================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934--For the quarterly period ended March 31, 2002 [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number ____________ ------------ ENTERPRISE FINANCIAL SERVICES CORP (Exact Name of Registrant as Specified in its Charter) Delaware 43-1706259 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 150 North Meramec, Clayton, MO 63105 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 314-725-5500 ------------ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate the number of shares outstanding of each of the registrant's classes of common stock as of May 1, 2002: Common Stock, $.01 par value---9,381,451 shares outstanding as of May 1, 2002 ================================================================================
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES TABLE OF CONTENTS <TABLE> <CAPTION> Page ---- <S> <C> PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets At March 31, 2002 and December 31, 2001 .............................................. 2 Consolidated Statements of Operations Three Months Ended March 31, 2002 and 2001 ........................................... 3 Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2002 and 2001 ........................................... 4 Consolidated Statements of Cash Flows Three Months Ended March 31, 2002 and 2001 ........................................... 5 Notes to Consolidated Financial Statements ........................................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....................................................... 9 Item 3. Quantitative and Qualitative Disclosures Regarding Market Risk .................. 18 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K ................................................ II-1 Signatures ............................................................................... II-2 </TABLE>
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> At March 31, December 31, Assets 2002 2001 ------ ------------ ------------ <S> <C> <C> Cash and due from banks $ 25,492,303 $ 32,178,155 Federal funds sold 11,745,467 48,624,680 Interest-bearing deposits 379,002 3,433,351 Investments in debt and equity securities: Available for sale, at estimated fair value 47,738,568 45,952,142 Held to maturity, at amortized cost (estimated fair value of $15,535 at March 31, 2002 and $116,633 at December 31, 2001) 15,268 116,214 ------------ ------------ Total investments in debt and equity securities 47,753,836 46,068,356 ------------ ------------ Loans held for sale 2,628,057 8,936,042 Loans, less unearned loan fees 687,260,649 642,053,483 Less allowance for loan losses 7,856,330 7,295,916 ------------ ------------ Loans, net 679,404,319 634,757,567 ------------ ------------ Other real estate owned 138,000 138,000 Fixed assets, net 9,838,479 9,999,432 Accrued interest receivable 3,748,688 3,140,912 Goodwill 2,087,537 2,087,537 Prepaid expenses and other assets 6,188,403 5,885,531 ------------ ------------ Total assets $789,404,091 $795,249,563 ============ ============ Liabilities and Shareholders' Equity ------------------------------------ Deposits: Demand $120,378,852 $126,648,048 Interest-bearing transaction accounts 56,702,389 71,574,686 Money market accounts 332,937,297 309,355,326 Savings 8,516,100 7,761,917 Certificates of deposit: $100,000 and over 80,275,499 89,323,516 Other 105,279,644 109,689,672 ------------ ------------ Total deposits 704,089,781 714,353,165 Guaranteed preferred beneficial interests in EBH-subordinated debentures 11,000,000 11,000,000 Federal Home Loan Bank advances 15,508,590 14,032,385 Notes payable 1,866,667 1,366,667 Accrued interest payable 1,610,487 1,208,549 Other liabilities 2,757,267 1,392,194 ------------ ------------ Total liabilities 736,832,792 743,352,960 ------------ ------------ Shareholders' equity: Common stock, $.01 par value; 20,000,000 shares authorized; 9,315,451 issued and outstanding at March 31, 2002, and 9,270,667 issued and outstanding at December 31, 2001 93,155 92,707 Surplus 37,619,433 37,288,725 Retained earnings 15,039,230 14,330,784 Accumulated other comprehensive (loss) income (180,519) 184,387 ------------ ------------ Total shareholders' equity 52,571,299 51,896,603 ------------ ------------ Total liabilities and shareholders' equity $789,404,091 $795,249,563 ============ ============ </TABLE> See accompanying notes to unaudited consolidated financial statements. 2
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) <TABLE> <CAPTION> Three months ended March 31, 2002 2001 ----------- ----------- <S> <C> <C> Interest income: Interest and fees on loans $10,461,904 $12,907,376 Interest on debt and equity securities: Taxable 445,040 784,114 Nontaxable 917 5,757 Interest on federal funds sold 91,826 500,972 Interest on interest-bearing deposits 17,132 1,804 Dividends on equity securities 12,644 43,854 ----------- ----------- Total interest income 11,029,463 14,243,877 ----------- ----------- Interest expense: Interest-bearing transaction accounts 68,411 178,940 Money market accounts 1,274,365 3,107,322 Savings 20,720 45,938 Certificates of deposit: $100,000 and over 829,276 1,387,733 Other 1,211,436 1,621,695 Other borrowed funds 199,841 146,663 Guaranteed preferred beneficial interests in EBH-subordinated debentures 258,500 252,578 ----------- ----------- Total interest expense 3,862,549 6,740,869 ----------- ----------- Net interest income 7,166,914 7,503,008 Provision for loan losses 590,000 265,000 ----------- ----------- Net interest income after provision for loan losses 6,576,914 7,238,008 ----------- ----------- Noninterest income: Service charges on deposit accounts 411,894 299,561 Trust and financial advisory income 629,056 252,346 Other service charges and fee income 90,433 115,769 Gain on sale of mortgage loans 360,337 180,023 Gain on sale of securities - 29,687 Loss from Merchant Banc investments - (38,629) ----------- ----------- Total noninterest income 1,491,720 838,757 ----------- ----------- Noninterest expense: Salaries 3,460,082 3,228,895 Payroll taxes and employee benefits 689,646 631,804 Occupancy 457,576 396,987 Furniture and equipment 251,990 217,489 Data processing 253,044 296,214 Amortization of goodwill - 47,642 Other 1,520,349 1,382,383 ----------- ----------- Total noninterest expense 6,632,687 6,201,414 ----------- ----------- Income before income tax expense 1,435,947 1,875,351 Income tax expense 564,589 715,299 ----------- ----------- Net income $ 871,358 $ 1,160,052 ----------- ----------- Per share amounts Basic earnings per share $ 0.09 $ 0.13 Basic weighted average common shares outstanding 9,298,749 9,117,286 Diluted earnings per share $ 0.09 $ 0.12 Diluted weighted average common shares outstanding 9,577,312 9,646,791 </TABLE> See accompanying notes to unaudited consolidated financial statements. 3
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited) <TABLE> <CAPTION> Three months ended March 31, 2002 2001 --------- ---------- <S> <C> <C> Net income $ 871,358 $1,160,052 Other comprehensive (loss) income: Unrealized (loss) gain on investment securities arising during the period, net of tax (139,186) 64,848 Less reclassification adjustment for realized gain included in net income, net of tax - 19,593 Unrealized loss on cash flow type derivative instruments arising during the period, net of tax (225,720) - --------- ---------- Total other comprehensive (loss) income (364,906) 45,255 --------- ---------- Total comprehensive income $ 506,452 $1,205,307 ========= ========== </TABLE> See accompanying notes to unaudited consolidated financial statements. 4
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> Three months ended March 31, 2002 2001 ------------ ------------- <S> <C> <C> Cash flows from operating activities: Net income $ 871,358 $ 1,160,052 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 430,826 339,491 Provision for loan losses 590,000 265,000 Net amortization (accretion) of debt and equity securities 215,777 (12,806) Gain on sale of available for sale investment securities - (29,687) Loss from Merchant Banc investments - 38,629 Mortgage loans originated (16,379,841) (15,236,542) Proceeds from mortgage loans sold 23,048,163 11,972,886 Gain on sale of mortgage loans (360,337) (180,023) Noncash compensation expense attributed to stock option grants 52,899 44,265 (Increase) decrease in accrued interest receivable (607,776) 377,850 Increase (decrease) in accrued interest payable 401,938 (12,565) Other, net 905,110 (201,836) ------------ ------------ Net cash provided by (used in) operating activities 9,168,117 (1,475,286) ------------ ------------ Cash flows from investing activities: Purchases of available for sale debt and equity securities (11,936,942) (2,978,117) Proceeds from sale of available for sale debt securities - 279,687 Proceeds from maturities and principal paydowns on available for sale debt and equity securities 9,724,797 20,443,114 Proceeds from maturities and principal paydowns on held to maturity debt securities 100,000 300,000 Net increase in loans (45,260,969) (27,208,218) Recoveries of loans previously charged off 24,217 34,556 Proceeds from sale of fixed assets 11,079 - Purchases of fixed assets (277,875) (523,181) ------------ ------------ Net cash used in investing activities (47,615,693) (9,652,159) ------------ ------------ Cash flows from financing activities: Net decrease in non-interest bearing deposit accounts (6,269,196) (14,173,676) Net (decrease) increase in interest bearing deposit accounts (3,994,188) 4,173,945 Decrease in federal funds purchased - (1,225,000) Maturities and paydowns of Federal Home Loan Bank advances (23,795) (10,986) Proceeds from borrowings of Federal Home Loan Bank advances 1,500,000 1,000,000 Proceeds from borrowings of notes payable 500,000 - Cash dividends paid (162,916) (137,029) Proceeds from the exercise of common stock options 278,257 571,923 ------------ ------------ Net cash used in financing activities (8,171,838) (9,800,823) ------------ ------------ Net decrease in cash and cash equivalents (46,619,414) (20,928,268) Cash and cash equivalents, beginning of period 84,236,186 84,276,370 ------------ ------------ Cash and cash equivalents, end of period $ 37,616,772 $ 63,348,102 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest $ 3,460,611 $ 6,753,434 Income taxes - 1,607,000 ============ ============ </TABLE> See accompanying notes to consolidated financial statements. 5
Notes to Unaudited Consolidated Financial Statements ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES (1) Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. The accompanying consolidated financial statements of Enterprise Financial Services Corp and subsidiaries (the "Company" or "Enterprise Financial") are unaudited and should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary for a fair presentation of the results of operations for the interim periods presented herein have been included. Operating results for the three month period ended March 31, 2002 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2002. The consolidated financial statements include the accounts of Enterprise Financial Services Corp (which changed its name from Enterbank Holdings, Inc. on April 29, 2002) and its subsidiaries. All significant intercompany accounts and transactions have been eliminated. Certain amounts in the consolidated financial statements for the year ended December 31, 2001 have been reclassified to conform to the 2002 presentation. Such reclassifications had no effect on previously reported consolidated net income or shareholders' equity. (2) Segment Disclosure Management segregates the Company into three distinct businesses for evaluation purposes. The three segments are Enterprise Banking, Enterprise Trust and Corporate. The segments are evaluated separately on their individual performance, as well as, their contribution to the Company as a whole. The Corporate, Intercompany, and Reclassifications segment includes the holding company and trust preferred securities activities. The Company incurs general corporate expenses and owns Enterprise Bank and Enterprise Merchant Banc, Inc. The majority of the Company's assets and income result from Enterprise Banking (the "Bank"). Enterprise Banking consists of three banking branches and an operations center in the St. Louis County area, two banking branches in the Kansas City region and three banking branches in the Southeast Kansas region. The products and services offered by the banking branches include a broad range of commercial and personal banking services, including certificates of deposit, individual retirement and other time deposit accounts, checking and other demand deposit accounts, interest checking accounts, savings accounts and money market accounts. Loans include commercial, financial and agricultural, real estate construction and development, commercial and residential real estate, consumer and installment loans. Other financial services include mortgage banking, debit and credit cards, automatic teller machines, internet account access, safe deposit boxes, and treasury management services. Enterprise Trust, which is a division of Enterprise Bank, provides fee-based personal and corporate financial consulting and trust services. Personal financial consulting includes estate planning, investment management, and retirement planning. Corporate consulting services are focused in the areas of retirement plans, management compensation and management succession issues. 6
Following are the financial results for the Company's operating segments. <TABLE> <CAPTION> Corporate, Intercompany, Enterprise Enterprise and Banking Trust Reclassifications Total Three months ended March 31, 2002 <S> <C> <C> <C> <C> Net interest income ............. $ 7,440,843 $ -- $ (273,929) $ 7,166,914 Provision for loan losses ....... 590,000 -- -- 590,000 Other noninterest income ........ 879,860 629,056 (17,196) 1,491,720 Other noninterest expense ....... 5,443,112 659,549 530,026 6,632,687 ------------ ------------ ------------ ------------ Income (loss) before income tax expense ......................... 2,287,591 (30,493) (821,151) 1,435,947 Income tax expense (benefit) .... 875,003 (11,282) (299,132) 564,589 ------------ ------------ ------------ ------------ Net income (loss) ............... $ 1,412,588 $ (19,211) $ (522,019) $ 871,358 ============ ============ ============ ============ At March 31, 2002 Loans, less unearned loan fees .. 687,260,649 -- -- 687,260,649 Deposits ........................ 704,344,000 -- (254,219) 704,089,781 Borrowings ...................... 15,508,590 -- 12,866,667 28,375,257 Total assets .................... $787,450,938 $ -- $ 1,953,153 $789,404,091 ============ ============ ============ ============ Corporate, Intercompany, Enterprise Enterprise and Banking Trust Reclassifications Total Three months ended March 31, 2001 Net interest income ............. $ 7,754,390 $ -- $ (251,382) $ 7,503,008 Provision for loan losses ....... 265,000 -- -- 265,000 Other noninterest income ........ 577,676 266,680 (5,599) 838,757 Other noninterest expense ....... 5,228,912 599,716 372,786 6,201,414 ------------ ------------ ------------ ------------ Income (loss) before income tax expense ......................... 2,838,154 (333,036) (629,767) 1,875,351 Income tax expense (benefit) .... 1,083,509 (127,142) (241,068) 715,299 ------------ ------------ ------------ ------------ Net income (loss) ............... $ 1,754,645 $ (205,894) $ (388,699) $ 1,160,052 ============ ============ ============ ============ At March 31, 2001 Loans, less unearned loan fees .. 583,953,908 -- -- 583,953,908 Deposits ........................ 624,424,873 -- (1,987,167) 622,437,706 Borrowings ...................... 10,954,913 -- 11,000,000 21,954,913 Total assets .................... $697,097,036 $ -- $ 4,438,921 $701,535,957 ============ ============ ============ ============ </TABLE> (3) Derivative Instruments and Hedging Activities The Company began utilizing derivative instruments to assist in the management of interest rate sensitivity and to modify the repricing, maturity and option characteristics of certain assets and liabilities in the first quarter of 2002. The 7
Company uses such derivative instruments solely to reduce its interest rate exposure. The following is a summary of the Company's accounting policies for derivative instruments and hedging activities under Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instrumenst and Hedging Activities, as amended. Interest Rate Swap Agreements - Cash Flow Hedges. Interest rate swap agreements designated as cash flow hedges are accounted for at fair value. The effective portion of the change in the cash flow hedge's gain or loss is initially reported as a component of other comprehensive income net of taxes and subsequently reclassified into noninterest income when the underlying transaction affects earnings. The ineffective portion of the change in the cash flow hedge's gain or loss is recorded in earnings on each monthly measurement date. The swap agreements are accounted for on an accrual basis with the net interest differential being recognized as an adjustment to interest income or interest expense of the related asset or liability. For the three months ended March 31, 2002, a net interest differential of $180,145 was included in interest income on loans. (4) New Accounting Standards In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities, which replaces SFAS 125. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. The standards are based on the consistent application of the financial components approach, whereupon after a transfer, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, and relieves financial liabilities when extinguished. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. This statement was effective for recognition and reclassification of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The implementation of this statement did not have a material effect on the Company's consolidated financial statements. In July 2001, the FASB issued SFAS 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001 as well as all purchase method business combinations completed after June 30, 2001. SFAS 141 also specifies criteria intangible assets acquired in a purchase method business combination must meet to be recognized and reported apart from goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets. As of March 31, 2002 and December 31, 2001, the Company has unamortized goodwill in the amount of $2,087,537, no unamortized identifiable intangible assets, and no negative goodwill, which will be subject to the transition provisions of SFAS 141 and SFAS 142. Amortization expense related to goodwill was $0 and $47,642 for the three months ended March 31, 2002 and 2001 respectively, and $190,567 for the year ended December 31, 2001. The goodwill intangible asset and related amortization expense are reported in the Enterprise Banking segment. The Company will determine the fair value of the reporting unit associated with the goodwill in the second quarter of 2002 as required by SFAS 142. The adoption of SFAS 141 and SFAS 142 has no impact on the basic or diluted earnings per share reported for the Company in the three months ended March 31, 2002 or 2001 (on a pro-forma basis). In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. While SFAS No. 144 supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, it retains many of the fundamental provisions of that statement. SFAS No. 144 also supercedes the accounting and reporting provisions of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transaction, for the disposal of a segment of a business. However, it retains the requirement in Opinion No. 30 to report 8
separately discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001 and interim financial periods within those fiscal years. The adoption of this statement did not have a material effect on the Company's consolidated financial statements. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995 Readers should note that in addition to the historical information contained herein, some of the information in this report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements typically are identified with use of terms such as "may," "will," "expect," "anticipate," "estimate" and similar words, although some forward-looking statements are expressed differently. You should be aware that Enterprise Financial Services Corp's actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including burdens imposed by federal and state regulation of banks, credit risk, exposure to local economic conditions, risks associated with rapid increase or decrease in prevailing interest rates and competition from banks and other financial institutions, all of which could cause Enterprise Financial Services Corp's actual results to differ from those set forth in the forward-looking statements. Introduction This discussion summarizes the significant factors affecting the consolidated financial condition, results of operations, liquidity, and cash flows of the Company for the three months ended March 31, 2002 compared to the three months ended March 31, 2001 and the year ended December 31, 2001. This discussion should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. Financial Condition Total assets at March 31, 2002 were $789 million, a decrease of $6 million compared to total assets of $795 million at December 31, 2001. Loans less unearned loan fees were $687 million, an increase of $45 million, or 7%, over total loans of $642 million at December 31, 2001. The increase in loans is attributed, in part, to the success of the Company's relationship officers' efforts. Federal funds sold and investment securities were $59 million, a decrease of $39 million, or 40%, from total federal funds sold and investment securities of $98 million at December 31, 2001. The decrease resulted from the shift in interest earning assets from short-term investments into loans during the first three months of 2002. Total deposits at March 31, 2002 were $704 million, a decrease of $10 million compared to total deposits of $714 million at December 31, 2001. Total shareholders' equity at March 31, 2002 was $52.6 million, an increase of $0.7 million over total shareholders' equity of $51.9 million at December 31, 2001. The increase in equity is primarily due to net income of $871,000 for the three months ended March 31, 2002, and the exercise of incentive stock options by employees, less dividends paid to shareholders and a $365,000 decrease in accumulated other comprehensive income. Results of Operations Net income was $871,358 for the three month period ended March 31, 2002, a decrease of $288,694 or 25% compared to net income of $1,160,052 for the same period ended March 31, 2001. Basic earnings per share for the three month periods ended March 31, 2002 and 2001 were $0.09 and $0.13, respectively. Diluted earnings per share for the three 9
month periods ended March 31, 2002 and 2001 were $0.09 and $0.12, respectively. The decrease in net income for the three month period ended March 31, 2002 as compared to the same period ended March 31, 2001 is due to a decrease in net interest income, an increase in the provision for loan losses and an increase in noninterest expenses, offset by an increase in noninterest income. Net Interest Income Net interest income (on a tax equivalent basis) was $7.2 million, or 3.92% of average interest-earning assets for the three months ended March 31, 2002, compared to $7.5 million, or 4.69%, of average interest-earning assets, for the same period in 2001. The $340,000 decrease in net interest income for the three months ended March 31, 2002 as compared to the same period in 2001 was the result of a decrease in the interest rates of average interest-earning assets and an increase in average interest-bearing liabilities offset by an increase in average interest-earning assets and a decrease in the interest rates on average interest-bearing liabilities. Average interest-earning assets for the three months ended March 31, 2002 were $744 million, which is a $94 million, or 14%, increase over $650 million for the three months ended March 31, 2001. The increase in average interest-earning assets is attributed to the continued calling efforts of the Company's relationship officers. The yield on average interest-earning assets decreased to 6.02% for the three month period ended March 31, 2002 compared to 8.89% for the three month period ended March 31, 2001. The decrease in asset yield was primarily due to a 325 basis point decrease in the prime rate since March 31, 2001 and a general decrease in the average yield on loans and investment securities. Average interest-bearing liabilities increased to $610 million for the three months ended March 31, 2002 from $542 million for the same period in 2001. The increase in interest-bearing transaction and money market accounts is attributed to continued calling efforts of the Company's relationship officers. The cost of interest-bearing liabilities decreased to 2.57% for the three months ended March 31, 2002 compared to 5.04% for the same period in 2001. This decrease is attributed mainly to declines in market interest rates for all sources of funding. 10
The following table sets forth, on a tax-equivalent basis, certain information relating to the Company's average balance sheet and reflects the average yield earned on interest-earning assets, the average cost of interest-bearing liabilities and the resulting net interest income for the three month periods ended March 31, 2002 and 2001: <TABLE> <CAPTION> Three months ended March 31, ---------------------------------------------------------------------------------------------- 2002 2001 --------------------------------------------- -------------------------------------------- Percent Interest Average Percent Interest Average Average of Total Income/ Yield/ Average of Total Income/ Yield/ Balance Assets Expense Rate Balance Assets Expense Rate -------- -------- -------- ------- ------- -------- -------- ------- Assets (Dollars in Thousands) - ------ <S> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans (1)(2) $668,497 85.58% $ 10,479 6.36% $568,178 82.74% $ 12,927 9.23% Taxable investments in debt and equity securities 47,924 6.13 458 3.87 44,538 6.49 828 7.54 Non-taxable investments in debt and equity securities (2) 73 0.01 1 7.72 457 0.07 9 7.75 Federal funds sold 24,068 3.08 92 1.55 37,242 5.42 501 5.46 Interest-earning deposits 3,397 0.43 17 2.05 33 - - 3.59 -------- ------ -------- -------- ------ -------- Total interest-earning assets 743,959 95.23 $ 11,047 6.02 650,448 94.72 $ 14,265 8.89 Noninterest-earning assets: Cash and due from banks 24,614 3.15 22,252 3.24 Fixed assets, net 9,953 1.27 8,926 1.30 Prepaid expenses and other assets 10,267 1.31 12,316 1.79 Allowance for loan losses (7,569) (0.96) (7,224) (1.05) -------- ------ -------- ------ Total assets $781,224 100.00% $686,718 100.00% ======== ====== ======== ====== Liabilities and Shareholders' Equity - ------------------------------------ Interest-bearing liabilities: Interest-bearing transaction accounts $ 66,297 8.48% $ 68 0.42% $ 53,783 7.83% $ 179 1.35% Money market accounts 317,383 40.62 1,274 1.63 267,359 38.94 3,107 4.71 Savings 8,328 1.07 21 1.02 7,223 1.05 46 2.58 Certificates of deposit 190,740 24.42 2,041 4.34 191,819 27.94 3,009 6.36 Borrowed funds 16,689 2.13 200 4.86 11,290 1.64 147 5.27 Guaranteed preferred beneficial interests in EBH-subordinated debentures 11,000 1.41 259 9.55 11,000 1.60 253 9.31 --------- ------ -------- -------- ------ -------- Total interest-bearing liabilities 610,437 78.13 $ 3,863 2.57 542,474 79.00 $ 6,741 5.04 Noninterest-bearing liabilities: Demand deposits 115,739 14.82 87,166 12.69 Other liabilities 2,100 0.27 2,325 0.34 -------- ------ -------- ------ Total liabilities 728,276 93.22 631,965 92.03 Shareholders' equity 52,948 6.78 54,753 7.97 -------- ------ -------- ------ Total liabilities and shareholders' equity $781,224 100.00% $686,718 100.00% -------- ------ -------- ------ Net interest income $ 7,184 $ 7,524 -------- -------- Net interest spread 3.45% 3.85% Net interest rate margin(3) 3.92% 4.69% ----- ----- </TABLE> (1) Average balances include non-accrual loans. The income on such loans is included in interest but is recognized only upon receipt. Loan fees included in interest income are approximately $335,000 and $345,000 for the three months ended March 31, 2002 and 2001, respectively. (2) Non-taxable investment income is presented on a fully tax-equivalent basis assuming a tax rate of 34%. (3) Net interest income divided by average total interest earning assets. 11
During the three months ended March 31, 2002, an increase in the average volume of interest-earning assets resulted in an increase in interest income of $1,960,000. Interest income decreased $5,178,000 due to a decrease in rates on average interest-earning assets. Increases in the average volume of interest-bearing demand deposits, savings and money market accounts, time deposits and borrowed funds resulted in an increase in interest expense of $582,000. Changes in interest rates on the average volume of interest-bearing liabilities resulted in a decrease in interest expense of $3,460,000. The net effect of the volume and rate changes associated with all categories of interest-earning assets during the three months ended March 31, 2002 as compared to the same period in 2001 was a decrease in interest income of $3,218,000, while the net effect of the volume and rate changes associated with all categories of interest-bearing liabilities was a decrease in interest expense of $2,878,000. The following table sets forth on a tax equivalent basis, for the three months ended March 31, 2002 compared to the same period ended March 31, 2001, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume: <TABLE> <CAPTION> 2002 Compared to 2001 Increase (Decrease) Due to ----------------------------------- Volume(1) Rate(2) Net --------- ------- -------- (Dollars in Thousands) <S> <C> <C> <C> Interest earned on: Loans $2,026 $(4,474) $(2,448) Taxable investments in debt and equity securities 59 (429) (370) Nontaxable investments in debt and equity securities (3) (8) - (8) Federal funds sold (135) (274) (409) Interest-bearing deposits 18 (1) 17 ------- ------- ------ Total interest-earning assets $1,960 $(5,178) $(3,218) ------ ------- ------- Interest paid on: Interest-bearing transaction accounts $ 35 $ (146) $ (111) Money market accounts 496 (2,329) (1,833) Savings 6 (31) (25) Certificates of deposit (17) (951) (968) Borrowed funds 62 (9) 53 Guaranteed preferred beneficial interests in EBH-subordinated debentures - 6 6 ------ ------- ------- Total 582 (3,460) (2,878) ------ ------- ------- Net interest income $1,378 $(1,718) $ (340) ====== ======= ======= </TABLE> (1) Change in volume multiplied by yield/rate of prior period. (2) Change in yield/rate multiplied by volume of prior period. (3) Nontaxable investments in debt securities are presented on a fully tax-equivalent basis assuming a tax rate of 34%. NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each. Provision for Loan Losses The provision for loan losses was $590,000 for the three months ended March 31, 2002, compared to $265,000 for the same period in 2001. The Company's asset quality remained sound with net chargeoffs of $30,000 for the three months ended March 31, 2002, compared to net chargeoffs of $13,000 for the same period in 2001. Loan growth remained strong during the first three months of 2002. The increase in provision expense in the first quarter of 2002 as compared to the same period in 2001 was due to an increase of $890,000 in nonperforming loans, a higher level of internally criticized credits as a percentage of bank capital plus loan loss reserves, and the continued increase in loans outstanding. 12
The following table summarizes changes in the allowance for loan losses arising from loans charged off and recoveries on loans previously charged off by loan category and additions to the allowance that have been charged to the provision: <TABLE> <CAPTION> Three months ended March 31, --------------------- 2002 2001 ---------- --------- (Dollars in thousands) <S> <C> <C> Allowance at beginning of period $ 7,296 $ 7,097 Loans charged off: Commercial and industrial 31 5 Real estate: Commercial 14 35 Construction - - Residential - - Consumer and other 9 7 --------- -------- Total loans charged off 54 47 --------- -------- Recoveries of loans previously charged off: Commercial and industrial 10 8 Real estate: Commercial 5 20 Construction - - Residential - 3 Consumer and other 9 3 --------- -------- Total recoveries of loans previously charged off 24 34 --------- -------- Net loans charged off 30 13 --------- -------- Provision for loan losses 590 265 --------- -------- Allowance at end of period $ 7,856 $ 7,349 ========= ======== Average loans $668,497 $568,178 Total loans $687,261 $583,954 Nonperforming loans $ 2,834 $ 1,944 Net charge-offs to average loans (annualized) 0.02% 0.01% Allowance for loan losses to total loans 1.14% 1.26% </TABLE> The Company's credit management policies and procedures focus on identifying, measuring, and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in external audits and regulatory bank examinations. The system requires rating all loans at the time they are made. Adversely rated credits, including loans requiring close monitoring, which would not normally be considered criticized credits by regulators, are included on a monthly loan watch list. Loans may be added to the watch list for reasons which are temporary and correctable, such as the absence of current financial statements of the borrower or a deficiency in loan documentation. Other loans are added whenever any adverse circumstance is detected which might affect the borrower's ability to meet the terms of the loan. This could be initiated by the delinquency of a scheduled loan payment, a deterioration in the borrower's financial condition identified in a review of periodic financial statements, a decrease in the 13
value of the collateral securing the loan, or a change in the economic environment in which the borrower operates. Loans on the watch list require detailed loan status reports prepared by the responsible officer every three months, which are then discussed in formal meetings with the Asset Quality/Risk Management Area and the Executive Loan Committee. Downgrades of loan risk ratings may be initiated by the responsible loan officer at any time. However, upgrades of risk ratings may only be made with the concurrence of the Executive Loan Committee generally at the time of the formal quarterly watch list review meetings. Each month, management prepares a detailed list of loans on the watch list and summaries of the entire loan portfolio categorized by risk rating. These are coupled with an analysis of changes in the risk profiles of the portfolios, changes in past due and non-performing loans and changes in watch list and classified loans over time. In this manner, the overall increases or decreases in the levels of risk in the portfolios are monitored continually. Factors are applied to the loan portfolios for each category of loan risk to determine acceptable levels of allowance for loan losses. These factors are derived primarily from the actual loss experience. The calculated allowance for loan losses required for the portfolios are then compared to the actual allowance balances to determine the provision necessary to maintain the allowance for loan losses at an appropriate level. In addition, management exercises judgment in its analysis of determining the overall level of the allowance for loan losses. In its analysis, management considers the change in the portfolio, including growth and composition, and the economic conditions of the region in which the Company operates. Based on this quantitative and qualitative analysis, the allowance for loan losses is adjusted. Such adjustments are reflected in the consolidated statements of operations. The Company does not engage in foreign lending. Additionally, the Company does not have any concentrations of loans exceeding 10% of total loans which are not otherwise disclosed in the loan portfolio composition table. The Company does not have a material amount of interest-bearing assets which would have been included in non-accrual, past due or restructured loans if such assets were loans. Management believes the allowance for loan losses is adequate to absorb probable losses in the loan portfolio. While management uses available information to recognize loan losses, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Company to increase the allowance for loan losses based on their judgments and interpretations about information available to them at the time of their examinations. The allowance for loan losses to total loans of 1.14% at March 31, 2002 is down from 1.26% at March 31, 2001 due to several large charge-offs in 2001 on loans that had specific reserves allocated to them. This same ratio was 1.14% at December 31, 2001. 14
The following table sets forth information concerning the Company's nonperforming assets as of the dates indicated: <TABLE> <CAPTION> March 31, March 31, 2002 2001 -------- --------- (Dollars in thousands) <S> <C> <C> Non-accrual loans $ 2,834 $ 1,944 Foreclosed property 138 338 -------- -------- Total nonperforming assets $ 2,972 $ 2,282 ======== ======== Total assets $789,404 $701,536 Total loans $687,261 $583,954 Total loans plus foreclosed property $687,399 $584,292 Nonperforming loans to loans 0.41% 0.33% Nonperforming assets to loans plus foreclosed property 0.43% 0.33% Nonperforming assets to total assets 0.38% 0.33% </TABLE> As of March 31, 2002, a large portion, $1.9 million or 69%, of the nonaccrual loans are three separate loans from one customer relationship. At March 31, 2001, $1.6 million or 81% of the nonaccrual loans were a result of one customer relationship. The loans related to this relationship were subsequently restructured and $270,000 was charged off during May 2001. Noninterest Income Noninterest income was $1,491,720 for the three months ended March 31, 2002, compared to $838,757 for the same period in 2001. The 78% increase is primarily attributed to a $376,710 increase in trust and financial advisory income, a $180,314 increase in the gain on sale of mortgage loans and a $112,333 increase in service charges on deposit accounts. Trust and financial advisory income was $629,056 for the three months ended March 31, 2002, as compared to $252,346 for the same period in 2001. The increase in fees was the result of increased assets under management in Enterprise Trust and commissions on insurance sales activity in the financial advisory area. The gain on sale of mortgage loans was $360,337 for the three months ended March 31, 2002, as compared to $180,023 for the three months ended March 31, 2001. The increase in the gain on sale of mortgage loans was due to a dramatic decrease in interest rates during 2001 resulting in higher purchase and refinancing activity on residential mortgage loans. Most of these loans are sold into the secondary market without retention of the servicing rights. The service charges on deposit accounts were $411,894 for the three months ended March 31, 2002 as compared to $299,561 for the three months ended March 31, 2001. The increase in service charges on deposit accounts is a result of a decrease in the earnings credit rate on business accounts and an increase in deposit balances outstanding. These increases were slightly offset by a $29,687 decrease in the gain on sale of securities and a $25,336 decrease in other service charges and fee income. The Company had no sales of investment securities during the three month period ended March 31, 2002. The Company wrote off its assets related to Merchant Banc investments during December 2001. The Company is pursuing recoveries on those Merchant Banc investment losses. There were no gains or further losses recorded on these Merchant Banc investments during the three months ended March 31, 2002. Noninterest Expense Noninterest expense was $6.6 million for the three months ended March 31, 2002, compared to $6.2 million for the same period in 2001. The 7% increase in noninterest expenses was primarily due to: 1) increased activity and growth in the trust and financial advisory services which resulted in a $59,833, or 10%, increase in noninterest expense; 2) increased 15
commissions of $63,535 related to the sale of mortgage loans; 3) recent renovation and remodeling at the Clayton location in the fourth quarter of 2001 which increased noninterest expenses by $102,740; and 4) the opening of a new banking facility in the Kansas City area which increased noninterest expenses by $178,590. Salaries, payroll and employee benefits increased $289,029, or 7%, for the three month period ended March 31, 2002 as compared to the same period ended March 31, 2001. Most of this increase is related to an increase in commission based income in the Mortgage and Financial Advisory areas. Occupancy expense increased $60,589, or 15%, for the three month period ended March 31, 2002 as compared to the same period ended March 31, 2001. The Clayton location acquired additional space for the Holding Company and Trust offices and existing space was remodeled. The Company opened a new banking facility in the Country Club Plaza in Kansas City, Missouri during the fourth quarter of 2001, which also increased occupancy and furniture equipment expenses. The Company upgraded its telephone and voicemail systems during the fourth quarter of 2001 which increased furniture and equipment expense during 2002. Furniture and equipment expense increased $34,501, or 16%, for the three month period ended March 31, 2002 as compared to the same period ended March 31, 2001. Data processing expense decreased $43,170, or 15%, for the three months ended March 31, 2002 as compared to the same period ended March 31, 2001. During the first quarter of 2001, the Bank expanded the computer and data processing infrastructure for the additional Kansas locations. Other operating expenses increased $137,966 or 10% for the three month period ended March 31, 2002 over the same period ended March 31, 2001. The Bank recognized a $138,000 loss in March, 2002 associated with fraud that was substantially recovered in April. Liquidity Liquidity is provided by the Company's earning assets, including short-term investments in federal funds sold, maturities in the loan and investment portfolios, and amortization of term loans, along with deposit inflows, and proceeds from borrowings. At March 31, 2002, the loan to deposit ratio was 98%, as compared to 90% at December 31, 2001. Federal funds sold and investment securities were $59 million at March 31, 2002 as compared to $98 million at December 31, 2000. During the three months ended March 31, 2002, the Company experienced loan growth of $45 million, while deposits decreased $10 million. This decrease in the Company's liquidity position resulted in the utilization of federal funds sold balances to fund loan growth. The Company also increased its Federal Home Loan Bank advances by $1.5 million to $15.5 million during the three month period ended March 31, 2002. This decrease in the Company's liquidity position during the first quarter of the year is very typical. The Company's deposits tend to increase at year end and decrease during the first quarter as its commercial customers payout year end bonuses and taxes. The Company closely monitors its current liquidity position and believes there are sufficient backup sources of liquidity. As of March 31, 2002, the Company has over $90 million available from the Federal Home Loan Bank of Des Moines under a blanket loan pledge and $27 million from the Federal Reserve under a pledged loan agreement. The Company also has access to over $50 million in overnight federal funds purchased from various banking institutions. Capital Adequacy Enterprise Bank is subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. 16
Quantitative measures established by regulations to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets, and of Tier I capital to average assets. Management believes Enterprise Bank is well capitalized. As of March 31, 2002, the most recent notification from the Company's primary regulator categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, Enterprise Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the following table. The following table summarizes the Company's and Bank's risk-based capital and leverage ratios at the dates indicated: <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 March 31, 2002: Total Capital (to risk weighted assets) Enterprise Financial Services Corp $69,520,611 10.17% $54,687,202 8.00% $ - - % Enterprise Bank 69,611,652 10.21 54,530,948 8.00 68,163,685 10.00 Tier 1 Capital (to risk weighted assets) Enterprise Financial Services Corp $61,664,281 9.02% $27,343,601 4.00% $ - - % Enterprise Bank 61,755,322 9.06 27,265,474 4.00 40,898,211 6.00 Tier 1 Capital (to average assets) Enterprise Financial Services Corp $61,664,281 7.91% $23,374,095 3.00% $ - - % Enterprise Bank 61,755,322 7.94 23,337,347 3.00 38,895,579 5.00 As of December 31, 2001: Total Capital (to risk weighted assets) Enterprise Financial Services Corp $67,920,595 10.41% $52,203,818 8.00% $ - - % Enterprise Bank 67,605,690 10.40 52,024,902 8.00 65,031,128 10.00 Tier 1 Capital (to risk weighted assets) Enterprise Financial Services Corp $60,624,679 9.29% $26,101,909 4.00% $ - - % Enterprise Bank 60,309,774 9.27 26,012,451 4.00 39,018,677 6.00 Tier 1 Capital (to average assets) Enterprise Financial Services Corp $60,624,679 8.18% $22,232,250 3.00% $ - - % Enterprise Bank 60,309,774 8.21 22,040,917 3.00 36,734,862 5.00 </TABLE> Effect of Inflation Changes in interest rates may have a significant impact on a commercial bank's performance because virtually all assets and liabilities of commercial banks are monetary in nature. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase equity capital at higher than normal rates to maintain an appropriate equity-to-assets ratio. 17
Item 3: Quantitative and Qualitative Disclosures Regarding Market Risk The Company's exposure to market risk is reviewed on a regular basis by its Asset/Liability Committee. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the interest risk while at the same time maximizing income. Management realizes certain interest rate risks are inherent in our business and that the goal is to identify and minimize those risks. Tools used by management include the standard repricing or "GAP" report subject to different rate shock scenarios. At March 31, 2002, the rate shock scenario models indicated that annual net interest income would change by less than 5% should rates rise or fall within 100 basis points from their current level over a one year period. The Bank has no market risk sensitive instruments held for trading purposes. In January 2002, the Bank executed two interest rate swaps in order to limit exposure from further falling interest rates. The first swap had a $40 million notional amount, a term of two years and obligated the Bank to pay a floating amount and receive a fixed amount. The second swap was also a "receive fixed" but had a notional amount of $20 million and a term of three years. The swaps qualify as "cash flow hedges" under SFAS 133, and so changes in the fair value of the swaps are recognized as part of other comprehensive income. 18
The following tables present the scheduled maturity of the Company's market risk sensitive instruments at March 31, 2002: <TABLE> <CAPTION> Beyond 5 Years or No Stated Year 1 Year 2 Year 3 Year 4 Year 5 Maturity Total -------- ------ ------ ------ ------ -------- -------- <S> <C> <C> <C> <C> <C> <C> <C> ASSETS Investment in debt and equity securities $ 25,221 9,794 5,541 4,866 1,002 1,330 $ 47,754 Interest-bearing deposits 379 - - - - - 379 Federal funds sold 11,745 - - - - - 11,745 Loans 539,323 32,625 72,826 13,820 14,219 14,448 687,261 Loans held for sale 2,628 - - - - - 2,628 -------- ------ ------ ------ ------ ------ -------- Total $579,296 42,419 78,367 18,686 15,221 15,778 $749,767 ======== ====== ====== ====== ====== ====== ======== LIABILITIES Savings, money market deposits $398,156 - - - - - $398,156 Certificates of deposit 161,322 19,314 1,979 2,545 395 - 185,555 Guaranteed preferred beneficial interests in EBH-subordinated debentures - - - - - 11,000 11,000 Borrowed funds 6,024 5,480 2,900 1,150 550 1,272 17,376 -------- ------ ------ ------ ------ ------ -------- Total $565,502 24,794 4,879 3,695 945 12,272 $612,087 ======== ====== ====== ====== ====== ====== ======== </TABLE> <TABLE> <CAPTION> Average Interest Rate for Three Months Ended Carrying March 31, Estimated Value 2002 Fair Value ----------- ------------ ------------- <S> <C> <C> <C> ASSETS Investment in debt and equity securities $ 47,754 3.87% $ 47,754 Interest-earning deposits 379 2.05 379 Federal funds sold 11,745 1.55 11,745 Loans 687,261 6.36% 701,883 Loans held for sale 2,628 2,628 -------- -------- Total 749,767 $764,389 ======== ======== LIABILITIES Savings, money market deposits $398,156 1.41% $398,156 Certificates of deposit 185,555 4.34 187,500 Guaranteed preferred beneficial interests in EBH-subordinated debentures 11,000 9.55 11,128 Borrowed funds 17,376 4.86% 17,550 -------- -------- Total $612,087 $614,334 ======== ======== </TABLE> 19
PART II - OTHER INFORMATION --------------------------- Item 6. - Exhibits and Reports on Form 8-K (a). Exhibits. Exhibit Number Description ------ ----------- 11.1 (1) Statement Regarding Calculation of Earnings Per Share (b). During the three months ended March 31, 2002, the Registrant filed one Current Report on Form 8-K, dated March 22, 2002, in which the Registrant announced a change in previously reported 2001 earnings. - ------------- (1) Filed herewith. I
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri on the 9th day of May, 2002. ENTERPRISE FINANCIAL SERVICES CORP By: /s/ Fred H. Eller ------------------------------------- Fred H. Eller Chief Executive Officer By: /s/ Frank H. Sanfilippo ------------------------------------- Frank H. Sanfilippo Chief Financial Officer II