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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the fiscal year ended December 31, 2002
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934
For the transition period from_________to_________
COMMISSION FILE NUMBER 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
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such filing requirements for
the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of Form 10-K [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes( ) No (X).
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 10, 2003:
Common Stock, par value $.01, $92,105,615
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of March 10, 2003:
Common Stock, par value $.01, 9,532,616 shares outstanding
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ENTERPRISE FINANCIAL SERVICES CORP
2002 ANNUAL REPORT ON FORM 10-K
Page
----
Business................................................................... 1
Properties................................................................. 5
Legal Proceedings.......................................................... 5
Submission of Matters to Vote of Security Holders.......................... 6
Market for Common Stock and Related Stockholder Matters.................... 6
Selected Financial Data.................................................... 7
Management's Discussion and Analysis of Financial Condition and
Results of Operations..................................................... 8
Quantitative and Qualitative Disclosures About Market Risk................. 27
Financial Statements and Supplementary Data................................ 34
Directors and Executive Officers of the Registrant......................... 34
Executive Compensation..................................................... 34
Security Ownership of Certain Beneficial Owners
and Management............................................................ 34
Certain Relationships and Related Party Transactions....................... 35
Disclosure Control and Procedures.......................................... 35
Exhibits, Financial Statement Schedules and Reports
on Form 8-K............................................................... 35
Independent Auditors' Report............................................... 36
Consolidated Financial Statements.......................................... 37
Signatures................................................................. 71
Exhibit Index.............................................................. 75
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.
PART I
ITEM 1: BUSINESS
GENERAL
Enterprise Financial Services Corp, formerly known as Enterbank Holdings Inc.
(the "Company" or "Enterprise Financial") was incorporated under the laws of the
State of Delaware on December 30, 1994, for the purpose of providing a holding
company structure for the ownership of Enterprise Bank, (the "Bank") which
commenced operations in 1988. The Company acquired the Bank in May 1995 through
a tax-free exchange with the Bank's shareholders. In June of 2000, Enterprise
Financial and Commercial Guaranty Bancshares, Inc. ("CGB"), the parent company
for First Commercial Bank, N.A. (the "Kansas Bank"), merged under a tax-free
reorganization. The holding company ownership structure gives the Bank a source
of capital and financial strength and allows the organization some flexibility
in expanding the products and services offered to clients. In 2000, the Company
elected to change its status from a bank holding company to a financial holding
company.
From 1988 through 1996, the Bank provided commercial banking services to its
customers from a single location in the City of Clayton, St. Louis County,
Missouri. During 1997, the Bank opened two additional facilities located in St.
Charles County, Missouri and the city of Sunset Hills, located in St. Louis
County, Missouri. During 1998, the Bank opened an operations facility in St.
Louis County, Missouri.
Enterprise Trust ("Trust"), formerly referred to as Enterprise Financial
Advisors ("EFA"), a division of the Bank, was organized in late 1998 to provide
fee-based trust services, personal financial planning, estate planning, and
corporate planning services to the Company's target market on a full time basis.
As part of the organization of Trust, the Company entered into solicitation and
referral agreements with Moneta Group, Inc. ("Moneta"), a large financial
planning company based in St. Louis, Missouri. These agreements call for Moneta
to provide assistance in staffing, training, marketing and regulatory compliance
for Trust for which Moneta receives compensation. Moneta refers customers, when
appropriate, to the Bank and receives a share of the revenue generated in the
form of options to purchase the Company's common stock. The agreements with
Moneta allow Trust to offer a full range of products and services with the depth
and expertise of a large financial planning firm.
The Kansas Bank began operations on February 20, 1996 as a new Kansas banking
corporation in Overland Park, Kansas located in Johnson County. The Kansas Bank
acquired First National Bank of Humboldt in December of 1997, adding three
additional locations in Humboldt, Chanute and Iola, all located in Southeast
Kansas. In June of 2000, Enterprise Financial completed a merger transaction
under which the Kansas Bank became a subsidiary of the Company. On January 1,
2001, the Kansas Bank changed its legal name to Enterprise Banking, N.A. and on
September 30, 2001 Enterprise Banking, N.A. merged into Enterprise Bank with
Enterprise Bank as the surviving entity.
On December 30, 2002, the Company signed an Asset Purchase Agreement to sell its
Humboldt, Chanute and Iola, Kansas branches ("Southeast Kansas branches") to
Emprise Financial Corporation based in Wichita, Kansas. Assets of $36.4 million
and deposits of $50.1 million associated with these branches are shown as "held
for sale" on the Company's balance sheet at December 31, 2002. The sale is
subject to the satisfaction of customary conditions, including regulatory
approvals, and is expected to close in April of 2003. The Southeast Kansas
branches had a minimal effect on net income (loss) for the years ended December
31, 2002, 2001, and 2000.
1
As used herein, unless the context indicates otherwise, Enterprise Financial
Services Corp and all of its subsidiaries are referred collectively as the
"Organization" or the "Company". Enterprise Bank and all of its subsidiaries are
referred to as the "Bank".
The Company's executive offices are located at 150 North Meramec, Clayton,
Missouri 63105. The Company's telephone number is (314) 725-5500.
STRATEGY
The Company's strategy is to provide a complete range of financial services
designed to appeal to closely-held businesses, their owners and to professionals
in the St. Louis and Kansas City metropolitan areas. The Bank serves the greater
St. Louis and Kansas City Metropolitan area. The Company's goal is to grow its
operations within its defined market niche by being well-managed,
well-capitalized, and disciplined in its approach to managing and expanding its
operations as growth opportunities arise. The Company believes its goals can be
achieved while providing attractive returns to shareholders. Net income,
earnings per share growth, and return on shareholders' equity are the financial
performance indicators the Company considers most critical in measuring success.
Through the Bank, the Company delivers a full range of commercial banking
services to the closely-held business market. Financial planning and trust
fiduciary services are offered through Trust. The Company plans to continue to
expand the range of services it provides within its market niche while expanding
the base of customers.
THE BANK
Enterprise Bank is a Missouri state chartered trust company. The Bank offers a
broad range of commercial and personal banking services to customers. Loans
include commercial, commercial real estate, financial and industrial
development, real estate construction and development, residential real estate,
and a smaller amount of consumer loans. Other services include treasury
management and safe-deposit boxes.
The Bank's primary source of funds has historically been customer deposits. The
Bank offers a variety of accounts for depositors designed to attract both
short-term and long-term deposits. These accounts include certificates of
deposit, savings accounts, money market accounts, commercial sweep accounts,
checking and negotiable order of withdrawal accounts, and individual retirement
accounts. Interest-bearing accounts earn interest at rates established by
management based on competitive market factors and management's desire to
increase or decrease certain types of deposits.
The Bank experiences significant competition in attracting depositors and
borrowers. Competition in lending activities comes principally from other
commercial banks, savings associations, insurance companies, governmental
agencies, credit unions, brokerage firms, and pension funds. The primary factors
in competing for loans are interest rate and overall lending services.
Competition for deposits comes from other commercial banks, savings
associations, money market and mutual funds, credit unions, insurance companies,
and brokerage firms. The primary factors in competing for deposits are overall
deposit services, interest rates paid on deposits, account liquidity,
convenience of office location and overall financial condition. The Bank
believes that its size provides flexibility, which enables the Bank to offer an
array of banking products and services. The Bank's financial condition also
contributes to a favorable competitive position in the markets it serves.
Management believes the Bank is able to compete effectively in its market
because: 1) the Bank's relationship officers and management maintain close
working relationships with their commercial clients, 2) the Bank's management
structure enables it to react to customer requests for loan and deposit services
more quickly than many competitors, 3) the Bank's management and officers have
significant experience in the communities serviced by the Bank, and 4) the Bank
is highly focused on the closely-held business and professional market.
Additionally, industry consolidation has resulted in fewer independent banks and
fewer banks serving the Bank's target market niche. Management believes the Bank
is one of only a few whose business model is specifically designed for
closely-held businesses, their owners and the professional market.
The Bank's historical growth strategy has been both client and asset driven. The
Bank continuously seeks to add clients that fit its target market. This strategy
enables the Bank to attract clients whose borrowing needs have grown along with
the Bank's increasing capacity to fund client loan requests. Additionally, the
Bank increased its loan portfolio based on lending opportunities developed by
relationship officers. The Bank funds loan growth by
2
attracting deposits from business and professional clients, by borrowing from
the Federal Home Loan Bank, and by issuing brokered certificates of deposits
which are priced at or below the Bank's all-in alternative cost of funds.
The Bank can expand its customer relationships and control operating costs by:
1) operating a small number of offices with a high per office asset base, 2)
emphasizing commercial loans which tend to be larger than retail loans, 3)
employing an experienced staff, all of whom are rewarded on the basis of
performance and customer service, 4) improving data processing and operational
systems to increase productivity and to control risk, 5) leasing facilities
where possible so that capital can be deployed more effectively to support
growth in earning assets, and 6) outsourcing services where possible.
The Bank has a strong orientation toward commercial banking, with a specific
focus on closely-held businesses, their owners, and professionals located in the
target service areas. The Bank stresses personal service, timely responsiveness
to the needs of clients, and flexibility in structuring loan and deposit
relationships which meet client needs. Management of the Bank makes it a
practice to maintain close working relationships and personal contact with each
of the commercial clients.
Each of the banking units has its own operating Board of Directors. Each Board
of Directors is comprised primarily of business owners and professionals who fit
the target client profile. Each Board of Directors takes an active role in the
business development activities of its respective banking unit. Input and
understanding of the needs of the Bank's current and target clients has been
critical in the Bank's past success and will be important in the Bank's plans
for future growth.
The Bank has historically had low relationship officer turnover, and the policy
is to keep officers assigned to accounts for long periods of time. This practice
improves each officer's understanding of clients' businesses, resulting in
knowledgeable credit assessments and superior client service.
Relationship officers are supported by credit analysts and other support
personnel who are familiar with each assigned customer, creating a team approach
to serving customers' needs. A significant portion of the Bank's new business
results from referrals from existing customers.
ENTERPRISE TRUST
In 1998, the Bank entered the trust and financial planning business on a full
time basis when the Bank was granted trust powers. At that time, the Bank
modified its agreements with Moneta. The new agreements call for Moneta to help
the Bank with many of the issues related to startup including, but not limited
to, staffing, training, marketing, and regulatory compliance. In return, Moneta
receives a portion of the gross margin earned by the Trust division of the Bank
in the form of cash. Moneta still refers banking business to the Bank and
receives compensation in the form of options to purchase the Company's common
stock for banking business referrals.
Enterprise Trust provides fee-based personal and corporate financial consulting
and trust services to the Company's target market. Personal financial consulting
includes estate planning, investment management, and retirement planning.
Corporate consulting services are focused in the areas of retirement plans,
management compensation and management succession issues. Some investment
management services are provided through Argent Capital Management LLC
("Argent"), a money management company that invests principally in large
capitalization companies. The Company owns approximately 4.8% of Argent's
outstanding shares.
In addition, the Company acquired approximately 11% of Retirement Plan Services,
LLC ("RPS") in October of 2000 and in December of 2000 elected to move its
401(k) plan from the Principal Group to RPS. RPS provides retirement plan
administration to primarily small and medium size businesses. During 2001, the
Company increased its ownership percentage to approximately 20% and actively
refers business to RPS.
MARKET AREAS AND APPROACH TO EXPANSION
In the St. Louis metropolitan area, the Bank has facilities in Clayton, St.
Charles County, and the city of Sunset Hills. In Kansas, the Bank has facilities
in Johnson County and Southeast Kansas along with an office in the Country Club
Plaza on the Missouri side of Kansas City. The Company chose to locate in all of
these markets, except Southeast Kansas, based on high expectations for growth,
high concentration of closely-held businesses and the high number of
professionals in those markets. As mentioned above, the Company believes that
local management and the involvement of a Board of Directors comprised of local
business persons and professionals are
3
key ingredients for success. Management believes that credit decisions, pricing
matters, business development strategies, and other decisions should be made
locally by managers who have an equity stake in the Company (see "Management")
while complying with the Bank's policies and procedures. The Company, as part of
its expansion effort, plans to continue its strategy of operating a small number
of offices with a high per office asset base, emphasizing commercial loans and
employing experienced staff who are rewarded on the basis of performance and
customer service.
ENTERPRISE MERCHANT BANC
The Company organized Enterprise Merchant Banc, Inc. ("Merchant Banc") (formerly
Enterprise Capital Resources, Inc.) in 1995 as a wholly owned subsidiary to
provide merchant banking services to closely-held business and their owners. Its
operations included a minority investment in Enterprise Merchant Banc, LLC ("EMB
LLC"), which focused on providing equity capital and equity-linked debt
investments to growing companies in need of additional capital to finance
internal and acquisition-related growth. EMB LLC managed and held a 1% economic
ownership interest as the general partner in two investment funds, Enterprise
Fund, LP ("Fund I") and Enterprise Capital Partners, LP ("Fund II") with total
committed capital of approximately $35 million, substantially all of which has
been invested. The portfolio companies held by each Fund are primarily
manufacturers, versus service providers, and have no relationship to the
internet or technology industries. EMB LLC focused on "second stage" and
mezzanine financing for established companies rather than "seed money" for start
up organizations.
In mid-1999, the Company restructured its ownership and control positions of its
various merchant banking operations. As a result of this restructuring, the
Company maintained a minority interest in EMB LLC. The minority interest in the
LLC included a 4.9% voting and common stock ownership interest with a 24.9%
economic interest in the earnings or losses. The Company also had a 4.5%
economic and voting interest in Fund I and had equity and debt investments in
two portfolio companies of Fund I and Fund II.
After experiencing significant losses on merchant banking investments in 2001,
the Company considered that the merchant banking investments were no longer a
viable part of its long term business strategy. The investments are now viewed
as "workouts", regardless of their individual performance, and the Company is
pursuing maximum recovery efforts as available.
INVESTMENTS
The Company's investment policy is designed to enhance its net income and return
on equity through prudent management of risk; ensure liquidity to meet cash-flow
requirements; help manage interest rate risk; ensure collateral is available for
public deposits, advances and repurchase agreements; and to seek asset
diversification. The Company, through its Asset/Liability Management Committee
("ALCO"), monitors investment activity and manages its liquidity by structuring
the maturity dates of its investments to meet anticipated customer funding
needs. However, the primary goal of the Company's investment policy is to
maintain an appropriate relationship between assets and liabilities while
maximizing interest rate spreads. Accordingly, the ALCO monitors the sensitivity
of its assets and liabilities with respect to changes in interest rates and
maturities and directs the overall acquisition and allocation of funds. ALCO
also utilizes derivative financial instruments to assist in the management of
interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities.
EMPLOYEES
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. Eichner still serves on the Board of Directors as Vice Chairman and
as a member of the Executive Committee.
Effective October 1, 2002, Peter F. Benoist was named Chairman and Chief
Executive Officer of the Bank. Mr. Benoist was also named Executive Vice
President of the Holding Company. He was subsequently appointed to its Board of
Directors and Executive Committee.
4
At December 31, 2002 and 2001 the Company had approximately 232 and 253,
respectively, full time equivalent employees. None of the Company's employees
are covered by a collective bargaining agreement. Management believes that its
relationship with its employees is very strong.
ITEM 2: PROPERTIES
All of the Company's St. Louis banking facilities are leased under agreements
that expire in 2004, 2008, 2011 and 2016, for Clayton, St. Louis County, the
City of Sunset Hills, and St. Charles County, respectively. The Company has the
option to renew the Clayton facility lease for one additional five-year period
with future rentals to be agreed upon. The Company has the option to renew the
St. Louis County facility lease for three additional five-year periods with
future rentals to be agreed upon. The Company has the option to renew the Sunset
Hills facility lease for two additional five-year periods with future rentals to
be agreed upon. The Company has no future rental options for the St. Charles
County facility; however, during the term of the lease, the monthly rentals are
adjusted periodically based on then-current market conditions and inflation. The
Company's Kansas City Country Club Plaza banking facility is leased under an
agreement that expires in 2011. The Company has the option to renew the Plaza
facility lease for one 5 year term. The banking facilities in Overland Park,
Humboldt, Chanute, and Iola, Kansas are owned by the Company. As noted above,
the Company plans to sell its Humboldt, Chanute, and Iola, Kansas branches in
2003.
The following is a list of the Company's current facilities:
Facility Address Description
- -------------------------------- ----------------------------- ---------------------
Enterprise Bank, Clayton 150 North Meramec Commercial and Retail
Clayton, Missouri 63105 Banking
Enterprise Bank, St. Peters 300 St. Peters Centre Blvd. Commercial and Retail
St. Peters, Missouri 63376 Banking
Enterprise Bank, Sunset Hills 3890 South Lindbergh Blvd. Commercial and Retail
Sunset Hills, Missouri 63127 Banking
Enterprise Bank, Overland Park 12695 Metcalf Avenue Commercial and Retail
Overland Park, Kansas 66213 Banking
Enterprise Bank, Humboldt 725 Bridge Street Commercial and Retail
Humboldt, Kansas 66748 Banking
Enterprise Bank, Chanute 17 S. Lincoln Commercial and Retail
Chanute, Kansas 66720 Banking
Enterprise Bank, Iola 208 West Street Commercial and Retail
Iola, Kansas 66749 Banking
Enterprise Bank, Plaza 444 W 47th Street Suite 110 Commercial and Retail
Kansas City, Missouri 64112 Banking
Enterprise Bank, St. Louis 1281 North Warson Road Operations Center
St. Louis, Missouri 63132
ITEM 3: LEGAL PROCEEDINGS
The Company and its subsidiaries are, from time to time, parties to various
legal proceedings arising out of their businesses. Management believes that
there are no such proceedings pending or threatened against the Company or its
subsidiaries which, if determined adversely, would have a material adverse
effect on the business, financial condition, results of operations or cash flows
of the Company or any of its subsidiaries.
5
ITEM 4: SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the quarter ended
December 31, 2002.
ITEM 5: MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
As of March 10, 2003, the Company had approximately 1,100 common stock
shareholders of record and a market price of $13.10 per share. The common stock
is not traded on an exchange but is traded on the Over-The-Counter Bulletin
Board. The Company believes the high and low sale prices for the common stock
and dividends declared were as follows in the quarters indicated:
Dividends
Market Price Declared
-------------------- -------------
2001 High Low
First Quarter $ 16.00 $ 13.00 $ .0150
Second Quarter 14.00 11.00 .0150
Third Quarter 13.50 11.25 .0150
Fourth Quarter 12.40 10.50 .0150
2002 High Low
First Quarter $ 12.10 $ 9.50 $ .0175
Second Quarter 10.75 9.00 .0175
Third Quarter 11.50 9.00 .0175
Fourth Quarter 13.05 10.25 .0175
There may have been other transactions at prices not known to the Company.
DIVIDENDS
The holders of shares of common stock of the Company are entitled to receive
dividends when, as, and if declared by the Company's Board of Directors out of
funds legally available for the purpose of paying dividends. The amount of
dividends, if any, that may be declared by the Company will be dependent on many
factors, including future earnings, bank regulatory capital requirements and
business conditions as they affect the Bank. As a result, no assurance can be
given that dividends will be paid in the future with respect to the common
stock.
COMMON STOCK
The authorized capital stock of the Company consists of 20,000,000 shares of
common stock, par value $.01 per share (the "Common Stock"). Holders of Common
Stock are entitled to one vote per share on all matters on which the holders of
Common Stock are entitled to vote. In all elections of directors, holders of
Common Stock have the right to cast votes equaling the number of shares of
Common Stock held by such stockholder multiplied by the number of directors to
be elected. All of such votes may be cast for a single director or may be
distributed among the number of directors to be elected, or any two or more
directors, as such stockholder may deem fit. Holders of Common Stock have no
preemptive, conversion, redemption, or sinking fund rights. In the event of a
liquidation, dissolution or winding-up of the Company, holders of Common Stock
are entitled to share equally and ratably in the assets of the Company, if any,
remaining after the payment of all liabilities of the Company.
6
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data should be read in connection with and are
qualified by reference to the consolidated financial statements, related notes
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this report. This selected financial data
presented below is derived from the Company's audited consolidated financial
statements as of and for the years ended: December 31, 2002, 2001, 2000, 1999,
and 1998.
(in thousands, except per share amounts)
Year Ended December 31,
---------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
STATEMENT OF INCOME DATA:
Interest income $ 45,171 $ 52,612 $ 56,030 $ 41,076 $ 33,505
Interest expense 14,307 23,810 27,596 18,160 15,705
Net interest income 30,864 28,802 28,434 22,916 17,800
Provision for loan losses 2,251 3,230 1,043 2,496 1,361
Noninterest income (loss) 6,306 (1,288) 3,280 3,595 2,758
Noninterest expense 28,304 25,577 22,262 18,095 14,526
Income (loss) before income tax expense 6,615 (1,293) 8,409 5,920 4,671
Income tax expense 1,614 1,242 3,208 2,335 1,725
Income (loss) before cumulative effect of a
change in accounting principle 5,001 (2,535) 5,201 3,585 2,946
Cumulative effect on prior years of a
change in asset classification - - - 121 -
Net income (loss) 5,001 (2,535) 5,201 3,706 2,946
PER SHARE DATA:
Net income (loss) per share-basic $ 0.53 $ (0.28) $ 0.58 $ 0.41 $ 0.34
Net income (loss) per share-diluted 0.52 (0.28) 0.54 0.39 0.32
Cash dividends per share 0.070 0.060 0.050 0.040 0.033
Book value per share 6.19 5.60 5.90 5.26 4.96
BALANCE SHEET DATA:
BALANCE SHEET TOTALS-END OF PERIOD:
Assets $ 876,787 $ 795,250 $ 710,938 $ 615,143 $ 488,066
Loans 679,799 602,747 516,810 445,448 322,394
Allowance for loan losses 8,600 7,296 7,097 6,758 4,430
Assets held for sale 36,401 40,575 41,222 36,695 33,886
Deposits 716,314 655,553 576,268 488,555 380,674
Guaranteed preferred beneficial interests
in subordinated debentures 15,000 11,000 11,000 11,000 -
Borrowings 31,823 15,399 11,191 12,417 9,205
Liabilities held for sale 50,053 58,800 56,169 53,774 52,529
Shareholders' equity 58,810 51,897 53,484 47,044 44,306
AVERAGE BALANCE SHEET AMOUNTS:
Assets $ 820,326 $ 743,163 $ 662,157 $ 527,255 $ 425,701
Loans 693,551 613,539 517,381 429,408 328,761
Earning assets 778,790 701,242 627,882 492,288 393,128
Interest-bearing liabilities 629,247 583,003 529,187 411,706 328,195
Shareholders' equity 55,361 56,623 50,132 46,261 41,148
SELECTED RATIOS:
Return on average equity 9.03% N/A% 10.37% 7.88% 7.16%
Return on average assets 0.61 N/A 0.79 0.70 0.69
Efficiency ratio (noninterest expense as
a percentage of total revenues) 76.15 92.96 70.40 68.25 70.66
Noninterest expense to average assets 3.45 3.44 3.36 3.43 3.41
Average equity to average assets 6.75 7.62 7.57 8.77 9.67
Leverage ratio 7.93 8.18 9.41 10.62 9.76
Net yield on average earning assets 5.83 7.52 8.95 8.37 8.56
Cost of interest-bearing liabilities 2.27 4.08 5.21 4.41 4.79
Net interest rate margin 4.00 4.13 4.55 4.68 4.56
Net interest rate spread 3.56 3.44 3.74 3.96 3.77
Nonperforming loans to total loans 0.57 0.62 0.39 0.57 0.21
Nonperforming assets to total assets 0.46 0.49 0.29 0.48 0.30
Net charge offs to average loans 0.14 0.49 0.14 0.04 0.03
Allowance for loan losses to total loans 1.27 1.21 1.37 1.52 1.37
Dividend payout ratio 13.21 N/A 8.62 9.66 9.74
7
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion and analysis is intended to review the significant
factors of the financial condition and results of operations of the Company for
the three-year period ended December 31, 2002. Reference should be made to the
accompanying consolidated financial statements and the selected financial data
presented elsewhere and herein for an understanding of the following review.
The Company has prepared all of the consolidated financial information in this
report in accordance with accounting principles generally accepted in the United
States of America ("U.S. GAAP"). In preparing the consolidated financial
statements in accordance with U.S. GAAP, the Company makes estimates and
assumptions that affect the reported amount of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements, and the reported amounts of revenue and expenses during
the reporting period. There can be no assurances that actual results will not
differ from those estimates.
CRITICAL ACCOUNTING POLICIES
We have identified the following accounting policies that we believe are the
most critical to the understanding of our financial condition and results of
operations. These critical accounting policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of a
materially different financial condition and/or results of operations could be a
reasonable likelihood. The impact and any associated risks related to our
critical accounting policies on our business operations is discussed throughout
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," where such policies affect our reported and expected financial
results. For a detail discussion on the application of these and other
accounting policies see Note 3 to our consolidated financial statements.
LOANS AND ALLOWANCE FOR LOAN LOSSES
We maintain an allowance for loan losses at a level considered adequate to
provide for probable losses in our loan portfolio. The determination of our
allowance for loan losses requires management to make significant judgments and
estimates based upon a periodic analysis of our loans held for portfolio and
held for sale considering, among other factors, current economic conditions,
loan portfolio composition, past loan loss experience ratios, independent
appraisals, the fair value of underlying loan collateral, our customers' ability
to pay and selected key financial ratios. If actual events prove the estimates
and assumptions we used in determining our allowance for loan losses were
incorrect, we may need to make additional provisions for loan losses.
DERIVATIVE FINANCIAL INSTRUMENTS
We utilize derivative financial instruments to assist in our management of
interest rate sensitivity by modifying the repricing, maturity and option
characteristics of certain assets and liabilities. The judgments and assumptions
that are most critical to the application of this critical accounting policy are
those affecting the estimation of fair value and hedge effectiveness. Fair value
is based on quoted market prices. Factors that affect hedge effectiveness
include the initial selection of the derivative that will be used as a hedge and
how well changes in its cash flow or fair value has correlated and is expected
to correlate with change in the cash flow or fair value of the underlying hedged
asset or liability. Past correlation is easy to demonstrate, but expected
correlation depends upon projections and trends that may not always hold true
with acceptable limits. Changes in assumptions and conditions could result in
greater than expected inefficiencies that, if large enough, could reduce or
eliminate the economic benefits anticipated when the hedges were established
and/or invalidate continuation of hedge accounting. The consequence of greater
inefficiency and discontinuation of hedge accounting results in increased
volatility to reported earnings. For cash flow hedges, this would result in more
or all of the change in the fair value of the affected derivative would be
reported in income. For fair value hedges, this would result in less or none of
the change in the fair value of the derivative would be offset by changes in the
fair value of the underlying hedged asset or liability.
8
DEFERRED TAX ASSETS
We recognize deferred tax assets and liabilities for the estimated future tax
effects of temporary differences, net operating loss carryforward and tax
credits. We recognize deferred tax assets subject to management's judgment based
upon available evidence that realization is more likely than not. Our deferred
tax assets are reduced if necessary, by a deferred tax asset valuation
allowance. In the event that we determine we would not be able to realize all or
part of our net deferred tax assets in the future, we would need to adjust the
recorded value of our deferred tax assets, which would result in a direct charge
to our provision for income taxes in the period that such determination is made.
Likewise, we would reverse the valuation allowance when realization of the
deferred tax asset is expected.
GOODWILL AND OTHER INTANGIBLE ASSETS
At December 31, 2002 we had $2.1 million of goodwill. Under Statement of
Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible
Assets, amortization of goodwill ceased as of January 1, 2002, and instead this
asset must be periodically tested for impairment. Our goodwill arose from the
acquisition of CGB. We test our goodwill for impairment utilizing the
methodology and guidelines established in SFAS No. 142. This methodology
involves assumptions regarding the valuation of the business segments that
contain the acquired entities. We believe that the assumptions we utilize are
reasonable. However, we may incur impairment charges related to our goodwill in
the future due to changes in business prospects or other matters that could
affect our valuation assumptions.
RESULTS OF OPERATIONS
OVERVIEW
Net income was $5.0 million for the year ended December 31, 2002, an increase of
$7.5 million, as compared to a net loss of $2.5 million for the same period in
2001. Diluted earnings (loss) per share for the years ended December 31, 2002
and 2001 were $0.52 and $(0.28), respectively.
The net loss for 2001 was attributed primarily to $5.7 million in losses related
to Merchant Banc investments. There was also a decrease in the net interest rate
margin, an increase in the provision for loan losses, and an increase in
noninterest expense that contributed adversely to the 2001 results. The decrease
in the net interest rate margin was precipitated by a dramatic decline in the
interest rate environment since December 2000.
NET INTEREST INCOME
The largest component of the Company's net income is net interest income. Net
interest income (presented on a tax equivalent basis) was $31.1 million, which
yielded a net interest rate margin of 4.00% for the year ended December 31,
2002, compared to net interest income of $28.9 million and net interest rate
margin of 4.13% for the same period in 2001.
The $2.2 million, or 8%, increase in tax equivalized net interest income was
driven primarily by an increase in average interest-earning assets and a
decrease in the interest rates on average interest-bearing liabilities. This was
offset by a decrease in the interest rates of average interest-earning assets
and an increase in average interest-bearing liabilities. Average
interest-earning assets increased by 11%, or $78 million, to $779 million for
the year ended December 31, 2002. The increase in earning assets, primarily
loans, is attributable to the continued calling efforts of the Company's
relationship officers. Average loans increased $80 million, or 13%, to $694
million in 2002 as compared to $614 million in 2001. The yield on average
interest-earning assets decreased to 5.83% for the year ended December 31, 2002
from 7.52% for the same period in 2001. The decrease in asset yield was
primarily due to a 225 basis point decrease in the prime rate since June of 2001
and a general decrease in market interest rates. The cash flow hedges on loans
increased interest income on loans by $967,551 during 2002.
Average interest-bearing liabilities increased $46 million, or 8%, to $629
million for the year ended December 31, 2002. The increase in demand deposits,
interest-bearing transaction accounts, and money market accounts is attributed
to continued calling efforts of the Company's relationship officers. Average
certificate of deposit accounts decreased to $189 million for the year ended
December 31, 2002 from $206 million in the previous year. This decrease is
partially due to a $16 million decrease in average wholesale certificate of
deposit accounts, most of which were replaced with Federal Home Loan Bank
borrowings. The remaining decrease in average certificate of
9
deposit accounts is a result of their relative unattractiveness to customers
versus money market and other more liquid products in the current rate
environment. The cost of interest-bearing liabilities decreased to 2.27% in 2002
compared to 4.08% for the same period in 2001. This decrease is primarily
attributed to a change in the mix of liabilities and declines in the market
interest rates for all sources of funding. Interest-bearing liabilities
decreased to 76.71% of total assets during 2002 from 78.45% during 2001. Demand
deposits increased $31 million or 31% to $131 million, which was 16% of total
assets in 2002. This increase is the result of an increase in the number of
customers, and an increase in the required balances for deposit accounts to
offset the decrease in the earnings credit rate for activity-based service
charges. During 2001, demand deposits were $100 million or 13% of total assets.
The net cash flows related to fair value hedges on certificates of deposit
decreased interest expense by $197,553 during 2002.
Net interest income (presented on a tax equivalent basis) was $28.9 million,
which yielded a net interest rate margin of 4.13% for the year ended December
31, 2001, compared to net interest income of $28.6 million and net interest rate
margin of 4.55% for the same period in 2000.
The $355,000, or 1%, increase in tax equivalized net interest income was driven
primarily by an increase in average interest-earning assets and a decrease in
the interest rates on average interest-bearing liabilities. This was offset by a
decrease in the interest rates of average interest-earning assets and an
increase in average interest-bearing liabilities. Average interest-earning
assets increased by 12%, or $73 million, to $701 million for the year ended
December 31, 2001. The increase in earning assets, primarily loans, is
attributable to the continued calling efforts of the Company's relationship
officers. Average loans increased $96 million, or 19%, to $614 million in 2001
as compared to $517 million in 2000. The yield on average interest-earning
assets decreased to 7.52% for the year ended December 31, 2001 from 8.95% for
the same period in 2000. The decrease in asset yield was primarily due to a 475
basis point decrease in the prime rate since December of 2000 and a general
decrease in market interest rates.
Average interest-bearing liabilities increased $54 million, or 10% to $583
million for the year ended December 31, 2001. The increase in demand deposits,
interest-bearing transaction accounts, and money market accounts is attributed
to continued calling efforts of the Company's relationship officers. The cost of
interest-bearing liabilities decreased to 4.08% in 2001 as compared to 5.21% for
the same period in 2000. This decrease is primarily attributed to the
aforementioned decreases in the prime rate and declines in the market interest
rates for all sources of funding.
The table on page 11 sets forth, on a tax-equivalent basis, certain information
relating to the Company's average balance sheet and reflects the average yield
earned on interest-earning assets, the average cost of interest-bearing
liabilities and the resulting net interest income for each of the three years
ended December 31, 2002, 2001, and 2000.
10
December 31,
-------------------------------------------------------------------------------
2002 2001
---------------------------------------------------- -----------------------
Percent Interest Average Percent
Average of Total Income/ Yield/ Average of Total
Balance Assets Expense Rate Balance Assets
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
ASSETS
Interest-earning assets:
Loans (1)(2) $ 693,551 84.55% $ 43,279 6.24% $ 613,539 82.55%
Taxable investments in debt and equity
securities 43,954 5.36 1,554 3.54 39,057 5.26
Non-taxable investments in debt and equity
securities(2) 18 0.00 1 5.56 294 0.04
Federal funds sold 39,928 4.87 574 1.44 47,778 6.43
Interest-bearing deposits 1,339 0.16 29 2.13 574 0.08
---------- ---------- ---------- ---------- ----------
Total interest-earning assets 778,790 94.94 45,437 5.83 701,242 94.36
Non-interest-earning assets:
Cash and due from banks 27,496 3.35 24,624 3.31
Fixed assets, net 9,492 1.16 9,475 1.27
Assets related to Merchant Banc
investments 3,895 0.52
Prepaid expenses and other assets 12,678 1.55 11,213 1.51
Allowance for loan losses (8,130) (1.00) (7,286) (0.98)
---------- ---------- ---------- ----------
Total assets $ 820,326 100.00% $ 743,163 100.00%
========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 62,104 7.57% $ 269 0.43% $ 53,846 7.25%
Money market accounts 332,700 40.56 5,001 1.50 289,264 38.92
Savings 8,571 1.05 84 0.98 7,706 1.04
Certificates of deposit 189,030 23.04 6,833 3.61 206,334 27.76
Guaranteed preferred beneficial
interests in subordinated debentures 13,049 1.59 1,117 8.56 11,000 1.48
Notes payable and other borrowed funds 23,793 2.90 1,004 4.22 14,853 2.00
---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities 629,247 76.71 14,308 2.27 583,003 78.45
Noninterest-bearing liabilities:
Demand deposits 130,931 15.96 100,103 13.47
Other liabilities 4,787 0.58 3,434 0.46
---------- ---------- ---------- ----------
Total liabilities 764,965 93.25 686,540 92.38
Shareholders' equity 55,361 6.75 56,623 7.62
---------- ---------- ---------- ----------
Total liabilities & shareholders' equity $ 820,326 100.00% $ 743,163 100.00%
========== ========== ========== ==========
Net interest income $ 31,129
==========
Net interest spread 3.56%
Net interest rate margin(3) 4.00%
==========
December 31,
----------------------------------------------------------------------------
2001 2000
----------------------- ------------------------------------------------
Interest Average Percent Interest Average
Income/ Yield/ Average of Total Income/ Yield/
Expense Rate Balance Assets Expense Rate
--------- ---------- --------- ---------- --------- -------
ASSETS
Interest-earning assets:
Loans (1)(2) $ 48,803 7.95% $ 517,381 78.14% $ 49,231 9.52%
Taxable investments in debt and equity securities 2,249 5.76 55,005 8.31 3,473 6.31
Non-taxable investments in debt and equity
securities(2) 26 8.96 700 0.11 54 7.75
Federal funds sold 1,634 3.42 54,773 8.27 3,410 6.23
Interest-bearing deposits 27 4.76 23 0.00 1 5.12
--------- --------- ---------- ---------
Total interest-earning assets 52,739 7.52 627,882 94.83 56,169 8.95
Non-interest-earning assets:
Cash and due from banks 19,878 3.00
Fixed assets, net 8,309 1.25
Assets related to Merchant Banc investments 2,046 0.31
Prepaid expenses and other assets 10,745 1.62
Allowance for loan losses (6,703) (1.01)
--------- ----------
Total assets $ 662,157 100.00%
========= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing transaction accounts $ 555 1.03% $ 48,781 7.37% $ 823 1.69%
Money market accounts 9,590 3.32 257,200 38.84 13,366 5.20
Savings 157 2.04 7,178 1.08 185 2.58
Certificates of deposit 11,703 5.67 194,593 29.39 11,624 5.97
Guaranteed preferred beneficial interests
in subordinated debentures 1,042 9.48 11,000 1.66 1,053 9.58
Notes payable and other borrowed funds 764 5.14 10,435 1.58 545 5.22
--------- --------- ---------- ---------
Total interest-bearing liabilities 23,811 4.08 529,187 79.92 27,596 5.21
Noninterest-bearing liabilities:
Demand deposits 79,364 11.99
Other liabilities 3,474 0.52
--------- ----------
Total liabilities 612,025 92.43
Shareholders' equity 50,132 7.57
--------- ----------
Total liabilities & shareholders' equity $ 662,157 100.00%
========= ==========
Net interest income $ 28,928 $ 28,573
========= =========
Net interest spread 3.44% 3.74%
Net interest rate margin(3) 4.13% 4.55%
========== =======
(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 $1,415,000, $1,310,000 and
$1,062,000 for 2002, 2001 and 2000, respectively.
(2) Non-taxable income is presented on a fully tax-equivalent basis assuming a
tax rate of 34%.
(3) Net interest income divided by average total interest earning assets.
11
During 2002, an increase in the average volume of earning assets resulted in an
increase in interest income of $6,580,000. Interest income decreased $13,882,000
due to a decrease in rates on earning assets. Increases in average volume of
interest-bearing demand deposits, savings and money market accounts, guaranteed
preferred beneficial interests in subordinated debentures, borrowed funds and
notes payable resulted in an increase in interest expense of $1,033,000. Changes
in interest rates on the average volume of interest-bearing liabilities resulted
in a decrease in interest expense of $10,536,000. The net effect of the volume
and rate changes associated with all categories of interest-earning assets
during 2002 as compared to 2001 decreased interest income by $7,302,000, while
the net effect of the volume and rate changes associated with all categories of
interest-bearing liabilities decreased interest expense by $9,503,000.
During 2001, an increase in the average volume of earning assets resulted in an
increase in interest income of $7,039,000. Interest income decreased $10,469,000
due to a decrease in rates on earning assets. Increases in average volume of
interest-bearing demand deposits, savings and money market accounts, time
deposits and notes payable resulted in an increase in interest expense of
$2,510,000. Changes in interest rates on the average volume of interest-bearing
liabilities resulted in a decrease in interest expense of $6,295,000. The net
effect of the volume and rate changes associated with all categories of
interest-earning assets during 2001 as compared to 2000 decreased interest
income by $3,430,000, while the net effect of the volume and rate changes
associated with all categories of interest-bearing liabilities decreased
interest expense by $3,785,000.
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 2001 Compared to 2000
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 $ 6,554 $ (12,078) $ (5,524) $ 8,381 $ (8,809) $ (428)
Taxable investments in debt
and equity securities 255 (950) (695) (941) (283) (1,224)
Nontaxable investments in debt
and equity securities/(3)/ (18) (7) (25) (35) 7 (28)
Federal funds sold (234) (826) (1,060) (392) (1,384) (1,776)
Interest- bearing deposits 23 (21) 2 26 (0) 26
----------- ------------ ---------- ----------- ---------- ----------
Total interest-earning assets $ 6,580 $ (13,882) $ (7,302) $ 7,039 $ (10,469) $ (3,430)
=========== ============ ========== =========== ========== ==========
Interest paid on:
Interest-bearing demand deposits $ 75 $ (361) $ (286) $ 79 $ (347) $ (268)
Money market accounts 1,277 (5,866) (4,589) 1,511 (5,287) (3,776)
Savings 16 (89) (73) 13 (41) (28)
Certificates of deposit (913) (3,957) (4,870) 680 (601) 79
Guaranteed preferred beneficial
interests in subordinated debentures 182 (107) 75 - (11) (11)
Notes payable and other
borrowed funds 396 (156) 240 227 (8) 219
----------- ------------ ---------- ----------- ---------- ----------
Total $ 1,033 $ (10,536) $ (9,503) $ 2,510 $ (6,295) $ (3,785)
----------- ------------ ---------- ----------- ---------- ----------
Net interest income (loss) $ 5,547 $ (3,346) $ 2,201 $ 4,529 $ (4,174) $ 355
=========== ============ ========== =========== ========== ==========
/(1)/ Change in volume multiplied by yield/rate of prior period.
/(2)/ Change in yield/rate multiplied by volume of prior period.
/(3)/ Nontaxable investments in debt securities are presented on a fully
tax-equivalent basis assuming a tax rate of 34%.
NOTE: The change in interest due to both rate and volume has been allocated to
rate and volume changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
12
In 2003, the Company plans to continue to manage the net interest rate margin
aggressively, including the use of derivative financial instruments and more
disciplined pricing on loans and deposits. These actions should reduce the level
of interest rate risk under various rate scenarios and result in less volatility
of the interest rate margin.
LIQUIDITY
Liquidity is provided by the Company's earning assets, including short-term
investments in federal funds sold, maturities in loan and investment portfolios,
and amortization of term loans, along with deposit inflows, and proceeds from
borrowings. At December 31, 2002 the loan to deposit ratio was 95%, as compared
to 92% at December 31, 2001. Federal funds sold, interest bearing deposits and
investment securities were $100 million at December 31, 2002 as compared to $98
million at December 31, 2001. During 2002, the Company experienced loan growth
of $77 million and deposit growth of $61 million. This decrease in the Company's
liquidity position resulted in the utilization of maturing investment securities
and federal funds sold balances to fund loan growth. The Company also increased
its Federal Home Loan Bank advances to $29 million at December 31, 2002 from $14
million at December 31, 2001. Finally, the Company increased its guaranteed
preferred beneficial interests in subordinated debentures to $15 million at
December 31, 2002 from $11 million at December 31, 2001.
The Company closely monitors its current liquidity position and believes there
are sufficient backup sources of liquidity. As of December 31, 2002, the Company
had over $96 million available from the Federal Home Loan Bank of Des Moines
under a blanket loan pledge and $49 million from the Federal Reserve Bank under
a pledged loan agreement. The Company also has access to over $50 million in
overnight federal funds purchased from various banking institutions and a $5
million line of credit at the holding company level if needed. Finally, since
the Bank plans to remain a "well-capitalized" institution, it has the ability to
sell certificates of deposit through various national or regional brokerage
firms, if needed.
Upon the sale of the Company's Southeast Kansas branches in April, 2003,
approximately $14 million of liquidity will need to be replaced through the
various other sources noted above since the branches were a net provider of
cash.
Over the normal course of business, the Company enters into certain forms of
off-balance sheet transactions, including unfunded loan commitments and letters
of credit. These transactions are managed through the Company's various risk
management processes. Management considers both on-balance sheet and off-balance
sheet transactions in its evaluation of the Company's liquidity.
OFF-BALANCE SHEET ACTIVITIES
In the normal course of business, the Company is party to activities that
contain credit, market and operational risk that are not reflected in whole or
part in the Company's consolidated financial statements. Such activities include
traditional off-balance sheet credit-related financial instruments, commitments
under operating leases and long-term debt.
The Company provides customers with off-balance sheet credit support though loan
commitments and standby letters of credit. Summarized credit-related financial
instruments, including both commitments to extend credit and letters of credit
at December 31, 2002 are as follows:
Unused loan commitments $ 183,070,617
Standby letters of credit $ 17,755,979
$37,247,524 of the commitments expire in over a year while the rest expire in
2003. Since many of the unused commitments are expected to expire or be only
partially used, the total amount of commitments in the preceding table does not
necessarily represent future cash requirements.
13
CONTRACTUAL CASH OBLIGATIONS
In addition to owned banking facilities, the Company has entered into long-term
leasing arrangements to support its ongoing activities. The required payments
under such commitments and long-term debt, including certificates of deposit at
December 31, 2002 are as follows:
(Dollars in thousands)
Over 1 Year
Less Than Less Than
Total 1 Year 5 Years Over 5 Years
--------- --------- ----------- ------------
Operating leases $ 10,537 $ 1,338 $ 5,073 $ 4,126
Certificates of deposit 156,648 88,797 67,851 -
Guaranteed preferred
beneficial interest in
subordinated debentures 15,000 - - 15,000
Federal Home Loan Bank advances 29,464 14,850 9,850 4,764
INTEREST RATE SENSITIVITY
The asset/liability management process, which involves management of the
components of the balance sheet to allow assets and liabilities to reprice at
approximately the same time, is an ever-changing process essential to minimizing
the effect of interest rate fluctuations on net interest income.
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 and the net
cash flow paid or received is included in interest income on loans. The swaps
qualify as "cash flow hedges" under SFAS No. 133, so changes in the fair value
of the swaps are recognized as part of other comprehensive income. On December
31, 2002, the Bank had $2.4 million in cash collateral from the counterparty 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 InterBank Offered 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 notional amounts of derivative financial instruments do no represent amounts
exchanged by the parties and, therefore, are not a measure of the Banks' credit
exposure through its use of these instruments. The credit exposure represents
the accounting loss the Bank would incur in the event the counterparties failed
completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value. On December 31, 2002 the Bank had credit exposure of $197,745.
The maturity dates, notional amounts, interest rates paid and received and fair
value of our interest rate swap agreements as of December 31, 2002 were as
follows:
Maturity Notional Interest Rate Interest Rate Fair
Date Amount Paid Received Value
-------------- ----------------- ---------------- ---------------- -----------
1/29/2005 $ 20,000,000 4.25% 6.97% $ 1,016,508
1/29/2004 40,000,000 4.25 6.26 1,002,063
5/10/2004 20,000,000 1.58 3.55 537,927
14
The following table reflects the Company's GAP analysis (rate sensitive assets
minus rate sensitive liabilities) as of December 31, 2002:
Over Over After
3 Months 1 Year 5 Years
3 Months Through 12 Through or No Stated
or Less Months 5 Years Maturity Total
------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
Assets:
Investments in debt and
equity securities $ 10,422 $ 23,173 $ 29,271 $ 3,765 $ 66,631
Interest-bearing deposits 66 - - - 66
Loans /(1)//(5)/ 414,910 57,131 187,021 20,737 679,799
Loans held for sale 6,991 - - - 6,991
Federal funds sold 33,367 - - - 33,367
------------ ------------ ------------ ------------ ------------
Total interest-sensitive
assets $ 465,756 $ 80,304 $ 216,292 $ 24,502 $ 786,854
------------ ------------ ------------ ------------ ------------
Liabilities:
Interest-bearing transaction
accounts /(2)/ $ 59,058 $ - $ - $ - $ 59,058
Money market and savings
accounts /(3)/ 345,011 - - - 345,011
Certificates of deposit /(4)//(5)/ 37,365 71,432 47,851 - 156,648
Guaranteed preferred
beneficial interests in
subordinated debentures - - - 15,000 15,000
Other borrowings 2,359 14,850 9,850 4,764 31,823
------------ ------------ ------------ ------------ ------------
Total interest-sensitive
liabilities $ 443,793 $ 86,282 $ 57,701 $ 19,764 $ 607,540
============ ============ ============ ============ ============
Interest-sensitivity GAP
GAP by period $ 21,963 $ (5,978) $ 158,591 $ 4,738 $ 179,314
============ ============ ============ ============ ============
Cumulative GAP $ 21,963 $ 15,985 $ 174,576 $ 179,314 $ 179,314
============ ============ ============ ============ ============
Ratio of interest-sensitive
assets to interest-sensitive
liabilities:
Periodic 1.05 0.93 3.75 1.24 1.30
Cumulative GAP 1.05 1.03 1.30 1.30 1.30
============ ============ ============ ============ ============
/(1)/ 3 months or less loans exclude Southeast Kansas Loans held for sale of
$35,294.
/(2)/ 3 months or less interest-bearing transaction accounts exclude Southeast
Kansas interest bearing transaction accounts held for sale of $12,284.
/(3)/ 3 months or less savings and money market accounts exclude Southeast
Kansas accounts held for sale of $9,832.
/(4)/ 3 months or less certificates of deposit exclude Southeast Kansas
certificate of deposits held for sale of $22,317.
/(5)/ Adjusted for the impact of the swap agreements.
The Company made certain assumptions in preparing the table above. These
assumptions included: loans will repay at historic repayment rates;
interest-bearing demand accounts and savings accounts are interest sensitive due
to immediate repricing of remaining balance for each period presented; and fixed
maturity deposits will not be withdrawn prior to maturity. A significant
variance in actual results from one or more of these assumptions could
materially affect the results reflected in the table.
As indicated in the preceding table, the Company was asset sensitive on a
cumulative basis for all periods except the 3 to 12 month period at December 31,
2002 based on contractual maturities. In this regard, a decrease in the general
level of interest rates would generally have a negative effect on the Company's
net interest income as the repricing of the larger volume of interest sensitive
assets would create a larger reduction in interest income as compared to the
reduction in interest expense created by the repricing of the smaller volume of
interest sensitive liabilities. Likewise, an increase in the general level of
interest rates would have a positive effect on net interest income.
15
As a policy, the Company focuses more attention to the cumulative GAP ratios
than any specific periods ratios since the cumulative GAP takes into account the
repricing nature of the assets and liabilities for a specific period plus all
previous periods which would have been affected by interest rate movements.
The Company also applies positive and negative interest rate "shocks" to a
static balance sheet using its asset/liability management software. This
analysis helps measure interest rate sensitivity against certain policy limits.
NONINTEREST INCOME
The following table depicts the annual changes in various noninterest income
categories:
December 31, December 31,
---------------------------------------- ----------------------------------------
2002 versus 2001 2001 versus 2000
---------------------------------------- ----------------------------------------
2002 2001 Change 2001 2000 Change
----------- ----------- ----------- ----------- ----------- -----------
Trust and financial advisory
income $ 2,353,927 $ 1,426,078 $ 927,849 $ 1,426,078 $ 851,829 $ 574,249
Gains on sale of mortgage loans 1,707,166 1,238,441 468,725 1,238,441 503,702 734,739
Recovery/income (loss)
from Merchant Banc investments 88,889 (5,716,138) 5,805,027 (5,716,138) 270,181 (5,986,319)
Gain on sale of securities - 74,658 (74,658) 74,658 - 74,658
Service charges on deposit
accounts 1,771,417 1,298,611 472,806 1,298,611 1,196,326 102,285
Other service charges and fee
income 384,592 390,790 (6,198) 390,790 457,563 (66,773)
----------- ----------- ----------- ----------- ----------- -----------
Total noninterest income (loss) $ 6,305,991 $(1,287,560) $ 7,593,551 $(1,287,560) $ 3,279,601 $(4,567,161)
=========== =========== =========== =========== =========== ===========
Total noninterest income (loss) was $6,305,991 in 2002, representing a
$7,593,551 increase from 2001. Total noninterest (loss) income was $(1,287,560)
in 2001, representing a $4,567,161 decrease from 2000. The key to these
differences is in understanding the trends associated with each income category.
The $927,849 increase in trust and financial advisory fees to $2,353,927 during
2002 and the $574,249 increase in fees to $1,426,078 during 2001 was the result
of increased transaction based fees and assets under management at Enterprise
Trust.
The increase in the gains on sale of mortgage loans was due to changes in the
interest rate environment during 2002, 2001, and 2000. The $468,725 increase in
the gains on the sale of mortgage loans during 2002 to $1,707,166, and the
$734,739 increase during 2001 to $1,238,441 as compared to $503,702 during 2000
were due to a dramatic decrease in interest rates during 2002 and 2001. This
decrease in interest rates spurred residential mortgage loan refinancing and an
increase in mortgage loans sold. Approximately 65% of the mortgage gains during
2002 and 2001 were the result of refinanced loans, while refinancing of mortgage
loans account for less than 25% of the mortgage gains in 2000. The Company
generally sells its mortgage loans and the related servicing rights to various
third party investors shortly after the loans close.
Recovery/income (loss) from Merchant Banc investments was $88,889, $(5,716,138)
and $270,181 during 2002, 2001 and 2000, respectively. Given the nature of
merchant banking investments, the income or loss can be volatile. The increase
during 2002 was 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 significant increase
in losses during 2001 was due to several factors. First, the Company recognized
$3,800,000 of losses related to its investment in, and guarantees to, a Midwest
manufacturing company that supplies certain products primarily to the automotive
industry. Second, the Company wrote off its minority investment in, and a
related receivable from, Fund I at December 31, 2001 totaling approximately
$800,000. Third, the Company wrote off its minority investment in, and a
receivable from, EMB LLC of approximately $1,000,000 at year-end. These
writeoffs were due to a lack of underlying cashflow from the various investments
to support the asset value. Finally, the Company has historically recorded its
share of the income or loss recorded by EMB LLC and Fund I in accordance with
the equity method of accounting. In 2001, both investments had operating losses
for which the Company recorded approximately $117,000 in losses.
16
Gains on the sale of investment securities were $0 for 2002, $74,658 for 2001,
and $0 for 2000. The Company sold several investment securities during 2001 for
liquidity purposes.
Service charges on deposit accounts increased $472,806 to $1,771,417 during 2002
from $1,298,611 during 2001. Service charges on deposit accounts increased
$102,285 to $1,298,611 during 2001 from $1,196,326 during 2000. The increases
during 2002 and 2001 were the result of a decrease in the earnings credit rate
on business accounts during the declining interest rate environment and an
increase in deposit balances and accounts outstanding.
NONINTEREST EXPENSE
The following table depicts changes in noninterest expense in the above
mentioned operations:
December 31, December 31,
---------------------------------------- ----------------------------------------
2002 verses 2001 2001 verses 2000
---------------------------------------- ----------------------------------------
2002 2001 Change 2001 2000 Change
------------ ------------ ------------ ------------ ------------ ------------
Employee compensation and
benefits $ 16,864,830 $ 15,802,893 $ 1,061,937 $ 15,802,893 $ 13,212,572 $ 2,590,321
Occupancy 1,900,812 1,677,965 222,847 1,677,965 1,557,082 120,883
Furniture, equipment and
data processing 2,013,531 2,173,548 (160,017) 2,173,548 1,807,080 366,468
Amortization of goodwill - 190,567 (190,567) 190,567 190,567 -
Correspondent bank charges 353,197 364,379 (11,182) 364,379 159,327 205,052
Professional, legal and
consulting 1,182,659 869,603 313,056 869,603 791,583 78,020
Losses and settlement 1,371,361 26,551 1,344,810 26,551 2,747 23,804
Postage, courier and armored
car 692,903 617,934 74,969 617,934 467,938 149,996
Meals, entertainment and travel 618,749 781,911 (163,162) 781,911 849,342 (67,431)
Stationary and office supplies 414,624 471,864 (57,240) 471,864 389,673 82,191
Communications 339,492 366,334 (26,842) 366,334 303,504 62,830
Marketing and public relations 202,707 259,789 (57,082) 259,789 345,320 (85,531)
FDIC and other insurance 424,299 233,465 190,834 233,465 310,771 (77,306)
Other 1,924,757 1,740,080 184,677 1,740,080 1,874,108 (134,028)
------------ ------------ ------------ ------------ ------------ ------------
Total noninterest expense $ 28,303,921 $ 25,576,883 $ 2,727,038 $ 25,576,883 $ 22,261,614 $ 3,315,269
============ ============ ============ ============ ============ ============
Total noninterest expense was $28,303,921 in 2002 representing a $2,727,038, or
11%, increase from 2001. This variance was due to increased employee
compensation, occupancy costs, professional fees, insurance expenses and losses
and settlement offset by declines in various discretionary expense categories,
reductions in equipment and data processing costs, and the elimination of
goodwill amortization due to implementation of a new goodwill accounting
standard in 2002.
Employee compensation and benefits increased $1,061,937 in 2002 as compared to
2001. Approximately $378,000 of this increase was related to higher commission
payouts in the Financial Advisory area of Trust and the Mortgage department of
the Bank. Another $404,000 of this increase was due to increased payouts under
the Company's incentive bonus program and 401K match benefit as the Company
exceeded budgeted performance for the year. The remaining variance in this
category was attributable to annual merit increases for personnel and higher
compensation associated with new middle and senior management hired during 2002.
Offsetting some of these costs was an overall reduction in staffing levels
required as there were 20 fewer full-time equivalent employees at the end of
2002 versus 2001.
Occupancy expense increased $222,847 in 2002 as compared to 2001. About half of
this increase was due to remodeling and construction in the prior year. The
Clayton location acquired additional space for the corporate and Trust offices
and remodeled the existing space, both in late 2001. In addition, the Company
opened a new banking facility in the Country Club Plaza in Kansas City, Missouri
during the fourth quarter of 2001. Most of the remaining increase in occupancy
expenses was due to scheduled rent increases on various Company facilities.
Professional, legal and consulting expenses increased $313,056 during 2002 due
to work on various special matters including Merchant Banc recovery efforts,
financial reporting and accounting issues, legal review on new laws and certain
contracts, and implementation of certain tax strategies, among other items.
17
The Bank recognized $25,000 in fraud losses during the first quarter of 2002,
net of recoveries. In accordance with SFAS No. 5, Accounting for Contingencies,
the Company recognized $1,300,000 in expense related to settlement of a dispute
with another financial institution pursuant to an agreement signed in February
of 2003. The precise cost of this settlement is subject to certain contingencies
over an eighteen month period, but in no case will exceed $1,300,000.
The FDIC and other insurance expenses increased $190,834 in 2002 as a result of
expected increases in premiums on the renewal of various insurance policies,
along with increases in certain insurance coverages.
Declines in certain discretionary expense categories like 1) meals,
entertainment and travel, 2) stationary and office supplies, and 3) marketing
and public relations were due to a concerted effort by management. The $160,017
decrease in furniture, equipment and data processing along with the $26,842
decrease in communications expense was the result of 1) savings from information
technology and communications upgrades in 2001, and 2) a $120,000 write-off of
the existing phone system in the prior year.
The ratio of noninterest expense to average assets for 2002 was 3.45%, or 3.29%
adjusting for the one time $1,300,000 expense related to the settlement, verses
3.36% and higher levels in prior years. Management is focused on lowering this
ratio in future years through improved employee productivity and better expense
controls.
Total noninterest expense was $25,576,883 in 2001 representing a $3,315,269, or
15%, increase from 2000. The increase in noninterest expense was primarily due
to 1) the hiring of additional business development officers, staff and senior
management; 2) increased commission-based activity in Enterprise Trust and
mortgage; 3) costs related to information technology and communication upgrades;
and 4) normal increases associated with continued growth.
Additional business development officers were hired at all of the business units
except for Southeast Kansas and additional capacity was added in the Company's
operations center to handle growth in volumes. The business development officers
contributed to the strong loan and deposit growth experienced in 2001 and 2000.
Throughout this two-year period, the Company also added senior management to
strengthen the skills and depth of the existing management team. Management
personnel added during the last two years include the following:
President of Enterprise Bank
Unit President in Overland Park
Senior Lender for the Company
Chief Financial Officer for the Company
President of Enterprise Trust- Fiduciary side
Most of these additions along with the business development officers and staff
were added during 2000, so the full year impact of these positions accounted for
most of the $2.6 million increase in salary and employee benefit expenses. Also
contributing to the increase in salaries expense are annual merit increases and
promotional increases which approximate $500,000.
The financial advisory division of Enterprise Trust provides a commission-based
compensation program to its producers. With the significant increases in
financial planning fees, commissions related to this activity increased
approximately $275,000.
The Company expanded its computer and data processing infrastructure for the
additional Kansas locations and communication between the regions, which
increased expenses. In February 2001, the Company completed a computer system
conversion to bring the Kansas banks on the same core processing system utilized
by the Company. The computer conversion, including fees to software vendors and
training, increased noninterest expenses by approximately $100,000 during 2001.
The Company also upgraded its telephone and voicemail systems during 2001. The
upgrade allows direct connections between the Company's multiple locations and
expanded capacity for future growth. This upgrade required the Company to write
off the old phone systems which increased expenses by $120,000 during 2001.
During 2000, the Company expensed approximately $496,386 in legal, accounting,
travel and other costs related to the merger completed in June 2000. Other
noninterest expense increased $495,930, or 10%, after adjusting for the merger
related expenses during 2000. This increase in other noninterest expenses is
related to growth of the Company and is in line with previous increases.
18
INCOME TAXES
Income tax expense was $1,613,737, $1,241,944, and $3,208,450, for 2002, 2001,
and 2000, respectively. The effective tax rates were 24%, N/A, and 38% for 2002,
2001, and 2000, respectively. In 2001, a valuation allowance was established in
the amount of $1,041,080 related to capital losses on certain merchant banking
investments. As of December 31, 2001, the Company had determined it is more
likely than not that certain of the deferred tax assets related to the capital
losses will not be realized. This adjustment resulted in income tax expense for
2001 in spite of a pre-tax loss. Due to the availability of certain tax planning
strategies in the fourth quarter of 2002, the Company reversed $800,000 of the
valuation allowance recorded in 2001.
FOURTH QUARTER RESULTS
The Company earned $1,347,000 in net income for the fourth quarter ended
December 31, 2002 versus a net loss of $5,876,000 in the same period in 2001.
This increase was due to several factors. First, net interest income in the
fourth quarter of 2002 increased $1,033,000 from the fourth quarter of 2001.
This increase in net interest income was the result of a $1,545,000 decrease in
interest expense offset slightly by a $512,000 decrease in interest income. The
Company's assets and liabilities repriced at a lower rates as a result of the
drastic reductions in the prime and other market rates during 2002 and 2001.
Second, the provision for loan losses was $491,000 in the fourth quarter of 2002
versus $2,460,000 in 2001. The decrease of $1,969,000 is due primarily to fewer
loan losses as compared to 2001.
Third, noninterest income (loss) was $1,860,000 in 2002 versus $(4,443,000) in
2001, an increase of $6,303,000. The loss in noninterest income was caused by
non-recurring losses on Merchant Banc investments of $5,675,000.
Fourth, noninterest expense was $8,580,000 in 2002 versus $6,834,000 in 2001.
This increase of $1,746,000 is due primarily to the recognition of $1,300,000 in
expense related to a settlement and a $471,000 increase in salaries, payroll
taxes, and benefits offset by a $196,000 decrease in furniture equipment, data
processing expenses and goodwill amortization. Excluding the $1,300,000
settlement expense, other noninterest expense increased $446,000 or 7% during
2002 as compared to 2001.
Finally, income tax benefit was $921,000 in 2001 versus $585,000 in 2002. The
income tax benefit was the result of the capital losses on Merchant Banc
investments discussed above. As of December 31, 2001, the Company had determined
it is more likely than not that certain of the deferred tax assets related to
the capital losses will not be realized and established a valuation allowance.
This adjustment resulted in income tax expense for 2001 in spite of a pre-tax
loss. During 2002, in conjunction with the pending sale of the Southeast Kansas
branches, the Company quantified the amount of gain of the appropriate character
which could be utilized to offset losses recorded in 2001 on the Merchant Banc
investments. Accordingly, in 2002, the Company reversed $800,000 of the
valuation allowance.
The Company had $5,876,000 in net loss for the fourth quarter ended December 31,
2001 versus net income of $1,495,000 in the same period in 2000. This decline
was due to several factors.
First, net interest income in the fourth quarter of 2001 declined $706,000 from
the fourth quarter of 2000. While earning assets were higher in 2001, the net
interest rate margin earned on those assets was significantly less. The drastic
reductions in the prime rate during 2001 caused the loan portfolio to reprice
faster than the core deposits funding those loans.
Second, the provision for loan losses was $2,460,000 in the fourth quarter of
2001 versus $280,000 in 2000. The increase of $2,180,000 is due to a $2,270,000
charge-off on a loan relationship at December 31, 2001 and increased risk in the
loan portfolio evidenced by higher levels of non-performing assets and a weaker
economic environment.
Third, noninterest (loss) income was $(4,443,000) in 2001 versus $1,029,000 in
2000, a decrease of $5,472,000. The decrease in non-interest income was caused
by non-recurring losses on Merchant Banc investments of $5,675,000 versus income
from those same investments of $162,000 in 2000, a $5,837,000 decline.
Offsetting this decline were increases in gains on the sale of mortgage loans of
$226,000 and trust and financial advisory income of $186,000.
19
Finally, noninterest expense was $6,834,000 in 2001 versus $5,990,000 in 2000.
This increase of $844,000 is due primarily to a $375,000 increase in salaries, a
$153,000 increase in furniture and equipment expense and a $200,000 increase in
legal and professional expenses.
FINANCIAL CONDITION
Total assets at December 31, 2002 were $877 million, an increase of $82 million,
or 10%, over total assets of $795 million at December 31, 2001. Loans were $680
million, an increase of $77 million, or 13%, over total loans of $603 million at
December 31, 2001. The increase in loans is attributed, in part, to the success
of the Company's relationship officers efforts. Federal funds sold,
interest-bearing deposits and investment securities were $100 million, an
increase of $2 million, or 2%, from a comparable balance of $98 million at
December 31, 2001.
Total deposits at December 31, 2002 were $716 million, an increase of $60
million, or 9%, over total deposits of $656 million at December 31, 2001. Most
of the deposit growth occurred in demand, money market deposits and certificates
of deposit $100,000 and over. Demand deposits grew $36 million, or 30%, during
2002. This increase is the result of an increase in the number of customers, and
an increase in the required balances for deposit accounts to offset the decrease
in the earnings credit rate for activity based service charges. Money market
deposits grew $37 million, or 12%, during 2002. Growth in transaction and money
market deposit accounts is attributed primarily to direct calling efforts of
relationship officers. Certificates of deposits decreased $13 million, or 8%,
during 2002 as customers chose alternative deposit types upon renewal. In
addition, the Bank obtained two $10 million brokered certificates of deposit and
let approximately $30 million of wholesale network CD's mature without renewing
them.
Total shareholders' equity at December 31, 2002 was $59 million, an increase of
$7 million compared to shareholders' equity of $52 million at December 31, 2001.
The increase in equity is primarily due to net income of $5.0 million for the
year ended December 31, 2002, the exercise of incentive stock options, and
changes in accumulated other comprehensive income offset by dividends paid to
shareholders.
Total assets at December 31, 2001 were $795 million, an increase of $84 million,
or 12%, over total assets of $711 million at December 31, 2000. Loans were $603
million, an increase of $85 million, or 16%, over total loans of $517 million at
December 31, 2000. The increase in loans is attributed, in part, to the success
of the Company's relationship officers efforts. Federal funds sold,
interest-bearing deposits and investment securities were $98 million, a decrease
of $14 million, or 13%, from a comparable balance of $112 million at December
31, 2000. The decrease resulted primarily from the shift in earning assets from
short-term investments to loans during 2001.
Total deposits at December 31, 2001 were $656 million, an increase of $80
million, or 14%, over total deposits of $576 million at December 31, 2000. Most
of the deposit growth occurred in demand, interest bearing transaction, and
money market deposits. Demand deposits grew $19 million, or 19%, during 2001.
Interest bearing transaction deposits grew $11 million, or 22%, during 2001.
Money market deposits grew $37 million, or 14%, during 2001. Growth in
transaction and money market deposit accounts is attributed primarily to direct
calling efforts of relationship officers and $18 million in deposit accounts
referred by Moneta. Certificates of deposits increased $12 million, or 8%,
during 2001.
Total shareholders' equity at December 31, 2001 was $52 million, a decrease of
$1 million compared to shareholders' equity of $53 million at December 31, 2000.
The decrease in equity was primarily due to a net loss of $2.5 million for the
year ended December 31, 2001 and dividends paid to shareholders, offset by the
exercise of incentive stock options, and changes in accumulated other
comprehensive income.
20
LOAN PORTFOLIO
Loans, as a group, are the largest asset and the primary source of interest
income for the Company. Diversification among different categories of loans
reduces the risks associated with any single type of loan. The following table
sets forth the composition of the Company's loan portfolio by type of loans at
the dates indicated:
December 31,
---------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------------- ------------------- ------------------- ------------------- ------------------
Percent Percent Percent Percent Percent
of of of of of
Total Total Total Total Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
(Dollars in Thousands)
Commercial and industrial $ 167,842 24.69% $ 160,218 26.58% $ 153,357 29.68% $ 137,815 30.94% $ 116,467 36.12%
Real estate:
Commercial 187,044 27.51 167,378 27.77 134,133 25.95 103,471 23.23 46,351 14.38
Construction 139,319 20.49 123,788 20.54 128,779 24.92 119,251 26.77 78,112 24.23
Residential 189,613 27.89 162,100 26.89 114,212 22.10 95,916 21.53 90,762 28.15
Consumer and other 31,275 4.60 28,569 4.74 26,312 5.09 24,438 5.49 23,235 7.21
Less: portfolio loans
held for sale (35,294) (5.18) (39,307) (6.52) (39,983) (7.74) (35,443) (7.96) (32,533) (10.09)
--------- ------- --------- ------- --------- ------- --------- ------- --------- -------
Total loans $ 679,799 100.00% $ 602,746 100.00% $ 516,810 100.00% $ 445,448 100.00% $ 322,394 100.00%
========= ======= ========= ======= ========= ======= ========= ======= ========= =======
In the St. Louis and Kansas City metropolitan markets, the Bank grants
commercial, residential and consumer loans primarily to small to medium sized
businesses and their owners. The Southeast Kansas loans are excluded from the
portfolio as loans held for sale. Overall, the Company has a diversified loan
portfolio, with no particular concentration of credit in any one economic
sector. However, a substantial portion of the portfolio is secured by real
estate. As of December 31, 2002, $516 million in loans, or 72% of the loan
portfolio, involved real estate as part or all of the collateral package, as
compared to $453 million, or 71%, and $377 million, or 68%, in 2001 and 2000,
respectively. As of December 31, 2002, $215 million, or 42%, of the real estate
secured loans for 2002, were personal and business loans and loans on
owner-occupied properties as compared to $199 million, or 44%, and $164 million,
or 43%, for 2002 and 2001, respectively. When evaluating the appropriateness of
the allowance for loan losses, these loans are evaluated based on commercial
considerations such as the financial condition, cash flow and income of the
borrower as well as the value of all collateral securing the loans, including
the market value of any real estate securing the loan.
21
The following table sets forth the interest rate sensitivity of the loan
portfolio at December 31, 2002:
Loans Maturing or Repricing
-------------------------------------------------------------------
After One
In One Through After
Year or Less Five Years Five Years Total
---------------- -------------- ----------- --------------
(Dollars in Thousands)
FIXED RATE LOANS /(1)/
Commercial and industrial $ 19,265 $ 23,821 $ 1,688 $ 44,774
Real estate:
Commercial 16,196 51,720 5,683 73,599
Construction 12,147 12,273 1,706 26,126
Residential 11,597 34,516 7,162 53,275
Consumer and other 5,392 4,691 4,498 14,581
---------------- -------------- ----------- --------------
Total $ 64,597 $ 127,021 $ 20,737 $ 212,355
================ ============== =========== ==============
Less: portfolio loans held for sale (23,427) - - (23,427)
---------------- -------------- ----------- --------------
Net Loans 41,170 127,021 20,737 188,928
================ ============== =========== ===============
VARIABLE RATE LOANS/(1)//(2)/
Commercial and industrial $ 123,068 $ - $ - $ 123,068
Real estate:
Commercial 113,445 - - 113,445
Construction 113,193 - - 113,193
Residential 136,338 - - 136,338
Consumer and other 16,694 - - 16,694
---------------- -------------- ----------- --------------
Total $ 502,738 $ - $ - $ 502,738
================ ============= ========== ==============
Less: portfolio loans held for sale (11,867) - - (11,867)
---------------- -------------- ----------- --------------
Net Loans 490,871 - - 490,871
================ ============== =========== ==============
TOTAL LOANS/(1)/
Commercial and industrial $ 142,333 $ 23,821 $ 1,688 $ 167,842
Real estate:
Commercial 129,641 51,720 5,683 187,044
Construction 125,340 12,273 1,706 139,319
Residential 147,935 34,516 7,162 189,613
Consumer and other 22,086 4,691 4,498 31,275
---------------- -------------- ----------- --------------
Total $ 567,335 $ 127,021 $ 20,737 $ 715,093
================ ============== =========== ==============
Less: portfolio loans held for sale (35,294) - - (35,294)
---------------- -------------- ----------- --------------
Net Loans 532,041 127,021 20,737 679,799
================ ============== =========== ==============
/(1)/ Loan balances are shown net of unearned loan fees and loans held for
sale.
/(2)/ This table excludes the impact of swap agreements.
ASSET QUALITY
The provision for loan losses was $2,250,578, $3,230,000, and $1,042,534 in
2002, 2001, and 2000, respectively. The provision for loan losses can vary each
year depending on net charge-offs, loan volumes, and the necessary level of the
allowance for loan losses as determined by management.
The Company has charged off a total of $5,595,000 in loans from January 1, 1998
through December 31, 2002. Total recoveries for the same period were $644,000,
resulting in a five-year net charge-off experience of $4,951,000, or 0.19% per
year of average loans for the same period.
22
The following table summarizes changes in the allowance for loan losses arising
from loans charged-off and recoveries on loans previously charged-off, by loan
category, and additions to the allowance charged to expense:
December 31,
------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Allowance at beginning of period $ 7,296 $ 7,097 $ 6,758 $ 4,430 $ 3,170
---------- ---------- ---------- ---------- ----------
Loans charged off:
Commercial and industrial 700 2,538 682 109 48
Real estate:
Commercial 25 279 48 2 39
Construction - - - - -
Residential 417 165 32 - -
Consumer and other 104 170 26 135 76
---------- ---------- ---------- ---------- ----------
Total loans charged off 1,246 3,152 788 246 163
---------- ---------- ---------- ---------- ----------
Recoveries of loans previously charged off:
Commercial and industrial 55 38 63 33 36
Real estate:
Commercial 8 25 - 21 10
Construction - - - - -
Residential 192 52 13 - -
Consumer and other 44 6 8 24 16
---------- ---------- ---------- ---------- ----------
Total recoveries of loans previously
charged off 299 121 84 78 62
---------- ---------- ---------- ---------- ----------
Net loans charged off 947 3,031 704 168 101
---------- ---------- ---------- ---------- ----------
Provision charged to operations 2,251 3,230 1,043 2,496 1,361
---------- ---------- ---------- ---------- ----------
Allowance at end of period $ 8,600 $ 7,296 $ 7,097 $ 6,758 $ 4,430
========== ========== ========== ========== ==========
Average loans $ 693,551 $ 613,539 $ 517,381 $ 429,408 $ 328,761
Total loans 679,799 602,747 516,810 445,448 322,394
Nonperforming loans 3,888 3,749 2,005 2,559 666
Net charge offs to average loans 0.14% 0.49% 0.14% 0.04% 0.03%
Allowance for loan losses to loans 1.27 1.21 1.37 1.52 1.37
Allowance for loan losses to nonperforming
loans 221% 195% 354% 265% 665%
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 internal loan reviews and regulatory
bank examinations. The system requires rating all loans at the time they are
made.
Adversely rated credits, including loans requiring close monitoring, which would
not normally be considered criticized credits by regulators, are included on a
monthly loan watch list. 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 Senior Lending Officer and the Executive Loan
Committee. Downgrades of loan risk ratings may be initiated by the responsible
loan officer, internal loan review, or credit analyst department 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
23
portfolios, changes in past due and non-performing loans and changes in watch
list and classified loans over time. In this manner, the overall increases or
decreases in the levels of risk in the portfolios are monitored continually.
Factors are applied to the loan portfolios for each category of loan risk to
determine acceptable levels of allowance for loan losses. These factors are
derived primarily from the actual loss experience. The calculated allowance for
loan losses required for the portfolios are then compared to the actual
allowance balances to determine the provision necessary to maintain the
allowance for loan losses at an appropriate level. In addition, management
exercises judgment in its analysis of determining the overall level of the
allowance for loan losses. In its analysis, management considers the change in
the portfolio, including growth and composition, and the economic conditions of
the region in which the Company operates. Based on this quantitative and
qualitative analysis, the allowance for loan losses is adjusted. Such
adjustments are reflected in the consolidated statements of operations.
The Company does not engage in foreign lending. Additionally, the Company does
not have any concentrations of loans exceeding 10% of total loans which are not
otherwise disclosed in the loan portfolio composition table. The Company does
not have a material amount of interest-bearing assets which would have been
included in non-accrual, past due or restructured loans if such assets were
loans.
Management believes the allowance for loan losses is adequate to absorb probable
losses in the loan portfolio. While management uses available information to
recognize loan losses, future additions to the allowance for loan losses may be
necessary based on changes in economic conditions. In addition, various
regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses. Such agencies may require the
Company to increase the allowance for loan losses based on their judgments and
interpretations about information available to them at the time of their
examinations.
As of December 31, 2002, 2001, and 2000, the Company had 17, 19, and 12 impaired
loans in the aggregate amounts of $3,887,945, $3,748,970, and $1,798,364,
respectively, all of which are considered potential problem loans.
The Company had foreclosed property in the amount of $125,000, $138,000, and
$76,680 as of December 31, 2002, 2001, and 2000, respectively, which are
considered nonperforming assets. Nonperforming assets increased from $3,887,000
at December 31, 2001 to $4,013,000 at December 31, 2002. The $126,000 increase
in nonperforming assets was due primarily to a $500,000 restructured loan offset
by a $294,000 decrease in nonaccrual loans. Non-performing assets increased from
$2,082,000 at December 31, 2000 to $3,887,000 at December 31, 2001. The
$1,805,000 increase in nonperforming assets was primarily due to a $1,243,000
restructured loan and a $708,000 increase in nonaccrual loans.
The following table sets forth information concerning the Company's
nonperforming assets including assets held for sale as of the dates indicated:
As of December 31,
-----------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Nonaccrual loans $ 2,212 $ 2,506 $ 1,798 $ 2,485 $ 581
Loans past due 90 days or more
and still accruing interest - - 207 74 85
Restructured loans 1,676 1,243 - - -
---------- ---------- ---------- ---------- ----------
Total nonperforming loans 3,888 3,749 2,005 2,559 666
Foreclosed real estate 125 138 77 396 806
---------- ---------- ---------- ---------- ----------
Total nonperforming assets $ 4,013 $ 3,887 $ 2,082 $ 2,955 $ 1,472
========== ========== ========== ========== ==========
Total assets $ 876,787 $ 795,250 $ 710,938 $ 615,143 $ 488,066
Total loans, net of unearned
loan fees 679,799 602,747 516,810 445,448 322,394
Total loans plus foreclosed property 679,924 602,885 516,887 445,844 323,200
Nonperforming loans to total loans 0.57% 0.62% 0.39% 0.57% 0.21%
Nonperforming assets to total loans
plus foreclosed property 0.59 0.64 0.40 0.66 0.46
Nonperforming assets to total assets 0.46 0.49 0.29 0.48 0.30
24
The Company's policy is to discontinue the accrual of interest on loans when
principal or interest is due and has remained unpaid for 90 days or more, unless
the Company is in the process of collecting the principal and interest due, and
is fairly certain to collect all interest.
The following table sets forth the allocation of the allowance for loan losses
by loan category as an indication of the estimated risk of loss for each loan
type. The unallocated portion of the allowance is intended to cover loss
exposure related to potential problem loans for which no specific allowance has
been estimated and for other losses in the loan portfolio deemed probable.
As of December 31,
-----------------------------------------------------------------------------
2002 2001 2000
----------------------- ----------------------- -----------------------
Percent Percent Percent
of of of
Category Category Category
Total Total Total
Allowance Loans Allowance Loans Allowance Loans
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
Commercial and industrial $ 2,846 24.69% $ 2,366 26.58% $ 3,046 29.68%
Real estate:
Commercial 1,903 27.51 1,915 27.77 1,589 25.95
Construction 1,062 20.49 932 20.54 833 24.92
Residential 2,369 27.89 1,625 26.89 1,026 22.10
Consumer and other 244 4.60 198 4.74 312 5.09
Loans held for sale - (5.18) - (6.52) - (7.74)
Not allocated 176 - 260 - 291 -
---------- ---------- ---------- ---------- ---------- ----------
Total $ 8,600 100.00% $ 7,296 100.00% $ 7,097 100.00%
========== ========== ========== ========== ========== ==========
As of December 31,
--------------------------------------------------
1999 1998
----------------------- -----------------------
Percent Percent
of of
Category Category
Total Total
Allowance Loans Allowance Loans
---------- ---------- ---------- ----------
(Dollars in Thousands)
Commercial and industrial $ 2,801 30.94% $ 1,625 36.12%
Real estate:
Commercial 1,437 23.23 577 14.38
Construction 972 26.77 688 24.23
Residential 959 21.53 896 28.15
Consumer and other 364 5.49 235 7.21
Loans held for sale - (7.96) - (10.09)
Not allocated 225 - 409 -
---------- ---------- ---------- ----------
Total $ 6,758 100.00% $ 4,430 100.00%
========== ========== ========== ==========
The above allocation by loan category does not mean that actual loan charge offs
will be incurred in the categories indicated. The risk factors considered in
determining the above allocation are the same as those used when determining the
overall level of the allowance.
INVESTMENT PORTFOLIO
The table below sets forth the carrying value of investment securities held by
the Company at the dates indicated:
December 31,
--------------------------------------------------------------------------------
2002 2001 2000
------------------------ ------------------------ ------------------------
Percent Percent Percent
of Total of Total of Total
Amount Securities Amount Securities Amount Securities
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies $ 38,826 58.27% $ 33,161 71.98% $ 42,674 79.98%
Municipal bonds - - 177 0.38 660 1.24
Mortgage-backed securities 25,812 38.74 11,091 24.08 7,474 14.01
Other securities 32 0.05 32 0.07 282 0.53
Capital stock of the Federal
Reserve Bank and the Federal
Home Loan Bank 1,961 2.94 1,607 3.49 2,263 4.24
---------- ---------- ---------- ---------- ---------- ----------
$ 66,631 100.00% $ 46,068 100.00% $ 53,353 100.00%
========== ========== ========== ========== ========== ==========
As of December 31, 2002, debt securities with an amortized cost of $12,600 were
classified as held to maturity securities and debt and equity securities with an
amortized cost of $66,148,708 were classified as available for sale securities.
The market valuation account for the available for sale securities was $469,848
to increase the recorded balance of such securities at December 31, 2002 to fair
value on that date. The Company had no securities classified as trading at
December 31, 2002.
25
As of December 31, 2001, debt securities with an amortized cost of $116,214 were
classified as held to maturity securities and debt and equity securities with an
amortized cost of $45,668,070 were classified as available for sale securities.
The market valuation account for the available for sale securities was $284,072
to increase the recorded balance of such securities at December 31, 2001 to fair
value on that date. The Company had no securities classified as trading at
December 31, 2001.
As of December 31, 2000, debt securities with an amortized cost of $521,280 were
classified as held to maturity securities, and debt and equity securities with
an amortized cost of $52,629,041 were classified as available for sale
securities. The market valuation account for the available for sale securities
was $202,842 to increase the recorded balance of such securities at December 31,
2000 to fair value on that date. The Company had no securities classified as
trading at December 31, 2000.
The following table summarizes maturity and yield information on the investment
portfolio at December 31, 2002:
Carrying
Value Yield (1)
------------------- ------------------
(Dollars in Thousands)
U.S. Treasury securities and obligations
of U.S. government corporations and
agencies:
0 to 1 year $ 28,117 3.27%
1 to 5 years 10,709 2.85
5 to 10 years - -
No stated maturity - -
---------------
Total $ 38,826 3.15%
=============== ============
Mortgage backed securities:
0 to 1 year $ 5,478 3.68%
1 to 5 years 18,562 3.61
5 to 10 years 1,772 5.12
No stated maturity - -
---------------
Total 25,812 3.73%
=============== ============
Other securities, including capital
stock of the Federal Reserve Bank
and the Federal Home Loan Bank
0 to 1 year $ - -%
1 to 5 years - -
5 to 10 years 32 8.75
No stated maturity 1,961 3.10
---------------
Total $ 1,993 3.19%
=============== ============
Total
0 to 1 year $ 33,595 3.34%
1 to 5 years 29,271 3.33
5 to 10 years 1,804 5.18
10 years or more - -
No stated maturity 1,961 3.10
---------------
Total $ 66,631 3.38%
=============== ============
(1) Weighted average tax-equivalent yield
26
DEPOSITS
The following table shows, for the periods indicated, the average annual amount
and the average rate paid by type of deposit:
December 31,
------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- ---------------------------- ---------------------------
(Dollars in Thousands)
Average Interest Average Interest Average Interest
Balance Expense Rate Balance Expense Rate Balance Expense Rate
--------- -------- ---- --------- -------- ---- -------- -------- ----
Noninterest-bearing
demand deposits $ 130,931 $ - -% $ 100,103 $ - -% $ 79,364 $ - -%
Interest-bearing transaction
accounts 62,104 269 0.43 53,846 555 1.03 48,781 823 1.69
Money market accounts 332,700 5,001 1.50 289,264 9,590 3.32 257,200 13,366 5.20
Savings accounts 8,571 84 0.98 7,706 157 2.04 7,178 185 2.58
Certificates of deposit 189,030 6,833 3.61 206,334 11,703 5.67 194,593 11,624 5.97
--------- -------- --------- -------- -------- --------
$ 723,336 $ 12,187 1.68% $ 657,253 $ 22,005 3.35% $587,116 $ 25,998 4.43%
========= ======== ==== ========= ======== ==== ======== ======== ====
Since inception, the Company has experienced rapid loan and deposit growth
primarily due to aggressive direct calling efforts of relationship officers.
Management has pursued closely-held businesses whose management desires a close
working relationship with a locally-managed, full-service bank. Due to the
relationships developed with these customers, management views large deposits
from this source as a stable deposit base. Additionally, the Company belongs to
a national network of time depositors (primarily credit unions) who place time
deposits with the Company, typically in increments of $99,000. The Company used
this source of deposits for over five years and considers it to be a stable
source of deposits that allows the Company to acquire funds at a cost below its
alternative cost of funds. There were $5 million at December 31, 2002, $30
million at December 31, 2001 and $45 million at December 31, 2000 in deposits
from the national network. In May 2002, the Company obtained two $10 million
brokered certificates of deposit that mature in two years. In the future the
Bank expects to continue to use certificate of deposit sold to retail customers
of regional and national brokerage firms (i.e. brokered certificate of deposit
program) as they generally have had lower overall costs versus the national
network.
The following table sets forth the amount and maturity of certificates of
deposit that had balances of more than $100,000 at December 31, 2002:
Remaining Maturity Amount
----------------------------------------- ----------
(Dollars in Thousands)
Three months or less $ 26,461
Over three through six months 7,778
Over six through twelve months 25,308
Over twelve months 45,483
----------
$ 105,030
==========
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company's exposure to market risk is reviewed on a regular basis by 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 rate 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 December 31, 2002, the rate shock
scenario models indicated that annual net interest income would change by less
than 9% should rates rise 100 basis points and 13% should rates fall 100 basis
points from their current level over a one year period. The Bank has no market
risk sensitive instruments held for trading purposes.
27
The following tables present the scheduled repricing of market risk sensitive
instruments at December 31, 2002:
Beyond 5
Years or
No
Stated
Year 1 Year 2 Year 3 Year 4 Year 5 Maturity Total
---------- ---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
Assets:
Investment in debt and
equity securities $ 33,595 $ 12,746 $ 10,192 $ 6,333 $ - $ 3,765 $ 66,631
Interest-bearing
deposits 66 - - - - - 66
Federal funds sold 33,367 - - - - - 33,367
Loans /(1)//(4)/ 472,041 85,522 78,965 12,819 9,715 20,737 679,799
Loans held for sale 6,991 - - - - - 6,991
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 546,060 $ 98,268 $ 89,157 $ 19,152 $ 9,715 $ 24,502 $ 786,854
========== ========== ========== ========== ========== ========== ==========
Liabilities:
Savings, now, money market
deposits/(2)/ $ 404,069 $ - $ - $ - $ - $ - $ 404,069
Certificates of deposit /(3)//(4)/ 108,797 34,964 9,989 2,668 230 - 156,648
Guaranteed preferred
beneficial interests in subordinated
debentures - - - - - 15,000 15,000
Other borrowed funds 17,209 3,400 3,675 1,525 1,250 4,764 31,823
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 530,075 $ 38,364 $ 13,664 $ 4,193 $ 1,480 $ 19,764 $ 607,540
========== ========== ========== ========== ========== ========== ==========
Average
Interest Estimated
Total Rate Fair Value
----------- ----------- -----------
Assets:
Investment in debt and equity
securities $ 66,631 3.54% 66,631
Interest-bearing deposits 66 2.13 66
Federal funds sold 33,367 1.44 33,367
Loans 679,799 6.24 692,582
Loans held for sale 6,991 6,991
----------- -----------
Total $ 786,854 $ 799,637
=========== ===========
Liabilities:
Savings, now, money market deposits $ 404,069 1.32% $ 404,069
Certificates of deposit 156,648 3.61 160,921
Guaranteed preferred
beneficial interests in
subordinated debentures 15,000 8.56 15,119
Other borrowed funds 31,823 4.22 32,258
----------- -----------
Total $ 607,540 $ 612,367
=========== ===========
/(1)/ Year 1 loans exclude loans held for sale of $35,294.
/(2)/ Year 1 savings, now, money market deposits exclude deposits held for sale
of $22,116.
/(3)/ Year 1 CD's exclude CD's held for sale of $22,317.
/(4)/ Adjusted for impact of swap agreements.
28
CAPITAL ADEQUACY
Risk-based capital guidelines were designed to relate regulatory capital
requirements to the risk profile of the specific institution and to provide for
uniform requirements among the various regulators. Currently, the risk-based
capital guidelines require the Company to meet a minimum total capital ratio of
8.0% of which at least 4.0% must consist of Tier 1 capital. Tier 1 capital
generally consists of (a) common shareholders' equity (excluding the unrealized
market value adjustments on the available-for-sale securities and cash flow
hedges), (b) qualifying perpetual preferred stock and related surplus subject to
certain limitations specified by the FDIC, and (c) minority interests in the
equity accounts of consolidated subsidiaries less (d) goodwill, (e) mortgage
servicing rights within certain limits, and (f) any other intangible assets and
investments in subsidiaries that the FDIC determines should be deducted from
Tier 1 capital. The FDIC also requires a minimum leverage ratio of 3.0%, defined
as the ratio of Tier 1 capital to average total assets for banking organizations
deemed the strongest and most highly rated by banking regulators. A higher
minimum leverage ratio is required of less highly rated banking organizations.
Total capital, a measure of capital adequacy, includes Tier 1 capital, allowance
for loan losses, and guaranteed beneficial interest on subordinated debentures.
The following table summarizes the Company's risk-based capital and leverage
ratios at the dates indicated:
December 31,
------------
2002 2001 2000
-------- -------- --------
Tier 1 capital to risk weighted assets 9.75% 9.29% 10.60%
Total capital to risk weighted assets 10.95 10.41 11.79
Leverage ratio (Tier 1 capital to
average assets) 7.93 8.18 9.41
Tangible capital to tangible assets 8.97 8.56 9.75
At December 31, 2002, the Company's Tier 1 capital was $70 million compared to
$61 million and $62 million at December 31, 2001 and 2000, respectively. At
December 31, 2002, the Company's total capital was $78 million compared to $68
million and $69 million at December 31, 2001 and 2000, respectively.
EFFECT OF NEW ACCOUNTING STANDARDS
On January 1, 2002, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. 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 Banking 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.
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, 2000:
2002 2001 2000
----------- ------------ -----------
Net income:
Reported net income $ 5,001,480 $ (2,534,691) $ 5,201,446
Add back - goodwill amortization - 190,567 190,567
----------- ------------ -----------
Adjusted net income $ 5,001,480 $ (2,344,124) $ 5,392,013
=========== ============ ===========
Basic earnings per share:
Reported net income $ 0.53 $ (0.28) $ 0.58
Add back - goodwill amortization - 0.03 0.02
----------- ------------ -----------
Adjusted net income $ 0.53 $ (0.25) $ 0.60
=========== ============ ===========
Diluted earnings per share:
Reported net income $ 0.52 $ (0.28) $ 0.54
Add back - goodwill amortization - 0.03 0.02
----------- ------------ -----------
Adjusted net income $ 0.52 $ (0.25) $ 0.56
=========== ============ ===========
29
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 SFAS No 144
was considered in the accounting and disclosure of the Company's sale of the
Southeast Kansas branches.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the related to Statement No. 13 were effective for
transactions occurring after May 14, 2002, with early application encouraged.
The adoption of SFAS No. 145 is not expected to have material effect on the
Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS No. 146 is not expected to 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 did not have a material effect on the
Company's consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's consolidated financial
statements. The disclosure requirements are effective for financial statements
of interim and annual periods ending after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
30
financial statements. Certain of the disclosures modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
EFFECT OF INFLATION
Persistent high rates of inflation can have a significant effect on the reported
financial condition and results of operations of all industries. However, the
asset and liability structure of commercial banks is substantially different
from that of an industrial company in that virtually all assets and liabilities
of commercial banks are monetary in nature. Accordingly, changes in interest
rates may have a significant impact on a commercial bank's performance. Interest
rates do not necessarily move in the same direction or in the same magnitude as
the prices of goods and services. Inflation does have an impact on the growth of
total assets in the banking industry, often resulting in a need to increase
equity capital at higher than normal rates to maintain an appropriate
equity-to-assets ratio.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws and
regulations which impose specific requirements or restrictions on and provide
for general regulatory oversight with respect to virtually all aspects of
operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. The numerous regulations and policies promulgated by the regulatory
authorities create a difficult and ever-changing atmosphere in which to operate.
The Company and the Bank commit substantial resources in order to comply with
these statutes, regulations and policies. The Company is unable to predict the
nature or the extent of the effect on its business and earnings that fiscal or
monetary policies, economic control, or new federal or state legislation may
have in the future.
FEDERAL FINANCIAL HOLDING AND BANK HOLDING COMPANY REGULATION
The Company is a bank holding company under the definition of the Bank Holding
Company Act of 1956 ("BHCA") and has elected to become a financial holding
company ("FHC"), as provided for under the Gramm-Leach-Bliley Act ("GLBA") which
amended the BHCA. As both a bank holding company and an FHC, the Company is
subject to periodic examination by the Federal Reserve and is required to file
periodic reports of its operations and such additional information as the
Federal Reserve may require. In order to become an FHC, the Company must have
been considered well managed and well capitalized by the Federal Reserve and
have at least a "satisfactory" rating under the Community Reinvestment Act.
Going forward, the Company continues to be considered well managed and well
capitalized and it has at least a "satisfactory" rating under the Community
Reinvestment Act. It must maintain these qualifications in order to remain an
FHC.
FHC Activities. GLBA establishes a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers through the creation of FHC's. GLBA permits an
FHC and its affiliates, with certain restrictions, to engage in activities that
are considered "financial in nature" or incidental or complementary to such
activities. This is a much broader spectrum of permissible activities than those
in which a bank holding company may engage. Other than as provided by GLBA, the
Company's and the Bank's activities are limited to banking, managing or
controlling banks, furnishing services to or performing services for its
subsidiaries, or engaging in any other activity that the Federal Reserve
determines to be closely related to banking.
In general, the expanded powers under GLBA are reserved to FHC's and banks,
where all depository institutions affiliated with them are well capitalized and
well managed based on applicable banking regulations and meet specified
Community Reinvestment Act ratings. GLBA authorizes the Federal Reserve and the
United States Treasury, in cooperation with one another, to determine what
activities, in addition to those discussed previously, are permissible as
financial in nature. Maintenance of activities which are financial in nature
will require FHC's and banks to continue to satisfy applicable well capitalized
and well managed requirements. Bank holding companies which do not qualify for
FHC status are limited to non-banking activities deemed closely related to
banking prior to adoption of GLBA.
In addition to the creation of FHC's, GLBA establishes a scheme of "functional
regulation" of financial services businesses which is intended to reflect the
primacy of regulation over activities and entities by regulators routinely
responsible for such activities and entities and with the appropriate expertise
in the area of regulation. This applies
31
both in allocating responsibility for supervising different companies within an
FHC and in supervising different activities within the same company.
Investments, Control and Activities. With certain limited exceptions, the BHCA
requires every financial holding company or bank holding company to obtain the
prior approval of the Federal Reserve before (i) acquiring substantially all the
assets of any bank, (ii) acquiring direct or indirect ownership or control of
any voting shares of any bank if, after such acquisition, it would own or
control more than 5% of the voting shares of such bank (unless it already owns
or controls the majority of such shares), or (iii) merging or consolidating with
another bank holding company. Federal legislation permits bank holding companies
to acquire control of banks throughout the United States.
In addition, and subject to certain exceptions, the BHCA and the Change in Bank
Control Act, together with regulations thereunder, require Federal Reserve
approval (or, depending on the circumstances, no notice of disapproval) prior to
any person or company acquiring "control" of a bank holding company (such as the
Company). Control is conclusively presumed to exist if an individual or company
acquires 25% or more of any class of voting securities of the bank holding
company. Under Federal Reserve regulations applicable to the Company, control
will be refutably presumed to exist if a person acquires at least 10% of the
outstanding shares of any class of voting securities registered under the
Securities and Exchange Act of 1934. The regulations provide a procedure for
challenge of the rebuttable control presumption.
Under the BHCA, the Company is generally prohibited from engaging in, or
acquiring direct or indirect control of more than 5% of the voting shares of any
company engaged in nonbanking activities, unless the Federal Reserve, by order
or regulation, has found those activities to be "financial in nature" or
incidental or complementary to such activities, which includes those activities
so closely related to banking or managing or controlling banks as to be a
related activity. Activities which are expressly considered financial in nature
include, among other things, securities and insurance underwriting and agency,
investment management and merchant banking. Some of the activities that the
Federal Reserve has determined by regulation to be proper incidents to the
business of banking include investment in and management of Small Business
Investment Companies, making or servicing loans and certain types of leases,
engaging in certain insurance and brokerage activities, performing data
processing services, acting in certain circumstances as a fiduciary or
investment or financial advisor, owning savings associations, and making
investments in limited projects designed primarily to promote community welfare.
Privacy Regulations. GLBA also imposes restrictions on the Company and the Bank
regarding the sharing of customer non-public personal information with
non-affiliated third parties unless the customer has had an opportunity to opt
out of the disclosure. GLBA also imposes periodic disclosure requirements
concerning the Company and the Bank policies and practices regarding data
sharing with affiliated and non-affiliated parties.
USA Patriot Act: The terrorist attacks in September, 2001 impacted the financial
services industry and led to federal legislation that addresses certain related
issues involving financial institutions. On October 26, 2001, President Bush
signed into law the Uniting and Strengthening America by Providing Appropriate
Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA PATRIOT
Act"). Among its other provisions, the USA PATRIOT Act requires each financial
institution to: (i) establish an anti-money laundering program; (ii) establish
due diligence policies, procedures and controls with respect to its private
banking accounts and correspondent banking accounts involving foreign
individuals and certain foreign banks; and (iii) implement certain due diligence
policies, procedures and controls with regard to correspondent accounts in the
United States for, or on behalf of, a foreign bank that does not have a physical
presence in any country. In addition, the USA PATRIOT Act contains a provision
encouraging cooperation among financial institutions, regulatory authorities and
law enforcement authorities with respect to individuals, entities and
organizations engaged in, or reasonably suspected of engaging in, terrorist acts
or money laundering activities.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve policy,
the Company is expected to act as a source of financial strength to the Bank and
to commit resources to support the Bank in circumstances in which the Company
might not otherwise do so. Under the BHCA, the Federal Reserve may require a
bank holding company (or an FHC) to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition.
32
BANK REGULATION
General. As of December 31, 2002, the Company is the holding company for
Enterprise Bank, a Missouri trust company. The Bank is not a member of the
Federal Reserve system. The Missouri Division of Finance and the FDIC are
primary regulators for the Bank. These regulatory authorities regulate or
monitor all areas of the Bank's operations, including security devices and
procedures, adequacy of capitalization and loss reserves, loans, investments,
borrowings, deposits, mergers, issuance of securities, payment of dividends,
interest rates payable on deposits, interest rates or fees chargeable on loans,
establishment of branches, corporate reorganizations, maintenance of books and
records, and adequacy of staff training to carry on safe lending and deposit
gathering practices. The Bank must maintain certain capital ratios and is
subject to limitations on aggregate investments in real estate, bank premises,
and furniture and fixtures.
Transactions With Affiliates and Insiders. The Bank is subject to the provisions
of Section 23A of the Federal Reserve Act, which place limits and conditions on
the amount of loans or extensions of credit to, investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. The Bank is also
subject to the provisions of Section 23B of the Federal Reserve Act that, among
other things, prohibit an institution from engaging in certain transactions with
certain affiliates unless the transactions are on terms substantially the same,
or at least as favorable to such institution or its subsidiaries, as those
prevailing at the time for comparable transactions with nonaffiliated companies.
The Bank is subject to certain restrictions on extensions of credit to executive
officers, directors, certain principal shareholders, and their related
interests. Such extensions of credit (i) must be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with third parties and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.
Sections 23A and 23B have been combined into Regulation W promulgated by the
Federal Reserve which is presently expected to become effective on April 1,
2003.
Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires
that, in connection with examinations of financial institutions within its
jurisdiction, the FDIC shall evaluate the record of the financial institutions
in meeting the credit needs of their local communities, including low and
moderate income neighborhoods, consistent with the safe and sound operation of
those institutions. These factors are also considered in evaluating mergers,
acquisitions, and applications to open a branch or facility. The Company has a
satisfactory rating under CRA.
Other Regulations. Interest and certain other charges collected or contracted
for by the Bank are subject to state usury laws and certain federal laws
concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers; the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves; the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit; the Fair Credit Reporting Act of 1978 governing
these and provision of information to credit reporting agencies; the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies; the Soldiers' and Sailors Civil Relief Act of 1940,
governing the repayment terms of, and property rights underlying obligations of
persons in military service; and the rules and regulations of the various
federal agencies charged with the responsibility of implementing such federal
laws. The deposit operations of the Bank are also subject to the Right to
Financial Privacy Act, which imposes a duty to maintain confidentiality of
consumer financial records and prescribes procedures for complying with
administrative subpoenas of financial records, and the Electronic Funds Transfer
Act and Regulation E issued by the Federal Reserve Board to implement that act,
which governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
Deposit Insurance. The deposits of the Bank are currently insured by the FDIC to
a maximum of $100,000 per depositor, subject to certain aggregation rules. The
FDIC establishes rates for the payment of premiums by federally insured banks
for deposit insurance. An insurance fund is maintained for commercial banks,
with insurance premiums from the industry used to offset losses from insurance
payouts when banks and thrifts fail. The FDIC has adopted a risk-based deposit
insurance premium system for all insured depository institutions, including the
Bank, which requires premiums from a depository institution based upon its
capital levels and risk profile, as determined by its primary federal regulator
on a semiannual basis.
33
RECENT LEGISLATION
On July 30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002
(the "Sarbanes-Oxley Act"). The stated goals of the Sarbanes-Oxley Act are to
increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures made pursuant to the securities laws. The proposed changes are
intended to allow shareholders to monitor the performance of companies and
directors more easily and efficiently.
The Sarbanes-Oxley Act generally applies to all companies, both U.S. and
non-U.S., that file or are required to file periodic reports with the SEC under
the Securities Exchange Act of 1934. Further, the Sarbanes-Oxley Act includes
very specified additional disclosure requirements and new corporate governance
rules, requires the SEC, securities exchanges and the NASDAQ Stock Market to
adopt extensive additional disclosure, corporate governance and other related
rules and mandates further studies of certain issues by the SEC and the
Comptroller General. Given the extensive SEC role in implementing rules relating
to many of the Sarbanes-Oxley Act's new requirements, the final scope of these
requirements remains to be determined.
This Sarbanes-Oxley Act addresses, among other matters: audit committees;
certification of financial statements by the chief executive officer and the
chief financial officer; the forfeiture of bonuses and profits made by directors
and senior officers in the twelve month period covered by restated financial
statements; a prohibition on insider trading during pension plan black out
periods; disclosure of off-balance sheet transactions; a prohibition on personal
loans to directors and officers (excluding Federally insured financial
institutions); expedited filing requirements for stock transaction reports by
officers and directors; the formation of a public accounting oversight board;
auditor independence; and various increased criminal penalties for violations of
securities laws.
Management has taken various measures to comply with the requirements of the
Sarbanes-Oxley Act. However, given the extensive role of the SEC in implementing
rules relating to many of the Act's new requirements, the final scope of these
requirements remains to be determined.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Included on pages 37 through 42, below.
PART III
MANAGEMENT
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated herein by reference to
pages [3] through [8] of the Company's Proxy Statement for its annual meeting to
be held on Wednesday, April 23, 2003.
ITEM 11: EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to
pages [9] through [10] of the Company's Proxy Statement for its annual meeting
to be held on Wednesday, April 23, 2003.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this item is incorporated herein by reference to
pages [14] through [16] of the Company's Proxy Statement for its annual meeting
to be held on Wednesday, April 23, 2003.
34
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The Company and the Bank have, and expect to continue to have, banking and other
transactions in the ordinary course of business with directors and executive
officers of the Company and their affiliates, including members of their
families or corporations, partnerships or other organizations in which such
directors or executive officers have a controlling interest, on substantially
the same terms (including price, or interest rates and collateral) as those
prevailing at the time for comparable transactions with unrelated parties. Such
transactions are not expected to involve more than the normal risk of
collectibility nor present other unfavorable features to the Company and the
Bank. The Bank is subject to limits on the aggregate amount it can lend to the
Bank's and the Company's directors and officers as a group. This limit is
currently equal to the entity's unimpaired capital plus reserve for loan losses.
Loans to individual directors and officers must also comply with the Bank's
lending policies and statutory lending limits, and directors with a personal
interest in any loan application are excluded from the consideration of such
loan application.
ITEM 14: DISCLOSURE CONTROL AND PROCEDURES
As of December 31, 2002, under the supervision and with the participation of the
Company's Chief Executive (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 December 31, 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.
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) The following documents are filed or incorporated by reference as part of
this Report:
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
1. Financial Statements: Page Number
-------------------------------------------------------- -----------
Independent auditors' report 36
Consolidated Balance Sheets
at December 31, 2002 and 2001 37
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001, and 2000 38
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2002, 2001, and 2000 39
Consolidated Statements of Cash Flows for the
years ended December 31, 2002, 2001, and 2000 40
Consolidated Statements of Comprehensive Income
for the years ended December 31, 2002, 2001 and 2000 42
Notes to Consolidated Financial Statements 43
2. Financial Statement Schedules
None other than those included in the Notes to
Consolidated Financial Statements.
3. Exhibits
See Exhibit Index
(b) Reports on Form 8-K
During the three months ended December 31, 2002, the Registrant filed one
current report on Form 8-K dated December 30, 2002 in which the Registrant
announced it had entered into a definitive agreement to sell its bank locations
in Iola, Chanute, and Humboldt, Kansas to Emprise Financial Corporation subject
to the terms and conditions contained in the agreement.
35
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Enterprise Financial Services Corp:
We have audited the accompanying consolidated balance sheets of Enterprise
Financial Services Corp and subsidiaries (the Company) as of December 31, 2002
and 2001, and the related consolidated statements of operations, shareholders'
equity, cash flows, and comprehensive income for each of the years in the
three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Enterprise Financial
Services Corp and subsidiaries as of December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets."
KPMG LLP
St. Louis, Missouri
February 21, 2003
36
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2002 and 2001
2002 2001
------------- -------------
Assets
Cash and due from banks $ 39,052,123 $ 32,178,155
Federal funds sold 33,367,011 48,624,680
Interest-bearing deposits 66,349 3,433,351
Investments in debt and equity securities:
Available for sale, at estimated fair value 66,618,556 45,952,142
Held to maturity, at amortized cost (estimated fair
value of $12,780 in 2002 and $116,633 in 2001) 12,600 116,214
------------- -------------
Total investments in debt and equity securities 66,631,156 46,068,356
------------- -------------
Loans held for sale 6,991,421 8,936,042
Loans, less unearned loan fees 679,799,399 602,746,799
Less allowance for loan losses 8,600,001 7,295,916
------------- -------------
Loans, net 671,199,398 595,450,883
------------- -------------
Other real estate owned 125,000 138,000
Fixed assets, net 7,685,682 8,730,853
Accrued interest receivable 3,458,596 3,140,912
Goodwill 2,087,537 2,087,537
Assets held for sale 36,401,416 40,575,263
Prepaid expenses and other assets 9,720,812 5,885,531
------------- -------------
Total assets $ 876,786,501 $ 795,249,563
============= =============
Liabilities and Shareholders' Equity
Deposits:
Demand $ 155,596,970 $ 119,760,758
Interest-bearing transaction accounts 59,058,224 58,282,392
Money market accounts 341,589,829 304,747,322
Savings 3,420,987 2,713,572
Certificates of deposit:
$100,000 and over 105,030,371 64,355,074
Other 51,617,893 105,693,791
------------- -------------
Total deposits 716,314,274 655,552,909
Guaranteed preferred beneficial interests in subordinated debentures 15,000,000 11,000,000
Federal Home Loan Bank advances 29,464,044 14,032,385
Notes payable and other borrowings 2,358,753 1,366,667
Accrued interest payable 1,264,600 1,208,549
Liabilities held for sale 50,053,023 58,800,256
Accounts payable and accrued expenses 3,521,857 1,392,194
------------- -------------
Total liabilities 817,976,551 743,352,960
------------- -------------
Shareholders' equity:
Common stock, $.01 par value; 20,000,000
shares authorized; 9,497,794 issued and
outstanding at December 31, 2002, and 9,270,667
issued and outstanding at December 31, 2001 94,978 92,707
Surplus 38,401,814 37,288,725
Retained earnings 18,673,619 14,330,784
Accumulated other comprehensive income 1,639,539 184,387
------------- -------------
Total shareholders' equity 58,809,950 51,896,603
------------- -------------
Total liabilities and shareholders' equity $ 876,786,501 $ 795,249,563
============= =============
See accompanying notes to consolidated financial statements.
37
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 2002, 2001, and 2000
2002 2001 2000
------------ ------------ ------------
Interest income:
Interest and fees on loans $ 43,013,955 $ 48,684,303 $ 49,110,601
Interest on debt and equity securities:
Taxable 1,495,968 2,129,348 3,328,199
Nontaxable 917 17,378 35,801
Interest on federal funds sold 574,094 1,634,289 3,410,002
Interest on interest-bearing deposits 28,406 27,332 1,183
Dividends on equity securities 58,137 119,461 144,566
------------ ------------ ------------
Total interest income 45,171,477 52,612,111 56,030,352
------------ ------------ ------------
Interest expense:
Interest-bearing transaction accounts 269,189 554,671 823,133
Money market accounts 5,000,759 9,589,652 13,365,785
Savings 84,093 156,665 185,127
Certificates of deposit:
$100,000 and over 3,144,962 5,106,034 4,689,220
Other 3,687,543 6,597,185 6,934,653
Guaranteed preferred beneficial interests
in subordinated debentures 1,116,808 1,042,439 1,053,334
Notes payable and other borrowed funds 1,004,398 763,769 544,657
------------ ------------ ------------
Total interest expense 14,307,752 23,810,415 27,595,909
------------ ------------ ------------
Net interest income 30,863,725 28,801,696 28,434,443
Provision for loan losses 2,250,578 3,230,000 1,042,534
------------ ------------ ------------
Net interest income after
provision for loan losses 28,613,147 25,571,696 27,391,909
------------ ------------ ------------
Noninterest income:
Service charges on deposit accounts 1,771,417 1,298,611 1,196,326
Trust and financial advisory income 2,353,927 1,426,078 851,829
Other service charges and fee income 384,592 390,790 457,563
Gain on sale of mortgage loans 1,707,166 1,238,441 503,702
Gain on sale of securities - 74,658 -
Recovery/income (loss) from Merchant Banc investments 88,889 (5,716,138) 270,181
------------ ------------ ------------
Total noninterest income (loss) 6,305,991 (1,287,560) 3,279,601
------------ ------------ ------------
Noninterest expense:
Salaries 14,307,993 13,438,811 11,045,439
Payroll taxes and employee benefits 2,556,837 2,364,082 2,167,133
Occupancy 1,900,812 1,677,965 1,557,082
Furniture and equipment 1,001,671 1,081,314 722,703
Data processing 1,011,860 1,092,234 1,084,377
Amortization of goodwill - 190,567 190,567
Losses and settlement 1,371,361 26,551 2,747
Other 6,153,387 5,705,359 5,491,566
------------ ------------ ------------
Total noninterest expense 28,303,921 25,576,883 22,261,614
------------ ------------ ------------
Income (loss) before income tax expense 6,615,217 (1,292,747) 8,409,896
Income tax expense 1,613,737 1,241,944 3,208,450
------------ ------------ ------------
Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446
============ ============ ============
Per share amounts:
Basic earnings (loss) per share $ 0.53 $ (0.28) $ 0.58
Basic weighted average common shares
outstanding 9,399,374 9,203,224 8,990,605
Diluted earnings (loss) per share $ 0.52 $ (0.28) $ 0.54
Diluted weighted average common
shares outstanding 9,611,108 9,203,224 9,684,752
See accompanying notes to consolidated financial statements.
38
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 2002, 2001 and 2000
Accumulated
Common Stock other
----------------------------- Retained comprehensive Treasury
Shares Amount Surplus earnings income (loss) stock
----------- ---------------- ------------ ------------ ------------- ----------
Balance December 31, 1999 8,970,359 89,703 35,133,786 12,622,630 (412,523) (390,000)
Net income - - - 5,201,446 - -
Dividends declared
($.05 per share) - - - (405,265) - -
Stock options exercised 134,621 1,346 802,779 - - -
Issuance of common stock 970 10 10,324 - - -
Option surplus - - 283,148 - - -
Retirement of treasury stock (33,429) (334) (389,666) - - 390,000
Other comprehensive income - - - - 546,399 -
----------- ---------------- ------------ ------------ ------------- ----------
Balance December 31, 2000 9,072,521 90,725 35,840,371 17,418,811 133,876 -
Net loss - - - (2,534,691) - -
Dividends declared
($.06 per share) - - - (553,336) - -
Stock options exercised 198,146 1,982 1,257,061 - - -
Option surplus - - 191,293 - - -
Other comprehensive income - - - - 50,511
----------- ---------------- ------------ ------------ ------------- ----------
Balance December 31, 2001 9,270,667 92,707 37,288,725 14,330,784 184,387 -
Net income - - - 5,001,480 - -
Dividends declared
($.07 per share) - - - (658,645) - -
Stock options exercised 227,127 2,271 903,313 - - -
Option surplus - - 209,776 - - -
Other comprehensive income - - - - 1,455,152
----------- ---------------- ------------ ------------ ------------- ----------
Balance December 31, 2002 9,497,794 $ 94,978 $ 38,401,814 $ 18,673,619 $ 1,639,539 $ -
=========== ================ ============ ============ ============= ==========
Total
share-
holders'
equity
------------
Balance December 31, 1999 47,043,596
Net income 5,201,446
Dividends declared
($.05 per share) (405,265)
Stock options exercised 804,125
Issuance of common stock 10,334
Option surplus 283,148
Retirement of treasury stock -
Other comprehensive income 546,399
------------
Balance December 31, 2000 53,483,783
Net loss (2,534,691)
Dividends declared
($.06 per share) (553,336)
Stock options exercised 1,259,043
Option surplus 191,293
Other comprehensive income 50,511
------------
Balance December 31, 2001 51,896,603
Net income 5,001,480
Dividends declared
($.07 per share) (658,645)
Stock options exercised 905,584
Option surplus 209,776
Other comprehensive income 1,455,152
------------
Balance December 31, 2002 $ 58,809,950
============
See accompanying notes to consolidated financial statements.
39
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
-------------- ------------- -------------
Cash flows from operating activities:
Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,717,891 1,720,967 1,399,929
Provision for loan losses 2,250,578 3,230,000 1,042,534
Gain on sale of other real estate owned - (12,630) (214,930)
Net amortization (accretion) of debt and equity securities 706,771 195,293 (93,459)
Gain on sale of available for sale investment securities - (74,658) -
Recovery/income (loss) from Merchant Banc investments 88,889 5,716,138 (270,181)
Proceeds from mortgage loans sold 96,871,525 87,574,753 37,535,129
Gain on sale of mortgage loans (1,707,166) (1,238,441) (503,702)
Proceeds from sale of trading security - - 910,500
Mortgage loans originated (93,219,738) (94,327,259) (36,538,187)
Write off of fixed assets - 104,174 -
Losses and settlement 1,300,000 - -
Noncash compensation expense attributed
to stock option grants 209,776 191,293 283,148
(Increase) decrease in accrued interest receivable (317,684) 1,117,798 (703,095)
Increase (decrease) in accrued interest payable 56,051 (478,739) 395,133
Deferred income tax benefit (325,816) (1,739,479) (173,148)
Other, net (1,208,354) (864,697) (238,132)
-------------- ------------- -------------
Net cash provided by (used in) operating activities 11,424,203 (1,420,178) 8,032,985
-------------- ------------- -------------
Cash flows from investing activities:
Purchases of available for sale debt securities (65,686,572) (67,809,110) (35,037,422)
Purchases of held to maturity securities - (101,195) -
Proceeds from sale of available for sale debt securities - 3,036,792 -
Proceeds from redemption of equity securities 1,600 655,250 -
Proceeds from maturities and principal paydowns on
available for sale debt and equity securities 44,501,177 70,941,026 27,221,293
Proceeds from maturities and principal paydowns on held
to maturity debt securities 100,000 500,000 150,000
Proceeds from sale of other real estate 2,298,266 313,630 653,002
Net increase in loans (80,498,510) (89,361,410) (72,065,460)
Recoveries of loans previously charged off 299,417 121,249 84,230
Net decrease (increase) in assets held for sale 4,173,847 676,321 (4,539,861)
Net (decrease) increase in liabilities held for sale (8,747,233) 2,631,045 2,394,839
Increase in note receivable from Enterprise Merchant Banc LLC - (1,362,779) -
Proceeds from sale of fixed assets 21,382 30,600 -
Purchases of fixed assets (532,329) (2,868,183) (2,018,658)
Additional Merchant Banc investments - (221,785) (1,514,686)
-------------- ------------- -------------
Net cash used in investing activities (104,068,955) (82,818,549) (84,672,723)
-------------- ------------- -------------
40
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
Years ended December 31, 2002, 2001, and 2000
2002 2001 2000
-------------- ------------- -------------
Cash flows from financing activities:
Net increase in non-interest bearing deposit accounts 35,836,212 19,086,926 31,167,901
Net increase in interest bearing deposit accounts 24,387,153 60,197,757 56,385,159
Proceeds from guaranteed preferred beneficial
interests in subordinated debentures 4,000,000 - -
Maturities and paydowns of Federal Home Loan Bank advances (3,243,341) (6,083,514) (1,150,931)
Decrease in federal funds purchased - (1,225,000) (75,000)
Proceeds from borrowings of Federal Home Loan Bank advances 18,675,000 10,150,000 -
Proceeds from borrowings of notes payable 1,750,000 1,500,000 -
Repayments of notes payable (3,116,667) (133,333) -
Increase in other borrowings 2,358,753 - -
Cash dividends paid (658,645) (553,336) (405,265)
Proceeds from the issuance of common stock - - 10,334
Proceeds from the exercise of common stock options 905,584 1,259,043 804,125
-------------- ------------- -------------
Net cash provided by financing activities 80,894,049 84,198,543 86,736,323
-------------- ------------- -------------
Net (decrease) increase in cash and cash equivalents (11,750,703) (40,184) 10,096,585
Cash and cash equivalents, beginning of year 84,236,186 84,276,370 74,179,785
-------------- ------------- -------------
Cash and cash equivalents, end of year $ 72,485,483 $ 84,236,186 $ 84,276,370
============== ============= =============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 14,251,701 $ 24,289,154 $ 19,205,805
Income taxes 2,062,744 3,776,300 3,218,300
============== ============= =============
Noncash transactions:
Transfers to other real estate owned in settlement of loans $ 2,235,000 $ 90,000 $ 76,680
Loans made to facilitate sale of other real estate owned 1,980,000 28,680 -
Retirement of treasury stock - - 390,000
Reduction of deferred tax asset valuation reserve 800,000 - -
============== ============= =============
See accompanying notes to consolidated financial statements.
41
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ------------- ------------
Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446
Other comprehensive income, before tax:
Unrealized gain on investment securities
arising during year, net of tax 122,612 97,157 546,399
Less reclassification adjustment for realized
gain on sales of investment securities
included in net income (loss), net of tax - (46,646) -
Unrealized gain on cash flow type derivative
instruments arising during the
period, net of tax 1,332,540 - -
------------ ------------- ------------
Total other comprehensive income, net of tax 1,455,152 50,511 546,399
------------ ------------- ------------
Total comprehensive income (loss) $ 6,456,632 $ (2,484,180) $ 5,747,845
============ ============= ============
See accompanying notes to consolidated financial statements.
42
NOTE 1--ORGANIZATION
Enterprise Financial Services Corp (the "Company") is a financial holding
company with five wholly-owned subsidiaries: Enterprise Bank, Enterprise
Merchant Banc, Inc., Commercial Guaranty Bancshares, Inc., EBH Capital Trust I,
and EFSC Capital Trust I.
The Company provides a full range of banking services to individual and
corporate customers located within St. Louis, Missouri, the surrounding
communities, the Kansas Metropolitan and Southeast Kansas markets through its
subsidiary, Enterprise Bank (the "Bank"). The Company is subject to competition
from other financial and nonfinancial institutions providing financial services
in the markets served by the Company's subsidiaries. Additionally, the Company
and its subsidiaries are subject to the regulations of certain federal and state
agencies and undergo periodic examinations by those regulatory agencies.
Enterprise Trust ("Trust") is a division of the Bank which provides fee-based
trust, personal financial planning, estate planning, and corporate planning
services to the Company's target market.
Enterprise Merchant Banc, Inc. ("Merchant Banc") (formerly Enterprise Capital
Resources, Inc.) was formed as a wholly owned subsidiary to provide merchant
banking services to closely-held businesses and their owners. Its current
operations included a minority investment in Enterprise Merchant Banc, LLC ("EMB
LLC"), which focused on providing equity capital and equity-linked dept
investments to growing companies in need of additional capital to finance
internal and acquisition-related growth. After experiencing significant losses
on merchant banking investments in 2001, the Company no longer views the
merchant banking investments as a viable part of its long term business
strategy. Its investments have been viewed as "workouts", regardless of their
individual performance, and the Company is pursuing maximum recovery efforts as
necessary.
Commercial Guaranty Bancshares, Inc. ("CGB") was the bank holding company for
First Commercial Bank, N.A. ("FCB"). On January 1, 2001, First Commercial Bank,
N.A., changed its name to Enterprise Banking, N.A. At the close of business on
September 30, 2001 Enterprise Banking N.A. merged with and into the Bank, with
the Bank being the surviving charter. The Company plans to dissolve CGB in 2003.
EBH Capital Trust I ("EBH Trust") is a Delaware business trust created for the
single purpose of offering trust preferred securities and purchasing the junior
subordinated debentures of the Company. EFSC Capital Trust I ("EFSC Trust") is a
Delaware business trust created for the single purpose of participating in a
trust preferred securities pool and purchasing the junior subordinated
debentures of the Company.
43
NOTE 2--PENDING SALE OF SOUTHEAST KANSAS BRANCHES
On December 30, 2002, the Company signed an Asset Purchase Agreement to sell its
Humboldt, Chanute and Iola, Kansas branches ("Southeast Kansas branches") to
Emprise Financial Corporation based in Wichita, Kansas. Assets of $36.4 million
and deposits of $50.1 million associated with these branches are shown as "held
for sale" on the Company's balance sheet at December 31, 2002. The Company will
receive a 2.5% premium on loans and a 4.75% premium on deposits. All other items
will be transferred at book value. The sale is subject to the satisfaction of
customary conditions, including regulatory approvals, and is expected to close
in April of 2003. The Southeast Kansas branches had a minimal effect on net
income (loss) for the years ended December 31, 2002, 2001 and 2000. The
Southeast Kansas branches are included in the Enterprise Banking segment.
As of December 31,
2002 2001
------------ ------------
Assets held for sale:
Loans, less unearned loan fees $ 35,294,138 $ 39,306,684
Fixed assets, net 1,107,278 1,268,579
------------ ------------
Total assets held for sale 36,401,416 40,575,263
============ ============
Liabilities held for sale:
Demand deposits 5,619,146 6,887,290
Interest bearing transaction accounts 12,284,145 13,292,294
Money market accounts 4,726,423 4,608,004
Savings 5,106,036 5,048,345
Certificates of deposit:
$100,000 and over 1,650,261 3,995,881
Other 20,667,012 24,968,442
------------ ------------
Total liabilities held for sale $ 50,053,023 $ 58,800,256
============ ============
NOTE 3--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The more significant accounting policies used by the Company in the preparation
of the consolidated financial statements are summarized below:
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements of the Company and its subsidiaries have
been prepared in conformity with accounting principles generally accepted in the
United States of America and conform to predominant practices within the banking
industry. In preparing the consolidated financial statements, management is
required to make estimates and assumptions which significantly affect the
reported amounts in the consolidated financial statements. Estimates which are
particularly susceptible to change in a short period of time include the
determination of the allowance for loan losses and the valuation of real estate
acquired in connection with foreclosures or in satisfaction of amounts due from
borrowers on loans. Actual amounts could differ from those estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its banking subsidiary, Enterprise Bank (100% owned). All significant
intercompany accounts and transactions have been eliminated.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
The Company currently classifies investments in debt and equity securities as
follows:
Trading - includes securities which the Company has bought and held principally
for the purpose of selling them in the near term.
44
Held to maturity - includes debt securities which the Company has the positive
intent and ability to hold until maturity.
Available for sale - includes debt and marketable equity securities not
classified as held to maturity or trading (i.e., investments which the Company
has no present plans to sell but may be sold in the future under different
circumstances).
Debt securities classified as held to maturity are carried at amortized cost,
adjusted for the amortization or accretion of premiums or discounts. Unrealized
holding gains and losses for held to maturity securities are excluded from
earnings and shareholders' equity. Debt and equity securities classified as
available for sale are carried at estimated fair value. Unrealized holding gains
and losses for available for sale securities are excluded from earnings and
reported as a net amount in a separate component of shareholders' equity until
realized. All previous fair value adjustments included in the separate component
of shareholders' equity are reversed upon sale. Debt and equity securities
classified as trading are carried at estimated fair value. The realized and
unrealized gains and losses on trading securities are included in noninterest
income.
A decline in the market value of any available for sale or held to maturity
security below cost that is deemed other than temporary results in a charge to
earnings and the establishment of a new cost basis for the security.
For securities in the held to maturity and available for sale categories,
premiums and discounts are amortized or accreted over the lives of the
respective securities as an adjustment to yield using the interest method.
Dividend and interest income is recognized when earned. Realized gains and
losses for securities classified as trading, available for sale and held to
maturity are included in earnings and are derived using the specific
identification method for determining the cost of securities sold.
LOANS HELD FOR SALE
The Company provides long-term financing of one-to four-family residential real
estate by originating fixed and variable rate loans. Long-term, fixed and
variable rate loans are sold into the secondary market without recourse. Upon
receipt of an application for a real estate loan, the Company determines whether
the loan will be sold into the secondary market or retained in the Company's
loan portfolio. The interest rates on the loans sold are locked with the buyer
and the Company bears no interest rate risk related to these loans. Mortgage
loans that are sold in the secondary market are sold principally under programs
with the Government National Mortgage Association (GNMA) or the Federal National
Mortgage Association (FNMA). Mortgage loans held for sale are carried at the
lower of cost or fair value, which is determined on a specific identification
method. The Company does not retain servicing on any loans sold, nor did the
Company have any capitalized mortgage servicing rights at December 31, 2002 and
2001.
INTEREST AND FEES ON LOANS
Interest income on loans is accrued and credited to income based on the
principal amount outstanding. The recognition of interest income is discontinued
when a loan becomes 90 days past due or a significant deterioration in the
borrower's credit has occurred which, in management's opinion, negatively
impacts the collectibility of the loan. Subsequent interest payments received on
such loans are applied to principal if any doubt exists as to the collectibility
of such principal; otherwise, such receipts are recorded as interest income.
Loans are returned to accrual status when management believes full
collectibility of principal and interest is expected.
Loan origination fees greater than $10,000 per loan are deferred and recognized
over the lives of the related loans as a yield adjustment using a method which
approximates the interest method.
LOANS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased by provisions charged to expense and
is available to absorb charge offs, net of recoveries. Management utilizes a
systematic, documented approach in determining the appropriate level of the
allowance for loan losses. Management's approach, which provides for general and
specific allowances, is based on current economic conditions, past losses,
collection experience, risk characteristics of the portfolio, assessments of
collateral values by obtaining independent appraisals for significant
properties, and such other factors which, in management's judgment, deserve
current recognition in estimating loan losses.
45
Management believes the allowance for loan losses is adequate to absorb probable
losses in the loan portfolio. While management uses available information to
recognize losses on loans, future additions to the allowance may be necessary
based on changes in economic conditions and other factors. In addition, various
regulatory agencies, as an integral part of the examination process,
periodically review the Bank's loan portfolio. Such agencies may require the
Bank to add to the allowance for loan losses based on their judgments and
interpretations of information available to them at the time of their
examinations.
ACCOUNTING FOR IMPAIRED LOANS
A loan is considered impaired when it is probable the Bank will be unable to
collect all amounts due, both principal and interest, according to the
contractual terms of the loan agreement. Generally, the Bank's non-accrual and
restructured loans qualify as "impaired loans." When measuring impairment, the
expected future cash flows of an impaired loan are discounted at the loan's
effective interest rate. Alternatively, impairment is measured by reference to
an observable market price, if one exists, or the fair value of the collateral
for a collateral-dependent loan. Regardless of the measurement method used,
historically, the Bank measures impairment based on the fair value of the
collateral when foreclosure is probable. Additionally, impairment of a
restructured loan is measured by discounting the total expected future cash flow
at the loan's effective rate of interest as stated in the original loan
agreement. The Bank recognizes interest income on nonaccrual loans only when
received and on impaired loans continuing to accrue interest as earned.
OTHER REAL ESTATE OWNED
Other real estate owned represents property acquired through foreclosure or
deeded to the Bank in lieu of foreclosure on loans on which the borrowers have
defaulted as to the payment of principal and interest. Other real estate owned
is recorded on an individual asset basis at the lower of cost or fair value less
estimated costs to sell. Subsequent reductions in fair value are expensed or
recorded in a valuation reserve account through a provision against income.
Subsequent increases in the fair value are recorded through a reversal of the
valuation reserve.
Gains and losses resulting from the sale of other real estate owned are credited
or charged to current period earnings. Costs of maintaining and operating other
real estate owned are expensed as incurred, and expenditures to complete or
improve other real estate owned properties are capitalized if the expenditures
are expected to be recovered upon ultimate sale of the property.
FIXED ASSETS
Buildings, leasehold improvements, and furniture, fixtures, and equipment are
stated at cost less accumulated depreciation and amortization is computed using
the straight-line method over their respective estimated useful lives.
Furniture, fixtures and equipment is depreciated over three to ten years and
buildings and leasehold improvements over ten to forty years based upon lease
obligation periods.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of costs over fair value of assets of businesses
acquired. The Company adopted the provisions of SFAS No. 142, Goodwill and Other
Intangible Assets, as of January 1, 2002. Goodwill and intangible assets
acquired in a purchase business combination and determined to have an indefinite
useful life are not 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 estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
review for impairment in accordance with SFAS No. 144, Accounting for Impairment
or Disposal of Long-Lived Assets.
In connection with SFAS No. 142's transitional goodwill impairment evaluation,
the Statement required the Company to perform an assessment of whether there was
an indication that goodwill is impaired as of the date of adoption. To
accomplish this, the Company was required to identify its reporting units and
determine the carrying value of each reporting unit by assigning the assets and
liabilities, including the existing goodwill and intangible assets to those
reporting units as of January 1, 2002. The Company was required to determine the
fair value of the reporting unit and compare it to the carrying amount of the
reporting unit within six months of January 1, 2002. To
46
the extent the carrying amount of a reporting unit exceeded the fair value of
the reporting unit, the Company would be required to perform the second step of
the transitional impairment test, as this is an indication that the reporting
unit goodwill may be impaired. The second step was not required because the fair
value exceeded the carrying amount for the reporting units.
Prior to the adoption of SFAS No. 142, goodwill was amortized on a straight-line
basis over the expected periods to be benefited, generally 20 years, and
assessed for recoverability by determining whether the amortization of the
goodwill balance over its remaining life could be recovered through undiscounted
future operating cash flows of the acquired operation. All other intangible
assets were amortized on a straight-line basis. The amount of goodwill and other
intangible asset impairment, if any, was measured based on projected discounted
future operating cash flows using a discount rate reflecting the Company's
average cost of funds.
IMPAIRMENT OF LONG-LIVED ASSETS
SFAS No. 144 provides a single accounting model for long-lived assets to be
disposed of. SFAS No. 144 also changes the criteria for classifying an asset as
held for sale; and broadens the scope of businesses to be disposed of that
qualify for reporting as discontinued operations and changes the timing of
recognizing losses on such operations. The Company adopted SFAS No. 144 on
January 1, 2002. The adoption of SFAS No. 144 was considered in the accounting
and disclosure of the Company's sale of the Southeast Kansas branches.
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment, and purchased intangibles subject to amortization, are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash
flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Assets to be disposed
of are separately presented in the balance sheet and reported at the lower of
the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposed group classified as held
for sale are presented separately in the appropriate asset and liability
sections of the balance sheet.
Goodwill and intangible assets not subject to amortization are tested annually
for impairment, and are tested for impairment more frequently if events and
circumstances indicate that the asset might be impaired. An impairment loss is
recognized to the extent that the carrying amount exceeds the asset's fair
value.
Prior to the adoption of SFAS No. 144, the Company accounted for long-lived
assets in accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of.
INCOME TAXES
The Company and its subsidiaries file consolidated federal income tax returns.
Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
in effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recognized if the Company
determines it is more likely than not that all or some portion of the deferred
tax asset will not be recognized.
CASH FLOW INFORMATION
For purposes of reporting cash flows, the Company considers cash and due from
banks, federal funds sold and interest-bearing deposits to be cash and cash
equivalents.
RECLASSIFICATION
Certain reclassifications have been made to the 2001 and 2000 amounts to conform
to the present year presentation.
47
STOCK OPTIONS
The Company applies the intrinsic-value-based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations including FASB Interpretation No. 44,
Accounting for Certain Transactions involving Stock Compensation, an
interpretation of APB Opinion No. 25, issued in March 2000, to account for its
fixed-plan stock options. Under this method, compensation expense is recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based
Compensation, established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As allowed by SFAS No. 123, the Company has elected to continue to apply
the intrinsic-value-based method of accounting described above, and has adopted
only the disclosure requirements of SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123. See Note 16--COMPENSATION PLANS for the Company's net income (loss) and
earnings (loss) per share had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method contained in SFAS 123.
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.
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.
NEW ACCOUNTING STANDARDS
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 Banking 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.
48
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, 2000:
2002 2001 2000
------------ ------------- -------------
Net income:
Reported net income $ 5,001,480 $ (2,534,691) $ 5,201,446
Add back - goodwill amortization - 190,567 190,567
------------ ------------- -------------
Adjusted net income $ 5,001,480 $ (2,344,124) $ 5,392,013
============ ============= =============
Basic earnings per share:
Reported net income $ 0.53 $ (0.28) $ 0.58
Add back - goodwill amortization - 0.03 0.02
------------ ------------- -------------
Adjusted net income $ 0.53 $ (0.25) $ 0.60
============ ============= =============
Diluted earnings per share:
Reported net income $ 0.52 $ (0.28) $ 0.54
Add back - goodwill amortization - 0.03 0.02
------------ ------------- -------------
Adjusted net income $ 0.52 $ (0.25) $ 0.56
============ ============= =============
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 SFAS No.
144 was considered in the accounting and disclosure of the Company's sale of the
Southeast Kansas branches.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
SFAS No. 145 amends existing guidance on reporting gains and losses on the
extinguishment of debt to prohibit the classification of the gain or loss as
extraordinary, as the use of such extinguishments have become part of the risk
management strategy of many companies. SFAS No. 145 also amends SFAS No. 13 to
require sale-leaseback accounting for certain lease modifications that have
economic effects similar to sale-leaseback transactions. The provisions of the
Statement related to the related to Statement No. 13 were effective for
transactions occurring after May 14, 2002, with early application encouraged.
The adoption of SFAS No. 145 is not expected to have material effect on the
Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue 94-3, Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002, with early application encouraged. The
adoption of SFAS No. 146 is not expected to 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
49
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 did not have a material effect on the Company's
consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others, an interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This Interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The Interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the Interpretation are
applicable to guarantees issued or modified after December 31, 2002 and are not
expected to have a material effect on the Company's consolidated financial
statements. The disclosure requirements are effective for financial statements
of interim and annual periods ending after December 15, 2002.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. This Statement amends FASB Statement No. 123, Accounting for Stock-Based
Compensation, to provide alternative methods of transition for a voluntary
change to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure requirements of
Statement No. 123 to require prominent disclosures in both annual and interim
financial statements. Certain of the disclosures modifications are required for
fiscal years ending after December 15, 2002 and are included in the notes to
these consolidated financial statements.
NOTE 4--EARNINGS PER SHARE
Basic earnings (losses) per share data is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings (losses) per share gives effect to the increase in the
average shares outstanding which would have resulted from the exercise of
dilutive stock options and warrants. The components of basic earnings (losses)
per share for the years ended December 31, 2002, 2001, and 2000 are as follows:
2002 2001 2000
------------ ------------- -------------
BASIC
Net income (loss) attributable to
common shareholders' equity $ 5,001,480 $ (2,534,691) $ 5,201,446
============ ============= =============
Weighted average common shares
outstanding 9,399,374 9,203,224 8,990,605
============ ============= =============
Basic earnings (losses) per share $ 0.53 $ (0.28) $ 0.58
============ ============= =============
The components of diluted earnings (losses) per share for the years ended
December 31, 2001, 2000, and 1999 are as follows:
2002 2001 2000
------------ ------------- -------------
DILUTED
Net income (loss) attributable to
common shareholders' equity $ 5,001,480 $ (2,534,691) $ 5,201,446
============ ============= =============
Weighted average common shares
outstanding 9,399,374 9,203,224 8,990,605
Effect of dilutive stock options 211,734 - 694,147
------------ ------------- -------------
Diluted weighted average common shares
outstanding 9,611,108 9,203,224 9,684,752
============ ============= =============
Diluted earnings (losses) per share $ 0.52 $ (0.28) $ 0.54
============ ============= =============
Since the company incurred a net loss for the year ended December 31, 2001,
diluted earnings (losses) per share was computed in the same manner as basic
earnings (losses) per share.
50
For the year ended December 31, 2002, 722,589 options at an average strike price
of $12.51 were outstanding but were not included in the calculation for diluted
earnings per share because the exercise price was higher than the average market
price of the Company's common shares. None of the 1,480,014 options outstanding
with an average strike price of $9.29 for the year ended December 31, 2001 were
included in the calculation of diluted earnings per share due to the net loss.
All options outstanding during the year ended December 31, 2000, were included
in the calculation for diluted earnings per share.
NOTE 5--REGULATORY RESTRICTIONS
The Bank is subject to regulations by regulatory authorities, which require the
maintenance of minimum capital standards, which may affect the amount of
dividends the Bank can pay.
At December 31, 2002 and 2001, approximately $1,851,000 and $2,214,000,
respectively, of cash and due from banks represented required reserves on
deposits maintained by the Bank in accordance with Federal Reserve Bank
requirements.
NOTE 6--INVESTMENTS IN DEBT AND EQUITY SECURITIES
A summary of the amortized cost and estimated fair value of debt and equity
securities classified as available for sale at December 31, 2002 and 2001 is as
follows:
2002
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- --------------- --------------- ----------------
U. S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 38,444,447 $ 381,829 $ - $ 38,826,276
Mortgage-backed securities 25,711,142 110,892 22,873 25,799,161
Other securities 32,419 - - 32,419
Federal Reserve Bank stock and Federal
Home Loan Bank stock 1,960,700 - - 1,960,700
--------------- --------------- --------------- ----------------
$ 66,148,708 $ 492,721 $ 22,873 $ 66,618,556
=============== =============== =============== ================
2001
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- --------------- --------------- ----------------
U. S. Treasury securities and obligations
of U.S. Government corporations and
agencies $ 32,855,635 $ 308,458 $ 3,354 $ 33,160,739
Mortgage-backed securities 11,099,034 31,143 55,049 11,075,128
Municipal bonds 73,682 2,874 - 76,556
Other securities 32,419 - - 32,419
Federal Reserve Bank stock and Federal
Home Loan Bank stock 1,607,300 - - 1,607,300
--------------- --------------- --------------- ----------------
$ 45,668,070 $ 342,475 $ 58,403 $ 45,952,142
=============== =============== =============== ================
51
The amortized cost and estimated fair value of debt and equity securities
classified as available for sale at December 31, 2002, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
--------------- ----------------
Due in one year or less $ 27,898,040 $ 28,117,179
Due after one year through five years 10,546,407 10,709,097
Due after five years through ten years 32,419 32,419
Mortgage-backed securities 25,711,142 25,799,161
Securities with no stated maturity 1,960,700 1,960,700
--------------- ----------------
$ 66,148,708 $ 66,618,556
=============== ================
A summary of the amortized cost and estimated fair value of debt and equity
securities classified as held to maturity at December 31, 2002 and 2001 is as
follows:
2002
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- --------------- --------------- ----------------
Mortgage-backed securities $ 12,600 $ 180 $ - $ 12,780
=============== =============== =============== ================
2001
----------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------- --------------- --------------- ----------------
Mortgage-backed securities $ 15,980 $ 286 $ - $ 16,266
Municipal bonds 100,234 133 - 100,367
--------------- --------------- --------------- ----------------
$ 116,214 $ 419 $ - $ 116,633
=============== =============== =============== ================
The amortized cost and estimated fair value of debt and equity securities
classified as held to maturity at December 31, 2002, by contractual maturity,
are shown below. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
Amortized Estimated
Cost Fair Value
--------------- ---------------
Due after one year through five
years $ 12,600 $ 12,780
=============== ===============
During 2001, the Company sold investment securities with proceeds of $3,036,792
and gross gains of $82,421 and gross losses of $7,763. The Company was required
to sell its equity stock in the Federal Reserve Bank of Kansas City when
membership in the Kansas City Federal Reserve was eliminated with the bank
merger during September 2001. The stock was sold at book value which equated to
cost at $385,950. The Company also redeemed a portion of its stock in the
Federal Home Loan Bank of Topeka. The Bank's membership in the Topeka Federal
Home Loan Bank was eliminated with the bank merger. The Bank redeemed 16 and
2,693 shares at $1,600 and $269,300 during 2002 and 2001, respectively, which
was equal to cost and book value. There were no sales of investments in debt or
equity securities for the years ended December 31, 2002 or December 31, 2000.
Debt and equity securities having a carrying value of $14,278,620 and
$15,094,553 at December 31, 2002 and 2001, respectively, were pledged as
collateral to secure public deposits and for other purposes as required by law
or contract provisions.
As a member of the Federal Home Loan Bank system administered by the Federal
Housing Finance Board, the Bank is required to maintain an investment in the
capital stock of its respective Federal Home Loan Bank (FHLB) in an amount equal
to the greater of 1% of the aggregate outstanding balance of loans secured by
dwelling units at the beginning of each year or 0.3% of its total assets. The
FHLB stock is recorded at cost which represents redemption value. The Bank is a
member of the Federal Home Loan Bank of Des Moines.
52
NOTE 7--LOANS
A summary of loans by category at December 31, 2002 and 2001 is as follows:
2002 2001
---------------- ---------------
Commercial and industrial $ 167,841,653 $ 160,218,233
Loans secured by real estate 515,976,972 453,266,196
Other 31,302,167 28,593,641
--------------- --------------
715,120,792 642,078,070
Less loans held for sale related
to the Southeast Kansas branches (35,294,138) (39,306,684)
Less unearned loan fees, net (27,255) (24,587)
---------------- ---------------
$ 679,799,399 $ 602,746,799
================ ===============
The breakdown of loans secured by real estate at December 31, 2002 and 2001 is
as follows:
2002 2001
---------------- ---------------
Business and personal loans $ 136,093,539 $ 111,082,174
Income-producing properties 158,596,417 111,899,684
Owner-occupied properties 79,263,469 87,865,291
Real estate development properties 142,023,547 142,419,047
---------------- ---------------
$ 515,976,972 $ 453,266,196
================ ===============
The Bank grants commercial, residential, and consumer loans throughout its
service areas, which consists primarily of the immediate area in which the Bank
is located. The Company has a diversified loan portfolio, with no particular
concentration of credit in any one economic sector; however, a substantial
portion of the portfolio is concentrated in and secured by real estate. The
ability of the Company's borrowers to honor their contractual obligations is
dependent upon the local economy and its effect on the real estate market.
Following is a summary of activity for the year ended December 31, 2002 of loans
to executive officers and directors or to entities in which such individuals had
beneficial interests as a shareholder, officer, or director. Such loans were
made in the normal course of business on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for comparable
transactions with other customers and did not involve more than the normal risk
of collectibility.
Balance, January 1, 2002 $ 19,457,562
New loans 8,524,106
Payments and other reductions (11,593,867)
---------------
Balance, December 31, 2002 $ 16,387,801
===============
At December 31, 2001, the Bank had two loans to Enterprise Merchant Banc, LLC
with total committed amounts of $1,600,000 and outstanding balances of
$1,570,000. The first loan was in the amount of $1,000,000 and was
collateralized with secured guarantees. This loan was fully drawn at December
31, 2001 and paid off in full during the year ended December 31, 2002. The
second loan in the amount of $600,000 was secured by a commercial building in
Kansas City, Kansas. The outstanding balance on this loan was $570,000 and
$600,000 at December 31, 2001 and 2002, respectively. The Company's investment
in Enterprise Merchant Banc, LLC was accounted for under the equity method prior
to the writeoff of the investment during the year ended December 31, 2001.
53
A summary of activity in the allowance for loan losses for the years ended
December 31, 2002, 2001, and 2000 is as follows:
2002 2001 2000
------------------ ---------------- ---------------
Balance at beginning of year $ 7,295,916 $ 7,096,544 $ 6,758,222
Provisions charged to operations 2,250,578 3,230,000 1,042,534
Loans charged off (1,245,910) (3,151,877) (788,442)
Recoveries of loans previously
charged off 299,417 121,249 84,230
------------------ ---------------- ---------------
Balance at end of year $ 8,600,001 $ 7,295,916 $ 7,096,544
================== ================ ===============
A summary of impaired loans at December 31, 2002, 2001, and 2000 is as follows:
2002 2001 2000
-------------- ------------- --------------
Nonaccrual loans $ 2,212,479 $ 2,506,188 $ 1,798,364
Impaired loans continuing
to accrue interest 1,675,466 1,242,782 -
-------------- ------------- --------------
Total impaired loans $ 3,887,945 $ 3,748,970 $ 1,798,364
============== ============= ==============
Allowance for losses on specific
impaired loans $ 690,493 $ 601,294 $ 859,046
Impaired loans with no related
allowance for loan losses - - -
Average balance of impaired
loans during the year $ 4,185,486 $ 2,208,486 $ 1,859,873
============== ============= ==============
The Bank had no loans over 90 days past due still accruing interest at December
2002 and 2001. If interest on nonaccrual loans had been accrued, such income
would have been $327,334, $141,282, and $287,696 for the years ended December
31, 2002, 2001, and 2000, respectively. The amount recognized as interest income
on nonaccrual loans was $135,077, $33,677, and $14,979 for the years ended
December 31, 2002, 2001, and 2000, respectively. The amount recognized as
interest income on impaired loans continuing to accrue interest was $127,048,
$69,282, and $208,133 for the years ended December 31, 2002, 2001, and 2000,
respectively.
NOTE 8--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 year ended December
31, 2002, a net interest differential of $967,551 was included in interest
income on loans.
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 paid 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 and the net
cash flow paid or received is included in interest income on loans. The swaps
qualify as "cash flow hedges" under SFAS No. 133, so
54
changes in the fair value of the swaps are recognized as part of other
comprehensive income. On December 31, 2002, the Bank had $2.4 million in cash
collateral from the counterparty 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 Offered Rate ("LIBOR").
The notional amounts of derivative financial instruments do no represent amounts
exchanged by the parties and, therefore, are not a measure of the Banks' credit
exposure through its use of these instruments. The credit exposure represents
the accounting loss the Bank would incur in the event the counterparties failed
completely to perform according to the terms of the derivative financial
instruments and the collateral held to support the credit exposure was of no
value. On December 31, 2002 the Bank had credit exposure of $197,745.
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.
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., broker 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 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 year ended December 31, 2002, a net interest differential of
$197,553 decreased interest expense on certificates of deposit.
The maturity dates, notional amounts, interest rates paid and received and fair
value of our interest rate swap agreements as of December 31, 2002 were as
follows:
Maturity Notional Interest Rate Interest Rate Fair
Hedge Date Amount Paid Received Value
---------- --------- ------------ ------------- ------------- -----------
Cash flow 1/29/2005 $ 20,000,000 4.25% 6.97% $ 1,016,508
Cash flow 1/29/2004 40,000,000 4.25 6.26 1,002,063
Fair Value 5/10/2004 20,000,000 1.58 3.55 537,927
NOTE 9--FIXED ASSETS
A summary of fixed assets at December 31, 2002 and 2001 is as follows:
2002 2001
------------ ------------
Land $ 842,953 $ 842,953
Buildings and leasehold improvements 7,268,246 7,241,633
Furniture, fixtures and equipment 7,069,154 8,754,467
------------ ------------
15,180,353 16,839,053
Less accumulated depreciation and amortization 6,387,393 6,839,621
------------ ------------
8,792,960 9,999,432
Less fixed assets held for sale, net 1,107,278 1,268,579
------------ ------------
$ 7,685,682 $ 8,730,853
============ ============
Depreciation and amortization of building, leasehold improvements, and
furniture, fixtures and equipment included in noninterest expense amounted to
$1,717,891, $1,530,400, and $1,209,362 in 2002, 2001, and 2000, respectively.
The Company wrote off $104,174 in telephone system assets during 2001. The
Company replaced its telephone and communication systems to incorporate the
Kansas locations and to allow for future growth.
55
All of the Company's Missouri banking facilities are leased under agreements
that expire in various years through 2016. The Company's aggregate rent expense
totaled $1,311,148, $1,152,679, and $1,030,883 in 2002, 2001, and 2000,
respectively, and sublease rental income totaled $7,250, $47,853, and $76,231 in
2002, 2001, and 2000, respectively. The future aggregate minimum rental
commitments required under the leases are as follows:
Year Amount
---------- -----------
2003 $ 1,338,020
2004 1,256,155
2005 1,260,306
2006 1,259,390
2007 1,297,222
Thereafter 4,126,302
For leases which renew or are subject to periodic rental adjustments, the
monthly rental payments will be adjusted based on then current market conditions
and rates of inflation.
NOTE 10--MATURITY OF CERTIFICATES OF DEPOSIT
Following is a summary of certificates of deposit maturities at December 31,
2002:
$100,000
Maturity Period and Over Other Total
------------------------------------------ -------------- --------------- ----------------
Less than 1 year $ 59,547,614 $ 29,249,969 $ 88,797,583
Greater than 1 year and less than 2 years 38,061,849 16,902,407 54,964,256
Greater than 2 years and less than 3 years 5,801,637 4,186,883 9,988,520
Greater than 3 years and less than 4 years 1,413,065 1,255,168 2,668,233
Greater than 4 years and less than 5 years 206,206 23,466 229,672
-------------- --------------- ----------------
$ 105,030,371 $ 51,617,893 $ 156,648,264
============== =============== ================
NOTE 11--GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES
On October 25, 1999, EBH Capital Trust I ("EBH Trust"), a Delaware business
trust subsidiary of Enterprise Financial Services Corp issued 1,375,000 shares
of 9.40% Cumulative Trust Preferred Securities ("Preferred Securities") at $8
per share in an underwritten public offering. The Preferred Securities mature on
December 15, 2029. The maturity date may be shortened to a date not earlier than
December 15, 2004, if certain conditions are met.
The debentures are the sole asset of EBH Trust. In connection with the issuance
of the Preferred Securities, the Company made certain guarantees and commitments
that, in the aggregate, constitute a full and unconditional guarantee by the
Company of the obligations of EBH Trust under the Preferred Securities. The
Company's proceeds from the issuance of the subordinated debentures to EBH
Trust, net of underwriting fees and offering expenses, were $10.28 million. The
Preferred Securities are classified as debt for reporting purposes and capital
for regulatory reporting purposes.
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 II") 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. Preferred Securities II are fully,
irrevocably and unconditionally guaranteed on a subordinated basis by the
Company. The proceeds of the Preferred Securities II 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 II are payable quarterly on March 30,
June 30, September 30 and December 30 of each year that the Preferred Securities
II are outstanding. The Preferred Securities II mature on June 30, 2032. The
maturity date may be shortened to a date not earlier than June 30 2007, if
certain conditions are met. The Preferred Securities II are classified as debt
for reporting purposes and capital for regulatory reporting purposes.
56
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 $5 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.
NOTE 12--FEDERAL HOME LOAN BANK ADVANCES
As a member of the Federal Home Loan Bank, the subsidiary bank has access to
Federal Home Loan Bank advances. The Federal Home Loan Bank advances at December
31, 2002 are collateralized by 1-4 family residential real estate loans,
business loans and certain commercial real estate loans with a carrying value of
$199 million and all stock held in the Federal Home Loan Bank of Des Moines.
The following table summarizes the type, maturity and rate of the Company's
Federal Home Loan Bank advances at December 31, 2002 and 2001:
2002 2001
----------------------- -----------------------
Outstanding Weighted Outstanding Weighted
Type of Advance Maturity Balance Rate Balance Rate
-------------------------------------------------- ---------------- ------------ -------- ------------ --------
Long term non-amortized advance less than 1 year $ 14,850,000 3.46% $ 3,164,296 4.44%
Long term non-amortized advance 1 - 2 years 3,400,000 4.73% 1,750,000 5.39%
Long term non-amortized & mortgage matched advance 2 - 3 years 3,675,000 4.47% 4,100,000 4.87%
Long term non-amortized advance 3 - 4 years 1,525,000 4.51% 3,185,000 4.75%
Long term non-amortized & mortgage matched advance 4 - 5 years 1,250,000 4.74% 550,000 5.43%
Long term non-amortized advance 5 - 10 years 2,800,000 5.30% 450,000 5.34%
Mortgage matched advance 10-15 years 1,964,044 5.78% 833,089 5.92%
------------ ------------
Total Federal Home Loan Advances $ 29,464,044 4.17% $ 14,032,385 4.91%
============ ============
The majority of these advances are used to match certain fixed rate loans to
lock in an interest rate spread. All of the Federal Home Loan Bank advances have
fixed interest rates, and $1,956,000 of these borrowings are callable at the
option of the Federal Home Loan Bank of Des Moines under certain conditions. The
Company's banking subsidiary, which has an investment in the capital stock of
the Federal Home Loan Bank, maintains a line of credit with the Federal Home
Loan Bank and had availability of approximately $96 million at December 31,
2002.
NOTE 13--NOTES PAYABLE
At December 31, 2002 the Company had a $7,500,000 unsecured bank line of credit
that matures on March 1, 2003 with no outstanding balance. The line was an
interest only note, accruing interest at a variable rate of prime minus 0.50%.
For the year ended December 31, 2002, the average balance and maximum month-end
balance of the note payable were $513,319 and $2,366,667, respectively. In
January 2003, the company negotiated a $5,000,000 unsecured line of credit with
another lender and cancelled the original $7,500,000 line of credit. The new
line of credit has debt covenants and accrues interest based on the Prime rate
or LIBOR at the Company's discretion and is payable quarterly.
The Company had a line with the Federal Reserve Bank of St. Louis during 2001
and 2002 for liquidity purposes and did not draw on the line. As of December 31,
2002 and 2001, $49,037,459 and $8,350,179 was available under this line.
57
NOTE 14--INCOME TAXES
The components of income tax expense (benefit) for the years ended December 31,
2002, 2001, and 2000 are as follows:
2002 2001 2000
------------------ ------------------ ------------------
Current:
Federal $ 1,832,879 $ 2,586,002 $ 2,949,725
State and local 106,674 395,421 431,873
Deferred (325,816) (1,739,479) (173,148)
------------------ ------------------ ------------------
$ 1,613,737 $ 1,241,944 $ 3,208,450
================== ================== ==================
A reconciliation of expected income tax expense (benefit), computed by applying
the statutory federal income tax rate of 34% in 2002, 2001, and 2000, to income
before income taxes and the amounts reflected in the consolidated statements of
operations is as follows:
2002 2001 2000
------------------ ------------------ ------------------
Income tax (benefit) expense at
statutory rate $ 2,249,174 $ (439,534) $ 2,859,365
Increase (reduction) in income taxes
resulting from:
Reversal of valuation allowance (800,000) - -
Establishment of valuation allowance
on merchant banking investments - 1,041,080 -
Tax-exempt income (165,798) (80,380) (82,032)
State and local income tax expense 70,405 260,978 285,036
Goodwill amortization - 64,793 64,793
Non-deductible expenses 113,494 125,425 97,611
Other, net 146,462 269,582 (16,323)
------------------ ------------------ ------------------
Total tax expense $ 1,613,737 $ 1,241,944 $ 3,208,450
================== ================== ==================
A net deferred income tax asset of $3,475,485 and $3,899,293 is included in
prepaid expenses and other assets in the consolidated balance sheets at December
31, 2002 and 2001, respectively. The tax effect of temporary differences that
gave rise to significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 2002 and 2001 is as follows:
2002 2001
----------------- ----------------
Deferred tax assets:
Allowance for loan losses $ 2,870,398 $ 3,962,027
Deferred compensation 361,418 229,457
Merchant banking investments 1,041,080 1,041,080
Other 512,775 -
----------------- ----------------
Gross deferred tax assets 4,785,671 5,232,564
Valuation allowance (241,080) (1,041,080)
----------------- ----------------
Deferred tax assets net
of valuation allowance 4,544,591 4,191,484
----------------- ----------------
Deferred tax liabilities:
Office equipment and leasehold
improvements 219,797 163,916
Unrealized gains on securities
available for sale 162,849 99,685
Unrealized gain on cash flow type
derivative instruments 686,400 -
Other - 28,590
----------------- ----------------
Total deferred tax liabilities 1,069,106 292,191
----------------- ----------------
Net deferred tax asset $ 3,475,485 $ 3,899,293
================= ================
58
A valuation allowance is provided on deferred tax assets when it is more likely
than not that some portion of the assets will not be realized. The Company had
established a valuation allowance as of December 31, 2001. Management has
determined it is more likely than not that certain of the deferred tax assets
related to the writedown recorded on assets related to Merchant Banc investments
will not be realized. During 2002, in conjunction with the pending sale of the
Southeast Kansas branches discussed in Note 2, the Company quantified the amount
of gain of the appropriate character which could be utilized to offset losses
recorded in 2001 on the Merchant Banc investments. Accordingly, in 2002, the
Company reversed $800,000 of the valuation allowance.
NOTE 15--REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
the Federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - and possible additional, discretionary - actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1
capital to average assets. Management believes, as of December 31, 2002 and
2001, that the Bank meets all capital adequacy requirements to which it is
subject.
As of December 31, 2002, the most recent notification from the FDIC categorized
the Bank as well capitalized under the regulatory framework for prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set
forth in the table. There are no conditions or events since that notification
that management believes have changed the institution's category.
The Company's and Bank's actual capital amounts and ratios are also presented in
the table.
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- --------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------ ------------ ------ ------------ -------
As of December 31, 2002:
Total Capital (to risk weighted assets)
Enterprise Financial Services Corp $ 78,207,875 10.95% $ 57,136,811 8.00% $ - -%
Enterprise Bank 75,204,737 10.58 56,885,394 8.00 71,106,743 10.00
Tier 1 Capital (to risk weighted assets)
Enterprise Financial Services Corp $ 69,607,874 9.75% $ 28,568,406 4.00% $ - -%
Enterprise Bank 66,604,736 9.37 28,442,697 4.00 42,664,046 6.00
Tier 1 Capital (to average assets)
Enterprise Financial Services Corp $ 69,607,874 7.93% $ 26,346,052 3.00% $ - -%
Enterprise Bank 66,604,736 7.60 26,283,571 3.00 43,805,951 5.00
As of 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 1 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 1 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
59
NOTE 16--COMPENSATION PLANS
STOCK OPTIONS PLANS
At December 31, 2002, the Company had five qualified incentive, two nonqualified
and one omnibus stock plan for the benefit of employees and directors. Plan I
was adopted on April 20, 1988 with 432,000 options. As of December 31, 2002,
Plan I had no options outstanding and no options available for future grant.
Plan II was adopted on April 25, 1990 with 225,000 options and a five year
vesting term. Plan II had 13,200 options outstanding and no options available
for grant. Plan III was adopted on June 19, 1996 with 600,000 options and a five
year vesting term. Plan III has 415,300 options outstanding and no options
available for future grants. Plan IV was adopted on April 28, 1999 with 600,000
options and a five year vesting term. Plan IV has 556,200 options outstanding
and 41,300 available for future grants. Plan V is an omnibus plan which allows
the Board to use its discretion for vesting terms. Plan V also has Stock
Appreciation Rights ("SAR") available for grant. Plan V was adopted by the
Company's Board of Directors on October 26, 2002 and is subject to stockholder
approval at the 2003 Annual Meeting of shareholders with 750,000 shares. At
December 31, 2002 the Company had 132,905 nonqualified options outstanding which
were granted to members of management pursuant to their employment agreements.
The Company inherited two stock option plans with the CGB merger completed in
June of 2000. The stock option plans provide qualified and nonqualified options
to certain officers and directors for up to 273,220 common shares of the
Company. These options were fully vested upon grant. The options are exercisable
for ten years and five years for the qualified and nonqualified options,
respectively. As of December 31, 2002 the CGB qualified plan had 29,252 options
outstanding and no options available for future grant. The CGB nonqualified plan
had 39,536 options outstanding and no options available for grant.
In 1998, the Company adopted by board approval a nonqualified stock option plan
("the Nonqualified Plan"), which sets aside up to 105,000 shares of Company
common stock to grant options with a five year vesting term to certain key
employees of the Company or any of its subsidiaries. There are limitations as to
the number of options which may be granted to any individual and additional
restrictions for options which may be granted to any individual who is also a
ten percent shareholder. The purchase price for any options granted under the
Nonqualified Plan will be determined based upon the market value of the common
stock at the time such options are granted. At December 31, 2002, the
Nonqualified Plan had 98,250 options outstanding and 6,750 options available for
future grants.
Following is a summary of the various stock option plan transactions:
Number Price Weighted Avg.
of Shares per Share Price per Share Total
--------- --------------- --------------- -------------
December 31, 1999 1,139,684 $ 1.67 - 15.17 $ 6.35 $ 7,234,512
Granted 214,097 15.00 - 18.00 15.34 3,284,122
Exercised 134,621 2.33 - 11.67 5.97 804,125
Forfeited 17,249 5.33 - 18.00 12.54 216,248
--------- --------------- --------------- -------------
December 31, 2000 1,201,911 $ 2.33 - 18.00 $ 7.90 $ 9,498,261
Granted 284,850 11.75 - 15.50 12.04 3,429,238
Exercised 198,146 2.33 - 11.67 6.35 1,259,043
Forfeited 33,571 5.33 - 18.00 9.70 325,680
--------- --------------- --------------- -------------
December 31, 2001 1,255,044 $ 2.33 - 18.00 $ 9.04 $ 11,342,776
Granted 373,905 9.25 - 11.50 9.93 3,714,079
Exercised 227,127 2.33 - 11.75 3.99 905,584
Forfeited 117,179 5.33 - 18.00 11.90 1,433,821
--------- --------------- --------------- -------------
December 31, 2002 1,284,643 $ 5.33 - 18.00 $ 9.90 $ 12,717,450
========= =============== =============== =============
The exercise price range of outstanding options at December 31, 2002 was $5.33
to $18.00 and the weighted average contractual life was 7.06 years. The exercise
price range of outstanding options at December 31, 2001 was $2.33 to $18.00 and
the weighted average contractual life was 6.33 years.
60
Following is a summary of the options outstanding at December 31, 2002:
Number of
Number of Exercisable
Option Price Options Total Options Total
-------------- --------- ------------- ----------- -----------
$ 5.33 324,700 $ 1,730,651 324,700 $ 1,730,651
5.58 6,000 33,480 6,000 33,480
7.78 7,286 56,685 7,286 56,685
8.33 3,000 24,990 2,400 19,992
9.25 250 2,312 - -
9.30 82,905 771,017 - -
9.72 30,537 296,820 30,537 296,820
9.92 3,900 38,688 3,120 30,950
10.00 261,750 2,617,500 55,200 552,000
10.25 79,000 809,750 - -
10.30 12,500 128,750 - -
10.33 10,500 108,465 3,900 40,287
10.67 1,500 16,005 1,200 12,804
11.50 6,500 74,750 - -
11.67 30,965 361,362 30,965 361,362
11.75 224,400 2,636,700 42,880 503,840
12.50 2,250 28,125 1,350 16,875
14.00 18,100 253,400 5,060 70,840
15.00 152,600 2,289,000 61,040 915,600
15.50 10,500 162,750 3,100 48,050
16.00 1,000 16,000 200 3,200
17.50 1,500 26,250 600 10,500
18.00 13,000 234,000 5,200 93,600
--------- ------------- ----------- -----------
1,284,643 $ 12,717,450 584,738 $ 4,797,536
========= ============= =========== ===========
The Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plans. Accordingly, no compensation cost has been recognized
for its stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method contained in SFAS No.
123, the Company's net income (loss) and earnings (loss) per share would have
been reduced to the pro forma amounts indicated below:
2002 2001 2000
-------------- --------------- ----------------
Net income, as reported $ 5,001,480 $ (2,534,691) $ 5,201,446
Deduct total stock-based employee compensation
expense determined under fair-value-based
method for all rewards, net of tax (809,289) (510,980) (439,585)
-------------- --------------- ----------------
Pro forma net income $ 4,192,191 $ (3,045,671) $ 4,761,861
============== =============== ================
Earnings (losses) per share:
Basic:
As reported $ 0.53 $ (0.28) $ (0.58)
Pro forma 0.45 (0.33) (0.53)
Diluted:
As reported $ 0.52 $ (0.28) $ (0.54)
Pro forma 0.44 (0.33) (0.49)
The fair value of each option granted in 2002 was estimated on the date of grant
using the Black-Scholes option-pricing model with following assumptions; a
risk-free interest rate of 5.20%, 5.44%, 4.85%, 4.22%, and 3.69% for January,
April, July, August, and September, respectively; a dividend yield of 0.60%;
vesting period for 5 years; expected lives of 10 years; and volatility of
60.02%, 65.80%, 68.88%, 66.93%, and 65.50% for January, April, July August, and
September, respectively. Additional grants were made in July and October with
the following
61
assumptions; a risk-free interest rate of 4.85% and 3.72% for July and October,
respectively; a dividend yield of 0.60%; vesting period for 3 years; expected
lives of 10 years; and volatility of 68.88% and 65.35% for July and October,
respectively. The weighted average fair value of the options granted in 2002 was
$7.41.
The fair value of each option granted in 2001 was estimated on the date of grant
using the Black-Scholes option-pricing model with following assumptions; a
risk-free interest rate of 4.92%, 4.98%, 5.37%, and 4.55% for January, April,
July, and October, respectively; a dividend yield of 0.60%; vesting period for 5
years; expected lives of 10 years; and volatility of 37.50%, 46.07%, 56.00%, and
58.34% for January, April, July and October, respectively. The weighted average
fair value of the options granted in 2002 was $7.89.
The fair value of each option granted in 2000 was estimated on the date of grant
using the Black-Scholes option- pricing model with the following assumptions; a
risk-free interest rate of 6.50% and 6.06% for April and September,
respectively; a dividend yield of 0.67%; vesting period for 5 years; expected
lives of 10 years; and volatility of 13.38% and 30.13% for April and September,
respectively. The weighted average fair value of the options granted in 2001 was
$6.75.
On April 1, 1999, the Company adopted a Stock Appreciation Rights ("SAR") Plan.
This Plan replaced the previous form of cash compensation for directors of the
Company and its subsidiaries and awards vest based upon attendance and unit
performance. Under the plan, the Company has the option to pay vested SARs
either in the form of cash or Company common stock. At December 31, 2001, there
were 104,500 SARs outstanding. On January 1, 2002, directors were given the
option to forfeit their SARs for cash compensation for previous services and
future meeting attendance or keep the SARs and the future value without cash
compensation for service. Approximately 35,300 SARs were forfeited for an
estimated payout of $57,000 for meeting attendance. At December 31, 2002, there
were 69,200 SARs outstanding. The Company recognized $49,163 in expense to
record the market value of the SARs on December 31, 2002.
In 1997, the Company entered into a solicitation and referral agreement with
Moneta Group, Inc. ("Moneta"), a nationally recognized firm in the financial
planning industry. Moneta receives options for banking business referrals and a
portion of the gross margin earned by Trust in the form of cash. The Company
recognizes the fair value of the options over the vesting period as expense. The
Company recognized $209,776, $191,293 and $283,148 in Moneta option related
expenses during 2002, 2001 and 2000, respectively. The fair value of each option
grant to Moneta was estimated on the date of grant using the Black-Scholes
option pricing model. The Company granted 11,769 options on January 1, 2002 at
$11.50 price per share, a fair value of $7.34, assuming a risk free interest
rate of 5.20%, a dividend yield of 0.60%, vesting period for 5 years, expected
life of 8 years and volatility of 59.47%. The Company granted 11,081 options on
January 1, 2001 at $10.33 price per share, a fair value of $7.77 per share,
assuming a risk free interest rate of 5.20%, a dividend yield of 0.67%, vesting
period for 5 years, expected life of 8 years and volatility of 39.79%. The
Company granted 5,648 options on January 1, 2000 at $18.25 price per share a
fair value of $6.30 per share, assuming a risk free interest rate of 6.19%, a
dividend yield of 0.67%, vesting period for 5 years, expected lives of 8 years
and volatility of 11.80%. The Company granted 60,000 options on August 18, 1999
at $15.00 price per share, a fair value of $6.56, assuming a risk free interest
rate of 6.10%, a dividend yield of 0.67% vesting period for 5 years, expected
lives of 8 years and volatility of 27.95%. The Company granted 99,180 options on
January 1, 1999 at $10.33 price per share, a fair value of $4.09 per share,
assuming a risk free interest rate of 4.75%, a dividend yield of 0.67% vesting
period for 5 years, expected lives of 8 years and volatility of 27.23%. The
weighted average fair value of the options granted to Moneta was $5.37. There
were no exercises of Moneta options since grant date. There were 1,182 Moneta
options forfeited in 2002.
Effective January 1, 1993, the Company adopted a 401(k) thrift plan which covers
substantially all full-time employees over the age of 21. The amount charged to
expense for the Company's contributions to the plan was $433,798, $255,807, and
$290,423 for 2002, 2001, and 2000, respectively.
NOTE 17--LITIGATION AND OTHER CLAIMS
Except as noted below, various legal claims have arisen during the normal course
of business which, in the opinion of management, after discussion with legal
counsel, will not result in any material liability.
In accordance with SFAS No. 5, Accounting for Contingencies, the Company
recognized $1,300,000 in expense related to settlement of a dispute with another
financial institution pursuant to an agreement signed in February of 2003.
62
NOTE 18--DISCLOSURES ABOUT FINANCIAL INSTRUMENTS
The Bank issues financial instruments with off balance sheet risk in the normal
course of the business of meeting the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments may involve, to varying degrees, elements of credit
and interest-rate risk in excess of the amounts recognized in the consolidated
balance sheets.
The Company's extent of involvement and maximum potential exposure to credit
loss in the event of nonperformance by the other party to the financial
instrument for commitments to extend credit and standby letters of credit is
represented by the contractual amount of these instruments. The Bank uses the
same credit policies in making commitments and conditional obligations as it
does for financial instruments included on its consolidated balance sheets. At
December 31, 2002, no amounts have been accrued for any estimated losses for
these financial instruments.
The contractual amount of off-balance-sheet financial instruments as of December
31, 2002 and 2001 is as follows:
2002 2001
--------------- --------------
Commitments to extend credit $ 183,070,617 $ 242,784,209
Standby letters of credit 17,755,979 13,402,288
=============== ==============
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Of the total commitments to extend credit at December
31, 2002, approximately $6,070,659 represents fixed rate loan commitments. Of
the total commitments to extend credit at December 31, 2001, approximately
$13,182,144 represents fixed rate loan commitments. Since certain of the
commitments may expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based on
management's credit evaluation of the borrower. Collateral held varies, but may
include accounts receivable, inventory, premises and equipment, and real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. These standby letters
of credit are primarily issued to support contractual obligations of the Bank's
customers. The credit risk involved in issuing letters of credit is essentially
the same as the risk involved in extending loans to customers. The approximate
remaining term of standby letters of credit range from 1 month to 10 years at
December 31, 2002.
SFAS 107, Disclosures about Fair Value of Financial Instruments, extends
existing fair value disclosure for some financial instruments by requiring
disclosure of the fair value of such financial instruments, both assets and
liabilities recognized and not recognized in the consolidated balance sheets.
63
Following is a summary of the carrying amounts and fair values of the Company's
financial instruments on the consolidated balance sheets at December 31, 2002
and 2001:
2002 2001
-------------------------------- --------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------------- -------------- --------------- --------------
Balance sheet assets:
Cash and due from banks $ 39,052,123 $ 39,052,123 $ 32,178,155 $ 32,178,155
Federal funds sold 33,367,011 33,367,011 48,624,680 48,624,680
Interest-bearing deposits 66,349 66,349 3,433,351 3,433,351
Investments in debt and
equity securities 66,631,156 66,631,336 46,068,356 46,068,775
Loans held for sale 6,991,421 6,991,421 8,936,042 8,936,042
Derivative financial
instruments 2,556,498 2,556,498 - -
Loans, net 671,199,398 683,981,753 595,450,883 602,492,575
Accrued interest receivable 3,458,596 3,458,596 3,140,912 3,140,912
Assets held for sale 36,401,416 37,283,769 40,575,263 41,557,930
Balance sheet liabilities:
Deposits $ 716,314,274 $ 720,586,761 $ 655,552,909 $ 658,742,159
Guaranteed preferred
beneficial interests in
subordinated debentures 15,000,000 15,118,851 11,000,000 11,126,098
Other borrowed funds 31,822,797 32,257,666 15,399,052 15,573,233
Accrued interest payable 1,264,600 1,264,600 1,208,549 1,208,549
Liabilities held for sale 50,053,023 47,675,504 58,800,256 56,007,244
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practical to estimate such
value:
CASH AND OTHER SHORT-TERM INSTRUMENTS
For cash and due from banks, federal funds sold (purchased), interest-bearing
deposits, and accrued interest receivable (payable), the carrying amount is a
reasonable estimate of fair value, as such instruments reprice in a short time
period.
INVESTMENTS IN DEBT AND EQUITY SECURITIES
Fair values are based on quoted market prices or dealer quotes.
LOANS, NET
The fair value of adjustable-rate loans approximates cost. The fair value of
fixed-rate loans is estimated by discounting the future cash flows using the
current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of derivative financial instruments is based on quoted market
prices where available. If quoted market prices were not available, the fair
value was based upon quoted market prices of comparable instruments.
64
DEPOSITS
The fair value of demand deposits, interest-bearing transaction accounts, money
market accounts and savings deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently offered
for deposits of similar remaining maturities.
GUARANTEED PREFERRED BENEFICIAL INTERESTS IN SUBORDINATED DEBENTURES
Fair value of fixed interest rate guaranteed preferred beneficial interests in
subordinated debentures is based on market prices as of December 31, 2002 and
2001. Fair value of floating interest rate guaranteed preferred beneficial
interests in the subordinated debentures is assumed to equal book value at
December 31, 2002.
OTHER BORROWED FUNDS
Other borrowed funds include Federal Home Loan Bank advances and notes payable.
The fair value of Federal Home Loan Bank advances is based on the discounted
value of contractual cash flows. The discount rate is estimated using current
rates on borrowed money with similar remaining maturities. The fair value of
notes payable is assumed to be its carrying amount since it has an adjustable
interest rate.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT
The fair value of commitments to extend credit and standby letters of credit are
estimated using the fees currently charged to enter into similar agreements,
taking into account the remaining terms of the agreements, the likelihood of the
counterparties drawing on such financial instruments, and the present
creditworthiness of such counterparties. The Company believes such commitments
have been made on terms which are competitive in the markets in which it
operates; however, no premium or discount is offered thereon and accordingly,
the Company has not assigned a value to such instruments for purposes of this
disclosure.
ASSETS AND LIABILITIES HELD FOR SALE
The fair value of assets and liabilities held for sale is based on the
contractual premium in the signed definitive agreement dated December 30, 2002.
LIMITATIONS
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the Company's entire holdings of a particular financial
instrument. Because no market exists for a significant portion of the Company's
financial instruments, fair value estimates are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment, and therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates. Fair value
estimates are based on existing on-balance and off-balance-sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. In addition, the tax ramifications related to the
realization of the unrealized gains and losses can have a significant effect on
fair value estimates and have not been considered in many of the estimates.
NOTE 19--SEGMENT REPORTING
Management segregates the Company into three distinct businesses for evaluation
purposes. The three segments are; Enterprise Banking, Enterprise Trust and
Corporate. The segments are evaluated separately on their individual
performance, as well as, their contribution to the Company as a whole.
65
The Corporate, Intercompany, and Reclassifications segment includes the holding
company, merchant banking investments, and trust preferred securities
activities. The Company incurs general corporate expenses and owns Enterprise
Bank and Enterprise Merchant Banc, Inc. Enterprise Merchant Banc, Inc. offered
merchant banking services through its investment in Enterprise Merchant Banc
LLC.
The majority of the Company's assets and income result from Enterprise Banking.
Enterprise Banking consists of three banking branches and an operations center
in the St. Louis County area, two banking branches in the Kansas City region and
three banking branches in the Southeast Kansas region. The products and services
offered by the banking branches include a broad range of commercial and personal
banking services, including certificates of deposit, individual retirement and
other time deposit accounts, checking and other demand deposit accounts,
interest checking accounts, savings accounts and money market accounts. Loans
include commercial, financial and agricultural, real estate construction and
development, commercial and residential real estate, consumer and installment
loans. Other financial services include mortgage banking, debit and credit
cards, automatic teller machines, internet account access, safe deposit boxes,
and treasury management services.
Enterprise Trust, which is a division of Enterprise Bank, provides fee-based
personal and corporate financial consulting and trust services. Personal
financial consulting includes estate planning, investment management, and
retirement planning. Corporate consulting services are focused in the areas of
retirement plans, management compensation and management succession issues.
66
Following are the financial results for the Company's operating segments.
Years ended December 31,
2002
-----------------------------------------------------------------------
Corporate,
Enterprise Enterprise Intercompany, and
Banking Trust Reclassifications Total
--------------- -------------- ----------------- ----------------
Net interest income $ 32,026,044 $ - $ (1,162,319) $ 30,863,725
Provision for loan losses 2,250,578 - - 2,250,578
Other income 3,871,752 2,353,927 80,312 6,305,991
Other expense 21,434,933 3,090,242 3,778,746 28,303,921
--------------- -------------- ----------------- ----------------
Income (loss) before income tax expense 12,212,285 (736,315) (4,860,753) 6,615,217
Income tax expense (benefit) 4,453,445 (272,437) (2,567,271) 1,613,737
--------------- -------------- ----------------- ----------------
Net income (loss) $ 7,758,840 $ (463,878) $ (2,293,482) $ 5,001,480
=============== ============== ================= ================
Loans, less unearned loan fees $ 679,799,399 $ - $ - $ 679,799,399
Assets held for sale 36,401,416 - - 36,401,416
Goodwill 2,087,537 - - 2,087,537
Deposits 717,135,113 - (820,839) 716,314,274
Borrowings 31,822,797 - 15,000,000 46,822,797
Liabilities held for sale 50,053,023 - - 50,053,023
Total assets $ 873,035,220 $ - $ 3,751,281 $ 876,786,501
=============== ============== ============= ================
2001
-----------------------------------------------------------------------
Corporate,
Enterprise Enterprise Intercompany, and
Banking Trust Reclassifications Total
--------------- -------------- ----------------- ----------------
Net interest income $ 29,883,119 $ - $ (1,081,423) $ 28,801,696
Provision for loan losses 3,230,000 - - 3,230,000
Other income 3,002,500 1,426,078 (5,716,138) (1,287,560)
Other expense 21,466,812 2,622,872 1,487,199 25,576,883
--------------- -------------- ----------------- ----------------
Income (loss) before income tax expense 8,188,807 (1,196,794) (8,284,760) (1,292,747)
Income tax expense (benefit) 3,106,493 (484,702) (1,379,847) 1,241,944
--------------- -------------- ----------------- ----------------
Net income (loss) $ 5,082,314 $ (712,092) $ (6,904,913) $ (2,534,691)
=============== ============== ================= ================
Loans, less unearned loan fees $ 602,746,799 $ - $ - $ 602,746,799
Assets held for sale 40,575,263 - - 40,575,263
Goodwill 2,087,537 - - 2,087,537
Deposits 655,775,912 - (223,003) 655,552,909
Borrowings 14,032,385 - 12,366,667 26,399,052
Liabilities held for sale 58,800,256 - - 58,800,256
Total assets $ 793,013,142 $ - $ 2,236,421 $ 795,249,563
=============== ============== ================= ================
2000
-----------------------------------------------------------------------
Corporate,
Enterprise Enterprise Intercompany, and
Banking Trust Reclassifications Total
--------------- -------------- ----------------- ----------------
Net interest income $ 29,478,075 $ - $ (1,043,632) $ 28,434,443
Provision for loan losses 1,042,534 - - 1,042,534
Other income 2,070,655 851,829 357,117 3,279,601
Other expense 18,108,886 1,772,477 2,380,251 22,261,614
--------------- -------------- ----------------- ----------------
Income (loss) before income tax expense 12,397,310 (920,648) (3,066,766) 8,409,896
Income tax expense (benefit) 4,622,965 (350,590) (1,063,925) 3,208,450
--------------- -------------- ----------------- ----------------
Net income (loss) 7,774,345 (570,058) (2,002,841) 5,201,446
=============== ============== ================= ================
Loans, less unearned loan fees $ 516,809,586 $ - $ - $ 516,809,586
Assets held for sale 41,221,943 - - 41,221,943
Goodwill 2,278,104 - - 2,278,104
Deposits 577,971,473 - (1,703,247) 576,268,226
Borrowings 11,190,899 - 11,000,000 22,190,899
Liabilities held for sale 56,169,211 - - 56,169,211
Total assets $ 706,479,592 $ - $ 4,458,746 $ 710,938,338
=============== ============== ================= ================
67
NOTE 20--QUARTERLY CONDENSED FINANCIAL INFORMATION (Unaudited)
The following table presents the unaudited quarterly financial information for
the years ended December 31, 2002 and 2001.
2002
------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
------------ ----------- ----------- -----------
(dollars in thousands, except per share data)
Interest income $ 11,221 $ 11,529 $ 11,392 $ 11,029
Interest expense 3,248 3,555 3,642 3,862
------------ ----------- ----------- -----------
Net interest income 7,973 7,974 7,750 7,167
Provision for loan losses 491 640 530 590
------------ ----------- ----------- -----------
Net interest income after provision
for loan losses 7,482 7,334 7,220 6,577
Noninterest income 1,860 1,508 1,446 1,492
Noninterest expense 8,580 6,724 6,367 6,633
------------ ----------- ----------- -----------
Income before income tax expense 762 2,118 2,299 1,436
Income tax (benefit) expense (585) 784 850 565
Net income $ 1,347 $ 1,334 $ 1,449 $ 871
============ ========== =========== ===========
Earnings per common share
Basic $ 0.15 $ 0.14 $ 0.15 $ 0.09
Diluted $ 0.14 $ 0.14 $ 0.15 $ 0.09
2001
------------------------------------------------------
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
------------ ----------- ----------- -----------
(dollars in thousands, except per share data)
Interest income $ 11,733 $ 13,180 $ 13,455 $ 14,244
Interest expense 4,793 5,996 6,280 6,741
------------ ----------- ----------- -----------
Net interest income 6,940 7,184 7,175 7,503
Provision for loan losses 2,460 175 330 265
------------ ----------- ----------- -----------
Net interest income after provision
for loan losses 4,480 7,009 6,845 7,238
Noninterest income (4,443) 1,205 1,112 838
Noninterest expense 6,834 6,455 6,087 6,201
------------ ----------- ----------- -----------
Income before income tax expense (6,797) 1,759 1,870 1,875
Income tax (benefit) expense (921) 713 735 715
------------ ----------- ----------- -----------
Net (loss) income $ (5,876) $ 1,046 $ 1,135 $ 1,160
============ =========== =========== ===========
(Loss) earnings per common share
Basic $ (0.64) $ 0.11 $ 0.12 $ 0.13
Diluted $ (0.64) $ 0.11 $ 0.12 $ 0.12
68
NOTE 21--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS
Condensed Balance Sheets
December 31,
--------------------------------------------
2002 2001
---------------- ----------------
Assets
Cash $ 814,197 $ 157,791
Investment in Enterprise Bank 70,331,813 62,581,698
Other assets 4,586,242 2,956,841
---------------- ----------------
Total assets $ 75,732,252 $ 65,696,330
=============== ===============
Liabilities and Shareholders' Equity
Guaranteed preferred beneficial interests
in subordinated debentures $ 15,000,000 $ 11,000,000
Notes payable - 1,366,667
Accounts payable and other liabilities 1,922,302 1,433,060
Shareholders' equity 58,809,950 51,896,603
---------------- ----------------
Total liabilities and shareholders' equity $ 75,732,252 $ 65,696,330
=============== ===============
Condensed Statements of Operations
Year ended December 31,
--------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Income:
Dividends from subsidiaries $ 1,060,000 $ 679,047 $ 1,935,000
Realized gain on trading security - - 500
Recoveries/income (loss) from
Merchant Banc investments 88,889 (2,939,443) 29,954
Other (loss) income (8,577) - 9,229
------------------ ------------------ ------------------
Total income 1,140,312 (2,260,396) 1,974,683
------------------ ------------------ ------------------
Expenses:
Interest expense-guaranteed preferred beneficial
interest in subordinated debentures 1,116,808 1,042,439 1,053,334
Interest expense-notes payable 45,510 40,260 -
Other expenses 3,773,548 1,472,435 1,748,947
------------------ ------------------ ------------------
Total expenses 4,935,866 2,555,134 2,802,281
------------------ ------------------ ------------------
Loss before tax benefit and equity
in undistributed earnings of subsidiaries (3,795,554) (4,815,530) (827,598)
Income tax benefit 2,566,996 1,232,792 995,872
------------------ ------------------ ------------------
(Loss) income before equity in undistributed
earnings of subsidiaries (1,228,558) (3,582,738) 168,274
------------------ ------------------ ------------------
Equity in undistributed earnings of subsidiaries 6,230,038 1,048,047 5,033,172
------------------ ------------------ ------------------
Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446
================== ================== ==================
69
Condensed Statements of Cash Flow
Year ended December 31,
--------------------------------------------------------------
2002 2001 2000
------------------ ------------------ ------------------
Cash flows from operating activities:
Net income (loss) $ 5,001,480 $ (2,534,691) $ 5,201,446
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Proceeds from sale of trading
security - - 910,500
Recoveries/income (loss) from
Merchant Banc investments 88,889 2,939,443 (30,454)
Losses and settlement 1,300,000 - -
Noncash compensation expense
attributed to stock option grants 209,777 191,293 283,148
Net income of subsidiaries (7,290,038) (1,727,094) (6,968,172)
Dividends from subsidiaries 1,060,000 679,047 1,935,000
Other, net (1,293,974) (728,916) (962,825)
------------------ ------------------ ------------------
Net cash (used in) provided
by operating activities (2,223,866) (1,180,918) 368,643
Cash flows from investing activities:
Capital contributions to subsidiaries - (860,000) (3,175,000)
Increase in note receivable from
Enterprise Merchant Banc, LLC - (1,362,779) -
------------------ ------------------ ------------------
Net cash used in investing activities - (2,222,779) (3,175,000)
Cash flows from financing activities:
Proceeds from borrowings
of notes payable 1,750,000 1,500,000 -
Repayments of notes payable (3,116,667) (133,333) -
Proceeds from issuance of subordinated
debentures 4,000,000 - -
Cash dividends paid (658,645) (553,336) (405,265)
Proceeds from the issuance of common stock - - 10,334
Proceeds from the exercise of
common stock options 905,584 1,259,043 804,125
------------------ ------------------ ------------------
Net cash provided by
financing activities 2,880,272 2,072,374 409,194
------------------ ------------------ ------------------
Net increase (decrease) in cash and cash
equivalents 656,406 (1,331,323) (2,397,163)
Cash and cash equivalents, beginning of year 157,791 1,489,114 3,886,277
------------------ ------------------ ------------------
Cash and cash equivalents, end of year $ 814,197 $ 157,791 $ 1,489,114
================== ================== ==================
Supplemental disclosures of cash flow information:
Retirement of treasury stock $ - $ - $ 390,000
Reduction of deferred tax asset
valuation reserve 800,000 - -
================== ================== ==================
70
SIGNATURES
Pursuant to the requirements of Section 13 or 15d of the Securities Act of 1934,
the undersigned Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Clayton,
State of Missouri, on the 25th of March, 2003.
ENTERPRISE FINANCIAL SERVICES CORP
/s/ Kevin C. Eichner /s/ Frank H. Sanfilippo
- ------------------------------------ ------------------------------------
Kevin C. Eichner Frank H. Sanfilippo
Chief Executive Officer Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this Report on Form
10-K has been signed by the following persons in the capacities indicated on the
25th day of March, 2003.
SIGNATURES TITLE
---------- -----
/s/ Paul J. McKee, Jr.
- ------------------------------------
Paul J. McKee, Jr. Chairman of the Board
of Directors
/s/ Kevin C. Eichner
- ------------------------------------
Kevin C. Eichner Chief Executive Officer and
Director
/s/ Peter F. Benoist
- ------------------------------------
Peter F. Benoist Executive Vice President and
Director
/s/ Paul R. Cahn
- ------------------------------------
Paul R. Cahn Director
/s/ William H. Downey
- ------------------------------------
William Downey Director
/s/ Robert E. Guest, Jr.
- ------------------------------------
Robert E. Guest, Jr. Director
/s/ Ronald E. Henges
- ------------------------------------
Ronald E. Henges Director
/s/ Richard S. Masinton
- ------------------------------------
Richard S. Masinton Director
/s/ Jerry McElhatton
- ------------------------------------
Jerry McElhatton Director
/s/ William B. Moskoff
- ------------------------------------
William B. Moskoff Director
/s/ Birch M. Mullins
- ------------------------------------
Birch M. Mullins Director
/s/ James J. Murphy
- ------------------------------------
James Murphy Director
/s/ Ted A. Murray
- ------------------------------------
Ted A. Murray Director
71
/s/ Stephen A. Oliver
- ------------------------------------
Stephen A. Oliver Director
/s/ Robert E. Saur
- ------------------------------------
Robert E. Saur Director
/s/ Jack L. Sutherland
- ------------------------------------
Jack L. Sutherland Director
/s/ Paul L. Vogel
- ------------------------------------
Paul L. Vogel Director
/s/ Henry D. Warshaw
- ------------------------------------
Henry D. Warshaw Director
/s/ Ted C. Wetterau
- ------------------------------------
Ted C. Wetterau Director
/s/ James L. Wilhite
- ------------------------------------
James L. Wilhite Director
/s/ James A. Williams
- ------------------------------------
James A. Williams Director
72
CERTIFICATION
I, Kevin C. Eichner, certify that:
1. I have reviewed this annual report on Form 10-K of Enterprise Financial
Services Corp;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
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 officer and I have indicated in this annual
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.
Date: March 25, 2003
/s/ Kevin C. Eichner
- ------------------------------------
Kevin C. Eichner, Chief Executive Officer
73
I, Frank H. Sanfilippo, certify that:
1. I have reviewed this annual report on Form 10-K of Enterprise Financial
Services Corp;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer 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 annual 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 annual
report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
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 officer and I have indicated in this annual
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.
Date: March 25, 2003
/s/ Frank H. Sanfilippo
- ------------------------------------
Frank H. Sanfilippo, Chief Financial Officer
74
EXHIBIT INDEX
Exhibit
No. Exhibit
- ------- -------------------------------------------------------------------
3.1 Certificate of Incorporation of the Registrant, as amended
(incorporated herein by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form S-1 dated December 19,
1996 (File No. 333-14737)).
3.2 Amendment to the Certificates of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 4.2 to the
Registrant's Registration Statement on Form S-8 dated July 1, 1999
(File No. 333-82087)).
3.3 Amendment to the Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 3.1 of the
Registrant's Quarterly Report on Form 10-Q for the period ending
September 30, 1999).
3.4 Amendment to the Certificate of Incorporation of the Registrant
(incorporated herein by reference to Exhibit 99.2 to the
Registrant's Current Report on Form 8-K filed on April 30, 2002).
3.5 Bylaws of the Registrant, as amended (incorporated herein by
reference to Exhibit 3.4 of the Registrant's Annual Report on Form
10-K for the period ending December 31, 1999).
4.1 Enterprise Bank Second Incentive Stock Option Plan (incorporated
herein by reference to Exhibit 44.4 of the Registrant's
Registration Statement on Form S-8 dated December 29, 1997 (File
No. 333-43365)).
4.2 Enterprise Financial Services Corp Third Incentive Stock Option
Plan (incorporated herein by reference to Exhibit 4.5 of the
Registrant's Registration Statement on Form S-8 dated December 29,
1997 (File No. 333-43365)).
4.3 Enterprise Financial Services Corp, Fourth Incentive Stock Option
Plan (incorporated herein by reference to the Registrant's 1998
Proxy Statement on Form 14-A).
4.4 Enterprise Financial Services Corp (formerly Commercial Guaranty
Bancshares, Inc.) Employee Incentive Stock Option Plan
(incorporated herein by reference to the Registrant's Form S-8
dated July 25, 2000 (File No. 333-42204)).
4.5 Enterprise Financial Services Corp (formerly Commercial Guaranty
Bancshares, Inc.) Non-Employee Organizer and Director Incentive
Stock Option Plan (incorporated herein by reference to the
Registrant's Form S-8 dated July 25, 2000 (File No. 333-42204)).
4.6 Enterprise Financial Services Corp Stock Appreciation Rights (SAR)
Plan and Agreement (incorporated herein by reference to Exhibit 4.5
of the Registrant's Quarterly Report on Form 10-Q for the period
ended March 31, 1999).
4.7.1 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 herein
by reference to Exhibit 4.6 to Registrant's Registration Statement
on Form S-3 (File No. 333-87881)).
4.7.2 Form of 9.40% Junior subordinated Debenture ((included as an
Exhibit to Exhibit 4.8.1), incorporated herein by reference to
Exhibit 4.6 to Registrant's Registration Statement on Form S-3
(File No. 333-87881)).
75
4.7.3 Amended and Redated Trust Agreement of EBH Capital Trust I dated
October 19, 1999, (incorporated herein by reference to Exhibit 4.4
to Registrant's Registration Statement on Form S-3 (File No.
333-87881)).
4.7.4 Preferred Securities Guarantee Agreement between Registrant and
Wilmington Trust Company dated October 25, 1999, (incorporated
herein by reference to Exhibit 4.8 to Registrant's Registration
Statement on Form S-3 (File No. 333-87881)).
4.8.1 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, (incorporated by
reference to exhibit 4.9.1 to Registrant's Quarterly Report on Form
10-Q for the period ended June 30, 2002).
4.8.2 Form of Floating Rate Junior Subordinated Deferrable Interest
Debenture due June 30, 2032, (incorporated by reference to exhibit
4.9.2 to Registrant's Quarterly Report on Form 10-Q for the period
ended June 30, 2002).
4.8.3 Amended and Restated Trust Agreement of EFSC Capital Trust I dated
June 27, 2002, (incorporated by reference to exhibit 4.9.3 to
Registrant's Quarterly Report on Form 10-Q for the period ended
June 30, 2002).
4.8.4 Trust Preferred Securities Guarantee Agreement between Registrant
and Wells Fargo, National Association, dated June 27, 2002,
(incorporated by reference to exhibit 4.9.4 to Registrant's
Quarterly Report on Form 10-Q for the period ended June 30, 2002.)
4.9 Enterprise Financial Services Corp 2002 Stock Incentive Plan
(incorporated herein by reference to Appendix B of the Company's
Definitive Proxy Statement dated April 4, 2003).
4.10 Enterprise Financial Services Corp, Incentive Stock Purchase Plan
(incorporated herein by reference to the Registrant's Registration
Statement on Form S-8 dated October 30, 2002 (File No.
333-100928)).
10.1 Revised Customer Referral Agreement by and among Enterprise
Financial Services Corp, Enterprise Bank and Moneta Group
Investment Advisors, Inc. (incorporated herein by reference to
Exhibit 10.3 of the Registrant's Annual Report on Form 10-K for the
period ended December 31, 1998).
10.2 Amendment #1 to the Revised Customer referral Agreement by and
among Enterbank Holdings, Inc., Enterprise Bank and Moneta Group
Investment Advisors, Inc. (incorporated herein by reference to
Exhibit 10.1 of the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 2001).
10.3 Amendment #2 to the Revised Customer Referral Agreement by and
among Enterbank Holdings, Inc., Enterprise Bank and Moneta Group
Investment Advisors, Inc. (incorporated herein by reference to
Exhibit 10.2 of the Registrant's Quarterly Report on Form 10-Q for
the period ended June 30, 2001).
10.4 Enterprise Financial Services Corp Deferred Compensation Plan I
(incorporated herein by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the period ended
March 31, 2000).
10.5 Consulting contract dated October 3, 2001 between Enterprise
Financial Services Corp and Paul J. McKee, Jr. (incorporated herein
by reference to Exhibit 10.12 of the Registrant's Annual Report on
Form 10-K for the period ending December 31, 2001).
76
10.6 Separation Agreement dated September 30, 2002 between Enterprise
Financial Services Corp and Fred H. Eller. (incorporated herein by
reference to Exhibit 10.15 of the Registrants Quarterly Report on
form 10-Q for the period ended September 30, 2002).
10.7/(1)/ Key Executive Employment Agreement dated July 1, 2002 between
Enterprise Financial Services Corp and Kevin C. Eichner.
10.8/(1)/ Form of Key Executive Employment Agreement dated October 15, 2002
between Enterprise Financial Services Corp and James C. Wagner and
Jack L. Sutherland.
10.9/(1)/ Key Executive Employment Agreement dated October 15, 2002 between
Enterprise Financial Services Corp and Paul L. Vogel.
10.10/(1)/ Key Executive Employment Agreement dated October 1, 2002 between
Enterprise Financial Services Corp and Peter F. Benoist.
10.11/(1)/ $5,000,000 Unsecured Credit Agreement dated January 9, 2004 between
Enterprise Financial Services Corp and Wells Fargo Bank, National
Association.
11.1/(1)/ Statement regarding computation of per share earnings.
21.1/(1)/ Subsidiaries of the Registrant.
23.1/(1)/ Consent of KPMG LLP.
99.1/(1)/ Chief Executive Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section Section 906 of the
Sarbanes-Oxley Act of 2002
99.2/(1)/ Chief Financial Officer Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to section Section 906 of the
Sarbanes-Oxley Act of 2002
/(1)/ Filed herewith
77