1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K /x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1997 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from to Commission file number 333-14737 ENTERBANK HOLDINGS, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 43-1706259 (State or other jurisdiction of incorporation (I.R.S. Employer 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 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of Form 10-K /x/ State the aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 15, 1998: Common Stock, par value $.01, $47,996,738 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of March 15, 1998: Common Stock, par value $.01, 2,305,112 shares outstanding ===============================================================================
2 <TABLE> ENTERBANK HOLDINGS, INC. 1997 ANNUAL REPORT ON FORM 10-K <CAPTION> Page ---- <S> <C> Selected Financial Data 1 Business 2 Market for Common Stock 6 Dividends 6 Description of Capital Stock 6 Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Supervision and Regulation 23 Management 26 Beneficial Ownership of Securities 29 Certain Related Party Transactions 30 Independent Auditors' Report 31 Consolidated Financial Statements 32 Signatures 56 Exhibit Index 57 </TABLE>
3 <TABLE> SELECTED FINANCIAL DATA ----------------------- <CAPTION> Year ended December 31, ------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------- (Dollars and number of shares in thousands, except per share data) <S> <C> <C> <C> <C> <C> STATEMENT OF INCOME DATA Interest income $ 18,759 $ 12,554 $ 10,914 $ 7,374 $ 5,770 Interest expense 8,582 5,569 4,887 2,570 2,083 -------- -------- -------- -------- ------- Net interest income 10,177 6,985 6,027 4,804 3,687 Provision for loan losses 775 345 631 450 162 -------- -------- -------- -------- ------- Net interest income after provision for loan losses 9,402 6,640 5,396 4,354 3,525 Noninterest income 476 1,239 836 805 744 Noninterest expense 6,339 5,146 4,187 3,551 3,106 -------- -------- -------- -------- ------- Income before income tax expense 3,539 2,733 2,045 1,608 1,163 Income tax expense 1,317 1,031 741 607 411 -------- -------- -------- -------- ------- Net income 2,222 1,702 1,304 1,001 752 ======== ======== ======== ======== ======= Basic earnings per share 1.06 1.11 0.89 0.68 0.51 Diluted earnings per share 1.00 0.97 0.77 0.62 0.48 Cash dividends per common share .09 0.08 0.07 0.06 0.05 Basic weighted average common shares and common stock equivalents outstanding<F1> 2,095 1,538 1,463 1,462 1,460 Diluted weighted average common shares and common stock equivalents outstanding<F1> 2,225 1,751 1,685 1,614 1,561 =========================================================================================================================== BALANCE SHEET DATA Cash and due from banks $ 13,897 $ 9,261 $ 8,110 $ 5,930 $ 4,872 Federal funds sold 32,825 23,250 16,230 11,300 10,125 Investments in debt and equity securities: Available for sale 12,515 14,006 16,065 15,740 2,999 Held to maturity 919 1,240 842 802 6,680 -------- -------- -------- -------- ------- Total investments 13,434 15,246 16,907 16,542 9,679 -------- -------- -------- -------- ------- Loans, net of unearned loan fees <F2> 225,560 134,133 110,464 85,687 72,215 Allowance for loan losses 2,510 1,765 1,400 1,000 722 Total assets 291,365 184,584 153,706 122,212 99,266 Total deposits 264,301 168,961 141,140 104,799 89,113 Note payable -- 300 -- -- -- Shareholders' equity 26,067 14,758 12,052 10,781 9,943 Book value per common share 11.34 8.88 8.24 7.38 6.81 Tangible book value per common share 11.32 8.84 8.19 7.38 6.81 =========================================================================================================================== SELECTED RATIOS Return on average assets 0.97% 1.12% 0.99% 0.96% 0.84% Return on average equity 9.78 12.73 11.13 9.71 7.83 Total capital to risk-weighted assets 12.28 11.53 11.40 11.75 14.12 Leverage ratio 8.93 7.96 7.81 8.89 10.02 Net yield on average earning assets 8.84 8.90 9.00 7.78 7.14 Cost of interest-bearing liabilities 5.03 4.89 4.94 3.36 3.11 Net interest margin 4.79 4.96 4.98 5.07 4.57 Nonperforming loans as a percent of loans 0.02 0.12 0.10 0.00 0.78 Nonperforming assets as a percent of assets 0.29 0.56 0.64 1.45 2.08 Net loan charge offs (recoveries) as a percent of average loans 0.02 (0.02) 0.24 0.23 0.07 Allowance for loan losses as a percent of loans, net of unearned loan fees 1.11 1.32 1.27 1.17 1.00 =========================================================================================================================== <FN> <F1> Reflects the results of a stock offering and a private placement of common stock in February and October 1997 (see "Market for Common Stock". <F2> Excludes loans held for sale. </TABLE> 1
4 BUSINESS -------- Enterbank Holdings, Inc. (the "Company") was incorporated under the laws of the State of Delaware on December 30, 1994, and was formed for the sole purpose of providing a holding company structure for the ownership of Enterprise Bank, a Missouri banking corporation. The Company acquired Enterprise Bank (the "Bank") in May 1995 through a tax-free exchange by Bank shareholders. The bank holding company ownership structure gives the Bank a source of capital and financial strength and allows the organization some flexibility in expanding the products and services offered to clients. The Bank began operations on May 9, 1988 as a newly formed and charted Missouri financial institution. From 1988 through 1996, commercial banking services had been provided to Bank customers from a single location in the City of Clayton, St. Louis County, Missouri. During 1996, the Bank received regulatory approval for two additional facilities located in St. Charles County and the City of Sunset Hills which opened in their permanent facilities in July and September 1997, respectively. The Company organized Enterprise Capital Resources, Inc. ("Capital Resources") in 1995 as a wholly owned subsidiary to provide merchant banking services to closely-held businesses and their owners. Capital Resources formed a wholly owned subsidiary, Enterprise Capital Management, Inc. ("Capital Management"), which manages and acts as the general partner of The Enterprise Fund, L.P., a licensed Small Business Investment Company ("SBIC") under the regulations of the Small Business Administration, providing venture capital to growing companies. In March 1998, Capital Resources changed its name to Enterprise Merchant Banc, Inc. ("Merchant Banc"). In 1997, the Company organized Enterprise Financial Advisors ("Financial Advisors") as a division of the Bank to provide fee-based personal financial planning, estate planning, and corporate planning services to the Company's target market. The Company entered into solicitation and referral agreements with Moneta Group, Inc., a financial planning company, as part of the organization of Financial Advisors. As used herein, unless the context indicates otherwise, Enterbank Holdings, Inc. and all of its subsidiaries are referred collectively as the "Organization". The Company's executive offices are located at 150 North Meramec, Clayton, Missouri 63105. The Company's telephone number is (314) 725-5500. STRATEGY The Company's strategy is to provide a complete range of financial services designed to appeal to closely-held businesses, their owners, and to professionals in the St. Louis metropolitan area, which encompasses the city of St. Louis, Missouri, the Missouri counties of St. Louis, St. Charles, Jefferson, Franklin, Lincoln and Warren and the Illinois county of St. Clair. The Company's merchant banking operation targets a larger geographic area which includes all of Missouri and the adjoining states. The Company's goal is to grow its operations within its defined market niche by being well-managed, well-capitalized and disciplined in its approach to managing and expanding its operations as growth opportunities arise. The Company believes its goals can be achieved while providing attractive returns to shareholders. Growth and return on shareholders' equity are the financial performance indicators the Company considers most critical in measuring success. Through the Bank, the Company currently delivers a full range of commercial banking services to the closely-held business market. Merchant banking and venture capital services are conducted through Merchant Banc and Capital Management. Financial planning services are offered through Financial Advisors. The Company plans to continue to expand the range of services it provides within its market niche while expanding the base of customers to which it provides its current services. 2
5 THE BANK The Bank offers a broad range of commercial and personal banking services to its customers. Loans include commercial, commercial real estate, financial and industrial development, real estate construction and development, residential real estate and a small amount of consumer loans. Other services include cash management, safe-deposit boxes, and lock boxes. The Company's primary source of funds has historically been customer deposits. The Company offers a variety of accounts for depositors designed to attract both short-term and long-term deposits. These accounts include certificates of deposit, savings accounts, money market accounts, checking and negotiable order to withdrawal accounts, and individual retirement accounts. Interest-bearing accounts earn interest at rates established by management based on competitive market factors and management's desire to increase or decrease certain types of deposits. Management believes the Bank is able to compete effectively in its market because the Company's officers and senior management maintain close working relationships with their commercial customers and their businesses; the Bank's management structure enables it to react to customer requests for loan and deposit services more quickly than larger competitors; the Bank's management and officers have significant experience in the communities serviced by the Bank; and the Company continues to target the closely-held business and professional market. Additionally, industry consolidation has resulted in fewer independent banks and fewer banks serving the Bank's target market niche. Management believes the Bank is the only bank in its market area whose primary strategy is to focus on closely-held businesses, their owners and the professional market. The Bank's historical growth strategy has been both customer and asset driven. The Bank continuously seeks to add customers that fit its target market. This strategy has enabled the Bank to attract customers whose borrowing needs have grown along with the Bank's increasing capacity to fund its customers' loan requests. Additionally, the Bank has increased its loan portfolio based on lending opportunities developed by relationship officers. The Bank funds its loan growth by attracting deposits from its business and professional customers and by attracting wholesale deposits which are considered stable deposit sources and which are priced at levels below the Bank's alternative cost of borrowing funds. The Bank's operating strategy results in efficient operating ratios despite its increasing investment in sales personnel whose goal is to expand the number and depth of the Bank's customer relationships. The Bank can expand its customer relationships and control operating costs by operating a small number of offices with a high per office asset base; emphasizing commercial loans which tend to be larger than retail loans; employing an experienced staff, all of whom are rewarded on the basis of performance and customer service; improving data processing and operational systems to increase productivity and control risk; leasing facilities so that capital can be deployed more effectively to support growth in earning assets; and outsourcing services where possible. The Bank has a strong orientation toward commercial banking, with a specific focus on closely-held businesses, their owners, and professionals located in its target service areas. The Bank stresses personal service, flexibility in structuring loan and deposit relationships which meet customers' needs and timely responsiveness to the needs of customers. Senior management of the Bank makes it a practice to maintain close working relationships and personal contact with each of its commercial customers. The Bank's Board of Directors is comprised primarily of business owners and professionals who fit the current and target customer profile of the Bank. The Board of Directors takes an active role in the Bank's business development activities and the credit review process. Its input and understanding of the needs of the Bank's current and target customers has been critical in the Bank's past success and will be critical in the Bank's plans for future growth. The Bank has historically had low turnover of relationship officers, and its policy is to keep officers assigned to accounts for long periods of time. This practice improves each officer's understanding of clients' businesses resulting in knowledgeable credit assessments and superior customer service. 3
6 Relationship officers are supported by credit analysts and other support personnel who are familiar with each assigned customer, creating a team approach to serving customers' needs. A significant portion of the Bank's new business results from referrals from existing customers. The Bank's growth in loans has been due in large measure to its strategy of targeting closely-held businesses and to the relationships and experience of the Bank's management and directors in the St. Louis community. The Loan Committee of the Bank consists of all members of the Board of Directors, who serve on a rotating basis. Generally, loan requests over $150,000 are initially reviewed by a committee of management officials, which includes among others, the Presidents of all geographic banking units and the Chief Executive Officer. This group has authority to approve loans when the aggregate loan balance of all the borrower's loans (including loans to affiliated entities) is less than $625,000. Loan requests where the borrower's aggregate loan balance is above $625,000 are also reviewed and examined by the respective geographic banking units' board committees. Loan requests when the borrower's aggregate loan balance is above $1,500,000 require approval of the Bank's full Board of Directors. Notwithstanding the required Board Committee approvals where the aggregate loan balance is greater than $625,000, all such loans are subsequently reported to the full Board of Directors for review and comment. MARKET AREAS AND APPROACH TO EXPANSION Recent expansion efforts include the establishment of banking facilities in St. Charles County and the City of Sunset Hills based on the high expectations for growth in those markets and the high concentration of closely-held businesses and professionals in those markets. As mentioned above, the Company believes that local management and the involvement of a Board of Directors comprised of local business persons and professionals are key ingredients for success. Management believes that credit decisions, pricing matters, business development strategies, etc. should be made locally by managers who have an equity stake in the Company (see "Management.") The Company, as part of its expansion effort, plans to continue its strategies of operating a small number of offices with a high per office asset base, emphasizing commercial loans, and employing experienced staff who are rewarded on the basis of performance and customer service. The following is a list of the Bank's current facilities: <TABLE> <CAPTION> Operating Unit Address - -------------- ------- <S> <C> Enterprise Bank, Clayton 150 North Meramec, Clayton, Missouri 63105 Enterprise Bank, St. Charles 300 St. Peters Center Blvd., St. Peters, Missouri 63376 Enterprise Bank, Sunset Hills 3890 South Lindbergh Blvd., Sunset Hills, Missouri 63127 </TABLE> ENTERPRISE MERCHANT BANC Merchant Banc, a wholly owned subsidiary of the Company, was organized in 1995 to provide merchant banking services to closely-held businesses and their owners as part of the Company's overall strategy to deliver financial services to that market. Operations to date have consisted of the formation of the Enterprise Fund (the "Fund"), a licensed SBIC formed in 1995 under the regulations of the Small Business Administration ("SBA") and, to a lesser extent, fee-based services related to capital formation and company acquisition. Capital Management, a wholly owned subsidiary of Merchant Banc, manages and acts as the general partner of the Fund. The Fund provides venture capital to growing companies which qualify under the SBA's definition of a small business eligible for investment by an SBIC. The Fund may also participate in certain qualifying management buy-out situations involving companies eligible for investment by an SBIC. The Fund began its operations in the fourth quarter of 1995. The Fund's committed capital is approximately $10.3 million, of which $1 million was committed by the Company as a limited partner. Capital Management collects annual management fees of 2% of committed capital, plus an incentive payment based upon the investment results achieved over the ten year life of the Fund. 4
7 ENTERPRISE FINANCIAL ADVISORS Financial Advisors, a division of the Bank, was organized in October of 1997 to provide fee-based personal financial planning, estate planning, and corporate planning services to the Company's target market. As part of the organization of Financial Advisors, the Company entered into solicitation and referral agreements with Moneta Group, Inc. ("Moneta"). These agreements call for Moneta to provide planning services for Financial Advisors' customers under a revenue sharing agreement. In addition, Moneta will refer customers, when appropriate, to the Bank and receive a share of the revenue generated in the form of options in the Company's common stock. The agreements with Moneta also allow Financial Advisors to immediately begin offering a full range of products and services with the depth and expertise of a large planning firm. Financial Advisors will continue to expand products and services available to customers as the division develops. INVESTMENTS The Company's investment policy is designed to enhance net income and return on equity through prudent management of risk; ensure liquidity to meet cash-flow requirements; help manage interest rate risk; ensure collateral is available for public deposits, advances and repurchase agreements; and manage asset diversification. The Company, through the Asset/Liability Management Committee ("ALCO"), monitors investment activity and manages its liquidity by structuring the maturity dates of its investments to meet anticipated customer funding needs. However, the primary goal of the Company's investment policy is to maintain an appropriate relationship between assets and liabilities while maximizing interest rate spreads. Accordingly, the ALCO monitors the sensitivity of its assets and liabilities with respect to changes in interest rates and maturities and directs the overall acquisition and allocation of funds. FACILITIES The Company's banking facilities are leased under agreements that expire in 1999, 2015, and 2012 for Clayton, St. Charles County and the City of Sunset Hills, respectively. The Company has the option to renew the Clayton facility lease for three additional five-year periods with future rentals to be agreed upon. The Company has no future rental options for the St. Charles County facility; however, during the term of the lease, the monthly rentals are adjusted periodically based on then current market conditions and inflation. The Company has the option to renew the Sunset Hills facility lease for two additional five-year periods with future rentals to be agreed upon. One section of the Clayton facility is sublet and the proceeds are used to reduce the Company's occupancy expenses. Rent expense amounted to $436,524, $319,002 and $285,178 in 1997, 1996 and 1995, respectively, and sublease rental income amounted to $35,422, $77,568 and $82,394 in 1997, 1996 and 1995 respectively. The Company leases its Clayton facility from a partnership in which a director and an officer have an ownership interest. The future minimum rental commitments required under the leases are as follows: <TABLE> <CAPTION> Year Amount ---- ------ <S> <C> 1998 $684,957 1999 480,243 2000 377,887 2001 377,887 2002 377,887 ======== </TABLE> For leases which renew or are subject to periodic rental adjustments, the monthly rental payments will be adjusted based on then current market conditions and rates of inflation. 5
8 EMPLOYEES At December 31, 1997, the Company had approximately 86 employees, which included nine part-time employees. None of the Company's employees are covered by a collective bargaining agreement. Management believes that its relationship with its employees is good. MARKET FOR COMMON STOCK ----------------------- As of March 15, 1998, the Company had approximately 500 common stock shareholders of record. The common stock has not been traded on an exchange or in any established public trading market, although there have been a limited number of transactions in the common stock that have been made known to the Company. Based solely on the information made available to the Company from a limited number of buyers and sellers, the Company believes the selling prices for the common stock ranged, during 1996, from $13.00 per share to $13.75 per share and, during 1997, from $15.50 per share to $20.25 per share. There was a single transaction in 1996 between two Directors of the Company at $15.00 per share involving additional consideration beyond the purchase of the stock. There may have been other transactions at other prices not known to the Company. On February 14, 1997, the Company completed a stock offering of 451,612 shares of common stock. These shares were offered to the public at $15.50 per share. The offering allowed for the sale of a minimum of 193,548 shares, or $3,000,000, and a maximum of 451,612 shares, or $7,000,000, in common stock. The maximum number of shares were sold at $15.50 per share. On October 31, 1997, the Company completed a private placement of its common stock allowing a maximum of 131,343 shares of common stock to be purchased. These shares were offered in a private sale to Moneta principals related to the previously mentioned agreements with Moneta. These shares were offered at $16.75 per share, and 130,940 shares were sold at $16.75. Since the Company does not expect to list its common stock on any exchange or seek quotation of common stock on the National Association of Securities Dealers Automated Quotation System (NASDAQ) in the near future, no established public trading market for the common stock is expected to develop in the foreseeable future. DIVIDENDS --------- The holders of shares of common sock of the Company are entitled to receive dividends when, as, and if declared by the Company's Board of Directors out of funds legally available for the purpose of paying dividends. The amount of dividends, if any, that may be declared by the Company will be dependent on many factors, including future earnings, capital requirements and business conditions as they affect the Bank. As a result, no assurance can be given that dividends will be paid in the future with respect to the cmmon sock. The Company declared and paid dividends quarterly during calendar years 1997, 1996 and 1995, in annual amounts of $.09, $.08 and $.07 per share, respectively. DESCRIPTION OF CAPITAL STOCK ---------------------------- COMMON STOCK The authorized capital stock of the Company consists of 3,000,000 shares of common stock, par value $.01 per share (the "Common Stock"). Holders of Common Stock are entitled to one vote per share on all matters on which the holders of Common Stock are entitled to vote and may cumulate their votes in any election of directors. Holders of Common Stock have no preemptive, conversion, redemption, or sinking fund rights. In the event of a liquidation, dissolution or winding-up of the Company, holders of Common Stock are entitled to share equally and ratably in the assets of the Company, if any, remaining after the payment of all debts and liabilities of the Company. 6
9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- INTRODUCTION The following discussion and analysis is intended to review the significant factors of the financial condition and results of operations of the Company for the three-year period ended December 31, 1997. Reference should be made to the accompanying consolidated financial statements and the selected financial data presented elsewhere and herein for an understanding of the following review. FINANCIAL CONDITION Total assets at December 31, 1997 were $291 million, an increase of $106 million, or 57%, over total assets of $185 million at December 31, 1996. Loans were $226 million, an increase of $92 million, or 69%, over total loans of $134 million at December 31, 1996. Federal funds sold and investment securities were $46 million, an increase of $8 million, or 21%, from total federal funds sold and investment securities of $38 million at December 31, 1996. Total deposits at December 31, 1997 were $264 million, an increase of $95 million, or 56%, over total deposits of $169 million at December 31, 1996. Deposit growth occurred in all categories during 1997. Most of the deposit growth occurred in the money market deposits. Money market deposits grew $44 million, or 81%, during 1997. Growth in transaction and money market deposit accounts is attributed primarily to direct calling efforts of relationship officers. Certificates of deposits under $100,000 grew $21 million, or 52%, which is in line with total deposit growth of 56%. Growth in certificates of deposits is due to an advertising program during the second half of the year. The advertising program produced over $18 million net growth in certificates of deposit during 1997. Total shareholders' equity increased $11 million primarily due to retained earnings of $2 million for the year, proceeds of $7 million and $2 million from two separate sales of common stock in February and October, and the exercise of incentive stock options by some employees. RESULTS OF OPERATIONS Net income was $2.2 million for the year ended December 31, 1997, an increase of 29% over net income of $1.7 million for the same period in 1996 which was a 31% increase over 1995 net income of $1.3 million. Diluted earnings per share for the years ended December 31, 1997, 1996 and 1995 were $1.00, $0.97 and $0.77, respectively. In 1997, basic and diluted earnings per share did not increase in line with the increase in net income due to an increase in weighted average common stock equivalents. Weighted average common stock equivalents increased primarily from the issuance of 451,612 and 130,940 shares of common stock on February 14, 1997 and October 31, 1997, respectively, in two common stock offerings. NET INTEREST INCOME The largest component of the Company's net income is net interest income. Net interest income (presented on a tax equivalent basis) was $10.2 million, which yielded a net interest margin of 4.79%, for the year ended December 31, 1997, compared to net interest income and net interest margin of $7.0 million and 4.96%, and $6.0 million and 4.98% for the same period in 1996 and 1995, respectively. The $3.2 million, or 46%, increase in net interest income was driven primarily by a $71 million increase in average earning assets to $213 million for the year ended December 31, 1997 compared to $20 million of earning asset growth during the same period in 1996. Some of the increase was offset by a lower average earning asset yield, growth in interest bearing deposits and higher cost of deposits. 7
10 The yield on average earning assets decreased to 8.84% for the year ended December 31, 1997 from 8.90% and 9.00% for the same period in 1996 and 1995, respectively. The mix of earning assets changed slightly from higher yielding assets, such as loans, to lower yielding assets, such as federal funds sold and investment securities. This change in asset mix accounts for most of the .06% drop in the yield on earning assets between 1997 and 1996. Average loans as a percent of average total assets decreased to 77.89% in 1997 from 79.14% in 1996 and increased from 71.84% in 1995. For the same period, the yield on average loans was 9.48%, 9.47% and 9.92% respectively. The decrease in loan yield in 1996 compared to 1995 offset the margin benefits obtained by increasing the loan to asset ratio during the same period. The yield on interest bearing deposits increased to 5.03% for the year ended December 31, 1997 from 4.89% for the same period in 1996. The yield on interest-bearing deposits decreased to 4.89% for the year ended December 31, 1996 from 4.94% for the same period in 1995. Deposits shifted from lower yielding transaction accounts to higher yielding money market accounts during 1997 resulting in the increase in interest expense. 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 year ended December 31: 8
11 <TABLE> <CAPTION> Year ended December 31, --------------------------------------------------------------------------------- 1997 1996 --------------------------------------- --------------------------------------- Percent Interest Average Percent Interest Average Average of Total Income/ Yield/ Average of Total Income/ Yield/ Balance Assets Expense Rate Balance Assets Expense Rate ------- ------ ------- ---- ------- ------ ------- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> Interest-earning assets: Loans <F1> $177,532 77.89% $16,834 9.48% $120,849 79.14% $11,449 9.47% Taxable investments in debt and equity securities 17,859 7.84 1,018 5.70 12,300 8.05 693 5.63 Nontaxable investments in debt securities <F2> 805 0.35 52 6.46 860 0.56 57 6.63 Federal funds sold 16,679 7.32 909 5.45 7,526 4.93 396 5.26 Certificates of deposit 38 0.02 2 5.26 -- -- -- 0.0 -------- ------ ------- -------- ------ ------- Total interest-earning assets 212,913 93.42 18,815 8.84 141,535 92.68 12,595 8.90 ------- ------- Noninterest-earning assets; Cash and due from banks 11,580 5.08 8,686 5.69 Office equipment and leasehold improvements 1,677 0.74 1,789 1.17 Prepaid expenses and other assets 3,829 1.68 2,215 1.45 Allowance for loan losses (2,085) (0.91) (1,520) (0.99) -------- ------ -------- ------ Total assets $227,914 100.00% $152,706 100.00 ======== ====== ======== ====== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Interest-bearing transaction accounts $ 15,840 6.95% $ 452 2.85% 13,180 8.63% $ 332 2.52% Money market 77,198 33.87 3,604 4.67 44,710 29.28 2,007 4.49 Savings 1,270 0.56 32 2.52 1,105 0.72 33 2.99 Certificates of deposit 77,081 33.82 4,521 5.87 54,756 35.86 3,181 5.81 Notes payable 25 0.01 3 12.00 205 0.13 15 7.35 Federal funds purchased 105 0.05 11 10.48 18 0.01 1 5.56 -------- ------ ------- ----- -------- ------ ------- ---- Total interest-bearing liabilities 171,519 75.26 8,623 5.03 113,974 74.63 5,569 4.89 ------- ------- Noninterest-bearing liabilities: Demand deposits 33,247 14.59 24,427 16.00 Other liabilities 426 0.19 932 0.61 -------- ------ -------- ------ Total liabilities 205,192 90.03 139,333 91.24 Shareholders' equity 22,722 9.97 13,373 8.76 -------- ------ -------- ------ Total liabilities and shareholder's equity $227,914 100.00% $152,706 100.00% ======== ====== ======== ====== Net interest income $10,192 $ 7,026 ======= ======= Net interest margin 4.79% 4.96% ===== ==== <CAPTION> Year ended December 31, ----------------------------------------- 1995 ----------------------------------------- Percent Interest Average Average of Total Income/ Yield Balance Assets Expense Rate ------- ------ ------- ---- <S> <C> <C> <C> <C> Interest-earning assets: Loans <F1> $ 94,737 71.84% $ 9,394 9.92% Taxable investments in debt and equity securities 13,093 9.93 745 5.69 Nontaxable investments in debt securities <F2> 687 0.52 42 6.11 Federal funds sold 12,837 9.73 745 5.80 Certificates of deposit 63 0.05 2 3.17 -------- ------ ------- Total interest-earning assets 121,417 92.07 10,928 9.00 ------- Noninterest-earning assets; Cash and due from banks 7,856 5.96 Office equipment and leasehold improvements 766 0.58 Prepaid expenses and other assets 3,025 2.30 Allowance for loan losses (1,196) (0.91) -------- ------ Total assets $131,868 100.00 ======== ====== Liabilities and Shareholders' Equity: Interest-bearing liabilities: Interest-bearing transaction accounts $ 14,002 10.62% $ 352 2.51% Money market 38,084 28.88 1,741 4.57 Savings 1,068 0.81 32 3.00 Certificates of deposit 45,669 34.63 2,760 6.04 Notes payable -- -- -- -- Federal funds purchased 41 0.03 2 4.88 -------- ------ ------- Total interest-bearing liabilities 98,864 74.97 4,887 4.94 ------- Noninterest-bearing liabilities: Demand deposits 20,532 15.57 Other liabilities 755 0.57 -------- ------ Total liabilities 120,151 91.11 Shareholders' equity 11,717 8.89 -------- ------ Total liabilities and shareholder's equity $131,868 100.00% ======== ====== Net interest income $ 6,041 ======= Net interest margin 4.98% ==== <FN> - ----------------------- <F1> Average balances include non-accrual loans and loans held for sale. The Company had $1,324,244 in loans held for sale at December 31, 1997. The income on non-accrual loans is included in interest but is recognized only upon receipt. Loan fees included in interest income are approximately $671,000, $474,000, and $385,000 for 1997, 1996 and 1995, respectively. <F2> Nontaxable investment income is presented on a fully tax-equivalent basis assuming a tax rate of 34%. </TABLE> 9
12 During 1997, an increase in the average volume of earning assets caused an increase in interest income of $6,186,000. Interest income increased $34,000 due to an increase in rates on earning assets. Increases in the average volume of interest-bearing demand deposits, savings and money market accounts, time deposits and notes payable resulted in an increase in interest expense of $2,890,000. Changes in interest rates on the average volume of interest-bearing liabilities resulted in an increase in interest expense of $164,000. The net effect of the volume and rate changes associated with all categories of interest-earning assets during 1997 as compared to 1996 increased interest income by $6,220,000 while the net effect of the volume and rate changes associated with all categories of interest-bearing liabilities increased interest expense by $3,054,000. During 1996, an increase in the average volume of earning assets caused an increase in interest income of $2,172,000. Interest income decreased $505,000 due to a decrease in rates on earning assets. Increases in the average volume of interest-bearing demand deposits, savings and money market accounts, time deposits and notes payable resulted in an increase in interest expense of $812,000. Changes in interest rates on the average volume of interest-bearing liabilities resulted in a decrease in interest expense of $130,000. The net effect of the volume and rate changes associated with all categories of interest-earning assets during 1996 as compared to 1995 increased interest income by $1,667,000 while the net effect of the volume and rate changes associated with all categories of interest-bearing liabilities increased interest expense by $682,000. The following table sets forth, on a tax-equivalent basis for the periods indicated, a summary of the changes in interest income and interest expense resulting from changes in yield/rates and volume: <TABLE> <CAPTION> 1997 Compared to 1996 1996 Compared to 1995 Increase (Decrease) Due to Increase (Decrease) Due to ------------------------------------ -------------------------------- Volume<F1> Rate<F2> Net Volume<F1> Rate<F2> Net ---------- -------- --- ---------- -------- --- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Interest earned on: Loans $5,375 $ 10 $5,385 $2,490 $(435) $2,055 Taxable investments in debt and equity securities 317 8 325 (45) (7) (52) Nontaxable investments in debt and equity securities <F3> (4) (1) (5) 14 1 15 Federal funds sold 498 15 513 (285) (64) (349) Certificates of deposit -- 2 2 (2) -- (2) ------ ----- ------ ------ ----- ------ Total interest-earning assets $6,186 34 6,220 2,172 (505) 1,667 ------ ----- ------ ------ ----- ------ Interest paid on: Interest-bearing transaction accounts $ 72 $ 48 $ 120 $ (21) $ 1 $ (20) Money market 1,514 83 1,597 298 (32) 266 Savings 5 (6) (1) 1 -- 1 Certificates of deposit 1,309 31 1,340 520 (99) 421 Notes payable (18) 6 (12) 15 -- 15 Federal funds purchased 8 2 10 (1) -- (1) ------ ----- ------ ------ ----- ------ Total interest-bearing liabilities 2,890 164 3,054 812 (130) 682 ------ ----- ------ ------ ----- ------ Net interest income $3,296 $(130) $3,166 $1,360 $(375) $ 985 ====== ===== ====== ====== ===== ====== <FN> <F1> Change in volume multiplied by yield/rate of prior period. <F2> Change in yield/rate multiplied by volume of prior period. <F3> Nontaxable investments in debt securities are presented on a fully tax-equivalent basis assuming a tax rate of 34%. NOTE: The change in interest due to both rate and volume has been allocated to rate and volume changes in proportion to the relationship of the absolute dollar amounts of the change in each. </TABLE> 10
13 LOAN PORTFOLIO Loans, as a group, are the largest asset and the primary source of interest income for the Company. Diversification among different categories of loans reduces the risks associated with any single type of loan. The following table sets forth the composition of the Company's loan portfolio by type of loans at the dates indicated: <TABLE> <CAPTION> December 31, -------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------------------- ------------------- ------------------ ---------------- ---------------- Percent Percent Percent Percent Percent of Total of Total of Total of Total of Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ ----- ------ ----- ------ ----- ------ ----- ------ ----- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Commercial and industrial $ 69,490 30.81% $ 43,876 32.71% $ 43,728 39.59% $30,001 35.01% $30,896 42.78% Real estate: Commercial 37,349 16.56 24,946 18.60 25,507 23.09 22,333 26.06 16,746 23.19 Construction 47,771 21.18 23,362 17.42 11,634 10.53 10,186 11.89 7,638 10.58 Residential 63,772 28.27 37,449 27.92 24,537 22.21 21,483 25.07 16,109 22.31 Consumer and other 7,178 3.18 4,500 3.35 5,058 4.58 1,684 1.97 826 1.14 -------- ------ -------- ------ -------- ------ ------- ------ ------- ------ Total loans $225,560 100.00% $134,133 100.00% $110,464 100.00% $85,687 100.00% $72,215 100.00% ======== ====== ======== ====== ======== ====== ======= ====== ======= ====== </TABLE> The Company's subsidiary bank grants commercial, residential and consumer loans primarily in the St. Louis metropolitan area. The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio is secured by real estate. As of December 31, 1997, $148.9 million in loans, or 66% of the loan portfolio, involved real estate as part or all of the collateral package, as compared to $85.8 million or 64% and $61.7 million or 56% in 1996 and 1995, respectively. Of these loans, $55.2 million or 37%, for 1997, were personal and business loans and loans on owner-occupied properties as compared to $32.6 million or 38% and $23.5 million or 38% for 1996 and 1995, respectively. Management views these types of loans as having less risk than traditional real estate loans because the primary source of repayment for these loans is not dependent upon the cash flow or sale of the real estate securing the loans. When evaluating the appropriateness of the allowance for loan losses, these loans are evaluated based on commercial considerations such as the financial condition, cash flow and income of the borrower as well as the value of all collateral securing the loans, including the market value of any real estate securing the loan. 11
14 The following table sets forth the interest rate sensitivity of the loan portfolio at December 31, 1997: <TABLE> <CAPTION> Loans Maturing or Repricing --------------------------- After One In One Through After Year or Less Five Years Five Years Total ------------ ---------- ---------- ----- (Dollars in Thousands) <S> <C> <C> <C> <C> FIXED RATE LOANS <F1> - ---------------- Commercial and industrial $ 2,234 12,015 592 14,841 Real estate: Commercial 6,737 14,980 -- 21,717 Construction 3,701 3,888 -- 7,589 Residential 4,635 24,116 -- 28,751 Consumer and other 938 1,622 -- 2,560 -------- ------ --- ------- Total $ 18,245 56,621 592 75,458 ======== ====== === ======= VARIABLE RATE LOANS <F1> - ------------------- Commercial and industrial $ 54,649 -- -- 54,649 Real estate: Commercial 15,632 -- -- 15,632 Construction 40,182 -- -- 40,182 Residential 35,022 -- -- 35,022 Consumer and other 4,617 -- -- 4,617 -------- ------ --- ------- Total $150,102 -- -- 150,102 ======== ====== === ======= LOANS <F1> - ----- Commercial and industrial $ 56,883 12,015 592 69,490 Real estate: Commercial 22,369 14,980 -- 37,349 Construction 43,883 3,888 -- 47,771 Residential 39,657 24,115 -- 63,772 Consumer and other 5,555 1,623 -- 7,178 -------- ------ --- ------- Total $168,347 56,621 592 225,560 ======== ====== === ======= <FN> <F1> Loan balances are shown net of unearned loan fees. </TABLE> PROVISION FOR LOAN LOSSES The provision for loan losses was $775,000, $345,000 and $631,000 in 1997, 1996 and 1995, respectively. During 1997, the increase in provision reflects an increase in net loan charge-offs to $30,000 as compared to net recoveries of $20,000 for the year ended December 31, 1996. In addition, the Company experienced loan growth of $92 million during 1997 versus loan growth of $24 million during the same period in 1996. The Company was able to decrease provision expense in 1996 as compared to 1995 based upon continued quality of the loan portfolio and net recoveries of $20,000 during 1996 as compared to net losses of $231,000 during 1995. In addition, the Company experienced loan growth of $24 million during 1996 versus $25 million during the same period in 1995. The Company has charged off a total of $404,000 in loans from January 1, 1995 through December 31, 1997. Total recoveries for the same period are $163,000, resulting in a three-year net charge-off experience of $241,000, or 0.06% per year of average loans for the same period. 12
15 The following table summarizes changes in the allowance for loan losses arising from loans charged-off and recoveries on loans previously charged-off, by loan category, and additions to the allowance that have been charged to expense: <TABLE> <CAPTION> December 31, ----------------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- -------- -------- ------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> Allowance at beginning of period $ 1,765 $ 1,400 $ 1,000 $ 722 $ 606 --------- -------- -------- ------- ------- Loans charged off: Commercial and industrial 90 -- 19 45 27 Real estate: Commercial 45 -- 118 132 -- Construction -- -- -- -- -- Residential 27 -- 106 -- 32 Consumer and other -- -- -- 14 -- --------- -------- -------- ------- ------- Total loans charged off 162 -- 243 191 59 --------- -------- -------- ------- ------- Recoveries of loans previously charged off: Commercial and industrial 44 -- -- 18 9 Real estate: Commercial 50 4 12 -- -- Construction -- -- -- -- -- Residential 38 15 -- -- 3 Consumer and other -- 1 -- 1 1 --------- -------- -------- ------- ------- Total recoveries of loans previously charged off 132 20 12 19 13 --------- -------- -------- ------- ------- Net loans charged off (recovered) 30 (20) 231 172 46 --------- -------- -------- ------- ------- Provisions charged to operations 775 345 631 450 162 --------- -------- -------- ------- ------- Allowance at end of period $ 2,510 $ 1,765 $ 1,400 $ 1,000 $ 722 ========= ======== ======== ======= ======= Average loans $ 177,532 $120,849 $ 94,737 $76,263 $64,290 Total loans, net of unearned loan fees 225,560 134,133 110,464 85,687 72,215 Nonperforming loans 50 161 107 -- 566 Net charge-offs (recoveries) to average loans 0.02% (0.02%) 0.24% 0.23% 0.07% Allowance for loan losses to total loans, net of unearned loan fees 1.11 1.32 1.27 1.17 1.00 Allowance for loan losses to nonperforming loans 5,020.00 1,096.27 1,308.41 N/A 127.56 </TABLE> The allowance for loan losses is maintained at a level considered adequate to provide for potential losses. The provision for loan losses is based on a periodic analysis which considers, among other factors, current economic conditions, loan portfolio composition, past loan loss experience, independent appraisals, loan collateral and payment experience. In addition to the allowance for estimated losses on identified problem loans, an overall unallocated allowance is established to provide for unidentified credit losses inherent in the portfolio. As adjustments to the allowance for loan losses become necessary, they are reflected in the results of operations in the periods in which they become known. 13
16 Management believes the allowance for loan losses is adequate to absorb losses in the loan portfolio. While management uses available information to recognize loan losses, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies may require the Company to increase the allowance for loan losses based on their judgments and interpretations about information available to them at the time of their examinations. While the Company has benefited from very low historical net charge-offs during an extended period of rapid loan growth, management remains cognizant that historical loan loss and nonperforming asset experience may not be indicative of future results. If the experience were to deteriorate and additional provisions for loan losses were required, future operating results would be negatively impacted. Both management and the Board of Directors continually monitor changes in asset quality, market conditions, concentration of credit and other factors, all of which impact the credit risk associated with the Company's loan portfolio. As of December 31, 1997 and 1996, the Company had eleven and eight impaired loans in the amount of $967,000 and $636,000, respectively, all of which are considered potential problem loans. Non-performing assets decreased from $1,035,000 as of December 31, 1996 to $856,000 as of December 31, 1997. Nonperforming assets increased from $988,000 as of December 31, 1995 to $1,035,000 as of December 31, 1996. The following table sets forth information concerning the Company's nonperforming assets as of the dates indicated: <TABLE> <CAPTION> December 31, ------------------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> Nonaccrual loans $ 50 $ 131 $ 107 $ -- $ 566 Loans past due 90 days or more and still accruing interest -- 30 -- -- -- Restructured loans -- -- -- -- -- -------- -------- -------- -------- ------- Total nonperforming loans 50 161 107 -- 566 Foreclosed property 806 874 881 1,776 1,496 -------- -------- -------- -------- ------- Total nonperforming assets $ 856 $ 1,035 $ 988 $ 1,776 $ 2,062 ======== ======== ======== ======== ======= Total assets $291,365 $184,584 $153,706 $122,212 $99,266 Total loans, net of unearned loan fees 225,560 134,133 110,464 85,687 72,215 Total loans plus foreclosed property 226,366 135,007 111,345 87,463 73,711 Nonperforming loans to total loans 0.02% 0.12% 0.10% 0.00% 0.78% Nonperforming assets to total loans plus foreclosed property 0.38 0.77 0.89 2.03 2.80 Nonperforming assets to total assets 0.29 0.56 0.64 1.45 2.08 </TABLE> The Company's policy is to discontinue the accrual of interest on loans when principal or interest is due and has remained unpaid for 90 days or more. 14
17 The following table sets forth the allocation of the allowance for loan losses by loan category as an indication of the estimated risk of loss for each loan type. The unallocated portion of the allowance is intended to cover loss exposure related to potential problem loans for which no specific allowance has been estimated and for the possible risks in the remainder of the loan portfolio. <TABLE> <CAPTION> December 31, ----------------------------------------------------------------------------------- 1997 1996 1995 ----------------------- ----------------------- ---------------------- Percent Percent Percent of of of Category Category Category Total Total Total Allowance Loans Allowance Loans Allowance Loans --------- ----- --------- ----- --------- ----- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> Commercial and industrial $ 656 30.81% $ 423 32.71% $ 348 39.59% Real estate: Commercial 316 16.56 253 18.60 265 23.09 Construction 465 21.18 413 17.42 93 10.53 Residential 605 28.27 381 27.92 510 22.21 Consumer and other 82 3.18 56 3.35 44 4.58 Not allocated 386 -- 239 -- 140 -- ------ ------ ------ ------ ------ ------ Total $2,510 100.00% $1,765 100.00% $1,400 100.00% ====== ====== ====== ====== ====== ====== <CAPTION> December 31, ---------------------------------------------------- 1994 1993 ---------------------- --------------------- Percent Percent of of Category Category Total Total Allowance Loans Allowance Loans --------- ----- --------- ----- (Dollars in Thousands) <S> <C> <C> <C> <C> Commercial and industrial $ 247 35.01% $212 42.78% Real estate: Commercial 218 26.06 145 23.19 Construction 69 11.89 41 10.58 Residential 350 25.07 214 22.31 Consumer and other 16 1.97 110 1.14 Not allocated 100 -- -- -- ------ ------ ---- ------ Total $1,000 100.00% $722 100.00% ====== ====== ==== ====== </TABLE> The above allocation by loan category does not mean that actual loan charge-offs will be incurred in the categories indicated. The risk factors considered in determining the above allocation are the same as those used when determining the overall level of the allowance. NONINTEREST INCOME The following table depicts the annual changes in various noninterest income categories: <TABLE> <CAPTION> 1996 versus 1997 1995 versus 1996 ------------------------------------- ------------------------------------- $ Change 1997 1996 $ Change 1996 1995 -------- -------- --------- -------- ---------- ------- <S> <C> <C> <C> <C> <C> <C> Merchant Banc management fee (49,500) $158,600 208,100 109,425 $ 208,100 98,675 Service charges on deposit accounts 44,038 173,452 129,414 (2,226) 129,414 131,640 Merchant credit card income (600,981) -- 600,981 38,532 600,981 562,449 Gain on sale of mortgage loans 78,948 78,948 -- -- -- -- Gain on sale of credit card operation (320,000) -- 320,000 320,000 320,000 -- Loss on investment in the Enterprise Fund L.P. 57,786 (4,904) (62,690) (54,468) (62,690) (8,222) Other noninterest income 25,892 69,879 43,987 (7,742) 43,987 51,729 -------- -------- --------- ------- ---------- ------- Total noninterest income (763,817) $475,975 1,239,792 403,521 $1,239,792 836,271 ======== ======== ========= ======= ========== ======= </TABLE> Total noninterest income was $475,975 in 1997, representing a $763,817 or 62% decrease from 1996. The decrease is primarily attributed to merchant credit card income. The company sold its merchant credit card portfolio in November 1996 for a gain of $320,000. Noninterest income, excluding merchant credit card income and the gain on the sale of the credit card operation, increased $157,164 or 49%, in 1997 as compared to 1996. This increase is attributed to the gain on sale of mortgage loans and an increase in service charges on a larger deposit base. Total noninterest income was $1,239,792 in 1996, representing a $403,521 or 48% increase from 1995. The increase is primarily the result of a $109,425 increase in the management fee earned by Merchant Banc and a $320,000 gain on the sale of the credit card operations. 15
18 NONINTEREST EXPENSE The following table depicts the annual changes in various noninterest expense categories: <TABLE> <CAPTION> 1996 versus 1997 1995 versus 1996 -------------------------------------------------------------------------------------- $ Change 1997 1996 $ Change 1996 1995 ---------- --------- --------- --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> Salaries and employee benefits $ 975,945 3,841,585 2,865,640 $ 822,680 2,865,640 2,042,960 Occupancy 218,268 552,063 333,795 58,616 333,795 275,179 Equipment 81,560 227,061 145,501 24,907 145,501 120,594 FDIC insurance premiums 19,846 21,846 2,000 (122,944) 2,000 114,944 Data processing (10,448) 237,248 247,696 38,429 247,696 209,267 Merchant credit card expense (441,991) -- 441,991 (13,727) 441,991 455,718 Other noninterest expense 349,062 1,458,773 1,109,711 141,650 1,109,711 968,061 ---------- --------- --------- --------- --------- --------- Total noninterest income $1,192,242 6,338,576 5,146,334 $ 959,611 5,146,334 4,186,723 ========== ========= ========= ========= ========= ========= </TABLE> Noninterest expense increased $1,192,242, or 23%, and $959,611, or 23%, from 1996 to 1997 and 1995 to 1996, respectively. The increases are primarily due to increases in salaries and employee benefits and occupancy and equipment expenses, offset by a reduction of $441,991 in 1997 of expenses related to the previously mentioned credit card operation. Increases in noninterest expenses are primarily related to the two new banking facilities located in St. Charles County and the City of Sunset Hills and normal increases associated with growth. On August 8, 1995, the FDIC voted to reduce the deposit insurance premiums paid by most members of the Bank Insurance Fund (BIF) and to keep existing assessment rates intact for members of the Savings Association Insurance Fund (SAIF). The Company's banking subsidiary is a member of the BIF. Under the reduced assessment rate schedule for the BIF, the best rated institutions will pay an annual rate of four cents per $100 of assessable deposits, down from the previous rate of 23 cents per $100. The SAIF members will continue to pay the 23 cents per $100 of assessable deposits. The reduction in the assessment rate schedule became effective June 1, 1995. In addition, as a result of the continued improvement in the capitalization of the FDIC's BIF, the assessment rate schedule for the best rated BIF members was further reduced to the statutory annual minimum payment of $2,000, effective January 1, 1996. In response to concerns that the insurance premium disparity between the BIF and the SAIF could have a negative effect on SAIF insured institutions and the SAIF, legislation was enacted by Congress to, among other things, eliminate the deposit insurance premium disparity by merging the BIF and SAIF into a new Deposit Insurance Fund on January 1, 1999. This legislation is not expected to have a significant effect on the Company. YEAR 2000 In 1997, the Company organized a formal program to address the implications of Year 2000 issues. The Company completed the assessment, analysis and planning phases and is in the implementation phase of the project. Testing of the systems will be conducted throughout 1998. The Company expects expenditures related to Year 2000 issues to be immaterial. INCOME TAXES Income tax expense was $1,316,590, $1,031,344 and $741,091 for 1997, 1996 and 1995, respectively. The effective tax rate was 37%, 38% and 36% for the years ended December 31, 1997, 1996, and 1995, respectively. 16
19 LIQUIDITY AND INTEREST RATE SENSITIVITY Liquidity is provided by the Company's earning assets, including short-term investments in federal funds sold, maturities in the loan portfolio, maturities in the investment portfolio, amortization of term loans, and by the Company's deposit inflows, proceeds from borrowings, and retained earnings. The following table reflects the Company's GAP analysis (rate sensitive assets minus rate sensitive liabilities) as of December 31, 1997: <TABLE> <CAPTION> Over After After 3 Months 1 Year 5 Years 3 Months Through 12 Through or No Stated or Less Months 5 Years Maturity Total -------- ---------- ------- ------------ ----- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> Assets: Investments in debt and equity securities $ 9,324 3,100 421 589 13,434 Interest-bearing deposits 50 98 -- -- 148 Federal funds sold 32,825 -- -- -- 32,825 Loans, net of unearned loan fees 157,350 10,997 56,621 592 225,560 -------- -------- ------ ------ ------- Total interest-sensitive assets $199,549 14,195 57,042 1,181 271,967 -------- -------- ------ ------ ------- Liabilities: Interest-bearing transaction accounts $ 22,520 -- -- -- 22,520 Money market and savings accounts 100,068 -- -- -- 100,068 Certificates of deposit 26,880 63,453 5,212 115 95,660 -------- -------- ------ ------ ------- Total interest-sensitive liabilities $149,468 63,453 5,212 115 218,248 -------- -------- ------ ------ ------- Interest-sensitivity GAP GAP by period $ 50,081 (49,258) 51,830 1,066 53,719 ======== ======== ====== ====== ======= Cumulative GAP $ 50,081 823 52,653 53,719 53,719 ======== ======== ====== ====== ======= Ratio of interest-sensitive assets to interest-sensitive liabilities: Periodic 1.34 0.22 10.94 10.27 1.25 Cumulative GAP 1.34 1.00 1.24 1.25 1.25 ======== ======== ====== ====== ======= </TABLE> As indicated in the preceding table, the Company was asset sensitive on a cumulative basis in the near term (three months or less) at December 31, 1997 based on contractual maturities. In this regard, a decrease in the general level of interest rates would generally have a negative effect on the Company's net interest income as the repricing of the larger volume of interest sensitive assets would create a larger reduction in interest income as compared to the reduction in interest expense created by the repricing of the smaller volume of interest sensitive liabilities. 17
20 MARKET RISK The Company's exposure to market risk is reviewed on a regular basis by the 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 inherent risk while at the same time maximizing income. Management realizes certain risks are inherent and that the goal is to identify and minimize those risks. Tools used by management include the standard GAP report. The Bank has no market risk sensitive instruments held for trading purposes. The following tables present the scheduled maturity of market risk sensitive instruments at December 31, 1997: <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 $ 12,424 106 -- 315 -- 589 $ 13,434 Interest-bearing deposits 148 -- -- -- -- -- 148 Federal funds sold 32,825 -- -- -- -- -- 32,825 Loans, net of unearned loan fees 168,347 15,184 26,363 3,772 11,302 592 225,560 -------- ------ ------ ----- ------ ----- -------- Total $213,744 15,290 26,363 4,087 11,302 1,181 $271,967 ======== ====== ====== ===== ====== ===== ======== Liabilities: Savings, Now, Money Market deposits $122,588 -- -- -- -- -- 122,588 Certificates of deposit 90,332 4,243 277 193 500 115 95,660 -------- ------ ------ ----- ------ ----- -------- Total $212,920 4,243 277 193 500 115 $218,248 ======== ====== ====== ===== ====== ===== ======== <CAPTION> Average Estimated Total Interest Rate Fair Value ----- ------------- ---------- <S> <C> <C> <C> Assets: Investment in debt and equity securities $ 13,434 5.70% 13,435 Interest-bearing deposits 148 4.47 148 Federal funds sold 32,825 5.45 32,825 Loans, net of unearned 225,560 9.48 225,287 loan fees Liabilities: Savings, Now, Money Market deposit $122,588 4.33% 122,588 Certificates of deposit 95,660 5.87 95,898 </TABLE> 18
21 BALANCE SHEET TREND The following table summarizes certain trends in the Company's balance sheet during the three-year period ended December 31, 1997: <TABLE> <CAPTION> December 31, ----------------------------------------------- 1997 1996 1995 -------- -------- -------- (Dollars in Thousands) <S> <C> <C> <C> Total assets $291,365 $184,584 $153,706 Earning assets 271,967 172,629 143,601 Deposits 264,301 168,961 141,140 Loans to deposits 85.34% 79.39% 78.27% Loans to total assets 77.41 72.67 71.87 Investment securities to total assets 4.61 8.26 11.00 Earning assets to total assets 93.34 93.52 93.43 ======== ======== ======== Loans $225,608 $134,150 $110,496 Unearned loan fees (48) (17) (32) -------- -------- -------- Net loans $225,560 $134,133 $110,464 ======== ======== ======== Investment securities - AFS $ 12,515 $ 14,006 $ 16,065 Investment securities - HTM 919 1,240 842 -------- -------- -------- Total investments $ 13,434 $ 15,246 $ 16,907 ======== ======== ======== Investment securities - AFS $ 12,515 $ 14,006 $ 16,065 Investment securities - HTM 919 1,240 842 Federal funds sold 32,825 23,250 16,230 Interest-bearing deposits 148 -- -- Net loans 225,560 134,133 110,464 -------- -------- -------- Total earning assets $271,967 $172,629 $143,601 ======== ======== ======== </TABLE> The ratio of earning assets to total assets remained relatively constant at 93% over the three years ending December 31, 1997. Earning assets increased $99,338,000 and $29,028,000, or 58% and 20%, for the years ended December 31, 1997 and 1996, respectively. Total assets increased $106,781,000 and $30,878,000, or 58% and 20%, during the same periods, respectively. The following table shows, for the periods indicated, the average annual amount and the average rate paid by type of deposit: <TABLE> <CAPTION> December 31, ------------------------------------------------------------------------------------------- 1997 1996 1995 ----------------------------- ---------------------------- ------------------------- (Dollars in Thousands) Average Interest Average Interest Average Interest Balance Expense Rate Balance Expense Rate Balance Expense Rate ------- -------- ---- ------- -------- ---- ------- ------- ---- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Noninterest-bearing demand deposits $ 33,247 $ -- --% $ 24,427 $ -- --% $ 20,532 $ -- --% Interest-bearing transaction accounts 15,840 452 2.85 13,180 332 2.52 14,002 352 2.51 Money market accounts 77,198 3,604 4.67 44,710 2,007 4.49 38,084 1,741 4.57 Savings accounts 1,270 32 2.52 1,105 33 2.99 1,068 32 3.00 Certificates of deposit 77,081 4,521 5.87 54,756 3,181 5.81 45,669 2,760 6.04 -------- ------ -------- ------ -------- ------ $204,636 $8,609 4.21% $138,178 $5,553 4.02% $119,355 $4,885 4.09% ======== ====== ==== ======== ====== ==== ======== ====== ==== </TABLE> 19
22 Since inception, the Company has experienced rapid loan and deposit growth primarily due to aggressive direct calling efforts of relationship officers and sustained economic growth in the local market served by the Company. Recent growth is also attributed to the new locations in St. Charles County and the City of Sunset Hills. Management has pursued closely-held businesses whose management desires a close working relationship with a locally-managed, full-service bank. Due to the relationships developed with these customers, management views large deposits from this source a stable deposit base. Additionally, the Company belongs to a national network of time depositors (primarily credit unions) who place time deposits with the Company, typically in increments of $99,000. The Company has used this source of deposits for over four years and considers it to be a stable source of deposits that allows the Company to acquire funds at a cost below its alternative cost of funds. There were $31 million of deposits from the national network with the Company at December 31, 1997 and 1996. The following table sets forth the amount and maturity of certificates of deposit that had balances of more than $100,000 at December 31, 1997: <TABLE> <CAPTION> Remaining Maturity Amount ------------------ ------ (Dollars in Thousands) <S> <C> Three months or less $14,144 Over three through six months 5,225 Over six through twelve months 11,732 Over twelve months 1,725 ------- $32,826 ======= </TABLE> The table below sets forth the carrying value of investment securities held by the Company at the dates indicated: <TABLE> <CAPTION> December 31, ------------------------------------------------------------------------- 1997 1996 1995 ------------------------ --------------------- ------------------- Percent Percent Percent of Total of Total of Total Amount Securities Amount Securities Amount Securities ------ ---------- ------ ---------- ------ ---------- (Dollars in Thousands) <S> <C> <C> <C> <C> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies $11,963 89.05% $13,850 90.84% $15,698 92.85% Municipal bonds 881 6.56 891 5.85 792 4.68 Mortgage-backed securities 38 0.28 44 0.29 50 0.30 Federal Home Loan Bank stock 552 4.11 461 3.02 367 2.17 ------- ------ ------- ------ ------- ------ $13,434 100.00% $15,246 100.00% $16,907 100.00% ======= ====== ======= ====== ======= ====== </TABLE> As of December 31, 1997, debt securities with an amortized cost of $919,163 were classified as held-to-maturity securities; debt and equity securities with an amortized cost of $12,516,952 were classified as available-for-sale securities; the market valuation account for the available-for-sale securities was adjusted to approximately $2,231 to decrease the recorded balance of such securities at December 31, 1997 to fair value on that date. As of December 31, 1996, debt securities with an amortized cost of $1,240,183 were classified as held to maturity securities, and debt and equity securities with an amortized cost of $13,995,643 were classified as available for sale securities. The market valuation account for the available for sale securities was adjusted to approximately $10,154 to increase the recorded balance of such securities at December 31, 1996 to fair value on that date. As of December 31, 1995, debt securities with an amortized cost of $841,732 were classified as held to maturity securities, and debt and equity securities with an amortized cost of $16,102,111 were classified as available for sale securities. The market valuation account for the available for sale securities was 20
23 adjusted to $36,910 to decrease the recorded balance of such securities at December 31, 1995 to fair value on that date. The change in the market valuation account and related components resulted from reinvestment of maturing investments at higher market rates in 1995. The following table summarizes maturity and yield information on the investment portfolio at December 31, 1997: <TABLE> <CAPTION> Carrying Value Yield <F1> -------- ---------- (Dollars in Thousands) <S> <C> <C> U.S. Treasury securities and obligations of U.S. government corporations and agencies: 0 to 1 year $11,963 5.81% 1 to 5 years -- -- 5 to 10 years -- -- No stated maturity -- -- ------- ---- Total $11,963 5.81% ======= ==== Municipal bonds: 0 to 1 year $ 460 6.38% 1 to 5 years 421 6.71 5 to 10 years -- -- No stated maturity -- -- ------- ---- Total $ 881 6.54% ======= ==== Mortgage-backed securities: 0 to 1 year $ -- -- 1 to 5 years -- -- 5 to 10 years -- -- No stated maturity 38 6.54% ------- ---- Total 38 6.54% ======= ==== Federal Home Loan Bank stock: 0 to 1 year $ -- -- 1 to 5 years -- -- 5 to 10 years -- -- No stated maturity 552 6.71% ------- ---- Total $ 552 6.71% ======= ==== Total 0 to 1 year $12,424 5.83% 1 to 5 years 421 6.71 5 to 10 years -- -- No stated maturity 589 6.70 ------- ---- Total $13,434 5.90% ======= ==== <FN> <F1> Weighted average tax-equivalent yield </TABLE> The asset/liability management process, which involves management of the components of the balance sheet to allow assets and liabilities to reprice at approximately the same time, is an ever-changing process essential to minimizing the effect of interest rate fluctuations on net interest income. 21
24 CAPITAL ADEQUACY On February 14, 1997, the Company completed a stock offering of 451,612 shares of common stock registered under the Securities Act of 1933 on Form S-1. These shares were offered to the public at $15.50 per share. The offering allowed for the sale of a minimum of 193,548 shares, or $3,000,000, and a maximum of 451,612 shares, or $7,000,000, in common stock. The maximum number of shares were sold at $15.50 per share. On October 31, 1997, the Company completed a private placement of its common stock to Moneta principals (as previously mentioned) of 130,940 shares of common stock exempt from registration under the Securities Act of 1933 pursuant to Regulation D thereunder. These shares were offered at $16.75 per share. The offering allowed for the sale of a minimum of 59,701 shares, or $1,000,000, and a maximum of 131,343 shares, or $2,200,000, in common stock. The Company sold 130,940 shares at $16.75 per share. The offering and substantially all shares of common stock were made to accredited investors. In April 1996, the Company obtained a $1,000,000 unsecured line of credit. The line of credit was a one-year interest only note accruing interest at the prime rate. The outstanding principal balance on the loan as of December 31, 1996 was $300,000 which was repaid from the proceeds of the Common Stock offering in the first quarter of 1997. The Company chose not to renew the line of credit at the maturity date in April 1997. Risk-based capital guidelines for financial institutions were adopted by regulatory authorities effective January 1, 1991. These guidelines were designed to relate regulatory capital requirements to the risk profile of the specific institution and to provide for uniform requirements among the various regulators. Currently, the risk-based capital guidelines require the Company to meet a minimum total capital ratio of 8.0% of which at least 4.0% must consist of Tier 1 capital. Tier 1 capital generally consists of (a) common shareholders' equity (excluding the unrealized market value adjustments on the available-for-sale securities), (b) qualifying perpetual preferred stock and related surplus subject to certain limitations specified by the FDIC, and (c) minority interests in the equity accounts of consolidated subsidiaries less (d) goodwill, (e) mortgage servicing rights within certain limits, and (f) any other intangible assets and investments in subsidiaries that the FDIC determines should be deducted from Tier 1 capital. The FDIC also requires a minimum leverage ratio of 3.0%, defined as the ratio of Tier 1 capital to average total assets for banking organizations deemed the strongest and most highly rated by banking regulators. A higher minimum leverage ratio is required of less highly rated banking organizations. Total capital, a measure of capital adequacy, includes Tier 1 capital, allowance for possible loan losses, and debt considered equity for regulatory capital purposes. The following table summarizes the Company's risk-based capital and leverage ratios at the dates indicated: <TABLE> <CAPTION> December 31, ------------------------------------ 1997 1996 1995 ------ ------ ------ <S> <C> <C> <C> Tier 1 capital to risk weighted assets 11.20% 10.29% 10.21% Total capital to risk weighted assets 12.28 11.53 11.40 Leverage ratio (Tier 1 capital to average assets) 8.93 7.96 7.81 Tangible capital to tangible assets 9.79 8.91 8.72 </TABLE> At December 31, 1997, the Company's Tier 1 capital was $26.0 million compared to $14.7 million and $12.6 million at December 31, 1996 and 1995, respectively. At December 31, 1997, the Company's total capital was $28.6 million compared to $16.5 million and $13.5 million at December 31, 1996 and 1995, respectively. 22
25 IMPLEMENTATION OF NEW ACCOUNTING PRONOUNCEMENTS SFAS 130, Reporting Comprehensive Income, was issued in June 1997. Comprehensive income is defined as net income plus certain items that are recorded directly to shareholders' equity, such as unrealized gains and losses on available-for-sale securities. Components of the Company's comprehensive income will be reported in a financial statement that is displayed with the same prominence as other financial statements starting in the first quarter of 1998. SFAS 130's disclosure requirements will have no impact on the Company's financial condition or results of operations. SFAS 131, Disclosures about Segments of an Enterprise and Related Information, is effective for financial statements for periods beginning after December 15, 1997, but interim period reporting is not required in 1998. An operating segment is defined under SFAS 131 as a component of an enterprise that engages in business activities that generate revenue and expense for which operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance. The Company does not believe the impact of SFAS 131 on future financial statement disclosures will be material. EFFECT OF INFLATION Persistent high rates of inflation can have a significant effect on the reported financial condition and results of operations of all industries. However, the asset and liability structure of commercial banks is substantially different from that of an industrial company in that virtually all assets and liabilities of commercial banks are monetary in nature. Accordingly, changes in interest rates may have a significant impact on a commercial bank's performance. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Inflation does have an impact on the growth of total assets in the banking industry, often resulting in a need to increase equity capital at higher than normal rates to maintain an appropriate equity-to-assets ratio. SUPERVISION AND REGULATION -------------------------- The Company and the Bank are subject to state and federal banking laws and regulations which impose specific requirements or restrictions on and provide for general regulatory oversight with respect to virtually all aspects of operations. These laws and regulations are generally intended to protect depositors, not shareholders. To the extent that the following summary describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statutory and regulatory provisions. Any change in applicable laws or regulations may have a material effect on the business and prospects of the Company. The numerous regulations and policies promulgated by the regulatory authorities creates a difficult and ever-changing atmosphere in which to operate. The Company and the Bank commit substantial resources in order to comply with these statutes, regulations and policies. The Company is unable to predict the nature or the extent of the effect on its business and earnings that fiscal or monetary policies, economic control, or new federal or state legislation may have in the future. FEDERAL BANK HOLDING COMPANY REGULATION The Company is a bank holding company under the definition of the Bank Holding Company Act of 1956 (the "BHCA"). Under the BHCA, the Company is subject to periodic examination by the Federal Reserve and is required to file periodic reports of its operations and such additional information as the Federal Reserve may require. The Company's and the Bank's activities are limited to banking, managing or controlling banks, furnishing services to or performing services for its subsidiaries, or engaging in any other activity that the Federal Reserve determines to be closely related to banking. Investments, Control and Activities. With certain limited exceptions, the BHCA requires every bank holding company to obtain the prior approval of the Federal Reserve before (i) acquiring substantially all the assets of any bank, (ii) acquiring direct or indirect ownership or control of any voting shares of any bank if after such acquisition it would own or control more than 5% of the voting shares of such bank 23
26 (unless it already owns or controls the majority of such shares), or (iii) merging or consolidating with another bank holding company. Recent federal legislation permits bank holding companies to acquire control of banks throughout the United States. In addition, and subject to certain exceptions, the BHCA and the Change in Bank Control Act, together with regulations thereunder, require Federal Reserve approval (or, depending on the circumstances, no notice of disapproval) prior to any person or company acquiring "control" of a bank holding company, such as the Company. Control is conclusively presumed to exist if an individual or company acquires 25% or more of any class of voting securities of the bank holding company. Under Federal Reserve regulations applicable to the Company, control will be rebuttably presumed to exist if a person acquires at least 10% of the outstanding shares of any class of voting securities once the Company registers the common stock under the Securities and Exchange Act of 1934. The regulations provide a procedure for challenge of the rebuttable control presumption. Under the BHCA, the Company is generally prohibited from engaging in, or acquiring direct or indirect control of more than 5% of the voting shares of any company engaged in, nonbanking activities, unless the Federal Reserve, by order of regulation, has found those activities to be so closely related to banking or managing or controlling banks as to be a related activity. Some of the activities that the Federal Reserve has determined by regulation to be proper incidents to the business of banking include investment in and management of Small Business Investment Companies, making or servicing loans and certain types of leases, engaging in certain insurance and brokerage activities, performing data processing services, acting in certain circumstances as a fiduciary or investment or financial advisor, owning savings associations, and making investments in limited projects designed primarily to promote community welfare. Source of Strength; Cross-Guarantee. In accordance with Federal Reserve policy, the Company is expected to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances in which the Company might not otherwise do so. Under the BHCA, the Federal Reserve may require a bank holding company to terminate any activity or relinquish control of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the Federal Reserve's determination that such activity or control constitutes a serious risk to the financial soundness or stability of any subsidiary depository institution of the bank holding company. Further, federal bank regulatory authorities have additional discretion to require a bank holding company to divest itself of any bank or nonbank subsidiary if the agency determines that divestiture may aid the depository institution's financial condition. BANK REGULATION General. The Company is the holding company for a single state bank. The Bank is not a member of the Federal Reserve system. The Missouri Division of Finance and the FDIC are primary regulators for the Bank. These regulatory authorities regulate or monitor all areas of the Bank's operations, including security devices and procedures, adequacy of capitalization and loss reserves, loans, investments, borrowings, deposits, mergers, issuances of securities, payment of dividends, interest rates payable on deposits, interest rates or fees chargeable on loans, establishment of branches, corporate reorganizations, maintenance of books and records, and adequacy of staff training to carry on safe lending and deposit gathering practices. The Bank must maintain certain capital ratios and is subject to limitations on aggregate investments in real estate, bank premises, and furniture and fixtures. All insured institutions must undergo regular on-site examinations by their appropriate banking agency. The cost of examinations of insured depository institutions and any affiliates may be assessed by the appropriate agency against each institution or affiliate as it deems necessary or appropriate. Insured institutions are required to submit annual and quarterly reports to the FDIC and the appropriate agency and the state supervisor. Transactions With Affiliates and Insiders. The Bank is subject to the provisions of Section 23A of the Federal Reserve Act, which place limits on the amount of loans or extensions of credit to, investments in, or certain other transactions with, affiliates and on the amount of advances to third parties collateralized by the securities or obligations of affiliates. In addition, most of these loans and certain 24
27 other transactions must be secured in prescribed amounts. The Bank is also subject to the provisions of Section 23B of the Federal Reserve Act that, among other things, prohibit an institution from engaging in certain transactions with certain affiliates unless the transactions are on terms substantially the same, or at least as favorable to such institution or its subsidiaries, as those prevailing at the time for comparable transactions with nonaffiliated companies. The Bank is subject to certain restrictions on extensions of credit to executive officers, directors, certain principal shareholders, and their related interests. Such extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with third parties and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. Community Reinvestment Act. The Community Reinvestment Act ("CRA") requires that, in connection with examinations of financial institutions within its jurisdiction, the FDIC shall evaluate the record of the financial institutions in meeting the credit needs of their local communities, including low and moderate income neighborhoods, consistent with the safe and sound operation of those institutions. These factors are also considered in evaluating mergers, acquisitions, and applications to open a branch or facility. The company has a satisfactory rating under CRA. Other Regulations. Interest and certain other charges collected or contracted for by the Bank are subject to state usury laws and certain federal laws concerning interest rates. The Bank's loan operations are also subject to certain federal laws applicable to credit transactions, such as the federal Truth-In-Lending Act governing disclosures of credit terms to consumer borrowers; the Home Mortgage Disclosure Act of 1975 requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; the Equal Credit Opportunity Act prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit; the Fair Credit Reporting Act of 1978 governing these and provision of information to credit reporting agencies; the Fair Debt Collection Act governing the manner in which consumer debts may be collected by collection agencies; and the rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. The deposit operations of the Bank also are subject to the Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records, and the Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve Board to implement that act, which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services. Deposit Insurance. The deposits of the Bank are currently insured by the FDIC to a maximum of $100,000 per depositor, subject to certain aggregation rules. The FDIC establishes rates for the payment of premiums by federally insured banks for deposit insurance. An insurance fund (BIF) is maintained for commercial banks, with insurance premiums from the industry used to offset losses from insurance payouts when banks and thrifts fail. The FDIC has adopted a risk-based deposit insurance premium system for all insured depository institutions, including the Bank, which requires premiums from a depository institution based upon its capital levels and risk profile, as determined by its primary federal regulator on a semiannual basis. DIVIDENDS The principal source of the Company's cash revenues comes from dividends received from the Bank. The amount of dividends that may be paid by the Bank to the Company depends on the Bank's earnings and capital position and is limited by federal and state law, regulations, and policies. CAPITAL REGULATIONS The federal bank regulatory authorities have adopted risk-based capital guidelines for banks and bank holding companies that are designed to make regulatory capital requirements more sensitive to differences in risk profile among banks and bank holding companies, account for off-balance-sheet exposure, and minimize disincentives for holding liquid assets. The resulting capital ratios represent qualifying capital as a percentage of total risk-weighted assets and off-balance-sheet items. The guidelines are minimums, and the federal regulators have noted that banks and bank holding companies 25
28 contemplating significant expansion programs should not allow expansion to diminish their capital ratios and should maintain ratios well in excess of the minimums. The current guidelines require all bank holding companies and federally-regulated banks to maintain a minimum risk-based total capital ratio, a portion of which must be Tier 1 capital. Tier 1 capital includes common shareholders' equity, qualifying perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries, but excludes goodwill and most other intangibles and excludes the allowance for loan and lease losses. Tier 2 capital includes the excess of any preferred stock not included in Tier 1 capital, mandatory convertible securities, hybrid capital instruments, subordinated debt and intermediate term-preferred stock, and general reserves for loan and lease losses up to 1.25% of risk-weighted assets. Under these guidelines, banks' and bank holding companies' assets are given risk-weights of 0%, 20%, 50% or 100%. In addition, certain off-balance-sheet items are given credit conversion factors to convert them to asset equivalent amounts to which an appropriate risk-weight will apply. These computations result in the total risk-weighted assets. Most loans are assigned to the 100% risk category, except for first mortgage loans fully secured by residential property and, under certain circumstance, residential construction loans, both of which carry a 50% rating. Most investment securities are assigned to the 20% category, except for municipal or state revenue bonds, which have a 50% rating, and direct obligations of or obligations guaranteed by the United States Treasury or United States Government agencies, which have a 0% rating. The federal bank regulatory authorities have also implemented a leverage ratio, which is Tier 1 capital as a percentage of average total assets less intangibles, to be used as a supplement to the risk-based guidelines. The principal objective of the leverage ratio is to place a constraint on the maximum degree to which a bank holding company may leverage its equity capital base. MANAGEMENT ---------- The biographical information is furnished with respect to each member of the Board of Directors (the Board) of the Company, some of whom also serve as directors and/or officers of one or more of the Company's subsidiaries Enterprise Bank, Enterprise Capital Management, Inc., and Enterprise Merchant Banc, Inc. There are no family relationships between or among any directors or executive officers of the Company. <TABLE> <CAPTION> PRESENT POSITION(S) PRINCIPAL OCCUPATION NAME AND AGE WITH THE COMPANY DURING PAST FIVE YEARS - ------------ ---------------- ---------------------- <S> <C> <C> Fred H. Eller, 53 President and Chief President, Chief Executive Officer Executive Officer, Director and Director of the Company (since 1995); Chairman of the Board of the Bank (since 1996); Chief Executive Officer and Director of the Bank (since 1988) Ronald E. Henges, 66 Chairman of the Board Chief Executive Officer, Creve Coeur Camera (multi-store retailer of camera and video equipment); President and Chief Executive Officer of Henges Associates, Inc. (manufacturer and installer of prefabricated wall systems) 1991-1995; Chairman of the Board of the Company (since 1995); Chairman of the Board of the Bank, 1988-1996 Kevin C. Eichner, 47 Vice Chairman of the Executive Vice President, General American Board, Director (insurance product provider); Vice Chairman of the Board of the Company (since 1995); Vice Chairman of the Board of the Bank, (since 1991) 26
29 Randall D. Humphreys, 43 Director President of Enterprise Capital Management (since 1997); President of Enterprise Merchant Banc, Inc., formerly Enterprise Capital Resources (since 1997), Director of the Company (since 1997) Paul R. Cahn, 72 Director President, Elan Polo Imports, Inc. (importer of women's and children's casual shoes); Director of the Company (since 1996); Director of the Bank (1991-1993 and since 1995) Birch M. Mullins, 54 Director President, Baur Properties (developer of commercial real estate properties); Director of the Company (since 1996); Director of the Bank (since 1991) Robert E. Saur, 54 Director President, Conrad Properties (developer of commercial and residential real estate properties); Director of the Company (since 1995); Director of the Bank (since 1991) Henry D. Warshaw, 44 Director Principal, Moneta Group (provides financial planning products and services); Director of the Company (since 1996); Director of the Bank (1991-1996); Chairman of Clayton Banking Unit (since 1996) James L. Wilhite, 64 Director President, Stange Corporation (manufacturer of marketing and incentive items); Director of the Company (since 1996); Director of the Bank (since 1996); Chairman of the St. Peters Banking Unit (since 1996) James A. Williams, 45 Director President, Sunset Transportation (trucking brokerage and consulting firm); Director of the Company (since 1996); Director of the Bank (since 1996); Chairman of the Sunset Hills Banking Unit (since 1996) Ted C. Wetterau, 70 Director Chairman, Chief Executive Officer (retired 1993) Wetterau Incorporated (wholesale food distributor); Director of the Company (since 1997) </TABLE> All Directors of the Company are elected at the annual meeting of shareholders and serve until their successors are duly elected and qualified or until their earlier resignation or removal. The Bank's standing committees are the audit and the compensation committee and the Bank's entire Board of Directors performs the functions of these committees. 27
30 COMPENSATION OF EXECUTIVE OFFICERS AND OTHERS The following table shows the compensation paid by the Company to its Chief Executive Officer and each of the other executive officers of the Company who earned more than $100,000.00 per year in compensation for any of the years ended December 31, 1997, 1996 and 1995: <TABLE> EXECUTIVE COMPENSATION ---------------------- <CAPTION> Company Fiscal Split Life Match Name Age Title Year Salary<F1> Bonus Premium Deferrals - ---- --- ----- ---- ---------- ----- ------- --------- <S> <C> <C> <C> <C> <C> <C> <C> Fred H. Eller 53 President and 1997 $175,225 $50,000 $2,586 $6,400 CEO of the 1996 166,197 50,000 2,484 7,600 Company 1995 166,473 64,000 2,330 4,620 David J. Mishler 39 President of 1997 $146,139 $45,000 $ 751 $6,400 Enterprise Bank, 1996 123,648 35,000 735 6,372 Clayton 1995 112,094 25,000 751 3,430 Richard C. Leuck 40 President of 1997 $ 94,761 $30,000 $ 698 $3,172 Enterprise Bank, 1996 67,976 20,000 674 n/a St. Peters 1995 n/a n/a n/a n/a James E. Graser 38 President of 1997 $ 84,920 $12,500 $ 732 $3,924 Enterprise Bank, 1996 80,641 22,000 726 4,132 Sunset Hills 1995 76,508 24,500 749 2,528 <FN> <F1> Includes car allowance </TABLE> STOCK OPTIONS PLANS In 1988 and 1992, the Bank established two incentive stock options plans pursuant to which certain officers and employees of the Bank received the right to purchase shares of Bank capital stock. Substantially all of the options available under the two initial stock option plans have been granted. Upon formation of the Company and in conjunction with the Company's plan to acquire all of the outstanding common stock of the Bank, the options to purchase Bank capital stock were exchanged for options to purchase an aggregate of 213,000 shares of Company Common Stock. As a result of those options issued under the 1988 stock option plan, options to purchase 88,500 shares of Common Stock at a price of $5.00 to $7.00 per share are outstanding, all of which are currently exercisable ("1988 Options"). In addition, options to purchase 74,600 shares of Common Stock are currently outstanding, representing those originally issued under the 1992 stock option plan ("1992 Options"). Of the 1992 Options, options to purchase 69,000 shares carry a purchase price of $7.00 per share, of which 69,000 were exercisable as of December 31, 1997, options to purchase 2,000 shares carry a purchase price of $9.25 per share, of which 1,200 were exercisable as of December 31, 1997, and options to purchase 3,600 shares carry a purchase price of $16.00 per share, of which none were exercisable as of December 31, 1997. All of the 1988 Options will expire between May 9, 1998 and December 1, 2002, if not exercised. The expiration dates for the 1992 Options are December 1, 2002 for those with a purchase price of $7.00 per share, June 15, 2004 for those with a purchase price of $9.25 per share, and April 1, 2007 for those with a purchase price of $16.00 per share. In 1996, the Company adopted by shareholder vote a third incentive stock option plan ("ISO Plan III"), which sets aside up to 200,000 shares of Company Common Stock to grant options to certain key employees of the Company or any of its subsidiaries. There are limitations as to the number of options which may be granted to any individual and additional restrictions for options which may be granted to any individual who is also a ten percent shareholder. The Company believes strongly in motivating its key employees by encouraging ownership in the organization. The purchase price for any options granted under ISO Plan III will be determined based upon the market value of the Common Stock at the time such options are granted. At December 31, 1997, options to purchase 187,900 shares of Common Stock at a price of $16.00 per share were outstanding, none of which were currently exercisable. In addition, options to purchase 2,000 shares of Common Stock at a price of $16.75 per share were outstanding, none of which were exercisable. 28
31 DIRECTORS' COMPENSATION Non-employee directors of the Company and the Bank receive directors' fees of $200 for each Board of Directors meeting and $50 for each loan committee meeting they attend. BENEFICIAL OWNERSHIP OF SECURITIES ---------------------------------- The following is a list of persons who beneficially owned more than 5% of the outstanding Common Stock of the Company, and the ownership of the executive officers and directors, and all directors and executive officers as a group at the close of business on March 6, 1998, according to record-ownership listings as of that date: <TABLE> <CAPTION> Beneficial Owner Number of Shares % Ownership<F1><F2> - ---------------- ---------------- ------------------- <S> <C> <C> Fred H. Eller <F3><F5><F6> 94,260 3.84% Ronald E. Henges <F3><F8> 141,640 5.76% Kevin C. Eichner <F3> 77,193 3.14% Randall D. Humphreys -- n/a Paul R. Cahn <F4> 69,967 2.85% Birch M. Mullins 17,850 <F*> Robert E. Saur 39,000 1.59% Henry D. Warshaw <F9> 17,260 <F*> James L. Wilhite <F12> 8,721 <F*> James A. Williams <F7> 4,840 <F*> Ted C. Wetterau <F13> 11,940 <F*> David J. Mishler <F3><F11><F6> 38,304 1.56% James E. Graser <F3><F10><F6> 15,000 <F*> Richard C. Leuck <F14> 6,591 <F*> James C. Wagner <F15> 19,595 <F*> All Directors and Executive Officers as a Group 562,161 22.88% <FN> <F*> Less than 1% <F1> Percentages are calculated based on 2,457,112 shares, which represents 2,298,412 shares outstanding as of December 31, 1997, plus Options outstanding and exercisable as of December 31, 1997 or within 60 days thereafter totaling 158,700 shares, of which 6,700 were exercised subsequent to year end. <F2> Unless otherwise indicated, the named person has sole voting and dispositive power for all shares shown. <F3> Assumes the exercise of Options outstanding and exercisable as of December 31, 1997 or within 60 days thereafter, including those beneficially owned by the named person, as follows: Mr. Eichner, 30,000 shares; Mr. Eller, 55,000 shares; Mr. Henges, 10,000 shares; Mr. Graser, 10,000 shares; Mr. Mishler, 10,000 shares; Mr. Wagner, 10,000 shares, of which 4,000 were exercised subsequent to year end; all directors and executive officers as a group, 125,000 shares, of which 4,000 shares were exercised subsequent to year end. 29
32 <F4> Excludes 23,980 held by two adult children of Mr. Cahn, as well as 5,000 shares held by the son-in-law of Mr. Cahn. Includes 5,000 shares held in trust for the benefit of Mr. Cahn's spouse, to which Mr. Cahn has voting power; and 64,967 shares held of record by Cahn Family Partnership, L.P., to which Mr. Cahn has voting power. <F5> Includes 39,240 shares held jointly by Mr. Eller and his spouse, and 20 shares held in the name of Mr. Eller to which Mr. Eller has voting power. <F6> Excludes all of the 15,460 shares held of record by EBSP Partnership in which each of Mr. Eller, Mr. Graser and Mr. Mishler each hold a 1/7 partnership interest, but for which none of the named persons holds voting power. Excludes all of the 13,820 shares held of record by EBSP II Partnership in which each of Mr. Eller, Mr. Graser and Mr. Mishler each hold a 1/6 partnership interest, but for which none of the named persons holds sole voting power. <F7> Includes 845 shares held by Mr. Williams held in an Individual Retirement Account for the benefit of Mr. Williams to which Mr. Williams has voting power. <F8> Excludes 18,110 shares held by and/or for the benefit of adult children of Mr. Henges. Includes 76,770 shares held of record by Henges Equity, L.P., to which Mr. Henges is the General Partner and has voting power; 22,285 shares held in an Individual Retirement Account for the benefit of Mr. Henges, to which Mr. Henges has voting power; 20 shares in the name of Mr. Henges to which Mr. Henges has voting power; 3,285 shares held in an Individual Retirement Account for the benefit of the spouse of Mr. Henges, to which Mr. Henges has voting power; 3,600 shares held in trust for six minor grandchildren of Mr. Henges, of which the spouse of Mr. Henges is trustee, and to which Mr. Henges has voting power; and 25,680 shares held in six separate trusts, each for the benefit of one of the grandchildren of Mr. Henges, to which Mr. Henges has voting power. Mr. Henges' address is c/o Enterbank Holdings, Inc., 150 North Meramec, Clayton, Missouri 63105. <F9> Includes 8,580 shares held in an Individual Retirement Account for the benefit of Mr. Warshaw, to which Mr. Warshaw has voting power; and 8,660 shares held in an Individual Retirement Account for the benefit of the spouse of Mr. Warshaw, to which Mr. Warshaw has voting power, and 20 shares in the name of Mr. Warshaw to which Mr. Warshaw has voting power. <F10> Includes 4,999 shares held jointly by Mr. Graser and his spouse; and one share in the name of Mr. Graser to which Mr. Graser has voting power. <F11> Includes 25,672 shares held jointly by Mr. Mishler and his spouse; and 2,631 shares held in an Individual Retirement Account for the benefit of Mr. Mishler, to which Mr. Mishler has voting power; and one share held in the name of Mr. Mishler to which Mr. Mishler has voting power. <F12> Includes 650 shares held in a trust for the benefit of the spouse of Mr. Wilhite of which the spouse of Mr. Wilhite is trustee, to which Mr. Wilhite has voting power. <F13> Includes 11,940 shares held jointly by Mr. Wetterau and his spouse. <F14> Includes 2,500 shares held in a trust of Mr. Leuck for the benefit of Mr. Leuck to which Mr. Leuck has voting power; 2,500 shares held in a trust of the spouse of Mr. Leuck, for the benefit of the spouse of Mr. Leuck; to which Mr. Leuck has shared voting power; 1,590 shares held in the Individual Retirement Account for the benefit of Mr. Leuck to which Mr. Leuck has voting power; one share in the name of Mr. Leuck to which Mr. Leuck has voting power. <F15> Includes 9,595 shares held jointly by Mr. Wagner and his spouse. </TABLE> CERTAIN RELATED PARTY TRANSACTIONS ---------------------------------- The Company and the Bank have and expect to continue to have banking and other transactions in the ordinary course of business with directors and executive officers of the Company and their affiliates, including members of their families or corporations, partnerships or other organizations in which such directors or executive officers have a controlling interest, on substantially the same terms (including price, or interest rates and collateral) as those prevailing at the time for comparable transactions with unrelated parties. Such transactions are not expected to involve more than the normal risk of collectibility nor present other unfavorable features to the Company and the Bank. The Bank is subject to limits on the aggregate amount it can lend to the Bank's and the Company's directors and officers as a group. This limit is currently equal to two times the applicable entity's unimpaired capital and surplus. Loans to individual directors and officers must also comply with the Bank's lending policies and statutory lending limits, and directors with a personal interest in any loan application are excluded from the consideration of such loan application. The Company's Clayton banking facility is leased from a limited partnership in which Fred H. Eller, the Company's Chief Executive Officer, is a limited partner and Robert E. Saur, a director of the Company, is a general partner. Terms of the lease were negotiated by parties other than Fred H. Eller or Robert E. Saur and based on the fair market value at origination. Rent expense, net of income from the sublet portions of the premises, amounted to $258,620 in 1997. 30
33 [LETTERHEAD OF KPMG PEAT MARWICK LLP] INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Enterbank Holdings, Inc.: We have audited the accompanying consolidated balance sheets of Enterbank Holdings, Inc. and subsidiaries (the Company) as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Enterbank Holdings, Inc. and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP January 23, 1998, except as to Note 19, which is as of March 13, 1998
34 <TABLE> ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1997 and 1996 <CAPTION> Assets 1997 1996 ------ ------------ ------------ <S> <C> <C> Cash and due from banks $ 13,897,054 $ 9,261,035 Federal funds sold 32,825,000 23,250,000 Interest-bearing deposits 148,349 -- Investments in debt and equity securities: Available for sale, at estimated fair value 12,514,721 14,005,797 Held to maturity, at amortized cost (estimated fair value of $920,154 in 1997 and $1,239,498 in 1996) 919,163 1,240,183 ------------ ------------ Total investments in debt and equity securities 13,433,884 15,245,980 ------------ ------------ Loans held for sale 1,324,244 -- Loans, net of unearned loan fees 225,560,208 134,133,092 Less allowance for loan losses 2,510,000 1,765,000 ------------ ------------ Loans, net 223,050,208 132,368,092 ------------ ------------ Other real estate owned 806,072 874,426 Office equipment and leasehold improvements 2,328,699 1,119,268 Accrued interest receivable 1,448,343 935,864 Investment in Enterprise Fund, L.P. 225,683 550,087 Prepaid expenses and other assets 1,877,320 979,361 ------------ ------------ Total assets $291,364,856 $184,584,113 ============ ============ Liabilities and Shareholders' Equity ------------------------------------ Deposits: Demand $ 46,052,686 $ 31,137,649 Interest-bearing transaction accounts 22,519,772 16,648,185 Money market accounts 98,639,345 54,637,747 Savings 1,429,316 1,030,346 Certificates of deposit: $100,000 and over 32,824,697 24,067,363 Other 62,834,818 41,439,799 ------------ ------------ Total deposits 264,300,634 168,961,089 Note payable -- 300,000 Accounts payable and accrued expenses 997,430 565,131 ------------ ------------ Total liabilities 265,298,064 169,826,220 ------------ ------------ Shareholders' equity: Common stock, $.01 par value; authorized 3,000,000 shares; issued and outstanding 2,298,412 shares in 1997 and 1,662,360 shares in 1996 22,984 16,624 Surplus 18,879,210 9,595,956 Retained earnings 7,166,071 5,138,612 Net unrealized holding gains (losses) on available for sale securities (1,473) 6,701 ------------ ------------ Total shareholders' equity 26,066,792 14,757,893 ------------ ------------ Total liabilities and shareholders' equity $291,364,856 $184,584,113 ============ ============ See accompanying notes to consolidated financial statements. </TABLE> 32
35 <TABLE> ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Income Years ended December 31, 1997, 1996 and 1995 <CAPTION> 1997 1996 1995 ----------- ----------- ----------- <S> <C> <C> <C> Interest income: Interest and fees on loans $16,795,887 $11,426,260 $ 9,393,945 Interest on debt and equity securities: Taxable 1,017,897 692,742 744,956 Nontaxable 34,630 38,914 27,427 Interest on federal funds sold 909,326 396,244 745,044 Interest on interest bearing deposits 1,289 -- 2,464 ----------- ----------- ----------- Total interest income 18,759,029 12,554,160 10,913,836 ----------- ----------- ----------- Interest expense: Interest-bearing transaction accounts 410,915 331,943 351,998 Money market accounts 3,604,225 2,006,578 1,740,701 Savings 32,357 33,122 31,958 Certificates of deposit: $100,000 and over 1,658,554 1,346,428 1,246,703 Other 2,862,256 1,834,540 1,513,251 Federal funds purchased 11,035 1,027 2,681 Notes payable 2,888 15,274 -- ----------- ----------- ----------- Total interest expense 8,582,230 5,568,912 4,887,292 ----------- ----------- ----------- Net interest income 10,176,799 6,985,248 6,026,544 Provision for loan losses 775,064 345,410 630,734 ----------- ----------- ----------- Net interest income after provision for loan losses 9,401,735 6,639,838 5,395,810 ----------- ----------- ----------- Noninterest income: Service charges on deposit accounts 173,452 129,414 131,640 Other service charges and fee income 307,427 252,087 150,404 Merchant credit card income -- 600,981 562,449 Gain on sale of credit card operation -- 320,000 -- Loss on investment in Enterprise Fund, L.P. (4,904) (62,690) (8,222) ----------- ----------- ----------- Total noninterest income 475,975 1,239,792 836,271 ----------- ----------- ----------- Noninterest expense: Salaries 3,221,147 2,400,165 1,710,740 Payroll taxes and employee benefits 620,438 465,475 332,220 Occupancy 552,063 333,795 275,179 Equipment 227,061 145,501 120,594 FDIC insurance 21,846 2,000 114,944 Data processing 237,248 247,696 209,267 Merchant credit card expense -- 441,991 455,718 Other 1,458,773 1,109,711 968,061 ----------- ----------- ----------- Total noninterest expense 6,338,576 5,146,334 4,186,723 ----------- ----------- ----------- Income before income tax expense 3,539,134 2,733,296 2,045,358 Income tax expense 1,316,590 1,031,344 741,091 ----------- ----------- ----------- Net income $ 2,222,544 $ 1,701,952 $ 1,304,267 =========== =========== =========== Basic earnings per share $ 1.06 $ 1.11 $ .89 Diluted earnings per share $ 1.00 $ .97 $ .77 Basic weighted average common shares and common stock equivalents outstanding 2,095,359 1,538,418 1,463,400 Diluted weighted average common shares and common stock equivalents outstanding 2,224,967 1,750,686 1,685,479 See accompanying notes to consolidated financial statements. </TABLE> 33
36 <TABLE> ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity Years ended December 31, 1997, 1996 and 1995 <CAPTION> Net unrealized holding gains (losses) on Total Common Stock available- share- -------------------------- Retained for-sale holders' Shares Amount Surplus earnings securities equity --------- ------- ----------- ---------- ---------- ----------- <S> <C> <C> <C> <C> <C> <C> Balance, December 31, 1994 1,462,400 $14,624 $ 8,498,176 $2,356,378 $(88,265) $10,780,913 Net income -- -- -- 1,304,267 -- 1,304,267 Dividends declared ($.07 per share) -- -- -- (102,437) -- (102,437) Stock warrants exercised 1,000 10 5,490 -- -- 5,500 Change in net unrealized holding gains (losses) on available for sale securities, net of tax effect -- -- -- -- 63,904 63,904 --------- ------- ----------- ---------- -------- ----------- Balance, December 31, 1995 1,463,400 14,634 8,503,666 3,558,208 (24,361) 12,052,147 Net income -- -- -- 1,701,952 -- 1,701,952 Dividends declared ($.08 per share) -- -- -- (121,548) -- (121,548) Stock warrants exercised 198,960 1,990 1,092,290 -- -- 1,094,280 Change in net unrealized holding gains (losses) on available for sale securities, net of tax effect -- -- -- -- 31,062 31,062 --------- ------- ----------- ---------- -------- ----------- Balance, December 31, 1996 1,662,360 16,624 9,595,956 5,138,612 6,701 14,757,893 Net income -- -- -- 2,222,544 -- 2,222,544 Dividends declared ($.09 per share) -- -- -- (195,085) -- (195,085) Stock options exercised 53,500 535 266,965 -- -- 267,500 Issuance of common stock 582,552 5,825 9,016,289 -- -- 9,022,114 Change in net unrealized holding gains (losses) on available for sale securities, net of tax effect -- -- -- -- (8,174) (8,174) --------- ------- ----------- ---------- -------- ----------- Balance, December 31, 1997 2,298,412 $22,984 $18,879,210 $7,166,071 $ (1,473) $26,066,792 ========= ======= =========== ========== ======== =========== See accompanying notes to consolidated financial statements. </TABLE> 34
37 <TABLE> ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995 <CAPTION> 1997 1996 1995 ------------ ------------ ------------ <S> <C> <C> <C> Cash flows from operating activities: Net income $ 2,222,544 $ 1,701,952 $ 1,304,267 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 311,132 225,328 177,454 Provision for loan losses 775,064 345,410 630,734 Write-downs and losses on other real estate owned, net 24,259 6,646 152,982 Net accretion of debt and equity securities (207,715) (6,357) (149,398) Loss on investment in Enterprise Fund, L.P. 4,904 62,690 8,222 Mortgage loans originated (8,455,878) -- -- Proceeds from mortgage loans sold 7,210,582 -- -- Gain on sale of mortgage loans (78,948) -- -- (Increase) decrease in accrued interest receivable (512,479) 45,178 (380,400) Increase in prepaid expenses and other assets (897,959) (333,550) (106,635) Increase in accounts payable and accrued expenses 436,511 35,271 425,670 ------------ ------------ ------------ Net cash provided by operating activities 832,017 2,082,568 2,062,896 ------------ ------------ ------------ Cash flows from investing activities: Purchases of interest-bearing deposits (148,349) -- -- Proceeds from maturity of interest-bearing deposits -- -- 98,000 Purchases of available for sale debt securities (18,788,955) (8,922,967) (20,877,229) Purchases of available for sale equity securities (90,500) (94,200) (366,800) Purchases of held to maturity debt securities (101,076) (414,733) (255,367) Proceeds from maturities of available for sale debt securities 20,580,000 11,140,000 21,200,000 Proceeds from maturities and principal paydowns on held to maturity debt securities 407,956 6,276 180,799 Net increase in loans (91,597,180) (23,649,751) (24,557,838) Proceeds from sale of other real estate owned 184,095 -- 292,417 Purchases of office equipment and leasehold improvements (1,520,563) (549,219) (288,503) Contributions returned from (paid to) investment in Enterprise Fund, L.P. 319,500 (520,500) (100,500) ------------ ------------ ------------ Net cash used in investing activities (90,755,072) (23,005,094) (24,675,021) ------------ ------------ ------------ Cash flows from financing activities: Net increase in demand and savings accounts 65,187,192 12,195,505 22,161,043 Net increase in certificates of deposit 30,152,353 15,625,520 14,180,109 Decrease in federal funds purchased -- -- (6,500,000) (Decrease) increase in notes payable (300,000) 300,000 -- Cash dividends paid (195,085) (121,548) (124,373) Proceeds from the issuance of common stock 9,022,114 -- -- Proceeds from the exercise of stock warrants and common stock options 267,500 1,094,280 5,500 ------------ ------------ ------------ Net cash provided by financing activities 104,134,074 29,093,757 29,722,279 ------------ ------------ ------------ Net increase in cash and due from banks 14,211,019 8,171,231 7,110,154 Cash and cash equivalents, beginning of year 32,511,035 24,339,804 17,229,650 ------------ ------------ ------------ Cash and cash equivalents, end of year $ 46,722,054 $ 32,511,035 $ 24,339,804 ============ ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 8,342,681 $ 5,546,601 $ 4,759,095 Income taxes 1,509,322 1,144,759 779,900 Noncash transactions: Transfers to other real estate owned in settlement of loans 140,000 50,000 -- Loans made to facilitate the sale of other real estate owned -- 70,000 449,895 ============ ============ ============ See accompanying notes to consolidated financial statements. </TABLE> 35
38 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements December 31, 1997, 1996 and 1995 NOTE 1--ORGANIZATION On May 9, 1995, Enterbank Holdings, Inc. (the Company) was formed as a bank holding company. Enterbank Holdings, Inc. exchanged 1,463,400 shares of Enterbank Holdings, Inc. for all 73,170 (100%) of outstanding shares of Enterprise Bank in a twenty-for-one stock exchange. The merger represented a combination of entities under common control and, accordingly, was accounted for in a manner similar to a pooling of interest. Therefore, results of operations for periods prior to May 9, 1995 reflect the results of operations for Enterprise Bank. Additionally, Enterprise Capital Resources, Inc. (Capital Resources) was formed as a small business investment company in 1995 and, on May 11, 1995, Enterbank Holdings, Inc. acquired 100% of the outstanding shares of Capital Resources. Subsequent to year end, Capital Resources changed its name to Enterprise Merchant Banc, Inc. (Merchant Banc). In 1997, the Company organized Enterprise Financial Advisors ("Financial Advisors") as a division of the Bank to provide fee-based personal financial planning, estate planning, and corporate planning services to the Company's target market. The Company entered into solicitation and referral agreements with Moneta Group, Inc., a financial planning company, as part of the organization of Financial Advisors. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Company provides a full range of banking services to individual and corporate customers located within St. Louis, Missouri and the surrounding communities through its subsidiary, Enterprise Bank (the Bank). The Company is subject to competition from other financial and nonfinancial institutions providing financial services in the markets served by the Company's subsidiaries. Additionally, the Company and its subsidiaries are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory agencies. The more significant accounting policies used by the Company in the preparation of the consolidated financial statements are summarized below: BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements of the Company and its subsidiaries have been prepared in conformity with generally accepted accounting principles and conform to predominant practices within the banking industry. In preparing the consolidated financial statements, management is required to make estimates and assumptions which significantly affect the reported amounts in the consolidated financial statement. Estimates which are particularly susceptible to change in a short period of time include the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in satisfaction of amounts due from borrowers on loans. Actual amounts could differ from those estimates. CONSOLIDATION The consolidated financial statements include the accounts of the Company; its banking subsidiary, Enterprise Bank (100% owned) and its merchant banking company, Merchant Banc (100% owned). All significant intercompany accounts and transactions have been eliminated. (Continued) 36
39 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements INVESTMENTS IN DEBT AND EQUITY SECURITIES The Company currently classifies investments in debt and equity securities as follows: Trading - includes securities which the Company has bought and held principally for the purpose of selling them in the near term. The Company has not held any trading securities. Held to maturity - includes debt securities which the company has the positive intent and ability to hold until maturity. Available for sale - includes debt and marketable equity securities not classified as held-to-maturity or trading (i.e., investments which the company has no present plans to sell but may be sold in the future under different circumstances). Debt securities classified as held to maturity are carried at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses for held-to-maturity securities are excluded from earnings and shareholders' equity. Debt and equity securities classified as available for sale are carried at estimated fair value. Unrealized holding gains and losses for available-for-sale securities are excluded from earnings and reported as a net amount in a separate component of shareholders' equity until realized. All previous fair value adjustments included in the separate component of shareholders' equity are reversed upon sale. Transfers of securities between categories are recorded at fair value at the date of transfer. Unrealized holding gains or losses associated with transfers of securities from the held-to-maturity category to the available-for-sale category are recorded as a separate component of shareholders' equity. A decline in the market value of any available for sale or held to maturity security below cost that is deemed other than temporary results in a charge to earnings and the establishment of a new cost basis for the security. For securities in the held to maturity and available for sale categories, premiums and discounts are amortized or accreted over the lives of the respective securities as an adjustment to yield using the interest method. Dividend and interest income is recognized when earned. Realized gains and losses for securities classified as available for sale and held to maturity are included in earnings and are derived using the specific-identification method for determining the cost of securities sold. LOANS HELD FOR SALE During 1997, the Company began mortgage banking operations. Mortgage banking activities included the origination of residential mortgage loans for sale to various investors. Mortgage loans are originated and intended for sale in the secondary market, principally under programs with the Government National Mortgage Association (GNMA) or the Federal National Mortgage Association (FNMA). Mortgage loans held for sale are carried at the lower of cost or fair value, which is determined on a specific identification method. Mortgage banking revenues, including origination fees, net gains on sales of servicing rights, net gains or losses on sales of mortgages and other fee income, which is determined on a specific identification method, were less than one percent of the Company's total revenue for the year ended December 31, 1997. The Company does not retain servicing on any loans originated and sold, nor does the Company have any purchased mortgage servicing rights at December 31, 1997. (Continued) 37
40 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements INTEREST AND FEES ON LOANS Interest income on loans is accrued and credited to income based on the principal amount outstanding. The recognition of interest income is discontinued when a loan becomes 90 days past due or a significant deterioration in the borrower's credit has occurred which, in management's opinion, negatively impacts the collectibility of the loan. Subsequent interest payments received on such loans are applied to principal if any doubt exists as to the collectibility of such principal; otherwise, such receipts are recorded as interest income. Loans are returned to accrual status when management believes full collectibility of principal and interest is expected. The Company defers the recognition of loan origination fees, net of the cost associated with originating such loans. Deferred loan fees are accreted into income over the contractual life of the loan using the straight-line method, which approximates the interest method. LOANS AND ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is increased by provisions charged to expense and is available to absorb charge-offs, net of recoveries. Management utilizes a systematic, documented approach in determining the appropriate level of the allowance for loan losses. Management's approach, which provides for general and specific allowances, is based on current economic conditions, past losses, collection experience, risk characteristics of the portfolio, assessments of collateral values by obtaining independent appraisals for significant properties, and such other factors which, in management's judgment, deserve current recognition in estimating loan losses. Management believes the allowance for loan losses is adequate to absorb possible losses in the loan portfolio. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions and other factors. In addition, various regulatory agencies, as an integral part of the examination process, periodically review the Bank's loan portfolio. Such agencies may require the Bank to add to the allowance for loan losses based on their judgments and interpretations of information available to them at the time of their examinations. ACCOUNTING FOR IMPAIRED LOANS A loan is considered impaired when it is probable the Bank will be unable to collect all amounts due, both principal and interest, according to the contractual terms of the loan agreement. When measuring impairment, the expected future cash flows of an impaired loan are discounted at the loan's effective interest rate. Alternatively, impairment is measured by reference to an observable market price, if one exists, or the fair value of the collateral for a collateral-dependent loan. Regardless of the measurement method used, historically, the Bank measures impairment based on the fair value of the collateral when foreclosure is probable. Additionally, impairment of a restructured loan is measured by discounting the total expected future cash flow at the loan's effective rate of interest as stated in the original loan agreement. The Bank recognizes interest income on nonaccrual loans only when received and on impaired loans continuing to accrue interest as earned. OTHER REAL ESTATE OWNED Other real estate owned represents property acquired through foreclosure or deeded to the Company's subsidiary bank in lieu of foreclosure on loans on which the borrowers have defaulted as to the payment of principal and interest. Other real estate owned is recorded on an individual asset basis at the lower of (1) current fair value minus estimated selling costs, or (2) fair value at the time of the acquisition (cost). Subsequent reductions in fair value are expensed or recorded in a valuation reserve account through a (Continued) 38
41 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements provision against income. Subsequent increases in the fair value are recorded through a reversal of the valuation reserve, but not below zero. Gains and losses resulting from the sale of other real estate owned are credited or charged to current period earnings. Costs of maintaining and operating other real estate owned are expensed as incurred, and expenditures to complete or improve other real estate owned properties are capitalized if the expenditures are expected to be recovered upon ultimate sale of the property. OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS Office equipment and leasehold improvements are stated at cost less accumulated depreciation and amortization is computed using the straight-line method over their respective estimated useful lives. Bank equipment is depreciated over three to ten years and leasehold improvements over ten to 30 years. INCOME TAXES The Company and its subsidiaries file consolidated federal income tax returns. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. CASH FLOW INFORMATION For purposes of reporting cash flows, the Company considers cash and due from banks and federal funds sold to be cash and cash equivalents. RECLASSIFICATION Certain reclassifications have been made to the prior year amounts to conform to the present year presentation. STOCK OPTIONS Prior to January 1, 1996, the Corporation accounted for its stock option plans in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense was recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standard (SFAS) No. 123, Accounting for Stock-Based Compensation, which permits entities to expense the fair value of stock-based awards, as measured on the date of grant, over their vesting period. Alternatively, SFAS 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma net income per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in SFAS 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS 123. (Continued) 39
42 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NEW ACCOUNTING STANDARDS SFAS 130, Reporting Comprehensive Income, was issued in June 1997. Comprehensive income is defined as net income plus certain items that are recorded directly to shareholders' equity, such as unrealized gains and losses on available for sale securities. Components of the Company's comprehensive income will be included in a financial statement that has the same prominence as other financial statements starting in the first quarter of 1998. SFAS 130's disclosure requirements will have no impact on the Company's financial condition or results of operations. SFAS 131, Disclosures about Segments of an Enterprise and Related Information, is effective for financial statements for periods beginning after December 15, 1997, but interim period reporting is not required in 1998. An operating segment is defined under SFAS 131 as a component of an enterprise that engages in business activities that generate revenue and expense for which operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance. The Company does not believe the impact of SFAS 131 on future financial statement disclosures will be material. NOTE 3--EARNINGS PER SHARE Basic earnings per share data is calculated by dividing net income, after deducting dividends on preferred stock, by the weighted average number of common shares outstanding during the period. Diluted earnings per share gives effect to the increase in the average shares outstanding which would have resulted from the exercise of dilutive stock options and warrants. The components of basic earnings per share are as follows: <TABLE> <CAPTION> 1997 1996 1995 ---------- ---------- ---------- <S> <C> <C> <C> BASIC Net income attributable to common shareholders' equity $2,222,544 $1,701,952 $1,304,267 ========== ========== ========== Weighted average common shares outstanding 2,095,359 1,538,418 1,463,400 ========== ========== ========== Basic earnings per share $1.06 $1.11 $0.89 ===== ===== ===== <CAPTION> The components of diluted earnings per share are as follows: 1997 1996 1995 ---------- ---------- ---------- <S> <C> <C> <C> DILUTED Net income attributable to common shareholders' equity $2,222,544 $1,701,952 $1,304,267 ========== ========== ========== Weighted average common shares outstanding 2,095,359 1,538,418 1,463,400 Stock warrants -- 79,979 110,377 Stock options 129,608 132,289 111,702 ---------- ---------- ---------- Diluted weighted average common shares outstanding $2,224,967 $1,750,686 $1,685,479 ========== ========== ========== Diluted earnings per share $1.00 $0.97 $0.77 ===== ===== ===== </TABLE> (Continued) 40
43 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 4--REGULATORY RESTRICTIONS The Company's subsidiary bank is subject to regulations by regulatory authorities which require the maintenance of minimum capital standards which may affect the amount of dividends the Company's subsidiary bank can pay. At December 31, 1997 and 1996, approximately $3,427,000 and $1,174,000, respectively, of cash and due from banks represented required reserves on deposits maintained by the Bank in accordance with Federal Reserve Bank requirements. NOTE 5--INVESTMENTS IN DEBT AND EQUITY SECURITIES A summary of the amortized cost and estimated fair value of debt and equity securities classified as available for sale at December 31, 1997 and 1996 is as follows: <TABLE> <CAPTION> 1997 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ----------- ---------- ---------- ---------- <S> <C> <C> <C> <C> U. S. Treasury securities and obligations of U.S. government corporations and agencies $11,965,452 $4,152 $6,383 $11,963,221 Federal Home Loan Bank stock 551,500 -- -- 551,500 ----------- ------ ------ ----------- $12,516,952 $4,152 $6,383 $12,514,721 =========== ====== ====== =========== <CAPTION> 1996 -------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value ----------- ---------- ---------- ---------- <S> <C> <C> <C> <C> U. S. Treasury securities and obligations of U.S. government corporations and agencies $13,534,643 $10,449 $295 $13,544,797 Federal Home Loan Bank stock 461,000 -- -- 461,000 ----------- ------- ------ ----------- $13,995,643 $10,449 $295 14,005,797 =========== ======= ====== =========== </TABLE> The amortized cost and estimated fair value of debt and equity securities classified as available for sale at December 31, 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> Amortized Estimated Cost Fair Value ----------- ------------ <S> <C> <C> Due in one year or less $11,965,452 $11,963,221 Due after one year through five years -- -- Due after five years through ten years -- -- Securities with no stated maturity 551,500 551,500 ----------- ----------- $12,516,952 $12,514,721 =========== =========== </TABLE> (Continued) 41
44 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A summary of the amortized cost and estimated fair value of debt and equity securities classified as held to maturity at December 31, 1997 and 1996 is as follows: <TABLE> <CAPTION> 1997 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> Mortgage-backed securities $ 37,825 $ -- $ 24 $ 37,801 Municipal Bonds 881,338 1,914 899 882,353 -------- ------ ---- -------- $919,163 $1,914 $923 $920,154 ======== ====== ==== ======== <CAPTION> 1996 ------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------- ---------- ---------- ---------- <S> <C> <C> <C> <C> U. S. Treasury securities and obligations of U.S. government corporation and agencies $ 305,583 $ 655 $ -- $ 306,238 Mortgage-backed securities 43,857 -- 164 43,693 Municipal Bonds 890,743 1,652 2,828 889,567 ---------- ------ ------ ---------- $1,240,183 $2,307 $2,992 $1,239,498 ========== ====== ====== ========== </TABLE> The amortized cost and estimated fair value of debt and equity securities classified as held to maturity at December 31, 1997, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. <TABLE> <CAPTION> Amortized Estimated Cost Fair Value --------- ---------- <S> <C> <C> Due in one year or less $460,312 $459,731 Due after one year through five years 421,026 422,622 Due after five years through ten years -- -- Securities with no stated maturity 37,825 37,801 -------- -------- $919,163 $920,154 ======== ======== </TABLE> There were no sales of investments in debt and equity securities in 1997, 1996 or 1995. Debt and equity securities having a carrying value of $8,748,476 and $10,933,728 at December 31, 1997 and 1996, respectively, were pledged as collateral to secure public deposits and for other purposes as required by law. As a member of the Federal Home Loan Bank system administered by the Federal Housing Finance Board, the Bank is required to maintain an investment in the capital stock of the Federal Home Loan Bank of Des Moines (FHLB) in an amount equal to the greater of 1% of the aggregate outstanding balance of loans secured by dwelling units at the beginning of each year or .3% of its total assets. The FHLB stock is recorded at cost which represents redemption value. (Continued) 42
45 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Statements NOTE 6--LOANS A summary of loans by category at December 31, 1997 and 1996 is as follows: <TABLE> <CAPTION> 1997 1996 ------------ ------------ <S> <C> <C> Commercial and industrial $ 69,489,557 $ 43,875,936 Loans secured by real estate 148,892,185 85,756,588 Other 7,226,719 4,517,501 ------------ ------------ 225,608,461 134,150,025 Less unearned loan fees 48,253 16,933 ------------ ------------ $225,560,208 $134,133,092 ============ ============ </TABLE> The breakdown of loans secured by real estate at December 31, 1997 and 1996 is as follows: <TABLE> <CAPTION> 1997 1996 ------------ ----------- <S> <C> <C> Business and personal loans $ 44,965,663 $26,508,877 Income-producing properties 55,025,798 29,898,499 Owner-occupied properties 10,259,749 6,133,825 Real estate development properties 38,640,975 23,215,387 ------------ ----------- $148,892,185 $85,756,588 ============ =========== </TABLE> The Company's subsidiary bank grants commercial, residential, and consumer loans throughout its service area, which consists primarily of the immediate area in which the Bank is located. The Company has a diversified loan portfolio, with no particular concentration of credit in any one economic sector; however, a substantial portion of the portfolio is concentrated in and secured by real estate. The ability of the Company's borrowers to honor their contractual obligations is dependent upon the local economy and its effect on the real estate market. In connection with the investment in FHLB Stock, the Bank has obtained a $2 million line of credit from the FHLB. As collateral for the line, the Bank has entered into a blanket agreement which pledges first mortgage loans with principal balances aggregating 150% of outstanding advances. No advances on the line were made during 1997 and 1996. Following is a summary of activity for the year ended December 31, 1997 of loans to executive officers and directors or to entities in which such individuals had beneficial interests as a shareholder, officer, or director. Such loans were made in the normal course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers and did not involve more than the normal risk of collectibility. <TABLE> <CAPTION> <S> <C> Balance, December 31, 1996 $ 8,333,344 New loans 4,210,930 Payments and other reductions (1,529,020) ----------- Balance, December 31, 1997 $11,015,254 =========== </TABLE> (Continued) 43
46 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A summary of activity in the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1997 1996 1995 ---------- ---------- ---------- <S> <C> <C> <C> Balance at beginning of year $1,765,000 $1,400,000 $1,000,000 Provisions charged to operations 775,064 345,410 630,734 Loans charged off (161,799) -- (242,734) Recoveries of loans previously charged off 131,735 19,590 12,000 ---------- ---------- ---------- Balance at end of year $2,510,000 $1,765,000 $1,400,000 ========== ========== ========== </TABLE> A summary of impaired loans, which include nonaccrual loans, at December 31, 1997 and 1996 is as follows: <TABLE> <CAPTION> 1997 1996 1995 -------- -------- ---------- <S> <C> <C> <C> Nonaccrual loans $ 50,000 $130,704 $ 106,504 Impaired loans continuing to accrue interest 916,803 505,669 948,510 -------- -------- ---------- Total impaired loans $966,803 $636,373 $1,055,014 ======== ======== ========== Allowance for losses on specific impaired loans $191,804 $82,616 $ 166,045 Impaired loans with no related allowance for loan losses -- -- -- Average balance of impaired loans during the year $563,943 $636,563 $1,252,362 ======== ======== ========== </TABLE> If interest on nonaccrual loans, including amounts computed on principal balances charged off on such loans, had been accrued, such income would have been $1,537, $15,147 and $3,119 for the years ended December 31, 1997, 1996 and 1995, respectively. The amount recognized as interest income on nonaccrual loans was $4,864, $2,005 and $-0- for the years ended December 31, 1997, 1996 and 1995, respectively. The amount recognized as interest income on impaired loans continuing to accrue interest was $94,801, $44,616 and $90,251 for the years ended December 31, 1997, 1996 and 1995, respectively. NOTE 7--OTHER REAL ESTATE OWNED A summary of activity in the valuation allowance for other real estate owned for the years ended December 31, 1997, 1996 and 1995 is as follows: <TABLE> <CAPTION> 1997 1996 1995 -------- ------- --------- <S> <C> <C> <C> Balance at beginning of year $ 20,000 $20,000 $ 75,000 Provisions charged to operations -- -- 152,982 Charge-offs and reversals (20,000) -- (207,982) -------- ------- --------- Balance at end of year $ -- $20,000 $ 20,000 ======== ======= ========= </TABLE> (Continued) 44
47 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 8--OFFICE EQUIPMENT AND LEASEHOLD IMPROVEMENTS A summary of office equipment and leasehold improvements at December 31, 1997 and 1996 is as follows: <TABLE> <CAPTION> 1997 1996 ---------- ---------- <S> <C> <C> Data processing equipment $ 691,985 $ 692,204 Furniture, fixtures and equipment 1,741,621 1,116,772 Leasehold improvements 1,184,052 507,106 Automobile 26,425 26,426 ---------- ---------- 3,644,083 2,342,508 Less accumulated depreciation and amortization 1,315,384 1,223,240 ---------- ---------- Office equipment and leasehold improvements, net $2,328,699 $1,119,268 ========== ========== </TABLE> Depreciation and amortization of office equipment and leasehold improvements included in occupancy expense amounted to $311,132 in 1997, $225,328 in 1996 and $177,454 in 1995. The Company's banking facilities are leased under agreements that expire in 1999, 2015, and 2012 for Clayton, St. Charles County and the City of Sunset Hills, respectively. The Company has the option to renew the Clayton facility lease for three additional five-year periods with future rentals to be agreed upon. The Company has no future rental options for the St. Charles County facility; however, during the term of the lease, the monthly rentals are adjusted periodically based on then current market conditions and inflation. The Company has the option to renew the Sunset Hills facility lease for two additional five-year periods with future rentals to be agreed upon. One section of the Clayton facility is sublet and the proceeds are used to reduce the Company's occupancy expenses. Rent expense amounted to $436,524, $319,002 and $285,178 in 1997, 1996 and 1995, respectively, and sublease rental income amounted to $35,422, $77,568 and $82,394 in 1997, 1996 and 1995 respectively. The Company leases its Clayton facility from a partnership in which a director and an officer have an ownership interest. The future minimum rental commitments required under the leases are as follows: <TABLE> <CAPTION> Year Amount ---- ------ <S> <C> 1998 $684,957 1999 480,243 2000 377,887 2001 377,887 2002 377,887 ======== </TABLE> For leases which renew or are subject to periodic rental adjustments, the monthly rental payments will be adjusted based on then current market conditions and rates of inflation. NOTE 9--INVESTMENT IN ENTERPRISE FUND, L.P. The Company and its subsidiaries have a combined 10% interest in a limited liability small business investment partnership, The Enterprise Fund L.P., for which a subsidiary of the company serves as the general partner. The Company has an additional $703,500 in future capital commitments. This investment, which is accounted for using the equity method of accounting, had a carrying value of $225,683 and $550,087 at December 31, 1997 and 1996, respectively. (Continued) 45
48 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 10--MATURITY OF CERTIFICATES OF DEPOSIT Following is a summary of certificates of deposit maturities at December 31, 1997: <TABLE> <CAPTION> $100,000 Maturity Period and Over Other Total ------------------------------------------ ----------- ----------- ----------- <S> <C> <C> <C> Less than 1 year $59,233,000 $31,100,000 $90,333,000 Greater than 1 year and less than 2 years 2,956,267 1,285,499 4,241,766 Greater than 2 years and less than 3 years 276,551 -- 276,551 Greater than 3 years and less than 4 years 192,984 -- 192,984 Greater than 4 years and less than 5 years 161,016 339,198 500,214 Over 5 years 15,000 100,000 115,000 ----------- ----------- ----------- $62,834,818 $32,824,697 $95,659,515 =========== =========== =========== </TABLE> NOTE 11--NOTE PAYABLE On April 23, 1996, the Company obtained a $1,000,000 unsecured line of credit from an unaffiliated bank. The line of credit was a one-year interest-only note accruing interest at the unaffiliated bank's prime rate. The Company chose not to renew the line of credit at the maturity date in April 1997. For the year ended December 31, 1997, the average balance and maximum month-end balance of the note payable were $25,000 and $300,000, respectively. For the year ended December 31, 1996, the average balance and maximum month end balance of the note payable were $205,000 and $300,000, respectively. The average rate paid on the note payable was $8.25% in 1997 and 1996. The Company had no notes payable outstanding during 1995. NOTE 12--INCOME TAXES The components of income tax expense (benefit) for the years ended December 31, 1997, 1996 and 1995 are as follows: <TABLE> <CAPTION> 1997 1996 1995 ---------- ---------- -------- <S> <C> <C> <C> Current: Federal $1,407,463 $1,021,847 $711,751 State and local 217,479 153,811 84,086 Deferred (308,352) (144,314) (54,746) ---------- ---------- -------- $1,316,590 $1,031,344 $741,091 ========== ========== ======== </TABLE> (Continued) 46
49 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements A reconciliation of expected income tax expense, computed by applying the statutory federal income tax rate of 34% in 1997, 1996 and 1995, to income before income taxes and the amounts reflected in the consolidated statements of income is as follows: <TABLE> <CAPTION> 1997 1996 1995 ---------- ---------- -------- <S> <C> <C> <C> Income tax expense at statutory rate $1,203,306 $ 929,320 $695,422 Increase (reduction) in income taxes resulting from: Tax-exempt income (31,828) (23,570) (24,660) State and local income tax expense 143,536 101,515 55,497 Other, net 1,576 24,079 14,832 ---------- ---------- -------- Total tax expense $1,316,590 $1,031,344 $741,091 ========== ========== ======== </TABLE> A net deferred income tax asset of $778,604 and $466,014 is included in prepaid expenses and other assets in the consolidated balance sheets at December 31, 1997 and 1996, respectively. The tax effect of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 is as follows: <TABLE> <CAPTION> 1997 1996 -------- -------- <S> <C> <C> Deferred tax assets: Allowance for loan losses $831,869 $541,530 Other real estate owned -- 7,492 Unrealized losses on securities available for sale 759 -- Other 17,613 11,706 -------- -------- Total deferred tax assets 850,241 560,728 -------- -------- Deferred tax liabilities: Deferred loan fees 6,495 51,381 Office equipment and leasehold improvements 65,142 39,881 Unrealized gains on securities available for sale -- 3,452 -------- -------- Total deferred tax liabilities 71,637 94,714 -------- -------- Net deferred tax assets $778,604 $466,014 ======== ======== </TABLE> A valuation allowance would be provided on deferred tax assets when it is more likely than not that some portion of the assets will not be realized. The Company has not established a valuation allowance as of December 31, 1997, due to management's belief that all criteria for recognition have been met, including the existence of a history of taxes paid sufficient to support the realization of the deferred tax assets. NOTE 13 -- REGULATORY MATTERS The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possible additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative (Continued) 47
50 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements measures of the Bank's assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 1997, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 1997, the most recent notification from the FDIC dated February 28, 1996 categorized the Bank as well as capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution's category. The Bank's actual capital amounts and ratios are also presented in the table. <TABLE> <CAPTION> To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions ------------------- ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- <S> <C> <C> <C> <C> <C> <C> As of December 31, 1997: Total Capital (to risk weighted assets) Enterbank Holdings, Inc. $28,538,743 12.28% $18,591,401 8.00% $23,239,251 10.00% Enterprise Bank 25,915,000 11.19 18,525,813 8.00 23,157,266 10.00 Tier 1 Capital (to risk weighted assets) Enterbank Holdings, Inc. $26,028,743 11.20% $ 9,295,700 4.00% $13,943,551 6.00% Enterprise Bank 23,405,000 10.11 9,262,906 4.00 13,894,359 6.00 Tier 1 Capital (to average assets) Enterbank Holdings, Inc. $26,028,743 11.42% $ 9,116,560 4.00% $11,395,700 5.00% Enterprise Bank 23,405,000 10.30 9,085,351 4.00 11,356,689 5.00 As of December 31, 1996: Total Capital (to risk weighted assets) Enterbank Holdings, Inc. $16,461,861 11.53% $11,424,028 8.00% $14,280,035 10.00% Enterprise Bank 15,979,917 11.28 11,334,400 8.00 14,168,000 10.00 Tier 1 Capital (to risk weighted assets) Enterbank Holdings, Inc. $14,696,861 10.29% $ 5,712,014 4.00% $ 8,568,021 6.00% Enterprise Bank 14,214,917 10.03 5,667,200 4.00 8,500,800 6.00 Tier 1 Capital (to average assets) Enterbank Holdings, Inc. $14,696,861 9.62% $ 6,108,240 4.00% $ 7,635,300 5.00% Enterprise Bank 14,214,917 9.35 6,085,960 4.00 7,607,450 5.00 </TABLE> (Continued) 48
51 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements NOTE 14--SHAREHOLDERS' EQUITY On August 15, 1996, warrants to purchase 9,948 shares of Enterprise Bank common stock were exercised for $1,094,280. On September 30, 1996, the Company issued 198,960 shares of its Common Stock to holders of common stock of the Bank incidental to a plan of reorganization for the purpose of making the Company the sole owner of Bank capital stock. On February 14, 1997, the Company completed a stock offering of 451,612 shares of common stock registered under the Securities Act of 1933 on Form S-1. These shares were offered to the public at $15.50 per share. The offering allowed for the sale of a minimum of 193,548 shares or $3,000,000, and a maximum of 451,612 shares or $7,000,000 in common stock. The maximum number of shares were sold at $15.50 per share. As part of the organization of Financial Advisors, the Company entered into solicitation and referral agreements with Moneta Group, Inc. (Moneta). These agreements call for Moneta to provide planning services for Financial Advisors' customers. Moneta will refer customers, when appropriate, to the Bank and receive a share of the revenue generated in the form of options in the Company's common stock. The agreements with Moneta also allow Financial Advisors to immediately begin offering a full range of products and services with the depth and expertise of a large planning firm. Financial Advisors will continue to expand products and services available to customers as the division develops. On October 31, 1997, the Company completed a private placement of its common stock of 130,940 shares of common stock exempt from registration under the Securities Act of 1933 pursuant to Regulation D thereunder. These shares were offered at $16.75 per share. These shares were offered in a private sale to Moneta principals related to the previously mentioned agreements with Moneta. The offering allowed for the sale of a minimum of 59,701 shares, or $1,000,000, and a maximum of 131,343 shares, or $2,200,000, in common stock. The Company sold 130,940 shares at $16.75 per share. NOTE 15--COMPENSATION PLANS STOCK OPTION PLANS In 1988 and 1992, the Bank established two incentive stock options plans pursuant to which certain officers and employees of the Bank received the right to purchase shares of Bank capital stock. Substantially all of the options available under the two initial stock option plans have been granted. Upon formation of the Company and in conjunction with the Company's plan to acquire all of the outstanding common stock of the Bank, the options to purchase Bank capital stock were exchanged for options to purchase an aggregate of 213,000 shares of Company Common Stock. As a result of those options issued under the 1988 stock option plan, options to purchase 88,500 shares of Common Stock at a price of $5.00 to $7.00 per share are outstanding, all of which are currently exercisable (1988 Options). In addition, options to purchase 74,600 shares of Common Stock are currently outstanding, representing those originally issued under the 1992 stock option plan (1992 Options). Of the 1992 Options, options to purchase 69,000 shares carry a purchase price of $7.00 per share, of which 69,000 were exercisable as of December 31, 1997, options to purchase 2,000 shares carry a purchase price of $9.25 per share, of which 1,200 were exercisable as of December 31, 1997, and options to purchase 3,600 shares carry a purchase price of $16.00 per share, of which -0- were exercisable as of December 31, 1997. All of the 1988 Options will expire between May 9, 1998 and December 1, 2002, if not exercised. The expiration dates for the 1992 Options are December 1, 2002 for (Continued) 49
52 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements those with a purchase price of $7.00 per share, June 15, 2004 for those with a purchase price of $9.25 per share, and April 1, 2007 for those with a purchase price of $16.00 per share. In 1996, the Company adopted by shareholder vote a third incentive stock option plan (ISO Plan III), which sets aside up to 200,000 shares of Company Common Stock to grant options to certain key employees of the Company or any of its subsidiaries. There are limitations as to the number of options which may be granted to any individual and additional restrictions for options which may be granted to any individual who is also a 10% shareholder. The Company believes strongly in motivating its key employees by encouraging ownership in the organization. The purchase price for any options granted under ISO Plan III will be determined based upon the market value of the Common Stock at the time such options are granted. At December 31, 1997, options to purchase 187,900 shares of Common Stock at a price of $16.00 per share were outstanding, none of which were currently exercisable. In addition, options to purchase 2,000 shares of Common Stock at a price of $16.75 per share were outstanding, none of which were exercisable. At December 31, 1997, 8,500 shares forfeited by participants were available for future issuance under the plans. A total of 10,100 shares were available for future issuance under the plans at December 31, 1997. Following is a summary of the various plan transactions: <TABLE> <CAPTION> Number Price of shares per share Total --------------------------------------------------------------------------------------------- <S> <C> <C> <C> December 31, 1994 213,000 $ 5.00 - 7.00 $1,251,500 Granted -- -- -- Exercised -- -- -- Forfeited -- -- -- ------- -------------- ---------- December 31, 1995 213,000 $ 5.00 - 9.25 $1,251,500 Granted -- -- -- Exercised -- -- -- Forfeited -- -- -- ------- -------------- ---------- December 31, 1996 213,000 $ 5.00 - 9.25 $1,251,500 Granted 202,000 16.00 - 16.75 3,233,500 Exercised 53,500 5.00 267,500 Forfeited 8,500 16.00 136,000 ------- -------------- ---------- December 31, 1997 353,000 $ 5.00 - 16.75 $4,081,500 ======= ============== ========== </TABLE> The Company applies APB Opinion 25 and related Interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined based on the fair (Continued) 50
53 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements value at the grant dates for awards under those plans consistent with the method contained in SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below: <TABLE> <CAPTION> 1997 1996 1995 ------ ------ ------ <S> <C> <C> <C> Net income As reported $2,222 $1,702 $1,304 Pro forma 2,025 1,702 1,304 Earnings per share: Basic: As reported $ 1.06 $ 1.11 $ 0.89 Pro forma 0.97 1.11 0.89 Diluted: As reported $ 1.00 $ 0.97 $ 0.77 Pro forma 0.91 0.97 0.77 </TABLE> There were no options granted in 1995 or 1996. The fair value of each option granted in 1997 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: a risk-free interest rate of 6.90%, 6.40% and 6.10% for April, July and September, respectively; a dividend yield of 0.25%; vesting period of 5 years; expected lives of 10 years; and volatility of 25%. the weighted average fair value of the options granted in 1997 were $8.45. Effective January 1, 1993, the company adopted a 401(k) thrift plan which covers substantially all full-time employees over the age of 21. The amount charged to expense for contributions to the plan was $78,948 for 1997, $66,000 for 1996 and $30,000 for 1995. NOTE 16--LITIGATION Various legal claims have arisen during the normal course of business which, in the opinion of management, after discussion with legal counsel, will not result in any material liability. NOTE 17--DISCLOSURES ABOUT FINANCIAL INSTRUMENTS The Bank issues financial instruments with off-balance-sheet risk in the normal course of the business of meeting the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments may involve, to varying degrees, elements of credit and interest-rate risk in excess of the amounts recognized in the consolidated balance sheets. The Company's extent of involvement and potential exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for financial instruments included on its balance sheets. (Continued) 51
54 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The contractual amount of off-balance-sheet financial instruments as of December 31, 1997 and 1996 is as follows: <TABLE> <CAPTION> 1997 1996 ------------ ---------- <S> <C> <C> Commitments to extend credit $124,493,916 71,106,687 Standby letters 6,237,738 3,656,598 ============ ========== </TABLE> Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Of the total commitments to extend credit at December 31, 1997, approximately $16,839,747 represents fixed rate loan commitments. Since certain of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the borrower. Collateral held varies, but may include accounts receivable, inventory, premises and equipment, and real estate. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. These standby letters of credit are primarily issued to support contractual obligations of Bank customers. The credit risk involved in issuing letters of credit is essentially the same as the risk involved in extending loans to customers. SFAS 107, Disclosures about Fair Value of Financial Instruments, extends existing fair value disclosure for some financial instruments by requiring disclosure of the fair value of such financial instruments, both assets and liabilities recognized and not recognized in the consolidated balance sheets. Following is a summary of the carrying amounts and fair values of the Company's financial instruments on the consolidated balance sheets at December 31, 1997 and 1996: <TABLE> <CAPTION> 1997 1996 ---------------------------------- ----------------------------- Carrying Estimated Carrying Estimated Amount fair value Amount fair value ------------ ------------ ------------ ------------ <S> <C> <C> <C> <C> Balance sheet assets: Cash and due from banks $ 13,897,054 $ 13,897,054 $ 9,261,035 $ 9,261,035 Federal funds sold 32,825,000 32,825,000 23,250,000 23,250,000 Interest-bearing deposits 148,349 148,349 -- -- Investments in debt and equity securities 13,433,884 13,434,875 15,245,980 15,245,295 Loans held for sale 1,324,244 1,334,466 -- -- Loans, net 223,050,208 222,777,300 132,368,092 132,955,773 Accrued interest receivable 1,448,343 1,448,343 935,864 935,864 ============ ============ ============ ============ Balance sheet liabilities: Deposits $264,300,634 $264,539,273 $168,961,089 $169,156,884 Notes payable -- -- 300,000 300,000 Accrued interest payable 549,059 549,059 309,510 309,510 ============ ============ ============ ============ </TABLE> (Continued) 52
55 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practical to estimate such value: CASH AND OTHER SHORT-TERM INSTRUMENTS For cash and due from banks, federal funds sold, and accrued interest receivable (payable), the carrying amount is a reasonable estimate of fair value, as such instruments reprice in a short time period. INVESTMENTS IN DEBT AND EQUITY SECURITIES Fair values are based on quoted market prices or dealer quotes. LOANS HELD FOR SALE Loans held for sale are recorded at the lower of cost or fair value, using the specific identification method. LOANS The fair value of adjustable-rate loans approximates cost. The fair value of fixed-rate loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSITS The fair value of demand deposits, interest-bearing transaction accounts, money market accounts and savings deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT The fair value of commitments to extend credit and standby letters of credit are estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the likelihood of the counterparties drawing on such financial instruments, and the present creditworthiness of such counterparties. The Company believes such commitments have been made on terms which are competitive in the markets in which it operates; however, no premium or discount is offered thereon and accordingly, the Company has not assigned a value to such instruments for purposes of this disclosure. LIMITATIONS Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment, and therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (Continued) 53
56 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements Fair value estimates are based on existing on- and off-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates. NOTE 18--PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS <TABLE> Condensed Balance Sheets <CAPTION> December 31, ------------------------------ Assets 1997 1996 ------ ----------- ----------- <S> <C> <C> Cash $ 1,831,497 $ 87,946 Investment in Enterprise Bank 23,404,214 14,221,619 Investment in Enterprise Merchant Banc 108,297 477,398 Investment in Enterprise Fund, L.P. 202,098 116,489 Other assets 571,460 148,440 ----------- ----------- Total assets $26,117,566 $15,051,892 =========== =========== Liabilities and Shareholders' Equity ------------------------------------ Accounts payable and other liabilities $ 50,774 $ (6,001) Notes payable -- 300,000 Shareholders' equity 26,066,792 14,757,893 ----------- ----------- Total liabilities and shareholders' equity $26,117,566 $15,051,892 =========== =========== </TABLE> <TABLE> Condensed Statements of Income <CAPTION> December 31, --------------------------------------------- 1997 1996 1995 ---------- ---------- ---------- <S> <C> <C> <C> Income: Dividends from subsidiaries $ 13,441 $ 600,000 $ 300,000 ---------- ---------- ---------- Total income 13,441 600,000 300,000 ---------- ---------- ---------- Expenses: Loss on investment in Enterprise Fund, L.P. 4,391 56,123 7,388 Other expenses 741,068 202,849 27,460 ---------- ---------- ---------- Total expenses 745,459 258,972 34,848 ---------- ---------- ---------- (Loss) income before tax benefit and equity in undistributed earnings of subsidiaries (732,018) 341,028 265,152 Income tax benefit 282,894 97,484 13,590 ---------- ---------- ---------- (Loss) income before equity in undistributed earnings of subsidiaries (449,124) 438,512 278,742 Equity in undistributed earnings of subsidiaries 2,671,668 1,263,440 1,025,525 ---------- ---------- ---------- Net income $2,222,544 $1,701,952 $1,304,267 ========== ========== ========== </TABLE> (Continued) 54
57 ENTERBANK HOLDINGS, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements <TABLE> Condensed Statements of Cash Flow <CAPTION> December 31, -------------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- <S> <C> <C> <C> Cash flows from operating activities: Net Income $ 2,222,544 $ 1,701,952 $ 1,304,267 Adjustments to reconcile net income to net cash provided by operating activities: Net income of subsidiaries (2,761,668) (1,863,440) (1,325,525) Dividends from subsidiaries -- 600,000 300,000 Other, net (271,854) (105,484) 14,553 ----------- ----------- ----------- Net cash provided by operating activities (810,978) 333,028 293,295 Cash flows from investing activities: Capital contributions to subsidiaries (6,150,000) (360,000) (100,000) Investment in Enterprise Fund L.P. (90,000) (90,000) (90,000) ----------- ----------- ----------- Net cash used in investing activities (6,240,000) (450,000) (190,000) Cash flows from financing activities: Payment of stock dividends (195,085) (121,548) (76,829) Proceeds from issuance of common stock 9,289,614 -- -- (Decrease) increase in notes payable (300,000) 300,000 -- ----------- ----------- ----------- Net cash provided by financing activities 8,794,529 178,452 (76,829) Net increase in cash and cash equivalents 1,743,551 61,480 -- Cash and cash equivalents, beginning of year 87,946 26,466 26,466 ----------- ----------- ----------- Cash and cash equivalents, end of year $ 1,831,497 $ 87,946 $ 26,466 =========== =========== =========== </TABLE> NOTE 19--SUBSEQUENT EVENTS On February 17, 1998, the Company signed a lease agreement for a building at 1277 North Warson Road in St. Louis County, Missouri. The Company plans on using the space for the operations unit, which is currently housed at the Clayton facility. The lease is for 11,458 square feet of a 31,100 square foot building. The Company entered a five-year lease with options to renew for three additional five-year periods. The annual rent expense for the first five years of the lease is $72,185 per year, paid monthly. (Continued) 55
58 SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15d of the Securities Act of 1934, the undersigned Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Clayton, State of Missouri, on the 24th of March 1998. ENTERBANK HOLDINGS, INC. By: /s/ Fred H. Eller ------------------- Fred H. Eller Chief Executive Office Pursuant to the requirements of the Securities Act of 1934, this 10-K Report has been signed by the following persons in the capacities and on the dates indicated. <TABLE> <CAPTION> SIGNATURES TITLE DATE ---------- ----- ---- <S> <C> <C> /s/ Fred H. Eller - --------------------------------- Fred H. Eller Chief Executive Officer and and Director March 24, 1998 <F*> - --------------------------------- Ronald E. Henges Chairman of the Board of Directors March 24, 1998 <F*> - --------------------------------- Kevin C. Eichner Vice Chairman of the Board of Directors March 24, 1998 <F*> - --------------------------------- Paul R. Cahn Director March 24, 1998 <F*> - --------------------------------- Birch M. Mullins Director March 24, 1998 <F*> - --------------------------------- Robert E. Saur Director March 24, 1998 <F*> - --------------------------------- James A. Williams Director March 24, 1998 <F*> - --------------------------------- Henry D. Warshaw Director March 24, 1998 <F*> - --------------------------------- James L. Wilhite Director March 24, 1998 <F*> - --------------------------------- Ted C. Wetterau Director March 24, 1998 <F*> - --------------------------------- Randall D. Humphreys Director March 24, 1998 /s/ James C. Wagner - --------------------------------- James C. Wagner Chief Executive Officer, Treasurer and Vice President March 24, 1998 <FN> <F*> By Fred H. Eller, James C. Wagner and Stacey Tate, as Attorney-in-Part pursuant to Powers of Attorney executed by the persons listed above, which Powers of Attorney have been filed with the Securities and Exchange Commission. /s/ Fred H. Eller /s/ James C. Wagner /s/ Stacey Tate - --------------------------------- --------------------------------- ------------------------------- Fred H. Eller James C. Wagner Stacey Tate Attorney-in-Part Attorney-in-Part Attorney-in-Part </TABLE> 56
59 <TABLE> EXHIBIT INDEX ------------- <CAPTION> Exhibit No. Exhibit --- ------- <C> <S> 3.1 Certificate of Incorporation of the Registrant, as amended (incorporated herein by reference from Exhibit 3.1 to the Registrant's Registration Statement on Form S-1 dated December 19, 1996 (File No. 333-14737)). 3.2 Bylaws of the Registrant, as amended, (incorporated herein by reference from Exhibit 3.2 to the Registrant's Registration Statement on Form S-1 dated December 19, 1996 (File No. 333-14737)). 4.1 Enterprise Bank Incentive Stock Option Plan (incorporated herein by reference from Exhibit 4.3 to the Registrant's Registration Statement on Form S-8 dated December 29, 1997 (File No. 333-43365)). 4.2 Enterprise Bank Second Incentive Stock Option Plan (incorporated herein by reference from Exhibit 44.4 to the Registrant's Registration Statement on Form S-8 dated December 29, 1997 (File No. 333-43365)). 4.3 Enterbank Holdings, Inc. Third Incentive Stock Option Plan (incorporated herein by reference from Exhibit 4.5 to the Registrant's Registration Statement on Form S-8 dated December 29, 1997 (File No. 333-43365)). 10.1 Lease with respect to the Registrant's Clayton banking facility (Incorporated herein by reference from Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 dated December 19, 1996 (File No. 333-14737)). 10.2 Customer Referral Agreement by and among Enterbank Holdings, Inc., Enterprise Bank and Moneta Group Investment Advisors, Inc. (Incorporated herein by reference from Exhibit 10 to the Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997). 11.1 Statement regarding computation of per share earnings. 13.1 1997 Annual Report. 21.1 Subsidiaries of the Registrant. 23.1 Consent of KPMG Peat Marwick LLP. 24.1 Power of Attorney. 27.1 Financial Data Schedule. 99.1 Proxy Materials for 1998 Annual Meeting of Shareholders. </TABLE> 57