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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 September 30,
2002
[_] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number: 001-15373
____________
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 October 22, 2002:
Common Stock, $.01 par value---- 9,448,151 shares outstanding
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ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets
At September 30, 2002 and December 31, 2001 ......................................... 1
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30, 2002 and 2001 ...................... 2
Consolidated Statements of Comprehensive Income
Three Months and Nine Months Ended September 30, 2002 and 2001 ...................... 4
Consolidated Statements of Cash Flows
Nine Months Ended September 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 ................. 24
PART II - OTHER INFORMATION
Item 4. Disclosure Control and Procedures .............................................. II-1
Item 6. Exhibits and Reports on Form 8-K ............................................... II-2
Signatures .............................................................................. II-3
Certifications .......................................................................... II-4
PART I - Item 1
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Balance Sheets (unaudited)
At September 30, At December 31,
Assets 2002 2001
------ ---------------- ---------------
Cash and due from banks $ 49,816,819 $ 32,178,155
Federal funds sold 42,467,048 48,624,680
Interest-bearing deposits 718,512 3,433,351
Investments in debt and equity securities:
Available for sale, at estimated fair value 44,436,127 45,952,142
Held to maturity, at amortized cost (estimated fair
value of $13,701 at September 30, 2002 and
$116,633 at December 31, 2001) 13,409 116,214
---------------- ---------------
Total investments in debt and equity securities 44,449,536 46,068,356
---------------- ---------------
Loans held for sale 4,866,647 8,936,042
Loans, less unearned loan fees 706,269,778 642,053,483
Less allowance for loan losses 8,442,245 7,295,916
---------------- ---------------
Loans, net 697,827,533 634,757,567
---------------- ---------------
Other real estate owned 177,494 138,000
Fixed assets, net 9,151,448 9,999,432
Accrued interest receivable 3,544,805 3,140,912
Goodwill 2,087,537 2,087,537
Prepaid expenses and other assets 9,711,643 5,885,531
---------------- ---------------
Total assets 864,819,022 $ 795,249,563
================ ===============
Liabilities and Shareholders' Equity
------------------------------------
Deposits:
Demand $ 148,868,199 $ 126,648,048
Interest-bearing transaction accounts 57,785,489 71,574,686
Money market accounts 356,351,127 309,355,326
Savings 8,449,734 7,761,917
Certificates of deposit:
$100,000 and over 107,044,127 89,323,516
Other 75,946,925 109,689,672
---------------- ---------------
Total deposits 754,445,601 714,353,165
Guaranteed preferred beneficial interests in
subordinated debentures 15,000,000 11,000,000
Federal Home Loan Bank advances 29,639,115 14,032,385
Notes payable and other borrowings 2,359,071 1,366,667
Accrued interest payable 1,453,242 1,208,549
Accounts payable and accrued expenses 4,787,842 1,392,194
---------------- ---------------
Total liabilities 807,684,871 743,352,960
---------------- ---------------
Shareholders' equity:
Common stock, $.01 par value; authorized
20,000,000 shares; issued and outstanding
9,448,151 shares at September 30, 2002 and
9,270,667 shares at December 31, 2001 94,482 92,707
Surplus 38,057,713 37,288,725
Retained earnings 17,492,304 14,330,784
Accumulated other comprehensive income 1,489,652 184,387
---------------- ---------------
Total shareholders' equity 57,134,151 51,896,603
---------------- ---------------
Total liabilities and shareholders' equity $ 864,819,022 $ 795,249,563
================ ===============
See accompanying notes to unaudited consolidated financial statements.
1
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
Interest income:
Interest and fees on loans $ 11,014,386 $ 12,191,313 $ 32,440,126 $ 37,755,020
Interest on debt securities:
Taxable 330,102 443,926 1,148,184 1,695,338
Nontaxable - 4,068 917 14,533
Interest on federal funds sold 163,735 506,496 290,961 1,297,431
Interest on interest-bearing deposits 5,406 6,213 27,982 14,630
Dividends on equity securities 15,501 28,195 42,785 102,861
------------ ------------ ------------ ------------
Total interest income 11,529,130 13,180,211 33,950,955 40,879,813
------------ ------------ ------------ ------------
Interest expense:
Interest-bearing transaction accounts 70,207 138,517 207,434 477,691
Money market accounts 1,308,472 2,309,575 3,795,141 7,972,964
Savings 21,671 40,409 64,550 131,841
Certificates of deposit:
$100,000 and over 781,535 1,279,653 2,400,234 4,020,654
Other 783,757 1,754,256 3,056,809 5,077,864
Guaranteed preferred beneficial
interests in subordinated debentures 315,428 264,244 836,535 778,195
Federal funds purchased 198 62,464 28,131 203,310
Federal Home Loan Bank borrowings 263,097 147,104 624,933 354,968
Notes payable and other borrowings 10,971 - 46,178 -
------------ ------------ ------------ ------------
Total interest expense 3,555,336 5,996,222 11,059,945 19,017,487
------------ ------------ ------------ ------------
Net interest income 7,973,794 7,183,989 22,891,010 21,862,326
Provision for loan losses 640,000 175,000 1,760,000 770,000
------------ ------------ ------------ ------------
Net interest income after
provision for loan losses 7,333,794 7,008,989 21,131,010 21,092,326
------------ ------------ ------------ ------------
Noninterest income:
Service charges on deposit accounts 441,111 319,375 1,301,752 932,750
Trust and financial advisory income 559,594 409,304 1,728,727 978,405
Other service charges and fee income 107,823 119,900 281,607 316,357
Gain on sale of mortgage loans 399,086 348,919 1,044,329 861,728
Gain on sale of other real estate - 12,630 - 12,630
Gain on sale of securities - - - 82,246
Recoveries and income (loss) from
Merchant Banc investments - (5,093) 88,889 (27,999)
------------ ------------ ------------ ------------
Total noninterest income 1,507,614 1,205,035 4,445,304 3,156,117
------------ ------------ ------------ ------------
Noninterest expense:
Salaries 3,670,276 3,432,869 10,482,822 10,001,786
Payroll taxes and employee benefits 619,439 625,429 1,942,824 1,852,124
Occupancy 488,578 418,459 1,406,404 1,216,465
Furniture and equipment 246,333 254,629 753,176 716,399
Data processing 251,350 273,171 763,944 812,074
Amortization of goodwill - 47,642 - 142,925
Other 1,447,828 1,402,262 4,374,227 4,001,114
------------ ------------ ------------ ------------
Total noninterest expense 6,723,804 6,454,461 19,723,397 18,742,887
------------ ------------ ------------ ------------
Income before income tax expense 2,117,604 1,759,563 5,852,917 5,505,556
Income tax expense 783,423 713,120 2,198,136 2,163,824
------------ ------------ ------------ ------------
Net income $ 1,334,181 $ 1,046,443 $ 3,654,781 $ 3,341,732
============ ============ ============ ============
See accompanying notes to unaudited consolidated financial statements
2
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Operations (unaudited) continued
Three months ended Nine months ended
September 30, September 30,
------------------------------- -------------------------------
2002 2001 2002 2001
------------- ----------- --------------- -----------
Per share amounts:
Basic earnings per share $ 0.14 $ 0.11 $ 0.39 $ 0.36
Basic weighted average common shares
outstanding 9,444,258 9,249,804 9,381,389 9,182,260
Diluted earnings per share $ 0.14 $ 0.11 $ 0.38 $ 0.35
Diluted weighted average common
shares outstanding 9,588,205 9,645,722 9,580,300 9,613,331
- -----------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
3
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (unaudited)
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
2002 2001 2002 2001
-------------- ------------- ------------ --------------
Net income $ 1,334,181 $ 1,046,443 $ 3,654,781 $ 3,341,732
Other comprehensive income (loss),
Unrealized gain on investment securities
arising during the period, net of tax 46,967 102,145 71,725 186,055
Less: reclassification adjustment for
realized gains included in net
income, net of tax - - - 54,282
Unrealized gain on cash flow type
derivative instruments arising during
the period, net of tax 673,200 - 1,233,540 -
-------------- -------------- ------------ --------------
Total other comprehensive income 720,167 102,145 1,305,265 131,773
-------------- -------------- ------------ --------------
Total comprehensive income $ 2,054,348 $ 1,148,588 $ 4,960,046 $ 3,473,505
============== ============== ============ ==============
- ----------------------------------------------------------
See accompanying notes to unaudited consolidated financial statements
4
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income $ 3,654,781 $ 3,341,732
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 1,300,445 1,202,782
Provision for loan losses 1,760,000 770,000
Net amortization (accretion) of debt and equity securities 542,312 (55,312)
Gain on sale of available for sale investment securities - (82,246)
Loss from Merchant Banc investments - 27,999
Mortgage loans originated (54,044,137) (64,257,678)
Proceeds from mortgage loans sold 59,157,861 64,584,664
Gain on sale of mortgage loans (1,044,329) (861,728)
Noncash compensation expense attributed to stock option grants 159,412 145,249
(Increase) decrease in accrued interest receivable (403,893) 696,595
Increase (decrease) in accrued interest payable 244,693 (188,318)
Increase in receivable from Enterprise Merchant Banc, LLC - (1,500,000)
Other, net 1,253,975 (1,441,385)
------------ ------------
Net cash provided by operating activities 12,581,120 2,382,354
------------ ------------
Cash flows from investing activities:
Purchases of available for sale debt and equity securities (29,070,387) (51,486,799)
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 30,154,569 63,375,375
Proceeds from maturities and principal paydowns on held to maturity debt securities 100,000 400,000
Proceeds from sale of other real estate 2,246,659 313,630
Proceeds from redemption of FHLB stock 1,000 -
Net increase in loans (67,105,722) (82,550,389)
Recoveries of loans previously charged off 75,756 98,832
Proceeds from sale of fixed assets 15,578 15,300
Purchases of fixed assets (472,040) (2,058,618)
Investment in Enterprise Merchant Banc LLC - (43,107)
------------ ------------
Net cash used in investing activities (64,054,587) (69,519,762)
------------ ------------
Cash flows from financing activities:
Net increase in non-interest bearing deposit accounts 22,220,151 9,679,153
Net increase in interest bearing deposit accounts 17,302,285 72,879,241
Proceeds from issuance of guaranteed preferred beneficial interests in subordinated
debentures 4,000,000 -
Maturities and paydowns of Federal Home Loan Bank advances (3,068,270) (3,064,877)
Proceeds from borrowings of Federal Home Loan Bank advances 18,675,000 8,000,000
Decrease in federal funds purchased - (1,225,000)
Proceeds from notes payable 1,000,000 1,500,000
Paydowns of notes payable (2,366,667) -
Increase in other borrowings 2,359,071 -
Cash dividends paid (493,261) (414,275)
Proceeds from the exercise of common stock options 611,351 1,173,565
------------ ------------
Net cash provided by financing activities 60,239,660 88,527,807
------------ ------------
Net increase in cash and cash equivalents 8,766,193 21,390,399
Cash and cash equivalents, beginning of period 84,236,186 84,276,370
------------ ------------
Cash and cash equivalents, end of period $ 93,002,379 $105,666,769
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 10,815,252 $ 19,205,805
Income taxes 1,115,100 3,218,300
============ ============
Noncash transactions:
Transfers to other real estate owned in settlement of loans 2,235,000 -
Loans made to facilitate sale of other real estate owned 1,980,000 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 nine month periods ended
September 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: Enterprise 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 Bank.
The majority of the Company's assets and income result from Enterprise Bank
(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.
6
The following are the financial results and balance sheet information for the
Company's operating segments as of and for the three and nine month periods
ended September 30, 2002 and 2001 (unaudited):
Corporate,
Enterprise Enterprise Intercompany,
Balance sheet information: Bank Trust and Reclassifications Total
-------------- ---------- ---------------------- --------------
September 30, 2002
- --------------------------
Loans, less unearned loan fees 706,269,778 - - 706,269,778
Deposits 754,860,134 - (414,533) 754,445,601
Borrowings 31,998,186 - 15,000,000 46,998,186
Total assets $ 862,098,405 $ - $ 2,720,617 $ 864,819,022
============== ========== ====================== ==============
September 30, 2001
- --------------------------
Loans, less unearned loan fees 638,658,163 - - 638,658,163
Deposits 715,207,196 - (211,365) 714,995,831
Borrowings 11,844,572 - 15,556,450 27,401,022
Total assets $ 796,603,591 $ - $ 7,238,333 $ 803,841,924
============== ========== ====================== ==============
7
Corporate,
Enterprise Enterprise Intercompany,
Income statement information: Bank Trust and Reclassifications Total
------------ ------------ ----------------------- -------
Three months ended September 30, 2002
- ---------------------------------------
Net interest income $ 8,297,123 $ - $ (323,329) $ 7,973,794
Provision for loan losses 640,000 - - 640,000
Noninterest income 942,165 559,594 5,855 1,507,614
Noninterest expense $ 5,169,738 742,794 811,272 6,723,804
----------- ----------- ----------- -----------
Income (loss) before income tax expense 3,429,550 (183,200) (1,128,746) 2,117,604
Income tax expense (benefit) 1,268,934 (67,784) (417,727) 783,423
----------- ----------- ----------- -----------
Net income (loss) $ 2,160,616 $ (115,416) $ (711,019) $ 1,334,181
=========== =========== =========== ===========
Three months ended September 30, 2001
- ---------------------------------------
Net interest income $ 7,448,234 $ - $ (264,245) $ 7,183,989
Provision for loan losses 175,000 - - 175,000
Noninterest income 800,824 409,304 (5,093) 1,205,035
Noninterest expense 5,238,595 673,462 542,404 6,454,461
----------- ----------- ----------- -----------
Income (loss) before income tax expense 2,835,463 (264,158) (811,742) 1,759,563
Income tax expense (benefit) 1,096,869 (97,738) (286,011) 713,120
----------- ----------- ----------- -----------
Net income (loss) $ 1,738,594 $ (166,420) $ (525,731) $ 1,046,443
=========== =========== =========== ===========
Nine months ended September 30, 2002
- --------------------------------------
Net interest income $23,770,652 $ - $ (879,642) $22,891,010
Provision for loan losses 1,760,000 - - 1,760,000
Noninterest income 2,639,029 1,728,727 77,548 4,445,304
Noninterest expense 15,642,191 2,125,117 1,956,089 19,723,397
----------- ----------- ----------- -----------
Income (loss) before income tax expense 9,007,490 (396,390) (2,758,183) 5,852,917
Income tax expense (benefit) 3,311,808 (146,664) (967,008) 2,198,136
----------- ----------- ----------- -----------
Net income (loss) $ 5,695,682 $ (249,726) $(1,791,175) $ 3,654,781
=========== =========== =========== ===========
Nine months ended September 30, 2001
- --------------------------------------
Net interest income $22,639,245 $ - $ (776,919) $21,862,326
Provision for loan losses 770,000 - - 770,000
Noninterest income 2,205,711 978,405 (27,999) 3,156,117
Noninterest expense 15,619,999 1,924,235 1,198,653 18,742,887
----------- ----------- ----------- -----------
Income (loss) before income tax expense 8,454,957 (945,830) (2,003,571) 5,505,556
Income tax expense (benefit) 3,271,170 (349,957) (757,389) 2,163,824
----------- ----------- ----------- -----------
Net income (loss) $ 5,183,787 $ (595,873) $(1,246,182) $ 3,341,732
=========== =========== =========== ===========
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 nine
months ended September 30, 2002, a net interest differential of $264,406 and
$700,240, 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 nine months ended September 30, 2002, a net
interest differential of $77,593 and $117,319, respectively, 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.
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. The goodwill intangible asset is
reflected in the Enterprise Bank segment. 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 completed the transitional goodwill impairment test required under SFAS
No. 142, to determine the potential impact, if any, on the consolidated
financial statements. The results of the transitional goodwill impairment
testing did not identify any goodwill impairment losses.
9
Following is a reconciliation of reported net income to net income adjusted to
reflect the adoption of SFAS No. 142, as if it had been implemented on January
1, 2001:
Three months ended September 30, Nine months ended September 30,
------------------------------------ -----------------------------------
2002 2001 2002 2001
----------------- --------------- ---------------- ----------------
Net income:
Reported net income $ 1,334,181 1,046,443 3,654,781 3,341,732
Add back - goodwill amortization - 47,642 - 142,925
----------------- --------------- ---------------- ----------------
Adjusted net income $ 1,334,181 $ 1,094,085 $ 3,654,781 $ 3,484,657
================= =============== ================ ================
Basic earnings per share:
Reported net income $ 0.14 $ 0.11 $ 0.39 $ 0.36
Add back - goodwill amortization - 0.01 - 0.02
----------------- --------------- ---------------- ----------------
Adjusted net income $ 0.14 $ 0.12 $ 0.39 $ 0.38
================= =============== ================ ================
Diluted earnings per share:
Reported net income $ 0.14 $ 0.11 $ 0.38 $ 0.35
Add back - goodwill amortization - - - 0.01
----------------- --------------- ---------------- ----------------
Adjusted net income $ 0.14 $ 0.11 $ 0.38 $ 0.36
================= =============== ================ ================
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.
In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial
Institutions. This Statement brings all business combinations involving
financial institutions, except mutuals, into the scope of SFAS No. 141, Business
Combinations. SFAS No. 147 requires that all acquisitions of financial
institutions that meet the definition of a business, including acquisitions of
part of a financial institution that meet the definition of a business, must be
accounted for in accordance with SFAS No. 141 and the related intangibles
accounted for in accordance with SFAS No. 142. SFAS No. 147 removes such
acquisitions from the scope of SFAS No. 72, Accounting for Certain Acquisitions
of Banking or Thrift Institutions, which was adopted in February 1983 to address
financial institutions acquisitions during a period when many of such
acquisitions involved "troubled" institutions. SFAS No. 147 also amends SFAS No.
144 to include in its scope long-term customer-relationship intangible assets of
financial institutions. SFAS No. 147 is generally effective immediately and
provides guidance with respect to amortization and impairment of intangibles
recognized in connection with acquisitions previously within the scope of SFAS
No. 72. The adoption of the Statement will 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.
10
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 are
payable quarterly on March 30, June 30, September 30 and December 30 of each
year that the Preferred Securities are outstanding. The Preferred Securities are
classified as long term debt, while the distributions are 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 Changes
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 H. Eller, former President and Chief Executive Officer,
resigned September 30, 2002 after a three month transition period with Mr.
Eichner. Mr. Eller still remains a director of the Company. Under a separation
agreement dated September 30, 2002, Mr. Eller is entitled to $675,000 paid over
three years in exchange for his nonsolicitation of the Company's customers (as
defined in the agreement) or employees.
Effective October 1, 2002, Peter F. Benoist was named Chairman and Chief
Executive Officer of the Banking division. Mr. Benoist was also named Executive
Vice President of the Holding Company. He was subsequently appointed to its
Board of Directors and Executive Committee.
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
the Company's actual results could differ materially from those contained in the
forward-looking statements due to a number of factors, including burdens imposed
by federal and state regulation of banks, credit risk, exposure to local
economic conditions, risks associated with rapid increase or decrease in
prevailing interest rates and competition from banks and other financial
institutions, all of which could cause the Company's actual results to differ
from those set forth in the forward-looking statements.
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 nine month periods ended September 30, 2002 compared
to the three and nine month periods ended September 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.
11
Financial Condition
Total assets at September 30, 2002 were $865 million, an increase of $70
million, or 9%, over total assets of $795 million at December 31, 2001. Loans
and leases, net of unearned loan fees, were $706 million, an increase of $64
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 $88 million, a decrease
of $10 million, or 11%, 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 nine months of 2002. Cash and due from banks
increased $17.6 million to $49.8 million at September 30, 2002. This temporary
increase is a result of two unusually large cash letters posted on September 30,
2002. The cash and due from bank balances have subsequently reduced to normal
levels of $30 million on average. Prepaid expenses and other assets were $9.7
million at September 30, 2002, an increase of $3.8 million, over $5.9 million at
December 31, 2001. This increase is a result of a $2.4 million increase in the
fair value of the swap agreements, a $389,000 increase in prepaid insurance, and
the Company recorded a $675,000 intangible asset to recognize the value of the
nonsolicitation provisions of the former Chief Executive Officer's separation
agreement previously discussed.
Total deposits at September 30, 2002 were $754 million, an increase of $40
million, or 6%, over total deposits of $714 million at December 31, 2001.
Accounts payable and accrued expenses were $4.8 million at September 30, 2001,
an increase of $3.4 million over $1.4 million at December 31, 2001. This
increase is a result of a $1.0 million increase in taxes payable, a $772,000
increase in deferred tax liabilities, a $1.4 million increase in accrued bonuses
and 401K match, and a $675,000 liability related to the aforementioned
nonsolicitation agreement.
Total shareholders' equity at September 30, 2002 was $57.1 million, an increase
of $5.2 million, or 10%, over total shareholders' equity of $51.9 million at
December 31, 2001. The increase in equity is due to net income of $3.7 million
for the nine months ended September 30, 2002, a $1.3 million 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 $1,334,181 for the three month period ended September 30, 2002,
an increase of 28% compared to net income of $1,046,443 for the same period in
2001. Net income was $3,654,781 for the nine month period ended September 30,
2002, an increase of 9% over net income of $3,341,732 for the same period in
2001. The increase in net income for the three months ended September 30, 2002
is attributable to an increase in the net interest income and an increase in
noninterest income offset by an increase in noninterest expense and provision
for loan losses. Basic earnings per share for the three month periods ended
September 30, 2002 and 2001 were $0.14 and $0.11, respectively. Diluted earnings
per share for the three month periods ended September 30, 2002 and 2001 were
$0.14 and $0.11, respectively. Basic earnings per share for the nine month
periods ended September 30, 2002 and 2001 were $0.39 and $0.36, respectively.
Diluted earnings per share for the nine month periods ended September 30, 2002
and 2001 were $0.38 and $0.35, respectively.
Net Interest Income
Net interest income (on a tax equivalent basis) was $8.1 million, or 4.08%, of
average interest-earning assets, for the three months ended September 30, 2002,
compared to $7.2 million, or 3.97%, of average interest-earning assets, for the
same period in 2001. The $847,000 increase in net interest income for the three
months ended September 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 September 30, 2002 were $784 million, a $65 million, or 9%,
increase over $719 million, during the same period in
12
2001. The increase in average interest-earning assets is attributable to the
continued calling efforts of the Company's relationship officers. The yield
onaverage interest-earning assets decreased to 5.88% for the three month period
ended September 30, 2002 compared to 7.28% for the three month period ended
September 30, 2001. The decrease in asset yield was primarily due to a 125 basis
point decrease in the prime rate since September 30, 2001 and a general decrease
in the average yield on new fixed rate loans and investment securities. Average
interest-bearing liabilities increased to $633 million for the three months
ended September 30, 2002 from $594 million for the same period in 2001. The
increase in interest-bearing transaction accounts, money market accounts and
savings accounts is attributed to continued calling efforts of the Company's
relationship officers. The cost of interest-bearing liabilities decreased to
2.23% for the three months ended September 30, 2002 compared to 4.00% for the
same period in 2002. This decrease is attributed mainly to declines in market
interest rates for all sources of funding. Certificate of deposit accounts
decreased to $189 million at September 30, 2002 from $219 million at September
30, 2001. This decrease is partially due to a $16 million decrease in wholesale
certificate of deposit accounts, most of which was replaced with Federal Home
Loan Bank borrowings. The remaining decrease in certificate of deposit accounts
is a result of their relative unattractiveness to customers versus money market
and other more liquid products in the current rate environment.
13
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 net interest rate margin
for the three month periods ended September 30, 2002 and 2001:
Three Months Ended September 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) $702,969 85.04% $11,093 6.26% $624,088 81.74% $ 12,212 7.76%
Taxable investments in debt
and equity securities 39,991 4.84 346 3.43 34,448 4.51 472 5.44
Non-taxable investments in debt
and equity securities (2) - - - - 262 0.03 6 9.32
Federal funds sold 40,141 4.86 164 1.62 59,784 7.83 506 3.36
Interest-bearing deposits 777 0.09 5 2.55 713 0.09 6 3.34
-------- ------ ------- -------- ------ --------
Total interest-earning assets 783,878 94.83 $11,608 5.88% 719,295 94.20 $ 13,202 7.28%
Non interest-earning assets:
Cash and due from banks 28,723 3.47 25,506 3.34
Fixed assets, net 9,326 1.13 9,586 1.26
Prepaid expenses and other assets 13,031 1.58 16,213 2.12
Allowance for loan losses (8,373) (1.01) (7,126) (0.92)
-------- ------ -------- ------
Total assets $826,585 100.00% $763,474 100.00%
======== ====== ======== ======
Liabilities and Shareholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 58,873 7.12% $ 70 0.47% $ 51,210 6.71% $ 138 1.07%
Money market accounts 335,509 40.59 1,309 1.55 289,333 37.90 2,310 3.17
Savings 8,508 1.03 22 1.03 7,878 1.03 40 2.04
Certificates of deposit 189,262 22.90 1,565 3.28 218,502 28.62 3,034 5.51
Guaranteed preferred beneficial
interest in subordinated debentures 15,000 1.81 315 8.33 11,000 1.44 264 9.53
Borrowed funds 25,916 3.14 274 4.19 16,207 2.12 210 5.13
-------- ------ ------- -------- ------ --------
Total interest-bearing liabilities 633,068 76.59 3,555 2.23 594,130 77.82 5,996 4.00
Noninterest-bearing liabilities:
Demand deposits 132,679 16.05 103,024 13.49
Other liabilities 4,523 0.55 8,825 1.16
-------- ------ -------- ------
Total liabilities 770,270 93.19 705,979 92.47
Shareholders' equity 56,315 6.81 57,495 7.53
-------- ------ -------- ------
Total liabilities and shareholders' equity $826,585 100.00% $763,474 100.00%
======== ====== ======== ======
Net interest income $ 8,053 $ 7,206
------- -------
Net interest spread 3.65 3.28
Net interest rate margin (3) 4.08% 3.97%
---- ----
(1) Average balances include non-accrual loans. The income on such loans is
included in interest income but is recognized only upon receipt. Loan fees
included in interest income are approximately $378,000 and $307,000 for the
three months ended September 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 $23.1 million, or
4.05% of average interest-earning assets, for the nine months ended September
30, 2002, compared to $21.9 million, or 4.30% of average interest-earning
assets, for the same period in 2001. The $1.1 million increase in net interest
income for the nine months ended September 30, 2002 as compared to the same
period in 2001 was the result of an increase in average interest-earning assets
and a
14
decrease in the interest rates on average interest-bearing liabilities offset by
a decrease in the interest rates of average interest-earning asset and an
increase in average interest-bearing liabilities. Average interest-earning
assets for the nine months ended September 30, 2002 were $760 million, a $79
million, or 12%, increase over $681 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 6.00% for the nine month period ended
September 30, 2002 compared to 8.04% for the same period ended September 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 $49 million, or 9%,
to $616 million, for the nine months ended September 30, 2002 from $567 million
for the same period in 2001. The increase in demand deposit accounts,
interest-bearing transaction accounts, money market accounts and savings
accounts is attributed to continued calling efforts of the Company's
relationship officers. The cost of interest-bearing liabilities decreased to
2.40% for the nine months ended September 30, 2002 compared to 4.48% for the
same period in 2001. This decrease is attributed mainly to declines in market
interest rates for all sources of funding and a shift in the liabilities mix.
Interest bearing liabilities decreased to 77.01% of total assets during the nine
month period ended September 30, 2002 from 78.58% during the same period ended
September 30, 2001. Demand deposits increased $30 million, or 32%, to average
$125 million for the nine month period ended September 30, 2002 from $95 million
for the same period in 2001.
15
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 nine
month periods ended September 30, 2002 and 2001:
Nine Months Ended September 30,
-----------------------------------------------------------------------------------------
2002 2001
-------------------------------------------- --------------------------------------------
Percent Percent
of Interest Average of Interest Average
Average Total Income/ Yield/ Average Total Income/ Yield/
Balance Assets Expense Rate Balance Assets Expense Rate
---------- -------- --------- --------- ----------- -------- --------- -------
Assets (Dollars in Thousands)
- ------
Interest-earning assets:
Loans (1) (2) $ 690,514 86.32% $ 32,599 6.31% $ 601,536 83.32% $ 37,814 8.40%
Taxable investments in debt
and equity securities 43,258 5.41 1,191 3.68 37,354 5.17 1,798 6.44
Non-taxable investments in debt
and equity securities (2) 24 - 1 5.57 326 0.05 22 9.03
Federal funds sold 24,566 3.07 291 1.58 41,526 5.75 1,297 4.18
Interest-earning deposits 1,755 0.22 28 2.13 549 0.07 15 3.57
---------- -------- -------- --------- -------- --------
Total interest-earning assets 760,117 95.02 34,110 6.00% 681,291 94.36 $ 40,946 8.04
Noninterest-earning assets:
Cash and due from banks 26,330 3.29 23,548 3.26
Fixed assets, net 9,653 1.21 9,285 1.29
Prepaid expenses and other assets 11,862 1.48 15,036 2.09
Allowance for possible loan losses (8,004) (1.00) (7,236) (1.00)
---------- -------- --------- --------
Total assets $ 799,958 100.00% 721,924 100.00%
========== ======== ========= ========
Liabilities and Shareholders' Equity
- ------------------------------------
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 61,556 7.70% $ 207 0.45% $ 52,058 7.21% $ 478 1.23%
Money market accounts 321,826 40.23 3,795 1.58 277,713 38.47 7,973 3.84
Savings 8,549 1.07 65 1.02 7,525 1.04 132 2.34
Certificates of deposit 190,698 23.84 5,457 3.83 204,606 28.34 9,098 5.95
Guaranteed preferred beneficial
interests in subordinated debentures 12,392 1.55 837 9.03 11,000 1.52 778 9.46
Borrowed funds 20,997 2.62 699 4.45 14,462 2.00 558 5.16
---------- -------- -------- --------- -------- --------
Total interest-bearing liabilities 616,018 77.01 11,060 2.40 567,364 78.58 $ 19,017 4.48
Noninterest-bearing liabilities:
Demand deposits 125,295 15.66 94,581 13.10
Other liabilities 4,242 0.53 3,865 0.55
---------- -------- --------- --------
Total liabilities 745,555 93.20 665,810 92.23
Shareholders' equity 54,403 6.80 56,114 7.77
---------- -------- --------- --------
Total liabilities and
shareholders' equity $ 799,958 100.00% $ 721,924 100.00%
========== ======== ========= ========
Net interest income $ 23,050 $ 21,929
======== ========
Net interest spread 3.60 3.56
Net interest rate margin (3) 4.05% 4.30%
======= =====
(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 $1,109,000 and $996,000 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 September 30, 2002, an increase in the average
volume of interest-earning assets resulted in an increase in interest income of
$1,356,000. Interest income decreased $2,950,000 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 $172,000. Changes
in interest rates on the average volume of interest-bearing liabilities resulted
in a decrease in interest expense of $2,613,000. The net effect of the volume
and rate changes associated with all categories of interest-earning assets
during the three months
16
ended September 30, 2002 as compared to the same period in 2001 was a decrease
in interest income of $1,594,000, 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 $2,441,000.
During the nine months ended September 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 $4,927,000, offset by a decrease of
$11,763,000 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 $932,000. Changes in interest rates on the average volume of
interest-bearing liabilities resulted in a decrease in interest expense of
$8,889,000. The net effect of the volume and rate changes associated with all
categories of interest-earning assets during the nine months ended September 30,
2002 as compared to the same period in 2001, decreased interest income by
$6,836,000, 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 $7,957,000.
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 September 30 9 months ended September 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) $ 1,423 $ (2,542) $ (1,119) $ 5,068 $ (10,283) $ (5,215)
Taxable investments in debt
and equity securities 68 (194) (126) 252 (859) (607)
Nontaxable investments in debt
and equity securities (3) (3) (3) (6) (15) (6) (21)
Federal funds sold (133) (209) (342) (399) (607) (1,006)
Interest-earning deposits 1 (2) (1) 21 (8) 13
------------- ------------- ------------- ------------- ------------- -------------
Total interest-earning assets $ 1,356 $ (2,950) $ (1,594) $ 4,927 $ (11,763) $ (6,836)
------------- ------------- ------------- ------------- ------------- -------------
Interest paid on:
Interest-bearing transaction accounts $ 18 $ (86) $ (68) $ 75 $ (346) $ (271)
Money market accounts 324 (1,325) (1,001) 1,107 (5,285) (4,178)
Savings 3 (21) (18) 16 (83) (67)
Certificates of deposit (365) (1,104) (1,469) (583) (3,058) (3,641)
Guaranteed preferred beneficial
interests in subordinated debentures 87 (36) 51 95 (36) 59
Borrowed funds 105 (41) 64 222 (81) 141
------------- ------------- ------------- ------------- ------------- -------------
Total interest-bearing liabilities 172 (2,613) (2,441) 932 (8,889) (7,957)
------------- ------------- ------------- ------------- ------------- -------------
Net interest income (loss) $ 1,184 $ (337) $ 847 $ 3,995 $ (2,874) $ 1,121
============= ============= ============= ============= ============= =============
(1) Change in volume multiplied by yield/rate of prior period.
(2) Change in yield/rate multiplied 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.
17
Provision for Loan Losses
The provision for loan losses was $640,000 and $1,760,000 for the three month
and nine month periods ended September 30, 2002, respectively, compared to
$175,000 and $770,000 for the same periods in 2001. The Company had net charge
offs of $614,000 for the nine months ended September 30, 2002 compared to net
charge offs of $562,000 during the same period ended September 30, 2001. In
September 2002, the Company charged off $382,000 related to a loan on
nonaccrual. The Company foreclosed upon and sold the property during September.
This one charge off is over 55% of the loans charged off during the nine months
ended September 30, 2002. Loan growth remained strong during the first nine
months of 2002. The increase in provision for loan losses during the first nine
months of 2002 as compared to the same period in 2001 was due to a $49,000
increase in non-accrual loans from September 30, 2001 to September 30, 2002, a
higher level of internally criticized credits as a percentage of bank capital
plus loan loss reserves, the continued increase in loans outstanding and a
concern with the current downward trend in the economic environment. Three
relationships comprise $1.9 million or 92% of the nonaccrual loans at September
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:
Three months ended September 30, Nine months ended September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
--------------- -------------- --------------- --------------
(Dollars in Thousands) (Dollars in Thousands)
Allowance at beginning of period $ 8,226 $ 7,118 $ 7,296 $ 7,097
Loans charged off:
Commercial and industrial 51 4 189 166
Real estate:
Commercial 11 - 25 270
Construction - - - -
Residential 388 2 388 167
Consumer and other 11 36 88 58
--------------- -------------- --------------- --------------
Total loans charged off 461 42 690 661
--------------- -------------- --------------- --------------
Recoveries of loans previously charged off:
Commercial and industrial 10 9 30 20
Real estate:
Commercial - 1 8 26
Construction - - - -
Residential 3 43 3 49
Consumer and other 24 1 35 4
--------------- -------------- --------------- --------------
Total recoveries of loans previously charged off: 37 54 76 99
--------------- -------------- --------------- --------------
Net loans charged off (recovered) 424 (12) 614 562
--------------- -------------- --------------- --------------
Provisions charged to operations 640 175 1,760 770
--------------- -------------- --------------- --------------
Allowance at end of period $ 8,442 $ 7,305 8,442 $ 7,305
=============== ============== =============== ==============
Average loans $ 702,969 $ 624,088 $ 690,514 $ 601,536
Total loans $ 706,270 $ 638,658 $ 706,270 $ 638,658
Nonperforming loans $ 2,005 $ 2,472 $ 2,005 $ 2,472
Net charge-offs (recoveries) to average loans 0.24% - 0.12% 0.12%
Allowance for loan losses to loans 1.20% 1.14% 1.20% 1.14%
18
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.
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 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 along with specific loss exposures 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 10-K Report. 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.
19
The Bank had no loans 90 days past due still accruing interest at September 30,
2002 or December 31, 2001. The following table sets forth information concerning
the Company's non-performing assets as of the dates indicated:
September 30, December 31,
2002 2001
------------- ------------
Dollars in Thousands)
Non-accrual loans $ 2,005 $ 2,506
Restructured loans 516 1,243
------------- ------------
Total nonperforming loans 2,521 3,749
Foreclosed property 177 138
------------- ------------
Total non performing assets $ 2,698 $ 3,887
============= ============
Total assets $ 864,819 $ 795,250
Total loans, less unearned loan fees $ 706,270 $ 642,053
Total loans plus foreclosed property $ 706,447 $ 642,191
Nonperforming loans to loans 0.36% 0.58%
Nonperforming assets to loans plus
foreclosed property 0.38% 0.61%
Nonperforming assets to total assets 0.31% 0.49%
Noninterest Income
Noninterest income was $1,507,614 and $4,445,304 for the three month and nine
month periods ended September 30, 2002, respectively, compared to $1,205,035 and
$3,156,117 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 gain on the sale of
mortgage loans. Trust and financial advisory income was $559,594 and $1,728,727
for the three month and nine month periods ended September 30, 2002,
respectively, as compared to $409,304 and $978,405 for the same periods in 2001.
The increases in fees were the result of increased assets under management in
Enterprise Trust and higher commissions on insurance sales activity in the
financial advisory area. Service charges on deposit accounts were $441,111 and
$1,301,752 for the three month and nine month periods ended September 30, 2002,
respectively, as compared to $319,375 and $932,750 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 account
activity and services provided. Recoveries and income (loss) on Merchant Banc
investments were $0 and $88,889 for the three month and nine month periods ended
September 30, 2002, respectively, as compared to ($5,093) and ($27,999) 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 $399,086 and $1,044,329 for the three month
and nine month periods ended September 30, 2002, respectively, as compared to
$348,919 and $861,728 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. These increases were
slightly offset by the $82,246 decrease in the gains on sale of securities for
the nine
20
month period ended September 30, 2002 as compared to the same period in 2001.
The Company had no sales of investment securities during 2002.
Noninterest Expense
Noninterest expense was $6.7 million and $19.7 million for the three and nine
month periods ended September 30, 2002, respectively, compared to $6.5 million
and $18.7 million for the same periods in 2001. The $269,343 increase for the
three month period ended September 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 $52,864 increase in noninterest expense; 2)
remodeling at the Clayton location in the fourth quarter of 2001 which increased
noninterest expense by $45,133; 3) the opening of a new banking facility in the
Kansas City area which increased noninterest expense by $102,469; and 4) a
$45,566 increase in various other operating expenses detailed below. The $1
million increase for the nine month period ended September 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 $200,882 increase
in noninterest expense; 2) remodeling at the Clayton location in the fourth
quarter of 2001 which increased noninterest expense by $118,505; 3) the opening
of a new banking facility in the Kansas City area which increased noninterest
expense by $296,293; and 4) a $373,111 increase in various other operating
expenses detailed below. These increases were offset by a $47,642 and $142,925
decrease in amortization of goodwill due to implementation of SFAS No. 142 for
the three and nine months ended September 30, 2002.
Salaries, payroll and employee benefits increased $231,417, or 6%, and $571,736,
or 5%, for the three and nine month periods ended September 30, 2002 as compared
to the same periods in 2001. Most of the increase for the nine months ended
September 30, 2002, as compared to the same period in 2001, is related to the
increase in commissions on commission based income in the mortgage and financial
advisory areas, an increase of $296,534 in bonus and 401K match accruals and
annual merit and promotional increases in salaries. Occupancy expense increased
$70,119, or 17%, for the three month period and $189,939, or 16%, for the nine
month period ended September 30, 2002 as compared to the same periods in 2001.
This increase was a result of the Clayton location acquiring additional space
for the Holding Company and Trust offices and remodeling existing space. In
addition, 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. Furniture and equipment expense
increased $36,777, or 5%, for the nine month period ended September 30, 2002 as
compared to the same period in 2001. The Company upgraded its telephone and
voicemail systems during the fourth quarter of 2001 which increased furniture
and equipment expense during 2002. Data processing expense decreased $21,821, or
8%, for the three month period and decreased $48,130, or 6%, for the nine month
period ended September 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 $45,566, or 3%, for the three month period
and $373,113, or 9%, for the nine month period ended September 30, 2002 over the
same periods ended September 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 nine month period ended
September 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 $76,415 from the 2001 year-to-date levels. The Bank
recognized $25,000 in fraud losses during the first quarter of 2002, net of
recoveries.
21
Liquidity
Liquidity is provided by the Bank'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 September 30, 2002, the loan to deposit ratio was
94%, as compared to 90% at December 31, 2001. Federal funds sold, interest
bearing deposits and investment securities were $88 million at September 30,
2002 as compared to $98 million at December 31, 2000. During the nine months
ended September 30, 2002, the Bank funded net new loans of $64 million, while
deposits increased a net $40 million. This decrease in the Bank's liquidity
position resulted in the utilization of federal funds sold balances and
investment securities to fund loan growth. Also, in May 2002, the Bank obtained
$20 million in brokered CDs with a 2 year maturity and in August 2002 the Bank
obtained $10 million in Federal Home Loan Bank advances, both of which
supplemented its core deposit activities.
The Bank closely monitors its current liquidity position and believes there are
sufficient backup sources of liquidity. As of September 30, 2002, the Bank has
over $86 million available from the Federal Home Loan Bank of Des Moines under a
blanket loan pledge and $53 million from the Federal Reserve under a pledged
loan agreement. The Bank also has access to over $50 million in overnight fed
funds lines from various banking institutions. In addition, the Company has a $7
million credit line which can be drawn upon for additional capital injections
into the Bank. The Company also issued $4 million in Trust Preferred Securities
on June 28, 2002 for capital purposes.
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 September 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.
22
At September 30, 2002 and December 31, 2001, Enterprise Financial Services Corp
and Enterprise Bank 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 September 30, 2002:
- ---------------------
Total Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp $ 76,324,207 10.86% $ 56,240,671 8.00% $ - - %
Enterprise Bank 74,197,975 10.59 56,077,019 8.00 70,096,274 10.00
Tier I Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp $ 67,881,962 9.66% $ 28,120,335 4.00% $ - - %
Enterprise Bank 65,755,730 9.38 28,038,510 4.00 42,057,765 6.00
Tier I Capital (to Average Assets)
Enterprise Financial Services Corp $ 67,881,962 8.24% $ 24,714,680 3.00% $ - - %
Enterprise Bank 65,755,730 8.00 24,673,178 3.00 41,121,964 5.00
At December 31, 2001:
- --------------------
Total Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp $ 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 I Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp $ 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 I Capital (to Average Assets)
Enterprise Financial Services Corp $ 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
(1) There are no regulatory guidelines for the well capitalization of Bank
Holding Companies as opposed to Banks.
23
Effects 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. The Company's operations are not
currently impacted by inflation.
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 September 30, 2002, the rate shock
scenario models indicated that annual net interest income would change by less
than 7% 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. On September 30,
2002 the Bank had $2.4 million in cash collateral from the counter party on the
interest rate swap agreements which is included on the balance sheet as notes
payable and other borrowings. The cash collateral is interest bearing at an
interest rate that floats with the three month London Inter Bank Offering Rate
("LIBOR").
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 simultaneously. 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 LIBOR 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 for 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
statement of operations 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 September 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% $ 911,347
1/29/2004 40,000,000 4.75 6.26 957,615
5/10/2004 20,000,000 2.10 3.55 569,681
24
The following tables present the scheduled maturity of market risk sensitive
instruments at September 30, 2002:
Beyond 5
Years or No
Stated
Year 1 Year 2 Year 3 Year 4 Year 5 Maturity Total
--------- --------- -------- -------- -------- ----------- ---------
ASSETS
Securities $ 30,749 $ 6,352 $ 5,356 $ - $ - $ 1,993 $ 44,450
Interest-bearing
deposits 719 - - - - - 719
Federal funds sold 42,467 - - - - - 42,467
Loans 562,223 43,194 58,063 15,997 11,257 15,536 706,270
Loans held for sale 4,867 - - - - - 4,867
--------- --------- -------- -------- -------- -------- ---------
Total $ 641,025 $ 49,546 $ 63,419 $ 15,997 $ 11,257 $ 17,529 $ 798,773
========= ========= ======== ======== ======== ======== =========
LIABILITIES
Savings, NOW, money
market deposits $ 422,586 $ - $ - $ - $ - $ - $ 422,586
Certificates of deposit 133,969 39,548 6,465 2,983 26 - 182,991
Guaranteed preferred
beneficial interest in
subordinated debentures - - - - - 15,000 15,000
Borrowed funds 14,209 5,450 4,625 1,525 1,250 4,939 31,998
--------- --------- -------- -------- -------- -------- ---------
Total $ 570,764 $ 44,998 $ 11,090 $ 4,508 $ 1,276 $ 19,939 $ 652,575
========= ========= ======== ======== ======== ======== =========
Average
Interest
Rate for
Nine
Months
Carrying Ended Estimated
Value September Fair Value
30, 2002
--------- ---------- -----------
ASSETS
Securities $ 44,450 3.68% $ 44,450
Interest-earning
deposits 719 2.13 719
Federal funds sold 42,467 1.58 42,467
Loans 706,270 6.31 723,896
Loans held for sale 4,867 4,867
--------- ---------
Total $ 798,773 $ 816,399
========= =========
LIABILITIES
Savings, NOW, money
market deposits $ 422,586 1.39% $ 422,586
Certificates of deposit 182,991 3.83 185,036
Guaranteed preferred
beneficial interest in
subordinated debentures 15,000 9.03 15,126
Borrowed funds 31,998 4.45 32,419
--------- ---------
Total $ 652,575 $ 655,167
========= =========
A substantial increase in the market value of the Company's stock price could
negatively affect earnings per share due to the dilutive effect of stock
options.
25
Item 4: Disclosure Control and Procedures
As of September 30, 2002, under the supervision and with the participation of
the Company's Chief Executive Officer (CEO) and the Chief Financial Officer
(CFO), management has evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based on that evaluation, the
CEO and CFO, concluded that the Company's disclosure controls and procedures
were effective as of September 30, 2002. There were no significant changes in
the Company's internal controls or in the other factors that could significantly
affect those controls subsequent to the date of the evaluation.
II-1
Item 6: Exhibits and Reports on Form 8-K
(a). Exhibits.
Exhibit
Number Description
10.15 Separation Agreement dated September 30, 2002 between
Enterprise Financial Services Corp and Fred H. Eller.
11.1 Statement regarding computation of per share earnings
99.1 Chief Executive Officer Certification pursuant to 18
U.S.C. (S) 1350, as adopted pursuant to section (S) 906 of
the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer Certification pursuant to 18
U.S.C. (S) 1350, as adopted pursuant to section (S) 906 of
the Sarbanes-Oxley Act of 2002
(b). During the three months ended September 30, 2002, the Registrant filed
two Current Reports on Form 8-K, dated July 9, 2002 and August 23, 2002.
In the Form 8-K dated July 9, 2002, the Registrant reported the
announcement of a change in the Company's Chief Executive Officer
position. In the Form 8-K dated August 23, 2002, the Registrant reported
the certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 by the Chief Executive
Officer and Chief Financial Officer.
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 5/th/ day of November 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
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Kevin C. Eichner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enterprise Financial
Services Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarter
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evalutation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Kevin C. Eichner Date: November 5, 2002
-------------------------------- -----------------------
Kevin C. Eichner
Chief Executive Officer
II-4
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Frank H. Sanfilippo, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Enterprise Financial
Services Corp;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarter
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is
being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the Evaluation Date); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evalutation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation including any corrective
actions with regard to significant deficiencies and material weaknesses.
By: /s/ Frank H. Sanfilippo Date: November 5, 2002
-------------------------------- ------------------------
Frank H. Sanfilippo
Chief Financial Officer
II-5