provision for loan losses amounted to $603,000 and $270,000 for the years ended December 31, 2000 and 1999, respectively. Loans, before the allowance for loan losses, have increased from $261.2 million, at December 31, 1999 to $311.8 million, at December 31, 2000, an increase of 19.4%. Growth during 2000 included $7.0 million in loans purchased from Fleet National Bank. Despite the growth in the bank's loan portfolio, there has not been a significant change in the bank's underwriting practices or significant increases in loan charge-offs. Management regularly reviews the level of non-accrual loans, levels of charge-offs and recoveries, levels of outstanding loans, and known and inherent risks in the nature of the loan portfolio. The allowance for loan losses to gross loan ratio declined from 2.08% at December 31, 1999 to 1.99% at December 31, 2000. The decrease was attributable to an increase in loans outstanding that outpaced the increase in the allowance for loan losses at December 31, 2000. Non-Interest Income Non-interest income, exclusive of net gains or losses on sales of securities, increased by $561,000 to $3,169,000 for the year ended December 31, 2000, compared to $2,608,000 for the year ended December 31, 1999. The increase was primarily attributable to increases in trust income, investment commission and other income. Trust fees increased by $215,000, or 18%, due primarily to an increase in trust assets under management. Trust assets under management amounted to $280.3 million at December 31, 2000 compared to $216.7 million at December 31, 1999. During the first quarter of 2000 the company established a brokerage operation through a third party service arrangement to provide securities brokerage services to customers. Commission income from these services amounted to $93,000 for the year ended December 31, 2000. Deposit fees increased slightly from $882,000 in 1999 to $938,000 in 2000. The increase was due to deposit growth and $44.3 million in savings and checking accounts assumed from Fleet National Bank on July 21, 2000. Gains on sales of loans decreased by $59,000 from 1999 to 2000 due to slower residential mortgage production resulting from higher interest rates. 26
Other income increased by $256,000 from 1999 to 2000. The increase was primarily from higher fee income compared to the year ended December 31, 1999 for check printing, debit cards, ATM's, and safe deposit boxes. Gains (Losses) on Sales of Securities Net gains from the sales of investment securities totaled $129,000 in 2000 compared to net gains of $183,000 in 1999. The net gain resulted from sales of securities based on management's decision to take advantage of certain investment opportunities and asset/liability repositioning. Non-Interest Expense Salaries and benefits expense totaled $10,847,000 for the year ended December 31, 2000, compared with $8,395,000 in 1999, an increase of $2,452,000, or 29%. The increase resulted primarily from additional staff hired in 2000 and 1999 to support growth and strategic initiatives implemented. Occupancy expense was $3,217,000 for the year ended December 31, 2000, compared with $2,448,000 in 1999, an increase of $769,000 or 31% due to the opening of the Westford branch, the acquisition of the Fleet branches, office renovations for operational support departments and loan officers and ongoing enhancements to the bank's computer systems. Audit, legal and other professional expenses decreased by $61,000, or 9%, in 2000 primarily resulting from a decrease in year 2000 readiness preparation expense incurred in 1999, offset by increased legal costs associated with the establishment of securities brokerage and insurance sales operations during 2000. Advertising and public relations expenses increased to $644,000 for the year ended December 31, 2000 from $502,000 for the same period in 1999 primarily due to increased marketing efforts associated with the Fleet branch acquisition and the bank's growth. Office and data processing supplies expense increased to $705,000 for the year ended December 31, 2000 compared to $369,000 for the same period in 1999 primarily due to one time costs associated with the Fleet branch acquisition, bank growth, and enhancements made to marketing materials. Trust professional and custodial expenses increased by $164,000, or 48%, due to an increase in trust assets under management, additional services being provided by the trust department, and increased professional fees as a percentage of assets. Other operating expense increased to $2,168,000 for the year ended December 31, 2000 compared to $1,438,000 for the same period in 1999 primarily due to the bank's growth, one time costs associated with the branch acquisition, and the numerous strategic initiatives implemented during the year. The primary increases were for postage, ATM's, internet banking, telephones, training, contributions, and courier services. Income Tax Expense The company's effective tax rate for the year ended December 31, 2000 was 24.1% compared to 26.7% for the year ended December 31, 1999. The reduction in rate is primarily due to the combination of lower pretax income and income from tax exempt municipal securities. 27
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998 Net Income The company had net income in 1999 of $4.1 million, or $1.28 per share and $1.22 per share on a basic and fully diluted basis, respectively, compared with net income in 1998 of $3.5 million, or $1.11 per share and $1.06 per share on a basic and fully diluted basis, respectively. (All per share amounts have been restated to give effect to a 2:1 stock split, effected through a stock dividend, effective January 4, 1999.) The increase in net income of $.6 million, or 16.6%, was primarily a result of an increase in net interest income of $1.5 million as the result of an increase in earning assets. Net Interest Income The bank's net interest income was $17.2 million for the year ended December 31, 1999, an increase of $1.5 million, or 9.7%, from $15.7 million in the year ended December 31, 1998, primarily a result of an increase in the bank's loan and investment balances funded principally by increases in deposits and short term borrowings. Interest income on loans increased in the year ended December 31, 1999 to $20.7 million from $18.8 million for the year ended December 31, 1998. The increase was primarily due to an increase in the average gross loan balance from $200.5 million in fiscal 1998 to $232.8 million in fiscal 1999. Partially offsetting the increase was a decrease in the average interest rate earned on loans from 9.38% in fiscal 1998 to 8.91% in fiscal 1999. The decrease in the interest rate earned was primarily attributable to the bank originating larger loans at competitive rates. The decrease also resulted from three decreases in the prime lending rate during the fourth quarter of 1998. These decreases lowered the yield for most of 1999 and were partially offset by three rate increases in the second half of 1999, which did not fully impact loans that re-priced in 2000. Interest income on investments increased for the year ended December 31, 1999 to $7.6 million from $6.3 million for the year ended December 31, 1998. The increase was primarily due to an increase in the average investment portfolio balance from $105.4 million in fiscal 1998 to $129.3 million in fiscal 1999. Also contributing to the increase was an increase in the average interest rate earned on investments from 6.45% in fiscal 1998 to 6.51% in 1999, both on a tax equivalent basis. Interest expense on savings, PIC and money market accounts remained consistent at $2.4 million for the years ended December 31, 1999 and December 31, 1998. An increase in average balances from $110.8 million in fiscal 1998 to $115.7 million in fiscal 1999 was offset by a decline in interest rate paid from 2.16% in fiscal 1998 to 2.09% in fiscal 1999. Interest expense on time deposits increased to $7.3 million for the year ended December 31, 1999 compared to $7.1 million for the year ended December 31, 1998. The increase was due to an increase in the average balance from $131.8 million in fiscal 1998 to $144.6 million in fiscal 1999. The increase in balances was partially offset by a decline in the average interest rate paid from 5.38% in fiscal 1998 to 5.05% in fiscal 1999. The decline in the interest rate paid on time deposits was due to both the run-offs of higher rate time deposits and the decline in rates offered by the bank, in response to changes in the market. Management will, from time to time, offer special programs with interest rates slightly higher than market rates on certificates of deposit to generate market share and penetration at the newer branches. Interest expense on short-term borrowings, including borrowings from the FHLB and repurchase agreements, increased to $1.5 million in fiscal 1999 from $0.5 million in fiscal 1998. The increase in average interest rate paid was due to increases in FHLB borrowings and sweep accounts, which bear higher rates of interest. The net interest rate spread and net interest margin both decreased to 4.18% and 4.96%, respectively, for the year ended December 31, 1999, from 4.37% and 5.11%, respectively, for the year ended December 31, 1998, both on a tax equivalent basis. The decrease in spread and margin primarily resulted from a decrease in loan yields. 28
Provision for Loan Losses The provision for loan losses amounted to $270,000 and $1,030,000 for the years ended December 31, 1999 and 1998, respectively. Loans, before the allowance for loan losses, increased from $215.2 million, at December 31, 1998 to $261.2 million, at December 31, 1999, or an increase of 21.3%. Despite the growth in the bank's loan portfolio, there was not a significant change in the bank's underwriting practices or significant increases in loan charge-offs. Furthermore, 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 further additions to the allowance for loan loss were not necessary during the second half of 1999. Accordingly, the allowance for loan loss to gross loan ratio declined from 2.42% at December 31, 1998 to 2.08% at December 31, 1999. Non-Interest Income Non-interest income, exclusive of net gains or losses on sales of securities, increased by $167,000 to $2,608,000 for the year ended December 31, 1999, compared to $2,441,000 for the year ended December 31, 1998. This increase was a result of increases in trust fees and other income. Deposit fees decreased slightly from $905,000 in 1998 to $882,000 in 1999. The decrease was due to lower overdraft fees. Trust fees increased by $208,000, or 20.7%, due primarily to stock market appreciation and an increase in trust assets under management. Gains on sales of loans decreased by $75,000 from 1998 to 1999 due to less loan production due to higher interest rates and management's decision to hold more loans in the loan portfolio. Other income increased by $57,000 from 1998 to 1999. Increases in check printing and wire fees were partially offset by a reduction in loan servicing income. Gains (Losses) on Sales of Securities Net gains from the sales of investment securities totaled $183,000 in 1999 compared to net gains of $476,000 in 1998. The net gain resulted from sales of securities based on management's decision to take advantage of certain investment opportunities and asset/liability repositioning. Non-Interest Expense Salaries and benefits expense totaled $8,395,000 for the year ended December 31, 1999, compared with $7,327,000 in 1998, an increase of $1,068,000, or 14.6%. This increase was primarily the result of additional staff hired in 1998 and 1999 due to bank growth and strategic initiatives implemented by the bank. Occupancy expense was $2,448,000 for the year ended December 31, 1999, compared with $2,196,000 in 1998, an increase of $252,000 or 11.5% due the opening of the Westford branch, office renovations for operational support departments and loan officers and ongoing enhancements to the bank's computer systems. Audit, legal and other professional expenses decreased by $48,000, or 6.5%, in 1999 primarily as a result of expenses associated with the implementation of certain tax strategies in 1998 not incurred in 1999. Advertising and public relations expenses increased to $502,000 for the year ended December 31, 1999 from $499,000 in 1998. Office and data processing supplies expense increased by $27,000, or 7.9%, in the year ended December 31, 1999 as compared to 1998. 29
Trust professional and custodial expenses increased by $50,000, or 17.2%, in 1999 as compared to 1998 due to an increase in trust assets under management, additional services being provided by the trust department, and increased professional fees as a percentage of assets. Income Tax Expense The company's effective tax rate for the year ended December 31, 1999 was 26.7% compared to 29.4% for the year ended December 31, 1998. The reduction in rate is a result of the implementation of certain tax strategies. Accounting Rule Changes The company adopted Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" on January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair market value. Under this statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Implementation of SFAS No. 133 had no material impact on the company's consolidated financial statements. Impact of Inflation and Changing Prices A bank's asset and liability structure is substantially different from that of an industrial company in that virtually all assets and liabilities of a bank are monetary in nature. Management believes the impact of inflation on financial results depends upon the bank's ability to react to changes in interest rates and by such reaction, reduce the inflationary impact on performance. Interest rates do not necessarily move in the same direction, or at the same magnitude, as the prices of other goods and services. As discussed previously, management seeks to manage the relationship between interest-sensitive assets and liabilities in order to protect against wide net interest income fluctuations, including those resulting from inflation. Various information shown elsewhere in this annual report will assist in the understanding of how well the bank is positioned to react to changing interest rates and inflationary trends. In particular, the Interest Margin Sensitivity Analysis contained in Item 7A and other maturity and repricing information of the bank's assets and liabilities in this report contain additional information. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Margin Sensitivity Analysis The company's primary market risk is interest rate risk, specifically, changes in the interest rate environment. The bank's investment committee is responsible for establishing policy guidelines on acceptable exposure to interest rate risk and liquidity. The investment committee is comprised of certain members of the Board of Directors and certain members of senior management. The primary objectives of the company's asset/liability policy is to monitor, evaluate and control the bank's interest rate risk, as a whole, within certain tolerance levels while ensuring adequate liquidity and adequate capital. The investment committee establishes and monitors guidelines for the net interest margin sensitivity, equity to capital ratios, liquidity, Federal Home Loan Bank borrowing capacity and loan to deposit ratio. The asset/liability strategies are reviewed continually by management and presented and discussed with the investment committee on at least a quarterly basis. The asset/liability strategies are revised based on changes in interest rate levels, general economic conditions, competition in the marketplace, the current position of the bank, anticipated growth of the bank and other factors. 30
One of the principal factors in maintaining planned levels of net interest income is the ability to design effective strategies to cope with the impact on future net interest income of changes in interest rates. The balancing of the changes in interest income from interest earning assets and the interest expense of interest bearing liabilities is done through the asset/liability management program. The bank's simulation model analyzes various interest rate scenarios. Varying the future interest rate environment affects prepayment speeds, reinvestment rates, maturities of investments due to call provisions, changes in interest rates on various assets and liability accounts based on different indices, and other factors, which vary under the different scenarios. The investment committee periodically reviews guidelines or restrictions contained in the asset/liability policy and adjusts them accordingly. The bank's current asset/liability policy is designed to limit the impact on the cumulative net interest income to 10% in the 24 month period following the date of the analysis, in a rising and falling rate shock analysis of 100 and 200 basis points. The following table summarizes the projected cumulative net interest income for a 24-month period from the company's interest bearing assets and liabilities as of December 31, 2000, resulting from a 200 basis point upward shift in the prime rate, 200 basis point downward shift in the prime rate and no change in the prime rate scenarios from the bank's asset/liability simulation model. Other rates (i.e., deposit, loan, and investment rates) have been changed accordingly. It should be noted that the interest rate scenarios used do not necessarily reflect management's view of the "most likely" change in interest rates over the next 24 months. Furthermore, since a static balance sheet is assumed, the results do not reflect the anticipated future net interest income of the company. <TABLE> <CAPTION> December 31, 2000 ------------------------------------------------ Rates Rise Rates Rates Fall ($ in thousands) 200 BP Unchanged 200 BP ------------- -------------- ------------- Interest Earning Assets: <S> <C> <C> <C> Variable rate loans $ 48,259 $ 42,663 $ 37,627 Fixed rate loans 13,128 12,794 12,500 Callable securities 4,597 4,427 4,258 Mortgage backed securities 12,634 12,131 11,161 Municipal securities 5,625 5,594 5,569 Fixed maturity treasury and agency securities 131 124 118 Other investments 4,077 4,021 3,906 ------------- -------------- ------------- Total interest income 88,451 81,754 75,139 ------------- -------------- ------------- Interest Earning Liabilities: Time deposits 18,738 14,981 12,424 PIC, money market, savings 12,287 10,250 8,840 FHLB borrowings and repurchase agreements 7,480 6,519 5,112 ------------- -------------- ------------- Total interest expense 38,505 31,750 26,376 ------------- -------------- ------------- Net interest income $ 49,946 $ 50,004 $ 48,763 ============= ============== ============= </TABLE> As of December 31, 2000, analysis indicated that the sensitivity of the net interest margin was in compliance with policy. Management estimates that, in a falling rate environment, there would be a reduction of the net interest income due to slower reductions in rates paid on deposits and increased cash flows from the company's loan and investment portfolios, which would be reinvested at lower marginal rates as rates fall, assuming a static balance sheet. Management estimates that, in a rising rate environment, there would be a small reduction in net interest income, over a 2 year period, due to the deposits repricing faster than the bank's loans and investments which have a longer duration. Over the long term, the bank's net interest margin increases in a rising rate environment. 31
The results and conclusions reached from the December 31, 2000 simulation are similar to the results of the December 31, 1999 simulation. As shown in the following table, the 24-month net interest margin projection from the December 31, 1999 model reflects a decline when interest rates fall and a smaller decline when rates rise. <TABLE> <CAPTION> December 31, 1999 ------------------------------------------------ Rates Rise Rates Rates Fall ($ in thousands) 200 BP Unchanged 200 BP ------------- -------------- ------------- <S> <C> <C> <C> Interest earning assets $ 70,714 $ 65,206 $ 58,928 Interest earning liabilities 33,278 27,276 22,902 ------------- -------------- ------------- Net interest income $ 37,436 $ 37,930 $ 36,026 ============= ============== ============= </TABLE> Maturity information of the company's loan portfolio, investment portfolio, certificates of deposit, and short-term borrowings are contained above under the caption "Investment Activities" and in Part II, Item 8 in Notes 7 and 8 to the company's financial statements. Management uses this information in the simulation model along with other information about the bank's assets and liabilities. Management makes certain prepayment assumptions based on an analysis of market consensus and management projections, regarding how the factors discussed above will affect the assets and liabilities of the bank as rates change. One of the more significant changes in the anticipated maturity of assets occurs in the investment portfolio, specifically the reaction of mortgage backed securities (including collateralized mortgage obligations) and callable securities as rates change. The following table reflects management's estimates of when principal, shown at amortized cost, of CMOs and callable securities, held in the bank's portfolio as of December 31, 2000, will be repaid and the securities' weighted average interest rates under three scenarios: interest rates up 200 basis points (BP), down 200 basis points and no change. <TABLE> <CAPTION> Up 200 BP No Change Down 200 BP ------------------------ ------------------------ ------------------------ Amortized Yield Amortized Yield Amortized Yield ($ in thousands) Cost Rate Cost Rate Cost Rate ------------- -------- ------------- ------- ------------- -------- <S> <C> <C> <C> <C> <C> <C> 0 - 12 Months $ 17,209 6.40% $ 18,717 6.43% $ 41,945 6.51% 13 - 24 Months 28,082 6.54% 35,561 6.67% 48,830 6.57% 25 - 36 Months 15,173 6.51% 15,711 6.53% 13,643 6.70% 37 - 48 Months 13,747 6.45% 18,020 6.67% 18,094 6.72% Over 48 Months 52,621 6.64% 38,823 6.47% 4,320 5.88% ------------- ------------- ------------- Total $ 126,832 6.56% $ 126,832 6.56% $ 126,832 6.56% ============= ============= ============= </TABLE> Management also periodically assesses sensitivity of the change in the net value of assets and liabilities (MVPE) under different scenarios. As interest rates rise, the value of interest-bearing assets generally declines while the value of interest-bearing liabilities increases. Management monitors the MVPE on at least an annual basis. Although management does consider the effect on the MVPE when making asset/liability strategy decisions, the primary focus is on managing the effect on the net interest margin under changing rate environments. 32
Item 8. Financial Statements Index to Consolidated Financial Statements ------------------------------------------ Page Independent Auditors' Report 34 Consolidated Balance Sheets as of December 31, 2000 and 1999 35 Consolidated Statements of Income for the years ended 36 December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Stockholders' Equity 37 for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended 38 December 31, 2000, 1999 and 1998 Notes to the Consolidated Financial Statements 40 33
Independent Auditors' Report ---------------------------- The Board of Directors Enterprise Bancorp, Inc. We have audited the accompanying consolidated balance sheets of Enterprise Bancorp, Inc. and subsidiaries (the "Company") as of December 31, 2000 and 1999, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Enterprise Bancorp, Inc. and subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP - ----------------------------- January 8, 2001 Boston, Massachusetts 34
ENTERPRISE BANCORP, INC. Consolidated Balance Sheets December 31, 2000 and 1999 <TABLE> <CAPTION> ($ in thousands) 2000 1999 ------------- ------------- Assets ------ Cash and cash equivalents: <S> <C> <C> Cash and due from banks (Note 15) $ 26,080 17,089 Daily federal funds sold 28,025 - ------------- ------------- Total cash and cash equivalents 54,105 17,089 ------------- ------------- Investment securities at fair value (Notes 2 and 8) 185,184 153,427 Loans, less allowance for loan losses of $6,220 in 2000 and $5,446 in 1999 (Notes 3 and 8) 305,598 255,708 Premises and equipment (Note 4) 10,903 7,691 Accrued interest receivable (Note 5) 4,078 3,264 Deferred income taxes, net (Note 13) 2,209 4,071 Prepaid expenses and other assets 2,735 1,590 Income taxes receivable 415 255 Intangible assets 7,587 - ------------- ------------- Total assets $ 572,814 443,095 ============= ============= Liabilities and Stockholders' Equity Deposits (Note 7) $ 461,975 333,423 Short-term borrowings (Notes 2 and 8) 58,271 78,767 Escrow deposits of borrowers 1,106 795 Accrued expenses and other liabilities 3,418 1,932 Accrued interest payable 1,389 715 ------------- ------------- Total liabilities 526,159 415,632 ------------- ------------- Commitments and contingencies (Notes 4, 8, 14 and 15) Trust preferred securities (Note 9) $ 10,500 - Stockholders' equity (Notes 1, 10 and 11): Preferred stock, $0.01 par value per share; 1,000,000 shares authorized; no shares issued - - Common stock $0.01 par value per share; 10,000,000 shares authorized at December 31, 2000 and 1999, respectively; 3,408,667 and 3,229,893 shares issued and outstanding at December 31, 2000 and 1999, respectively 34 32 Additional paid-in capital 17,843 16,149 Retained earnings 16,793 14,026 Accumulated other comprehensive income 1,485 (2,744) ------------- ------------- Total stockholders' equity 36,155 27,463 ------------- ------------- Total liabilities and stockholders' equity $ 572,814 443,095 ============= ============= </TABLE> See accompanying notes to consolidated financial statements. 35
ENTERPRISE BANCORP, INC. Consolidated Statements of Income Years Ended December 31, 2000, 1999 and 1998 <TABLE> <CAPTION> ($ in thousands, except per share data) 2000 1999 1998 ------------- -------------- ------------- Interest and dividend income: <S> <C> <C> <C> Loans $ 26,498 20,736 18,810 Investment securities 11,307 7,624 6,307 Federal funds sold 341 78 602 ------------- -------------- ------------- Total interest income 38,146 28,438 25,719 ------------- -------------- ------------- Interest expense: Deposits 12,302 9,722 9,476 Borrowed funds 3,827 1,477 522 ------------- -------------- ------------- Total interest expense 16,129 11,199 9,998 ------------- -------------- ------------- Net interest income 22,017 17,239 15,721 Provision for loan losses (Note 3) 603 270 1,030 ------------- -------------- ------------- Net interest income after provision for loan losses 21,414 16,969 14,691 ------------- -------------- ------------- Non-interest income: Trust fees 1,430 1,215 1,007 Investment commission income 93 - - Deposit service fees 938 882 905 Net gains on sales of investment securities (Note 2) 129 183 476 Gains on sales of loans 95 154 229 Other income 613 357 300 ------------- -------------- ------------- Total non-interest income 3,298 2,791 2,917 ------------- -------------- ------------- Non-interest expense: Salaries and employee benefits (Note 12) 10,847 8,395 7,327 Occupancy expenses (Note 4 and 14) 3,217 2,448 2,196 Audit, legal and other professional fees 635 696 744 Advertising and public relations 644 502 499 Office and data processing supplies 705 369 342 Trust professional and custodial expenses 504 340 290 Amortization of intangible assets 351 - - Trust preferred expense 895 - - Other operating expenses 2,168 1,438 1,253 ------------- -------------- ------------- Total non-interest expense 19,966 14,188 12,651 ------------- -------------- ------------- Income before income taxes 4,746 5,572 4,957 Income tax expense (Note 13) 1,142 1,489 1,456 ------------- -------------- ------------- Net income $ 3,604 4,083 3,501 ============= ============== ============= Basic earnings per share $ 1.08 1.28 1.11 ============= ============== ============= Diluted earnings per share $ 1.07 1.22 1.06 ============= ============== ============= Basic weighted average common shares outstanding 3,322,364 3,187,292 3,165,134 ============= ============== ============= Diluted weighted average common shares outstanding 3,369,025 3,335,338 3,299,432 ============= ============== ============= </TABLE> See accompanying notes to consolidated financial statements. 36
ENTERPRISE BANCORP, INC. Consolidated Statements of Changes in Stockholders' Equity Years Ended December 31, 2000, 1999 and 1998 <TABLE> <CAPTION> Common Stock Additional Comprehensive Income Total -------------------- Paid-in Retained -------------------- Stockholder's ($ in thousands) Shares Amount Capital Earnings Period Accumulated Equity ------ ------ ------- -------- ------ ----------- ------ <S> <C> <C> <C> <C> <C> <C> Balance at December 31, 1997 3,160,434 32 15,515 7,663 635 23,845 --------- -- ------ ----- --- ------ Comprehensive income Net Income 3,501 3,501 3,501 Unrealized appreciation on securities, net of reclassification 361 361 361 ------- --- ----- Total comprehensive income $ 3,862 ======= Common stock dividend declared ($0.175 per share) (554) (554) Stock options exercised (Note 11) 7,250 - 45 45 -- --------- ---- ------ ------ ------- ------ -------- Balance at December 31, 1998 3,167,684 32 15,560 10,610 996 27,198 --------- --- ------ ------ ------- ------ -------- Comprehensive income Net Income 4,083 4,083 4,083 Unrealized depreciation on securities, net of reclassification (3,740) (3,740) (3,740) ------- Total comprehensive income $ 343 ======= Common stock dividend declared ($0.210 per share) (667) (667) Common stock issued 27,054 388 388 Stock options exercised (Note 11) 35,155 201 201 --------- ------ --------- ------- -------- ------- Balance at December 31, 1999 3,229,893 $ 32 $ 16,149 $14,026 $(2,744) $27,463 ========= ====== ========= ======= ======== ======= Comprehensive income Net Income 3,604 3,604 3,604 Unrealized appreciation on securities, net of reclassification 4,229 4,229 4,229 ------- Total comprehensive income $ 7,833 ======= Tax benefit on non-qualified stock options exercised - 377 377 Common stock dividend declared ($0.250 per share) (837) (837) Common stock issued 55,804 1 585 586 Stock options exercised (Note 11) 122,970 1 732 733 --------- ------- --------- ------- --------- ------- Balance at December 31, 2000 3,408,667 $ 34 $ 17,843 $16,793 $ 1,485 $36,155 ========= ======= ========= ======= ========= ======= Disclosure of reclassification amount: 2000 1999 1998 --------- -------- ------- Gross unrealized appreciation (depreciation) arising during the period $ 6,515 $(5,567) $ 994 Tax (expense) benefit (2,201) 1,947 (321) --------- ------- ------ 37
Unrealized holding appreciation (depreciation), net of tax 4,314 (3,620) 673 --------- ------- ------ Less: reclassification adjustment for gains included in net income (net of $44, $63, and $164 tax, respectively) 85 120 312 --------- ------- ------ Unrealized appreciation (depreciation) on securities, net of reclassification $ 4,229 $(3,740) $ 361 ========= ======= ====== </TABLE> See accompanying notes to consolidated financial statements. 38
ENTERPRISE BANCORP, INC. Consolidated Statements of Cash Flows Years Ended December 31, 2000, 1999 and 1998 <TABLE> <CAPTION> ($ in thousands) 2000 1999 1998 --------- ---------- -------- Cash flows from operating activities: <S> <C> <C> <C> Net income $ 3,604 4,083 3,501 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 603 270 1,030 Depreciation and amortization 1,717 1,374 1,134 Amortization of intangible assets 351 -- -- Net gains on sale of investments (129) (183) (476) Gain on sale of loans (95) (154) (229) Loss on sale of real estate -- 54 14 (Increase) decrease in: Loans held for sale, net of gain (3) (735) 229 Accrued interest receivable (814) (840) 547 Prepaid expenses and other assets (1,145) (727) (218) Deferred income taxes (325) (274) (363) Income taxes receivable (160) 16 (51) Increase(decrease) in: Accrued expenses and other liabilities 1,486 (290) 338 Accrued interest payable 674 92 57 ----- ----- ----- Net cash provided by operating activities 5,764 2,686 5,513 ----- ----- ----- Cash flows from investing activities: Proceeds from sales of investment securities 10,971 12,524 21,252 Proceeds from maturities, calls and paydowns of investment securities 14,392 17,539 40,388 Purchase of investment securities (50,558) (74,558) (62,476) Proceeds from sales of real estate acquired by foreclosure -- 250 173 Net increase in loans (50,645) (45,111) (34,812) Additions to premises and equipment, net (4,946) (4,633) (1,270) Cash paid for assets in excess of liabilities (7,688) -- -- -------- ------- -------- Net cash used in investing activities (88,474) (93,989) (36,745) -------- -------- -------- Cash flows from financing activities: Net increase in deposits 128,552 15,757 34,417 Net increase (decrease) in short-term borrowings (20,496) 66,682 (382) Proceeds from issuance of trust preferred securities 10,500 -- -- Net increase in escrow deposits of borrowers 311 108 75 Cash dividends paid (837) (667) (554) Proceeds from issuance of common stock 586 388 -- Proceeds from exercise of stock options 1,110 201 45 Net cash provided by financing activities 119,726 82,469 33,601 Net increase (decrease) in cash and cash equivalents 37,016 (8,834) 2,369 Cash and cash equivalents at beginning of year 17,089 25,923 23,554 --------- ------- ------ Cash and cash equivalents at end of year $ 54,105 17,089 25,923 ========= ======= ====== </TABLE> See accompanying notes to consolidated financial statements. (Continued) 39
ENTERPRISE BANCORP, INC. Consolidated Statements of Cash Flows (Continued) Years Ended December 31, 2000, 1999 and 1998 2000 1999 1998 ---- ---- ---- Supplemental financial data: Cash paid for: Interest $16,337 11,107 9,941 Income taxes 1,348 1,588 1,996 See accompanying notes to consolidated financial statements. 40
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements Years Ended December 31, 2000, 1999 and 1998 (1) Summary of Significant Accounting Policies (a) Holding Company Formation - Agreement and Plan of Reorganization Enterprise Bancorp, Inc. (the "company") was organized on February 29, 1996 at the direction of Enterprise Bank and Trust Company (the "bank") for the purpose of becoming the holding company of the bank (the "Reorganization"). Upon the effectiveness of the Reorganization, the bank became the wholly owned subsidiary of the company and the former shareholders of the bank became the shareholders of the company. (b) Basis of Presentation The consolidated financial statements of Enterprise Bancorp, Inc. include the accounts of the company and its wholly owned subsidiaries, Enterprise Bank and Trust Company and Enterprise (MA) Capital Trust I (the "Trust"). The Trust, is a statutory business trust created under the laws of Delaware and was organized on March 10, 2000 for the purpose of issuing trust preferred securities. The bank has two wholly owned subsidiaries, Enterprise Insurance Services LLC and Enterprise Investment Services LLC. These subsidiaries were organized on March 21, 2000 for the purpose of engaging in insurance sales activities and offering non-deposit investment products and related securities brokerage services to its present and future customers. The bank also has a substantially owned subsidiary, Enterprise Realty Trust, Inc., which invests in commercial and residential mortgage loans originated by the bank. During 2000 the bank dissolved its wholly owned subsidiary, Enterprise Securities Corporation, Inc., which was incorporated on March 1, 1991 to hold certain investment securities. During 1999 the bank dissolved its wholly owned subsidiary, ERT Holdings, Inc., which served as the vehicle for the bank's indirect ownership of Enterprise Realty Trust, Inc. Certain legislation enacted during the year made it unnecessary for ERT Holdings, Inc. to own Enterprise Realty Trust, Inc., and, accordingly, it transferred its shares in Enterprise Realty Trust, Inc. to the bank and was dissolved. The business and operations of the company are subject to the regulatory oversight of the Board of Governors of the Federal Reserve System. The Massachusetts Commissioner of Banks also retains supervisory jurisdiction over the company. To the extent that the accompanying financial statements contain information as of a date or for a period prior to July 26, 1996, such information pertains to the bank. The company had no material assets or operations prior to completion of the Reorganization on July 26, 1996. Enterprise Bank and Trust Company is a Massachusetts trust company, which commenced banking operations on January 3, 1989. The bank's main office is located at 222 Merrimack Street in Lowell, Massachusetts. The bank began offering trust services in June of 1992. Branch offices were opened in Chelmsford, Massachusetts in June of 1993, Leominster, Massachusetts in May of 1995, Billerica, Massachusetts in June of 1995, Tewksbury, Massachusetts in October of 1996, Dracut, Massachusetts in November of 1997, and Westford, Massachusetts in November 1999. The bank also acquired two branches (in Chelmsford and Billerica) by acquisition in July 2000. The bank's deposit gathering and lending activities are conducted primarily in Lowell and the surrounding Massachusetts cities and towns of Andover, Billerica, Chelmsford, Dracut, Tewksbury, Tyngsboro, Westford, Leominster and Fitchburg. The bank offers a range of commercial and consumer services with a goal of satisfying the needs of consumers, small and medium-sized businesses and professionals. (Continued) 41
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements The bank's deposit accounts are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC") up to the maximum amount provided by law. The FDIC and the Massachusetts Commissioner of Banks (the "Commissioner") have regulatory authority over the bank. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported values of assets and liabilities at the balance sheet date and income and expenses for the years. Actual results, particularly regarding the estimate of the allowance for loan losses may differ significantly from these estimates. (c) Investment Securities Investment securities that are intended to be held for indefinite periods of time but which may not be held to maturity or on a long-term basis are considered to be "available for sale" and are carried at fair value. Net unrealized appreciation and depreciation on investments available for sale, net of applicable income taxes, are reflected as a component of accumulated comprehensive income. Included as available for sale are securities that are purchased in connection with the company's asset/liability risk management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other related factors. In instances where the company has the positive intent to hold to maturity, investment securities will be classified as held to maturity and carried at amortized cost. At December 31, 2000 and 1999, all of the company's investment securities were classified as available for sale and carried at fair value. Investment securities' discounts are accreted and premiums are amortized over the period of estimated principal repayment using methods, which approximate the interest method. Gains or losses on the sale of investment securities are recognized at the time of sale on a specific identification basis. (d) Loans The company grants single family and multi-family residential loans, commercial real estate loans, commercial loans and a variety of consumer loans. In addition, the company grants loans for the construction of residential homes, multi-family properties, and commercial real estate properties and for land development. Most loans granted by the company are collateralized by real estate or equipment and/or are guaranteed by the borrower. The ability and willingness of the single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic activity and real estate values within the borrowers' geographic areas. The ability and willingness of commercial real estate, commercial and construction loan borrowers to honor their repayment commitments is generally dependent on the health of the real estate sector in the borrowers' geographic areas and the general economy. Loans are reported at the principal amount outstanding, net of deferred origination fees and costs. Loan origination fees received are offset with direct loan origination costs and are deferred and amortized over the life of the related loans using the level-yield method or are recognized in income when the related loans are sold or paid off. (Continued) 42
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued either when reasonable doubt exists as to the full and timely collection of interest or principal, or generally when a loan becomes contractually past due by 60 days or a mortgage loan becomes contractually past due by 90 days with respect to interest or principal. When a loan is placed on non-accrual status, all interest previously accrued but not collected is reversed against current period interest income. Interest accruals are resumed on such loans only when payments are brought current and when, in the judgment of management, the collectability of both principal and interest is reasonably assured. Payments received on loans in a non-accrual status are generally applied to principal. Loans held for sale are carried at the lower of aggregate amortized cost or market value, giving consideration to commitments to originate additional loans and commitments to sell loans. When loans are sold a gain or loss is recognized to the extent that the sales proceeds exceed or are less than the carrying value of the loans. Gains and losses are determined using the specific identification method. (e) Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to operations. Loan losses are charged against the allowance when management believes that the collectability of the loan principal is unlikely. Recoveries on loans previously charged-off are credited to the allowance. The bank uses a methodology to systematically measure the amount of estimated loan loss exposure inherent in the portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: identification of specific loan losses, general loss allocations for certain loan types based on credit grade and loss experience factors, and general loss allocations for other economic or market factors. The methodology includes analysis of individual loans deemed to be impaired in accordance with the terms of SFAS 114. Other individual commercial and commercial mortgage loans are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system and the related loss allocation factors take into consideration the borrower's financial condition, the borrower's performance with respect to loan terms and the adequacy of collateral. Portfolios of more homogenous populations of loans including residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators, the bank's historical loss experience and comparison to industry standards of loss allocation factors for each type of credit product. Finally, an additional allowance is maintained based on a judgmental process whereby management considers qualitative and quantitative assessments of other factors including industry concentration, results of regulatory examinations, historical loss ranges, portfolio composition, economic conditions such as interest rates and other changes in the portfolio. The allowance for loan losses is management's best estimate of the probable loan losses incurred as of the balance sheet date. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the company's allowance for loan losses. Such agencies may require the company to recognize additions to the allowance based on judgments different from those of management. (Continued) 43
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements Impaired loans are individually significant commercial and commercial real estate loans for which it is probable that the company will not be able to collect all amounts due in accordance with contractual terms. Impaired loans are accounted for, except those loans that are accounted for at fair value or at lower of cost or fair value, at the present value of the expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, in the case of collateralized loans, the difference between the fair value of the collateral and the recorded amount of the loans. Impaired loans exclude large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, loans that are measured at fair value and leases and debt securities as defined in SFAS No. 115. Management considers the payment status, net worth and earnings potential of the borrower, and the value and cash flow of the collateral as factors to determine if a loan will be paid in accordance with its contractual terms. Management does not set any minimum delay of payments as a factor in reviewing for impaired classification. Impaired loans are charged-off when management believes that the collectability of the loan's principal is remote. (f) Premises and Equipment Landis carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Fully depreciated assets have been removed from the premises and equipment inventory. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the related asset categories as follows: Buildings 25 years Leasehold improvements 10 years Computer software and equipment 3 to 5 years Furniture, fixtures and equipment 3 to 5 years (g) Real Estate Acquired by Foreclosure Real estate acquired by foreclosure is comprised of properties acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Real estate formally acquired in settlement of loans is initially recorded at the lower of the carrying value of the loan or the fair value of the property constructively or actually received less estimated selling costs. Loan losses arising from the acquisition of such properties are charged against the allowance for loan losses. Operating expenses and any subsequent provisions to reduce the carrying value to net fair value are charged to real estate operations in the current period. Gains and losses upon disposition are reflected in earnings as realized. (h) Intangible Assets On July 21, 2000 the bank completed its acquisition of two Fleet National Bank branch offices (the "Fleet branches"). The excess of cost over the fair market value of assets acquired and liabilities assumed of approximately $7.9 million has been allocated to identified intangible assets and goodwill (combined "intangible assets") and is being amortized over a ten-year period. (Continued) 44
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (i) Income Taxes The company uses the asset and liability method of accounting for income taxes. Under this method deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities will be adjusted accordingly through the provision for income taxes. (j) Stock Options The company measures compensation cost for stock-based compensation plans under Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB No. 25, no compensation cost is recorded if, at the grant date, the exercise price of the options is equal to the fair market value of the company's common stock. (k) Investment Management & Trust Services Securities and other property held in a fiduciary or agency capacity are not included in the consolidated balance sheets because they are not assets of the company. Trust assets under management at December 31, 2000 and 1999 totaled $280.3 million and $216.7 million, respectively. Income from trust activities is reported on an accrual basis. (l) Earnings Per Share Basicearnings per share are calculated by dividing net income by the weighted average number of common shares outstanding during the year. Diluted earnings per share reflects the effect on weighted average shares outstanding of the number of additional shares outstanding if dilutive stock options were converted into common stock using the treasury stock method. The increase in average shares outstanding, using the treasury stock method, for the diluted earnings per share calculation were 46,661, 148,046 and 134,298 for the years ended December 31, 2000, 1999 and 1998, respectively. (m) Reporting Comprehensive Income Comprehensive Income is defined as net income plus revenues, expenses, gains, and losses that under accounting principles generally accepted in the United States of America are excluded from net income. The bank classifies items of comprehensive income by their nature in the financial statements, and displays the accumulated balance of comprehensive income separately from retained earnings and additional-paid-in capital in the equity section of the balance sheet. Reporting comprehensive income only affects the presentation in the financial statements and has no impact on the bank's results of operations. (Continued) 45
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (n) Other Accounting Rule Changes The company adopted Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities" on January 1, 2001. This statement establishes accounting and reporting standards for derivative instruments including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in its balance sheet and measure those instruments at fair market value. Under this statement, an entity that elects to apply hedge accounting is required to establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedging derivative and the measurement approach for determining the ineffective aspect of the hedge. Implementation of SFAS No. 133 had no material impact on the company's consolidated financial statements. (2) Investment Securities The amortized cost and estimated fair values of investment securities at December 31, are summarized as follows: <TABLE> <CAPTION> 2000 ------------------------------------------------------------------------ Amortized Unrealized Unrealized Fair ($ in thousands) cost appreciation depreciation value --------------- ---------- ------------ ---------- <S> <C> <C> <C> <C> U.S. agency obligations $ 32,341 1,292 23 33,610 Mortgage-backed securities 95,480 703 408 95,775 Municipal obligations 51,811 687 - 52,498 --------------- --------------- ---------------- ------------- Total bonds and obligations 179,632 2,682 431 181,883 Federal Home Loan Bank stock, at cost 3,301 - - 3,301 --------------- --------------- --------------- ------------- Total investment securities $ 182,933 2,682 431 185,184 =============== =============== ================ ============= 1999 ------------------------------------------------------------------------ Amortized Unrealized Unrealized Fair ($ in thousands) cost appreciation depreciation value ---------------- ------------ ------------ ----------- U.S. agency obligations $ 26,989 13 470 26,532 U.S. treasury obligations 2,997 15 - 3,012 Mortgage-backed securities 80,721 7 2,297 78,431 Municipal obligations 43,924 74 1,507 42,491 --------------- --------------- ------------- ------------- Total bonds and obligations 154,631 109 4,274 150,466 Federal Home Loan Bank stock, at cost 2,961 - - 2,961 --------------- --------------- ------------- ------------- Total investment securities $ 157,592 109 4,274 153,427 =============== =============== ============= ============= </TABLE> Included in U.S. agency securities are investments that can be called prior to final maturity with fair values of $32,601,000 and $19,574,000 at December 31, 2000 and 1999, respectively. Included in mortgage-backed securities are collateralized mortgage-backed obligations with fair values of $93,138,000 and $78,221,000 at December 31, 2000 and 1999, respectively. (Continued) 46
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements At December 31, 2000, securities with a fair value of $62,933,000 were pledged as collateral for short-term borrowings (Note 8) and securities with a fair value of $998,000 were pledged as collateral for treasury, tax and loan deposits. At December 31, 1999, securities with a fair value of $32,561,000 were pledged as collateral for short-term borrowings (Note 8) and securities with a fair value of $969,000 were pledged as collateral for treasury, tax and loan deposits. The contractual maturity distribution of total bonds and obligations at December 31, 2000 is as follows: <TABLE> <CAPTION> Amortized Fair ($ in thousands) Cost Percent Value Percent ---- ------- ----- ------- <S> <C> <C> <C> <C> Within one year $ 1,254 0.70% $ 1,257 0.69% After one but within three years 7,072 3.94 7,107 3.91 After three but within five years 21,302 11.86 21,511 11.83 After five but within ten years 66,291 36.90 71,925 39.54 After ten years 83,713 46.60 80,083 44.03 ------- ----------- -------- ----------- $179,632 100.00% $181,883 100.00% ======= =========== ======= =========== </TABLE> Mortgage-backed securities are shown at their final maturity but are expected to have shorter average lives due to principal prepayments. U.S. agency obligations are shown at their final maturity but are expected to have shorter average lives because issuers of certain bonds reserve the right to call or prepay the obligations without call or prepayment penalties. Sales and calls of investment securities for the years ended December 31, 2000, 1999, and 1998 are summarized as follows: <TABLE> <CAPTION> ($ in thousands) 2000 1999 1998 ------------- -------------- ------------- <S> <C> <C> <C> Book value of securities sold or called $ 11,252 22,951 52,072 Gross realized gains on sales/calls 139 184 476 Gross realized losses on sales/calls (10) (1) - ------------- -------------- ------------- Total proceeds from sales or calls of investment securities $ 11,381 23,134 52,548 ============= ============== ============= </TABLE> (3) Loans and Loans Held for Sale Major classifications of loans and loans held for sale at December 31, are as follows: ($ in thousands) 2000 1999 ------------- ------------- Real estate: Commercial $ 120,390 104,940 Construction 21,894 18,198 Residential 57,037 50,156 ------------- ------------- Total real estate 199,321 173,294 47
Commercial 84,284 68,177 Home equity 21,229 14,135 Consumer 8,210 6,672 ------------- ------------- Total loans $ 313,044 262,278 Deferred loan origination fees (1,226) (1,124) Allowance for loan losses (6,220) (5,446) ------------- ------------- Net loans and loans held for sale $ 305,598 255,708 ============= ============= (Continued) 48
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements Directors, officers, principal stockholders and their associates are credit customers of the company in the normal course of business. All loans and commitments included in such transactions are made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated persons and do not involve more than a normal risk of collectability or present other unfavorable features. As of December 31, 2000, and 1999, the outstanding loan balances to directors and officers of the company and their associates was $7.2 million and $5.3 million, respectively. Unadvanced portions of lines of credit available to directors and officers were $1.8 million and $2.2 million, as of December 31, 2000 and 1999, respectively. During 2000, new loans and net increases in loan balances on lines of credit under existing commitments of $2.3 million were made and principal paydowns of $0.4 million were received. All loans to these related parties are current. Non-accrual loans at December 31, are summarized as follows: <TABLE> <CAPTION> <S> <C> <C> <C> ($ in thousands) 2000 1999 ------------- ------------- Real estate $ 465 2,484 Commercial 539 368 Consumer, including home equity 50 46 ------------- ------------- Total non-accrual $ 1,054 2,898 ============= ============= </TABLE> There were no commitments to lend additional funds to those borrowers whose loans were classified as non-accrual at December 31, 2000, 1999 and 1998. The increase /reduction in interest income for the years ended December 31, associated with non-accruing loans is summarized as follows: <TABLE> <CAPTION> ($ in thousands) 2000 1999 1998 ------------- -------------- ------------- <S> <C> <C> <C> Income in accordance with original loan terms $ 269 392 239 Income recognized 306 242 108 ------------- -------------- ------------- (Increase)/reduction in interest income $ (37) 150 131 ============= ============== ============= </TABLE> The increase in interest income at December 31, 2000 resulted primarily from non accrual loans at December 31, 1999 that were returned to accrual status during 2000. At December 31, 2000 and 1999, total impaired loans were $0.5 million and $1.9 million, respectively. In the opinion of management, there were no impaired loans requiring an allocated reserve at December 31, 2000 and 1999, respectively. All of the $0.5 million of impaired loans have been measured using the fair value of the collateral method. During the years ended December 31, 2000 and 1999, the average recorded value of impaired loans was $1.2 million and $1.7 million, respectively. Included in the (increase)/reduction in interest income in the table above is $75,000 and $49,000 of interest income that was not recognized on loans that were deemed impaired as of December 31, 2000 and 1999, respectively. All payments received on non-accrual loans deemed to be impaired loans are applied to principal. The company is not committed to lend additional funds on any loans that are considered impaired. (Continued) 49
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements Changes in the allowance for loan losses for the years ended December 31, are summarized as follows: <TABLE> <CAPTION> ($ in thousands) 2000 1999 1998 ------------- -------------- ------------- <S> <C> <C> <C> Balance at beginning of year $ 5,446 5,234 4,290 Provision charged to operations 603 270 1,030 Addition related to acquired loans 250 - - Loan recoveries 207 114 54 Loans charged-off (286) (172) (140) ------------- -------------- ------------- Balance at end of year $ 6,220 5,446 5,234 ============= ============== ============= </TABLE> At December 31, 2000, 1999 and 1998, the bank was servicing mortgage loans sold to investors amounting to $25,699,000, $24,001,000, and $26,491,000, respectively. (4) Premises and Equipment Premises and equipment at December 31, are summarized as follows: ($ in thousands) 2000 1999 ------------- ------------- Land $ 1,373 608 Buildings and leasehold improvements 7,731 5,143 Computer software and equipment 4,006 2,959 Furniture, fixtures and equipment 2,182 1,636 ------------- ------------- 15,292 10,346 Less accumulated depreciation (4,389) (2,655) ------------- ------------- $ 10,903 7,691 ============= ============= The company is obligated under various non-cancelable operating leases, some of which provide for periodic adjustments. At December 31, 2000 minimum lease payments for these operating leases were as follows: ($ in thousands) Payable in: 2001 $ 434 2002 347 2003 277 2004 246 Thereafter 55 ----------------- Total minimum lease payments $ 1,359 ================= Total rent expense for the years ended December 31, 2000, 1999 and 1998 amounted to $581,000, $488,000 and $403,000, respectively. (Continued) 50
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (5) Accrued Interest Receivable Accrued interest receivable consists of the following at December 31: ($ in thousands) 2000 1999 ------------- ------------- Investments $ 1,911 1,688 Loans and loans held for sale 2,167 1,576 ----------------- ------------- $ 4,078 3,264 ================= ============= (6) Real Estate Acquired by Foreclosure An analysis of real estate acquired by foreclosure for the years ended December 31, is as follows: <TABLE> <CAPTION> ($ in thousands) 2000 1999 ------------- ------------- <S> <C> <C> Balance at beginning of year $ - 304 Acquisitions as a result of foreclosures - - Sales proceeds and principal repayments, net of loss on sale - (304) ------------- ------------- Balance at end of year $ - - ============= ============= </TABLE> (7) Deposits Deposits at December 31, are summarized as follows: ($ in thousands) 2000 1999 ------------- ------------- Demand $ 100,917 67,308 Savings 53,412 32,019 Personal interest checking 97,417 59,040 Money market 50,653 28,487 Time deposits less than $100,000 99,231 95,045 Time deposits of $100,000 or more 60,345 51,524 ------------- ------------- $ 461,975 333,423 ============= ============= Interest expense on time deposits with balances of $100,000 or more amounted to $3,438,000 in 2000, $2,438,000 in 1999, and $2,538,000 in 1998. The following table shows the scheduled maturities of time deposits with balances less than $100,000 and greater than $100,000 at December 31, 2000: <TABLE> <CAPTION> Less Greater than than ($ in thousands) $100,000 $100,000 Total ------------- -------------- ------------- 51
<S> <C> <C> <C> Due in less than three months $ 29,060 33,412 62,472 Due in over three through twelve months 50,204 22,257 72,461 Due in over twelve through thirty six months 19,967 4,676 24,643 ------------- -------------- ------------- $ 99,231 60,345 159,576 ============= ============== ============= </TABLE> (Continued) 52
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (8) Short-Term Borrowings Borrowed funds at December 31, are summarized as follows: <TABLE> <CAPTION> 2000 1999 1998 ----------------------- ----------------------- ----------------------- Average Average Average ($ in thousands) Amount Rate Amount Rate Amount Rate ------------- --------- ------------- --------- ------------- --------- <S> <C> <C> <C> <C> <C> <C> Securities sold under agreements to repurchase $ 57,801 5.86% $ 28,697 4.99% $ 11,615 2.70% Federal Home Loan Bank of Boston borrowings 470 5.94% 50,070 4.68% 470 5.94% ------------- ------------- ------------- $ 58,271 5.86% $ 78,767 4.78% $ 12,085 2.83% ============= ============= ============= </TABLE> Securities sold under agreement to repurchase averaged $39,782,000, $18,002,000, and $12,673,000 during 2000, 1999, and 1998, respectively. Maximum amounts outstanding at any month end during 2000, 1999, and 1998 were $57,801,000, $28,697,000, and $16,426,000, respectively. The average cost of repurchase agreements was 5.71%, 4.43%, and 3.19% during fiscal 2000, 1999, and 1998, respectively. The bank became a member of the Federal Home Loan Bank of Boston ("FHLB") in March 1994. FHLB borrowings averaged $24,753,000, $12,241,000, and $2,011,000 during 2000, 1999, and 1998, respectively. Maximum amounts outstanding at any month end during 2000, 1999, and 1998 were $61,300,000, $50,070,000, and $7,836,000, respectively. The average cost of FHLB borrowings was 6.29%, 5.55%, and 5.88% during fiscal 2000, 1999, and 1998, respectively. Borrowings from the FHLB are secured by FHLB stock, 1-4 family owner occupied residential loans and the bank's investment portfolio not otherwise pledged. As a member of the FHLB, the bank has access to a pre-approved overnight line of credit for up to 5% of its total assets and the capacity to borrow an amount up to the value of its qualified collateral, as defined by the FHLB. At December 31, 2000, the bank had the additional capacity to borrow up to approximately $115,874,000 from the FHLB. (9) Trust Preferred Securities On March 10, 2000 the company organized Enterprise (MA) Capital Trust I (the "Trust"), a statutory business trust created under the laws of Delaware. The company is the owner of all the common shares of beneficial interest of the Trust. On March 23, 2000 the Trust issued $10.5 million of 10.875% trust preferred securities. The trust preferred securities have a thirty-year maturity and may be redeemed at the option of the Trust after ten years. The proceeds from the sale of the trust preferred securities were used by the Trust, along with the company's $0.3 million capital contribution, to acquire $10.8 million in aggregate principal amount of the company's 10.875% Junior Subordinated Deferrable Interest Debentures due 2030. The company has, through the Declaration of Trust establishing the Trust, fully and unconditionally guaranteed on a subordinated basis all of the Trust's obligations with respect to distributions and amounts payable upon liquidation, redemption or repayment. (Continued) 53
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (10) Stockholders' Equity The company's authorized capital is divided into common stock and preferred stock. On May 10, 1999, the number of authorized shares of the company's common stock was increased from 5,000,000 to 10,000,000. The company is authorized to issue 1,000,000 shares of preferred stock. Holders of common stock are entitled to one vote per share, and are entitled to receive dividends if and when declared by the board of directors. Dividend and liquidation rights of the common stock may be subject to the rights of any outstanding preferred stock. The company maintains a dividend reinvestment plan pursuant to which shareholders may elect to reinvest some or all of any cash dividends they may receive in shares of the company's common stock at a purchase price equal to fair market value. Shares issued under the plan may be newly issued or treasury shares. In 2000 the company issued 47,800 shares under the plan at a per share purchase price of $10.32. In 1999, the first year in which the plan was in effect, the company issued 27,054 shares under the plan at a per share purchase price of $14.35. The company maintains a shareholders rights plan pursuant to which each share of common stock includes a right to purchase under certain circumstances one-two hundredth of a share of the company's Series A Junior Participating Preferred Stock, par value $0.01 per share, at a purchase price of $37.50 per one-two hundredth of a preferred share, subject to adjustment, or, in certain circumstances, to receive cash, property, shares of common stock or other securities of the company. The rights are not presently exercisable and remain attached to the shares of common stock until the occurrence of certain triggering events that would ordinarily be associated with an unsolicited acquisition or attempted acquisition of 10% or more of the company's outstanding shares of common stock. The rights will expire, unless earlier redeemed or exchanged by the company, on January 13, 2008. The rights have no voting or dividend privileges, and unless and until they become exercisable have no dilutive effect on the earnings of the company. Applicable regulatory requirements require the company to maintain Tier 1 capital (which in the case of the company is composed of common equity) equal to 4.00% of assets (leverage capital ratio), total capital equal to 8.00% of risk-weighted assets (total capital ratio) and Tier 1 capital equal to 4.00% of risk-weighted assets (Tier 1 capital ratio). Total capital includes Tier 1 capital plus Tier 2 capital (which in the case of the company is composed of the general valuation allowance up to 1.25% of risk-weighted assets). The company met all regulatory capital requirements at December 31, 2000. The company is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate or result in certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a material adverse effect on the company's financial statements. Under applicable capital adequacy requirements and the regulatory framework for prompt corrective action applicable to the bank, the company must meet specific capital guidelines that involve quantitative measures of the company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The company's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. (Continued) 54
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements Quantitative measures established by regulation to ensure capital adequacy require the company to maintain the minimum capital amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined). Management believes, as of December 31, 2000, that the company meets all capital adequacy requirements to which it is subject. As of December 31, 2000, both the company and the bank qualify as "well capitalized" under applicable Federal Reserve Board and FDIC regulations. To be categorized as well capitalized, the company and the bank must maintain minimum total, Tier 1 and, in the case of the bank, leverage capital ratios as set forth in the table below. The company's actual capital amounts and ratios are presented in the table below. The bank's capital amounts and ratios do not differ materially from the amounts and ratios presented. <TABLE> <CAPTION> Minimum Capital Minimum Capital For Capital To Be Actual Adequacy Purposes Well Capitalized ----------------------- ----------------------- ----------------------- ($ in thousands) Amount Ratio Amount Ratio Amount Ratio ------------- --------- ------------- --------- ------------- --------- As of December 31, 2000: Total Capital <S> <C> <C> <C> <C> <C> <C> (to risk weighted assets) $ 42,124 11.79% $ 28,572 8.0% $ 35,715 10.0% Tier 1 Capital (to risk weighted assets) 37,638 10.54% 14,286 4.0% 21,429 6.0% Tier 1 Capital* (to average assets) 37,638 6.66% 22,618 4.0% 28,273 5.0% As of December 31, 1999: Total Capital (to risk weighted assets) $ 33,325 11.50% $ 23,184 8.0% $ 28,980 10.0% Tier 1 Capital (to risk weighted assets) 29,673 10.24% 11,592 4.0% 17,388 6.0% Tier 1 Capital* (to average assets) 29,673 6.98% 17,000 4.0% 21,250 5.0% </TABLE> * For the bank to qualify as "well capitalized", it must also maintain a leverage capital ratio (Tier 1 capital to average assets) of at least 5%. This requirement does not apply to the company and is reflected in the table merely for informational purposes with respect to the bank. Neither the company nor the bank may declare or pay dividends on its stock if the effect thereof would cause stockholders' equity to be reduced below applicable regulatory capital requirements or if such declaration and payment would otherwise violate regulatory requirements. (Continued) 55
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (11) Stock Option Plans The board of directors of the bank adopted a 1988 Stock Option Plan (the "1988 plan"), which was approved by the shareholders of the bank in 1989. The 1988 plan permitted the board of directors to grant both incentive and non-qualified stock options to officers and full-time employees for the purchase of up to 307,804 shares of common stock. The 1988 plan was assumed by and became effective under the company after the completion of the Reorganization discussed in Note 1. While no further grants of options may be made under the 1988 plan, all currently outstanding and unexercised options previously granted under the 1988 plan remain outstanding in accordance with their terms. The board of directors of the company adopted a 1998 stock incentive plan (the "1998 plan"), which was approved by the shareholders of the company in 1998. The 1998 plan permits the board of directors to grant incentive and non-qualified options (as well as shares of stock, with or without restrictions, and stock appreciation rights) to officers and other employees, directors and consultants for the purchase of up to 157,620 shares of common stock. The company's board of directors has approved an amendment to the 1998 plan, which remains subject to shareholder approval, that will increase the number of shares that may be issued under the 1998 plan to a total of 328,023. Under the terms of the 1988 plan and 1998 plan, incentive stock options may not be granted at less than 100% of the fair market value of the shares on the date of grant and may not have a term of more than ten years. Any shares of common stock reserved for issuance pursuant to options granted under the plans which are returned to the company unexercised shall remain available for issuance under the plans. For participants owning 10% or more of the company's outstanding common stock, such options may not be granted at less than 110% of the fair market value of the shares on the date of grant. All options that have been granted through December 31, 2000 under either the 1988 plan or the 1998 plan, generally become exercisable at the rate of 25% a year. All options granted prior to 1998, expire 10 years from the date of the grant. All options granted in 1999 and 1998 expire 7 years from the date of grant. All options granted through December 31, 1998 under either plan are categorized as incentive stock options. Stock options granted in 1999 were to non employee directors and are non-qualified options. Stock option transactions are summarized as follows: <TABLE> <CAPTION> 2000 1999 _ _ 1998 -------------------------- ----------------------- ---------------------- Wtd. Avg. Wtd. Avg. Wtd. Avg. Exercise Exercise Exercise Shares Price Shares Price Shares Price ----------- ----------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Outstanding at beginning of year 355,130 $ 8.35 379,550 $ 7.97 296,750 $ 6.55 Granted - - 12,760 12.50 90,500 12.50 Exercised (122,970) 5.97 (35,155) 5.62 (7,250) 6.28 Forfeited (1,925) 9.04 (2,025) 11.54 (450) 9.00 ----------- ---------- ---------- Outstanding at end of year 230,235 9.61 355,130 8.35 379,550 7.97 =========== ========== ========== Exercisable at end of year 179,835 8.97 251,580 7.25 216,010 6.07 Shares reserved for future grants 50,654 56,385 67,120 </TABLE> (Continued) 56
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements A summary of options outstanding and exercisable by exercise price as of December 31, 2000 follows: Outstanding Exercisable ------------------------------ -------------- Wtd. Avg. Remaining Exercise Price # Shares Life # Shares -------------- ------------- ------------- -------------- $ 5.50 2,300 1.43 2,300 $ 6.00 3,600 3.43 3,600 $ 6.75 39,000 4.51 39,000 $ 7.00 44,900 5.51 44,900 $ 9.00 44,050 6.50 35,550 $12.50 96,385 4.93 54,485 ------------- ------------- ------------- 230,235 5.22 179,835 ============= ============= ============= During 2000, 8,004 shares of stock were issued to members of the Board of Directors in lieu of cash compensation for attendance at Board and Board Committee meetings. These shares were issued at a fair market value price of $11.46 and were issued from the shares reserved for future grants under the 1998 plan. In addition to the 122,970 options exercised under the company's option plans in 2000, certain executives of the bank exercised options in February 2000 to acquire an aggregate of 104,000 shares of company common stock from the company's chief executive officer. The options were granted to them in connection with their recruitment at the time the bank was organized and constitute non-qualified options of the company for tax purposes. Accordingly, in connection with the exercise of the options the company realized a compensation expense for tax purposes, which resulted in a tax benefit to the company of $0.4 million. The tax benefit is recorded as an adjustment to additional paid-in capital. The company applies APB Opinion No. 25 in accounting for stock options and, accordingly, no compensation expense has been recognized in the financial statements. Had the company determined compensation expense based on the fair value at the grant date for its stock options under SFAS 123, the company's net income would have been reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> ($ in thousands, except per share data) 2000 1999 1998 ------------- -------------- ------------- <S> <C> <C> <C> Net income as reported $ 3,604 4,083 3,501 Pro forma net income 3,455 3,915 3,364 Basic earnings per share as reported 1.08 1.28 1.11 Pro forma basic earnings per share 1.04 1.23 1.06 Fully diluted earnings per share as reported 1.07 1.22 1.06 Pro forma fully diluted earnings per share 1.03 1.17 1.02 </TABLE> Pro forma net income reflects only options granted since 1995. Therefore, the full impact of calculating the compensation expense for stock options under SFAS 123 is not reflected in the pro forma net income amounts above since options granted prior to January 1, 1995 are not considered. The per share weighted average fair value of stock options was determined to be $4.00 for options granted in both 1999 and 1998. The fair value of the options was determined to be 32% of the market value of the stock at the date of grant. The value was based on consultation with compensation consultants hired by the company and subsequent validation by management using a binomial distribution model. The assumptions used in the model at the last option grant date for the risk-free interest rate, expected volatility and expected life in years were 4.65%, 15%, and 8, respectively. (Continued) 57
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (12) Employee Benefit Plans 401(k) Defined Contribution Plan The company has a 401(k) defined contribution employee benefit plan. The 401(k) plan allows eligible employees to contribute a base percentage, plus a supplemental percentage, of their pre-tax earnings to the plan. A portion of the base percentage, as determined by the board of directors, is matched by the company. No company contributions are made for supplemental contributions made by participants. The percentage matched for 2000, 1999 and 1998 were 75%, 101% and 85%, respectively, up to the first 6% contributed by the employee. The company's expense for the 401(k) plan match for the years ended December 31, 2000, 1999 and 1998 was $300,000, $329,000, and $227,000, respectively. All employees, at least 21 years of age, are immediately eligible to participate. Vesting for the bank's 401(k) plan contribution is based on years of service with participants becoming 20% vested after 3 years of service, increasing pro-rata to 100% vesting after 7 years of service. Amounts not distributable to an employee following termination of employment are returned to the bank. Employee Bonus Program The company bonus program includes all employees. Bonuses are paid to the employees based on the accomplishment of certain goals and objectives that are determined at the beginning of the fiscal year and approved by the compensation committee of the board of directors. Participants are paid a share of the bonus pool, based on a pre-determined allocation depending upon which group the employee falls into: vice presidents and above, officers, and non-officer employees. In 2000, 1999 and 1998, gross payments charged to salaries and benefits expense under the plan were $1,217,000, $993,000, and $896,000, respectively. In 2000, in addition to the $1,217,000 increase in salaries, the bank also increased the employer contribution to the 401(k) plan by $97,000, or an additional 25% of employee contributions up to the first 6% contributed by the employee. The $97,000 increase on employer match on the company's 401(k) plan is also included in salaries and benefits for 2000. The company maintains a supplemental cash bonus plan for its top two executive officers. The goals, objectives and payout schedule of this plan are set by the compensation committee. The plan provides for payment of cash bonuses based on the achievement of a bonus payout to all employees in the employee bonus program discussed in the previous paragraph and the achievement of certain earnings per share goals. In 2000, 1999, and 1998, $0, $222,000, and $147,000, respectively, was charged to salaries and benefits under this plan. Split-Dollar Plan The company adopted a Split-Dollar Plan for the company's chief executive officer in 1996 and in 1999 the company increased this plan. In 1999 the company also adopted plans for the president and an executive vice president. The plans provide for the company to fund the purchase of a cash value life insurance policy owned by the executive. Annual premiums are paid by the company until the executive retires. At the time of retirement of the executive, annuity payments are made to the executive. The aggregate amount of the premiums funded is returned to the company at the time of the executive's death. Annual premiums under the three plans are $393,800 through 2004, $127,000 through 2010 and $93,000 through 2012, respectively. The amount charged to expense for these benefits was $15,000, $23,000, and 2,000 in 2000, 1999, and 1998, respectively. (Continued) 58
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (13) Income Taxes The components of income tax expense for the years ended December 31 were calculated using the liability method as follows: <TABLE> <CAPTION> ($ in thousands) 2000 1999 1998 ---- ---- ---- Current tax expense: <S> <C> <C> <C> Federal $ 1,417 1,715 1,791 State 49 48 28 ------- ------- ------- Total current tax expense 1,466 1,763 1,819 ------- ------- ------- Deferred tax expense (benefit): Federal (324) (274) (369) State -- -- 6 ------- ------- ------- Total deferred tax expense (benefit) (324) (274) (363) ------- ------- ------- Total income tax expense $ 1,142 1,489 1,456 ======= ======= ======= </TABLE> The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate (34%) as follows: <TABLE> <CAPTION> 2000 1999 1998 -------------------- --------------------- ---------------------- ($ in thousands) Amount % Amount % Amount % --------- ------ ---------- ------- ---------- -------- Computed income tax expense <S> <C> <C> <C> <C> <C> <C> at statutory rate $ 1,614 34.0% $ 1,894 34.0% $ 1,685 34.0% State income taxes, net of federal tax benefit 32 0.7% 32 0.6% 22 0.4% Municipal bond interest (624) (13.1%) (536) (9.6%) (303) (6.1%) Other 120 2.5% 99 1.7% 52 1.1% --------- ------- ---------- ------- ---------- -------- Income tax expense $ 1,142 24.1% $ 1,489 26.7% $ 1,456 29.4% ========= ======= ========== ======= ========== ======== </TABLE> At December 31 the tax effects of each type of income and expense item that give rise to deferred taxes are: ($ in thousands) 2000 1999 ---- ---- Deferred tax asset: Allowance for loan losses $2,120 1,915 Net unrealized depreciation on -- 1,421 investment securities Depreciation 562 491 Other 293 244 ------ ------ Total 2,975 4,071 59
Deferred tax liability: Net unrealized appreciation on investment securities 766 -- ------ ------ Net deferred tax asset $2,209 4,071 ====== ====== Management believes that it is more likely than not that current recoverable income taxes and the results of future operations will generate sufficient taxable income to realize the deferred tax asset existing at December 31, 2000. (Continued) 60
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (14) Related Party Transactions The company's offices in Lowell, Massachusetts, are leased from realty trusts, the beneficiaries of which include various bank officers and directors. The maximum remaining term of the leases including options is for 20 years. Total amounts paid to the realty trusts for the years ended December 31, 2000, 1999, and 1998, were $474,000, $366,000 and $297,000, respectively. (15) Commitments, Contingencies and Financial Instruments with Off-Balance Sheet Risk and Concentrations of Credit Risk The company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to originate loans, standby letters of credit and unadvanced lines of credit. The instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheets. The contract amounts of those instruments reflect the extent of involvement the company has in the particular classes of financial instruments. The company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for loan commitments and standby letters of credit is represented by the contractual amounts of those instruments. The company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments with off-balance sheet credit risk at December 31, 2000 and 1999, are as follows: ($ in thousands) 2000 1999 ---------------- ---- ---- Commitments to originate loans $17,700 14,386 Standby letters of credit 3,187 3,728 Unadvanced portions of consumer loans (including credit card loans) 2,252 2,631 Unadvanced portions of construction loans 9,901 13,589 Unadvanced portions of home equity loans 19,063 14,003 Unadvanced portions of commercial lines of credit 49,835 28,993 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. (Continued) 61
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements The company originates residential mortgage loans under agreements to sell such loans, generally with servicing released. At December 31, 2000 and 1999, the company had commitments to sell loans totaling $806,000 and $276,000, respectively. The company manages its loan portfolio to avoid concentration by industry or loan size to minimize its credit risk exposure. Commercial loans may be collateralized by the assets underlying the borrower's business such as accounts receivable, equipment, inventory and real property. Residential mortgage and home equity loans are secured by the real property financed. Consumer loans such as installment loans are generally secured by the personal property financed. Credit card loans are generally unsecured. Commercial real estate loans are generally secured by the underlying real property and rental agreements. The bank is required to maintain in reserve certain amounts of vault cash and/or deposits with the Federal Reserve Bank of Boston. The amount of this reserve requirement, included in "Cash and Due from Banks," was approximately $1,500,000 at December 31, 2000, and 1999. The company is involved in various legal proceedings incidental to its business. After review with legal counsel, management does not believe resolution of any present litigation will have a material adverse effect on the financial condition or results of operations of the company. (16) Fair Values of Financial Instruments The following methods and assumptions were used by the company in estimating fair values of its financial instruments: The respective carrying values of certain financial instruments approximated their fair value, as they were short-term in nature or payable on demand. These include cash and due from banks, daily federal funds sold, accrued interest receivable, repurchase agreements, accrued interest payable and non-certificate deposit accounts. Investments: Fair values for investments were based on quoted market prices, where available. If quoted market prices were not available, fair values were based on quoted market prices of comparable instruments. The carrying amount of FHLB stock reported approximates fair value. If the FHLB stock is redeemed, the company will receive an amount equal to the par value of the stock. Loans: The fair values of loans, was determined using discounted cash flow analysis, using interest rates currently being offered by the company. The incremental credit risk for non-accrual loans was considered in the determination of the fair value of the loans. The fair values of the unused portion of lines of credit and letters of credit were based on fees currently charged to enter into similar agreements and were estimated to be the fees charged. Commitments to originate non-mortgage loans were short-term and were at current market rates and estimated to have no fair value. (Continued) 62
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements Financial liabilities: The fair values of time deposits were estimated using discounted cash flow analysis using rates offered by the bank on December 31, 2000 for similar instruments. The fair value of trust preferred securities was estimated using discounted cash flow analysis using an interest rate of a similar trust preferred issue issued in the first quarter of 2001. Limitations: The estimates of fair value of financial instruments were based on information available at December 31, 2000 and 1999 and are not indicative of the fair market value of those instruments at the date this report is published. These estimates do not reflect any premium or discount that could result from offering for sale at one time the bank's entire holdings of a particular financial instrument. Because no active market exists for a portion of the bank's financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates were based on existing on and off-balance sheet financial instruments without an attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including premises and equipment and foreclosed real estate. In addition, the tax ramifications related to the realization of the unrealized appreciation and depreciation can have a significant effect on fair value estimates and have not been considered in any of the estimates. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the company. <TABLE> <CAPTION> 2000 1999 --------------------------- ---------------------------- Carrying Fair Carrying Fair ($ in thousands) Amount Value Amount Value ------------ ------------- ------------- ------------- Financial assets: <S> <C> <C> <C> <C> Cash and cash equivalents $ 54,105 54,105 17,089 17,089 Investment securities 185,184 185,184 153,427 153,427 Loans, net 305,598 310,852 255,708 257,024 Accrued interest receivable 4,078 4,078 3,264 3,264 Financial liabilities: Non-interest bearing demand deposits 100,917 100,917 67,308 67,308 Savings, PIC and money market 201,482 201,482 119,546 119,546 Time deposits 159,576 159,988 146,569 146,732 Short-term borrowings 58,271 58,271 78,767 78,767 Escrow deposit of borrowers 1,106 1,106 795 795 Accrued interest payable 1,389 1,389 670 670 Trust preferred securities 10,500 10,923 - - </TABLE> (Continued) 63
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements (17) Parent Company Only Financial Statements <TABLE> <CAPTION> Balance Sheets December 31, ------------------------------ ($ in thousands) 2000 1999 ------------- ----------- Assets <S> <C> <C> Cash and due from subsidiary 427 334 Investment in subsidiary 46,548 27,120 Other assets 375 9 ------------- ------------- Total assets 47,350 27,463 ============= ============= Liabilities and Stockholders' Equity Junior subordinated deferrable interest debentures 10,825 - Accrued interest payable 370 - ------------- ------------- Total liabilities 11,195 - ------------- ------------- Stockholders' equity: Preferred stock, $0.01 par value per share; 1,000,000 shares authorized; no shares issued $ - - Common stock, $0.01 par value per share, 10,000,000 shares authorized at December 31, 2000 and 1999, respectively; 3,408,667 and 3,229,893 shares issued and outstanding at December 31, 2000 and 1999, respectively 34 32 Additional paid-in capital 17,843 16,149 Retained earnings 16,793 14,026 Accumulated other comprehensive income 1,485 (2,744) ------------- ------------- Total stockholders' equity 36,155 27,463 ------------- ------------- Total liabilities and stockholders' equity $ 47,350 27,463 ============= ============= </TABLE> (Continued) 64
ENTERPRISE BANCORP, INC. Notes to Consolidated Financial Statements Statements of Income <TABLE> <CAPTION> For the years ended December 31, ------------------------------------------------ ($ in thousands) 2000 1999 1998 ------------- ------------- ------------- Undistributed equity in net income of <S> <C> <C> <C> subsidiary $ 4,203 3,811 2,949 Dividends received from subsidiary 16 278 552 ------------- ------------- ------------- Total subsidiary income 4,219 4,089 3,501 ------------- ------------- ------------- Interest expense 909 - - Other operating expenses 11 (6) - ------------- ------------- ------------- Total operating expenses 920 (6) - ------------- ------------- ------------- Income before income taxes 3,299 4,083 3,501 Income tax benefit 305 - - ------------- ------------- ------------- Net income $ 3,604 4,083 3,501 ============= ============= ============= </TABLE> Statements of Cash Flows <TABLE> <CAPTION> For the years ended December 31, ------------------------------------------------ ($ in thousands) 2000 1999 1998 ------------- ------------- ------------- Cash flows from operating activities: <S> <C> <C> <C> Net income $ 3,604 4,083 3,501 Undistributed equity in net income of subsidiary (4,203) (3,811) (2,949) Increase in other assets (366) (9) - Increase in other liabilities 370 - - ------------- ------------- ------------- Net cash (used in) provided by operating activities (595) 263 552 ------------- ------------- ------------- Cash flows from investing activities: Investments in subsidiaries $ (10,996) - - ------------- ------------- ------------- Net cash used by investing activities (10,996) - - ------------- ------------- ------------- Cash flows from financing activities: Proceeds from issuance of junior subordinated deferrable interest debentures 10,825 - - Cash dividends paid (837) (667) (554) Proceeds from issuance of common stock 586 388 - Proceeds from exercise of stock options 1,110 201 45 ------------- ------------- ------------- 65
Net cash used in provided by financing activities 11,684 (78) (509) ------------- ------------- ------------- Net increase in cash and cash equivalents 93 185 43 Cash and cash equivalents, beginning of period 334 149 106 ------------- ------------- --------- - Cash and cash equivalents, end of period $ 427 334 149 ============= ============= ============= </TABLE> Cash and cash equivalents include cash and due from subsidiary. Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure None 66
Part III Item 10. Directors and Executive Officers of the Registrant (a) Certain information regarding directors and executive officers and identification of significant employees of the company in response to this item is incorporated herein by reference from the discussion under the captions "Information Regarding Executive Officers and Other Significant Employees" and "Proposal One Election of Class of Directors" of the proxy statement for the company's annual meeting of stockholders to be held May 1, 2001, which it expects to file with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this report. Directors of the Company - ------------------------ George L. Duncan Chairman and Chief Executive Officer of the Company and the Bank Richard W. Main President of the Company; President, Chief Operating Officer and Chief Lending Officer of the Bank Walter L. Armstrong Retired; former Executive Vice President of the Bank Kenneth S. Ansin Business Development Officer of the Bank Gerald G. Bousquet, M.D. Physician; director and partner in several health care entities Kathleen M. Bradley Retired; former owner, Westford Sports Center, Inc. John R. Clementi President, Plastican, Inc., a plastic shipping container manufacturer James F. Conway, III Chairman, Chief Executive Officer and President Courier Corporation, a commercial printing company Dr. Carole A. Cowan President, Middlesex Community College Nancy L. Donahue Chair of the Board of Trustees, Merrimack Repertory Theatre Lucy A. Flynn Executive Vice President, Marketing, of ADS Financial Service Solutions Eric W. Hanson Chairman and President, D.J. Reardon Company, Inc., a beer distributorship John P. Harrington Energy Consultant for Tennessee Gas Pipeline Company Arnold S. Lerner Vice Chairman and Clerk of the Company and the Bank Director, Courier Corporation, a commercial printing company Charles P. Sarantos Chairman, C&I Electrical Supply Co., Inc. Michael A. Spinelli Owner, Merrimack Travel and Action Six Travel Network 67
Additional Executive Officers of the Company - -------------------------------------------- Name Position - ---- -------- John P. Clancy, Jr. Treasurer of the Company; Executive Vice President, Chief Financial Officer, Treasurer and Chief Investment Officer of the Bank - Robert R. Gilman Executive Vice President, Administration, and Commercial Lender of the Bank Stephen J. Irish Executive Vice President, Chief Information Officer and Chief Operations Officer of the Bank Items 11, 12 and 13. The information required in Items 11, 12 and 13 of this part is incorporated herein by reference to the company's definitive proxy statement for its annual meeting of stockholders to be held May 1, 2001, which it expects to file with the Securities and Exchange Commission within 120 days of the end of the fiscal year covered by this report. Part IV Item 14. Exhibits List and Reports on Form 8-K Exhibit # Exhibit Description 2.1 Purchase and Assumption Agreement dated as of September 22, 1999 by and among Fleet Financial Group, Inc., Fleet National Bank, Enterprise Bancorp, Inc. and Enterprise Bank and Trust Company (exclusive of disclosure schedules), incorporated by reference to the exhibit to the company's Form 10-Q for the quarter ended September 30, 1999. 3.1 Restated Articles of Organization of the Company, as amended through May 10, 1999, incorporated by reference to the exhibit to the company's Form 10-Q for the quarter ended March 31, 1999. 3.2 Amended and Restated Bylaws of the company, incorporated by reference to the exhibit to the company's Form 10-QSB for the quarter ended June 30, 1997. 4.1 Rights Agreement dated as of January 13, 1998 between Enterprise Bancorp, Inc. and Enterprise Bank and Trust Company, as Rights Agent, incorporated by reference to the exhibit to the company's registration statement on Form 8-A filed on January 14, 1998. 4.2 Terms of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit A to Rights Agreement, filed with the company's Form 8-A registration statement on January 14, 1998. 4.3 Summary of Rights to Purchase Shares of Series A Junior Participating Preferred Stock, incorporated by reference to Exhibit B to Rights Agreement, filed with Form 8-A registration statement on January 14, 1998. 4.4 Form of Rights Certificate, incorporated by reference to Exhibit C to Rights Agreement, filed with Form 8-A registration statement on January 14, 1998. 10.1 Lease agreement dated July 22, 1988, between the bank and First Holding Trust relating to the premises at 222 Merrimack Street, Lowell, Massachusetts, incorporated by reference to the exhibit to the company's Form 10-QSB for the quarter ended June 30, 1996. 10.2 Amendment to lease dated December 28, 1990, between the bank and First Holding Trust for and relating to the premises at 222 68
Merrimack Street, Lowell, Massachusetts, incorporated by reference to the exhibit to the company's Form 10-QSB for the quarter ended June 30, 1996. 10.3 Amendment to lease dated August 15, 1991, between the bank and First Holding Trust for 851 square feet relating to the premises at 222 Merrimack Street, Lowell, Massachusetts, incorporated by reference to the exhibit to the company's Form 10-QSB for the quarter ended June 30, 1996. 10.4 Lease agreement dated May 26, 1992, between the bank and Shawmut Bank, N.A., for 1,458 square feet relating to the premises at 170 Merrimack Street, Lowell, Massachusetts, incorporated by reference to the exhibit to the company's Form 10-QSB for the quarter ended June 30, 1996. 10.5 Lease agreement dated March 14, 1995, between the bank and North Central Investment Limited Partnership for 3,960 square feet related to the premises at 2-6 Central Street, Leominster, Massachusetts, incorporated by reference to the exhibit to the company's Form 10-QSB for the quarter ended June 30, 1996. 10.6 Amended employment agreement between the bank and George L. Duncan dated December 13, 1995, incorporated by reference to the exhibit to the company's Form 10-QSB for the quarter ended June 30, 1997. 10.7 Employment agreement between the bank and Richard W. Main dated December 13, 1995, incorporated by reference to the exhibit to the company's Form 10-QSB for the quarter ended June 30, 1996. 10.8 Lease agreement dated June 20, 1996, between the bank and Kevin C. Sullivan and Margaret A. Sullivan for 4,800 square feet related to the premises at 910 Andover Street, Tewksbury, Massachusetts, incorporated by reference to the exhibit to the company's Form 10-KSB for the year ended December 31, 1996. 10.9 Amendment to employment agreement between the bank and George L. Duncan dated December 4, 1996, incorporated by reference to the exhibit to the company's Form 10-KSB for the year ended December 31, 1996. 10.10 Amendment to employment agreement between the bank and Richard W. Main dated December 4, 1996, incorporated by reference to the exhibit to the company's Form 10-KSB for the year ended December 31, 1996. 10.11 Split Dollar Agreement for George L. Duncan, incorporated by reference to the exhibit to the company's Form 10-KSB for the year ended December 31, 1996. 10.12 Lease agreement dated April 7, 1993 between the bank and Merrimack Realty Trust for 4,375 square feet relating to premises at 21-27 Palmer Street, Lowell, Massachusetts, incorporated by reference to the exhibit to the company's Form 10-KSB for the year ended December 31, 1997. 10.13 Lease agreement dated September 1, 1997, between the bank and Merrimack Realty Trust to premises at 129 Middle Street, Lowell, Massachusetts, incorporated by reference to the exhibit to the company's Form 10-KSB for the year ended December 31, 1997. 10.14 Lease agreement dated May 2, 1997 between the bank and First Lakeview Avenue Limited Partnership to premises at 1168 Lakeview Avenue, Dracut, Massachusetts, incorporated by reference to the exhibit to the company's Form 10-KSB for the year ended December 31, 1997. 10.15 Enterprise Bancorp, Inc. 1988 Stock Option Plan, incorporated by reference to the exhibit to the company's Form 10-KSB for the year ended December 31, 1997. 69
10.16 Enterprise Bancorp, Inc. 1998 Stock Incentive Plan, incorporated by reference to the exhibit to the company's definitive proxy statement for the annual meeting of stockholders held May 5, 1998. 10.17 Enterprise Bancorp, Inc. automatic dividend reinvestment plan, incorporated by reference to the section of the company's Registration Statement on Form S-3 (Reg. No. 333-79135), filed May 24, 1999, appearing under the heading "The Plan". 10.18 Split Dollar Agreement for Richard W. Main, incorporated by reference to the exhibit to the company's Form 10-Q for the quarter ended March 31, 1999. 10.39 Split Dollar Agreement for Robert R. Gilman, incorporated by reference to the exhibit to the company's Form 10-Q for the quarter ended March 31, 1999. 10.40 Additional Split Dollar Agreement for George L. Duncan, incorporated by reference to the exhibit to the company's Form 10-K for the year ended December 31, 1999. 21.0 Subsidiaries of the Registrant. 23.0 Consent of KPMG LLP. 27.0 Financial Data Schedule (electronic copy only). (b) Reports on Form 8-K The company has not filed any report on Form 8-K during the quarter ended December 31, 2000. 70
ENTERPRISE BANCORP, INC. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ENTERPRISE BANCORP, INC. Date: March 20, 2001 By: /s/ John P. Clancy, Jr. ----------------------- John P. Clancy, Jr. Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ George L. Duncan Chairman, Chief Executive March 20, 2001 - -------------------------------- Officer and Director George L. Duncan /s/ Richard W. Main President, Chief Operating March 20, 2001 - -------------------------------- Officer and Director Richard W. Main /s/ John P. Clancy, Jr. Treasurer March 20, 2001 - -------------------------------- (Principal Financial Officer) John P. Clancy Jr. /s/ Todd A. Klibansky (Principal Accounting March 20, 2001 - -------------------------------- Officer) Todd A. Klibansky Director March 20, 2001 - -------------------------------- Kenneth S. Ansin Director March 20, 2001 - -------------------------------- Walter L. Armstrong /s/ Gerald G. Bousquet, M.D. Director March 20, 2001 - -------------------------------- Gerald G. Bousquet, M.D. Director March 20, 2001 - -------------------------------- Kathleen M. Bradley Director March 20, 2001 - -------------------------------- John R. Clementi /s/ James F. Conway, III Director March 20, 2001 - -------------------------------- James F. Conway, III Director March 20, 2001 - -------------------------------- Carole A. Cowan /s/ Nancy L. Donahue Director March 20, 2001 - -------------------------------- Nancy L. Donahue Director March 20, 2001 - -------------------------------- Lucy A. Flynn 71
/s/ Eric W. Hanson Director March 20, 2001 - -------------------------------- Eric W. Hanson /s/ John P. Harrington Director March 20, 2001 - -------------------------------- John P. Harrington /s/ Arnold S. Lerner Director, Vice Chairman March 20, 2001 - -------------------------------- and Clerk Arnold S. Lerner /s/ Charles P. Sarantos Director March 20, 2001 - -------------------------------- Charles P. Sarantos /s/ Michael A. Spinelli Director March 20, 2001 - -------------------------------- Michael A. Spinelli 72