Back to GetFilings.com
================================================================================
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 For the fiscal year ended December 31, 2001
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 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 of incorporation or organization) (I.R.S. Employer Identification Number)
150 North Meramec, Clayton, MO 63105
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 314-725-5500
---------------------
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
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 5, 2002: Common Stock, par value $.01, $77,322,798
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of March 5, 2002: Common Stock, par value $ .01, 9,309,451
shares outstanding
================================================================================
Enterbank Holdings, Inc.
2001 Annual Report on Form 10-K
Page
----
Business.............................................................. 1
Properties............................................................ 5
Legal Proceedings..................................................... 6
Submission of Matters to Vote of Security Holders..................... 6
Market for Common Stock and Related Stockholder Matters............... 7
Selected Financial Data............................................... 8
Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 9
Quantitative and Qualitative Disclosures About Market Risk............ 29
Financial Statements and Supplementary Data........................... 35
Directors and Executive Officers of the Registrant.................... 35
Executive Compensation................................................ 35
Security Ownership of Certain Beneficial Owners
and Management................................................... 36
Certain Relationships and Related Party Transactions.................. 36
Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................................... 36
Independent Auditors' Report.......................................... 37
Consolidated Financial Statements..................................... 38
Signatures ........................................................... 70
Exhibit Index ....................................................... 72
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," "will,"
"expect," "anticipate," "estimate" and similar words, although some
forward-looking statements are expressed differently. You should be aware that
Enterbank Holdings, Inc.'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 Enterbank Holdings, Inc.'s
actual results to differ from those set forth in the forward-looking statements.
PART I
------
ITEM 1: BUSINESS
General
Enterbank Holdings, Inc. (the "Company" or "Enterbank") was incorporated under
the laws of the State of Delaware on December 30, 1994, for the purpose of
providing a holding company structure for the ownership of Enterprise Bank, a
Missouri banking corporation, (the "Bank"). The Company acquired the Bank in May
1995 through a tax-free exchange with the Bank's shareholders. In June of 2000,
Enterbank and Commercial Guaranty Bancshares, Inc., the parent company for First
Commercial Bank, N.A. (the "Kansas Bank"), merged under a tax-free
reorganization. The transaction was accounted for as a pooling of interests. The
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. In 2000, the Company elected to change
its status from a bank holding company to a financial holding company.
The Bank began operations on May 9, 1988 as a new Missouri banking corporation.
From 1988 through 1996, the Bank provided commercial banking services to its
customers from a single location in the City of Clayton, St. Louis County,
Missouri. During 1997, the Bank opened two additional facilities located in St.
Charles County, Missouri and the City of Sunset Hills, located in St. Louis
County. During 1998, the Bank opened an operations facility in St. Louis County,
Missouri.
Enterprise Trust ("Trust"), formerly referred to as Enterprise Financial
Advisors ("EFA"), a division of the Bank, was organized in late 1998 to provide
fee-based trust services, personal financial planning, estate planning, and
corporate planning services to the Company's target market on a full time basis.
As part of the organization of Trust, the Company entered into solicitation and
referral agreements with Moneta Group, Inc. ("Moneta"), a large financial
planning company based in St. Louis, Missouri. These agreements call for Moneta
to provide assistance in staffing, training, marketing and regulatory compliance
for Trust for which Moneta receives compensation. Moneta refers customers, when
appropriate, to the Bank and receives a share of the revenue generated in the
form of right to by stock options on the Company's common stock. The agreements
with Moneta allow Trust to offer a full range of products and services with the
depth and expertise of a large planning firm.
The Kansas Bank began operations on February 20, 1996 as a new Kansas banking
corporation in Overland Park, Kansas located in Johnson County. The Kansas Bank
acquired First National Bank of Humboldt in December of 1997, adding three
additional locations in Humboldt, Chanute and Iola, all located in Southeast
Kansas. In June of 2000, Enterbank completed a merger transaction under which
the Kansas Bank became a subsidiary of the Company. On January 1, 2001, the
Kansas Bank changed its legal name to Enterprise Banking, N.A.
On September 30, 2001 Enterprise Banking, N.A. merged into Enterprise Bank with
Enterprise Bank as the surviving entity.
1
As used herein, unless the context indicates otherwise, Enterbank Holdings, Inc.
and all of its subsidiaries are referred collectively as the "Organization" or
the "Company". Enterprise Bank and all of its subsidiaries are referred to as
the "Bank" or the "Banking Franchise".
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 and Kansas City metropolitan areas. The Bank serves the greater
St. Louis and Kansas City Metropolitan area, as well as Southeast Kansas. 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.
Assets and income 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 Banking Franchise, the Company delivers a full range of commercial
banking services to the closely-held business market. Financial planning and
trust fiduciary services are offered through Trust. 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
Enterprise Bank is a Missouri state chartered bank. The Bank offers a broad
range of commercial and personal banking services to customers. Loans include
commercial, commercial real estate, financial and industrial development, real
estate construction and development, residential real estate and a smaller
amount of consumer loans. Other services include treasury management and
safe-deposit boxes.
The Bank's primary source of funds has historically been customer deposits. The
Bank 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, commercial sweep accounts,
checking and negotiable order of 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: 1) the Bank's calling officers and management maintain close working
relationships with their commercial clients, 2) the Bank's management structure
enables it to react to customer requests for loan and deposit services more
quickly than larger competitors, 3) the Bank's management and officers have
significant experience in the communities serviced by the Bank, and 4) the Bank
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 one of only a few 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 client and asset driven. The
Bank continuously seeks to add clients that fit its target market. This strategy
enables the Bank to attract clients whose borrowing needs have grown along with
the Bank's increasing capacity to fund client loan requests. Additionally, the
Bank increased its loan portfolio based on lending opportunities developed by
relationship officers. The Bank funds loan growth by attracting deposits from
business and professional clients, by borrowing from the Federal Home Loan Bank
and by attracting wholesale deposits which are considered stable deposit sources
and which are priced at or below the Bank's all-in alternative cost of funds.
2
The Bank can expand its customer relationships and control operating costs by:
1) operating a small number of offices with a high per office asset base, 2)
emphasizing commercial loans which tend to be larger than retail loans, 3)
employing an experienced staff, all of whom are rewarded on the basis of
performance and customer service, 4) improving data processing and operational
systems to increase productivity and to control risk, 5) leasing facilities
where possible so that capital can be deployed more effectively to support
growth in earning assets, 6) 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 the
target service areas. The Bank stresses personal service, flexibility in
structuring loan and deposit relationships which meet client needs and timely
responsiveness to the needs of clients. Management of the Bank makes it a
practice to maintain close working relationships and personal contact with each
of the commercial clients.
Each of the banking units has its own operating Board of Directors. Each Board
of Directors is comprised primarily of business owners and professionals who fit
the target client profile. Each Board of Directors takes an active role in the
business development activities and the credit review process of its respective
banking unit. Input and understanding of the needs of the Bank's current and
target clients 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 low relationship officer turnover, and the 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 client 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.
Market Areas and Approach to Expansion
In the St. Louis metropolitan area, the Bank has facilities in Clayton, St.
Charles County and the City of Sunset Hills. In Kansas, the Bank has facilities
in Johnson County and Southeast Kansas along with a recently opened office in
the Country Club Plaza on the Missouri side of Kansas City. The Company chose to
locate in all of these markets, except Southeast Kansas, based on high
expectations for growth, high concentration of closely-held businesses and the
high number of professionals in those markets. The Southeast Kansas locations
provide a profitable and stable source of core deposits that the Company can
invest in the higher growth markets. 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, and other decisions 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 strategy 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
The Company organized Enterprise Merchant Banc, Inc. ("Merchant Banc") (formerly
Enterprise Capital Resources, Inc.) in 1995 as a wholly owned subsidiary to
provide merchant banking services to closely-held business and their owners. Its
current operations include a minority investment in Enterprise Merchant Banc,
LLC ("EMB LLC"), which focuses on providing equity capital and equity-linked
debt investments to growing companies in need of additional capital to finance
internal and acquisition-related growth. EMB LLC manages and holds a 1% economic
ownership interest as the general partner in two investment funds, Enterprise
Fund, LP ("Fund I") and Enterprise Capital Partners, LP "Fund II"with total
committed capital of approximately $35 million, substantially all of which has
been invested. The portfolio companies held by each Fund are primarily
manufacturers, versus service providers, and have
3
no relationship to the internet or technology industries. EMB LLC focuses on
"second stage" and mezzanine financing for established companies rather than
"seed money" for start up organizations.
In mid-1999, the Company restructured its ownership and control positions of its
various merchant banking operations. As a result of this restructuring, the
Company maintains a minority interest in EMB LLC. The minority interest in the
LLC includes a 4.9% voting and common stock ownership interest with a 24.9%
economic interest in the earnings or losses
The Company also has a 4.5% economic and voting interest in Fund I and has
equity and debt investments in two portfolio companies of Fund I and Fund II.
After experiencing significant losses on merchant banking investments in 2001,
the Company decided, in first quarter of 2002, that it no longer views the
merchant banking investments as a viable part of its long term business
strategy. The investments are now viewed as "workouts", regardless of their
individual performance, and the Company will pursue maximum recovery efforts as
necessary.
Enterprise Trust (formerly Enterprise Financial Advisors)
In 1997, the Bank entered into solicitation and referral agreements with Moneta
Group, Inc., a nationally recognized firm in the financial planning industry, to
begin offering financial services to clients. Under the agreements, Moneta
provided assistance in staffing, training, marketing and regulatory compliance
and in return received a share of the gross margin generated by Enterprise Trust
for financial planning and fiduciary services. In addition, Moneta refers
banking clients, when appropriate, to the Bank and receives a share of the
revenue generated in the form of options in the Company's common stock.
In 1998, the Bank entered the trust and financial planning business on a full
time basis when the Bank was granted trust powers. At that time, the Bank
modified its agreements with Moneta. The new agreements call for Moneta to help
the Bank with many of the issues related to startup including, but not limited
to, staffing, training, marketing, and regulatory compliance. In return, Moneta
receives a portion of the gross margin earned by the Trust division of the Bank
in the form of cash. Moneta still refers banking business to the Bank and
receives options in the form of compensation for banking business referrals.
Enterprise Trust provides fee-based personal and corporate financial consulting
and trust services to the Company's target market. Personal financial consulting
includes estate planning, investment management, and retirement planning.
Corporate consulting services are focused in the areas of retirement plans,
management compensation and management succession issues. Some investment
management services are provided through Argent Capital Management LLC
("Argent"), a money management company that invests principally in large
capitalization companies, of which the Company owns approximately 4.8% of the
outstanding shares.
In addition, the Company acquired approximately 11% of Retirement Plan Services,
LLC ("RPS") in October of 2000 and in December of 2000 elected to move its
401(k) plan from the Principal Group to RPS. RPS provides retirement plan
administration to primarily small and medium size businesses. During 2001, the
Company increased its ownership percentage to approximately 20% and actively
refers business to RPS.
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 its 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
4
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, 2001, the Company had approximately 253 full time equivalent
employees. None of the Company's employees are covered by a collective
bargaining agreement. Management believes that its relationship with its
employees is very strong.
ITEM 2: PROPERTIES
All of the Company's St. Louis banking facilities are leased under agreements
that expire in 2004, 2003, 2011 and 2016, 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 one additional five-year period
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 be 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 market conditions and inflation. The
Merchant Banc facility in Kansas is leased under an agreement that expires in
2003. The Merchant Banc facility is sublet for the same amount as the lease and
the proceeds are used to reduce the Company's occupancy expense. The Company's
Country Club Plaza banking facility is leased under an agreement that expires in
2011. The Company has the option to renew the Plaza facility lease for one 5
year term. The banking facilities in Overland Park, Humbolt, Chanute, and Iola,
Kansas are owned by the Company.
5
The following is a list of the Company's current facilities:
Facility Address Description
- -------- ------- -----------
Enterprise Bank, Clayton 150 North Meramec Commercial and Retail
Clayton, Missouri 63105 Banking
Enterprise Bank, St. Peters 300 St. Peters Centre Blvd. Commercial and Retail
St. Peters, Missouri 63376 Banking
Enterprise Bank, Sunset Hills 3890 South Lindbergh Blvd. Commercial and Retail
Sunset Hills, Missouri 63127 Banking
Enterprise Bank, Overland Park 12695 Metcalf Avenue Commercial and Retail
Overland Park, Kansas 66213 Banking
Enterprise Bank, Humboldt 725 Bridge Street Commercial and Retail
Humboldt, Kansas 66748 Banking
Enterprise Bank, Chanute 17 S. Lincoln Commercial and Retail
Chanute, Kansas 66720 Banking
Enterprise Bank, Iola 208 West Street Commercial and Retail
Iola, Kansas 66749 Banking
Enterprise Bank, Plaza 444 W 47th Street Suite 110 Commercial and Retail
Kansas City, Missouri 64112 Banking
Enterprise Bank, St. Louis 1281 North Warson Road Operations Center
St. Louis, Missouri 63132
Enterprise Merchant Banc, Inc., 7400 W. 110th Street 5th Floor Merchant Banking
Overland Park Overland Park, Kansas 66210
ITEM 3: 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 adverse
effect on the business, financial condition, results of operations or cash flows
of the Company or any of its subsidiaries.
ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter ended
December 31, 2001.
6
ITEM 5: MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of March 5, 2002, the Company had approximately 1,100 common stock
shareholders of record and a market price of $10.50 per share. The common stock
is not traded on an exchange but is traded on the Over-The-Counter Bulletin
Board. The Company believes the high and low sale prices for the common stock
and dividends declared were as follows in the quarters indicated:
Dividends
Market Price Declared
---------------- ---------
2000 High Low
----
First Quarter $18.25 $18.00 $.0125
Second Quarter 18.00 17.00 .0125
Third Quarter 17.75 14.75 .0125
Fourth Quarter 16.00 14.50 .0125
2001
----
First Quarter $16.00 $13.00 $.0150
Second Quarter 14.00 11.00 .0150
Third Quarter 13.50 11.25 .0150
Fourth Quarter 12.40 10.50 .0150
There may have been other transactions at other prices not known to the Company.
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, bank regulatory 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.
Common Stock
On August 18, 1999, the Board of Directors approved a 3 for 1 stock split, in
the form of a stock dividend, of the Company's common stock for shareholders of
record on September 29, 1999. On September 29, 1999, the Company's shareholders
approved the 3 for 1 stock split and an amendment to the Company's Certificate
of Incorporation to increase the number of authorized shares of common stock
from 3,500,000 to 20,000,000. All share and per share amounts have been restated
to reflect the split.
The authorized capital stock of the Company consists of 20,000,000 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, 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.
7
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data should be read in connection with and are
qualified by reference to the consolidated financial statements, related notes
and "Managements Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report. This selected financial data
presented below is derived from the Company's audited consolidated financial
statements as of and for the years ended: December 31, 2001, 2000, 1999, 1998
and 1997.
(in thousands, except per share amounts)
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
STATEMENT OF INCOME DATA:
Interest income $ 52,612 $ 56,030 $ 41,076 $ 33,505 $ 21,574
Interest expense 23,810 27,596 18,160 15,705 9,955
Net interest income 28,802 28,434 22,916 17,800 11,619
Provision for loan losses 3,230 1,043 2,496 1,361 875
Noninterest income (1,275) 3,495 3,595 2,758 638
Noninterest expense 25,590 22,477 18,095 14,526 7,923
(Loss) income before income tax expense (1,293) 8,409 5,920 4,671 3,459
Income tax expense 1,242 3,208 2,335 1,725 1,203
(Loss) income before cumulative effect of a
change in accounting principle (2,535) 5,201 3,585 2,946 2,256
Cumulative effect on prior years of a
change in asset classification -- -- 121 -- --
Net (loss) income (2,535) 5,201 3,706 2,946 2,256
Loss (income) from merchant banking
investments (after-tax) 5,200 (167) 3 1 3
Provision for loss on merchant banking
loan (after-tax) 1,100 -- -- -- --
Operating earnings (a) 3,765 5,034 3,709 2,947 2,259
PER SHARE DATA:
Net (loss) income per share-basic $ (0.28) $ 0.58 $ 0.41 $ 0.34 $ 0.30
Net (loss) income per share-diluted (0.28) 0.54 0.39 0.32 0.29
Cash dividends per share 0.060 0.050 0.040 0.033 0.030
Book value per share 5.60 5.90 5.26 4.96 4.43
Tangible book value per share 5.37 5.64 4.99 4.66 4.09
BALANCE SHEET DATA:
Balance sheet totals-end of period:
Assets $795,250 $710,938 $615,143 $488,066 $398,839
Loans 642,053 556,793 480,891 354,927 293,893
Allowance for loan losses 7,296 7,097 6,758 4,430 3,170
Deposits 714,353 632,437 542,329 433,203 356,635
Guaranteed preferred beneficial interests
in EBH-subordinated debentures 11,000 11,000 11,000 -- --
Borrowings 15,399 11,191 12,417 9,205 3,674
Shareholders' equity 51,897 53,484 47,044 44,306 37,001
Average balance sheet amounts:
Assets $743,163 $662,157 $527,255 $425,701 $265,218
Loans 613,539 517,381 429,408 328,761 203,344
Earning assets 701,242 627,882 492,288 393,128 246,122
Interest-bearing liabilities 583,003 529,187 411,706 328,195 197,759
Shareholders' equity 56,623 50,132 46,261 41,148 30,997
8
ITEM 6: SELECTED FINANCIAL DATA (continued)
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
SELECTED RATIOS:
Return on average equity N/A% 10.37% 7.88% 7.16% 7.28%
Return on average tangible equity N/A 10.87 8.46 7.66 8.01
Return on average assets N/A 0.79 0.70 0.69 0.85
Efficiency ratio (noninterest expenses as
a percentage of total revenues) 92.96 70.40 68.25 70.66 64.64
Average equity to average assets 7.62 7.57 8.77 9.67 11.69
Leverage ratio 8.18 9.41 10.62 9.76 12.88
Net yield on average earning assets 7.52 8.95 8.37 8.56 8.79
Cost of interest-bearing liabilities 4.08 5.21 4.41 4.79 5.05
Net interest rate margin 4.13 4.55 4.68 4.56 4.73
Net interest rate spread 3.44 3.74 3.96 3.77 3.74
Nonperforming loans to total loans 0.58 0.36 0.53 0.19 0.02
Nonperforming assets to total assets 0.49 0.29 0.48 0.30 0.21
Net charge offs to average loans 0.49 0.14 0.04 0.03 0.01
Allowance for loan losses to total loans 1.14 1.27 1.41 1.25 1.08
Dividend payout ratio N/A 8.62 9.66 9.74 9.96
SELECTED RATIOS EXCLUDING MERCHANT
BANKING INVESTMENTS AND LOANS (a)
Return on average equity 6.65 10.04 8.02 7.16 7.29
Return on average assets 0.51 0.76 0.70 0.69 0.85
Efficiency ratio (non-interest expense as a
percentage of total revenues) 76.98 71.00 8.24 70.65 64.61
(a) Operating earnings are presented as supplemental information to enhance the
reader's understanding of the Company's financial results excluding the impact
of losses or income from merchant banking investments and loans. Operating
earnings should not be viewed as a substitute for net income and earnings
(losses) per share as determined in accordance with accounting principles
generally accepted in the United States of America.
ITEM 7: 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, 2001. 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.
The Company has prepared all of the consolidated financial information in this
report in accordance with accounting principles generally accepted in the United
States of America (U.S. GAAP). In preparing the consolidated financial
statements in accordance with U.S. GAAP, the Company makes estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurances that actual results will not
differ from those estimates.
Critical Accounting Policies
We have identified the accounting policy related to the allowance for loan
losses as critical to the understanding of the Company's results of operations,
since the application of this policy requires significant management assumptions
and estimates that could result in materially different amounts to be
9
reported if conditions or underlying circumstances were to change. The impact
and any associated risks related to this policy on our business operations are
discussed in the "Asset Quality" section below.
RESULTS OF OPERATIONS
Overview
The net loss was $2.5 million for the year ended December 31, 2001, a decrease
of $7.7 million, compared to net income of $5.2 million for the same period in
2000. Basic (losses) earnings per share for the years ended December 31, 2001
and 2000 were $(0.28) and $0.58, respectively.
The net loss for 2001 is attributed primarily to $5.7 million in losses related
to Merchant Banc investments. There was also a decrease in the net interest rate
margin, an increase in the provision for loan losses, and an increase in
noninterest expenses that contributed adversely to the 2001 results. The
decrease in the net interest rate margin was precipitated by a dramatic decline
in the interest rate environment since December 2000.
Net income was $5.2 million for the year ended December 31, 2000, an increase of
40% over net income of $3.7 million for the same period in 1999. Diluted
earnings per share for the years ended December 31, 2000 and 1999 were $0.54 and
$0.39 respectively.
The increase in net income during 2000 is attributed to an increase in the net
interest income from growth in earning assets and a decrease in the provision
for loan losses.
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 $28.9 million, which
yielded a net interest rate margin of 4.13% for the year ended December 31,
2001, compared to net interest income of $28.6 million and net interest rate
margin of 4.55% for the same period in 2000.
The $355,000, or 1%, increase in tax equivalized net interest income was driven
primarily by an increase in average interest-earning assets and a decrease in
the interest rates on average interest-bearing liabilities. This was offset by a
decrease in the interest rates of average interest-earning assets and an
increase in average interest-bearing liabilities. Average interest-earning
assets increased by 12%, or $73 million, to $701 million for the year ended
December 31, 2001. The increase in earning assets, primarily loans, is
attributable to the continued calling efforts of the Company's relationship
officers. Average loans increased $96 million, or 19%, to $614 million in 2001
as compared to $517 million in 2000. The yield on average interest-earning
assets decreased to 7.52% for the year ended December 31, 2001 from 8.95% for
the same period in 2000. The decrease in asset yield was primarily due to a 475
basis point decrease in the prime rate since December of 2000 and a general
decrease in market interest rates.
Average interest-bearing liabilities increased $54 million, or 10% to $583
million for the year ended December 31, 2001. The increase in demand deposits,
interest-bearing transaction accounts, and money market accounts is attributed
to continued calling efforts of the Company's relationship officers. The cost of
interest-bearing liabilities decreased to 4.08% in 2001 compared to 5.21% for
the same period in 2000. This decrease is primarily attributed to the
aforementioned decreases in the prime rate and declines in the market interest
rates for all sources of funding.
Net interest income (presented on a tax equivalent basis) was $28.6 million,
which yielded a net interest rate margin of 4.55%, for the year ended December
31, 2000, compared to net interest income of $23.1 million and net interest rate
margin of 4.68% for the same period in 1999.
The $5.5 million, or 24%, increase in net interest income was driven primarily
by a 28%, or $136 million, increase in average interest-earning assets to $628
million for the year ended December 31, 2000. The increase in the
interest-earning assets, primarily loans, is attributable to the continued
calling efforts of the Company's relationship officers and sustained economic
growth in the local market served
10
by the Company. Average loans increased $88 million, or 20%, to $517 million in
2000 compared to $429 million in 1999.
The yield on average interest-earning assets increased to 8.95% for the year
ended December 31, 2000 from 8.37% for the same period in 1999. The increase in
asset yield was primarily due to a 125 basis point increase in the prime rate
since July of 1999 and a general increase in average yields on loans and
investment securities. Average interest-earning assets increased to 94.82% of
total assets in 2000 from 93.37% for the same period in 1999. The increase in
net interest income was offset by a $117 million increase in average
interest-bearing liabilities to $529 million in 2000 from $412 million during
the same period in 1999. The cost of interest-bearing liabilities increased to
5.21% in 2000 compared to 4.41% for the same period in 1999. This increase is
primarily attributed to the aforementioned increases in the prime rate and the
addition of $11 million in guaranteed preferred beneficial interest in
EBH-subordinated debentures.
The increase in the interest paid on interest-bearing liabilities was also
attributed to a change in the mix of liabilities from lower cost liabilities,
such as interest-bearing transaction and savings accounts, to higher cost
liabilities, such as money market accounts, certificates of deposits, and
guaranteed preferred beneficial interests in EBH-subordinated debentures. Total
average interest-bearing liabilities increased to 79.92% of total average assets
for the year ended December 31, 2000 from 78.08% for the same period in 1999.
The table on page 12 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, 2001, 2000, and 1999.
11
Years ended December 31,
---------------------------------------- ----------------------------------------
2001 2000
---------------------------------------- ----------------------------------------
Percent Interest Average Percent Interest Average
Average of Total Income/ Yield/ Average of Total Income/ Yield/
Balance Assets Expense Rate Balance Assets Expense Rate
-------- -------- -------- ------- -------- -------- -------- -------
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (1)(2) $613,539 82.55% $48,803 7.95% $517,381 78.14% $49,231 9.52%
Taxable investments in debt and equity
securities 39,057 5.26 2,249 5.76 55,005 8.31 3,473 6.31
Non-taxable investments in debt and equity
securities(2) 294 0.04 26 8.96 700 0.11 54 7.75
Federal funds sold 47,778 6.43 1,634 3.42 54,773 8.27 3,410 6.23
Interest-bearing deposits 574 0.08 27 4.76 23 0.00 1 5.12
-------- ------ ------- -------- ------ -------
Total interest-earning assets 701,242 94.36 52,739 7.52 627,882 94.83 56,169 8.95
Non-interest-earning assets:
Cash and due from banks 24,624 3.31 19,878 3.00
Fixed assets, net 9,475 1.27 8,309 1.25
Assets related to Merchant Banc investments 3,895 0.52 2,046 0.31
Prepaid expenses and other assets 11,213 1.51 10,745 1.62
Allowance for loan losses (7,286) (0.98) (6,703) (1.01)
-------- ------ -------- ------
Total assets $743,163 100.00% $662,157 100.00%
======== ====== ======== ======
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 53,846 7.25% $ 555 1.03% $ 48,781 7.37% $ 823 1.69%
Money market accounts 289,264 38.92 9,590 3.32 257,200 38.84 13,366 5.20
Savings 7,706 1.04 157 2.04 7,178 1.08 185 2.58
Certificates of deposit 206,334 27.76 11,703 5.67 194,593 29.39 11,624 5.97
Borrowed funds 14,853 2.00 764 5.14 10,435 1.58 545 5.22
Guaranteed preferred beneficial interests
in EBH-subordinated debentures 11,000 1.48 1,042 9.48 11,000 1.66 1,053 9.58
-------- ------ ------- -------- ------ -------
Total interest-bearing liabilities 583,003 78.45 23,811 4.08 529,187 79.92 27,596 5.21
Noninterest-bearing liabilities:
Demand deposits 100,103 13.47 79,364 11.99
Other liabilities 3,434 0.46 3,474 0.52
-------- ------ -------- ------
Total liabilities 686,540 92.38 612,025 92.43
Shareholders' equity 56,623 7.62 50,132 7.57
-------- ------ -------- ------
Total liabilities & shareholders' equity $743,163 100.00% $662,157 100.00%
======== ====== ======== ======
Net interest income $28,928 $28,573
======= =======
Net interest spread 3.44% 3.74%
Net interest margin(3) 4.13% 4.55%
==== ====
Years ended December 31,
----------------------------------------
1999
----------------------------------------
Percent Interest Average
Average of Total Income/ Yield/
Balance Assets Expense Rate
-------- -------- -------- -------
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans (1)(2) $429,408 81.44% $37,820 8.81%
Taxable investments in debt and equity
securities 36,955 7.01 2,094 5.67
Non-taxable investments in debt and equity
securities(2) 935 0.18 70 7.49
Federal funds sold 24,957 4.73 1,231 4.93
Interest-bearing deposits 33 0.01 2 6.06
-------- ------ -------
Total interest-earning assets 492,288 93.37 41,217 8.37
Non-interest-earning assets:
Cash and due from banks 21,419 4.06
Fixed assets, net 7,813 1.48
Assets related to Merchant Banc investments 890 0.17
Prepaid expenses and other assets 9,678 1.83
Allowance for loan losses (4,833) (0.91)
-------- ------
Total assets $527,255 100.00%
======== ======
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 44,477 8.43% $ 814 1.83%
Money market accounts 197,931 37.53 8,528 4.31
Savings 6,935 1.32 179 2.58
Certificates of deposit 148,790 28.22 7,821 5.26
Borrowed funds 11,595 2.20 632 5.45
Guaranteed preferred beneficial interests
in EBH-subordinated debentures 1,978 0.38 186 9.40
-------- ------ -------
Total interest-bearing liabilities 411,706 78.08 18,160 4.41
Noninterest-bearing liabilities:
Demand deposits 66,044 12.53
Other liabilities 3,244 0.62
-------- ------
Total liabilities 480,994 91.23
Shareholders' equity 46,261 8.77
-------- ------
Total liabilities & shareholders' equity $527,255 100.00%
======== ======
Net interest income $23,057
=======
Net interest spread 3.96%
Net interest margin(3) 4.68%
====
(1) Average balances include non-accrual loans. The income on such loans is
included in interest but is recognized only upon receipt. Loan fees
included in interest income are approximately $1,310,000, $1,062,000, and
$1,128,000 for 2001, 2000 and 1999, respectively.
(2) Non-taxable income is presented on a fully tax-equivalent basis assuming a
tax rate of 34%.
(3) Net interest income divided by average total interest earning assets
12
During 2001, an increase in the average volume of earning assets resulted in an
increase in interest income of $7,036,000. Interest income decreased $10,466,000
due to a decrease in rates on earning assets. Increases in 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
$2,498,000. Changes in interest rates on the average volume of interest-bearing
liabilities resulted in a decrease in interest expense of $6,283,000. The net
effect of the volume and rate changes associated with all categories of
interest-earning assets during 2001 as compared to 2000 decreased interest
income by $3,430,000, while the net effect of the volume and rate changes
associated with all categories of interest-bearing liabilities decreased
interest expense by $3,785,000.
During 2000, an increase in the average volume of earning assets resulted in an
increase in interest income of $11,082,000. Interest income increased $3,870,000
due to an increase in rates on earning assets. Increases in 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
$6,390,000. Changes in interest rates on the average volume of interest-bearing
liabilities resulted in an increase in interest expense of $3,046,000. The net
effect of the volume and rate changes associated with all categories of
interest-earning assets during 2000 as compared to 1999 increased interest
income by $14,952,000, while the net effect of the volume and rate changes
associated with all categories of interest-bearing liabilities increased
interest expense by $9,436,000.
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:
2001 Compared to 2000 2000 Compared to 1999
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------------- --------------------------------
Volume(1) Rate(2) Net Volume(1) (Rate(2) Net
--------- ------- ------- --------- -------- -------
(Dollars in Thousands)
Interest earned on:
Loans $8,381 $ (8,809) $ (428) $ 8,189 $3,222 $11,411
Taxable investments in debt
and equity securities (941) (283) (1,224) 1,120 259 1,379
Nontaxable investments in debt
and equity securities (3) (38) 10 (28) (11) (5) (16)
Federal funds sold (392) (1,384) (1,776) 1,785 394 2,179
Interest- bearing deposits 26 -- 26 (1) (0) (1)
------ -------- ------- ------- ------ -------
Total interest-earning assets $7,036 $(10,466) $(3,430) $11,082 $3,870 $14,952
------ -------- ------- ------- ------ -------
Interest paid on:
Interest-bearing demand deposits $ 80 $ (348) $ (268) $ 75 $ (66) $ 9
Money market accounts 1,511 (5,287) (3,776) 2,863 1,975 4,838
Savings deposits -- (28) (28) 6 -- 6
Time deposits 680 (601) 79 2,644 1,159 3,803
Borrowed funds 227 (8) 219 (61) (26) (87)
Guaranteed preferred beneficial
interests in EBH-subordinated
debentures -- (11) (11) 863 4 867
------ -------- ------- ------- ------ -------
Total $2,498 $ (6,283) $(3,785) $ 6,390 $3,046 $ 9,436
------ -------- ------- ------- ------ -------
9,436
Net interest income (loss) $4,538 $ (4,183) $ 355 $ 4,692 $ 824 $ 5,516
====== ======== ======= ======= ====== =======
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied by volume of prior period.
(3) 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.
In 2002, the Company plans to manage the net interest rate margin more
aggressively, including the use of derivative financial instruments and more
disciplined pricing on loans and deposits. These actions should reduce the level
of interest rate risk under various rate scenarios and result in less volatility
of the interest rate margin.
13
Liquidity
Liquidity is provided by the Company's earning assets, including short-term
investments in federal funds sold, maturities in loan and investment portfolios,
and amortization of term loans, along with deposit inflows, and proceeds from
borrowings. At December 31, 2001 the loan to deposit ratio was 90%, as compared
to 88% at December 31, 2000. Federal funds sold, interest bearing deposits and
investment securities were $98 million at December 31, 2001 as compared to $112
million at December 31, 2000. During 2001, the Company experienced loan growth
of $85 million and deposit growth of $82 million. This decrease in the Company's
liquidity position resulted in the utilization of maturing investment securities
and federal funds sold balances to fund loan growth. The Company increased its
Federal Home Loan Bank advances to $14 million at December 31, 2001 from $10
million at December 31, 2000.
The Company closely monitors its current liquidity position and believes there
are sufficient backup sources of liquidity. As of December 31, 2001, the Company
has over $119 million available from the Federal Home Loan Bank of Des Moines
under a blanket loan pledge and $8 million from the Federal Reserve Bank under a
pledged loan agreement. Plans are in place in 2002 to increase the availability
from this line of credit by pledging more loans. The Company also has access to
over $50 million in overnight federal funds purchased from various banking
institutions. Finally, since the Bank plans to remain a "well-capitalized"
institution, it has the ability to sell up to $25 million in certificates of
deposit through various national or regional brokerage firms, if needed.
Over the normal course of business, the Company enters into certain forms of
off-balance sheet transactions, including unfunded loan commitments and letters
of credit. These transactions are managed through the Company's various risk
management processes. Management considers both on-balance sheet and off-balance
sheet transactions in its evaluation of the Company's liquidity.
Other Off-Balance Sheet Activities
In the normal course of business, the Company is party to activities that
contain credit, market and operational risk that are not reflected in whole or
part in the Company's consolidated financial statements. Such activities include
traditional off-balance sheet credit-related financial instruments, commitments
under operating leases and long-term debt.
The Company provides customers with off-balance sheet credit support though loan
commitments and standby letters of credit. Summarized credit-related financial
instruments, including both commitments to extend credit and letter of credit at
December 31, 2001 are as follows:
Unused loan commitments $242,784,209
Standby letters of credit $ 13,402,288
$48,156,000 of the commitments expire in over a year. Since many of the unused
commitments are expected to expire or be only partially used, the total amount
of commitments in the preceding table does not necessarily represent future cash
requirements.
14
Contractual Cash Obligations
In addition to owned banking facilities, the Company has entered into long-term
leasing arrangements to support its ongoing activities. The required payments
under such commitments and long-term debt at December 31, 2001 are as follows:
(Dollars in thousands) Less than
Total 1 Year 1-5 years Over 5 Years
-------- --------- --------- ------------
Operating leases $ 8,493 $ 1,261 $ 3,606 $ 3,626
Certificates of Deposit 199,013 172,869 26,144 --
Guaranteed preferred beneficial
interest in EBH-subordinated
debentures 11,000 -- -- 11,000
Federal Home Loan Bank Advances 14,032 4,164 8,585 1,283
Interest Rate Sensitivity
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.
15
The following table reflects the Company's GAP analysis (rate sensitive assets
minus rate sensitive liabilities) as of December 31, 2001:
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 $ 8,117 $ 16,628 $ 19,239 $ 2,084 $ 46,068
Interest-bearing deposits 3,433 -- -- -- 3,433
Loans, net of unearned loan fees 440,493 56,689 131,139 13,732 642,053
Loans held for sale 8,936 -- -- -- 8,936
Federal funds sold 48,625 -- -- -- 48,625
-------- -------- -------- -------- --------
Total interest-sensitive
assets $509,604 $ 73,317 $150,378 $ 15,816 $749,115
-------- -------- -------- -------- --------
Liabilities:
Interest-bearing transaction
accounts $ 71,575 $ -- $ -- $ -- $ 71,575
Money market and savings
accounts 317,117 -- -- -- 317,117
Certificates of deposit 48,836 124,033 26,144 -- 199,013
Guaranteed preferred
beneficial interests in
EBH-subordinated
debentures -- -- -- 11,000 11,000
Other borrowings -- 5,531 8,585 1,283 15,399
-------- -------- -------- -------- --------
Total interest-sensitive
liabilities $437,528 $129,564 $ 34,729 $ 12,283 $614,104
======== ======== ======== ======== ========
Interest-sensitivity GAP
GAP by period $ 72,076 $(56,247) $115,649 $ 3,533 $135,011
======== ======== ======== ======== ========
Cumulative GAP $ 72,076 $ 15,829 $131,478 $135,011 $135,011
======== ======== ======== ======== ========
Ratio of interest-sensitive assets
to interest-sensitive liabilities:
Periodic 1.16 0.57 4.33 1.29 1.22
Cumulative GAP 1.16 1.03 1.22 1.22 1.22
======== ======== ======== ======== ========
The Company made certain assumptions in preparing the table above. These
assumptions included: loans will repay at historic repayment speeds;
interest-bearing demand accounts and savings accounts are interest sensitive due
to immediate repricing of remaining balance for each period presented; and fixed
maturity deposits will not be withdrawn prior to maturity. A significant
variance in actual results from one or more of these assumptions could
materially affect the results reflected in the table.
As indicated in the preceding table, the Company was asset sensitive on a
cumulative basis for all periods except the 3 to 12 month period at December 31,
2001 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 reduction in interest income as compared to the
reduction in interest expense created by the repricing of the smaller volume of
interest sensitive liabilities. Likewise, an increase in the general level of
interest rates would have a positive effect on net interest income.
As a policy, the Company focuses more attention to the cumulative GAP ratios
than any specific periods ratios since the cumulative GAP takes into account the
repricing nature of the assets and liabilities for a specific period plus all
previous periods which would have been affected by interest rate movements.
16
The Company also applies positive and negative interest rate "shocks" to a
static balance sheet using its asset/liability management software. This
analysis helps measure interest rate sensitivity against certain policy limits.
Noninterest Income
The following table depicts the annual changes in various noninterest income
categories:
December 31, December 31,
---------------------------------------- --------------------------------------
2001 versus 2000 2000 versus 1999
---------------------------------------- --------------------------------------
$Change 2001 2000 $Change 2000 1999
----------- ----------- ---------- --------- ---------- -----------
Trust and financial advisory
income $ 574,249 $ 1,426,078 $ 851,829 $ 257,019 $ 851,829 $ 594,810
Gain on sale of mortgage loans 734,739 1,238,441 503,702 (305,408) 503,702 809,110
(Loss) income from Merchant
Banc investments (5,985,819) (5,716,138) 269,681 274,510 269,681 (4,829)
Gain on sale of securities 74,658 74,658 -- -- -- --
Gain on sale of other real
estate (202,300) 12,630 214,930 84,880 214,930 130,050
Realized gain on trading assets (500) -- 500 (201,954) 500 202,454
Service charges on deposit
accounts 102,285 1,298,611 1,196,326 10,962 1,196,326 1,185,364
Other service charges and fee
income (66,773) 390,790 457,563 (220,993) 457,563 678,556
----------- ----------- ---------- --------- ---------- -----------
Total noninterest income $(4,769,461) $(1,274,930) $3,494,531 $(100,984) $3,494,531 $ 3,595,515
=========== =========== ========== ========= ========== ===========
Total noninterest (loss) income was $(1,274,930) in 2001, representing a
$4,769,461 decrease from 2000. Total noninterest income was $3,494,531 in 2000,
representing a $100,984 decrease from 1999. The key to these differences is in
understanding the trends associated with each income category.
The Company began offering trust and financial advisory services in October
1998. The $594,810 in fees during 1999 was the result of several life insurance
and financial planning transaction fees. The $257,019 increase in fees to
$851,829 during 2000 and the $574,249 increase in fees to $1,426,078 during 2001
was the result of increased transaction-based fee and assets under management at
Enterprise Trust. Management expects these fees to continue to increase in
future years.
The fluctuations in the gains on sale of mortgage loans was due to changes in
the interest rate environment during 1999, 2000 and 2001. The $734,739 increase
in the gains on the sale of mortgage loans during 2001 to $1,238,441 as compared
to $503,702 during 2000 were due to a dramatic decrease in interest rates during
2001. This decrease in interest rates spurred residential mortgage loan
refinancing and an increase in mortgage loans sold. Approximately 65% of the
mortgage gains during 2001 were the result of refinanced loans, while
refinancing of mortgage loans account for less than 25% of the mortgage gains in
2000. The demand for refinanced mortgage loans dramatically decreased during
2000 with the rise in interest rates. The Company generally sells its mortgage
loans and the related servicing rights to various third party investors.
The (loss) income from Merchant Banc investments was ($5,716,138), $269,681 and
($4,829) during 2001, 2000 and 1999, respectively. Given the nature of merchant
banking investments, the income or loss can be volatile. The increase in income
from 1999 to 2000 was primarily due to a $175,000 merchant banking fee that the
Company earned on one specific transaction. Management believes that the 2001
losses can be considered non-recurring in nature since they represent full
writedowns on all merchant banking investments.
The significant increase in losses during 2001 is due to several factors. First,
the Company recognized $3,800,000 of losses related to its investment in, and
guarantees to, a Midwest manufacturing company
17
("Company-A") that supplies certain products primarily to the automotive
industry. Company-A is highly leveraged, and as sales declined due to the
slumping automotive industry during the last half of 2001, Company-A violated
several of its loan covenants with its senior lender. The senior lender required
an additional equity infusion in the fourth quarter of 2001 that has not been
made and foreclosure is possible. Given these uncertainties, the Company could
not predict any level of cash flows to support its $1,450,000 preferred equity
investment and therefore wrote the balance off as of December 31, 2001. The
remaining $2,300,000 of losses on Company-A relates to a letter of credit in
favor of the mezzanine debt provider that the Company guaranteed for EMB LLC.
Given the financial difficulties experienced by Company-A, most of the letter of
credit had been drawn and the guarantee enforced. With no viable repayment
source and continued cash flow shortages at Company A, the Company wrote off its
$1,363,000 receivable from EMB LLC at December 31, 2001 and accrued a $1,000,000
loss for the remaining commitment under the letter of credit and guarantee as
the Company believes it is probable this remaining commitment will be drawn.
Second, the Company wrote off its minority investment in, and a related
receivable from, Fund I at December 31, 2001 totaling approximately $800,000.
During the fourth quarter of 2001, Fund I was experiencing liquidity shortfalls
as its capital commitments were nearly exhausted and its investments were not
producing any cash flows. In addition, the Company believed that the net assets,
and projected cash flows from the net assets, of Fund I could not support any
asset valuation at December 31, 2001.
Third, the Company wrote off its minority investment in, and a receivable from,
EMB LLC of approximately $1,000,000 at year-end. EMB LLC relies on management
fees from the investment funds it manages (i.e. Fund I and Fund II). It also
relied on working capital investments by the Company. In the fourth quarter of
2001, Funds I and II experienced liquidity issues. Economic factors impaired the
performance of the portfolio companies of Fund I and Fund II, which in turn
prevented opportunities to sell the healthy companies and forced some of the
leveraged companies into bankruptcy. In addition, the ability of EMB LLC to make
additional capital requests from the Funds' partners had diminished due to
exhausted capital commitments. As a result of these factors, no predictable
level of cash flows or earnings from this investment could support a value at
December 31, 2001.
Finally, the Company has historically recorded its share of the income or loss
recorded by EMB LLC and Fund I in accordance with the equity method of
accounting. In 2001, both investments had operating losses for which the Company
recorded approximately $117,000 in losses.
The gains on the sale of investment securities were $74,658 for 2001 as compared
to $0 for 2000 and 1999. The Company sold several investment securities during
2001 for liquidity purposes.
The gain on sale of other real estate of $214,930 in 2000 and $130,050 in 1999
was a result of the sale of two separate parcels of foreclosed properties the
Company has owned since 1992. Management considers this to be nonrecurring
income.
In connection with the adoption of SFAS 133 in 1999, the Company elected to
reclassify an equity investment from held-to-maturity to trading. The Company
recorded a $197,546 gain by marking the asset to market during the second
quarter of 1999, which is treated as a cumulative effect of a change in
accounting principle. In the fourth quarter of 1999 the Company obtained a
purchase agreement for the equity investment which resulted in a $202,454 gain.
This gain was recognized as noninterest income. The asset was sold on February
2, 2000. Management considers this to be nonrecurring income.
Service charges on deposit accounts increased $102,285 to $1,298,611 during 2001
from $1,196,326 during 2000. This slight increase is a result of a decrease in
the earnings credit on business accounts during the declining interest rate
environment and an increase in deposit balances outstanding. Service charges on
deposit accounts increased $10,962 to $1,196,326 during 2000 from $1,185,364
during 1999. As a result of the rising interest rate environment in 2000, the
service charges did not increase in line with deposit growth compared to 1999.
Higher interest rates resulted in higher earnings credit on deposit accounts
which offset service charges.
18
Noninterest Expense
The following table depicts changes in noninterest expenses in the above
mentioned operations:
December 31, 2001 versus 2000 December 31, 2000 versus 1999
---------------------------------------- ----------------------------------------
$ Change 2001 2000 $ Change 2000 1999
---------- ----------- ----------- ---------- ----------- -----------
Salaries, payroll taxes and
employee benefits $2,626,074 $15,877,831 $13,251,757 $2,647,554 $13,251,757 $10,604,203
Occupancy 120,883 1,677,965 1,557,082 245,953 1,557,082 1,311,129
Furniture, equipment and
data processing 366,468 2,173,548 1,807,080 326,655 1,807,080 1,480,425
Amortization of goodwill -- 190,567 190,567 1 190,567 190,566
Other (456) 5,669,602 5,670,058 1,161,424 5,670,058 4,508,634
---------- ----------- ----------- ---------- ----------- -----------
Total noninterest expense $3,112,969 $25,589,513 $22,476,544 $4,381,587 $22,476,544 $18,094,957
========== =========== =========== ========== =========== ===========
Total noninterest expense was $25,589,513 in 2001 representing a $3,112,969 or
14% increase from 2000. The increase in noninterest expense was primarily due to
1) the hiring of additional business development officers, staff and senior
management; 2) increased commission-based activity in Enterprise Trust and
mortgage; 3) costs related to information technology and communication upgrades;
and 4) normal increases associated with continued growth.
Additional business development officers were hired at all of the business units
except for Southeast Kansas and additional capacity was added in the Company's
operations center to handle growth in volumes. The business development officers
contributed to the strong loan and deposit growth experienced in 2001 and 2000.
Throughout this two-year period, the Company also added senior management to
strengthen the skills and depth of the existing management team. Management
personnel added during the last two years include the following:
President of Enterprise Bank
Unit President in Overland Park
Senior Lender for the Company
Chief Financial Officer for the Company
President of Enterprise Trust- Fiduciary side
Most of these additions along with the business development officers and staff
were added during 2000, so the full year impact of these positions accounted for
most of the $2.6 million increase in salary and employee benefit expenses. Also
contributing to the increase in salaries expense are annual merit increases and
promotional increases which approximate $500,000.
The financial advisory division of Enterprise Trust provides a commission-based
compensation program to its producers. With the significant increases in
financial planning fees, commissions related to this activity increased
approximately $275,000.
19
The Company expanded its computer and data processing infrastructure for the
additional Kansas locations and communication between the regions, which
increased expenses. In February 2001, the Company completed a computer system
conversion to bring the Kansas banks on the same core processing system utilized
by the Company. The computer conversion, including fees to software vendors and
training, increased noninterest expenses by approximately $100,000 during 2001.
The Company also upgraded its telephone and voicemail systems during 2001. The
upgrade allows direct connections between the Company's multiple locations and
expanded capacity for future growth. This upgrade required the Company to write
off the old phone systems which increased expenses by $120,000 during 2001.
Other noninterest expense was $5,669,602 during 2001, a slight decrease from
2000. During 2000, the Company expensed approximately $496,386 in legal,
accounting, travel and other costs related to the merger completed in June 2000.
Other noninterest expense increased $495,930, or 10%, after adjusting for the
merger related expenses during 2000. This increase in other noninterest expenses
is related to growth of the Company and is in line with previous increases.
Total noninterest expense was $22,476,544 in 2000 representing a $4,381,587, or
24%, increase from 1999. Increases in salaries, payroll taxes and employee
benefits, occupancy expense, and data processing expenses are primarily due to:
1) increased activity and growth in trust and financial advisory operations
started during 1998, 2) the investment in several additional new business
development officers in the St. Louis region and additional management in the
Kansas region, and 3) normal increases associated with growth. The Company
implemented an internet banking product and check imaging system in 2000 to
enhance customer service. Both programs increased noninterest expense during
2000. In addition, the Company expanded its computer and data processing
infrastructure for the additional Kansas locations and communication between the
regions, which also increased expenses. During 2000, the Company expensed
approximately $496,386 in legal, accounting, travel, and other costs related to
the merger. The remaining increase is attributed to normal operating expenses
associated with growth. Other noninterest expenses, excluding costs related to
the merger, were $5,173,672 for 2000, an increase of $665,038, or 15%, over
1999.
Income Taxes
Income tax expense was $1,241,944, $3,208,450, and $2,335,408 for 2001, 2000,
and 1999, respectively. In 2001, a valuation allowance was established in the
amount of $1,041,080 related to losses on certain merchant banking investments.
As of December 31, 2001, the Company had determined it is more likely than not
that certain of the deferred tax assets related to the losses will not be
realized. This adjustment resulted in income tax expense for 2001 in spite of a
pre-tax loss. The effective tax rates were 38% and 39% for the years ended
December 31, 2000, and 1999, respectively.
Fourth Quarter Results
The Company had $5,876,000 in net loss for the fourth quarter ended December 31,
2001 versus net income of $1,495,000 in the same period for 2000. This decline
was due to several factors.
First, net interest income in the fourth quarter of 2001 declined $706,000 from
the fourth quarter of 2000. While earning assets were higher in 2001, the net
interest rate margin earned on those assets was significantly less. The drastic
reductions in the prime rate during 2001 caused the loan portfolio to reprice
faster than the core deposits funding those loans.
Second, the provision for loan losses was $2,460,000 in the fourth quarter of
2001 versus $280,000 in 2000. The increase of $2,180,000 is due to a $2,270,000
charge-off on a loan relationship at December 31, 2001 and increased risk in the
loan portfolio evidenced by higher levels of non-performing assets and a weaker
economic environment.
Third, non-interest (loss) income was ($4,430,000) in 2001 versus $1,029,000 in
2000, a decrease of $5,489,000. The decrease in non-interest income was caused
by non-recurring losses on Merchant Banc investments of $5,675,000 versus income
from those same investments of $162,000 in 2000, a
20
$5,837,000 decline. Offsetting this decline were increases in gains on the sale
of mortgage loans of $226,000 and trust and financial advisory income of
$186,000.
Finally, non-interest expense was $6,847,000 in 2001 versus $5,990,000 in 2000.
This increase of $857,000 is due primarily to a $375,000 increase in salaries, a
$153,000 increase in furniture and equipment expense and a $200,000 increase in
legal and professional expenses.
FINANCIAL CONDITION
Total assets at December 31, 2001 were $795 million, an increase of $84 million,
or 12%, over total assets of $711 million at December 31, 2000. Loans were $642
million, an increase of $85 million, or 15%, over total loans of $557 million at
December 31, 2000. The increase in loans is attributed, in part, to the success
of the Company's relationship officers efforts. Federal funds sold,
interest-bearing deposits and investment securities were $98 million, a decrease
of $14 million, or 13%, from a comparable balance of $112 million at December
31, 2000. The decrease resulted primarily from the shift in earning assets from
short-term investments to loans during 2001.
Total deposits at December 31, 2001 were $714 million, an increase of $82
million, or 13%, over total deposits of $632 million at December 31, 2000. Most
of the deposit growth occurred in demand, interest bearing transaction, and
money market deposits. Demand deposits grew $21 million, or 20%, during 2001.
Interest bearing transaction deposits grew $10 million, or 17%, during 2001.
Money market deposits grew $38 million, or 14%, during 2001. Growth in
transaction and money market deposit accounts is attributed primarily to direct
calling efforts of relationship officers and $18 million in deposit accounts
referred by Moneta. Certificates of deposits increased $12 million, or 6%,
during 2001.
Total shareholders' equity at December 31, 2001 was $52 million, a decrease of
$2 million compared to shareholders' equity of $53 million at December 31, 2000.
The decrease in equity is primarily due to a net loss of $2.5 million for the
year ended December 31, 2001 and dividends paid to shareholders, offset by the
exercise of incentive stock options, and changes in accumulated other
comprehensive income.
Total assets at December 31, 2000 were $710 million, an increase of $95 million,
or 15%, over total assets of $615 million at December 31, 1999. Loans were $557
million, an increase of $76 million, or 16%, over total loans of $481 million at
December 31, 1999. Federal funds sold and investment securities were $112
million, an increase of $11 million, or 11%, from total federal funds sold and
investment securities of $101 million at December 31, 1999. The increase in
loans and investments is attributable to the continued calling efforts of the
Company's relationship officers and sustained economic growth in the local
markets served by the Company.
Total deposits at December 31, 2000 were $632 million, an increase of $90
million, or 17%, over total deposits of $542 million at December 31, 1999. Most
of the deposit growth occurred in demand, interest- bearing transaction, and
money market deposits. Demand deposits grew $31 million, or 41%, during 2000.
Interest-bearing transaction deposits grew $13 million, or 27%, during 2000.
Money market deposits grew $53 million, or 24%, during 2000. Growth in
transaction and money market deposit accounts is attributed primarily to direct
calling efforts of relationship officers and $12 million in money market
accounts referred by Moneta. Certificates of deposits decreased $6 million, or
3%, during 2000. 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 refers to such deposits as network CD's. The
Bank chose to decrease the amount of network CDs by $15 million, or 33%, because
of sufficient growth in other categories to meet loan demand. The $9 million in
core certificates of deposit growth is due to an enhanced presence in the
markets served by the Company.
Total shareholders equity at December 31, 2000 was $53 million, an increase of
$6 million over total shareholders equity of $47 million at December 31, 1999.
The increase in equity is primarily due to net income of $5.2 million for the
twelve months ended December 31, 2000, the exercise of incentive stock options,
and changes in accumulated other comprehensive income, less dividends paid to
shareholders.
21
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,
-------------------------------------------------------------------------------------
2001 2000 1999 1998
------------------- ------------------- ------------------- -------------------
Percent Percent Percent Percent
of Total of Total of Total of Total
Amount Loans Amount Loans Amount Loans Amount Loans
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Commercial and industrial $160,218 24.95% $153,357 27.54% $137,815 28.66% $116,467 32.81%
Real estate:
Commercial 167,378 26.07 134,133 24.09 103,471 21.51 46,351 13.06
Construction 123,788 19.28 128,779 23.13 119,251 24.80 78,112 22.01
Residential 162,100 25.25 114,212 20.51 95,916 19.95 90,762 25.57
Consumer and other 28,569 4.45 26,312 4.73 24,438 5.08 23,235 6.55
-------- ------ -------- ------ -------- ------ -------- ------
Total loans $642,053 100.00% $556,793 100.00% $480,891 100.00% $354,927 100.00%
======== ====== ======== ====== ======== ====== ======== ======
December 31,
-------------------
1997
-------------------
Percent
of Total
Amount Loans
-------- --------
(Dollars in Thousands)
Commercial and industrial $ 95,499 32.50%
Real estate:
Commercial 47,744 16.25
Construction 50,793 17.28
Residential 85,493 29.09
Consumer and other 14,354 4.88
-------- ------
Total loans $293,883 100.00%
======== ======
In the St. Louis metropolitan, Overland Park, Kansas and Kansas City Plaza
markets, the Bank grants commercial, residential and consumer loans primarily to
small to medium sized businesses and their owners. In the Southeast Kansas
market, loans are made to a wider range of businesses and consumers, including
farmers. Overall, 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, 2001, $453 million in loans, or 71% of the loan portfolio, involved real
estate as part or all of the collateral package, as compared to $377 million, or
68%, and $319 million, or 66%, in 2000 and 1999, respectively. As of December
31, 2001, $199 million, or 44%, of the real estate secured loans for 2001, were
personal and business loans and loans on owner-occupied properties as compared
to $164 million, or 43%, and $151 million, or 47%, for 2000 and 1999,
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 considerations 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.
22
The following table sets forth the interest rate sensitivity of the loan
portfolio at December 31, 2001:
Loans Maturing or Repricing
----------------------------------------------------
After One
In One Through After
Year or Less Five Years Five Years Total
------------ ---------- ---------- --------
(Dollars in Thousands)
Fixed Rate Loans /(1)/
- ----------------------
Commercial and industrial $ 17,630 $ 29,513 $ 455 $ 47,598
Real estate:
Commercial 17,725 53,561 6,344 77,630
Construction 11,735 14,236 730 26,701
Residential 18,706 25,855 6,063 50,624
Consumer and other 3,956 7,974 140 12,070
-------- -------- ------- --------
Total $ 69,752 $131,139 $13,732 $214,623
======== ======== ======= ========
Variable Rate Loans /(1)/
- -------------------------
Commercial and industrial $112,620 $ -- $ -- $112,620
Real estate:
Commercial 89,748 -- -- 89,748
Construction 97,087 -- -- 97,087
Residential 111,476 -- -- 111,476
Consumer and other 16,499 -- -- 16,499
-------- -------- ------- --------
Total $427,430 $ -- $ -- $427,430
======== ======== ======= ========
Total Loans /(1)/
- -----------------
Commercial and industrial $130,250 $ 29,513 $ 455 $160,218
Real estate:
Commercial 107,473 53,561 6,344 167,378
Construction 108,822 14,236 730 123,788
Residential 130,182 25,855 6,063 162,100
Consumer and other 20,455 7,974 140 28,569
-------- -------- ------- --------
Total $497,182 $131,139 $13,732 $642,053
======== ======== ======= ========
/(1)/ Loan balances are shown net of unearned loan fees and loans held for sale.
Asset Quality
The provision for loan losses was $3,230,000, $1,042,534, and $2,496,256 in
2001, 2000 and 1999, respectively. The increase in provision in 2001 as compared
to 2000 reflects an increase in nonaccrual loans, net loans charged off,
continued loan growth, and increased risk in the loan portfolio.
During 2001, loans increased $85 million as compared to loan growth of $76
million during 2000. The Company had net chargeoffs of $3,031,000 during 2001 as
compared to net chargeoffs of $704,000 during 2000. In December 2001, the
Company charged off a $2,270,000 loan participation purchased from one of the
investment funds managed by EMB LLC. Most of the remaining charged off loans
during 2001 and 2000 were from the loan portfolio of the Kansas Bank acquired in
2000. The Kansas Bank loans were made under a different underwriting and
management review process than currently used by the Bank. The provision for
loan loss decreased from 1999 to 2000 due to a large provision expense being
recognized in 1999 related to the classification of a large commercial
relationship. In December 1999, the Company made an additional $1 million
provision for loan losses for two specific loans. During 2000, the decrease in
provision reflects loan growth of $76 million during 2000 versus loan growth of
$126 million during the same period in 1999.
23
The charge-off on the loan participation from Fund I noted above represents 72%
of the loans charged off during 2001. During May 2001, the Company restructured
a $1.5 million commercial loan on nonaccrual which resulted in a chargeoff of
$270,000. The Company had specifically reserved for this loan relationship.
During 2001, the Company charged off three additional large loan relationships,
each in excess of $100,000 for a total of approximately $407,000. These four
large loans account for over $677,000 or another 21% of the loans charged off
during 2001.
In September 2000, the Kansas bank charged off one commercial loan in the amount
of $495,000 which accounted for a substantial portion of the charged off loans
during the year. The Company has charged off a total of $4,511,000 in loans from
January 1, 1997 through December 31, 2001. Total recoveries for the same period
are $477,000, resulting in a five-year net charge-off experience of $4,034,000,
or 0.19%, per year of average loans for the same period.
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 charged to expense:
December 31,
--------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in Thousands)
Allowance at beginning of period $ 7,097 $ 6,758 $ 4,430 $ 3,170 $ 1,950
-------- -------- -------- -------- --------
Loans charged off:
Commercial and industrial 2,538 682 109 48 90
Real estate:
Commercial 279 48 2 39 45
Construction -- -- -- -- --
Residential 165 32 -- -- 27
Consumer and other 170 26 135 76 --
-------- -------- -------- -------- --------
Total loans charged off 3,152 788 246 163 162
-------- -------- -------- -------- --------
Recoveries of loans previously
charged off:
Commercial and industrial 38 63 33 36 44
Real estate:
Commercial 25 -- 21 10 50
Construction -- -- -- -- --
Residential 52 13 -- -- 38
Consumer and other 6 8 24 16 --
-------- -------- -------- -------- --------
Total recoveries of
loans previously
charged off 121 84 78 62 132
-------- -------- -------- -------- --------
Net loans charged off 3,031 704 168 101 30
-------- -------- -------- -------- --------
Provisions charged to operations 3,230 1,043 2,496 1,361 875
Allowance of acquired entity -- -- -- -- 375
-------- -------- -------- -------- --------
Allowance at end of period $ 7,296 $ 7,097 $ 6,758 $ 4,430 $ 3,170
======== ======== ======== ======== ========
Average loans $613,539 $517,381 $429,408 $328,761 $203,344
Total loans 642,053 556,793 480,892 354,927 293,883
Nonperforming loans 3,749 2,005 2,559 666 50
Net charge offs
to average loans 0.49% 0.14% 0.04% 0.03% 0.01%
Allowance for loan losses to loans 1.14 1.27 1.41 1.25 1.08
Allowance for loan losses
to nonperforming loans 195 353 264 665 N/M
The Company's credit management policies and procedures focus on identifying,
measuring, and controlling credit exposure. These procedures employ a
lender-initiated system of rating credits, which
24
is ratified in the loan approval process and subsequently tested in external
audits and regulatory bank examinations. 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 in which the borrower operates. Loans on the watch list
require detailed loan status reports prepared by the responsible officer every
three months, which are then discussed in formal meetings with the Asset
Quality/Risk Management Area and the Executive Loan Committee. 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
Executive Loan Committee generally at the time of the formal quarterly watch
list review meetings.
Each month, management prepares a detailed list of loans on the watch list and
summaries of the entire loan portfolio categorized by risk rating. These are
coupled with an analysis of changes in the risk profiles of the portfolios,
changes in past due and non-performing 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 loan losses. These factors are derived
primarily from the actual loss experience. The calculated allowance for loan
losses required for the portfolios are then compared to the actual allowance
balances to determine the provision necessary to maintain the allowance for loan
losses at an appropriate level. In addition, management exercises judgment in
its analysis of determining the overall level of the allowance for 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 loan losses is adjusted. Such adjustments are reflected in the
consolidated statements of operations.
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 non-accrual, past due or restructured loans if such assets were
loans.
Management believes the allowance for loan losses is adequate to absorb probable
losses in the loan portfolio. While management uses available information to
recognize loan losses, future additions to the allowance for loan losses 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.
As of December 31, 2001, 2000, and 1999, the Company had 19, 12, and 21 impaired
loans in the aggregate amounts of $3,748,970, $1,798,364, and $2,558,370,
respectively, all of which are considered potential problem loans. From December
31, 2000 to December 31, 2001 the balance of impaired loans increased by $1.95
million.
25
The Company had foreclosed property in the amount of $138,000, $76,680, and
$396,000, as of December 31, 2001, 2000, and 1999, respectively, which are
considered nonperforming assets. Nonperforming assets increased from $2,082,000
at December 31, 2000 to $3,887,000 at December 31, 2001. The $1,805,000 increase
in nonperforming assets was due primarily to the $1,243,000 restructured loan
and a $708,000 increase in nonaccrual loans. Non-performing assets decreased
from $2,955,000 at December 31, 1999 to $2,082,000 at December 31, 2000.
The following table sets forth information concerning the Company's
nonperforming assets as of the dates indicated:
As of December 31,
------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in Thousands)
Nonaccrual loans $ 2,506 $ 1,798 $ 2,485 $ 581 $ 50
Loans past due 90 days or more
and still accruing interest -- 207 74 85 --
Restructured loans 1,243 -- -- -- --
-------- -------- -------- -------- --------
Total nonperforming loans 3,749 2,005 2,559 666 50
Foreclosed real estate 138 77 396 806 806
-------- -------- -------- -------- --------
Total nonperforming assets $ 3,887 $ 2,082 $ 2,955 $ 1,472 $ 856
======== ======== ======== ======== ========
Total assets $795,250 $710,938 $615,143 $488,065 $398,839
Total loans, net of unearned
loan fees 642,053 556,793 480,892 354,927 293,883
Total loans plus foreclosed property 642,191 556,870 481,287 355,733 294,689
Nonperforming loans to total loans 0.58% 0.36% 0.53% 0.19% 0.02%
Nonperforming assets to total loans
plus foreclosed property 0.61 0.37 0.61 0.41 0.29
Nonperforming assets to total assets 0.49 0.29 0.48 0.30 0.21
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, unless
the Company is in the process of collecting the principal and interest due, and
is fairly certain to collect all interest.
26
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 other losses in the loan portfolio deemed probable.
As of December 31,
------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
Percent Percent Percent
of of of
Category Category Category
Total Total Total
Allowance Loans Allowance Loans Allowance Loans
--------- -------- --------- -------- --------- --------
(Dollars in Thousands)
Commercial and industrial $2,366 24.95% $3,046 27.54% $2,801 28.66%
Real estate:
Commercial 1,915 26.07 1,589 24.09 1,437 21.51
Construction 932 19.28 833 23.13 972 24.80
Residential 1,625 25.25 1,026 20.51 959 19.95
Consumer and other 198 4.45 312 4.73 364 5.08
Not allocated 260 -- 291 -- 225 --
------ ------ ------ ------ ------ ------
Total $7,296 100.00% $7,097 100.00% $6,758 100.00%
====== ====== ====== ====== ====== ======
As of December 31,
-------------------------------------------
1998 1997
-------------------- --------------------
Percent Percent
of of
Category Category
Total Total
Allowance Loans Allowance Loans
--------- -------- --------- --------
(Dollars in Thousands)
Commercial and industrial $1,625 32.81% $ 903 32.50%
Real estate:
Commercial 577 13.06 399 16.25
Construction 688 22.01 489 17.28
Residential 896 25.57 777 29.09
Consumer and other 235 6.55 170 4.88
Not allocated 409 -- 432 --
------ ------ ------ ------
Total $4,430 100.00% $3,170 100.00%
====== ====== ====== ======
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.
Investment Portfolio
The table below sets forth the carrying value of investment securities held by
the Company at the dates indicated:
December 31,
------------------------------------------------------------------
2001 2000 1999
-------------------- -------------------- --------------------
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 $33,161 71.98% $42,674 79.98% $38,740 84.99%
Municipal bonds 177 0.38 660 1.24 819 1.79
Mortgage-backed securities 11,091 24.08 7,474 14.01 3,245 7.10
Other securities 32 0.07 282 0.53 32 0.07
Trading securities -- -- -- -- 910 1.99
Capital stock of the Federal
Reserve Bank and the Federal
Home Loan Bank 1,607 3.49 2,263 4.24 1,930 4.23
------- ------ ------- ------ ------- ------
$46,068 100.00% $53,353 100.00% $45,676 100.00%
======= ====== ======= ====== ======= ======
As of December 31, 2001, debt securities with an amortized cost of $116,214 were
classified as held to maturity securities and debt and equity securities with an
amortized cost of $45,668,070 were classified as available for sale securities.
The market valuation account for the available for sale securities was $284,072
to increase the recorded balance of such securities at December 31, 2001 to fair
value on that date. The Company had no securities classified as trading at
December 31, 2001.
27
As of December 31, 2000, debt securities with an amortized cost of $521,280 were
classified as held to maturity securities and debt and equity securities with an
amortized cost of $52,629,041 were classified as available for sale securities.
The market valuation account for the available for sale securities was $202,842
to increase the recorded balance of such securities at December 31, 2000 to fair
value on that date. The Company had no securities classified as trading at
December 31, 2000.
As of December 31 1999, debt securities with an amortized cost of $679,806 were
classified as held to maturity securities, and debt and equity securities with
an amortized cost of $44,710,927 were classified as available for sale
securities. The market valuation account for the available for sale securities
was ($625,035) to decrease the recorded balance of such securities at December
31, 1999 to fair value on that date.
The Company had one security classified as trading with a fair market value of
$910,000 at December 31, 1999. The trading security was sold for $910,500 on
February 2, 2000.
The following table summarizes maturity and yield information on the investment
portfolio at December 31, 2001:
Carrying
Value Yield (1)
-------- ---------
(Dollars in Thousands)
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies:
0 to 1 year $23,204 6.16%
1 to 5 years 9,957 5.80
5 to 10 years -- --
No stated maturity -- --
------- ----
Total $33,161 6.05%
======= ====
Municipal bonds:
0 to 1 year $ 100 5.00%
1 to 5 years 77 5.00
5 to 10 years -- --
No stated maturity -- --
------- ----
Total $ 177 5.00%
======= ====
Mortgage backed securities:
0 to 1 year $ 1,441 6.80%
1 to 5 years 9,205 3.62
5 to 10 years 445 6.50
No stated maturity -- --
------- ----
Total 11,091 4.14%
======= ====
Other securities, including capital
stock of the Federal Reserve Bank
and the Federal Home Loan Bank
0 to 1 year $ -- --%
1 to 5 years -- --
5 to 10 years 32 8.75
No stated maturity 1,607 6.53
------- ----
Total $ 1,639 6.58%
======= ====
Total
0 to 1 year $24,745 6.19%
1 to 5 years 19,239 4.75
5 to 10 years 477 6.65
No stated maturity 1,607 6.53
------- ----
Total $46,068 5.61%
======= ====
(1) Weighted average tax-equivalent yield
28
Deposits
The following table shows, for the periods indicated, the average annual amount
and the average rate paid by type of deposit:
December 31,
-------------------------------------------------------------------------------------
2001 2000 1999
--------------------------- -------------------------- --------------------------
(Dollars in Thousands)
Average Interest Average Interest Average Interest
Balance Expense Rate Balance Expense Rate Balance Expense Rate
-------- -------- ----- -------- -------- ---- -------- -------- ----
Noninterest-bearing
demand deposits $100,103 $ -- --% $ 79,364 $ -- --% $ 66,044 $ -- --%
Interest-bearing transaction
accounts 53,846 555 1.03 48,781 823 1.69 44,477 814 1.83
Money market accounts 289,264 9,590 3.32 257,200 13,366 5.20 197,931 8,528 4.31
Savings accounts 7,706 157 2.04 7,178 185 2.58 6,935 179 2.58
Certificates of deposit 206,334 11,703 5.67 194,593 11,624 5.97 148,790 7,821 5.26
-------- ------- ---- -------- ------- ---- -------- ------- ----
$657,253 $22,005 3.35% $587,116 $25,998 4.43% $464,177 $17,342 3.74%
======== ======= ==== ======== ======= ==== ======== ======= ====
Since inception, the Company has experienced rapid loan and deposit growth
primarily due to aggressive direct calling efforts of relationship officers.
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 as 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 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 $30 million at December 31, 2001 and 2000
and $45 million at December 31, 1999 in deposits from the national network.
Going forward the Bank expects to use certificate of deposit sold to retail
customers of regional and national brokerage firms (i.e. brokered certificate of
deposit program) as they generally have lower overall costs versus 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, 2001:
Remaining Maturity Amount
------------------ ------
(Dollars in Thousands)
Three months or less $33,204
Over three through six months 17,361
Over six through twelve months 31,465
Over twelve months 7,294
------
$89,324
=======
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
The Company's exposure to market risk is reviewed on a regular basis by the
Asset/Liability Committee (ALCO). 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, 2001, the rate shock scenario models indicated that
annual net interest income would change by less than 15% should rates rise or
fall within 200 basis points from their current level over a one year period.
29
In January 2002, the Bank executed two interest rate swaps in order to limit
exposure from further falling rates. The first swap had a $40 million notional
amount, a term of two years and obligated the Bank to pay a floating amount and
receive a fixed amount. The second swap was also a "receive fixed" but had a
notional amount of $20 million and a term of three years. The swaps qualify as
"cash flow hedges" under SFAS 133.
The following tables present the scheduled maturity of market risk sensitive
instruments at December 31, 2001:
Beyond 5
Years or
No
Stated
Year 1 Year 2 Year 3 Year 4 Year 5 Maturity Total
-------- ------- ------- ------- ------- -------- --------
(Dollars in thousands)
Assets:
Investment in debt and
equity securities $ 24,745 $ 6,704 $ 5,926 $ 3,042 $ 3,567 $ 2,084 $ 46,068
Interest-bearing
deposits 3,433 -- -- -- -- -- 3,433
Federal funds sold 48,625 -- -- -- -- -- 48,625
Loans 497,183 25,879 73,108 16,676 15,475 13,732 642,053
Loans held for sale 8,936 -- -- -- -- -- 8,936
-------- ------- ------- ------- ------- ------- --------
Total $582,922 $32,583 $79,034 $19,718 $19,042 $15,816 $749,115
======== ======= ======= ======= ======= ======= ========
Liabilities:
Savings, now, money
market deposits $388,692 $ -- $ -- $ -- $ -- $ -- $388,692
Certificates of deposit 172,869 19,824 3,980 1,727 613 -- 199,013
Guaranteed preferred
beneficial interests in
EBH-subordinated
debentures -- -- -- -- -- 11,000 11,000
Other borrowed funds 5,531 3,450 3,435 1,150 550 1,283 15,399
-------- ------- ------- ------- ------- ------- --------
Total $567,092 $23,274 $ 7,415 $ 2,877 $ 1,163 $12,283 $614,104
======== ======= ======= ======= ======= ======= ========
Average Estimated
Total Interest Rate Fair Value
-------- ------------- ----------
Assets:
Securities $ 46,068 5.78% 46,069
Interest-bearing deposits 3,433 4.76 3,433
Federal funds sold 48,625 3.42 48,625
Loans 642,053 7.95 649,095
Loans held for sale 8,936 8,936
-------- --------
Total $749,115 $756,158
======== ========
Liabilities:
Savings, now, money
market deposits $388,692 2.94% $388,692
Certificates of deposit 199,013 5.67 202,202
Guaranteed preferred
beneficial interests in
EBH-subordinated
debentures 11,000 9.48% 11,126
Other borrowed funds 15,399 5.14 15,573
-------- --------
Total $614,104 $617,593
======== ========
30
Capital Adequacy
Risk-based capital 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 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,
-----------------------
2001 2000 1999
----- ----- -----
Tier 1 capital to risk weighted assets 9.29% 10.60% 11.15%
Total capital to risk weighted assets 10.41 11.79 12.35
Leverage ratio (Tier 1 capital to
average assets) 8.18 9.41 10.62
Tangible capital to tangible assets 8.56 9.75 7.68
At December 31, 2001, the Company's Tier 1 capital was $61 million compared to
$62 million and $56 million at December 31, 2000 and 1999, respectively. At
December 31, 2001, the Company's total capital was $68 million compared to $69
million and $62 million at December 31, 2000 and 1999, respectively.
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 create 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
31
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 Financial Holding and Bank Holding Company Regulation
The Company is a bank holding company under the definition of the Bank Holding
Company Act of 1956 (the "BHCA"). In 2001, the Company elected to become a
Financial Holding Company ("FHC"), as provided for under the Gramm-Leach-Bliley
Act ("GLBA") which amended the BHCA. As such, 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, however, is still subject to regulation as a bank holding
company.
GLBA permits an FHC and its affiliates, with certain restrictions, to engage
activities that are considered "financial in nature" or incidental or
complementary to such activities. Other than as provided by GLBA, 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 financial holding company or 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. Federal legislation permits bank holding companies
to acquire control of banks throughout the United States.
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
or regulation, has found those activities to be "financial in nature" or
incidental or complementary to such activities, which includes those activities
so closely related to banking or managing or controlling banks as to be a
related activity. Activities which are expressly considered financial in nature
include, among other things, securities and insurance underwriting and agency,
investment management and merchant banking. 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.
FHC Activities. In general, the expanded powers under GLBA are reserved to FHC's
and banks, where all depository institutions affiliated with them are well
capitalized and well managed based on applicable banking regulations and meet
specified Community Reinvestment Act ratings. GLBA authorizes the Federal
Reserve and the United States Treasury, in cooperation with one another, to
determine what activities, in addition to those discussed previously, are
permissible as financial in nature. Maintenance of activities which are
financial in nature will require FHC's and banks to continue to satisfy
applicable well capitalized and well managed requirements. Bank holding
companies which do not qualify for FHC status are limited to non-banking
activities deemed closely related to banking prior to adoption of GLBA.
32
In addition to the creation of FHC's, GLBA establishes a scheme of "functional
regulation" of financial services businesses which is intended to reflect the
primacy of regulation over activities and entities by regulators routinely
responsible for such activities and entities and with the appropriate expertise
in the area of regulation. This applies both in allocating responsibility for
supervising different companies within an FHC and in supervising different
activities within the same company. In this connection, GLBA clarifies the
regulation by states of insurance products sold by depository institutions,
repeals some of the exemptions enjoyed by banks under federal securities laws in
relation to securities offered by banks and licensing of broker-dealers and
investment advisors.
Privacy Regulations. GLBA also adopts restrictions on financial institutions
regarding the sharing of customer non-public personal information with
non-affiliated third parties unless the customer has had an opportunity to opt
out of the disclosure. GLBA also imposes periodic disclosure requirements
concerning the financial institution's policies and practices regarding data
sharing with affiliated and non-affiliated parties.
Recent Developments: The terrorist attacks in September, 2001 have impacted the
financial services industry and have already led to federal legislation that
attempts to address certain related issues involving financial institutions. On
October 26, 2001, President Bush signed into law the Uniting and Strengthening
America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (the "USA PATRIOT Act") has already been passed into law.
Among its other provisions, the USA PATRIOT Act requires each financial
institution to: (i) establish an anti-money laundering program; (ii) establish
due diligence policies, procedures and controls with respect to its private
banking accounts and correspondent banking accounts involving foreign
individuals and certain foreign banks; and (iii) implement certain due diligence
policies, procedures and controls with regard to correspondent accounts in the
United States for, or on behalf of, a foreign bank that does not have a physical
presence in any country. In addition, the USA PATRIOT Act contains a provision
encouraging cooperation among financial institutions, regulatory authorities and
law enforcement authorities with respect to individuals, entities and
organizations engaged in, or reasonably suspected of engaging in, terrorist acts
or money laundering activities. It is anticipated that regulations interpreting
the USA PATRIOT Act will be issued during 2002.
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 (or an FHC) 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. As of December 31, 2001, the Company is the holding company for
Enterprise Bank, a Missouri chartered 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, issuance 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.
33
Transactions With Affiliates and Insiders. The Bank is subject to the provisions
of Section 23A of the Federal Reserve Act, which place limits and conditions 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. 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 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 are also 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 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.
34
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 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.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included on pages 38 through 44, below.
PART III
--------
MANAGEMENT
----------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
pages [2] through [14] of the Company's Proxy Statement for its annual meeting
to be held on Monday, April 29, 2002, at the Marriott West which is located at
600 Maryville Centre Drive, St. Louis, Missouri 63141. The meeting will be held
at 8:30 a.m.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
pages [6] through [10] of the Company's Proxy Statement for its annual meeting
to be held on Monday, April 29, 2002, at the Marriott West which is located at
600 Maryville Centre Drive, St. Louis, Missouri 63141. The meeting will be held
at 8:30 a.m.
35
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is incorporated herein by reference to
pages [11] through [13] of the Company's Proxy Statement for its annual meeting
to be held on Monday, April 29, 2002, at the Marriott West which is located at
600 Maryville Centre Drive, St. Louis, Missouri 63141. The meeting will be held
at 8:30 a.m.
ITEM 13: CERTAIN RELATIONSHIPS AND 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 the entity's unimpaired capital plus reserve for loan losses.
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.
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) The following documents are filed or incorporated by reference as part of
this Report:
Enterbank Holdings Inc. and subsidiaries
----------------------------------------
1. Financial Statements: Page Number
-------------------- -----------
Independent auditors' report 37
Consolidated Balance Sheets
at December 31, 2001 and 2000 38
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000, and 1999 39
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999 41
Consolidated Statements of Cash Flows for the
years ended December 31, 2001, 2000 and 1999 42
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2001, 2000 and 1999 44
Notes to Consolidated Financial Statements 45
2. Financial Statement Schedules
-----------------------------
None other than those included in the Notes to Consolidated Financial
Statements.
3. Exhibits
--------
See Exhibit Index
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 2001.
36
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, 2001 and
2000, and the related consolidated statements of operations, shareholders'
equity, cash flows, and comprehensive income for each of the years in the
three-year period ended December 31, 2001. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Enterbank Holdings, Inc. and subsidiaries as of December 31, 2001 and 2000,
and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
St. Louis, Missouri
March 27, 2002
37
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2001 and 2000
Assets 2001 2000
------ ------------ ------------
Cash and due from banks $ 32,178,155 $ 25,933,462
Federal funds sold 48,624,680 58,302,921
Interest-bearing deposits 3,433,351 39,987
Investments in debt and equity securities:
Available for sale, at estimated fair value 45,952,142 52,831,883
Held to maturity, at amortized cost (estimated fair
value of $116,633 in 2001 and $519,442 in 2000) 116,214 521,280
------------ ------------
Total investments in debt and equity securities 46,068,356 53,353,163
------------ ------------
Loans held for sale 8,936,042 945,095
Loans, less unearned loan fees 642,053,483 556,792,591
Less allowance for loan losses 7,295,916 7,096,544
------------ ------------
Loans, net 634,757,567 549,696,047
------------ ------------
Other real estate owned 138,000 76,680
Fixed assets, net 9,999,432 8,792,020
Accrued interest receivable 3,140,912 4,258,710
Assets related to Merchant Banc investments -- 3,408,375
Goodwill 2,087,537 2,278,104
Prepaid expenses and other assets 5,885,531 3,853,774
------------ ------------
Total assets $795,249,563 $710,938,338
============ ============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Demand $126,648,048 $105,649,983
Interest-bearing transaction accounts 71,574,686 61,314,029
Money market accounts 309,355,326 271,060,782
Savings 7,761,917 7,326,217
Certificates of deposit:
$100,000 and over 89,323,516 84,535,714
Other 109,689,672 102,550,712
------------ ------------
Total deposits 714,353,165 632,437,437
Guaranteed preferred beneficial interests in EBH-subordinated debentures 11,000,000 11,000,000
Federal Home Loan Bank advances 14,032,385 9,965,899
Federal funds purchased -- 1,225,000
Notes payable 1,366,667 --
Accrued interest payable 1,208,549 1,687,288
Accounts payable and accrued expenses 1,392,194 1,138,931
------------ ------------
Total liabilities 743,352,960 657,454,555
------------ ------------
Shareholders' equity:
Common stock, $.01 par value; 20,000,000
shares authorized; 9,270,667 issued and
outstanding at December 31, 2001, and 9,072,521
issued and outstanding at December 31, 2000 92,707 90,725
Surplus 37,288,725 35,840,371
Retained earnings 14,330,784 17,418,811
Accumulated other comprehensive income 184,387 133,876
------------ ------------
Total shareholders' equity 51,896,603 53,483,783
------------ ------------
Total liabilities and shareholders' equity $795,249,563 $710,938,338
============ ============
See accompanying notes to consolidated financial statements.
38
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
------------ ----------- ------------
Interest income:
Interest and fees on loans $ 48,684,303 $49,110,601 $ 37,704,318
Interest on debt and equity securities:
Taxable 2,129,348 3,328,199 1,976,574
Nontaxable 17,378 35,801 46,027
Interest on federal funds sold 1,634,289 3,410,002 1,230,721
Interest on interest-earning deposits 27,332 1,183 1,107
Dividends on equity securities 119,461 144,566 117,261
------------ ----------- ------------
Total interest income 52,612,111 56,030,352 41,076,008
------------ ----------- ------------
Interest expense:
Interest-earning transaction accounts 554,671 823,133 814,184
Money market accounts 9,589,652 13,365,785 8,528,748
Savings 156,665 185,127 179,029
Certificates of deposit:
$100,000 and over 5,106,034 4,689,220 2,696,800
Other 6,597,185 6,934,653 5,123,408
Other borrowed funds 763,769 544,657 631,327
Guaranteed preferred beneficial interests
in EBH-subordinated debentures 1,042,439 1,053,334 186,605
------------ ----------- ------------
Total interest expense 23,810,415 27,595,909 18,160,101
------------ ----------- ------------
Net interest income 28,801,696 28,434,443 22,915,907
Provision for loan losses 3,230,000 1,042,534 2,496,256
------------ ----------- ------------
Net interest income after
provision for loan losses 25,571,696 27,391,909 20,419,651
------------ ----------- ------------
Noninterest income:
Service charges on deposit accounts 1,298,611 1,196,326 1,185,364
Trust and financial advisory income 1,426,078 851,829 594,810
Realized gain on trading security -- 500 202,454
Other service charges and fee income 390,790 457,563 678,556
Gain on sale of other real estate 12,630 214,930 130,050
Gain on sale of mortgage loans 1,238,441 503,702 809,110
Gain on sale of securities 74,658 -- --
(Loss) income from Merchant Banc investments (5,716,138) 269,681 (4,829)
------------ ----------- ------------
Total noninterest income (1,274,930) 3,494,531 3,595,515
------------ ----------- ------------
Noninterest expense:
Salaries 13,438,811 11,045,439 9,007,536
Payroll taxes and employee benefits 2,439,020 2,206,318 1,596,667
Occupancy 1,677,965 1,557,082 1,311,129
Furniture and equipment 1,081,314 722,703 674,421
Data processing 1,092,234 1,084,377 806,004
Amortization of goodwill 190,567 190,567 190,566
Other 5,669,602 5,670,058 4,508,634
------------ ----------- ------------
Total noninterest expense 25,589,513 22,476,544 18,094,957
------------ ----------- ------------
(Loss) income before income tax expense (1,292,747) 8,409,896 5,920,209
Income tax expense 1,241,944 3,208,450 2,335,408
------------ ----------- ------------
(Loss) income before cumulative effect of a change
in accounting principle (2,534,691) 5,201,446 3,584,801
Cumulative effect on prior years of a change in
asset classification, net of taxes -- -- 121,491
------------ ----------- ------------
Net (loss) income $ (2,534,691) $ 5,201,446 $ 3,706,292
============ =========== ============
See accompanying notes to consolidated financial statements.
39
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (continued)
Years Ended December 31, 2001, 2000, and 1999
2001 2000 1999
---------- ---------- ----------
Per share amounts
Basic (losses) earnings per share:
(Loss) income before cumulative effect
of change in accounting principle $ (0.28) $ 0.58 $ 0.40
Cumulative effect on prior years of a
change in asset classification -- -- 0.01
---------- ---------- ----------
Net (loss) income $ (0.28) $ 0.58 $ 0.41
========== ========== ==========
Basic weighted average common shares
outstanding 9,203,224 8,990,605 8,953,717
Diluted (losses) earnings per share:
(Loss) income before cumulative effect
of change in accounting principle $ (0.28) $ 0.54 $ 0.38
Cumulative effect on prior years of a
change in asset classification -- -- 0.01
---------- ---------- ----------
Net (loss) income $ (0.28) $ 0.54 $ 0.39
========== ========== ==========
Diluted weighted average common
shares outstanding 9,203,224 9,684,752 9,596,490
See accompanying notes to consolidated financial statements.
40
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 2001, 2000 and 1999
Common Stock
-------------------- Retained
Shares Amount Surplus earnings
--------- ------- ----------- -----------
Balance December 31, 1998 8,933,020 $89,330 $34,956,974 $ 9,201,915
Net income -- -- -- 3,706,292
Dividends declared
($.04 per share) -- -- -- (285,577)
Stock options exercised 28,125 281 69,404 --
Issuance of common stock 9,214 92 107,408 --
Purchase of treasury stock -- -- -- --
Other comprehensive income -- -- -- --
--------- ------- ----------- -----------
Balance December 31, 1999 8,970,359 89,703 35,133,786 12,622,630
Net income -- -- -- 5,201,446
Dividends declared
($.05 per share) -- -- -- (405,265)
Stock options exercised 134,621 1,346 802,779 --
Issuance of common stock 970 10 10,324 --
Option surplus -- -- 283,148 --
Retirement of treasury stock (33,429) (334) (389,666) --
Other comprehensive income -- -- -- --
--------- ------- ----------- -----------
Balance December 31, 2000 9,072,521 90,725 35,840,371 17,418,811
Net loss -- -- -- (2,534,691)
Dividends declared
($.06 per share) -- -- -- (553,336)
Stock options exercised 198,146 1,982 1,257,061 --
Option surplus -- -- 191,293 --
Other comprehensive income -- -- -- --
--------- ------- ----------- -----------
Balance December 31, 2001 9,270,667 $92,707 $37,288,725 $14,330,784
========= ======= =========== ===========
Accumulated Total
other share-
comprehensive Treasury holders'
income (loss) stock equity
------------- --------- -----------
Balance December 31, 1998 $ 57,359 $ -- $44,305,578
Net income -- -- 3,706,292
Dividends declared
($.04 per share) -- -- (285,577)
Stock options exercised -- -- 69,685
Issuance of common stock -- -- 107,500
Purchase of treasury stock -- (390,000) (390,000)
Other comprehensive income (469,882) -- (469,882)
--------- --------- -----------
Balance December 31, 1999 (412,523) (390,000) 47,043,596
Net income -- -- 5,201,446
Dividends declared
($.05 per share) -- -- (405,265)
Stock options exercised -- -- 804,125
Issuance of common stock -- -- 10,334
Option surplus -- -- 283,148
Retirement of treasury stock -- 390,000 --
Other comprehensive income 546,399 -- 546,399
--------- --------- -----------
Balance December 31, 2000 133,876 -- 53,483,783
Net loss -- -- (2,534,691)
Dividends declared
($.06 per share) -- -- (553,336)
Stock options exercised -- -- 1,259,043
Option surplus -- -- 191,293
Other comprehensive income 50,511 50,511
--------- --------- -----------
Balance December 31, 2001 $ 184,387 $ -- $51,896,603
========= ========= ===========
See accompanying notes to consolidated financial statements.
41
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ -------------
Cash flows from operating activities:
Net (loss) income $ (2,534,691) $ 5,201,446 $ 3,706,292
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle, net of tax -- -- (121,491)
Depreciation and amortization 1,720,967 1,399,929 1,110,234
Provision for loan losses 3,230,000 1,042,534 2,496,256
Gain on sale of other real estate owned (12,630) (214,930) (130,050)
Proceeds from sale of trading security -- 910,500 --
Realized gain on sale of trading security -- (500) (202,454)
Increase in trading security -- -- (400,000)
Net amortization (accretion) of debt and equity securities 195,293 (93,459) (133,779)
Gain on sale of available for sale investment securities (74,658) -- --
Loss (income) from Merchant Banc investments 5,716,138 (269,681) 4,829
Mortgage loans originated (94,327,259) (36,538,187) (56,541,117)
Proceeds from mortgage loans sold 87,574,753 37,535,129 62,184,016
Gain on sale of mortgage loans (1,238,441) (503,702) (809,110)
Write off of fixed assets 104,174 -- --
Noncash compensation expense attributed to stock option grants 191,293 283,148 --
Decrease (increase) in accrued interest receivable 1,117,798 (703,095) (1,034,026)
(Decrease) increase in accrued interest payable (478,739) 395,133 207,601
Deferred income tax benefit (1,739,479) (173,148) (884,732)
Other, net (864,697) (238,132) 40,123
------------ ------------ -------------
Net cash (used in) provided by operating activities (1,420,178) 8,032,985 9,492,592
------------ ------------ -------------
Cash flows from investing activities:
Purchases of available for sale debt securities (67,809,110) (35,037,422) (36,903,835)
Purchases of held to maturity securities (101,195) -- (100,000)
Proceeds from sale of available for sale debt securities 3,036,792 -- --
Proceeds from redemption of equity securities 655,250 -- --
Proceeds from maturities and principal paydowns on available for sale
debt and equity securities 70,941,026 27,221,293 56,280,542
Proceeds from maturities and principal paydowns on held to maturity
debt securities 500,000 150,000 103,000
Proceeds from sale of other real estate 313,630 653,002 540,050
Net increase in loans (88,685,089) (76,766,232) (126,210,752)
Recoveries of loans previously charged off 121,249 84,230 78,478
Increase in note receivable from Enterprise Merchant Banc LLC (1,362,779) -- --
Proceeds from sale of fixed assets 30,600 -- 28,522
Purchases of fixed assets (2,868,183) (2,018,658) (901,813)
Additional Merchant Banc investments (221,785) (1,514,686) (699,064)
------------ ------------ -------------
Net cash used in investing activities (85,449,594) (87,228,473) (107,784,872)
------------ ------------ -------------
42
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ------------ ------------
Cash flows from financing activities:
Net increase in non-interest bearing deposit accounts 20,998,065 30,604,280 3,376,469
Net increase in interest bearing deposit accounts 60,917,663 59,504,530 105,749,088
(Decrease) increase in federal funds purchased (1,225,000) (75,000) 1,300,000
Maturities and paydowns of Federal Home Loan Bank advances (6,083,514) (1,150,931) --
Proceeds from borrowings of Federal Home Loan Bank advances 10,150,000 -- 1,911,818
Repayments of notes payable (133,333) -- (5,000,000)
Proceeds from issuance of subordinated debentures -- -- 11,000,000
Proceeds from borrowings of notes payable 1,500,000 -- 5,000,000
Cash dividends paid (553,336) (405,265) (285,577)
Proceeds from the issuance of common stock -- 10,334 107,500
Proceeds from the exercise of common stock options 1,259,043 804,125 69,685
Purchase of treasury stock -- -- (390,000)
----------- ------------ ------------
Net cash provided by financing activities 86,829,588 89,292,073 122,838,983
----------- ------------ ------------
Net (decrease) increase in cash and cash equivalents (40,184) 10,096,585 24,546,703
Cash and cash equivalents, beginning of year 84,276,370 74,179,785 49,633,082
----------- ------------ ------------
Cash and cash equivalents, end of year $84,236,186 $ 84,276,370 $ 74,179,785
=========== ============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $24,289,154 $ 27,200,776 $ 17,788,374
Income taxes 3,776,300 3,959,352 2,245,189
=========== ============ ============
Noncash transactions:
Transfers to other real estate owned in settlement of loans $ 90,000 $ 76,680 $ 42,000
Loans made to facilitate sale of other real estate owned 28,680 -- 515,240
Transfer of held to maturity security to trading -- -- 510,000
Retirement of treasury stock -- 390,000 --
=========== ============ ============
See accompanying notes to consolidated financial statements.
43
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ---------- ----------
Net (loss) income $(2,534,691) $5,201,446 $3,706,292
Other comprehensive income (loss), before tax:
Unrealized gain (loss) arising during year,
net of tax 97,157 546,399 (469,882)
Less reclassification adjustment for realized
gain on sales of investment securities
included in net (loss) income, net of tax (46,646) -- --
----------- ---------- ----------
Total other comprehensive income (loss), net of tax 50,511 546,399 (469,882)
----------- ---------- ----------
Total comprehensive (loss) income $(2,484,180) $5,747,845 $3,236,410
=========== ========== ==========
See accompanying notes to consolidated financial statements.
44
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. On September 29, 1999, the Company
completed a 3 for 1 stock split in the form of a stock dividend. In October,
2000, the Company changed its status from a bank holding company to a financial
holding company. The Company has four wholly-owned subsidiaries consisting of
Enterprise Bank, Enterprise Merchant Banc, Inc., Commercial Guaranty Bancshares,
Inc. and EBH Capital Trust I.
Enterprise Capital Resources, Inc. ("ECR") 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 ECR. Subsequent to December 31, 1997,
ECR changed its name to Enterprise Merchant Banc, Inc. ("Merchant Banc").
In 1997, the Company organized Enterprise Trust ("Trust") as a division of
Enterprise Bank to provide fee-based trust, 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. ("Moneta"), a financial planning company, as part of the organization of
Trust. In 1998, the Bank obtained trust powers. The Company renegotiated the
agreements with Moneta with the introduction of trust services.
In 1999, the Company formed EBH Capital Trust I ("EBH Trust"). EBH Trust is a
Delaware business trust created for the single purpose of offering trust
preferred securities and purchasing the junior subordinated debentures of the
Company.
On June 23, 2000, the Company completed the merger transaction with Commercial
Guaranty Bancshares, Inc. located in Overland Park, Kansas. Commercial Guaranty
Bancshares, Inc. ("CGB") was the bank holding company for First Commercial Bank,
N.A. ("FCB"). The merger was a tax-free reorganization for federal income tax
purposes and was accounted for as a pooling of interests; therefore, all
recorded amounts were restated to reflect this acquisition. On January 1, 2001,
First Commercial Bank, N.A., changed its name to Enterprise Banking, N.A.
At the close of business on September 30, 2001 Enterprise Banking N.A. merged
with and into Enterprise Bank, with Enterprise Bank (the "Bank") being the
surviving charter. The Company plans to dissolve Commercial Guaranty Bancshares
in 2002.
The Company provides a full range of banking services to individual and
corporate customers located within St. Louis, Missouri, the surrounding
communities, the Kansas Metropolitan and Southeast Kansas markets through its
subsidiary, Enterprise 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.
NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 accounting principles generally accepted in the
United States of America 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 statements. 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.
45
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 Inc. (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.
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. Debt and equity securities
classified as trading are carried at estimated fair value. The realized and
unrealized gains and losses on trading securities are included in noninterest
income.
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 trading, 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
The Company provides long-term financing of one-to four-family residential real
estate by originating fixed and variable rate loans. Long-term, fixed and
variable rate loans are sold into the secondary market without recourse. Upon
receipt of an application for a real estate loan, the Company determines whether
the loan will be sold into the secondary market or retained in the Company's
loan portfolio. The interest rates on the loans sold are locked with the buyer
and the Company bears no interest rate risk related to these loans. Mortgage
loans that are sold in the secondary market are sold 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. The Company does not retain servicing on any loans sold, nor did the
Company have any capitalized mortgage servicing rights at December 31, 2001 and
2000.
46
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.
Loan origination fees greater than $10,000 per loan are deferred and recognized
over the lives of the related loans as a yield adjustment using a 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 probable
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. Generally, the Bank's non-accrual and
restructured loans qualify as "impaired loans." 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 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.
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.
47
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Fixed Assets
Buildings, leasehold improvements, and furniture, fixtures, and equipment are
stated at cost less accumulated depreciation and amortization is computed using
the straight-line method over their respective estimated useful lives.
Furniture, fixtures and equipment is depreciated over three to ten years and
buildings and leasehold improvements over ten to forty years based upon lease
obligation periods.
Goodwill
Banks acquired and recorded under the purchase method are recorded at the fair
value of the net assets acquired at the acquisition date, and results of
operations are included from that date. Excess of purchase price over the fair
value of net assets acquired is recorded as goodwill and is being amortized on a
straight-line basis over 15 years.
Impairment of Long-Lived Assets
Long-lived assets, including assets related to Merchant Banc investments,
goodwill and premises and equipment, are reviewed for impairment whenever events
or changes in circumstances indicate the carrying amount of an asset or group of
assets may not be recoverable. The impairment review includes a comparison of
future cash flows expected to be generated by the asset or group of assets with
their associated carrying value. If the carrying value of the asset or group of
assets exceeds expected cash flows (undiscounted and without interest changes),
an impairment loss is recognized to the extent the carrying amount exceeds
expected cash flows.
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, federal funds sold and interest-bearing deposits to be cash and cash
equivalents.
Reclassification
Certain reclassifications have been made to the 2000 and 1999 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. The Company provides pro forma net
income and pro forma net income per share disclosures for employee stock option
grants as if the fair-value-based method defined in Statement of Financial
Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, had
been applied.
48
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
New Accounting Standards
In September 2000, the Financial Accounting Standards Board (FASB) issued SFAS
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishment of Liabilities, which replaces SFAS 125. This statement provides
consistent standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings. The standards are based on the
consistent application of the financial components approach, whereupon after a
transfer, an entity recognizes the financial and servicing assets it controls
and the liabilities it has incurred, and relieves financial liabilities when
extinguished. This statement is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. This statement was effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. A transfer of
financial assets in which the transferor surrenders control is accounted for as
a sale to the extent that consideration other than beneficial interests in the
transferred assets is received in exchange. This statement requires that
liabilities and derivatives transferred be initially measured at fair value, if
practicable. Servicing assets and other retained interests in the transferred
assets are to be measured by allocating the previous carrying amount between the
assets and retained interests sold, if any, based on their relative fair values
on the date of the transfer. This statement requires that servicing assets and
liabilities be subsequently measured by amortization in proportion to and over
the period of estimated net servicing income or loss, and assessment for asset
impairment or increased obligation based on their fair values. This statement
requires that a liability be relieved if the debtor pays the creditor and is
relieved of its obligation for the liability, or the debtor is legally released
from being the primary obligor under the liability either judicially or by the
creditor. The implementation of this statement did not have a material effect on
the Company's consolidated financial statements.
In July 2001, the FASB issued SFAS 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method
of accounting be used for all business combinations initiated after June 30,
2001 as well as all purchase method business combinations completed after June
30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and reported
apart from goodwill. SFAS 142 will require that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead tested for
impairment at least annually in accordance with the provisions of SFAS 142. SFAS
142 will also require that intangible assets with definite useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets.
The Company is required to adopt the provisions of SFAS 141 as of the date of
adoption of the standard and SFAS 142 effective January 1, 2002. Furthermore,
any goodwill and any intangible asset determined to have an indefinite useful
life that are acquired in a purchase business combination completed after June
30, 2001 will not be amortized, but will continue to be evaluated for impairment
in accordance with the appropriate pre-SFAS 142 accounting literature. Goodwill
and intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized prior to the adoption of SFAS 142.
Upon adoption of SFAS 142, SFAS 141 will require that the Company evaluate its
existing intangible assets and goodwill that were acquired in a prior purchase
business combination, and to make any necessary reclassifications in order to
conform with the new criteria in SFAS 141 for recognition apart from goodwill.
The Company will also be required to reassess the useful lives and residual
values of all intangible assets acquired in purchase business combinations, and
make any necessary amortization period adjustments by the end of the first
interim period after adoption. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS 142 within the first interim period. Any impairment loss will be measured
as of the date of adoption and recognized as the cumulative effect of a change
in accounting principle in the first interim period.
49
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In connection with the transitional goodwill impairment evaluation, SFAS 142
will require the Company to perform an assessment of whether there is an
indication that goodwill is impaired as of the date of adoption. To accomplish
this the Company must identify its reporting units and determine the carrying
value of each reporting unit by assigning the assets and liabilities, including
the existing goodwill and intangible assets, to those reporting units as of the
date of adoption. The Company will then have up to six months from the date of
adoption to determine the fair value of each reporting unit and compare it to
the reporting unit's carrying amount. To the extent a reporting unit's carrying
amount exceeds its fair value, an indication exists that the reporting unit's
goodwill may be impaired and the Company must perform the second step of the
transitional impairment test. In the second step, the Company must compare the
implied fair value of the reporting unit's goodwill, determined by allocating
the reporting unit's fair value to all of it assets (recognized and
unrecognized) and liabilities in a manner similar to a purchase price allocation
in accordance with SFAS 141, to its carrying amount, both of which would be
measured as of the date of adoption. This second step is required to be
completed as soon as possible, but no later than the end of the year of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings. Finally, any unamortized negative goodwill existing at the date SFAS
142 is adopted must be recognized as an extraordinary gain.
As of December 31, 2001, the Company has unamortized goodwill in the amount of
$2,087,537, no unamortized identifiable intangible assets, and no negative
goodwill, which will be subject to the transition provisions of SFAS 141 and
SFAS 142. Amortization expense related to goodwill was $190,567 for the years
ended December 31, 2001 and 2000.
The Company is evaluating its goodwill for impairment in accordance with SFAS
142 and does not believe adoption of this standard will have a material effect
on its operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," it retains many of the fundamental
provisions of that statement. SFAS No. 144 also supercedes the accounting and
reporting provisions of APB Opinion No. 30, "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transaction," for
the disposal of a segment of a business. However, it retains the requirement in
Opinion No. 30 to report separately discontinued operations and extends that
reporting to a component of an entity that either has been disposed of (by sale,
abandonment, or in a distribution to owners) or is classified as held for sale.
By broadening the presentation of discontinued operations to include more
disposal transactions, the FASB has enhanced management's ability to provide
information that helps financial statement users to assess the effects of a
disposal transactions on the ongoing operations of an entity. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001 and interim
financial period within those fiscal years. Management is evaluating the impact
that adopting SFAS 144 will have on its consolidated financial statements.
50
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 3--EARNINGS PER SHARE
Basic (losses) earnings per share data is calculated by dividing net (loss)
income by the weighted average number of common shares outstanding during the
period. Diluted (losses) 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. The components of basic (losses) earnings
per share for the years ended December 31, 2001, 2000, and 1999 are as follows:
2001 2000 1999
----------- ---------- ----------
Basic
Net (loss) income attributable to
common shareholders' equity $(2,534,691) $5,201,446 $3,706,292
=========== ========== ==========
Weighted average common
shares outstanding 9,203,224 8,990,605 8,953,717
=========== ========== ==========
Basic (losses) earnings per share $ (0.28) $ 0.58 $ 0.41
=========== ========== ==========
The components of diluted (losses) earnings per share for the years ended
December 31, 2001, 2000, and 1999 are as follows:
2001 2000 1999
----------- ---------- ----------
Diluted
Net (loss) income attributable to
common shareholders' equity $(2,534,691) $5,201,446 $3,706,292
=========== ========== ==========
Weighted average common
shares outstanding 9,203,224 8,990,605 8,953,717
Effect of dilutive stock options -- 694,147 642,773
----------- ---------- ----------
Diluted weighted average
common shares outstanding 9,203,224 9,684,752 9,596,490
=========== ========== ==========
Diluted (losses) earnings per share $ (0.28) $ 0.54 $ 0.39
=========== ========== ==========
Since the company incurred a net loss for the year ended December 31, 2001,
diluted (losses) earnings per share was computed in the same manner as basic
(losses) earnings per share.
NOTE 4--REGULATORY RESTRICTIONS
The Bank is subject to regulations by regulatory authorities, which require the
maintenance of minimum capital standards, which may affect the amount of
dividends the Bank can pay.
At December 31, 2001 and 2000, approximately $2,214,000 and $3,533,000,
respectively, of cash and due from banks represented required reserves on
deposits maintained by the Bank in accordance with Federal Reserve Bank
requirements.
51
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, 2001 and 2000 is as
follows:
2001
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
U. S. Treasury securities and obligations
of U.S. Government corporations
and agencies $32,855,635 $308,458 $ 3,354 $33,160,739
Mortgage-backed securities 11,099,034 31,143 55,049 11,075,128
Municipal bonds 73,682 2,874 -- 76,556
Other securities 32,419 -- -- 32,419
Federal Reserve Bank stock and
Federal Home Loan Bank stock 1,607,300 -- -- 1,607,300
----------- -------- ------- -----------
$45,668,070 $342,475 $58,403 $45,952,142
=========== ======== ======= ===========
2000
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
----------- ---------- ---------- -----------
U. S. Treasury securities and obligations
of U.S. Government corporations
and agencies $42,462,946 $218,058 $ 6,477 $42,674,527
Mortgage-backed securities 7,461,840 15,720 24,459 7,453,101
Municipal bonds 159,287 -- -- 159,287
Other securities 282,418 -- -- 282,418
Federal Reserve Bank stock and
Federal Home Loan Bank stock 2,262,550 -- -- 2,262,550
----------- -------- ------- -----------
$52,629,041 $233,778 $30,936 $52,831,883
=========== ======== ======= ===========
The amortized cost and estimated fair value of debt and equity secur ities
classified as available for sale at December 31, 2001, 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 $22,989,331 $23,203,551
Due after one year through five years 9,939,986 10,033,744
Due after five years through ten years 32,419 32,419
Mortgage-backed securities 11,099,034 11,075,128
Securities with no stated maturity 1,607,300 1,607,300
----------- -----------
$45,668,070 $45,952,142
=========== ===========
52
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, 2001 and 2000 is as
follows:
2001
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Mortgage-backed securities $ 15,980 $286 $-- $ 16,266
Municipal bonds 100,234 133 -- 100,367
-------- ---- --- --------
$116,214 $419 $-- $116,633
======== ==== === ========
2000
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
Mortgage-backed securities $ 20,497 $-- $ 160 $ 20,337
Municipal bonds 500,783 -- 1,678 499,105
-------- --- ------ --------
$521,280 $-- $1,838 $519,442
======== === ====== ========
The amortized cost and estimated fair value of debt and equity securities
classified as held to maturity at December 31, 2001, 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 $100,234 $100,367
Mortgage-backed securities 15,980 16,266
-------- --------
$116,214 $116,633
======== ========
During 2001, the Company sold investment securities with proceeds of $3,036,792
and gross gains of $82,421 and gross losses of $7,763. The Company was required
to sell its equity stock in the Federal Reserve Bank of Kansas when membership
in the Kansas City Federal Reserve was eliminated with the bank merger during
September 2001. The stock was sold at book value which equated to cost at
$385,950. The Company also redeemed a portion of its stock in the Federal Home
Loan Bank of Topeka. The Bank's membership in the Topeka Federal Home Loan Bank
was eliminated with the bank merger. The Bank redeemed 2,693 shares at $269,300
which was equal to cost and book value. There were no sales of investments in
debt or equity securities for the years ended December 31, 2000 and 1999. Debt
and equity securities having a carrying value of $15,094,553 and $14,481,015 at
December 31, 2001 and 2000, 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 its respective Federal Home Loan Bank (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. The Bank is a
member of the Federal Home Loan Bank of Des Moines.
In connection with the adoption of SFAS 133, the Company elected to reclassify
an equity investment from held to maturity to trading. The Company recorded a
$197,546 gain on marking the asset to market during the second quarter of 1999,
which is treated as a cumulative effect of change in accounting principle. In
the fourth quarter of 1999, the Company obtained a purchase agreement for the
equity investment which resulted in a $202,454 gain in the fair value. This gain
was recognized as noninterest income. The asset was subsequently sold on
February 2, 2000 for $910,500.
53
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 6--LOANS
A summary of loans by category at December 31, 2001 and 2000 is as follows:
2001 2000
------------ ------------
Commercial and industrial $160,218,233 $153,357,212
Loans secured by real estate 453,266,196 377,123,787
Other 28,593,641 26,417,315
------------ ------------
642,078,070 556,898,314
Less unearned loan fees 24,587 105,723
------------ ------------
$642,053,483 $556,792,591
============ ============
The breakdown of loans secured by real estate at December 31, 2001 and 2000 is
as follows:
2001 2000
------------ ------------
Business and personal loans $111,082,174 $102,380,296
Income-producing properties 111,899,684 102,237,244
Owner-occupied properties 87,865,291 61,158,902
Real estate development properties 142,419,047 111,347,345
------------ ------------
$453,266,196 $377,123,787
============ ============
The Bank grants commercial, residential, and consumer loans throughout its
service areas, 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, 2001 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. Payments and other reductions includes decreases related to
the restructuring of the Board of Directors as of December 31, 2001.
Balance, January 1, 2001 $ 29,955,114
New loans 10,427,319
Payments and other reductions (20,924,871)
------------
Balance, December 31, 2001 $ 19,457,562
============
At December 31, 2001 and 2000 the Bank had loans to Enterprise Merchant Banc,
LLC which is accounted for under the equity method, of $1,570,000 and
$1,600,000. These 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.
A summary of activity in the allowance for loan losses for the years ended
December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
----------- ---------- ---------
Balance at beginning of year $ 7,096,544 $6,758,222 $4,429,545
Provisions charged to operations 3,230,000 1,042,534 2,496,256
Loans charged off (3,151,877) (788,442) (246,057)
Recoveries of loans previously
charged off 121,249 84,230 78,478
----------- ---------- ----------
Balance at end of year $ 7,295,916 $7,096,544 $6,758,222
=========== ========== ==========
54
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
A summary of impaired loans at December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999
---------- ---------- ----------
Nonaccrual loans $2,506,188 $1,798,364 $2,484,725
Impaired loans continuing
to accrue interest 1,242,782 -- 73,645
---------- ---------- ----------
Total impaired loans $3,748,970 $1,798,364 $2,558,370
========== ========== ==========
Allowance for losses on specific
impaired loans $ 601,294 $ 859,046 $ 941,631
Impaired loans with no related
allowance for loan losses -- -- 2,820
Average balance of impaired
loans during the year $2,208,486 $1,859,873 $1,571,713
========== ========== ==========
If interest on nonaccrual loans had been accrued, such income would have been
$141,282, $287,696 and $178,520 for the years ended December 31, 2001, 2000, and
1999, respectively. The amount recognized as interest income on nonaccrual loans
was $33,677, $14,979 and $4,834 for the years ended December 31, 2001, 2000, and
1999, respectively. The amount recognized as interest income on impaired loans
continuing to accrue interest was $69,282, $208,133 and $0 for the years ended
December 31, 2001, 2000, and 1999, respectively.
NOTE 7--FIXED ASSETS
A summary of fixed assets at December 31, 2001 and 2000 is as follows:
2001 2000
----------- ----------
Land $ 842,953 $ 842,953
Buildings and leasehold improvements 7,241,633 5,760,676
Furniture, fixtures and equipment 8,754,467 7,784,251
----------- ----------
16,839,053 14,387,880
Less accumulated depreciation and amortization 6,839,621 5,595,860
----------- ----------
$ 9,999,432 $8,792,020
=========== ==========
Depreciation and amortization of building, leasehold improvements, and
furniture, fixtures and equipment included in noninterest expense amounted to
$1,530,400, $1,209,363 and $919,668 in 2001, 2000, and 1999, respectively. The
Company wrote off $104,174 in telephone system assets during 2001. The Company
replaced its telephone and communication systems to incorporate the Kansas
locations and allow for future growth.
All of the Company's Missouri banking facilities are leased under agreements
that expire in various years through 2016. The Company's aggregate rent expense
totaled $1,152,679, $1,030,883, and $814,538 in 2001, 2000 and 1999,
respectively, and sublease rental income totaled $47,853, $76,231, and $60,550
in 2001, 2000 and 1999, respectively.
The future aggregate minimum rental commitments required under the leases are as
follows:
Year Amount
---- ------
2002 $1,261,117
2003 980,143
2004 872,610
2005 876,297
2006 876,773
Thereafter 3,625,589
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.
55
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 8--ASSETS RELATED TO MERCHANT BANC INVESTMENTS
A summary of assets related to Merchant Banc investments at December 31, 2001
and 2000 is as follows:
2001 2000
---- ----------
Investment in Series B Preferred stock $-- $1,450,000
Investment in Enterprise Merchant Banc LLC -- 876,422
Investment in Enterprise Fund I LP -- 576,664
Note receivable from Enterprise Fund I LP -- 330,289
Fees receivable from Enterprise Merchant Banc LLC -- 175,000
--- ----------
$-- $3,408,375
=== ==========
One of the Enterprise Fund II LP ("Fund II") portfolio companies issued Series B
Preferred Stock several years ago and the Company invested $1.5 million. The
financial trends, including uncertain cash flows and significant leverage of the
portfolio company, led the Company to believe that its Preferred Stock
investment had no supportable value at December 31, 2001 and therefore it was
written off.
That same portfolio company experienced sluggish sales and declining cash flows
in 2001 and one of the major creditors exercised their option to draw on a $2.5
million letter of credit that was provided in the event certain negative
financial events occurred. The Company had guaranteed that letter of credit and
therefore had to draw down its line of credit at the holding company by
approximately $1.5 million to cover the advance. The balance had been paid down
since the draw, but the remaining $1.3 million was written off at December 31,
2001 due to liquidity concerns at Enterprise Merchant Banc, LLC ("EMB LLC"), the
obligor, and lack of sufficient collateral value as a secondary source of
repayment. The Company also accrued $1.0 million in loss for its guarantee under
the remaining commitment on the letter of credit at December 31, 2001.
The Investments in EMB LLC and Fund I are recorded using the equity method, and
the Company recorded operating losses of $117,000 in 2001. In addition, the
investments in and receivables from both entities totaling $1.8 million were
written off at December 31, 2001 due to liquidity concerns and insufficient net
assets and cash flows to support the asset balances.
NOTE 9--MATURITY OF CERTIFICATES OF DEPOSIT
Following is a summary of certificates of deposit maturities at December 31,
2001:
$100,000
Maturity Period and Over Other Total
- ------------------------------------------ ----------- ------------ ------------
Less than 1 year $82,029,801 $ 90,839,539 $172,869,340
Greater than 1 year and less than 2 years 5,820,262 14,003,303 19,823,565
Greater than 2 years and less than 3 years 757,933 3,222,550 3,980,483
Greater than 3 years and less than 4 years 405,915 1,321,156 1,727,071
Greater than 4 years and less than 5 years 309,605 303,124 612,729
----------- ------------ ------------
$89,323,516 $109,689,672 $199,013,188
=========== ============ ============
NOTE 10--GUARANTEED PREFERRED BENEFICIAL INTERESTS IN EBH-SUBORDINATED
DEBENTURES
On October 25, 1999, EBH Capital Trust I ("EBH Trust"), a Delaware business
trust subsidiary of Enterbank Holdings, Inc. issued 1,375,000 shares of 9.40%
Cumulative Trust Preferred Securities ("Preferred Securities") at $8 per share
in an underwritten public offering. The Preferred Securities mature on December
15, 2029. The maturity date may be shortened to a date not earlier than December
15, 2004, if certain conditions are met.
The debentures are the sole asset of EBH Trust. In connection with the issuance
of the Preferred Securities, the Company made certain guarantees and commitments
that, in the aggregate, constitute a full and unconditional guarantee by the
Company of the obligations of EBH Trust under the Preferred Securities. The
Company's proceeds from the issuance of the subordinated debentures to EBH
Trust, net of underwriting fees and offering expenses, were $10.28 million. The
Preferred Securities are classified as debt for reporting purposes and capital
56
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
for regulatory reporting purposes.
NOTE 11--FEDERAL HOME LOAN BANK ADVANCES
As a member of the Federal Home Loan Bank, the subsidiary bank has access to
Federal Home Loan Bank advances. The Federal Home Loan Bank advances at December
31, 2001 are collateralized by 1-4 family residential real estate loans,
business loans and certain commercial real estate loans with a carrying value of
$231 million and all stock held in the Federal Home Loan Bank of Des Moines.
The following table summarizes the type, term and rate of the Company's Federal
Home Loan Bank advances at December 31, 2001:
Outstanding Issue
Type of Advance Balance Date Term Rate
- ------------------------------- ----------- --------- -------- ----
Long term non-amortized advance $ 3,000,000 5/1/2001 1 year 4.52
Long term non-amortized advance 150,000 12/4/2001 1 year 2.56
Long term non-amortized advance 300,000 5/1/2001 2 years 4.89
Long term non-amortized advance 150,000 12/4/2001 2 years 3.40
Long term non-amortized advance 300,000 5/1/2001 3 years 5.24
Long term non-amortized advance 950,000 11/2/2001 3 years 3.48
Long term non-amortized advance 150,000 12/4/2001 3 years 4.13
Long term non-amortized advance 1,000,000 5/3/2001 4 years 5.46
Long term non-amortized advance 150,000 12/4/2001 4 years 4.60
Long term non-amortized advance 3,000,000 10/5/1998 5 years 4.72
Long term non-amortized advance 400,000 5/1/2001 5 years 5.65
Long term non-amortized advance 150,000 12/4/2001 5 years 4.86
Long term non-amortized advance 150,000 12/4/2001 6 years 5.13
Long term non-amortized advance 150,000 12/4/2001 7 years 5.38
Long term non-amortized advance 150,000 12/4/2001 8 years 5.51
Mortgage matched advance 2,000,000 5/16/2001 3 years 5.30
Mortgage matched advance 1,000,000 8/28/1998 5 years 5.89
Mortgage matched advance 14,296 8/1/1995 7 years 6.64
Mortgage matched advance 35,000 2/3/1995 10 years 8.10
Mortgage matched advance 434,720 2/1/1999 15 years 5.62
Mortgage matched advance 176,455 4/5/1999 15 years 6.15
Mortgage matched advance 221,914 5/6/1999 15 years 6.32
-----------
Total Federal Home Loan Advances $14,032,385
===========
The weighted average interest rate on outstanding Federal Home Loan Bank
advances as of December 31, 2001 is 4.91%. The majority of these advances are
used to match certain fixed rate loans to lock in an interest rate spread. All
of the Federal Home Loan Bank advances have fixed interest rates, and $825,000
of these borrowings are callable at the option of the Federal Home Loan Bank of
Des Moines under certain conditions. The Company's banking subsidiary, which has
an investment in the capital stock of the Federal Home Loan Bank, maintains a
line of credit with the Federal Home Loan Bank and had availability of
approximately $117 million at December 31, 2001.
NOTE 12--NOTES PAYABLE
At December 31, 2001 the Company had a $7,500,000 unsecured bank line of credit
that matures on March 1, 2002 with an outstanding balance of $1,366,667. The
line is an interest only note, accruing interest at a variable rate of prime
minus 0.50%. For the year ended December 31, 2001, the average balance and
maximum month-end balance of the note payable were $738,889 and $1,500,000,
respectively. The Company had no outstanding principal balance on the loan as of
December 31, 2000.
The Company had a line with the Federal Reserve Bank of St. Louis during 2001
for liquidity purposes and did not draw on the line. As of December 31, 2001,
$8,350,179 was available under this line.
57
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 13--INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31,
2001, 2000 and 1999 are as follows:
2001 2000 1999
----------- ---------- ----------
Current:
Federal $ 2,586,002 $2,949,725 $2,830,153
State and local 395,421 431,873 389,987
Deferred (1,739,479) (173,148) (884,732)
----------- ---------- ----------
$ 1,241,944 $3,208,450 $2,335,408
=========== ========== ==========
A reconciliation of expected income tax expense (benefit), computed by applying
the statutory federal income tax rate of 34% in 2001, 2000 and 1999, to income
before income taxes and the amounts reflected in the consolidated statements of
operations is as follows:
2001 2000 1999
---------- ---------- ----------
Income tax (benefit) expense at
statutory rate $ (439,534) $2,859,365 $2,012,871
Increase (reduction) in income taxes
resulting from:
Establishment of valuation allowance
on merchant banking investments 1,041,080 -- --
Tax-exempt income (80,380) (82,032) (78,604)
State and local income tax
expense 260,978 285,036 257,391
Goodwill amortization 64,793 64,793 64,793
Non-deductible expenses 125,425 97,611 77,716
Other, net 269,582 (16,323) 1,241
---------- ---------- ----------
Total tax expense $1,241,944 $3,208,450 $2,335,408
========== ========== ==========
A net deferred income tax asset of $3,899,293 and $2,190,533 is included in
prepaid expenses and other assets in the consolidated balance sheets at December
31, 2001 and 2000, 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, 2001 and 2000 is as follows:
2001 2000
----------- ----------
Deferred tax assets:
Allowance for loan losses $ 3,962,027 $2,359,638
Deferred compensation 229,457 198,711
Merchant banking investments 1,041,080 --
----------- ----------
Gross deferred tax assets 5,232,564 2,558,349
Valuation allowance (1,041,080) --
----------- ----------
Deferred tax assets net
of valuation allowance 4,191,484 2,558,349
----------- ----------
Deferred tax liabilities:
Deferred loan fees -- 213
Office equipment and leasehold
improvements 163,916 281,309
Unrealized gains on securities
available for sale 99,685 68,966
Other 28,590 17,328
----------- ----------
Total deferred tax liabilities 292,191 367,816
----------- ----------
Net deferred tax asset $ 3,899,293 $2,190,533
=========== ==========
A valuation allowance is 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
established a valuation allowance as of December 31, 2001. Management has
determined it is more likely than not that certain of the deferred tax assets
related to the writedown recorded on assets related to Merchant Banc investments
will not be realized.
58
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 14--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, 2001, that
the Bank meets all capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the FDIC categorized
the Bank as well 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.
The Company's and Bank's actual capital amounts and ratios are also presented in
the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- ------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
----------- ----- ----------- ----- ----------- -----
As of December 31, 2001:
Total Capital (to risk weighted assets)
Enterbank Holdings, Inc. $67,920,595 10.41% $52,203,818 8.00% $ -- --%
Enterprise Bank 67,605,690 10.40 52,024,902 8.00 65,031,128 10.00
Tier 1 Capital (to risk weighted assets)
Enterbank Holdings, Inc. $60,624,679 9.29% $26,101,909 4.00% $ -- --%
Enterprise Bank 60,309,774 9.27 26,012,451 4.00 39,018,677 6.00
Tier 1 Capital (to average assets)
Enterbank Holdings, Inc. $60,624,679 8.18% $22,232,250 3.00% $ -- --%
Enterprise Bank 60,309,774 8.21 22,040,917 3.00 36,734,862 5.00
As of December 31, 2000:
Total Capital (to risk weighted assets)
Enterbank Holdings, Inc. $69,043,524 11.79% $46,859,325 8.00% $ -- --%
Enterprise Bank 61,205,313 10.54 46,446,857 8.00 34,835,143 10.00
Tier 1 Capital (to risk weighted assets)
Enterbank Holdings, Inc. $62,071,803 10.60% $23,429,663 4.00% $ -- --%
Enterprise Bank 54,948,985 9.46 23,223,428 4.00 58,058,571 6.00
Tier 1 Capital (to average assets)
Enterbank Holdings, Inc. $62,071,803 9.41% $19,796,366 3.00% $ -- --%
Enterprise Bank 54,948,985 8.38 19,673,541 3.00 32,789,235 5.00
NOTE 15--SHAREHOLDERS' EQUITY
On September 29, 1999, the Company completed a 3 for 1 stock split in the form
of a stock dividend. All share and per share data have been restated to reflect
this stock split.
59
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
NOTE 16--COMPENSATION PLANS
Stock Options Plans
At December 31, 2001, the Company had five qualified incentive and two
nonqualified stock option plans for the benefit of employees and directors of
Enterbank Holdings and subsidiaries. Plan I was adopted on April 20, 1988 with
432,000 options. As of December 31, 2001, Plan I had no options outstanding and
no options available for future grant. Plan II was adopted on April 25, 1990
with 225,000 options. Plan II had 149,200 options outstanding and no options
available for grant. Plan III was adopted on June 19, 1996 with 600,000 options.
Plan III has 465,350 options outstanding and 18,050 options available for future
grants. Plan IV was adopted on April 28, 1999 with 600,000 options. Plan IV has
427,350 options outstanding and 172,650 available for future grants.
The Company inherited two stock option plans with the CGB merger completed in
June of 2000. The stock option plans provide qualified and nonqualified options
to certain officers and directors for up to 273,220 common shares of the
Company. These options were fully vested upon grant. The options are exercisable
for ten years and five years for the qualified and nonqualified options,
respectively. As of December 31, 2001 the CGB qualified plan had 59,825 options
outstanding and no options available for future grant. The CGB nonqualified plan
had 70,390 options outstanding and no options available for grant.
In 1998, the Company adopted by board approval a nonqualified stock option plan
("the Nonqualified Plan"), which sets aside up to 105,000 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, 2001, the Nonqualified Plan had 85,500 options
outstanding and 19,500 options available for future grants.
Following is a summary of the various stock option plan transactions:
Number Price Weighted Avg.
of Shares per Share Price per Share Total
--------- -------------- --------------- -----------
December 31, 1998 1,085,950 $ 1.67 - 11.67 $ 5.80 $ 6,294,117
Granted 104,316 10.33 - 15.17 11.61 1,211,280
Exercised 28,125 1.67 - 5.33 2.48 69,685
Forfeited 22,457 5.33 - 11.67 8.96 201,200
--------- -------------- ------ -----------
December 31, 1999 1,139,684 $ 1.67 - 15.17 $ 6.35 $ 7,234,512
Granted 214,097 15.00 - 18.00 15.34 3,284,122
Exercised 134,621 2.33 - 11.67 5.97 804,125
Forfeited 17,249 5.33 - 18.00 12.54 216,248
--------- -------------- ------ -----------
December 31, 2000 1,201,911 $ 2.33 - 18.00 $ 7.90 $ 9,498,261
Granted 284,850 11.75 - 15.50 12.04 3,429,238
Exercised 198,146 2.33 - 11.67 6.35 1,259,043
Forfeited 31,000 5.33 - 18.00 9.70 300,690
--------- -------------- ------ -----------
December 31, 2001 1,257,615 $ 2.33 - 18.00 $ 9.04 $11,367,766
========= ============== ====== ===========
The exercise price range of outstanding options at December 31, 2001 was $2.33
to $18.00 and the weighted average contractual life was 6.33 years. The exercise
price range of outstanding options at December 31, 2000 was $2.33 to $18.00 and
the weighted average contractual life was 6.39 years.
60
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Following is a summary of the options outstanding at December 31, 2001:
Number of
Number of Exercisable
Option Price Options Total Options Total
------------ --------- ----------- ----------- ----------
$ 2.33 136,000 $ 316,880 136,000 $ 316,880
5.33 399,700 2,130,401 310,600 1,655,498
5.58 6,000 33,480 4,800 26,784
7.78 11,072 86,140 11,072 86,140
8.33 3,000 24,990 1,800 14,994
9.72 52,392 509,250 52,392 509,250
9.92 3,900 38,688 2,340 23,213
10.00 69,000 690,000 41,400 414,000
10.33 19,500 201,435 47,490 490,572
10.67 1,500 16,005 900 9,603
11.67 66,751 778,984 66,751 778,984
11.75 256,850 3,017,988 -- --
12.50 2,250 28,125 900 11,250
14.00 19,100 267,400 1,440 20,160
15.00 172,100 2,581,500 58,432 876,480
15.50 17,500 271,250 1,200 18,600
16.00 1,000 16,000 -- --
17.50 1,500 26,250 300 5,250
18.00 18,500 333,000 3,700 66,600
-------- ----------- ------- ----------
1,257,615 $11,367,766 741,517 $5,324,258
========= =========== ======= ==========
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 123,
the Company's net (loss) income and earnings (losses) per share would have been
reduced to the pro forma amounts indicated below:
2001 2000 1999
------- ------ ------
Net (loss) income (in thousands):
As reported $(2,535) $5,201 $3,706
Pro forma (3,046) 4,762 3,337
(Losses) earnings per share:
Basic:
As reported $ (0.28) $ 0.58 $ 0.41
Pro forma (0.33) 0.53 0.38
Diluted:
As reported $ (0.28) $ 0.54 $ 0.39
Pro forma (0.33) 0.49 0.35
The fair value of each option granted in 2001 was estimated on the date of grant
using the Black-Scholes option-pricing model with following assumptions; a
risk-free interest rate of 4.92%, 4.98%, 5.37% and 4.55% for January, April,
July and October, respectively; a dividend yield of 0.60%; vesting period for 5
years; expected lives of 10 years; and volatility of 37.50%, 46.07%, 56.00% and
58.34% for January, April, July and October, respectively. The weighted average
fair value of the options granted in 2001 was $7.89.
The fair value of each option granted in 2000 was estimated on the date of grant
using the Black-Scholes option- pricing model with the following assumptions; a
risk-free interest rate of 6.50% and 6.06% for April and September,
respectively; a dividend yield of 0.67%; vesting period for 5 years; expected
lives of 10 years; and volatility of 13.38% and 30.13% for April and September,
respectively. The weighted average fair value of the options granted in 2000 was
$6.75.
61
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Note to Consolidated Financial Statements
The fair value of each option granted in 1999 was estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions; a
risk-free interest rate of 4.72%, 5.18%, 5.79% and 6.11% for January, April,
July and October, respectively; a dividend yield of 0.67%; vesting period for 5
years; expected lives of 10 years; and volatility of 24.13%. The weighted
average fair value of the options granted in 1999 was $4.93.
On April 1, 1999, the Company adopted a Stock Appreciation Rights ("SAR") Plan.
This Plan replaced the previous form of cash compensation for directors of the
Company and its subsidiaries and awards vest based upon attendance and unit
performance. Under the plan, the Company has the option to pay vested SARs
either in the form of cash or Company common stock. At December 31, 2001, there
were 104,500 SARs outstanding. On January 1, 2002, directors were given the
option to forfeit their SARs for cash compensation for previous services and
future meeting attendance or keep the SARs and the future value without cash
compensation for service.
In 1997 the Company entered into a solicitation and referral agreement with
Moneta, a nationally recognized firm in the financial planning industry. Moneta
receives options for banking business referrals and a portion of the gross
margin earned by Trust in the form of cash. The Company recognizes the fair
value of the options over the vesting period as expense. The Company recognized
$191,293 in Moneta option related expenses during 2001. The fair value of each
option grant to Moneta was estimated on the date of grant using the
Black-Scholes option pricing model. The Company granted 11,081 options on
January 1, 2001 at $10.33 price per share, a fair value of $7.77 per share,
assuming a risk free interest rate of 5.20%, a dividend yield of 0.67%, vesting
period for 5 years, expected life of 8 years and volatility of 39.79%. The
Company granted 5,648 options on January 1, 2000 at $18.25 price per share a
fair value of $6.30 per share, assuming a risk free interest rate of 6.19%, a
dividend yield of 0.67%, vesting period for 5 years, expected lives of 8 years
and volatility of 11.80%. The Company granted 60,000 options on August 18, 1999
at $15.00 price per share, a fair value of $6.56, assuming a risk free interest
rate of 6.10%, a dividend yield of 0.67% vesting period for 5 years, expected
lives of 8 years and volatility of 27.95%. The Company granted 99,180 options on
January 1, 1999 at $10.33 price per share, a fair value of $4.09 per share,
assuming a risk free interest rate of 4.75%, a dividend yield of 0.67% vesting
period for 5 years, expected lives of 8 years and volatility of 27.23%. The
weighted average fair value of the options granted to Moneta was $5.24. There
were no exercises or forfeitures of Moneta options since grant date.
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 the Company's contributions to the plan was $255,807, $290,423, and
$170,152 for 2001, 2000, and 1999, respectively.
NOTE 17--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 18--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 the same credit policies
in making commitments and conditional obligations as it does for financial
instruments included on its consolidated balance sheets.
62
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Note to Consolidated Financial Statements
The contractual amount of off-balance-sheet financial instruments as of December
31, 2001 and 2000 is as follows:
2001 2000
------------ ------------
Commitments to extend credit $242,784,209 $210,994,613
Standby letters of credit 13,402,288 11,806,101
============ ============
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, 2001, approximately $13,182,144 represents fixed rate loan commitments. Of
the total commitments to extend credit at December 31, 2000, approximately
$21,820,731 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 the Bank's
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, 2001
and 2000:
2001 2000
--------------------------- ---------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ -------------
Balance sheet assets:
Cash and due from banks $ 32,178,155 $ 32,178,155 $ 25,933,462 $ 25,933,462
Federal funds sold 48,624,680 48,624,680 58,302,921 58,302,921
Interest-bearing deposits 3,433,351 3,433,351 39,987 39,987
Investments in debt and
equity securities 46,068,356 46,068,775 53,353,163 53,351,325
Loans held for sale 8,936,042 8,936,042 945,095 945,095
Loans, net 634,757,567 641,799,259 549,696,047 552,255,829
Accrued interest receivable 3,140,912 3,140,912 4,258,710 4,258,710
============ ============ ============ ============
Balance sheet liabilities:
Deposits $714,353,165 $717,542,415 $632,437,437 $633,999,426
Guaranteed preferred
beneficial interests in EBH-
subordinated debentures 11,000,000 11,126,098 11,000,000 10,312,500
Other borrowed funds 15,399,052 15,573,233 9,965,899 9,960,145
Federal funds purchased -- -- 1,225,000 1,225,000
Accrued interest payable 1,208,549 1,208,549 1,687,288 1,687,288
============ ============ ============ ============
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:
63
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Note to Consolidated Financial Statements
Cash and Other Short-term Instruments
For cash and due from banks, federal funds sold (purchased), interest-bearing
deposits, 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, net
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 by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.
Guaranteed Preferred Beneficial Interests in EBH-Subordinated Debentures
Fair value of guaranteed preferred beneficial interests in EBH-subordinated
debentures is based on market prices as of December 31, 2001 and 2000.
Other Borrowed Funds
Other borrowed funds include Federal Home Loan Bank advances and notes payable.
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 current
rates on borrowed money with similar remaining maturities. The fair value of
notes payable is assumed to be its carrying amount since it has an adjustable
interest rate.
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 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.
64
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Note to Consolidated Financial Statements
Fair value estimates are based on existing on-balance 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 19--SEGMENT REPORTING
Management segregates the Company into three distinct businesses for evaluation
purposes. The three segments are; Enterprise Banking, Enterprise Trust and
Corporate. The segments are evaluated separately on their individual
performance, as well as, their contribution to the Company as a whole.
The Corporate, Intercompany, and Reclassifications segment includes the holding
company, merchant banking investments, and trust preferred securities
activities. The Company incurs general corporate expenses and owns Enterprise
Bank and Enterprise Merchant Banc, Inc. Enterprise Merchant Banc, Inc. offers
merchant banking services through its investment in Enterprise Merchant Banc
LLC.
The majority of the Company's assets and income result from Enterprise Banking.
Enterprise Banking consists of three banking branches and an operations center
in the St. Louis County area, two banking branches in the Kansas City region and
three banking branches in the Southeast Kansas region. The products and services
offered by the banking branches include a broad range of commercial and personal
banking services, including certificates of deposit, individual retirement and
other time deposit accounts, checking and other demand deposit accounts,
interest checking accounts, savings accounts and money market accounts. Loans
include commercial, financial and agricultural, real estate construction and
development, commercial and residential real estate, consumer and installment
loans. Other financial services include mortgage banking, debit and credit
cards, automatic teller machines, internet account access, safe deposit boxes,
and treasury management services.
Enterprise Trust, which is a division of Enterprise Bank, provides fee-based
personal and corporate financial consulting and trust services. Personal
financial consulting includes estate planning, investment management, and
retirement planning. Corporate consulting services are focused in the areas of
retirement plans, management compensation and management succession issues.
65
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Note to Consolidated Financial Statements
Following are the financial results for the Company's operating segments.
Years ended December 31,
1999
Corporate,
Enterprise Enterprise Intercompany, and
Banking Trust Reclassifications Total
------------ ---------- ------------------ ------------
Net interest income $ 23,181,152 $ -- (265,245) 22,915,907
Provision for loan losses 2,496,256 -- -- 2,496,256
Other income 2,497,090 594,810 503,615 3,595,515
Other expense 15,644,360 1,109,643 1,340,954 18,094,957
------------ ---------- ----------- ------------
Income (loss) before income tax expense 7,537,626 (514,833) (1,102,584) 5,920,209
Income tax expense (benefit) 2,885,371 (192,911) (357,052) 2,335,408
------------ ---------- ----------- ------------
Income before cumulative effect of a
change in accounting principle 4,652,255 (321,922) (745,532) 3,584,801
Cumulative effect of prior years of a
change in asset classification -- 121,491 121,491
------------ ---------- ----------- ------------
Net income (loss) $ 4,652,255 $ (321,922) $ (624,041) $ 3,706,292
============ ========== =========== ============
Loans, less unearned loan fees $480,891,481 $ -- $ -- $480,891,481
Deposits 546,287,644 -- (3,959,017) 542,328,627
Borrowings 12,416,830 -- 11,000,000 23,416,830
Total assets $611,921,314 $ -- $ 3,222,175 $615,143,489
============ ========== =========== ============
2000
Corporate,
Enterprise Enterprise Intercompany, and
Banking Trust Reclassifications Total
------------ ---------- ------------------ ------------
Net interest income 29,478,075 $ -- $ (1,043,632) $ 28,434,443
Provision for loan losses 1,042,534 -- -- 1,042,534
Other income 2,285,585 851,829 357,117 3,494,531
Other expense 18,323,816 1,772,477 2,380,251 22,476,544
------------ ---------- ------------ ------------
Income (loss) before income tax expense 12,397,310 (920,648) (3,066,766) 8,409,896
Income tax expense (benefit) 4,622,965 (350,590) (1,063,925) 3,208,450
------------ ---------- ------------ ------------
Net income (loss) $ 7,774,345 $ (570,058) $ (2,002,841) $ 5,201,446
============ ========== ============ ============
Loans, less unearned loan fees $556,792,591 $ -- $ -- $556,792,591
Deposits 634,140,684 -- (1,703,247) 632,437,437
Borrowings 11,190,899 -- 11,000,000 22,190,899
Total assets $706,479,592 $ -- $ 4,458,746 $710,938,338
============ ========== ============ ============
2001
Corporate,
Enterprise Enterprise Intercompany, and
Banking Trust Reclassifications Total
------------ ----------- ----------------- ------------
Net interest income $ 29,883,119 $ -- $(1,081,423) $ 28,801,696
Provision for loan losses 3,230,000 -- -- 3,230,000
Other income 3,015,130 1,426,078 (5,716,138) (1,274,930)
Other expense 21,479,442 2,622,872 1,487,199 25,589,513
------------ ----------- ----------- ------------
Income (loss) before income tax expense 8,188,807 (1,196,794) (8,284,760) (1,292,747)
Income tax expense (benefit) 3,106,493 (484,702) (1,379,847) 1,241,944
------------ ----------- ----------- ------------
Net income (loss) $ 5,082,314 $ (712,092) $(6,904,913) $ (2,534,691)
============ =========== =========== ============
Loans, less unearned loan fees $642,053,483 $ -- $ -- $642,053,483
Deposits 714,576,168 -- (223,003) 714,353,165
Borrowings 14,032,385 -- 12,366,667 26,399,052
Total assets $794,813,142 $ -- $ 2,236,421 $795,249,563
============ =========== =========== ============
66
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consoldidated Financial Statements
NOTE 20--QUARTERLY CONDENSED FINANCIAL INFORMATION
The following table presents the unaudited quarterly financial information for
the years ended December 31, 2001 and 2000.
2001
----
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
Interest income $11,733 $13,180 $13,455 $14,244
Interest expense 4,793 5,996 6,280 6,741
------- ------- ------- -------
Net interest income 6,940 7,184 7,175 7,503
Provision for loan losses 2,460 175 330 265
------- ------- ------- -------
Net interest income after provision
for loan losses 4,480 7,009 6,845 7,238
Noninterest income (4,430) 1,205 1,112 838
Noninterest expense 6,847 6,455 6,087 6,201
------- ------- ------- -------
Income before income tax expense (6,797) 1,759 1,870 1,875
Income tax (benefit) expense (921) 713 735 715
------- ------- ------- -------
Net (loss) income $(5,876) $ 1,046 $ 1,135 $ 1,160
======= ======= ======= =======
(Losses) earnings per common share
Basic $ (0.64) $ 0.11 $ 0.12 $ 0.13
Diluted $ (0.64) $ 0.11 $ 0.12 $ 0.12
2000
----
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----------- ----------- ----------- -----------
(dollars in thousands, except per share data)
Interest income $15,332 $14,547 $13,615 $12,536
Interest expense 7,686 7,245 6,570 6,095
------- ------- ------- -------
Net interest income 7,646 7,302 7,045 6,441
Provision for loan losses 280 215 328 220
------- ------- ------- -------
Net interest income after provision
for loan losses 7,366 7,087 6,717 6,221
Noninterest income 1,029 1,052 793 621
Noninterest expense 5,990 5,854 5,435 5,198
------- ------- ------- -------
Income before income tax expense 2,405 2,285 2,075 1,644
Income tax expense 910 863 800 635
------- ------- ------- -------
Net income $ 1,495 $ 1,422 $ 1,275 $ 1,009
======= ======= ======= =======
Earnings per common share
Basic $ 0.17 $ 0.16 $ 0.14 $ 0.11
Diluted $ 0.16 $ 0.15 $ 0.13 $ 0.10
67
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consoldidated Financial Statements
NOTE 21--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31,
-------------------------
Assets 2001 2000
------ ----------- -----------
Cash $ 157,791 $ 1,489,114
Investment in Enterprise Bank 62,581,698 43,248,747
Assets related to Merchant Banc investments -- 576,664
Investment in Commercial
Guaranty Bancshares, Inc. 250,280 14,946,947
Other assets 2,706,561 4,801,244
----------- -----------
Total assets $65,696,330 $65,062,716
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Guaranteed preferred beneficial interests
in EBH-subordinated debentures $11,000,000 $11,000,000
Notes payable 1,366,667 --
Accounts payable and other liabilities 1,433,060 578,933
Shareholders' equity 51,896,603 53,483,783
----------- -----------
Total liabilities and shareholders' equity $65,696,330 $65,062,716
=========== ===========
Condensed Statements of Operations
December 31
----------------------------------------
2001 2000 1999
----------- ----------- ----------
Income:
Realized gain on trading security $ -- $ 500 $ 202,454
Other income 32,424 43,089 5,168
(Loss) income from Merchant Banc investments (2,939,443) 29,954 (7,763)
----------- ----------- ----------
Total income (2,907,019) 73,543 199,859
----------- ----------- ----------
Expenses:
Interest expense-guaranteed preferred beneficial
interest in EBH-subordinated debentures 1,074,863 1,087,194 192,468
Interest expense-notes payable 40,260 -- 78,650
Other expenses 1,472,435 1,748,947 873,176
----------- ----------- ----------
Total expenses 2,587,558 2,836,141 1,144,294
----------- ----------- ----------
Loss before tax benefit and equity
in undistributed earnings of subsidiaries (5,494,577) (2,762,598) (944,435)
Income tax benefit 1,232,792 995,872 268,458
Loss before equity in undistributed
----------- ----------- ----------
earnings of subsidiaries (4,261,785) (1,766,726) (675,977)
----------- ----------- ----------
Equity in undistributed earnings of subsidiaries 1,727,094 6,968,172 4,260,778
Cumulative effect on prior years of a change in asset
classification, net of taxes -- -- 121,491
----------- ----------- ----------
Net (loss) income $(2,534,691) $ 5,201,446 $3,706,292
=========== =========== ==========
68
ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consoldidated Financial Statements
Condensed Statements of Cash Flow
December 31,
-----------------------------------------
2001 2000 1999
----------- ----------- -----------
Cash flows from operating activities:
Net (loss) income $(2,534,691) $ 5,201,446 $ 3,706,292
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
Cumulative effect of a change in
accounting principle, net of tax -- -- (121,491)
Realized gain on sale of trading security -- (500) (202,454)
Increase in trading security -- -- (400,000)
Proceeds from sale of trading
security -- 910,500 --
Loss (income) from
Merchant Banc investments 2,939,443 (29,954) 7,763
Noncash compensation expense
attributed to stock option grants 191,293 283,148 --
Net income of subsidiaries (1,727,094) (6,968,172) (4,260,778)
Dividends from subsidiaries 679,047 1,935,000 --
Other, net (728,916) (962,825) 269,099
----------- ----------- -----------
Net cash (used in) provided
by operating activities (1,180,918) 368,643 (1,001,569)
----------- ----------- -----------
Cash flows from investing activities:
Capital contributions to subsidiaries (860,000) (3,175,000) (5,921,500)
Increase in note receivable from
Enterprise Merchant Banc, LLC (1,362,779) -- --
Additional Merchant Banc investments -- -- (129,989)
----------- ----------- -----------
Net cash used in investing activities (2,222,779) (3,175,000) (6,051,489)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from borrowings
of notes payable 1,500,000 -- 5,000,000
Repayments of notes payable (133,333) -- (5,000,000)
Proceeds from issuance of subordinated
debentures -- -- 11,000,000
Cash dividends paid (553,336) (405,265) (285,577)
Proceeds from the issuance of common stock -- 10,334 107,500
Proceeds from the exercise of
common stock options 1,259,043 804,125 69,685
Purchase of treasury stock -- -- (390,000)
----------- ----------- -----------
Net cash provided by
financing activities 2,072,374 409,194 10,501,608
----------- ----------- -----------
Net (decrease) increase in cash and cash
equivalents (1,331,323) (2,397,163) 3,448,550
Cash and cash equivalents, beginning of year 1,489,114 3,886,277 437,727
----------- ----------- -----------
Cash and cash equivalents, end of year $ 157,791 $ 1,489,114 $ 3,886,277
=========== =========== ===========
69
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 27th of March, 2002.
ENTERBANK HOLDINGS, INC.
By: /s/ Fred H. Eller
-------------------------
Fred H. Eller
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this Report on Form
10-K has been signed by the following persons in the capacities indicated on the
27th day of March, 2002.
Signatures Title
---------- -----
/s/ Fred H. Eller
- ----------------------------------------
Fred H. Eller Chief Executive Officer and
and Director
/s/ Paul J. McKee, Jr.
- ----------------------------------------
Paul J. McKee, Jr. Chairman of the Board
of Directors
/s/ Kevin C. Eichner
- ----------------------------------------
Kevin C. Eichner Vice Chairman of the
Board of Directors
/s/ Paul R. Cahn
- ----------------------------------------
Paul R. Cahn Director
/s/ Birch M. Mullins
- ----------------------------------------
Birch M. Mullins Director
/s/ Robert E. Saur
- ----------------------------------------
Robert E. Saur Director
/s/ James A. Williams
- ----------------------------------------
James A. Williams Director
/s/ Henry D. Warshaw
- ----------------------------------------
Henry D. Warshaw Director
/s/ James L. Wilhite
- ----------------------------------------
James L. Wilhite Director
/s/ Ted C. Wetterau
- ----------------------------------------
Ted C. Wetterau Director
/s/ Randall D. Humphreys
- ----------------------------------------
Randall D. Humphreys Director
/s/ Paul L. Vogel
- ----------------------------------------
Paul L. Vogel Director
/s/ William B. Moskoff
- ----------------------------------------
William B. Moskoff Director
/s/ Richard S. Masinton
- ----------------------------------------
Richard S. Masinton Director
70
/s/ Ted A. Murray
- ----------------------------------------
Ted A. Murray Director
/s/ Ronald E. Henges
- ----------------------------------------
Ronald E. Henges Director
/s/ Robert D. Ames
- ----------------------------------------
Robert D. Ames Director
/s/ Jack L. Sutherland
- ----------------------------------------
Jack L. Sutherland Director
/s/ Stephen A. Oliver
- ----------------------------------------
Stephen A. Oliver Director
/s/ Frank H. Sanfilippo
- ----------------------------------------
Frank H. Sanfilippo Chief Financial Officer
/s/ Fred H. Eller /s/ Frank H. Sanfilippo /s/ Stacey Tate
- ---------------------------------------- -------------------------------------- ----------------------------------
Fred H. Eller Frank H. Sanfilippo Stacey Tate
Attorney-in-Part Attorney-in-Part Attorney-in-Part
71
EXHIBIT INDEX
-------------
Exhibit
No. Exhibit
- --- -------
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated herein by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form S-1 dated December
19, 1996 (File No. 333-14737)).
3.2 Amendment to the Certificates of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8 dated July 1,
1999 (File No. 333-82082)).
3.3 Amendment to the Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 of the
Registrant's Quarterly Report on Form 10-Q for the period ending
September 30, 1999).
3.4 Bylaws of the Registrant, as amended (incorporated herein by
reference to Exhibit 3.4 of the Registrant's Annual Report on
Form 10-K for the period ending December 31, 1999).
4.1 Enterprise Bank Incentive Stock Option Plan (incorporated herein
by reference to Exhibit 4.3 of 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 to Exhibit 44.4 of 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 to Exhibit 4.5 of the
Registrant's Registration Statement on Form S-8 dated December
29, 1997 (File No. 333-43365)).
4.4 Enterbank Holdings, Inc., Fourth Incentive Stock Option Plan
(incorporated herein by reference to the Registrant's 1998 Proxy
Statement on Form 14-A).
4.5 Enterbank Holdings, Inc. (formerly Commercial Guaranty
Bancshares, Inc.) Employee Incentive Stock Option Plan
(incorporated herein by reference to the Registrant's Form S-8
dated July 25, 2000 (File No. 333-42204)).
4.6 Enterbank Holdings, Inc. (formerly Commercial Guaranty
Bancshares, Inc.) Non-Employee Organizer and Director Incentive
Stock Option Plan (incorporated herein by reference to the
Registrant's Form S-8 dated July 25, 2000 (File No. 333-42204)).
4.7 Enterbank Holdings, Inc. Stock Appreciation Rights (SAR) Plan and
Agreement (incorporated herein by reference to Exhibit 4.5 of the
Registrant's Quarterly Report on Form 10-Q for the period ended
March 31, 1999).
10.1 Customer Referral Agreement by and among Enterbank Holdings,
Inc., Enterprise Bank and Moneta Group Investment Advisors, Inc.
(incorporated herein by reference to Exhibit 10 of the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 1997).
10.2 Revised Customer Referral Agreement by and among Enterbank
Holdings, Inc., Enterprise Bank and Moneta Group Investment
Advisors, Inc. (incorporated herein by reference to Exhibit 10.3
of the Registrant's Annual Report on Form 10-K for the period
ended December 31, 1998).
72
10.3 Agreement and Plan of Merger dated January 5, 2000 between
Enterbank Holdings, Inc. and Commercial Guaranty Bancshares, Inc.
(incorporated herein by reference to Exhibit 10.4 of the
Registrant's Annual Report on Form 10-K for the period ended
December 31, 1999).
10.4 Joint Proxy Statement/Prospectus of Enterbank Holdings, Inc. and
Commercial Guaranty Bancshares, Inc. (incorporated herein by
reference to the Registrant's Form S-4/A dated May 11, 2000 (File
No. 333-35794)).
10.5 Enterbank Holdings, Inc. Deferred Compensation Plan I
(incorporated herein by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the period ended
March 31, 2000)
10.6 Amendment #1 to the Revised Customer referral Agreement by and
among Enterbank Holdings, Inc., Enterprise Bank and Moneta Group
Investment Advisors, Inc. (incorporated herein by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 2001)
10.7 Amendment #2 to the Revised Customer Referral Agreement by and
among Enterbank Holdings, Inc., Enterprise Bank and Moneta Group
Investment Advisors, Inc. (incorporated herein by reference to
Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 2001).
10.8/(1)/ Key Executive Employment Agreement dated September 1, 2000
between Enterbank Holdings, Inc. and Fred H. Eller.
10.9/(1)/ Key Executive Employment Agreement dated September 1, 2000
between Enterbank Holdings, Inc. and Richard C. Leuck.
10.10/(1)/ Key Executive Employment Agreement dated September 1, 2000
between Enterbank Holdings, Inc. and Jack L. Sutherland.
10.11/(1)/ Key Executive Employment Agreement dated September 1, 2000
between Enterbank Holdings, Inc. and Paul L. Vogel.
10.12/(1)/ Consulting contract dated October 3, 2001 between Enterbank
Holdings, Inc. and Paul J. McKee, Jr.
10.13/(1)/ Consulting contract dated October 3, 2001 between Enterbank
Holdings, Inc. and Kevin D. Eichner.
10.14/(1)/ Consulting contract dated October 3, 2001 between Enterbank
Holdings, Inc. and Ronald E. Henges.
11.1/(1)/ Statement regarding computation of per share earnings.
21.1/(1)/ Subsidiaries of the Registrant.
23.1/(1)/ Consent of KPMG LLP.
/(1)/ Filed herewith
73