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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
[Fee Required] For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
[No Fee Required] For the transition period from to
Commission file number 000-24131
ENTERBANK HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 43-1706259
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) Number)
150 NORTH MERAMEC, CLAYTON, MO 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 314-725-5500
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 of the Securities Exchange Act of 1934
during the preceding 12 months, 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 Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of Form 10-K [ ]
State the aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 17, 1999:
Common Stock, par value $.01, $64,625,995.00
Indicate the number of shares outstanding of each of the registrant's classes
of common stock as of March 17, 1999:
Common Stock, par value $.01, 2,378,637 shares outstanding
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ENTERBANK HOLDINGS, INC.
1998 ANNUAL REPORT ON FORM 10-K
Page
----
Selected Financial Data........................................ 1
Business....................................................... 2
Market for Common Stock........................................ 7
Dividends...................................................... 7
Description of Capital Stock................................... 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................... 8
Supervision and Regulation..................................... 27
Management..................................................... 30
Beneficial Ownership of Securities............................. 31
Certain Related Party Transactions............................. 31
Independent Auditors' Report................................... 32
Consolidated Financial Statements.............................. 33
Signatures..................................................... 60
Exhibit Index.................................................. 62
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SELECTED FINANCIAL DATA
-----------------------
Year ended December 31,
--------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars and number of shares in thousands, except per share data)
STATEMENT OF INCOME DATA
Interest income $ 25,414 $ 18,759 $ 12,554 $ 10,914 $ 7,374
Interest expense 11,869 8,582 5,569 4,887 2,570
-------- -------- -------- -------- --------
Net interest income 13,545 10,177 6,985 6,027 4,804
Provision for loan losses 711 775 345 631 450
-------- -------- -------- -------- --------
Net interest income after provision
for loan losses 12,834 9,402 6,640 5,396 4,354
Noninterest income 2,079 476 1,239 836 805
Noninterest expense 10,052 6,339 5,146 4,187 3,551
-------- -------- -------- -------- --------
Income before income tax expense 4,861 3,539 2,733 2,045 1,608
Income tax expense 1,850 1,317 1,031 741 607
-------- -------- -------- -------- --------
Net income 3,011 2,222 1,702 1,304 1,001
======== ======== ======== ======== ========
Basic earnings per share 1.28 1.06 1.11 0.89 0.68
Diluted earnings per share 1.20 1.00 0.97 0.77 0.62
Cash dividends per common share .10 0.09 0.08 0.07 0.06
Basic weighted average common
shares and common stock
equivalents outstanding 2,351 2,095 1,538 1,463 1,462
Diluted weighted average common
shares and common stock
equivalents outstanding 2,515 2,225 1,751 1,685 1,614
============================================================================================================================
BALANCE SHEET DATA
Cash and due from banks $ 29,701 $ 13,897 $ 9,261 $ 8,110 $ 5,930
Federal funds sold 14,250 32,825 23,250 16,230 11,300
Investments in debt and equity securities:
Available for sale 45,592 12,515 14,006 16,065 15,740
Held to maturity 699 919 1,240 842 802
-------- -------- -------- -------- --------
Total investments 46,291 13,434 15,246 16,907 16,542
-------- -------- -------- -------- --------
Loans, net of unearned loan fees 273,818 225,560 134,133 110,464 85,687
Allowance for loan losses 3,200 2,510 1,765 1,400 1,000
Total assets 375,304 291,365 184,584 153,706 122,212
Total deposits 339,180 264,301 168,961 141,140 104,799
Borrowings 6,000 -- 300 -- --
Shareholders' equity 29,240 26,067 14,758 12,052 10,781
Book value per common share 12.33 11.34 8.88 8.24 7.38
Tangible book value per common share 12.32 11.32 8.84 8.19 7.38
============================================================================================================================
SELECTED RATIOS
Return on average assets 0.94% 0.97% 1.12% 0.99% 0.96%
Return on average equity 10.86 9.78 12.73 11.13 9.71
Total capital to risk-weighted assets 10.97 12.28 11.53 11.40 11.75
Leverage ratio 9.16 11.42 9.62 9.11 10.46
Net yield on average earning assets 8.59 8.84 8.90 9.00 7.78
Cost of interest-bearing liabilities 4.88 5.03 4.89 4.94 3.36
Net interest margin 4.59 4.79 4.96 4.98 5.07
Nonperforming loans as a percent of loans 0.00 0.02 0.12 0.10 0.00
Nonperforming assets as a percent of assets 0.22 0.29 0.56 0.64 1.45
Net loan charge offs (recoveries)
as a percent of average loans 0.01 0.02 (0.02) 0.24 0.23
Allowance for loan losses as a percent
of loans, net of unearned loan fees 1.17 1.11 1.32 1.27 1.17
Dividend payout ratio 7.81 8.49 7.21 7.87 8.82
Average equity to average assets ratio 8.70 9.97 8.76 8.89 9.92
============================================================================================================================
Excludes loans held for sale.
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SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Readers should note that in addition to the historical information contained
herein, some of the information in this report contains forward-looking
statements within the meaning of the federal securities laws.
Forward-looking statements typically are identified with use of terms such as
"may," "expect," "anticipate," "estimate" and similar words, although some
forward-looking statements are expressed differently. You should be aware
that the Company's actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including burdens imposed by federal and state regulation of banks, credit
risk, exposure to local economic conditions, risks associated with rapid
increase or decrease in prevailing interest rates and competition from banks
and other financial institutions, all of which could cause the Company's
actual results to differ from those set forth in the forward-looking
statements.
BUSINESS
--------
Enterbank Holdings, Inc. (the "Company") was incorporated under the laws of
the State of Delaware on December 30, 1994, and was formed for the purpose of
providing a holding company structure for the ownership of Enterprise Bank, a
Missouri banking corporation. The Company acquired Enterprise Bank (the
"Bank") in May 1995 through a tax-free exchange by Bank shareholders. The
bank holding company ownership structure gives the Bank a source of capital
and financial strength and allows the organization some flexibility in
expanding the products and services offered to clients.
The Bank began operations on May 9, 1988 as a newly formed and charted
Missouri financial institution. From 1988 through 1996, commercial banking
services had been provided to Bank customers from a single location in the
City of Clayton, St. Louis County, Missouri. During 1996, the Bank received
regulatory approval for two additional facilities located in St. Charles
County and the City of Sunset Hills which opened in their permanent
facilities in July and September 1997, respectively. During 1998, the Bank
opened an operations facility in St. Louis County, Missouri.
The Company organized Enterprise Capital Resources, Inc. ("Capital
Resources") in 1995 as a wholly owned subsidiary to provide merchant banking
services to closely-held businesses and their owners. Capital Resources
formed a wholly owned subsidiary, Enterprise Capital Management, Inc.
("Capital Management"), which manages and acts as the general partner of The
Enterprise Fund, L.P., a licensed Small Business Investment Company ("SBIC")
under the regulations of the Small Business Administration("SBA"), providing
venture capital to growing companies. In March 1998, Capital Resources
changed its name to Enterprise Merchant Banc, Inc. ("Merchant Banc"). In
March 1998, Merchant Banc opened an office in Overland Park, Kansas. The
Company is currently raising capital for a second merchant banking fund (Fund
II). It is anticipated that Fund II will not be an SBIC regulated by the
SBA. Due to current Federal Reserve regulations, the Company cannot have
control of an investment company that is not SBA regulated. Therefore, if
successful, the Company will restructure the ownership of Merchant Banc
resulting in a minority ownership of Enterprise Merchant Banc.
Enterprise Financial Advisors ("Financial Advisors"), a division of the Bank,
was organized in October of 1997 to provide fee-based personal financial
planning, estate planning, trust services, and corporate planning services to
the Company's target market. As part of the organization of Financial
Advisors, the Company entered into solicitation and referral agreements with
Moneta Group, Inc. ("Moneta"). These agreements were renegotiated with the
introduction of trust services by Financial Advisors. These agreements call
for Moneta to provide assistance in staffing, training, marketing and
regulatory compliance for Financial Advisors. Moneta will refer customers,
when appropriate, to the Bank and receive a share of the revenue generated in
the form of options in the Company's common stock. Moneta will receive a
percent of the gross margin generated in Financial Advisors as compensation.
The agreements with Moneta also allow Financial Advisors to immediately begin
offering a full range of products and services with the depth and expertise
of a large planning firm. Financial Advisors will continue to expand
products and services available to customers as the division develops.
As used herein, unless the context indicates otherwise, Enterbank Holdings,
Inc. and all of its subsidiaries are referred collectively as the
"Organization".
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The Company's executive offices are located at 150 North Meramec, Clayton,
Missouri 63105. The Company's telephone number is (314) 725-5500.
STRATEGY
The Company's strategy is to provide a complete range of financial services
designed to appeal to closely-held businesses, their owners, and to
professionals in the St. Louis metropolitan area, which encompasses the city
of St. Louis, Missouri, the Missouri counties of St. Louis, St. Charles,
Jefferson, Franklin, Lincoln and Warren and the Illinois county of St.
Clair. The Company's merchant banking operation targets a larger geographic
area, which includes all of Missouri and the adjoining states. The Company's
goal is to grow its operations within its defined market niche by being
well-managed, well-capitalized and disciplined in its approach to managing
and expanding its operations as growth opportunities arise. The Company
believes its goals can be achieved while providing attractive returns to
shareholders. Growth, net income, earnings per share, and return on
shareholders' equity are the financial performance indicators the Company
considers most critical in measuring success.
Through the Bank, the Company currently delivers a full range of commercial
banking services to the closely-held business market. Merchant banking and
venture capital services are conducted through Merchant Banc and Capital
Management. Financial planning and trust services are offered through
Financial Advisors. The Company plans to continue to expand the range of
services it provides within its market niche while expanding the base of
customers.
THE BANK
The Bank offers a broad range of commercial and personal banking services to
its customers. Loans include commercial, commercial real estate, financial
and industrial development, real estate construction and development,
residential real estate and a small amount of consumer loans. Other services
include cash management, safe-deposit boxes, and lock boxes.
The Company's primary source of funds has historically been customer
deposits. The Company offers a variety of accounts for depositors designed
to attract both short-term and long-term deposits. These accounts include
certificates of deposit, savings accounts, money market accounts, checking
and negotiable order to withdrawal accounts, and individual retirement
accounts. Interest-bearing accounts earn interest at rates established by
management based on competitive market factors and management's desire to
increase or decrease certain types of deposits.
Management believes the Bank is able to compete effectively in its market
because the Company's officers and senior management maintain close working
relationships with their commercial customers and their businesses; the
Bank's management structure enables it to react to customer requests for loan
and deposit services more quickly than larger competitors; the Bank's
management and officers have significant experience in the communities
serviced by the Bank; and the Company continues to target the closely-held
business and professional market. Additionally, industry consolidation has
resulted in fewer independent banks and fewer banks serving the Bank's target
market niche. Management believes the Bank is the only bank in its market
area whose primary strategy is to focus on closely-held businesses, their
owners and the professional market.
The Bank's historical growth strategy has been both customer and asset
driven. The Bank continuously seeks to add customers that fit its target
market. This strategy has enabled the Bank to attract customers whose
borrowing needs have grown along with the Bank's increasing capacity to fund
its customers' loan requests. Additionally, the Bank has increased its loan
portfolio based on lending opportunities developed by relationship officers.
The Bank funds its loan growth by attracting deposits from its business and
professional customers, by borrowing from the Federal Home Loan Bank and by
attracting wholesale deposits which are considered stable deposit sources and
which are priced at levels below the Bank's alternative cost of borrowing
funds.
The Bank's operating strategy results in operating ratios comparable to peer
banks despite its increasing investment in sales personnel whose goal is to
expand the number and depth of the Bank's customer relationships. The Bank
can expand its customer relationships and control operating costs by: operating
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a small number of offices with a high per office asset base; emphasizing
commercial loans which tend to be larger than retail loans; employing an
experienced staff, all of whom are rewarded on the basis of performance and
customer service; improving data processing and operational systems to increase
productivity and control risk; leasing facilities so that capital can be
deployed more effectively to support growth in earning assets; and outsourcing
services where possible.
The Bank has a strong orientation toward commercial banking, with a specific
focus on closely-held businesses, their owners, and professionals located in
its target service areas. The Bank stresses personal service, flexibility in
structuring loan and deposit relationships which meet customers' needs and
timely responsiveness to the needs of customers. Senior management of the
Bank makes it a practice to maintain close working relationships and personal
contact with each of its commercial customers.
The Bank's Board of Directors is comprised primarily of business owners and
professionals who fit the current and target customer profile of the Bank.
The Board of Directors takes an active role in the Bank's business
development activities and the credit review process. Its input and
understanding of the needs of the Bank's current and target customers has
been critical in the Bank's past success and will be critical in the Bank's
plans for future growth.
The Bank has historically had low turnover of relationship officers, and its
policy is to keep officers assigned to accounts for long periods of time.
This practice improves each officer's understanding of clients' businesses
resulting in knowledgeable credit assessments and superior customer service.
Relationship officers are supported by credit analysts and other support
personnel who are familiar with each assigned customer, creating a team
approach to serving customers' needs. A significant portion of the Bank's
new business results from referrals from existing customers.
The Bank's growth in loans has been due in large measure to its strategy of
targeting closely-held businesses and to the relationships and experience of
the Bank's management and directors in the St. Louis community.
The Loan authority and Approval Process of the Bank consists of several
committee reviews. The Presidents of all geographic banking units, the
Bank's Chief Financial Officer, and the Bank's Chief Executive Officer review
and vote on any aggregate loan relationships greater than $350,000 and all
insider loans. Any aggregate loan relationships greater than $3,000,000 and
all insider loans, are reviewed and examined by each banking unit's board
committee consisting of all members of the Board of Directors. These
directors serve on a rotating basis at their respective banking units.
Notwithstanding the required board committee approvals for insider loans, all
such loans are subsequently reported to the full Board of Directors for
review and comment.
MARKET AREAS AND APPROACH TO EXPANSION
Recent expansion efforts include the establishment of banking facilities in
St. Charles County and the City of Sunset Hills based on the high
expectations for growth in those markets and the high concentration of
closely-held businesses and professionals in those markets, and the
establishment of an operations facility in St. Louis County. As mentioned
above, the Company believes that local management and the involvement of a
Board of Directors comprised of local business persons and professionals are
key ingredients for success. Management believes that credit decisions,
pricing matters, business development strategies, etc. should be made locally
by managers who have an equity stake in the Company (see "Management.") The
Company, as part of its expansion effort, plans to continue its strategies of
operating a small number of offices with a high per office asset base,
emphasizing commercial loans, and employing experienced staff who are
rewarded on the basis of performance and customer service.
ENTERPRISE MERCHANT BANC
Merchant Banc, a wholly owned subsidiary of the Company, was organized in
1995 to provide merchant banking services to closely-held businesses and their
owners as part of the Company's overall strategy to deliver financial services
to that market. Operations to date have consisted of the formation of the
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Enterprise Fund (the "Fund"), a licensed SBIC formed in 1995 under the
regulations of the Small Business Administration ("SBA") and, to a lesser
extent, fee-based services related to capital formation and company
acquisition. Capital Management, a wholly owned subsidiary of Merchant Banc,
manages and acts as the general partner of the Fund. The Fund provides
venture capital to growing companies which qualify under the SBA's definition
of a small business eligible for investment by an SBIC. The Fund may also
participate in certain qualifying management buy-out situations involving
companies eligible for investment by an SBIC. The Fund began its operations
in the fourth quarter of 1995. The Fund's committed capital is approximately
$9 million, of which $1 million was committed by the Company as a limited
partner. Capital Management collects annual management fees of 2% of
committed capital, plus an incentive payment based upon the investment
results achieved over the ten year life of the Fund. In 1998, the Company
entered into a lease agreement for Enterprise Merchant Banc at 7400 West
110th Street, Overland Park, Kansas, 66210 that expires in 2003.
ENTERPRISE FINANCIAL ADVISORS
Financial Advisors, a division of the Bank, was organized in October of 1997
to provide fee-based personal financial planning, estate planning, trust
services, and corporate planning services to the Company's target market. As
part of the organization of Financial Advisors, the Company entered into
solicitation and referral agreements with Moneta Group, Inc. ("Moneta").
These agreements were renegotiated with the introduction of trust services by
Financial Advisors. These agreements call for Moneta to provide assistance in
staffing, training, marketing and regulatory compliance for Financial
Advisors. Moneta will refer customers, when appropriate, to the Bank and
receive a share of the revenue generated in the form of options in the
Company's common stock. Moneta will receive a percent of the gross margin
generated in Financial Advisors as compensation. The agreements with Moneta
also allow Financial Advisors to immediately begin offering a full range of
products and services with the depth and expertise of a large planning firm.
Financial Advisors will continue to expand products and services available to
customers as the division develops.
INVESTMENTS
The Company's investment policy is designed to enhance net income and return
on equity through prudent management of risk; ensure liquidity to meet
cash-flow requirements; help manage interest rate risk; ensure collateral is
available for public deposits, advances and repurchase agreements; and manage
asset diversification. The Company, through the Asset/Liability Management
Committee ("ALCO"), monitors investment activity and manages its liquidity by
structuring the maturity dates of its investments to meet anticipated
customer funding needs. However, the primary goal of the Company's
investment policy is to maintain an appropriate relationship between assets
and liabilities while maximizing interest rate spreads. Accordingly, the
ALCO monitors the sensitivity of its assets and liabilities with respect to
changes in interest rates and maturities and directs the overall acquisition
and allocation of funds.
EMPLOYEES
At December 31, 1998, the Company had approximately 116 employees. None of
the Company's employees are covered by a collective bargaining agreement.
Management believes that its relationship with its employees is good.
PROPERTIES
----------
All of the Company's banking facilities are leased under agreements that
expire in 1999, 2003, 2012 and 2015, for Clayton, St. Louis County, the City
of Sunset Hills, and St. Charles County, respectively. The Company has the
option to renew the Clayton facility lease for three additional five-year
periods with future rentals to be agreed upon. One section of the Clayton
facility is sublet and the proceeds are used to reduce the Company's
occupancy expenses. The Company has the option to renew the St. Louis County
facility lease for three additional five-year periods with future rentals to
agreed upon. The Company has the option to renew the Sunset Hills facility
lease for two additional five-year periods with future rentals to be agreed
upon. The Company has no future rental options for the St. Charles County
facility; however, during the term of the lease, the monthly rentals are
adjusted periodically based on then-current
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market conditions and inflation. The Merchant Banc facility in Kansas is leased
under an agreement that expires in 2003. The Company has no future rental
options for the Kansas office. The Company's aggregate rent expense totaled
$749,086, $436,524 and $319,002 in 1998, 1997 and 1996, respectively, and
sublease rental income totaled $42,816, $35,422 and $77,568 in 1998, 1997 and
1996, respectively. The Company leases its Clayton facility from a partnership
in which a director, [Robert E. Saur], and an officer, [Fred H. Eller], have an
ownership interest.
The future aggregate minimum rental commitments required under the leases are
as follows:
Year Amount
---- ------
1999 $776,125
2000 784,892
2001 793,658
2002 793,658
2003 426,065
========
For leases which renew or are subject to periodic rental adjustments, the
monthly rental payments will be adjusted based on then-current market
conditions and rates of inflation.
The following is a list of the Company's current facilities:
Operating Unit Address Description
- -------------- ------- -----------
Enterprise Bank, Clayton 150 North Meramec Commercial and Retail Banking
Clayton, Missouri 63105
Enterprise Bank, St. Charles 300 St. Peters Center Blvd. Commercial and Retail Banking
St. Peters, Missouri 63376
Enterprise Bank, Sunset Hills 3890 South Lindbergh Blvd. Commercial and Retail Banking
Sunset Hills, Missouri 63127
Enterprise Bank, St. Louis 12281 North Warson Road Operations Offices
St. Louis, Missouri 63132
Enterprise Merchant Banc, Kansas City 7400 W. 110th Street; 5th Floor, Merchant Banking
Overland Park, Kansas 66210
LEGAL PROCEEDINGS
-----------------
The Company and its subsidiaries are, from time to time, parties to various
legal proceedings arising out of their businesses. Management believes that
there are no such proceedings pending or threatened against the Company or
its subsidiaries which, if determined adversely, would have a material effect
on the business, financial condition, results of operations or cash flows of
the Company or any of its subsidiaries.
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MARKET FOR COMMON STOCK
-----------------------
As of March 17, 1999, the Company had approximately 675 common stock
shareholders of record and a market price of $35.00. The common stock has
not been traded on an exchange or in any established public trading market,
although there have been a limited number of transactions in the common stock
that have been made known to the Company. Based solely on the information
made available to the Company from a limited number of buyers and sellers,
the Company believes the selling prices for the common stock were as follows:
Market Price
1998 High Low
First Quarter $ 25.75 $ 21.00
Second Quarter 30.00 25.75
Third Quarter 32.00 28.00
Fourth Quarter 31.00 29.50
1997
First Quarter $ 15.50 $ 13.75
Second Quarter 15.50 15.50
Third Quarter 20.25 15.50
Fourth Quarter 20.25 20.25
There may have been other transactions at other prices not known to the
Company.
On February 14, 1997, the Company completed a stock offering of 451,612
shares of common stock. These shares were offered to the public at $15.50
per share. The offering allowed for the sale of a minimum of 193,548 shares,
or $3,000,000, and a maximum of 451,612 shares, or $7,000,000, in common
stock. The maximum number of shares were sold at $15.50 per share.
On October 31, 1997, the Company completed a private placement of its common
stock allowing a maximum of 131,343 shares of common stock to be purchased.
These shares were offered in a private sale to Moneta principals related to
the previously mentioned agreements with Moneta. These shares were offered
at $16.75 per share, and 130,940 shares were sold at $16.75.
Since the Company does not expect to list its common stock on any exchange or
seek quotation of common stock on the National Association of Securities
Dealers Automated Quotation System (NASDAQ) in the near future, no
established public trading market for the common stock is expected to develop
in the foreseeable future.
DIVIDENDS
---------
The holders of shares of common stock of the Company are entitled to receive
dividends when, as, and if declared by the Company's Board of Directors out
of funds legally available for the purpose of paying dividends. The amount
of dividends, if any, that may be declared by the Company will be dependent
on many factors, including future earnings, capital requirements and business
conditions as they affect the Bank. As a result, no assurance can be given
that dividends will be paid in the future with respect to the common stock.
The Company declared and paid dividends quarterly during calendar years 1998
and 1997, in annual amounts of $.10 and $.09 per share, respectively.
DESCRIPTION OF CAPITAL STOCK
----------------------------
COMMON STOCK
The authorized capital stock of the Company consists of 3,000,000 shares of
common stock, par value $.01 per share (the "Common Stock"). Holders of
Common Stock are entitled to one vote per share on all matters on which the
holders of Common Stock are entitled to vote. In all elections of directors,
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holders of Common Stock have the right to cast votes equaling the number of
shares of Common Stock held by such stockholder multiplied by the number of
directors to be elected. All of such votes may be cast for a single director
or may be distributed among the number of directors to be elected, or any two
or more directors, as such stockholder may deem fit. Holders of Common Stock
have no preemptive, conversion, redemption, or sinking fund rights. In the
event of a liquidation, dissolution or winding-up of the Company, holders of
Common Stock are entitled to share equally and ratably in the assets of the
Company, if any, remaining after the payment of all debts and liabilities of
the Company.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
INTRODUCTION
The following discussion and analysis is intended to review the significant
factors of the financial condition and results of operations of the Company
for the three-year period ended December 31, 1998. Reference should be made
to the accompanying consolidated financial statements and the selected
financial data presented elsewhere and herein for an understanding of the
following review.
FISCAL 1998 COMPARED TO FISCAL 1997
- -----------------------------------
FINANCIAL CONDITION
Total assets at December 31, 1998 were $375 million, an increase of $84
million, or 29%, over total assets of $291 million at December 31, 1997.
Loans were $274 million, an increase of $48 million, or 21%, over total loans
of $226 million at December 31, 1997. Federal funds sold and investment
securities were $61 million, an increase of $15 million, or 33%, from total
federal funds sold and investment securities of $46 million at December 31,
1997.
Total deposits at December 31, 1998 were $339 million, an increase of $75
million, or 28%, over total deposits of $264 million at December 31, 1997.
Most of the deposit growth occurred in the money market deposits, demand
deposits and certificates of deposit $100,000 and over. Money market
deposits grew $51 million, or 51%, during 1998. Certificates of deposit
$100,000 and over grew $11 million or 32% during 1998. Demand deposits grew
$15 million, or 33%, during 1998. Growth in transaction and money market
deposit accounts is attributed primarily to direct calling efforts of
relationship officers and $16 million in money market accounts referred by
Moneta. Growth in certificates of deposit is also due to an established
presence in the marketplace.
Total shareholders' equity increased $3.2 million primarily due to retained
earnings of $2.8 million for the year and the exercise of incentive stock
options by employees.
RESULTS OF OPERATIONS
Net income was $3.0 million for the year ended December 31, 1998, an increase
of 36% over net income of $2.2 million for the same period in 1997. Diluted
earnings per share for the years ended December 31, 1998 and 1997 were $1.20
and $1.00, respectively.
NET INTEREST INCOME
The largest component of the Company's net income is net interest income.
Net interest income (presented on a tax equivalent basis) was $13.6 million,
which yielded a net interest margin of 4.59%, for the year ended December 31,
1998, compared to net interest income and net interest margin of $10.2
million and 4.79%, for the same period in 1997.
The $3.4 million, or 33%, increase in net interest income was driven
primarily by a $84 million increase in average earning assets to $297 million
for the year ended December 31, 1998 compared to $71 million of earning asset
growth during the same period in 1997. The increase in the earning assets is
attributable
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to the continued calling efforts of the Company's relationship officers and
sustained economic growth in the local market served by the Company. Some of
the increase was offset by a lower average earning asset yield and growth in
interest bearing deposits.
The yield on average earning assets decreased to 8.59% for the year ended
December 31, 1998 from 8.84% for the same period in 1997. The decrease in
asset yield was primarily due to three 0.25% drops in the prime rate during
the third and fourth quarters of 1998 and a general decrease in average yield
on loans.
Average loans as a percent of average total assets increased to 79.06% in
1998 from 77.89% in 1997. For the same periods, the yield on average loans
was 9.16% and 9.48%, respectively. The decrease in loan yield in 1998
compared to 1997 offset the margin benefits obtained by increasing the loan
to asset ratio during the same period.
The yield on interest bearing liabilities decreased to 4.88% for the year
ended December 31, 1998 from 5.03% for the same period in 1997. The yield on
all deposits decreased in 1998 as compared to 1997. This drop is due to the
above mentioned drops in the prime rate and a concerted effort by the ALCO
committee to decrease the interest paid on deposits. This general drop in
yields was offset by deposits shifting to higher yielding money market
accounts.
FISCAL 1997 COMPARED TO FISCAL 1996
- -----------------------------------
FINANCIAL CONDITION
Total assets at December 31, 1997 were $291 million, an increase of $106
million, or 57%, over total assets of $185 million at December 31, 1996.
Loans were $226 million, an increase of $92 million, or 69%, over total loans
of $134 million at December 31, 1996. Federal funds sold and investment
securities were $46 million, an increase of $8 million, or 21%, from total
federal funds sold and investment securities of $38 million at December 31,
1996.
Total deposits at December 31, 1997 were $264 million, an increase of $95
million, or 56%, over total deposits of $169 million at December 31, 1996.
Deposit growth occurred in all categories during 1997. Most of the deposit
growth occurred in the money market deposits. Money market deposits grew $44
million, or 81%, during 1997. Growth in transaction and money market deposit
accounts is attributed primarily to direct calling efforts of relationship
officers. Certificates of deposits under $100,000 grew $21 million, or 52%,
which is in line with total deposit growth of 56%. Growth in certificates of
deposits is due to an advertising program during the second half of the year.
The advertising program produced over $18 million net growth in certificates
of deposit during 1997.
Total shareholders' equity increased $11 million primarily due to retained
earnings of $2 million for the year, proceeds of $7 million and $2 million
from two separate sales of common stock in February and October, and the
exercise of incentive stock options by some employees.
RESULTS OF OPERATIONS
Net income was $2.2 million for the year ended December 31, 1997, an increase
of 29% over net income of $1.7 million for the same period in 1996. Diluted
earnings per share for the years ended December 31, 1997 and 1996 were $1.00,
and $0.97, respectively. In 1997, basic and diluted earnings per share did
not increase in line with the increase in net income due to an increase in
weighted average common stock equivalents. Weighted average common stock
equivalents increased primarily from the issuance of 451,612 and 130,940
shares of common stock on February 14, 1997 and October 31, 1997,
respectively, in two common stock offerings.
NET INTEREST INCOME
The largest component of the Company's net income is net interest income.
Net interest income (presented on a tax equivalent basis) was $10.2 million,
which yielded a net interest margin of 4.79%, for
9
12
the year ended December 31, 1997, compared to net interest income and net
interest margin of $7.0 million and 4.96%, for the same period in 1996.
The $3.2 million, or 46%, increase in net interest income was driven
primarily by a $71 million increase in average earning assets to $213 million
for the year ended December 31, 1997 compared to $20 million of earning asset
growth during the same period in 1996. Some of the increase was offset by a
lower average earning asset yield, growth in interest bearing deposits and
higher cost of deposits.
The yield on average earning assets decrease to 8.84% for the year ended
December 31, 1997 from 8.90% for the same period in 1996. The mix of earning
assets changed slightly from higher yielding assets, such as loans, to lower
yielding assets, such as federal funds sold and investment securities. This
change in asset mix accounts for most of the .06% drop in the yield on
earning assets between 1997 and 1996.
Average loans as a percent of average total assets decreased to 77.89% in
1997 from 79.14% in 1996. For the same period, the yield on average loans
was 9.48% and 9.47%.
The yield on interest bearing deposits increased to 5.03% for the year ended
December 31, 1997 from 4.89% for the same period in 1996. Deposits shifted
from lower yielding transaction accounts to higher yielding money market
accounts during 1997 resulting in the increase in interest expense.
The following table sets forth, on a tax-equivalent basis, certain
information relating to the Company's average balance sheet, and reflects the
average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest income for each
of the three years ended December 31, 1998:
10
13
Year ended December 31,
----------------------------------------------------
1998
----------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
-------- -------- -------- -------
Interest-earning assets:
Loans $251,916 79.06% $23,084 9.16%
Taxable investments in debt
and equity securities 15,887 4.99 878 5.53
Nontaxable investments in
debt securities 619 0.19 40 6.46
Federal funds sold 27,679 8.69 1,469 5.31
Interest earning deposits 795 0.25 40 5.03
-------- ------ ------- ----
Total interest-earning assets 296,896 93.18 25,511 8.59
Noninterest-earning assets:
Cash and due from banks 17,422 5.47
Office equipment and leasehold
improvements 2,686 0.84
Prepaid expenses and other assets 4,609 1.45
Allowance for loan losses (2,985) (0.94)
-------- ------
Total assets $318,628 100.00%
======== ======
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 20,503 6.43% $ 492 2.40%
Money market 117,027 36.74 5,361 4.58
Savings 1,496 0.47 37 2.47
Certificates of deposit 102,897 32.29 5,912 5.75
Notes payable -- -- -- --
Federal Home Loan Bank advances 1,447 0.45 67 4.63
Federal funds purchased -- -- -- --
-------- ------ ------- ----
Total interest-bearing liabilities 243,370 76.38 11,869 4.88
-------
Noninterest-bearing liabilities:
Demand deposits 46,326 14.54
Other liabilities 1,213 0.38
-------- ------
Total liabilities 290,909 91.30
Shareholders' equity 27,719 8.70
-------- ------
Total liabilities and
shareholders' equity $318,628 100.00%
======== ======
Net interest income $13,642
=======
Net interst margin 4.59%
====
Year ended December 31,
----------------------------------------------------
1997
----------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
-------- -------- -------- --------
Interest-earning assets:
Loans $177,532 77.89% $16,834 9.48%
Taxable investments in debt
and equity securities 17,859 7.84 1,018 5.70
Nontaxable investments in
debt securities 805 0.35 52 6.46
Federal funds sold 16,679 7.32 909 5.45
Interest earning deposits 38 0.02 2 5.26
-------- ------ ------- ----
Total interest-earning assets 212,913 93.42 18,815 8.84
Noninterest-earning assets:
Cash and due from banks 11,580 5.08
Office equipment and leasehold
improvements 1,677 0.74
Prepaid expenses and other assets 3,829 1.68
Allowance for loan losses (2,085) (0.91)
-------- ------
Total assets $227,914 100.00%
======== ======
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 15,840 6.95% $ 452 2.85%
Money market 77,198 33.87 3,604 4.67
Savings 1,270 0.56 32 2.52
Certificates of deposit 77,081 33.82 4,521 5.87
Notes payable 25 0.01 3 12.00
Federal Home Loan Bank advances -- -- -- --
Federal funds purchased 105 0.05 11 10.48
-------- ------ ------- -----
Total interest-bearing liabilities 171,519 75.26 8,623 5.03
-------
Noninterest-bearing liabilities:
Demand deposits 33,247 14.59
Other liabilities 426 0.19
-------- ------
Total liabilities 205,192 90.03
Shareholders' equity 22,722 9.97
-------- ------
Total liabilities and
shareholders' equity $227,914 100.00%
======== ======
Net interest income $10,192
=======
Net interst margin 4.79%
====
Year ended December 31,
----------------------------------------------------
1996
----------------------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
-------- -------- -------- -------
Interest-earning assets:
Loans $120,849 79.14% $11,449 9.47%
Taxable investments in debt
and equity securities 12,300 8.05 693 5.63
Nontaxable investments in
debt securities 860 0.56 57 6.63
Federal funds sold 7,526 4.93 396 5.26
Interest earning deposits -- -- -- --
-------- ------ ------- ----
Total interest-earning assets 141,535 92.68 12,595 8.90
-------
Noninterest-earning assets:
Cash and due from banks 8,686 5.69
Office equipment and leasehold
improvements 1,789 1.17
Prepaid expenses and other assets 2,215 1.45
Allowance for loan losses (1,520) (0.99)
-------- ------
Total assets $152,706 100.00%
======== ======
Liabilities and Shareholders' Equity:
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 13,180 8.63% $ 332 2.52%
Money market 44,710 29.28 2,007 4.49
Savings 1,105 0.72 33 2.99
Certificates of deposit 54,756 35.86 3,181 5.81
Notes payable 205 0.13 15 7.32
Federal Home Loan Bank advances -- -- -- --
Federal funds purchased 18 0.01 1 5.56
-------- ------ ------- ----
Total interest-bearing liabilities 113,974 74.63 5,569 4.89
-------
Noninterest-bearing liabilities:
Demand deposits 24,427 16.00
Other liabilities 932 0.61
-------- ------
Total liabilities 139,333 91.24
Shareholders' equity 13,373 8.76
-------- ------
Total liabilities and
shareholders' equity $152,706 100.00%
======== ======
Net interest income $ 7,026
=======
Net interst margin 4.96%
====
- ---------------------------
Average balances include non-accrual loans and loans held for sale. The Company had $6,272,124 and 1,324,244
in loans held for sale at December 31, 1998 and 1997, respectively. The income on non-accrual loans is
included in interest but is recognized only upon receipt. Loan fees included in interest income are
approximately $625,000, $671,000 and $474,000 for 1998, 1997 and 1996, respectively.
Nontaxable investment income is presented on a fully tax-equivalent basis assuming a tax rate of 34%.
11
14
During 1998, an increase in the average volume of earning assets caused an
increase in interest income of $7,335,000. Interest income decreased
$639,000 due to a decrease in rates on earning assets. Increases in the
average volume of interest-bearing demand deposits, savings and money market
accounts, time deposits and notes payable resulted in an increase in interest
expense of $3,463,000. Changes in interest rates on the average volume of
interest-bearing liabilities resulted in a decrease in interest expense of
$217,000. The net effect of the volume and rate changes associated with all
categories of interest-earning assets during 1998 as compared to 1997
increased interest income by $6,696,000 while the net effect of the volume
and rate changes associated with all categories of interest-bearing
liabilities increased interest expense by $3,246,000.
During 1997, an increase in the average volume of earning assets caused an
increase in interest income of $6,186,000. Interest income increased
$34,000 due to an increase in rates on earning assets. Increases in the
average volume of interest-bearing demand deposits, savings and money market
accounts, time deposits and notes payable resulted in an increase in interest
expense of $2,890,000. Changes in interest rates on the average volume of
interest-bearing liabilities resulted in an increase in interest expense of
$164,000. The net effect of the volume and rate changes associated with all
categories of interest-earning assets during 1997 as compared to 1996
increased interest income by $6,220,000 while the net effect of the volume
and rate changes associated with all categories of interest-bearing
liabilities increased interest expense by $3,054,000.
The following table sets forth, on a tax-equivalent basis for the periods
indicated, a summary of the changes in interest income and interest expense
resulting from changes in yield/rates and volume:
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Due to Increase (Decrease) Due to
------------------------------------ ------------------------------------
Volume Rate Net Volume Rate Net
---------- -------- ------- ---------- -------- -------
(Dollars in Thousands)
Interest earned on:
Loans $6,834 $(584) $6,250 $5,375 $ 10 $5,385
Taxable investments in debt
and equity securities (111) (29) (140) 317 8 325
Nontaxable investments in debt
and equity securities (12) -- (12) (4) (1) (5)
Federal funds sold 584 (24) 560 498 15 513
Certificates of deposit 40 (2) 38 -- 2 2
------ ----- ------ ------ ----- ------
Total interest-earning assets $7,335 $(639) $6,696 $6,186 $ 34 $6,220
------ ----- ------ ------ ----- ------
Interest paid on:
Interest-bearing transaction
accounts $ 119 $ (79) $ 40 $ 72 $ 48 $ 120
Money market 1,826 (69) 1,757 1,514 83 1,597
Savings 6 (1) 5 5 (6) (1)
Certificates of deposit 1,485 (94) 1,391 1,309 31 1,340
Notes payable (2) (1) (3) (18) 6 (12)
Federal Home Loan Bank Advances 34 33 67 -- -- --
Federal funds purchased (5) (6) (11) 8 2 10
------ ----- ------ ------ ----- ------
Total interest-bearing
liabilities $3,463 $(217) $3,246 $2,890 $ 164 $3,054
------ ----- ------ ------ ----- ------
Net interest income $3,872 $(422) $3,450 $3,296 $(130) $3,166
====== ===== ====== ====== ===== ======
Change in volume multiplied by yield/rate of prior period.
Change in yield/rate multiplied by volume of prior period.
Nontaxable investments in debt securities are presented on a fully
tax-equivalent basis assuming a tax rate of 34%.
NOTE: The change in interest due to both rate and volume has been allocated
to rate and volume changes in proportion to the relationship of the absolute
dollar amounts of the change in each.
12
15
LOAN PORTFOLIO
Loans, as a group, are the largest asset and the primary source of interest
income for the Company. Diversification among different categories of loans
reduces the risks associated with any single type of loan. The following
table sets forth the composition of the Company's loan portfolio by type of
loans at the dates indicated:
December 31,
-----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ---------------- ---------------- ----------------- -----------------
Percent Percent Percent Percent Percent
of Total of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
Commercial and industrial $ 81,346 29.70% $ 69,490 30.81% $ 43,876 32.71% $ 43,728 39.59% $30,001 35.01%
Real estate:
Commercial 33,242 12.14 37,349 16.56 24,946 18.60 25,507 23.09 22,333 26.06
Construction 76,739 28.03 47,771 21.18 23,362 17.42 11,634 10.53 10,186 11.89
Residential 69,978 25.56 63,772 28.27 37,449 27.92 24,537 22.21 21,483 25.07
Consumer and other 12,513 4.57 7,178 3.18 4,500 3.35 5,058 4.58 1,684 1.97
-------- ------ -------- ------ -------- ------ -------- ------ ------- ------
Total loans $273,818 100.00% $225,560 100.00% $134,133 100.00% $110,464 100.00% $85,687 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======= ======
The Company's subsidiary bank grants commercial, residential and consumer
loans primarily in the St. Louis metropolitan area. The Company has a
diversified loan portfolio, with no particular concentration of credit in any
one economic sector; however, a substantial portion of the portfolio is
secured by real estate. As of December 31, 1998, $180.0 million in loans, or
66% of the loan portfolio, involved real estate as part or all of the
collateral package, as compared to $148.9 million or 66% and $85.8 million or
64% in 1997 and 1996, respectively. Of these loans, $75.6 million or 28%,
for 1998, were personal and business loans and loans on owner-occupied
properties as compared to $55.2 million or 37% and $32.6 million or 38% for
1997 and 1996, respectively. Management views these types of loans as having
less risk than traditional real estate loans because the primary source of
repayment for these loans is not dependent upon the cash flow or sale of the
real estate securing the loans. When evaluating the appropriateness of the
allowance for loan losses, these loans are evaluated based on commercial
consider-ations such as the financial condition, cash flow and income of the
borrower as well as the value of all collateral securing the loans, including
the market value of any real estate securing the loan.
13
16
The following table sets forth the interest rate sensitivity of the loan
portfolio at December 31, 1998:
Loans Maturing or Repricing
---------------------------------------------------------
After One
In One Through After
Year or Less Five Years Five Years Total
------------ ---------- ---------- -------
(Dollars in Thousands)
FIXED RATE LOANS
- ----------------
Commercial and industrial $ 2,995 $24,556 $ 638 $ 28,189
Real estate:
Commercial 5,743 12,898 152 18,793
Construction 3,460 9,255 205 12,920
Residential 6,148 25,126 482 31,756
Consumer and other 837 3,370 -- 4,207
-------- ------- ------ --------
Total $ 19,183 $75,205 $1,477 $ 95,865
======== ======= ====== ========
VARIABLE RATE LOANS
- -------------------
Commercial and industrial $ 53,157 $ -- $ -- $ 53,157
Real estate:
Commercial 14,449 -- -- 14,449
Construction 63,819 -- -- 63,819
Residential 38,222 -- -- 38,222
Consumer and other 8,306 -- -- 8,306
-------- ------- ------ --------
Total $177,953 $ -- $ -- $177,953
======== ======= ====== ========
TOTAL LOANS
- -----------
Commercial and industrial $ 56,152 $24,556 $638 $ 81,346
Real estate:
Commercial 20,192 12,898 152 33,242
Construction 67,279 9,255 205 76,739
Residential 44,370 25,126 482 69,978
Consumer and other 9,143 3,370 -- 12,513
-------- ------- ------ --------
Total $197,136 $75,205 $1,477 $273,818
======== ======= ====== ========
Loan balances are shown net of unearned loan fees and loans held for sale.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $711,000, $775,000, and $345,000 in 1998,
1997, and 1996 respectively. During 1998, the decrease in provision
reflects a decrease in net loan charge-offs to $21,000 as compared to net
charge-offs of $30,000 for the year ended December 31, 1997. In addition,
the Company experienced loan growth of $48 million during 1998 versus loan
growth of $92 million during the same period in 1997.
The Company was able to decrease provision expense in 1996 as compared to
1995 based upon continued quality of the loan portfolio and net recoveries of
$20,000 during 1996 as compared to net losses of $231,000 during 1995. In
addition, the Company experienced loan growth of $24 million during 1996
versus $25 million during the same period in 1995. The Company has charged
off a total of $645,000 in loans from January 1, 1994 through December 31,
1998. Total recoveries for the same period are $211,000, resulting in a
five-year net charge-off experience of $434,000, or 0.07% per year of average
loans for the same period.
14
17
The following table summarizes changes in the allowance for loan losses
arising from loans charged-off and recoveries on loans previously
charged-off, by loan category, and additions to the allowance that have been
charged to expense:
December 31,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in Thousands)
Allowance at beginning of period $ 2,510 $ 1,765 $ 1,400 $ 1,000 $ 722
-------- -------- -------- ------- -------
Loans charged off:
Commercial and industrial 30 90 -- 19 45
Real estate:
Commercial 19 45 -- 118 132
Construction -- -- -- -- --
Residential -- 27 -- 106 --
Consumer and other -- -- -- -- 14
-------- -------- -------- ------- -------
Total loans charged off 49 162 -- 243 191
-------- -------- -------- ------- -------
Recoveries of loans previously
charged off:
Commercial and industrial 18 44 -- -- 18
Real estate:
Commercial 10 50 4 12 --
Construction -- -- -- -- --
Residential -- 38 15 -- --
Consumer and other -- -- 1 -- 1
-------- -------- -------- ------- -------
Total recoveries of
loans previously
charged off 28 132 20 12 19
-------- -------- -------- ------- -------
Net loans charged
off (recovered) 21 30 (20) 231 172
-------- -------- -------- ------- -------
Provisions charged to operations 711 775 345 631 450
-------- -------- -------- ------- -------
Allowance at end of period $ 3,200 $ 2,510 $ 1,765 $ 1,400 $ 1,000
======== ======== ======== ======= =======
Average loans $251,916 $177,532 $120,849 $94,737 $76,263
Total loans, net of unearned
loan fees 73,818 225,560 134,133 110,464 85,687
Nonperforming loans 2 50 161 107 --
Net charge-offs (recoveries)
to average loans 0.01% 0.02% (0.02%) 0.24% 0.23%
Allowance for loan losses to total
loans, net of unearned loan fees 1.17 1.11 1.32 1.27 1.17
The Company's credit management policy and procedures focus on identifying,
measuring and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which is ratified in the loan
approval process and subsequently tested in internal loan reviews, external
audits and regulatory bank examinations. Basically, the system requires rating
all loans at the time they are made.
Adversely rated credits, including loans requiring close monitoring which
would not normally be considered criticized credits by regulators, are
included on a monthly loan watch list. Loans may be added to the watch list
for reasons which are temporary and correctable, such as the absence of
current financial statements of the borrower, or a deficiency in loan
documentation. Other loans are added whenever any adverse circumstance is
detected which might affect the borrower's ability to meet the terms of the
loan. This could be initiated by the delinquency of a scheduled loan
payment, a deterioration in the borrower's financial condition identified in
a review of periodic financial statements, a decrease in the value of the
collateral securing the loan, or a change in the economic environment within
which the borrower operates. Loans on the watch list require detailed loan
status reports prepared
15
18
by the responsible officer every four months, which are then discussed in formal
meetings with the loan review and loan administration staffs. Downgrades of loan
risk ratings may be initiated by the responsible loan officer at any time.
However, upgrades of risk ratings may only be made with the concurrence of the
loan review and credit administration staffs generally at the time of the formal
watch list review meetings.
Each month, loan administration provides management with detailed lists of
loans on the watch list and summaries of the entire loan portfolio by risk
rating. These are coupled with analyses of changes in the risk profiles of
the portfolios, changes in past due and nonperforming loans and changes in
watch list and classified loans over time. In this manner, the overall
increases or decreases in the levels of risk in the portfolios are monitored
continually. Factors are applied to the loan portfolios for each category of
loan risk to determine acceptable levels of allowance for possible loan
losses. These factors are derived primarily from the actual loss experience
and from published national surveys of norms in the industry. The calculated
allowances required for the portfolios are then compared to the actual
allowance balances to determine the provisions necessary to maintain the
allowances at appropriate levels. In addition, management exercises judgment
in its analysis of determining the overall level of the allowance for
possible loan losses. In its analysis, management considers the change in
the portfolio, including growth and composition, and the economic conditions
of the region in which the Company operates. Based on this quantitative and
qualitative analysis, the allowance for possible loan losses is adjusted.
Such adjustments are reflected in the consolidated statements of income.
The Company does not engage in foreign lending. Additionally, the Company
does not have any concentrations of loans exceeding 10% of total loans which
are not otherwise disclosed in the loan portfolio composition table. The
Company does not have a material amount of interest-bearing assets which
would have been included in nonaccrual, past due or restructured loans if
such assets were loans.
Management believes the allowance for loan losses is adequate to absorb
losses in the loan portfolio. While management uses available information to
recognize loan losses, future additions to the allowance may be necessary
based on changes in economic conditions. In addition, various regulatory
agencies, as an integral part of their examination process, periodically
review the allowance for loan losses. Such agencies may require the Company
to increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examinations.
While the Company has benefited from very low historical net charge-offs
during an extended period of rapid loan growth, management remains cognizant
that historical loan loss and non-performing asset experience may not be
indicative of future results. If the experience were to deteriorate and
additional provisions for loan losses were required, future operation results
would be negatively impacted. Both management and the Board of Directors
continually monitor changes in asset quality, market conditions,
concentration of credit and other factors, all of which impact the credit
risk associated with the Company's loan portfolio.
As of December 31, 1998, 1997, and 1996, the Company had thirteen, eleven,
and eight impaired loans in the amount of $1,087,000, $967,000, and $636,000
respectively, all of which are considered potential problem loans.
Non-performing assets decreased from $856,000 as of December 31, 1997 to
$808,000 as of December 31, 1998. Non-performing assets decreased from
$1,035,000 as of December 31, 1996 to $856,000 as of December 31, 1997.
16
19
The following table sets forth information concerning the Company's
nonperforming assets as of the dates indicated:
December 31,
-----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans $ 2 $ 50 $ 131 $ 107 $ --
Loans past due 90 days or more
and still accruing interest -- -- 30 -- --
Restructured loans -- -- -- -- --
-------- -------- -------- -------- --------
Total nonperforming loans 2 50 161 107 --
Foreclosed property 806 806 874 881 1,776
-------- -------- -------- -------- --------
Total nonperforming assets $ 808 $ 856 $ 1,035 $ 988 $ 1,776
======== ======== ======== ======== ========
Total assets $375,304 $291,365 $184,584 $153,706 $122,212
Total loans, net of unearned
loan fees 273,818 225,560 134,133 110,464 85,687
Total loans plus foreclosed property 274,624 226,366 135,007 111,345 87,463
Nonperforming loans to total loans 0.00% 0.02% 0.12% 0.10% 0.00%
Nonperforming assets to total loans
plus foreclosed property 0.29 0.38 0.77 0.89 2.03
Nonperforming assets to total assets 0.22 0.29 0.56 0.64 1.45
The Company's policy is to discontinue the accrual of interest on loans when
principal or interest is due and has remained unpaid for 90 days or more.
The following table sets forth the allocation of the allowance for loan
losses by loan category as an indication of the estimated risk of loss for
each loan type. The unallocated portion of the allowance is intended to
cover loss exposure related to potential problem loans for which no specific
allowance has been estimated and for the possible risks in the remainder of
the loan portfolio.
December 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------------------- ------------------ ------------------ ------------------ --------------------
Percent Percent Percent Percent Percent
of of of of of
Category Category Category Category Category
Total Total Total Total Total
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(Dollars in Thousands)
Commercial and industrial $ 848 29.70% $ 656 30.81% $ 423 32.71% $ 348 39.59% $ 247 35.01%
Real estate:
Commercial 447 12.14 316 16.56 253 18.60 265 23.09 218 26.06
Construction 679 28.03 465 21.18 413 17.42 93 10.53 69 11.89
Residential 798 25.56 605 28.27 381 27.92 510 22.21 350 25.07
Consumer and other 112 4.57 82 3.18 56 3.35 44 4.58 16 1.97
Not allocated 316 -- 386 -- 239 -- 140 -- 100 --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total $3,200 100.00% $2,510 100.00% $1,765 100.00% $1,400 100.00% $1,000 100.00%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
The above allocation by loan category does not mean that actual loan
charge-offs will be incurred in the categories indicated. The risk factors
considered in determining the above allocation are the same as those used
when determining the overall level of the allowance.
17
20
NONINTEREST INCOME
The following table depicts the annual changes in various noninterest income
categories:
1998 versus 1997 1997 versus 1996
------------------------------------ -----------------------------------
$ Change 1998 1997 $ Change 1997 1996
-------- ---------- -------- -------- ----------- -----------
Merchant Banc management fee $ 33,000 $ 191,600 $158,600 $ (49,500) $158,600 $ 208,100
Merchant Banc consulting fees 224,500 232,500 8,000 8,000 8,000 --
Service charges on deposit accounts 79,421 252,873 173,452 44,038 173,452 129,414
Merchant credit card income N/A -- -- (600,981) -- 600,981
Gain on sale of mortgage loans 1,163,921 1,242,869 78,948 78,948 78,948 --
Gain on sale of credit card operation N/A -- -- (320,000) -- 320,000
Loss on investment in the Enterprise
Fund L.P. 2,705 (2,199) (4,904) 57,786 (4,904) (62,690)
Other noninterest income 99,190 161,069 61,879 17,892 61,879 43,987
---------- ---------- -------- --------- -------- ----------
Total noninterest income $1,602,737 $2,078,712 $475,975 $(763,817) $475,975 $1,239,792
========== ========== ======== ========= ======== ==========
Total noninterest income was $2,078,712 in 1998, representing a $1,602,737
increase from 1997. The increase is primarily the result of a $1,163,921
increase on the gain on sale of mortgage loans. The company started offering
mortgage products during the third quarter of 1997. In addition, Merchant
Banc consulting fees increased $224,500 in 1998 as compared to 1997. These
fees are a result of increased business activity in this company from the new
office in Kansas. Noninterest income, excluding Merchant Banc consulting
fees and gain on sale of mortgage loans increased $214,316 in 1998 as
compared to 1997. This increase is due to an increase in service charges on
a larger deposit base and other fees.
Total noninterest income was $475,975 in 1997, representing a $763,817 or 62%
decrease from 1996. The decrease is primarily attributed to merchant credit
card income. The company sold its merchant credit card portfolio in November
1996 for a gain of $320,000. Noninterest income, excluding merchant credit
card income and the gain on the sale of the credit card operation, increased
$157,164 or 49%, in 1997 as compared to 1996. This increase is attributed to
the gain on sale of mortgage loans and an increase in service charges on a
larger deposit base.
NONINTEREST EXPENSE
Total noninterest expense was $10,051,702 in 1998 representing a $3,713,126
or 59% increase from 1997. The increase in noninterest expenses are
primarily attributable to: 1) a new merchant bank office in Kansas City
opened in March, 1998 2) new banking facilities opened during 1997 in St.
Peters and Sunset Hills; and 3) expenses related to the origination and sale
of mortgage loans. The following table depicts changes in noninterest
expenses in the above mentioned operations:
1998 versus 1997 1997 versus 1996
------------------------------------- ------------------------------------
$ Change 1998 1997 $ Change 1997 1996
---------- ----------- ---------- ---------- ---------- ----------
Merchant banking division $ 409,361 $ 591,737 $ 182,376 $ (18,235) $ 182,376 $ 200,611
St. Peters and Sunset Hills banking
units 1,871,666 3,928,985 2,057,319 1,913,695 2,057,319 143,624
Mortgage operations 724,830 855,405 130,575 130,575 130,575 --
Merchant credit card expense N/A -- -- (441,991) -- 441,991
Other operations 707,269 4,675,575 3,968,306 (391,801) 3,968,306 4,360,108
---------- ----------- ---------- ---------- ---------- ----------
Total noninterest expense $3,713,126 $10,051,702 $6,338,576 $1,192,243 $6,338,576 $5,146,334
========== =========== ========== ========== ========== ==========
The increases are primarily due to increases in salaries and benefits
expense, occupancy and equipment expense and other operating expenses related
to the above mentioned operations. Noninterest expenses attributable to
other operations increased 18% in 1998 as compared to 1997 and is due to
normal increases related to growth.
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Noninterest expense increased $1,192,242, or 23%, from 1996 to 1997. The
increases are primarily due to increases in salaries and employee benefits
and occupancy and equipment expenses, offset by a reduction of $441,991 in
1997 of expenses related to the previously mentioned credit card operation.
Increases in noninterest expenses are primarily related to the two new
banking facilities located in St. Charles County and the City of Sunset Hills
and normal increases associated with growth.
INCOME TAXES
Income tax expense was $1,850,275, $1,316,590 and $1,031,344 for 1998, 1997,
and 1996, respectively. The effective tax rate was 38%, 37% and 38% for the
years ended December 31, 1998, 1997, and 1996, respectively.
LIQUIDITY AND INTEREST RATE SENSITIVITY
Liquidity is provided by the Company's earning assets, including short-term
investments in federal funds sold, maturities in the loan portfolio,
maturities in the investment portfolio, amortization of term loans, and by
the Company's deposit inflows, proceeds from borrowings, and retained
earnings.
The following table reflects the Company's GAP analysis (rate sensitive
assets minus rate sensitive liabilities) as of December 31, 1998:
Over Over After
3 Months 1 Year 5 Years
3 Months Through 12 Through or No Stated
or Less Months 5 Years Maturity Total
-------- --------- ------- ------------ --------
(Dollars in Thousands)
Assets:
Investments in debt and
equity securities $ 34,017 $ 8,802 $ 2,570 $ 902 $ 46,291
Interest-bearing deposits 5 -- -- -- 5
Federal funds sold 14,250 -- -- -- 14,250
Loans, net of unearned loan fees 181,563 15,573 75,205 1,477 273,818
-------- -------- ------- ------- --------
Total interest-sensitive
assets $229,835 $ 24,375 $77,775 $ 2,379 $334,364
-------- -------- ------- ------- --------
Liabilities:
Interest-bearing transaction
accounts 24,235 -- -- -- 24,235
Money market and savings
accounts 150,650 -- -- -- 150,650
Certificates of deposit 34,495 58,827 9,844 15 103,181
Federal Home Loan Bank
advances -- -- 6,000 -- 6,000
-------- -------- ------- ------- --------
Total interest-sensitive
liabilities $209,380 $(34,452) $61,931 $ 2,364 $ 50,298
-------- ======== ======= ======= ========
Cumulative GAP $ 20,455 $(13,997) $47,934 $50,298 $ 50,298
======== ======== ======= ======= ========
Ratio of interest-sensitive assets to
interest-sensitive liabilities:
Periodic 1.1 0.41 4.91 158.60 1.18
Cumulative GAP 1.1 0.95 1.17 1.18 1.18
======== ======== ======= ======= ========
As indicated in the preceding table, the Company was asset sensitive on a
cumulative basis in the near term (three months or less) at December 31, 1998
based on contractual maturities. In this regard, a decrease in the general
level of interest rates would generally have a negative effect on the
Company's net interest income as the repricing of the larger volume of
interest sensitive assets would create a larger
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reduction in interest income as compared to the reduction in interest expense
created by the repricing of the smaller volume of interest sensitive
liabilities.
MARKET RISK
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current
fair market values. The objective is to measure the effect on net interest
income and to adjust the balance sheet to minimize the inherent risk while at
the same time maximizing income. Management realizes certain risks are
inherent and that the goal is to identify and minimize those risks. Tools
used by management include the standard GAP report subject to different rate
shock scenarios. At December 31, 1998, the rate shock scenario models
indicated that annual net interest income would change by less than 5% should
rates rise or fall within 200 basis points from their current level over a
one year period. The Bank has no market risk sensitive instruments held for
trading purposes.
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The following tables present the scheduled maturity of market risk sensitive
instruments at December 31, 1998:
Beyond
5 Years
or No
Year 1 Year 2 Year 3 Year 4 Year 5 Stated Total
------ ------ ------ ------ ------ Maturity -----
--------
Assets:
Investment in debt and
equity securities $ 42,819 $ 2,570 $ -- $ -- $ -- $ 902 $ 46,291
Interest-bearing deposits 5 -- -- -- -- -- 5
Federal funds sold 14,250 -- -- -- -- -- 14,250
Loans, net of unearned
loan fees 197,136 21,108 27,282 14,122 12,692 1,477 273,818
-------- ------- --------- ------- ------- ------ --------
Total $254,210 $23,678 $ 27,282 $14,122 $12,692 $2,379 $334,364
======== ======= ========= ======= ======= ====== ========
Liabilities:
Savings, Now, Money
Market deposits $174,885 $ -- $ -- $ -- $ -- $ -- $174,885
Certificates of deposit 93,323 6,011 1,704 548 1,579 16 103,181
Federal Home Loan
Bank advances -- -- 3,000 -- 3,000 -- 6,000
-------- ------- --------- ------- ------- ------ --------
Total $268,208 $ 6,011 $ 4,704 $ 548 $ 4,579 $ 16 $284,066
======== ======= ========= ======= ======= ====== ========
Average Estimated
Total Interest Rate Fair Value
---- ------------- ----------
Assets:
Investment in debt and
equity securities $ 46,291 5.48% $ 46,297
Interest-bearing deposits 5 5.03 5
Federal funds sold 14,250 5.31 14,250
Loans, net of unearned
loan fees 273,818 9.16 274,121
-------- ------- --------
Total $334,364 $334,673
Liabilities:
Savings, Now, Money
Market deposit $174,885 4.24% $174,885
Certificates of deposit 103,181 5.75 103,697
Federal Home Loan Bank
advances 6,000 4.63 6,004
-------- --------
Total $284,066 $284,586
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BALANCE SHEET TREND
The following table summarizes certain trends in the Company's balance sheet
during the three-year period ended December 31, 1998:
December 31,
---------------------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
Total assets $375,304 $291,365 $184,584
Earning assets 334,364 271,967 172,629
Deposits 339,180 264,301 168,961
Loans to deposits 80.73% 85.34% 79.39%
Loans to total assets 72.96 77.41 72.67
Investment securities to total assets 12.33 4.61 8.26
Earning assets to total assets 89.09 93.34 93.52
======== ======== ========
Loans $273,915 $225,608 $134,150
Unearned loan fees (97) (48) (17)
-------- -------- --------
Net loans $273,818 $225,560 $134,133
======== ======== ========
Investment securities - AFS $ 45,592 $ 12,515 $ 14,006
Investment securities - HTM 699 919 1,240
-------- -------- --------
Total investments $ 46,291 $ 13,434 $ 15,246
======== ======== ========
Investment securities - AFS $ 45,592 $ 12,515 $ 14,006
Investment securities - HTM 699 919 1,240
Federal funds sold 14,250 32,825 23,250
Interest-bearing deposits 5 148 --
Net loans 273,818 225,560 134,133
-------- -------- --------
Total earning assets $334,364 $271,967 $172,629
======== ======== ========
The ratio of earning assets was 89.09%, 93.34% and 93.52% for years ending
December 31, 1998, 1997 and 1996, respectively. Earning assets increased
$62,397,000 and $99,338,000, or 23% and 58%, for the years ended December 31,
1998 and 1997, respectively. Total assets increased $83,939,000 and
$106,781,000, or 29% and 58%, during the same periods, respectively.
The following table shows, for the periods indicated, the average annual
amount and the average rate paid by type of deposit:
December 31,
----------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------ -------------------------- ---------------------------
(Dollars in Thousands)
Average Interest Average Interest Average Interest
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- ----
Noninterest-bearing
demand deposits $ 46,326 $ -- --% $ 33,247 $ -- --% $ 24,427 $ -- --%
Interest-bearing transaction
accounts 20,503 492 2.40 15,840 452 2.85 13,180 332 2.52
Money market accounts 117,027 5,361 4.58 77,198 3,604 4.67 44,710 2,007 4.49
Savings accounts 1,496 37 2.47 1,270 32 2.52 1,105 33 2.99
Certificates of deposit 102,897 5,912 5.75 77,081 4,521 5.87 54,756 3,181 5.81
-------- ------- -------- ------ -------- ------
$288,249 $11,802 4.09% $204,636 $8,609 4.21% $138,178 $5,553 4.02%
======== ======= ==== ======== ====== ==== ======== ====== ====
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Since inception, the Company has experienced rapid loan and deposit growth
primarily due to aggressive direct calling efforts of relationship officers
and sustained economic growth in the local market served by the Company.
Recent growth is also attributed to the new locations in St. Charles County
and the City of Sunset Hills. Management has pursued closely-held businesses
whose management desires a close working relationship with a locally-managed,
full-service bank. Due to the relationships developed with these customers,
management views large deposits from this source a stable deposit base.
Additionally, the Company belongs to a national network of time depositors
(primarily credit unions) who place time deposits with the Company, typically
in increments of $99,000. The Company has used this source of deposits for
over five years and considers it to be a stable source of deposits that
allows the Company to acquire funds at a cost below its alternative cost of
funds. There were $29 million at December 31, 1998 and $31 million at
December 31, 1997 and 1996 in deposits from the national network.
The following table sets forth the amount and maturity of certificates of
deposit that had balances of more than $100,000 at December 31, 1998:
Remaining Maturity Amount
------------------ ------
(Dollars in Thousands)
Three months or less $18,037
Over three through six months 8,167
Over six through twelve months 13,913
Over twelve months 3,209
-------
$43,326
=======
The table below sets forth the carrying value of investment securities held
by the Company at the dates indicated:
December 31,
---------------------------------------------------------------------------------------
1998 1997 1996
------------------------- ---------------------------- -----------------------
Percent Percent Percent
of Total of Total of Total
Amount Securities Amount Securities Amount Securities
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $44,720 96.61% $11,963 89.05% $13,850 90.84%
Municipal bonds 669 1.45 881 6.56 891 5.85
Mortgage-backed securities 30 0.06 38 0.28 44 0.29
Federal Home Loan Bank stock 872 1.88 552 4.11 461 3.02
------- ------ ------- ------ ------- ------
$46,291 100.00% $13,434 100.00% $15,246 100.00%
======= ====== ======= ====== ======= ======
As of December 31 1998, debt securities with an amortized cost of $698,609
were classified as held to maturity securities, and debt and equity
securities with an amortized cost of $45,576,239 were classified as available
for sale securities. The market valuation account for the available for sale
securities was adjusted to approximately $16,088 to increase the recorded
balance of such securities at December 31, 1998 to fair value on that date.
As of December 31, 1997, debt securities with an amortized cost of $919,163
were classified as held-to-maturity securities; debt and equity securities
with an amortized cost of $12,516,952 were classified as available-for-sale
securities; the market valuation account for the available-for-sale
securities was adjusted to approximately $2,231 to decrease the recorded
balance of such securities at December 31, 1997 to fair value on that date.
As of December 31, 1996, debt securities with an amortized cost of $1,240,183
were classified as held to maturity securities, and debt and equity
securities with an amortized cost of $13,995,643 were classified as available
for sale securities. The market valuation account for the available for sale
securities was
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adjusted to approximately $10,154 to increase the recorded balance of such
securities at December 31, 1996 to fair value on that date.
The following table summarizes maturity and yield information on the
investment portfolio at December 31, 1998:
Carrying
Value Yield
-------- ----------
(Dollars in Thousands)
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies:
0 to 1 year $42,715 5.33%
1 to 5 years 2,005 5.33
5 to 10 years -- --
No stated maturity -- --
------- ------
Total $44,720 5.33%
======= ======
Municipal bonds:
0 to 1 year $ 104 7.10%
1 to 5 years 565 5.91
5 to 10 years -- --
No stated maturity -- --
------- ------
Total $ 669 6.09%
======= ======
Mortgage-backed securities:
0 to 1 year $ -- --
1 to 5 years -- --
5 to 10 years -- --
No stated maturity 30 6.13%
------- ------
Total 30 6.13%
======= ======
Federal Home Loan Bank stock:
0 to 1 year $ -- --
1 to 5 years -- --
5 to 10 years -- --
No stated maturity 872 6.13%
------- ------
Total $ 872 6.13%
======= ======
Total
0 to 1 year $42,819 5.33%
1 to 5 years 2,570 5.46
5 to 10 years -- --
No stated maturity 902 6.69
------- ------
Total $46,291 5.37%
======= ======
Weighted average tax-equivalent yield
The asset/liability management process, which involves management of the
components of the balance sheet to allow assets and liabilities to reprice at
approximately the same time, is an ever-changing process essential to
minimizing the effect of interest rate fluctuations on net interest income.
CAPITAL ADEQUACY
On February 14, 1997, the Company completed a stock offering of 451,612
shares of common stock registered under the Securities Act of 1933 on Form
S-1. These shares were offered to the public at $15.50 per share. The
offering allowed for the sale of a minimum of 193,548 shares, or $3,000,000,
and a maximum of 451,612 shares, or $7,000,000, in common stock. The maximum
number of shares were sold at $15.50 per share.
24
27
On October 31, 1997, the Company completed a private placement of its common
stock of 130,940 shares of common stock exempt from registration under the
Securities Act of 1933 pursuant to Regulation D thereunder. These shares
were offered at $16.75 per share. The offering allowed for the sale of a
minimum of 59,701 shares, or $1,000,000, and a maximum of 131,343 shares, or
$2,200,000, in common stock. The Company sold 130,940 shares at $16.75 per
share. The offering and substantially all shares of common stock were made
to accredited investors.
In April 1996, the Company obtained a $1,000,000 unsecured line of credit.
The line of credit was a one-year interest only note accruing interest at the
prime rate. The outstanding principal balance on the loan as of December 31,
1996 was $300,000 which was repaid from the proceeds of the Common Stock
offering in the first quarter of 1997. The Company chose not to renew the
line of credit at the maturity date in April 1997.
Risk-based capital guidelines for financial institutions were adopted by
regulatory authorities effective January 1, 1991. These guidelines were
designed to relate regulatory capital requirements to the risk profile of the
specific institution and to provide for uniform requirements among the
various regulators. Currently, the risk-based capital guidelines require the
Company to meet a minimum total capital ratio of 8.0% of which at least 4.0%
must consist of Tier 1 capital. Tier 1 capital generally consists of (a)
common shareholders' equity (excluding the unrealized market value
adjustments on the available-for-sale securities), (b) qualifying perpetual
preferred stock and related surplus subject to certain limitations specified
by the FDIC, and (c) minority interests in the equity accounts of
consolidated subsidiaries less (d) goodwill, (e) mortgage servicing rights
within certain limits, and (f) any other intangible assets and investments in
subsidiaries that the FDIC determines should be deducted from Tier 1 capital.
The FDIC also requires a minimum leverage ratio of 3.0%, defined as the ratio
of Tier 1 capital to average total assets for banking organizations deemed
the strongest and most highly rated by banking regulators. A higher minimum
leverage ratio is required of less highly rated banking organizations. Total
capital, a measure of capital adequacy, includes Tier 1 capital, allowance
for possible loan losses, and debt considered equity for regulatory capital
purposes.
The following table summarizes the Company's risk-based capital and leverage
ratios at the dates indicated:
December 31,
------------------------------
1998 1997 1996
------ ------ ------
Tier 1 capital to risk weighted assets 9.89% 11.20% 10.29%
Total capital to risk weighted assets 10.97 12.28 11.53
Leverage ratio (Tier 1 capital to
average assets) 9.16 11.42 9.62
Tangible capital to tangible assets 8.63 9.79 8.91
At December 31, 1998, the Company's Tier 1 capital was $29.2 million compared
to $26.0 million and $14.7 million at December 31, 1997 and 1996,
respectively. At December 31, 1998, the Company's total capital was $32.4
million compared to $28.6 million and $16.5 million at December 31, 1997 and
1996, respectively.
YEAR 2000
OVERVIEW
The year 2000 ("Y2K") issue refers to the ability of a date-sensitive
computer program to reorganize a two-digit date field designated "00" as the
year 2000. Mistaking "00" for 1900 could result in a system failure or
miscalculations causing a disruptions to operations and normal business
activities. This is a significant issue for many companies, including banks,
and the implications of the Y2K issue cannot be predicted with any high
degree of certainty.
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The Company's State of Readiness:
The Company has developed a Y2K compliance program with five primary phases.
These are: 1) Awareness, 2) Assessment, 3) Renovations, 4) Validation and
5) Implementation. As of December 31, 1998 the Awareness and Assessment and
Renovations phases were complete and all systems had been reviewed for Y2K
compliance. The scope of the Assessment phase included all areas of
technology for the Company and its subsidiaries including, but not limited
to, the phone system, voice mail system, computer network, banking mainframe
and related software. As of December 31, 1998, the Validation phase was
approximately 80% complete and the Implementation phase was approximately 30%
complete. The Company expects to have the Validation Phase completed March
31, 1999. Testing of the Company's hardware and software applications will
take place during the first six months of fiscal 1999. Management is
comfortable that the program will identify areas of exposure early enough to
address Y2K issues prior to December 31, 1999. The Company feels the primary
Y2K exposure is in the core banking software, which is leased from a third
party bank software vendor providing the same software to hundreds of other
banks. This vendor is working closely with the Company to address any Y2K
issues that may be discovered and has indicated to the Company that there
will be no material Y2K problems.
The Cost of Y2K Compliance:
The total cost to the Company to assess, correct and verify Y2K issues is
estimated at $83,000, consisting of $40,000 in salaries and benefit costs
allocated to Y2K projects and $43,000 in software and hardware expenses
required for upgrading and testing of the Company's systems. This cost
estimate does not include the cost associated with regulatory reporting,
legal review of regulatory requirements, auditing requirements or other costs
incurred related only to the disclosure requirements and not actual software
or hardware issues. Such costs are difficult to determine as these
requirements change frequently. If these non-systems related costs become
significant and quantifiable, they will be disclosed at that time.
What Risks Exist for the Company:
The most likely risk the Company faces with respect to Y2K issues is in the
core banking software. This system identifies and calculates payments due
the Company's subsidiary bank for loans made to customers and amounts due to
the bank's customers for deposits in the bank. The loss of these records or
inability to accurately perform these calculations could cause the bank to
incur additional expenses such as loan losses, underpayments of amounts due
on loans, overpayments of amounts due to depositors or increased personnel
expenses required to track this information manually. Such expenses are not
currently quantifiable, but may be material to the operations and financial
performance of the Company and its subsidiaries.
Contingency Plans:
Management feels the Company will be Y2K compliant by December 31, 1999.
However, as a precautionary measure, the Company will create electronic and
paper based reports of every customer's account as a back up. The back up
reports will include the necessary information to calculate balance and
payment information. If necessary, the electronic version of this
information can be used by other common software applications such as Lotus
1-2-3 or Microsoft Excel to perform many of the calculations performed by the
bank's core software system. The back up reports can also be used to
manually calculate customer information indefinitely if needed.
IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, Reporting Comprehensive Income. This
statement requires presentation of the components of comprehensive earnings,
including the changes in equity from items such as unrealized gains (losses)
on securities. The company did not sell any investments in debt and equity
securities during 1998 and 1997.
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29
Effective December 31, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) 131, Disclosures about Segments of an Enterprise
and Related Information. This statement establishes standards for the way
public business enterprises report information about operating segments. An
operating segment is defined under SFAS 131 as a component of an enterprise
that engages in business activities that generate revenue and expense for
which operating results are reviewed by the chief operating decision maker in
the determination of resource allocation and performance.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 1999. Earlier
application is encouraged but should not be applied retroactively to
financial statements of prior periods. SFAS 133 establishes standards for
derivative instruments embedded in other contracts, and for hedging
activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. The Company is currently evaluating the requirements and impact
of SFAS 133.
EFFECT OF INFLATION
Persistent high rates of inflation can have a significant effect on the
reported financial condition and results of operations of all industries.
However, the asset and liability structure of commercial banks is
substantially different from that of an industrial company in that virtually
all assets and liabilities of commercial banks are monetary in nature.
Accordingly, changes in interest rates may have a significant impact on a
commercial bank's performance. Interest rates do not necessarily move in the
same direction or in the same magnitude as the prices of goods and services.
Inflation does have an impact on the growth of total assets in the banking
industry, often resulting in a need to increase equity capital at higher than
normal rates to maintain an appropriate equity-to-assets ratio.
SUPERVISION AND REGULATION
--------------------------
The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on and provide
for general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary
describes statutory or regulatory provisions, it is qualified in its entirety
by reference to the particular statutory and regulatory provisions. Any
change in applicable laws or regulations may have a material effect on the
business and prospects of the Company. The numerous regulations and policies
promulgated by the regulatory authorities creates a difficult and
ever-changing atmosphere in which to operate. The Company and the Bank
commit substantial resources in order to comply with these statutes,
regulations and policies. The Company is unable to predict the nature or the
extent of the effect on its business and earnings that fiscal or monetary
policies, economic control, or new federal or state legislation may have in the
future.
FEDERAL BANK HOLDING COMPANY REGULATION
The Company is a bank holding company under the definition of the Bank
Holding Company Act of 1956 (the "BHCA"). Under the BHCA, the Company is
subject to periodic examination by the Federal Reserve and is required to
file periodic reports of its operations and such additional information as
the Federal Reserve may require. The Company's and the Bank's activities are
limited to banking, managing or controlling banks, furnishing services to or
performing services for its subsidiaries, or engaging in any other activity
that the Federal Reserve determines to be closely related to banking.
Investments, Control and Activities. With certain limited exceptions, the
BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any
bank, (ii) acquiring direct or indirect ownership or control of any voting
shares of any bank if after such acquisition it would own or control more
than 5% of the voting shares of such bank (unless it already owns or controls
the majority of such shares), or (iii) merging or consolidating with another
bank holding company. Recent federal legislation permits bank holding
companies to acquire control of banks throughout the United States.
27
30
In addition, and subject to certain exceptions, the BHCA and the Change in
Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of
disapproval) prior to any person or company acquiring "control" of a bank
holding company, such as the Company. Control is conclusively presumed to
exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Under Federal Reserve regulations
applicable to the Company, control will be refutably presumed to exist if a
person acquires at least 10% of the outstanding shares of any class of voting
securities once the Company registers the common stock under the Securities
and Exchange Act of 1934. The regulations provide a procedure for challenge
of the rebuttable control presumption.
Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in, nonbanking activities, unless the Federal Reserve, by
order of regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a related activity. Some
of the activities that the Federal Reserve has determined by regulation to be
proper incidents to the business of banking include investment in and
management of Small Business Investment Companies, making or servicing loans
and certain types of leases, engaging in certain insurance and brokerage
activities, performing data processing services, acting in certain
circumstances as a fiduciary or investment or financial advisor, owning
savings associations, and making investments in limited projects designed
primarily to promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to
the Bank and to commit resources to support the Bank in circumstances in
which the Company might not otherwise do so. Under the BHCA, the Federal
Reserve may require a bank holding company to terminate any activity or
relinquish control of a nonbank subsidiary (other than a nonbank subsidiary
of a bank) upon the Federal Reserve's determination that such activity or
control constitutes a serious risk to the financial soundness or stability of
any subsidiary depository institution of the bank holding company. Further,
federal bank regulatory authorities have additional discretion to require a
bank holding company to divest itself of any bank or nonbank subsidiary if
the agency determines that divestiture may aid the depository institution's
financial condition.
BANK REGULATION
General. The Company is the holding company for a single state bank. The
Bank is not a member of the Federal Reserve system. The Missouri Division of
Finance and the FDIC are primary regulators for the Bank. These regulatory
authorities regulate or monitor all areas of the Bank's operations, including
security devices and procedures, adequacy of capitalization and loss
reserves, loans, investments, borrowings, deposits, mergers, issuances of
securities, payment of dividends, interest rates payable on deposits,
interest rates or fees chargeable on loans, establishment of branches,
corporate reorganizations, maintenance of books and records, and adequacy of
staff training to carry on safe lending and deposit gathering practices. The
Bank must maintain certain capital ratios and is subject to limitations on
aggregate investments in real estate, bank premises, and furniture and
fixtures.
All insured institutions must undergo regular on-site examinations by their
appropriate banking agency. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate agency
against each institution or affiliate as it deems necessary or appropriate.
Insured institutions are required to submit annual and quarterly reports to
the FDIC and the appropriate agency and the state supervisor.
Transactions With Affiliates and Insiders. The Bank is subject to the
provisions of Section 23A of the Federal Reserve Act, which place limits on
the amount of loans or extensions of credit to, investments in, or certain
other transactions with, affiliates and on the amount of advances to third
parties collateralized by the securities or obligations of affiliates. In
addition, most of these loans and certain other transactions must be secured
in prescribed amounts. The Bank is also subject to the provisions of Section
23B of the Federal Reserve Act that, among other things, prohibit an
institution from engaging in certain transactions with certain affiliates
unless the transactions are on terms substantially the same, or at least as
favorable to such institution or its subsidiaries, as those prevailing at the
time for comparable
28
31
transactions with nonaffiliated companies. The Bank is subject to certain
restrictions on extensions of credit to executive officers, directors, certain
principal shareholders, and their related interests. Such extensions of credit
(i) must be made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
third parties and (ii) must not involve more than the normal risk of repayment
or present other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
that, in connection with examinations of financial institutions within its
jurisdiction, the FDIC shall evaluate the record of the financial
institutions in meeting the credit needs of their local communities,
including low and moderate income neighborhoods, consistent with the safe and
sound operation of those institutions. These factors are also considered in
evaluating mergers, acquisitions, and applications to open a branch or
facility. The company has a satisfactory rating under CRA.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain
federal laws concerning interest rates. The Bank's loan operations are also
subject to certain federal laws applicable to credit transactions, such as
the federal Truth-In-Lending Act governing disclosures of credit terms to
consumer borrowers; the Home Mortgage Disclosure Act of 1975 requiring
financial institutions to provide information to enable the public and public
officials to determine whether a financial institution is fulfilling its
obligation to help meet the housing needs of the community it serves; the
Equal Credit Opportunity Act prohibiting discrimination on the basis of race,
creed or other prohibited factors in extending credit; the Fair Credit
Reporting Act of 1978 governing these and provision of information to credit
reporting agencies; the Fair Debt Collection Act governing the manner in
which consumer debts may be collected by collection agencies; and the rules
and regulations of the various federal agencies charged with the
responsibility of implementing such federal laws. The deposit operations of
the Bank also are subject to the Right to Financial Privacy Act, which
imposes a duty to maintain confidentiality of consumer financial records and
prescribes procedures for complying with administrative subpoenas of
financial records, and the Electronic Funds Transfer Act and Regulation E
issued by the Federal Reserve Board to implement that act, which governs
automatic deposits to and withdrawals from deposit accounts and customers'
rights and liabilities arising from the use of automated teller machines and
other electronic banking services.
Deposit Insurance. The deposits of the Bank are currently insured by the
FDIC to a maximum of $100,000 per depositor, subject to certain aggregation
rules. The FDIC establishes rates for the payment of premiums by federally
insured banks for deposit insurance. An insurance fund (BIF) is maintained
for commercial banks, with insurance premiums from the industry used to
offset losses from insurance payouts when banks and thrifts fail. The FDIC
has adopted a risk-based deposit insurance premium system for all insured
depository institutions, including the Bank, which requires premiums from a
depository institution based upon its capital levels and risk profile, as
determined by its primary federal regulator on a semiannual basis.
DIVIDENDS
The principal source of the Company's cash revenues comes from dividends
received from the Bank. The amount of dividends that may be paid by the Bank
to the Company depends on the Bank's earnings and capital position and is
limited by federal and state law, regulations, and policies.
CAPITAL REGULATIONS
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance-sheet
exposure, and minimize disincentives for holding liquid assets. The
resulting capital ratios represent qualifying capital as a percentage of
total risk-weighted assets and off-balance-sheet items. The guidelines are
minimums, and the federal regulators have noted that banks and bank holding
companies contemplating significant expansion programs should not allow
expansion to diminish their capital ratios and should maintain ratios well in
excess of the minimums. The current guidelines require all bank holding
companies and federally-regulated banks to maintain a minimum risk-based
total capital ratio, a portion of which must be Tier 1 capital. Tier 1
capital includes common shareholders' equity, qualifying
29
32
perpetual preferred stock, and minority interests in equity accounts of
consolidated subsidiaries, but excludes goodwill and most other intangibles and
excludes the allowance for loan and lease losses. Tier 2 capital includes the
excess of any preferred stock not included in Tier 1 capital, mandatory
convertible securities, hybrid capital instruments, subordinated debt and
intermediate term-preferred stock, and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets.
Under these guidelines, banks' and bank holding companies' assets are given
risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance-sheet
items are given credit conversion factors to convert them to asset equivalent
amounts to which an appropriate risk-weight will apply. These computations
result in the total risk-weighted assets. Most loans are assigned to the
100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstance, residential
construction loans, both of which carry a 50% rating. Most investment
securities are assigned to the 20% category, except for municipal or state
revenue bonds, which have a 50% rating, and direct obligations of or
obligations guaranteed by the United States Treasury or United States
Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a leverage
ratio, which is Tier 1 capital as a percentage of average total assets less
intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity
capital base.
MANAGEMENT
----------
The information required by this item is incorporated herein by reference to
pages 2-4 of the Company's 1998 Proxy Statement.
All Directors of the Company are elected at the annual meeting of
shareholders and serve until their successors are duly elected and qualified
or until their earlier resignation or removal.
The Bank's standing committees are the audit and the compensation committee
and the Bank's entire Board of Directors performs the functions of these
committees.
COMPENSATION OF EXECUTIVE OFFICERS AND OTHERS
The information required by this item is incorporated herein by reference to
pages 4 and 5 of the Company's 1998 Proxy Statement.
STOCK OPTIONS PLANS
At December 31, 1998, the Company had three qualified incentive stock option
plans for the benefit of the employees of Enterbank Holdings and its
subsidiaries. Plan I was adopted on April 20, 1988 with 144,000 options. As
of December 31, 1998, Plan I had 16,575 options outstanding and no options
available for future grant. Plan II was adopted on April 25, 1990 with
75,000 options. Plan II had 73,400 options outstanding and no options
available for grant. Plan III was adopted on June 19, 1996 with 200,000
options. Plan III has 183,400 options outstanding and 16,300 options
available for future grants.
In 1998, the Company adopted by Board Approval a nonqualified stock option
plan ("the Nonqualified Plan"), which sets aside up to 35,000 shares of
company Common Stock to grant options to certain key employees of the Company
or any of its subsidiaries. There are limitations as to the number of
options which my be granted to any individual and additional restrictions for
options which may be granted to any individual who is also a ten percent
shareholder. The Company believes strongly in motivating its key employees
by encouraging ownership in the organization. The purchase price for any
options granted under the Nonqualified Plan will be determined based upon the
market value of the Common Stock at the time such options are granted. At
December 31, 1998, the Nonqualified plan had 23,000 options outstanding and
12,000 options available for future grants.
30
33
Following is a summary of the various plan transactions:
Number Price
of shares per share Total
---------- ---------------- -------------
December 31, 1995 213,000 $ 5.00-9.25 $1,251,500
Granted -- -- --
Exercised -- -- --
Forfeited -- -- --
---------- ---------------- -------------
December 31, 1996 213,000 $ 5.00-9.25 $1,251,500
Granted 202,000 16.00-16.75 3,233,500
Exercised 53,500 5.00 267,500
Forfeited 8,500 16.00 136,000
---------- ---------------- -------------
December 31, 1997 353,000 $ 5.00-16.75 $4,081,500
Granted 28,800 25.00-32.00 863,425
Exercised 73,425 5.00-16.00 385,525
Forfeited 12,000 9.25-16.00 186,600
---------- ---------------- -------------
December 31, 1998 296,375 $ 5.00-32.00 $4,372,800
========== ================ =============
DIRECTORS' COMPENSATION
Non-employee directors of the Company and the Bank receive directors' fees of
$200 for each Board of Directors meeting and $50 for each loan committee
meeting they attend.
BENEFICIAL OWNERSHIP OF SECURITIES
----------------------------------
The information required by this item is incorporated herein by reference to
pages 7 and 8 of the Company's 1998 Proxy Statement.
CERTAIN RELATED PARTY TRANSACTIONS
----------------------------------
The Company and the Bank have and expect to continue to have banking and
other transactions in the ordinary course of business with directors and
executive officers of the Company and their affiliates, including members of
their families or corporations, partnerships or other organizations in which
such directors or executive officers have a controlling interest, on
substantially the same terms (including price, or interest rates and
collateral) as those prevailing at the time for comparable transactions with
unrelated parties. Such transactions are not expected to involve more than
the normal risk of collectibility nor present other unfavorable features to
the Company and the Bank. The Bank is subject to limits on the aggregate
amount it can lend to the Bank's and the Company's directors and officers as
a group. This limit is currently equal to two times the applicable entity's
unimpaired capital and surplus. Loans to individual directors and officers
must also comply with the Bank's lending policies and statutory lending
limits, and directors with a personal interest in any loan application are
excluded from the consideration of such loan application.
The Company's Clayton banking facility is leased from a limited partnership
in which Fred H. Eller, the Company's Chief Executive Officer, is a limited
partner and Robert E. Saur, a director of the Company, is a general partner.
Terms of the lease were negotiated by parties other than Fred H. Eller or
Robert E. Saur and based on the fair market value at origination. Rent
expense, net of income from the sublet portions of the premises, amounted to
$202,270 in 1998.
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34
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Enterbank Holdings, Inc.:
We have audited the accompanying consolidated balance sheets of Enterbank
Holdings, Inc. and subsidiaries (the Company) as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders'
equity, cash flows, and comprehensive income for each of the years in the
three-year period ended December 31, 1998. 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 generally accepted auditing
standards. 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 Enterbank
Holdings, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
January 29, 1999
32
35
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
------ ---------- ----------
Cash and due from banks $ 29,701,018 $ 13,897,054
Federal funds sold 14,250,000 32,825,000
Interest-bearing deposits 5,035 148,349
Investments in debt and equity securities:
Available for sale, at estimated fair value 45,592,327 12,514,721
Held to maturity, at amortized cost
(estimated fair value of $704,723 in 1998
and $920,154 in 1997) 698,609 919,163
------------ ------------
Total investments in debt and equity securities 46,290,936 13,433,884
------------ ------------
Loans held for sale 6,272,124 1,324,244
Loans, net of unearned loan fees 273,817,522 225,560,208
Less allowance for loan losses 3,200,000 2,510,000
------------ ------------
Loans, net 270,617,522 223,050,208
------------ ------------
Other real estate owned 806,072 806,072
Office equipment and leasehold improvements 3,063,123 2,328,699
Accrued interest receivable 1,648,775 1,448,343
Investment in Enterprise Fund, L.P. 424,484 225,683
Prepaid expenses and other assets 2,224,829 1,877,320
------------ ------------
Total assets $375,303,918 $291,364,856
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Demand $ 61,114,961 $ 46,052,686
Interest-bearing transaction accounts 24,234,717 22,519,772
Money market accounts 149,177,922 98,639,345
Savings 1,471,647 1,429,316
Certificates of deposit:
$100,000 and over 43,326,061 32,824,697
Other 59,854,862 62,834,818
------------ ------------
Total deposits 339,180,170 264,300,634
Federal Home Loan Bank advances 6,000,000 --
Accrued interest payable 608,056 549,059
Accounts payable and accrued expenses 275,563 448,371
------------ ------------
Total liabilities 346,063,789 265,298,064
------------ ------------
Shareholders' equity:
Common stock, $.01 par value; authorized 3,000,000
shares; issued and outstanding 2,371,837 shares in
1998 and 2,298,412 shares in 1997 23,719 22,984
Surplus 19,264,000 18,879,210
Retained earnings 9,941,792 7,166,071
Accumulated other comprehensive income 10,618 (1,473)
------------ ------------
Total shareholders' equity 29,240,129 26,066,792
------------ ------------
Total liabilities and shareholders' equity $375,303,918 $291,364,856
============ ============
See accompanying notes to consolidated financial statements.
33
36
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
----------- ----------- -----------
Interest income:
Interest and fees on loans $23,001,165 $16,795,887 $11,426,260
Interest on debt and equity securities:
Taxable 878,147 1,017,897 692,742
Nontaxable 26,565 34,630 38,914
Interest on federal funds sold 1,468,652 909,326 396,244
Interest on interest bearing deposits 39,740 1,289 --
----------- ----------- -----------
Total interest income 25,414,269 18,759,029 12,554,160
----------- ----------- -----------
Interest expense:
Interest-bearing transaction accounts 492,581 410,915 331,943
Money market accounts 5,361,463 3,604,225 2,006,578
Saving 36,918 32,357 33,122
Certificates of deposit:
$100,000 and over 2,189,803 1,658,554 1,346,428
Other 3,722,039 2,862,25 1,834,540
Federal funds purchased -- 11,035 1,027
Federal Home Loan Bank advances 66,527 -- --
Notes payable -- 2,888 15,274
----------- ----------- -----------
Total interest expense 11,869,331 8,582,230 5,568,912
----------- ----------- -----------
Net interest income 13,544,938 10,176,799 6,985,248
Provision for loan losses 710,899 775,064 345,410
----------- ----------- -----------
Net interest income after
provision for loan losses 12,834,039 9,401,735 6,639,838
----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 252,873 173,452 129,414
Other service charges and fee income 585,169 228,479 252,087
Merchant credit card income -- -- 600,981
Gain on sale of credit card operation -- -- 320,000
Gain on sale of mortgage loans 1,242,869 78,948 --
Loss on investment in Enterprise Fund, L.P. (2,199) (4,904) (62,690)
----------- ----------- -----------
Total noninterest income 2,078,712 475,975 1,239,792
----------- ----------- -----------
Noninterest expense:
Salaries 5,103,863 3,221,147 2,400,165
Payroll taxes and employee benefits 999,579 620,438 465,475
Occupancy 879,046 552,063 333,795
Equipment 389,274 227,061 145,501
FDIC insurance 40,638 21,846 2,000
Data processing 306,691 237,248 247,696
Merchant credit card expense -- -- 441,991
Other 2,332,611 1,458,773 1,109,711
----------- ----------- -----------
Total noninterest expense 10,051,702 6,338,576 5,146,334
----------- ----------- -----------
Income before income tax expense 4,861,049 3,539,134 2,733,296
Income tax expense 1,850,275 1,316,590 1,031,344
----------- ----------- -----------
Net income $ 3,010,774 $ 2,222,544 $ 1,701,952
=========== =========== ===========
Basic earnings per share $ 1.28 $ 1.06 $ 1.11
Diluted earnings per share $ 1.20 $ 1.00 $ .97
Basic weighted average common shares and
potential common stock 2,350,763 2,095,359 1,538,418
Diluted weighted average common shares and
potential common stock 2,514,940 2,224,967 1,750,686
See accompanying notes to consolidated financial statements.
34
37
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998, 1997 and 1996
Net
unrealized
holding
gains
(losses) on Total
Common Stock available- share-
------------------------- Retained for-sale holders'
Shares Amount Surplus earnings securities equity
---------- ------- ----------- --------- ---------- -----------
Balance, December 31, 1995 1,463,400 $14,634 $ 8,503,666 $3,558,208 $(24,361) $12,052,147
Net income -- -- -- 1,701,952 -- 1,701,952
Dividends declared
($.08 per share) -- -- -- (121,548) -- (121,548)
Stock warrants exercised 198,960 1,990 1,092,290 -- -- 1,094,280
Other comprehensive income -- -- -- -- 31,062 31,062
--------- ------- ----------- ---------- -------- -----------
Balance, December 31, 1996 1,662,360 16,624 9,595,956 5,138,612 6,701 14,757,893
Net income -- -- -- 2,222,544 -- 2,222,544
Dividends declared
($.09 per share) -- -- -- (195,085) -- (195,085)
Stock options exercised 53,500 535 266,965 -- -- 267,500
Issuance of Common Stock 582,552 5,825 9,016,289 -- -- 9,022,114
Other comprehensive income -- -- -- -- (8,174) (8,174)
--------- ------- ----------- ---------- -------- -----------
Balance, December 31, 1997 2,298,412 22,984 18,879,210 7,166,071 (1,473) 26,066,792
Net income -- -- -- 3,010,774 -- 3,010,774
Dividends declared
($.10 per share) -- -- -- (235,053) -- (235,053)
Stock options exercised 73,425 735 384,790 385,525
Other comprehensive income -- -- -- -- 12,091 12,091
--------- ------- ----------- ---------- -------- -----------
Balance, December 31, 1998 2,371,837 $23,719 $19,264,000 $9,941,792 $ 10,618 $29,240,129
========= ======= =========== ========== ======== ===========
See accompanying notes to consolidated financial statements.
35
38
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
------------ ------------ ------------
Cash flows from operating activities:
Net income $ 3,010,774 $ 2,222,544 $ 1,701,952
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 488,790 311,132 225,328
Provision for loan losses 710,899 775,064 345,410
Write-downs and losses on other real estate owned, net -- 24,259 6,646
Gain on sale of other real estate owned (26,546) -- --
Net accretion of debt and equity securities (288,951) (207,715) (6,357)
Loss on investment in Enterprise Fund, L.P. 2,199 4,904 62,690
Mortgage loans originated (94,433,924) (8,455,878) --
Proceeds from mortgage loans sold 90,728,913 7,210,582 --
Gain on sale of mortgage loans (1,242,869) (78,948) --
(Increase) decrease in accrued interest receivable (200,432) (512,479) 45,178
Increase in prepaid expenses and other assets (347,509) (897,959) (333,550)
Increase in accrued interest payable 58,997 239,549 22,311
Increase (decrease) in accounts payable and accrued expenses (179,036) 196,962 12,960
------------ ------------ ------------
Net cash provided by operating activities (1,718,695) 832,017 2,082,568
------------ ------------ ------------
Cash flows from investing activities:
Purchases of interest-bearing deposits -- (148,349) --
Proceeds from maturity of interest-bearing deposits 143,314 -- --
Purchases of available for sale debt securities (49,683,878) (18,788,955) (8,922,967)
Purchases of available for sale equity securities (320,000) (90,500) (94,200)
Purchases of held to maturity debt securities (256,689) (101,076) (414,733)
Proceeds from maturities of available for sale debt securities 17,250,000 20,580,000 11,140,000
Proceeds from maturities and principal paydowns on
held to maturity debt securities 460,785 407,956 6,276
Net increase in loans (48,275,994) (91,597,180) (23,649,751)
Proceeds from sale of other real estate owned 24,327 184,095 --
Purchases of office equipment and leasehold improvements (1,225,736) (1,520,563) (549,219)
Write-down of office equipment and leasehold improvements 2,522 -- --
Contributions returned from (paid to) investment in Enterprise Fund, L.P. (201,000) 319,500 (520,500)
------------ ------------ ------------
Net cash used in investing activities (82,082,349) (90,755,072) (23,005,094)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand and savings accounts 67,358,128 65,187,192 12,195,505
Net increase in certificates of deposit 7,521,408 30,152,353 15,625,520
Increase in Federal Home Loan Bank Advances 6,000,000 -- --
(Decrease) increase in notes payable -- (300,000) 300,000
Cash dividends paid (235,053) (195,085) (121,548)
Proceeds from the issuance of common stock -- 9,022,114 --
Proceeds from the exercise of stock warrants and common stock options 385,525 267,500 1,094,280
------------ ------------ ------------
Net cash provided by financing activities 81,030,008 104,134,074 29,093,757
------------ ------------ ------------
Net increase in cash and due from banks (2,771,036) 14,211,019 8,171,231
Cash and cash equivalents, beginning of year 46,722,054 32,511,035 24,339,804
------------ ------------ ------------
Cash and cash equivalents, end of year $ 43,951,018 $ 46,722,054 $ 32,511,035
============ ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 11,810,334 $ 8,342,681 $ 5,546,601
Income taxes 2,014,266 1,509,322 1,144,759
Noncash transactions:
Transfers to other real estate owned in settlement of loans 97,781 140,000 50,000
Loans made to facilitate the sale of other real estate owned 100,000 -- 70,000
============ ============ ============
See accompanying notes to consolidated financial statements.
36
39
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 1998, 1997 and 1996
1998 1997 1996
---------- ---------- ----------
Net income $3,010,774 $2,222,544 $1,701,952
Other comprehensive income, before tax:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period 18,319 (12,385) 47,065
---------- ---------- ----------
Other comprehensive income, before tax 18,319 (12,385) 47,065
Income tax benefit (expense) related to items of
other comprehensive income (6,228) 4,211 (16,003)
---------- ---------- ----------
Other comprehensive income, net of tax 12,091 (8,174) 31,062
---------- ---------- ----------
Comprehensive income $3,022,865 $2,214,370 $1,733,014
========== ========== ==========
See accompanying notes to consolidated financial statements.
37
40
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998, 1997 and 1996
NOTE 1--ORGANIZATION
On May 9, 1995, Enterbank Holdings, Inc. (the Company) was formed as a bank
holding company. Enterbank Holdings, Inc. exchanged 1,463,400 shares of
Enterbank Holdings, Inc. for all 73,170 (100%) of outstanding shares of
Enterprise Bank in a twenty-for-one stock exchange. The merger represented a
combination of entities under common control and, accordingly, was accounted
for in a manner similar to a pooling of interest. Therefore, results of
operations for periods prior to May 9, 1995 reflect the results of operations
for Enterprise Bank.
Additionally, Enterprise Capital Resources, Inc. (Capital Resources) was
formed as a small business investment company in 1995 and, on May 11, 1995,
Enterbank Holdings, Inc. acquired 100% of the outstanding shares of Capital
Resources. Subsequent to December 31, 1997, Capital Resources changed its
name to Enterprise Merchant Banc, Inc. (Merchant Banc).
In 1997, the Company organized Enterprise Financial Advisors ("Financial
Advisors") as a division of the Bank to provide fee-based personal financial
planning, estate planning, and corporate planning services to the Company's
target market. The Company entered into solicitation and referral agreements
with Moneta Group, Inc., a financial planning company, as part of the
organization of Financial Advisors. In 1998, Financial Advisors obtained
trust powers. The Company renegotiated the agreements with Moneta with the
introduction of trust services.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company provides a full range of banking services to individual and
corporate customers located within St. Louis, Missouri and the surrounding
communities through its subsidiary, Enterprise Bank (the Bank). The Company
is subject to competition from other financial and nonfinancial institutions
providing financial services in the markets served by the Company's
subsidiaries. Additionally, the Company and its subsidiaries are subject to
the regulations of certain federal and state agencies and undergo periodic
examinations by those regulatory agencies.
The more significant accounting policies used by the Company in the
preparation of the consolidated financial statements are summarized below:
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements of the Company and its subsidiaries
have been prepared in conformity with generally accepted accounting
principles and conform to predominant practices within the banking industry.
In preparing the consolidated financial statements, management is required to
make estimates and assumptions which significantly affect the reported
amounts in the consolidated financial statement. Estimates which are
particularly susceptible to change in a short period of time include the
determination of the allowance for loan losses and the valuation of real
estate acquired in connection with foreclosures or in satisfaction of amounts
due from borrowers on loans. Actual amounts could differ from those
estimates.
38
41
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
CONSOLIDATION
The consolidated financial statements include the accounts of the Company;
its banking subsidiary, Enterprise Bank (100% owned) and its merchant banking
company, Merchant Banc (100% owned). All significant intercompany accounts
and transactions have been eliminated.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company currently classifies investments in debt and equity securities as
follows:
Trading - includes securities which the Company has bought and held
principally for the purpose of selling them in the near term. The
Company has not held any trading securities.
Held to maturity - includes debt securities which the company has the
positive intent and ability to hold until maturity.
Available for sale - includes debt and marketable equity securities
not classified as held-to-maturity or trading (i.e., investments which
the company has no present plans to sell but may be sold in the future
under different circumstances).
Debt securities classified as held to maturity are carried at amortized cost,
adjusted for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses for held-to-maturity securities are
excluded from earnings and shareholders' equity. Debt and equity securities
classified as available for sale are carried at estimated fair value.
Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported as a net amount in a separate component
of shareholders' equity until realized. All previous fair value adjustments
included in the separate component of shareholders' equity are reversed upon
sale.
Transfers of securities between categories are recorded at fair value at the
date of transfer. Unrealized holding gains or losses associated with
transfers of securities from the held-to-maturity category to the
available-for-sale category are recorded as a separate component of
shareholders' equity.
A decline in the market value of any available for sale or held to maturity
security below cost that is deemed other than temporary results in a charge
to earnings and the establishment of a new cost basis for the security.
For securities in the held to maturity and available for sale categories,
premiums and discounts are amortized or accreted over the lives of the
respective securities as an adjustment to yield using the interest method.
Dividend and interest income is recognized when earned. Realized gains and
losses for securities classified as available for sale and held to maturity
are included in earnings and are derived using the specific-identification
method for determining the cost of securities sold.
LOANS HELD FOR SALE
During 1997, the Company began mortgage banking operations. Mortgage banking
activities included the origination of residential mortgage loans for sale to
various investors. Mortgage loans are originated and intended for sale in
the secondary market, principally under programs with the Government National
Mortgage Association (GNMA) or the Federal National Mortgage Association
(FNMA). Mortgage loans held for sale are carried at the lower of cost or
fair value, which is determined on a specific identification method.
Mortgage banking revenues, including origination fees, net gains on sales of
servicing rights, net gains or losses on sales of mortgages and other fee
income, which is determined on a specific identification method, were less
than five percent of the Company's total revenue for the year ended December
31, 1998. The Company does not retain servicing on any loans originated and
sold, nor does the Company have any purchased mortgage servicing rights at
December 31, 1998.
(Continued)
39
42
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
INTEREST AND FEES ON LOANS
Interest income on loans is accrued and credited to income based on the
principal amount outstanding. The recognition of interest income is
discontinued when a loan becomes 90 days past due or a significant
deterioration in the borrower's credit has occurred which, in management's
opinion, negatively impacts the collectibility of the loan. Subsequent
interest payments received on such loans are applied to principal if any
doubt exists as to the collectibility of such principal; otherwise, such
receipts are recorded as interest income. Loans are returned to accrual
status when management believes full collectibility of principal and interest
is expected.
The Company defers the recognition of loan origination fees, net of the cost
associated with originating such loans. Deferred loan fees are accreted into
income over the contractual life of the loan using the straight-line method,
which approximates the interest method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions charged to expense
and is available to absorb charge-offs, net of recoveries. Management
utilizes a systematic, documented approach in determining the appropriate
level of the allowance for loan losses. Management's approach, which
provides for general and specific allowances, is based on current economic
conditions, past losses, collection experience, risk characteristics of the
portfolio, assessments of collateral values by obtaining independent
appraisals for significant properties, and such other factors which, in
management's judgment, deserve current recognition in estimating loan losses.
Management believes the allowance for loan losses is adequate to absorb
possible losses in the loan portfolio. While management uses available
information to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions and other factors.
In addition, various regulatory agencies, as an integral part of the
examination process, periodically review the Bank's loan portfolio. Such
agencies may require the Bank to add to the allowance for loan losses based
on their judgments and interpretations of information available to them at
the time of their examinations.
ACCOUNTING FOR IMPAIRED LOANS
A loan is considered impaired when it is probable the Bank will be unable to
collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. When measuring impairment, the
expected future cash flows of an impaired loan are discounted at the loan's
effective interest rate. Alternatively, impairment is measured by reference
to an observable market price, if one exists, or the fair value of the
collateral for a collateral-dependent loan. Regardless of the measurement
method used, historically, the Bank measures impairment based on the fair
value of the collateral when foreclosure is probable. Additionally,
impairment of a restructured loan is measured by discounting the total
expected future cash flow at the loan's effective rate of interest as stated
in the original loan agreement. The Bank recognizes interest income on
nonaccrual loans only when received and on impaired loans continuing to
accrue interest as earned.
OTHER REAL ESTATE OWNED
Other real estate owned represents property acquired through foreclosure or
deeded to the Company's subsidiary bank in lieu of foreclosure on loans on
which the borrowers have defaulted as to the payment of principal and
interest. Other real estate owned is recorded on an individual asset basis
at the lower of cost or fair value less estimated costs to sell. Subsequent
reductions in fair value are expensed or recorded in a valuation reserve
account through a provision against income. Subsequent increases in the fair
value are recorded through a reversal of the valuation reserve, but not below
zero.
(Continued)
40
43
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Gains and losses resulting from the sale of other real estate owned are
credited or charged to current period earnings. Costs of maintaining and
operating other real estate owned are expensed as incurred, and expenditures
to complete or improve other real estate owned properties are capitalized if
the expenditures are expected to be recovered upon ultimate sale of the
property.
OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Office equipment and leasehold improvements are stated at cost less
accumulated depreciation and amortization is computed using the straight-line
method over their respective estimated useful lives. Bank equipment is
depreciated over three to ten years and leasehold improvements over ten to 30
years.
INCOME TAXES
The Company and its subsidiaries file consolidated federal income tax
returns. Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled.
CASH FLOW INFORMATION
For purposes of reporting cash flows, the Company considers cash and due from
banks and federal funds sold to be cash and cash equivalents.
RECLASSIFICATION
Certain reclassifications have been made to the prior year amounts to conform
to the present year presentation.
STOCK OPTIONS
The Corporation accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting
for Stock Issued to Employees, and related interpretations. As such,
compensation expense is recorded on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On January
1, 1996, the Company adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for
Stock-Based Compensation, which permits entities to expense the fair value of
stock-based awards, as measured on the date of grant, over their vesting
period. Alternatively, SFAS 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma net income per share disclosures for employee stock option grants made
in 1995 and future years as if the fair-value-based method defined in SFAS
123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123.
(Continued)
41
44
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NEW ACCOUNTING STANDARDS
Effective December 31, 1998, the Company adopted SFAS 130, Reporting
Comprehensive Income. Comprehensive income is defined as net income plus
certain items that are recorded directly to shareholders' equity, such as
unrealized gains and losses on available for sale securities. Comparative
financial statements provided for earlier periods have been restated to
reflect the application of SFAS 130. SFAS 130's disclosure requirements had
no impact on the Company's financial condition or results of operations.
Effective December 31, 1998, the Company adopted SFAS 131, Disclosures about
Segments of an Enterprise and Related Information. An operating segment is
defined under SFAS 131 as a component of an enterprise that engages in
business activities that generate revenue and expense for which operating
results are reviewed by the chief operating decision maker in the
determination of resource allocation and performance. The new disclosures
are included in Note 18 to the consolidated financial statements.
SFAS 133, Accounting for Derivative Instruments and Hedging Activities, is
effective for all fiscal years beginning after June 15, 1999. Earlier
application is encouraged but should not be applied retroactively to
financial statements of prior periods. SFAS 133 establishes standards for
derivative instruments embedded in other contracts, and for hedging
activities. It requires an entity to recognize all derivatives as either
assets or liabilities in the balance sheet and measure those instruments at
fair value. The Company is currently evaluating the requirements and impact
of SFAS 133.
NOTE 3--EARNINGS PER SHARE
Basic earnings per share data is calculated by dividing net income by the
weighted average number of common shares outstanding during the period.
Diluted earnings per share gives effect to the increase in the average shares
outstanding which would have resulted from the exercise of dilutive stock
options and warrants.
(Continued)
42
45
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of basic earnings per share are as follows:
1998 1997 1996
---------- ---------- ----------
BASIC
Net income attributable to
common shareholders' equity $3,010,774 $2,222,544 $1,701,952
========== ========== ==========
Weighted average common
shares outstanding 2,350,763 2,095,359 1,538,418
========== ========== ==========
Basic earnings per share $1.28 $1.06 $1.11
===== ===== =====
The components of diluted earnings per share are as follows:
1998 1997 1996
---------- ---------- ----------
DILUTED
Net income attributable to
common shareholders' equity $3,010,774 $2,222,544 $1,701,952
========== ========== ==========
Weighted average common
shares outstanding 2,350,763 2,095,359 1,538,418
Stock warrants -- -- 79,979
Stock options 164,177 129,608 132,289
---------- ---------- ----------
Diluted weighted average
common shares outstanding $2,514,940 $2,224,967 $1,750,686
========== ========== ==========
Diluted earnings per share $1.20 $1.00 $0.97
===== ===== =====
NOTE 4--REGULATORY RESTRICTIONS
The Company's subsidiary bank is subject to regulations by regulatory
authorities which require the maintenance of minimum capital standards which
may affect the amount of dividends the Company's subsidiary bank can pay.
At December 31, 1998 and 1997, approximately $8,001,000 and $3,427,000,
respectively, of cash and due from banks represented required reserves on
deposits maintained by the Bank in accordance with Federal Reserve Bank
requirements.
(Continued)
43
46
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 5--INVESTMENTS IN DEBT AND EQUITY SECURITIES
A summary of the amortized cost and estimated fair value of debt and equity
securities classified as available for sale at December 31, 1998 and 1997 is
as follows:
1998
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- ----------
U. S. Treasury securities and obligations
of U.S. government corporations
and agencies $44,704,739 $24,142 $8,054 $44,720,827
Federal Home Loan Bank stock 871,500 -- -- 871,500
----------- ------- ------ -----------
$45,576,239 $24,142 $8,054 $45,592,327
=========== ======= ====== ===========
1997
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- ----------
U. S. Treasury securities and obligations
of U.S. government corporations
and agencies $11,965,452 $ 4,152 $6,383 $11,963,221
Federal Home Loan Bank stock 551,500 -- -- 551,500
----------- ------- ------ -----------
$12,516,952 $ 4,152 $6,383 $12,514,721
=========== ======= ====== ===========
The amortized cost and estimated fair value of debt and equity securities
classified as available for sale at December 31, 1998, by contractual
maturity, are shown below. Expected maturities may differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
----------- -----------
Due in one year or less $42,692,435 $42,715,621
Due after one year through five years 2,012,304 2,005,206
Securities with no stated maturity 871,500 871,500
----------- -----------
$45,576,239 $45,592,327
=========== ===========
(Continued)
44
47
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of the amortized cost and estimated fair value of debt and equity
securities classified as held to maturity at December 31, 1998 and 1997 is as
follows:
1998
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- ----------
Mortgage-backed securities $ 30,106 $ 245 $ -- $ 30,351
Municipal bonds 668,503 5,908 39 674,372
-------- ------ ----- --------
$698,609 $6,153 $ 39 $704,723
======== ====== ===== ========
1997
---------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- ----------
Mortgage-backed securities $ 37,825 $ -- $ 24 $ 37,801
Municipal bonds 881,338 1,914 899 882,353
-------- ------ ---- --------
$919,163 $1,914 $923 $920,154
======== ====== ==== ========
The amortized cost and estimated fair value of debt and equity securities
classified as held to maturity at December 31, 1998, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
--------- ----------
Due in one year or less $103,400 $103,361
Due after one year through five years 565,103 571,011
Mortgage-backed securities 30,106 30,351
-------- --------
$698,609 $704,723
======== ========
There were no sales of investments in debt and equity securities in 1998,
1997 or 1996. Debt and equity securities having a carrying value of
$6,941,888 and $8,748,476 at December 31, 1998 and 1997, respectively, were
pledged as collateral to secure public deposits and for other purposes as
required by law.
As a member of the Federal Home Loan Bank system administered by the Federal
Housing Finance Board, the Bank is required to maintain an investment in the
capital stock of the Federal Home Loan Bank of Des Moines (FHLB) in an amount
equal to the greater of 1% of the aggregate outstanding balance of loans
secured by dwelling units at the beginning of each year or .3% of its total
assets. The FHLB stock is recorded at cost which represents redemption
value.
(Continued)
45
48
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6--LOANS
A summary of loans by category at December 31, 1998 and 1997 is as follows:
1998 1997
------------ ------------
Commercial and industrial $ 81,346,004 $ 64,489,557
Loans secured by real estate 179,959,303 148,892,185
Other 12,609,494 7,226,719
------------ ------------
273,914,801 225,608,461
Less unearned loan fees 97,279 48,253
------------ ------------
$273,817,522 $225,560,208
============ ============
The breakdown of loans secured by real estate at December 31, 1998 and 1997 is
as follows:
1998 1997
------------ ------------
Business and personal loans $ 65,011,812 $ 44,965,663
Income-producing properties 55,283,273 55,025,798
Owner-occupied properties 10,628,492 10,259,749
Real estate development properties 49,035,726 38,640,975
------------ ------------
$179,959,303 $148,892,185
============ ============
The Company's subsidiary bank grants commercial, residential, and consumer
loans throughout its service area, which consists primarily of the immediate
area in which the Bank is located. The Company has a diversified loan
portfolio, with no particular concentration of credit in any one economic
sector; however, a substantial portion of the portfolio is concentrated in
and secured by real estate. The ability of the Company's borrowers to honor
their contractual obligations is dependent upon the local economy and its
effect on the real estate market.
Following is a summary of activity for the year ended December 31, 1998 of
loans to executive officers and directors or to entities in which such
individuals had beneficial interests as a shareholder, officer, or director.
Such loans were made in the normal course of business on substantially the
same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other customers and did not involve
more than the normal risk of collectibility.
Balance, December 31, 1997 $11,015,254
New loans 4,836,823
Payments and other reductions (8,218,356)
-----------
Balance, December 31, 1998 $ 7,633,721
===========
(Continued)
46
49
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of activity in the allowance for loan losses for the years ended
December 31, 1998, 1997 and 1996 is as follows:
1998 1997 1996
---------- ---------- ----------
Balance at beginning of year $2,510,000 $1,765,000 $1,400,000
Provisions charged to operations 710,899 775,064 345,410
Loans charged off (48,854) (161,799) --
Recoveries of loans previously
charged off 27,955 131,735 19,590
---------- ---------- ----------
Balance at end of year $3,200,000 $2,510,000 $1,765,000
========== ========== ==========
A summary of impaired loans, which include nonaccrual loans, at December 31,
1998, 1997 and 1996 is as follows:
1998 1997 1996
---------- -------- --------
Nonaccrual loans $ 2,000 $ 50,000 $130,704
Impaired loans continuing
to accrue interest 1,084,658 916,803 505,669
---------- -------- --------
Total impaired loans $1,086,658 $966,803 $636,373
========== ======== ========
Allowance for losses on specific
impaired loans $ 157,870 $191,804 $ 82,616
Impaired loans with no related
allowance for loan losses -- -- --
Average balance of impaired
loans during the year $ 915,260 $563,943 $636,563
========== ======== ========
If interest on nonaccrual loans had been accrued, such income would have been
$31, $1,537 and $15,147 for the years ended December 31, 1998, 1997 and 1996,
respectively. The amount recognized as interest income on nonaccrual loans
was $138, $4,864 and $2,005 for the years ended December 31, 1998, 1997 and
1996, respectively. The amount recognized as interest income on impaired
loans continuing to accrue interest was $126,355, $94,801 and $44,616 for the
years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 7--OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS
A summary of office equipment and leasehold improvements at December 31, 1998
and 1997 is as follows:
1998 1997
---------- ----------
Data processing equipment $ 903,851 $ 691,985
Furniture, fixtures and equipment 2,299,995 1,741,621
Leasehold improvements 1,633,585 1,184,052
Automobile 29,023 26,425
---------- ----------
4,866,454 3,644,083
Less accumulated depreciation
and amortization 1,803,331 1,315,384
---------- ----------
Office equipment and leasehold improvements, net $3,063,123 $2,328,699
========== ==========
Depreciation and amortization of office equipment and leasehold improvements
included in occupancy expense amounted to $488,790 in 1998, $311,132 in 1997
and $225,328 in 1996.
(Continued)
47
50
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company's banking facilities are leased under agreements that expire in
1999, 2015, 2012 and 2003 for Clayton, St. Charles County, the City of Sunset
Hills, and St. Louis County, respectively. The Company has the option to
renew the Clayton facility lease for three additional five-year periods with
future rentals to be agreed upon. The Company has no future rental options
for the St. Charles County facility; however, during the term of the lease,
the monthly rentals are adjusted periodically based on then current market
conditions and inflation. The Company has the option to renew the Sunset
Hills facility lease for two additional five-year periods with future rentals
to be agreed upon. The Company has the option to renew the St. Louis County
facility lease for three additional five-year periods with future rentals to
agreed upon. One section of the Clayton facility is sublet and the proceeds
are used to reduce the Company's occupancy expenses. The Merchant Banc
facility in Kansas is leased under an agreement that expires in 2003. The
Company has no future rental options for the Kansas office. Rent expense
amounted to $749,086, $436,524 and $319,002 in 1998, 1997 and 1996,
respectively, and sublease rental income amounted to $42,816, $35,422 and
$77,568 in 1998, 1997 and 1996, respectively. The Company leases its Clayton
facility from a partnership in which a director and an officer have an
ownership interest. The future minimum rental commitments required under the
leases are as follows:
Year Amount
---- ------
1999 $776,125
2000 784,892
2001 793,658
2002 793,658
2003 426,065
========
For leases which renew or are subject to periodic rental adjustments, the
monthly rental payments will be adjusted based on then current market
conditions and rates of inflation.
NOTE 8--INVESTMENT IN ENTERPRISE FUND, L.P.
The Company and its subsidiaries have a combined 10% interest in a limited
liability small business investment partnership, The Enterprise Fund L.P.,
for which a subsidiary of the company serves as the general partner. The
Company has an additional $502,500 in future capital commitments. This
investment, which is accounted for using the equity method of accounting, had
a carrying value of $424,484 and $225,683 at December 31, 1998 and 1997,
respectively.
NOTE 9--FEDERAL HOME LOAN BANK ADVANCES
The Bank maintains a $2 million line of credit from the Federal Home Loan
Bank of Des Moines. In addition, the Bank has access to Federal Home Loan
Bank advances. Federal Home Loan Bank advances are secured under a blanket
agreement which assigns all Federal Home Loan Bank stock, and one to four
family mortgage loans equal to 150% of the outstanding balance. On October
5, 1998, the Bank obtained two advances from the Federal Home Loan Bank -
$3,000,000 for three years at 4.68% payable monthly and $3,000,000 for five
years at 4.72% payable monthly. No advances on the line were made in 1997.
(Continued)
48
51
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 10--MATURITY OF CERTIFICATES OF DEPOSIT
Following is a summary of certificates of deposit maturities at December 31,
1998:
$100,000
Maturity Period and Over Other Total
--------------------------------------- ----------- ----------- ------------
Less than 1 year $40,116,764 $53,204,783 $ 93,321,547
Greater than 1 year and less than 2 years 2,354,297 3,658,391 6,012,688
Greater than 2 years and less than 3 years 350,000 1,354,065 1,704,065
Greater than 3 years and less than 4 years 405,000 548,077 953,077
Greater than 4 years and less than 5 years 100,000 1,074,032 1,174,032
Over 5 years -- 15,514 15,514
----------- ----------- ------------
$43,326,061 $59,854,862 $103,180,923
=========== =========== ============
NOTE 11--NOTE PAYABLE
On April 23, 1996, the Company obtained a $1,000,000 unsecured line of credit
from an unaffiliated bank. The line of credit was a one-year interest-only
note accruing interest at the unaffiliated bank's prime rate. The Company
chose not to renew the line of credit at the maturity date in April 1997. For
the year ended December 31, 1997, the average balance and maximum month-end
balance of the note payable; were $25,000 and $300,000, respectively. The
average rate paid on the note payable was 8.25% in 1997.
NOTE 12--INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31,
1998, 1997 and 1996 are as follows:
1998 1997 1996
---------- ---------- ----------
Current:
Federal $1,821,571 $1,407,463 $1,021,847
State and local 289,415 217,479 153,811
Deferred (260,711) (308,352) (144,314)
---------- ---------- ----------
$1,850,275 $1,316,590 $1,031,344
========== ========== ==========
A reconciliation of expected income tax expense, computed by applying the
statutory federal income tax rate of 34% in 1998, 1997 and 1996, to income
before income taxes and the amounts reflected in the consolidated statements
of income is as follows:
1998 1997 1996
---------- ---------- ----------
Income tax expense at statutory rate $1,652,757 $1,203,306 $ 929,320
Increase (reduction) in income taxes
resulting from:
Tax-exempt income (55,510) (31,828) (23,570)
State and local income tax
expense 191,014 143,536 101,515
Other, net 62,014 1,576 24,079
---------- ---------- ----------
Total tax expense $1,850,275 $1,316,590 $1,031,344
========== ========== ==========
(Continued)
49
52
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A net deferred income tax asset of $1,033,086 and $778,604 is included in
prepaid expenses and other assets in the consolidated balance sheets at
December 31, 1998 and 1997, respectively. The tax effect of temporary
differences that gave rise to significant portions of the deferred tax assets
and deferred tax liabilities at December 31, 1998 and 1997 is as follows:
1998 1997
---------- --------
Deferred tax assets:
Allowance for loan losses $1,098,172 $831,869
Unrealized losses on securities
available for sale -- 759
Other 8,297 17,613
---------- --------
Total deferred tax assets 1,106,469 850,241
---------- --------
Deferred tax liabilities:
Deferred loan fees 1,709 6,495
Office equipment and leasehold
improvements 66,204 65,142
Unrealized gains on securities
available for sale 5,470 --
---------- --------
Total deferred tax liabilities 73,383 71,637
---------- --------
Net deferred tax asset $1,033,086 $778,604
========== ========
A valuation allowance would be provided on deferred tax assets when it is
more likely than not that some portion of the assets will not be realized.
The Company has not established a valuation allowance as of December 31,
1998, due to management's belief that all criteria for recognition have been
met, including the existence of a history of taxes paid sufficient to support
the realization of the deferred tax assets.
NOTE 13-- REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered
by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory - and possible additional
discretionary - actions by regulators that, if undertaken, could have a
direct material effect on the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and other
factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital to risk-weighted assets, and of Tier
1 capital to average assets. Management believes, as of December 31, 1998,
that the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the FDIC dated
January 14, 1997 categorized the Bank as well as capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Bank must maintain minimum total risk-based, Tier 1
risk-based and Tier 1 leverage ratios as set forth in the table. There are
no conditions or events since that notification that management believes have
changed the institution's category.
(Continued)
50
53
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Bank's actual capital amounts and ratios are also presented in the table.
To Be Well
Capitalized Under
For Capital Prompt
Actual Adequacy Purposes Action Provisions
------------------- ------------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ----- -----
As of December 31, 1998:
Total Capital (to risk weighted assets)
Enterbank Holdings,Inc. $32,400,862 10.97% $23,618,397 8.00% $29,522,997 10.00%
Enterprise Bank 30,809,159 10.48 23,520,774 8.00 29,400,967 10.00
Tier 1 Capital (to risk weighted assets)
Enterbank Holdings, Inc. $29,200,862 9.89% $11,809,199 4.00% $17,713,798 6.00%
Enterprise Bank 27,609,159 9.39 11,760,387 4.00 17,640,580 6.00
Tier 1 Capital (to average assets)
Enterbank Holdings, Inc. $29,200,862 9.16% $ 9,558,703 3.00% $15,931,172 5.00%
Enterprise Bank 27,609,159 8.69 9,526,209 3.00 15,877,015 5.00
As of December 31, 1997:
Total Capital (to risk weighted assets)
Enterbank Holdings, Inc. $28,538,743 12.28% $18,591,401 8.00% $23,239,251 10.00%
Enterprise Bank 25,915,000 11.19 18,525,813 8.00 23,157,266 10.00
Tier 1 Capital (to risk weighted assets)
Enterbank Holdings, Inc. $26,028,743 11.20% $ 9,295,700 4.00% $13,943,551 6.00%
Enterprise Bank 23,405,000 10.11 9,262,906 4.00 13,894,359 6.00
Tier 1 Capital (to average assets)
Enterbank Holdings, Inc. $26,028,743 11.42% $ 6,837,420 3.00% $11,395,700 5.00%
Enterprise Bank 23,405,000 10.30 6,814,013 3.00 11,356,689 5.00
NOTE 14--SHAREHOLDERS' EQUITY
On February 14, 1997, the Company completed a stock offering of 451,612
shares of common stock registered under the Securities Act of 1933 on Form
S-1. These shares were offered to the public at $15.50 per share. The
offering allowed for the sale of a minimum of 193,548 shares or $3,000,000,
and a maximum of 451,612 shares or $7,000,000 in common stock. The maximum
number of shares were sold at $15.50 per share.
As part of the organization of Financial Advisors, the Company entered into
solicitation and referral agreements with Moneta Group, Inc. (Moneta). These
agreements call for Moneta to provide planning services for Financial
Advisors' customers. Moneta will refer customers, when appropriate, to the
Bank and receive a share of the revenue generated in the form of options in
the Company's common stock. The agreements with Moneta also allow Financial
Advisors to immediately begin offering a full range of products and services
with the depth and expertise of a large planning firm. Financial Advisors
will continue to expand products and services available to customers as the
division develops.
On October 31, 1997, the Company completed a private placement of its common
stock of 130,940 shares of common stock exempt from registration under the
Securities Act of 1933 pursuant to Regulation D thereunder. These shares
were offered at $16.75 per share. These shares were offered in a private
sale to Moneta principals related to the previously mentioned agreements with
Moneta. The offering allowed for the sale of a minimum of 59,701 shares, or
$1,000,000, and a maximum of 131,343 shares, or $2,200,000, in common stock.
The Company sold 130,940 shares at $16.75 per share.
(Continued)
51
54
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 15--COMPENSATION PLANS
STOCK OPTIONS PLANS
At December 31, 1998, the Company had three qualified incentive stock option
plans for the benefit of the employees of Enterbank Holdings and it's
subsidiaries. Plan I was adopted on April 20, 1988 with 144,000 options. As
of December 31, 1998, Plan I had 16,575 options outstanding and no options
available for future grant. Plan II was adopted on April 25, 1990 with
75,000 options. Plan II had 73,400 options outstanding and no options
available for grant. Plan III was adopted on June 19, 1996 with 200,000
options. Plan III had 183,400 options outstanding and 16,300 options
available for future grants.
In 1998, the Company adopted by Board Approval a nonqualified stock option
plan ("the Nonqualified Plan"), which sets aside up to 35,000 shares of
company Common Stock to grant options to certain key employees of the Company
or any of its subsidiaries. There are limitations as to the number of
options which my be granted to any individual and additional restrictions for
options which may be granted to any individual who is also a ten percent
shareholder. The purchase price for any options granted under the
Nonqualified Plan will be determined based upon the market value of the
Common Stock at the time such options are granted. At December 31, 1998, the
nonqualified plan has 23,000 options outstanding and 12,000 options available
for future grants.
Following is a summary of the various plan transactions:
Number Price
of shares per share Total
---------- ----------------------------------
December 31, 1995 213,000 $ 5.00 - 9.25 $1,251,500
Granted -- -- --
Exercised -- -- --
Forfeited -- -- --
---------- ---------------- -------------
December 31, 1996 213,000 $ 5.00 - 9.25 $1,251,500
Granted 202,000 16.00 -16.75 3,233,500
Exercised 53,500 5.00 267,500
Forfeited 8,500 16.00 136,000
---------- ---------------- -------------
December 31, 1997 353,000 $ 5.00 -16.75 $4,081,500
Granted 28,800 25.00 -32.00 863,425
Exercised 73,425 5.00 -16.00 385,525
Forfeited 12,000 9.25 -16.00 186,600
---------- ---------------- -------------
December 31, 1998 296,375 $ 5.00 -32.00 $4,372,800
========== ================ =============
(Continued)
52
55
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company applies APB Opinion 25 and related Interpretations in accounting
for its stock option plans. Accordingly, no compensation cost has been
recognized for its stock option plans. Had compensation cost for the
Company's stock-based compensation plans been determined based on the fair
value at the grant dates for awards under those plans consistent with the
method contained in SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996
------ ------ ------
Net income
As reported $ 3,011 $ 2,222 $ 1,702
Pro forma 2,762 2,025 1,702
Earnings per share:
Basic:
As reported $ 1.28 $ 1.06 $ 1.11
Pro forma 1.18 0.97 1.11
Diluted:
As reported $ 1.20 $ 1.00 $ 0.97
Pro forma 1.10 0.91 0.97
The fair value of each option granted in 1998 was estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions: a risk-free interest rate of 5.50%, 5.46%, 5.40% and 4.67% for
February, June, August and September, respectively; a dividend yield of
0.67%; vesting period for 5 years; expected lives of 10 years; and volatility
of 27.23%. The weighted average fair value of the options granted in 1998
was $13.67.
There were no options granted in 1996. The fair value of each option granted
in 1997 was estimated on the date of grant using the Black-Scholes
option-pricing model with the following assumptions: a risk-free interest
rate of 6.90%, 6.40% and 6.10% for April, July and September, respectively; a
dividend yield of 0.25%; vesting period of 5 years; expected lives of 10
years; and volatility of 25%. The weighted average fair value of the options
granted in 1997 was $8.45. There were no options granted in 1996.
Effective January 1, 1993, the company adopted a 401(k) thrift plan which
covers substantially all full-time employees over the age of 21. The amount
charged to expense for contributions to the plan was $153,621 for 1998,
$78,948 for 1997 and $66,000 for 1996.
NOTE 16--LITIGATION
Various legal claims have arisen during the normal course of business which,
in the opinion of management, after discussion with legal counsel, will not
result in any material liability.
NOTE 17--DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Bank issues financial instruments with off-balance-sheet risk in the
normal course of the business of meeting the financing needs of its
customers. These financial instruments include commitments to extend credit
and standby letters of credit. These instruments may involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amounts
recognized in the consolidated balance sheets.
The Company's extent of involvement and potential exposure to credit loss in
the event of nonperformance by the other party to the financial instrument
for commitments to extend credit and standby letters of credit is represented
by the contractual amount of these instruments. The Bank uses
(Continued)
53
56
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
the same credit policies in making commitments and conditional obligations as
it does for financial instruments included on its balance sheets.
The contractual amount of off-balance-sheet financial instruments as of
December 31, 1998 and 1997 is as follows:
1998 1997
------------ ------------
Commitments to extend credit $164,012,297 $124,493,916
Standby letters of credit 10,368,944 6,237,738
============ ============
Commitments to extend credit are agreements to lend to a customer as long as
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. Of the total commitments to extend
credit at December 31, 1998, approximately $12,684,764 represents fixed rate
loan commitments. Since certain of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed necessary
by the Bank upon extension of credit, is based on management's credit
evaluation of the borrower. Collateral held varies, but may include accounts
receivable, inventory, premises and equipment, and real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These standby
letters of credit are primarily issued to support contractual obligations of
Bank customers. The credit risk involved in issuing letters of credit is
essentially the same as the risk involved in extending loans to customers.
SFAS 107, Disclosures about Fair Value of Financial Instruments, extends
existing fair value disclosure for some financial instruments by requiring
disclosure of the fair value of such financial instruments, both assets and
liabilities recognized and not recognized in the consolidated balance sheets.
Following is a summary of the carrying amounts and fair values of the
Company's financial instruments on the consolidated balance sheets at
December 31, 1998 and 1997:
1998 1997
---------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Amount fair value Amount fair value
------------ ------------ ------------ ------------
Balance sheet assets:
Cash and due from banks $ 29,701,018 $ 29,701,018 $ 13,897,054 $ 13,897,054
Federal funds sold 14,250,000 14,250,000 32,825,000 32,825,000
Interest-bearing deposits 5,035 5,035 148,349 148,349
Investments in debt and equity
securities 46,290,936 46,297,050 13,433,884 13,434,875
Loans held for sale 6,272,124 6,362,197 1,324,244 1,334,466
Loans, net 270,617,522 270,920,794 223,050,208 222,777,300
Accrued interest receivable 1,648,775 1,648,775 1,448,343 1,448,343
============ ============ ============ ============
Balance sheet liabilities:
Deposits $339,180,170 $339,696,164 $264,300,634 $264,539,273
FHLB advances 6,000,000 6,004,397 -- --
Accrued interest payable 608,056 608,056 549,059 549,059
============ ============ ============ ============
(Continued)
54
57
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate
such value:
CASH AND OTHER SHORT-TERM INSTRUMENTS
For cash and due from banks, federal funds sold, and accrued interest
receivable (payable), the carrying amount is a reasonable estimate of fair
value, as such instruments reprice in a short time period.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Fair values are based on quoted market prices or dealer quotes.
LOANS HELD FOR SALE
Loans held for sale are recorded at the lower of cost or fair value, using
the specific identification method.
LOANS
The fair value of adjustable-rate loans approximates cost. The fair value of
fixed-rate loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
DEPOSITS
The fair value of demand deposits, interest-bearing transaction accounts,
money market accounts and savings deposits is the amount payable on demand at
the reporting date. The fair value of fixed-maturity certificates of deposit
is estimated using the rates currently offered for deposits of similar
remaining maturities.
FEDERAL HOME LOAN BANK ADVANCES
The fair value of Federal Home Loan Bank advances is based on the discounted
value of contractual cash flows. The discount rate is estimated using rates
on borrowed money with similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of credit
are estimated using the fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements, the
likelihood of the counterparties drawing on such financial instruments, and
the present creditworthiness of such counterparties. The Company believes
such commitments have been made on terms which are competitive in the markets
in which it operates; however, no premium or discount is offered thereon and
accordingly, the Company has not assigned a value to such instruments for
purposes of this disclosure.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Company's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Company's financial instruments, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are
(Continued)
55
58
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 are based on existing on- and off-balance-sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not
considered financial instruments. In addition, the tax ramifications related
to the realization of the unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in many of the
estimates.
NOTE 18-LINE OF BUSINESS RESULTS
Management of the Company reviews the financial performance of its operating
segments on an after-tax basis. The company's three major operating segments
in 1998 include Enterbank Holdings, Enterprise Bank and Enterprise Merchant
Banc. Enterbank Holdings includes general corporate expenses not allocated to
the operating segments. Enterprise Bank provides a full range of commercial
banking services. These services include but are not limited to loans,
demand and interest earning accounts, safe deposit boxes, lock boxes and cash
management services. Currently, the Bank includes Enterprise Financial
Advisors, which offers financial planning and trust services. The Merchant
Banc segment offers merchant banking and venture capital services. Following
is the financial results for the Company's operating segments.
(Continued)
56
59
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Enterbank Enterprise Bank Merchant Eliminations Consolidated
Holdings Banc
For the year ended December 31,1998
Interest income $ -- $ 25,414,269 $ 4 $ (4) $ 25,414,269
Interest expense -- 11,869,335 -- (4) 11,869,331
Provision for loan losses -- 710,899 -- -- 710,899
Noninterest income 13,670 1,642,481 422,561 -- 2,078,712
Noninterest expense 915,546 8,546,389 589,767 -- 10,051,702
Income before income tax expense (benefit) (901,876) 5,930,127 (167,202) -- 4,861,049
Income tax expense (benefit) (314,474) 2,226,744 (61,995) -- 1,850,275
---------- ------------ --------- ------------ ------------
Net income (587,402) 3,703,383 (105,207) -- 3,010,774
========== ============ ========= ============ ============
Total Assets $1,465,870 $374,054,971 $ 425,291 $ (645,214) $375,303,918
---------- ------------ --------- ------------ ------------
For the year ended December 31,1997
Interest income $ -- $ 18,759,029 $ 1,109 $ (1,109) $ 18,759,029
Interest expense 2,888 8,580,451 -- (1,109) 8,582,230
Provision for loan losses -- 775,064 -- -- 775,064
Noninterest income 13,441 300,241 162,293 -- 475,975
Noninterest expense 742,571 5,417,758 178,247 -- 6,338,576
Income before income tax expense (benefit) (732,018) 4,285,997 (14,845) -- 3,539,134
Income tax expense (benefit) (282,894) 1,605,229 (5,745) -- 1,316,590
---------- ------------ --------- ------------ ------------
Net income (449,124) 2,680,768 (9,100) -- 2,222,544
========== ============ ========= ============ ============
Total Assets $2,605,055 $290,505,483 $ 134,799 $(25,392,992) $291,364,856
---------- ------------ --------- ------------ ------------
For the year ended December 31,1996
Interest income $ -- $ 12,554,160 $ 789 $ (789) $ 12,554,160
Interest expense 15,274 5,554,427 -- (789) 5,568,912
Provision for loan losses -- 345,410 -- -- 345,410
Noninterest income 600,000 1,035,774 204,018 (600,000) 1,239,792
Noninterest expense 243,698 4,723,350 179,286 -- 5,146,334
Income before income tax expense (benefit) 341,028 2,966,747 25,521 (600,000) 2,733,296
Income tax expense (benefit) (97,484) 1,119,510 9,318 -- 1,031,344
---------- ------------ --------- ------------ ------------
Net income 438,512 1,847,237 16,203 (600,000) 1,701,952
========== ============ ========= ============ ============
Total Assets $ 352,875 $183,834,658 $ 931,921 $ (534,801) $184,584,113
---------- ------------ --------- ------------ ------------
As demonstrated on the table, Enterprise Bank experienced asset growth of
$83.5 million during 1998 and $106.8 million during 1997. The bank is also
providing a majority of the income for the Company. The Merchant Banc had
increased activity in 1998 with the opening of the Kansas office. The
Merchant Banc is beginning to provide more fee income to the company.
Enterbank Holdings has some assets in the form of small investments.
Enterbank Holdings also has noninterest expenses related to items for the
consolidated entity.
(Continued)
57
60
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 19--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31,
--------------------------------------
Assets 1998 1997
------ ----------- -----------
Cash $ 437,727 $ 1,831,497
Investment in Enterprise Bank 27,619,778 23,404,214
Investment in Enterprise Merchant Banc 403,089 108,297
Investment in Enterprise Fund, L.P. 380,129 202,098
Other assets 648,014 571,460
----------- -----------
Total assets $29,488,737 $26,117,566
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Accounts payable and other liabilities $ 248,608 $ 50,774
Shareholders' equity 29,240,129 26,066,792
----------- -----------
Total liabilities and shareholders' equity $29,488,737 $ 26,117,566
=========== ===========
Condensed Statements of Income
December 31,
-----------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Income:
Dividends from subsidiaries $ -- $ -- $ 600,000
Other income 13,670 13,441 --
---------- ---------- ----------
Total income 13,670 13,441 600,000
---------- ---------- ----------
Expenses:
Loss on investment in Enterprise Fund, L.P. 1,969 4,391 56,123
Other expenses 913,577 741,068 202,849
---------- ---------- ----------
Total expenses 915,546 745,459 258,972
---------- ---------- ----------
(Loss) income before tax benefit and equity
in undistributed earnings of subsidiaries (901,876) (732,018) 341,028
Income tax benefit 314,474 282,894 97,484
---------- ---------- ----------
(Loss) income before equity in undistributed
earnings of subsidiaries (587,402) (449,124) 438,512
Equity in undistributed earnings of subsidiaries 3,598,176 2,671,668 1,263,440
---------- ---------- ----------
Net income $3,010,774 $2,222,544 $1,701,952
========== ========== ==========
(Continued)
58
61
Condensed Statements of Cash Flow
December 31,
-----------------------------------------------------
1998 1997 1996
---------- ---------- ----------
Cash flows from operating activities:
Net Income $ 3,010,774 $ 2,222,544 $ 1,701,952
Adjustments to reconcile net income to
net cash provided by operating activities:
Net income of subsidiaries (3,598,176) (2,761,668) (1,863,440)
Dividends from subsidiaries -- -- 600,000
Other, net 123,160 (271,854) (105,484)
----------- ----------- -----------
Net cash provided by operating
activities (464,242) (810,978) 333,028
Cash flows from investing activities:
Capital contributions to subsidiaries (900,000) (6,150,000) (360,000)
Investment in Enterprise Fund L.P. (180,000) (90,000) (90,000)
----------- ----------- -----------
Net cash used in investing activities (1,080,000) (6,240,000) (450,000)
Cash flows from financing activities:
Payment of dividends (235,053) (195,085) (121,548)
Proceeds from issuance of common stock 385,525 9,289,614 --
(Decrease) increase in notes payable -- (300,000) 300,000
----------- ----------- -----------
Net cash provided by
financing activities 150,472 8,794,529 178,452
Net increase(decrease) in cash and cash
equivalents (1,393,770) 1,743,551 61,480
Cash and cash equivalents, beginning of year 1,831,497 87,946 26,466
----------- ----------- -----------
Cash and cash equivalents, end of year $ 437,727 $ 1,831,497 $ 87,946
=========== =========== ===========
59
62
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15d of the Securities Act of
1934, the undersigned Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Clayton, State of Missouri, on the 17th of March 1999.
ENTERBANK HOLDINGS, INC.
By: /s/ Fred H. Eller
---------------------------------
Fred H. Eller
Chief Executive Office
Pursuant to the requirements of the Securities Act of 1934, this 10-K Report
has been signed by the following persons in the capacities and on the dates
indicated.
Signatures Title Date
---------- ----- ----
/s/ Fred H. Eller
- -----------------------------
Fred H. Eller Chief Executive Officer and
and Director March 17, 1999
- -----------------------------
Ronald E. Henges Chairman of the Board
of Directors March 17, 1999
- -----------------------------
Kevin C. Eichner Vice Chairman of the
Board of Directors March 17, 1999
- -----------------------------
Paul R. Cahn Director March 17, 1999
- -----------------------------
Birch M. Mullins Director March 17, 1999
- -----------------------------
Robert E. Saur Director March 17, 1999
- -----------------------------
James A. Williams Director March 17, 1999
- -----------------------------
Henry D. Warshaw Director March 17, 1999
- -----------------------------
James L. Wilhite Director March 17, 1999
- -----------------------------
Ted C. Wetterau Director March 17, 1999
- -----------------------------
Randall D. Humphreys Director March 17, 1999
- -----------------------------
Paul L. Vogel Director March 17, 1999
- -----------------------------
William B. Moskoff Director March 17, 1999
By Fred H. Eller, James C. Wagner and Stacey Tate, as Attorney-in-Part
pursuant to Powers of Attorney executed by the persons listed above,
which Powers of Attorney have been filed with the Securities and Exchange
Commission.
60
63
/s/ James C. Wagner
- -----------------------------
James C. Wagner Chief Executive Officer, Treasurer
and Vice President March 17, 1999
/s/ Fred H. Eller /s/ James C. Wagner /s/ Stacey Tate
- ----------------------------- ----------------------------- ------------------------
Fred H. Eller James C. Wagner Stacey Tate
Attorney-in-Part Attorney-in-Part Attorney-in-Part
61
64
EXHIBIT INDEX
-------------
Exhibit
No. Exhibit
------- -------
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated herein by reference from Exhibit 3.1 to the
Registrant's Registration Statement on Form S-1 dated December 19,
1996 (File No. 333-14737)).
3.2 Bylaws of the Registrant, as amended, (incorporated herein by
reference from Exhibit 3.2 to the Registrant's Registration
Statement on Form S-1 dated December 19, 1996 (File No.
333-14737)).
3.3 Amendment to the Bylaws of the Registrant (incorporated herein
by reference from Exhibit 3 to the Registrant's Registration on
form 8-K dated May 15, 998 (File No. 000-24131)).
4.1 Enterprise Bank Incentive Stock Option Plan (incorporated herein
by reference from Exhibit 4.3 to the Registrant's Registration
Statement on Form S-8 dated December 29, 1997 (File No.
333-43365)).
4.2 Enterprise Bank Second Incentive Stock Option Plan (incorporated
herein by reference from Exhibit 44.4 to the Registrant's
Registration Statement on Form S-8 dated December 29, 1997 (File
No. 333-43365)).
4.3 Enterbank Holdings, Inc. Third Incentive Stock Option Plan
(incorporated herein by reference from Exhibit 4.5 to the
Registrant's Registration Statement on Form S-8 dated December 29,
1997 (File No. 333-43365)).
4.4 Enterbank Holdings, Inc., Qualified Incentive Stock Option Plan
(incorporated herein by reference to the Registrant's 1998 Proxy
Statement).
10.2 Customer Referral Agreement by and among Enterbank Holdings, Inc.,
Enterprise Bank and Moneta Group Investment Advisors, Inc.
(Incorporated herein by reference from Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1997).
10.3 Revised Customer Referral Agreement by and among Enterbank
Holdings, Inc., Enterprise Bank and Moneta Group Investment
Advisors, Inc.
11.1 Statement regarding computation of per share earnings.
13.1 1998 Annual Report.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG.
24.1 Power of Attorney.
27.1 Financial Data Schedule. (EDGAR only)
99.1 1998 Proxy Statement.
- ------------------------
Filed Herewith
62