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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number: 001-15373
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ENTERPRISE FINANCIAL SERVICES CORP
(Exact Name of Registrant as Specified in its Charter)
Delaware 43-1706259
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) 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
----------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of July 1, 2002:
Common Stock, $.01 par value---- 9,437,551 shares outstanding
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ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
At June 30, 2002 and December 31, 2001.......................................1
Consolidated Statements of Operations
Three Months and Six Months Ended June 30, 2002 and 2001.....................2
Consolidated Statements of Comprehensive Income
Three Months and Six Months Ended June 30, 2002 and 2001.....................4
Consolidated Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001......................................5
Notes to Consolidated Financial Statements...................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..............................................11
Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk ........23
PART II - OTHER INFORMATION
Item 4. Submissions of Matters to a Vote of Security Holders.................II-1
Item 6. Exhibits and Reports on Form 8-K.....................................II-2
Signatures...................................................................II-3
PART I - Item 1
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
At June 30, At December 31,
2002 2001
------------ ---------------
Assets
Cash and due from banks $ 35,490,098 $ 32,178,155
Federal funds sold 9,166,870 48,624,680
Interest-bearing deposits 798,551 3,433,351
Investments in debt and equity securities:
Available for sale, at estimated fair value 40,826,823 45,952,142
Held to maturity, at amortized cost (estimated fair
value of $14,489 at June 30, 2002 and
$116,633 at December 31, 2001) 14,236 116,214
------------ ------------
Total investments in debt and equity securities 40,841,059 46,068,356
------------ ------------
Loans held for sale 1,526,950 8,936,042
Loans, less unearned loan fees 704,999,997 642,053,483
Less allowance for loan losses 8,226,229 7,295,916
------------ ------------
Loans, net 696,773,768 634,757,567
------------ ------------
Other real estate owned 125,000 138,000
Fixed assets, net 9,433,397 9,999,432
Accrued interest receivable 3,778,308 3,140,912
Goodwill 2,087,537 2,087,537
Prepaid expenses and other assets 8,052,818 5,885,531
------------ ------------
Total assets $808,074,356 $795,249,563
============ ============
Liabilities and Shareholders' Equity
Deposits:
Demand $139,849,189 $126,648,048
Interest-bearing transaction accounts 57,954,682 71,574,686
Money market accounts 317,984,957 309,355,326
Savings 8,699,472 7,761,917
Certificates of deposit:
$100,000 and over 100,707,337 89,323,516
Other 94,434,752 109,689,672
------------ ------------
Total deposits 719,630,389 714,353,165
Guaranteed preferred beneficial interests in
subordinated debentures 15,000,000 11,000,000
Federal Home Loan Bank advances 13,696,764 14,032,385
Notes payable -- 1,366,667
Accrued interest payable 1,473,841 1,208,549
Accounts payable and accrued expenses 3,108,666 1,392,194
------------ ------------
Total liabilities 752,909,660 743,352,960
------------ ------------
Shareholders' equity:
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
9,437,551 shares at June 30, 2002 and
9,270,667 shares at December 31, 2001 94,376 92,707
Surplus 37,977,368 37,288,725
Retained earnings 16,323,467 14,330,784
Accumulated other comprehensive income 769,485 184,387
------------ ------------
Total shareholders' equity 55,164,696 51,896,603
------------ ------------
Total liabilities and shareholders' equity $808,074,356 $795,249,563
============ ============
See accompanying notes to consolidated financial statements.
1
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Interest income:
Interest and fees on loans $10,963,836 $12,656,331 $21,425,740 $25,563,707
Interest on debt securities:
Taxable 373,042 467,297 818,082 1,251,412
Nontaxable -- 4,708 917 10,465
Interest on federal funds sold 35,400 289,963 127,226 790,935
Interest on interest-bearing deposits 5,444 6,613 22,576 8,417
Dividends on equity securities 14,640 30,813 27,284 74,666
----------- ----------- ----------- -----------
Total interest income 11,392,362 13,455,725 22,421,825 27,699,602
----------- ----------- ----------- -----------
Interest expense:
Interest-bearing transaction accounts 68,817 139,028 137,228 317,968
Money market accounts 1,212,304 2,577,273 2,486,669 5,684,595
Savings 22,159 45,494 42,879 91,432
Certificates of deposit:
$100,000 and over 789,423 1,353,268 1,618,699 2,741,001
Other 1,061,615 1,701,913 2,273,051 3,323,608
Federal funds purchased 27,620 77,621 27,933 140,846
Federal Home Loan Bank borrowings 177,736 124,427 361,836 207,864
Notes payable 19,779 -- 35,207 --
Guaranteed preferred beneficial
interests in subordinated debentures 262,607 261,372 521,107 513,951
----------- ----------- ----------- -----------
Total interest expense 3,642,060 6,280,396 7,504,609 13,021,265
----------- ----------- ----------- -----------
Net interest income 7,750,302 7,175,329 14,917,216 14,678,337
Provision for loan losses 530,000 330,000 1,120,000 595,000
----------- ----------- ----------- -----------
Net interest income
after provision for loan losses 7,220,302 6,845,329 13,797,216 14,083,337
----------- ----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 448,747 313,814 860,641 613,375
Trust and financial advisory income 540,077 316,755 1,169,133 569,101
Other service charges and fee income 83,351 80,688 173,784 196,457
Gains on sale of mortgage loans 284,906 332,786 645,243 512,809
Gains on sale of securities -- 52,559 -- 82,246
Recoveries and income (loss)
from Merchant Banc investments 88,889 15,723 88,889 (22,906)
----------- ----------- ----------- -----------
Total noninterest income 1,445,970 1,112,325 2,937,690 1,951,082
----------- ----------- ----------- -----------
Noninterest expense:
Salaries 3,352,464 3,248,456 6,812,546 6,477,351
Payroll taxes and employee benefits 690,283 719,926 1,379,929 1,351,730
Occupancy 460,250 401,019 917,826 798,006
Furniture and equipment 254,853 244,281 506,843 461,770
Data processing 259,550 242,689 512,594 538,903
Amortization of goodwill -- 47,641 -- 95,283
Other 1,349,506 1,183,000 2,869,855 2,565,383
----------- ----------- ----------- -----------
Total noninterest expense 6,366,906 6,087,012 12,999,593 12,288,426
----------- ----------- ----------- -----------
Income before income tax expense 2,299,366 1,870,642 3,735,313 3,745,993
Income tax expense 850,124 735,405 1,414,713 1,450,704
----------- ----------- ----------- -----------
Net income $ 1,449,242 $ 1,135,237 $ 2,320,600 $ 2,295,289
=========== =========== =========== ===========
See accompanying notes to unaudited consolidated financial statements
2
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited) continued
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2002 2001 2002 2001
---------- ---------- ---------- ----------
Per share amounts:
Basic earnings per share $ 0.15 $ 0.12 $ 0.25 $ 0.25
Basic weighted average common
shares outstanding 9,399,560 9,178,233 9,349,433 9,147,928
Diluted earnings per share $ 0.15 $ 0.12 $ 0.24 $ 0.24
Diluted weighted average
common shares outstanding 9,575,650 9,611,136 9,576,225 9,630,369
- ----------
See accompanying notes to unaudited consolidated financial statements
3
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
Three months ended June 30, Six months ended June 30,
--------------------------- -------------------------
2002 2001 2002 2001
------------ ------------ ----------- -----------
Net income $1,449,242 $1,135,237 $2,320,600 $2,295,289
Other comprehensive income (loss), before tax
Unrealized gain on investment securities
arising during the period, net of tax 163,944 19,062 24,758 83,910
Less: reclassification adjustment for
realized gains included in net
income, net of tax -- 34,689 -- 54,282
Unrealized gain on cash flow type
derivative instruments arising during 786,060 -- 560,340 --
the period, net of tax
---------- ---------- ---------- ----------
Total other comprehensive income (loss),
net of tax 950,004 (15,627) 585,098 29,628
---------- ---------- ---------- ----------
Total comprehensive income $2,399,246 $1,119,610 $2,905,698 $2,324,917
========== ========== ========== ==========
- ----------
See accompanying notes to unaudited consolidated financial statements
4
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30,
---------------------------
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 2,320,600 $ 2,295,289
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 871,158 768,449
Provision for loan losses 1,120,000 595,000
Net amortization (accretion) of debt and equity securities 388,346 (55,336)
Gain on sale of available for sale investment securities -- (82,246)
(Recovery on) loss from Merchant Banc investments (88,889) 22,906
Mortgage loans originated (29,149,314) (46,341,528)
Proceeds from mortgage loans sold 37,203,649 40,452,278
Gain on sale of mortgage loans (645,243) (512,809)
Noncash compensation expense attributed to stock option grants 103,262 99,205
(Increase) decrease in accrued interest receivable (637,396) 824,126
Increase (decrease) in accrued interest payable 265,292 (77,410)
Other, net 237,661 (802,362)
------------ ------------
Net cash provided (used in) by operating activities 11,989,126 (2,814,438)
------------ ------------
Cash flows from investing activities:
Purchases of available for sale debt and equity securities (16,387,077) (10,143,108)
Purchases of held to maturity debt securities -- (101,195)
Proceeds from sale of available for sale debt securities -- 2,517,209
Proceeds from maturities and principal paydowns on available for sale
debt and equity securities 21,162,540 31,505,215
Proceeds from maturities and principal paydowns on held to maturity
debt securities 100,000 300,000
Proceeds from redemption of FHLB stock 1,000 --
Net increase in loans (63,210,415) (60,156,694)
Recoveries of loans previously charged off 39,214 44,736
Proceeds from sale of fixed assets 15,578 15,300
Purchases of fixed assets (324,702) (1,392,482)
Investment in Enterprise Merchant Banc LLC -- (35,000)
------------ ------------
Net cash used in investing activities (58,603,862) (37,446,019)
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in non-interest bearing deposit accounts 13,201,141 (2,211,595)
Net (decrease) increase in interest bearing deposit accounts (7,923,917) 17,855,816
Decrease in federal funds purchased -- (1,225,000)
Maturities and paydowns of Federal Home Loan Bank advances (3,035,621) (41,420)
Paydowns of notes payable (2,366,667) --
Proceeds from borrowings of Federal Home Loan Bank advances 2,700,000 8,000,000
Proceeds from borrowings of notes payable 1,000,000 --
Proceeds from sale of guaranteed preferred beneficial interest in
subordinated debentures 4,000,000 --
Cash dividends paid (327,917) (275,456)
Proceeds from the exercise of common stock options 587,050 1,054,036
------------ ------------
Net cash provided by financing activities 7,834,069 23,156,381
------------ ------------
Net decrease in cash and cash equivalents (38,780,667) (17,104,076)
Cash and cash equivalents, beginning of period 84,236,186 84,276,370
------------ ------------
Cash and cash equivalents, end of period $ 45,455,519 $ 67,172,294
============ ============
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest $ 7,239,317 $ 13,098,675
Income taxes 1,079,100 3,389,300
============ ============
Noncash transactions:
Transfers to other real estate owned in settlement of loans 35,000 --
Loans made to facilitate sale of other real estate owned -- 28,680
============ ============
See accompanying notes to unaudited consolidated financial statements.
5
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Basis of Presentation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not
include all information and footnotes required by accounting principles
generally accepted in the United States of America for complete
consolidated financial statements. The accompanying consolidated financial
statements of Enterprise Financial Services Corp and subsidiaries (the
"Company" or "Enterprise Financial") are unaudited and should be read in
conjunction with the consolidated financial statements and notes thereto
contained in the Company's Annual Report on Form 10-K for the year ended
December 31, 2001. In the opinion of management, all adjustments consisting
of normal recurring accruals considered necessary for a fair presentation
of the results of operations for the interim periods presented herein have
been included. Operating results for the three and six month periods ended
June 30, 2002 are not necessarily indicative of the results that may be
expected for any other interim period or for the year ending December 31,
2002. The consolidated financial statements include the accounts of
Enterprise Financial Services Corp (which changed its name from Enterbank
Holdings, Inc. on April 29, 2002) and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Certain amounts in the consolidated financial statements for the year ended
December 31, 2001 have been reclassified to conform to the 2002
presentation. Such reclassifications had no effect on previously reported
consolidated net income or shareholders' equity.
(2) Segment Disclosure
Management segregates the Company into three distinct businesses for
evaluation purposes. The three segments are the Bank, Enterprise Trust and
Corporate, Intercompany and Reclassifications. 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 and trust preferred securities activities. The Company
incurs general corporate expenses and owns Enterprise Banking.
The majority of the Company's assets and income result from Enterprise
Banking (the "Bank"). The Bank 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 the 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.
The following are the financial results and balance sheet information for the
Company's operating segments as of and for
6
the three and six month periods ended June 30, 2002 and 2001 (unaudited):
Corporate,
Intercompany,
Enterprise Enterprise and
Balance sheet information: Banking Trust Reclassifications Total
------------ ---------- ----------------- ------------
June 30, 2002
- -------------
Loans, less unearned loan fees 704,999,997 -- -- 704,999,997
Deposits 721,894,666 -- (2,264,277) 719,630,389
Borrowings 13,696,764 -- 15,000,000 28,696,764
Total assets $805,925,276 $-- $ 2,149,080 $808,074,356
============ === =========== ============
June 30, 2001
- -------------
Loans, less unearned loan fees 616,098,416 -- -- 616,098,416
Deposits 648,970,190 -- (888,532) 648,081,658
Borrowings 11,855,887 -- 17,068,592 28,924,479
Total assets $731,451,512 $-- $ 5,447,473 $736,898,985
============ === =========== ============
7
Corporate,
Intercompany,
Enterprise Enterprise and
Income statement information: Banking Trust Reclassifications Total
----------- ---------- ----------------- -----------
Three months ended June 30, 2002
- --------------------------------
Net interest income $ 8,032,687 $ -- $ (282,385) $ 7,750,302
Provision for loan losses 530,000 -- -- 530,000
Noninterest income 817,002 540,077 88,891 1,445,970
Noninterest expense $ 5,029,340 722,774 614,792 6,366,906
----------- ---------- ----------- -----------
Income (loss) before income tax expense 3,290,349 (182,697) (808,286) 2,299,366
Income tax expense (benefit) 1,167,871 (67,598) (250,149) 850,124
----------- ---------- ----------- -----------
Net income (loss) $ 2,122,478 $ (115,099) $ (558,137) $ 1,449,242
=========== ========== =========== ===========
Three months ended June 30, 2001
- --------------------------------
Net interest income $ 7,436,700 $ -- $ (261,371) $ 7,175,329
Provision for loan losses 330,000 -- -- 330,000
Noninterest income 819,847 316,755 (24,277) 1,112,325
Noninterest expense 5,205,696 634,589 246,727 6,087,012
----------- ---------- ----------- -----------
Income (loss) before income tax expense 2,720,851 (317,834) (532,375) 1,870,642
Income tax expense (benefit) 1,082,432 (126,810) (220,217) 735,405
----------- ---------- ----------- -----------
Net income (loss) $ 1,638,419 $ (191,024) $ (312,158) $ 1,135,237
=========== ========== =========== ===========
Six months ended June 30, 2002
- ------------------------------
Net interest income $15,473,530 $ -- $ (556,314) $14,917,216
Provision for loan losses 1,120,000 -- -- 1,120,000
Noninterest income 1,696,862 1,169,133 71,695 2,937,690
Noninterest expense 10,472,452 1,382,323 1,144,818 12,999,593
----------- ---------- ----------- -----------
Income (loss) before income tax
expense 5,577,940 (213,190) (1,629,437) 3,735,313
Income tax expense (benefit) 2,042,874 (78,880) (549,281) 1,414,713
----------- ---------- ----------- -----------
Net income (loss) $3,535,066 $ (134,310) $(1,080,156) $ 2,320,600
=========== ========== =========== ===========
Six months ended June 30, 2001
- ------------------------------
Net interest income $15,191,011 $ -- $ (512,674) $ 4,678,337
Provision for loan losses 595,000 -- -- 595,000
Noninterest income 1,404,887 569,101 (22,906) 1,951,082
Noninterest expense 10,397,872 1,234,305 656,249 12,288,426
----------- ---------- ----------- -----------
Income (loss) before income tax
expense 5,603,026 (665,204) (1,191,829) 3,745,993
Income tax expense (benefit) 2,176,034 (253,952) (471,378) 1,450,704
----------- ---------- ----------- -----------
Net income (loss) $ 3,426,992 $ (411,252) $ (720,451) $ 2,295,289
=========== ========== =========== ===========
8
(3) Derivative Instruments and Hedging Activities
The Company began utilizing derivative instruments to assist in the management
of interest rate sensitivity and to modify the repricing, maturity and option
characteristics of certain assets and liabilities in the first quarter of 2002.
The Company uses such derivative instruments solely to reduce its interest rate
exposure. The following is a summary of the Company's accounting policies for
derivative instruments and hedging activities under Statement of Financial
Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and
Hedging Activities, as amended.
Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap agreements
designated as cash flow hedges are accounted for at fair value. The effective
portion of the change in the cash flow hedge's gain or loss is initially
reported as a component of other comprehensive income net of taxes and
subsequently reclassified into noninterest income when the underlying
transaction affects earnings. The ineffective portion of the change in the cash
flow hedge's gain or loss is recorded in earnings on each quarterly measurement
date. The swap agreements are accounted for on an accrual basis with the net
interest differential being recognized as an adjustment to interest income or
interest expense of the related asset or liability. For the three and six months
ended June 30, 2002, a net interest differential of $255,689 and $435,834,
respectively was included in interest income on loans.
Interest Rate Swap Agreements - Fair Value Hedges. Interest rate swap agreements
designated as fair value hedges are accounted for at fair value. Changes in the
fair value of the swap agreements are recognized currently in noninterest
income. The change in the fair value on the underlying hedged item attributable
to the hedged risk adjusts the carrying amount of the underlying hedged item and
is also recognized currently in noninterest income. All changes in fair value
are measured on a quarterly basis. The swap agreement is accounted for on an
accrual basis with the net interest differential being recognized as an
adjustment to interest income or interest expense of the related asset or
liability. For the three and six months ended June 30, 2002, a net interest
differential of $39,726 decreased interest expense on certificates of deposit.
(4) New Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Account Standards (SFAS) No. 142 - Goodwill and other Intangible
Assets. SFAS No. 142 requires 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 No. 142.
SFAS No. 142 also requires 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 No. 144 -
Accounting for the Impairment or Disposal of Long-Lived Assets as discussed
below. The amortization of goodwill ceased upon adoption of SFAS No. 142, which
for the calendar year-end companies was January 1, 2002.
On January 1, 2002, the Company adopted SFAS No. 142. At the date of adoption,
the company had unamortized goodwill of $2,087,537, which was subject to the
transition provisions of SFAS No. 142. Under SFAS No. 142, goodwill will no
longer be amortized, but instead will be tested annually for impairment
following existing methods of measuring and recording impairment losses. The
Company recently completed the testing for the goodwill and found no impairment.
Amortization expense related to goodwill was $0 and $47,641 for the three months
ended June 30, 2002 and 2001 respectively, $0 and $95,283 for the six months
ended June 30, 2002 and 2001 respectively, and $190,567 for the year ended
December 31, 2001. The goodwill intangible asset is reflected in the Enterprise
Banking segment.
The adoption of SFAS No. 142 had no impact on the basic or diluted earnings per
share reported for the Company for the three and six months ended June 30, 2002
and 2001.
9
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
supersedes 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 supersedes 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.
SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and
interim financial periods within those fiscal years. The adoption of this
statement did not have a material effect on the Company's consolidated financial
statements.
(5) Trust Preferred Securities
On June 28, 2002, EFSC Capital Trust I ("EFSC Trust"), a newly-formed Delaware
business trust and subsidiary of the Company issued 4,000 floating rate Trust
Preferred Securities ("Preferred Securities") at $1,000 per share to a Trust
Preferred Securities Pool. The floating rate is equal to the three month LIBOR
rate plus 3.65%, and reprices quarterly. The Preferred Securities are fully
irrevocably and unconditionally guaranteed on a subordinated basis by the
Company. The proceeds of the Preferred Securities were invested in junior
subordinated debentures of the Company. The net proceeds to the Company from the
sale of the junior subordinated debentures, after deducting underwriting
commissions and estimated offering expenses, were approximately $3.92 million.
Distributions on the Preferred Securities will be payable quarterly on March 30,
June 30, September 30 and December 30 of each year that the Preferred Securities
are outstanding, commencing September 30, 2002. The Preferred Securities will be
classified as long term debt, while the distributions will be recorded as
interest expense in the Company's consolidated financial statements.
A portion of the proceeds from the offering were used to repay the $2.3 million
of outstanding indebtedness with the remaining available for cash operating
expenses at the holding company level. The Company currently has $7 million
available under its revolving credit facility and uses it for general corporate
purposes, including investments from time to time in the Bank in the form of
additional capital.
(6) Management Change
Effective July 1, 2002, Kevin C. Eichner, the Vice Chairman of the Board of
Directors since inception of the Company, was named President and Chief
Executive Officer. Fred Eller, the former President and Chief Executive Officer,
will remain with the Company during a transition period until September 30,
2002, after which the Company expects Mr. Eller to continue serving as a
Director.
10
Item 2: Management's Discussion and Analysis of
Financial Condition and Results of Operations
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
Enterprise Financial Services Corp'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 Enterprise Financial Services
Corp's actual results to differ from those set forth in the forward-looking
statements.
Introduction
This discussion summarizes the significant factors affecting the consolidated
financial condition, results of operations, liquidity and cash flows of the
Company for the three and six month periods ended June 30, 2002 compared to the
three and six month periods ended June 30, 2001 and the year ended December 31,
2001. This discussion should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 2001.
Financial Condition
Total assets at June 30, 2002 were $808 million, an increase of $13 million, or
2%, over total assets of $795 million at December 31, 2001. Loans and leases,
net of unearned loan fees, were $705 million, an increase of $63 million, or
10%, over total loans and leases of $642 million at December 31, 2001. The
increase in loans is attributed, in part, to the success of the efforts of the
Company's relationship officers. Federal funds sold, interest-bearing deposits
and investment securities were $51 million, a decrease of $47 million, or 48%,
from total federal funds sold, interest-bearing deposits and investment
securities of $98 million at December 31, 2001. The decrease resulted primarily
from the shift in earning assets from short-term investments into loans during
the first six months of 2002.
Total deposits at June 30, 2002 were $720 million, an increase of $6 million, or
1%, over total deposits of $714 million at December 31, 2001.
Total shareholders' equity at June 30, 2002 was $55.2 million, an increase of
$3.3 million, or 6%, over total shareholders' equity of $51.9 million at
December 31, 2001. The increase in equity is due to net income of $2.3 million
for the six months ended June 30, 2002, a $585,000 increase in accumulated other
comprehensive income, and the exercise of incentive stock options by employees,
less dividends paid to shareholders.
Results of Operations
Net income was $1,449,242 for the three month period ended June 30, 2002, an
increase of 28% compared to net income of $1,135,237 for the same period in
2001. Net income was $2,320,600 for the six month period ended June 30, 2002, an
increase of 1.0% over net income of $2,295,289 for the same period in 2001. The
increase in net income for the three months ended June 30, 2002 is attributable
to an increase in the net interest income and an increase in noninterest
11
income offset by an increase in noninterest expense and provision expense. Basic
earnings per share for the three month periods ended June 30, 2002 and 2001 were
$0.15 and $0.12, respectively. Diluted earnings per share for the three month
periods ended June 30, 2002 and 2001 were $0.15 and $0.12, respectively. Basic
earnings per share for the six month periods ended June 30, 2002 and 2001 were
$0.25 and $0.25, respectively. Diluted earnings per share for the six month
periods ended June 30, 2002 and 2001 were $0.24 and $0.24, respectively.
Net Interest Income
Net interest income (on a tax equivalent basis) was $7.8 million, or 4.16%, of
average interest-earning assets, for the three months ended June 30, 2002,
compared to $7.2 million, or 4.30%, of average earning assets, for the same
period in 2001. The $609,000 increase in net interest income for the three
months ended June 30, 2002 as compared to the same period in 2001 was the result
of an increase in average interest-earning assets and a decrease in the interest
rates on average interest-bearing liabilities offset by a decrease in interest
rates of average interest-earning assets and an increase in average
interest-bearing liabilities. Average interest-earning assets for the three
months ended June 30, 2002 were $752 million, an $80 million, or 12%, increase
over $672 million, during the same period in 2001. The increase in average
interest-earning assets is attributable to the continued calling efforts of the
Company's relationship officers. The yield on average interest-earning assets
decreased to 6.11% for the three month period ended June 30, 2002 compared to
8.05% for the three month period ended June 30, 2001. The decrease in asset
yield was primarily due to a 200 basis point decrease in the prime rate since
June 30, 2001 and a general decrease in the average yield on new fixed rate
loans and investment securities. Average interest-bearing liabilities increased
to $606 million for the three months ended June 30, 2002 from $560 million for
the same period in 2001. The increase in interest-bearing transaction accounts,
money market accounts and certificates of deposit is attributed to continued
calling efforts of the Company's relationship officers. The cost of
interest-bearing liabilities decreased to 2.41% for the three months ended June
30, 2002 compared to 4.50% for the same period in 2002. This decrease is
attributed mainly to declines in market interest rates for all sources of
funding.
12
The following table sets forth, on a tax-equivalent basis, certain information
relating to the Company's average balance sheet and reflects the average yield
earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting interest spread and net interest rate margin for
the three month periods ended June 30, 2002 and 2001:
Three Months Ended June 30,
-----------------------------------------------------------------------------------
2002 2001
---------------------------------------- ----------------------------------------
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) $699,697 88.39% $11,020 6.32% $610,342 85.91% $12,675 8.33%
Taxable investments in debt
and equity securities 41,946 5.30 388 3.71 32,934 4.64 498 6.07
24
Non-taxable investments in debt
and equity securities (2) -- -- -- -- 350 7 8.18
0.05
Federal funds sold 9,312 1.18 35 1.51 27,252 3.84 290 4.27
Interest-bearing deposits 817 0.10 5 2.45 717 0.10 7 3.70
-------- ------ ------- -------- ------ -------
Total interest-earning assets 751,772 94.97 $11,448 6.11% 671,595 94.54 $13,477 8.05%
Non interest-earning assets:
Cash and due from banks 25,912 3.27 22,934 3.22
Fixed assets, net 9,688 1.22 9,319 1.31
Prepaid expenses and other assets 12,262 1.55 13,871 1.95
Allowance for loan losses (8,062) (1.01) (7,339) (1.02)
-------- ------ -------- ------
Total assets $791,572 100.00% $710,380 100.00%
======== ====== ======== ======
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction
accounts $ 59,578 7.53% $ 69 0.46% $ 51,009 7.18% $ 139 1.09%
Money market accounts 312,387 39.46 1,212 1.56 272,379 38.34 2,577 3.80
Savings 8,809 1.11 22 1.00 7,409 1.04 46 2.46
Certificates of deposit 192,115 24.27 1,851 3.86 202,522 28.51 3,055 6.05
Guaranteed preferred beneficial
interest in subordinated
debentures 11,132 1.41 263 9.48 11,000 1.55 261 9.53
Borrowed funds 21,641 2.73 225 4.17 15,767 2.22 202 5.14
-------- ------ ------- -------- ------ -------
Total interest-bearing liabilities 605,662 76.51 3,642 2.41 560,086 78.84 6,280 4.50
Noninterest-bearing liabilities:
Demand deposits 127,281 16.08 91,500 12.88
Other liabilities 4,720 0.60 2,701 0.38
-------- ------ -------- ------
Total liabilities 737,663 93.19 654,287 92.10
Shareholders' equity 53,909 6.81 56,093 7.90
-------- ------ -------- ------
Total liabilities and
shareholders' equity $791,572 100.00% $710,380 100.00%
======== ====== ======== ======
Net interest income $ 7,806 $ 7,197
======= =======
Net interest spread 3.70 3.55
Net interest rate margin(3) 4.16% 4.30%
==== ====
(1) Average balances include non-accrual loans. The income on such loans is
included in interest income but is recognized only upon receipt. The income
on such loans is included in interest but is recognized only upon receipt.
Loan fees included in interest income are approximately $394,000 and
$342,000 for the three months ended June 30, 2002 and 2001, respectively.
(2) Non-taxable investment 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.
Net interest income, presented on a tax equivalent basis, was $15.0 million, or
4.04% of average interest-earning assets, for the six months ended June 30,
2002, compared to $14.7 million, or 4.49% of average interest-earning assets,
for the same period in 2001. The $276,000 increase in net interest income for
the six months ended June 30, 2002 as compared to the same period in 2001 was
the result of an increase in average interest-earning assets and a decrease in
the interest rates on average interest-bearing liabilities offset by a decrease
in the interest rates of average interest earning assets and
13
an increase in average interest-bearing liabilities. Average interest-earning
assets for the six months ended June 30, 2002 were $748 million, an $87 million,
or 13%, increase over $661 million during the same period in 2001. The increase
in interest-earning assets is attributable to the continued calling efforts of
the Company's relationship officers. The yield on average interest-earning
assets decreased to 6.07% for the six month period ended June 30, 2002 compared
to 8.46% for the same period ended June 30, 2001. The decrease in asset yield
was primarily due to decreases in the prime rate and a general decrease in the
average yield on loans and investment securities. Average interest-bearing
liabilities increased $55 million, or 10%, to $607 million, for the six months
ended June 30, 2002 from $552 million for the same period in 2001. The increase
in 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 2.49% for the six months ended June
30, 2002 compared to 4.76% for the same period in 2001. This decrease is
attributed mainly to declines in market interest rates for all sources of
funding.
14
The following table sets forth, on a tax-equivalent basis, certain
information relating to the Company's average balance sheet and reflects
the average yield earned on interest-earning assets, the average cost of
interest-bearing liabilities and the resulting net interest spread and rate
margin for the six month periods ended June 30, 2002 and 2001:
Six Months Ended June 30,
-----------------------------------------------------------------------------------
2002 2001
---------------------------------------- ----------------------------------------
Percent Interest Average Percent Interest Average
Average of Total Income/ Yield/ Average of Total Income/ Yield/
Balance Assets Expense Rate Balance Assets Expense Rate
-------- -------- -------- ------- -------- -------- -------- -------
Assets (Dollars in Thousands)
Interest-earning assets:
Loans (1)(2) $684,183 87.00% $21,507 6.34% $589,384 84.30% $25,602 8.76%
Taxable investments in debt
and equity securities 44,919 5.71 845 3.79 38,699 5.53 1,326 6.91
Non-taxable investments in debt
and equity securities (2) 37 -- 1 5.45 409 0.06 16 7.82
Federal funds sold 16,649 2.12 127 1.54 32,218 4.61 791 4.95
Interest-earning deposits 2,252 0.29 23 2.06 461 0.07 8 3.68
-------- ------ ------- -------- ------ -------
Total interest-earning assets 748,040 94.12 22,503 6.07% 661,171 94.57 $27,743 8.46
Noninterest-earning assets:
Cash and due from banks 25,114 3.19 22,524 3.22
Fixed assets, net 9,820 1.25 9,107 1.30
Prepaid expenses and other assets 11,267 1.43 13,586 1.94
Allowance for possible loan losses (7,817) (0.99) (7,282) (1.03)
-------- ------ -------- ------
Total assets $786,424 100.00% $699,106 100.00%
======== ====== ======== ======
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 62,919 8.00% $ 137 0.44% $52,392 7.49% $ 318 $1.22%
Money market accounts 314,871 40.04 2,487 1.59 269,885 38.60 5,684 4.25
Savings 8,570 1.09 43 1.01 7,316 1.05 91 2.52
Certificates of deposit 191,428 24.34 3,892 4.10 197,182 28.20 6,065 6.20
Guaranteed preferred beneficial
interests in subordinated debentures 11,066 1.41 521 9.49 11,000 1.57 514 9.42
Borrowed funds 18,497 2.35 425 4.63 13,771 1.97 349 5.11
-------- ------ ------- -------- ------ -------
Total interest-bearing liabilities 607,351 77.23 7,505 2.49 551,546 78.88 $13,021 $4.76
Noninterest-bearing liabilities:
Demand deposits 121,542 15.46 89,353 12.79
Other liabilities 4,099 0.52 2,784 0.40
-------- ------ -------- ------
Total liabilities 732,992 93.21 643,683 92.07
Shareholders' equity 53,432 6.79 55,423 7.93
-------- ------ -------- ------
Total liabilities and shareholders' equity $786,424 100.00% $699,106 100.00%
======== ====== ======== ======
Net interest income $14,998 $14,722
======= =======
Net interest spread 3.58 3.70
Net interest rate margin (3) 4.04% 4.49%
==== =====
(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 $731,000 and $690,000 for
2002 and 2001, respectively.
(2) Non-taxable investment 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.
During the three months ended June 30, 2002, an increase in the average volume
of interest-earning assets resulted in an increase in interest income of
$1,668,000. Interest income decreased $3,697,000 due to a decrease in rates on
average interest-earning assets. Increases in the average volume of
interest-bearing transaction accounts, savings and money market accounts, and
borrowed funds resulted in an increase in interest expense of $281,000. Changes
in interest rates on the average volume of interest-bearing liabilities resulted
in a decrease in interest expense of $2,919,000. The net effect of the volume
and rate changes associated with all categories of interest-earning assets
during the three months
15
ended June 30, 2002 as compared to the same period in 2001 was a decrease in
interest income of $2,029,000, while the net effect of the volume and rate
changes associated with all categories of interest-bearing liabilities was a
decrease in interest expense of $2,638,000.
During the six months ended June 30, 2002 as compared to the same period in
2001, an increase in the average volume of interest-earning assets resulted in
an increase in interest income of $3,622,000, offset by a decrease of $8,862,000
due to a decrease in interest rates on interest-earning assets. Increases in the
average volume of interest-bearing transaction accounts, savings and money
market accounts, borrowed funds, and guaranteed preferred beneficial interests
in subordinated debentures resulted in an increase in interest expense of
$835,000. Changes in interest rates on the average volume of interest-bearing
liabilities resulted in a decrease in interest expense of $6,351,000. The net
effect of the volume and rate changes associated with all categories of
interest-earning assets during the six months ended June 30, 2002 as compared to
the same period in 2001, decreased interest income by $5,240,000, while the net
effect of the volume and rate changes associated with all categories of
interest-bearing liabilities was a decrease in interest expense of $5,516,000.
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:
2002 Compared to 2001
-------------------------------------------------------------
3 months ended June 30 6 months ended June 30
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 (3) $1,685 $(3,340) $(1,655) $3,699 $(7,794) $(4,095)
Taxable investments in debt
and equity securities 115 (225) (110) 188 (669) (481)
Nontaxable investments in debt
and equity securities (3) (4) (3) (7) (11) (4) (15)
Federal funds sold (129) (126) (255) (274) (390) (664)
Interest-earning deposits 1 (3) (2) 20 (5) 15
------ ------- ------- ------ ------- -------
Total interest-earning assets $1,668 $(3,697) $(2,029) $3,622 $(8,862) $(5,240
------ ------- ------- ------ ------- -------
Interest paid on:
Interest-bearing transaction accounts $ 20 $ (90) $ (70) $ 54 $ (235) $ (181)
Money market accounts 335 (1,700) (1,365) 825 (4,022) (3,197)
Savings 7 (31) (24) 14 (62) (48)
Certificates of deposit (150) (1,054) (1,204) (172) (2,001) (2,173)
Borrowed funds 66 (43) 23 111 (35) 76
Guaranteed preferred beneficial
interests in subordinated
debentures 3 (1) 2 3 4 7
------ ------- ------- ------ ------- -------
Total interest-bearing liabilities 281 (2,919) (2,638) 835 (6,351) (5,516)
------ ------- ------- ------ ------- -------
Net interest income (loss) $1,387 $ (778) $ 609 $2,787 $(2,511) $ 276
====== ======= ======= ====== ======= =======
(1) Change in volume multiplied by yield/rate of prior period
(2) Change in yield/rate multiplie d by volume of prior period
(3) Nontaxable investment income is 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.
16
Provision for Loan Losses
The provision for loan losses was $530,000 and $1,120,000 for the three month
and six month periods ended June 30, 2002, respectively, compared to $330,000
and $595,000 for the same periods in 2001. The Company had net chargeoffs of
$190,000 for the six months ended June 30, 2002 compared to net charge offs of
$574,000 during the same period ended June 30, 2001. Loan growth remained strong
during the first six months of 2002. The Company increased its allowance for
loan losses for the six months ended June 30, 2002 by charging $1,120,000 to the
provision for loan losses. The increase in provision for loan losses during the
first six months of 2002 as compared to the same period in 2001 was due to a
$407,000 increase in non-accrual loans, a higher level of internally criticized
credits as a percentage of bank capital plus loan loss reserves, and the
continued increase in loans outstanding. One relationship comprises $1.7
million, or 57%, of the nonaccrual loans at June 30, 2002 .
The following table summarizes changes in the allowance for loan losses arising
from loans charged off and recoveries on loans previously charged off, by loan
category, and additions to the allowance that have been charged to the
provision:
Six Months Ended June 30,
-------------------------
2002 2001
--------- ---------
(Dollars in Thousands)
Allowance at beginning of year $ 7,296 $ 7,097
Loans charged off:
Commercial and industrial 138 162
Real estate:
Commercial 14 270
Construction -- --
Residential -- 165
Consumer and other 77 22
-------- --------
Total loans charged off 229 619
-------- --------
Recoveries of loans previously charged off:
Commercial and industrial 20 11
Real estate:
Commercial 8 25
Construction -- --
Residential -- 6
Consumer and other 11 3
-------- --------
Total recoveries of loans previously charged off 39 45
-------- --------
Net loans charged off 190 574
-------- --------
Provision charged to operations 1,120 595
-------- --------
Allowance at end of period $ 8,226 $ 7,118
======== ========
Average loans $684,183 $589,384
Ending total loans, less unearned loan fees $705,000 $616,098
Ending nonperforming loans $ 2,913 $ 2,692
Net charge offs to average loans (annualized) 0.06% 0.19%
Allowance for loan losses to total loans 1.17% 1.16%
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 is ratified in the loan
approval process and subsequently tested in regulatory bank examinations. The
system requires rating all loans at the time they are made.
17
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 provided in the most
recent form 10-K. 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.
18
The following table sets forth information concerning the Company's
non-performing assets as of the dates indicated:
June 30, December 31,
2002 2001
-------- ------------
(Dollars in Thousands)
Non-accrual loans $ 2,913 $ 2,506
Restructured loans -- 1,243
-------- --------
Total nonperforming loans 2,913 3,749
Foreclosed property 125 138
-------- --------
Total non-performing assets $ 3,038 $ 3,887
======== ========
Total assets $808,074 $795,250
Total loans, less unearned loan fees $705,000 $642,053
Total loans plus foreclosed property $705,125 $642,191
Nonperforming loans to loans 0.41% 0.58%
Nonperforming assets to loans plus
foreclosed property 0.43% 0.61%
Nonperforming assets to total assets 0.38% 0.49%
Noninterest Income
Noninterest income was $1,445,970 and $2,937,690 for the three month and six
month periods ended June 30, 2002, respectively, compared to $1,112,325 and
$1,951,082 for the same periods in 2001. The increases are primarily attributed
to increases in trust and financial advisory income, increases in service
charges on deposit accounts, recoveries and income (loss) on previously written
off Merchant Banc investments and an increase in the gains on the sale of
mortgage loans. Trust and financial advisory income was $540,077 and $1,169,133
for the three month and six month periods ended June 30, 2002, respectively, as
compared to $316,755 and $569,101 for the same periods in 2001. The increases in
fees were the result of increased assets under management in Enterprise Trust
and commissions on insurance sales activity in the financial advisory area.
Service charges on deposit accounts were $448,747 and $860,641 for the three
month and six month periods ended June 30, 2002, respectively, as compared to
$313,814 and $613,375 for the same periods in 2001. The increase in service
charges on deposit accounts is a result of a decrease in the earnings credit
rate on business accounts and an increase in deposit balances outstanding.
Recoveries and income (loss) on Merchant Banc investments were $88,889 for the
three month and six month periods ended June 30, 2002, respectively, as compared
to $15,723 and ($22,906) for the same periods in 2001. The increase is a result
of a $88,889 reimbursement from a participant guarantor for a line of credit
guaranteed by the Company for a Merchant Banc investment, which the Company had
previously written off in full. The Company wrote off its assets related to
Merchant Banc investments during December 2001 and is pursuing recoveries on
those investment losses. The gains on the sale of mortgage loans were $284,906
and $645,243 for the three month and six month periods ended June 30, 2002,
respectively, as compared to $332,786 and $512,809 for the same periods in 2001.
The year to date increase in these gains was due to continued demand for
refinancing and purchase activities as a result of a very low interest rate
environment. These loans are sold into the secondary market with release of the
servicing rights. This activity has somewhat slowed down during the three month
period ended June 30, 2002 as demonstrated by the $47,880 decrease in gains on
the sale of mortgage loans during the three months ended June 30, 2002 as
compared to the same period in 2001. These increases were slightly offset by the
$52,559 and $82,246 decreases in the gains on sale of securities for the three
month and six month periods
19
ended June 30, 2002 respectively as compared to the same periods in 2001. The
Company had no sales of investment securities during 2002.
Noninterest Expense
Noninterest expense was $6.4 million and $13.0 million for the three month and
six month periods ended June 30, 2002, respectively, compared to $6.1 million
and $12.3 million for the same periods in 2001. The 6% increase for the six
month period ended June 30, 2002 in noninterest expense was primarily due to: 1)
increased activity and growth in the trust and financial advisory services which
resulted in a $148,018 increase in noninterest expense; 2) recent renovation and
remodeling at the Clayton location in the fourth quarter of 2001 which increased
noninterest expense by $73,372; 3) the opening of a new banking facility in the
Kansas City area which increased noninterest expense by $193,824; and 4) a
$304,472 increase in various other operating expenses detailed below. These
increases were offset by a $47,641 and $95,283 decrease in amortization of
goodwill for the three and six months ended June 30, 2002 as compared to the
same periods in 2001.
Salaries, payroll and employee benefits increased $74,365, or 2%, and $363,394
or 5%, for the three and six month periods ended June 30, 2002 as compared to
the same periods in 2001. Most of this increase is related to an increase in
commission based income in the Mortgage and Financial Advisory areas and annual
merit and promotional increases in salaries. Occupancy expense increased
$59,231, or 15%, for the three month period and $119,820 or 15% for the six
month period ended June 30, 2002 as compared to the same periods in 2001. The
Clayton location acquired additional space for the Holding Company and Trust
offices and existing space was remodeled. The Company opened a new banking
facility in the Country Club Plaza in Kansas City, Missouri during the fourth
quarter of 2001, which also increased occupancy, furniture and equipment
expenses. The Company upgraded its telephone and voicemail systems during the
fourth quarter of 2001 which increased furniture and equipment expense during
2002. Furniture and equipment expense increased $10,572, or 4%, for the three
month period and $45,073, or 10%, for the six month period ended June 30, 2002
as compared to the same period in 2001. Data processing expense increased
$16,861, or 7%, for the three month period and decreased $26,309, or 5%, for the
six month period ended June 30, 2002 as compared to the same periods in 2001.
During the first quarter of 2001, the Bank expanded the computer and data
processing infrastructure for the additional Kansas locations.
Other operating expenses increased $166,506, or 14%, for the three month period
and $304,472, or 12%, for the six month period ended June 30, 2002 over the same
periods ended June 30, 2001. In June 2002, the Company donated foreclosed
property to a not-for-profit organization. This donation resulted in a $49,000
charitable contribution expense which is expected to be offset with state tax
credits. The Company incurred approximately $150,000 in additional professional
fees and other expenses during the six month period ended June 30, 2002 related
to the Merchant Banc investment recovery efforts. In addition, expected
increases in premiums on renewal of various insurance policies along with
increases in certain coverages caused those expenses to increase approximately
$78,000 from the 2001 year-to-date levels. The Bank recognized $138,000 in fraud
losses in March, 2002 that was substantially recovered in April.
Liquidity
Liquidity is provided by the Company's earning assets, including short-term
investments in federal funds sold, maturities in the loan and investment
portfolios, and amortization of term loans, along with deposit inflows, and
proceeds from borrowings. At June 30, 2002, the loan to deposit ratio was 98%,
as compared to 90% at December 31, 2001. Federal funds sold, interest bearing
deposits and investment securities were $51 million at June 30, 2002 as compared
to $98 million at December 31, 2000. During the six months ended June 30, 2002,
the Company funded net new loans of $63 million, while deposits increased a net
$6 million. This decrease in the Company's liquidity position resulted in the
utilization of federal funds sold balances and investment securities to fund
loan growth. In May 2002, the Bank obtained $20 million in brokered CDs with a 2
year maturity to supplement its core deposit activities.
20
This decrease in the Company's liquidity position during the first six months of
the year is very typical. The Company's deposits tend to increase at year end
and decrease during the first six months of the year.
The Company closely monitors its current liquidity position and believes there
are sufficient backup sources of liquidity. As of June 30, 2002, the Company has
over $110 million available from the Federal Home Loan Bank of Des Moines under
a blanket loan pledge and $59 million from the Federal Reserve under a pledged
loan agreement. The Company also has access to over $50 million in overnight fed
funds lines from various banking institutions.
Capital Adequacy
The Bank is subject to various regulatory capital requirements administered by
the federal and state banking agencies. Failure to meet minimum requirements can
initiate certain mandatory and possibly 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 assets, liabilities and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classifications are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital (as defined in the regulations) to risk-weighted assets, and of Tier I
capital to average assets. Management believes the Bank is well capitalized.
As of June 30, 2002, the most recent notification from the Company's primary
regulator 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 I risk-based and Tier I
leverage ratios as set forth in the following table.
21
At June 30, 2002 and December 31, 2001, Enterprise Financial Services Corp and
Enterprise Banking had required and actual capital ratios as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions(1)
-------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----- ----------- ----- ----------- ------
At June 30, 2002:
Total Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp $ 75,533,903 10.85% $55,709,212 8.00% $ -- --%
Enterprise Banking 71,936,759 10.37 55,511,683 8.00 69,389,604 10.00
Tier I Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp $ 67,307,674 9.67% $27,854,606 4.00% $ -- --%
Enterprise Banking 63,710,530 9.18 27,755,842 4.00 41,633,763 6.00
Tier I Capital (to Average Assets)
Enterprise Financial Services Corp $ 67,307,674 8.58% $23,529,738 3.00% $ -- --%
Enterprise Banking 63,710,530 8.09 23,624,386 3.00 39,373,977 5.00
At December 31, 2001:
Total Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp $67,920,5958 10.41% $52,203,818 8.00% $ -- --%
Enterprise Banking 67,605,690 10.40 52,024,902 8.00 65,031,128 10.00
Tier I Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp $ 60,624,679 9.29% $26,101,909 4.00% $ -- --%
Enterprise Banking 60,309,774 9.27 26,012,451 4.00 39,018,677 6.00
Tier I Capital (to Average Assets)
Enterprise Financial Services Corp $ 60,624,679 8.18% $22,232,250 3.00% $ -- --%
Enterprise Banking 60,309,774 8.21 22,040,917 3.00 36,734,862 5.00
(1) There are no regulatory guidelines for the well capitalization of Bank
Holding Companies as opposed to Banks.
22
Effect of Inflation
Changes in interest rates may have a significant impact on a commercial bank's
performance because virtually all assets and liabilities of commercial banks are
monetary in nature. 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 asset ratio.
Item 3: Quantitative and Qualitative Disclosures Regarding Market Risk
The Company's exposure to market risk is reviewed on a regular basis by its
Asset/Liability Committee. Interest rate risk is the potential of economic
losses due to future interest rate changes. These economic losses can be
reflected as a loss of future net interest income and/or a loss of current fair
market values. The objective is to measure the effect on net interest income and
to adjust the balance sheet to minimize the interest risk while at the same time
maximizing income. Management realizes that certain interest rate risks are
inherent in our business and that the goal is to identify and minimize those
risks. Tools used by management include the standard repricing or "GAP" report
subject to different rate shock scenarios. At June 30, 2002, the rate shock
scenario models indicated that annual net interest income would change by less
than 5% should rates rise or fall within 100 basis points from their current
level over a one year period. The Bank has no market risk sensitive instruments
held for trading purposes.
In January 2002, the Bank executed two interest rate swaps in order to limit
exposure from falling interest rates. The first swap had a $40 million notional
amount, a term of two years and obligated the Bank to pay an adjustable rate
equivalent to the Prime rate and receive a fixed rate of 6.255%. The second swap
was also a "receive fixed" interest rate of 6.97% and pay an adjustable rate
equivalent to the Prime rate, but had a notional amount of $20 million and a
term of three years. Both swaps pay interest on a quarterly basis. The swaps
qualify as "cash flow hedges" under SFAS 133, so changes in the fair value of
the swaps are recognized as part of other comprehensive income.
In May 2002, the Bank executed an interest rate swap to limit the risk of a
change in the fair value of the $20 million in fixed interest rate brokered CDs
obtained that month. The swap had a $20 million notional amount, a term of two
years and obligated the Bank to pay an adjustable rate equivalent to the
three-month London Interbank Offering Rate plus 19 basis points and receive a
fixed rate of 3.55%. The terms allow for semiannual payments for both sides of
the swap. The swap qualifies under the "shortcut method" under SFAS No. 133. As
a result, changes in the fair value of the swap directly offset changes in the
fair value of the hedged item (i.e., brokered CDs). The impact of the swap on
the Company's income statement is that it converts the fixed interest rate on
the brokered CDs to a variable interest rate.
The maturity dates, notional amounts, interest rates paid and received and fair
value of our interest rate swap agreements as of June 30 2002 were as follows:
Maturity Notional Interest Rate Interest Rate Fair
Date Amount Paid Received Value
- --------- ----------- ------------- ------------- --------
1/29/2005 $20,000,000 4.75% 6.97% $365,797
1/29/2004 40,000,000 4.75 6.26 483,170
5/10/2004 20,000,000 2.10 3.55 139,154
23
The following tables present the scheduled maturity of market risk
sensitive instruments at June 30, 2002:
Beyond 5
Years or No
Stated
Year 1 Year 2 Year 3 Year 4 Year 5 Maturity Total
-------- ------- ------- ------- ------- ----------- --------
ASSETS
Securities $ 22,858 $10,681 $ 2,306 $ 2,001 $ 1,002 $ 1,993 $ 40,841
Interest-bearing
deposits 799 -- -- -- -- -- 799
Federal funds sold 9,167 -- -- -- -- -- 9,167
Loans 564,836 36,789 66,917 13,055 10,494 12,909 705,000
Loans held for sale 1,527 -- -- -- -- -- 1,527
-------- ------- ------- ------- ------- ------- --------
Total $599,187 $47,470 $69,223 $15,056 $11,496 $14,902 $757,334
======== ======= ======= ======= ======= ======= ========
LIABILITIES
Savings, NOW, money
market deposits $524,488 $ -- $ -- $ -- $ -- $ -- $524,488
Certificates of deposit 145,775 43,059 3,868 2,020 420 -- 195,142
Guaranteed preferred
beneficial interest
in subordinated
debentures -- -- -- -- -- 15,000 15,000
Borrowed funds 457 6,480 3,800 550 450 1,960 13,697
-------- ------- ------- ------- ------- ------- --------
Total $670,720 $49,539 $ 7,668 $ 2,570 $ 870 $16,960 $748,327
======== ======= ======= ======= ======= ======= ========
Average
Interest
Rate for
Six Months
Ended
Carrying June 30, Estimated
Value 2001 Fair Value
-------- ---------- ----------
ASSETS
Securities $ 40,841 3.79% $ 40,841
Interest-earning
deposits 799 2.06 799
Federal funds sold 9,167 1.54 9,167
Loans 705,000 6.34 723,990
Loans held for sale 1,527 1,527
-------- --------
Total $757,334 $776,324
======== ========
LIABILITIES
Savings, NOW, money
market deposits $524,488 1.39% $524,488
Certificates of deposit 195,142 4.10 196,845
Guaranteed preferred
beneficial interest
in subordinated
debentures 15,000 9.49 15,123
Borrowed funds 13,697 4.63 13,897
-------- --------
Total $748,327 $750,353
======== ========
24
PART II - Item 4:
Submissions of Matters to a Vote of Security Holders
ANNUAL MEETING OF SHAREHOLDERS: The annual meeting of shareholders was held on
April 25, 2002. Proxies were solicited pursuant to Regulation 14A of the
Securities Exchange Act of 1934. There was no solicitation in opposition to
management's nominees for Directors and all nominees were elected. The
appointment of KPMG LLP to serve as independent auditor for the Company in 2002
was ratified and shareholders approved changing the name of the Company to
Enterprise Financial Services Corp. There were no other matters considered
except those stated above. The results of the votes are as follows:
PROPOSAL NO. 1: ELECTION OF DIRECTORS
Director For Against Abstain
- ------------------- --------- ------- -------
Fred H. Eller 6,435,215 0 49,010
Ronald E. Henges 6,192,826 0 291,399
Kevin C. Eichner 6,189,497 0 294,728
Paul R. Cahn 6,467,838 0 16,387
William B. Moskoff 6,474,338 0 9,887
Birch M. Mullins 6,195,897 0 288,328
Robert E. Saur 6,191,997 0 292,288
Paul L. Vogel 6,439,715 0 44,510
James L. Wilhite 6,466,196 0 18,029
James A. Williams 6,474,338 0 9,887
Ted C. Wetterau 6,189,897 0 294,328
Richard S. Masinton 6,197,712 0 286,513
Ted A. Murray 6,199,897 0 284,328
Stephen Oliver 6,473,838 0 10,387
Paul J. McKee, Jr. 6,459,125 0 25,100
Jack L. Sutherland 6,439,215 0 45,010
PROPOSAL NO. 2: INDEPENDENT PUBLIC ACCOUNTANTS
Accountants For Against Abstain
- ----------- --------- ------- -------
KPMG LLP 6,337,242 14,936 18,586
PROPOSAL NO. 3: NAME CHANGE TO ENTERPRISE FINANCIAL SERVICES CORP
For Against Abstain
--------- ------- -------
Name Change 6,293,441 51,745 25,578
II-1
Item 6: Exhibits and Reports on Form 8-K
(a). Exhibits.
Exhibit
Number Description
- --------- -----------
4.8.1 Subordinated Indenture dated October 24, 1999 between the Registrant
and Wilmington Trust Company relating to 9.40% Junior Subordinated
Debentures due December 15, 2029, incorporated by reference to
Exhibit 4.6 to Registrant's Registration Statement No. 333-87881 on
Form S-3.
4.8.2 Form of 9.40% Junior subordinated Debenture (included as an Exhibit
to Exhibit 4.8.1), incorporated by reference to Exhibit 4.6 to
Registrant's Registration Statement No. 333-87881 on Form S-3.
4.8.3 Amended and Redated Trust Agreement of EBH Capital Trust I dated
October 19, 1999, incorporated by reference to Exhibit 4.4 to
Registrant's Registration Statement No. 33-87881 on Form S-3.
4.8.4 Preferred Securities Guarantee Agreement between Registrant and
Wilmington Trust Company dated October 25, 1999, incorporated by
reference to Exhibit 4.8 to Registrant's Registration Statement No.
333-87881 on Form S-3.
4.9.1 (1) Indenture dated June 27, 2002 between Registrant and Wells Fargo,
National Association, relating to Floating Rate Junior Subordinated
Deferrable Interest Debentures due June 30, 2032.
4.9.2 (1) Form of Floating Rate Junior Subordinated Deferrable Interest
Debenture due June 30, 2032.
4.9.3 (1) Amended and Restated Trust Agreement of EFSC Capital Trust I dated
June 27, 2002.
4.9.4 (1) Trust Preferred Securities Guarantee Agreement between Registrant
and Wells Fargo, National Association, dated June 27, 2002.
11.1 (1) Statement regarding computation of per share earnings
(b). During the three months ended June 30, 2002, the Registrant filed one
Current Report on Form 8-K, dated April 29, 2002, in which the Registrant
reported the change in the Company's name to Enterprise Financial Services
Corp.
(1) Filed herewith.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the 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 1st day of August 2002.
ENTERPRISE FINANCIAL SERVICES CORP
By: /s/ Kevin C. Eichner
------------------------------
Kevin C. Eichner
Chief Executive Officer
By: /s/ Frank H. Sanfilippo
------------------------------
Frank H. Sanfilippo
Chief Financial Officer
II-3