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, 2005
o
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: 000-24131
ENTERPRISE FINANCIAL SERVICES CORP
(Exact Name of Registrant as Specified in its Charter)
Delaware
43-1706259
(State or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer 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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities and Exchange Act of 1934).
Indicate the number of shares outstanding of each of the Registrant’s classes of common stock as of May 4, 2005:
Common Stock, $.01 par value---- 10,043,202 shares outstanding
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets At March 31, 2005 and December 31, 2004
1
Consolidated Statements of Operations Three Months Ended March 31, 2005 and 2004
2
Consolidated Statements of Comprehensive Income Three Months Ended March 31, 2005 and 2004
3
Consolidated Statements of Cash Flows Three Months Ended March 31, 2005 and 2004
4
Notes to Consolidated Financial Statements
5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk
22
Item 4. Disclosure Control and Procedures
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
23
Item 2 Unregistered Sale of Equity Securities and Use of Proceeds
Item 3 Defaults Upon Senior Securities
Item 4 Submission of Matters to a Vote of Securities Holders
Item 5 Other Information
Item 6. Exhibits
Signatures
24
Certifications
27
PART I Item 1 – Financial Statements
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Balance Sheets (In thousands, except share and per share data)
(Unaudited)
(Audited)
At March 31, 2005
At December 31, 2004
Assets
Cash and due from banks
$
32,085
28,324
Interest-bearing deposits
141
156
Investments in debt and equity securities:
Available for sale, at estimated fair value
92,572
121,630
Held to maturity, at amortized cost (estimated fair value of $8 at December 31, 2004)
—
8
Total investments in debt and equity securities
121,638
Loans held for sale
4,180
2,376
Loans, less unearned loan fees
972,802
898,505
Less: Allowance for loan losses
12,639
11,665
Loans, net
960,163
886,840
Other real estate owned
123
Fixed assets, net
8,413
8,044
Accrued interest receivable
4,678
4,238
Goodwill
1,938
Prepaid expenses and other assets
6,289
6,273
Total assets
1,110,582
1,059,950
Liabilities and Shareholders' Equity
Deposits:
Demand
190,667
197,283
Interest-bearing transaction accounts
91,512
85,523
Money market accounts
424,749
432,340
Savings
4,352
3,919
Certificates of deposit:
$100 and over
183,979
178,851
Other
41,534
41,712
Total deposits
936,793
939,628
Subordinated debentures
20,620
Federal Home Loan Bank advances
68,879
10,299
Other borrowings
2,303
9,616
Notes payable
250
Accrued interest payable
1,367
1,665
Accounts payable and accrued expenses
3,896
5,146
Total liabilities
1,033,858
987,224
Shareholders' equity:
Common stock, $.01 par value; authorized 20,000,000 shares; issued and outstanding 10,032,252 shares at March 31, 2005 and 9,778,357 at December 31, 2004.
100
98
Additional paid in capital
46,107
41,326
Unearned compensation
(1,993
)
Retained earnings
34,172
32,075
Accumulated other comprehensive loss
(1,662
(773
Total shareholders' equity
76,724
72,726
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Operations (unaudited) (In thousands, except share and per share data)
Three months ended March 31,
2005
2004
Interest income:
Interest and fees on loans
13,887
10,457
Interest on debt and equity securities:
Taxable
716
409
Nontaxable
10
Interest on federal funds sold
11
48
Dividends on equity securities
29
20
Total interest income
14,653
10,944
Interest expense:
151
39
1,779
859
1,255
861
274
264
260
317
Federal Home Loan Bank borrowings
377
185
Notes payable and other borrowings
30
26
Total interest expense
4,131
2,554
Net interest income
10,522
8,390
Provision for loan losses
786
597
Net interest income after provision for loan losses
9,736
7,793
Noninterest income:
Service charges on deposit accounts
483
457
Wealth Management income
1,223
856
Other service charges and fee income
109
97
Gain on sale of mortgage loans
68
Gain on sale of securities
Total noninterest income
1,837
1,479
Noninterest expense:
Employee compensation and benefits
5,198
4,689
Occupancy
530
496
Furniture and equipment
172
182
Data processing
224
1,593
1,318
Total noninterest expense
7,717
6,870
Income before income tax expense
3,856
2,402
Income tax expense
1,409
875
Net income
2,447
1,527
Per share amounts:
Basic earnings per share
0.25
0.16
Basic weighted average common shares outstanding
9,921,762
9,640,145
Diluted earnings per share
0.23
0.15
Diluted weighted average common shares outstanding
10,520,844
9,942,143
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (unaudited) (In thousands)
Other comprehensive (loss) income:
Unrealized (loss) gain on investment securities arising during the period, net of tax
(663
60
Less reclassification adjustment for realized gain on sale of securities included in net income, net of tax
(1
Unrealized (loss) gain on cash flow type derivative instruments arising during the period, net of tax
(226
31
Total other comprehensive (loss) income
(889
90
Total comprehensive income
1,558
1,617
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) (In thousands)
Three months ended March 31
Cash flows from operating activities:
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization
258
251
Net amortization of debt and equity securities
129
67
Gain on sale of available for sale investment securities
Mortgage loans originated
(12,765
(13,194
Proceeds from mortgage loans sold
10,983
13,466
(22
(68
Noncash compensation for stock option grants and restricted share units
191
50
Tax benefit for nonqualified stock options
249
(Increase) decrease in accrued interest receivable
(440
459
Decrease in accrued interest payable
(298
(130
Decrease in accrued salaries payable
(1,840
(1,756
Other, net
719
418
Net cash provided by operating activities
397
1,686
Cash flows from investing activities:
Net increase in loans
(74,300
(48,258
Purchases of available for sale debt and equity securities
(3,637
(10,601
Proceeds from sales of available for sale debt securities
9,995
37,753
Proceeds from redemption of equity securities
106
620
Proceeds from maturities and principal paydowns on available for sale debt and equity securities
21,437
4,798
Recoveries of loans previously charged off
34
Purchases of fixed assets
(626
(158
Net cash used in investing activities
(46,834
(15,814
Cash flows from financing activities:
Net (decrease) increase in non-interest bearing deposit accounts
(6,616
6,224
Net increase in interest bearing deposit accounts
3,780
58,017
Proceeds from Federal Home Loan Bank advances
146,300
15,000
Repayments of Federal Home Loan Bank advances
(87,720
(15,031
Decrease in federal funds purchased
(6,333
(8,381
Decrease in customer repurchase agreements
(979
Decrease in other borrowings
(279
Paydowns of notes payable
(250
Cash dividends paid
(350
(242
Proceeds from the exercise of common stock options
2,351
342
Net cash provided by financing activities
50,183
55,650
Net increase in cash and cash equivalents
3,746
41,522
Cash and cash equivalents, beginning of period
28,480
26,488
Cash and cash equivalents, end of period
32,226
68,010
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest
4,429
2,684
Income taxes
161
Noncash transactions:
Transfer to other real estate owned in settlement of loans
653
ENTERPRISE FINANCIAL SERVICES CORP AND SUBSIDIARIES Notes to Consolidated Financial Statements
NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Financial Statement 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”) 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, 2004. Enterprise Financial Services Corp (the “Company”) is a financial holding company that provides a full range of banking services to individual and corporate customers located in the St. Louis and Kansas City metropolitan markets through its subsidiary, Enterprise Bank & Trust (the “Bank”). 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 months ended March 31, 2005 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending December 31, 2005. The consolidated financial statements include the accounts of the Company. All significant intercompany accounts and transactions have been eliminated.
Certain amounts in the consolidated financial statements for the year ended December 31, 2004 and the three months ended March 31, 2004 have been reclassified to conform to the 2005 presentation. Such reclassifications had no effect on previously reported consolidated net income or shareholders’ equity.
Stock Options Plans
The Company applies the intrinsic-value-based method of accounting proscribed by Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations including FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25, issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. SFAS No. 123, Accounting for Stock-Based Compensation, established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period.
(In thousands, except per share data)
Net income, as reported
Add total stock-based employee compensation expense included in reported net income, net of tax
117
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax
(118
(346
Pro forma net income
2,446
1,181
Earnings per share:
Basic:
As reported
Pro forma
0.12
Diluted:
New Accounting Standards
On March 1, 2005, the Board of Governors of the Federal Reserve System, or Board, adopted a final rule, Risk-Based Capital Standards: Trust Preferred Securities and the Definition of Capital, that allows for the continued limited inclusion of trust preferred securities in Tier 1 capital. The Board’s final rule limits restricted core capital elements to 25% of the sum of all core capital elements, including restricted core capital elements, net of goodwill less any associated deferred tax liability. Amounts of restricted core capital elements in excess of these limits may generally be included in Tier 2 capital. Amounts of qualifying trust preferred securities and cumulative perpetual preferred stock in excess of the 25% limit may be included in Tier 2 capital, but limited, together with subordinated debt and limited-life preferred stock, to 50% of Tier 1 capital. In addition, the final rule provides that in the last five years before the maturity of the underlying subordinated note, the outstanding amount of the associated trust preferred securities is excluded from Tier 1 capital and included in Tier 2 capital, subject to one-fifth amortization per year. The final rule provides for a five-year transition period, ending March 31, 2009, for the application of the quantitative limits. Until March 31, 2009, the aggregate amount of qualifying cumulative perpetual preferred stock and qualifying trust preferred securities that may be included in Tier 1 capital is limited to 25% of the sum of the following core capital elements: qualifying common stockholders’ equity, qualifying noncumulative and cumulative perpetual preferred stock, qualifying minority interest in the equity accounts of consolidated subsidiaries and qualifying trust preferred securities. The Company has evaluated the impact of the final rule on the Company’s financial condition and results of operations, and determined the implementation of the Board’s final rule, as adopted, will not have a material impact on the Company’s regulatory capital ratios.
6
In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123(R), Share-Based Payment (“SFAS No. 123(R)”). SFAS No. 123(R) replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123(R) requires compensation costs related to share-based payment transactions to be recognized in the financial statements over the period that an employee provides service in exchange for the award.
The accounting provisions of SFAS 123(R) are effective for annual reporting periods beginning after June 15, 2005, therefore, the Company will be required to adopt SFAS 123R in the first quarter of fiscal 2006. The pro forma disclosures previously permitted under SFAS 123 will no longer be an alternative to financial statement recognition. See Note 1 in our Notes to Consolidated Financial Statements for the pro forma net income and net income per share amounts, for the quarters ended March 31, 2005, and March 31, 2004, as if we had used a fair-value-based method similar to the methods required under SFAS 123R to measure compensation expense for employee stock incentive awards. The Company expects the implementation of SFAS 123R will have no material effect on the Company’s consolidated financial position or results of operations.
In March 2004, the Emerging Issues Task Force (“EITF”) reached a consensus on criteria to evaluate whether to record a loss and disclose additional information about unrealized losses relating to debt and equity securities under EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. The consensus applies to investments in debt and marketable equity securities that are accounted under SFAS 115, Accounting for Certain Investments in Debt and Equity Securities, and SFAS 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. The Consensus divides the procedures into three sequential steps. The Company first determines whether the investment is impaired. If so, the next step is to determine whether the impairment is other-than-temporary. If it is other-than-temporary, the third step is to recognize the impairment loss in earnings. An investment is impaired if its fair value is less than its carrying value, and an impairment is other-than-temporary if the investor does not have the “ability and intent” to hold the investment until a forecasted recovery of its carrying amount. The loss recognized from an other-than-temporary impairment should equal the difference between the investment’s carrying value and its quoted market price. This establishes a new cost basis for the investment. The EITF has proposed a delay in the effective date of the requirement to record impairment losses caused by the effect of increases in interest rates on investments. The EITF is also determining how to assess the severity of the impairment as well as the effect of selling investments on the Company’s ability and intent to hold other securities until a forecasted recovery of fair value. Consequently, we are currently awaiting additional guidance from the EITF on EITF Issue No. 03-1 and are presently unable to determine its overall impact on our consolidated financial statements or results of operations.
In December 2003, the Accounting Standards Executive Committee, (“AcSEC”) issued SOP 03-3, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, effective for loans acquired in fiscal years beginning after December 15, 2004. The scope of SOP 03-3 applies to “problem” loans that have been acquired, either individually in a portfolio, or in an acquisition. These loans must have evidence of credit deterioration and the purchaser must not expect to collect contractual cash flows. SOP 03-3 updates Practice Bulletin (PB) No. 6, Amortization of Discounts on Certain Acquired Loans, for more recently issued literature, including FASB Statements No. 114, Accounting by Creditors for Impairment of a Loan; No. 115, Accounting for Certain Investments in Debt and Equity Securities; and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinquishments of Liabilities. Additionally, it addresses FASB Statement No. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, which requires that discounts be recognized as an adjustment of yield over a loan’s life.
SOP 03-3 states that an institution may no longer display discounts on purchased loans within the scope of SOP 03-3 on the balance sheet and may not carry over the allowance for loan losses. For those loans within the scope of SOP 03-3, this statement clarifies that a buyer cannot carry over the seller’s allowance for loan losses for the acquisition of loans with credit deterioration. Loans acquired with evidence of deterioration in credit quality since origination will need to be accounted for under a new method using an income recognition model. This prohibition also applies to purchases of problem loans not included in a purchase business combination, which would include syndicated loans purchased in the secondary market and loans acquired in portfolio sales. This guidance did not have a material effect on the Company’s consolidated financial position or results of operations.
7
NOTE 2 – EARNINGS PER SHARE
The following table shows the components of basic and diluted earnings per share (in thousands, except share and per share data) for the three months ended March 31, 2005 and 2004.
Basic
Weighted average common shares outstanding
Diluted
Effect of dilutive stock options and restricted share units (1)
599,082
301,998
(1) Represents average shares outstanding which would have resulted from the exercise of dilutive stock options and issuance of restricted share units.
NOTE 3 - SEGMENT DISCLOSURE
Following are the financial results and balance sheet information for the Company’s operating segments as of March 31, 2005 and December 31, 2004, and for the three months ended March 31, 2005 and 2004 (in thousands) (unaudited):
Balance Sheet Information:
Banking
Wealth Management
Corporate, Intercompany, and Reclassifications
Total
March 31, 2005
Deposits
937,616
(823
Borrowings
71,182
91,802
1,109,144
1,438
December 31, 2004
939,784
(156
19,914
20,870
40,784
1,058,538
1,412
Income Statement Information:
Three months ended March 31, 2005
10,757
19
(254
Noninterest income
606
Noninterest expense
5,819
1,111
787
Income (loss) before income tax expense
4,758
131
(1,033
Income tax expense (benefit)
1,734
(373
Net income (loss)
3,024
83
(660
Three months ended March 31, 2004
8,678
(307
615
5,411
873
586
3,285
(885
1,197
(323
2,088
(562
Management segregates the Company into three distinct businesses for evaluation purposes. The three segments are Banking, Wealth Management and Corporate. The segments are evaluated separately on their individual performance, as well as, their contribution to the Company as a whole.
The majority of the Company’s assets and income result from the Banking segment. The Bank consists of three banking branches and an operations center in the St. Louis County area and two banking branches in the Kansas City 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, 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.
9
Wealth Management 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 strategic planning issues.
The Corporate, Intercompany, and Reclassifications segment includes the holding company, merchant banking investments, and subordinated debentures. The Company incurs general corporate expenses and owns the Bank.
NOTE 4 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company utilizes interest rate swap derivatives as one method to manage some of its interest rate risks from recorded financial assets and liabilities. These derivatives are utilized when they can be demonstrated to effectively hedge a designated asset or liability and such asset or liability exposes the Bank to interest rate risk.
The Bank accounts for its derivatives under Statement of Financial Accounting Standards (SFAS) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities and SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. These Standards require recognition of all derivatives as either assets or liabilities in the balance sheet and require measurement of those instruments at fair value through adjustments to either the other comprehensive income, current earnings, or both, as appropriate.
The decision to enter into an interest rate swap is made after considering the asset/liability mix of the Bank, the desired asset/liability sensitivity and by interest rate levels. Prior to entering into a hedge transaction, the Bank formally documents the relationship between hedging instruments and hedged items, as well as the risk management objective for undertaking the various hedge transactions.
The following is a summary of the Company’s accounting policies for derivative instruments and its activities under SFAS No. 149 and SFAS No. 133.
Cash Flow Hedges – The Bank enters into interest rate swap agreements to convert floating-rate loan assets to fixed rates. The swap agreements provide for the Bank to pay a variable rate of interest equivalent to the prime rate and to receive a fixed rate of interest. Under the swap agreements the Bank is to pay or receive interest quarterly. Amounts to be paid or received under these swap agreements are accounted for on an accrual basis and recognized as interest income of the related asset. The net cash flows related to cash flow hedges increased interest income on loans by $12,000 and $321,000 during the three months ended March 31, 2005 and 2004, respectively. Increasing prime rates cause interest income from these interest rate swaps to decrease. In addition, a $20 million swap under which the Bank received a fixed rate of 6.97% matured in late January 2005.
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 reported as a component of other comprehensive income net of taxes. The ineffective portion of the change in the cash flow hedge’s gain or loss is recorded in earnings on each quarterly measurement date. At March 31, 2005 and December 31, 2004, $573,000 and $347,000, respectively, in deferred losses, net of tax, related to cash flow hedges were recorded in accumulated other comprehensive income. All cash flow hedges were effective; therefore, no gain or loss was recorded in earnings. The maximum term over which the Bank is hedging its exposure to the variability of future cash flows is approximately 1 year.
Fair Value Hedges - The Bank enters into interest rate swap agreements with the objective of converting the fixed interest rate on brokered CDs to a variable interest rate. The swap agreements provide for the Bank to pay a variable rate of interest based on a spread to the three-month London Interbank Offered Rate (LIBOR) and to receive a fixed rate of interest equal to that of the brokered CD (hedged instrument.) Under the swap agreements the Bank is to pay or receive interest semiannually. Amounts to be paid or received under these swap agreements are accounted for on an accrual basis and recognized as interest income or expense of the related liability. The net cash flows related to fair value hedges increased interest expense on certificates of deposit by $56,000 during the three months ended March 31, 2005. For the same period in 2004, the net cash flows related to fair value hedges decreased interest expense on certificates of deposit by $177,000.
Fair value hedges are accounted for at fair value. The swaps qualify for the “shortcut method” under SFAS No. 133. Based on this shortcut method, no ineffectiveness is assumed. As a result, changes in the fair value of the swaps directly offset changes in the fair value of the underlying hedged item (i.e., brokered CDs). All changes in fair value are measured on a quarterly basis.
The maturity dates, notional amounts, interest rates paid and received and fair value of our interest rate swap agreements as of March 31, 2005 and December 31, 2004 were as follows:
Cash Flow Hedges
(Dollars in thousands)
Notional amount
70,000
90,000
Weighted average pay rate
5.75
%
5.25
Weighted average receive rate
5.39
5.74
Weighted average maturity in months
13
Unrealized loss related to interest rate swaps
(879
(511
Fair Value Hedges
30,000
40,000
2.90
2.60
2.55
2.34
16
14
(575
(415
NOTE 5 - 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 Bank’s extent of involvement and maximum potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its consolidated balance sheets. At March 31, 2005 and December 31, 2004, no amounts have been accrued for any estimated losses for these financial instruments.
The contractual amount (in thousands) of off-balance-sheet financial instruments as of March 31, 2005 and December 31, 2004 is as follows:
Commitments to extend credit
299,034
296,561
Standby letters of credit
21,018
20,263
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. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate.
Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of the Bank’s customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. The approximate remaining terms of standby letters of credit range from 1 month to 5 years at March 31, 2005.
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, including the audited financial statements contained therein, filed with the Securities and Exchange Commission.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
Readers should note that in addition to the historical information contained herein, some of the information in this report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements typically are identified with use of terms such as “may,” “will,” “expect,” “anticipate,” “estimate” and similar words, although some forward-looking statements are expressed differently. You should be aware that the Company’s actual results could differ materially from those contained in the forward-looking statements due to a number of factors, including burdens imposed by federal and state regulation of banks, credit risk, availability of capital to fund the expansion of the Company’s business, exposure to local economic conditions, risks associated with rapid increase or decrease in prevailing interest rates, critical accounting policies and competition from banks and other financial institutions, all of which could cause the Company’s actual results to differ from those set forth in the forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
Overview
This discussion describes significant changes in the financial condition of the Company that have occurred during the first quarter of 2005 compared to December 31, 2004. In addition, this discussion summarizes the significant factors affecting the consolidated results of operations, liquidity and cash flows of the Company for the three months ended March 31, 2005 compared to the three months ended March 31, 2004. This discussion should be read in conjunction with the unaudited financial statements and accompanying notes presented in Part I, Item 1 of this report.
The first quarter of 2005 reflected continued growth in both the Banking and Wealth Management segments. The increasing interest rate environment had a favorable effect on the Company’s net interest income as rates on interest-bearing assets rose. In addition, the Company experienced significant loan growth as a result of continued efforts of the relationship officers in obtaining new and expanding existing relationships. However, rising rates also caused the costs of funds to increase on most of the Company’s deposit products.
The Company continued to develop and expand fee income opportunities. Wealth Management income increased 43% from $856,000 in the first quarter of 2004 to $1.2 million in the first quarter of 2005.
Results of Operations
Net income for the three months ended March 31, 2005 was $2.4 million, up 60% compared to the three months ended March 31 2004 of $1.5 million. Earnings per fully diluted share increased 53% to $0.23 per fully diluted share for the first quarter 2005 compared to $0.15 per fully diluted share in the first quarter 2004. Basic earnings per share for the first quarter 2005 were $0.25 compared to $0.16 for the same period in 2004.
Financial Condition
Total assets increased $51 million, or 5% from $1.06 billion at December 31, 2005 to $1.11 billion at March 31, 2005. Since December 31, 2004, loans and leases, net of unearned loan fees, have increased $74 million, or 8% from $899 million to $973 million. The growth in loans was funded by $29 million of short-term discount notes that matured and were not replaced and short-term advances from the Federal Home Loan Bank (“FHLB”).
Total deposits at March 31, 2005 were $937 million, a decrease of $3 million over total deposits of $940 million at December 31, 2004. Historically, deposits decline in the first quarter due to seasonal cash demands of our deposit client base. In the first quarter of 2004, a new client relationship deposited $30 million, which offset most of the seasonal reduction of deposits. During first quarter 2005, the Bank executed $30 million of brokered certificates of deposits, a net increase of $10 million from year-end.
FHLB advances were $69 million at March 31, 2005. This is a $51 million increase over December 31, 2004. The new advances have less than one-month maturities and were used to temporarily fund loan growth until replaced with core deposits. Management considers these advances from the FHLB an attractive alternative to higher-priced certificates of deposit or term fed funds.
Total shareholders’ equity was $77 million at March 31, 2005 compared to $73 million at December 31, 2004. The $4 million increase in equity is due to net income of $2.4 million for the three months ended March 31, 2005 and the exercise of incentive stock options by employees offset by dividends paid to shareholders and changes in accumulated other comprehensive income.
Net Interest Income
Net interest income, the most significant component of the Company’s earnings, is the difference between interest income earned on loans, investment securities and other interest-earning assets less interest expense on deposit accounts and other interest-bearing liabilities. The level of net interest income is determined by the mix and volume of interest-earning assets, interest-bearing deposits and borrowed funds, and by changes in interest rates. Business volumes are influenced by overall economic factors including inflation, market interest rates, business spending, consumer confidence and competitive conditions within the marketplace. Net interest rate margin represents net interest income on a tax equivalent basis as a percentage of average interest-earning assets during the period. Net interest rate margin is affected by the spread between average yields earned on interest-earning assets and the average rates paid on interest-bearing deposits and borrowings. The level of non-interest bearing funds, primarily consisting of demand deposits and stockholders’ equity, also affects the net interest rate margin.
Net interest income (on a tax-equivalent basis) was $10.7 million for the three months ended March 31, 2005, compared to $8.5 million for the same period of 2004, an increase of 25%. Average interest-earning assets increased $153 million, or 17% to $1.035 billion at March 31, 2005 compared to $882 million at March 31, 2004. Average interest-bearing liabilities increased $118 million, or 17% to $804 million at March 31, 2005 compared to $685 million at March 31, 2004.
Net interest rate margin (on a tax-equivalent basis) was 4.18% for the first quarter of 2005, up from 3.88% in the first quarter of 2004. The increase in net interest rate margin reflects a 75 basis point increase in yields on average interest-earning assets and a 58 basis point increase in the costs of average interest-bearing liabilities. The increase in average interest-earning asset yields was the result of prime rate increases in the latter half of 2004 and first quarter of 2005. Approximately two-thirds of the Company’s loan portfolio floats with the prime rate. The increase in cost of funds was primarily due to increases in money market and certificate of deposit rates.
The following table sets forth, on a tax-equivalent basis, information relating to the Company’s average balance sheet and reflects the average yield earned on interest-earning assets, the average cost of interest-bearing liabilities and the resulting net interest spread and net interest rate margin for the three months ended March 31, 2005 and 2004.
Average Balance
Percent of Total Assets
Interest Income/ Expense
Average Yield/ Rate
Interest-earning assets:
Taxable loans (1)
916,978
85.25
13,645
6.03
786,373
85.45
10,241
5.24
Tax-exempt loans(2)
17,655
1.64
8.66
17,156
1.86
327
7.67
Total loans
934,633
86.89
14,022
6.08
803,529
87.31
10,568
5.29
Taxable investments in debt and equity securities
96,132
8.94
746
3.15
54,632
5.94
429
3.16
Non-taxable investments in debt and equity securities(2)
1,585
4.09
1,653
0.18
15
3.65
Short-term investments
2,176
0.20
2.05
21,715
2.36
49
0.91
Total securities and short-term investments
99,893
9.29
773
3.14
78,000
8.48
493
2.54
Total interest-earning assets
1,034,526
96.18
14,795
5.80
881,529
95.79
11,061
5.05
Non-interest-earning assets:
33,263
3.09
28,089
3.05
Other assets
20,030
21,519
Allowance for loan losses
(12,144
(1.13
(10,823
(1.18
1,075,675
100.00
920,314
Interest-bearing liabilities:
85,071
7.91
0.72
55,605
6.04
0.28
414,926
38.57
1.74
373,028
40.53
0.93
4,198
0.39
0.48
4,235
0.46
Certificates of deposit
224,690
20.89
1,529
2.76
212,828
23.13
1,126
2.13
Total interest-bearing deposits
728,885
67.76
3,464
1.93
645,696
70.16
2,027
1.26
1.92
5.11
15,464
1.68
316
8.22
Borrowed funds
54,191
5.04
407
24,250
2.63
211
3.50
Total interest-bearing liabilities
803,696
74.72
2.08
685,410
74.38
1.50
Noninterest-bearing liabilities:
Demand deposits
191,024
17.76
163,103
17.72
Other liabilities
5,916
0.55
5,719
1,000,636
93.03
854,232
92.82
Shareholders' equity
75,039
6.98
66,082
7.18
Total liabilities & shareholders' equity
10,664
8,507
Net interest spread
3.72
3.55
Net interest rate margin(3)
4.18
3.88
(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 $189,000 and $133,000 for the quarters ended March 31, 2005 and 2004, respectively.
(2)
Non-taxable income is presented on a fully tax-equivalent basis assuming a tax rate of 36% for 2005 and 34% for 2004. The approximate tax-equivalent adjustments were $141,000 and $116,000 for the quarters ended March, 2005 and 2004, respectively.
(3)
Net interest income divided by average total interest-earning assets.
The following table sets forth, on a tax equivalent basis, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume for the three months ended March 31, 2005 and 2004.
2005 Compared to 2004 Increase (decrease) Due to
Volume(1)
Rate(2)
Net
Interest earned on:
Loans
1,777
1,627
3,404
Nontaxable loans (3)
41
318
Nontaxable investments in debt and equity securities (3)
(67
(38
2,036
1,698
3,734
Interest paid on:
28
84
112
105
815
920
63
340
403
(140
(56
226
(30
196
506
1,071
1,577
1,530
627
2,157
Change in volume multiplied by yield/rate of prior period.
Change in yield/rate multiplied by volume of prior period.
Nontaxable income is presented on a fully tax-equivalent basis assuming a tax rate of 36% in 2005 and 34% in 2004.
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 is affected by changes in the loan portfolio, management’s assessment of the collectability of the loan portfolio, loss experience and economic and market factors. A description of the process used to determine the loan loss provision is below. The allowance for loan losses as a percentage of total loans was 1.30% at March 31, 2005 compared to 1.30% at December 31, 2004 and 1.29% at March 31, 2004. At March 31, 2005, three relationships comprised $2.2 million, or 71% of the non-performing loans. The remaining non-performing loans represented four different relationships. At March 31, 2004, two relationships comprised $1.1 million, or 77% of the non-performing loans. One of the relationships was foreclosed and sold in first quarter 2005. The Company recovered $73,000 on the property. In March 2005, the Company also recovered $92,000 on a loan previously charged off.
The following table summarizes changes in the allowance for loan losses for the three months ended March 31, 2005 and 2004.
Allowance at beginning of period
10,590
Loans charged off:
Commercial and industrial
Real estate:
Commercial
427
Construction
Residential
Consumer and other
Total loans charged off
535
Recoveries of loans previously charged off:
73
94
Total recoveries of loans previously charged off:
Net loans (recovered) charged off
(188
501
Allowance at end of period
10,686
Average loans
830,948
Non-performing loans
3,134
1,480
Net (recoveries) charge-offs to average loans (annualized)
(0.08
)%
Allowance for loan losses to loans
1.30
1.29
Allowance for loan losses to non-performing loans
722
The Company’s credit management policies and procedures focus on identifying, measuring, and controlling credit exposure. These procedures employ a lender-initiated system of rating credits, which is ratified in the loan approval process and subsequently tested in internal loan reviews and regulatory bank examinations. The system requires rating all loans at the time they are made, and at each renewal date.
Adversely rated credits, including loans requiring close monitoring, which would normally not be considered criticized credits by regulators, are included on a monthly loan watch list. Other loans are added whenever any adverse circumstances are detected which might affect the borrower’s ability to meet the terms of the loan. This could be initiated by any of the following:
1)
delinquency of a scheduled loan payment;
2)
deterioration in the borrower’s financial condition identified in a review of periodic financial statements;
3)
decrease in the value of collateral securing the loan; or
4)
change in the economic environment in which the borrower operates.
Loans on the watch list require detailed loan status reports, including recommended corrective actions, prepared by the responsible loan officer every three months. These reports are then discussed in formal meetings with the Chief Credit Officer and Chief Executive Officer of the Bank.
Downgrades of loan risk ratings may be initiated by the responsible loan officer, internal loan review, or the credit analyst department at any time. Upgrades of risk ratings may only be made with the concurrence of the Chief Credit Officer and Loan Review.
In determining the allowance and the related provision for loan losses, three principal elements are considered:
•
specific allocations based upon probable losses identified during a monthly review of the loan portfolio;
allocations based principally on the Company’s risk rating formulas; and
an unallocated allowance based on subjective factors.
The first element reflects management’s estimate of probable losses based upon a systematic review of specific loans considered to be impaired. These estimates are based upon collateral exposure, if they are collateral dependent for collection. Otherwise, discounted cash flows are estimated and used to assign loss.
The second element reflects the application of the Company’s loan rating system. This rating system is similar to those employed by state and federal banking regulators. Loans are rated and assigned a loss allocation factor for each category that is consistent with our historical losses, adjusted for environmental factors. The higher the rating assigned to a loan, the greater the allocation percentage that is applied.
The unallocated allowance is based on management’s evaluation of conditions that are not directly reflected in the determination of the formula and specific allowances. The evaluation of the inherent loss with respect to these conditions is subject to a higher degree of uncertainty because they may not be identified with specific problem credits or portfolio segments. The conditions evaluated in connection with the unallocated allowance include the following:
general economic and business conditions affecting our key lending areas;
credit quality trends (including trends in nonperforming loans expected to result from existing conditions);
collateral values;
loan volumes and concentrations;
competitive factors resulting in shifts in underwriting criteria;
specific industry conditions within portfolio segments;
recent loss experience in particular segments of the portfolio;
bank regulatory examination results; and
findings of our internal loan review department.
Executive management reviews these conditions quarterly in discussion with the entire lending staff. To the extent that any of these conditions is evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s estimate of the effect of such conditions may be reflected as a specific allowance, applicable to such credit or portfolio segment. Where any of these conditions is not evidenced by a specifically identifiable problem credit or portfolio segment as of the evaluation date, management’s evaluation of the probable loss related to such condition is reflected in the unallocated allowance.
Based on this quantitative and qualitative analysis, provisions are made to the allowance for loan losses. Such provisions are reflected in the Company’s consolidated statements of income.
The allocation of the allowance for loan losses by loan category is a result of the analysis above. The allocation methodology applied by the Company, designed to assess the adequacy of the allowance for loan losses, focuses on changes in the size and character of the loan portfolio, changes in levels of impaired and other nonperforming loans, the risk inherent in specific loans, concentrations of loans to specific borrowers or industries, existing economic conditions,
17
and historical losses on each portfolio category. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. Management continues to target and maintain the allowance for loan losses equal to the allocation methodology plus an unallocated portion, as determined by economic conditions and other qualitative and quantitative factors affecting the Company’s borrowers, as described above.
Prior to 2004, the methods of calculating the allowance requirements had not changed significantly over time. The reallocations among different categories of loans that appear between periods were the result of the redistribution of the individual loans that comprise the aggregate portfolio due to the factors listed above. However, the perception of risk with respect to particular loans within the portfolio will change over time as a result of the characteristics and performance of those loans, overall economic and market trends, and the actual and expected trends in nonperforming loans. Consequently, while there are no specific allocations of the allowance resulting from economic or market conditions or actual or expected trends in nonperforming loans, these factors are considered in the initial assignment of risk ratings to loans, subsequent changes to those risk ratings and to a lesser extent in the size of the unallocated reserve amount.
The Bank had no loans 90 days past due still accruing interest at March 31, 2005 or December 31, 2004. The following table sets forth information concerning the Company’s non-performing assets as of the dates indicated:
Non-accrual loans
1,827
Total non-performing loans
Foreclosed real estate
Total non-performing assets
3,257
1,950
Total loans plus foreclosed property
972,925
898,628
Non-performing loans to loans
0.32
Non-performing assets to loans plus foreclosed property
0.33
0.22
Non-performing assets to total assets
0.29
The increase in nonperforming loans during the first quarter of 2005 consists of a $1.1 million credit that is secured by a first mortgage on a residential property and a $480,000 credit to a manufacturer. The increase was partially offset by a motel property that was foreclosed and sold during the first quarter of 2005. Five other borrowers represent the remainder.
Noninterest Income Noninterest income primarily consists of fees and service charges on deposit accounts, Wealth Management fee income and to a lesser extent, gains on sales of mortgage loans. Noninterest income was $1.8 million for the three months ended March 31, 2005, compared to $1.5 million for the same period in 2004. Wealth Management income was $1.2 million for the three months ended March 31, 2005, compared to $856,000 for the same period in 2004. This increase was the result of both increased assets under administration and a more favorable mix of managed versus custodial assets. Assets under administration in Enterprise Trust were $1.4 billion at March 31, 2005 versus $1.2 billion at March 31, 2004. Gains on the sale of mortgage loans were $22,000 for the three months ended March 31, 2005, compared to $68,000 for the same period in 2004. The decrease in mortgage gains in 2005 was due to higher demand for refinancing and purchase activities in the first three months of 2004.
Noninterest Expense Total noninterest expense was $7.7 million for the three months ended March 31, 2005, representing a $847,000, or 12% increase over the same period in 2004. Most of the increase was comprised of a $509,000 increase in employee compensation and benefits and a $275,000 increase in other expenses.
18
The increase in employee compensation and benefits was related to several factors. Payouts under the Company’s incentive bonus programs, which are tied to performance targets, increased $210,000. As a result of the higher compensation, payroll taxes increased $37,000. During the fourth quarter 2004, the Board of Directors accelerated the vesting on the Company’s outstanding stock options. Additional compensation expense of $45,000 related to the acceleration was incurred during the first quarter of 2005. Growth in the Wealth Management business increased commissions by $30,000. Effective January 1, 2005, the Board of Directors awarded restricted share units (“RSUs”) to selected personnel during the first quarter of 2005. RSUs will be expensed annually as they vest over five years. Compensation expense related to the RSUs was $112,000 in the first of quarter 2005. The remaining increase was attributable to annual merit increases for personnel, recruiting bonuses for new employees and increases in temporary help.
The increase in other expenses was the result of legal and professional and director expenses. Legal and professional expenses increased $135,000 for the first three months of 2005 compared to the same period in 2004. This increase was primarily due to additional expenses related to Sarbanes-Oxley 404 compliance. Director expenses increased $132,000 for the first three months of 2005 compared to the first three months of 2004. $29,000 of this increase was related to director stock appreciation rights which are marked to market on a quarterly basis based upon the Company’s stock price. The remaining increase in director expenses was due to increases in compensation to more competitive levels.
Income Taxes
The provision for income taxes was $1.4 million for the three months ended March 31, 2005 compared to $875,000 for the three months ended March 31, 2004. The effective tax rates for the first quarter of 2005 and 2004 were 36.5% and 36.4%, respectively.
Liquidity
The objective of liquidity management is to ensure the Company has the ability to generate sufficient cash or cash equivalents in a timely and cost-effective manner to meet its commitments as they become due. Funds are available from a number of sources, such as from the core deposit base and from loans and securities repayments and maturities. Additionally, liquidity is provided from sales of the securities portfolio, lines of credit with major banks, the Federal Reserve and the Federal Home Loan Bank, the ability to acquire large and brokered deposits and the ability to sell loan participations to other banks.
The Company’s liquidity management framework includes measurement of several key elements, such as the loan to deposit ratio, wholesale deposits as a percentage of total deposits, and various dependency ratios used by regulators. The Company’s liquidity framework also incorporates contingency planning to assess the nature and volatility of funding sources and to determine alternatives to these sources.
Strong capital ratios, credit quality and core earnings are essential to retaining cost-effective access to the wholesale funding markets. Deterioration in any of these factors could have an impact on the Company’s ability to access these funding sources and, as a result, these factors are monitored on an ongoing basis as part of the liquidity management process.
While core deposits and loan and investment repayment are principal sources of liquidity, funding diversification is another key element of liquidity management. Diversity is achieved by strategically varying depositor types, terms, funding markets, and instruments.
Investment securities are an important part of the Company’s liquidity objective. As of March 31, 2005, all of the investment portfolio was available for sale. Of the $92.6 million available for sale investment portfolio, $12.6 million was pledged as collateral for public deposits, treasury, tax and loan notes, and other requirements. The remaining securities could be pledged or sold to enhance liquidity if necessary.
The Bank has a variety of funding sources (in addition to key liquidity sources, such as core deposits, loan repayments, loan participations sold, and investment portfolio sales) available to increase financial flexibility. During the first quarter 2005, the Bank increased its reliance on FHLB borrowings as a funding source. At March 31, 2005, the Bank had $69 million of outstanding FHLB borrowings. Of the outstanding borrowings, $15.1 million were overnight funds and $45.0 million were short-term advances with one month or less maturities. At March 31, 2005, the Bank had an additional $84.5 million available for borrowing from the Federal Home Loan Bank of Des Moines under a blanket loan pledge, absent the Bank being in default of its credit agreement, and $26.6 million available from the Federal Reserve Bank under a pledged loan agreement. The Bank also has access to over $70.0 million in overnight federal funds purchased lines from various banking institutions. Finally, since the Bank is a “well-capitalized” institution, it has the ability to sell certificates of deposit through various national or regional brokerage firms, if needed.
Over the normal course of business, the Company enters into certain forms of off-balance sheet transactions, including unfunded loan commitments and letters of credit. These transactions are managed through the Company’s various risk management processes. Management considers both on-balance sheet and off-balance sheet transactions in its evaluation of the Company’s liquidity. The Company has $299 million in unused loan commitments as of March 31, 2005. The Company believes that the nature of these commitments are such that the likelihood of such a funding demand is very low.
Capital Adequacy
The Company and Bank are subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum 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 Company and Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company and Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets. The Company believes, as of March 31, 2005 and December 31, 2004, that the Company and Bank meet all Capital Adequacy requirements to which they are subject.
As of March 31, 2005 and December 31, 2004, the Bank was categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized” the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table.
The Company’s and Bank’s actual capital amounts and ratios are also presented in the table.
Actual
For Capital Adequacy Purposes
To Be Well Capitalized Under Applicable Action Provisions
Amount
Ratio
As of March 31, 2005:
Total Capital (to Risk Weighted Assets)
Enterprise Financial Services Corp
109,497
10.98
79,782
8.00
Enterprise Bank & Trust
103,584
10.39
79,772
99,715
10.00
Tier I Capital (to Risk Weighted Assets)
97,029
9.73
39,891
4.00
91,117
9.14
39,886
59,829
6.00
Tier I Capital (to Average Assets)
9.03
32,230
3.00
8.49
32,188
53,646
5.00
As of December 31, 2004:
103,673
11.19
74,086
99,545
10.76
74,036
92,545
92,096
9.94
37,043
87,976
9.51
37,018
55,527
8.44
32,725
8.08
32,659
54,432
21
Item 3 – Quantitative and Qualitative Disclosures About Market Risk
Market risk arises from exposure to changes in interest rates and other relevant market rate or price risk. The Company faces market risk in the form of interest rate risk through other than trading activities. Market risk from other than trading activities in the form of interest rate risk is measured and managed through a number of methods. The Company uses financial modeling techniques that measure the sensitivity of future earnings due to changing rate environments to measure interest rate risk. Policies established by the Company’s Asset/Liability Committee and approved by the Company’s Board of Directors limit exposure of earnings at risk. General interest rate movements are used to develop sensitivity as the Company feels it has no primary exposure to a specific point on the yield curve. These limits are based on the Company’s exposure to a 100 basis points and 200 basis points immediate and sustained parallel rate move, either upward or downward.
The following table (in thousands) presents the scheduled repricing of market risk sensitive instruments at March 31, 2005:
Year 1
Year 2
Year 3
Year 4
Year 5
Beyond 5 years or no stated maturity
ASSETS
Investments in debt and equity securities
3,056
36,990
44,981
693
6,844
Loans (1)
728,197
102,413
57,011
35,684
37,954
11,543
735,574
139,403
101,992
36,377
37,962
18,387
1,069,695
LIABILITIES
Savings, NOW, and Money market deposits
520,613
Certificates of deposit (1)
141,845
58,424
22,580
2,382
281
225,513
64,553
1,525
1,250
1,050
650
2,154
747,631
59,949
23,830
3,432
931
2,155
837,928
(1) Adjusted for the impact of the interest rate swaps.
Item 4 – Disclosure Control and Procedures
As of March 31, 2005, under the supervision and with the participation of the Company’s Chief Executive Officer (CEO) and the Chief Financial Officer (CFO), management has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2005, to ensure that information required to be disclosed in the Company’s periodic SEC filings is processed, recorded, summarized and reported when required. There were no significant changes in the Company’s internal controls over financial reporting for the quarter ended March 31, 2005, that have materially affected, or are reasonably likely to affect, those controls.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
There were no material changes in legal proceedings as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
(a)
During the quarter ended March 31, 2005, the Company issued 27,722 unregistered shares of its common stock to officers upon exercise of stock options pursuant to the 2002 Stock Incentive Plan (Plan V.) The aggregate value of unregistered shares issued was $368,375. The issuances were made in reliance upon the exemptions from registration (to the extent applicable) under Section 4(2) of the Securities Act of 1933.
(b)
Not applicable.
(c)
There were no repurchases of the Company’s common stock during the quarter ended March 31, 2005.
Item 3 – Defaults Upon Senior Securities
None.
Item 4 – Submission of Matters to a Vote of Securities Holders
Not applicable or required.
Item 5 – Other Information
Item 6 – Exhibits
Exhibit Number
Description
*11.1
Statement regarding computation of per share earnings
*31.1
Chief Executive Officer’s Certification required by Rule 13(a)-14(a).
*31.2
Chief Financial Officer’s Certification required by Rule 13(a)-14(a).
*32.1
Chief Executive Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002
*32.2
Chief Financial Officer Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to section § 906 of the Sarbanes-Oxley Act of 2002
* Filed herewith
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 day of May 6, 2005.
By:
/s/ KEVIN C. EICHNER
Kevin C. Eichner
Chief Executive Officer
/s/ FRANK H. SANFILIPPO
Chief Financial Officer
Frank H. Sanfilippo