1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to Commission file number 333-14737 ENTERBANK HOLDINGS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 43-1706259 (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 150 NORTH MERAMEC, CLAYTON, MO 63105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 314-725-5500 -------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No (This is the first filing for the Company required ------- ----- by the Securities and Exchange Act of 1934) 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 this Form 10-K [X] State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 15, 1997: Common Stock, par value $.01, $26,832,360 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 15, 1997: Common Stock, par value $.01, 2,113,972 shares outstanding ================================================================================
2 ENTERBANK HOLDINGS, INC. 1996 ANNUAL REPORT ON FORM 10-K <TABLE> <CAPTION> Page ---- <S> <C> Selected Financial Data 1 Business 2 Market for Common Stock 5 Description of Capital Stock 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Supervision and Regulation 20 Management of the Company 22 Beneficial Ownership 26 Certain Transactions 27 Independent Auditors' Report 28 Consolidated Financial Statements 29 Signatures 50 Exhibit Index 51 </TABLE>
3 <TABLE> SUMMARY OF SELECTED FINANCIAL DATA <CAPTION> Year Ended December 31, -------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- (Dollars and number of shares in thousands, except per share data) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA Interest income $ 12,554 $ 10,914 $ 7,374 $ 5,770 $ 5,297 Interest expense 5,569 4,887 2,570 2,083 2,355 Net interest income 6,985 6,027 4,804 3,687 2,942 Provision for possible loan losses 345 631 450 162 181 Net interest income after provision for possible loan losses 6,640 5,396 4,354 3,525 2,761 Noninterest income 1,239 836 805 744 652 Noninterest expense 5,146 4,187 3,551 3,106 2,623 Income before income tax expense 2,733 2,045 1,608 1,163 790 Income tax expense 1,031 741 607 411 285 Net income 1,702 1,304 1,001 752 505 Net income per common share 0.98 0.79 0.62 0.48 0.33 Cash dividends per common share 0.08 0.07 0.06 0.05 -- Weighted average common shares and common stock equivalents outstanding 1,731 1,650 1,601 1,555 1,530 BALANCE SHEET DATA Cash and due from banks $ 9,261 $ 8,110 $ 5,930 $ 4,872 $ 2,650 Federal funds sold 23,250 16,230 11,300 10,125 9,450 Investments in debt securities: Available for sale 14,006 16,065 15,740 2,999 -- Held to maturity 1,240 842 802 6,680 6,620 Total investments 15,246 16,907 16,542 9,679 6,620 Loans, less unearned loan fees 134,133 110,464 85,687 72,215 57,553 Allowance for loan losses 1,765 1,400 1,000 722 606 Total assets 184,584 153,706 122,212 99,266 79,398 Total deposits 168,961 141,140 104,799 89,113 69,612 Notes payable 300 -- -- -- -- Shareholders' equity 14,758 12,052 10,781 9,943 9,264 Book value per common share 8.88 8.24 7.38 6.81 6.35 Tangible book value per common share 8.84 8.19 7.38 6.81 6.34 SELECTED RATIOS Return on average assets 1.12% 0.99% 0.96% 0.84% 0.66% Return on average equity 12.73 11.13 9.71 7.83 5.62 Total capital to risk-adjusted assets 11.53 11.40 11.75 14.12 15.61 Net yield on average earning assets 8.90 9.00 7.78 7.14 7.63 Cost of interest-bearing liabilities 4.89 4.94 3.36 3.11 4.10 Net interest margin 4.96 4.98 5.07 4.57 4.24 Nonperforming loans as a percent of loans 0.12 0.10 0.00 0.78 0.91 Nonperforming assets as a percent of assets 0.56 0.64 1.45 2.08 2.58 Net loan charge offs (recoveries) as a percent of average loans (0.02) 0.24 0.23 0.07 0.25 Allowance for possible loan losses as a percent of net loans 1.32 1.27 1.17 1.00 1.05 Leverage ratio 7.96 7.81 8.89 10.02 11.66 </TABLE> 1
4 BUSINESS -------- Enterbank Holdings, Inc. (the "Company") was incorporated under the laws of the State of Delaware on December 30, 1994, and was formed for the sole purpose of providing a holding company structure for the ownership of Enterprise Bank, a Missouri banking corporation. The Company acquired Enterprise Bank (the "Bank") through a tax-free exchange by Bank shareholders in May 1995. The bank holding company ownership structure gives the Bank a source of capital and financial strength and allows the organization some flexibility in expanding the products and services offered to clients. The Bank began operations on May 9, 1988 as a newly formed and chartered Missouri financial institution. Commercial banking services have been provided to Bank customers from a single location in the City of Clayton, St. Louis County, Missouri. During 1996, the Bank received regulatory approval for two additional facilities located in St. Charles County and the City of Sunset Hills. Currently operating from temporary locations, these new offices in St. Charles and Sunset Hills are expected to be fully operational in their new locations in June 1997 and August 1997, respectively. The Company organized Enterprise Capital Resources, Inc. ("Capital Resources") in 1995 as a wholly-owned subsidiary to provide merchant banking services to closely-held businesses and their owners. Capital Resources formed a wholly-owned subsidiary, Enterprise Capital Management, Inc. ("Capital Management"), which manages and acts as the general partner of The Enterprise Fund, L.P., a licensed Small Business Investment Company ("SBIC") under the regulations of the Small Business Administration, providing venture capital to growing companies. As used herein, unless the context indicates otherwise, the term "Company" refers to Enterbank Holdings, Inc. Enterprise Bank is referred to herein as the "Bank". Enterbank Holdings, Inc. and all of its subsidiaries are referred collectively as the "Organization" . 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 and their owners and employees, and to professional persons in the St. Louis metropolitan area, consisting of the City of St. Louis, Missouri, the Missouri counties of St. Louis, St. Charles, Jefferson, Franklin, Lincoln and Warren and the Illinois county of St. Clair. The Company's 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 for such growth can be accomplished while providing attractive returns on Shareholders' equity. Operations growth and return on Shareholders' equity are the financial measures the Company considers most critical in measuring success. The Company currently delivers a full range of commercial banking services to the closely-held business market through the Bank, which was founded in 1988. Merchant banking and venture capital services are conducted through Capital Resources and Capital Management. The Company plans to continue to expand the range of services it provides within its market niche while expanding the base of customers to which it provides its current services. THE BANK The Bank offers a broad range of commercial and personal banking services to its customers. Loans include commercial, commercial real estate, financial and industrial development, real estate construction and development, residential real estate and a small amount of consumer loans. Other services include cash management services, safe-deposit boxes, and lock boxes. The Company's primary source of funds has historically been customer deposits. The Company offers a variety of accounts for depositors designed to attract both short-term and long-term deposits. These accounts include certificates of deposit, savings accounts, money market accounts, checking and negotiable order to withdrawal accounts and individual retirement accounts. Interest-bearing accounts earn interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types of maturities or deposits. 2
5 Management believes the Bank is able to compete effectively in its market because: the Company's officers and senior management maintain close working relationships with their commercial customers and their businesses; the Bank's management structure enables it to react more quickly to customer requests for deposit services and loan requests than larger competitors; the Bank's management and officers have significant experience in the communities serviced by the Bank; the Company's focus on the closely-held business and professional market; and industry consolidation has resulted in fewer independent banks and fewer banks serving the Bank's target market niche. Management believes the Bank is the only bank in its market area whose primary strategy is to focus on closely-held businesses, and their owners and employees. The Bank's historical growth strategy has been both customer and asset driven. The Bank continuously seeks to add customers that fit its target market. This strategy has enabled the Bank to attract customers whose borrowing needs have grown along with the Bank's increasing capacity to fund loan requests. Additionally, the Bank has increased its loan portfolio based on lending opportunities developed by calling officers, which meet the Bank's underwriting standards. The Bank funds its loan growth by attracting deposits from its business and professional customers and by attracting wholesale deposits which are considered stable deposit sources and which are priced at levels below the Bank's alternative cost of borrowing funds. The Bank's operating strategy results in efficient operating ratios despite its increasing investment in sales personnel whose goal is to expand the number and depth of the Bank's customer relationships. The Bank can expand its customer relationships and control operating costs by: operating a small number of offices with a high per office asset base; emphasizing commercial loans which tend to be larger in size than retail loans; employing an experienced staff, all of whom are rewarded on the basis of performance and customer service; improving data processing and operational systems to increase productivity and control risk; leasing facilities so that capital can be deployed more effectively to support growth in earning assets; and, outsourcing services where possible. The Bank has a strong orientation toward commercial banking, with a specific focus on closely-held businesses, and their owners and employees, and professionals located in its target service areas. The Bank stresses personal service, flexibility in structuring loan and deposit relationships to meet the customer's needs, and timely responsiveness to the needs of customers. Senior management of the Bank makes it a practice to maintain close working relationships and personal contact with commercial customers. The Bank's Board of Directors is comprised primarily of business owners and professionals who fit the target customer profile of the Bank. The Board of Directors takes an active role in the Bank's business development activities and the credit review process. Its input and understanding of the needs of the Bank's current and target customers is considered to be a critical factor in the Bank's past success and its plans for future growth. The Bank has historically had a low turnover of relationship officers, and its policy is to keep officers assigned to accounts for long periods of time. This practice improves each officer's understanding of clients' businesses and results in knowledgeable credit assessments and superior customer service. Relationship officers are supported by credit analysts and other support personnel who are familiar with each assigned customer, thus creating a team approach to serving a customer's needs. A significant portion of the Bank's new business results from referrals from existing customers. The Bank's growth in loans and profitability has been due in large measure to its strategy of targeting closely-held businesses, and to the business and personal relationships and long experience of the Bank's management and directors in the St. Louis community. The Loan Committee of the Bank consists of all members of the Board of Directors, who serve on a rotating basis. All loan requests are initially reviewed by a committee of management officials, which includes among others, the Presidents of all geographic Banking Units and the Chief Executive Officer. This group has authority to approve loans where the aggregate loan balance of all the borrower's loans (including loans to affiliated entities) is less than $400,000. Loan requests where the borrower's aggregate loan balance is above $400,000 are also reviewed and examined by the respective Board Committee of the geographic Banking Unit. Loan requests where the borrower's aggregate loan balance is above $1,500,000 require approval of the Bank's full Board of Directors. Notwithstanding the required Board Committee approvals where the aggregate loan balance is greater than $400,000, all such loans are subsequently reported to the full Board of Directors for review and comment. MARKET AREAS AND APPROACH TO EXPANSION The Company plans to expand its Bank operations using its current strategy and delivering its services to new business markets through new facilities located in areas of high growth for the Company's established market 3
6 niche. Current expansion efforts include the establishment of banking facilities in St. Charles County and Sunset Hills based on the high expectations of growth for those markets and the high concentration of closely-held businesses and 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 key ingredients for success. Management believes that credit decisions, pricing matters, business development strategies, etc. should be made locally by managers who have an equity stake in the Company. See "Management." The Company plans to grow its St. Charles County and Sunset Hills units upon such local involvement and presence. The Company, as part of its expansion effort, plans to continue its strategies of operating a small number of offices with a high per office asset base, emphasizing commercial loans, and employing experienced staff who are rewarded on the basis of performance and customer service. The following is a list of the Bank's current and planned facilities: <TABLE> <CAPTION> Operating Unit Address - -------------- ------- <S> <C> Current: Enterprise Bank, Clayton 150 North Meramec, Clayton, Missouri 63105 Planned: Enterprise Bank, St. Charles<F1> 300 St. Peters Center Blvd., St. Peters, Missouri 63376 Enterprise Bank, Sunset Hills<F2> 3890 South Lindbergh Blvd., Sunset Hills, Missouri 63127 <FN> <F1> The St. Charles facility currently operates from a temporary facility located on the site of its permanent location. The facility can make loans, collect deposits, and offers substantially all of the products and services that will be offered from the Bank's permanent facility. The targeted opening date for the permanent facility is June of 1997. <F2> The Sunset Hills facility has received approval from the Missouri Commissioner of Finance and the FDIC. The permanent facility of the Sunset Hills branch is expected to be open in August of 1997. </TABLE> On March 19, 1997, the Board of Directors of the Company approved an investment of $510,000 in City Bancorp, a proposed Missouri bank holding company. The $510,000 investment represents the purchase of 5,000 units. Each unit consists of one share of common stock (purchased for $100) and one warrant (purchased for $2) to purchase one additional share of common stock for $102 per share. City Bancorp is the proposed holding company for a proposed newly chartered Missouri state bank which will be located in Springfield, Missouri. The proposed holding company, bank charter and investment is subject to final regulatory approval. The Company believes this investment will provide an opportunity to participate in the growing Springfield market by affiliating with an organization with a philosophy similar to its own. The management of City Bancorp consists of individuals with whom Company's management has worked with in the past and has a good reputation in the banking industry. ENTERPRISE CAPITAL RESOURCES Capital Resources, a wholly-owned subsidiary of the Company, was organized in 1995 to provide merchant banking services to closely-held businesses and their owners as part of the Company's overall strategy to deliver financial services to that market. Operations to date have consisted of the formation of an SBIC which is managed by Capital Management a wholly-owned subsidiary of Capital Resources, and, to a lesser extent, fee-based services related to capital formation and company acquisition. Capital Management acts as the general partner of The Enterprise Fund, a licensed SBIC formed in 1995 under the regulations of the Small Business Administration ("SBA"). The Enterprise Fund provides venture capital to growing companies in need of additional capital which qualify under the SBA's definition of a small business eligible for investment by an SBIC. The Enterprise Fund may also participate in certain qualifying management buy-out situations involving companies eligible for investment by an SBIC. The Enterprise Fund began its operations in the fourth quarter of 1995. The Fund's committed capital is approximately $10.4 million, of which $1 million was committed by the Company as a limited partner. Capital Management collects annual management fees of 2% of committed capital, plus an incentive payment based upon the investment results achieved over the ten year life of Enterprise Fund. 4
7 INVESTMENTS The Company's investment policy is designed: to enhance net income and return on equity through prudent management of risk; to ensure liquidity for cash-flow requirements; to help manage interest rate risk; to ensure collateral is available for public deposits, advances and repurchase agreements; and to manage asset diversification. The Company, through its Asset/Liability Management Committee ("ALCO"), monitors investment activity and manages the Company's liquidity by structuring the maturity dates of the Company's investments to maintain necessary liquidity. However, the primary goal of the Company's investment policy is to maintain an appropriate relationship between assets and liabilities while maximizing interest rates 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. FACILITIES The Company's principal office is located at 150 N. Meramec, Clayton, Missouri 63105. This facility is leased under an agreement that expires in 1999. The operating lease for the Company's principal facility has options to renew the leases for additional periods with future rentals based upon increases in the consumer price index. The lease provides that the Company pay taxes, maintenance, insurance, and certain other operating expenses generally applicable to the leased premises. Rent expense, net of income from the sublet portions of premises, amounted to $241,434, $202,784 and $200,125 in 1996, 1995, and 1994 respectively. The future minimum rental commitments required under the operating lease for 150 N. Meramec are as follows: 1997 307,068 1998 307,068 1999 102,356 The Company has signed preliminary leases for the Sunset Hills and St. Charles locations which are contingent upon completion of construction and final determination of usable space. Both of these buildings are currently under construction and are expected to be completed in mid 1997. The lease payments begin upon completion of the buildings and leasehold improvements. Annual rental expense for the Sunset Hills and St. Charles locations are expected to approximate $176,000 and $172,000, respectively. EMPLOYEES At December 31, 1996, the Company had approximately 60 employees, which included 6 part-time employees. None of the Company's employees are covered by a collective bargaining agreement and management believes that its relationship with its employees is good. MARKET FOR COMMON STOCK ----------------------- As of March 15, 1997, the Company had approximately 462 Common Stock shareholders of record. The Common Stock has not been traded on an exchange or in any established public trading market, although there have been a limited number of private transactions in the shares that have been made known to the Company. Based solely on the information made available to the Company from a limited number of buyers and sellers, the Company believes the selling prices for the Common Stock ranged, during 1995, from $11.50 to $12.00 per share and, during 1996, from $13.00 per share to $13.75 per share. There was a single transaction in 1996 between two Directors of the Company at $15.00 per share involving additional consideration beyond the purchase of the stock. There may have been other transactions at other prices not known to the Company. On February 14, 1997, the Company completed a stock offering of 451,612 shares of Common Stock. These shares were offered to the public at $15.50 per share. The offering allowed for the sale of a minimum of 193,548 shares, or $3,000,000, and a maximum of 451,612 shares, or $7,000,000 in Common Stock. The maximum number of shares was sold at $15.50 per share. Since the Company does not expect to list its stock on any exchange or seek quotation of its stock on NASDAQ in the near future, no established public trading market for the Common Stock is expected to develop for the foreseeable future. 5
8 DESCRIPTION OF CAPITAL STOCK ---------------------------- COMMON STOCK The authorized capital stock of the Company consists of 3,000,000 shares of Common Stock, par value $.01 per share (the "Common Stock"). Holders of shares of the Common Stock are entitled to receive such dividends as may from time to time be declared by the Board of Directors of the Company out of funds legally available therefor. 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 and may cumulate their votes in any election of directors. Holders of Common Stock have no preemptive, conversion, redemption or sinking fund rights. In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock are entitled to share equally and ratably in the assets of the Company, if any, remaining after the payment of all debts and liabilities of the Company. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- INTRODUCTION The following discussion and analysis is intended to review the significant factors of the financial condition and results of operations of the Company for the three-year period ended December 31, 1996. Reference should be made to the accompanying consolidated financial statements and the selected financial data presented elsewhere herein for an understanding of the following review. NET INCOME ANALYSIS Net income for 1996 was $1,702,000 as compared to $1,304,000 for 1995 and $1,001,000 for 1994. The increase in net income for 1996 as compared to 1995 was due primarily to an increase in non interest income and a lower provision for loan losses. Noninterest income increased $404,000 in 1996 compared to 1995. Provision expense decreased $286,000 from $631,000 in 1995 to $345,000 in 1996. The increase in net income for 1995 as compared to 1994 was primarily due to a $1,224,000 increase in net interest income, partially offset by a $636,000 increase in noninterest expense. NET INTEREST INCOME The largest component of the Company's net income is net interest income. The Company's net interest income (expressed on a tax-equivalent basis) increased by 16% to $7,026,000 during 1996 after an increase of 25% in 1995. The net interest margin was 4.96% in 1996 as compared to 4.98% and 5.07% in 1995 and 1994, respectively. Average loans as a percent of total assets increased from 71.84% to 79.14% from 1995 to 1996. For the same period, the yield on average loans decreased from 9.92% to 9.47%. This decrease in loan yield offset the margin benefits obtained by increasing the loan to asset ratio during the same period. The decrease in the net interest margin during 1995 primarily resulted from the change in the mix of earning assets from higher yielding loans to lower yielding securities and federal funds sold. The Company's average loan to asset ratio decreased to 71.84% from 73.41% for 1995 and 1994, respectively. The Company also increased its average yield on earning assets from 7.78% in 1994 to 9.00% in 1995. For the same periods, the average cost of interest-bearing liabilities increased from 3.36% to 4.94%, primarily resulting from a general rise in the interest rate environment. The Company's average federal funds sold position increased from $8,603,000 in 1994 to $12,837,000 in 1995. This shift in asset mix further impacted the net interest margin. During 1996, an increase in the average volume of earning assets caused an increase in interest income of $2,172,000. Interest income decreased $505,000 due to a decrease in rates on earning assets. Increases in the average volume of interest-bearing demand deposits, savings and money market accounts, time deposits and notes payable resulted in an increase in interest expense of $812,000. Changes in interest rates on the average volume of interest-bearing liabilities resulted in a decrease in interest expense of $130,000. The net effect of the volume and rate changes associated with all categories of interest-earning assets during 1996 as compared to 1995 increased interest income by $1,667,000 while the net effect of the volume and rate changes associated with all categories of interest-bearing liabilities increased interest expense by $682,000. 6
9 During 1995, an increase in the average volume of earning assets caused an increase in interest income of $2,146,000. Additionally, interest income increased $1,398,000 due to an increase in rates on earning assets. Increases in the average volume of interest-bearing demand deposits, savings and money market accounts, time deposits and federal funds purchased resulted in an increase in interest expense of $1,132,000. Changes in interest rates on the average volume of interest-bearing liabilities resulted in an increase in interest expense of $1,185,000. The net effect of the volume and rate changes associated with all categories of interest-earning assets during 1995 as compared to 1994 increased interest income by $3,544,000 while the net effect of the volume and rate changes associated with all categories of interest-bearing liabilities increased interest expense by $2,317,000. The following table presents, on a tax equivalent basis for the periods indicated, certain information related to the Company's average balance sheet items or accounts and its average yield on assets and average cost of liabilities. Such yields are derived by dividing income or expense by the average balance of the corresponding assets or liabilities. Average balances have been derived from quarterly averages, which are indicative of daily averages. REMAINDER OF THIS PAGE LEFT BLANK INTENTIONALLY 7
10 <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------ 1996 ------------------------------------------------------ Percent Interest Average Average of Total Income/ Yield/ Balance Assets Expense Rate ------- -------- -------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> Interest-earning assets: Loans <F1> $120,849 79.14% $11,449 9.47% Taxable investments in debt securities 12,300 8.05 693 5.63 Nontaxable investments in debt securities <F2> 860 0.56 57 6.63 Federal funds sold 7,526 4.93 396 5.26 Certificates of deposit -- -- 0 0.00 -------- ------ ------- ---- Total interest-earning assets 141,535 92.68 12,595 8.90 ------- ==== Noninterest-earning assets: Cash and due from banks 8,686 5.69 Office equipment and leasehold improvements 1,789 1.17 Prepaid expenses and other assets 2,215 1.45 Allowance for loan losses (1,520) (0.99) -------- ------ Total Assets $152,706 100.00% ======== ====== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Interest-bearing transaction accounts $ 13,180 8.63% $ 332 2.52% Money market 44,710 29.28 2,007 4.49 Savings 1,105 0.72 33 2.99 Certificates of deposit 54,756 35.86 3,181 5.81 Notes payable 205 0.13 15 7.35 Federal funds purchased 18 0.01 1 5.56 -------- ------ ------- ---- Total interest-bearing liabilities 113,974 74.63 5,569 4.89 ------- ==== Noninterest-bearing liabilities: Demand deposits 24,427 16.00 Other liabilities 932 0.61 -------- ------ Total liabilities 139,333 91.24 Shareholders' equity 13,373 8.76 -------- ------ Total liabilities and shareholders' equity $152,706 100.00% ======== ====== Net interest income $ 7,026 ======= Net interest margin 4.96% ==== <CAPTION> Year Ended December 31, ------------------------------------------------------ 1995 ------------------------------------------------------ Percent Interest Average Average of Total Income/ Yield/ Balance Assets Expense Rate ------- -------- -------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> Interest-earning assets: Loans <F1> $ 94,737 71.84% $ 9,394 9.92% Taxable investments in debt securities 13,093 9.93 745 5.69 Nontaxable investments in debt securities <F2> 687 0.52 42 6.11 Federal funds sold 12,837 9.73 745 5.80 Certificates of deposit 63 0.05 2 3.17 -------- ------ ------- ---- Total interest-earning assets 121,417 92.07 10,928 9.00 ------- ==== Noninterest-earning assets: Cash and due from banks 7,856 5.96 Office equipment and leasehold improvements 766 0.58 Prepaid expenses and other assets 3,025 2.30 Allowance for loan losses (1,196) (0.91) -------- ------ Total Assets $131,868 100.00% ======== ====== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Interest-bearing transaction accounts $ 14,002 10.62% $ 352 2.51% Money market 38,084 28.88 1,741 4.57 Savings 1,068 0.81 32 3.00 Certificates of deposit 45,669 34.63 2,760 6.04 Notes payable -- -- -- -- Federal funds purchased 41 0.03 2 4.88 -------- ------ ------- ---- Total interest-bearing liabilities 98,864 74.97 4,887 4.94 ------- ==== Noninterest-bearing liabilities: Demand deposits 20,532 15.57 Other liabilities 755 0.57 -------- ------ Total liabilities 120,151 91.11 Shareholders' equity 11,717 8.89 -------- ------ Total liabilities and shareholders' equity $131,868 100.00% ======== ====== Net interest income $ 6,041 ======= Net interest margin 4.98% ==== <CAPTION> Year Ended December 31, ------------------------------------------------------ 1994 ------------------------------------------------------ Percent Interest Average Average of Total Income/ Yield/ Balance Assets Expense Rate ------- -------- -------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> Interest-earning assets: Loans <F1> $ 76,263 73.41% $ 6,612 8.67% Taxable investments in debt securities 9,407 9.06 369 3.92 Nontaxable investments in debt securities <F2> 561 0.54 33 5.88 Federal funds sold 8,603 8.28 367 4.27 Certificates of deposit 98 0.09 3 3.06 -------- ------ ------- ---- Total interest-earning assets 94,932 91.38 7,384 7.78 ------- ==== Noninterest-earning assets: Cash and due from banks 6,430 6.19 Office equipment and leasehold improvements 629 0.61 Prepaid expenses and other assets 2,773 2.67 Allowance for loan losses (879) (0.85) -------- ------ Total Assets $103,885 100.00% ======== ====== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Interest-bearing transaction accounts $14,226 13.69% $ 292 2.05% Money market 33,548 32.29 1,053 3.14 Savings 1,275 1.23 33 2.59 Certificates of deposit 27,440 26.41 1,190 4.34 Notes payable -- -- -- -- Federal funds purchased 36 0.03 2 5.56 -------- ------ ------- ---- Total interest-bearing liabilities 76,525 73.65 2,570 3.36 ------- ==== Noninterest-bearing liabilities: Demand deposits 16,686 16.07 Other liabilities 369 0.36 -------- ------ Total liabilities 93,580 90.08 Shareholders' equity 10,305 9.92 -------- ------ Total liabilities and shareholders' equity $103,885 100.00% ======== ====== Net interest income $ 4,814 ======= Net interest margin 5.07% ==== <FN> - ---------------------- <F1> 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 $474,000, $385,000, and $293,000 for 1996, 1995, and 1994, respectively. <F2> Non-taxable investment income is presented on a fully tax-equivalent basis assuming a tax rate of 34%. </TABLE> 8
11 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: <TABLE> <CAPTION> 1996 Compared to 1995 1995 Compared to 1994 Increase (Decrease) Due to Increase (Decrease) Due to ------------------------------ ------------------------------ Volume<F1> Rate<F2> Net Volume<F1> Rate<F2> Net ---------- -------- --- ---------- -------- --- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Interest earned on: Loans $2,490 $ (435) $2,055 $1,746 $1,036 $2,782 Taxable investments in debt securities (45) (7) (52) 175 201 376 Nontaxable investments in debt securities <F3> 14 1 15 8 1 9 Federal funds sold (285) (64) (349) 218 160 378 Certificates of deposit (2) -- (2) (1) -- (1) ------ ------ ------ ------ ------ ------ Total interest-earning assets $2,172 (505) 1,667 2,146 1,398 3,544 ------ ------ ------ ------ ------ ------ Interest paid on: Interest-bearing transaction accounts $ (21) 1 (20) (5) 65 60 Money market 298 (32) 266 157 531 688 Savings 1 (0) 1 (6) 5 (1) Certificates of deposit 520 (99) 421 986 584 1,570 Notes payable 15 -- 15 -- -- -- Federal funds purchased (1) -- (1) -- -- -- ------ ------ ------ ------ ------ ------ Total interest-bearing liabilities 812 (130) 682 1,132 1,185 2,317 ------ ------ ------ ------ ------ ------ Net interest income $1,360 $ (375) $ 985 $1,014 $ 213 $1,227 ====== ====== ====== ====== ====== ====== <FN> <F1> Change in volume multiplied by yield/rate of prior period. <F2> Change in yield/rate multiplied by volume of prior period. <F3> 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. </TABLE> 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: <TABLE> <CAPTION> December 31, --------------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- -------------------- Percent Percent Percent Of Total Of Total Of Total Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Commercial and industrial $ 43,876 32.71% $ 43,728 39.59% $30,001 35.01% Real estate: Commercial 24,946 18.60 25,507 23.09 22,333 26.06 Construction 23,362 17.42 11,634 10.53 10,186 11.89 Residential 37,449 27.92 24,537 22.21 21,483 25.07 Consumer and other 4,500 3.35 5,058 4.58 1,684 1.97 -------- ------ -------- ------ ------- ------ Total Loans $134,133 100.00% $110,464 100.00% $85,687 100.00% ======== ====== ======== ====== ======= ====== </TABLE> The Company's subsidiary bank grants commercial, residential and consumer loans primarily in the St. Louis metropolitan area. The Company has a diversified loan portfolio, with no particular concentration of credit in 9
12 any one economic sector; however, a substantial portion of the portfolio is secured by real estate. As of December 31, 1996, $85,756,588 in loans, or 64% of the loan portfolio, involved real estate as part or all of the collateral package. Of these loans, $32,642,702, or 38%, were personal and business loans and loans on owner-occupied properties. Management views these types of loans as having less risk than traditional real estate loans because the primary source of repayment for the loans is not dependent upon the cash flow or sale of the real estate securing the loans. When evaluating the appropriateness of the allowance for loan losses, these loans are evaluated based on commercial considerations such as the financial condition, cash flow and income of the borrower as well as the value of all collateral securing the loans, including the market value of any real estate securing the loan. The following table sets forth the interest rate sensitivity of the loan portfolio at December 31, 1996: <TABLE> <CAPTION> Loans Maturing or Repricing ----------------------------------------------------- After One In One Through After Year or Less Five Years Five Years Total ------------ ---------- ---------- ----- (Dollars in Thousands) <S> <C> <C> <C> <C> FIXED RATE LOANS - ---------------- Commercial and industrial $ 3,055 5,667 15 8,737 Real estate: Commercial 3,917 10,907 198 15,022 Construction -- -- -- -- Residential 2,644 10,630 91 13,365 Consumer and other 392 688 7 1,087 -------- ------ --- ------- Total $ 10,008 27,892 311 38,211 ======== ====== === ======= VARIABLE RATE LOANS - ------------------- Commercial and industrial $ 35,139 -- -- 35,139 Real estate: Commercial 9,924 -- -- 9,924 Construction 23,362 -- -- 23,362 Residential 24,084 -- -- 24,084 Consumer and other 3,413 -- -- 3,413 -------- ------ --- ------- Total $ 95,922 0 0 95,922 ======== ====== === ======= TOTAL LOANS - ----------- Commercial and industrial $ 38,194 5,667 15 43,876 Real estate: Commercial 13,841 10,907 198 24,946 Construction 23,362 -- -- 23,362 Residential 26,728 10,630 91 37,449 Consumer and other 3,805 688 7 4,500 -------- ------ --- ------- Total $105,930 27,892 311 134,133 ======== ====== === ======= </TABLE> PROVISION FOR LOAN LOSSES The provision for loan losses charged to expense was $345,000, $631,000 and $450,000 in 1996, 1995 and 1994, respectively. Although the Company has not experienced significant loan losses with any one particular category or class of loans, management remains cognizant of the credit risks associated with the business and the Company's increase in loan volume. The Company has charged-off a total of $434,000 in principal from January 1, 1994 through December 31, 1996. Total recoveries for the same period are $51,000, resulting in a three year net charge-off experience of $383,000, or 0.13% per year of average loans for the same period. 10
13 The allowance for loan losses is maintained at a level considered adequate to provide for potential losses. The provision for loan losses is based on a periodic analysis which considers, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, loan collateral and payment experience. In addition to the allowance for estimated losses on identified problem loans, an overall unallocated allowance is established to provide for unidentified credit losses inherent in the portfolio. As adjustments to the allowance for loan losses become necessary, they are reflected in the results of operations in the periods in which they become known. Management believes the allowance for loan losses is adequate to absorb losses in the loan portfolio. While management uses available information to recognize loan losses, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Company to increase the allowance for loan losses based on their judgments and interpretations about information available to them at the time of their examinations. While the Company has benefited from very low historical net charge-off experience during an extended period of rapid loan growth, management remains cognizant that historical loan loss and nonperforming asset experience may not be indicative of future results. If the experience were to deteriorate and additional provisions for loan losses were required, future operating results would be negatively impacted. Both management and the Board of Directors continually monitor changes in asset quality, market conditions, concentration of credit and other factors which impact the credit risk associated with the Company's loan portfolio. Continued quality of the loan portfolio and net recoveries of $20,000 allowed the Company to decrease the provision for loan losses in 1996 from amounts provided in 1995 while maintaining an adequate allowance for loan losses. The allowance for loan losses increased $365,000 to $1,765,000 during 1996 to account for loan growth of $24 million and continued asset quality. During the same period, impaired loans decreased from $1,055,000 to $636,000 while non performing loans increased from $107,000 to $161,000 and the allowance for loan losses to non-performing loans decreased from 1,308% to 1,096%. As of December 31, 1996 and 1995, the Company had eight and five impaired loans in the amount of $636,000 and $1,055,000 respectively, all of which are considered potential problem loans. Non-performing assets increased from $988,000 as of December 31, 1995 to $1,035,000 as of December 31, 1996. The following table sets forth information concerning the Company's nonperforming assets as of the dates indicated: <TABLE> <CAPTION> December 31, -------------------------------------- 1996 1995 1994 -------- -------- -------- (Dollars in Thousands) <S> <C> <C> <C> Non-accrual loans $ 131 $ 107 $ -- Loans past due 90 days or more and still accruing interest 30 -- -- Restructured loans -- -- -- -------- -------- -------- Total nonperforming loans 161 107 -- Foreclosed property 874 881 1,776 -------- -------- -------- Total nonperforming assets $ 1,035 $ 988 $ 1,776 ======== ======== ======== Total assets $184,584 $153,706 $122,212 Total loans 134,133 110,464 85,687 Total loans plus foreclosed property 135,007 111,345 87,463 Nonperforming loans to loans 0.12% 0.10% 0.00% Nonperforming assets to loans plus foreclosed property 0.77 0.89 2.03 Nonperforming assets to total assets 0.56 0.64 1.45 </TABLE> 11
14 The following table summarizes changes in the allowance for loan losses arising from loans charged-off and recoveries on loans previously charged-off, by loan category, and additions to the allowance that have been charged to expense: <TABLE> <CAPTION> December 31, -------------------------------------- 1996 1995 1994 -------- -------- ------- (Dollars in Thousands) <S> <C> <C> <C> Allowance at beginning of period $ 1,400 $ 1,000 $ 722 -------- -------- ------- Loans charged off: Commercial and industrial -- 19 45 Real estate: Commercial -- 118 132 Construction -- -- -- Residential -- 106 -- Consumer and other -- -- 14 -------- -------- ------- Total loans charged off -- 243 191 -------- -------- ------- Recoveries of loans previously charged off Commercial and industrial -- -- 18 Real estate: Commercial 4 12 -- Construction -- -- -- Residential 15 -- -- Consumer and other 1 -- 1 -------- -------- ------- Total recoveries of loans previously charged off 20 12 19 -------- -------- ------- Net loans charged off (recovered) (20) 231 172 -------- -------- ------- Provisions charged to operations 345 631 450 -------- -------- ------- Allowance at end of period $ 1,765 $ 1,400 $ 1,000 ======== ======== ======= Average loans 120,849 94,737 76,263 Total loans 134,133 110,464 85,687 Nonperforming loans 161 107 -- Net charge-offs (recoveries) to average loans (0.02)% 0.24% 0.23% Allowance for loan losses to loans 1.32 1.27 1.17 Allowance for loan losses to nonperforming loans 1,096.27 1308.41 N/A </TABLE> 12
15 The following table sets forth the allocation of the allowance for loan losses by loan category as an indication of the estimated risk of loss for each loan type. The unallocated portion of the allowance is intended to cover loss exposure related to potential problem loans for which no specific allowance has been estimated and for the possible risks in the remainder of the loan portfolio. <TABLE> <CAPTION> December 31, ----------------------------------------------------------------------- 1996 1995 1994 ---------------------- ---------------------- ---------------------- Percent of Percent of Percent of Category to Category to Category to Allowance Total Loans Allowance Total Loans Allowance Total Loans --------- ----------- --------- ----------- --------- ----------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Commercial and industrial $ 423 32.71% $ 348 39.59% $ 247 35.01% Real estate: Commercial 253 18.60 264 23.09 218 26.06 Construction 413 17.42 93 10.53 69 11.89 Residential 381 27.92 510 22.21 350 25.07 Consumer and other 56 3.35 44 4.58 16 1.97 Not allocated 239 -- 140 -- 100 -- ------ ------ ------ ------ ------ ------ Total $1,765 100.00% $1,400 100.00% $1,000 100.00% ====== ====== ====== ====== ====== ====== </TABLE> 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. 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. NONINTEREST INCOME The following table depicts the annual changes in various noninterest income categories: <TABLE> <CAPTION> 1995 versus 1996 1994 versus 1995 ----------------------------------- --------------------------------- % Change 1996 1995 % Change 1995 1994 -------- ---- ---- -------- ---- ---- <S> <C> <C> <C> <C> <C> <C> Capital Resources management fee 111% $ 208,100 98,675 100% $ 98,675 -- Service charges on deposit accounts (2) 129,414 131,640 (22) 131,640 168,018 Credit card merchant income 7 600,981 562,449 29 562,449 434,991 Gain on sale of credit card operation 100 320,000 -- -- -- -- Investment in the Enterprise Fund L.P. 662 (62,690) (8,222) (100) (8,222) -- Other noninterest income (15) 43,987 51,729 (74) 51,729 202,254 --- ---------- ------- ---- -------- ------- Total noninterest income 48 $1,239,792 836,271 4 $836,271 805,264 === ========== ======= ==== ======== ======= </TABLE> Total noninterest income was $1,239,792 in 1996, representing a 48% increase from 1995. The increase is primarily the result of a $109,425 increase in the management fee earned by Capital Resources and a $320,000 gain on the sale of the credit card operations. Total noninterest income was $836,271 in 1995, representing a 4% increase from 1994. Capital Resources management fees were $98,675, representing six months of management fees from the Enterprise Fund. Service charges on deposit accounts decreased by $36,378, or 22%, in 1995 due to a general increase in interest rates and a subsequent increase in the earnings credit offsetting the service charges on commercial checking accounts. 13
16 NONINTEREST EXPENSE The following table depicts the annual changes in various noninterest expense categories: <TABLE> <CAPTION> 1995 versus 1996 1994 versus 1995 ------------------------------------ ------------------------------------- % Change 1996 1995 % Change 1995 1994 -------- ---- ---- -------- ---- ---- <S> <C> <C> <C> <C> <C> <C> Salaries and employee benefits 40% $2,865,640 2,042,960 35% $2,042,960 1,514,073 Occupancy 21 333,795 275,179 2 275,179 269,259 FDIC insurance premiums (98) 2,000 114,944 (41) 114,944 194,231 Data processing 18 247,696 209,267 17 209,267 179,066 Credit card merchant expense (3) 441,991 455,718 42 455,718 321,217 Other noninterest expense 15 1,255,212 1,088,655 1 1,088,655 1,072,903 -------- ---------- --------- ------- ---------- --------- Total noninterest expense 23 $5,146,334 4,186,723 18 $4,186,723 3,550,749 ======== ========== ========= ======= ========== ========= </TABLE> Noninterest expense increased $959,611, or 23%, from 1995 to 1996 primarily due to increases in salaries and benefits and occupancy expense. These increases are primarily attributed to additional staff needed for the two planned facilities in St. Charles and Sunset Hills. Increases in data processing and other operating expenses are due to the general growth experienced by the Company during 1996. FDIC insurance premiums decreased 98% during the same period. Noninterest expense increased 18% in 1995 compared to 1994 due primarily to an increase of 35% in salary and benefits expense offset by a decrease in the FDIC insurance premiums. On August 8, 1995, the FDIC voted to reduce the deposit insurance premiums paid by most members of the Bank Insurance Fund (BIF) and to keep existing assessment rates intact for members of the Savings Association Insurance Fund (SAIF). The Company's banking subsidiary is a member of the BIF. Under the reduced assessment rate schedule for the BIF, the best rated institutions will pay an annual rate of four cents per $100.00 of assessable deposits, down from the previous rate of 23 cents per $100.00. The SAIF members will continue to pay the 23 cents per $100.00 of assessable deposits. The reduction in the assessment rate schedule became effective June 1, 1995. In addition, as a result of the continued improvement in the capitalization of the FDIC's BIF, the assessment rate schedule for the best rated BIF members was further reduced to the statutory annual minimum payment of $2,000, effective January 1, 1996. In response to concerns that the insurance premium disparity between the BIF and the SAIF could have a negative effect on SAIF insured institutions and the SAIF, legislation was enacted by Congress to, among other things, eliminate the deposit insurance premium disparity by merging the BIF and SAIF into a new Deposit Insurance Fund on January 1, 1999. This legislation is not expected to have a significant effect on the Company. INCOME TAXES Income tax expense was $1,031,344 for 1996, $741,091 for 1995 and $606,756 for 1994. The effective tax rate was 38%, 36%, 38% for the years ended December 31, 1996, 1995, and 1994, respectively. LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity is provided by the Company's earning assets, including short-term investments in federal funds sold, maturities in the loan portfolio, maturities in the investment portfolio, and amortization of term loans, and by the Company's deposit inflows, proceeds from borrowings, and retained earnings. 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. 14
17 The following table reflects the Company's GAP analysis (rate sensitive assets minus rate sensitive liabilities) as of December 31, 1996: <TABLE> <CAPTION> Over Over 3 Months 1 Year 3 Months Through 12 Through After or Less Months 5 Years 5 Years Total -------- ---------- ------- ------- ----- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Assets: Investments in debt and equity securities $ 5,506 5,916 3,780 44 15,246 Loans 100,319 5,611 27,892 311 134,133 Federal funds sold 23,250 -- -- -- 23,250 -------- ------- ------ ------ ------- Total interest-sensitive assets $129,075 11,527 31,672 355 172,629 -------- ------- ------ ------ ------- Liabilities: Interest-bearing transaction accounts $ 16,648 -- -- -- 16,648 Savings and money market accounts 55,668 -- -- -- 55,668 Certificates of deposit 12,309 48,960 4,238 -- 65,507 Note payable 300 -- -- -- 300 -------- ------- ------ ------ ------- Total interest-sensitive liabilities $ 84,925 48,960 4,238 -- 138,123 -------- ------- ------ ------ ------- Interest-sensitivity GAP GAP by period $ 44,150 (37,433) 27,434 355 34,506 -------- ------- ------ ------ ======= Cumulative GAP $ 44,150 6,717 34,151 34,506 ======== ======= ====== ====== Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic 1.52 0.24 7.47 -- 1.25 ======= Cumulative GAP 1.52 1.05 1.25 1.25 ======== ======= ====== ====== </TABLE> As indicated in the preceding table, the Company was asset sensitive on a cumulative basis in the near term (three months or less) at December 31, 1996 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 revenue as compared to the reduction in interest expense created by the repricing of the smaller volume of interest sensitive liabilities. The Company's revenue was also slightly asset sensitive on a one year basis. 15
18 The following table summarizes certain trends in the Company's balance sheet during the three-year period ended December 31, 1996: <TABLE> <CAPTION> December 31, -------------------------------- 1996 1995 1994 ------- -------- -------- (Dollars in thousands) <S> <C> <C> <C> Total assets $184,584 $153,706 $122,212 Earning assets 172,629 143,601 113,627 Deposits 168,961 141,140 104,799 Loans to deposits 79.39% 78.27% 81.76% Loans to total assets 72.67 71.87 70.11 Investment securities to total assets 8.26 11.00 13.54 --------------------------------------------------------------------------------- Loans $134,150 110,496 85,718 Unearned loan fees (17) (32) (31) -------- -------- -------- Net loans $134,133 110,464 85,687 ======== ======== ======== Investment securities -AFS $ 14,006 16,065 15,740 Investment securities -HTM 1,240 842 802 -------- -------- -------- Total investments $ 15,246 16,907 16,542 ======== ======== ======== Investment securities -AFS $ 14,006 16,065 15,740 Investment securities -HTM 1,240 842 802 Fed funds sold 23,250 16,230 11,300 Interest-bearing deposits -- -- 98 Loans 134,150 110,496 85,718 Unearned loan fees (17) (32) (31) -------- -------- -------- Total earning assets $172,629 143,601 113,627 ======== ======== ======== </TABLE> The ratio of earning assets to total assets remained relatively constant at 93% over the three years ending December 31, 1996. Earning assets increased $29,028,000 and $29,974,000, or 20% and 26% for the years ended December 31, 1996 and 1995, respectively. Total assets increased $30,878,000 and $31,494,000 or 20% and 26% during the same periods. The following table shows, for the periods indicated, the average annual amount and the average rate paid by type of deposit: <TABLE> <CAPTION> December 31, ------------------------------------------------------------------------------------------- 1996 1995 1994 ---------------------------- ----------------------------- ------------------------ (Dollars in Thousands) Average Interest Average Interest Average Interest Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- -------- ---- ------- -------- ---- ------- -------- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Noninterest-bearing demand deposits $ 24,427 -- --% $ 20,532 -- --% $16,686 -- --% Interest-bearing transaction accounts 13,180 332 2.52 14,002 352 2.51 14,226 292 2.05 Money market accounts 44,710 2,007 4.49 38,084 1,741 4.57 33,548 1,053 3.14 Savings accounts 1,105 33 2.99 1,068 32 3.00 1,275 33 2.59 Certificates of deposit 54,756 3,181 5.81 45,669 2,760 6.04 27,440 1,190 4.34 -------- ----- ---- -------- ----- ---- ------- ----- ---- $138,178 5,553 4.02% $119,355 4,885 4.09% $93,175 2,568 2.76% ======== ===== ==== ======== ===== ==== ======= ===== ==== </TABLE> Since inception, the Company has experienced rapid loan and deposit growth primarily due to an aggressive direct calling effort and sustained economic growth in the local market served by the Company. Management has pursued privately held businesses who desire a close working relationship with a locally-managed, full service bank. Additionally, the Company belongs to a national network of time depositors (primarily credit unions) who 16
19 place time deposits with the Company, typically in increments of $99,000. The Company has used this source of deposits for four 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 $31,152,124 and $16,488,000 of deposits from the national network with the Company as of December 31, 1996 and 1995, respectively. The following table sets forth the amount and maturity of certificates of deposit that had balances of more than $100,000 at December 31, 1996. <TABLE> <CAPTION> Remaining Maturity Amount ------------------------------ ------ (Dollars in Thousands) <S> <C> Three months or less $ 8,897 Over three through six months 5,994 Over six through twelve months 8,156 Over twelve months 1,020 ------- $24,067 ======= </TABLE> The table below sets forth the carrying value of investment securities held by the Company at the dates indicated: <TABLE> <CAPTION> December 31, ------------------------------------------------------------------- 1996 1995 1994 --------------------- --------------------- ------------------- Percent Percent Percent Of Total Of Total Of Total Amount Securities Amount Securities Amount Securities ------ ---------- ------ ---------- ------ ---------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies $13,850 90.84% $15,698 92.85% $15,740 95.15% Municipal Bonds 891 5.85 792 4.68 746 4.51 Mortgage-backed securities 44 0.29 50 0.30 56 0.34 Federal Home Loan Bank Stock 461 3.02 367 2.17 -- -- ------- ------ ------- ------ ------- ------ $15,246 100.00% $16,907 100.00% $16,542 100.00% ======= ====== ======= ====== ======= ====== </TABLE> Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards ("SFAS") 115 for which the cumulative effect was recorded on the consolidated balance sheet on that date. On January 1, 1994, debt securities with an amortized cost of $280,553 were classified as "held-to-maturity" securities; debt securities with an amortized cost of $9,398,256 were classified as "available-for-sale" securities; a market valuation account was established for the available-for-sale securities of $44,207 to adjust the recorded balance of such securities at January 1, 1994 to their fair value on that date; a deferred tax asset of $15,030 was recorded for the tax effect of the market valuation account; and the net decrease resulting from the market valuation adjustment at January 1, 1994 was recorded as a separate component of shareholders' equity. As of December 31, 1995, debt securities with an amortized cost of $841,732 were classified as held-to-maturity securities, debt and equity securities with an amortized cost of $16,102,111 were classified as available-for-sale securities, the market valuation account for the available-for-sale securities was adjusted to $36,910 to decrease the recorded balance of such securities at December 31, 1995 to fair value on that date. The change in the market valuation account and related components resulted from reinvestment of maturing investments at higher market rates in 1995. As of December 31, 1996, debt securities with an amortized cost of $1,240,183 were classified as held-to-maturity securities; debt and equity securities with an amortized cost of $13,995,643 were classified as available-for-sale securities; the market valuation account for the available-for-sale securities was adjusted to approximately $10,154 to increase the recorded balance of such securities at December 31, 1996 to fair value on that date. 17
20 The following table summarizes maturity and yield information on the investment portfolio at December 31, 1996: <TABLE> <CAPTION> Carrying Value Yield <F1> -------- ---------- (Dollars in Thousands) <S> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies 0 to 1 year $10,861 5.50% 1 to 5 years 2,989 5.80 5 to 10 years -- -- No stated maturity -- -- ------- Total $13,850 5.57% ======= ==== Municipal Bonds 0 to 1 year $ 100 4.54% 1 to 5 years 791 6.57 5 to 10 years -- -- No stated maturity -- -- ------- Total $ 891 6.34% ======= ==== Mortgage-backed securities 0 to 1 year $ -- --% 1 to 5 years -- -- 5 to 10 years -- -- No stated maturity 44 6.54 ------- Total $ 44 6.54% ======= ==== Federal Home Loan Bank Stock 0 to 1 year $ -- --% 1 to 5 years -- -- 5 to 10 years -- -- No stated maturity 461 6.73 ------- Total $ 461 6.73% ======= ==== Total 0 to 1 year $10,961 5.50% 1 to 5 years 3,780 5.96 5 to 10 years -- -- No stated maturity 505 6.71 ------- Total $15,246 5.65% ======= ==== <FN> <F1> Weighted average tax-equivalent yield </TABLE> CAPITAL ADEQUACY The Company's Shareholders' equity was $14,757,893 at December 31, 1996. This represented an increase of 22.5% over Shareholders' equity at December 31, 1995. The $2,705,746 increase in Shareholders' equity was the result of $1,701,952 in earnings for 1996, a $31,062 increase in the unrealized holding loss on investment securities available-for-sale (adjusted for taxes), a $1,094,280 increase from the exercise of outstanding warrants for common stock, and dividends of $121,548 paid to Shareholders during 1996. Subsequent to year end, the Company raised an additional $6,999,986, prior to deduction of offering expenses, with the sale of 451,612 shares of Common Stock at $15.50 per share. The offering closed on February 14, 1997. 18
21 In April 1996, the Company obtained a $1,000,000 unsecured line of credit. The line of credit is a one year interest only note accruing interest at the prime rate. The outstanding principal balance on the loan as of December 31, 1996 was $300,000 which was repaid subsequent to year end. Risk-based capital guidelines for financial institutions were adopted by regulatory authorities effective January 1, 1991. These guidelines were designed to relate regulatory capital requirements to the risk profile of the specific institutions and to provide for uniform requirements among the various regulators. Currently, the risk-based capital guidelines require the Company to meet a minimum total capital ratio of 8.0% of which at least 4.0% must consist of Tier 1 capital. Tier 1 capital generally consists of (a) common Shareholders' equity (excluding the unrealized market value adjustments on the available for sale securities), (b) qualifying perpetual preferred stock and related surplus subject to certain limitations specified by the FDIC, and (c) minority interests in the equity accounts of consolidated subsidiaries less goodwill and 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 less purchased mortgage servicing rights to 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. The following table summarizes the Company's risk-based capital and leverage ratios at the dates indicated: <TABLE> <CAPTION> December 31, ----------------------------- 1996 1995 1994 ---- ---- ---- <S> <C> <C> <C> Tier I Capital 10.29% 10.21% 10.76% Total Risk Based Capital 11.53 11.40 11.75 Leverage Ratio 7.96 7.81 8.89 Tangible Capital to Assets 8.91 8.72 9.71 </TABLE> Primary capital, a measure of capital adequacy, includes equity capital, allowance for possible loan losses, and debt considered equity for regulatory capital purposes. Tangible primary capital represents primary capital reduced by total intangible assets included in the balance sheet. At December 31, 1996, the Company's primary capital was $16,515,992 compared to $13,476,508 and $11,869,178 at December 31, 1995 and 1994, respectively. The Company's primary capital to asset ratio on a consolidated basis was 8.95%, 8.77%, and 9.71% at December 31, 1996, 1995, and 1994, respectively. The Company's tangible primary capital was $16,461,861, $13,407,369 and $11,869,178 at December 31, 1996, 1995, and 1994, respectively. IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS During October 1995, the FASB issued SFAS 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 encourages companies to adopt a new accounting method in 1996 based on the estimated fair value of stock options. The implementation of SFAS 123 did not have a material effect on the Company's financial position or results of operations. In June 1995, the FASB issued SFAS 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities. SFAS 125 established accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. The standards established by SFAS 125 are based on consistent applications of a financial-components approach that focuses on control. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, derecognizes financial assets when control has been surrendered and derecognizes liabilities when extinguished. SFAS 125 provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. SFAS 125 is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application is not permitted. The Company does not believe the implementation of SFAS 125 will have a material effect on its consolidated financial position or results of operation. 19
22 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. Compliance with the numerous regulations and policies promulgated by the regulatory authorities is a difficult and ever-changing atmosphere in which to operate. The Company and the Bank commit substantial resources in order to comply with these statutes, regulations and policies. The Company is unable to predict the nature or the extent of the effect on its business and earnings that fiscal or monetary policies, economic control, or new federal or state legislation may have in the future. FEDERAL BANK HOLDING COMPANY REGULATION The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the "BHCA"). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. The Company's and the Bank's activities are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries, or engaging in any other activity that the Federal Reserve determines to be closely related to banking. Investments, Control and Activities. With certain limited exceptions, the BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (I) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company. Recent federal legislation permits bank holding companies to acquire control of banks throughout the United States. 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 rebuttably presumed to exist if a person acquires at least 10% of the outstanding shares of any class of voting securities once the Company registers the Common Stock under the Securities and Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption. Under the BHCA, the Company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in, nonbanking activities, unless the Federal Reserve, by order or regulation, has found those activities to be so closely related to banking or managing or controlling banks as to be a related activity. Some of the activities that the Federal Reserve has determined by regulation to be proper incidents to the business of banking include investment in and management of Small Business Investment Companies, making or servicing loans and certain types of leases, engaging in certain insurance and brokerage activities, performing data processing services, acting in certain circumstances as a fiduciary or investment or financial advisor, owning savings associations, and making investments in limited projects designed primarily to promote community welfare. 20
23 Source of Strength; Cross-Guarantee. In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which the Company might not otherwise do so. Under the BHCA, the Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition. BANK REGULATION General. The Company is the holding company for a single state bank. The Bank is not a member of the Federal Reserve system. The Missouri Division of Finance and the FDIC are primary regulators for the Bank. These regulatory authorities regulate or monitor all areas of the Bank's operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuances of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. The Bank must maintain certain capital ratios and is subject to limitations on aggregate investments in real estate, bank premises, and furniture and fixtures. All insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual and quarterly reports to the FDIC and the appropriate agency and the state supervisor. Transactions With Affiliates and Insiders. The Bank is subject to the provisions of Section 23A of the Federal Reserve Act, which place limits on the amount of loans or extensions of credit to, or investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. In addition, most of these loans and certain other transactions must be secured in prescribed amounts. The Bank is also subject to the provisions of Section 23B of the Federal Reserve Act that, among other things, prohibit an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with non-affiliated companies. The Bank is subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. The Company has a satisfactory rating under CRA. Other Regulations. Interest and certain other charges collected or contracted for by the Bank are subject to state usury laws and certain federal laws concerning interest rates. The Bank's loan operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves, the Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit, the Fair Credit Reporting Act of 1978 governing the use and provision of information to credit reporting agencies, the Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies, and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of the Banks also are subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which governs 21
24 automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services. Deposit Insurance. The deposits of the Bank are currently insured by the FDIC to a maximum of $100,000 per depositor, subject to certain aggregation rules. The FDIC establishes rates for the payment of premiums by federally insured banks for deposit insurance. An insurance fund (BIF) is maintained for commercial banks, with insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail. The FDIC has adopted a risk-based deposit insurance premium system for all insured depository institutions, including the Bank, which requires premiums from a depository institution based upon its capital levels and risk profile, as determined by its primary federal regulator on a semiannual basis. DIVIDENDS The principal source of the Company's cash revenues comes from dividends received from the Bank. The amount of dividends that may be paid by the Bank to the Company depends on the Bank's earnings and capital position and is limited by federal and state law, regulations, and policies. CAPITAL REGULATIONS The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, account for off-balance-sheet exposure, and minimize disincentives for holding liquid assets. The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance-sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimums. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio, a portion of which must be Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets. Under these guidelines, banks' and bank holding companies' assets are given risk-weights of 0%, 20%, 50%, or 100%. In addition, certain off-balance-sheet items are given credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstances, residential construction loans, both of which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% rating. The federal bank regulatory authorities have also implemented a leverage ratio, which is Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. MANAGEMENT ---------- EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY <TABLE> <CAPTION> PRESENT POSITION(S) PRINCIPAL OCCUPATION NAME AND AGE WITH THE COMPANY DURING PAST 5 YEARS - ------------ ---------------- ------------------- <S> <C> <C> Fred H. Eller, 52 President and Chief Executive President, Chief Executive Officer and Director of the Company Officer, Director (since 1995); Chairman of the Board of the Bank (since 1996); Chief Executive Officer and Director of the Bank ( since 1988) 22
25 Ronald E. Henges, 64 Chairman of the Board, Director Chief Executive Officer, Creve Coeur Camera (multi-store retailer of camera and video equipment); President and Chief Executive Officer of Henges Associates, Inc. (manufacturer and installer of prefabricated wall systems) 1991-1995; Chairman of the Board of the Company (since 1995); Chairman of the Board of the Bank, 1988-1996 Kevin C. Eichner, 46 Vice Chairman of the Board, President, The Financial Collaborative, Inc. (a management Director consulting firm); Vice Chairman of the Board of the Company (since 1995); Vice Chairman of the Board of the Bank, 1991-1996 Joseph D. Garea, 42 Chief Financial Officer, Chief Financial Officer and Director of the Company (since Director, President Enterprise 1996); President, Enterprise Capital Management, Inc. (since Capital Management and 1995); President, Enterprise Capital Resources, Inc. (since Enterprise Capital Resources 1995); Senior Vice President, United Postal Savings, 1991-1994 Paul R. Cahn, 71 Director President, Elan Polo Imports, Inc. (importer of women's and children's casual shoes); Director of the Company (since 1996); Director of the Bank, 1991-1993 and 1995-1996 Birch M. Mullins, 53 Director President, Baur Properties (developer of commercial real estate properties); Director of the Company (since 1996); Director of the Bank, 1991-1996 Robert E. Saur, 54 Director President, Conrad Properties (developer of commercial and residential real estate properties); Director of the Company (since 1995); Director of the Bank, 1991-1996 Henry D. Warshaw, 43 Director Principal, Moneta Group (provides financial planning products and services to individuals); Director of the Company (since 1996); Director of the Bank, 1991-1996; Chairman of Clayton Banking Unit (since 1996) 23
26 James L. Wilhite, 63 Director President, Stange Corporation (manufacturer of marketing and incentive items); Director of the Company (since 1996); Director of the Bank (since 1996); Chairman of the St. Charles Banking Unit (since 1996) James A. Williams, 44 Director President, Sunset Transportation (trucking brokerage and consulting firm); Director of the Company (since 1996); Director of the Bank (since 1996); Chairman of the Sunset Hills Banking Unit (since 1996) David J. Mishler, 38 President, Clayton Unit, President of the Clayton Unit of the Bank and Director (since Executive Officer 1996); Vice PResident of the Bank 1991-1996. James E. Graser, 37 President, Sunset Hills Unit, President of the Sunset Hills Unit of the Bank and Director Executive Officer (since 1996); Vice President of the Bank 1991-1996. Richard C. Leuck, 39 President, St. Charles Unit, President of the St. Charles Unit of the Bank and Director Executive Officer (since 1996); President and CHief Executive Officer of Duchesne Bank 1994-1996; Senior Lending Officer of Duchesne Bank 1991-1994. </TABLE> All Directors of the Company are elected at the annual meeting of Shareholders and serve until their successors are duly elected and qualified or until their earlier resignation or removal. The Company has no standing committees. The Bank's standing committees are the audit and the compensation committee and the Bank's entire Board of Directors performs the functions of these Committees. 24
27 COMPENSATION OF EXECUTIVE OFFICERS AND OTHERS The following table shows the compensation paid by the Company or the Bank, to the Company's Chief Executive Officer and each of the other executive officers of the Company or the Bank who earned more than $100,000 per year in compensation for any of the years ended December 31, 1996, 1995 and 1994: <TABLE> SUMMARY COMPENSATION TABLE <CAPTION> Name and Current Position Annual Compensation Other Compen- Year Salary Bonus sation <F1> ------ ---------- --------- ------------ <S> <C> <C> <C> <C> Fred H. Eller 1996 $ 165,000 $ 50,000 $ 10,084 President and Chief Executive Officer 1995 165,000 64,000 6,950 of the Company, Chairman and Chief 1994 150,000 23,500 3,640 Executive Officer of the Company Joseph D. Garea 1996 $ 125,000 $ 500 $ 5,024 Chief Financial Officer and Director 1995 100,000 5,000 0 of the Company, President, Enterprise 1994 8,333 0 0 Capital Resources Inc., President Enterprise Capital Management, Inc. David J. Mishler 1996 $ 117,000 $ 35,000 $ 7,107 President, Clayton Banking Unit 1995 109,000 25,000 4,181 Director of the Bank 1994 91,666 15,000 3,431 James E. Graser 1996 $ 77,000 $ 22,000 $ 4,858 President, Sunset Hills Banking Unit 1995 77,000 24,500 3,277 Director of the Bank 1994 68,500 13,000 2,751 Richard C. Leuck 1996 $ 63,750 $ 20,000 $ 674 President, St. Charles Banking Unit 1995 0 0 0 Director of the Bank 1994 0 0 0 <FN> <F1> Includes employer matching contribution pursuant to the Company's 401(k) program and life insurance premiums paid by the Company. </TABLE> STOCK OPTION PLANS In 1988 and 1992, the Bank established two Incentive Stock Option Plans pursuant to which certain officers and employees of the Bank received the right to purchase shares of Bank capital stock. Substantially all of the options available under the two initial stock option plans have been granted. Upon formation of the Company and in conjunction with the Company's plan to acquire all of the outstanding common stock of the Bank, the options to purchase Bank capital stock were exchanged for options to purchase an aggregate of 213,000 shares of Company Common Stock. As a result of those options issued under the 1988 stock option plan, options to purchase 142,000 shares of Common Stock at a price of $5.00 to $7.00 per share are outstanding, all of which are currently exercisable ("1988 Options"). In addition, options to purchase 71,000 shares of Common Stock are currently outstanding, representing those originally issued under the 1992 stock option plan ("1992 Options"). Of the 1992 Options, options to purchase 69,000 shares carry a purchase price of $7.00 per share, of which 51,200 were exercisable as of December 31, 1996, and options to purchase 2,000 shares carry a purchase price of $9.25 per share, of which 800 were exercisable as of December 31, 1996. All of the 1988 Options will expire between May 9, 1998 and December 1, 2002, if not exercised. The 25
28 expiration dates for the 1992 Options are December 1, 2002 for those with a purchase price of $7.00 per share, and June 15, 2004 for those with a purchase price of $9.25 per share. In 1996, the Company adopted by shareholder vote a Third Incentive Stock Option Plan ("ISO Plan III"), which sets aside up to 200,000 shares of Company Common Stock to grant options to certain Key Employees of the Company or any of its subsidiaries. There are limitations as to the number of options which 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 Company believes strongly in motivating its Key Employees by encouraging ownership in the organization. To date, none of the options available under ISO Plan III have been granted. The purchase price for any options granted under ISO Plan III will be determined based upon the market value of the Common Stock at the time such options are granted. DIRECTORS' COMPENSATION Non-employee directors of the Company and the Bank receive directors' fees of $200 for each Board of Directors meeting and $50 for each committee meeting they attend. BENEFICIAL OWNERSHIP OF SECURITIES ---------------------------------- The following table provides information concerning those persons known by the Company to be the beneficial owners of 5% or more of its outstanding common stock, each director and executive officer, and all directors and executive officers of the Company as a group as of March 15, 1997. For purposes of the table, a person is deemed to be a beneficial owner of the subject shares if the person has or shares the power to vote or dispose of them. <TABLE> <CAPTION> Beneficial Owner Number of Shares % Ownership <F1><F2> - -------------------------------------------- ---------------- -------------------- <S> <C> <C> Fred H. Eller <F3><F5><F6> 91,260 3.95% Ronald E. Henges <F3><F8> 137,14 5.94% Kevin C. Eichner <F3> 75,19 3.26% Joseph D. Garea <F7> 5,226 <F*> Paul R. Cahn <F4> 67,467 2.92% Birch M. Mullins 17,850 <F*> Robert E. Saur 39,000 1.69% Henry D. Warshaw <F9> 17,260 <F*> James A. Williams 4,840 <F*> James L. Wilhite 8,721 <F*> David J. Mishler <F3><F11><F6> 36,304 1.57% James E. Graser <F3><F10><F6> 13,000 <F*> Richard C. Leuck 6,591 <F*> All Directors and Executive Officers as a Group <F6> 519,852 22.52% <FN> <F*> Less than 1% <F1> Percentages are calculated based on 2,307,972 shares which represents 2,113,972 shares outstanding as of December 31, 1996, plus Options outstanding and exercisable as of December 31, 1996 or within 60 days thereafter totaling 194,000 shares 26
29 <F2> Unless otherwise indicated, the named person has sole voting and dispositive power for all shares shown. <F3> Assumes the exercise of Options outstanding and exercisable as of December 31, 1996 or within 60 days thereafter, including those beneficially owned by the named person, as follows: Mr. Eichner, 28,000 shares; Mr. Eller, 52,000 shares; Mr. Henges, 28,000 shares; Mr. Graser, 8,000 shares; Mr. Mishler, 21,000 shares; all directors and executive officers as a group, 137,000 shares. <F4> Excludes 23,980 held by two adult children of Mr. Cahn. Includes 5,000 shares held in trust for the benefit of Mr. Cahn's spouse, to which Mr. Cahn has voting power; 1,000 shares held in trust for the benefit of Mr. Cahn, to which Mr. Cahn has voting power; and 61,447 shares held of record by Cahn Family Partnership, L.P., to which Mr. Cahn has voting power. <F5> Includes 39,240 shares held jointly by Mr. Eller and his spouse. <F6> Excludes all of the 13,960 shares held of record by EBSP Partnership in which each of Mr. Eller, Mr. Graser and Mr. Mishler hold a 1/7 partnership interest, but for which none of the named persons holds voting power. Excludes all of the 13,820 shares held of record by EBSP II Partnership in which each of Mr. Eller, Mr. Graser and Mr. Mishler hold a 1/7 partnership interest, but for which none of the named persons holds voting power. <F7> Includes 5,226 shares held in trust for the benefit of Mr. Garea, to which Mr. Garea has voting power. <F8> Excludes 18,110 shares held by and/or for the benefit of adult children of Mr. Henges. Includes 54,270 shares held of record by MICALA Partnership Ltd., to which Mr. Henges has voting power; 22,285 shares held in an Individual Retirement Account for the benefit of Mr. Henges, to which Mr. Henges has voting power; 3,285 shares held in an Individual Retirement Account for the benefit of the spouse of Mr. Henges, to which Mr. Henges has voting power; 3,600 shares held in trust for six minor grandchildren of Mr. Henges, of which the spouse of Mr. Henges is trustee, and to which Mr. Henges has voting power; and 25,680 shares held in six separate trusts, each for the benefit of one of the grandchildren of Mr. Henges, to which Mr. Henges has voting power. The address of Mr. Henges of 13398 Conway Road, St. Louis, Missouri 63141. <F9> Includes 8,580 shares held in an Individual Retirement Account for the benefit of Mr. Warshaw, to which Mr. Warshaw has voting power; and 8,660 shares held in an Individual Retirement Account for the benefit of the spouse of Mr. Warshaw, to which Mr. Warshaw has voting power. <F10> Includes 4,999 shares held jointly by Mr. Graser and his spouse. <F11> Includes 12,672 shares held jointly by Mr. Mishler and his spouse; and 2,631 shares held in an Individual Retirement Account for the benefit of Mr. Mishler, to which Mr. Mishler has voting power. </TABLE> CERTAIN TRANSACTIONS -------------------- The Company and the Bank have and expect to continue to have banking and other transactions in the ordinary course of business with directors and executive officers of the Company and their affiliates, including members of their families or corporations, partnerships or other organizations in which such directors or executive officers have a controlling interest, on substantially the same terms (including price, or interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated parties. Such transactions are not expected to involve more than the normal risk of collectibility nor present other unfavorable features to the Company and the Bank. The Bank is subject to limits on the aggregate amount it can lend to the Bank's and the Company's directors and officers as a group. This limit is currently equal to two times the applicable entity's unimpaired capital and surplus. Loans to individual directors and officers must also comply with the Bank's lending policies and statutory lending limits, and directors with a personal interest in any loan application are excluded from the consideration of such loan application. The Company's Clayton banking facility is leased from a limited partnership in which Fred H. Eller, the Company's Chief Executive Officer, is a limited partner and Robert E. Saur, a director of the Company, is a general partner. Rent expense, net of income from the sublet portions of the premises, amounted to $241,434 in 1996. 27
30 Independent Auditors' Report ---------------------------- The Board of Directors and Shareholders Enterbank Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Enterbank Holdings, Inc. and subsidiaries (the Company) as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Enterbank Holdings, Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick January 24, 1997, except as to note 18, which is as of March 19, 1997 28
31 <TABLE> ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 and 1995 <CAPTION> Assets 1996 1995 ------ ------------ ------------ <S> <C> <C> Cash and due from banks $ 9,261,035 $ 8,109,804 Federal funds sold 23,250,000 16,230,000 Investments in debt and equity securities: Available for sale, at estimated fair value 14,005,797 16,065,201 Held to maturity, at amortized cost (estimated fair value of $1,239,498 in 1996 and $840,566 in 1995) 1,240,183 841,732 ------------ ------------ Total investments in debt and equity securities 15,245,980 16,906,933 ------------ ------------ Loans, less unearned loan fees 134,133,092 110,463,751 Less allowance for loan losses 1,765,000 1,400,000 ------------ ------------ Loans, net 132,368,092 109,063,751 ------------ ------------ Other real estate owned 874,426 881,072 Office equipment and leasehold improvements 1,119,268 795,377 Accrued interest receivable 935,864 981,042 Investment in Enterprise Fund, L.P. 550,087 92,278 Prepaid expenses and other assets 979,361 645,810 ------------ ------------ Total assets $ 184,584,113 $ 153,706,067 ============ ============ Liabilities and Shareholders' Equity ------------------------------------ Deposits: Demand $ 31,137,649 $ 25,432,639 Interest-bearing transaction accounts 16,648,185 21,662,697 Money market accounts 54,637,747 42,993,844 Savings 1,030,346 1,169,242 Certificates of deposit: $100,000 and over 24,067,363 23,285,939 Other 41,439,799 26,595,703 ------------ ------------ Total deposits 168,961,089 141,140,064 Notes payable 300,000 -- Accounts payable and accrued expenses 565,131 513,856 ------------ ------------ Total liabilities 169,826,220 141,653,920 ------------ ------------ Shareholders' equity: Common stock, $.01 par value; authorized 3,000,000 shares; issued and outstanding 1,662,360 shares in 1996 and 1,463,400 shares in 1995 16,624 14,634 Surplus 9,595,956 8,503,666 Retained earnings 5,138,612 3,558,208 Net unrealized holding gains (losses) on available-for-sale securities 6,701 (24,361) ------------ ------------ Total shareholders' equity 14,757,893 12,052,147 ------------ ------------ Total liabilities and shareholders' equity $ 184,584,113 $ 153,706,067 ============ ============ See accompanying notes to consolidated financial statements. </TABLE> 29
32 <TABLE> ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1996, 1995 and 1994 <CAPTION> 1996 1995 1994 ------------ ------------ ------------ <S> <C> <C> <C> Interest income: Interest and fees on loans $ 11,426,260 $ 9,393,945 $ 6,612,560 Interest on debt securities: Taxable 692,742 744,956 369,228 Nontaxable 38,914 27,427 21,624 Interest on federal funds sold 396,244 745,044 366,743 Interest on certificates of deposit -- 2,464 3,663 ------------ ------------ ------------ Total interest income 12,554,160 10,913,836 7,373,818 ------------ ------------ ------------ Interest expense: Interest-bearing transaction accounts 331,943 351,998 291,801 Money market accounts 2,006,578 1,740,701 1,053,459 Savings 33,122 31,958 32,936 Certificates of deposit: $100,000 and over 1,346,428 1,246,703 568,376 Other 1,834,540 1,513,251 621,537 Federal funds purchased 1,027 2,681 2,325 Notes payable 15,274 -- -- ------------ ------------ ------------ Total interest expense 5,568,912 4,887,292 2,570,434 ------------ ------------ ------------ Net interest income 6,985,248 6,026,544 4,803,384 Provision for loan losses 345,410 630,734 449,962 ------------ ------------ ------------ Net interest income after provision for loan losses 6,639,838 5,395,810 4,353,422 ------------ ------------ ------------ Noninterest income: Service charges on deposit accounts 129,414 131,640 168,018 Other service charges and fee income 853,068 712,853 624,346 Data processing fees -- -- 12,900 Gain on sale of credit card operation 320,000 -- -- Loss on investment in Enterprise Fund, L.P. (62,690) (8,222) -- ------------ ------------ ------------ Total noninterest income 1,239,792 836,271 805,264 ------------ ------------ ------------ Noninterest expense: Salaries 2,400,165 1,710,740 1,231,596 Payroll taxes and employee benefits 465,475 332,220 282,477 Occupancy 333,795 275,179 269,259 FDIC insurance 2,000 114,944 194,231 Data processing 247,696 209,267 179,066 Other 1,697,203 1,544,373 1,394,120 ------------ ------------ ------------ Total noninterest expense 5,146,334 4,186,723 3,550,749 ------------ ------------ ------------ Income before income tax expense 2,733,296 2,045,358 1,607,937 Income tax expense 1,031,344 741,091 606,756 ------------ ------------ ------------ Net income $ 1,701,952 $ 1,304,267 $ 1,001,181 ============ ============ ============ Earnings per share $ .98 .79 .62 Weighted average common shares and common stock equivalents outstanding 1,731,203 1,650,451 1,601,312 See accompanying notes to consolidated financial statements. </TABLE> 30
33 <TABLE> ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 1996, 1995 and 1994 <CAPTION> Net unrealized holding gains (losses) on Total available- share- Common Stock Retained for-sale holders' Shares Amount Surplus earnings securities equity ---------- -------- ---------- ---------- ---------- ---------- <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1993 1,460,000 $ 14,600 $ 8,485,400 $ 1,442,906 $ -- $ 9,942,906 Cumulative effect of change in accounting for debt securities, net of tax effect -- -- -- -- (29,177) (29,177) Net income -- -- -- 1,001,181 -- 1,001,181 Dividends declared ($.06 per share) -- -- -- (87,709) -- (87,709) Stock options exercised 2,400 24 12,776 -- -- 12,800 Change in net unrealized holding gains (losses) on available-for-sale securities, net of tax effect -- -- -- -- (59,088) (59,088) ---------- -------- ---------- ---------- ---------- ---------- Balance, December 31, 1994 1,462,400 14,624 8,498,176 2,356,378 (88,265) 10,780,913 Net income -- -- -- 1,304,267 -- 1,304,267 Dividends declared -- -- -- (102,437) -- (102,437) ($.07 per share) Stock warrants exercised 1,000 10 5,490 -- -- 5,500 Change in net unrealized holding gains (losses) on available-for-sale securities, net of tax effect -- -- -- -- 63,904 63,904 ---------- -------- ---------- ---------- ---------- ---------- Balance, December 31, 1995 1,463,400 14,634 8,503,666 3,558,208 (24,361) 12,052,147 Net income -- -- -- 1,701,952 -- 1,701,952 Dividends declared ($.08 per share) -- -- -- (121,548) -- (121,548) Stock warrants exercised 198,960 1,990 1,092,290 -- -- 1,094,280 Change in net unrealized holding gains (losses) on available-for-sale securities, net of tax effect -- -- -- -- 31,062 31,062 ---------- -------- ---------- ---------- ---------- ---------- Balance, December 31, 1996 1,662,360 $ 16,624 $ 9,595,956 $ 5,138,612 $ 6,701 $14,757,893 ========== ======== ========== ========== ========== ========== See accompanying notes to consolidated financial statements. </TABLE> 31
34 <TABLE> ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1996, 1995 and 1994 <CAPTION> 1996 1995 1994 ----------- ----------- ----------- <S> <C> <C> <C> Cash flows from operating activities: Net income $ 1,701,952 $ 1,304,267 $ 1,001,181 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 225,328 177,454 147,346 Provision for loan losses 345,410 630,734 449,962 Write-downs and losses on other real estate owned, net 6,646 152,982 138,757 Net accretion of debt securities (6,357) (149,398) (70,037) Loss on investment in Enterprise Fund, L.P. 62,690 8,222 -- (Increase) decrease in accrued interest receivable 45,178 (380,400) (211,592) (Increase) decrease in prepaid expenses and other assets (333,550) (106,635) (183,612) Increase in accounts payable and accrued expenses 35,271 425,670 31,393 ----------- ----------- ----------- Net cash provided by operating activities 2,082,568 2,062,896 1,303,398 ----------- ----------- ----------- Cash flows from investing activities: Increase in federal funds sold (7,020,000) (4,930,000) (1,175,000) Purchases of available-for-sale debt securities (8,922,967) (20,877,229) (10,994,009) Purchases of available-for-sale equity securities (94,200) (366,800) -- Purchases of held-to-maturity debt securities (414,733) (255,367) (538,811) Proceeds from maturities of available-for-sale debt securities 11,140,000 21,200,000 4,588,662 Proceeds from maturities and principal paydowns on held-to-maturity debt securities 6,276 180,799 17,155 Proceeds from maturity of certificates of deposit -- 98,000 -- Net increase in loans (23,649,751) (24,557,838) (14,127,248) Capitalized expenses on other real estate owned -- -- (50,673) Proceeds from sale of other real estate owned -- 292,417 115,244 Purchases of office equipment and leasehold improvements (549,219) (288,503) (194,835) Investment in Enterprise Fund, L.P. (520,500) (100,500) -- ----------- ----------- ----------- Net cash used in investing activities (30,025,094) (29,605,021) (22,359,515) ----------- ----------- ----------- Cash flows from financing activities: Net increase in demand and savings accounts 12,195,505 22,161,043 4,076,677 Net increase in certificates of deposit 15,625,520 14,180,109 11,608,748 Net increase (decrease) in federal funds purchased -- (6,500,000) 6,500,000 Increase in notes payable 300,000 -- -- Cash dividends paid (121,548) (124,373) (84,023) Proceeds from the exercise of stock warrants 1,094,280 5,500 -- Proceeds from the exercise of common stock options -- -- 12,800 ----------- ----------- ----------- Net cash provided by financing activities 29,093,757 29,722,279 22,114,202 ----------- ----------- ----------- Net increase in cash and due from banks 1,151,231 2,180,154 1,058,085 Cash and due from banks, beginning of year 8,109,804 5,929,650 4,871,565 ----------- ----------- ----------- Cash and due from banks, end of year $ 9,261,035 $ 8,109,804 $ 5,929,650 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 5,546,601 $ 4,759,095 $ 2,501,376 Income taxes 1,144,759 779,900 706,480 Noncash transactions: Transfers to other real estate owned in settlement of loans 50,000 -- 483,382 Loans made to facilitate the sale of other real estate owned 70,000 449,895 -- Transfer of held-for-sale securities to available-for-sale debt securities -- -- 2,998,817 Transfer of held-to-maturity debt securities to available-for-sale debt securities -- -- 6,399,439 =========== =========== =========== See accompanying notes to consolidated financial statements. </TABLE> 32
35 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE 1--ORGANIZATION On May 9, 1995, Enterbank Holdings, Inc. (the Company) was formed as a bank holding company. Enterbank Holdings, Inc. exchanged 1,463,400 shares of Enterbank Holdings, Inc. for all 73,170 (100%) of outstanding shares of Enterprise Bank in a twenty-for-one stock exchange. The merger represented a combination of entities under common control and, accordingly, was accounted for in a manner similar to a pooling of interest. Therefore, results of operations for periods prior to May 9, 1995 reflect the results of operations for Enterprise Bank. Additionally, Enterprise Capital Resources, Inc. was formed as a small business investment company in 1995 and, on May 11, 1995, Enterbank Holdings, Inc. acquired 100% of the outstanding shares of Enterprise Capital Resources, Inc. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company provides a full range of banking services to individual and corporate customers located within St. Louis, Missouri and the surrounding communities through its subsidiary, Enterprise Bank (the Bank). The Company is subject to competition from other financial and nonfinancial institutions providing financial services in the markets served by the Company's subsidiaries. Additionally, the Company and its subsidiaries are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. The more significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below: BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements of the Company and its subsidiaries have been prepared in conformity with generally accepted accounting principles and conform to predominant practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions which significantly affect the reported amounts in the consolidated financial 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; its banking subsidiary, Enterprise Bank (100% owned) and its merchant banking company, Enterprise Capital Resources, Inc. (100% owned). All significant intercompany accounts and transactions have been eliminated. INVESTMENTS IN DEBT AND EQUITY SECURITIES The Company currently classifies investments in debt and equity securities as follows: Trading - includes securities which the Company has bought and held principally for the purpose of selling them in the near term. The Company has not held any trading securities. Held-to-maturity - includes debt securities which the Company has the positive intent and ability to hold until maturity. Available-for-sale - includes debt and marketable equity securities not classified as held-to-maturity or trading (i.e., investments which the Company has no present plans to sell but may be sold in the future under different circumstances). 33
36 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 Debt securities classified as held to maturity are carried at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses for held-to-maturity securities are excluded from earnings and shareholders' equity. Debt and equity securities classified as available for sale are carried at estimated fair value. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized. All previous fair value adjustments included in the separate component of shareholders' equity are reversed upon sale. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains or losses associated with transfers of securities from the held-to-maturity category to the available-for-sale category are recorded as a separate component of shareholders' equity. A decline in the market value of any available-for-sale or held-to-maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. For securities in the held-to-maturity and available-for-sale categories, premiums and discounts are amortized or accreted over the lives of the respective securities as an adjustment to yield using the interest method. Dividend and interest income is recognized when earned. Realized gains and losses for securities classified as available-for-sale and held-to-maturity are included in earnings and are derived using the specific-identification method for determining the cost of securities sold. INTEREST AND FEES ON LOANS Interest income on loans is accrued and credited to income based on the principal amount outstanding. The recognition of interest income is discontinued when a loan becomes 90 days past due or a significant deterioration in the borrower's credit has occurred which, in management's opinion, negatively impacts the collectibility of the loan. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectibility of such principal; otherwise, such receipts are recorded as interest income. Loans are returned to accrual status when management believes full collectibility of principal and interest is expected. The Company defers the recognition of loan origination fees, net of the cost associated with originating such loans. Deferred loan fees are accreted into income over the contractual life of the loan using the straight-line method, which approximates the interest method. LOANS AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is increased by provisions charged to expense and is available to absorb charge-offs, net of recoveries. Management utilizes a systematic, documented approach in determining the appropriate level of the allowance for loan losses. Management's approach, which provides for general and specific allowances, is based on current economic conditions, past losses, collection experience, risk characteristics of the portfolio, assessments of collateral values by obtaining independent appraisals for significant properties, and such other factors which, in management's judgment, deserve current recognition in estimating loan losses. Management believes the allowance for loan losses is adequate to absorb possible losses in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank's loan portfolio. Such agencies may require the Bank to add to the allowance for loan losses based on their judgments and interpretations of information available to them at the time of their examinations. Effective January 1, 1995, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures (SFAS 118). SFAS 114 defines the recognition criteria for loan impairment and the measurement methods for certain 34
37 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 impaired loans and loans whose terms have been modified in troubled-debt restructurings. Impairment of a loan is measured by discounting the total expected future cash flows at the loan's effective rate of interest as stated in the original loan agreement or at the fair value of the collateral for a collateral-dependent loan. SFAS 114 requires a creditor to measure impairment based on the fair value of the collateral when the creditor determines foreclosure is probable. SFAS 118 allows the creditor to use existing methods for recognizing interest income on impaired loans. The Company has elected to continue to use its existing nonaccrual methods for recognizing interest income on impaired loans. The adoption of SFAS 114 and SFAS 118 resulted in no prospective adjustment to the provision for loan losses. OTHER REAL ESTATE OWNED Other real estate owned represents property acquired through foreclosure or deeded to the Company's subsidiary bank in lieu of foreclosure on loans on which the borrowers have defaulted as to the payment of principal and interest. Other real estate owned is recorded on an individual asset basis at the lower of (1) current fair value minus estimated selling costs or (2) fair value at the time of the acquisition (cost). Subsequent reductions in fair value is expensed or recorded in a valuation reserve account through a provision against income. Subsequent increases in the fair value are recorded through a reversal of the valuation reserve, but not below zero. Gains and losses resulting from the sale of other real estate owned are credited or charged to current period earnings. Costs of maintaining and operating other real estate owned are expensed as incurred, and expenditures to complete or improve other real estate owned properties are capitalized if the expenditures are expected to be recovered upon ultimate sale of the property. OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS Office equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization computed using the straight-line method over their respective estimated useful lives. Bank equipment is depreciated over three to ten years and leasehold improvements over ten to 30 years. INCOME TAXES The Company and its subsidiaries file consolidated federal income tax returns. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. EARNINGS PER SHARE Earnings per share is calculated by dividing net income by the weighted average number of common shares and common stock equivalents outstanding using the treasury stock method. Common stock equivalents consist of stock options and warrants to purchase common stock, neither of which have a material impact on the calculation of fully diluted earnings per share. CASH FLOW INFORMATION For purposes of reporting cash flows, the Company considers cash and due from banks to be cash and cash equivalents. RECLASSIFICATION Certain reclassifications have been made to the prior year amounts to conform to the present year presentation. 35
38 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 STOCK OPTIONS During October 1995, the FASB issued SFAS 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 encourages companies to adopt a new accounting method in 1996 based on the estimated fair value of stock options. The implementation of SFAS 123 did not have a material effect on the Company's financial position or results of operations NOTE 3--REGULATORY RESTRICTIONS The Company's subsidiary bank is subject to regulations by regulatory authorities which require the maintenance of minimum capital standards which may affect the amount of dividends the Company's subsidiary bank can pay. At December 31, 1996 and 1995, approximately $1,174,000 and $1,083,000, respectively, of cash and due from banks represented required reserves on deposits maintained by the Bank in accordance with Federal Reserve Bank requirements. NOTE 4--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, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1996 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 13,534,643 $ 10,449 $ 295 $ 13,544,797 Federal Home Loan Bank stock 461,000 -- -- 461,000 ----------- ---------- ---------- ----------- $ 13,995,643 $ 10,449 $ 295 $ 14,005,797 =========== ========== ========== =========== <CAPTION> 1995 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 15,735,311 $ 13,360 $ 50,270 $ 15,698,401 Federal Home Loan Bank stock 366,800 -- -- 366,800 ----------- ---------- ---------- ----------- $ 16,102,111 $ 13,360 $ 50,270 $ 16,065,201 =========== ========== ========== =========== </TABLE> The amortized cost and estimated fair value of debt and equity securities classified as available for sale at December 31, 1996, 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. <TABLE> <CAPTION> Amortized Estimated Cost Fair Value ----------- ----------- <S> <C> <C> Due in one year or less $ 10,549,538 $ 10,556,047 Due after one year through five years 2,985,105 2,988,750 Due after five years through ten years -- -- Securities with no stated maturity 461,000 461,000 ----------- ----------- $ 13,995,643 $ 14,005,797 =========== =========== </TABLE> 36
39 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 A summary of the amortized cost and estimated fair value of debt and equity securities classified as held to maturity at December 31, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1996 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 305,583 $ 655 $ -- $ 306,238 Mortgage-backed securities 43,857 -- 164 43,693 Municipal Bonds 890,743 1,652 2,828 889,567 ----------- ---------- ---------- ----------- $ 1,240,183 $ 2,307 $ 2,992 $ 1,239,498 =========== ========== ========== =========== <CAPTION> 1995 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> Mortgage-backed securities 50,133 627 -- 50,760 Municipal Bonds 791,599 2,433 4,226 789,806 ----------- ---------- ---------- ----------- $ 841,732 $ 3,060 $ 4,226 $ 840,566 =========== ========== ========== =========== </TABLE> The amortized cost and estimated fair value of debt and equity securities classified as held to maturity at December 31, 1996, 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. <TABLE> <CAPTION> Amortized Estimated Cost Fair Value ----------- ----------- <S> <C> <C> Due in one year or less $ 405,582 $ 405,916 Due after one year through five years 572,047 572,242 Due after five years through ten years 218,697 217,647 Mortgage-backed securities 43,857 43,693 ----------- ----------- $ 1,240,183 $ 1,239,498 =========== =========== </TABLE> There were no sales of investments in debt securities in 1996, 1995 or 1994. Debt securities having a carrying value of $10,933,728 and $8,955,282 at December 31, 1996 and 1995, respectively, were pledged as collateral to secure public deposits and for other purposes as required by law. As a member of the Federal Home Loan Bank system administered by the Federal Housing Finance Board, the Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank of Des Moines (FHLB) in an amount equal to the greater of 1% of the aggregate outstanding balance of loans secured by dwelling units at the beginning of each year or .3% of the total assets of Enterprise Bank. The FHLB stock is recorded at cost which represents redemption value. 37
40 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE 5--LOANS A summary of loans by category at December 31, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1996 1995 ------------ ------------ <S> <C> <C> Commercial and industrial loans $ 43,875,936 $ 43,727,848 Loans secured by real estate 85,756,588 61,679,002 Other 4,517,501 5,089,353 ------------ ------------ 134,150,025 110,496,203 Less deferred loan fees 16,933 32,452 ------------ ------------ $ 134,133,092 $ 110,463,751 ============ ============ </TABLE> The breakdown of loans secured by real estate at December 31, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1996 1995 ------------ ------------ <S> <C> <C> Business and personal loans $ 26,508,877 $ 17,358,778 Income-producing properties 29,898,499 24,933,943 Owner-occupied properties 6,133,825 6,173,812 Real estate development properties 23,215,387 13,212,469 ------------ ------------ $ 85,756,588 $ 61,679,002 ============ ============ </TABLE> The Company's subsidiary bank grants commercial, residential, and consumer loans throughout its service area, which consists primarily of the immediate area in which the Bank is located. The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio is concentrated in and secured by real estate. The ability of the Company's borrowers to honor their contractual obligations is dependent upon the local economy and its effect on the real estate market. In connection with the investment in FHLB Stock, the Bank has obtained a $2 million line of credit from the FHLB. As collateral for the line, the Bank has entered into a blanket agreement which pledges first mortgage loans with principal balances aggregating 150% of outstanding advances. No advances on the line were made during 1996 and 1995. Following is a summary of activity for the year ended December 31, 1996 of loans to executive officers and directors or to entities in which such individuals had beneficial interest as Shareholders, officers, or directors. 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. 38
41 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 <TABLE> <S> <C> Balance, December 31, 1995 $ 6,367,059 New loans 3,696,357 Payments and other reductions (1,730,072) ------------- Balance, December 31, 1996 $ 8,333,344 ============= </TABLE> A summary of activity in the allowance for loan losses for the years ended December 31, 1996, 1995 and 1994 is as follows: <TABLE> <CAPTION> 1996 1995 1994 ---------- ---------- ---------- <S> <C> <C> <C> Balance at beginning of year $ 1,400,000 $ 1,000,000 $ 722,000 Provisions charged to operations 345,410 630,734 449,962 Loans charged off -- (242,734) (190,879) Recoveries of loans previously charged off 19,590 12,000 18,917 ---------- ---------- ---------- Balance at end of year $ 1,765,000 $ 1,400,000 $ 1,000,000 ========== ========== ========== </TABLE> A summary of impaired loans, which include nonaccrual loans, at December 31, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1996 1995 ---------- ---------- <S> <C> <C> Nonaccrual loans $ 130,704 $ 106,504 Impaired loans continuing to accrue interest 505,669 948,510 ---------- ---------- Total impaired loans $ 636,373 $ 1,055,014 ========== ========== Allowance for losses on impaired loans $ 82,616 $ 166,045 Impaired loans with no related allowance for loan losses -- -- Average balance of impaired loans during the year $ 636,563 $ 1,252,362 ========== ========== </TABLE> If interest on nonaccrual loans, including amounts computed on principal balances charged off on such loans, had been accrued, such income would have been $15,147 and $3,119 for the years ended December 31, 1996 and 1995, respectively. The amount recognized as interest income on nonaccrual loans was $2,005 for 1996. No interest income on nonaccrual loans was recognized during 1995. The Company had no loans on nonaccrual at December 31, 1994. The amount recognized as interest income on other impaired loans continuing to accrue interest was $44,616 and $90,251 for the years ended December 31, 1996 and 1995, respectively. NOTE 6--OTHER REAL ESTATE OWNED A summary of activity in the valuation allowance for other real estate owned for the years ended December 31, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1996 1995 1994 ---------- ---------- ---------- <S> <C> <C> <C> Balance at beginning of year $ 20,000 $ 75,000 $ -- Provisions charged to operations -- 152,982 75,000 Charge-offs and reversals -- (207,982) -- ---------- ---------- ---------- Balance at end of year $ 20,000 $ 20,000 $ 75,000 ========== ========== ========== </TABLE> 39
42 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE 7--OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS A summary of office equipment and leasehold improvements at December 31, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1996 1995 ------------ ------------ <S> <C> <C> Data processing equipment $ 692,204 $ 536,037 Furniture, fixtures and equipment 1,116,772 733,505 Leasehold improvements 507,106 497,321 Automobile 26,426 26,426 ------------ ------------ $ 2,342,508 $ 1,793,289 Less accumulated depreciation and amortization 1,223,240 997,912 ------------ ------------ Office equipment and leasehold improvements, net $ 1,119,268 $ 795,377 ============ ============ </TABLE> Depreciation and amortization of office equipment and leasehold improvements included in occupancy expense amounted to $225,328 in 1996, $177,454 in 1995 and $147,346 in 1994. The Company's banking facility is leased under an agreement that expires in 1999. The Company has options to renew the lease for three additional five-year periods with future rentals to be agreed upon. This lease provides that the Company pay taxes, maintenance, insurance, and certain other operating expenses applicable to the leased premises. Two portions of the premises are sublet and the proceeds are used to reduce the Company's occupancy expenses. Rent expense amounted to $319,002, $285,178, and $240,905 in 1996, 1995 and 1994, respectively, and sublease rental income amounted to $77,568 in 1996, $82,394 in 1995, and $40,780 in 1994. The Company leases its operating facilities from a partnership in which a director and an officer have an ownership interest. The future minimum rental commitments required under the lease are as follows: <TABLE> <CAPTION> Year Amount ------ ---------- <S> <C> 1997 $ 307,068 1998 307,068 1999 102,356 ========== </TABLE> Total minimum future rental payments in 1997 will be reduced by $27,768 of sublease rentals to be received in the future under one noncancellable sublease expiring on October 31, 1997. The Company has signed preliminary leases for the Sunset Hills and St. Charles locations. Both of these buildings are currently under construction and are expected to be completed in mid 1997. The lease payments begin upon completion of the buildings and leasehold improvements. Annual rental expense for the Sunset Hills and St. Charles locations are expected to approximate $176,000 and $172,000, respectively. The Company is financing a portion of the construction cost of the Sunset Hills and St. Charles buildings. These loans contain substantially the same terms offered on similar loans by the Company. NOTE 8--INVESTMENT IN ENTERPRISE FUND, L. P. The Company and its subsidiaries have a combined 10% interest in a limited liability merchant banking partnership, The Enterprise Fund L.P., for which a subsidiary of the Company serves as the general partner. The Company invested $100,500 in the partnership in 1996 and 1995. The Company has an additional $804,000 in future capital commitments. This investment, which is accounted for using the equity method of accounting, had a carrying value of $550,087 and $92,278 at December 31, 1996 and 1995, respectively. 40
43 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE 9--MATURITY OF TIME DEPOSITS Following is a summary of time deposit maturities at December 31, 1996: <TABLE> <CAPTION> Deposits Less than Other Maturity Period $100,000 Deposits Total --------------------------------------------------- ------------ ----------- ----------- <S> <C> <C> <C> Less than 1 year $ 23,047,587 38,222,543 61,270,130 Greater than 1 year and less than 2 years 886,046 3,012,590 3,898,636 Greater than 2 years and less than 3 years 133,730 187,535 321,265 Greater than 3 years and less than 4 years -- 1,803 1,803 Greater than 4 years and less than 5 years -- 15,328 15,328 Over 5 years -- -- -- ------------ ----------- ----------- $ 24,067,363 41,439,799 65,507,162 ============ =========== =========== </TABLE> NOTE 10--NOTE PAYABLE On April 23, 1996, the Company obtained a $1,000,000 unsecured line of credit from an unaffiliated bank. The line of credit bears interest at the unaffiliated bank's prime rate, requires monthly interest only payments and matures on April 23, 1997. For the year ended December 31, 1996, the average balance and maximum month-end balance of the note payable were $205,000 and $300,000, respectively. The average rate paid on the note payable was 8.25% in 1996. The Company had no notes payable outstanding during 1995 or 1994. NOTE 11--INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 1996, 1995, and 1994 are as follows: <TABLE> <CAPTION> 1996 1995 1994 ---------- ---------- ---------- <S> <C> <C> <C> Current: Federal $ 1,021,847 $ 711,751 $ 572,540 State 153,811 84,086 90,622 Deferred (144,314) (54,746) (56,406) ---------- ---------- ---------- $ 1,031,344 $ 741,091 $ 606,756 ========== ========== ========== </TABLE> A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate of 34% in 1996, 1995 and 1994, to income before income taxes and the amounts reflected in the consolidated statements of income is as follows: <TABLE> <CAPTION> 1996 1995 1994 ---------- ---------- ---------- <S> <C> <C> <C> Income tax expense at statutory rate $ 929,320 $ 695,422 $ 546,699 Increase (reduction) in income taxes resulting from: Tax-exempt income (23,570) (24,660) (12,989) State and local income tax expense 101,515 55,497 59,810 Other, net 24,079 14,832 13,236 ---------- ---------- ---------- Total tax expense $ 1,031,344 $ 741,091 $ 606,756 ========== ========== ========== </TABLE> A net deferred income tax asset of $466,014 and $337,701 is included in prepaid expenses and other assets in the consolidated balance sheets at December 31, 1996 and 1995, respectively. The tax effect of 41
44 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1996 1995 ------------ ------------ <S> <C> <C> Deferred tax assets: Allowance for loan losses $ 541,530 $ 412,140 Other real estate owned 7,492 7,493 Unrealized losses on securities available for sale -- 12,549 Other 11,706 11,493 ------------ ------------ Total deferred tax assets 560,728 443,675 Deferred tax liabilities: Deferred loan fees 51,381 68,244 Office equipment and leasehold improvements 39,881 37,730 Unrealized gains on securities available for sale 3,452 -- ------------ ------------ Total deferred tax liabilities 94,714 105,974 ------------ ------------ Net deferred tax asset $ 466,014 $ 337,701 ============ ============ </TABLE> A valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance as of December 31, 1996, due to management's belief that all criteria for recognition have been met, including the existence of a history of taxes paid sufficient to support the realization of the deferred tax assets. NOTE 12--REGULATORY MATTERS The Bank is subject 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 I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 1996, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1996, the most recent notification from the FDIC dated February 28, 1997, categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. 42
45 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 The Bank's actual capital amounts and ratios are also presented in the table. <TABLE> <CAPTION> To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio ------------ -------- ------------ ------- ------------ --------- <S> <C> <C> <C> <C> <C> <C> As of December 31, 1996: Total Capital (to Risk Weighted Assets) Enterbank Holdings, Inc. $ 16,461,861 11.53% $ 11,424,028 8.00% $ 14,280,035 10.00% Enterprise Bank $ 15,979,917 11.28% $ 11,334,400 8.00% $ 14,168,000 10.00% Tier I Capital (to Risk Weighted Assets) Enterbank Holdings, Inc. $ 14,696,861 10.29% $ 5,712,014 4.00% $ 8,568,021 6.00% Enterprise Bank $ 14,214,917 10.03% $ 5,667,200 4.00% $ 8,500,800 6.00% Tier I Capital (to Average Assets) Enterbank Holdings, Inc. $ 14,696,861 9.62% $ 6,108,240 4.00% $ 7,635,300 5.00% Enterprise Bank $ 14,214,917 9.35% $ 6,085,960 4.00% $ 7,607,450 5.00% As of December 31, 1995: Total Capital (to Risk Weighted Assets) Enterbank Holdings, Inc. $ 13,407,369 11.40% $ 9,405,760 8.00% $ 11,757,200 10.00% Enterprise Bank $ 13,273,400 11.50% $ 9,232,960 8.00% $ 11,541,200 10.00% Tier I Capital (to Risk Weighted Assets) Enterbank Holdings, Inc. $ 12,007,369 10.21% $ 4,702,880 4.00% $ 7,054,320 6.00% Enterprise Bank $ 11,873,400 10.29% $ 4,616,480 4.00% $ 6,924,720 6.00% Tier I Capital (to Average Assets) Enterbank Holdings, Inc. $ 12,007,369 9.11% $ 5,274,720 4.00% $ 6,593,400 5.00% Enterprise Bank $ 11,873,400 9.03% $ 5,257,322 4.00% $ 6,571,652 5.00% </TABLE> NOTE 13--SHAREHOLDERS' EQUITY On August 15, 1996, warrants to purchase 9,948 shares of Enterprise Bank common stock were exercised for $1,094,280. On September 30, 1996, the Company issued 198,960 shares of its Common Stock to holders of common stock of the Bank incidental to a plan of reorganization for the purpose of making the Company the sole owner of Bank capital stock. NOTE 14--COMPENSATION PLANS INCENTIVE STOCK OPTION PLAN In 1988 and 1992, the Bank established two Incentive Stock Option Plans pursuant to which certain officers and employees of the Bank received the right to purchase shares of Bank capital stock. Substantially all of the options available under the two initial stock option plans have been granted. Upon formation of the Company and in conjunction with the Company's plan to acquire all of the outstanding capital stock of the Bank, the options to purchase Bank capital stock were exchanged for options to purchase an aggregate of 213,000 shares of Company Common Stock. As a result of those options issued under the 1988 stock option plan, options to purchase 142,000 shares of Common Stock at a price of $5.00 to $7.00 per share are outstanding, all of which are currently exercisable ("1988 Options"). In addition, options to purchase 71,000 shares of Common Stock are currently outstanding, representing those originally issued under the 1992 stock option plan ("1992 43
46 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 Options"). Of the 1992 Options, options to purchase 69,000 shares carry a purchase price of $7.00 per share, of which 51,200 were exercisable as of December 31, 1996, and options to purchase 2,000 shares carry a purchase price of $9.25 per share, of which 800 were exercisable as of December 31, 1996. All of the 1988 Options will expire between May 9, 1998 and December 1, 2002, if not exercised. The expiration dates for the 1992 Options are December 1, 2002 for those with a purchase price of $7.00 per share, and June 15, 2004 for those with a purchase price of $9.25 per share. In 1996, the Company adopted by shareholder vote a Third Incentive Stock Option Plan ("ISO Plan III"), which sets aside up to 200,000 shares of Company common stock to grant options to certain key employees of the Company or any of its subsidiaries. To date, none of the options available under ISO Plan III have been granted. The purchase price for any options granted under ISO Plan III will be determined based upon the market value of the common stock at the time such options are granted. At December 31, 1996, 1,600 shares forfeited by participants were available for future issuance under the plan. Following is a summary of the various plan transactions: <TABLE> <CAPTION> Number Price of shares per share Total ----------- ------------ ----------- <S> <C> <C> <C> December 31, 1993 210,000 $ 5.00 - 7.00 $ 1,222,000 Granted 7,000 7.00 - 9.25 53,500 Exercised 2,400 5.00 - 7.00 (12,800) Forfeited 1,600 7.00 (11,200) ----------- ------------ ----------- December 31, 1994 213,000 $ 5.00 - 9.25 $ 1,251,500 Granted -- -- -- Forfeited -- -- -- ----------- ------------ ----------- December 31, 1995 213,000 5.00 - 9.25 1,251,500 Granted -- -- -- Forfeited -- -- -- ----------- ------------ ----------- December 31, 1996 213,000 $ 5.00 - 9.25 $ 1,251,500 =========== ============ =========== </TABLE> During October 1995, the FASB issued SFAS 123, Accounting for Stock-Based Compensation (SFAS 123). SFAS 123 encourages companies to adopt a new accounting method in 1996 based on the estimated fair value of stock options. The Company did not adopt the new accounting method but has complied with the expanded disclosure requirements of FASB 123. The implementation of SFAS 123 did not have a material effect on the Company's financial position or results of operations as no options were granted in 1995 and 1996. Effective January 1, 1993, the Company adopted a 401(k) thrift plan which covers substantially all full-time employees over the age of 21. The amount charged to expense for contributions to the plan was $66,000 for 1996 and $30,000 for both 1995 and 1994. NOTE 15--LITIGATION Various legal claims have arisen during the normal course of business which, in the opinion of management, after discussion with legal counsel, will not result in any material liability. 44
47 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE 16--DISCLOSURES ABOUT FINANCIAL INSTRUMENTS The Bank issues financial instruments with off-balance-sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company's extent of involvement and potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its balance sheets. The contractual amount of off-balance-sheet financial instruments as of December 31, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1996 1995 ------------ ------------ <S> <C> <C> Commitments to extend credit $ 71,106,687 51,501,823 Standby letters of credit 3,656,598 3,114,206 ============ ============ </TABLE> 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, 1996, approximately $6,233,000 represents fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of Bank customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. At December 31, 1995, the Company adopted the provisions of SFAS 107, Disclosures About Fair Value of Financial Instruments. SFAS 107 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. 45
48 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 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, 1996 and 1995: <TABLE> <CAPTION> 1996 1995 ------------------------------------------------------------------- Carrying Estimated Carrying Estimated Amount fair value Amount fair value ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Balance sheet assets: Cash and due from banks $ 9,261,035 $ 9,261,035 $ 8,109,804 $ 8,109,804 Federal funds sold 23,250,000 23,250,000 16,230,000 16,230,000 Investments in debt and equity securities 15,245,980 15,245,295 16,906,933 16,905,767 Loans, net 132,368,092 132,955,773 109,063,751 110,714,776 Accrued interest receivable 935,864 935,864 981,042 981,042 ============= ============= ============= ============= Balance sheet liabilities: Deposits $ 168,961,089 $ 169,156,884 $ 141,140,064 $ 141,444,569 Notes payable 300,000 300,000 -- -- Accrued interest payable 309,510 309,510 287,199 287,199 ============= ============= ============= ============= </TABLE> 46
49 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate such value: CASH AND OTHER SHORT-TERM INSTRUMENTS For cash and due from banks, federal funds sold and accrued interest receivable (payable), the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period. INVESTMENTS IN DEBT AND EQUITY SECURITIES Fair values are based on quoted market prices or dealer quotes. LOANS The fair value of adjustable-rate loans approximates cost. The fair value of fixed-rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSITS The fair value of demand deposits, interest-bearing transaction accounts, money market accounts and savings deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. 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 credit worthiness of such counterparties. The Company believes such commitments have been made on terms which are competitive in the markets in which it operates; however, no premium or discount is offered thereon and accordingly, the Company has not assigned a value to such instruments for purposes of this disclosure. LIMITATIONS - Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. 47
50 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 NOTE 17--PARENT COMPANY ONLY FINANCIAL STATEMENTS <TABLE> <CAPTION> Condensed Balance Sheets December 31, --------------------------- 1996 1995 ------------ ------------ <S> <C> <C> Assets ------ Cash $ 87,946 $ 26,466 Investment in Enterprise Bank 14,221,619 11,849,039 Investment in Enterprise Capital Resources 477,398 101,195 Investment in Enterprise Fund, L.P. 116,489 82,612 Other assets 148,440 13,000 ------------ ------------ Total assets $ 15,051,892 $ 12,072,312 ============ ============ Liabilities and Shareholders' Equity ------------------------------------ Accounts payable and other liabilities $ (6,001) $ 20,165 Notes payable 300,000 -- Shareholders' equity 14,757,893 12,052,147 ------------ ------------ Total liabilities and shareholders' equity $ 15,051,892 $ 12,072,312 ============ ============ </TABLE> <TABLE> <CAPTION> Condensed Statements of Income Years Ended December 31, --------------------------- 1996 1995 ------------ ------------ <S> <C> <C> Income: Dividends from subsidiaries $ 600,000 $ 300,000 ------------ ------------ Expenses: Loss on investment in Enterprise Fund, L.P. 56,123 7,388 Other expenses 202,849 27,460 ------------ ------------ Total expenses 258,972 34,848 ------------ ------------ Income before tax benefit and equity in undistributed earnings of subsidiaries 341,028 265,152 Income tax benefit 97,484 13,590 ------------ ------------ Income before equity in undistributed earnings 438,512 278,742 of subsidiaries Equity in undistributed earnings of subsidiaries 1,263,440 1,025,525 ------------ ------------ Net income $ 1,701,952 $ 1,304,267 ============ ============ </TABLE> 48
51 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1996, 1995 and 1994 <TABLE> <CAPTION> Condensed Statements of Cash Flow Years Ended December 31, --------------------------- 1996 1995 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net Income $ 1,701,952 $ 1,304,267 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries (1,863,440) (1,325,525) Dividends from subsidiaries 600,000 300,000 Other, net (105,484) 14,553 ------------ ------------ Net cash provided by operating activities 333,028 293,295 Cash flows from investing activities: Capital contributions to subsidiaries (360,000) (100,000) Investment in Enterprise Fund L.P. (90,000) (90,000) ------------ ------------ Net cash used in investing activities (450,000) (190,000) Cash flows from financing activities: Payment of stock dividends (121,548) (76,829) Increase in notes payable 300,000 -- ------------ ------------ Net cash provided by (used in) financing activities 178,452 (76,829) Net increase in cash and cash equivalents 61,480 -- Cash and cash equivalents, beginning of year 26,466 26,466 ------------ ------------ Cash and cash equivalents, end of year $ 87,946 $ 26,466 ============ ============ </TABLE> NOTE 18--SUBSEQUENT EVENTS STOCK OFFERING On February 14, 1997, the Company completed a stock offering of 451,612 shares of Common Stock at $15.50 per share for a total proceeds of $6,999,986 prior to deduction of offering expenses. INVESTMENT IN CITY BANCORP On March 19, 1997, the Board of Directors of the Company approved an investment of $510,000 in City Bancorp, a proposed Missouri bank holding company. The $510,000 investment represents the purchase of 5,000 units. Each unit consists of one share of common stock (purchased for $100) and one warrant (purchased for $2) to purchase one additional share of common stock for $102 per share. City Bancorp is the proposed holding company for a proposed newly chartered Missouri state bank which will be located in Springfield, Missouri. The proposed holding company, bank charter and investment is subject to final regulatory approval. 49
52 SIGNATURES Pursuant to the requirements of Section 13 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 19th day of March, 1997 ENTERBANK HOLDINGS, INC. By: /s/ Fred H. Eller ------------------- Fred H. Eller Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURE TITLE DATE --------- ----- ---- <C> <S> <C> /s/Fred H. Eller Chief Executive Officer and March 15, 1997 - ---------------------------------- Director -------------------- Fred H. Eller Principal Executive Officer /s/Joseph D. Garea Chief Financial Officer, March 26, 1997 - ---------------------------------- Treasurer and Director -------------------- Joseph D. Garea Principal Financial Officer /s/James C. Wagner Vice President and Controller March 26, 1997 - ---------------------------------- -------------------- James C. Wagner Principal Accounting Officer /s/Ronald E. Henges Director March 19, 1997 - ---------------------------------- -------------------- Ronald E. Henges /s/Kevin C. Eichner Director March 19, 1997 - ---------------------------------- -------------------- Kevin C. Eichner /s/Robert E. Saur Director March 19, 1997 - ---------------------------------- -------------------- Robert E. Saur /s/Henry D. Warshaw Director March 19, 1997 - ---------------------------------- -------------------- Henry D. Warshaw /s/James L. Wilhite Director March 19, 1997 - ---------------------------------- -------------------- James L. Wilhite /s/James A. Williams Director March 19, 1997 - ---------------------------------- -------------------- James A. Williams /s/Paul R. Cahn Director March 19, 1997 - ---------------------------------- -------------------- Paul R. Cahn /s/Birch M. Mullins Director March 19, 1997 - ---------------------------------- -------------------- Birch M. Mullins </TABLE> 50
53 <TABLE> EXHIBIT INDEX <CAPTION> Exhibit Number - ------- <C> <S> 11 Statement re: computation of per share earnings 13 1996 Annual report 99 Proxy Materials for 1997 annual meeting </TABLE> 51